Southwest-AirTran? What about fees? First class? Who should worry?

by Christopher Muise on September 28, 2010

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.

Bags-fly-free stays
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.

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  • Karen Shepard

    Please- Bought by AA—NO! Southwest has to stay as the top independent low cost airline. AA is not in the same league when it comes to customer service, working with agents, honesty, and their air service.

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  • Carlo

    I disagree – Southwest has made a terrific profit for it’s entire existence (save a couple of times when their fuel hedging didn’t pay off) by following this mantra – this thing you say is saturated. What Southwest has figured out is that all customers are gold, not just the new ones. People are loyal to Southwest because they like it exactly the way it is – no fees, no classes, great service. When Southwest tried to implement a seating strategy a while back, it was quietly dumped when someone must have realized people didn’t like it. People like Southwest because it is different from all the other airlines. If they become like every other airline, there is nothing left to make Southwest stand out. When that happens, they’ll start consistently losing money – just like every other airline.

  • Frank

    People like Southwest because it is different from all the other airlines.
    =====================================

    YES , IT IS.
    They offer no first class, no meals, no entertainment, no interlining of bags, no business class, no upgrades, no international frequent flyer program, no airline clubs…etc…etc….etc.

  • Kevin M

    Actually, the Southwest assigned seating test was deemed a failure, not because people didn’t like it, but because it resulted in slower boarding times, which directly impacted another Southwest advantage (fast turn-arounds on the ground, which gives their planes the ability to fly, on average, one extra flight segment per day–considerable extra revenue without the cost of another plane.

    Without that fast turn-around, Southwest can’t go to assigned seats, which means they can’t reserve a section for business or first class (because there’s no easy way to police that cabin, and those passengers would be opting to board in the midst of the “line up in order” boarding that Southwest uses now – further complicating things.

    Southwest is already rolling out Wi-Fi in its planes, and there’s no reason to assume it couldn’t roll out in-flight entertainment over time, as well, if they believe a sufficient number of passengers will pay enough to cover the costs and make money. If they do, that’s two more things they can offer their A-List customers for free, along with the free drinks and early boarding they already offer.

    With seat pitch fairly reasonable in coach, and load factors that frequently mean lots of middle seats unoccupied, Southwest coach is really not bad at all. It has a less than stellar reputation among people who are accustomed to paying a fortune to be pampered, but I don’t think those people were flying AirTran or Southwest anyway.

  • Barry Graham

    I hope you are right about first class, then I may just start flying SouthWest, as I did AirTran.

  • http://www.cockam.com ajaynejr

    RE: “When Southwest tried to implement a seating strategy a while back, it was quietly dumped when someone must have realized people didn’t like it.”

    The reason it failed, right in the testing phase, was that Southwest assigned seats randomly, no choice for the passenger regardless of booking date. Thus it met up with many instant complaints.

  • Carlo

    There were also plenty of complaints about assigned seating from people who hadn’t tried it yet. If there were other problems from those who did use the assigned seating, well, that’s just more fuel on the fire. In any case, it was dropped and because it didn’t work. Southwest customers continue fly Southwest because they do things the Southwest way. And for those who feel like they must have the first class or business class section, crummy meals (that aren’t free anymore anyway – really, you want to pay $9 for a sandwich? I’d rather buy something better in the airport and bring it with me), entertainment, interlining of bags (whatever that is? Guess I haven’t missed it.), upgrades (one class – why would you need an upgrade?), international frequent flyer programs (no international flights, so why would you need this?), and airline clubs, there are lots of other airlines for you to choose. Southwest isn’t hurting much for business. I think that’s an indication of what people appreciate, along with a willingness to serve markets the legacy airlines don’t give a hoot about.

  • http://www.chrisbrunner.com/ Chris Brunner

    This article says it will be the other way around (AirTran will lose its First Class):
    http://www.suntimes.com/business/2814840,CST-NWS-firstclass19.article

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  • Dnspartners

    Nope – will not happen. No first class, as that would lose seats and profits. And by the way, just flew 2 planes on Southwest in June that had Wi-Fi, so your facts are way out of date.

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