It’s the same plane going to the same place at exactly the same time. But these days, not all airline passengers are equal. Nor do they all pay equally. In fact, a person on any given flight has likely paid a different price for his or her ticket than the people on either side of them. No matter where they sit, however, all passengers seem to have one thing in common: Almost nobody’s happy with what they get for what they pay. Tempers are flaring over rising air travel prices coupled with fewer amenities and less attentive customer service. Industry-wide, satisfaction ratings dropped last year for the third year in a row. Something is just not right with the airline price-value equation.
Most of us probably have had experiences like those of Doug Fesler, an executive at a medical research group in Washington, D.C.
He wasn’t expecting much in the way of amenities on his American Airlines flight to Honolulu. In fact, knowing the airline no longer served free meals, he had packed his own lunch for the second leg of his flight from Dallas to Honolulu. But he said he was shocked at the lack of basic services and the overall condition of the cabin. On that flight, the audio for the movie was broken. The light that indicated when the bathroom was occupied was squirrelly, causing confusion and, in some cases, embarrassingly long waits for passengers in need of the lavatory. And though food was available for purchase, the quantity of food was depleted before the flight attendants could serve the entire cabin, leaving some fellow passengers looking longingly at the snack he had packed.
His return flight was just as disappointing. This time the audio for the movie worked—but only in Spanish—and his seat refused to stay in the upright position. “I was just appalled,” said Fesler. “You pay $500 or $600 for a seat, and you expect it to be functional.” He said he has considered refusing to fly airlines with such poor service but added that “if you did that with every airline that made you mad, you’d never get anywhere in this country.”
Certainly, these aren’t the best of times for airlines. The long recession has had the dual effect of decreasing revenues while increasing costs. This has made it more difficult to maintain aircraft and provide the niceties that customers have come to expect.
In the midst of the turmoil, however, one airline in particular seems to be flying high. Southwest Airlines is setting records for customer loads and profitability. This isn’t just a recent phenomenon for the most famous low-fare airline. Since it started flying in 1972, Southwest Airlines has never lost money, something no other U.S. airline can claim. And for 2009, Southwest was the only airline to carry more passengers than it did the year before. What’s its secret? In short, it has been able to provide airline service that maximizes value by giving customers great benefits for the price paid.
THE SOUTHWEST FORMULA
From its humble beginnings, the airline has been known for a few things that truly classify it as a “no-frills” airline. For starters, it does not assign seats. Rather, passengers board on a first-come, first-served basis, a procedure that customers prefer by a two-toone ratio. It doesn’t serve meals on any flights, only basic snacks. It flies only 737 narrow-body planes and doesn’t have a first-class section. And it doesn’t provide electronic entertainment, relying instead on humorous flight attendants to entertain passengers.
From the beginning, its main draw has been low prices. It has communicated very effectively to customers that the lack of amenities allows it to charge some of the lowest fares in the industry. In fact, this has long been a competitive advantage for Southwest. As the airline expanded into city after city, other airlines were forced to drop their fares to compete. That overall lowering of fares in markets that Southwest enters has become widely known as the “Southwest effect.”
But during the mid-2000s, Southwest’s cost advantage over other airlines narrowed considerably. The bigger carriers in the industry cut costs tremendously as fuel and labor costs rose. New low-fare carriers gained strength. Competition became leaner and better able to match Southwest’s prices. But Southwest didn’t put all its eggs in the price basket. For years, it focused on providing the types of benefits that truly matter to air travel patrons. Gary Kelly, CEO since 2004, summarizes these benefits:
Ultimately, our industry is a customer-service business, and we have the best people to provide special customer service. Clearly, as the differences between air carriers narrow with respect to fares, we must execute in order to differentiate ourselves. But that’s our core advantage. Since the U.S. Department of Transportation began collecting and publishing operating statistics, we’ve excelled at on-time performance, baggage handling, fewest complaints, and
fewest canceled flights. Besides, we’re still the low-cost producer and the low-fare leader in the U.S. We have no intention of conceding that position.
HOW TO INCREASE PROFITS
As the effects of the global recession tightened its grip on the travel industry, many major carriers struggled to find ways to cut costs and increase revenue. Northwest discovered that it could save $2 million a year by cutting pretzels from its coach seating. American dropped $30 million a year by eliminating free meal service on longer flights. In fact, in a move that extinguished any hope of hot meals returning to coach, the airline removed the rear galleys from its MD-80 aircraft and replaced them with four seats, an addition worth another $34 million a year. Eliminating pillows was good for another million. The cutting of such amenities has made some traditional airlines even lower on frills than “no-frills” Southwest. After all, you can still get free snacks and a pillow on its flights. “I actually have more respect for Southwest Airlines in this area,” says one experienced traveler. “They’ve never pretended to have more than they do.”
But the most common—and perhaps annoying—new practice is the addition of baggage fees. Almost every airline now charges a fee of $15 to $35 for the first checked bag, even more for the second bag, and as much $125 if you have to check a third bag. And that’s only for the departing trip! Customers pay the same fees on the return. And Spirit Airlines recently announced the unthinkable. It will soon begin charging customers between $30 and $45 to stow carry-on bags in the overhead bin.
On this matter, Southwest has taken a stand. In a nationwide ad campaign, it has communicated to customers that “bags fly free.” In fact, it is the only U.S. carrier that does not charge for checking luggage. Despite criticism that Southwest has faced for not taking advantage of the revenue stream from charging for bags, the airline has chosen to side with customers. “At Southwest, we try to give you more, while all our competitors are taking away,” said Kelly.
Kelly couldn’t be happier with the results of this campaign. He doesn’t see it as a missed opportunity for revenue. In fact, he quickly points out that Southwest is the only airline that has actually gained customers. “We’re beating the pants off everybody in terms of our revenue production. We have fewer seats offered every day, and we’re carrying more passengers. We’re defying gravity.” Kelly claims that Southwest has gained about $1 billion in revenue this past year by taking market share from its rivals. Although he is quick to point out that it is difficult to determine just how much of that revenue increase is due to its “bags-fly free” campaign, Kelly thinks that this policy is the biggest factor
in its current financial success. “We can’t prove to you it is the source of the (market share) shift, but what we can prove is the awareness,” Kelly said. “The ad campaign has been very powerful. It has definitely penetrated the American traveler’s consciousness. They definitely know that we don’t charge for bags.” Kelly believes that the airline’s increase in revenues from its higher load factors dwarfs what it could have collected in bag fees.
A STRONG VALUE EQUATION
In addition to charging fees for checking bags, airlines are continually searching for ways to squeeze any dollar they can from customers. Some airlines charge a fee if you want to sit in an aisle or window seat. There are now booking fees, fees for checking in online or at the airport, and fuel surcharges. One airline even hinted that it might begin charging customers to use the onboard lavatory. All these new ways to make money make it difficult for customers to easily determine the actual price of a ticket. They also don’t seem to be working as USAirways, Continental, United, Delta, and American combined lost almost $4 billion in 2009. If Southwest was beginning to lose its low fare advantage, it is now evident that the airline has found a new way to compete on price. By not adding new fees, it is driving home the message that it is once again the cheaper choice. Combined with the fact that it has not cut services, customers are eager to board its planes. The tried and true method of increasing customer benefits while decreasing costs is working better than ever for Southwest. And if Kelly has his way, it will continue to assert its competitive strength for years to come.