United versus Southwest

I feel like I’m missing something in this debate.

A proposal by Southwest Airlines to offer international flights from Hobby Airport has triggered an intense lobbying duel with United Airlines, which still wields considerable local clout as the successor to Houston-based Continental.

In this corner...

If it gets city approval, Southwest says it would spend an estimated $75 million to $100 million to build a new international terminal equipped with full-scale Customs facilities, as well as to improve the aging airport’s domestic terminals. Southwest flights would depart from the new terminal to destinations such as Cancun and the Caribbean.

But United has already broken ground on what may become another international terminal, a $700 million investment piled on top of an additional billion it has pumped into Bush Intercontinental Airport since the late 1990s.

And in this corner...

United says this town isn’t big enough for both projects.

While the city awaits two consultants’ reports, expected next week, on the pros and cons of Hobby going international, both airlines have dispatched emissaries to City Hall. The outcome of their lobbying battle will determine whether Houston becomes the sixth among the nation’s 10 largest cities to have two full-scale, international airports.

As far as I can tell, United’s argument boils down to the belief that allowing Southwest to go forward with their plans would eat into United’s bottom line because Southwest would be able to compete with United for some routes to the Carribbean. They claim that it would dilute international traffic through IAH for reasons that aren’t clear, and they claim that there wouldn’t be enough Customs officials to go around, which strikes me as something that the Congressional delegation ought to be able to address. Beyond that, it’s pretty much fear for United’s profits, and I don’t see how that’s the city’s concern. We’ll see what those consultants’ reports say, but unless they raise red flags that I can’t see from here, I say the city ought to approve this. So I ask again: Am I missing something? Help me out here.

Well, I may not know much about airlines, but I happen to be married to someone who does. Tiffany got her PhD in industrial strategy with her thesis in the airline industry, and though she hasn’t worked in that field for awhile, she had a few thoughts about this:

The proposal by Southwest Airlines to bring international traffic to Hobby has created a tempest in a teacup. Now that teacup is Houston City Council, and the tempest includes the potential ill-winds of United Airlines pulling traffic and investments from IAH, so it’s a big tempest and a big teacup. But if there’s one thing I know more than a little about, it’s airline routing, equipment selection and route economics. I’ll let others argue the ins and outs of hardball politics. And that bit about a lack of customs agents? Red Herring if ever there was one. Let’s talk about operational issues related to any additional competition Southwest might give United on the contested Mexican, Central/ South American and Caribbean routes.

First, look at the route map of the newly merged United/ Continental. Southwest currently flies an all domestic route system. Air Tran does operate some international routes, which gives them experience in operational issues that will be relevant in an expansion of service for the rest of Southwest. Eyeballing the route map for Air Tran, I don’t see a Caribbean route they serve that is not also already covered by United.

It’s also interesting to look at Latin American routes American Airlines flies through Dallas and Miami.

If you are going to buy that the competition provided by opening Latin America to Southwest at Hobby is sufficiently dangerous to United that they’d downsize their Houston presence, I think you need to look at the entirety of the routes available to those destinations. Clearly, there are other flights out of Atlanta or Chicago or Los Angeles, but Dallas and Miami are large hubs for accessing the same cities where United and Southwest would potentially go head to head. Interestingly, Southwest entering the Latin American market could potentially provide as much or more competition to American as it does United. Of course, American was among the carriers that lobbied (and worse) and lost in its quest to keep Southwest from growing, and they are reorganizing under the Bankruptcy Code right now, so perhaps they have other things to spend time on.

Passengers choose their travel arrangements based on a combination of price, available flight schedule and perceived amenities. Prior to September 11, 2001, research indicated that schedule was the primary influence on travel decisions for both business and leisure travelers. Get me where I want to go, when I want to get there, and you get my business. Price was generally a secondary consideration. In this new era of high jet fuel prices and fees for baggage, customers have become more price sensitive, and the importance of schedule frequency has diminished. Airline amenities, a proxy for quality, can include things like availability and cost of meal service, comfort of airline seats/ availability of differing classes of service and professionalism/ friendliness of the airline staff. For shorter haul flights, passengers are generally willing to trade fewer amenities for lower prices.

Will international passengers be willing to fly Southwest style? Given international restrictions on transporting food, those sack lunches from home might not work so well. And who knows what anyone thinks of a singing flight attendant. It’s also unclear whether the Southwest strategy of frequent flights (sometimes called “the flying bus”) will work in a Latin American context, since demand for those flights may be significantly lower than the domestic model their planners are used to, and it will require significant schedule coordination for transfer of passengers from the domestic flights into a new international terminal at Hobby. Will gate agents in Providence be checking passports on the first leg of a trip to Cancun? And the logistics of all those bags flying free and then going international? These things are manageable, but not trivial. And they take time. Time travelers may save flying a single stop into IAH or Dallas with schedules that are already suited to international travelers, depending on their departure city.

The other side of the coin is where are these planes going? In any market Southwest enters, they must have LANDING SLOTS at the corresponding airports. One of the reasons they have historically used “secondary” airports is not only the greater ease of fast gate turnarounds in less crowded airports, but also the sheer availability of gate slots. Secondary airports may also have lower gate fees, further enabling Southwest to create a price advantage in the local market.

Among the things not currently being discussed around the potential Southwest expansion to Latin America and the Caribbean is where their landing slots will be. What will their cost structure in those airports be? They are unlikely to be significantly different than those United or American face in the same places. So some significant cost advantages that benefit Southwest domestically may not be in play abroad.

Both American and United already compete with Southwest domestically. This has generally resulted in lower fares for passengers, and there has been some realignment of flight schedules to recognize which airlines may be dominant in particular markets. For the Latin American routes under discussion with a potential opening of Hobby Airport to international traffic, it’s clear that Southwest’s entry could lower fares and increase competition on those routes. But the potential cost advantages in Southwest’s business model come from elements that may not be in play as strongly on international routes as they are domestically. Schedule frequency and coordination may be more difficult for Southwest internationally, and the no-frills flying experience may not translate well for passengers hopping their way across North America on Southwest before heading abroad.

Southwest representatives are currently arguing that opening Hobby to international traffic will lower fares and increase traffic. I tend to believe this is true, both for leisure travel, where people tend to be more price-sensitive, and for business travel, where the ability to deal face to face with your customers is essential in building long term relationships. Of course more seats at lower fares benefits the carrier with the lowest cost structure and the most flexibility. That increased frequency plays directly to the operational strengths Southwest has honed over the past 30 odd years battling the hub and spoke carriers. Should United be worried? Yes. But so should American, and Delta, and AereoMexico. If the legacy Latin American route holders want to hold onto their customers, they should start differentiating themselves clearly on service while keeping the price differential minimized. American learned the hard way in 1978 what happens if you try to keep Southwest from growing. Once upon a time, Continental knew that lesson. It seems United may have to learn it again.

So there you have it. That’s only about half of what Tiffany wrote for me on this – she was all set to get into a discussion of aircraft types and route miles and whatnot, but we decided to leave it at this. She did enjoy the chance to geek out a little, that’s for sure. According to Houston Politics (more here), we’ll have a decision in the next eight weeks. Any guesses what will happen?

Related Posts:

• Mayor to announce Hobby expansion deal
• Council is skeptical of Hobby International
• Houston Airport System sides with Southwest