For nearly a decade, Southwest Airlines Co. (NYSE:LUV) counted down the days until the expiration of federal regulations restricting flights at its home base airport: Dallas Love Field. These restrictions -- designed to steer traffic to the larger Dallas-Fort Worth International Airport -- had prevented Southwest from operating long-haul flights in Dallas.
The Wright Amendment finally expired in October. Now that Southwest Airlines is free to fly from Love Field to anywhere in the U.S., it has been eager to expand in Dallas. On Friday, it announced plans to add even more flights at Love Field starting this spring.
Pushing the limits
Prior to the Wright Amendment's expiration, Southwest operated about 120 to 130 daily flights at Love Field to cities in Texas and a handful of neighboring states. Since October, it has added flights to 17 new cities across the country, including major metro areas like New York, Chicago, Washington, D.C., Atlanta, Las Vegas, Los Angeles, and San Francisco.
However, federal regulations still limit Love Field to 20 gates, of which Southwest Airlines controls 16. Southwest's current schedule of 153 peak-day departures is already pushing the limits of what it can support with 16 gates.
On the company's earnings call last month, Southwest Airlines CEO Gary Kelly remarked that the company would like to keep expanding at Love Field. However, he acknowledged that Southwest would need access to more gates for that to be possible.
A new strategy for extra gates
Of the four Love Field gates that Southwest Airlines does not currently control, two came up for grabs last year as part of American Airlines' (NASDAQ:AAL) antitrust settlement. Southwest tried to acquire those gates, but lost out to rival low-cost carrier Virgin America.
The other two gates have been used -- lightly -- by United Continental (NYSE:UAL). United flies seven times daily on 50-seat regional jets from Love Field to its hub in Houston. Late last year, United announced plans to expand to 12 daily flights on that route, even though its regional jet flights were not cost-competitive with other carriers' mainline flights.
This announcement earned United the wrath of some airline analysts. Ultimately, United reconsidered its plan. It has maintained its previous schedule of seven daily flights up until now -- and in a few months it will depart Love Field for good. On Friday, Southwest Airlines announced that it will sublease both of United's Love Field gates beginning in April.
New destinations coming
Southwest Airlines has not yet provided the full details for its latest expansion at Love Field. However, the carrier stated that it plans to use the extra gate space to start nonstop flights to another nine cities, including Memphis, Milwaukee, and Seattle.
Some of the other potential new destinations can be gleaned from plans that Southwest presented last year when it was vying for American Airlines' two gates at Love Field. At that time, Southwest revealed plans to add nonstop flights to Boston, Portland, and San Jose in 2015, but these flights have not been officially announced yet.
Southwest also put forward tentative plans to fly to a dozen other cities if it could get extra gate space at Love Field. These cities -- including Detroit, Indianapolis, Philadelphia, and Raleigh-Durham -- will also get strong consideration for Southwest's additional flights.
Watch out, American Airlines!
American Airlines acknowledged last week that Southwest Airlines' recent buildup in Dallas has hurt unit revenue for its massive hub at Dallas-Fort Worth International Airport. Southwest's plans to continue expanding at Love Field will come as an unwelcome surprise for American Airlines.
That said, American Airlines will "re-bank" the Dallas-Fort Worth schedule in late March to create more connecting opportunities. This will offset some of the pricing pressure on nonstop flights that face new competition from Southwest Airlines. American Airlines investors can also take comfort in the fact that this will probably be the last round of expansion for Southwest at Love Field.
On the other side of the coin, this arrangement is a win-win for Southwest and United. United will drop flights that are probably marginally profitable, while getting compensated for its valuable Love Field gates. Meanwhile, Southwest will be able to further expand capacity in its home market: an airport where it has a solid competitive advantage.
Adam Levine-Weinberg owns shares of Virgin America. He wishes every airline had free checked bags like Southwest. 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.
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