Last year, Southwest Airlines (NYSE:LUV) posted impressive growth in profits on gains from capacity expansion and lower jet fuel costs. For many years now, the low cost carrier has grown through aggressive capacity expansion, eating into domestic market shares of legacy carriers on strength of its lower fares. In 2014, in addition to lower fares, we figure Southwest’s capacity expansion will be enabled by a host of other factors. Primary among these will be international flying that Southwest plans to begin from July 1. The recent acquisition of many slots at Washington Reagan National Airport and repeal of Wright amendment will provide additional growth in the carrier’s flying capacity in the domestic US market. And, like previous years, this capacity expansion will likely drive growth in Southwest’s passenger traffic and revenues in 2014.
We currently have a stock price estimate of $21.95 for Southwest, marginally above its current market price.
International Flying Will Drive Southwest’s Capacity Expansion In 2014
Southwest recently announced that it will start flying to near international destinations in the Caribbean from July 1, 2014.  The carrier currently through its wholly owned subsidiary, AirTran, flies to some near international destinations in the Caribbean and Mexico, but flights under the Southwest brand will enable fliers to carry up to two bags for free for the first time on international routes. In addition, a host of other Southwest policies like zero ticket change fee will be available to passengers flying to these destinations during summer. Thus, as Southwest’s lower fares, zero baggage and ticket change fee enabled it to expand in the domestic US market, we figure these factors will enable it to expand in these near international air travel markets as well. Looking ahead, not just in 2014 but over the coming years, we figure international expansion will play a key role in Southwest’s growth.
However, the carrier will be limited by its aircraft type. Southwest currently operates only single-aisle Boeing 737 jets that can fly up to the Caribbean, Central America and northern parts of South America. This strategy of operating a single aircraft type – the 737 – has been one of the pillars of Southwest’s low cost model because this lowers spare part inventory management costs, personnel training and other maintenance costs. Flying a single aircraft type also simplifies scheduling and flight operations. Nonetheless, despite this limitation, we figure expansion to these near Latin American air travel markets will enable Southwest to take advantage of the growing demand for air travel from this region, driven by its relatively fast growing economy.
Slot Wins At Washington & New York
Another factor which we figure will drive Southwest’s capacity expansion in 2014 is its acquisition of slots vacated by American Airlines and US Airways under their settlement terms with the Justice Department. Southwest won 27 of the 52 slot pairs that were vacated by American-US Airways at Washington Reagan National Airport. As a result, the carrier will be able to increase its flights at Reagan National Airport from daily departures of 17 to 44. Southwest also won six out of the 17 slot pairs that were up for bids at New York’s LaGuardia.  For many years, the carrier’s growth at these two major airports – New York LaGuardia and Washington Reagan – was constrained by lack of availability of landing and take-off slots. Now, with these recent slot acquisitions, Southwest will be able to expand its services at these important airports, growing its overall flying capacity.
Apart from Southwest, JetBlue was the other major airline that acquired several slots vacated by American and US Airways at these two airports. Late last year, we wrote on how JetBlue and Southwest could benefit from the Justice Department’s settlement terms related to American-US Airways merger approval.
Additionally, the repeal of Wright amendment, which up till now restricted Southwest’s capacity expansion at Dallas Love Field airport, will also help the carrier raise its flying capacity and passenger traffic in 2014. Earlier this month, soon after the repeal of this amendment, Southwest announced that it would begin flights from Dallas Love Field to 15 new nonstop destinations by the end of the year.  All in all, we figure driven by international flying, slot acquisitions and repeal of Wright amendment Southwest’s flying capacity will continue to grow in 2014. In turn, this higher capacity will enable the carrier to continue to eat into the market shares of legacy carriers and grow its passenger traffic and revenues.Notes:
- Southwest announces first international destinations, January 27 2014, www.swaamedia.com [↩]
- Southwest brings new service and low fares to the nation’s capital, January 30 2014, www.swamedia.com [↩]
- Southwest airlines announces new nonstop destinations from Dallas Love Field, February 3 2014, www.swamedia.com [↩]