United Continental Holdings Inc. (UAL:US), the world’s second-biggest airline, is dropping Cleveland as a hub for connecting flights and cutting 470 jobs as the carrier works to cut $2 billion in annual costs by 2017.
Average daily departures will shrink about 60 percent by June as United eliminates most regional flights at an airport where United has been losing money, Chief Executive Officer Jeff Smisek said in a Feb. 1 letter to employees. Only one of 26 peak-day departures on mainline jets will be halted, he said.
“Given Cleveland’s regional focus we are not shocked to see this significant reduction in flying,” Helane Becker, a Cowen & Co. analyst in New York, wrote in a note today. “We view this move as a positive one for United as there has been a continued shift from smaller aircraft with numerous frequencies to larger aircraft with less frequency.”
United set its savings goal in November as the Chicago-based carrier continues to struggle to control costs since its merger with Continental Airlines in 2010. Larger planes let airlines spread their operations expenses across more seats, while also generating more revenue.
That’s been a challenge at United, whose costs are growing faster for each seat flown a mile than revenue (UAL:US) on the same basis. Last month, United said revenue for each seat flown a mile, an industry benchmark, may show little increase this quarter.
United fell 0.4 percent to $45.64 at 9:34 a.m. in New York. The stock rallied 26 percent through Jan. 31 since Nov. 18, the day before the expense-reduction goal was outlined, to top the 5.1 percent gain for the Bloomberg U.S. Airlines Index. Becker rates the shares as outperform.
United expects to eliminate 430 airport-operations employees and 40 catering workers while keeping pilot and flight attendant bases in Cleveland, Smisek said.
“Our hub in Cleveland hasn’t been profitable for over a decade, and has generated tens of millions of dollars of annual losses in recent years,” Smisek said. “The demand for hub-level connecting flying through Cleveland simply isn’t there.”
Cleveland was the smallest domestic hub for Continental, which merged with former United parent UAL Corp. Under a 2010 agreement, most Cleveland flights were to be retained for at least two years after the merger.
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