Southwest Airlines Prepares to Take on United in Houston

Last week, Southwest Airlines (NYSE: LUV  ) broke ground on a new five-gate international terminal at Houston's Hobby Airport. Southwest already serves more domestic passengers than any other airline, but near-international markets like Latin America and the Caribbean represent a big potential growth opportunity for the company.

Southwest Airlines is breaking ground on a new international terminal in Houston.

The Houston terminal is a big part of Southwest's international expansion plans. Houston is the fifth-largest U.S. metropolitan area, so it has plenty of local traffic, and it is well located to serve as a Latin American gateway. Moreover, it is already one of Southwest's biggest focus cities, with 156 peak-day departures (a figure that is sure to grow after the new terminal opens in late 2015).

The biggest loser is sure to be United Continental (NYSE: UAL  ) . United has dominated the Houston air travel market for a long time, offering more than 600 daily departures from the city's larger Bush Intercontinental Airport. The new terminal at Hobby Airport will allow Southwest to compete with United on even more routes from a smaller, more customer-friendly airport, pressuring United's margins in Houston.

Ugly fight over expansion
United's fear of the planned Southwest expansion resulted in an unusually strong lobbying battle between the two last year. United argued that expanding Hobby Airport would siphon passengers away from its hub at Bush Intercontinental Airport.

As a result, United threatened to cut capacity in Houston if the city permitted Southwest to start international flights at Hobby Airport. United began implementing those cuts last fall, after the city sided with Southwest.

Lower fares
While Houston has lost service to some small cities due to United's cutbacks, the upside is cheaper fares on nonstop flights to Latin America and the Caribbean in the future. This is good news for anybody looking to travel from Houston to a popular international vacation destination.

Southwest is likely to focus on routes to cities with plenty of leisure traffic, such as Mexico City, Cancun, Guadalajara, Puerto Vallarta, and San Jose, Costa Rica. Many of those routes have no competition today, because United has such a dominant position at Bush Intercontinental Airport.

United's Houston operation has historically been one of the most profitable airline hubs in the country, which is a sure sign of a high-fare environment. Southwest will look to stimulate demand with lower fares as it begins international service in Houston. In order to maintain its market share, United will undoubtedly drop fares as well -- as it has done when challenged at other key hubs like Newark. This will provide consumer benefits that will most likely outweigh the costs from United's downsizing.

New thorn in United's side
Southwest Airlines has been a recurring thorn in the side of United Continental over the last 10 years, as it has expanded in numerous of United's hub markets, including Denver, Chicago, Newark, and now Houston. This increasing competition from Southwest has taken a toll on United's bottom line.

United's main strategy in recent years for competing against airlines with lower cost structures has centered on maintaining a dominant position at hubs in key markets. Southwest is gradually chipping away at this lead on multiple fronts.

So far, United's attempts to retrench have not allowed it to reclaim its historical revenue premium. In fact, United recently announced that Q3 unit revenue will miss the company's original guidance. With Southwest starting international service, United will have to worry about competition on even more routes, putting additional pressure on its pricing power.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2013, at 11:45 AM, josegeorge wrote:

    It is a BS about Southwest a low fare airline, the prices of Southwest fares are almost the same, or the same in some cases than the called legacy airlines, So the press people and Southwest should stop the lie that it is a Low cost carrier, because believe me it is not

  • Report this Comment On October 07, 2013, at 11:47 AM, PS75425 wrote:

    Southwest has got to be burning through a lot of capital expanding. Eventually it will catch up them and we all know what will happen next ...

  • Report this Comment On October 07, 2013, at 12:12 PM, ereper wrote:

    it's really simple. fly on United, then fly on Southwest. both are bottom line focused. the difference is that with United the bottom line is first and the customer is further down the list of priorities. Southwest understands, you make the customer feel welcome, he comes back again and again, and this grow the bottom line. Southwest is different and honestly not everybody will like the way the function, but if your goal is to get from point A to point B on time and comfortable, at a competitive price, Southwest will win out every time. i fly Southwest when i can and United only when i have to

  • Report this Comment On October 07, 2013, at 12:40 PM, TMFGemHunter wrote:

    @PS75425: Southwest has the best balance sheet in the airline industry with the sole exception of Allegiant (Allegiant never buys new airplanes in order to cut down on CapEx). Southwest's CapEx plans are actually quite manageable.

    @josegeorge: It's true that Southwest's fares are usually comparable to legacy carriers' fares. But those fares also include 2 free checked bags and no change fees, both of which are very valuable. Southwest is not a "cheap" airline like Spirit or Allegiant, but it does have low costs compared to the legacies.


  • Report this Comment On October 08, 2013, at 7:32 AM, Here4travel wrote:

    No you are wrong mr Levine , you have to buy up,to the next fare which is often more than a change fee. Traveled extensively for over 40 years, and I disagree with you as many other travelers will, southwest is a cattle car and a very undesirable airline to deal with. United has been a great carrier for all my life and I find it appalling how you consistently badger united more than than any other. Why? We have all experienced bad service, however united delta American are light years better than southwest. I fly from Denver, southwest empty , united packed every time. What does that tell you. United is on time, southwest does well but is in a world of their own. Good luck when you have a ticket on southwest and things go wrong, no choice they work with no,other. Stop badgering united delta and American , the carriers that been here longer than you and will stay longer than you and I. Respect the workers.

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