Editor: Christopher Muise, the CEO and founder of TruPrice.net, one of the pioneers of airline fee tracking, has his own ideas about what the Southwest/AirTran merger will mean for the industry. He is not buying the Southwest line that they will remain a no-baggage-fee, single-class, open-seating airline after the merger with AirTran. He says the no-baggage-fee mantra will stay, but everything else may and probably will change. Plus, he adds an end-of-the-post shocker.
Make no mistake about it. Southwest already makes lots of money from fees, just not baggage fees. They don’t need baggage fees to make a profit. Southwest’s fees are extremely lucrative because of their sheer volume of enplanements. They dwarf the U.S. #2 airline, American (AA), in domestic passengers by more than 30 million passengers per year (100 million+ on Southwest versus about 80 million on AA. Plus, 18 million of AA’s passengers are international tickets that get first bags free and often free meals as well. (Some carriers even give away alcohol in coach on international flights). So, Southwest, especially if it swallows AirTran, does not have to abandon bags-fly-free or change their fee structure at all to make millions.
By keeping the same fee structure and adding AirTran’s traffic, they’ll make a bundle while still, rightfully, positioning themselves as the “Low Fee” carrier. In short, even with the much lower fees that Southwest charges, the volume of people more than makes up for the actual fee disparity when comparing identical fees liked checked bags, boarding priority, and ticket change fees. For that reason alone, I expect the Southwest fee structure to remain virtually intact. It’s a great branding advantage and gives them a massive market advantage over Delta whose fees are astronomically higher — all things being equal. And it may be a strong selling point to assuage the regulators who will be looking at yet again fewer options for the traveling public.
Seat assignments and first class may come
I challenge the assumption that Southwest will remain one class; just the opposite. According to the press release “The result is an airline that is better prepared to meet the challenges of an increasingly competitive airline environment and take advantage of strategic opportunities better than ever before.” This is because Southwest’s model has met its strategic end. It has reached the saturation point with no wi-fi, no in-flight entertainment, and no first class.
Perhaps not immediately, I predict that all of these will be imported from AirTran and will be part of a new business model offering the best of both worlds: Southwest’s incredible service reputation, significant operational economies of scale based on Southwest’s simple fleet model, coupled with the on-board goodies of AirTran that Southwest needs to stay competitive.
This purchase by Southwest is an admission that their fuel hedges can no longer drive their operating profit. It says that the mega mergers have squeezed their profit margins and that flying into secondary airports to stimulate travel has become an exhausted strategy. It further says that international travel and more passenger services will be required to stay competitive. AirTran has many of these and has a limited, but established, international presence.
This is a brilliant move by Southwest. And it’s no secret that AirTran’s Fornaro has had a “For Sale” sign for a few years. Let’s face it, alone, Southwest and AirTran were swimming upstream. (The UAL/CO merger only highlighted this.) But together, they mix and match a brilliant winning formula with new airplanes with all the goodies.
If I’m Delta, it will be a nightmare to have Southwest in my back yard.
Make no mistake, this latest news is just another ripple in the continuing airline consolidation. American Airlines and US Airways MUST respond. But don’t fall for the logic that they may merge. The better scenario is a quiet landscape for a while then an AA offer on the new Southwest – you heard it here first.
Christopher Muise comments can be found regularly in the TruPrice.net Blog.