ANALYSIS: Southwest gears up for international expansion

Washington DC
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Southwest Airlines might have celebrated its 43rd anniversary this year, but it is just getting started in entering its next phase of growth as it prepares to expand beyond the US border.

The Dallas-based carrier, after carving out a niche in offering low-fare short-haul service within mainland USA for decades, is weeks away from operating its first international flights - a milestone among several that will significantly expand the carrier's reach in the years ahead.

On 1 July, Southwest will take over subsidiary AirTran Airways' flights from Atlanta to Aruba and Montego Bay, from Baltimore/Washington to Aruba, Nassau and Montego Bay, and from Orlando to Aruba and Montego Bay. In the months following July, Southwest will transition more of AirTran's international flying to its own metal.

Southwest closed on its acquisition of AirTran in May 2011, and plans to integrate the carrier fully by the end of this year. The AirTran purchase is a key component in Southwest's plan to evolve in the coming years - a plan that also includes the lifting of flight restrictions at its base of Dallas Love Field in October, and key airport infrastructure projects to support international flying.

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Deutsche Bank analyst Michael Linenberg has noted that these ongoing projects have been good for Southwest. "The stock price has been impressive," he said at the Deutsche Bank Global Industrials and Basic Materials conference on 5 June. Southwest's stock now hovers over $27 per share, compared with a 52-week low of $12.58 recorded in July 2013.

While Linenberg acknowledged that the days when Southwest used to post over 20% operating margins might be over, he expressed optimism in the carrier growing its margin this year. Southwest posted an operating margin of 7.2% in 2013, with analysts forecasting that the airline could achieve a more than 10% operating margin for 2014.

Southwest chief financial officer Tammy Romo said the airline is "very excited" about its future. "When you think about Southwest, historically relative to the industry, we were very short-haul focused," she said, speaking at the Deutsche Bank conference. "We really worked hard to enable the capabilities that will take us beyond the US border. All of that is coming together in 2014."

Besides taking on AirTran's international flights, Southwest's network will be boosted by the repeal of the Wright Amendment at Dallas Love Field, which currently restricts where Southwest can operate non-stop flights to. The legislation will be repealed on 13 October, clearing the way for Southwest to launch new non-stop service to 15 new destinations starting from the same day.

Having financed a facelift for Dallas Love Field in recent years, Southwest will operate at 16 of the airport's 20 gates. "Customer reactions to the newly renovated Love Field have been tremendous," said Romo.

Outside Love Field, Southwest is paying for a new international terminal at Houston Hobby, where it plans to launch international flights from in end-2015. The airline has said it will fly to Latin America and the Caribbean.

The new five-gate international terminal in Houston will be built for $156 million. Construction started in the third quarter of 2013 and is expected to be completed in the second half of 2015.

Elsewhere, the carrier is also investing to facilitate its international plans. Southwest is overseeing a makeover of Fort Lauderdale airport's terminal one to enable the facility to handle international flights. The terminal will receive a new five-gate concourse A with international processing capabilities. Broward County, which operates the airport, is funding the construction with costs that will not exceed $295 million. However, Southwest has said the funds will flow through the carrier since it is the manager of the project. Construction is expected to be completed in early 2017.

Taking over AirTran's international flights and investing in airport infrastructure is just the tip of the iceberg for Southwest's international ambitions. The airline's executives have said the carrier sees potential for as many as 50 new destinations in its network.

"We wouldn't be surprised if it's a couple hundred of aircraft worth of growth," said Romo. Southwest chief executive Gary Kelly has said Canada could very well receive Southwest service in the future.

Southwest route network, after AirTran integration

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Source: FlightMaps Analytics