Will Southwest Airlines Follow WestJet's Example of International Expansion?

Canada's WestJet Airlines (TSX: WJA  ) is often thought of as the Southwest Airlines (NYSE: LUV  ) of the north. WestJet, having started out decades after an expanding Southwest found reliable profits in a turbulent industry, is now Canada's second-largest airline, behind the 78-year-old Air Canada.

But as WestJet looks beyond the domestic Canadian market for growth, does its expansion strategy give us a hint at what Southwest Airlines may do next?

Challenging the big guys
Southwest and WestJet have both built their businesses on challenging big, established legacy airlines. In Southwest's case, it was the legacy carriers that had divided domestic and international flying among themselves, and in WestJet's case, it was competition with the privatized former Crown corporation, Air Canada.

These two airlines managed to succeed in an industry where almost all start-ups perish, dragging millions of investor dollars down along with them. But having established themselves solidly in their respective domestic markets, Southwest and WestJet are increasingly looking abroad for additional growth.

Where to go
Despite being around nearly 30 years longer than its Canadian counterpart, Southwest hasn't needed to look internationally for continued growth as much as WestJet. With the Canadian market being about one-ninth the size of the U.S. market based on population, continued growth has pushed WestJet to launch flights to the U.S., Mexico, the Caribbean, and Central America. Meanwhile, the larger U.S. market has provided plenty of room for Southwest's expansion, with flights to Mexico being available only through AirTran, which Southwest acquired in 2011.

Southwest is now busy making former AirTran routes into Southwest routes and recently announced plans to switch its international service in the Caribbean from AirTran to Southwest. While not brand-new expansion of the company's overall network, it does begin international service under the Southwest name.

Continuing in its own expansion, WestJet looked to Europe next, starting seasonal flights between St. John's, Newfoundland, and Dublin, Ireland. While transatlantic flights seem like a major increase in distance for an airline that previously kept to within the Americas, WestJet notes that St. John's is actually closer to Dublin than it is to Calgary.

Following WestJet?
WestJet has long been seen as a follower of Southwest by introducing the model of a low-cost carrier into the Canadian market. But as expanding airlines know, the domestic market can only fulfill growth plans for so long before international expansion is required. WestJet ran into this issue faster because of the smaller size of the Canadian market and began expanding internationally and across the Atlantic sooner than Southwest did.

Fleet management
Southwest and WestJet have taken very similar fleet management strategies, with both carriers having Boeing 737 variants as their only jet aircraft, allowing them to benefit from reduced maintenance costs and increased pilot flexibility. But WestJet is realizing it will need new equipment to compete in the transatlantic market on longer routes and has noted plans to introduce widebody aircraft within the next couple of years.

While having 737 aircraft as its only jets makes sense for a fleet flying within the domestic market and the Americas, transatlantic flights always always involve larger aircraft. Looking at how WestJet is adding wide-body aircraft for transatlantic operations, it wouldn't be surprising to see Southwest do the same once it decides to expand across the Atlantic.

Transatlantic expansion is probably at least a few years down the road for Southwest, since the airline is still working to restructure flights in Mexico and the Caribbean. However, if Southwest does decide to expand beyond the Americas, investors should keep an eye on what new equipment the airline buys.

Has the student become the master?
Southwest Airlines posted a remarkable record of growth and profitability from over the past few decades, and a similar strategy and performance by WestJet has led to frequent comparisons between the two.

But as Southwest has expanded within the domestic U.S. market, WestJet has sought opportunities outside its smaller domestic Canadian market. This has led WestJet to begin transatlantic flights and even discuss ordering wide-body aircraft for further overseas growth. So as WestJet expands beyond its home market, Southwest investors should watch to see what may lie ahead.

OPEC is absolutely terrified of this game-changer
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour. (That's almost as much as the average American makes in a year!) And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click here to uncover the name of this industry-leading stock for free, and join Buffett in his quest for a veritable landslide of profits!


Read/Post Comments (1) | Recommend This Article (3)

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 July 09, 2014, at 6:11 AM, Tyeward wrote:

    Southwest is already an international airline. Their subsidiary Air Tran has most of that covered. Southwest it´self will be moving in the direction of international service this year. I am assuming this is what the revamp at Houston Hobby was really all about. I expect to see international service out of Love Field in the future as well. Southwest has a really big fleet, however it´s handicap is it´s single choice of different variants of the 737. It´s a good idea, but it´s pretty limiting in the international market when it comes to range. If Southwest is going to take the international market more serious, it will have to do what Westjet is doing and that´s investing in widebodies. That would mean however that Southwest would have to renegotiate it´s contract in order to have it in their fleet. I don´t really think that should be a problem since I get the feeling that their employees would like to see Southwest become more ambitious. A word of caution to the New American. If Southwest makes an ambitious move into the international market, you might want to look at PHX and revamp your reason for having it as a hub. Southwest will more than likely target that aggressively and if they do, you will be caught with your pants down at PHX. If they do get aggressive and ambitious, I would highly recommend coming up with a really good battle plan it you want to keep that hub.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3020479, ~/Articles/ArticleHandler.aspx, 9/21/2014 2:17:50 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement