Southwest Airlines, the bastion of the keep-it-simple, no-frills model, is getting itchy feet. The Dallas-based carrier is beginning to extend its tentacles - cautiously at first - beyond its domestic turf and into markets that are not only foreign geographically, but also foreign to its original business model. And it is not alone. The days of the low-cost carrier going it alone, sticking to one fleet-type and leaving long-haul flying to the big boys may soon be consigned to the history books, as they increasingly find that the only way to continue growing is to extend their global footprint.
Rather than impulsively throwing a few items into a backpack and setting off on its global travels, Southwest is taking a much more cautious approach to overseas expansion. It has started by signing codeshare deals with Canada's WestJet and Mexico's Volaris, under which its new partners will initially take on the risks associated with operating the transborder flights, allowing the US carriertoevaluate whether or not to eventually operate beyond its borders with its own aircraft.
"This is a way for us to get a toe in the water in a low-risk way," says Southwest senior director of planning and distribution Richard Sweet. "It's an opportunity for us to learn without investing a tonof money in terms of marketing and operational needs."
The agreement with WestJet is scheduled to take effect towards the end of this year, once the challenges of implementing a reservations system that allows for codesharing have been ironed out. Southwest will initially place its code on existing transborder routes operated by WestJet, while the Canadian carrier will be able to reap the benefits of offering its passengers access to Southwest's vast US network. "At this point, they'll do all the [transborder] flying, but that doesn't preclude us from doing it in the future," says Sweet.
Summing up the perceived advantages of the deal, WestJet vice-president of revenue and planning Chris Avery says: "The big thing is combining our two networks, giving our guests greater access to a network in the US. Beyond that, there are opportunities for both carriers to expand their networks.
"Southwest will put its code on routes we operate today and as we expand and new routes are added, we will discuss codesharing. The intention is to link the two networks through codesharing, and we will hit the routes with the biggest bang for the buck first. This is an evolution of our business model, and we recognise that we need to do this to continue to grow. It's a different way of thinking, but it's part of our future."
To enable the codesharing pact to go ahead, WestJet is working to introduce Sabre's SabreSonic reservation system to replace its Navitaire Open Skies platform. "Navitaire didn't support codesharing to a degree we were confident with. Switching to SabreSonic gives us the best opportunities to expand codeshares," explainsAvery. "Implementation is taking place and we hope to have it in place by the fourth quarter of 2009. Southwest is working on similar issues with its reservation system."
Southwest has also been working with Sabre to develop its custom-built reservation system to allow for international codeshares, a process it has been working on since entering into a domestic codeshare with ATA Airlines. Says Sweet: "The ATA codeshare was held together with duct tape, and we knew then we would have to make several changes internally and work with Sabre to provide the ability to work with other partners."
Volaris codeshare deal
The agreement Southwest signed with Volaris is very similar to the WestJet deal in that it allows the US carrier to dip its toe in the Mexican market without making any huge commitments. "It gives us the opportunity of tapping into the relatively new but emerging network that Volaris has developed," says Sweet. "There are lots of opportunities with the huge Hispanic market in many of the cities we serve." Volaris plans to launch its first two US routes in June and serve at least 10 US airports within three to five years. It expects to start carrying Southwest's code on transborder flights in early 2010, giving it a powerful sales channel in the US.
Volaris is not the only Mexican low-cost carrier intent on expanding out of its limited and oversaturated domestic market. Monterrey-based VivaAeroBus already operates transborder flights to Austin in Texas, and Toluca-based Interjet, while taking a more conservative approach to overseas expansion, certainly has it on its radar.
Interjet has been evaluating several potential markets in the US and was originally intending to launch its first service north of the border late last year. But the carrier decided to hold off on the launch and is waiting for economic conditions to improve.
"We're ready to fly to the US. Everything is in place. [But] now the problem is, 'Is it commercially wise or not?' We're waiting for the right commercial signals. We're not sure," says Interjet chief executive Jose Luis Garza. He adds that Interjet might launch service in the second half of this year to Ontario in California, or Houston or San Antonio in Texas, but this would just be a single route "to test out the waters".
Garza says Interjet has no intention of following Volaris with a major transborder operation and Interjet, which briefly operated a service to Guatemala in late 2007 and early 2008, plans to mainly focus on the domestic market. "For the time being, Interjet is committed to providing domestic services," he says. "International for the foreseeable future isn't our biggest venture. If we go to the US, Central America or the Caribbean it will be a niche operation."
Like the WestJet agreement, Southwest's deal with Volaris "does not preclude" the US carrier from ultimately operating the transborder flights with its own aircraft, and this is something that "we're certainly always looking at", says Sweet.
This is a pattern that could eventually be repeated on flights outside the Americas. Southwest is looking into the idea of entering codeshare deals with long-haul carriers, and Sweet does not rule out the possibility that it could one day operate long-haul routes with its own aircraft. Southwest is "starting to hold talks with potential [long-haul] partners" with a view to entering into similar codeshare agreements to those it has struck with WestJet and Volaris.
However, Sweet says that from a technological and operational standpoint, "getting out of this hemisphere" will be a lot more challenging. "This would be phase two of the work we'd have to do to codeshare on longer flights east and west," he notes, adding that any deal with a long-haul carrier is "probably at least a year-and-a-half to two years down the road".
"Flying with a codeshare partner long-haul is certainly something we're interested in doing in the long-term," says Sweet. Could an eventual codeshare deal with a long-haul airline pave the way to Southwest one day branching into the long-haul market with its own aircraft? Sweet says this would represent "another big move out of our present model and it would involve a different aircraft type, but I'm not saying we wouldn't do it".
Michael Coltman, a partner at Mango Aviation, a consultancy specialising in the low-cost carrier market, believes any long-haul codeshare deal would present Southwest with numerous complications. "The needs and expectations of a long-haul passenger are much different from the typical profile of a Southwest passenger," says Coltman. "There are no long-haul carriers operating to North America that have a similar business model to Southwest. I can't think of a natural fit on the long-haul front for Southwest."
As for the prospects for a long-haul Southwest, Coltman is sceptical: "In terms of Southwest operating long-haul low-cost flights, I don't think this model has been proven as yet. I don't see it happening any time soon - and probably only once the US/Canada/Mexico markets are saturated with Southwest flights. While there are still markets to pursue that fit the model better, why would you want to take the risk of trying something that is so far outside the business model?"
Southwest is not the only low-cost carrier that is exploring the possibility of codesharing with long-haul network carriers. WestJet earlier this year signed a memorandum of understanding with SkyTeam carrier Air France-KLM. Under this partnership, the respectiveairlines will begin working on a codesharing agreement later this year or in early 2010. "The primary driver of this deal is to increase the flow to WestJet's network," says Avery. "Air France-KLM flies to Toronto but has no connection access in Canada - this will give them access to other destinations in Canada. Maybe after that there will be access for our guests beyond our network."
Network carrier partners
And WestJet does not plan to stop with Air France-KLM. "There are various discussions in the works with other carriers because this makes sense for WestJet," says Avery, adding that the carrier is ideally looking for a partner in the US, a partner in Europe and a partner in Asia. "There is no specific timing but a transpacific partner makes sense, then perhaps more partners from Europe. We've been in talks for quite some time with Cathay Pacific and British Airways but there is nothing firm yet."
So could we one day also expect to see a long-haul WestJet? "We are happy with the growth opportunities for our [Boeing] 737 fleet and are focused on executing this," says Avery. "Long-range aircraft may be on our horizon but we are not actively pursuing this, nor do we have any plans to."
Ahead of the curve on entering agreements with carriers based well outside its domestic market is JetBlue Airways, which already has deals with Germany's Lufthansa and Ireland's Aer Lingus under its belt and is on the lookout for more. Lufthansa acquired a 19% stake in JetBlue in 2007 and the two carriers have since been working on getting the technology in place to enable them to begin transferring passengers at JetBlue's New York JFK hub.
"We plan to start transferring passengers in the second half of 2009 and we're on track to do that," says JetBlue vice-president planning Marty St George. "This is part of our bigger goal of participating in the international marketplace. We have no plans to start transoceanic services, so it was a natural extension for us to work with Lufthansa."
St George describes the agreement JetBlue signed last year with Aer Lingus, which involves the two carriers selling combination tickets for flights that funnel two point-to-point local fares into a single itinerary, as "very successful", adding that JetBlue has received "thousands of bookings" through Aer Lingus. "We're on our third target with Aer Lingus - we've continued to revise the target upwards."
Spurred on by its existing agreements, the US carrieris keen to enter similar deals with other international carriers. "We've talked to several dozen airlines that want to work with us," explains St George. "As we've had conversations we've had to educate them on how low-cost carriers work. With Aer Lingus we had to come up with procedures for two business models."
Not to be outdone, another US budget operator AirTran Airways is also on the hunt for potential codeshare deals with European carriers. "We're open to European carriers codesharing with us if they want a gateway to the US," says AirTran director of strategic planning and scheduling John Kirby.
Why the sudden interest from low-cost carriers in forming overseas partnerships? "We're clearly seeing an evolution of low-cost carriers," says Kirby. "As they've grown and matured they feel that their product is now expandable beyond the typical low-cost arena. Southwest is looking before it leaps - the partners are the ones taking the risk and Southwest is getting a feel for the value of this new arena. They're so big that they have to start looking globally."
But JetBlue's St George does not attribute the drive towards international expansion to a maturing of the US low-cost market. "The low-cost model in the US has a long time to go before it matures," he says, adding that expansion outside the US "is not driven by need but by places to extend our footprint - it's a natural extension".
Expanding into longer-haul markets is nothing new to low-cost carriers outside the Americas. For instance, Australia's Jetstar, a low-cost subsidiary of the Qantas Group, branched into long-haul international operations in 2006 and has not looked back since.
"Under the original business plan, the focus was absolutely on the Australian domestic market with a view that we could operate some short-haul international routes over the medium term," says Jetstar. "We just announced interlining with Qantas and this will roll through to other carriers. We want [to interline with] 10 international carriers over the next 18 months."
And low-cost carriers in Europe have been gradually increasing the stage length of their flights to encompass markets outside the European Union. One example is Oslo-based Norwegian, which is looking to add more longer-haul flights to its network as and when traffic rights allow.
"We now have quite a few services outside Europe - we fly to Dubai, Turkey, Egypt and Morocco," says Norwegian chief commercial officer Daniel Skjeldam. "We might see more of this type of expansion in the years to come. We're entering markets that were not previously on our agenda and it works well for us.
"The largest challenge is traffic rights," Skjeldam explains. "We have an AOC in Sweden and Norway that has given us access [to countries that have bilateral agreements with Sweden and Norway]. But from Denmark, for instance, we can't operate to any place we want outside Europe."
Southwest's Sweet neatly sums up the thinking behind the drive of low-cost carriers to look further afield in their continual search for extra revenue: "The spike in oil prices certainly made us realise we have to look for additional revenue sources," he says. "To some degree it has to do with the maturity we have domestically. We still have some additional domestic [opportunities], but we need to look outside of the US."
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