Analysis: Airline merger clouds prospects for Cleveland hub

ATLANTA/WASHINGTON (Reuters) - Consolidation could reshape the future of airlines hoping to boost profits in the recovery but it could also spell cutbacks for smaller airport hubs.

Operations in Cincinnati have been further downsized following Delta Air Lines Inc's (DAL.N) acquisition of Northwest in 2008, and now officials in Cleveland are pondering their airport's fate should the proposed merger of United Airlines parent UAL Corp UAUA.O and Continental Airlines Inc CAL.N be approved.

A key question is whether the merged United, set to become the world's largest airline, would maintain two full-service Midwest hubs for connecting flights over the long term.

The new United Airlines would have eight domestic hubs: Chicago, Houston, Newark, New Jersey; Los Angeles, San Francisco, Denver, Cleveland and Washington, D.C., as well as hubs in Guam and Japan.

"Continental and UAL said they are going to keep all eight (domestic) hubs," said Jonathan Godbey, a finance professor at Georgia State University in Atlanta. "They may maintain these hubs but certainly some of them are going to have to shrink in size."

Transportation Department figures show the new carrier would account for 60 percent of passenger market share at Cleveland's Hopkins International Airport, currently Continental's third-largest hub behind Houston and Newark.

The new airline would account for 42 percent of passenger traffic at Chicago O'Hare, the nearest hub to Cleveland. Moreover, Chicago will be the headquarters of the new company and is a major destination for domestic and international business travel.

A closer look by the Government Accountability Office (GAO), the investigative arm of Congress, shows that 52 of 63 domestic airports served by Continental from Cleveland are also served by United from Chicago O'Hare.

"Right now, our general feelings range from being cautiously optimistic to somewhat nervous," said Ricky Smith, director of Cleveland Hopkins International Airport. "We simply do not know with any certainty what the merger means for Cleveland."

In Washington, lawmakers whose districts or states face uncertainty over the deal have voiced opposition to the proposed United-Continental merger.

"Many analysts flatly predict that Cleveland will lose its hub," U.S. Rep. Dennis Kucinich, an Ohio Democrat whose district includes Cleveland, told Jeff Smisek, the current Continental chief executive who will assume that role at the new United, in a letter last week.

Robert Mann, a Long Island-based airline consultant and former industry executive, said Cleveland could be downsized to a focus city that offers nonstop service to several cities and smaller jet traffic.

"I think the nature of flying out of Cleveland will change somewhat," Mann said.

U.S. airports have already had service curbs in the wake of recession-driven airline capacity reductions over the past year. In Cleveland, scheduled departures for the 12 months through March were down 11 percent from a year earlier, while passenger volume was off 9 percent, Transportation Department figures show.

"If there were a scale-back on the part of the new United, that could have a fiscal impact on Hopkins that would make it difficult for us to attract new carriers," Smith said.

CUTS IN ST. LOUIS, CINCINNATI

Airports are mindful of the risks inherent in the streamlining that can follow consolidation and tough economic times.

St. Louis, once a hub, has seen a dramatic decline in flight operations. AMR Corp AMR.N unit American Airlines has steadily curbed service there since it acquired the assets of Trans World Airlines in 2001.

Over the past decade, takeoffs and landings of passenger airlines at Lambert-St. Louis airport have fallen each year, dropping to 199,202 last year from more than 474,000 in 1999, airport data indicates.

American Airlines said the St. Louis cutbacks reflect economic conditions and a company strategy to focus on business markets such as New York, Chicago and Los Angeles.

"By concentrating our network around the key business cities in the United States, we're not only strengthening our network, but most importantly becoming strong in the right places," American spokesman Tim Wagner said.

Delta Air Lines Inc (DAL.N) began pulling back operations in Cincinnati in 2005 when it sought bankruptcy protection, and cutbacks there have continued since its merger with Northwest Airlines in 2008.

Last month, Delta began operating its mainline and regional flights in Cincinnati out of one concourse instead of two and reduced the number of gates used by nearly half. Delta currently has about 170 daily departures out of Cincinnati, down from some 650 in 2005.

"With the acquisition of the Northwest assets, principally the Detroit hub, there was then immediate redundancy in their domestic network between Cincinnati and Detroit," said John Mok, director of Cincinnati/Northern Kentucky International Airport.

Delta spokesman Kent Landers said much of the Cincinnati restructuring was part of the bankruptcy plan, but noted that more cuts have followed since the Northwest deal in an effort to align service with area demand. Delta emerged from bankruptcy protection in 2007.

(Reporting by Karen Jacobs in Atlanta and John Crawley in Washington, editing by Matthew Lewis)