Defensive Strategy

Southwest’s Gamble

29 Sep 2009  

Southwest Airlines has once again taken a different path in the airline industry.

While virtually every major carrier is now charging people to check bags, Southwest continues to offer free baggage checking.  And Southwest is now promoting this fact with some bold, in your face advertising.

The spot currently running features Southwest baggage handlers discussing baggage fees.  It is a simple, direct and memorable spot.  My favorite line in the spot goes something like this:  “Maybe I should just send my bags on vacation while I stay home.”

On the surface this is a smart strategy because Southwest is clearly differentiating itself from the other carriers.  Southwest has always taken some pride in being different and this approach has worked very well over the years; Southwest is by far the most profitable airline in the United States.

The bigger question is whether the move makes financial sense.  Southwest is certainly passing up substantial revenues by not charging for bags; the other carriers are making millions and millions from the charges.  This decision puts Southwest at a competitive disadvantage in terms of pricing.  This is a potentially dangerous situation.  Will people pay more to fly Southwest because the airline doesn’t charge to check bags?  That seems highly debatable.  Southwest is making quite  a gamble.

This is not about philosophy; Southwest is not hesitant to charge consumers for extras.  It recently introduced the Early Bird program, for example, where travelers can board early by paying an extra $10 each way.  So why doesn’t Southwest charge a fee to check bags?  It seems like a very odd decision to me.

It may well be that a bag charge is not quite as good as it looks for an airline like Southwest.  Southwest relies of high utilization of planes to drive profitability; Southwest planes are moving all day long, with very short stops at different cities.  If a bag fee encourages more people to carry on bags, then each plane might need to spend more time at the gate, and this would slow things down.  That would have a major financial impact.

If the operations issue is driving Southwest’s bag fee decision, then the airline is just turning the decision into a savvy marketing pitch.  That would be clever marketing indeed.

No Responses

  1. Lauren Taylor says:

    I’m wondering when people will see through Southwest’s “no fees” claim; I may be one of the few who isn’t a big fan. They even charge me to stand by on an earlier flight if I buy a discounted ticket, so I’ll stick to other airlines!

  2. Patricia Ledesma says:

    Gad Allon discussed the “Early Bird” program in The Operations Room:

  3. Tim Calkins says:

    There is real money in bag fees! This article from the USA Today shows revenue by carrier; the money is not insignificant. The figures put Southwest’s choice in financial perspective; it is a major decision.

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