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Bush on Southwest Airlines expansion

On May 30, 2012, the City of Houston approved Southwest Airlines $100-million expansion plan for Hobby Airport. The plan would enable Southwest to offer international service from Hobby commencing in 2015. The City Council voted 16-1 to offer international service from five newly constructed gates at Hobby, with Southwest controlling four of those gates. 

The issue proved contentious for the City Council. United claimed that the commencement of such service from Hobby would ultimately cost 3,700 jobs. Immediately after the Council voted, United announced that it would eliminate 1,300 jobs at Intercontinental Airport, as well as halt plans to offer service from Intercontinental to Auckland.

A Houston Airport system study, in contrast, projected substantial job creation, as well as now-infamous fare numbers such as $133 fares to Bogota, Colombia. Southwest in large argued that competition was going to reduce fares, increase traffic, and is overall good for the Houston economy.

University of Houston Law Center Professor Darren Bush has published an op-ed on the trouble with economic studies on both sides of the argument, and has appeared in the press numerous times on the issue. Bush answered a few questions about the expansion and what it means for Houston.

Q: How many jobs will be lost or gained by Southwest offering international service from Hobby?
Let me just say that you might as well grab your tarot cards.  It is a function of so many things that you really can’t accurately predict what’s going to happen.  That is in part why United, Southwest, and the Houston Airport System predict wildly different economic outcomes.  It’s a function of fuel costs, the global economy, the nature of Houston economy, and a whole host of other things. 

So you have two different and wildly contrasting views.  The independent estimate prepared for the Houston Airport System made some interesting assumptions, including a $133 one-way fare from Hobby to Bogota.  It also projected the creation of 10,000 more jobs, an overall economic impact of $1.6 billion and an increase in passenger traffic to both airports.

In contrast, United seems to claim in essence that the increase in service at Hobby spells doom.  It has suggested that the move would cause it to cut 1,300 jobs and reduced service, and it has already announced it would do both. It also claims that the Houston Airport System study is "fundamentally flawed" in its assumptions about the economic effect of international service at Hobby. Finally, United worries that the increased customs presence at Hobby would hurt an already understaffed customs presence at Intercontinental.  Its own study indicated that 3,700 jobs would be lost and $295 million to the region.  

Q: In 2015, when Southwest offers those first flights from Hobby to South American destinations, will fares be lower?

The real question is:  Lower than what?   Let’s assume Southwest is right and that United has a monopoly on many of the routes from Houston to Mexico and beyond.  If true, Southwest’s service should lower fares from the fare a monopolist would charge.  However, keep in mind that having two carriers compete in a market doesn’t necessarily create the fares that three or more competitors might create.   Having only two carriers is called a duopoly.  It’s better than monopoly, but much worse than competition. 

Fares fluctuations are largely a function of competition, but that’s not the full story.  Costs of service matter.  That typically means that fluctuations in jet fuel costs play an important role.  And who knows where jet fuel prices are going to be in the next few years, adjusting for inflation.  So fares might be higher, but lower than they would be if those routes were only subject to service by one carrier. 

Q: Are the job cuts United announced related to Southwest’s plans for Hobby?
Only United knows.  As you know, United went through a merger recently with Continental.  Are the job losses due to that?  Are they due to economic conditions?  United claims they are due to what Southwest’s commencement of international service from Hobby in 2015.  However, I am skeptical of such claims.  Why initiate the layoffs now?  In my opinion, it’s more likely that these were planned layoffs, which are now being used strategically to make a point.  And even if they were related somehow, we don’t know how United got to the number 1,300.  United’s numbers should be treated with equal skepticism to that used to scrutinize Southwest’s numbers. 

To the extent that there are job losses at United (and again it’s a big question as to whether those job losses are related to Hobby at all), then if the passenger demand is there one would expect to see job gains shifting from Intercontinental to Hobby. 

For recent media appearances:
Click here to read Bush’s op-ed on the issue.

To schedule an interview with Professor Darren Bush, please contact: Carrie Criado, Executive Director of Communications and Marketing, cacriado@Central.UH.EDU, 713.743.2184; or John Kling, Communications Manager, , 713.743.8298.

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