Turns out Houston isn’t the only city squabbling with United Airlines about airport expansions. There’s a similar fight going on in Chicago.
Mayor Rahm Emanuel has gotten tough with the teachers union and muscled the City Council. But will he mess with somebody his own size?
Mr. Emanuel is at odds with airline boss Jeff Smisek over expansion of O’Hare International Airport. The CEO of United Continental Holdings Inc. jabbed at Mr. Emanuel recently, saying there’s no need to finish the multibillion-dollar project launched seven years ago.
The new mayor shot back with a demand to start talks now on the final phase of the expansion. The deadline for starting those negotiations isn’t until next March.
Mr. Emanuel can’t afford to let O’Hare fall behind rival airports. Mr. Smisek, on the other hand, has a different agenda. Unlike airline execs of the past, whose expansionist strategies dovetailed with the city’s desire for an ever-bigger O’Hare, he’s focused on the bottom line. He aims to boost profits by reducing capacity and competition in the airline industry, which has a long history of big spending, bloody fare wars and monumental losses. His merger of Houston-based Continental Airlines Inc. and Chicago’s UAL Corp. advanced those aims while creating an airline with unprecedented market power, the largest in the industry.
Proceeding with the final phase of the O’Hare expansion would undercut Mr. Smisek’s agenda, adding capacity that could allow new airlines into the airport, where United and AMR Corp.’s American Airlines now control 80 percent of the flights. Their stranglehold makes it hard for newcomers to get into O’Hare and maybe offer lower fares. It also means that United and American pay most of the cost of any expansion projects at O’Hare, giving them clout in construction negotiations.
The terms of the debate are different in Chicago, but the bottom line is the same. What’s best for the city may not be best for United Airlines, and vice versa. There’s nothing particularly remarkable about a large company with near-monopoly control in a given market doing whatever it can to keep competition out. What is remarkable is that the argument to allow such competition would somehow be damaging to consumers is given any credibility.
Which brings me to Tuesday’s Council session, in which United and Southwest made their case before a joint meeting of the Budget & Fiscal Affairs and Transportation, Technology & Infrastructure committees.
CEO Gary Kelly spoke for Southwest. He framed the debate in his company’s David-and-Goliath narrative of the scrappy low-cost carrier trying to crack a market dominated by the big boys.
Kelly opened with, “It is déjà vu.” Southwest had to fight just to keep from being killed in its crib by legacy carriers that schemed and litigated all the way to the U.S. Supreme Court to keep the airline from starting up, by Kelly’s version of history.
“That group included Continental Airlines,” Kelly said, the hometown carrier that merged with United in 2010. “It was a cynical move.”
In 1971, Southwest sought to reopen Hobby, which had closed two years earlier when Houston Intercontinental Airport opened.
“Then, as now, the legacy carriers went ballistic,” Kelly said, “… insisting that reopening Hobby would cause irreparable damage to Intercontinental.”
[United] delivered PowerPoint slides with statistics on how over the past 19 years Southwest has increased its fares at a faster rate than the legacy carriers have and juxtaposed the city’s projection of a Houston-Bogota flight for $133 on Southwest with the airline’s recent advertised rate of $160 just to get from Chicago to Oklahoma City.
John Gebo, United’s senior vice president of financial planning, even contested Southwest’s central contention that its entry into Houston’s international travel market will lower fares:
“There are cases where Southwest’s fares are lower. There are cases where they’re higher. It is a fallacy that Southwest’s fares are always lower.”
They also focused on the future instead of history. A council vote to expand Hobby, they said, would prompt them to reconsider a $700 million investment they have planned at Bush’s Terminal B. United broke ground on the project in January, unaware that later that same day Kelly would be meeting with Mayor Annise Parker to discuss Hobby expansion.
Let me refer you back to the two posts in which my wife Tiffany Tyler analyzed Southwest’s proposal and the claims United was making at the time, which seem to have evolved somewhat. I understand United’s fear of this proposal. I understand their threats regarding Terminal B at IAH, though given the growth projections for IAH and the fact that they want to close down the former Continental hub in Cleveland it’s hard for me to take those threats too seriously – where else are they going to go? Unlike Southwest, which says it will go to San Antonio for their Latin American and Caribbean business if Hobby is not available to them, they’re pretty much locked in. What I don’t understand is how having more competition, even if it’s just for a handful of Latin American routes, can be bad for travelers. It makes no sense to me, and according to his press release it makes no sense to CM Andrew Burks, either. I hope in the end it makes no sense to the rest of Council.