As Southwest Airlines Goes International, Who Will Lose?

Southwest Airlines just became an international airline. One legacy carrier stands to lose out from this development.

Jul 2, 2014 at 2:32PM

Southwest Airlines (NYSE:LUV) made its name as a discount airline flying short point-to-point routes in the U.S. This week, it entered a new phase of its history, as it operated its first international flights. Southwest's expansion into Latin America and the Caribbean will put it in competition with American Airlines (NASDAQ:AAL) and United Continental (NYSE:UAL), the top two U.S. airlines in that region.

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American Airlines is the top carrier to Latin America, thanks to its hub in Miami. Photo: The Motley Fool

In the short run, Southwest's move into "near-international" markets won't impact American or United. For the moment, it is merely taking over flying previously done by its AirTran subsidiary. However, as Southwest starts to grow its international presence in the next few years, United Continental is more at risk than American Airlines.

Southwest ventures beyond the U.S.
Southwest (as opposed to AirTran) operated its first international flights on Tuesday. For now, it is flying seven international routes: from Baltimore, Atlanta, and Orlando to Aruba and Montego Bay, Jamaica, and from Baltimore to Nassau, Bahamas.

Southwest plans to wind down the AirTran brand by the end of this year. All of AirTran's other international routes will become Southwest international service by the end of 2014. However, international flying represented a fairly small part of AirTran's flying -- and AirTran, in turn, is much smaller than Southwest. All told, international flying will represent just about 1% of Southwest's capacity at year-end.

Growth plans
Despite Southwest/AirTran's small presence in international markets today, the company sees a big opportunity in Latin America, the Caribbean, and Canada. Ultimately, Southwest thinks it can add 50 cities to its route network (a roughly 50% increase) and get 10%-15% of its revenue from international markets, which would make it a multibillion-dollar business.

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Southwest Airlines has big plans for international service. Photo: The Motley Fool

Southwest's first big international growth push is likely to come late next year, when it opens a new five-gate international expansion at Houston Hobby Airport. Houston is Southwest's fifth-largest destination in terms of daily departures, and it is a perfect jumping-off point for flights to Mexico and Central America. United Continental operates its top Latin American gateway across town at Bush Intercontinental Airport.

Longer term, Southwest also plans to add international flights from Fort Lauderdale, where work recently began on a five-gate international concourse within the Southwest terminal. These new gates will be ready by 2017.

Southwest Airlines can also add more flights to Latin America and the Caribbean from its other big East Coast cities (Baltimore, Atlanta, and Orlando) as well as large markets in the Southwest like Phoenix and San Diego. Lastly, a number of major markets could support Southwest Airlines flights to Canada.

United is the main victim
Among the top three U.S. carriers, American Airlines has by far the largest presence in Latin America (including the Caribbean) due to its its hub in Miami. On a combined basis, American and US Airways deployed 40.1 billion available seat miles to Latin America last year. By contrast, No. 2 United Continental had just 20.5 billion ASMs in Latin America.

However, American Airlines devotes a substantial portion of its Latin American capacity to Brazil, to which it offers nearly 100 weekly flights, as well as other southern South America markets like Buenos Aires. These markets are well out of reach of Southwest's Boeing 737 fleet. Thus, American Airlines is insulated from competition by Southwest Airlines across a large portion of its Latin American route network.

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United Continental is more vulnerable than American Airlines to competition in Latin America. Photo: The Motley Fool

By contrast, United Continental operates just half a dozen daily flights to Brazil and southern South America. Most of its Latin American capacity is devoted to Central America, northern South America, and the Caribbean -- which makes sense given that Houston is its main Latin American gateway.

United waged an intense (unsuccessful) lobbying campaign in 2012, urging Houston to maintain its ban on international flights at Hobby Airport. This effort spoke volumes about United's fear of a Southwest Airlines international expansion in Houston.

By 2017 or 2018, Southwest could operate 30 or more international flights per day from Hobby Airport. Since United Continental faces competition on just a few of its Latin American routes from Houston today, the new Southwest service will break a number of monopolies, which are presumably quite profitable.

Foolish wrap
Southwest Airlines is finally moving into the international travel market. Previously, the three big legacy carriers had the bulk of the Latin American travel market sewn up. While other U.S. low-cost carriers serve Latin America, none of them can approach the nationwide reach of Southwest Airlines.

As a result, in the next five to 10 years, Southwest could have almost as big an impact on travel to "near-international" destinations as it did in the U.S. market. The threat is relatively modest for American Airlines, the top carrier to Latin America, because of American's focus on long-haul routes to Brazil and beyond.

By contrast, United Continental needs to watch out. Its main Latin American gateway is in Houston -- where Southwest plans to make its first big international growth push -- and it has heavy exposure to northern Latin America. This makes it uniquely vulnerable as Southwest ramps up its international presence.

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Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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