United Upgrades San Francisco Hub as Boeing 787 Chengdu Flight Looms

SAN FRANCISCO (TheStreet) -- The best Asian hub in the U.S. will get better next week, when United (UAL) opens a new boarding area in its dedicated terminal at San Francisco International Airport, where one of the most ambitious efforts in recent U.S. aviation history -- a San Francisco to Chengdu flight -- will take off in five months.

At San Francisco, United operates the largest hub on the West Coast with nearly 300 daily departures, including eight daily non-stops to seven cities in Asia -- making it the largest single airline Asia hub in the U.S. -- as well as 260 daily departures to 70 domestic cities. This year, the carrier will begin service to two more Asian cities, Taipei and Chengdu, in March and June, respectively.

The Chengdu flight is a symbol of the vast possibilities ahead for U.S. commercial aviation, using the Boeing (BA) 787, a new airplane with unique capabilities, serving a destination with no non-stop U.S. service, and taking advantage of a hub system that at its best aggregates passengers at levels that enable the opening of new air travel frontiers.

The boarding area improvements, which cost $138 million, will add a newly renovated Boarding Area E in Terminal 3, which is wholly dedicated to United flights. Boarding Area F has 21 gates; Boarding Area E, which will re-open on Jan. 28, will add 10 more. By May, United will have moved most of the operations it has in Terminal 1 to Terminal 3. The upgrade is part of a long-term $5 billion improvement project at SFO.

"The terminal and the new boarding area reinforce our commitment to the San Francisco market and to keeping SFO as the leading Pacific gateway in the U.S.," said Brian Znotins, United vice president for networks, in an interview.

Asian growth has been a focus of U.S. aviation for years, but the focus has intensified given two recent developments. The merger between US Airways and American (AAL) completed the post-deregulation consolidation into an industry with three global carriers, coinciding with three global alliances with three major European carriers.

Additionally, Delta (DAL) has begun a push to establish its Asia hub in Seattle, as the three carriers maneuver to stake out positions at the big three West Coast airports: LAX, SFO and Seattle. In this pursuit, United starts with a huge lead.

"If you take a clean sheet of paper and build hubs from scratch, and you want a Pacific gateway, it's hard to think of a better gateway than SFO," Znotins said. "It's geographically well-situated. It has a strong corporate presence, a lot of local travel, regional GDP growth and (multiple) demographic and economic factors" including a sizable Asian population."

Among the demographic advantages, he said, San Francisco leads all Western gateways in terms of its propensity for international travel. Each San Francisco resident makes 0.38 international trips annually; the rate in Los Angeles is two-thirds of that and the rate in Seattle is half of that.

In a sense, the competitive situation on the West Coast parallels the situation in the New York area. In both cases, United operates the best hub, although the carrier has been held back in recent years by repeated failures in its efforts to integrate United and Continental following a 2010 merger. Nearly every quarter since then, the airline has declared a turning point, but the hope has repeatedly dashed. United reported earnings on Thursday.

Action-oriented Delta aggressively deals with the realities it faces -- in New York, it is growing service and improving facilities at both JFK and LaGuardia, although both are congested airports where no single carrier dominates. Delta is also growing in Seattle, which is closer than the California airports to many key Asia destinations, but faces impediments posed by an entrenched hub carrier, Alaska (ALK) and by a relatively small local market. By mid-year, Delta will serve six Asian destinations from Seattle.

American doesn't dominate any of the three New York airports, nor does it dominate any of the three major West Coast airports. It may be said that American's New York hub is Philadelphia and its West Coast hub is Phoenix. Neither location is optimal.

LAX would seem to potentially represent the best West Coast hub for American, but it is difficult to make money at LAX because the airport is gate-constrained and the market is so diversified that no carrier can carve out a major hub, although both American and United operate undersized hubs.

"International carriers are more interested in collecting origin and destination traffic in Los Angeles," Znotins said. They help to make LAX the third-biggest U.S. international gateway, after JFK and Miami. But U.S. carriers need substantial hubs to build a critical mass of flights to feed international service.

That is why the Chengdu flight serves San Francisco and not LAX. United will begin thrice-weekly service in June with a 787 seating 216 passengers.

"This whole business, this entire industry, works best when you match capacity with demand," Znotins said. "The 787-8 allows us to do that. No other 220-seat airplane can go 8,000 miles."

United's Houston-Lagos route provides an example of the efficiency: United had served the route with a 777 seating around 300 passengers; loads were in the 70% range. In August, United switched to a 787, loads are in the 80% range, and profits have improved by about $2 million a month. The biggest contributor to the improvement, Znotins said, is the reduced fuel burn.

The Boeing 787 means United "can get deep into Asia," he said. "Fast forward 20 years, and United will be serving six to eight secondary markets in China, as more of these opportunities in secondary cities in China open up. All signs point to significant growth in China." United currently flies nine 787s.

The Chengdu flight is evidence that in every case, "SFO is going to be the first and most successful gateway to serve new Pacific destinations," Znotins said. "If a destination doesn't work there, it's not going to work anywhere." Potentially, United would even fly between SFO and Tokyo Haneda, a problematic airport for U.S. carriers because they have been unable to secure acceptable arrival and departure times.

Delta recently sought approval to switch its Haneda destinations from Seattle and LAX if it needs to, although the carrier said it has no immediate plans to switch. Said Znotins: "If any service to Haneda is going to work, it's San Francisco, because of the power of the hub."

Written by Ted Reed in Charlotte, N.C.

To contact this writer, click here.

Follow @tedreednc

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