The snow came down pretty heavily in Chicago yesterday. I suppose the weather gods decided that break time was over and the city was destined to get some flurries. Oh well, thank you sun – you were enjoyed and appreciated while you lasted!
Many of my friends are fully aware that I am a big admirer of Southwest Airlines. It could be my Texan roots. The phenomenal customer service experience. The David and Goliath success story. Perhaps it could be the childhood memories of spotting SWA aircraft landing at Love Field in Dallas every Friday (for a brief period of time when I was four, my Mom was traveling to Houston weekly for work, Monday thru Friday, and Dad and I would go retrieve her on Friday evenings). It was a joy to watch the burnt orange 737’s inbound in the Texas summer, knowing that they were bringing my mother home from her business commute.
More than anything, the evolving nature of the carrier has made it the subject of many case studies; from bucking the customer service trends commonplace in the industry, to its successful expansion to become the largest carrier (in terms of passengers transported) in the domestic U.S. market place. Growth for the carrier has come in many ways. They are now flying into congested airports such as New York LaGuardia (LGA) and Boston Logan (BOS), markets which they traditionally avoided. They are adding a larger fleet size, launching international routes, and integrating AirTran Airways, Inc while gaining access to robust metropolitan airports such Atlanta Hartsfield International (ATL) and Washington Reagan National Airport (DCA).
The Southwest Airlines as we know it
Most people know that Southwest Airlines “secret sauce” to delivering high customer satisfaction begins with their corporate culture. Following the Golden Rule, the company treats its Employees (or “People,” as they like to codify it) well, and in return expect them to treat their customers in the same high regard. For years, the Southwest Airlines model seemed to achieve dual purposes: not only were they lauded for receiving the lowest number of customer complaints relative to other carriers in the US airline industry, but also their low-cost operations model provided high returns for shareholders. Being ‘LUV-ed’ and profitable by consumers and investors gave the carrier some significant bragging rights.
Of course, no single airline in this world is loved by every single individual. I mean, some people hate flying in general, let alone choosing their favorite airline, which to them is almost akin to choosing their favorite syringe to get their flu shots (okay, maybe a bit extreme, but you get the picture).
Then there are those who travel often enough who have no choice but to formulate opinions. Road warriors love to align themselves with the carrier they feel most deserves their loyalty. It’s almost like an emotional connection; the exchange of goods and services come with the “fluffy” extras such as complimentary upgrades, private lounge access, priority boarding and screening. They warrant the business and patronage of the elite fliers. Even the frills such as having a “priority” luggage tag, or “Global Services Member” printed beneath their name on the boarding card, can resemble a love note, just like when your Mom would slip little messages into your brown bag lunches in grade school. It generates a feeling of warmth and appreciation.
Many elite fliers (at least the majority of the ones who I am friends with) are more partial towards the so-called “legacy” carriers, enjoying benefits such as premium cabin service, special ground handling services, upgrade options, waived fees, and even dedicated toll-free numbers especially reserved for the ultra-elite. Such individuals, while wholly respectful of Southwest Airlines, opt to put their stock in the full-service legacy carriers since Southwest does not offer these benefits.
And, to be fair, Southwest’s style of service is not for everyone. In fact, just yesterday, I was having lunch with a buddy who, having flown SWA for the first time a few weeks back, didn’t seem all that enthralled by the idea that the Flight Attendants were “tossing” packaged peanuts and pretzels to passengers due to heavy turbulence. “They said, ‘watch out, your drinks are next,'” he shuddered. I chuckled at the familiarity of this Southwest-style in-flight humor. Like I said, it’s not for everyone, but it does retain a fair amount of customer loyalty because it’s quirky.
And you can’t put a price tag on a sense of humor. Plus, when you’re paying a competitive fare for a decently comfortable seat, and on the whole able to enjoy friendly, on-time and safe service from end-to-end, sometimes, you have to question, “what more can I ask for?”
For many travelers, these checkboxes are enough to warrant repeat buying behavior for Southwest. “Every time I fly Southwest, I want to write them a thank-you letter,” another one of my friends gushed to me once. In other words, people LUV the friendly, simple style of service. And, the absence of change fees and luggage fees is a nice added bonus.
Why I selected to blog about Southwest today…
The reality is, Southwest is facing some challenging cross-roads given the evolving nature of the industry. It would be unfair, and unwise, for me to paint a big rosy picture for the carrier’s future given some very practical, unavoidable, and certainly not easy decisions it has to make in concurrence with the nature of the industry. This is also consistent with some candid statements Southwest CEO Gary Kelly made about the competitive future of the carrier with regards to rising costs shortly after rival legacy carrier American Airlines filed for Chapter 11 bankruptcy protection last November. As these competitors are able to negotiate their cost bases through Ch. 11 restructuring, Southwest, conversely, will no longer enjoy a competitive advantage against them as its own costs continue to rise.
My intention in this posting is not to point out flaws in the carriers’ business model or to create a sense of gloom from this point forward. Rather, I would like to simply dialogue about where the carrier stands relative to the industry given a few data points we are all aware of. We all watch the Super Bowl. We know the kind of traction and media attention the ‘Bags Fly Free’ marketing efforts have captured. Anyone with any higher-education background in business or economics have learned, through textbook examples, how the history of labor relations at Southwest has an impeccably clean record, and the carrier has not laid off a single employee in the post 9/11 environment.
The list goes on. Protection from rising oil prices due to fuel hedging in the mid-2000’s. Standardized fleet. Point-to-point business model. Use of uncongested airports.
But many of the latter topics are no longer relevant pieces in the puzzle. Fuel hedges have run out. The fleet size is undergoing major changes. Traffic flows seem to indicate that Southwest has veered towards a more “hub-and-spoke” style model. Once fully merged with AirTran, Southwest will have access to virtually every single major domestic U.S. airport, delay-prone or not.
In other words, Southwest has changed. A lot. And more changes are on the way.
When the need to evolve becomes a greater concern, so do the growing pains that come with it.
Aspire Aviation, a Hong Kong-based website that provides insights, analysis and commentary on pressing issues in aviation and aerospace fields (updated: unfortunately their site was taken down in 2016), published an article on February 6 titled, “Southwest faces challenges in AirTran integration.” While very rich in terms of its coverage of a variety of different topics, the premise of the article rested on one single summary: that Southwest’s original model only took them so far, and has undergone massive evolution over the past five years to keep the carrier profitable in wake of unforeseen challenges.
Moreover, it is unlikely the carrier can rest on its laurels anytime soon, and highly likely that more changes are about to take place. While one can only hypothesize about such changes, we can look to the various pain points and opportunities soon-to-be in Southwests’ realm of “major life choices” as possible indicators of what may become reality.
The Challenges Ahead
Cost control
Fuel prices continue to act as a drain on profit margins. According to the article, fuel costs per gallon have rose 34.7% year over year. In addition, labor costs have grown 19.9% year over year, but the article stated that under new contracts with former AirTran employees, in which the aforementioned individuals are scheduled to receive a pay raise, the overall year over year figure can expect to increase.
Competitive forces
Despite mega industry consolidation, the rise of other low-cost carriers such as JetBlue Airways, Spirit Airlines, Allegiant Airlines, and Frontier Airlines cannot be ignored as a threat to Southwest’s market share. All of the previously mentioned carriers utilized various tactics of differentiation to segment their target markets when defining their business models. Spirit and Allegiant, for example, evolved into “ultra-low-cost” carriers where they practically seized upon every opportunity to absorb ancillary revenue from travelers. For them, it was all about forgoing the need to maintain a squeaky-clean brand image knowing full well they were attracting customers who would either travel with them for their ultra low fares, or not travel at all. Due to disparity in cost structures, Southwest cannot match their fares without losing money, so theoretically speaking, Spirit and Allegiant on the whole do not have to worry about losing customers to Southwest, but the same logic does not apply in the reversed scenario.
Frontier and jetBlue introduced premium cabins and “a-la-carte” pricing options to give travelers different levels of perks for different fare classes. In addition to providing options such as in-flight DirectTV, these carriers also have expanded internationally, taking on some legacy carriers (with fewer product offerings) or launching routes that lacked competition, such as from New York to secondary cities in Puerto Rico, or from Florida to Latin America.
Tweaking the model
Such forces prompted the “paradigm shift,” as the article states, for Southwest to revaluate its network strategy. All of the sudden, congested airports Southwest had avoided in New York, Newark and Boston suddenly received the green light. No longer was Southwest simply flying into cities such as Islip/Long Island airport, or Manchester, NH/Providence, RI, to attract passengers from these larger metropolitan service areas (MSAs).
According to the article, there were gains in revenue appreciation, as well as the additions of corporate traffic and contracts. However, the much-touted productivity levels of Southwest, which was once its prized claim to fame for on-time performance (OTP), waned as Southwest grew at these delay-prone, congested airports in the northeast. And, ultimately, at the end of the day, it is tough for a newcomer Low-Cost Carrier to entrench itself in markets that have already been “gentrified” by the growth of other LCCs for a relatively lengthy period of time, such as jetBlue in Boston and New York, which had built up a loyalty following in these cities long before Southwest’s arrival.
The AirTran piece of the puzzle
As with any airline integration, the combined carrier has to often make painful decisions about route and market additions that just may not be economically sustainable moving forward. The tricky issue with the AirTran merger was that there were stark differences between AirTran and Southwest’s traditional style of operating a minimum of 8-10 flights into each destination it served. This latter’s approach allowed the carrier to spread airport costs over a larger number of flights throughout the day. Conversely, at AirTran, the situation was a bit different: some stations only received 1-2 daily flights.
Therefore, Southwest had to work to eliminate service to the smaller/marginally profitable airports, and consequently axed stations such as Allentown, PA, Harrisburg, PA and Sarasota, FL, amongst several others. Given the leisure nature of many of these markets, Southwest felt that they were largely unsupportable by larger aircraft, which hinted at potential long-term plans to ditch the acquired Boeing 717 fleet Southwest will receive from AirTran, which are relatively aging and inefficient aircraft to keep around.
On the plus side, Southwest will gain access to new business markets such as Atlanta and Charlotte, increased access to New York and Washington, D.C., and finally an international presence through serving Punta Cana, Montego Bay, Aruba, Bermuda, Cancun, and eventually Mexico City and San Jose del Cabo. Southwest will inevitably need to adjust its reservations system to account for such flying.
In Atlanta, the article suggests that the competitive reaction by Delta, which is the #1 hub carrier at ATL, may create a harrier situation for Southwest than it did for AirTran. Using a Origin and Destination (O & D) analysis of the top markets served from Atlanta, derived from the US Department of Transportation, Aspire Aviation concluded that Delta is the market share leader in 27 out of 50 of them. Not only does Delta command a higher fare premium across the board, but also Southwest’s ability to penetrate the markets with lower fares will be largely limited, given that AirTran, as a low-cost carrier, had stimulated most of them as far as they could go before the merger took place.
Then, there comes the issue of luggage. As a subsidiary of Southwest, AirTran has continued to derived luggage fees for Southwest, as that was a pre-existing ancillary revenue practice used by the airline. However, that will eventually be phased out, along with the revenue gains from it, once AirTran is completely folded in, in order to stay aligned with Southwest’s highly-proclaimed, “Bags Fly Free” campaign.
The future implications
Bag fees or not, AirTran’s DNA will become part of Southwests’ in a short period of time. The 800lb gorilla will become a beast in Atlanta, no doubt, but this will involve fending off the formidable threat of Delta’s market presence in its hometown. The latter enjoys a higher command of corporate traffic, along with a membership in the global SkyTeam alliance. Furthermore, Delta has a strong frequent flier programme, using a mileage/point-per-flight model, whereas Southwest utilizes a point-per-flight model. Product-wise, AirTran offered a business class section as well as assigned seating, concepts which will be eliminated post-merger. With Delta offering not only these options, but also enhanced amenities such as in-flight WiFi, in-seat audio video entertainment, and buy-on-board purchases, Southwest may be in for an uphill battle to seize customers who value these offerings in Atlanta.
The next question revolves around low-hanging fruit to drive up revenues. Undoubtedly, as Southwests’ labor and fuel costs continue to rise, there is the delicate see-saw of searching for alternate ways to keep the balance sheet strong. Without a doubt, attending to costs is probably the first area Southwest will want to explore before anything else.
On the plus side, the carrier has invested in a new, younger and more fuel-efficient fleet that will require less maintenance. And, to a lesser degree, this represents an improved product offering that can hopefully continue to attract repeat customers and drive up revenue.
However, without question the labor challenge remains to be the biggest chunk to be broken down. At its helm, the peaceful labor relations aspect is actually a cost advantage to Southwest; but alterations to the actual labor productivity levels (i.e. doing more with fewer people), as well as potential decisions with regards to wages and benefits, may be the larger (and more difficult) considerations at stake. Offsetting any balance could have deleterious effects.
From a revenue perspective, many people, particularly Wall Street, have hampered down on the carrier for opting out of ticket change/cancellation and checked luggage fees. With nearly every US carrier charging for at least two checked bags for non-elites (jetBlue still offers the first checked bag for free), industry experts estimate that Southwest is leaving at least $1.4 billion USD in revenue annually on the table.
Still, one cannot ignore the capital that Southwest has invested in marketing its ‘No Bags Fee’ attribute. Furthermore, in response to the Aspire Aviation piece, AeroBlogger.com theorized, in an article published the following day, that Southwest will still continue to avoid adding checked bag fees because the threat of damaging its brand image will be too high. Moreover, AeroBlogger feels that a more subtle, yet relevant consequence of adding checked bags will be an increase in turnaround times for Southwest aircraft, a metric that cannot take any more hits to add on lag.
It’s actually a very interesting argument, and once I can agree with. It seems that more and more often, flight attendants on legacy carriers continue to make announcements about conserving overhead space “by placing smaller articles under the seat in front of you, so we can expect an on-time departure without having to gate-check bags once the space fills up.” With more customers bringing carry-on luggage on to avoid the fees, it does become problematic every once in awhile, and not only does gate checking add delays, but also it doesn’t bring in revenues.
On the flip side, it could be that passengers will become more and more de-sensitized to bag fees, in which case the imminent “threat” towards negatively affecting Southwests’ brand image may be lowered a few years down the road if a push-comes-to-shove situation occurs with the need to instill bag fees. Plus, if people just happen to travel heavy and the bin space on Southwest flights are already full as-is, then the argument that checked bag fees may slow the boarding and deplaning process does not hold as much water as previously speculated.
Some final thoughts
The good news is, I don’t think that Southwest is at any risk to not evolve when the time comes. The challenging news is, the decisions will be just that – a challenge. Many answers may be found on re-evaluating what Southwest’s success has been founded on (providing exemplary customer service, its corporate culture) and not solely about what steps it has taken along the way (such as bags fly free) in order to give it a clearer answer on which best foot to place forward.
Inevitably, however, there will probably be a large ripple effect one way or another.
More than anything, Southwest does know what is best for its company, its People, and its customers. I laud them and wholly respect them for everything they stand to be and how well they deliver their services in an extremely challenging industry and revenue environment. Just because Southwest’s competition has become smarter, doesn’t mean that Southwest still doesn’t have the power to outsmart its competition.
I am confident they will find their way. Their value proposition is still very robust in the eyes of many, and I think that will pay off dividends for a very long time.
References:
‘Southwest CEO warns high costs are a danger to the airline’
Aspire Aviation: ‘Southwest Airlines faces challenges in AirTran integration’
Aero Blogger: ‘Why Southwest Airlines won’t add bag fees.’
