Southwest Airlines is beloved by flyers for allowing two free checked bags and not charging fare change fees. It’s also famous for not assigning passengers seats.
Even without charging these popular ancillary fees that are the basis of many other airlines’ profits, the budget carrier still raked in a cool $645 million from extra fees in 2018, according to a regulatory filing Southwest submitted last week. That’s a 13% jump over 2017’s fee numbers.
“Southwest does good job of differentiating the product from peer group: Bags fly free on Southwest, they’re very proud of that,” Helane Becker, an airline analyst at Cowen, said in an interview. “I suspect that won’t change while the current CEO is in place.”
Behind the double-digit climb in profits from fees is likely Southwest’s EarlyBird check-in, a popular product that it switched to a dynamic pricing model back in August. “The way they priced it is based on length of distance, and there is some popularity built into the system,” Becker said of the dynamic pricing model. “The algorithms were designed with that in mind.”
Southwest did not disclose exactly how much of its $645 million ancillary fee profit stemmed from the EarlyBird check-in pricing model. But, as USA Today reports, the airline did say in 2017 that it earned $358 million in EarlyBird fees. Tom Nealon, Southwest’s president, said in January that EarlyBird boarding profits alone grew by “double digits” as well. So even if it only increased by 10%, EarlyBird is raking in at least about $400 million.
But because EarlyBird, as well as upgraded boarding that guarantees flyers a prime A1 to A15 boarding spot for $30 to $50 extra, are priority boarding products, Southwest can’t introduce more of them, Becker points out. “They can’t really offer too many of the highest-value seats because it defeats the purpose of buying up,” she says. “But they can make it more expensive. They could at some point offer to assign seats.”
Also grabbing Southwest flyers’ attention is the fact that the airline’s CEO Gary Kelly said on the airline’s January earnings call that it will introduce new ancillary fees in 2020. To customers’ relief, he vowed to not begin charging for the first two checked bags or introduce basic economy. So what could possibly be in store for these new sources of revenue? Becker thinks the new fees could center around the carrier’s upcoming Hawaii service.
“They don’t have a first-class section of their cabins,” Becker says. “It’s an all-coach seating, and they haven’t really indicated a desire to do main cabin versus basic economy the way other airlines have done it.” But, Southwest might take a page out of European airlines’ books and offer a first class type product, she says.
“Some of the European airlines have aircraft similar to Southwest with one cabin but they save the first four or five seats out for what they call business class and they just block the middle seat,” to give a bigger business class seat, she explains. “So we can see Southwest doing something similar for transcon and for Hawaii and up-charging for it,” Becker said, noting that although Southwest has flown transcon for a long time and never approached that revenue option, as the airline expands internationally and on longer routes, she sees them trying out such a model.
As for Southwest’s Hawaii fares, passengers can expect cheap tickets — at least at the beginning of operations to the islands.
“[Hawaii is] a high leisure destination. A lot of the airlines that fly there like American, Delta and United tend to see a high level of frequent flyer redemptions on those routes, so fares tend to be low,” Becker explains. “So we expect when Southwest announces their fare structure, at least in the early days that those fares will be relatively low.”
And as far as ancillary fees go, it’s worth noting the fact that although it doesn’t charge for the first two check bags, Southwest still raked in a healthy amount for luggage items that were over the two-bag limit or were oversized (which is anything heavier than 50 pounds and wider than 62 inches). The airline earned $37.7 million according to the DOT. That number, however, is dwarfed in comparison to other large airlines’ baggage fees. American Airlines, the top earner for US bag fees in 2018, totaled $665.9 million.
Becker points out that it’s not just the lack of fees that have gained Southwest its loyal fan club.
“It’s so easy to earn miles on Southwest than it is on some of the other airlines,” she says. “They don’t devalue them every year. It’s just strictly Rapid Rewards — you can get the Companion Pass. There’s a lot you can do that Southwest makes it just so easy. That I think their customers, no pun intended, love them.”
Featured photo by Max Prosperi/TPG.