Southwest Airlines three business defining changes during 2014

Many things worked out for Southwest in 2014, making the year arguably one of the best in its entire history. The carrier launched international service, came out of Wright Amendment restrictions, and won rights to expand at the high value Washington Reagan and New York LaGuardia airports during the year.

Each of these developments would have been sufficient individually to drive healthy growth in Southwest’s 2014 profit, but these three major developments occurred together, making 2014 a special year for Southwest. Apart from these major developments, Southwest launched a new aircraft livery, named Heart, and continued to modernize its fleet with new 737-800s in 2014.

Gains from all these business developments have allowed the low-cost carrier to grow its revenue by 5% annually and nearly double its profit to $946 million in the first three quarters of 2014. Based on traffic reports for the months of October and November, we figure Southwest is set to post strong results in the fourth quarter as well. Here we review the year 2014 for Southwest, and analyze the impact of these major developments on the carrier’s future.

Acquisition of Slots At High Value Airports Has Provided A Solid Growth Window

In early 2014, Southwest acquired 27 of the 52 slot pairs (take-off and landing timings) vacated by American Airlines-US Airways at the Washington Reagan National airport. American and US Airways had to vacate these slots under their merger agreement with the Justice Department.

Southwest also won 6 out of the 17 slot pairs that were up for bids at New York’s LaGuardia airport. For many years, Southwest’s capacity expansion at these high value airports was restricted as slots were note readily available, but with these slot wins, the carrier has been able to significantly ramp up its flying capacity at these airports.

This capacity expansion has played a key role in growing Southwest’s results in the first three quarters of 2014, and we figure the high value nature of the Washington and New York markets has also enabled Southwest to grow its average air fare, yield and margin.

Looking ahead, slot wins at Washington Reagan and New York LaGuardia will allow Southwest to expand its capacity by 2% in 2015.

 

Expiry Of Wright Amendment Has Unshackled Growth Potential At Dallas Love Field

Separately, on October 13, the Wright Amendment expired, enabling Southwest to fly nonstop to a greater number of destinations from its home airport, Dallas Love Field. This amendment had been in place for many decades and was originally introduced to make the nearby Dallas Fort Worth International Airport commercially viable.

Everyone knew of the coming expiry of the Wright Amendment, but the key question was how well Southwest would be able to utilize this growth opportunity. In the more than two months since the expiry of the Wright Amendment, Southwest has launched nonstop flights to about a dozen U.S. cities, and it has has seen occupancy rates (percentage of seats occupied by passengers in a flight) of over 90% on these new flights. 

Typically, it takes many weeks, if not months, for occupancy rates for an airline to reach even around 75-80% on new routes. However, as Southwest is well established in the Dallas market, these new flights from the carrier found many takers. Thus, the expiry of the Wright Amendment has unshackled Southwest’s growth potential at Dallas Love Field.

In the coming year, this growth opportunity out of Dallas Love Field will allow Southwest to expand its capacity by 3%, playing a key role in its overall growth.

International Flying Provides Long Term Growth Potential

Southwest also began flying outside of the continental U.S. in 2014, taking over routes that were previously served by AirTran. Southwest’s entry to these international routes has brought the carrier’s iconic "Bags Fly Free" service and other policies such as zero ticket change fees to these routes.

Southwest has always maintained that the additional passenger traffic that it generates from these policies more than compensates for the loss in revenue from baggage and ticket change fees. In our view, as low fares, zero baggage fee and no change fees enabled Southwest to rapidly expand in the domestic market, these policies should help the carrier grow in the international market as well.

International flying could also drive long term growth at Southwest. In 2015, international flying will add 1% growth in Southwest’s capacity.

Together, the acquisition of slots, expiry of the Wright Amendment and international flying will allow Southwest to expand its capacity by 6% in 2015. This aggressive capacity expansion will in turn lift the carrier’s passenger traffic and revenue.

Apart from these three major business developments, Southwest made significant progress in integrating AirTran in 2014. The carrier expects that the integration will be complete by year end.

The company also launched a new look, consisting of a new logo, new aircraft livery and a fresh airport experience in 2014. After an eventful 2014, Southwest is looking to drive its results higher in 2015, and the carrier looks well positioned to do so.

(Trefis Team - Forbes)