Last week, domestic airline giant Southwest Airlines (NYSE:LUV) announced plans to begin flying to Long Beach Airport in Southern California. This would give it a presence at all five commercial airports in the Los Angeles area.
It also means that Southwest will challenge the long-running dominance of JetBlue Airways (NASDAQ:JBLU) at Long Beach Airport. Let's take a look at why Southwest Airlines thinks this is a battle worth waging.
Long Beach Airport opens for business
Based on a 1995 noise ordinance, commercial airlines have been limited to 41 daily departures at Long Beach Airport, excluding small commuter planes. In 2001, JetBlue saw an opportunity to make Long Beach a mini-hub, as most of these slots were unused.
As it began to expand in Long Beach, JetBlue shrewdly snapped up all 27 remaining commercial airline slots. It briefly had to return some of those slots, but JetBlue has since amassed 32 of the 41 slots available for large jets. The remaining slots are scattered among several other airlines.
However, last year, officials announced that Long Beach Airport would add nine new commercial airline slots, as the industry shift to newer, quieter airplanes meant that the airport was not using its full "noise budget." This was the first time in more than a decade that such a large block of slots became available -- creating an opportunity for Southwest.
For more than a decade, Southwest Airlines has maintained a huge presence in Southern California. At Los Angeles International Airport (LAX), Southwest carries nearly as many passengers as each of the three legacy carriers.
However, the real source of Southwest's strength in Southern California is its dominance of the region's secondary airports. During 2014 -- the last full year for which statistics are available -- Southwest carried 41% of passenger traffic at John Wayne Airport in Orange County, 58% of passenger traffic at Ontario International Airport, and 75% of passenger traffic at Burbank's Bob Hope Airport.
Southwest particularly focuses on short-haul flights at all four of its LA-area airports. Flights to San Francisco, Oakland, San Jose, Sacramento, Las Vegas, and Phoenix -- all 400 miles or less from Los Angeles -- represent the vast majority of Southwest's flights in Burbank and Ontario, two-thirds of its flights in Orange County, and about half of its flights at LAX.
Southwest's strategy of offering numerous short-haul flights from multiple Southern California airports has been very successful. Many travelers value the convenience of a nearby airport for short flights, whereas they are more willing to drive to a bigger hub for a long-haul flight.
Southwest moves in
Given Southwest's strategy of blanketing the LA region with short-haul flights, it's not that surprising that it sees an opportunity at Long Beach Airport. Southwest applied for all nine slots, but it will only receive four, based on the preliminary slot allocation.
That obviously limits what it can do in Long Beach. Based on Southwest's service patterns at the region's other airports, the most likely options are flights to the Bay Area or to Las Vegas. No matter what Southwest does, the result will likely be competition for JetBlue on one or more of its Long Beach routes. JetBlue currently flies three times a day from Long Beach to San Francisco, Oakland, and Las Vegas.
Luckily for JetBlue, these routes represent a very small proportion of its revenue. On the other hand, Long Beach has been JetBlue's weakest market for some time and new competition will probably make things worse.
The real threat is that Southwest will seek to grow further in Long Beach. That will be difficult due to the slot limitations, but Southwest could try to grab any slots that other airlines are willing to sell or trade, while the city could eventually be forced to raise the flight caps again as jets become quieter. It's unlikely that Southwest would bother entering the market unless it plans to move beyond four daily flights.
Southwest's decision to start flying from Long Beach Airport thus represents a small challenge to JetBlue that could grow into a real threat over time. This could force JetBlue to make some tough decisions about how it wants to compete in the Los Angeles metro area and at Long Beach Airport in particular.
Adam Levine-Weinberg owns shares of JetBlue Airways and is long Jan. 2017 $17 calls on JetBlue Airways. 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.