Southwest Airlines (LUV -0.54%) made a name for itself in the 1990s and early 2000s by growing rapidly and offering low-fare, no-frills service. One of its standard strategies for keeping costs low was avoiding most of the busiest U.S. airports, where airport fees were high and congestion could lead to costly delays.
In recent years, Southwest has become more comfortable operating in big hub airports. However, in the midst of the COVID-19 pandemic, it has become way more aggressive, making plans to launch service to Miami International Airport, Chicago O'Hare International Airport, and Houston's George Bush Intercontinental Airport.
Let's take a look at why Southwest Airlines has decided to launch flights to these busy airports and what it means for incumbents American Airlines (AAL -2.18%) and United Airlines (UAL -2.52%).
Strategy shift
Southwest's move into big hub airports began in earnest in 2004 with its decision to launch flights in Philadelphia. Over the course of the following 10 years, the airline began flying to Boston; two of the three major New York-area airports; both airports in Washington, D.C.; and airports in Charlotte, Atlanta, Minneapolis-St. Paul, and Denver. All 10 are among the 30 busiest airports in the country.
There were a couple of big reasons behind this change in strategy. First, staying away from major airports would have severely constrained Southwest's growth over the past 15 years. Today, it is the fourth-largest U.S. airline (and the largest as measured by the number of domestic passengers carried), a position it could not have achieved under its previous strategy.
Image source: Southwest Airlines.
Second, as it has gained scale, Southwest Airlines has diversified away from being purely a leisure airline. To gain market share with business travelers, it was important to serve key business travel destinations. On the flip side, business travelers have given Southwest a base of high-fare traffic that can help cover the costs of operating in crowded hub airports.
New airports coming to Southwest's route map
Despite embracing big hub airports in recent years, Southwest Airlines has continued to serve Chicago, Dallas, and Houston -- three of the five largest metro areas in the U.S. -- from secondary airports where it is the dominant airline. Additionally, it has served Miami from Fort Lauderdale-Hollywood International Airport, 25 miles north of the city center.
That's about to change in three of those four cities. In early September, Southwest announced its intention to begin flying to Miami (an American Airlines fortress hub) later this year. Last week, the airline revealed its initial schedule. It will start service on Nov. 15, operating three daily departures to Tampa International, four daily departures each to Baltimore-Washington International Thurgood Marshall Airport and Houston's William P. Hobby Airport, and one daily departure to Chicago Midway International.
Southwest Airlines doubled down on its big-city growth initiative this Monday. The carrier announced that it will begin flying to O'Hare Airport (a major hub for both United Airlines and American Airlines) and Houston Intercontinental (another one of United's biggest hubs) in the first half of 2021. Southwest will continue to serve Midway Airport and Hobby Airport as its main bases in Chicago and Houston, respectively.
It's all about business travelers
So far, Southwest Airlines hasn't disclosed what destinations it will serve from O'Hare and Houston Intercontinental. However, the airline's initial batch of Miami flights points to this being a targeted growth initiative designed to woo business travelers. Southwest is the leading airline in Tampa (holding roughly a third of the market), accounts for nearly two-thirds of the traffic at BWI, and dominates Houston Hobby and Chicago Midway with more than 90% market share. By flying from those cities to Miami, Southwest can better compete with rivals like American for business travelers who wouldn't want to waste time by flying into Fort Lauderdale.
Indeed, Southwest was sharpening its focus on gaining market share with business travelers before the pandemic hit. Most notably, it is partnering with two of the three main global distribution system (GDS) operators to get better access to the corporate market.
It's reasonable to guess that Southwest will adopt similar tactics at O'Hare and Houston Intercontinental, flying to a handful of key markets where it has high market share.
On the margins, this is a negative for American Airlines and United Airlines, which are already struggling more than most U.S. airlines. However, the impact of Southwest moving into their hubs shouldn't be overstated. This is more about the low-fare airline deepening its appeal to business travelers in markets where it is already very strong than a frontal assault on some of its rivals' biggest markets.
In Denver, Southwest Airlines has gone from zero flights 15 years ago to more than 250 daily departures today. It now has roughly 30% market share there. Nevertheless, Denver is United's fastest-growing and most successful hub. Thus, while the airline industry is extremely competitive, Southwest's growth in key American Airlines and United Airlines hubs doesn't necessarily spell doom for the legacy carriers.
