ANALYSIS: Southwest unfolds international ambitions

Washington DC
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Low-cost carrier Southwest Airlines won approval from its flight attendants last week for the airline to operate overwater and international flights, clearing a key hurdle in the carrier's transition to international operations that first began with its acquisition of AirTran Airways.

The acquisition, which closed in May 2011, will go on to transform Southwest's business during the next three years as it integrates AirTran into its business and expands its network beyond the continental USA.

AirTran operates to Mexico and the Caribbean - flights that Southwest is not able to take over with its existing reservations system as it integrates AirTran's operations with its own. Southwest has hired Amadeus to implement its Altea reservations system that will allow it to operate international flights in 2014, and has also indicated that it could hire Amadeus to convert its existing domestic reservations system, now powered by Sabre.

The transition to a reservations system that can handle international flights is just one of several changes Southwest will undergo in the coming years, as the carrier broadens its horizons to serving destinations outside the USA.

Southwest's expansion will be boosted by two significant airport-related developments: the lifting of the Wright amendment at its Dallas Love Field base, and its plan to build an international terminal at Houston Hobby airport.

Implemented in the 1970s to protect the then newly-built Dallas-Fort Worth International airport from competition, the Wright amendment limits non-stop flights from Love Field to Texas, Alabama, Arkansas, Kansas, Louisiana, Mississippi, Missouri, New Mexico and Oklahoma, as well as to anywhere in the USA on aircraft with up to 56 seats. Due to the legislation. Southwest's Boeing 737s must stop on one of those states before continuing on to final destinations elsewhere in the USA.

The Wright amendment is set to be repealed on 13 October 2014, which will open up tremendous opportunities for the airline to launch non-stop flights to more destinations.

Southwest chief executive Gary Kelly, who called the repeal "a pretty big change for us", said that the airline has a vision of the routes it wants to launch in 2014, but was quick to add that it does not make sense for the carrier to lock those plans down. The airline also needs to gain a clearer idea of its fleet size then before it commits to new routes.

"Because of the dynamic nature and uncertainties of the economy, we have not committed to increasing the fleet yet for 2014. We want to buy ourselves as much time as we possibly can before we are forced to make that commitment," Kelly told reporters at the Boyd Group International Aviation Forecast Summit in Dallas on 17 September.

Southwest is taking a cautious stance with managing its fleet size in the coming years, as Kelly reiterates a commitment for the airline to hit a 15% return on investment (ROIC) target. The airline announced this year that it would defer 30 Boeing 737 deliveries scheduled for 2013 and 2014 to 2017 and 2018, in line with keeping capacity flat or slightly down.

Kelly said last week that 2014 is "eligible for increasing the fleet" but the airline has not made a decision on that, adding that this will depend on the economy.

Aside from new growth out of Love Field post-2014, Southwest will also gain a significant new revenue opportunity when it begins international flights from a new terminal at Houston Hobby, likely to open in 2015.

The airline is designing, building and paying for the new terminal, estimated to cost $100 million. Southwest has said that it is likely to launch flights to the Caribbean, Mexico, Central and near South America from Hobby once the new terminal and federal inspection services facility are ready.

"Obviously with our strong presence in Texas, we think we have significant opportunities to grow the route system out of Houston," the airline's chief financial officer Tammy Romo has said.

Southwest's foray into international flights is happening in line with several fleet-related initiatives it is undertaking to drive revenue towards meeting the 15% ROIC target. Besides the 737 deferrals, the carrier concluded an agreement in May to sublease AirTran's 88 Boeing 717s to Delta Air Lines. Southwest will spend about $100 million to reconfigure the 717s with Delta's livery and desired seat configuration, double what it would have spent if Southwest had kept the 717s and transitioned them to Southwest's livery.

However, Kelly has deemed these costs as worthy as Southwest has repeatedly said that the 717s do not fit with its overall fleet strategy.

Besides finding a home for the 717s, Southwest is in the midst of adding more seats to its 737-700s and will also extend this seat reconfiguration programme to 100 of its 737-300s in what it views as a revenue opportunity. Adding the extra seats on these 737s will afford the airline some flexibility as well, as it uses the aircraft to backfill some capacity with the 717s leaving the fleet.

Southwest operates 140 737-300s and 21 737-500s, according to Flightglobal's Ascend Online database. Kelly has said all of these older 737s will be retired by the end of the decade, although the airline has not released a retirement plan.

The airline has 126 737-700s and 54 737-800s on firm order, as well as firm orders for 150 737 Max aircraft, Ascend Online shows.