United's Biggest Hub Faces Attack by Southwest
Bob McAdoo, airline analyst for Los Angeles-based Imperial Capital, said it is unlikely that Southwest's projected international operation in Houston would have a major impact on United, but it is understandable that United would be opposed.
"In terms of impacting United shares, it won't," McAdoo said. "It's such a small piece of the pie, strung out over many years because it will take Southwest a long while to build service. From a shareholder point of view, it's so far down the road that I'm not worried about it yet."
Still, he said, "If I open up a store across the street from a Starbucks (SBUX), you never see it in the Starbucks numbers, but Starbucks would still prefer I wasn't there."
The airport's study projects that Southwest would initially serve five international cities from Hobby: three in Mexico and the capitals of Costa Rica and San Salvador. Longer term, the destinations would include six cities in Mexico, three in Central America, Bogota and Caracas. Currently, Southwest Hobby service includes 134 daily departures to 34 domestic cities.McAdoo said questions remain about Southwest's intent because the airline has been evolving since it ran out of new U.S. destinations big enough to materially impact its earnings. Most Mexico-Houston markets seem small for Southwest's normal operational mode of providing frequent service on 737 jets. "You don't know what Southwest is going to look like," McAdoo said. "They are learning to fly internationally. They now have different sizes of airplanes (after merging with AirTran). Maybe, in these markets, they will fly once a day. The point is, you used to know what Southwest was going to do, and I don't think you do anymore. They are trying stuff they've never tried before." Whatever Southwest plans, it is clear that Houston faces a tough choice. Of course, new service is typically desirable for a city, and new service from Southwest can bring lower fares. But at the same time, a major airline hub airport is perhaps the most attractive asset a city can provide in terms of stimulating commerce. US Airways (LCC)President Scott Kirby has said that United's Houston hub is the third most profitable major airline operation in the U.S., in terms of profit margin. That means it is a place where the hub carrier will continually be willing to commit resources.
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