The clock has already been put up with less than a year remaining. Together with PR campaigns and billboards, Southwest Airlines (NYSE:LUV) is counting down the days until it can fly flights farther distances from the Dallas Love Field Airport. But why does this matter to Southwest and why is this giant industry-challenging carrier even in this position?
Freedom to fly
Unlike most major network carriers that have extensive histories dating back to the early 20th century, Southwest Airlines is a relative latecomer to the airline game, having started in 1967. While major legacy carriers existed in the federally regulated system of aviation, Southwest freely flew its planes within the state of Texas, where the Civil Aeronautics Board couldn't force route changes.
After airline deregulation in 1978, the Wright Amendment was added limiting flights out of Dallas Love Field Airport to only Texas and a few other central southern states. Southwest never really liked the Amendment; after all, Love Field was a major part of the airline's operations. However, enough support from other cities and rival airlines pushed the Amendment through anyway and Southwest operated long distance flights from other airports while retaining its Love Field presence.
A deal was reached in 2006 that would open up Love Field for operations across the United States (international flights are still not permitted) that would go into effect eight years later. With 2014 fast approaching, Southwest is gearing up to begin nonstop flights from Love Field for longer-distance flights, hence the name "Nonstop Love."
Effects on other carriers
Clearly, this is something Southwest Airlines is in favor of as it would give the airline a greater Dallas presence. But what does it mean for other carriers?
When "Dallas/Fort Worth" and "airlines" are mentioned, American Airlines, a subsidiary of AMR (NASDAQOTH:AAMRQ), always ends up as part of the conversation. Based in Fort Worth, Texas, American Airlines has built Dallas/Fort Worth International as its premier hub, making it an integral part of operations.
But I do not see Southwest being able to operate longer-distance flights from Love Field as a major threat to American Airlines. It is worth noting that the 2006 agreement that will result in Love Field being opened for longer-distance flights in 2014 was an agreement that received the consent of American Airlines. Based on American's input on the 2006 agreement, it would be difficult to see how American could also feel a major threat from Southwest.
Furthermore, there is a reasonable chance that American will soon offer even more flights out of Dallas/Fort Worth International. The potential merger of AMR and US Airways (NYSE:LCC) sets up the new American Airlines Group to become an even more dominating force in the Dallas/Fort Worth area.
The merger of these two airlines would mean benefits on top of whatever American itself saw in agreeing to the 2006 agreement. After all, it would be unreasonable to assume that it could have foreseen a merger with US Airways a full seven years (and one bankruptcy) before it was announced.
Of course, this merger is awaiting trial right now as the Department of Justice and several states have challenged it. But as noted earlier, this merger did not even play into American's calculations when signing off on the 2006 Amendment. Therefore, any benefits gained from this merger are pure icing for the new American Airlines Group.
Love Field potential
With less than a year until Southwest can operate longer-distance flights from Love Field, the Dallas-based airline is undoubtedly excited. Love Field allows Southwest to expand its Dallas presence at a time when the airline is looking for new places to grow.
Southwest has shown itself to be a very financially capable carrier over the past few decades and airline investors should continue to monitor the airline's progress. With a merger with AirTran in 2011 and this expansion at Love Field, it will certainly be interesting to see how one of the most financially successful airlines works toward expansion.
Alexander MacLennan owns shares of Air Canada, AMR, Delta Air Lines, and Gol Linhas. He is also long the following options: $22 January 2015 Delta calls, $25 January 2015 Delta calls, $30 January 2015 Delta calls, $17 January 2015 US Airways calls. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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