Southwest Airlines Co. (NYSE: LUV) has been a changing carrier in recent years. It has resisted the urge to bilk its customers with endless fees, it has acquired AirTran, it has started flying outside of the continental United States and it has started to run into performance issues that historically were not the norm. Now a new issue may lie ahead: Southwest may look to start flying into Canada.
Southwest’s desire to expand is far from a secret. You might not be flying Southwest to Paris or Hong Kong any time soon, but flying into Toronto, Montreal, Calgary or Vancouver could be in the works.
A report in the Globe and Mail outlines some of the issues that make Canada a potential destination for Southwest. One issue to consider is that Southwest could bring in more competition to a market that is fairly expensive to fly into relative to U.S. destinations.
Another issue to consider is that Canada could push back if it wants to protect its carrier network. Air Canada’s woes of the past could become an issue again if a more stable and powerful competitor like Southwest came in and shook things up (Air Canada went into bankruptcy in 2003).
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Southwest is still growing revenues, but its model has started to look a bit more like many of the legacy carriers now that it has acquired AirTran. Revenue growth is expected to almost 5% in 2014 and to be more than 5% in 2015 as its efforts into Mexico and the Caribbean become more realized. Can Canada bring that next leg of near-domestic growth? Perhaps.
The thought of entering Canada is not an entirely new one for Southwest. What is different this time in that Globe and Mail article that has differed from articles in the past is that management seemed to indicate that it may be closer to a “when” rather than “if.”
At $32.91, Southwest shares have traded in a 52-week range of $13.69 to $33.44. Its market cap is $22.5 billion, and the stock trades at close to 15.5 times expected 2015 earnings per share.
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