Continental-United Rivalry: Majors Attack Hub Routes

<I>Newark, N.J.</I> - Continental Airlines and United Airlines are shooting it out in the most dynamic dogfight between the major network airlines today. In fact, the rivalry is the only current example of extraordinary domestic competition that does not involve a low-cost carrier.

A number of corporate buyers, consultants and agents hope the battle is a positive sign of things to come. However, as the only skirmish of its kind these days between hub-and-spoke carriers, it may be more of an illustration of just how far major airlines have gone to avoid competing with each other.

On top of several operational and service-related salvos fired at each other, Continental and United are both trying to gain a higher share of business travelers out of New York. As part of that plan, United is aggressively courting corporations in New Jersey as well as Manhattan-and Continental isn't simply standing by.

"Both airlines are becoming more creative than they have been in the past," said a travel manager for a large New Jersey-based company. "I've been very impressed with the ideas I've seen them come up with, and it's really good for us."

The source would not elaborate on what new ideas are under consideration, but other travel buyers said net deals are one of them. "United has been very aggressive with net net fares, upwards of 18 or 22 percent off," said another New Jersey buyer, referring specifically to transcontinental city pairs.

On the operational front, United in January began four daily round trips using A320s and B737s between Boston and Newark, with one continuing on to San Diego. This followed a buildup of United Express turboprop flights on the same route to six a day by the end of 1996. However, United's latest move was a schedule change that reduces the four jets to two this spring. "We're adjusting our capacity to bring it into better balance with demand," said airline spokesman Joe Hopkins.

Commenting on the schedule change, Dave Hilfman, senior vice president of national sales for Continental, said, "we hope they realized it was a difficult market in which to compete with our frequent flyer loyalty and corporate programs." In what is now a seriously delayed response to United's initial jet entry into Newark-Boston, Continental last week started four daily round trips using B737s and an MD-80 between San Francisco and Los Angeles.

Given that Newark and San Francisco are hubs for Continental and United, respectively, the moves-in today's hub-and-spoke airline industry-are quite serious.

"They broke the rules," said one source of United's initial move, referring to the unwritten rule that tells airline planners to expect retaliation if they fly from a competitor's hub to a city that is not one of its own hubs. Continental and United already compete, of course, on routes between their hubs.

Meanwhile, United chose its Newark routes to Los Angeles, San Diego, San Francisco and Seattle for an experiment in expanded food service for all classes. An additional response by Continental to United's Newark-Boston moves is a new program awarding bonus miles and upgrades to frequent passengers on that route.

This kind of tit-for-tat competition is rare these days. "It is a bit of a throwback to the early '90s-more like a skirmish than a war," said Brian Harris, airline analyst for Lehman Brothers in New York. "It's certainly more the exception than the rule."

Irrespective of United's latest pullback in Newark-Boston, the question of why it would start flying that route in the first place is an intriguing one. Sources speculated that it could be the first in a series of moves designed to increase United's presence in New York City.

"I absolutely think that United wants a bigger piece of Newark," said a major travel agency's airline liaison. "I think they're testing the waters, and Continental is taking it personally."

"United has a deficient market position in New York relative to many of their other cities," according to Rolfe Shellenberger, senior analyst for Runzheimer International. "It would be a good strategy for United to seek replacement status with Continental in Newark-that would give them a leg up on American. Incidentally, United is cutting deals like mad in Boston too."

Harris said that United "has a lot of interesting plans in the works for the New York area-you'll hear more about that soon."

Apart from a merger, however, an attempt by United to increase its presence dramatically in New York would be more than a challenge. Michael Boyd, president of Golden, Colo.-based Aviation Data Systems Research, points out that in New York, "it's too late for United-there's no room left at the inn."

United spokesman Tony Molinaro said the airline is simply trying to hold its own in Newark. United is the second largest airline at that airport with 2.57 million passengers in 1996, behind Continental's 13.35 million and just ahead of American's 2.44 million.

As for Continental's seemingly suicidal entry into the highly competitive SFO-LAX route, observers could find no rationale for it other than signaling to United that Continental won't tolerate new Newark routes. United offers 39 daily round trips on SFO-LAX, and Southwest holds down fares with its 25 dailies from LAX to Oakland.

"Continental would love to have every airline reduce their presence in Newark," said another highly placed agency manager. "They're pricing and adding flights to do that. They're certainly not going to hurt Southwest or United on the West Coast, but they're willing to lose money to signal to United or anyone else, 'don't screw with our hub, our pricing, our market base, our customers.' "

Sources said the standoff between the two carriers likely will continue, given United's apparent desires and Newark's position as the airport of growth in the New York area.

Newark surpassed LaGuardia and Kennedy in total passenger traffic in 1986 and since then has seen international traffic-which was virtually nonexistent in the early 1980s-increase from 819,000 passengers in 1986 to 4.58 million last year. In the same time period, international passengers at Kennedy increased from 13.9 to 17.37 million.

Despite horrible delays at Newark, more business travelers are realizing it's more convenient to Manhattan than they thought, and an increasing number of corporations are setting up headquarters in New Jersey. In addition, Newark has more domestic feed than JFK, making it a prime gateway for code-share operations to Europe.

"I think a lot of airlines are attacking Newark as the hot spot for hopping off to Europe," said one New Jersey-based travel manager. "That's good because everybody here hates going to JFK."

It's no surprise, then, that Continental is willing to do whatever it can to protect that position. However, as Continental and United have demonstrated, "whatever they can" doesn't mean what it once did-compared, say, to the war they fought in Denver from 1993 to 1994. "This is good honest competition," said Continental's Hilfman, which for area corporate buyers is better than the near monopolies found in most of the nation's hubs.

Mike McCormick, director of supplier relations for Philadelphia-based Rosenbluth International, added a hopeful outlook: "The competition between these two does signal something we haven't seen in years as the pattern has been retrenchment," he said. "It could mean the beginning of more change.