Long known for its unique, customer-friendly commercial model, Southwest Airlines is now on a final course toward alignment with its main rivals after deciding to introduce bag fees starting May 28.
“It’s the slaying of a sacred cow,” United CEO Scott Kirby said of the Southwest policy change during comments at the J.P. Morgan Industrial Conference on March 11.
Southwest has long made its two-bags-free policy a centerpiece of its customer offering, advertising it aggressively.
Last September, when the airline announced a transformation plan to bolster its faltering financial performance, executives were resolute that they would not get rid of free checked bags. The airline said in-house studies showed that the policy generates market-share gains in excess of lost revenue from not charging for bags.
However, CEO Bob Jordan said that conclusion had been upended by what the airline has observed since beginning to display and sell flights on metasearch engines and OTAs over the past 10 months.
“We saw no share shift to Southwest Airlines for the fact that we have better policies,” he said at the J.P. Morgan conference. “What we did see is that customers are incredibly, in those channels, sensitive to price.”
So now, the airline will mimic other carriers by focusing on more fare segmentation. That will include the May 28 introduction of a basic economy fare to attract bargain flyers and give Southwest a greater opportunity to upsell.
Southwest also expects the introduction of bag fees to increase demand for its co-branded credit card because cardholders will get one free checked bag — a common policy across the U.S. airline industry.
Southwest has made other changes over the past two weeks, include reinstituting flight credit expirations after one year for most fares and substantially reducing the accrual of loyalty points for purchases of lower-end fare products Wanna Get Away and Wanna Get Away Plus.
Also this month, the carrier will implement dynamic Rapid Rewards redemption rates across its flights, a replacement of its long-standing model in which redemption costs correlated with a ticket’s cash cost.
With these latest changes, Southwest has announced a dizzying slate of initiatives since last May that represent the longtime disrupter’s transformation into a legacy carrier, said Delta president Glen Hauenstein at the J.P. Morgan event. Especially transformative will be the introduction of reserved seats and the sale of extra-legroom seats in the first quarter of next year.
Southwest’s move to an omni-platform merchandising strategy, including sales via Expedia and full displays on Kayak and Google Flights, has also been a major reversal. The airline started operating red-eye flights in February.
And, the carrier has begun seeking out airline partners, beginning last month with Icelandair. It has initiated aggressive cost-cutting, including laying off 15% of its corporate-level workforce.
Southwest expects these and other initiatives to cumulatively drive $1.8 billion in incremental earnings before interest and taxes this year, with $800 million from bag fees, the layoffs and other changes.
Disappointment for Southwest loyalists
The elimination of Southwest’s popular free-bags policy will certainly cause disillusionment among loyal customers.
“Clearly there are some customers who chose Southwest because of that, and now those customers are up for grabs. We’ll see how that plays out,” Delta’s Hauenstein said.
Brad Beakley, CEO of travel industry consultancy Hospitio, noted that one major advantage Southwest still has over competitors is its extensive point-to-point domestic network, which enables customers to avoid being routed through a small grouping of hubs.
He said Southwest must maintain its well-regarded internal and outward-facing company culture as it transforms.
“Customers can handle change, employees can handle change, but if the love is out of the process, if their soul isn’t in there, then they’re going to have a lot of trouble executing,” Beakley said.
Jordan said the airline will remain focused on such intangibles. Southwest, he said, has “the best people in the business, the best hospitality in the business, and none of that is going to change.”
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