Southwest Ventures Into The International Markets

Southwest Airlines (NYSE: LUV), traditionally known as a domestic low-cost carrier, now aims to tap into the international markets due to the saturation faced by the carrier in the domestic market. Following the successful integration of AirTran in 2014, Southwest is now geared up to establish its footprint in the international market such as Central America, Mexico, and the Caribbean. The Dallas-based airline currently operates flights to more than 90 destinations and initiated its first international service to Aruba, the Bahamas, and Jamaica in the Caribbean in July 2014. We currently have a price estimate of $47.50 for Southwest Airlines, 10% higher than its current market price.

See our complete analysis for Southwest Airlines.

Building Houston as its International Gateway

While Southwest gained access to airports in Maryland and Florida due to the merger with AirTran, Houston, being the seventh largest city in Southwest’s network, continues to be a focus city for the airline. In an effort to build Houston as its international gateway, the airline is currently constructing its first international terminal at the Hobby Airport in Houston. The airline has invested $156 million in the construction of this five-gate terminal which is expected to be operational by October of this year. The new terminal will open opportunities for Southwest to offer its services to new international destinations. To test the waters, the carrier launched a seasonal weekly flight between Aruba and Houston in March, which marks the first-ever international flight from the Hobby airport.

Southwest, which currently flies to seven countries, added a daily non-stop flight from Baltimore/Washington to San Jose, Costa Rica. In addition to this, the airline has announced plans to add flights from Hobby to Cancun, Mexico City, Puerto Vallarta, Los Cabos in Mexico, and Belize City, Belize later this year. While the carrier already flies to Cancun, Mexico City, and Los Cabos from other US airports, Belize has been newly added to its network. In addition to these six new flights, Southwest Airlines aims to expand its services in 50 new international markets through the Baltimore Airport, the carrier’s second-busiest hub. These additions will enable Southwest to boost its international presence and enhance its passenger traffic and revenues.

Latin America is considered to be one of the most lucrative markets, after Asia, for growth by the US airline companies. Hence, the carrier’s decision to focus its international expansion efforts in the Latin American market seems logical, given that the market is expected to grow at a CAGR of close to 5% over the next 10 years as compared to only 3% in the US domestic market. The airline is also considering the Canadian market, which it may enter towards the end of the decade.

Maintaining Domestic Presence by adding Flights from Dallas Love Field

With the expiration of the Wright Amendment (a federal law restricting the number and destinations of flights to/from Love Field) and subleasing of two additional gates from United (NYSE: UAL), Southwest has announced its plans to introduce non-stop flights to eight new cities out of Dallas Love Field. The new routes which are scheduled to commence in August this year include Raleigh-Durham to Charlotte, Boston, Detroit, Omaha, Nebraska, Philadelphia, Pittsburgh, and Salt Lake City. In addition, Southwest will also offer additional nonstop service between Dallas and Atlanta, Austin, Baltimore/Washington, Houston (Hobby), Little Rock, Chicago (Midway), and Seattle/Tacoma in August of this year. The carrier will also upgrade the Saturday-only nonstop service between Dallas and Charleston, South Carolina that is scheduled to begin April, to daily service in August.

Subsequent to this expansion, Southwest will be offering 180 daily departures to about 50 destinations from Dallas Love Field. The passenger boardings from the Dallas airport are expected to reach 6.5 million as opposed to reaching this mark in 2017-2018, again a result of this aggressive expansion. The new routes will enable Southwest to gain a decent share in the international market and contribute to its top line growth. Besides, the passengers will now have a variety of travel options to and from Love Field and will benefit from the low fares offered by carrier.

In terms of competition, Virgin America is slowly trying to enter into Southwest’s territory by launching five daily nonstop flights between Love Field and Austin in April this year. However, it may be difficult for the new entrant to match the scale and low-cost offered by Southwest at its home base, Dallas. Further, the entry of Allegiant in the Raleigh-Durham market may also raise competition for the carrier. However, Allegiant has third-party labor contracts and is focused only on leisure travel, unlike Southwest which hires its own staff and offers a variety of travel options at lower fares. Hence, we expect Southwest to maintain its dominance in the Dallas market.  Moreover, the airline has been phasing out smaller planes to add bigger and more efficient planes to its fleet to maintain its low-cost advantage over the large network carriers. As a result, the carrier’s average seating capacity has increased from 135 to 143, which will help the carrier to meet the growing travel demand while maintaining its low-cost operations.

To conclude, we believe that Southwest’s aggressive international expansion particularly in Central America and the Caribbean, coupled with its low-cost structure, will enable it to establish a strong footing in the international markets despite competition from large network carriers.

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