Sunday, May 06, 2012

Debunking United's anti-Hobby arguments

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 (UPDATE: here it is, with excellent counter-arguments, even better is the presentation here), but there are some key arguments I'd like to dismantle here.  Italics are direct quotes from the United report.

But first, here is the absolute core rebuttal: every argument United marshals against international service at Hobby could also apply to domestic service at Hobby, yet do any of us really believe Houston would be better off if we didn't have vigorous competition from Southwest at Hobby?  When seen through this lense, all of United's arguments crumble.
 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 last week in favor of allowing it.  UPDATE: excellent news - evidently the city is legally required to accommodate Southwest or face the loss of federal funds.

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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4 Comments:

At 7:58 AM, May 07, 2012, Anonymous Anonymous said...

What about the current and future routes United has threatened to cancel? Would other airlines be able or willing to replace all of them? Houston is a large and growing metropolis, but it still is not a New York, LA, London, or even Miami, where a major airline hub isn't necessary to cover destinations around the world since enough demand exisits that other airlines will fill the void. Many nonstop routes from Houston work because of the critical mass of the hub at IAH.

When looking at top US cities for origin/destination traffic (passengers starting or ending their journeys, not connecting), the Houston area doesn't even make the top 15 - even with 2 airports. Smaller cities like Denver, Phoenix, and Seattle have more local traffic. Dallas and Atlanta have larger connecting hubs, but they are also ranked higher in terms of O&D traffic. So if United doesn't serve an international route with low local traffic, how would another airline be able to?

In this era of global alliances, it becomes even more challenging. If a destination with thin local demand could be served by a United Star Alliance partner it may be flown since it could still benefit from the United feed at IAH. (Air New Zealand may decide to serve Auckland if United doesn't.) But what about routes like Santiago, Madrid, or Sydney? The only possible airlines would be LAN, Iberia, or QANTAS. That isn't likely since they're already being served by AA or a partner at the Oneworld meaga hub up the way in Dallas.

In the end, United won't pull routes out of spite - it will come down purely to profitability. If routes become unsustainable or could be served more profitably somewhere else, my fear is Houston could lose non-stop links to international destinations that aren't replaced by other carriers.

 
At 8:31 AM, May 07, 2012, Blogger Tory Gattis said...

You are perfectly describing the Fear-Uncertainty-Doubt/FUD United is trying to stir up over the whole situation.

1) This doesn't affect connecting traffic at all, which by United's own admission is the bulk of the traffic at IAH. Or rather, any impact it has on connecting traffic will be because SWA offers *any* Latin America service from anywhere (which they definitely will be doing), whether or not it's in Houston - so why wouldn't we want to grab that connecting traffic (and the beneficial nonstops) instead of Orlando, Ft. Lauderdale, Atlanta, San Antonio, or others SW could use?

2) Houston is United's - and in most cases the Star Alliance's - only hub positioned to serve Latin America. They simply have no other options than to route those United and Star Alliance flows through here, including from New Zealand.

3) We are still home to the big-spending/big-travel energy industry, and they will still continue to buy those expensive business class intl tickets that support all those exotic flights.

That's actually part of the reason our O&D numbers are so low: 1) the energy industry is concentrated here, so most meetings are local rather than requiring travel, 2) we're not a tourist destination, and 3) our locals don't feel compelled to go south every winter to escape the snow and cold, like much of the U.S. does.

> So if United doesn't serve an international route with low local traffic, how would another airline be able to?

Well, for the most part, SW will be providing competition on existing routes. But it's because SW has a substantial hub at Hobby, and just like United at IAH, most of their intl passengers will be connecting. Why wouldn't we want that traffic flow instead of punting it to one of Southwest's other southern focus cities?

> But what about routes like Santiago, Madrid, or Sydney? The only possible airlines would be LAN, Iberia, or QANTAS. That isn't likely since they're already being served by AA or a partner at the Oneworld meaga hub up the way in Dallas.

None of that changes under this scenario.

 
At 12:44 AM, May 09, 2012, Blogger Rail Claimore said...

I just read the legal memo as well. If the city doesn't allow for expansion by Southwest at Hobby, then they're in for a pretty big legal fight.

 
At 5:52 PM, May 24, 2012, Anonymous Doug Stephan said...

Sorry, here's the link:
http://www.centreforaviation.com/analysis/japan-airlines-17-margin-may-be-envy-of-the-industry-but-jals-outlook-is-less-upbeat-74120?goback=%2Egde_90578_member_117052948

 

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