Southwest Airlines Will Focus On Expanding Its International Operations In 2016

The success of Southwest’s newly launched flights from the Dallas Love Field Airport, coupled with the weakness in crude oil prices, paints a positive outlook for the airline’s third quarter performance.  Going forward, the airline plans to focus on expanding its international operations while keeping Dallas Love Field at the core of its operations. Further, the airline expects to take a step back and slow down its growth in 2016, primarily to digest the 12% growth it has experienced over the last two years.  In this article, we will talk more about Southwest’s outlook for the rest of the year and going forward.

Source: Google Finance

Dallas Love Field Continues To Be The Focus Through 2015

Since the expiration of the Wright Amendment in October 2014, Southwest has been rapidly expanding its operations at the Dallas Love Field Airport. The airline has grown from 118 daily departures to 16 cities in the last year to 180 flights to 50 cities as of August 2015. Interestingly, the airline’s newly launched flights have been generating a load factor, i.e. the number of passengers flown per flight, of more than 90%. This implies that the air travel demand in Dallas is strong and airline has been able to attract more passengers for its newer flights. Moreover, Southwest offers high quality customer service and charges lower fares due to its low cost structure. Thus, the passengers prefer flying with Southwest as opposed to its competitors.

Routes Offered From Dallas Love Field Airport

Source: J.P.Morgan Aviation, Transportation and Industrials Conference, March 2015

Apart from Dallas, Southwest is also venturing into other markets. Tammy Romo, Southwest’s Chief Financial Officer (CFO), pointed out during her presentation at an annual industry conference last week, that the airline currently has 18-20% of its markets under development, which is notably high compared to other network carriers. However, going forward, the company expects this rate to come down to 4-5%, in line with its rivals. For the full year 2015, Southwest expects to grow its system capacity by 7%, the majority of which will be driven by the Dallas growth. The airline anticipates this capacity expansion to have a spill-over effect of 4-5% on the capacity in 2016. Accordingly, the domestic carrier has given a capacity growth target of 5-6% for 2016. Considering all these factors, we expect the capacity expansion and passenger traffic growth to drive the airline’s top line at least in the next two quarters.

Southwest’s Market Under Developement

Source: J.P.Morgan Aviation, Transportation and Industrials Conference, March 2015

International Markets To Take Center Stage In 2016

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, the airline initiated international flights to Aruba, Bahamas, and Jamaica. Following the success of these flights, the airline decided to further expand its presence internationally by building an international hub at Houston Hobby Airport, where the airline has a significant domestic presence. In this effort, the airline invested heavily on the first international terminal at the Hobby Airport consisting of five gates, of which four will be operated by Southwest. The new terminal will allow the airline to offer flights to new international destinations, particularly in Central America, Mexico, and the Caribbean.

According to the update provided by the CFO, the new terminal, which drew an estimated investment of $156 million, is on track for its launch next month. She also highlighted that the airline will be dedicated towards establishing its footing in the international markets in the next year, while enjoying the benefits of the robust capacity in Dallas. The airline has announced its plans to add flights from Hobby to Cancun, Mexico City, Puerto Vallarta, Los Cabos in Mexico, and Belize City, Belize by the end of this year. Apart from these six new flights, Southwest also aims to expand its services in 50 new international markets through the Baltimore Airport, the carrier’s second-busiest hub, and the Fort Lauderdale Airport. Over the next few years, we anticipate Southwest’s international operations to contribute a larger and more significant portion of its revenue growth.

No Bag Fees and Low Cost Structure – A Competitive Advantage

Southwest is the only airline that does not charge a fee for baggage from its passengers. While this may be seen as a loss of revenue by investors, the airline views it as a competitive edge over its counterparts. The airline believes that it has been able to attract more customers due to this no bag fee policy and plans to continue with this policy in the future. Overall, the airline is pleased with its revenue trends and estimates a decline of only 1% in its unit revenue for the third quarter as opposed to a 4.5%-6.5% decline anticipated by its close competitor Delta.

On the cost front, Southwest has a 30-40% cost advantage over the network carriers such as American, United, and Delta. Besides, the airline has a cost structure which is almost 10% lower compared to the average cost of the low-cost carriers. In addition to the fuel cost savings that will benefit all the airline companies, Southwest expects its unit costs (excluding fuel costs and special items) to decline by 2% in this current fiscal. Since Southwest enjoys the scale of large carriers in terms of the passenger traffic and a cost structure similar (if not lower) to that of the low-cost carriers, it makes commercial relevance for the airline to expand its operations internationally to gain market share and, in turn, improve its operating margins.

New Reservation System Likely To Come On Board Next Year

Not only is Southwest focused at expanding its operations, but it also plans to enhance its operational performance through various initiatives. One such initiative is the single reservation system that the airline is planning to launch in 2016. The CFO pointed out that the work on the reservation system is in line with the airline’s expectation, but did not provide any timeline for its launch. She expects the new system to enable the airline to make faster code-sharing agreements with other airlines and result in revenue enhancement of hundreds of millions of dollars.

See Our Complete Analysis For Southwest Airlines Here

Conclusion

Leveraging its competitive cost structure, Southwest will continue to focus on its Dallas expansion for the rest of 2015, before shifting its energies to international markets in 2016 and beyond.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research