Kelly: Southwest holds firm to no baggage fees

Despite the wave of fees introduced by US carriers in 2008 for the first and second checked bags, Southwest Airlines remains steadfast in its belief of achieving profitability without adopting similar measures.

All of the US majors charge for the first checked bag, and once rival Delta initiated the charge low-fare carrier AirTran Airways followed suit. Virgin America plans to start charging for the first bag on 5 May, while JetBlue recently said a first-checked bag fee could unlock $10 million in revenue. Currently JetBlue only has as $20 fee for a second bag.

Those charges were not rolled back as fuel prices retreated from record highs of $140 per barrel in the second half of 2008, as their fall coincided with softening passenger demand triggered by the global economic downturn.

Yet despite the challenges all carriers face in strengthening revenue in a weak demand environment, Southwest remains the lone holdout in opting not to institute a bag charge, and CEO Gary Kelly remains unconvinced it would be revenue positive for the carrier.

"You have either agree or reject that argument, but we would argue to you that our load factors and our revenue production is superior to what we're seeing and especially compared to the legacy carriers," says Kelly, after being pressed by analysts during a recent earnings call about the lift bag fees are providing to the carrier's legacy competitors.

One analyst posits the idea to Kelly that bag fees could have carried the carrier to profitability during the first quarter. Southwest losses including special items totaled $91 million, but fell to roughly $20 million with their exclusion.

Kelly remains unconvinced. "I would argue that our revenue results would demonstrate that we are somehow doing something different than our peers, because the revenue results are better," he tells analyst.

Southwest's revenues for the first quarter fell only 6.8% compared with a 16% drop at American Airlines. But American gained traction in the "other" revenues category that includes sales of flight changes, buy-on-board and bag fees. Year-over-year American posted a 6.9% gain in that area to $558 million. The remaining US legacy and low-cost carriers plan to release first quarter earnings this week.

Kelly believes Southwest's "No Hidden Fees" advertising campaign translates into bolstering its passenger base during the economic downturn. "We believe we are having a meaningful impact in creating awareness among customers that we are virtually alone in not charging the bag fee. "That is translating into higher demand for Southwest Airlines," he explains.

Southwest did during the first quarter did preserve load factors, growing those statistics slightly by 0.1% to 70%. But lower fares year-over-year did dilute the carrier's yields by 2.8%.

US Airways is probably the network carrier that has the most exposure to Southwest competing against the low cost carrier in its Phoenix and Philadelphia hubs and in Las Vegas.

Yet during the carrier's annual media day US Airways president Scott Kirby said the carrier has gotten "very little pushback" on the baggage fee. In fact, those charges comprised the bulk of the $165 million in revenue the carrier earned in 2008 with the introduction of its a la carte pricing scheme. Total combined revenues for first and second bag fees were roughly $154 million.

Kirby believes it is "hard to overstate he importance of this seminal change [a la carte pricing] to the industry ".This year US Airways expects to net roughly $400-$500 million in revenue from product unbundling.

But Kelly argues its strategy of not charging for checked bags is a basic adherence to its low-fare philosophy. "I would argue that the No Hidden Fees is an extension or an underscoring of our low-fare brand, which I would argue is not different than not charging $400 one way from Minneapolis to Chicago."

Southwest's CEO also believes its philosophy also "makes it a more credible argument that we will be able to get more customers with this approach as compared to simply becoming another airline who nickels and dimes customers that they hate".

Source: Airline Business