No-Frills Southwest May Have to Start Charging for Some Frills

(Bloomberg) -- Southwest Airlines Co. Chief Executive Officer Gary Kelly piqued investor curiosity recently when he said new ways to generate revenue are “under construction.’’

The discounter barely has a toe in the big pool of money that rivals collect from so-called ancillary fees for, say, food bought on board or preferred seating. And Kelly has ruled out some of the juiciest mainstays at other airlines, such as charges for checked bags, assigned seats and reservation changes.

“That’s not what we do,” he said on an earnings call. Southwest has “better opportunities that fit our brand.’’

Kelly won’t go into specifics just yet, and Southwest declined to provide additional comment. That’s fueling a guessing game on Wall Street about what he has up his sleeve to boost revenue as Southwest grapples with an increase in costs. Here are some likely options:

More Perks

While Southwest flies just coach cabins and has no assigned seats, it does have several fare categories, including Business Select, which comes with a free drink, a spot among the first 15 passengers to board and expedited security screening in some locations.

Southwest could provide additional perks at higher prices, said Adam Hackel, an Imperial Capital analyst. A passenger might pay extra to gain access to priority screening, for example, or to get her bag in the first wave off the luggage carousel. The extras could be sold separately, like Southwest’s Early Bird boarding option, or built into fare categories along the lines of Business Select.

The Dallas-based airline spent $500 million to replace its 30-year-old reservation system in 2017, in part to build new revenue options like those. The updated platform also made it easier for Southwest to change fares, seat inventories and flight schedules.

Forward Seating

Southwest could also take Business Select a step further -- think business-class lite. The carrier always has dismissed the idea of offering a first- or business-class cabin, so isn’t expected to add seats with more legroom for a higher fare.

It could, however, charge more for guaranteed access to as many as four rows near the front of the plane, said Jamie Baker, an analyst at JPMorgan Chase & Co.

Those 24 seats might appeal to business travelers who would avoid standing in boarding lines yet be assured a spot toward the front of the plane, with last-on/first-off benefits and dedicated bin space. Such a system could add from 10 cents to $1 a share in annual earnings, depending on the pricing, Baker said in a report.

“The concept checks four important boxes: ease of execution, ease of passenger understanding, profits, and the broader preservation of the existing Southwest experience,” he wrote.

Up-Selling Opportunities

Instead of -- or in addition to -- adding perks on the high end, Southwest could reduce benefits in cheaper fare categories. One possibility, for example, would be not allowing a passenger who cancels a ticket to use the amount paid toward another flight.

This plan would take a page from the many rivals who offer basic-economy fares. Those bare-bones tickets often entice travelers to buy more-expensive options. While Southwest has said basic economy per se is off the table, a few changes could have the same up-selling effect.

Seller Beware

Ancillary fees accounted for just 3.1 percent of Southwest’s passenger revenue through the first nine months of last year, lagging well behind Delta Air Lines Inc. and United Continental Holdings Inc. U.S. carriers as a whole took in more than $3.6 billion in checked-bag fees alone during the period, according to the U.S. Transportation Department.

Southwest will have to tread carefully, though, to avoid damaging the brand it has cultivated for transparency in fares and not peppering passengers with a slew of fees.

“As long as Southwest offers these as add-ons and the consumer sees they are appealing, and Southwest doesn’t take anything from its core value proposition, they have a reasonable chance of success,” said Henry Harteveldt, founder of Atmosphere Research Group, which focuses on the travel industry.

Southwest’s intention to find new revenue sources makes sense, he said. “It’s been timid and allowed itself to be held hostage by its legacy, as opposed to being innovative and saying, ‘We can keep our legacy and still innovate and add products that would appeal to customers.’”

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Tony Robinson

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