Southwest and United Clash in the Battle of Houston

A blog about business and economics.
May 24 2012 9:20 AM

Southwest and United Clash in the Battle of Houston

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CHICAGO - APRIL 05: A Southwest Airlines passenger jet prepares to land at Midway Airport on April 5, 2011 in Chicago, Illinois.

Photo by Scott Olson/Getty Images

Southwest Airlines wants to spend about $100 million to upgrade the infrastructure at Houston's Hobby Airport. What's not to like? Well according to United, the plan would be a disaster for the city, causing "a net loss of 3,700 jobs and $295 million in gross regional product annually in the Houston region."

What's going on?

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Houston, like several American cities, has two airports. One, Hobby, is older smaller and closer to downtown. The other, Bush, is bigger newer and further away. Since United merged with Continental the combined airline has an utterly dominant position at Bush Airport. Meanwhile Southwest, which has its origin in Texas, is the other airline that provides substantial service to Houston but does so through Hobby. Right now Hobby isn't set up to provide international air service, which has been fine with Southwest, since Southwest doesn't have international flights. But Southwest recently acquired Airtran, which does have international flights and is in the process of integrating Airtran into the Southwest brand. So since the new Southwest will be conducting international operations anyway, it naturally makes sense to build on Southwest's strong position in Texas to start providing international service to Latin America and they're gearing up to do so out of San Antonio and Austin airports. In Dallas, Soutwest operates out of Love Field which is the subject of an endless regulatory snarl due to the Wright and Shelby Amendments. And then there's Houston—a big city where Southwest has a big base and only one real competitor, but an airport that can't accommodate international flights.

So Southwest reached an agreement with Houston's mayor to build the necessary facilities, specifically a customs terminal and five international gates. All the physical plant would be owned by the city of Houston, but Southwest would get to use four of the gates rent-free while the city would lease the fifth gate to some other airline.

It's a little bit difficult to see why a city would turn down what amounts to a free extra gate at its airport plus some additional competition for local travelers, but United has an obvious stake in convincing the city council to reject the mayor's plan. Their argument is essentially that if you divide Houstonians' Latin American travel between two different airlines at two different airports, that will undermine Bush Airport's status as a hub. That, in turn, will cause Houston to lose transfer traffic to American's hub in Dallas and Delta's hub in Miami, which will reduce revenue and employment at the city's airports in the aggregate.

Something to note about this is that even if it's true (which I honestly can't assess, both sides are wielding studies by reputable people) it's still the case that the large majority of Houstonians who don't work at airports might like to see competition on routes to Latin America. United has a lot of pricing power in and out of Houston on international routes right now, and competition should take that away.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.