Smaller Cities Look Big Again to United

smaller-cities-look-big-again-to-united-wsjUnited Continental sees potential as profit margins are squeezed on international routes.

Until recently, the big three U.S. airlines turned toward more international flying, cutting service to smaller U.S. cities in favor of profitable overseas routes. Now it is places like Manhattan in Kansas and Columbia in Missouri that are back in favor. Taking passengers to Waterloo in Iowa looks more attractive—and profitable—than to its namesake in Belgium. The economics of the domestic airline industry have flipped and the largest airlines are prioritizing domestic service and adding flights to places once considered backwaters.

The push into as many as 20 smaller cities formed the centerpiece of plans laid out this week by United Continental Holdings Inc. to reinvigorate the No. 3 U.S. carrier by traffic. United has arguably the best international network among peers American Airlines
Group Inc. and Delta Air Lines Inc. but executives said it hasn’t kept pace with changes in its home market.

“The only places with reasonable fares are smaller cities,” said United Chief Financial Officer Andrew Levy in an interview. “That’s where the money is.”

Dollar strength, the cooling global economy and fierce competition across the Atlantic has made international routes to and from the U.S. less profitable. Meanwhile, industry consolidation in the U.S. has also reduced competition at smaller cities, boosting fares as ultralow cost carriers such as Spirit Airlines Inc. expand more into larger markets like Dallas and Chicago.

Mr. Levy is a former president and CFO at Las Vegas-based Allegiant Travel Co. The budget airline expanded rapidly by flying to smaller cities like Rockford, Ill., that lacked any scheduled service, often linking them with popular vacation destinations.

He said smaller cities became neglected as United focused on feeding its international operation. Now, the number of domestic seats it plans to fly is expected to rise 2.6% early next year compared with a year earlier, according to schedules analyzed by Wolfe Research LLC, while international flying remains flat.

Big airlines also shifted out of secondary cities when oil prices moved above $100 a barrel and made the 50-seat jets used on the routes unprofitable. Smaller jets aren’t coming back—hundreds remain parked in the desert—but airlines are finding they can make more money flying larger planes with 75 seats or more and a business-class section to lure corporate fliers.

Mr. Levy was hired by United in August as part of a refresh of senior ranks that included the addition of former American Airlines’ President Scott Kirby, who has cemented the refocus on smaller cities.

The big three airlines still rely heavily on their big hubs to feed international flights. Mr. Kirby said at a United’s investor meeting this week that the airports most reliant on connections are also the most profitable for the big three: Denver for United, Delta’s
home base in Atlanta and American’s base in Charlotte.

United handles more passengers at Chicago O’Hare airport than its rivals, but it didn’t fly from there to around 20 cities operated by American, said Mr. Levy.

“That’s going to change,” he said. It started flights to Kalamazoo, Mich., last December, with more than a dozen other cities including Bismarck, N.D., and El Paso, Texas, under consideration for service.

By DOUG CAMERON (Wall Street Journal)

Write to Doug Cameron at doug.cameron@wsj.com