Frontier Airlines Comes to the Rescue in Cleveland

United Continental is slashing capacity in Cleveland by 36% this spring, but Frontier Airlines wants to pick up some of the slack.

Mar 18, 2014 at 10:31AM

When United Continental (NYSE:UAL) announced plans to end hub service in Cleveland this spring, many local pundits expressed worry that losing the United hub would be a huge blow to the regional economy.

To some extent, these fears are reasonable. The presence of an airline hub can help a midsize city maintain direct air links to many more cities than would be possible without a flow of connecting traffic.

Images

United announced last month that it will end hub operations in Cleveland this spring. Photo: The Motley Fool

However, the demise of United's Cleveland hub may encourage new competition in the market. In the six weeks following United's announcement, other airlines have already rolled out significant plans to grow in Cleveland. Most notably, Frontier Airlines, which is the only ultra-low-cost carrier serving Cleveland, has announced new service to eight cities. This will significantly reduce airfares, particularly for leisure travelers.

United starts to downsize
On Feb. 1, news broke that United Airlines planned to cut 60% of its flights in Cleveland this spring, ending the city's hub status. While most mainline flights will remain, regional departures will be slashed by more than 70%, reducing United's total capacity in Cleveland by around 36%.

United's decision to downsize in Cleveland was driven by its persistent losses there. However, the timing was accelerated by the growing pilot shortage at regional airlines. United's regional airline partners like SkyWest (NASDAQ:SKYW) and Republic Airways (NASDAQ:RJET) have had trouble meeting their hiring quotas due to the low wage scales at regional airlines and increased hiring demand at larger carriers. This is forcing some regional airlines to reduce service.

Images

United is cutting regional flights in Cleveland. Photo: The Motley Fool

By this summer, United will offer 72 peak-day departures from Cleveland to 20 destinations, down from nearly 200 peak-day departures before. United will continue to serve its hubs and certain major business airports (e.g., New York, Boston, and Washington) and top tourist destinations. However, Cleveland will lose nonstop service to dozens of small and mid-size cities.

The upside of losing a hub
Hub markets tend to be very inhospitable for potential competitors. The hub airline benefits from connecting traffic and can therefore "overschedule" routes with more service than could be supported by origin-and-destination passengers alone. Other airlines don't have that luxury, making it hard for them to compete profitably.

As a result, some of the smaller hub cities in the U.S. like Cleveland, Cincinnati, and Memphis have had some of the highest airfares in the U.S. in recent years. Thus, while losing a hub leads to fewer nonstop destinations being available, it tends to increase competition on the remaining routes. This process has already begun in Cleveland

Last month, Frontier Airlines announced that it would add new year-round nonstop service from Cleveland to Orlando and seasonal service to Seattle starting in June. The Seattle flights replace seasonal service that United has dropped, while the Orlando flights represent United's first year-round competition on that route.

Frontier

Frontier Airlines will start eight new routes from Cleveland in June. Photo: Frontier Airlines.

Just last week, Frontier announced more new routes out of Cleveland. Frontier will now add service to Raleigh-Durham, Atlanta, Tampa, Fort Lauderdale, Fort Myers, and Phoenix in June. This represents a mix of cities where Frontier will now compete with United, cities that were due to lose their only nonstop service to Cleveland, and cities where Frontier will compete with other airlines (but not United).

Frontier offers a very different type of product than United or the other legacy carriers. Most of its new Cleveland routes will be served less than daily (typically with three to five weekly flights). Frontier also lacks a first class section, and legroom tends to be tighter than on United's planes. These attributes make Frontier less attractive to business travelers.

However, many leisure customers will be happy to cope with less legroom and a more restrictive flight schedule for the lower fares that Frontier will offer. Thus, while losing the United hub may be bad for Cleveland-area businesses, it seems increasingly likely that leisure travelers will benefit from more competition and lower fares.

Foolish bottom line
When United dominated Cleveland, low-cost carriers and ultra-low-cost carriers like Frontier Airlines mainly avoided the airport. With United now cutting flights in Cleveland, other carriers see a more hospitable environment for expansion.

Frontier's decision to grow in Cleveland will significantly change the dynamics of the market. First, Frontier will offer a different product (infrequent no-frills flights on mainline jets) than what United and other legacy carriers provide (frequent flights targeted at business travelers, mainly on regional jets). Second, Frontier will undercut United and other airlines on price due to its lower cost structure.

For businesses that were willing to pay extra for more nonstop flight options, United's decision to close its Cleveland hub is a big loss. However, typical Cleveland residents may find that they are better off with fewer flights but more competition.

The Motley Fool's top stock pick for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Adam Levine-Weinberg owns shares of Republic Airways Holdings and is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers