Southwest Airlines is battling back in the fight over fees and unbundling. A recent Spirit Airlines ad campaign aims to call attention to the unused amenities “bundled” in an all-in fare like those Southwest offers. The Dallas-based carrier launched a new campaign this week entitled “Transfarency” in which it aims to highlight the extra fees passengers pay when booking such fares. The Transfarency effort includes a national TV campaign in Southwest’s NFL ad slots and other print and media efforts.
In some ways the transfarency marketing spat is an exercise in consumer psychology. Speaking at the company’s annual media day event this week Chief Marketing Officer Kevin Krone pointed out that the bundled items are generally necessities of travel:
I think we are on the right side of the game.
You need a boarding pass to get on the airplane. Most people when they leave town take clothes with them, and things with them for their trip. I don’t think we’re necessarily giving away stuff that you don’t need. We’re providing the essential things that should be part of your trip. …
We think we’re providing what is a reasonable service for people when you take a trip somewhere, a boarding pass, a seat, your baggage.
The change fee and seat assignment fee numbers Southwest chose to include in the marketing comparisons are arguably misleading given that change fee policies vary, especially on day of travel versus in advance, and that Southwest doesn’t offer seat assignments so suggesting that travelers are always paying that is a confusing position to reconcile.
Later in the event CEO Gary Kelly took the stage and addressed a similar inquiry. When pressed on the amount of money “left on the table” by not charging such fees Kelly pushed back, suggesting that the company’s internal analysis sees a $1 billion revenue premium from passengers on airfare based on the bundled fares. That’s $1 billion Kelly believes would dissipate if fees came in to play.
Re bag/change fees @Gary_Kelly says, "The revenue that we gain from our approach is close to $1bn." Not leaving money on the table.
— Seth Miller (@WandrMe) October 8, 2015
Considering that Delta Air Lines saw approximately $862mm in bag fee revenue in 2014 the $1bn number may mean that no fees is the smarter play, though convincing Wall Street of such may prove challenging, especially as Southwest is raising fares faster than the competition over the past decade.
Kelly also remarked that the recently renegotiated deal with Chase regarding the co-branded credit card product will see a one-time $150mm infusion into the carrier’s coffers and then ongoing revenue year-over-year near a quarter of a billion annually. Maybe not as much as bag fees, but it will likely hold off some of the Wall Street Analysts for a little while.
Another interesting point Southwest raised is that the market still believes it consistently offers the lowest fares.
This reputations gives it strong positioning to push the “bundled” number at travelers and have the perception remain that the bundled number will be cheaper than the competition and also inclusive of the extras. As for whether that’s actually true, well, travelers will need to compare the details. And with no transparency into the GDS platforms Southwest is doing a good job of making such comparisons more challenging.
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Southwest once had the lowest walk-up fares in the industry. Now it’s often the highest less than 7 days in advance. Distant peak travel dates also tend to be higher than the competition: Just look at Super Bowl weekend to and from SF.
The option to change your plans will full re-use of funds is Southwest’s killer edge. If only Southwest still had comfortable seats with ample pitch.
JetBlue is currently testing the proposition that diluting your competitive edge (in their case free bags and extra legroom) for increased revenue will improve an airline’s profit in the long run. I would like to think Southwest’s approach will work for them, but I just don’t know.