Southwest Airlines Co. Reveals Its Washington, D.C., Plans

As part of its merger with US Airways, American Airlines (NASDAQ: AAL  ) agreed to sell 104 takeoff and landing slots at Washington, D.C.'s crowded Reagan National Airport. Two months ago, Southwest Airlines Co. (NYSE: LUV  ) came up as the biggest winner in this slot sale, acquiring 27 slot pairs. This will allow it to grow from 17 daily departures today to 44 daily departures by the end of 2014.

Until this week, Southwest Airlines had kept its Reagan Airport plans quiet, aside from announcing that it will fly between Dallas Love Field and Reagan Airport beginning this fall. On Monday, Southwest finally revealed the rest of its Washington, D.C., expansion plans.

Southwest Airlines will add about 27 more flights from Reagan Airport by the end of 2014.

There weren't too many surprises -- for the most part, Southwest will be adding service to cities where it has high market share. Since American Airlines currently holds a monopoly (or a dominant share) on most of these routes, this stepped-up competition will reduce the profitability of American's Reagan Airport operation.

Southwest's new routes
Early last month, I told investors to expect Southwest to use its new Reagan Airport slots to add flights to its biggest focus cities within the 1,250-mile perimeter governing most Reagan Airport flights. On that basis, the top candidates for new service were Chicago, Dallas, and Orlando, followed by Nashville. Houston and St. Louis were top candidates for additional flight frequencies. (Both cities have two daily roundtrips on Southwest today.)

Of that group of six cities, only Orlando was left out of Southwest's expansion plans. Instead, Southwest is spreading its Reagan National Airport slots over more cities. The net effect will be the same: more options for D.C. area travelers and tougher competition for American Airlines.

Southwest plans to begin using its Reagan Airport slots in a staggered fashion between August and November. On August 10, it will begin flying six times daily to Chicago's Midway Airport, the top airport in Southwest's route network. At that time, Southwest will also begin offering three daily roundtrips to Nashville and two daily roundtrips to New Orleans.

On September 30, Southwest will add an additional three daily flights to Chicago (bringing the total to nine), along with two daily flights to Tampa. Lastly, on November 2, Southwest will begin flying from Reagan Airport to Akron/Canton, Dallas Love Field, and Indianapolis, and it will add more flights to St. Louis and Houston.

Southwest hasn't published its fall schedule yet, so the exact number of flights to each city in this round has not been finalized. Assuming Southwest does not drop any of its current flights, it will be able to add 10-11 daily departures across those last five cities.

A change in the competitive landscape
Southwest's new routes will primarily impact American Airlines, which currently has a dominant position at Reagan National Airport. American flies from Reagan Airport to all of the cities where Southwest is starting or increasing service, except for Houston.

In fact, American Airlines has a monopoly on nonstop flights to Reagan National Airport from New Orleans, Nashville, Akron/Canton, Dallas, and Indianapolis. Southwest's entry into those markets will thus mark a significant change in the competitive dynamic. Today, the only alternatives to American are connecting flights on other airlines or flights to other (less convenient) D.C. area airports.

American Airlines currently monopolizes many routes from Reagan Airport. Photo: American Airlines.

Of the eight American Airlines markets where Southwest is starting or increasing service, only Chicago and Tampa have other nonstop competition. On the Reagan Airport-Chicago route, United Continental (NYSE: UAL  ) and American Airlines share a duopoly, but United currently has higher market share.

On the Tampa route, JetBlue Airways (NASDAQ: JBLU  ) currently offers a single daily flight, competing against five daily flights on American Airlines subsidiary US Airways. This summer, JetBlue plans to add a second daily flight. Southwest is the dominant carrier in Tampa, with more than 100 daily departures, so it has a built-in advantage in serving that airport.

Foolish conclusion
Washington's Reagan National Airport has been a very profitable hub for US Airways in recent years. Slot constraints severely limited competition, giving US Airways a monopoly or near-monopoly on numerous routes to and from the Washington area's most convenient airport.

American Airlines will continue to benefit from its leading market share at Reagan Airport. However, at the same time, it will have vastly stronger competition. Between the recent new service announcements from Southwest and JetBlue, American will face competition on seven routes that were previously monopolies. Additionally, American will confront a significant increase in competitors' flights on three other routes.

Fortunately for American Airlines shareholders, Reagan Airport represents a relatively small part of the company's overall business. However, American will also face increasing competitive pressure in Dallas and on lucrative transcontinental and transatlantic routes. Together, these factors could drag down American's unit revenue beginning this fall and throughout 2015.

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  • Report this Comment On March 25, 2014, at 6:52 PM, MaverickFlyer wrote:

    Really Adam? Significant competition and significant change in the market - with 44 departures spread out over a varied amount of cities - sure, there will be some competition, but the article you put forth fails to mention what AA is going to do, or doing to counter and compete - as the new AA is not the passive old AA with Horton and Arpey at the helm - and with Parker, it has become emboldened as well as aggressive in aligning their hub strategies, flights to major cities and such - what about AA's 270+ departures, and ability to realign schedules and slots based on demand - as one is not to assume they are going to stand idly by while Southwest comes in and takes market share. Sure, competition is good - but this article implies that AA is shaking in its boots - DCA will continue to be a profitable hub for AA and with alignment of resources of AA and US to one airline - am sure Doug Parker and his Executive team will keep a close watch on what Southwest and other competitors are doing in the DCA market - and adjust accordingly. As other publications I have read, the Southwest affect has waned over the years - as their prices in most cases are not any cheaper than their legacy competitors. And get over it Southwest, you are no longer a considered LCC airline. Otherwise - appreciate your point of view on your article, but as other comments that I have contributed to - please offer more balanced insight on what the other airlines are doing as well, not just totally focused on Southwest. Thanks!

  • Report this Comment On March 25, 2014, at 7:03 PM, iahphx wrote:

    No business likes competition, but Southwest is not the fearsome competitor they used to be. Sadly for their shareholders, Southwest has gotten fat and happy over the years, largely by paying employees higher-than-market-rate wages. To recoup these costs, Southwest has to charge market fares. And if you charge market prices, you're not a fearsome competitor -- especially because Southwest's product doesn't particularly appeal to the business travelers' who pay the higher fares.

    Of course, more seats in a market will tend to depress yields. So it's not great news for American. But it's not terrible news either. I doubt it's even material to their earnings.

  • Report this Comment On March 25, 2014, at 11:23 PM, Tyeward wrote:

    Well they most certainly didn´t disappoint, however I do understand the logic in going with just additional frequency to destinations already served with a few new destinations. They will be competitive to a point out of DCA, however I am thinking that they might want to revise how they view American Airlines, because it´s not the same carrier it used to be. Since they had to give up ground at DCA, you can expect them to be far more aggressive. I´m not sure if the government travel contract that USAirways has automatically shifts over to American after the merger. If it does then that just gave the combined carrier a much broader and more reliable passenger flow and they have still have quite an impressive network out of DCA. You can also expect to see The New American be far more aggressive in the corporate contract arena in the area, and with them aiming to have solid direct links to just about all of their major international gateways, they will be very hard to beat (especially with their frequent flyer program). The New American had to give up ground at DCA for the sake of competition, however it´s still going to be an uphill battle against them there.

  • Report this Comment On March 26, 2014, at 10:15 AM, TMFGemHunter wrote:

    Thanks for the comments.

    @MaverickFlyer: I take your point, but I don't think American can do anything at DCA beyond what it's already been doing. To say that AA has some kind of knockout response in store at DCA basically implies that US Airways had a suboptimal strategy there. And if that were the case, then why would you expect the same management team to implement a better strategy now?

    I think US Airways had a great strategy at DCA, which was to mostly avoid competitors' biggest hubs and fly routes with no competition. I don't see any evidence that the new American has better alternatives than just accepting lower yields on routes where it now faces competition.

    The one longer-term response American has is that it can replace the 50 seat jets which will be competing with Southwest on some of these routes with 76 seaters, or perhaps even A319s. That would depress yields even further, but it would narrow the cost gap.

    Bottom line, it's not that Southwest or JetBlue are these fearsome competitors bulldozing everything in their path. However, when they enter new markets, they will offer robust competition, which is a huge difference from no competition today. (E.g. I just looked at a DCA-BNA nonstop roundtrip in May, and American/US Airways is charging $400. Southwest is charging less than $300 roundtrip in August, which is a much busier travel period, and also offers free checked bags and free changes.)

    @Tyeward: I'm sure that all US Airways contracts go to American. I don't think DCA will necessarily be a gold mine for Southwest, but if American Airlines does get "more aggressive" in competing with new entrants, American will pay the biggest price since it has the most capacity in that airport.

    Adam

  • Report this Comment On March 26, 2014, at 11:48 AM, MaverickFlyer wrote:

    Adam,

    Thanks for your response - as understand the logic. Points mainly on the word 'significant' competition - not sure how 'significant' competition one can be with a limited amount of flights - as SW will be at 44 and JB even less. With AA's larger capacity, and 270+ flights at DCA - they easily have the ability to decrease at markets as well as increase flights and availability at markets that SW and JB will fly - as competition is good - but with the bigger market share and the flexibility to add/decrease with the slots that they already have (AA) - rest assured they are not going to stand by idly and let market share just go out the window without some response. So, I counter that the combined AA can do more at DCA than already doing - as they have just combined recently and not even realized the flexibility and compatibility in scheduling, resources, planes, etc - as integration takes time, as well as the outcome of such integration (look at Delta as example with combination with NW). No one says US alone had a sub-optimal strategy there, they were just 'one' airline that had a strategy - now with the DOJ changes to DCA, and AA/US combined, and additional slots of JB and SW - things are bound to change as each airline works for it's share of the pie.

    And with the govt contracts to AA - a combined AA - will be good for them as well. And as mentioned with the new management at AA - defending and growing home turf (since DCA is an AA hub), there is reward to the service offerings, flights, availabilities, amount of cities served, healthy competition, and definitely revenue, to name a few things. And lastly and like others, a $100 fare difference will not get me, nor many others like, to ever consider flying SW, as there is a lot more to a ticket than price - such as service, FF programs privileges, destinations, classes of services, etc - the list goes on. There will be those SW followers, absolutely agree - but over time - I suspect and expect as in other SW markets where they compete with 3 legacies - prices are pretty even across the board, and in many cases - SW more.

    Good conversation and good points - thanks for sharing! MaverickFlyer

  • Report this Comment On March 26, 2014, at 1:40 PM, MaverickFlyer wrote:

    and to your comment to @Tyeward:

    @Tyeward: I'm sure that all US Airways contracts go to American. I don't think DCA will necessarily be a gold mine for Southwest, but if American Airlines does get "more aggressive" in competing with new entrants, American will pay the biggest price since it has the most capacity in that airport.

    What do you mean by 'if American Airlines does get 'more aggressive' in competing with new entrants, American will pay the biggest price since it has the most capacity in that airport' -

    Biggest price - how? What is there to stop AA from being aggressive to any competitor (see DL and AS in Seattle as example) - with flight frequencies, bigger planes, better schedules, etc?

    Thanks! MaverickFlyer

  • Report this Comment On March 26, 2014, at 2:28 PM, MaverickFlyer wrote:

    Adam -

    What do you mean by this comment to @Tyeward:

    @Tyeward: ......, but if American Airlines does get "more aggressive" in competing with new entrants, American will pay the biggest price since it has the most capacity in that airport.

    Why can't American get more aggressive? All carriers do that to some extent - see AS and DL in Seattle as example, or AS and DL in SLC. AA has the flexibility and bandwidth to get aggressive in DCA as far largest market share, volumes, etc and can compete on frequencies, size of planes, cities, etc - what do you mean by 'paying biggest price?' -- thanks!

    MaverickFlyer

  • Report this Comment On March 26, 2014, at 2:28 PM, MaverickFlyer wrote:

    Sorry for duplicate, did not see my latest post, so re-typed it - please delete. thanks!

  • Report this Comment On March 26, 2014, at 5:11 PM, TMFGemHunter wrote:

    No problem. American can get more aggressive, but adding more frequencies on routes where it is getting new competition or increasing gauge significantly will dilute RASM. Since American has more market share than anybody else at DCA, falling yields there will have a bigger impact on it than on other carriers.

    I actually made the same argument about DL and AS in Seattle. The routes where DL is adding flights to compete with AS make up a very small part of Delta's overall revenue base, but a significant portion of Alaska's revenue. As a result, I expect Alaska to experience declining unit revenue in the second half of this year

    For another example, when Virgin America entered EWR-LAX and EWR-SFO last year, United got "aggressive" and upped its own schedule by 50%. The result was a 30%-40% drop in unit revenue on those routes -- enough to reduce United's company-wide operating margin by about 1 percentage point.

    It's fair to say that maybe American can do some damage control by moving planes around at Reagan Airport. But I cannot envision any scenario where adding 44 flights on competitors will not noticeably reduce the hub's profitability. Remember that American primarily uses regional planes at DCA, while Southwest, JetBlue, and Virgin America will use mainline aircraft... i.e. more capacity than what American is removing and at a lower unit cost.

    Adam

  • Report this Comment On March 26, 2014, at 5:42 PM, MaverickFlyer wrote:

    Adam,

    Yup - point taken - and even with the 270+ flights that AA will now have - over 100 are mainline aircraft - and with the checking or keeping in check of the RASM and other key variables - think someone at AA will be keeping a close eye on this, to match/equate competition and not lag behind, as no one wants failing yields.

    No, agreed - as don't think AA will add 44 flights on competitors routes is the right answer, as they don't want to reduce profitability if can help it - rather adjust accordingly in the market to the competitor's cities and direct competition, add new cities and move forward. I suspect that when all of DCA aligned with the combined AA - there will be some good adjustments made - and things will move forward in hub profitability, but maybe not as much as it was prior to merger and just it being a US hub.

    It brings up a good point on the AS/DL activity in Seattle as well - as an article on archive.net talks about how AS is planning on battling DL in that market, interesting reading.

    Thanks for discussion - good stuff! MaveickFlyer

  • Report this Comment On March 26, 2014, at 7:15 PM, TMFGemHunter wrote:

    Sorry, my sentence structure was confusing. What I meant was that competitors (Southwest, JetBlue, and Virgin America) will be adding 44 roundtrip flights at DCA between now and year-end. This will lead to significant capacity increases on various routes.

    E.g. Today, AA/US fly 8X daily to Nashville on regional jets, representing about 400 one-way seats. Southwest will add 3 flights, which is at least 429 one-way seats, for a total capacity increase on that route of more than 100%.

    To New Orleans, US flies 5X daily on E170s and E175s: a little under 400 one-way seats each day. Southwest will add at least 286 seats with its 2 daily flights, increasing capacity on that route by about 75%.

    To Tampa, US Airways flies 5X daily on A319s (620 total one-way seats) and JetBlue flies daily on an A320 (150 one-way seats) right now. Later this year, JetBlue will add a second A320 and Southwest will add to 737s, or at least 436 seats. That's 57% capacity growth. To Chicago, Southwest will drive 40% capacity growth or more.

    American could try using larger planes, or try cutting frequencies to these cities, or both. But there aren't many alternatives for where to put this capacity, because of the 1,250 mile perimeter rule. The reason why US Airways has been flying these markets and not others is because there was not much competition there. American could start flying to Atlanta or Houston instead, but then it's going to be fighting a market share battle in another airline's fortress hub.

    I hope that clarifies my point a bit.

    Adam

  • Report this Comment On March 27, 2014, at 11:21 AM, MaverickFlyer wrote:

    Thanks Adam, good points and you did clarify - appreciate it. Also do know with the flexibility that the airlines have, especially AA with the most coverage at DCA - look to add routes to other cities that can be revenue generating, while letting the dust settle on the overlapping/competing routes. With the increase in seat count to BNA, TPA and other cities - will be interesting to see how much the market share changes, if only slightly or more - interesting times. My personal belief is the new AA will do a lot more adjusting to market dynamics and such, than the 'old' regime - as their main option was to cut, run and retreat. For AA loyal flyers, know that is a welcome change, amongst many. Thanks for your inputs and sharing.

    MaverickFlyer

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