Competition from Small Caps has Southwest Airlines revising Business Model (LUV, SAVE, JBLU)

Southwest Airlines must alter business model to Prosper

Dec 19, 2011 6:35:06 AM PST | 579 View(s) | No Comment(s) - Post a Comment Rating

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SAVE
$32.99 +$0.42 +1.29%
JBLU
$6.40 +$0.09 +1.43%
DB
$46.36 +$0.60 +1.31%
LUV
$13.86 +$0.08 +0.58%

Southwest Arilines (NYSE: LUV) has been so successful that competition from small cap, discount carriers such as Spirit Airlines (NASDAQ: SAVE) and JetBlue (NASDAQ: JBLU) utilizing aspects of its business models has clouds on the horizon.

It has been said that imitation is the sincerest form of flattery. What has worked for Southwest Airlines (LUV) that is now working for JetBlue (JBLU) and Spirit Airlines (SAVE) has the chief executive officer of Southwest Airlines deeply concerned, according to an article in The Wall Street Journal by Susan Carey and Jack Nicas. In the Wall Street Journal piece, "Rivals Invade Southwest's Air Space," a memo from Gary Kelly, the Chief Executive Officer of Southwest Airlines, stated that, from this competition, "our advantage is cut in half."

As with most air carriers, this year has been trying for Southwest Airlines. Year to date, the stock is down more than 30%. Quarterly earnings growth is a negative 164%. Now around $8.70, the stock is down from its high for the year of $13.70. By contrast, Spirit Airlines (SAVE) is up more than 30%, year to date.

Tougher times for Southwest Airlines (LUV) has been reflected in numerous changes. The Rapid Rewards program has been revised. There have been alterations to the reusing funds from previous tickets. Advance boarding can be purchased.

More changes are needed, suggested Michael Linenberg with Deutsche Bank (NYSE: DB). From the Wall Street Journal article by Carey and Nicas, Lineneberg "suggested that to increase revenue Southwest may have to add international routes, charge passengers for assigned seating, operate red-eye overnight fligths, and buy more types of aircraft to better match supply and demand."

Change is in the air for Southwest Airlines (LUV).