Dawn Gilbertson

The Arizona Republic

PHOENIX -- The economy is humming, new flights are taking off and airfares are down.

That trio of positives should have Phoenix Sky Harbor International Airport, which Phoenix Mayor Greg Stanton calls the economic engine of Arizona, on track for its third consecutive record year.

Instead, shrinking business from American Airlines has the city-owned airport experiencing its first decline in annual passengers since 2013, and that decline is likely to continue in 2017. The trend has potential consequences for airport businesses, passengers and employees if it lingers, and for big airport projects on the books if it worsens.

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Sky Harbor's 2016 passenger count through October is down 1.6% from a year ago at a time when most major airports are adding passengers. The decline isn't devastating by any measure but is the worst performance among the nation's 10 busiest airports and one of just two declines among the top 10.

In contrast, top performers Los Angeles International Airport and Denver International Airport are each up 8%. Passenger traffic at Sky Harbor's tiny sister airport, Phoenix-Mesa Gateway in east Mesa, home to discounter Allegiant Air, is up 6.6%.

The lone culprit in Sky Harbor's poor showing: American Airlines, the airport's largest tenant.

Chapter 1

Cutting flights, but still the dominant carrier

American, which accounted for half of the 44 million passengers who flew into and out of Phoenix last year, is shrinking at Sky Harbor, as merger critics feared.

Three years after American and Arizona-based US Airways merged, the airline is cutting flights and shifting to smaller planes on many routes as it carves out Phoenix's role among its nine hubs across the country. It also faces increased competition from low-cost carriers like Frontier and Spirit.

The upshot: American's passenger count is down 6.5% this year, with the pace of the declines accelerating since July.

Through October, 1.2 million fewer passengers got on or off an American flight at Sky Harbor compared with a year ago. That's the equivalent of losing all the passengers of pre-merger American, which had been a small player at Sky Harbor, or the combined Phoenix passengers of Alaska, Spirit, Hawaiian and JetBlue in the same period.

No one is sounding alarms that this is the beginning of the end for American's Phoenix hub, a concern since the deal was announced in February 2013 because previous airline mergers had left a trail of closed or downsized hubs in Cleveland, Cincinnati and Memphis. Phoenix is sandwiched between two important American hubs in larger cities, Dallas/Fort Worth and Los Angeles, and has significantly less big-dollar business travel than its other hubs because of the lack of corporate headquarters in Arizona.

American still dominates Sky Harbor, with 260 daily non-stop flights and 17.4 million passengers through October. The airline, which says the hub is profitable and here to stay, has added or announced flights to several smaller destinations including Santa Fe, N.M., and Sonoma, Calif., this year, more than any American hub except Los Angeles.

But it appears the airline will likely shrink more as it shifts its attention to the meat of the merger — creating the most efficient and profitable network of flights — after three years of complicated logistics such as combining the operations and work forces of American and US Airways.

American calls it "fine-tuning'' and says it is a work in progress.

"Is (passenger traffic in Phoenix) going to continue to go down? The way we anticipate it right now, we don't anticipate it will go down forever,'' said Vasu Raja, vice president of network planning. "How it changes still sort of remains to be seen.''

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The fleet and hubs of American Airlines, by the numbers

Chapter 2

Airport: Reductions aren't ominous

Airport officials downplay American's sharp passenger decline this year and don't see the airline's cutbacks as an ominous sign.

Phoenix Aviation Director Jim Bennett called the merger's impact on Sky Harbor "very minimal.'' He said other airlines, including rapidly growing discounter Frontier, are adding flights and passengers and making for up some of American's passenger losses. The rest of the losses, he said, are connecting passengers who don't park, rent cars, take taxis or stay in hotels, so they create less of an economic ripple effect.

"Will we have as many passengers this year as we had last year? No. But it will probably be the second-best year in the history of Sky Harbor,'' Bennett said. "Will it be down next year? Might be. But that does not mean Sky Harbor Airport is going to continue to decline. It will return to growth.''

Still, factoring in increases by smaller airlines, Sky Harbor is down about 580,000 passengers from a year ago and it's unclear where the growth will come from to offset American's declining passenger count. Sky Harbor is already served by all but one U.S. airline (besides Allegiant, which is focused on the lesser-used airport in nearby Mesa). The holdout, Virgin America, was just acquired by Alaska Airlines, which already serves Sky Harbor. The airport is woefully lacking in international flights, an area of growth for other airports.

Economists and other industry experts say the situation warrants watching.

"You've got to wonder, is this the start of a trend? Or is there something going on there?'' said Lee McPheters, research professor of economics in the W.P. Carey School of Business at Arizona State University and director of the school's JPMorgan Chase Economic Outlook Center.

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Chapter 3

How the merger unfolded here

No one thought Sky Harbor or greater Phoenix would be unscathed by the American-US Airways megamerger, which was announced in February 2013 and closed in December 2013, creating one of the world's largest airlines.

The US Airways executives in Tempe, Ariz., who engineered the deal and were tapped to run the new American said from the start of the merger talks in 2012 that the combined airline's headquarters would be in Fort Worth, Texas, American's longtime home base. Arizona lost the high-paying jobs and Fortune 500 prestige that came with US Airways' downtown headquarters across from Tempe Beach Park.

Executives tried to blunt the impact by saying the airline was committed to downtown Tempe even if top executives were leaving, noting that they had signed a new five-year lease on the nine-story building. Last year, they decided to vacate the building earlier than planned, removing the giant US Airways sign atop the building and not replacing it with American's name. The last workers moved out a few months ago. The building is being renovated for its new tenant, payroll giant ADP, but American's logo is still etched into the lobby wall.

Flights and fares were a big concern, too, because airlines routinely streamline their networks after mergers, eliminating route overlap and pruning unprofitable flights, pushing up fares in the process. Despite American and US Airways assurances that there was very little route overlap, federal and state antitrust regulators sued to block the deal on the grounds that it would reduce competition and wasn't good for travelers.

The airlines made concessions in a settlement with the U.S. Department of Justice and a promise in a settlement with attorneys general in Arizona and several other states: Flight levels at the airlines' nine hubs including Phoenix would remain the same for three years. US Airways CEO Doug Parker, who became American CEO upon the merger, repeatedly said no one should interpret the three-year timetable as a sign the airline planned to make big cuts anywhere after that.

"We were willing to agree to three years because we fully intend to keep the hub-and-spoke structure we have in place forever,'' he said at the time.

The three-year period ended Dec. 13.

Chapter 4

Fewer flights, fewer seats

American is smaller at Sky Harbor today than the combined US Airways/American was three years ago by every flight measure, though not dramatically enough for casual travelers to notice.

American's departures from Phoenix in December are down 8.1% from the merged airline's level in December 2013, to an average of 260 per day from 283, according to FlightGlobal, an international aviation data, analytics and media company. Seats and available seat miles, two measures of capacity, are down, too, but by smaller amounts — 2.9% and 1.5%, respectively.

In the same period, Southwest Airlines, American's roommate at Sky Harbor's Terminal 4 and the airport's second largest carrier with 30% of passengers last year, boosted its number of flights by 8.4%, its number of seats by 12.8% and its available seat miles by nearly 20%. Delta Air Lines posted double-digit gains in each category. Frontier's gains were off the charts because it has grown rapidly in Phoenix the past three years.

American's flight cutbacks have been concentrated in 2016, according to FlightGlobal data. The airline's flights this month are down 6.5% from December 2015.

American has eliminated daily non-stop flights to cities including Fort Lauderdale, Cleveland and Calgary, Alberta, this year. It also has reduced the frequency of flights between Phoenix and dozens of cities. Among the routes with the biggest percentage cuts in the number of flights and seats, according to FlightGlobal: Vancouver; Spokane, Wash.; Atlanta; Oakland, Calif.; and Houston, each down 30% or more from a year ago.

Airfares in Phoenix haven't risen as a result of the merger but they haven't fallen as fast as fares in the rest of the country. Phoenix fares in the second quarter of this year, the most recent period available, were down 6.8% from the same period in 2013, according to the federal Bureau of Transportation Statistics. Nationally, fares were down 9.7% in the same period.

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Tears, tales and champagne flow on US Airways' last-ever flight

Chapter 5

Fewer layovers, smaller planes

American says the biggest changes it has made this year are behind-the-scenes moves involving the best use of its planes. With the airlines combined, Raja says American can move its "factory" — the aircraft — to wherever there is demand. Pre-merger US Airways didn't have such flexibility because of a prolonged pilot unions squabble after its merger with America West in 2005.

In Phoenix, the tweaking has translated into American swapping out the Airbus A321s so prevalent in US Airways' fleet to smaller Boeing 737-800s from American's fleet on many routes. The latter have 25 to 27 fewer seats. Fewer seats means fewer passengers.

Raja said American is making the switch because Phoenix is no longer the hot spot for layovers that it was for US Airways three years ago when the merger occurred. US Airways and predecessor America West built up an oversize hub here in part by enticing bargain-hunting travelers from east and west of Phoenix to save money by connecting at Sky Harbor. The fare savings could be as much as 40% over non-stop flights, Raja said.

"Not surprisingly, a lot of customers would go and take that option,'' Raja said.

Demand for connecting flights in Phoenix and many other cities has diminished, he said, with the growth of low-cost carriers like Frontier and Spirit. They have expanded into major cities, pushing non-stop fares down for all carriers on popular routes like Dallas to Los Angeles. Southwest has also expanded dramatically in Dallas with the lifting of federal flight restrictions from Love Field in 2014.

Passengers are choosing the non-stop flights, so American doesn't need as many seats in Phoenix for connecting passengers. Charlotte, another big former US Airways hub with even more connecting traffic, has also seen a decline. American's boardings there are down 4% this fiscal year versus last.

American has beefed up its flights in Los Angeles, so travelers there have more non-stop options and less need to connect in Phoenix.

Brett Snyder, who worked for America West for a few years and now runs the popular Cranky Flier blog and Cranky Concierge flight-planning and assistance service, said he used to take US Airways from Los Angeles or Long Beach, with a stop in Phoenix, to visit his in-laws in Indianapolis. Now, American offers non-stop service from Los Angeles so he opts for that. That is just one example, he said, of new non-stops from Los Angeles on American.

"These are people who used to go over Phoenix and now they're skipping Phoenix entirely,'' he said.

Altogether, one-fourth of the decline in passengers boarding American flights in Phoenix through October this year was attributed to fewer connecting passengers, according to an Arizona Republic/azcentral analysis of Sky Harbor's monthly traffic statistics.

The biggest piece, though, was a decline in locals and visitors heading out of Phoenix on American.

Chapter 6

Fewer late-night and summer flight

American also is significantly reducing the number of late-night flights out of Sky Harbor, another hallmark of US Airways' operations here. US Airways operated a bank of late-night flights, including red-eye flights, to boost revenue at a time when the planes would otherwise just be sitting there.

The airline offered so-called "flex" flying -- flights departing between 11 p.m. and 1 a.m. -- on 132 days a year in Phoenix, more than any US Airways hub. It now offers it 49 days a year, such as during the current holiday-travel rush.

Instead, the planes will get maintenance at night and be used for other, more profitable daytime flights. That's an extra 20 to 32 flights per night gone from Phoenix, not to mention a source of cheap fares for travelers willing to travel at odd hours.

Looking ahead to the busy summer-vacation season, American's passenger numbers will likely decrease in Phoenix. The airline will have 8% fewer flights out of Sky Harbor next July, traditionally the airport's second busiest month after March, and there will be 7% fewer seats, according to FlightGlobal. Delta, in contrast, will have 19% more seats in Phoenix next July than it did three years ago.

"They're going to do what makes economic sense,'' said Robert Mittelstaedt, who retired as dean of ASU's business school just after the merger was announced. "Part of the problem with Phoenix has always been that it's not as big a place as people think. It's still only the 12th or 13th (biggest) metropolitan area.''

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Chapter 7

Adding flights to some destinations

American and Sky Harbor officials note that American isn't just subtracting in Phoenix. The airline has added service to nine destinations this year and has announced two new destinations for 2017 — Sonoma, Calif., in northern California's wine country and Bullhead City, Ariz., across the Colorado River from the low-key gambling haven Laughlin, Nev.

Raja admits most aren't "sexy'' destinations — the cities added this year include Lubbock and Midland/Odessa, Texas, and Roswell, N.M. — but says they are a perfect fit for local and connecting Phoenix passengers. All are commuter flights operated as American Eagle flights by American's regional partners.

During the merger build-up, American dangled talk of a Phoenix-London route as a possibility. That has not happened. But the airline has added new international routes out of Dallas and Los Angeles since the merger.

"We're actually trying to add more unique markets into Phoenix,'' Raja said.

Blogger Snyder said the addition of those flights in Phoenix is encouraging. He said that didn't occur in Memphis and Cincinnati before those cities losing their hubs after airline mergers.

"There is still an important place for Phoenix and you can see that by some of the routes they've added,'' he said. "Even though they're not the biggest new destinations, it still shows that they're important for American to serve and Phoenix is the way to serve them.''

Chapter 8

Impact on Sky Harbor is limited so far

Because American's steepest passenger declines at Sky Harbor began in July, it's too early to gauge the long-term impact. The airport's overall passenger traffic is down 5.1% from July through October. American's traffic during that period is down nearly 13%.

There are indications that the drop-off is slightly affecting food and beverage sales in Terminal 4. From July through October, the first four months of the airport's fiscal year, sales were down a fraction from a year ago — $6.11 million vs. $6.14 million — at a time when overall food and beverage sales at all three terminals were up 3.7%.

Sales at retail shops in Terminal 4, which are in the midst of a makeover with new stores opening, were up 5.9%.

Together, Terminal 4 concessions revenue is up 1.4% from the same period a year ago, to nearly $9.2 million.

The airport did not break out parking by terminal but said overall parking revenue was up 1.9% in the July-October period. Rental-car revenue rose 1.7%. Total revenue excluding airline landing fees, rent and related aeronautical categories was up 1.4%, to $50.8 million.

The drop-off in passengers comes as Sky Harbor is in the midst of a $590 makeover of Terminal 3 (the first phase opened in early December) and is about to embark on two new projects totaling $950 million. The Phoenix City Council in late October approved the extension of the Sky Train from Terminal 3 to the Rental Car Center and the addition of an eight-gate concourse at Terminal 4, home to American, Southwest and international carriers. The projects will be funded with passenger fees and other airport revenue and bonds and be completed by 2021.

At the time, Mayor Stanton brushed off concerns about the timing of the investments given a couple months of passenger declines. He said American "thus far has made a business decision to keep the hub.''

"We have no reason to think that's not going to continue,'' he said.

Aviation Director Bennett said local traffic demand will propel Sky Harbor in the long term.

"A few months or even a year or two a trend does not make,'' he said. "As long as Phoenix is a strong economic market, which it is, Sky Harbor will continue to grow and serve that market.''

Dawn Gilbertson is a travel reporter at The Arizona Republic. Her content is occasionally featured here in Ben Mutzabaugh's Today in the Sky blog. The Republic is part of the USA TODAY Network.

Era of airline merger mania comes to a close with last US Airways flight