“United Should Close IAD Dulles Hub” …says analyst

Imperial Capital analyst Bob McAdoo downgraded United yesterday, saying it will take the carrier years to catch up with its competitors and recommended that the Dulles hub be closed. His chief arguments are the overlap with Newark (EWR), located 230 miles north and the fact that “local passengers prefer flying from DCA”.  Hmm, 230 miles is a long way (5 hours with current traffic conditions on I-95) and I’d imagine the last thing anyone in DC wants to do is fly up to New York to make an international connection. DCA of course has slot and mileage restrictions (1,250 statute miles in any direction nonstop).  Anyway, here’s his viewpoint. What do you think? Courtesy of TheStreet:

“From a trading perspective, shares of UAL may continue to move upward as sector sentiment remains positive,” McAdoo wrote. However, he said, “United’s presentations and published plans (indicate it) will take at least four years to close $2 billion of the gap on American and Delta .”Importantly, during those four years, Delta and American will be similarly working to increase earnings,” he wrote. Year-to-date, United shares are up 10%, while Delta shares are up 43% and American shares are up 76%.
Regarding the presentation United executives made at the November investor day event, where they outlined a $2 billion program of cost and revenue improvements:

It “seemed more likely to be found in a typical operating department’s annual budget presentation than in a corporate presentation as to how United’s results would be lifted to record levels,” he wrote, noting that adjustments such as reducing overtime “will not close the gap with Delta and American.” What United should do, McAdoo argued, is to close the Dulles hub, given its proximity to the hub in Newark, N.J. Other airlines have realized synergies by closing hubs that are close together, he said, and United has already moved to close its redundant Cleveland hub. Moreover, local passengers to Washington generally prefer to fly to US Airways’ hub at Reagan National. McAdoo estimated that at best, Dulles flights can get only 20% to 30% of local traffic to Washington.”United would not operate two payroll departments, so we wonder why it would operate two hubs only 211 miles apart?” McAdoo asked. “Both hubs connect traffic from the eastern third of the country to Europe (and) connect north/south domestic traffic. By eliminating the smaller of the two hubs, United would see outsized savings and improved profitability across the entire United route network.”

The Washington hub was created to compete with Continental’s Newark hub. The two airlines merged in 2010, yet “almost four years after the merger, it is still competing,” McAdoo said. “Today the Dulles hub is the smallest in the northeast, carrying fewer passengers to Europe than Newark, than Delta at JFK or American Airlines/US Airways in Philadelphia.” In fact, Newark, with 32 daily departures to Europe, is the largest and strongest of the four. Yet curiously, United flies Boeing 757s on two-thirds of its flights to Europe. “Typically a carrier would place its largest aircraft in its largest hub, especially if the hub were slot-limited,” McAdoo wrote. “By upgauging these aircraft, we believe United would be able to move traffic currently connecting to Europe over IAD to EWR.

“United’s cuts in Cleveland set the standard for whether to unwind the Washington Dulles hub,” McAdoo noted. In Cleveland, he said, 17 markets with less than 10 local passengers per flight and 16 markets with generally 11 to 30 local passengers per flight were eliminated as of next month. Using the same metrics in Dulles, 65 spoke routes would be cut.

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  1. I’d agree with the viewpoint in the article. I do not know of a single carrier who has hubs 200 miles apart (don’t consider the combined AA-US entity, since they just got merged).

  2. The analyst is an idiot.
    DCA can not take me nonstop anywhere in the world
    IAD- I can go almost anywhere with 1 stop

  3. What’s curious is that an analyst feels the need to jump in with ideas of how to run UA. Lack of confidence in the leadership is expanding.

  4. He may be right for the wrong reasons…
    The point of a hub is to collect passengers in one place. By doing that, larger equipment can be used which lowers CASM and creates revenue potentials through better connection opportunities (more banks). UA cant do that with two hubs that serve the same CONNECTING passengers. Sure 230 miles isn’t drive-able, but someone connecting from Florida to Europe doesn’t have any trip time impact. so for that passenger, the hubs are redundant.

    IAD has tons of RJs whose sole purpose is to feed international flights, not local demand. If there are flights averaging less than 10 people, I can’t imagine the yields are strong enough to make the flights profitable. And if 65 of those cities are cut, then is there enough traffic to feed the international flights that rely on them. The question is not if DCA or IAD is more preferred, it is “can IAD be profitable without the domestic feed or international connections” because the international connections could be more profitable by consolidating and upgaguing in EWR and domestic o/d seems to be weak.

    Lastly, before someone tells me AA has JFK/PHL/CLT/DCA and DL has DTW/MSP, let me point out that UA is not those carriers. UA is in much worse financial shape and may need more drastic steps to strengthen its business.

  5. IAD may simply be better off as a large o/d focus city with limited international connections than a full blown hub

  6. United should downgrade LAX and IAD into focus city (airport)..
    Also they should reduce flights from ORD as it is a pathetic and inefficient airport for connecting flights

  7. New Yorkers want frequency, hence the 757s. How are you going to get more people into EWR with essentially two runways – spend a few billion to put a new runway on the far side of the Turnpike?

  8. @Levy Flight
    Suggestions on how to improve operations are not exclusive to United, analysts do it for every airline, which isn’t to say that questions about leadership aren’t expanding, but this sure as hell isn’t an indicator of such.

    Anyway, the analysts are idiots. United would close it or at least de-hub it if it were more unprofitable than CLE.

  9. Seriously close IAD? Did the analyst forget that DC is the Capitol with huge international demand and IAD has a brand new terminal train system with the DC metro coming soon. This is actually one of the easiest airports to use!

  10. Things that make you go hmmm. Theoretically, as much as Dulles blows, it should be doing OK financially….. it is the international airport for our Nation’s Capital, afterall. Not sure that United’s primary terminal being a series of connected double-wide mobile homes makes it all that attractive for customers. Whether or not it works as a full blown hub for a merged United remains to be seen. I would lean towards saying no.

  11. Close, I don’t think so. Change to a focus city and move most connecting international flights to EWR, sounds like a better idea.

  12. This “analyst” couldn’t be more wrong.

    – As others have pointed out, most of the routes to/from DCA are restricted in distance. United has the lion’s share of the market between the DC area and the west coast and Hawaii. That means profits that it won’t be looking to give up.

    – A large part of his argument appears based on the proximity to EWR. Well, EWR may only be a few hundred miles away, but you also have to take into account the east coast’s population density. CLE didn’t survive in part because of its proximity to ORD and IAD, that’s not at all the same as saying IAD won’t survive because of its proximity to EWR and JFK.

    – Has the writer actually been to Newark? It’s a very, very congested airport, with long delays as a result, made worse by the congestion in the larger NYC area airspace. Dulles isn’t my idea of fun, but delays are much less severe. If I have a choice as a passenger, I’d much rather connect in IAD than EWR. This isn’t just a matter of passenger preference but also room for the airline to grow.

    – Washington DC: Not only is it the capital but also the 7th largest metropolitan area in the US, and one of the fastest growing (in terms of population and economy). The metro area can absolutely support a hub with its O&D traffic, as well as connecting traffic.

    – Dulles isn’t a huge hub, but I think it’s a very valuable one in the United network. A small but significant aspect of this is the way the GSA awards city pair contracts (these are contracts awarded to carriers for specific routes, which the vast majority of government travelers have to take). Not surprisingly, many if not most city-pair routings originate/end in the DC area. GSA places a significant premium on nonstop routes, which United and its codeshare partners dominate out of the DC area, esp. for int’l routes. The fact that GSA is willing to pay a premium for nonstop routes is a major boon to United’s bottom line – and another reason the IAD hub isn’t going away.

    – Look at the evidence from the past decade: The vast majority of new IAD routes United has introduced in the past decade have stuck (as far as I recall every long-haul route except DME: e.g., BRU, DXB, KWI, NRT, PEK, FCO, ZRH, GVA). It’s clear from CLE United won’t keep routes/hubs running just for the sake of running them, so one would think these are profitable. I bet if you pointed a gun to the heads of United’s accountants (tempting …) and asked them to eliminate their least profitable hubs, DEN and LAX would go before IAD.

    – The 787 and its suitability for “long-and-thin” routes are ideal for IAD. United hasn’t introduced many new routes out of IAD on 787s, but long-term it will reinforce IAD’s position as a hub, both in terms of potential new routes and in terms of viability of existing ones.

    – Or look to the past, at how aggressively United defended its IAD hub in 2005, when Independence Air threatened it. The industry was weaker and less profitable then, so Dulles is in all likelihood more valuable/profitable to UA today than a decade ago.

  13. Marshall: Ah, those “temporary concourses” from 1985. It’s one of those tremendously pathetic “Welcome to America” images, like looking at the Capitol from the slums of Southeast. This (http://www.metwashairports.com/dulles/783.htm) can’t happen soon enough.

    The analyst also seems to have no idea how the economic geography of DC works. Yes, DCers prefer National because it’s so convenient. But Washingtonians – and NoVA defense contractors – are the IAD crowd.

    Finally, look at the lesson of US/AA: Don’t mess with air service out of the nation’s capital, or you will find that the Justice Department would like a second look at your books.

  14. DCA can never replace IAD; It would be a bad decision for United to shut IAD with so many star alliance partners flying into IAD and making regional connections.

  15. O2nz made several excellent points, especially about GSA contracts. However, hooks to politicians and decision making bureaucrats are very important to United. A hub at DCA is worth how many lobbyists?

  16. I thought this idea was ridiculous, but I went ahead and read all the way through. I lost all respect for this “analyst” when he could not figure out why the airlines continue to fly 757s to Europe. Come on, that was especially ignorant considering that Businessweek just ran an article explaining why the carriers continue to use the 757 an TATL routes.

    Others above have already defended IAD, so I won’t bother, except to make the obvious point that there is no more capacity at National or at Newark, so this guy’s theory is kaput.

    This analyst is just trying to make a name for himself. He doesn’t know anymore about covering airlines than he does about covering hi-tech, or car makers.

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