Southwest's Gain Is United's Loss
Southwest Airlines (NYS: LUV) is making a play to be a major carrier for routes into Central and South America, greasing the skids by offering to spend $100 million to build an international terminal at Houston's Hobby Airport. United Continental (NYS: UAL) is crying foul. But it probably won't stop Southwest from grabbing some choice market share.
When my baby smiles at me, I go to Rio
The domestic airline industry might be sluggish these days, but that's not the case elsewhere in the world. According to research conducted by MasterCard, visitor numbers are up throughout Latin America. Rio de Janeiro, for example, saw a 27.5% year-over-year boost between 2010 and 2011, while Lima gained a little more than 20%, and Buenos Aires posted growth of 15%. Of the 10 cities surveyed for the poll, seven saw year-over-year gains in their visitor numbers.
Two of the three laggards saw only slight dips -- San Jose, Costa Rica, with 1.6% and Quito, Ecuador, at 2.7. The sharpest fall was recorded by Santo Domingo, Dominican Republic, but its drop of 9.4% was not even half the gain enjoyed by Lima.
So it's no wonder Southwest wants to get in on the action. At the moment, the airline has no international route of its own, although its recently acquired subsidiary AirTran operates a handful of flights to the Caribbean and Mexico.
Missing out on destinations south of our border would cede market to big operators like United and American Airlines (OTC: AAMRQ), major South American carriers like LAN (NYS: LFL) , and feisty small fry like Spirit Airlines (NAS: SAVE) . All have deep hooks and/or solid niches in the U.S.-to-Latin America market. American is the only U.S. airline flying to key smaller destinations such as Bolivia, LAN derived a full one-fifth of its 2011 revenue from el America del Norte, and Spirit operates in just as many airports south of our border as it does inside the U.S.
Houston is the perfect base for Central and South American flights. Not only does it sit right on the Gulf of Mexico, it's also home to a big Latin population (nearly 44% of the city's 2.1 million inhabitants). So with a little marketing savvy, Southwest can build a big customer list from Houston locals with Hispanic roots.
The company's to be commended for attacking this market so boldly and so directly by offering the city that $100 million for the new international terminal at Hobby. This is probably a better move than trying to get a few slots at George H.W. Bush Airport, the city's current international terminal, which also happens to be a major United hub. It's also, incidentally, the latter company's gateway to those juicy Latin American markets.
Money well spent
United is pushing against Southwest's move, of course, but despite the time, effort, and research it's put into the fight, it seems inevitable that it'll lose. Many American municipalities, like Houston, have strained budgets these days, so it's hard to say no when a company offers to subsidize an international airline terminal so heavily. And who can refuse any firm building a structure that will employ scores of locals and open a particular market a little wider?
Southwest is also in the enviable position of having a relatively good amount of wiggle room in relation to its bank account. At the end of its most recent quarter, the company's cash position stood at more than $1.5 billion. Also, there might be more flowing in; the airline industry's No. 1 bugaboo, fuel prices, looks set to drop following a recent fall in the price of crude to below $90 per barrel.
The airline is obviously feeling flush these days. Earlier this month it announced it was more than doubling its dividend. OK, OK, that meant a tiny bump of 0.55 cents per share, but at least the company pays out to its shareholders. At the moment, no major domestic competitor, be it a biggie like United or one of those little hoppers such as Spirit, can say the same. And given their usually thin profit margins, none are likely to offer a dividend in the near future.
The airline industry is a challenging one and it's hard for its participants to improve their financials. So it's a good sign when one of them finds a smart way to do so. Look for Southwest to succeed in its Houston gambit, and for the discount carrier to poach some of the Latin American business from its full-priced neighbor United once the new terminal comes online. Andale!
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At the time this article was published Fool contributor Eric Volkman owns no stocks mentioned in the story above. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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