Challenges of Southwest Airlines

Topics: Southwest Airlines, Airline, Low-cost carrier Pages: 9 (3249 words) Published: July 13, 2013
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Southwest Airlines has long gotten a free ride in terms of its great brand reputation because of its “bags fly free” policy for the first two checked bags. But, Southwest revealed yesterday that it anticipates $100 million in new fee revenue for 2013 as it will be charging no-show fees when passengers with restricted tickets don’t cancel before the flight; selling open A1 to A15 boarding positions at the gate, and increasing existing ancillary fees, perhaps for excess baggage, pets, and unaccompanied minors. Southwest has yet to detail the breakdown of its new fees, which are slated to take effect early in 2013. Southwest’s new fee blitz will undoubtedly conflict with one of the key goals it espoused yesterday at an investors’ day: to “maintain brand, culture & operational excellence.”

Keeping its passengers enthusiastic about the Southwest brand will certainly clash with fee increases and new programs that are expected to bring in an additional $100 million in new ancillary revenue in 2013.

If you expect to see a whole lot of the old Southwest in the future, you may be disappointed. Or at least passengers should brace themselves for the changes. Just take into account what Bob Jordan, Southwest’s chief commercial officer and president of its AirTran subsidiary told investors and analysts about the new ancillary revenue initiatives: Finally, we’re focused on several new or improved ancillary revenue opportunities. The industry and consumer behavior has changed substantially over the past 10 years, and we know that. At Southwest,we realized that we cannot sit still if things change, and I would tell you that we have not. Southwest even sees itself in somewhat of a paternalistic role, teaching its customers how to change their behavior with the new no-show fees. “This should add ancillary revenue and promote customer behavior that allows us to resell the open seat prior to departure,” Jordan said. “So you have a double win there.” Southwest has still not revealed what happens with AirTran’s checked bag fees once the integration of the two airlines is complete, although Southwest has argued that its bags fly free policy for the first two checked bags has been advantageous when compared with AirTran’s bag fees. Despite the public relations plaudits that Southwest receives from its two checked bags for free policy, many people do not realize that the airline is one of the leaders in collecting ancillary fees before and after those two bags are loaded onto the plane. In the third quarter of 2012 alone, Southwest took in about $75 million from ancillary fees, including $41 million for EarlyBird Check-in, and $19 to $20 million for pets, unaccompanied minors, and excess bags. And, here’s a chart from IdeaWorks Company showing that Southwest took fifth place among the top 10 airlines in ancillary revenue in 2011. These fees, including partner sales and commissions from its Rapid Rewards frequent flyer program, accounted for nearly € 950 million ($1.2 billion) in 2011.

As Southwest cranks up its ancillary revenue in 2013, the airline will be hard-pressed to keep its brand reputation unscathed.

For more than three decades, Southwest Airlines has been the star of the airline business, with nonstop growth, an unprecedented string of profits and a culture that transcended the industry’s notoriously bitter labor relations. But as it flies into 2009, the Dallas-based discount carrier is under pressure as never before: Southwest lost $176 million during the second half of last year, its first two unprofitable quarters in a row. The airline is retreating for the first time, cutting flights and slowing its flow of new airplanes after years of steady expansion. A vaunted fuel-hedging program, which gave Southwest a significant advantage over rivals, turned negative when the price of oil plunged, costing Southwest hundreds of millions of...
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