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Southwest Into Canada


j.k.
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http://www.theglobeandmail.com/report-on-business/international-business/us-business/southwest-eyes-northern-push-threatening-air-canada-westjet/article19783679/#dashboard/follows/

Low-cost U.S. airline giant Southwest Airlines Co., says Canada is on a list of “attractive” destinations it is considering for expansion – a development that would shake up Canada-U.S. air travel.

The delivery of Boeing 737-800 models that offer more seats and longer range than Southwest’s 737-700 planes makes expansion to Canada, Hawaii, Alaska, Central America and the northern part of South America possible, the airline’s chief executive officer Gary Kelly told analysts on a conference call Thursday.

“Those are all within the performance capabilities of the 737,” Mr. Kelly said. “And they all look at least sufficiently attractive when it comes to the traffic potential in filling up the 737s.”

The move would mean increased competition for Air Canada, WestJet Airlines Ltd. and Porter Airlines Inc., which would likely lead to reduced fares for transborder travellers.

“There’s some opportunities because there’s a lack of low-cost carrier action between the two countries and that’s part of the problem why we’re leaching five million passengers to and from the U.S. border airports,” said industry analyst Robert Kokonis, who heads consulting firm AirTrav Inc.

Mr. Kelly did not say when new routes might be added or which routes are being considered, but noted that the carrier is assessing 50 destinations outside the continental U.S. market.

“It’s a wonderful place to be and whether we’ll ultimately serve all 50 destinations is not guaranteed or committed to,” he said on the call about the airline’s second-quarter financial results. “It’s just the fact that those are opportunities – there’s a number of them.”

The airline looks at such factors as the state of local and macro economies, airport costs and job trends and then makes plans based on forecasts of costs of fuel, availability of planes and overall strategic goals, spokesman Brad Hawkins said in an e-mail message Friday.

Southwest is effectively the model for WestJet and other global low-cost carriers around the world with the aim of getting passengers to destinations at the lowest fares possible and trying to make the experience enjoyable, illustrated in part by the company’s stock symbol, LUV.

From three aircraft that began flights in 1971, it is now among the four largest U.S. carriers as measured by number of passengers.

Southwest has focused strictly on the U.S. market until recently when it added international destinations such as the Caribbean.

“It appears Southwest is out of runway in the U.S. and is now looking north,” said Ben Cherniavsky, who follows the industry for brokerage firm Raymond James Ltd.

The obvious destinations are New York-Toronto and other high-traffic Canada-U.S. routes, Mr. Kokonis said.

“Southwest has got a pretty good track record and these guys are only going to fly where they think they can make money,” he said. “They’re going to research it very carefully. If they don’t make money on a destination, they’re not going to sit around forever trying to make it work. They’re going to cut bait and they’re going to run.”

Competition is already being ratcheted up on Canada-U.S. routes as Air Canada expands its low-cost Rouge brand to more U.S. destinations.

American Airlines said last month it will begin offering twice-daily flights between Los Angeles and Vancouver on Oct. 2 and daily flights between Los Angeles and Edmonton the same day.

Mr. Cherniavsky said in research note Friday that WestJet’s rollout of its Encore regional service and acquisition of wide-bodied aircraft will make its business more complex and perhaps open room in Canada for an ultra low-cost carrier such as two that are now in startup mode; Jet Naked, which aims to offer Canada-U.S. flights and Canada Jetlines Ltd.

But he noted that they have struggled so far to raise capital, reducing the risk to Air Canada and WestJet that the arrival of an ultra low-cost carrier is imminent.

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The Southwest story is a little stale within the investment community ever since the legacies, and esp Delta and apparently AAG, figured out how to run their business properly, (ditch the ersatz LCC's, get the costs down across the board, focus on hub and spoke flying and nothing else, keep capacity growth in line with economic growth and maintain a consistent brand and product) and are now printing money.

Southwest needs to come up with something to satisfy the appetites of the quarterly earnings junkies so they roll out the expansion story. This is not the first time we've heard it and it won't be the last.

Yep. I can sure see Southwest making use of precious, and very expensive LGA or DCA slots to operate their typical high frequency model to YYZ, with connecting service from FLL, MCO, TPA, RSW etc

Why fly non-stop to Florida when you can connect at one of the most congested airports in the US for the same price?

Lest anyone forget, almost 40% of Southwest traffic is through or connecting. WestJet is probably a little more.

I doubt Air Canada or WestJet are going to feed Southwest any passengers. Conversely, I doubt either CDN carrier is kept awake at night worrying that Southwest might corner the connecting market from Tucson, Albuquerque, El Paso, Charleston or Omaha to Canada.

The key markets they'd be interested in are the ones that have a strong mix of both leisure AND business traffic.

In the US, Las Vegas, Florida, SoCal and Phx are both leisure and business. From Canada, they are much more heavily slanted to leisure.

That's not really what Southwest needs to make their model work.

I doubt SW is going to change their m/o in order to enter the Canadian market that is less than a tenth the size of the US market, yet already has a dedicated collective LCC fleet, (excluding what ever definition you choose to give Rouge), about 25% the size of SWA already flying n/s to the places they'd want to go.

Naturally, all trans-border fees and charges, not to mention excessive Cdn airport charges and AIF's, not to mention all other costs of operating in Canada will be waived allowing SW to be able to undercut Canadian domiciled carriers.

Cheaper fuel can be tankered in, but that option is available to Cdn carriers on short haul routes as well, esp on routes where aircraft are all but close cycled.

Southwest isn't a big fan of contracting out above or below wing functions in order to maintain consistency of their product and brand, so they'll have to start with a critical mass of flights from where ever they begin operations. Last time I checked, Southwest contracts basically prohibit redeye flying. Southwest isn't going to operate one flight a day from Winnipeg to Orlando or Moncton to Fort Lauderdale. They like to dominate whatever they take on, and that won't be easy in Canada. They don't like to go head to head with other LCCs. If you overlay the SW route map and the AirTran route map, there was very little overlap. That would not be the case in Canada.

Outside Texas and the few remaining Air Tran markets, Southwest doesn't pay much attention to markets smaller than 750,000 people. That doesn't leave a lot of possibilities in Canada. Trying to find the sorts of routes they like, with the sorts of frequencies they require to make it work in markets where they can achieve any sort of meaningful cost advantage is going to be a pretty tough task.

It would have been a heck of a lot easier in 2002.

It's a nice story to excite the market, but when one takes a hard look at all the factors and pieces that would have to fall into place to make it work, of which only a few are mentioned above, and knowing how fixed and stubborn SWA are in their ways, I'd be very surprised to see SW cross the border north anytime soon.

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  • 1 month later...

Nice takeout by Bloomberg.

SWA is no longer an LCC - even if the media hasn't gotten the message. They are leaving money on the table with the "bags fly free" offer, and the unions are up in arms over current contract concession demands.

They are beginning to sound like just another legacy airline.

http://www.businessweek.com/articles/2014-09-11/southwest-airlines-no-longer-the-low-cost-leader

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Re, "They are beginning to sound like just another legacy airline.", as will apply to all "Lo-cost" carriers. I think it's just history of the industry catching up with itself.

We know too well that flying airplanes isn't cheap. Having already plumbed "bottom" and having seen numerous upstarts disappear, "lo-cost" is the New Legacy. Airlines that are modestly profitable but advertsing 'lo-cost' are making it up in all the user-pay additions beginning with paying-for-food, paying for bags and now paying for inches in seat pitch. How creative can it get?

And with the exception of a few, recognized carriers, the interiors of airplanes are a mess, and they're dirty.

They have to make money to fly, and have got creative with the term "Lo-cost". The fundamental principle of aviation remains, and you can fine-tune things until something breaks; that's "bottom", but at a cost.

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There's a new generation of aviation journalist wannabes that have yet to grasp the concept that the lower the asl, the higher the unit costs are going to be. Similarly, the higher the asl, the lower the yield is going to be.

Last quarter, SW posted a casm including debt service of 12.52 cents per mile over an asl of 723 miles.

United mainline 's asl was 1,971 miles, the contracted out regional flying, which represents a fraction of the total ASM's produced, was 555 miles. The consolidated casm was 15.20 cents.

AAG's casm was 15.67 cents with an asl of 1,215 miles.

Delta's casm was 14.88 cents with an asl of at least the same as AAG's.

Anyone choosing to believe SW's costs place them in "legacy airline" territory does so at their peril.

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There's a new generation of aviation journalist wannabes that have yet to grasp the concept that the lower the asl, the higher the unit costs are going to be. Similarly, the higher the asl, the lower the yield is going to be.

Last quarter, SW posted a casm including debt service of 12.52 cents per mile over an asl of 723 miles.

United mainline 's asl was 1,971 miles, the contracted out regional flying, which represents a fraction of the total ASM's produced, was 555 miles. The consolidated casm was 15.20 cents.

AAG's casm was 15.67 cents with an asl of 1,215 miles.

Delta's casm was 14.88 cents with an asl of at least the same as AAG's.

Anyone choosing to believe SW's costs place them in "legacy airline" territory does so at their peril.

True, but Southwest is no longer a low cost leader, and on the revenue side it hasn’t been able to generate the same kind of profit margins some of the other carriers (Delta, Alaskan, Jet Blue, Spirit) have been able to achieve. Isn’t that the crux of their problems?

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How Southwest Airlines is continuing its upward trajectory


Sunday, Sep. 14 2014 - Globe and Mail
Greg Keenan - Airline Industry Reporter

DALLAS - Gary Kelly will be permitted to do something on Oct. 13 that he has been banned from doing since he joined Southwest Airlines Co. in 1986. The chief executive officer of Southwest will be able to fly non-stop on one of his airline’s Boeing 737s from its base at Love Field in Dallas to Las Vegas or Denver or Orlando, Fla.

That’s because a 1979 regulation that has severely restricted Southwest’s flights out of Love Field ends next month.

The law, known as the Wright Amendment, was put in place to protect what was then the new Dallas-Fort Worth International Airport and airlines operating out of it. Southwest was permitted to fly non-stop only within Texas and a handful of other states.

So on Oct. 12, Mr. Kelly and any travellers heading from Love Field to Las Vegas have a choice of 15 flights, each of which will stop in a smaller Texas city such as Lubbock or Odessa, or Albuquerque, N.M., or somewhere else before landing in Sin City. A day later, three of those daily flights out of Love Field will be non-stop.

The expiration of the Wright Amendment is such a momentous event in the airline’s history that a clock at its headquarters next to Love Field is counting down the days to when the restrictions end.

Despite the handcuffs of the Wright Amendment, Southwest has grown into a massive change agent and disruptive force in the U.S. airline industry.

It started with a sketch on a napkin that outlined a triangle of flights between Dallas, San Antonio and Houston. Since beginning those flights in 1971, the airline has grown to a point where it now carries the largest number of U.S. passengers domestically on 3,600 flights a day, has reported 41 straight years of profit and has never laid off employees.

In the same period, the carcasses of deceased airlines piled up, while those that survived and now rank with Southwest in the big four are the products of chapter 11 bankruptcy filings and mega-mergers. In some of those mergers, both partners went through chapter 11 filings.

“The world has changed so much for the airline industry since 2001,” Mr. Kelly told reporters at Southwest’s sprawling campus near Love Field last week.

The world is also changing for Southwest, which began its first international flights earlier this year – including service between Baltimore-Washington International Airport and San Jose, Costa Rica, which was announced on Friday – and is sending strong signals that it is preparing to enter the Canadian market.

Southwest’s success is based on a few core principles:

o A relentless focus on keeping costs low;
o Use of a single type of airplane, the Boeing 737;
o Flights between city pairs or from point to point, rather than using a hub and spoke model;
o Maintaining a unique corporate culture with a heavy emphasis on fun.

“This is an airline that has made money in an industry that has had extraordinary volatility in terms of ups and downs and losses industry-wide that in some three or four-year periods have been in the $10- to $20-to $30-billion (U.S.) range,” said Jeffrey Rayport, a senior lecturer at the Harvard School of Business.

'But in the midst of record profit, international expansion and a new advertising campaign, there is some turbulence.'

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