Southwest Airlines (NYSE:LUV) announced on Monday, March 10, that it will add flights to 12 new destinations from the Dallas Love Field Airport, if it is able to acquire the two gates at this airport that will be vacated by American Airlines as part of its settlement with the Justice Department.  We figure Southwest stands a good chance of acquiring these two gates as in the past couple of months it has actively pursued slots and gates that have been vacated by the American Airlines-US Airways merger. The carrier successfully bid for 27 of the 52 slot pairs given up by American at the Washington Reagan National Airport and 11 of the 17 slot pairs given up by it at New York’s LaGuardia airport. Thus, Southwest has gained the most among other airlines from slot/gate divestitures executed by the new American airline under its commitment with the Justice Department. Therefore, it is highly likely that the carrier will bid strongly for the two gates at Dallas Love Field, which also hosts its corporate headquarters.
At the same time, even if Southwest is able to acquire these gates, it will not become a dominant player in the Dallas/Fort Worth air travel market, as other airlines including American, Virgin America and Delta Air Lines (NYSE:DAL) have a significant presence at DFW International Airport – the other major airport of this area. Nonetheless, for Southwest, addition of these gates will enable it to add more flying capacity to its network in 2014. In turn, higher flying capacity, given the healthy demand for air travel in the domestic US market, will grow the carrier’s passenger traffic and results.
We currently have a stock price estimate of $21.95 for Southwest, around 5% below its current market price.
Acquisition Of Additional Gates Will Enable Greater Expansion In Southwest’s Flying Capacity
Earlier this year, enabled by the repeal of Wright Amendment, Southwest announced that it would begin flights to 15 new destinations from the Dallas Love Field Airport.  The Wright Amendment restricted long haul flights from Dallas Love Field Airport, which is the base for Southwest’s operations in the Dallas/Fort Worth metroplex. At that time, we had written how the repeal of Wright Amendment, in addition to international flying and slot acquisitions, would drive Southwest’s results in 2014. Now with the possible acquisition of a couple more gates at the Love Field Airport, Southwest’s capacity expansion plans for 2014 will receive a boost. In turn, this higher flying capacity will enable the carrier to raise its passenger traffic and revenues.
Separately, this increase in Southwest’s presence in the Dallas/Fort Worth area will not be significant from the standpoint of reducing competition, as other airlines, notably American has a significant presence in this area. After the acquisition of these two gates, Southwest will occupy only about 10% of the 175 gates available in this air travel market – 20 gates at the Love Field Airport and 155 gates at the DFW International Airport.  For passengers though, increased presence of Southwest in this market will likely lower average fares. As with more low priced flights from Southwest on routes connecting Dallas/Fort Worth, other airlines notably legacy carriers will be compelled to slash their fares.Notes:
- Southwest announced 12 additional nonstop destination from Love Field with access to two additional gates, March 10 2014, www.swamedia.com [↩] [↩]
- Southwest airlines announces new nonstop destinations from Dallas Love Field, February 3 2014, www.swamedia.com [↩]