Southwest mulls more international service

updated 1:35 p.m. ET Nov. 11, 2008

DALLAS - One of the knocks on Southwest Airlines — you'll hear it from fans of other carriers — is that you can't fly to London or Paris on one of its planes.

That won't change right away, but Southwest is finally taking baby steps into international service.

This week, it announced a deal to sell travel to Mexico in 2010 with partner Volaris, a well-financed Mexican carrier that is just two years old. Southwest has already said it would team with WestJet to offer U.S.-Canada travel by late 2009.

Southwest executives are overseeing a technology makeover that will modernize its reservations system to handle more international travel. They are talking to other carriers about service to Hawaii and the Caribbean.

Competitors are paying close attention. Some may fear that Southwest Airlines Co. could emerge as a low-cost rival on their lucrative international routes, just as it pushed beyond Texas and grew into the nation's largest carrier by number of domestic passengers.

Others are courting Southwest. Last month, the chief executive of AirTran Airways said he would like to talk to Southwest about selling seats on each other's planes and sharing the revenue.

Such arrangements are called code-sharing, because one airline puts its name or code on a flight operated by the other.

Code-sharing is considered a low-risk way for airlines to expand their networks without the added cost of more planes and employees. It figures to be a particularly important strategy for Southwest, which is alone among the nation's major carriers in not belonging to one of three big global alliances or teams of airlines.

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Go-it-alone Southwest's first foray into code-sharing was an afterthought — part of a move to expand at Chicago's Midway Airport in 2004. Southwest acquired six gates that had been controlled by ATA Airlines in exchange for making a cash infusion into ATA and beginning a marketing joint venture.

Southwest said it took in $50 million in revenue from the code-sharing deal in 2005. An extra benefit — the best part of the deal for some travelers — was that Southwest customers could cash in frequent-flier points for free trips on ATA to Hawaii, which Southwest does not serve.

Soon Southwest was considering expanding the partnership to include selling seats on ATA flights to Canada, Mexico and the Caribbean. But ATA weakened and cut flights. It filed for bankruptcy and stopped flying in April. Undetered by ATA's demise, Southwest's interest in code-sharing possibilities grew.

The timing for such agreements is also important.

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Since 2001, Southwest has enjoyed fortress-like strength in the troubled U.S. airline industry, earning consistent profits because it bet right on the direction of oil prices several years ago.

But the castle walls are showing cracks.

Last month, Southwest reported its first quarterly loss since early 1991. Its wildly successful fuel-hedging bets are winding down and losing value. Its once enormous financial advantage over other airlines is shrinking.

To avoid big losses or draconian spending cuts, Southwest must raise more money — and fast.

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