May 31 (Bloomberg) -- United Continental Holdings Inc. plans to cut 1,300 jobs and some service at Houston’s main airport after the city backed Southwest Airlines Co.’s bid to start international flights from a secondary facility.
The 10 percent reduction in seating capacity at George Bush Intercontinental Airport includes dropping a planned route to Auckland, United told employees in a memo yesterday. Most of a $700 million terminal project is also “in significant doubt,” Chicago-based United said.
United is retrenching in a city that a predecessor once called home. It was formed in the 2010 merger between former United parent UAL Corp. and Houston-based Continental Airlines Inc., and Chief Executive Officer Jeff Smisek moved from Continental to United’s headquarters to run the new company.
“There is some bitterness that exists between the city of Houston and United management, given the merger and the decision to relocate in Chicago,” Hunter Keay, a Wolfe Trahan & Co. analyst in New York, said today in an interview. “But this certainly jibes with everything the company has been saying, that there would be a cannibalization of Bush.”
Houston’s City Council rebuffed United in approving Southwest’s $100 million expansion to add overseas flights at William P. Hobby Airport. United, the world’s biggest airline, said its busiest hub was imperiled by that plan, which was supported by the city’s airport system and Mayor Annise Parker.
“I am deeply disappointed that Mayor Parker and the City Council have taken this action that harms United and Houston’s international gateway at IAH,” Smisek said in the memo, using the airport code for Bush Intercontinental.
Southwest is the world’s largest discount carrier and the dominant airline at Hobby, with more than 90 percent of passengers in the year ended in January. Council members voted 16-1 for Dallas-based Southwest’s plan to add flights there to Mexico, the Caribbean and South America in 2015.
United said the loss of connecting travelers to Hobby would curb future growth at Intercontinental, wiping out projections for traffic gains that would have turned some unprofitable routes there into money-makers. The airline said that without the promise of that business, it had to cut back.
“This will harm us and IAH, but IAH will continue to be a strong hub for United,” Smisek said in the memo. “Unfortunately, the city of Houston will suffer the consequences of this decision for decades to come.”
Because the competition from Southwest at Hobby airport wouldn’t begin for at least three years, any personnel decisions United makes “are based on other things, not the vote we cast,” Parker said at a press conference yesterday after the City Council meeting.
“For United to say there will be 1,300 people laid off next week or so, that’s just not reasonable because nothing’s going to happen until that terminal is built,” Parker said. When United and Continental merged, “they committed early on that we would be the largest hub of the largest airline in the world, and that’s the commitment I expect them to keep.”
Jobs at Intercontinental will be eliminated over time, and relocations and a voluntary departure program will be offered to ease the blow, United said in the memo. The pullback in flights will take effect with United’s fall schedule, the airline said.
Southwest declined to comment on United’s move, said Paul Flaningan, an airline spokesman. The carrier said earlier that the council vote was “a monumental moment for Southwest and the city.”
United had said that allowing flights outside of the U.S. from a secondary airport would drain passengers from Intercontinental, putting Houston at a competitive disadvantage to other cities that serve as major global gateways. About $600 million of a $700 million terminal upgrade project at Intercontinental remains unfinished, United said.
“We didn’t announce anything new,” Mary Clark, a United spokeswoman, said yesterday in a telephone interview. “This is part of what we have been saying all along would be the result of international service starting from Hobby.”
United is set to be the first North American carrier to get the delayed Boeing Co. 787 Dreamliner, and had planned to fly the initial plane between Houston and Auckland. Dropping that flight may be part of a plan to have 787s replace older, less-efficient jets rather than put them on new routes, said Wolfe Trahan’s Keay, who rates United as outperform.
“It’s possible this is as good an excuse as any to classify more of the 787s for replacement instead of growth,” he said.
Keay said he expects United will shift an existing Houston-Lagos flight to a 787 from the larger Boeing 777 used now. “That is too big of an airplane for that route,” he said.
United rose 2.5 percent to $24.77 at 1:07 p.m. in New York, while Southwest gained 1.4 percent to $8.99.
Hobby Airport is 12 miles (19 kilometers) from downtown, in Houston’s southeast quadrant. While Intercontinental is almost twice as far from the central business district, it’s closer to newer business and residential areas on the city’s northwest fringes.
Southwest, which agreed to pay for a new international terminal at Hobby, said the city will benefit from more travelers and local jobs. The airline still needs approval from U.S. officials before it can begin international flights at Hobby in 2015.
The $100 million international terminal at Hobby would include five gates to support as many as 25 Southwest round trips a day and facilities for U.S. Customs.
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