[Houston Strategies] Debunking United's anti-Hobby arguments

[Tory Gattis]

United recently released their own web site and "study" (pdf) arguing against allowing Southwest to compete internationally at Hobby.  Overall, I'd say it's one of the most impressive acts of FUD (Fear, Uncertainty, Doubt) inducing, hand-waving, smokescreen obfuscations I've seen in my lifetime.  I'm sure Southwest will successfully refute it point-by-point for City Council on Tuesday, but there are some key arguments I'd like to dismantle here.  Italics are direct quotes from the United report.

 Metropolitan areas with multiple airports providing international service have seen virtually no growth in international capacity over the past five years, as compared to more than 6% growth for unified international gateways overall and nearly 8% for IAH. 

Clever implementation of the old "lies, damned lies, and statistics" cliche.  Cities with multiple international airports are the very largest in the nation (NYC, LA, Chicago, DC, SF, Miami, etc.), and, as a whole, they are not substantially growing - thus their service is not particularly growing.  High growth air service happens at high-growth hub cities, which tend to be smaller with a single airport.  The highest-growth single airport they point out is Charlotte, where US Air has been increasing their intl hub service - a high growth city about the size of Austin.  They are mixing up the cause and effect.  In reality, the fact that Houston is now large enough to support multiple international airports is a sign we're joining the big boys.

In another case, the HAS Hobby Study purports to show that the incumbent network carrier, American Airlines (American), expanded service at its Miami International Airport (MIA) as the result of LCC entry by JetBlue at Fort Lauderdale (FLL), when, in fact, MIA grew as a result of American dismantling its nearby San Juan hub (which itself resulted from JetBlue’s entry). 

When AA announced that it was cutting the San Juan hub in July 2008, they cut it from 55 to 35 departures a day, while announcing Miami would pick up the lost Caribbean service with an increase of 7 departures a day to 258.  A year later they were operating 276 flights/day out of Miami, and as of Feb 2011 it was 317 departures/day, with service more than doubling since 2006, while JetBlue and Spirit ramped up discount international competition at Ft. Lauderdale the entire time, lowering fares and driving up demand.  Does the scale of that growth sound like it merely happened because they cut 20 daily departures from San Juan?  No, I don't think so.

United has argued a competing international airport would siphon off connecting passengers and force it to move planes out of Houston 

In response to one analyst's question about Southwest's bid, Smisek said United depends on connecting traffic at Houston's Bush Intercontinental Airport, the airline's largest hub, to fill planes. (source)

United can't legitimately link "siphoning off connecting passengers" with Hobby going international.  Connecting passengers have choice of many connecting flights/hubs to get to their final destination.  SWA could "siphon them off" with intl flights from just about any airport in the south, including San Antonio, Austin, New Orleans, Atlanta, Orlando, Tampa, or Ft. Lauderdale.  By UA's definition, every competing airline that serves a destination is "siphoning off" connecting passengers they could be routing thru IAH - that's called competition.

 

What they are actually concerned about is "siphoning off" local passengers, not connecting traffic.  Those are the people who want to fly nonstop from Houston and have no choices other than UA.  UA charges them a stiff premium for that benefit.  They make minimal profit off of connecting passengers (because of all the competition), but lots of profit off of local passengers (as they have a monopoly on nonstop service).  That profit would of course be reduced if SWA competed with them nonstop on the same routes.

 

What they are pretending will happen is that the fares and number of passengers on any given route are static, and that by splitting them with SWA, they will have to cancel IAH flights (because there aren't as many passengers to fill their planes - SWA is "siphoning them off").  What happens in reality is the famous "Southwest effect": SWA reduces fares, UA matches, and demand increases because the price dropped (simple supply-demand curve economics).  SWA does not have to actually have lower costs than UA to reduce fares (although they do), they simply have to be willing to give up some of the fat monopoly profit margins UA currently enjoys on those routes.  Even if their costs are exactly the same as UA, fares will come down and demand will be stimulated.  This terrifies UA, of course, because not only do they lose the fat monopoly profit margins, but they have to offer more flights to meet the demand surge, pulling planes from elsewhere (either that or just cede market share to SWA).  Of course, Houston wins all the way around: lower fares and more service.

 

I know it's sort of a subtle argument, but next time you hear "siphons off connecting passengers", you can correct them with a simple "Couldn't Southwest siphon off connecting passengers just as easily by offering international service from their other major airports?"

And here's a Bloomberg story confirming those fat profit margins United makes off Houstonians:

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.

The benefits of Southwest competition at Hobby are so compelling, even the Greater Houston Partnership, with very strong ties to United, boldly came out in favor last week of allowing it.

In a sad sign of their precipitous decline since the merger, aviation writer Joe Brancatelli recently declared United to be the worst airline ever, again! (an exaggeration, but still a sad indicator) They gave up on us and shifted the headquarters to Chicago (a big cause of the disastrous effects of the merger, from what I've heard).  Why again do we owe them a protected monopoly on international service?

It's important to keep up the pressure on City Council, which you can do by signing the Free Hobby petition here, or, better yet, attending the City Council meeting or at least weighing in at one of the public meetings, which I fully expect to be stacked with United employees and lobbyists.

City Council Chambers
Tuesday, May 8, 2012
9:00 a.m.
(MAP (http://email.netvictories.com/t/r-l-dkuturd-nuthjhytr-d/))

Presentations by HAS consultants, Southwest Airlines, and United Airlines
Public Comment

Doubletree Hotel JFK
Wednesday, May 9, 2012
6:00 p.m. to 8:00 p.m.
15747 JFK Boulevard
Houston, TX 77032
(MAP (http://email.netvictories.com/t/r-l-dkuturd-nuthjhytr-h/))

Presentation by Aviation Director Mario Diaz
Public Comment

Marriott Houston South at Hobby Airport
Tuesday, May 15, 2012
6:00 p.m. to 8:00 p.m.
9100 Gulf Freeway
Houston, TX 77017
(MAP (http://email.netvictories.com/t/r-l-dkuturd-nuthjhytr-k/))

Presentation by Aviation Director Mario Diaz
Public Comment

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Posted By Tory Gattis to Houston Strategies at 5/06/2012 09:50:00 PM