The Stengel Angle

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During my time at United Airlines, a controversial situation developed that threatened the carrier’s largest hub in Houston, TX. Southwest Airlines was lobbying the Houston administration for permission to build an international terminal and begin international flights at Hobby Airport, the counterpart to Intercontinental Airport where United has a large operation. United’s leaders were quick to denounce the proposal, claiming in it’s own study that it would harm United’s operation and lead to job losses in the Houston area.

Fast forward a few months, and the Houston officials granted Southwest their wish, much to United’s chagrin. After all, it’s a sweet deal for Houston since Southwest agreed to pay the $100 million to expand the terminal and renovate the gates, thereby handing an asset to the city on a silver platter. Admittedly, I was first very critical of United’s case against the Houston proposal. In my mind, extra competition was always good and United was trying to be a bully by creating obstacles to Southwest’s entrance into the international market from Houston. That was until I realized that it’s not always wise to kill the goose that laid the golden egg.

Continental Airlines had maintained a large presence in Houston since the late 1960s, and following the merger with United Airlines in 2010, it is still the largest hub in the company’s network. Since the merger, Houston experienced the fastest growth among United’s hubs, adding 12 new destinations since October 2010. It is United’s premier gateway to Latin America, second only to Miami International Airport in terms of passenger traffic to the region. United also recently completed a $300 million renovation of the new international Terminal E and is currently in the middle of renovating Terminal B as a part of a 3-phase and $1 billion project, according to United’s 2012 annual report. In summary, United has made a large investment in Houston with the expectation that they will be able to continue to grow there as the sole international airport for the city.

With Southwest’s new presence, United is living up to the pledge they made in their argument against Southwest’s proposal: to slow down or scale back its operations in Houston. United announced capacity and job cuts in Houston, cancelled the inaugural Boeing 787 service to Auckland, New Zealand, and also cut the international flight to Paris (which seems to have moved to the San Francisco hub). But the majority of the initial route cuts are actually to much smaller markets which are served by 30 or 50-seat regional aircraft. Some of these cities that are being cut include: Asheville, NC; Greensboro, NC; Toluca, Mexico; Tuxtula Guiterrez, Mexico; Waco, TX; Beaumont, TX; and Victoria, TX.

So why is United cancelling its service to Auckland when Southwest is only planning to serve flights to Latin America? It all has to do with connections. The reason why Houston is so successful as a hub is because it feeds passengers from all over United’s network and sends them out on international flights. For example, the flight from Houston to Auckland may only carry a few passengers who are originating from Houston, while the large majority of passengers come from connecting cities. Now that Southwest is a factor, United will not see as many connecting passengers from those cities, and as a result, many other routes suddenly become impractical. In other words, Intercontinental Airport will lose the critical mass of passengers it enjoyed for a long time before Southwest’s international presence at Hobby.

The economic impact of Southwest’s international flights from Hobby Airport on Houston’s economy will be minimal. Southwest caters to more price-conscious leisure passengers who search for the lowest possible fare. In addition, Southwest, although the largest and most successful discount carrier, does not offer as large of a network as United. Consequently, Southwest will not feed as many passengers into Houston from connecting cities. United, on the other hand, attracts higher-yielding business class travelers and offers the large network to feed passengers from all over the country through Houston.

In summary, although the Houston City Council’s decision to accept Southwest’s proposal is good for competition, it’s a strikingly poor decision for the city of Houston. United’s growth at its largest hub is now seriously threatened, and Southwest’s impact will not be able to support the losses. United has also started to implement its promised cuts in Houston and has signaled cuts to future growth plans at the hub. Although United has been the largest carrier to Houston for more than 40 years, has undertaken risks in developing new markets, and has invested significant funds into new facilities, the Houston City Council seems to have overlooked what United has provided for the city and instead elected to threaten the longstanding relationship (see the Pittsburgh-US Airways relationship).