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Southwest Airlines Co. Reveals Its Washington, D.C., Plans

By Adam Levine-Weinberg – Mar 25, 2014 at 9:11AM

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Southwest Airlines Co. finally unveiled its plans for 27 slot pairs it recently acquired from American Airlines at Reagan National Airport.

As part of its merger with US Airways, American Airlines (AAL 1.93%) agreed to sell 104 takeoff and landing slots at Washington, D.C.'s crowded Reagan National Airport. Two months ago, Southwest Airlines Co. (LUV 2.26%) came up as the biggest winner in this slot sale, acquiring 27 slot pairs. This will allow it to grow from 17 daily departures today to 44 daily departures by the end of 2014.

Until this week, Southwest Airlines had kept its Reagan Airport plans quiet, aside from announcing that it will fly between Dallas Love Field and Reagan Airport beginning this fall. On Monday, Southwest finally revealed the rest of its Washington, D.C., expansion plans.

Southwest Airlines will add about 27 more flights from Reagan Airport by the end of 2014.

There weren't too many surprises -- for the most part, Southwest will be adding service to cities where it has high market share. Since American Airlines currently holds a monopoly (or a dominant share) on most of these routes, this stepped-up competition will reduce the profitability of American's Reagan Airport operation.

Southwest's new routes
Early last month, I told investors to expect Southwest to use its new Reagan Airport slots to add flights to its biggest focus cities within the 1,250-mile perimeter governing most Reagan Airport flights. On that basis, the top candidates for new service were Chicago, Dallas, and Orlando, followed by Nashville. Houston and St. Louis were top candidates for additional flight frequencies. (Both cities have two daily roundtrips on Southwest today.)

Of that group of six cities, only Orlando was left out of Southwest's expansion plans. Instead, Southwest is spreading its Reagan National Airport slots over more cities. The net effect will be the same: more options for D.C. area travelers and tougher competition for American Airlines.

Southwest plans to begin using its Reagan Airport slots in a staggered fashion between August and November. On August 10, it will begin flying six times daily to Chicago's Midway Airport, the top airport in Southwest's route network. At that time, Southwest will also begin offering three daily roundtrips to Nashville and two daily roundtrips to New Orleans.

On September 30, Southwest will add an additional three daily flights to Chicago (bringing the total to nine), along with two daily flights to Tampa. Lastly, on November 2, Southwest will begin flying from Reagan Airport to Akron/Canton, Dallas Love Field, and Indianapolis, and it will add more flights to St. Louis and Houston.

Southwest hasn't published its fall schedule yet, so the exact number of flights to each city in this round has not been finalized. Assuming Southwest does not drop any of its current flights, it will be able to add 10-11 daily departures across those last five cities.

A change in the competitive landscape
Southwest's new routes will primarily impact American Airlines, which currently has a dominant position at Reagan National Airport. American flies from Reagan Airport to all of the cities where Southwest is starting or increasing service, except for Houston.

In fact, American Airlines has a monopoly on nonstop flights to Reagan National Airport from New Orleans, Nashville, Akron/Canton, Dallas, and Indianapolis. Southwest's entry into those markets will thus mark a significant change in the competitive dynamic. Today, the only alternatives to American are connecting flights on other airlines or flights to other (less convenient) D.C. area airports.

American Airlines currently monopolizes many routes from Reagan Airport. Photo: American Airlines.

Of the eight American Airlines markets where Southwest is starting or increasing service, only Chicago and Tampa have other nonstop competition. On the Reagan Airport-Chicago route, United Continental (UAL 1.24%) and American Airlines share a duopoly, but United currently has higher market share.

On the Tampa route, JetBlue Airways (JBLU 2.54%) currently offers a single daily flight, competing against five daily flights on American Airlines subsidiary US Airways. This summer, JetBlue plans to add a second daily flight. Southwest is the dominant carrier in Tampa, with more than 100 daily departures, so it has a built-in advantage in serving that airport.

Foolish conclusion
Washington's Reagan National Airport has been a very profitable hub for US Airways in recent years. Slot constraints severely limited competition, giving US Airways a monopoly or near-monopoly on numerous routes to and from the Washington area's most convenient airport.

American Airlines will continue to benefit from its leading market share at Reagan Airport. However, at the same time, it will have vastly stronger competition. Between the recent new service announcements from Southwest and JetBlue, American will face competition on seven routes that were previously monopolies. Additionally, American will confront a significant increase in competitors' flights on three other routes.

Fortunately for American Airlines shareholders, Reagan Airport represents a relatively small part of the company's overall business. However, American will also face increasing competitive pressure in Dallas and on lucrative transcontinental and transatlantic routes. Together, these factors could drag down American's unit revenue beginning this fall and throughout 2015.

Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. 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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