Skift Take

Other airlines are trying to segment their customers as much as possible. But that's not something Southwest plans to copy.

Southwest Airlines is watching as its competitors begin to more carefully segment customers, allotting perks based on how much passengers paid, but it does not plan to copy American Airlines, United Airlines, and Delta Air Lines, Southwest CEO Gary Kelly said Thursday.

“We want to protect our brand,” Kelly said at Southwest’s investor day. “Our brand is really good. We don’t want to pull threads that cause the whole thing to unravel.”

But for Southwest, that’s only part of it. Unlike its competitors, who use sophisticated software allowing them to target offers to individual customers, Southwest still relies on an antiquated platform to manage its domestic flights. In many cases, Southwest cannot segment customers, even when it wants to.

That should change next year, when Southwest finally will adopt a new reservations system that will give it similar capabilities as other airlines. It will allow Southwest to assign seats in advance, though executives have said they may still stick with open seating, even if that approach makes it difficult for the airline to earn extra revenue from the best seats.

The new technology also will let Southwest vary prices for its ancillary revenue products based on demand. Today, prices usually are set in advance and generally do not fluctuate much.

During Thursday’s investor day, several analysts pushed Southwest to make the most of its new system, using it to wring more revenue from customers. But executives repeatedly said they wanted to be careful, saying they fear levying more fees would make Southwest too much like its competitors.

“We have lots and lots of evidence that our approach – no bag fees, no change fees, transparency – is a winner,” said Bob Jordan, Southwest’s chief commercial officer. “So a move to something different as a model, whether that’s a segmented product or an overall model change, is a loser. We want to be very careful.”

Southwest’s lack of bag fees still confuses some analysts, including J.P. Morgan’s Jamie Baker. He asked Kelly why Southwest does not test bag fees in some markets to gauge whether customers would revolt. Other low-cost airlines, including JetBlue Airways and Canada’s WestJet Airlines, held off on instituting fees, believing their customers might not accept them. But when each airline finally added them, there was little backlash, and revenues improved considereably.

Kelly reiterated it is unlikely Southwest would implement bag fees, but he said it will experiment with ideas to increase revenue without hurting the brand.

“We are going to make changes,” he said. “We are going to evolve.”

In other matters, Southwest told investors it had restructured its orders for new Boeing aircraft. It will add 67 fewer Boeing 737 Max aircraft than expected between 2019 and 2022, taking them instead between 2023 and 2025.

In deferring the aircraft, Southwest said it had two goals. First, it now wants to grow the fleet by only about 2 percent each year. And second, it wants to control its capital expenditures budget.

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Tags: ancillary revenue, bag fees, southwest airlines

Photo credit: Southwest wants to increase ancillary revenues without hurting its brand. 178594 / 178594

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