United Makes Hubs the New Battleground in Fight for Supremacy

(Bloomberg) -- A year ago, United Continental Holdings Inc. startled the airline world with an aggressive growth agenda aimed at bolstering hub profits and reclaiming traffic—a strategy to win back passengers rivals had siphoned away in the nine years since the carrier’s chaotic merger.

One-third of the way into its three-year plan, United has declared the project a success and is plotting the next phase. Now comes the hard part.

United’s overall expansion involves adding as much as 6 percent of capacity annually. In 2018, much of that growth came from beefing up its schedule in Hawaii and larger U.S. cities, said Savanthi Syth, an airline analyst with Raymond James Financial Inc. United also plucked “low-hanging fruit” such as improving its operations and customer service, she said.

But in 2019, the carrier is concentrating on its hubs. While Delta and American have been minting money at their respective bases in Atlanta and Dallas-Fort Worth, United hasn’t been as successful with its hubs in Chicago, Denver and Houston. One of United’s top priorities is to close that gap. 

United Makes Hubs the New Battleground in Fight for Supremacy

“So far I don’t think there’s anything that they’ve done that causes alarm at other airlines,” Syth said. “It was always 2019 and 2020 that are the key questions on that growth.”

Chicago-based United is aiming at small-city growth, moving regional jets out of big markets in favor of flying mainline jets between hubs and hinterlands. To do so, it will use 40 new jets—its highest annual total since 2010—plus another 25 Embraer 175s at its regional airlines. 

United’s grand plan might just help it regain some of what President Scott Kirby called its “natural share” of the travel market. 

American and Delta, however, might not see it that way. The good news for consumers is that, if the two rivals choose to retaliate, it could trigger a fare war.

Moves to counter United’s hub-and-spoke expansion will be easier if fuel prices stay low, making it less costly for American and Delta to add flights in the same markets. Still, executives at both airlines have noted that new flights into a dominant hub don’t typically spark major price skirmishing. More often, the Big Four (including Southwest) hit back at ultra low-cost rivals such as Frontier or Spirit Airlines Inc. should they encroach. In October, American Chief Executive Officer Doug Parker said his carrier hadn’t detected “any discernible market share shift” from United’s growth.

For its part, American is planning 3 percent capacity growth this year; two-thirds will be 100 additional flights from 15 new gates at its home base in Dallas, its largest and most profitable hub. The airline is working toward a goal of 900 daily departures from Dallas-Fort Worth this summer. Delta, which also is targeting 3 percent growth, already has about 1,000 flights per day at Atlanta, its biggest hub. By comparison, United has only about 600 at Chicago-O’Hare, its biggest.

All three carriers are keen to harvest profits with new flights this year from cities such as Augusta, Georgia; Madison, Wisconsin; and Santa Barbara, California—destinations where airfares are generally higher. “The environment’s going to get more competitive,” said Joseph DeNardi, an aviation analyst with Stifel.

“American Airlines’ growth is going to start to accelerate in 2019,” he said. “They recognize that there’s some share being lost.”

When United executives laid out their plan last January, they criticized prior management’s decision to shrink capacity. One reason United’s margins trail its two biggest rivals, according to current leadership, is that the carrier lagged American and Delta in seat growth from 2011 to 2016, leaving United exposed at its own hubs.

United has already revamped its schedules in Chicago and Houston, and has similar plans for Denver, where in the coming weeks the size of each flight “bank” will increase from 43 to 50 flights. United said Jan. 16 that it’s also cutting pre-6 a.m. departures by half because they command less revenue.

A broad response from American and Delta to United’s aggression has yet to materialize, according to traffic data Wolfe Research compiled for a Jan. 18 report. Of the 59 domestic routes United recently connected to its hubs, American competes on only 11. American added capacity to only four routes and shrank in seven, Wolfe’s research showed. Delta contracted on three routes and grew on two of the five which overlap with United.

United declined to comment beyond saying it is focused on its operations.

United’s capacity growth relative to the other two legacy airlines means it is deriving a larger, “natural” share of traffic in places like Oklahoma City, where no airline holds a clear advantage, analysts said.

“We believe UAL didn’t really ‘go after’ one specific airline with its growth, but rather added capacity to small spoke cities that it believed could use more service because of limited existing supply, high connecting fares, or circuitous connecting options to the most popular destinations from that city,” Wolfe analyst Hunter Keay wrote.

“American and Delta have the most to lose because their fares [have been] higher, and United is picking them off,” said George Ferguson, an aerospace analyst with Bloomberg Intelligence. “That’s what they get paid to do.”

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