Tuesday, April 29, 2008

Why Continental independence is good for Houston

Sorry for the late post this week. I had been preparing material this weekend for a post originally titled "A better alternative than Continental-United", but then CAL beat me to the punch with their Sunday no-merger announcement. Despite the fact that I wrote an editorial in the Chronicle a number of years ago calling for a CAL-UAL merger, I had shifted to a more neutral stance over the last year, and actually decided I was opposed last week.

Lots of potential downsides of a merger:
  • Headquarters, name, and jobs lost
  • UAL's half-billion loss the first quarter is a big warning sign that it could be a financial black hole for any company embracing it
  • UAL's hubs are getting absolutely pounded by low-fare competition, from Southwest to Frontier to JetBlue to Virgin America, and there doesn't seem to be any way to stop the erosion
  • UAL's really degraded service and culture could "infect" Continental
  • IAH could lose nonstop flights as more people get routed through the "new" United hubs instead
  • IAH, which is really growing as a global hub, could be relegated to regional status as "our Latin America operation"
  • Right now, CAL has a lot of very nice, ultra-long-range, international-serving 787s on order. Most will go to Newark, but Houston may get some. Under a merger, Houston would probably lose out to Asia deployments from SF and Chicago.
On the flip-side, their potential new strategy of ditching SkyTeam for OneWorld (w/ American/AA and British Airways/BA) has some nice advantages:
  • Keep headquarters, name, and jobs
  • Get some 787s and maybe even China service to Houston
  • IAH hub continues to bulk up
  • No distracting merger mess. They can seize opportunities as other airlines struggle to consolidate and integrate.
  • They would dominate the most lucrative market in America, New York, with strong flights from all three major airports there: LaGuardia, JFK, and Newark. Looks like the would have about 40% market share, which is enough to dominate but shouldn't be an anti-trust issue.
  • BA is capacity constrained at its Heathrow hub. CAL can take some of the pressure off with flights to/from Europe via Newark.
  • New partners create some very nice route and connection possibilities from Houston: through Tokyo on JAL, through Hong Kong on Cathay Pacific, through London on BA, or even to Australia on Qantas. All good, high-quality airlines.
  • They would lose a lot of customers from the Midwest and Southeast that are loyal to NWA and Delta (SkyTeam), but pick up plenty of loyal AA customers from both coasts as well as Chicago and DFW. AA has a reasonably strong presence in CA, which routes very well through IAH to Latin America (actually better than DFW or Miami on AA).
All in all, it looks like a very good decision on Continental's part, as most comments seem to agree. Good for the company, and definitely good for Houston.



At 8:01 AM, April 30, 2008, Anonymous Anonymous said...

"UAL's hubs are getting absolutely pounded by low-fare competition, from Southwest to Frontier to JetBlue to Virgin America, and there doesn't seem to be any way to stop the erosion"

Absolutely true, I'm a one pass member on Continental but recently I took a vacation to northern Idaho and decided to fly another airline. To reach this destination the best place to fly to is Spokane, WA. The most direct way would be flying to Denver then Spokane.

Continental would have charged me a little under $500 round trip to fly to Spokane. United (which has a hub in Denver) would have charged me about the same. Frontier Airlines which is based out of Denver charged only about $250 round trip. Frontier also offered better service than the last time I flew United (about 6 years ago).

I see the benefits of the One World partnership, but i wonder how Continental Express and American Eagle (AA) service between Dallas and Houston would be affected. Southwest is a major player in these trips, but Continental Express and American Eagle offer the same service. It seems a compromise between the two airlines may need to be reached because of the common and busy service route.

At 8:53 AM, April 30, 2008, Blogger Tory Gattis said...

I don't think much would change on the Dallas-Houston routes. You would just be able to get OnePass miles on both AA and CAL, plus maybe some code sharing. There might be some schedule tweaks on the IAH-DFW route, but I doubt even that. AA flights are timed to connect with flights from DFW, and CAL flights are timed to connect in IAH. And then there are CAL flights to Love and AA flights to Hobby - on top of all the SWA Hobby-Love flights. It's a *well* served market.

At 1:30 PM, May 01, 2008, Anonymous Anonymous said...

In talks on the radio a week before this announcement, I had heard an industry analyst discussing the fact that tourist travel to the United States may at least double as the rest of the world becomes more middle-class in this present generation: that the real benefit of consolidation for US airlines is not eliminating hub costs and so forth, but freeing planes and pilots for those vast additional international passenger miles to be flying here in American seats instead of foreign airlines'. Thoughts?

At 5:56 PM, May 01, 2008, Blogger Tory Gattis said...

International service does seem to be the place to be today. Both business and leisure demand is increasing, and there is less low-cost competition. One key limit is the need for long-range widebody planes for service beyond North America, and there just aren't that many of those in use domestically that can be redeployed internationally. Delta did have a lot of big planes offering domestic service (mostly to Florida) that they have shifted to intl service. But the vast majority of US fleets are shorter-range narrowbody planes that really are limited to local service.


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