Southwest’s Near Term Growth Drivers: Expiry Of Wright Amendment Restrictions & Slot Wins

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In the first half of 2014, Southwest Airlines (NYSE:LUV) has posted impressive growth in its profits on strong demand for air travel in the domestic U.S. market. Even though the low-cost carrier has not raised its flying capacity this year, its profits have risen sharply on fare hikes and higher passenger traffic. We figure that Southwest will likely maintain its growth momentum through early 2015, on gains from specific growth opportunities. Within the next month, restrictions imposed on Southwest’s capacity expansion at Dallas Love Field airport will expire, allowing the carrier to expand its flight network from this airport. In addition, slot (specific take-off and landing timings) wins at Washington Reagan and New York LaGuardia airports earlier this year are enabling Southwest to expand in these high value geographies. We figure expansion in these markets will likely lift Southwest’s overall yield and margin. Separately, in the long term, the carrier has the opportunity to expand in near international markets, which currently constitute a very small portion of its overall service network.

In all, faced with these growth opportunities, Southwest will likely continue to grow its results in the second half of 2014 and early 2015. We currently have a stock price estimate of $34 for Southwest, marginally below its current market price.

See our complete analysis of Southwest here

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Expiry Of Wright Amendment Will Enable Capacity Expansion At Dallas Love Field Airport

On October 13, Wright Amendment will expire, enabling Southwest to fly non-stop to a greater number of destinations from the Dallas Love Field airport. This amendment has been in place for many decades and was originally introduced to make the nearby located, Dallas Fort Worth International Airport, commercially viable. When this amendment expires next month, Southwest will launch non-stop flights on several new routes out of Dallas Love Field. We think, as the carrier is well established and very well recognized in the Dallas market, its additional flights will find many takers. Thus, this capacity expansion will be unlike a new market entry in which a carrier typically takes considerable time to achieve healthy occupancy rates (percentage of seats occupied by revenue paying passengers in a flight).

Slot Wins At Washington & New York Airports Is Boosting Growth

Separately, earlier this year, Southwest acquired 27 of the 52 slot pairs vacated by American Airlines-US Airways at the Washington Reagan National airport under the terms of their merger settlement with the Justice Department. The low-cost carrier also won six out of the 17 slot pairs that were up for bids at New York’s LaGuardia airport. For many years, Southwest’s capacity expansion in the Washington and New York markets was restricted by the non-availability of slots, but with these slot wins at the start of 2014, the carrier is rapidly expanding its operations in these markets. At a recent presentation, Southwest said that it has achieved 33 daily departures from New York LaGuardia, and that it will achieve 44 daily departures from Washington by the end of 2014, up from about 17 daily departures from the city at the start of 2014. [1] [2] We figure this ongoing capacity expansion in New York and Washington markets will likely lift Southwest’s yield and margin, as the high value nature of these markets will likely allow Southwest to raise its average air fares.

International Expansion Also Presents Long Term Growth Opportunity

Apart from these near term growth opportunities, Southwest could expand in international markets to maintain its growth momentum in the long term. The carrier is currently building an international facility at the Houston Hobby airport. This facility is expected to be ready by the end of 2015. We expect that once this facility becomes operational, Southwest will be able to expand more aggressively in near international markets which include Mexico and the Caribbean. Another factor which will help grow Southwest’s international market share is the carrier’s Bags Fly Free policy. Like in the domestic market, Southwest fliers will be allowed to carry up to two bags for free on international flights. We figure this policy along side lower fares, has helped Southwest to grow aggressively in the domestic market, it will also likely help the carrier grow its market share in the international market.

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Notes:
  1. Transcript for 2nd annual Morgan Stanley Laguna Conference, September 15 2014, www.swamedia.com []
  2. Southwest brings new service and low fares to the nation’s capital, January 30 2014, www.swamedia.com []