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Houston airport operator envisions Hobby offering international flights in 12 markets

12th April, 2012

Studies carried out on behalf of the Houston Airport System (HAS) to examine the viability of international flights from Houston Hobby airport contemplate a two-phased introduction of 12 markets to Mexico and Central America. Southwest Airlines is pushing for facilities at Hobby to support international flights, but research conducted shows that Mexican low cost carriers VivaAerobus and Volaris would also have an interest to operate international service from Hobby. It is not surprising United has mounted vehement opposition to Southwest’s campaign, as it enjoys majority carrier status in most of those markets with its service offerings from Houston Intercontinental Airport.

Earlier this year Southwest asked Houston Airport System (HAS) to conduct a feasibility study for the addition of a five-gate terminal at Houston Hobby Airport to support international flights. Houston is Southwest’s sixth largest city based on daily departures, and the city’s geographical location makes it an ideal destination for short-haul international flights to Mexico and Central and South America. Data in the study conducted on behalf of HAS show that Houston was the point of entry for 64% of Mexican visitors travelling by air to the US in 2010. Through its acquisition of AirTran, previously domestic-only Southwest is gaining knowledge of international operations now that it is managing AirTran’s network, which includes flights to the Caribbean and Central America.

See related article: Southwest intensifies its campaign to launch international service from Houston Hobby

HAS commissioned InterVISTAS and GRA to study the economic impact of new international service from Hobby on the Houston metropolitan area. In their study, the companies concluded that while the majority of the analysis focused on anticipated new service from Southwest, “there is strong interest in new service starts from foreign-based low-cost carriers including Volaris, Interjet and VivaAerobus”.

Projections show 12 new destinations for a total of 23 daily flights

Using modelling from Sabre based on the Quality of Service Index, service patterns operated by US and Mexican carriers, market sizes and price stimulation rates, the study’s authors identified 12 markets for introduction in two phases from Hobby. Those include the Mexican destinations of Cancun, Guadalajara, Mexico City, Monterrey, Puerto Vallarta, San Jose del Cabo and Toluca; San Jose and Liberia, Costa Rica; San Salvador, El Salvador; Bogota, Colombia; and Caracas, Venezuela.

With the exceptions of Mexico City, Monterrey and San Salvador, United is the sole carrier on the routes, which is a point Houston director of aviation Mario Diaz made to the city’s mayor when recommending Houston approve development of the new international terminal at Hobby. He stressed Star Alliance partners, dominated by United, account for 97% of Houston’s service to Latin America. Mexico City is served by Aeromexico, while VivaAerobus serves Monterrey. TACA, which is set to become a new member and partner to United in the Star Alliance, serves Houston from its San Salvador hub. The study’s authors anticipate that VivaAerobus will transition its flights from Houston Intercontinental Airport to Houston Hobby.

Based on the study’s projections, the initial six markets that Southwest, Volaris and VivaAerobus would likely debut from Hobby are Cancun, Mexico City, Monterrey, San Jose Costa Rica, San Jose del Cabo, and San Salvador. The estimates show a total of 12 daily flights in those markets from the three carriers, with Southwest dominating the schedule. Southwest and Volaris have a nearly two-year-old partnership that entails passenger transfer connections to five of Volaris’ Mexican destinations – Mexico City, Toluca, Guadalajara, Morelia and Zacatecas – from Los Angeles, Chicago Midway, and Oakland, San Diego and San Jose, California. The study’s projections show that both Volaris and Southwest would both operate from Houston to Mexico City, but the airlines could also elect to have just one carrier operate the route and add Houston to their partnership.

Projected new initial international markets from Houston Hobby Airport

Mexico City, San Jose del Cabo and Cancun seem like obvious choices for Southwest from Hobby since its AirTran subsidiary operates flights to five US destinations from Cancun and has secured approval to launch service to the Mexican resort destination from Chicago Midway. AirTran is launching flights from Orange County John Wayne Airport to San Jose del Cabo and Mexico City in June. The city of Houston estimates it would take roughly three years to develop and construct the new terminal, so by the time Southwest would launch flights it is likely the majority of the airports in AirTran’s network would be rebranded as Southwest stations. That would allow Southwest an already established presence in those three Mexican markets as flights from Hobby begin.

The frequencies offered in the initial projected international markets from Hobby are small in comparison to the daily flights United offers in the pairings, especially in Mexico City and Monterrey, which have a mix of business and leisure travellers. United has numerous daily flights in each of those markets with both regional jets and widebodies and offers appealing schedules to business travellers. Although United is concerned over Southwest’s moves to reintroduce international flights to Hobby, the network carrier has a solid frequent flyer base of business travellers that are not likely to trade schedule and preferred treatment for Southwest’s service with fewer frills.

During the projected second phase of new flight introduction from Hobby to international destinations, the study concludes flights would debut to Bogota, Caracas, Guadalajara, Liberia, Puerto Vallarta and Toluca, which is considered Mexico’s secondary airport. Authors of the study anticipate that during this phase Interjet would launch flights from Toluca to Houston. The carrier currently operates flights from both Toluca and Mexico City to San Antonio, Texas. The study’s authors estimate the carriers would add 11 daily non-stops for a total of 23 daily flights from Hobby to Mexico and Central and Latin America from Houston.

Projected schedule once all new international flights are introduced from Houston Hobby Airport

Although the study projects Southwest operating one daily flight each to Bogota and Caracas,  those cities do not seem likely candidates for Southwest service. Gaining access to Caracas will be challenging, which is reflected in Spirit Airlines’ ongoing frustration over its five-year wait in gaining authorisation from the Venezuelan Government to launch flights to the country. Although Bogota is served by US low-cost carriers JetBlue and Spirit, it seems that Southwest would prefer to introduce service to more markets dominated by leisure travel, like Aruba, which is already served by AirTran from Atlanta, Baltimore and Orlando. If Southwest applies its traditional conservative approach to market launches from Hobby, it will likely initially gravitate to destinations where AirTran has gained some experience.

See related article: Spirit goes to new lengths to press its case for Venezuela

United also offers numerous daily flights in all the markets projected for launch during the second phase of Hobby’s international expansion. While there will be some migration of passengers attracted to lower fares offered by Southwest, it can be argued those passengers are marginal to carriers like United, which, along with the US major airlines, places a primary focus on the more lucrative frequent flyers and business travellers.

Conservative load factor projections

Authors of the study calculated during the first phase of international flights from Hobby, Southwest, Volaris and VivaAerobus would transport roughly 846,514 passengers annually to international destinations. Approximately 469,903 of that total would comprise local Houston passengers while the remaining 376,611 customers would connect to other Southwest flights. The analysis conservatively estimated a 69.4% load factor for the first six markets with an average of 143 seats per flight.

Estimated load factors for the initial six new international destinations from Houston Hobby Airport

If the full projected schedule is implemented, 1.5 million passengers would travel on those three airlines plus Interjet annually, with local Houston passengers accounting for 877,694 of the total and connecting passengers representing the remaining 589,947.

Estimated load factors of full projected international schedule from Houston Hobby Airport

The study’s conservative average load factor estimate for all 12 markets is 60.4%, although some potential destinations – such as Monterrey and Guadalajara – would see unsustainable low load factors. The projections were calculated based on average seats per flight of 143. Southwest’s single-class Boeing 737-700s have 137 seats while the carrier’s new 737-800s introduced this year have 175-seat configuration. 

Authors of the study believe initially 445,226 passengers would be diverted from Houston International to Hobby at the end of flights phase-in. But they believe Houston Intercontinental would recapture 539,437 passengers through stimulation by the new international services in the market, which would create a net positive change of 94,211 passengers at the airport.

If the scenario proposed in the study is realised, United and Star’s share of the short-haul service to Latin America from Houston would drop to 73%, with Southwest taking a 20% share and other carriers accounting for the remaining 7%.

United charges the 'Southwest Effect' is outdated

Using Southwest’s pricing in domestic markets for the year ending 3Q2011, the study projects fares would be lowered significantly in all 12 markets covered under the analysis. The calculations show Caracas would enjoy the largest decrease of 83%, or a USD634 decrease.

Estimated fare prices once international flights commence from Houston Hobby Airport

But United disputes Southwest’s perceived pricing power in the Houston market. The carrier is in the midst of carrying out its own study examining how international flights from Hobby would change the dynamics of the Houston air travel market. United dismisses the “Southwest Effect” of lower fares stimulating new traffic as outdated in the mature US market place. “Implicit in the HAS study analysis is that fares will go down 55% and traffic will grow by 181% in the local market. This defies contemporary logic when the industry is experiencing record jet fuel prices in the USD140 per barrel range, and is no longer engaged in significant growth and unprofitable flying,” said United, highlighting some details of its upcoming study. “Based on Southwest’s public cost data, our work suggests that should Southwest choose to operate the proposed schedule at the fare levels envisioned by the HAS study, Southwest would lose roughly USD76 million every year.”

The decision to push forward with international flights from Hobby now rests with Houston’s city council, and ultimately the US Government, which must grant the necessary approvals for Hobby to handle international passengers. There is no doubt both Southwest and United will be fierce in their campaigns championing new international flights and opposing the new service, and both carriers are likely preparing to continue to ensure their messages are clearly communicated to city leaders in Houston.

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