United should wind down Washington Dulles hub: Analyst

Washington DC
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Imperial Capital analyst Bob McAdoo suggests that United Airlines wind down its hub at Washington Dulles International airport in order to boost financial performance.

The recommendation comes as Imperial downgrades the Chicago-based carrier to in-line from outperform due to the continued “lag” of its financial metrics to its peers American Airlines and Delta Air Lines, in a report published on 26 June.

“We believe United’s published objectives are logical and their efforts will likely reduce costs and increase revenues, in our opinion, the scope and scale of the overall plan seem myopic in the post-merger context of what was recently the largest airline in the world,” writes McAdoo, citing the airline’s plan to reduce costs by $2 billion over four years.

United reported an operating loss of $349 million with passenger revenue per available seat mile (PRASM) falling 2% in the first quarter. Both American and Delta reported an operating profit and unit revenue gains during the period.

Cutting the hub at Washington Dulles and additional reductions to United’s 50-seat regional jet fleet in favour of larger aircraft would boost earnings and performance, says McAdoo.

The “vast majority” of markets from Dulles are unprofitable and compete with similar routes from United’s hub at Newark Liberty International airport only 338km (211 miles) distant, he claims. There are 65 routes from the Washington DC area airport that carry fewer than 30 local passengers per flight, he adds citing US Department of Transportation (DOT) data.

The fewer than 30 local passengers per flight metric is what the airline used to determine what markets to cut from its former hub at Cleveland Hopkins International airport, which was downsized in three waves from April to June, adds McAdoo.

“The IAD [Dulles] hub may be profitable, but United in-total would likely be more profitable if IAD were reduced,” he says. The carrier could upgauge flights to Europe from Newark to widebody aircraft from Boeing 757-200s with the reductions, he adds.

Not included in McAdoo’s analysis is how much revenue government traffic generates for United on routes from Washington Dulles. While not necessarily large numbers of passengers, the US government pays pre-negotiated Y fares for most work tickets.

United has already cut some flights at Dulles. Nonstop flights to Albuquerque, Clarksburg, Salt Lake City and San Salvador have been cut since April 2013, according to operator the Metropolitan Washington Airports Authority (MWAA).

The airline carried 4.8% fewer domestic passengers and 1.2% fewer international passengers at the airport in April compared to a year earlier, MWAA data shows.

Washington Dulles also suffers from competition for domestic passengers with Ronald Reagan Washington National airport, which is just 8km from central Washington DC. United’s decision to drop its Dulles-Salt Lake City nonstop was due to the addition of a 2nd daily flight from National on Delta following the creation of additional beyond perimeter exemptions by the US Congress in 2012, according to MWAA.

More passengers are expected to move to Washington National following the launch of 43 new daily flights on JetBlue Airways, Southwest Airlines and Virgin America during 2014.

Further reductions in United’s fleet of 50-seat regional jets would also benefit the bottom-line, writes McAdoo. Roughly 7.6% of its available seat miles (ASMs) are on the aircraft compared to 5.3% at American and 3.4% at Delta, he says.

Replacing these jets with larger aircraft would allow United to capture more higher-revenue premium passengers, provide more direct routings and reduce costs, says McAdoo.

United plans to remove more than 100 regional jets with up to 50 seats and replace them with 70 Embraer 175s with 76 seats by the end of 2015. Under this plan, it will still have about 250 of the small jets in its fleet in 18 months.

The carrier declines to comment on McAdoo’s report.