At the beginning of July, Southwest Airlines (LUV) did something it hadn’t previously done in its 43 years of existence: It landed a Southwest-branded commercial flight in a foreign country.
Its move abroad is a departure for the carrier, which over the decades built a reputation as a charmingly low-frills airline flying only domestic routes. In a tough industry, it’s done well with this business profile, so why is it starting to go overseas now?
Domestic air travel is growing relatively slowly. In 2013, total passenger numbers for intra-U.S. voyages rose by less than 1 percent on a year-over-year basis, and just over 4 percent from 2009 to 2013. Those growth numbers for international travel, meanwhile, were 3 percent and 17 percent, respectively.
American Airlines Group (AAL) brought in around 40 percent of its total $ 23 billion or so in passenger revenues from international flights in fiscal 2013.
United Continental (UAL) doesn’t break down its take by domestic versus international hauling. It does, however, admit that for June its revenue passenger miles (a key figure of total paying customer volume) for domestic flights totaled 8.36 billion, while that for international came in at 8.40 billion — an almost exact 50/50 split.
Southwest plans to use its famous discounts to win business for its new routes — the nearby vacation destinations of Jamaica, the Bahamas and Aruba.
For example, booking one of Southwest’s round-trip, nonstop flights from Atlanta to Montego Bay, Jamaica, for midweek departure and return in September at the lowest available fare recently brought up a ticket for just under $ 300.
The cheapest option for a nonstop round trip for the same dates on Priceline Group’s (PCLN) Kayak booking engine was a bit over $ 400 from Delta (DAL). That was similar to the price returned from a search on the airline’s own site. Meanwhile, Priceline’s proprietary booking engine could not produce a nonstop option for the return flight on the chosen day.
A Gradual Trip Across the Sea
Southwest’s move abroad is a cautious but not impulsive decision. In 2010 the company paid roughly $ 1.4 billion to buy rival carrier AirTran Airways.
One of the attractions of AirTran was its overseas routes. In the news release announcing the acquisition, Southwest said that its new asset provided “access to key near-international leisure markets in the Caribbean and Mexico.”
As with AirTran as a whole — which is slated to be absorbed by the mother company by the end of this year — those flights are being transitioned to the Southwest brand.
Also on the way are Southwest’s investments in international capacity at strategic facilities. It’ll captain a nearly $ 300 million project to renovate its terminal at Fort Lauderdale-Hollywood International Airport to allow for overseas flights. That project should be complete by 2017.
The company will also spend an estimated $ 156 million to exclusively fund a five-gate international terminal at Houston’s William P. Hobby Airport. This is expected to come onstream in 2015.
The Battle for the Near Abroad
Southwest will be far from the only game in town for travelers wanting to jet to those balmy islands. Although rival carriers appear to be pricier just now, that’ll surely change quickly when the company starts filling planes for its Caribbean flights.
So we should expect a tough fight for market share. This could be a positive for travelers looking for deals. But for investors, it has the potential to bruise the results of all participant airlines.
This will be an interesting contest to witness. Given Southwest’s track record, though, we shouldn’t be surprised to see it eventually come to dominate the lovely blue skies over the Caribbean — and even further abroad, if it’s successful in this foray.