One of the main reasons for Southwest Airlines' (NYSE:LUV) acquisition of AirTran Airways a few years ago was to accelerate its entry into international markets. On Thursday, Southwest's international ambitions will take a big step forward as it opens its new international concourse at Hobby Airport in Houston.
The new five gate facility will allow Southwest Airlines to fly nonstop from Houston -- its seventh-largest market in terms of daily flights -- to international markets without U.S. border preclearance. This represents an important opportunity for Southwest to continue broadening its route network.
Southwest Airlines is starting small with its international service from Houston. It will begin with seven daily flights from Houston to six cities in Mexico and Central America launching on Thursday. On November 1, it will add two more international destinations from Houston -- Liberia, Costa Rica and Montego Bay, Jamaica.
However, Southwest CEO Gary Kelly has stated that the terminal could ultimately support about 25 daily international departures. That would allow the carrier to add numerous new cities in Latin America and the Caribbean to its route map. Some of those new routes are likely to start up in 2016, but Southwest hasn't made any announcements yet.
Looking for growth opportunities
Southwest currently operates more than 3,600 daily flights. Thus, adding a handful of roundtrip international flights in Houston won't have a big impact on the company's overall performance.
Even when Southwest gets up to a full schedule of 25 daily international departures (plus 25 arrivals) in Houston, it would only represent 1%-2% of its total capacity. Yet Southwest needs to exploit whatever growth opportunities it can find, because the carrier is starting to saturate the U.S. market.
Furthermore, international flights in Houston could have a bigger impact than is readily apparent. For example, Southwest Airlines may be able to add domestic flights in Houston that would only be viable with the connecting traffic generated by international flights. Eventually, Southwest may be able to increase the international terminal's capacity beyond 25 daily departures as well.
Southwest will also develop other big international gateways in the next few years. It already has plans to add international flights in Fort Lauderdale after terminal renovations are completed there in late 2017 or 2018. Most of Southwest's other big focus cities could potentially support flights to Latin America, the Caribbean, or both.
The more international gateways available to Southwest, the more success it will have. At most of its destinations, Southwest operates many flights each day, allowing it to spread its fixed operating costs at each airport over more passengers. To replicate that formula for success in the international market, the company needs to turn as many of its top U.S. markets as possible into international gateways.
A multi-year journey
The best way to think about Southwest Airlines' international expansion in Houston is that it is the first step of a multi-year journey. As Southwest starts to run short of new domestic markets to serve, having the facilities and technology needed to fly beyond the U.S. will become extremely important for opening up new growth opportunities.
Today, international flights only bring in about 1% of Southwest's revenue. However, in the coming years, flights beyond the continental U.S. could account for a majority of Southwest's growth, reaching perhaps 15% of the airline's total capacity a decade from now. That great transformation starts this week.