Delta Air Lines and Southwest Airlines Are Ready for Expansion

While the U.S. domestic air travel market is mature, Delta Air Lines (DAL 0.43%) and Southwest Airlines (LUV -0.91%) are looking beyond domestic flights for growth. To capitalize on their ambitions, each airline is building a gateway hub.

I'll take a look at why they chose the airports they did and what Delta and Southwest's strategies could be going forward.

Baltimore
Baltimore Washington International Thurgood Marshall Airport, commonly referred to as BWI, could soon see a boost in international flights. While it only operates 24 scheduled international flights per day now, Southwest Airlines has its eyes on the airport as an international gateway hub.

Although a large airline in its own right, Southwest lacks the international networks of its rivals. Delta Air Lines, United Continental Holdings, and American Airlines Group operate vast networks around the globe but Southwest only recently got its hands on international routes when it acquired AirTran Airways in 2011. 

But since acquiring AirTran, Southwest has integrated the airline's routes into its own network, and now operates flights to Mexico, Central America, and the Caribbean. In the next several years, Southwest plans to consider another 50 international routes, although not all of them would necessarily operate through BWI.

source: Wikimedia Commons

Logistically, it makes sense for the airline. Staying within a closer distance of the U.S. allows Southwest to continue operating an all Boeing 737 fleet through which it benefits given the increased pilot flexibility and maintenance savings.On the subject of where these routes will be to, Southwest Airlines CEO Gary Kelly has offered some clues. According to The Baltimore Sun, the routes being considered are in Central America and the Caribbean.

In the future, Gary Kelly has also indicated that Southwest may operate flights to Canada telling, The Globe and Mail, "I'd be surprised if we weren't in Canada at least by the end of the decade." This would allow the airline to stick with an all-737 fleet.

In my opinion, Southwest's choice of BWI for international expansion is a good one. The airport is Southwest's second largest hub, is situated near Washington D.C. bringing access to the international visitors to the American capital, and has limited current international competition from rival airlines.

Being a major hub for Southwest allows the airline to connect its international flights into its domestic network without requiring significant domestic flight expansion. In turn, this allows a larger number of passengers from other cities served by the airline to take single-connection flights to international destinations.

Currently, Southwest operates flights to 93 destinations so the addition of another 50 international destinations would make the number of foreign cities served quite significant within the Southwest network. However, it has not disclosed the frequency with which flights to these cities will happen so it's unknown just what percentage of flights will be to international destinations. Investors should look for these numbers once they're disclosed as they will provide another clue as to how aggressively the airline will pursue international expansion.

With the U.S. airline market relatively mature, the airline is looking abroad where the International Air Transport Association expects that through 2034, Latin America will have a 4.7% annual passenger growth rate compared to North America's at 3.3%.

This faster demand growth should help fuel Southwest's international ambitions further backing the airline's move to operate more international flights.

Seattle-Tacoma
Seattle-Tacoma International Airport, commonly known as Sea-Tac Airport, has served as the hub for both Delta Air Lines and Alaska Air Group, parent company of Alaska Airlines. But now, Delta is gearing up for expansion at the airport as it moves to turn Sea-Tac Airport into a more prominent west-coast hub.

On domestic routes, a turf war has been developing between Delta Air Lines and Alaska Airlines -- both of which have been adding routes that drove 2014 to be a record year for Sea-Tac Airport passenger traffic.

But Alaska Airlines has avoided the Asian and European markets while Delta has been growing them as a core part of its expansion strategy. Flights are now being operated to Asian destinations such as Tokyo, Beijing, and Shanghai and European destinations such as London, Amsterdam, and Paris.

source: Wikimedia Commons

And Delta doesn't plan to end its international expansion here; Sea-Tac Airport plans to expand its international terminal to allow even more international flights to be operated through the airport. Puget Sound Business Journal has noted that Alaska Airlines isn't happy that passenger facilities charges will be used to pay for the expansion considering only 8% of Alaska's flights are international ones and the PFCs will go to expand the international terminal that will feed Delta's growth.

But Alaska's loss is Delta's gain here as the Atlanta-based airline will now be the carrier through which more international passengers move through Seattle giving Delta an edge on selling them domestic flights as well.

Based on a forecast from the International Air Transport Association, Asia-Pacific international passenger growth is expected to grow at 4.9% annually through 2034 while European and North American international passenger growth numbers are estimated at 2.7% and 3.3%, respectively.

By building out its Sea-Tac Airport hub, the airline is able to develop a stronger west-coast hub which is a benefit giving it closer geographical proximity to Asia than most of the continental U.S. helping to expand Delta's already large international network.

International expansion important, but U.S. still matters
Over the next several years, U.S. airline passengers can look for more international flight options from Baltimore and Seattle with Southwest and Delta.

Despite this international expansion, investors should still be well aware that these airlines are primarily tied to the health of the U.S. economy through their domestic networks, since most of their flights originate or terminate in the U.S. Going forward, investors should continue to pay attention to what opportunities for growth airlines are seeking out.