Southwest Airlines To Spread Its Wings Overseas

| About: Southwest Airlines (LUV)
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Investors in the troubled U.S. airline industry are familiar with Southwest Airlines Company (LUV). It is the largest low-cost carrier in the United States and has for years been able to turn low costs and friendly service into a relatively (to its peers) high margin, profitable business.

It is also well-run on the financial side as, unlike it main competitors, its total debt is approximately equal to its cash position. Most other major airlines have high debt in proportion to cash, which has led to a series of bankruptcies for a number of its competitors such as AMR Corporation (AAMRQ.PK) which is still in bankruptcy and US Airways Group (LCC) which was in bankruptcy twice in the last decade.

But now, changes are in the wind for Southwest. It is busy assembling the pieces necessary for a concerted major-time move into territory where it has rarely ventured . . . international markets.

Southwest's senior management has set a goal of doubling within five years the amount of overseas flying the airline does, which is very small at the moment. Last year's acquisition of AirTran, the biggest in the company's history, was one step toward international expansion as AirTran brought with it short-haul overseas destinations generating about $75 million in annual revenues.

So far this year, the company has taken a series of steps in order to make this goal of management a reality. Some steps taken include upgrades to both its aircraft fleet and its IT system (through European firm Amadeus). Southwest has also announced plans to build a new international terminal in Houston. It is also developing a number of new routes for its AirTran subsidiary - focused mainly on destinations in Mexico - and is eying other opportunities in South America.

These plans for an international terminal and flights are serving as a thorn in the side to United Continental Holdings (UAL). From its George Bush Intercontinental Airport hub, United serves a large number of Latin American destinations. It is so worried about Southwest Airlines eating its lunch again that it even threatened to cut flights from the airport in Houston if Southwest is allowed to build the terminal.

Some investors may be wondering why the heck Southwest Airlines is even thinking about such a move away from its very successful domestic business. The answer is simply that the company can see that, over the past 10 years in the United States, domestic air traffic has basically been stagnant. The company is looking to renew its growth as it has seen in the past few years its cost base edge up as it has matured as a company.

It is also trying to play catch-up to other low-cost carriers such as Spirit Airlines (SAVE) which has been flying abroad since 2003. In 2011, about 16 percent of the carrier's flying was to places such as Costa Rica and the Bahamas from its Miami hub.

Flying internationally in a major way will certainly be a big change for Southwest Airlines. It will have to learn how to handle foreign currencies and overseas politics among a host of items. But it has been successful to date in nearly every venture it has undertaken. Do not be surprised if, in a few years, it is a large international carrier and a very successful one.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.