Will International Expansion Be A Big Part Of Southwest’s Future Growth Strategy?
Until 2014, Southwest was known to be a domestic carrier with negligible international exposure. However, with the completion of its merger with AirTran in 2014, Southwest initiated international flights to Aruba, Bahamas, and Jamaica. Following the success of these flights, the airline decided to expand its presence further in international markets by building an international hub at Houston Hobby Airport, where the airline already had a significant domestic presence.
Why Go International?
Currently, Southwest serves 98 destinations, of which 87 are in the U.S. This translates to less than 2% international capacity of the carrier’s total capacity. The need to expand internationally arises out of Southwest’s flattening growth. For the last decade, the carrier has strengthened its presence in the U.S. by offering lower fares, using a point to point business model, and a single Boeing fleet which is cheaper to service and maintain. Further, it has almost exhausted the list of cities it would like to serve domestically. In such a scenario, it becomes important for Southwest to spread its wings to foreign destinations.
After launching flights to Mexico and Cuba in 2016, the Dallas-based carrier is considering expanding to Canada, Caribbean, Central America, and South America. It is also looking at routes across the Atlantic. The management gave a timeline of 15 to 25 years, to establish its services across 48 states in South and Central America. According to our estimates, international operations would translate to approximately 15% of total capacity and 5% of total revenues for the company, over the next five years.
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How To Go International?
To be able to serve international markets, Southwest plans to upgrade its fleet by adding Boeing 737 Max jetliners to it, in 2017. The 737 Max is a larger, more fuel-efficient engine, which could help the carrier extend the distance it can fly. It will also be ordering more BA 737-800s, which would allow the company to fly long-haul distances. In line with this, the company has updated its fleet program to look as follows:
As can be seen from the table above, the company is looking at ordering almost 500 new aircraft. Of this, 737-800/8s form the majority of the delivery. It has also entered option contracts with Boeing to take delivery of more 737-800/8s. This shows that Southwest anticipates its international demand to grow exponentially in the next decade or so. If this order is anything to go by, Southwest may well become a force to be reckoned with, even internationally. Thus, we can confidently say that international operations will be a major growth driver for the airline in the future.
Have more questions about Southwest Airlines (NYSE:LUV)? See the links below:
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Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Southwest Airlines
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