Domestic Carrier Southwest Ramps Up International Strategy
Southwest, which flies more domestic passengers than any other U.S. airline, is going international.
The airline is picking up AirTran's flights to Mexico and the Caribbean after buying its rival last year. It's getting a new reservations system to handle overseas bookings and is seeking to build an international terminal at Houston's Hobby Airport, where it says it could ultimately add 25 flights abroad a day.
Building an international presence is a significant shift for Southwest , which flew to success by focusing on reliable, low-fare service within the U.S. And it's another sign that the one-time niche carrier is increasingly competing on the same turf as the big network airlines, the so-called legacy carriers, such as United , Delta and American.
"Flying into more congested markets, now trying to go overseas … it seems like they're becoming a legacy carrier," says Basili Alukos, an airline analyst at Morningstar. But, he adds, if Southwest can replicate its domestic network and success internationally, "I think there's a lot of opportunity there."
Having a footprint beyond the U.S. was a key reason Southwest decided to buy AirTran, says Bob Jordan, Southwest's executive vice president and chief commercial officer.
"We have always wanted to get to a point where we added international capabilities," said Jordan, adding that AirTran's staff, aircraft, and perch at Atlanta's Hartsfield-Jackson International, the world's busiest airport, also figured into the decision to merge.
Combined with AirTran, Southwest has roughly 25 percent of the U.S. market in terms of passenger traffic, Jordan says. While there is still room to grow domestically, he says, "You do get to a point where the next best set of destinations becomes international."
For now, Southwest's international flights are still operated by AirTran, which flies more than 20 a day and plans to add more. Service between San Antonio and Mexico City will start Thursday, while flights from Orange County to Mexico City and Cabo San Lucas, Mexico, will launch on June 3.
Eventually, however, those flights will be under Southwest's banner. And Jordan says passengers heading to foreign destinations will have access to low ticket prices that Southwest is known for domestically.
"We've looked at the fares, and in every single case, using our typical Southwest structure, Southwest will be able to lower fares on the routes we're considering," he says.
Southwest recently announced it was deferring delivery of 30 Boeing 737-800 jets to cut costs roughly $1 billion over two years and strengthen its cash flow amid uncertain economic times and volatile fuel prices. But, it says, the move won't affect its plans to fly internationally.
Jordan says low prices, a strong record for on-time flights, and a good staff have fueled Southwest's popularity, and those hallmarks will stay in place as it stretches abroad.
"None of that changes with international service," he says. "Our service, our frequencies, our low fares, all of that comes with it. And that's what makes us different from the (large network carriers), not whether we do or don't fly internationally. I have no doubt we'll be successful."
New Terminal Plans
Southwest reached an agreement last month for a new reservations system that can handle international bookings, technology it previously lacked.
The airline also is seeking approval from Houston's city council to build a five-gate international terminal at Hobby Airport, whose private flights are the only ones that go to foreign destinations. The city's mayor, Annise Parker, announced her support for the terminal on Wednesday. Federal aviation officials will also have to give their OK.
Southwest would like to open the terminal, which would cost $100 million to $125 million, by 2015. It envisions it as the launching point for flights into Central and South America in addition to Mexico and the Caribbean.
A report commissioned by the Houston Airport System determined that the new portal would bring in an extra 1.5 million passengers annually, lead to 10,000 jobs for the Houston area, and amount to an economic benefit of $1.6 billion a year.
"The report projects that opening Hobby to international service would create a more competitive landscape" and lower fares, Houston Airport System's aviation director Mario Diaz wrote in a memo to Mayor Parker that supports the new terminal .
Plans were for the council to take up the matter by the end of May, said mayoral spokeswoman Janice Evans.
United, the biggest of the network carriers and which counts Houston's larger Bush Intercontinental Airport as its biggest hub, is not on board with Southwest's plan to turn Hobby into its international launch pad.
United flies the majority of passengers headed to foreign destinations from Houston. And it says its own study found that the proposed terminal at Hobby would result in the area taking an economic hit.
"Dividing the air service between the two airports … will mean that Houston is competing with itself for international connecting traffic rather than competing with very successful cities that have one international airport, like Atlanta and Dallas," says United spokeswoman Mary Clark. "We believe it will result in a loss of jobs and also there will be an economic loss for the city of Houston."
Clark says there is room for Southwest at Bush Intercontinental.
Southwest's Jordan counters that United is concerned about itself rather than the community.
"United Airlines doesn't want the competition," he says. "We're asking to bring more flights, and lower fares for the people of Houston, and bring in the economic benefits that come from that."
The Southwest Effect
Southwest's impact on the markets it enters led to the coining of the term "the Southwest effect" in the airline industry. It refers to how its low ticket prices would spur competitors to lower their fares, too.
But nowadays Southwest fares are not necessarily the cheapest.
Spirit , Frontier and Allegiant are considered the truer low-cost carriers, industry watchers say. And in some markets, airlines such as American or US Airways have been found to offer a better price, says Henry Harteveldt, an airline and travel industry analyst.
Additionally, Southwest's growing foothold in larger, more congested markets could jeopardize the on-time performance that it's known for, says Akulos, the Morningstar analyst.
Yet, Southwest still stands apart from its peers, experts say. Unlike the network carriers, it continues to let passengers check two bags for free. And while travelers flying Spirit or Allegiant have to pay for everything from booking a ticket online to an on-board snack, Southwest still offers the services at no cost.
"Southwest won't be as inexpensive as Spirit or Allegiant on a ticket price alone," Harteveldt says. "But when you factor in what Southwest includes … Southwest still provides good value."
That value may be ultimately enhanced by service to far-flung destinations, he says.
"The critical thing in terms of making sure this is a smart move will be the cities that Southwest is serving … the number of flights they operate between those cities and the prices they charge," Harteveldt says. "But I think this is a logical and understandable part of Southwest's evolution as an airline."
AirTran's current international destinations that eventually will be flown under Southwest's banner:
- Nassau/Paradise Island, Bahamas
- San Jose/Cabo San Lucas, Mexico
- Mexico City
- Montego Bay, Jamaica
- Punta Cana, Dominican Republic