Smisek Lies Again: “Our hub in Cleveland hasn’t been profitable for over a decade”

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Related post: CLE Is Dehubbed; The Continental-United Merger Has Brought Nothing But Misery To All
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Cleveland and United have a rocky history.

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United had a hub in Cleveland in the 70s and early 80s before jumping ship in 1985.  Continental immediately filled the void by hubbing Cleveland, something that won’t happen again today due to considerable airline consolidation.  Nobody has filled the void that American left in St. Louis, that Delta left in Memphis and Cincinnati, that America West left in Columbus, or that USAirways left in Pittsburgh.  Pittsburgh just took another hit when they learned that AA would shutter their 6 year old USAirways operation center that was built with taxpayer funds.

If Cleveland is lucky perhaps we’ll get Porter flights to Toronto or JetBlue service to Boston and JFK.  And if we’re unlucky perhaps we’ll get Spirit 😉

United CEO Jeff Smisek said in a letter to CLE employees that,

Our hub in Cleveland hasn’t been profitable for over a decade.

This is just another lie from someone who has been caught in a web of lies since the merger.  He has lied about so many topics that it’s hard to keep them all straight. There’s a reason that passengers and employees alike can’t stand him and that United is bleeding cash and high value customers and corporate contracts. He has made strings of bad decisions that are hurting United in both the short and long term.

You have to love the irony that Cleveland is featured in this month’s United Hemispheres magazine and that Cleveland will host this year’s annual United shareholder’s meeting.

Gordon Bethune turned Continental around from the brink of closing shop to being considered the best airline in the country.

He turned it into a profitable well run and highly regarded airline.  He was an ex-pilot and had a great relationship with both labor and passengers.

This ad summed up the customer experience at Continental while other airlines pinched every dime:

He passed on the torch to Larry Kellner who started the culture of service cuts at Continental.  Still it was better than every other US airline.

In 2008 Kellner refused to merge with United, instead opting to ditch Skyteam and join the Star Alliance.

He said at the time rejecting the merger,

We have significant cultural, operational and financial strengths compared to the rest of the industry, and we want to protect and enhance those strengths – which we believe would be placed at risk in a merger with another carrier in today’s environment.

He was right. Continental went from being the most admired airline to becoming a part of what is now the most reviled airline.

United was shocked at Kellner’s rejection. Apparently, so was Continental’s board. Kellner was forced out less than a year later for Smisek, a Harvard educated lawyer.
Smisek immediately reached out to United and merged Continental with them.

Now here’s the rub with Cleveland. It added value to Continental’s route network as their only other hubs were Houston and overly congested Newark. The writing has been on the wall since the merger thanks to United’s more powerful hubs in Chicago and DC.

Still United had to say that Cleveland was losing tens of millions of dollars in order to close the hub without paying penalties.

Let’s look at some facts.

Continental announced an expansion at Cleveland in 2007/2008 to dozens of new cities.

When rumors of a United merger came up in 2008 retired CEO Gordon Bethune said about the prospects of Cleveland should the merger go through,

The Cleveland hub is too valuable to abandon, especially with Continental’s plans for a $50 million expansion at the airport.
Cleveland must be profitable, or Continental wouldn’t be expanding there. Why would you stop doing things that are profitable? Cleveland’s probably going to be OK.

There might be some rationalization, but I don’t see a huge shift. here would you move the Cleveland traffic to? I don’t see how Chicago could take much more.

Indeed, if CLE has been bleeding for a decade then why would they expand?

When oil prices started to soar the expansion was curtailed. However in June 2012, after the merger was finalized United’s senior vice president/network, Greg Hart, said,

Year over year, Cleveland Hopkins’ performance is better than some other hubs in terms of profitability. The hub is in a far better place than it would have been without the efforts of the team in Cleveland.

Joseph Schwieterman, a former planner United route planner said then that he thought the CLE hub could have a future.

They were making some good money in Cleveland. I would be surprised if they substantially downsize Cleveland.

Noting that the majority of United’s flights in and out of Cleveland are on smaller, regional jets, Mr. Schwieterman said it wouldn’t make sense to move that traffic to crowded O’Hare or Dulles, taking slots now filled by more profitable international and transcontinental flights.

“It’s a pretty nice niche for United that hasn’t been a drain on its bottom line,” he said.

I attended an official United MegaDo in November of 2012 and wrote up a long trip report.

At that DO I had the pleasure to attend a session given by Brian Znotins, VP of United’s network strategy. I had never before spoken to someone so intimately knowledgeable with airline route planning and I just ate it all up and wrote it up back then. He knew the profitability levels of every route and was just a fountain of incredible knowledge.

He said that,

Cleveland is actually performing well and is profitable. The only reason a hub would be closed or a route would end would be if it was not profitable and if the company did not see a path to profitability.

At that same MegaDO I spoke with Martin Hand, United’s Senior VP of Customer Experience.

Here is what I wrote back then,

Martin Hand, United’s Senior VP of Customer Experience, was a pleasure to talk to as well. Being a Cleveland guy I once again brought up the future of Cleveland, calling it United’s step-child hublette. He joked that as a former Continental guy they love Cleveland and that I shouldn’t be calling it that!

He said that Cleveland’s local business community seems to know that they need to support United to keep the hub and they have been doing a good job doing that so far. He went on to ask why Cleveland folks seem so paranoid as to the future of United in Cleveland.

I could’ve said it was because United had already de-hubbed Cleveland once before in the 1980s before Continental eventually took it over and that nearb cities like Pittsburgh, Columbus, and Cincinnati have seen recent catastrophic hub closures, but I said it’s just Clevelanders natural rejection fearing attitude, helped in no small part by LeBron.

He and his former Continental colleague loved that response and started laughing out loud and heartily agreed with me and they both said they were shocked by that episode as well.

Now I’m not saying United has it out for Cleveland. I think the real reason is that United wants to ditch most of their regional jet flying and Cleveland just has too much of that. Perhaps there is some truth behind there being a regional pilot shortage due to the new FAA rules. For now only 1 mainline jet frequency is being cut from Cleveland’s schedule so all the pain is in the regional jet routes.

But this business about not being profitable in a decade seems like an utter farce. It strains credibility to believe that an airline would run a hub operation as a charity for that long of a period of time.

Profitability for a hub is a funny thing, so it’s probably easy for United to shift some fixed costs onto Cleveland and now it’s magically not making a profit. Perhaps it’s just to avoid having to make any payment to Ohio for closing the hub?

Per the merger agreement the audit will be completely at United’s expense. I sure hope Ohio’s attorney general takes a really close look at the full story here.

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55 Comments On "Smisek Lies Again: “Our hub in Cleveland hasn’t been profitable for over a decade”"

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aaron

I smell someone here is pretty biased about Cleveland, If there losing money, they have a right to close down

Aj

Dan another reason to move out of cle and move to nyc

Anonymous

Hey Dan, it may just be time to move to your second favorite city. LA!
Great Food!
Great Weather!
Great community!

David

If they’re making money off of it why would they close it You think they hate. Cleveland because you’re from there?????

C

Dan- in essence what he’s saying is that ever since you started ctownbochur they haven’t been able to make any money there!

How can anyone NOT see the connection?

Andrew

With cvg being slashed by delta and now cle with united, ohio has had a dark decade for air travel growth

Josh

I’ve never flown through Cleveland but given the accuracy of the information presented here, I’d say it’s a scam to cut out of Ohio. After several headaches with United in general over the last month, and now the devaluation, I’m regretting my loyalty to United.

sky121

Seriously guys, don’t you think Dan checks his facts? Of course he is personally affected as well but give the man some credit.

yudig

Contrary to popular belief not every business decesion that’s made by airlines turns out to be a good one

This is just another one of united’s bad moves

Gabi

Dan,
Why do you think they would close it other than that they are simply not making money from CLE ?

Yk

They keeps running radio ads to support the hub in cle. It sounded like united was running ad to get support to keep it

JohnnieD

When you write about something like this, you call it exactly what it is–the United CEO lying to its customers! When I read about this subject on the travel blogs, I read about de-hubing or some other soft puff ball words– can’t take the chance that they will upset their beloved United…

username

@C:
Very good.

Anonymous

@josh it will only be a few months before you’ll regret your loyalty to American too wait until they close hubs raise redemption and cut regional jets that’s what happens when they get to big they can’t focus on little things. Just wait until delta takes out Alaska airlines

Zeke

So…. when’s the shareholder meeting? Want to organize a protest?

mark

just face it dan cleveland sucks maybe when lebron comes back united will come back to

Nobody

Sorry dan, no one gives a hoot about Cleveland

Ich Hub Nit

I feel you, Dan. The Cleveland/Beachwood community is a beautiful outpost of Jewish life beyond the congested, stressed-out ghettos of the NY/NJ metro area. Having it as a United hub helped keep the connections to the outside world. I am sure that this decision by United is a poorly thought out response to the changes in the industry. Hopefully the Cleveland veldt will overcome this nasty set-back, some other airline will step in to pick up the slack and United will live to regret their move.

Ramsey

Dan as an ex airline person I especially enjoy reading your takes on the industry. I’m no expert but I did live and breath it for 27 years. As usual I think that you are again spot on with your comments. Just as Howard Shultz of Starbucks said that there is a seismic shift going on in the retail industry, the same is going on in the airline industry. They are going from what many once said is the most competitive industry (just look at all the disappearing airlines) to one of the least competitive. Everywhere in every facet the customer is going to get less and pay more. As much as I hate American Airlines for ruining the lives of so many of my former coworkers, I am going full on into buying AAL stock. Huge upside ahead w/o the cyclical headwinds. Love your site!

Anonymous

@Nobody: i agree

Liam Knuj

@Aaron @David
Helpful Hint: READ THE ARTICLE!
Dan was quite upfront about his Cleveland “bias”. He also spent MOST of the article debunking the “lack of profitability” claim. Dan even put forth his own theory ad to the “real” reason to the de-hubbing of CLE (i.e. United’s possible desire to divest itself of relying on regional type of airplanes).

TF

As a United cardholder that flys mostly from CLE to NYC and TLV, is the card still a good one to hold or are there now better ones with airlines that have better CLE access?

DaninSTL

Cleveland you will survive like we do here in St. Louis. Sorry to see this develop. I’m sorry you will have to hub out of other cities to get almost everywhere you want to go but you will survive.

Danny

Dan how can you complain when united probably lost thousands from you alone

ted

@Nobody: Agreed…WHO GIVES A FLYING CARPET ABOUT STUPID CLEVELAND!!!ENOUGH DAN ABOUT YOUR STUPID CLEVELAND ALREADY!!

Anonymous

@ted: hahahahahahaha
i’m rolling in laughter

Reality check

Hi CLE, meet CVG, MEM and STL… all second tiers cities that used to be hubs. Airlines promised the local Chamber of Commerce loyalty and more.. but the airline industry has shifted to mega-hubs with REAL Business ties… ORD, NYC, LAX, ATL, DFW, MIA… these are super strong megahubs… DTW,MSP are lower on the hierarchy but have entrenched super carriers… Regional Jet to Regional Jet doesn’t work, if going from a small town to a small town, why connect in CLE versus ORD…
some might be sad to see CLE gone, but MEM, CVG and STL suffered that, and PHX (US) will suffer the same path..
CLE is between ORD/NYC two megahubs/cities… time to call Allegiant Air and the charters…

Greg

I definitely feel bad for you Cleveland folk, I just searched a random day in July for cle-nyc and it was $700. Makes me appreciate my Avios that much more.

Dan

@aaron:
@David:
See comment 21 for someone who can properly read.

@Aj:
@Anonymous:
I live in a laid back stress free suburb with a beautifully diverse Jewish community where the cost of living is dirt cheap, crime is unheard of, traffic doesn’t exist, parking is plentiful+parking tickets don’t exist, where they plow our sidewalks and they pickup out trash on demand.

Why would I trade that in for a Jewish community where you’re scared to walk outside by yourself at night, where sirens blast the night away, where trash is everywhere, where housing costs make ownership but a dream for many, where taxes are sky-high, where traffic is a nightmare, where parking tickets are a way of life, and where I’m embarrassed for my kids to see the billboards on the street?

I love visiting LA and NYC and engorge on good food. But to more there? Meh. I can’t find a compelling reason to do that.

@C:
Har har.

@Gabi:
Did you read the post?

@mark:
I’ve been to dozens of Jewish communities around the world and have yet to find another as enticing as Beachwood’s.

@Ich Hub Nit:
CLE will be fine, I’m just tired of United’s lies.
And yes, Beachwood is the best kept secret among Jewish communities in the US.

@Ramsey:
Thanks for commenting Ramsey. Seems like CLE-PDX will never be back again.
Last time I was in PDX was during the great east coast blackout. On the news they said “Stay tuned to see how Portland was affected.” And after the break they showed the cancelled flight to CLE…

Anyway AA has a real opportunity to steal high value flyers from DL and UA.
The ball is truly in their court. But Parker is at the helm and frankly I don’t trust him either.

@TF:
UA will still fly CLE-EWR-TLV and you can use their miles to fly on Air Canada to Tel Aviv via Toronto.

@Danny:
Huh?

@ted:
Why the screaming Mr. Honig?

I blog about things I enjoy writing about. I’ve been doing the same thing for over 9 years now.

@Reality check:
People connected in CLE when they didn’t want to put up with the insane delays they face in NYC, ORD, PHL, etc due to congestion.
They were able to have a 30 minute connection and not worry about it.

Anyway I agree, those times are gone.

@Greg:
And Southwest/CAK.

Mogro17

@Dan who’s a bigger liar, Smisek or Obama?

Dan

@Mogro17:
How Do You Tell When a Politician is Lying?
His Lips Are Moving.

I expect all politicians to lie.
I don’t expect CEOs that want my business to lie.

aaron

@Liam Knuj: There is no reason to kiss up to Dan, I read the article but he does not own United, and if they say they are losing money, they are

Gary Leff

Accounting is a funny thing, you can do all sorts of things with accounting, it’s a stretch to say that Cleveland has been losing money for more than a decade. United is a financial mess though and pushing costs around you can probably show anything losing money right now, largely because of United management rather than their underlying assets.

That said, if Cleveland was making them money they wouldn’t kill it. If Cleveland was making them money and they killed it anyway, another airline would step into the breach.

Cleveland can’t really support a hub, and it makes no sense to duplicate their O’hare operation, you don’t make money overflying your own hubs.

It was destined to happen, you said it yourself from the get go. They’re disingenous about it, but that doesn’t mean it’s the wrong business decision.

Why anyone would choose to fly United at this point, though, unless they lived in Houston or on the wrong side of New York City…

Dan

@Gary Leff:
Can’t argue with any of that, we all knew this day was coming. I just don’t like Smisek’s duplicity.

CLE was told for years that it was performing well and now it’s being told that it was losing money for a decade.
Just come out and say that regional jets are going the way of the dodo and a hub built around them doesn’t make sense going forward.

The idea that CLE was a money pit dating back to the Bethune, Kellner, and the merger era really strains credibility. And I do hope the OH AG sticks it to UA and makes ’em pay for an audit.

face it

cleveland will always lose just like all the sports teams fiascos..simple

myb821

@gary leff unfortunately there is another breed of people stuck flying UA, those that live in denver.

Evan

Gary Leff’s comment is very likely the real issue, but I would add that an audit is unlikely to stick it to anyone.

The problem is that while accounting is largely accurate in calculating profits and losses for an entire company, when you start trying to break down and calculate costs and profits for parts or sections of a company, you inevitably get into arbitrary allocations of where costs (and even revenues) belong.

I’m sure that United has incredibly sophisticated models of how to allocate the various overheads, depreciation, interest, maintenance, etc. costs of running an airline. And I’m sure, like all companies, United changes the allocation models frequently. Sometimes in good faith and sometimes for political purposes. Cleveland will obviously argue that these models unfairly apply too much of those costs to them.

In the end, an audit is unlikely to definitely prove anything, since it is hard to challenge cost allocation models unless they have no economic substance at all, which I’d is very unlikely in this case. But just my raising the threat of an audit, they probably can extract some short term concessions, so United can avoid a fight and start on the agenda they want anyway.

ideas

Dan, open up you own airline.

Dang6

Most mergers fail. While they may get hyped in the media as great things…History states otherwise.
The population of Cleveland is approximately 400,000.
The population of Chicago is approximately 2.7 million.

Airlines make more money when planes fly full.
Congested Chicago has the potential of filling more seats, so I’m guessing the planes will shift there. Planes don’t make money sitting on the ground, so they will be used somewhere.

Given equal routes, most people will fly the lowest price.
Most people will not pay 20-50% more for a name brand carrier. (Although most Children will push their parents for carriers that have TV in their seats)

I think that the day of the merger, everyone knew that CLE’s days were numbered for UA. It just doesn’t have the population on its own to consistently pack aircraft.

If the routes from CLE are truly profitable, there will be other carriers that fill the void. (e.g. Southwest) they are not hub and spoke, and frankly aren’t looking for the international connections.

The CEO of UA, is frankly making excuses because in the end…This merger continues to dismay all. United staff continue to refer to themselves as either former Continental or former Untied. People tend to blame their predecessors for bad performance, and the current management is no exception. The CEO is acting like a scared animal, and scared beings make mistakes.

Chaos for lack of a better word…Is good. In the end, United still isn’t integrated, Pre-Merger US Airways still isn’t integrated, and AA adds even more complexity.

There will be several hundred missteps by all in the next couple of years. It should benefit many. It’s just sad for the people in CLE that will lose their jobs.

Dan

@myb821:
…until DEN is axed.
I think PHL and PHX hubs will be gone within a few years as well.

@Evan:
It will be an embarrassment to have United’s books laid open to see just how bad this merger was.
I sure hope to see the data.

@Dang6:
You’ve got a lot of bad data there.

First of all airports don’t draw passengers from a “city.” Downtown CLE is making an insane resurgence right now, but everyone moved out of the city and into the suburbs half a century ago.

The statistic you’re looking for is the CSA or Combined Statistical Area.
Cleveland’s CSA has 3,497,711 people, the 15th largest in the USA out of 169.
That’s bigger than DEN and one of the largest without a hub.
http://en.wikipedia.org/wiki/List_of_United_States_combined_statistical_areas

Second of all you say “Given equal routes, most people will fly the lowest price.”

That’s not true. Airlines make real money of corporate travelers, not off of “most people”. They are willing to pay a big premium for nonstop flights which is why United often charged more than double other airlines for their nonstop CLE flights since the merger.

Frankly I think they just charged too much though for the nonstops. Before the merger the price differential was never as much as it’s been recently.

CLE is one of the most expensive airports to fly into in the nation, so one bright side should be some lower fares at the cost of convenient nonstops to dozens and dozens of places.

CLE has plenty of Origin/Destination traffic, which is why it is remaining a United focus city with flights to 20 airports. And I do think they’ll land another airline this year to compensate for need.

But yes, the United merger has been a textbook fiasco.

Moshe

I think a lot of their decision had to do with the layoff’s they announced and used the “profitability” as an excuse so not to sound so callus. A company can improve their “profitability” but increasing their top line (revenue) or decreasing their bottom line (cost). Even though revenue was where it needed to be to make a profit, the additional cost savings United will see by laying off 400+ people outweighs any potential increase in revenue. I agree they should have just come out and said, but like Dan mentioned, the CEO seems to be making mistakes right and left here, so poor or misleading communications is no surprise.

Linda Thede

@aaron: Look, figures don’t lie, but liars can figure. I have no doubt but what UNITED, not Continental, was not profitable here – its tough for an airline with a bad reputation to compete with what was the best airline in the world. Bookkeeping is an art and you can bet that UAL will hire the foxiest accountants to prove their point.

cleveland

is like that relative who stays and wont leave

cleveland

only place worthwhile in midwest is chicago

Chi town

So Dan…since you have it all figured out. United is closing a secretly profitable hub…
That makes a lot of sense, if they are making money hand over fist in CLE…they shut it down…perfect sense!
Do you not understand there have been major changes in the aviation industry since 2007? Mergers…Bankruptcies…
Don’t be salty Dan just because CLE sucks

anash

dont belong in a telzer stronghold ..period

anash

it does such ..but they have nice parks ..parkgrounds for bbquing

Anonymous

@Chi town: tax all your companies back to Ohio

eds

I think that your post about CSA and link provided might have answered part of the question. Of the top 50 CSA’s, CLE is one of only 4 that has had an estimated population drop between 2010 and 2012. It has also seen the biggest percentage drop of the top 70 metro areas, even larger than Detroit.

Using this CSA logic PHL is quite safe. DEN/PHX/CLT could be on the chopping block, but those metro areas are growing.

weds

this is a pacticularly long rant in support of clev…dont feel bad no one wants to go there …period

anonymous

When United merged with Continental it also lost a huge cargo contract from a multi – million dollar freight company (tazmanian freight), not only in Cleveland but 6 other cities. Since United does not do cargo they also outsourced that function.

Ron

@David: The reason why it is closing is because there is a shortage of pilots due to FAR 117. They are lying about its profitability because they don’t want to pay the $20MM reparation for violating the contract. If it weren’t profitable for decades, then it would have been gone long before pillows, blankets, free meals at meal time, and charging for bags.

Anonymous

Comment 25. Really, what are you, 3 years old you idiot. You obviously have zero intelligence by the way you speak. Why don’t you listen and learn before you open your mouth you moron.

Reason

Gotta love big Dan complaining about United devaluations, when Dan probably costs United thousands of dollars a year with all those miles he racks up.

What’s their kickback on that money you spend on a credit card? I guarantee United would be happier to not have Dan as a customer at all. It’s hard for me to imagine that Dan has provided United with positive income.

Dan should just be happy they haven’t taken away all his miles for all of his borderline abusive tactics.

No airline owes anything to us. We should all be grateful we live in a world where we can hop on a plane FOR FREE (with miles) and go see family halfway around the country (or world).

Dan

@Chi town:
Congrats on completely missing my point.

@eds:
PHL, DEN, and PHX are all doomed.
Come back in 5 years and see.

@Ron:
Indeed.

@Reason:
Wow.
Talk about better tor remain silent and be thought a fool than to speak and remove all doubt.

The only profitable part of US airlines are their mileage programs.
They get billions of dollars from the credit card companies.

United would not exist today if not for revenues from selling miles to banks. That’s not an exaggeration.

Did you really think that they have these programs where you can fly free out of the goodness of their heart??

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