Is United Continental destined to be Southwest Airlines' next victim? There are some eerie parallels between the situation in Houston today -- where United is the dominant airline -- and the circumstances in the Dallas-Fort Worth area a year ago.
Southwest Airlines' upcoming growth in Houston could eventually drag on United Continental's performance. However, in all likelihood, it won't be nearly as dramatic as the disruptive impact Southwest's growth in Dallas had on American Airlines.
American Airlines gets sucker-punched
American's recent woes in Dallas-Fort Worth were precipitated by the repeal of the Wright Amendment. This somewhat bizarre and antiquated law limited most flights at Love Field -- the closest airport to downtown Dallas -- to Texas and a handful of nearby states.
Because Southwest Airlines is the dominant carrier at Love Field, but doesn't fly to Dallas-Fort Worth International Airport, it was severely limited in where it could fly from Dallas. The law's repeal allowed Southwest to dramatically expand at Love Field by adding flights, switching to larger aircraft, and replacing short hops to nearby cities with longer flights to major East Coast and West Coast destinations.
At first, American Airlines didn't expect Southwest's growth to affect it much. Soon after the Wright Amendment was lifted, American Airlines President Scott Kirby said during an earnings call that the company's unit revenue was still growing on the routes where it faced new head-to-head competition from Southwest.
However, that didn't last long. While the company projected that unit revenue would increase by 0%-2% in fourth-quarter 2014 (the quarter during which Southwest began ramping up its fights at Love Field), American Airlines' unit revenue ultimately fell by 1%. Unit revenue then declined 1.7% in the first quarter of this year, which American's management blamed primarily on the increased competition in Dallas.
The pain might not be over yet for American Airlines in Dallas. Southwest has added more flights in Dallas during 2015 and will only reach its full long-term flight schedule this summer.
Southwest is about to expand in Houston
Like Dallas, Houston is one of Southwest's original markets, and the carrier maintains a major presence there. It currently operates about 151 departures per day on average at Houston's Hobby Airport.
Like Love Field in Dallas, Hobby Airport has historically operated under certain constraints in order to drive more traffic to Houston's larger main airport -- Bush Intercontinental -- which happens to be one of United Continental's top hubs. Most notably, Hobby Airport has not had full U.S. customs facilities in decades.
Several years ago, Southwest Airlines set out to change this so that it could begin offering international flights from Houston. United Continental, which is by far the largest airline in the Houston area, vociferously opposed Southwest's plans to build a small international terminal at Hobby Airport but couldn't stop the project from going forward.
International expansion won't be as disruptive
At this point, Southwest's expansion plans in Houston encompass fewer than a dozen daily departures. Clearly, that won't have a major impact on United Continental, which operates more than 500 daily departures in Houston.
In Dallas, Southwest had a big opportunity for domestic expansion, and its position as one of the top domestic carriers encouraged it to move aggressively to maximize its growth there. By contrast, international flights are still relatively new to Southwest. Thus, it's not surprising that it is moving more deliberately in Houston, where the opportunity is primarily international.
In the long run, Southwest is likely to ramp up to at least two dozen daily international departures in Houston. What it does beyond that will be the main determinant of the impact on United Continental.
For example, Southwest isn't yet fully using its gates in Houston, so it could add domestic flights there to bring in connecting traffic for its international flights.
That would put more pressure on United Continental. Furthermore, the new international terminal at Hobby Airport was designed with flexibility to be expanded from five gates today to as many as 12 gates in the future.
International service from Houston represents one of Southwest's best remaining growth opportunities. United Continental would be foolish to ignore this potential threat.
(Investopedia)
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