United CEO Discusses Whether Cleveland Can Support a Hub, I Remain Skeptical

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. Drew Carey Cleveland 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.

United CEO Jeff Smisek spoke recently on this very topic.

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.

[Original photo via Flickr user JoeDuck/CC 2.0]


23 Responses to United CEO Discusses Whether Cleveland Can Support a Hub, I Remain Skeptical

  1. bob says:

    Since the beginning of the merger, it seemed like Cle was going to be closed,
    I wish you would have carried that article one step further, WHAT other
    Bases will Jeff close…International or Domestic?????????????????????

    • CF says:

      No other hub seems susceptible to downsizing the way Cleveland does. I would expect changes in aircraft types and patterns at other hubs, particularly ones outside the US, but that’s it.

  2. Zack Rules says:

    Hum, Cleveland already has a relatively small amount of UA hub flights, around 225 daily compared to say Pittsburgh and Cincinnati with around 500 daily during their heyday. Thus, they are starting from a relatively small base. The percentage of O&D passengers is great as well, 73% versus around 10% at Pittsburgh during their peak and around 15% at Cincinnati during their peak. All of those bode well for Cleveland. Next, United should add either a flight to London on a 757-200 (high season) or maybe with a 737-700 (low season, same planes used for SNA-Hawaii). Frankfurt is another thought although it is on the edge of the 757’s performance. The other thing that bodes well for Cleveland is that they have not retained high levels of LCC service. Southwest could not even make CLE-Orlando work and has a relatively minimal presence, even cutting long time flights to St Louis. I would say that if UA eliminated the fourth bank of connecting flights (CLE-BUF goes from 4 daily to 3 daily), cut some of the marginal routings to say Portland ME and Quebec City (both are seasonal) and added some flights to places where a Chicago connection is a pain, such as Saginaw (DH2’s work well here), Lansing, Moline/Quad Cities, Springfield IL, Fort Wayne as well as some cities where there is no EWR or IAD service, I would say that Cleveland would be relatively profitable.

    • CF says:

      The thing about Cleveland is that some routes certainly do have good local traffic but others don’t. I have no doubt that flying will continue to the other hubs, large business airports like LaGuardia and National, and Florida. Outside of that, I think everything is up for review.

      It’s funny, because outside of those markets, only Vegas and Phoenix even have big jets. Everything else is on regional jets or props. Is there really a ton of local traffic on the flights to Albany, Buffalo, Burlington, Columbus, Dayton, Erie, Flint, Grand Rapids, Harrisburg, Knoxville, Louisville, Norfolk, Pittsburgh, Richmond, Rochester, South Bend, and Syracuse, among others? I highly doubt it.

      But if those passengers start connecting over other hubs, then that means some of the other more marginal flights will go away as well. Sure, you can’t downsize nearly as much when the hub isn’t as big to start with, but that doesn’t mean it won’t go away.

  3. Didn’t I read they agreed to keep CLE for 5 years (or some amount of years) or they would have to pay the city millions to de-hub it? So like AA did to STL, UA will do the same for CLE when that time is up or they see it would be cheaper in the long run for them to pay the millions and reduce CLE service to non-hub status.

    CLE will keep good service to hubs and maybe a few other key cities, but it will slowly be reduced in time.

    • CF says:

      Yeah, but if the hub isn’t profitable, then United can pull out. Even if there was a question, the cost is capped at $20m per year as a penalty for a couple years. For a $30b revenue company, that’s nothing if it really wants it to go away. But the reality is that it won’t go away unless it does suck.

  4. Ed says:

    I really think this issue is much ado about nothing; unless you live in Cleveland or are an airline geek.

    • ED – I really think this issue is much ado about nothing; unless you live in Cleveland or are an airline geek.

      —————
      Very true and that goes for any hub, unless you live in that city or going there for a reason you really don’t care. But you do have to feel bad for all the people who would loose their jobs. Also all the revenue lost to the airport, vendors, etc who service the hub airline and hub connecting passengers. It’s more an impact on the local economy then on anyone not living in that area.

      • Arcanum says:

        I disagree. Given the choice, I’d much rather connect through CLE than have to deal with ORD!

        As Cranky says, ORD is pushing its capacity. Would it not make sense to offload some of that volume if you already have another hub nearby? A second hub also offers some redundancy if ORD gets backed up due to thunderstorms, blizzards, etc.

        • CF says:

          Well, that’s the rationale that American used with St Louis. It was going to focus O’Hare more on local traffic and use St Louis to handle a lot of the connections. What it found was that the operation just wasn’t profitable that way. Customers might like going through St Louis (I did it in the hub’s dying days last year and it was great), but the revenues just weren’t there to support enough flights. So you could take one of a dozen options via Chicago or a couple through St Louis and Chicago usually won that battle for flexibility, at least for the higher dollar travelers.

  5. Bruce says:

    When you say UA is (present tense) the only carrier between CLE and LGA, you must be speaking about the future and using the merged carrier’s name. At present CO is and has been the dominant carrier operating CLE-LGA, but AA also offers a few token flites to LGA on RJs. And DL offers a few CLE-JFK daily flights.

    • CF says:

      I was ignoring JFK because that’s not really the same market for short haul flights, but I did miss AA. It was solely meant to be illustrative anyway. United (future) and American will be the ones to set pricing on that route. That tends to be a pretty cozy relationship when it’s just two legacy carriers there.

  6. PF says:

    “The trick is that while big local traffic is the key for hub success”-

    Does SLC generate big local traffic for DL – enough to support the frequency to the Northeast, CDG and seasonal NRT? Any idea on the breakdown of local traffic for DL in SLC?

    • CF says:

      The thing about Salt Lake is that there isn’t another option for serving the Mountain West other than the already-crowded Denver. There’s no doubt that Denver is the best hub in the area, but after that, Salt Lake is the only option. Without Salt Lake, how would Delta serve cities like Twin Falls, Idaho or St George, Utah? Even without a lot of local traffic, those smaller cities have high fares. So it’s a different dynamic out there.

  7. UA/CO must plan on keeping IAD around as I see today CO announced they got the ok for Houston-Lagos, Nigeria (NOV2011) and say they are planning IAD-Lagos also.

    • Bob says:

      Lagos sounds good as an oil run from Houston and potential gateway to the African continent.

      But Dulles to Lagos just sounds weird to me. Is the NGO/govt aid market that strong, or am I missing something?

  8. Richard says:

    IAD-LOS is a tag onto the IAD-ACC service on United. The Dulles hub is mega profitable for United and will continue to expand after the merger is operationally complete. IAD is also the only Northeast airport with room to grow. Other NE airports (PHL, EWR, JFK, BOS etc) are pretty much maxed out.

  9. John Chapin says:

    You say a hub needs lots of local traffic to be profitable. I just flew through Charlotte on US airways on monday. Huge hub… is there really that much local O/D traffic in Charlotte? Or is it an exception to your observation?

    • CF says:

      Great question. Charlotte does have some good local traffic, but my guess is that Charlotte is bigger than it should be except that it has one big thing going for it. Other than Atlanta, it’s the only real hub option in the southeast, so it provides service to a bunch of cities that wouldn’t be likely to be served otherwise. So those may be connections, but they’re high dollar connections where it’s unlikely we’ll see low cost service.

      It’s amazing to me that US Airways serves 8 airports within North Carolina alone. Within 250 miles of Charlotte, there is service to small airports with decent demand like Roanoke (VA), Lynchburg (VA), Tri-Cities (VA/TN), Asheville (NC), Greenville (NC), Fayetteville (NC), New Bern, Jacksonville (NC), Florence (SC), Augusta (GA), Hilton Head (SC). These airports aren’t usually very close to another airport, so there aren’t many drive opportunities. So it’s usually either Delta or US Airways (except for maybe Allegiant or AirTran to Florida on occasion). They may be connections but they’re high fare.

      • JamesK says:

        That was an interesting twist on the failed takeover bid of DL by US–the promise to keep both the ATL and CLT hubs going, with CLT taking overflow from ATL.

      • Payton C says:

        US Airways’ network within the Carolinas was inherited from Piedmont Airlines — which was headquartered in GSO but built its fortress hub at Charlotte due to its larger market. (Pace Communications, the largest producer of inflight magazines, was a Piedmont spinoff.) CLT usually works well operationally and has good corporate traffic from its outsized banking industry; it’s also a rare legacy hub that has minimal LCC competition.

        NC/SC/VA present an interesting case-study rebuke to central place theory in general. There are several medium-sized cities and many small cities, but no one large city has emerged.

        I’m also skeptical that Cleveland will remain at current levels; ORD and IAD are more useful and not all that congested. The connecting banks will deteriorate (aircraft will be scheduled to feed other hubs) and the percentage of O&D pax will grow until it becomes a focus city. It’s not even a question of whether the flights themselves are profitable; it’s whether they’re profitable relative to other opportunities within the system — and a hub with a strong international presence will be more profitable to feed.

  10. Gary says:

    Bingo. Cleveland service needs to survive on O/D traffic. It won’t survive or be maintained as a conecting hub (though connections will of course remain possible).

    And airline doesn’t make money by overflying its own hubs, and Cleveland is too close to other hubs to make any sense for the combined carrier. There’s no reason to maintain the costs and infrastructure for the purpose of competing against and draining away business from O’Hare.

    Of course the airline isn’t going to announce the end of Cleveland, why do that? But the fact that they’re even publicly skeptical should tell you something.

    On another note, it’s worth expecting some changes to Washington Dulles and Newark as well. I’d expect some larger aircraft flying transatlantic from Newark, and a push towards more O/D flying out of Dulles., at least at the margin.

  11. someonewithvision says:

    Mayor Jackson and Director Ricky Smith knew of this over 2 years ago, but so as to get Re-Elected and to maintain their jobs they said nothing

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