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The last holdout falls: Southwest to add fees for missed flights, more to come

Dec 14, 2012 9:25 am

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How will this work with its till-now consumer-friendly brand positioning?

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Southwest Airlines Co., the discount carrier with the “Bags Fly Free” slogan, forecast $100 million in annual revenue from fee changes that will include the first charges for no-shows on flights and premium boarding positions.

The new fees and increases to existing charges will start in the first quarter, Chief Commercial Officer Bob Jordan said today at an investor meeting in New York. Dallas-based Southwest expects to boost revenue by $1.1 billion in 2013 as it works to cover rising labor and jet-fuel costs amid growing competition.

Southwest’s fee moves mark a departure from its reputation as a no-frills carrier that bucked the rest of the industry by letting passengers check two bags for free and change flights without penalty. The no-show fee would be levied on passengers who don’t cancel tickets before a flight.

“This one is pretty industry standard,” Chief Executive Officer Gary Kelly said. “Customers understand we could all benefit from the opportunity to resell a seat. Once the airplane takes off and it’s empty, we can’t ever resell it.”

Kelly didn’t rule out that other fees may be added in the future, saying “we don’t have a first bag fee idea for 2013 or a change fee.”

With the changes, Southwest expects “a doubling or more of earnings year over year” in 2013, Kelly said, without giving details. The forecast is based on unchanged economic conditions and fuel prices. Southwest’s net income through 2012’s first nine months was $343 million on $12.9 billion in sales.

Two Bags

Passengers can still check two pieces of luggage for free, although charges for a third checked bag will increase an unspecified amount, said Jordan, who is also president of the AirTran unit. The overweight-bag fee will double to $100.

Southwest already has a charge to reserve an early boarding slot, and will increase that fee to $12.50 from $10. Starting next year, passengers can get an early-boarding slot by paying a fee at the gate.

At AirTran, the first checked bag fee will rise to $25 from $20 and a second bag to $35 from $25, Jordan said.

“These are real, valuable and noteworthy changes, considering Southwest’s historical aversion to an unbundled product,” Hunter Keay, a Wolfe Trahan & Co. analyst, said in a note today. Keay, based in New York, maintained an underperform rating on Southwest.

Southwest rose less than 1 percent to $10.19 at the close of New York trading. The shares have climbed 19 percent this year, compared with a 27 percent increase on the Bloomberg U.S. Airlines Index.

Managing ‘Aggressively’

The elimination of 300 jobs by not filing open positions and anticipated retirements is part of $100 million in savings planned for 2013, Kelly said. The carrier had 46,048 employees at the end of September and has never laid off workers.

Kelly declared rising expenses Southwest’s enemy a year ago, after larger carriers such as Delta Air Lines Inc. restructured in bankruptcy. The changes by competitors cut Southwest’s cost advantage in half and pushed its employee pay rates to the highest in the industry.

“We are managing as aggressively as we dare to evolve the Southwest Airlines customer experience and operations to be successful in this environment,” Kelly said today.

The airline expects to meet its goal of a 15 percent return on invested capital in 2013, he said.

Southwest, the fourth-largest U.S. carrier, will change the way it schedules planes and people and the way it prepares jets between flights, raising $100 million in revenue, Jordan said. Another $100 million in 2013 will come from a change in its revenue management system.

Southwest bought AirTran Holdings Inc. in 2011 to expand its fleet and add service in Atlanta, the biggest market it didn’t yet serve. The two airlines will be able to share each other’s booking codes on flights starting in early 2013, with full integration not coming until the end of 2014.

The airline expects its loyalty program to add another $80 million in 2013, with $400 million in 2013 synergies from connecting Southwest and AirTran networks. New, more fuel- efficient aircraft and added seats will contribute “hundreds of millions” in incremental revenue next year, Southwest said.

–With assistance from Mary Jane Credeur in Atlanta. Editors: James Langford, Cecile Daurat

To contact the reporters on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net.

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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