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United Airline cuts likely to hit hubs, smaller airports

by Jason M. Breslow
June 04, 2008

United Airlines parent UAL Corp. will have to reduce service from major hubs if the company hopes to realize any significant, long-term benefits from its plan to remove 100 planes from its fleet of 460 aircraft, experts say.

United’s plan, announced Wednesday, is projected to reduce the airline's domestic capacity between 17 percent and 18 percent by the end of next year. Cumulative capacity, meanwhile, will drop between 9 percent and 10 percent in that time. The plan includes the grounding of all 94 of United’s 737 aircraft, a short-to-medium range plane, and six 747s, a four-engine jumbo jet typically used for flights to Asia and Australia.

The airline is also cutting as many as 1,600 salaried, management and contract employees, and eliminating its low-cost Ted unit.

The steps are designed to help United, the nation’s No. 2 airline by traffic, “build a stronger, more competitive business better able to withstand record oil prices and a softening economy,” according to a company statement.

The airline said schedule changes will principally occur at unspecified "underperforming markets." Experts, however, say the carrier will have to be more aggressive in order for the plan to make sense.

Routes to smaller, regional airports “are the first routes that will likely be axed because there just isn’t the kind of demand there that will sustain a profit,” said Jon Ostrower, author of the popular Flight Blogger blog for Flight International magazine.

Ostrower said he also sees room for cuts at destinations that cater more to leisure travelers rather than business passengers, such as Hawaii, Las Vegas and Los Angeles. European destinations may be candidates for cuts, too, he added.

Brian Nelson, an analyst with Morningstar Inc., said the number of flights to and from hubs such as New York and Washington, D.C. is likely to be scaled down. The east coast “is a very competitive region,” Nelson said. “Given those characteristics, those flights are probably not terribly profitable.”

Such trimming will have an impact on the number of planes United flies from O’Hare International Airport, according to Nelson.  Operations will be scaled down in Denver, too, he added, due to the presence there of low-cost carrier Southwest Airlines Co.

“As a general rule," said Alan Bender, an airline economist at Embry-Riddle Aeronautical University, "where they go head-to-head with low-cost airlines, they’re beating their heads against the wall so they’re going to pull back.” However, in cities such as Chicago and Denver, Bender said, “United is king … you can pare back some and still be number one.”

At the moment, though, United is concerned with simply staying afloat. Soaring fuel costs are placing an especially significant strain on the airline industry. During the first quarter, for instance, UAL Corp. spent $1.57 billion on fuel and posted a loss of $537 million. Current fuel prices, the company said, present United with “a $3 billion challenge to overcome.”

Ostrower called the current landscape is “the most difficult phase for airlines since 9/11.” He added, “no airline will be spared some kind of pain … It’s not going to be pretty.”

Legacy carriers, such as United, are at particular risk, according to Ostrower, because their large business models are not as easy to readjust. One or more legacy carriers could go out of business, he said, and “United is probably close to the top of that list.”

Nelson called Wednesday’s moves “an excellent step going forward.” Still, “United is far from out of the woods. Despites this change they're still not a healthy company.”

UAL stock closed at $9.14 Wednesday, up 7.15 percent, or 61 cents, over Tuesday's close. UAL shares have dropped 76 percent over the last 12 months. The stock's 52-week low is $7.36.