Continental's Approach Benefits Houston Airport

Growth in passenger traffic soared 9 percent last year at Bush Intercontinental Airport, enough to make it the fourth-fastest growing airport in the world.

That surpasses hot Asian airports such as Singapore's.

What gives?

A big factor is Houston's surging oil-fired economy, which has stoked job growth and punched up travel demand.

Nearly 80,000 jobs will be added to the Houston region this year, according to the Greater Houston Partnership report in May. That's up two-thirds from a December estimate.

But much of the airport traffic hike lies with the strategy of its major carrier, Continental Airlines Inc. Houston's hometown airline has taken a markedly different approach from most of its peers by adding planes and beefing up international and domestic flying.

"We're not flying more international just to escape the domestic market like our competitors," Jeff Smisek, Continental's president, said at the carrier's annual meeting here last week.

Continental's domestic flying will grow 5 percent this year, he said, in part because the nation's fourth-largest airline needs passengers to feed its hubs and to support more international flying.

Most large rivals have added international flights by cannibalizing their domestic networks, where they face intense low-fare competition.

"It's fair to say that Houston's strong economy has helped us have confidence here," said Karen Zachary, who plans Continental's domestic system, from her office in the carrier's downtown headquarters.

Continental and its regional affiliates fly 85 percent of the traffic at Intercontinental today.

The carrier isn't done growing by any stretch. Continental announced 34 aircraft orders at its annual meeting, including doubling its orders for next-generation Boeing 787s to 20 planes.

"That's the perfect plane for our airport," said Richard Vacar, director of Bush Intercontinental, who has seen his facility go from half-empty in the mid-1990s, when Continental was struggling, to completely full today.

"Only the biggest hubs with the best traffic are going to get those planes," he said, "and we'll be one of them."

Small-plane gains

Intercontinental's brisk growth has come from much smaller planes than the 787.

Continental has increased its daily 50-seat regional jet and smaller turboprop flights at the hub to 463 this year from 324 in 2004, a 43 percent bump.

"What Continental has done at Houston is just fantastic," said Alan Sbarra, an aviation consultant with Roach and Sbarra in San Francisco. "It's just a great hub for sending traffic to Latin America and, to a lesser extent, to South America."

Most of those planes have added flights on existing routes to add appeal to Continental's schedule, which is built to give business travelers lots of choices to visit a city and come back in the same day.

The heady growth rate may not last. Continental has pulled 69 regional planes out of service, but it may find other operators to replace those aircraft. The changes in Continental's regional fleet mix mean Intercontinental's growth will probably slow, Ms. Zachary said.

That won't change Continental's long-term plans, which will have the carrier increase its schedule up to 9 percent a year.

Like all the network carriers, Continental has faced fuel price increases and pricing wars with low-cost rivals such as Southwest Airlines Co., which operates a growing schedule at Houston's Hobby Airport, and JetBlue Airways Corp., which has invaded Continental's prized hub in Newark, N.J.

Southwest's traffic at Houston Hobby was up 8.2 percent in January compared with a year earlier, the latest figure available. The Dallas-based carrier has added several more flights from Hobby, most recently to its new Denver operation.

Southwest spokesman Ed Stewart said the carrier is pleased with improvements at Hobby and has big plans for the airport.

Southwest's low fares pose a problem for Continental at Bush, though Mr. Vacar said "both carriers create their own markets" and don't necessarily fight for the same kind of passenger.

Elusive profitability

Continental has yet to regain profitability on an annualized basis.

But it has restructured its costs in concert with its labor unions, pulling out $1.1 billion in annual expenses. Its fleet of 360 Boeing planes is among the youngest in the world, a natural hedge against rising fuel costs.

Continental has kept hot food on its flights both in business class and in coach, in part because it owns the food kitchens that cater the flights and also because it wants to differentiate its service from the competition.

Continental's aggressive expansion has some analysts concerned that it may have too much capacity just as the current business cycle may be peaking.

But that doesn't worry Larry Kellner, chairman and chief executive.

"We have a lot of flexibility in our fleet plan," he told reporters after the annual meeting. The carrier's older planes are on leases that could be terminated in the event that demand doesn't meet expectations, he said.

Future fares

Continental's long-term strategy leans on its ability to charge higher fares, said Mr. Sbarra, and that could be risky if the economy slows or more low-cost competition enters Continental's markets.

"It's a lot less risky for Continental to try that than other carriers," he said. "But I think it could be a short-sighted plan for them because I don't think they'll get back to charging the fares they could before."

As for Mr. Vacar, the future of his airport has been helped by Continental but won't necessarily rest solely on the carrier's fortunes.

That's because a high proportion -- about 45 percent -- of Bush Intercontinental's passengers start or end their journeys in Houston.

At Dallas/Fort Worth International Airport, so-called local traffic makes up about a third of the total.

With so much lucrative local traffic in Houston, other carriers would be eager to step in if Continental were to stumble.

"There's going to be a lot of change in this business," Mr. Vacar said. "There's always a lot of inherent risk in airports."



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