MIAMI — With the flip of the calendar from June to July, jetBlue officially axed a policy that gained significant popularity among its customers: the allowance of one checked bag free of charge. Itineraries booked since June 30 face the imposition of a $25 fee for the first checked bag. With jetBlue defecting and trailing in the path of other major airlines, many eyes have turned to Dallas-based Southwest Airlines, which remains the only carrier to allow bags to fly free for all its passengers.
Southwest’s CEO Gary Kelly reaffirmed the airline’s commitment to its stance on free bags at a recent industry convention in Orlando. “We will not charge for bags,” he said bluntly, claiming that the airline “would lose a billion dollars if we started these things.”
Some industry analysts question Southwest’s decision to stray away from baggage fees, citing the exorbitant amount of revenue they’ve generated for its competitors. Almost all investors on Wall Street clamor even more loudly for Southwest to abandon its historically customer-friendly policies for the lure of an immediately thicker bottom line. Kelly’s suggestion that refraining from bag fees saves the company money seems initially counterintuitive. However, continuing to allow free bags does more than make its customers happy. Southwest Airlines believes that continuing to hold out from pesky fees serves as a point of distinction from the increasingly muddled pack of airlines. Additionally, it supports Southwest’s historically great operational performance and even benefits it financially by spinning a loyal customer base unmatched by its rivals, both aspects which offer hidden value.
A recent study from IdeaWorks and CarTrawler highlights the upward trend within the airline industry of ancillary revenue, which broadly represents money generated on top of the ticket’s base price. On the whole, ancillary revenue spiked by 21% from last year, demonstrating its growing importance in many airlines’ business models. Since 2008, airlines have turned to ancillary revenue – of which baggage fees compose a very significant part – to bring in more money, unbundling elements formerly associated with a fare and tacking on an extra fee for them.
Ancillary revenue at low cost carriers, a category in which Southwest is generally lumped, increased even more strongly than the average, leaping by a whopping 32.8%. However, Southwest differs from its peers, both low cost carriers and legacy airlines, under the lens of ancillary revenue. While its rivals raked in billions resulting from ancillary revenue – United led the way, taking in an astounding $5.861 billion on top of ticket sales – it represents a far smaller slice of total revenue for Southwest. Many choose to see this as leaving money on the table, but Southwest’s more inclusively-defined airfares go a long way to maximizing operational efficiency, which has served as a cornerstone for the airline.
Southwest relies on a high utilization of employees and equipment to spread costs more thinly across each flight, allowing the airline to keep a cap on its airfares. Generally, Southwest consistently boards its airplanes among the quickest in the industry, in no small part thanks to its bags fly free policy. Without imposing a fee for checking a bag, Southwest encourages its customers to send their bags under the plane rather than trudging them onboard, shedding boarding time consumed by clogged aisleways with travelers frantically shoving baggage in the overhead bins. And although a greater demand for checked baggage may impose a heavier toll on the ground crew, creating a new potential for delays, loading a plane with bags is usually a far more streamlined process than boarding an aircraft.
Southwest understands that shaving the number of minutes a plane spends on the ground can perhaps open the door for an additional flight each day – which, without whipping out the calculator, can benefit an airline far more financially than extracting a few more bucks at the check-in counter.
Additionally, Southwest enjoys an overwhelmingly satisfied customer base, not only due to its exceptional customer service but also due to its consumer-oriented policies, which feed Southwest with many return customers.
Some might argue that the company’s history of boldly advertising its “Bags Fly Free” slogan boxes it into the policy for the time being, but only temporarily. However, judging by Kelly’s remarks, Southwest appears to be applying full throttle behind this stance for the long term. It even trumpeted its position as the only domestic carrier to shuttle bags for free on the day jetBlue implemented its bag fees.
Standing alone in this regard sets Southwest apart from the pack of airlines. Despite the legacies growing more synonymous, offering a nearly indistinguishable product, Southwest continues to exhibit its trailblazing attitude, demonstrated as well as with its free bags policy as with tattooing a heart across the belly of an airplane. A noticeably, and more importantly, a positively received image yields tangible value, especially when fliers see virtually all of its competitors equally.
While Southwest still reeled in $1.885 billion in ancillary revenue last year, it sourced this money from areas in which consumers feel they retain more choice. Many fliers, particularly the leisure crowd from which Southwest draws heavily, would find it difficult to leave their bags behind, but not nearly as taxing to enroll in the airline’s Rapid Rewards program, which accounted for a large share of its ancillary revenue growth. Other policies, such as “Early Bird Check-In,” offering early boarding privileges for $12.50 one-way, offer a carrot to those willing to pay without punishing its average flier. This yields significant reputational gains that many analysts only examining a financial statement will ignore. A company’s reputation will never appear as a line on the income statement, but can nonetheless play a large role in pulling in new customers and retaining existing ones.
Those who advocate tossing Southwest’s consumer-friendly policies sprinkle long-term concerns too lightly. Southwest’s decision to stand by free bags seems consistent with the fun and simple image it wishes to pursue. In an era in which the airline industry typically garners as much praise as its peers in the cable television and internet service industries, a warm public perception pays dividends. Southwest calculates that the benefits of filling a few more seats and supplementing ancillary revenue through more benign methods outweighs the costs of foregoing bag fee revenue. This is a completely rationally driven conclusion, not simply a kind gesture at the expense of profitability.
And while other airlines continually come to a different determination, Southwest’s string of over forty-consecutive profitable years speaks very well for the airline. While Wall Street prefers to push Southwest to adopt baggage fees, its resistance to do so continues to pay back Wall Street very handsomely.