Transport Airlines

Southwest won’t debut bag fees because it would lose $1 billion per year

@denschaal

Apr 01, 2013 1:46 pm

Skift Take

Southwest officials aren’t do-gooders when it comes to their lack of bag fees. They just know it is good for business.

— Dennis Schaal

Free Report: The Changing Business of Extended-Stay Hotels

Southwest Airlines

Bag all the talk about Southwest dumping its Bags Fly Free policy. It is not going to happen anytime soon. Southwest Airlines


Southwest’s very corporate new ad campaign doesn’t have a trace of maverick in it, and that led the Los Angeles Times and some analysts to speculate that the airline may give up on its first two checked bags for free policy.

We’re not buying it.

Yes, the new campaign is geared to show that the Southwest brand is much more than free checked bags. And, the airline clearly doesn’t worship at the alter of its Bags Fly Free policy.

Southwest charges plenty of fees for early check-in, excess bags, and pets, but the airline calculates that charging for the first two checked bags would roll back its market share gains over the last few years.

And, instead of bringing in new revenue, charging for the first two checked bags would actually cost Southwest about $1 billion annually.

Although Southwest could one day indeed change its bag-fee policy, don’t expect it to mess with it anytime soon.

On January 24, 2013, a financial analyst asked Southwest CEO Gary Kelly to detail how the airline has viewed the bag fee question over the years, and Kelly stated:

“Oh, no. I think you’re exactly right. And of course, the longer — the more the time goes by, the more chance we have to research this and experiment. But our judgment at the time was that we would be revenue positive by virtue of the fact that we would get more customers, and that would outweigh the direct fee revenue. In the intervening years from — — that was lost in ’09. In the intervening years, our market share, adjusting for capacity changes, has been up as much as 2 percentage points at times. So yes, we’ve consistently shared that the best estimate that we had was about $1 billion increase annually from these market share gains, which we attribute much of that to our baggage policy.

“What marketing has begun to do more scientifically here in 2012 is much more specific research. Because now customers know. I mean, they know what we do. They know what others do. And so you can introduce a series of questions. And in doing that, interestingly enough, it supports the argument that we’ve been making that it would cost us, and it would cost us something close to $1 billion. Now who knows if that is true until you try to do that. But in any event, that is our judgment. And we don’t have any plans to charge for bags at this time.”

It isn’t that Southwest is morally opposed to fees on the two first checked bags. The airline, however, believes it would be bad for business.

Asked whether bag fees would hurt the Southwest brand, Kelly said: “Well, customers hate bag fees, Hunter [Keay of Wolfe Trahan & Co.] So I think that by definition, there would be an impact to the brand.”

Speaking more recently, on March 4 at the JPMorgan Aviation, Transportation and Defense conference, Southwest CFO Tammy Romo, talked about the reasoning behind the new ad campaign, and how the Bags Fly Free policy continues to be a differentiator for the airline.

“I can give you my, at least, my own views on that,” Romo said. “I don’t think our brand is Bags Fly Free, that’s not who we are. As I mentioned, our brand is the affordable fares that you get with Southwest and the friendly, warm service that you get from our employees. So I don’t think — an advertising campaign is not your brand. So at least, that’s my belief.

“And we’ll continue to look at our plan and adjust as we need to meet our financial objectives. Now again, at least so far, based on our internal analysis, we certainly have not concluded that charging for bags would get us there because we have grown our market share pretty dramatically over the period of time that you’re referring to. So — but as always, we’ll continue to evaluate that. But if we can continue to not charge for bags, that certainly would be a differentiator. But do I personally think that’s critical to the brand? I just — I’d kind of put that in a different category.”

Tags: ,

Follow @denschaal

Next Up

More on Skift

National Parks’ Centennial Campaign Expected to Boost Outdoor Recreation
4 Tourism Trends We’re Tracking at Skift This Week
Marriott Uses its Own Staff to Recruit Employees in New Campaign
Free Webinar: How To Effectively Personalize Marketing Across Travel Sectors