Airlines

Not-So-Scrappy Southwest Starts to Look More Like the Bigger Airlines


Southwest Airlines was already a behemoth when federal regulators were grappling over the latest huge merger in the industry, and this year the airline will get even bigger.

Southwest (LUV) was the dominant winner in the asset auction that federal regulators mandated as part of its approval of American’s (AAL) merger with US Airways. The carriers were required to divest takeoff and landing slots at New York’s LaGuardia Airport and Reagan National Airport near Washington, D.C., as well as airport gates and other assets in several cities. LaGuardia and Reagan are both constrained by U.S. limits on hourly aircraft operations due to congestion, so gaining ground in either venue is a big deal. (In a 2008 blog post, Southwest called its entry into New York City “GINORMOUS!”)

Rival JetBlue Airways (JBLU) collected slots for a dozen new daily round-trip flights at Reagan, giving it 30 total. American remains the airport’s largest carrier, with about 56 percent of the slots. Virgin America, which flies daily from Reagan National to San Francisco, is also believed to have bid for slots there, although the carrier has refused to confirm that. The last batch of slots at Reagan has not been finalized, a Justice Department spokesman said Friday, and federal officials have declined to identify bidders for the slots at either airport aside from making it clear that United (UAL) and Delta (DAL) aren’t welcome in the process.

The number of daily Southwest flights at both LaGuardia and Reagan will remain modest: 33 in New York and 44 in Washington. Yet the flight expansion gives the airline more exposure to two airports with many high-paying corporate travelers. It also helps to cement the idea—at least among regulators—that Southwest serves as an effective deterrent to pricing excess by the Big Three legacy airlines. That idea will soon get a field test, with the new flights beginning in the summer.

Rival airline executives have grumbled for several years about how Southwest manages to retain its public image as a low-fare champion, even though the carrier is not always the cheapest option and has aggressively raised fares since the 2008 spike in jet fuel prices. Southwest contends that its two free checked bags per traveler—a $50 extra fee at most U.S. airlines—still keeps it ahead on total price.

Since the end of 2012, Southwest’s average one-way fare has climbed 5.5 percent, to $156.05. Comparatively, that’s still below the national round-trip domestic average of $390, as of Sept. 30, according to federal data. But the carrier has made no secret of its frantic push for new revenue as its rivals revamped their costs in bankruptcy and then bulked up through mergers. That has left Southwest with higher costs than some newer upstarts, such as Spirit (SAVE) and Allegiant (ALGT), while no longer being a growth airline. As a result, new business opportunities will come largely from abroad and from luring business travelers in some of the larger markets Southwest once shunned.

Southwest has grown to 3,600 daily flights since its first flight in June 1971, when its fleet numbered three Boeing 737s shuttling travelers among Dallas, Houston, and San Antonio. The airline is no longer “a small fish in a big pond,” as Edward Jones analyst Logan Purk told Bloomberg News. On Monday, Feb. 3, the airline will announce a bevy of new destinations from its home base at Dallas Love Field, an airport where flights have been restricted geographically since 1979, when Congress enacted the Wright Amendment to protect Dallas-Fort Worth International Airport 25 miles west. That law expires Oct. 13, and Southwest has been heavily promoting its freedom to fly nationwide from Love Field.

The airline is also about to embark on its first international foray this year, with new flights to Aruba, Jamaica, and the Bahamas starting in July. Southwest is building a new international terminal at Houston’s Hobby Airport to allow it to fly to Mexico, the Caribbean, and Latin America. That facility is scheduled to open next year, in what promises to be a year of expansion for Southwest.

Bachman is an associate editor for Businessweek.com.

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Companies Mentioned

  • LUV
    (Southwest Airlines Co)
    • $41.66 USD
    • 0.68
    • 1.63%
  • AAL
    (American Airlines Group Inc)
    • $51.43 USD
    • 1.22
    • 2.37%
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