Bloomberg News

United Fights Southwest in Texas to Keep Grip on Busy Hub

May 03, 2012

Southwest’s plan would create Houston competition for some flights to Latin America, the region where United posts its highest yields, or average fare per mile, according to data compiled by Bloomberg. Photographer: David McNew/Getty Images

Southwest’s plan would create Houston competition for some flights to Latin America, the region where United posts its highest yields, or average fare per mile, according to data compiled by Bloomberg. Photographer: David McNew/Getty Images

United Continental Holdings Inc. (UAL:US)’s grip on Houston, home to its busiest hub, is under attack from Southwest Airlines Co. (LUV:US)

Southwest wants to build an international terminal at Houston’s secondary airport, casting itself as a monopoly-buster that will serve Mexico, the Caribbean and Latin America. United says that dividing such flights in Houston threatens the city’s main gateway, George Bush Intercontinental Airport.

Both carriers covet overseas travelers, who typically pay the highest fares. For United, the world’s largest airline, keeping those fliers lends urgency to its defense of a market it dominates. For Southwest, the biggest discounter, pulling some of those passengers to its base at the city’s No. 2 airport would help boost profit.

“United risks sounding like a bully that’s trying to squelch new competition,” said Henry Harteveldt, an Atmosphere Research Group LLC analyst in San Francisco. “The big question is, what does Houston feel is the best use of their money and what’s best for the community?”

Southwest is working to win support from Mayor Annise Parker and Houston’s City Council. Parker is reviewing a staff recommendation to construct a five-gate international terminal at William P. Hobby Airport before she decides whether to support the idea. Southwest targets 2015 to start new flights.

Ruffled Feathers

United needs political allies in a city that felt jilted when local icon Continental Airlines merged with former United parent UAL Corp. in 2010 and kept that company’s Chicago headquarters. United says its $700 million investment at Intercontinental would be imperiled if the traffic there fell.

The Houston Airport System sees Southwest’s plan producing an annual economic benefit to the region of $1.6 billion, 10,000 jobs and 1.5 million passengers.

United said today in its own analysis that those assumptions are “pie-in-the-sky promises” and the economic boost “will never materialize.” The Southwest plan would cause the loss of 5,000 jobs and erode $414 million of regional economic activity and may force United to cut 6 percent of capacity at Intercontinental, United’s study said.

United welcomes international competition as long as it comes at Intercontinental, Brian Znotins, the carrier’s managing director of international planning, said today in an interview.

‘Single International Gateway’

“Other hubs that are divided internationally are shrinking or stagnating, but the cities with one single international gateway are growing,” he said. “When we benefit from a stronger hub, Houston benefits from a stronger hub.”

Southwest declined to comment on United’s study, said Paul Flaningan, a spokesman for the Dallas-based carrier.

United and Southwest are scheduled to present their findings to the City Council on May 8, said Darian Ward, a Houston Airport System spokeswoman. The council would need to approve a Hobby terminal, as would U.S. regulators.

“If Southwest builds a second international airport, there is a fair amount of traffic that may prefer Southwest over United and go to Hobby,” said Helane Becker, a Dahlman Rose & Co. analyst in New York, who recommends buying shares of both airlines. “That is why United is defending their turf.”

Southwest’s plan would create Houston competition for some flights to Latin America, the region where United posts its highest yields, or average fare per mile, according to data compiled by Bloomberg. Latin America produced a bigger gain in first-quarter yields than routes in the U.S. or across the Atlantic and Pacific, United said.

Bond Backer

Airport bonds also are an issue. United took over as backer of $632.8 million debt Continental Airlines sold for facilities run by the Houston Airport System, including Intercontinental, according to data compiled by Bloomberg.

For the 12 months ended in January, 83 percent of Intercontinental fliers used the new United and its regional partners, making the facility a “fortress hub” in industry parlance. US Airways Group Inc. (LCC:US) was next, with 3.2 percent, according to the U.S. Bureau of Transportation Statistics.

“Houston is a good funnel to Latin America, and there’s a reason it has worked so well for Continental,” said Chris McGinnis, a consultant and travel blog editor in San Francisco.

Overseas flights have helped spur faster growth in yields at United than at Southwest, which fell behind its bigger rival in that category last quarter, data compiled by Bloomberg show. United has risen 14 percent this year in New York trading, and closed today at $21.57. Southwest has fallen 4 percent this year, and finished at $8.22 today.

Southwest’s only current non-U.S. flights are through its AirTran unit, which was bought last year, and it had more than 90 percent of Hobby’s passengers in the year ended in January.

‘Scarce Resources’

Flights abroad from both airports would erode service at Intercontinental, with hourlong lines for international arriving passengers worsening as investment in security and customs is spread too thin, United says.

“Stretching these scarce resources would further damage Intercontinental and make Houston less competitive as an international connection city,” researchers hired by United wrote in the April 2 memo to Chief Executive Officer Jeff Smisek and Chief Revenue Officer Jim Compton.

Intercontinental began operations in 1969, supplanting Hobby as Houston’s main airport, and handled 40.5 million passengers in 2010, according to trade group Airports Council International.

That was four times as many as at 85-year-old Hobby, which is 12 miles (19 kilometers) from downtown, in Houston’s southeast quadrant. While Intercontinental is almost twice as far from the central business district, it’s closer to newer business and residential areas on the city’s northwest fringes.

History Lesson

United’s complaints about harm to Intercontinental from a Hobby expansion are baseless, according to Southwest.

“History would prove them wrong,” Bob Montgomery, Southwest’s vice president for properties, said in an interview. “The same allegations were made in the domestic marketplace when Southwest came. What happened was that traffic grew because low-fare airlines generate traffic. Competition grew the pie for everybody.”

Southwest hasn’t yet said which overseas cities it intends to serve from Hobby, nor how much additional revenue the flights would generate.

Both Southwest and United boast deep Houston roots.

The city was one of Southwest’s original destinations when the airline started flying began in 1971, and United predecessor Continental relocated from Los Angeles in 1983. Smisek, who was Continental’s CEO during the 2010 merger, shifted to United’s former Chicago offices to run the new airline. He keeps Houston and Chicago homes.

Fostering Competition

“We’re all still a little miffed that the union of Continental and United moved the headquarters,” said Stephen Klineberg, co-director of the Kinder Institute for Urban Research at Rice University in Houston. “There is still some tenderness and concern. The city wants to make sure United Continental is happy and growing, yet they also want to foster competition.”

Greater access to Latin America would draw more visitors, said consultant McGinnis. “Latin America is growing and needs more lift, and to do that you need to expand facilities that will also attract more Latin carriers to Houston.”

Houston’s population also is shifting, with the share of Latino residents more than doubling to 41 percent since 1980, Klineberg said.

“This is a city of immigrants, an international city,” Klineberg said. “Passengers want to go to Mexico City as much as they want to go to places like Dallas. What Southwest wants to do would establish Hobby as a real player and not just the little baby brother of the big guy.”

To contact the reporters on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net


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Companies Mentioned

  • UAL
    (United Continental Holdings Inc)
    • $64.93 USD
    • 2.45
    • 3.77%
  • LUV
    (Southwest Airlines Co)
    • $41.66 USD
    • 0.68
    • 1.63%
Market data is delayed at least 15 minutes.
 
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