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New customers who apply for the Southwest credit card by Monday, February 11, and meet minimum spending requirements will earn one of the airline's companion passes for the rest of the year. The deal sounds too good to be true. But Southwest knows what it's doing. This is probably smart business.

Before Mark Goshgarian, a consultant, applied for the Southwest Airlines credit card more than a year ago, he calculated how much value he could extract from it, sketching his 2018 travel plans, month by month.

He had good reason. Once approved, he would earn a Southwest companion pass, allowing him to bring another person on each trip for free. It’s a perk Southwest usually reserves for its most lucrative frequent flyers, many of whom spend $10,000 or more per year on high-priced tickets. But in late 2017, Southwest, locked in a skirmish with Alaska Airlines over which would be California’s preferred short-haul airline, offered it to any state resident who signed up for its credit card and made one purchase.

“We liked to travel a lot and we saw it as, ‘shoot, now we can get a crazy good deal,”‘ said Goshgarian, 35, who used it about eight times from John Wayne Airport in Orange County, California, usually with his girlfriend. He estimates they saved as much as $2,400 flying to Sacramento, San Francisco, Phoenix, Albuquerque in the United States, and Los Cabos, Mexico.

Now the offer is back, and while the terms are less generous, it is open to consumers nationwide. This time, new customers who apply by Monday, Feb. 11, will earn a companion pass for 2019 if they spend $4,000 within three months. By the time customers receive the pass, they might have just seven months to use it, but savvy travelers might extract more value from it than Goshgarian did in a year, as it works on every fare with no blackout dates.

Is this offer good business? The answer is likely yes. Credit cards generate significant margins for airlines, and while Southwest’s deal with JP Morgan Chase is lucrative, the airline is not generating as much cash as many of its competitors do with their credit card partnerships. Consumers may jump for the companion pass — and the 30,000 points that come as a sign-up bonus — and apply for a credit card they would otherwise ignore.

Some customers may receive outsized value. But in the aggregate, Southwest probably will win. It should not only add to its credit card revenue, but also may attract customers from other airlines who could be intrigued by the promotion. Once they start flying Southwest, perhaps they’ll stay when the pass expires.

“Southwest has always done things differently and the too-good-to-pass up free companion pass on the co-brand stays true to the brand strategy,” said Mark Ross-Smith, former head of Malaysia Airlines’ loyalty program. “Forty-six years of profitability is proof that Southwest doesn’t do things by accident or without it being part of the bigger picture.”

Here are some reasons Southwest’s promotion is not as risky as it sounds.

It Doesn’t Dilute Much Revenue

Statistically speaking, most passengers travel alone. Yes, on weekends and holidays that number jumps, but on many airlines, the average number of people on a record locator is fewer than two.

That means, on many flights, Southwest isn’t losing money with its offer. The airline earns normal revenue from the single traveler, and then gives a free seat to the companion. If the companion would not have gone otherwise, Southwest is not losing revenue.

Southwest only will take a hit on full flights, when the companion pass displaces a paying passenger. But Southwest has more empty seats, on average, than some competitors. Its load factor for the fourth quarter was 83.5 percent, about 2 points less than Delta’s.

“They run with load factors slightly behind everyone else,” said Carlos Ozores, a principle at ICF, a consulting firm. “They have the capacity for it.”

There will be exceptions. Some companions would have traveled even without the pass, and Southwest will lose revenue from tickets they would have bought. And some flights may sell out, keeping the airline from selling as many seats as it could.

But Southwest and Chase have modeled the likely outcomes and are confident the promotion will work, said Nathaniel Felsher, former president and chief strategy officer at Aimia, which until last month owned Air Canada’s frequent flyer program.

“This is one of those promotions where Southwest and Chase have run the numbers and decided that it will generate maximum marketing bang without a substantial impact on either existing customers or margins,” he said.

Even sophisticated companies sometimes miscalculate, unintentionally offering a money-losing promotion. In this case, couples could quit their jobs and travel around North America for eight or nine months, flying for half price every week or weekend. Or college students might spend the summer traveling nonstop.

Some customers will take advantage. But Felsher said he predicts many more will use the promotion less than they expected.

“How many flights could someone take?” he said. “I have always loved the idea of having a companion pass but when I think about my ability to actually utilize it I get depressed.”

Extra Revenue

There will be positives for revenue, too, as the companion pass can stimulate demand and fill seats that might have gone unsold.

If Goshgarian hadn’t earned a companion pass last year, he said he doubts he would have flown so much. And even if he had, he might have been more price-sensitive, skipping travel if fares were higher than he wanted.

For one trip, he paid $500 roundtrip, far more than he usually pays.

“I justified paying that much because we had the companion pass,” he said. “If we were buying those tickets individually, I don’t think we we would have gone on that trip.”

Southwest spokesman Ro Hawthorne pointed to another revenue-producing benefit. He said customers with the companion pass spend more on the travel experience than other passengers.

“They are valuable to us because they do more of the things we like — more flights, more card spend, more ancillaries,” including priority boarding, he said.

It’ll Juice Credit Card Applications

When consumers apply for a travel-branded credit card, they usually think big. They may dream of redeeming points for business or first class seats to far-flung places. Or they may think about booking a hotel room they usually can’t afford.

Card companies and travel brands know they need to make their programs aspirational to spur applications. But Southwest has had trouble with this aspect of its program.

Until recently, it did to not fly outside the United States, and it does not have first or business class. And while its program provides reasonable value, how many people covet a credit card so they can travel for free between Chicago and Omaha?

It’s a big reason Southwest has underperformed American Airlines, United Airlines and Delta Air Lines on credit card revenue. Last year, Southwest earned roughly $1.1 billion in profit from selling points to Chase, according to Stifel analyst Joe DeNardi. That’s up 10 percent, year-over-year, but it’s also about how much American made in the first half of the year from its credit card deals, DeNardi’s calculations show.

This year, Southwest will expand to Hawaii, an aspirational destination the airline hopes will increase credit card sign-ups. But it wanted to push applications higher, so it dangled the companion pass.

The pass is probably its top (and only) aspirational product. Hawthorne called it, “arguably the best benefit/perk in the airline industry.”

Of course, customers may cancel as soon as the benefit ends. But many more will probably keep it, if only because canceling often seems like it is more trouble than it’s worth.

Goshgarian said last month he plans to drop his card, but several weeks after his promotion ended, he still hasn’t done so. “I’ve been too lazy,” he said.

Attracting new customers

The most lucrative U.S. airline customers generally stick with one carrier because they like the perks loyalty provides, such as free upgrades (on full-service airlines), fee waivers, and improved customer service.

It’s hard to persuade customers to change from one preferred carrier to another. But for the right promotion, a customer could consider switching, Ozores said

“The companion pass is a way to win this business over,” he said. “With an offer like this, you might actually tempt people to try Southwest. I don’t think it’s just a credit card play. It’s a way to say, ‘Hey, give us a shot. Try us out.'”

He said more business travelers likely would prefer Southwest if they gave it a chance. Many still view Southwest as a no-frills airline, but the carrier has improved its passenger experience in recent years. Today, Southwest’s product and service in economy class is nearly indistinguishable from a legacy airline’s. (It’s biggest quirk is that it still does not assign seats.)

“Once you fly them, you realize the service is great,” Ozores said. “It is actually comparable to mainline carriers in economy. I think it is a way to win valuable customers who have never given you the time of day.”

Those customers are likely far less price-conscious than the average Southwest passenger and could be worth a lot to the airline long-term, Ross-Smith said.

“The type of passenger who use the benefit already are likely above average spenders,” he said. “The card could be a tool to capture more passengers like these — lookalike passengers who buy business and premium tickets,” he said.

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Tags: airline innovation, frequent flyer programs, loyalty, southwest airlines

Photo credit: Southwest Airlines will begin flying to Hawaii later this year, in part because it hopes to boost sign-ups for its co-branded credit card. Pictured is a Boeing 737 on the ground in Honolulu. Southwest Airlines

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