A favorite pastime in airline mergers is to guess which routes stay and which routes go. When it comes to the United/Continental merger, most of the talk in that arena has focused on little Cleveland. Will it be able to keep a hub in the new combined airline? United CEO Jeff Smisek says it can, but it needs to do more.
Cleveland is really one of the last of a dying breed. Airlines used to pop up hubs throughout the country just because it made sense operationally. Unfortunately, that didn’t make it work from an economic perspective. In the last few years, we’ve seen American shut down St Louis, America West walk away from Columbus, US Airways kill Pittsburgh, and Delta slowly drain the life out of Cincinnati. Will Cleveland be next?
Under Continental, it was widely believed that Cleveland was safe because there was no other alternative for the airline in the Midwest. But now with the United hubs of Chicago and Washington/Dulles bracketing the airport, does it still make sense to keep Cleveland around? It all comes down to local traffic.
For a hub to work, you have to have a lot of local traffic, because that’s where the money is made. If you’re flying from Cleveland to New York/LaGuardia, United is the only one in the market, and it can charge a premium for convenience. But if you’re flying from Columbus to LaGuardia via Cleveland, then United is just one of many airlines you can use to connect. United has no pricing power in that market, so it is likely to earn a lower fare. Not only is the fare lower, but the costs are higher since it involves two flights.
So having a base of local traffic is hugely important for a hub, and Cleveland says it has a ton. Then again, Cincinnati says the same thing and claims that Delta is making a mistake by cutting back. That’s apparently not what Delta sees.
The reality is that Cleveland certainly has enough local traffic for markets like New York and Washington, so it’s not going to lose those flights. We’ve seen the same thing in places like Pittsburgh and St Louis. They haven’t lost all service; there has been some to big markets that stuck around. But can Cleveland really support some secondary markets on its own?
That’s what we’ll need to find out. The trick is that while big local traffic is the key for hub success, you still need a fair amount of connecting traffic to help fill the airplanes. Let’s say there are 30 people a day who want to fly from Cleveland to Kansas City. That’s good, but it’s not enough to support a flight by itself. However, if you can take those passengers and then add another 35 people who want to connect to Kansas City from other places, then you’ve got enough to fly a single CRJ-700 and do it profitably (theoretically). So the key is having a good base of local traffic and then filling in the empty seats with connections. That’s what makes a hub work.
Cleveland was the only place for people to connect on Continental in the region, but now it’s different. Let’s say 10 of those passengers connected to Kansas City from Buffalo every day. Now those passengers can connect over O’Hare which will not only have a broader, more frequent schedule but it will also involve larger, jet aircraft. It’s possible that the traffic from the combined United would be enough to sustain Cleveland, especially since O’Hare doesn’t have much room for growth, but that’s going to require more commitment from the community itself to support larger airplanes and more flights.
Asked during a question-and-answer period about what benchmarks a hub needs in order to survive, Smisek said the key was profitability based on “consistent” business travel demand.
“And you haven’t been able to do that,” he said, “and we’ve stuck by you all these years.
“We need to hear from you as to where you see the future growth.
So if Cleveland doesn’t grow, then United won’t grow in Cleveland. And if United can adequately serve its Cleveland connecting customers via other hubs, then things don’t look very good for Cleveland as a hub at all. There will still be a decent-sized operation there, but I still expect to see it shrink to better match local demand.