Just a few months ago, it looked like 2020 could be a banner year for the U.S. airline industry. Instead, the COVID-19 pandemic has sparked an existential crisis for many airlines. Revenue dried up almost completely, causing the companies to begin burning cash at a rapid pace. Not surprisingly, airline stocks have plummeted.
However, while all airlines are hurting right now, there could be some long-term winners from the crisis. Rising debt levels, near-term losses, and the likelihood that margins will remain weak in 2021 will force many airlines to retrench, prioritizing their best markets and shrinking in non-core markets. That could open up long-term growth and margin expansion opportunities for other carriers.
Southwest Airlines (NYSE:LUV) is looking to seize these opportunities, recently announcing an ambitious plan to return capacity to near 2019 levels by November. Yet even as it returns to a fairly normal schedule, it is making significant cutbacks in some markets -- most notably, Fort Lauderdale and Orlando, Florida. That could be great news for low-cost rivals JetBlue Airways (NASDAQ:JBLU) and Spirit Airlines (NYSE:SAVE).
Southwest gets aggressive in some markets
Last week, Southwest Airlines opened its schedule for bookings through Jan. 4, 2021. As part of this update, it announced nearly a dozen new routes that will launch in late 2020, a stark contrast from rivals that plan to shrink. It will also offer more frequent service in many markets.
The two cities with the most growth by far are Denver and Phoenix. Southwest will operate 32 more daily departures in Denver and 29 more daily departures in Phoenix during November and December of 2020 than it did a year earlier. These two markets are hubs for United Airlines (NASDAQ:UAL) and American Airlines (NASDAQ:AAL), respectively.
In Phoenix, Southwest already carries nearly as much traffic as American Airlines -- and is the market leader when excluding connecting passengers. While American's management has said it doesn't plan to close any hubs, Southwest's growth plan could force its hand. American's Phoenix hub is sandwiched between its hubs in Dallas-Fort Worth and Los Angeles, and retrenching to those larger, more-strategic markets might be more sensible than battling Southwest for market share in Phoenix.
Southwest is also the largest carrier for local traffic in Denver. That said, Denver is a strategically vital hub for United Airlines, which isn't going to go away. Still, United plans to be very cautious about restoring capacity removed due to COVID-19, which could create a short-term market-share opportunity for Southwest Airlines in this high-growth market. Southwest also may hope to push budget carrier Frontier Airlines (the No. 3 airline in Denver) to reduce its presence there.
But Southwest shrinks elsewhere
While Southwest Airlines plans to return to normal service across much of the country in November and will battle for market share with American Airlines and United Airlines in Phoenix and Denver, it is shrinking other parts of its route network. The cuts look promising for JetBlue and Spirit Airlines.
The biggest schedule reductions by far will come in Fort Lauderdale, where Southwest Airlines plans to operate 30 fewer daily departures in November and December than it did in the same period last year. This entails suspending 16 routes, roughly a third of its pre-coronavirus nonstop routes out of Fort Lauderdale.
After investing in a terminal expansion a few years ago to accommodate increased international service from Fort Lauderdale, Southwest is now suspending service on all international routes there with the exception of flights to Cancun and Montego Bay. It is also cutting its routes to Boston, Cleveland, Hartford, Las Vegas, Louisville, Birmingham, Alabama; and Islip, New York -- in addition to a short-lived Fort Lauderdale-Jacksonville route that ended earlier this year.
Fort Lauderdale is a brutally competitive market. In recent years, Southwest, JetBlue, and Spirit have all tried to grow there and have traded places as the airport's largest carrier. Most recently, Spirit has taken the lead, followed by JetBlue and Southwest. The planned retreat by Southwest Airlines could lead to a more rational competitive environment, making JetBlue and Spirit more successful in Fort Lauderdale.
JetBlue has typically competed with Southwest on 12 of the 16 Fort Lauderdale routes that won't return this fall. Spirit has somewhat less overlap, serving seven of those routes. However, both will benefit from a reduced Southwest Airlines presence.
In Orlando, Southwest has a substantial market share lead, holding a quarter of the domestic market. Spirit and JetBlue are smaller, with 12%-13% of the market, but they are still big-enough players to benefit from Southwest Airlines shrinking. Southwest plans to operate 15 fewer daily departures in Orlando in late 2020 than it did in late 2019.
What does it mean in the long run?
If Southwest Airlines restores all of the flights being cut in late 2020 over the next year or two, JetBlue and Spirit Airlines won't see any lasting benefit from the low-fare giant's recently announced network changes. That may well be the case in Orlando. While Southwest Airlines is paring back its schedule there modestly, it will remain the No. 1 carrier by a wide margin. As local tourist attractions return to full capacity and tourist visits rebound, Southwest is likely to backfill the capacity it is removing now.
By contrast, Southwest is making much deeper cuts in Fort Lauderdale, where it already had a weaker market position. Perhaps it will eventually return to its previous international growth strategy there. However, there's a good chance that the announced cuts really are permanent: JetBlue and Spirit both offer ample international service from Fort Lauderdale -- as does American Airlines at nearby Miami International Airport.
Southwest Airlines has a strong competitive advantage in many markets around the U.S. Fort Lauderdale doesn't seem to be one of them. Rather than fighting a margin-sapping market share battle against JetBlue and Spirit -- two strong low-cost rivals -- Southwest may look to greener pastures for its future growth. If it does, JetBlue Airways and Spirit Airlines will have a clear path to growth and higher margins in the future in Fort Lauderdale, an important focus city for both low-cost airlines.