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.
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.
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.
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.
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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.