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Houston: The Short Sighted City

Yesterday the City of Houston voted to approve a project to expand the city's second airport, Hobby, to include international flights.   The city already has a very large international airport on the north end of town, Intercontinental.  But the motivation to add international capacities at Hobby were driven by Southwest, who consolidated all of their Houston operations at Hobby a few years back. 

Southwest plans to launch flights into Central America and the Carribean challenging United's dominant position in Houston in those markets. 

Southwest has made some rather ludicrous claims as to the number of jobs they will add and the revenue they will bring to the city, thus proving that you get numbers to say anything you want.  On the flip side, United also "used" numbers to prove the impact they would see and that they would have no choice to cut service and reduce their presence at Intercontinental, currently United's largest hub.

Apparently the city is still bitter for losing Continetal and the headquarters for the combined airline. 

Southwest no longer has the pricing power it used to after all of its fuel hedges expired.  The fact that Southwest brings lower fares and competition is a myth in a lot of cases, Southwest isn't that aggresive on pricing, they just have amazing marketing that makes people feel they are getting a deal because they are on a Southwest plane.  To further complicate things, Southwest has never had international service.  Unlike domestic service, there are a lot more intracies and challenges when dealing with international service, particularly to places in Latin America.  All of these factors will add complexity to the Southwest operation going against the very thing that makes them succesful - simplicity. 

The city feels that United is bluffing and they went ahead and approved the vote.  But, the city's decision was very short sighted.  While the expansion at Hobby is three years away, United is likely to start moving its operations much sooner and thus hitting the city pretty hard as landing fees dwindle while its citizens are left with fewer and fewer options.

In the wake of the decision, United announced cuts of 1,300 jobs and the formal cancelation of the Houston - Auckland route.  This is just the begining. Just like Delta abandoned Cincinatti (once on of their highest yield hubs at the time), American with St. Louis, Continental with Denver and United rolling up the carpet at Miami, the city of Houston should be ready for a major downfall.   United could very easily move a lot of the Houston operations to Denver or Chicago and both of those cities would love the extra traffic and revenue that comes with it. 

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Comments

#1
Jim May 31, 2012 at 11:57 am

I don't think you can compare Houston to Cincinnati. Houston by itself is almost 10x the size of Cincinnati and can support more than one airport.

#2
UA-NYC May 31, 2012 at 01:39 pm

Fozz - talk is cheap when IAH has THE highest airfares in the country. You don't think that the consumer just might win out here with lower airfares?

Let's see COdbaUA put their money where their mouth is. Tying short-haul WN flights to MX/Caribbean to a decision to axe AKL is completely ludicrous.

#3
AS May 31, 2012 at 06:47 pm

IAH has too compelling a position in the UA network to South America with no compelling alternative. The odds of UA downshifting operations is minimal given the South America routes.

#4
Fozz May 31, 2012 at 06:57 pm

@Jim: The size of the city is only part of the equation. Premerger, CO built up a substantial Latin American network, second only to American. While a portion of the traffic was O&D, a very large portion was connecting traffic. They did the same thing with Europe out of EWR. While CO focused on O&D traffic domestically, they did not use the same philosophy with the Europe and Latin America markets. That said, whether you connect in Houston, Denver or Chicago, for most people it makes no difference.

@UA-NYC: The consumer may only win for the short term, but in the long run, I doubt they will. The AKL route was projected to carry a lot of Latin American traffic, if the Latin American feed routes are being moved, the AKL flight could be just as easily be moved to move that traffic. Do you really think there is that much of a market for IAH-AKL?

@AS: Not really, with the exception of Buenos Aries, Lima, Rio De Janiero and Sao Paulo, all of the existing Latin American cities can be served with 737s from DEN, LAX or ORD. EZE, LIM, GIG and GRU could be moved with their existing equipment to another hub thus minimizing the impact, but I don't think these "big" cities are going to be at risk as much as the much smaller ones in Central America.

#5
AS May 31, 2012 at 07:53 pm

Maybe some Central and South American cities can be served from other hubs, but it involves greater distances and time and therefore more fuel and labor cost, plus it creates a fairly significant backtracking issue. IAH has great strategic location for a hub.

The smaller cities in Central America that pick up Southwest service - that's more interesting, and for those I can envision your argument about some drawdowns.

#6
Hunt May 31, 2012 at 08:55 pm

Houston - Auckland was going to be UAs first 787 route? Any thoughts on what the "new" first 787 route will be?

#7
Sanjeev M May 31, 2012 at 10:47 pm

There will be some reduction due to network adjustments. Geographically also, as a domestic hub IAH is not exactly the most convenient place (although its relatively uncongested airspace). It's convenient for the Southwest, the Gulf Coast, and Latin America. Continental had no choice so used IAH for everything.

So there will be reduction at IAH. But to say that its the next CVG is a little far-fetched. IAH has O&D to many Mexican cities that just wouldn't work from DEN.

I would like to see Copa do a PTY-HOU to give WN a run for its money.

#8
UA-NYC June 1, 2012 at 12:08 am

Fozz - of course there's no O&D market for IAH-AKL, Smisek himself admitted that. But realistically, how much of the connecting traffic is going to come from MEX, CUN, etc? Answer - not much. And it's not like, even for flyers from those markets, they're going to take WN to HOU and then schlep over to IAH to catch the flight to AKL.

Face it - it's the latest misstep in the disastrous $misek regime.

@Hunt: The first UA 787 international route will be DEN-NRT, but look for domestic runs before it starts that route.

I am happy about this new--not only because it might put downward pressure (albeit temporarily) on airfare ex-IAH, but if it moves business to DEN, I would breathe a sigh of relief--I thought for sure DEN would be de-hubbed almost as fast as CLE will be.

#10
Peter November 27, 2012 at 09:19 pm

As comment #1 stated, Houston is a MUCH larger city/metro than Cincy, it's comparing Apples with Oranges. Continental made a decision to change it's name to United, to basically become UNited, etc, etc. It's obvious positions become redundant when two companies merge. Two aiports can survive...Bush airport isn't the best designed anyway. Let SouthWest Thrive! It still serves snacks!

Yes, I'm a recreational traveler...I pay for my own flights.

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