How Will Southwest Transform in Response to High Fuel Prices and Increasing Competition?

Southwest is in the midst of a transformation from being a pure low-cost carrier, with non-labor costs trimmed as much as possible, to looking more like a legacy carrier in certain aspects of its operation, with some additional costs for commissions and amenities. Even though the airline still wields enormous power within the industry, Southwest is being attacked from all sides, and the airline is becoming increasingly less competitive. Southwest's costs are also rising quickly. The airline has been able to profit from artificially low fuel prices in recent years due to hedgess, but with the hedges expiring, the airline may be forced to raise fares. And the airline is still growing, though Southwest will have to carefully navigate how it grows in the coming years. Should the airline focus more on attracting higher-yield business travelers, or should it focus on lower-yield leisure travelers? Since Southwest already has considerable market share in many popular leisure destinations, Southwest has decided to focus on business travelers since that market has more growth potential. This choice to focus more on attracting business travelers is demonstrated by some of Southwest's latest destinations. Denver, Philadelphia, and Washington Dulles, three airports which were unlikely to see Southwest service ten years ago, are now served by Southwest, the first two being well-served with over 30 daily flights in each market. Southwest plans to fill a niche from markets with large concentrations of business travelers to offer nonstop service between these cities and other cities that have little or no nonstop service. In many cases, only one airline offers nonstop service on a route Southwest is entering, and Southwest is able to lower fares considerably for business travelers, spur demand, and hurt the competitor which had a former monopoly on the route. Southwest also plans to soon enter another airport that is one of the few high-fare fortresses in the United States still remaining: San Francisco. But Southwest's route network isn't the only way the airline is changing its strategy to meet the needs of business travelers, other areas of its operation are changing as well.

One of the biggest ways Southwest is changing is by offering its tickets through global distribution systems (GDS), which many business travelers and companies use to purchase tickets. Even though Southwest will have to pay GDS a commission for every ticket sold through that booking channel, it's a necessary tradeoff if Southwest plans to reach a larger share of business travelers. Since travelers who purchase tickets on GDS are more likely to pay higher fares than travelers who book on Southwest's Web site or over the phone, that helps to cover the added costs of using GDS. This is a major transition for Southwest, which has been the only major US airline to not offer customers the ability even to search (instead of book) any of its flights on any third-party sites. Southwest has long insisted that by not enabling customers to view or book flights through any third-party site that the airline can trim its costs and simplify its operation. However, this has made it difficult for customers to compare Southwest flights, since they have to search on Southwest's site in addition to another third-party site in order to compare fares for all major carriers, increasing the amount of time they spend searching. This policy has also hurt Southwest's ability to fill its planes, since customers who aren't aware that Southwest's flights are only available on its Web site or over the phone can't book tickets with the airline. Hopefully, Southwest's listing of fares on GDS will enable the airline to reach a broader set of customers, which Southwest needs if it expects to keep growing.

But Southwest will also need to transform in other ways. For example, the airline will probably change its seating policies in the not-too-distant future. I suspect that if Southwest adopts assigned seating, it will do so in a manner similar to how AirTran does it. If customers pay a higher fare, because they book late or want flexibility with their travel, then they would be able to assign their seat when they book. Customers who book lower fares could only receive a seat assignment when they check in. A variation on this idea could be that customers who book lower fares but are willing to pay extra (between $5 and $10 each way) could select assigned seats. Also, Southwest may place more restrictions on checked baggage. Right now the airline allows people to carry on up to three checked bags free-of-charge, a policy that needs to change. This could be a very beneficial step for the airline, since it could raise additional revenues and cut costs. Since most business travelers don't carry more than one checked bag anyway (and many only bring carry-ons to save time), Southwest could probably lower its checked baggage limit to one free 50 lb bag per passenger while still appealing to business travelers.

Southwest needs to improve some of its add-on onboard amenities. The two biggest areas Southwest can do this are in meals and entertainment. While it's unlikely that Southwest will offer full meals, even for a fee, Southwest will probably expand its onboard food service offerings in the next couple of years. Southwest will probably continue to offer peanuts and other goodies in very small bags to passengers for free, but the airline may follow the lead of other carriers by offering more food items, such as sandwiches or salads, for a nominal price. The only caveat with this is that if more food items are added, that could mean the provisioning crews that load food and beverages on the ground could take longer to do their jobs, threatening Southwest's ability to offer 25-minute turnarounds. Southwest may also add some sort of entertainment in the coming years. I expect that it will be relatively simple; but friendly to business travelers. Satellite radio would be the most likely candidate, but video entertainment, either in-seat or on screens above seats is also a possibility. However, if Southwest were to add in-flight entertainment, it would likely pale in comparison to JetBlue's. Southwest isn't trying to lure people to its planes based primarily on entertainment and amenities, but it is trying to maintain its competitiveness with legacy carriers in this area. Southwest's entertainment will probably be just enough to entertain travelers on longer flights, but nothing special.

One bright spot for Southwest is its frequent flyer program, which will need few, if any, changes in the coming years. It was recently changed to give customers two years (instead of one) to earn the necessary credits for a free flight. However, credits expire two years from when they're first earned, and cannot be renewed, unlike miles on most legacy carriers. By forcing travelers to fly 16 one-way flights within a two-year period, Southwest is weeding out customers who fly irregularly, but who may have racked up enough credits for a free ticket over many years. This lowers the number of people who can redeem their credits, and ultimately benefits those who fly most frequently, such as business travelers, since award seats are limited.

If Southwest can transform itself to look less like an LCC and more like a legacy carrier, with many of the same touches that have gained Southwest customer loyalty and notoriety in the past decades, Southwest will be able to attract a greater share of business travelers. While Southwest is unlikely to replicate legacy carriers in every way, since Southwest will still likely operate a 737-only fleet and serve a limited number of international destinations in the coming years, Southwest will take many other pages out of the legacy playbook. These may raise Southwest's costs, but it will ultimately put Southwest in a better position to attract a wider array of travelers, which is critical as the airline grows.