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Abstract
On 4th April, 2012, Houston Airport System presented an interoffice correspondence memorandum to the mayor of Houston; there they highlighted a proposal. It contained the information that if implemented it would foresee the expansion of Hobby airport. However, after the proposal was accepted, there a breaking report made by Dr. Smith of the United Airlines-Southwest Airlines was published. This was a major competitor for Houston market. This report discredited the report presented by the Southwest Airlines.
This research paper analyses two reports, highlighting the major differences in the approach undertaken by two airlines. If to compare, this research seeks to draw a valid conclusion, which of these two reports is valid as well as to understand the lessons that could be drawn from this. The methodology that this research paper adopts is based on the secondary sources of data, i.e. the library researches.
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The major results were presented in tables, providing the differences in data from these two reports. It is considered that the Southwest Airlines were a bit enthusiastic about their new project using the invalid data overestimated. Their analysis relied majorly on the output in order to convince the authorities.
Introduction
The expansion of Houston’s Hobby Airport was the proposal made by Houston Airport System (HAS) as on 4 April 2012. It assessed the economic impact of international flights from William P. Hobby’s Airport. Its major conclusions included $1.6 billion in the annual economic impact as well as 18,000 jobs (Diaz, 2012).
Under the proposal, it was postulated that there would be an economic growth that would profit the company greatly as well as increase the employment rates (Diaz, 2012). However, the report was assessed and found to be greatly flawed. The following highlights were indicated in the assessment report:
i. The proposal gave very low fares for passengers; this would result in the increase of passengers’ numbers. This would then result in the increased profits (Diaz, 2012).
ii. The report indicated that there would be an increased employment. However, the assessment established that the employment terms were mediocre, which would later imply that more people would qualify for job positions (Diaz, 2012).
iii. The United Airlines would also not transport the passengers which Houston Hobby Airport was set to transport (Diaz, 2012).
Swelbar and Smith executed the assessment of the HAS proposal making their calculations, in which they found out that in reality, Houston Airport Expansion would lead to the loss of $414 million employment’s positions and 5000 jobs. That was dependent on a gross regional product.
In addition, they established that the economic impact would not only be short termed. This would also implicate the future by reducing the capacity of the United Airlines to operate by 6%.
The assessment established that a projected reduction of traffic in overlapping routes would not be the case. However, ideally, there would be the reduction in their capacity (Smith & Swelbar, 2012).
Through an interoffice correspondence titled Recommendation on Southwest Airlines’ Request for Expansion of Federal Inspection Facilities at William P. Hobby Airport, the Southwest Airlines has the following to economic impacts highlighted. The document emphasised that the recommendations being there indicated were aimed at the best interests of taxpayers and residents of the city as well as of the region.
The international service would increase the employment capacity of the city and the region greatly. Each year, there would be the economic impact of 1.6 billion dollars and create more than 10,000 jobs.
There would be the fare rates reduced resulting from the competition created in Houston market of Latin America. This would also give Houston’s travellers a range of travel options to pick from.
The document used the heuristics that other regions had expanded in their airports. They also experienced the economic growth that was accompanied by the reduced fare rates. These regions included Miami and Chicago.
The airlines suggested that their international flight operations would take place either in Hobby or George Bush International Airport. They demonstrated their ability to deal with the increased number of passengers that was expected.
The findings on the economic impact of airport expansion that helped with drawing the conclusions and coming up with recommedations that given and conducted by GRA, Incorporated (GRA) and the InterVISTAS Consulting LLC (IVC), experts in avaiation economics. The findings included:
a. Growing Houston’s population creates a large market base as it continues to grow. Currently, it is ranked as the fifth most polulated metropolitan region in the United States. It was indicated that between 2000-2009 the population of Houston had grown by 24.4 percent. In comparison, the nation’s polulation growth was only 9.1 percent. In addition, the regional Hispanic population is the fourth largest in the nation. It continues to increase almost exponentially. The Hispanic population is an indication of need for international flights from and to the region.
b. The increase in employment with a concominant increase in the gross economic product; the increase in population as well as an expansion of the airport allows an international travel. It was projected that there would have been the increase in employment for 10,000 new jobs. In addition, the direct, indirect and induced income from business will be running. It was supposed to have the economic impact of 1.6 billion annually. The direct sources of income are those being from the airline and airport operators from passengers as well as from those generated from the movement of freight. The indirect sources of income are generated from passengers spending on the transport, hotel and retal services. This supplemented the direct sources of income. The induced sources of income on their part are those arising from a subsequent purchase of goods and services and supporting business sectors that rely on the airport.
c. There will be the increased competion leading to the change in pricing strategies of airports that would see a decrease in fare rates:
The international flight services that are provided within Houston region are not owned by the Southwest Airlines. However, other shareholders own a larger part of internatinal stocks; their pricing strategy is very high. For instance, at Bush Intercontinental, 99 percent of domestic seats are owned by the Star Alliance and the United Airlines.Moreover, the later one owns 66 percent of the domestic market in both Bush Intercontinental and Houston. If to compare, 25 percent is owned by the Southwest. The overall effect is that the StarAlliance and the United Airlines own 97 percent of the Latin-American seats and 87 percent of the worldwide ones.
It is, therefore, through the indulgence of Southwest Airlines into the northern South American, Caribbean, Central Ameican and Mexican regions that will compell other airlines to consider their pricing strategies and leading them to reduce their prices significanly. Such will allow a higher employment and a further increase of income.
d. Such a program has been successfully run in Miami and Chicago. These are the two regions that run multiple international airports as well. The major state cities such as Los-Angeles, San Fransisco and New York have the multiple international airports. However, they cannot be compared to Houston as the region is still under its development. Such cities Chicago and Miami provided the relavant benchmarks for Houston Project. As for Chicago, the United and the American Airlines and Air Tran Airways as a subsidiary of Southwest all are operating with the internaitional flights. Since 2002, there has been a great competition among the companies having the reduction in internatinal fares.
As of Miami/Fort Lauderdale, JetBlue Airways, American Airways, Oneworld Airways and Spirit Airlines all operate with international flights on a competitive basis that gets them re-evakuating their pricing strategy. They reduce fares and increas their international flight frequencies to gain a competitive edge.
e. There will be an overall increase in the market base for all airlines that operated within the region. In 1993, it was referred to as the Southwest Effect. whereby another low-cost airline entering into the market would lead to the competition based on the reduction of prices by other airlines that would encourage more passengers to take up international flights due to the affordability. This way, there will be an increased market base leading to the increased revenue.
f. Houston was bound to lose if the City Council did not allow Hobby Airport’s expansion. Given the immense benefits outlined, theywould result from Hobby’s expansion. As a result, the document indicated that Houston would be at its loss if they did not take upthe Southwest Airlines’ recommendations. Besides, the Southwest was continually increasing its market base by the international expansion in other regions like the Orange Country, Austin, Chicago and San Francisco.
The Timeline of Review of Southwest Airlines’ Proposal by Houston City Council (Fly2Houston)
The ambitions of the Southwest Airlines were well documented; and their objectives were justified. The expansion of Houston Airport would require the support of City Council, hence, the involvement of Mayor Anise Parker in the discussions led the Southwest Airlines’ proposal to be accepted.
The Airlines sent a document to the Mayor’s office on 9 April, 2012, in which they outlined the purpose of expansion and its implementation. Following the receipt of this letter, the Mayor received the official findings from the Southwest Airlines during the meeting held on 16 April. There was such issue discussed as how the plan would fit into the City Council’s fiscal affairs and budget to transportation, technology and infrastructure committee. The mayor had reviewed the findings before agreeing to the recommendations given.
Following the meeting with the City Council’s committee that dealt with transportation, technology and infrastructure affairs, another meeting was held. It involved the community members. This one was provided on 9 May. In the meeting, the question concerning the expansion of the airport was addressed. The director of the Southwest Airlines, Mario Diaz, was present to answer to them. Another session was held on 15 May; it was conducted at the Marriott Houston in Hobby Airport. On May 30, the mayor announced the City Council’s support to the airport’s expansion at the William P. Hobby’s Airport.
Swelbar and Smith’s Assessment of the “Recommendation on Southwest Airlines’ Request for Expansion of Federal Inspection Facilities at William P. Hobby Airport”
The study conducted by United Airlines on the recommendations concerning the Southwest Airlines’ Request for its Expansion of the Federal Inspection Facilities at William P. Hobby’s Airport seemed to be keen to put down them. This section will look objectively into the analysis provided by Swelbar and Smith.
Concerning the economics of gateway hubs, the report indicated that Houston already had the economic partner, i.e. the United Airlines. This suggested that the Southwest Airlines were targeting the market that had been already dominated by its recommendations. If anything occurred, it could be the United Airlines’ responsibility to ensure that Houston’s needs had been met in reference to the air travel. In addition, it was indicated that since Houston already had the United Airlines as one of its largest network carriers; it mentioned that it had operated on a small profit margin. Pushing this margin further with introducing a new pricing strategy it would jeopardize the economy of Houston other than strengthen it.
The report also showed that the calculations that had been made by the Southwest were greatly flawed; thereby, giving the invalid conclusions since its assumptions had been incorrect. The report showed that this was a very important factor; which had estimated fares and would be reduced being unrealistically low.
The United Airlines’ report also indicated that the mentioned state of airline competition in Houston fares was not based on a real fact. The Southwest has indicated that the United Airlines’ dominance is what let to high fares. However, the company mentioned that the high fares were due to the local economy proving to be strong over the years in comparison to other regions in the United States.
The report in addition showed that instead of gaining from its recommendations being realized, the Southwest would end up losing. They would have an operating margin of about fifty per cent negatively, i.e. in 11 routes that were hypothesizes. In addition, they would lose 75 million dollars on a daily flight.
The study did not analyze the implications of weakening the IAH’s performance against other players in international gateways. It appeared that the Southwest was being myopic by targeting the one specific enemy without looking into a larger picture. The effect would be the decrease in passengers in whole of Houston, since the IAH would be operating at the loss. It was operating at the low profit margins. It would be forced to get out of business. The IAH is the main airline in Houston region. This implies that it will give a way for other airways to operate; and the residents of Houston would be forced to seek the alternative airlines for their travels. These are located outside of Houston. The figure below indicates a net effect of reduced fares.
During the economic analysis, the United Airlines proved that the Southwest findings were too erroneous with the invalid inputs. The measurement of economic impact can be conducted in several ways. According to Andrew & Bailey, the economic impact analysis should consider the following functions listed below.
The analysis should have a comprehensive understanding of the region’s economy. In addition, it should know the functions that the airport would play within the economy. Usually, the airport has several main functions. It may serve as a market for the high tech products; it is an access point for touristic markets and international businesses. Also, it is a platform for the service industry as well (Breheny, 1996).
The analysis should point out and analyze every infrastructure being significant to the growth of the region’s economy. The airport could be just one of these infrastructures.
The analysis should look into the direct, indirect and induced impacts of the airport to the region’s economy. The applicable multipliers must be put in place while making such analyses (Chadwick, 1995).
The analysis should not only look into the economic impact but also at the social impact and the influence on a labor market. This is in order to establish a holistic outlook (Chadwick, 1995; Breheny, 1996)
The analysis conducted by the HOU is theoretical. They relied on the figured project from the passengers’ stimulation. In turn, this led to invalid assumptions. However, the United Airlines relied upon passengers’ levels. The statistics were drawn from what they had been working on since their incorporation. These were bound to give a better analysis, since they had already been tested on the ground. In addition, the Southwest Airlines focused on the results that they would gain. This may have been in part because they needed to sell their ideas to residents and tax payers, as well as the City Council of Houston in order to begin their operation. The United Airlines, however, gave a holistic overview by looking into what they had termed as a total value added. This included both the social and economic factors.
The study conducted by the Southwest was said not to be competent enough, since it relied on an input-output model. The United Airlines’ analysis, on the other hand, was conducted by Dr. Smith, a highly experienced economist, that understood the dynamics of Houston’s economy quite competently. Dr. Smith used the IMPLAN input-output model instead, which is believed to give a better analysis as it looks into every other factor other than pre-packaged “I-O model” used by the Southwest Airlines.
The erroneous inputs that the Southwest had involved in its analysis included exaggerated airline and airport job effects at Hobby and the reliance on exaggerated passengers’ stimulation numbers. Smith considered that the Southwest was quite enthusistic about their new project due to the fact that their figures had not been realistic. The general differences in the results on the economic impact were simplified in two graphs showed below.
The above graph indicates the estimated impact on the employment. Hobby estimated that there would be 1.59 million passengers. They would bring about 16,943 new jobs. However, the United Airlines estimated 1.0 million new passengers and the increase in 1,503 jobs. The difference indicated to be due to the optimistic assumptions that Hobby had made.
The graph above indicates the estimated impact on the output. Again, Hobby’s estimates were much higher than that of the United Airlines. The United Airlines’ analysis was much more objective than that of Hobby.
The economic impact of jobs and Houston’s economy after the expansion of Houston’s Hobby Airport was the matter that had received a great controversy. Just after Houston mayor had announced that the recommendations were valid, the United Airlines, as a major competitor of the Southwest Airlines in Houston’s market, came up with a confounding report questioning the credibility of the Southwest Airlines’ findings. This led them to make the recommendations that they had come up with.
From the analysis made above, the importance of conducting the objective economic analyses cannot be underestimated. If Hobby’s proposal was released to work, the effect would bring down one of the United States’ major economies. This would have most probably affected the whole of the country’s economy as well as the world. Thus, the United States would be the world’s most powerful nation.
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