Southwest Airlines Buzz Words: Monetize + Premium

The repeated use of “monetize” and “premium” in its investor presentation last week reveals the heart of Southwest’s strategy to adapt to a changing aviation market. I am of the opinion that the changes strike the right balance and have the potential to be a net positive.

Southwest Airlines Goes All-In On “Monetize” And “Premium”

Kyle argued the “new” Southwest Airlines is unrecognizable from its former self and he makes a compelling point, though I would not go quite that far. Two free checked bags will remain, the familiar fare structure, no change fees, and probably the same folksy service onboard…even in new uniforms.

On the baggage point, Southwest claims it carefully considered its alternatives and found the $1-1.5 billion in ancillary revenue that baggage fees would raise would be more than offset by customers who would book away. I’ll take Sotuhwest’s word for it, but I would then think that might be the case for other carriers too…

At its latest investor presentation last week, Southwest officials returned to two words over and over:

Premium – 34 times
Monetize – 11 times

Southwest hopes that by offering a more premium product (extra legroom seats further incentivized by allowing its top-tier A-List elites to secure these seats for no extra charges) will foster loyalty and ancillary revenue. Extra legroom seats is something all US carriers currently offer and does not distinguish Southwest, but it is a market segment Southwest has long neglected and may usher in a whole new of business and premium leisure travelers who were previously unwilling to deal with the “musical chairs” annoyance of open seating.

I’d argue there will still be very little “premium” about Southwest Airlines. Nothing it offers will edge out its competition beyond its schedule in certain markets.

In terms of monetization, it will try to discourage people from booking “Wanna Get Away” fares (the new “basic economy”) by restricting seat assignments to check-in only (and auto-assigned). Wanna middle seat? book a Wanna Get Away fare…

As Dawn Gilbertson of the Wall Street Journal correctly identifies, there are winners and losers in the “new” Southwest”

Winners

Southwest frequent flyers – A-List Preferred members can choose extra legroom seats at time of booking and A-List members within 48 hours of travel
Heavy packers – two free checked bags will remain a Southwest distinctive
Travelers who hate Southwest today – Most people who refuse to fly Stouhwest say this is because of the lack of assigned seating may give the Dallas-based carrier another look

Losers

Travelers who buy cheap tickets – Southwest argues that those who purchase “Wanna Get Away” fares lose nothing because they did not have a pre-assigned seat before and will not have one now..but that’s a bit deceptive. Before, Wanna Get Away travelers could check-in on the dot, get an early boarding number, and secure a prime seat onboard. Now they will be relegated to leftover seats…Wanna Get Away may become Wanna Sit In The Middle?
Passengers who like open seating – if 80% of Southwest travelers want assigned seating, that means up to 20% prefer open seating. They will lose out on “the thrill of the hunt.”
Cheaters + Losers – Losers lose. Those who feign a disability in order to pre-board will find there is no longer an advantage to do so. I’d expect wheelchair assistants will suddenly have a lot more time on their hands. Yay! Also, the idiots who put coats or bags down to try to “reserve” seats onboard will no longer be able to play this game.

CONCLUSION

I am cautiously optimistic about these changes striking the right balance between making the necessary innovation that customers demand and not throwing out the entire business model (free checked bags) that has worked for decades. I’m not sure this will be enough to pacify activist investors, but it marks a fair start. In any case, we can certainly see that “monetize” and “premium” are at the forefront of Southwest’s evolution.