Southwest Airlines (LUV), the carrier famous for its cattle-car boarding process and lack of first-class amenities, now wants to reach out to the Gucci loafer and Hermes tie crowd. On Nov. 7 Southwest introduced a new fare structure that will give preferential treatment to customers who pay more for their tickets. The following day the company will roll out a new boarding process nationwide that assigns each passenger a number indicating when they can get on the plane, sparing customers the need to line up an hour before a flight to get the best seat. "No more cattle calls," says Chief Executive Officer Gary Kelly.
Over the next few months, Southwest will be upgrading the Spartan waiting areas at its gates with cushy leather chairs featuring built-in outlets for plugging in computers and recharging cell phones. By January, 2009, the company hopes to offer international connections to Mexico and the Caribbean as well as in-flight media options—perks that appeal to hardened road warriors.
Business Model Update Is Overdue
Two factors are driving the radical changes: tougher competition and higher oil prices. Many of Southwest's competitors have gone through bankruptcy, allowing them to cut labor costs and shed unprofitable gate and plane leases. The result is that the airline's cost advantage over rivals has shrunk, and its pilots and flight attendants are now the highest paid in the industry. At the same time, the price of oil is nearing $100 a barrel (BusinessWeek, 11/7/07), driving up Southwest's costs. The top brass recognizes that the airline needs to adapt to the new realities of the industry. "We've had oil price spikes in the past," says Herbert Kelleher , co-founder and chairman. "This time I don't think anyone expects prices to come down. It radically changes the way you look at things."
The outlook this year isn't pretty. Southwest's earnings are expected to decline about 15% in 2007, to $510 million, on sales of $9 billion, even as many of its rivals are reporting profit gains. "Their business model is ten years out of date," says aviation industry consultant Michael Boyd. "But the good thing is management knows that and is doing something about it." The company is using financial hedges to protect against rising fuel prices, but current hedges must be entered into at today's higher prices.
Kelly, a company veteran who took over as chief executive in 2004, has made wringing more revenues from the existing business a top priority. He has throttled back expansion plans and hopes to generate more than $1 billion a year in what he calls ancillary revenues.
Customer Reaction Is Mixed
From Day One Southwest had shunned assigned seats as a way of speeding the turnaround time at the gate to as little as ten minutes. But the long lines that resulted as passengers waited to board were the No. 1 customer complaint for decades. Southwest tested the use of assigned seats in San Diego last year and the result was predictable—it added to the boarding time and many passengers complained that they liked being able to choose their seats. Employees suggested assigning passengers a specific number when they checked in twenty four hours before a flight so that they would know ahead of time in what order they would board.
The switch to a more organized boarding process gave Southwest an opportunity to gin up some more revenue. The company has introduced a new "business select" fare class—passengers who pay this higher ticket price will automatically get the first numbers on the boarding list. They'll also earn frequent-flier credits more rapidly and will get a free drink on board.
The switch has left some folks feeling left out. In order to charge some customers more for priority boarding, Southwest had to stop allowing families with small children to board first. After that change, in early October, a number of parents got angry. Some drafted online petitions urging the company to change the policy. "I'll definitely fly Southwest less," says Shaun Dakin, a political organizer and father of a three-year-old who organized one of the petitions. Kelly says parents will ultimately get used to the change. He's heard from some who like it because they don't face as much pressure to find a seat quickly.
Ersatz First Class?
Rivals say the changes don't go far enough to equal true first-class treatment, which usually includes private lounges and cushier seats onboard. "I don't expect them to be able to match our first class," says US Airways (LCC) President Scott Kirby. "The ability to upgrade to the first class cabin is the No. 1 request of our frequent fliers."
Southwest is talking to potential airline partners who will carry passengers through to international destinations so the company can offer those destinations without assigning its own aircraft and paying for new infrastructure at the airports. Southwest is also testing vendors for a new, in-flight service that will allow passengers with laptops to surf the Web or watch movies for a fee onboard.
A new ad campaign will emphasize Southwest as an airline for business travel. The company has also hired more sales reps to call on corporate accounts and is promoting online tools that help businesses track employee travel spending at swabiz.com.
Some business travelers welcome the changes. Marc Still, an investment banker in Dallas who enjoys the highest customer status available on American Airlines (AMR), says he continues to fly Southwest on shorter hops. "They get me there on time and their people are always happy," he says. Still says he'll gladly pay a little more for the right to board early. "I know exactly what seat I want," he says. "In the emergency exit rows there are only two seats and there's more legroom."