United's Move of Trans-Con Service to Newark Is a No-Brainer

NEW YORK ( TheStreet) -- United's (UAL) shutdown at John F. Kennedy International Airport and move of trans-continental service to Newark seems to benefit everybody, particularly United, raising the question why it didn't happen sooner.

Airline shares rallied Friday, partially as a result of a report by JPMorgan analyst Jamie Baker who wrote that "sentiment remains poor, despite improving headlines." One of the headlines Baker cited involved United's move, which will result in reduced capacity -- Wall Street loves this -- on trans-con routes.

On Friday, United shares gained $1.24 to $53.25, as shares rose at every major U.S. airline except for Spirit (SAVE). Year to date, United shares are down 20%, American (AAL) shares are down 23%, Southwest (LUV) shares are down 10% and Delta (DAL) shares are down 15%.

Over the past three years, airline shares have risen dramatically. The industry is enjoying its highest profits ever: One reason has been that airlines are increasingly consolidating operations at their hubs. In Newark, United operates the most profitable U.S. hub.

So it seems a no-brainer to focus there, but the move is complicated nonetheless. Vacating one of the world's most important airports after seven decades is not an easy choice to make, even if, as United executives told reporters on a June 16 conference call, the airline has been losing money at JFK for seven years.

One important step was to assemble sufficient aircraft to enable stepped-up service at Newark. Aircraft do not grow on trees.

In April, United said it would put widebody Boeing 767s to work on four of its Newark-origination, trans-Atlantic routes that had been operated with 757s.

The first transition to a 767 took place took place May 6 on the Newark-Barcelona route. On June 4, a 767 replaced a 757 on Newark-Berlin. On Oct. 25, the same switch will take place on Newark-Hamburg and Newark-Madrid.

United had planned the change ever since the 2010 merger with Continental, Andy Buchanan, United managing director of international planning, said in a May interview.

"As we looked at the network and the fleet, we thought early on that getting larger gauge aircraft into Newark to fly to Europe would satisfy customer demand and also improve our financials," Buchanan said. "But our timing was dictated by fleet availability and by the opportunity cost since we were using those aircraft elsewhere."

It is interesting to consider Buchanan's remarks in retrospect, given that United was already planning a significant alternate use for the 757s.

Another factor: Competition is intense in the JFK-California market, with five carriers offering about 75 daily departures. United spokesman Rahsaan Johnson said that didn't directly cause the move; over time, capacity tends to rationalize. Nevertheless, Johnson said, "We are in our seventh year of losing money at JFK."

One more factor: JFK is not an inexpensive place to operate, and United's lease at Terminal 7 comes up for renegotiation this year.

Johnson said the move means United will discontinue an unneeded complexity: "Making customers choose between a great schedule of flights at Newark and a great product at JFK."

United p.s. flights all provide premium service: flat-bed seats in business class; extra legroom in economy plus, and Wi-Fi, enhanced seatback entertainment and power ports in every row. Each p.s. 757 has just 114 seats, about 40 less than a 757 normally carries.

United will fly up to 17 Newark-SFO trips. It currently flies seven SFO-JFK and 15 SFO-EWR. United will fly up to 15 Newark-LAX trips. It currently flies six LAX-JFK and 14 LAX-EWR.

"It's hard to believe it took this long to do this," said aviation consultant Bob Mann. "But the manner was decisive, and they engineered a slot swap with Delta that benefited both parties" because it strengthens Delta's JFK hub as well as the Newark hub.

Mann said the biggest potential problem for United may be that it loses entertainment industry travelers, including performing artists, attorneys, financial types and executives who fly frequently between Los Angeles and New York.

"The entertainment market, which is huge, is wedded to JFK, I don't know why, so there is a perceived risk from moving to Newark," he said. "United will have to get the entertainment crowd to move over." This will no doubt reignite the continuing debate over whether it is easier to get to midtown Manhattan from JFK or Newark. Newark is clearly closer to Wall Street and clearly further from the eastern boroughs and northern Manhattan.

What is not subject to debate is that United's JFK presence was an anachronism,  "a holdover from the days before people decided they ought to focus on hubs and eliminate point-to-point boutique service," Mann said. "The move should be hugely positive."

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

More from Stocks

REPLAY: Jim Cramer on How to Navigate the Stock Market Amid Tariff Worries

REPLAY: Jim Cramer on How to Navigate the Stock Market Amid Tariff Worries

Jim Cramer: 4 Stocks Could Get Throttled By a 'Knock Down Drag Out' With China

Jim Cramer: 4 Stocks Could Get Throttled By a 'Knock Down Drag Out' With China

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

3 Warren Buffett Stock Picks That Could Be Perfect for Your Retirement Portfolio

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites

50 Stocks That Could Be Shredded If a U.S. Trade War With China Ignites

Why Starbucks Latest Data Reveal Should Worry Investors

Why Starbucks Latest Data Reveal Should Worry Investors