Hobby is Houston’s smaller, secondary airport, which currently provides domestic-only services throughout the country. As the biggest tenant at Hobby, Southwest lobbied the City Council of Houston to undertake a $100 million project to expand the airport and add international flights. The plan entailed building five new additional gates and Federal Inspections Services, scheduled to be completed by 2015.
Across town, United Airlines, which operates a mega, international hub at George Bush Intercontinental airport (IAH), was the largest opponent of the expansion plans, arguing that splitting international services among two airports would stymie growth and cost jobs at Bush.
Most consumers were well aware that United’s claims were largely far-fetched; at present, United controls nearly 80% of the market share at Bush airport, and, in particular, enjoys a monopoly over a lucrative nonstop network to destinations all over Latin America and the Caribbean from Houston.
Yesterday, the Houston City Council voted overwhelmingly to expand Hobby Airport, in discordance with the position held by United. The Council voted 16-1 in favor of an Memorandum of Understanding to proceed forward with the project. Southwest aims to launch flights to cities in Latin America, namely Mexico, the Caribbean, Central and possibly Northern South America, as part of the expansion.
My initial speculations were that United’s defenses were purely out of rhetorical chest-beating; any claims of job losses or stagnated growth were empty-threats designed to convince City Council voters otherwise. Naturally, United will likely see SOME deflection of traffic away towards Southwest, but United enjoys too many competitive advantages over Southwest, from product to frequency of schedule to longer-standing market entrenchment, to cause such a ruckus.
Well, after the decision was made yesterday, United chose not to retreat quietly into the corner to stew in the wake of defeat. Nor did they express outraged disappointment and call it a day.
They decided to play hardball: a decision which could potentially lead United further down a dangerous path leading to enhanced public relations nightmares, agitated customers (particularly elites) and damaged brand reputations. As-is, United customers are still quite unhappy with the results of the official merger with Continental Airlines, nearly three months after the system cut over ran into major snarls in early March with several unabated issues outstanding.
To the shock of many, United sent out a memo to its employees in the aftermath of the announcement, which later became public information, and what seemed like sinister threats are actually taking concrete form.
First, United announced it will cut 1,300 jobs in Houston, representing a 26% reduction in workforce of the 5,000 individuals currently employed by United in the Houston-area. “Regrettably,” according to United, the job reductions will likely begin this fall and continue over time, but can be “hopefully” mitigated through voluntary programs and relocation to other jobs across United’s system-wide hubs.
As if this wasn’t bad enough, United then announced that it would slash 10% of schedule capacity at Houston, claiming that as-is, the carrier had been “maintaining some unprofitable flying” at Bush and that the purported “future growth” that would have occurred had the City Council voted otherwise in the Hobby decision would have “made these routes profitable” later on down the road. However, United claims that all hopes of this happening has evaporated, thanks to a staggering 5 extra gates going to a 737-only run airline. Future growth will no longer occur, international connecting traffic will drop, and consequently, that capacity needs to be re-deployed elsewhere as a saving act.
Doom and gloom, all the way.
To reiterate that point, United declared it has shelved plans to launch previously planned service to Auckland, New Zealand from Bush. The Houston-Auckland flight, announced by Continental Airlines back in summer 2010 amid much fanfare, was highly glamorized for being the 787-launch route for the airline. Now, it has been revoked allegedly, “as a result of the Mayor’s and Council’s action,” United published in the memo. United argues that the “loss in connecting traffic” will no longer allow the economics of the 787 to become feasible.
Pause for a second: I am confused – wasn’t the 787 designed to operate on longer, thinner routes? I mean, considering United happily announced 787 service to Tokyo from Denver last week (its Denver hub is significantly smaller than its Houston hub, mind you, with far LESS connecting traffic, especially international), so doesn’t this all seem a tad confounding?
Finally, as part of the third blow penalizing the City, United also claimed that the decision threw, “significant doubt” as to whether the carrier will complete its $700 million share of a join city-United expansion of Terminal B at Bush. United has already broken ground in the first phase, after committing $100 million to the project.
Well, one would think that a relatively minor change in the competitive landscape of just one of several of its systemwide hubs wouldn’t cause as much as a ripple in the aftermath. But that notion was far from accurate.
I am not employed by an airline, so maybe I cannot dig up hard data to prove United wrong. But I do know basic, public knowledge out there such as the fact that Bush Airport is an extremely high-yielding, profitably rich international hub, with robust levels of origin-and-destination traffic that reaps revenue to pad United’s bottom line.
I can understand the impetus why United is willing to cancel the Houston to Auckland route: it was a decision made by Continental, which United had to acquire and ultimately implement. The 787 deliveries have been delayed significantly, and United still has an exit strategy in case they no longer want to fly the route (for whatever business case). So they don’t want to fly it anymore. It doesn’t fit within their strategy. Big deal?
I can also understand why United wants to reduce capacity at Houston. Oil prices are high. Domestic flights are bringing in razor-thin profits. There is indeed a glut of older, inefficient aircraft flying unprofitable routes. Certainly, United is entitled to reduce this capacity. It’s not like they haven’t done this before.
But to scapegoat the City of Houston, Southwest and the freedom to increase consumer choices is a horrible, irreversible and dirty political agenda. If United needs to trim capacity at Bush, and perhaps feels that the Houston to Auckland flight will likely under perform to expectations in this revenue environment, then they should isolate those as separate, independent decisions and inform the public accordingly.
The rest of the threats, with regards to cutting jobs and halting construction on the terminals, seem to be posturing. United wouldn’t have merged with Continental if there wasn’t significant value in the Houston hub, and its in their best interests to stay as committed to the city as they can possibly be. Just from a visibility standpoint, to imply that they, as the biggest airline in the world, would want to penalize their largest hub to prove a point, to me is just sad.
Returning to the public relations and operational nightmare that has been the United-Continental merger, imagine how the agitated customers in Los Angeles, Chicago and New York are feeling. To them, the “drama in Houston” is no skin off their backs. The losses in value proposition as a result of the merger, in the form of running into problems with upgrades, switched seat assignments, lack of transparency on fees/policies, and inconsistent service standards between two newly “merged” companies, are enough driving factors to pursue loyalties with other major airlines.
United needs to do some serious soul-searching at this juncture. Somehow, I’d like to believe that after many promises and dry runs that seemingly haven’t gone to plan, the carrier would re-invest its focuses on picking up the slack in the three-month aftermath of the merger to straighten out its priorities. Instead, it’s chasing its tail after losing uphill battles on subjects that don’t even matter long-term.
There are much higher priorities, internal and external, that United needs to distill through quickly before any real-damage starts to impale them. Worrying about circumstances that will not materialize beyond 2015, and burning bridges in the process, is a slippery slope that the carrier cannot afford to mess with.
References and further reading:
Seattle Times: ‘Southwest to offer international flights from Houston.’
Houston Chronicle: ‘United to cut Houston jobs’