Can you smell that? United (UAUA) and Continental's (CAL) agreement to keep a hub in Cleveland for five years stinks of politics. It sounds great on paper, and that may help the Attorney General in Ohio win his reelection bid, but it's not likely to have any teeth. Instead, it gives the new United a very clear path for walking away from Cleveland, if it so chooses.
Ohio Attorney General Richard Cordray sounded like a proud papa this week when he gave birth to an "unprecedented" agreement with United and Continental to keep a hub in Cleveland. The reality is that this agreement will play well in the public, but it's just not a significant deal.
Here are the main points of the agreement. (Read the entire agreement here in PDF format.)
- For the first two years following the merger, the new United will maintain at least 90 percent of the flights that United/Continental operated in the year before the merger.
- In years 3-5, United can reduce departures as long as it's not more than 25 percent more than what's happening at the other hubs. Also, if profitability of the hub is awful, then the airline can reduce flying even more or potentially eliminate it altogether.
- This doesn't apply if there are acts of God involved, which I assume includes strikes, massive cost spikes (fuel), or natural disasters. It doesn't include economic distress, but there is a provision that allows United to reduce flights further under that situation as well.
- If United breaches the agreement, it will be forced to pay up to $20 million a year for the life of the agreement.
But now, instead of having to shell out court fees and risk a delay in the merger, United has an agreement it can point to giving strict guidelines on how it can go ahead and start dismantling the hub if it so chooses.
The way this agreement is structured makes little sense. If the hub is making money commensurate with the rest of the system, then the airline will have to keep the hub. Well, yeah. If the hub is performing well, why would United want to kill it? But if it performs poorly, then United has the ability to kill it off and not even have to pay the $20 million. At least, that's the case after the second year.
This may help Attorney General Cordray's reelection bid, but it's not likely to do anything to help Cleveland keep a hub in the city. If the hub stinks, United will walk away. All this does is set the path clearly.
- United-Continental Merger: Continental Is Taking the Reins, No Question
- United-Continental Merger: A Good Fit (If It Happens), but Cleveland Won't Like It
- Continental and United: This "Merger of Equals" Isn't a Great Plan