Thursday, June 22, 2017

Southwest Airlines filling out its passport three years into international expansion

When Southwest’s inaugural flight to Turks and Caicos touches down this November, it will mark the 11th country or territory served by the Dallas-based carrier.

The flight will cap another year of aggressive international growth for Southwest, which has transformed itself from a short-haul domestic airline once confined to the borders of Texas into an emerging heavyweight in the Latin American and Caribbean markets.

Since its first international flights in 2014, the Dallas-based company has launched service from 15 U.S. cities to a total of 16 international destinations, with a heavy focus on beach towns and leisure-friendly spots in places like Mexico, Jamaica and the Bahamas.

Southwest’s international presence is still relatively small, representing just 4 percent of the company’s flying, and an even smaller fraction of its revenue. Southwest reported international revenue of about $383 million in 2016 — up 69 percent in just two years — against a total of $20.4 billion.

But for an airline with a historic appetite for growth and a domestic network that is increasingly built out, capitalizing on close-in international destinations offers a tantalizing opportunity that will be central to the carrier's future.

The new service from Florida to Turks and Caicos will depart from Fort Lauderdale airport’s new five-gate international concourse opening at the end of June. The concourse will provide Southwest much-needed growing room — it’s adding at least seven international routes there in 2017 — and serve as a key connecting point for passengers heading south of the border.

The Fort Lauderdale airport will play a role similar to Houston’s Hobby Airport, where Southwest opened an international concourse in 2015. But Fort Lauderdale’s geography also creates new possibilities.

Coupled with the launch of the new, more fuel-efficient Boeing 737 Max later this year, Southwest will be able to take passengers farther than ever before. The Florida airport could serve as a launching point for flights to northern parts of South America, a currently untapped market for the company that is seen as a logical next step in its growth.

An overnight transformation

Whether to expand internationally had been a topic of discussion at Southwest dating back years.

“The question was always: Would the effort be worth the benefit?” Southwest’s chief revenue officer, Andrew Watterson, said.

Launching international service comes with a host of challenges not found on domestic routes, from navigating customs to training foreign workers to making sure crew members have their passports.

Instead of building its network from scratch, Southwest decided to buy one, acquiring AirTran’s limited footprint of Latin American and Caribbean routes as part of its $1.4 billion deal for the company in 2011.

“It basically allowed us to go from a history-laden all-domestic carrier to an international carrier overnight,” said senior vice president of ground operations and provisioning Steve Goldberg. “It gave us a quick opportunity to learn the business and get us ready for where we’re at today and where we’re going in the future.”

Post-merger, Southwest operated international flights for several years under the AirTran brand while the two carriers were integrated. Southwest launched international flights under its own brand in July 2014 and since then has built out its network by looking at where it’s existing customers want to fly.

Southwest has reported international revenue of about $896 million since 2014.

“The destinations we add are because they have relevance to places where we are already the hometown carrier,” Watterson said.

Instead of building up massive international hubs along the coasts like rivals American, Delta and United, Southwest has worked to add a selection of routes from major points across its network from Southern California to Chicago to Baltimore.

“Southwest has this brand and this style. It’s the attractiveness of saying to their customer base ‘Hey, we can get you to Phoenix and we can get you to Mexico City,' ” said George Ferguson, a senior airlines analyst with Bloomberg Intelligence. “It’s a natural progression as they continue to grow.”

With Southwest's value-minded offering and bags-fly-free policy, Ferguson said, the airline is also well-positioned to compete for the business of U.S. residents traveling south of the border to visit friends and family.

The company’s much-bragged about “Southwest Effect” of lowering fares in new markets it enters has seemed to play out internationally, with average prices from the U.S. falling about 25 percent, or $155, according to a 2016 analysis of selected routes by FareCompare.

Competition at home and abroad

But success won’t come easy in a competitive market that already includes major U.S. carriers like American and discounters like Spirit and Frontier, not to mention the foreign airlines also vying for their share of traffic.

“You’re probably faced with even more competition than you’re faced with in the U.S. in some of those markets,” Ferguson said.

Launching international routes also means delving into international politics, from securing takeoff and landing slots at local airports to dealing with the fallout from diplomatic decisions, like President Donald Trump’s decision last week to tighten restrictions on travel to Cuba less than two years after Barack Obama opened the door for U.S. carriers to serve the island.

Southwest moved aggressively to establish its presence in Cuba last year, launching six daily flights to three cities. While service to the capital Havana has performed as expected — the company is seeking government authority for another daily flight from Fort Lauderdale — there have been growing pains on routes into smaller Cuban markets, Watterson said.

Future international growth at Southwest will rely in part on partnering with foreign airlines to help take passengers to destinations it doesn’t serve directly. That prospect has drawn concern from the company’s pilots union and is sure to be a continued item of debate in the next round of contract negotiations.

With the opening of the new Fort Lauderdale concourse and subsequent expansion playing out over the rest of this year, Southwest expects its international growth will slow a bit in 2018. Where exactly the carrier will land next is unknown, but there are plenty of opportunities.

When Southwest first launched international service, CEO Gary Kelly said there were nearly 50 destinations outside the contiguous U.S. on the company’s radar, including Hawaii and Alaska.

So far, it's made it to less than half.

(Conor Shine - The Dallas Morning News)

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