MIAMI — United Airlines is set to announce major cutbacks at Cleveland International Airport on Monday. According to an internal company email obtained by Airchive, United CEO Jeff Smisek informed employees that the carrier will be reducing daily departures by more than 64% spread over several stages beginning in April 2014.
Smisek claims in the letter that the hub in Cleveland, which United inherited as part of a 2010 merger with Houston based Continental Airlines, hasn’t been profitable for over a decade, and that it has generated “tens of millions of dollars of losses.” The email also says the city lacks the requisite demand for “hub-level connecting flying.”
As per the tentative details, the carrier will keep mainline flying levels roughly the same (reducing from 26 to 25 daily departures). Regional flying, however, will take a much larger haircut with a more than 70% reduction in departures. Total capacity as measured by available seat miles will decline by about 36%, and the reductions will be phased in over April, May, and June 2014 in equivalent increments.
Once the reductions are fully implemented, United’s overall service offering will be reduced to 72 peak-day departures serving 20 destinations. While United has not yet made a final decision as to which destinations will be eliminated, service to all of United’s remaining hubs (Chicago O’Hare, Washington Dulles, Houston Intercontinental, Denver,
Los Angeles, San Francisco, and Newark) will be retained, as well as flights to key business markets such as New York La Guardia, Washington Reagan, and Boston. Leisure destinations marked for retention include Fort Lauderdale, Tampa, Fort Myers, and Orlando.
During the summer of 2013, United operated roughly 200 daily departures from Cleveland, while this winter United operated around 170 peak day departures. The carrier currently serves 68 destinations from Cleveland, 63 domestic ones and five outside of the United States. Airchive sources report that airports that will retain Cleveland service beyond the fourteen confirmed above include Albany, Baltimore-Washington, Dallas-Fort Worth, Las Vegas, Milwaukee, and St. Louis.
In 2010, United and Continental reached a deal with the Ohio Attorney General to maintain its hub in Cleveland for at least five years (a period ending in September 2015). The company was only required to maintain 90% of combined flight levels at Cleveland (around 190 daily departures at the time) for the first two years of the agreement, after which United would be able to reevaluate its flight levels. United would be required to pay damages of up to $20 million if the commitment were not honored.
However, United might not have to pay a cent. Technically speaking, Cleveland cannot be counted as just a spoke destination, since it has flights to 13 other cities that aren’t United hubs. Moreover, each of these cities will likely continue to see United offering two to three daily flights on larger regional jets, allowing United to make the claim that it is retaining a connecting complex at Cleveland. And even if United is forced to pay a fine, $20 million is a drop in the bucket for a company that books more than $38 billion a year in revenue.
The move did come as a bit of a reversal, given that as recently as mid-2012, United executives were lauding the financial performance of Cleveland as a hub.
“Cleveland is to be commended” for encouraging customers to choose United Airlines, said Greg Hart, United’s senior vice president/network. “It is incredibly helpful….Year over year, (Cleveland Hopkins International Airport’s) performance is better than some other hubs in terms of profitability. The hub is in a far better place than it would have been without the efforts of the team in Cleveland.”
And its certainly true that O&D demand in Cleveland has been relatively robust over the past few years. The problem is, as Smisek noted, connections. The primary function of an airline hub, especially one in as small of an origin and destination (O&D) market as Cleveland, is to connect passengers. And for pre-merger Continental, Cleveland did a good job of that, providing Continental with a presence in the Midwest.
But once the merger happened, Chicago O’Hare was already positioned to provide those connections at a higher volume and cheaper price (thanks to its higher flight counts, which allows for lower costs on an amortized per-flight basis). With Chicago O’Hare in the network, United didn’t really need a hub at Cleveland, and while the agreement with the Attorney General (which United signed in an attempt to stave off Department of Justice scrutiny of its merger) delayed the inevitable, this was bound to happen at some point.
Cleveland is the victim of a unique confluence of factors that can be essentially boiled down to small hubs don’t work in today’s US airline industry without significant geographic isolation (Salt Lake City for Delta). The other factors at play here are the long run decline of 50 seat regional jets, the growing importance of O&D traffic, and more broadly, the financial benefits of capacity reduction. The first reason is a particularly important one.
Close to 80% of Cleveland’s daily departures are on aircraft seating 50 passengers or less, but the economics of these aging aircraft don’t make sense with fuel prices at $95+ per barrel and maintenance costs rising in tandem. Meanwhile, legacy airlines have increasingly grown to realize that O&D revenue volume is important in hub profitability, an area where Cleveland is sorely lacking. And the reduction in capacity will allow United to raise fares across its network, especially in smaller Midwest communities.
The de-hubbing provides ammunition to critics of airline consolidation, who can now point to the de-hubbing of Memphis for Delta (plus massive cuts at Cincinnati), Las Vegas for US Airways, Milwaukee for Frontier, and Cleveland for United as evidence of the victims of consolidation.
But for United the move will be financially beneficial. De-hubbing Cleveland will allow United to save millions each year in expenses, and allow the carrier to more quickly retire its aging and costly fleet of 50-seat regional jets. The reduction in capacity will cause fares to rise for United and every US carrier in the recovering Midwest, so there’s a broader revenue boost for United and the industry as a whole. And with United lagging behind its peers Delta and American with an operating margin of just 3.3% in 2013, eliminating what is certainly United’s worst performing hub will certainly help.
The service cuts are expected to eliminate 430 airport operations jobs as well as 40 catering positions. United currently employs more than 2,000 people at its hub operation in Cleveland. And the cumulative estimated economic impact of the Cleveland hub is more than $5 billion a year in a metro area with a total economy of $139.8 billion. The broader story for Ohio, the nation’s seventh most populous state, is one of declining importance in the US airline system. Over the past thirty years, the state of Ohio has now lost five airline hubs; Piedmont (US Airways) at Dayton, America West at Columbus, Skybus at Columbus, Delta at Cincinnati (still called a hub by Delta, but with 99 peak day departures to 41 destinations versus 600 daily departures at its peak), and United at Cleveland.
United will hold its annual shareholders meeting in Cleveland this June.