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

Canada's second-largest airline is entering a new phase in its international growth. Could it serve as an outline for Southwest's potential international plans?

Jul 8, 2014 at 9:26AM

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.

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