United drops Hangzhou service, scaling back in China

It appears that United Airlines is dropping its 3x weekly service from San Francisco to Hangzhou, China (HGH). The route is just over a year old and part of the company’s major expansion into secondary cities in China. With ongoing weakness in China-originating traffic and a new focus on growing domestic traffic perhaps this cut is not too surprising. While still listed in public schedules the route does not appear for sale on the United website, a common scenario on weekends when the carrier loads major schedule changes into its systems. The final westbound flight is 14 October 2017.

United offers twice-daily service from San Francisco to Shanghai, not too far from Hangzhou. It also faces significant pressure from Chinese airlines rapidly expanding service into the United States. None of that helps with yields for flights to secondary cities. The Hangzhou route theoretically benefits from not being service into Beijing or Shanghai in the sense that the airport is not overwhelmed with traffic and subject to random, extensive delay programs due to military aviation activity. But it is close to Shanghai, possibly close enough to still be affected in some cases.

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The US-China market is still governed by a bilateral treaty that makes adding additional service challenging. There are no additional traffic rights available for US carriers to Tier 1 cities in China; any expansion must be to secondary destinations at this point. Delta recently reassigned its Tokyo-Shanghai service to Atlanta, preserving its allocation while further cutting its Narita hub. Dropping the route outright would’ve ceded the slots back to the DOT for reassignment to another US airline and a battle would have almost certainly ensued.

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But United mostly chose to avoid those battles in recent years, expanding into secondary markets with its fleet of more fuel-efficient Boeing 787 Dreamliner aircraft. Hangzhou, Xi’an and Chengdu are the trio the carrier tried with Brian Znotins in the roe of VP, Network, in charge of route planning. He left the company in late 2016 (now at WestJet planning a similar major international push) as part of the executive suite purge under new Untied CEO Oscar Muñoz. With his departure and the arrival of Scott Kirby as president for the airline the focus for growth shifted to domestic markets. Hawaii gets a major boost from United this winter, for example, and many domestic hub routes are seeing larger aircraft enter service while cuts are coming across the Atlantic as well.

In the most recent quarterly earnings call Kirby hinted at the pressures in China, though stopped short of calling for routes to be cut:

We have big exposure to China and less exposure to domestic. And so with China doing worse, and domestic is doing better, we’re going to underperform [relative to Delta] on the system level, not because we’re performing, but just because we have bad geography… If China goes gangbusters all of a sudden, we’ll outperform more. If China is bad, that kind of widens the gap.

EVP/CCO Andrew Nocella also talked about caution in the Chinese market during the call:

So we’re going to be really careful, particularly in Shanghai and Beijing over the next 12 months in terms of our capacity deployment to make sure we can move those markets in the right trajectory for a positive RASM outlook. But we’re really confident where we are in the Pacific partners and our hubs and we think we have these leading franchises.

Turns out that caution means at least one route dropping for now.

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Even with this cut United still has options in China. The carrier is deepening ties with Air China to help feed traffic and ANA offers a number of connecting opportunities via Tokyo, though neither of those arrangements include joint venture immunized operations (China is excluded from the ANA JV) nor an equity stake. Both Delta (done deal with China Eastern) and America (in progress deal with China Southern) are using partner equity stakes as part of their strategy in China.

Earnings call quotes from SeekingAlpha.