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Is the End of this Restrictive Amendment a Game Changer for Southwest Airlines?

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Dallas, TX based Southwest Airlines (NYSE: LUV  ) calls Love Field Airport its home and even derived its stock ticker symbol from the airport's name. Until this year, the carrier has been restricted on the routes that it can fly from the airport by the Wright Amendment, a 1979 law sponsored by U.S. Representative Jim Wright D-Fort Worth, but that is about to change.

The Wright Amendment was put in place to protect the newly opened Dallas-Fort Worth Airport from competition at Love Field by restricting flights on aircraft larger than 56 seats outside of Texas and the surrounding states of Arkansas, Alabama, Kansas, Louisiana, Mississippi, Missouri, New Mexico and Oklahoma.

To build its operation at Love Field, Southwest was forced to find workarounds, such as flying passengers from Dallas to Houston, then on to their destination. While this allowed Dallas passengers to reach destinations outside of the allowed states, it was not the most efficient, or cost effective way to move passengers.

The end of the Wright Amendment

The repeal of the Wright Amendment started with the 2006 signing of a bill to phase it out by October of 2014. One of the first steps was to allow through-ticketing as a work around to the flight restrictions. If a passenger wanted to fly from Dallas to Tampa, Southwest could now sell the ticket with a transfer in Houston, a practice prohibited in the past.

With the end of the Wright Amendment approaching this fall, Southwest has announced the first round of flights to new non-stop destinations previously not allowed. These 42 new round-trip flights are to 15 cites and include important business routes such as New York's LaGuardia, Washington D.C.'s Reagan National, Baltimore, Denver, Los Angeles and San Diego.

The agreement to end the Wright Amendment was not without compromise. It contained restrictions on Love Field limiting the number of gates to 20; and a ban on international flights. Of the 20 gates allowed, Southwest controls 16. The other four gates are split between United Airlines and American Airlines. American was required to divest its two gates as part of the agreement to merge with US Airways and these have been sublet to Virgin America.

Southwest's plans

The 16-gate limit effectively caps the number of flights that Southwest can operate out of Love Field. Currently, the airline has 126 daily flights to 16 cities in the permitted states. The planned expansion will require the carrier to reduce service on current routes to accommodate the 42 new flights and additional 15 destinations.

These new non-stop routes introduce efficiencies for both passengers and the airline. Each segment added to an itinerary adds the additional costs to transport and handle the passenger for an additional flight. It is also a more efficient use of aircraft and crews. In a December 2012 meeting for investors and analysts, Southwest Executive Vice President Ron Ricks was discussing the efficiencies of the through-ticketing changes and said the incremental annual revenue was $250 million. Southwest has not released specific forecast for the financial benefits of the upcoming nonstop routes.

These changes at Love Field are an important step for Southwest, but it isn't the milestone it would have been 10 or 15 years ago. The largest airport operation is now Chicago's Midway Airport with an average of 270 departures per day to 66 cities; Love Field is ranked eighth in size of operation.

Southwest has changed and grown into a major carrier, transporting more domestic passengers than any other U.S. airline.  This month it launched its first international routes under the Southwest operating certificate, taking over destinations previously served by its AirTran subsidiary.

The Love Field operation is now a smaller part of the overall company. While the changes at Love have the potential to improve yields, the limitation on the number of flights and passengers will mean that the total improvement to the bottom line will be smaller than if this had occurred in the past.

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8/28/2015 4:00 PM
LUV $37.10 Down -0.21 -0.56%
Southwest Airlines CAPS Rating: ****