For years, American Airlines Group Inc. (NASDAQ:AAL) has maintained a dominant position in the Dallas-Fort Worth air travel market. In 2005, Delta Air Lines (NYSE:DAL) abandoned its competing hub at the airport, dropping its schedule from 250 daily departures to just 21.
The only real competition since then has been from Southwest Airlines (NYSE:LUV), which operates one of its larger focus cities at Love Field in Dallas. However, Southwest has been hamstrung for decades by the Wright Amendment, a piece of legislation that limited flights from Love Field to airports in Texas and a few neighboring states.
That's about to change. The Wright Amendment is going away in October, and as a result, Southwest is embarking on a major expansion in Dallas this fall. Southwest will add flights to a variety of large cities, bringing a much needed boost to competition in many key markets.
American Airlines operates its largest hub at Dallas-Fort Worth International Airport, offering more than 750 daily departures. The company boasts that this hub operation accounts for more than 85% of all passenger traffic at the airport.
Most of the other U.S. carriers that serve Dallas-Fort Worth International Airport merely fly to their own hubs or focus cities. The only airline offering nonstop service to more than a handful of destinations is ultra-low-cost carrier Spirit Airlines (NYSE:SAVE). Spirit isn't a significant threat to American at this time, although it could be much more dangerous 10 years from now.
While Spirit serves 20 destinations from Dallas on its current schedule, it flies most of those routes just once a day (and less, in some cases). Even where Spirit has two daily flights, it is offering a fraction of American's capacity. The result is that Spirit is stimulating the market (encouraging more people to travel) more than it is taking market share from American.
Finally, some real competition
Southwest Airlines' looming expansion at Love Field changes the calculus for American. Unlike Spirit, Southwest flies most routes several times a day (or more, in some cases!).
On Monday, Southwest announced 15 new routes it will serve from Dallas beginning this fall. The list includes all eight of the carrier's 10 largest focus cities that were not already served nonstop from Dallas. It also includes key business markets like New York's LaGuardia Airport and Washington's Reagan National Airport, and major leisure markets, such as Fort Lauderdale, Tampa, and Orange County (the home of Disneyland).
Fortunately for American, gate constraints at Love Field will still limit Southwest to around 150-160 daily departures, and its initial schedule for the fall will have only 140 daily departures. That's far short of American's 750 departures, although many of American's flights are on small regional jets, whereas Southwest only flies mainline aircraft.
Moreover, even with 140 daily flights, Southwest can provide a respectable level of service to many of the largest metro areas in the country. Indeed, in most of Southwest's new markets, American has a monopoly or near-monopoly. The addition of a few flights on Southwest could do a lot to keep American "honest" in terms of pricing.
Breaking down the new routes
Southwest's new routes in Dallas can be usefully grouped into three categories: routes where American already faces significant competition, routes where Spirit provides the only current competition, and routes where American has a monopoly.
There are five routes in the first group. Denver, Chicago, Atlanta, Los Angeles, and New York's LaGuardia Airport all have two or three other airlines competing with American today. Spirit flies once or twice daily on all of those routes, and each route is also contested by another legacy carrier. Lastly, the Denver and Los Angeles routes have additional service on Frontier Airlines and Virgin America, respectively.
Seven routes fall into the second group. Spirit flies nonstop to Baltimore-Washington, Las Vegas, Fort Lauderdale, Tampa, Orlando, Phoenix, and San Diego, but it represents American's only direct competition on those routes.
Adding Southwest service will significantly tilt the competitive balance. First, Spirit's infrequent service means it's not really competing for market share with American. Second, choosing between American and Spirit is like walking into a mall and having to choose between Lord & Taylor and a dollar store. The two companies are targeting very different sets of potential customers.
Lastly, there are three routes where American has a true monopoly today. First, Southwest will be using some of its newly won gate space at Reagan Airport to offer nonstop service to Dallas Love Field. The proximity of the two airports to Washington, D.C., and downtown Dallas, respectively, could make Southwest an appealing alternative on this route.
Second, for families going to Disneyland, Southwest will add competition on the route to John Wayne Airport in Orange County. While travelers have the alternative of flying to Los Angeles, John Wayne Airport is much more convenient to Disneyland. Third, Southwest will offer the first competing service on the Dallas-Nashville route.
Foolish bottom line
Southwest's expansion at Love Field this fall will significantly increase the level of competition for American's mega hub at Dallas-Fort Worth International Airport. Southwest's growth at Love Field is limited by gate availability. However, even with this constraint, Southwest will be able to provide 500-1,000 air seats a day to most of the cities on its expansion list.
That will be a significant change for the 10 routes where American either has an outright monopoly today, or only competes with Spirit. Moreover, Southwest may have the capacity to add another 10-20 flights next year if things go well.
Since Delta closed its Dallas-Fort Worth hub almost 10 years ago, American has benefited from a lack of serious competition at its largest hub. Now that Southwest is finally allowed to offer a full array of flights from Dallas Love Field, Dallas-area fliers are likely to see better prices on flights to major destinations. Meanwhile, American may have to cope with a lower profit margin in Dallas.
Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.