MIAMI — Following our article earlier this morning “Southwest CCO Robert Jordan on Business Travel, Rising Fares“, we wanted to release the full transcript of our interview for your perusal. Enjoy the read!
The focus of this interview is certainly going to be around the evolution that I think you guys [Southwest] have undergone over the last few years. Specifically with regards to making yourselves a very attractive option for business travelers in a way that I don’t know that you were in the mid 90’s, late 90’s or early 2000’s. So I’ll start with sort of a high level question. Why does Southwest today present a compelling value proposition to business travelers?
Well, one thing to dispel is the fallacy that we have not been a business airline. Business customers value the right fare, and the right schedule and we have a very broad network now and a lot of flexibility: the ability to change flights if needed and the ability to do that without paying fees to do it. So there’s the schedule, reliability and flexibility.
So, it is kind of funny that folks think automatically of Southwest as a leisure airline [when] we carry more business customers than any other domestic carrier here. What we’re seeing that does confuse folks, is that business customers with all airlines, more and more over the years, are learning how to buy advanced purchase fares. So not just those last minute expensive fares. In the old days it was pretty easy: The cheap fares went to leisure and the expensive fares went to business, right? And that’s just not the case now.
And with regards to that topic, you guys shifted over to a revenue based rapid rewards frequent flyer program…
We did, we did, and Delta, Delta just followed!
Right, and I know Jet Blue and Virgin America already had a revenue based program when you guys made the switch which I believe was in ’09. So, what kind of response has there been to that from the corporate and small business travelers that use your network frequently?
Well, a couple things. You have to look at that in the context of the broad value composition, right? So, again, you know you have to offer the right fares, the flexible policy, the right network, great service – all those things. So the loyalty program gets one component of the broad value composition. And we did make the change to base the program more on what you’ve paid. Because what we saw, really, is over time as we shifted from a short haul carrier to a more of a medium to long haul carrier, the rewards stayed the same. So the reward for long haul are credited with the exact same as a reward with a very short flight…[it] didn’t match the way our customers were flying any longer- [especially] our business customers.
We’re seeing just a tremendous response to the program. The share of wallet that we get. The annual spend per member. Every single metric is up-double digits. Every year since we introduced the program. Our Chase Rapid Rewards Visa card is one of the largest card- it’s one of the largest Visa card portfolios in the world. And it’s seen just tremendous growth since we’ve changed the program.
OK, I could definitely see that, given how frequently I know people who surprisingly have the Southwest miles card even when they don’t have other ones. So…
Well, when you hear that, I think people automatically assume: well that must not be very good for the airline, but the economics of the program are right, so your partners are paying you the right amount of money for the points. The economics of the program are very favorable as well, so not only is it a great quality program and it’s helped grow our rapid rewards quality program, but it’s a great financial program for Southwest.
Staying along the theme of your business traveler focused product… Business Select, do you see opportunities for further enhancements? Adding services to that? …is there potential to kind of add different services on top of that? Or is the growth in Business Select revenues going to come from you guys winning more Business Select customers. Where do you think that mix lies?
You know, I think that’s a great question. I think it’s all of that. So, we added business select. See we got a couple of different things. I’m sure you know we have different fare products; business select is a fare product that has attributes like more credit and early boarding and those kinds of things. And then we have add-ons like early bird where you can simply buy automated check in so you’re earlier in the line, you have better access to big space, seats and those kind of things. So over time, we have added optionality to what you can buy. Which is really different than forcing you to buy something a check bag, or you have to buy a fare product if you want flexibility to change your ticket. So we avoided that and rather give you the options.
But business select was really targeted at a pretty small percentage of folks who typically buy in business fares.
It’s not always business. Sometimes it’s actually leisure. Folks did want it even more convenient, so they did want to board very early. You’ve got the attractions and the credit.
We looked at adding things like live tv for example, rather than make that an option where there’s a charge and it’s free for business select [but] we decided instead to make live tv free to everybody.
I think the thing that’s interesting is if you look at business select as not necessarily a proxy but maybe just compare it to business class on other carriers, what we see is we actually sell more business select than other carriers sell first class seats. You might get on a plane on a competitor [with] 12 seats up front. But what you typically see is they only sell about 2% of the seats. So just a couple are actually sold as first class [while] all the rest of those are given away as part of the loyalty program. With business select, we’re obviously selling all of those. Part of that is a very modest differential from our other fares. And then second we have tried to maintain that to a reasonable number of people because you want to preserve the benefit. Is there a chance that we could expand that to perhaps a larger number? Of course we’ve looked at that, but I think to preserve the benefit there will always be a relatively small percentage of folks on the aircraft.
I’m looking for some color as to how Southwest corporate market share and corporate business has sort of performed the past 2 to 3 years. I mean we get some data on your quarterly earnings call, but I’m maybe looking for sort of how that’s done and how it’s going to do moving forward, more importantly.
We divide corporate into three buckets. One is what I would call the corporate managed business…typically larger companies that we’re working with directly through technology. They may have agreements, they may not. They’ve got a way to display southwest fares and schedules through a piece of technology we have…we’re working with them through a more sophisticated way. Those are typically larger companies and larger contracts, larger amounts of staff.
We have corporate un-managed travel, so we have a relationship with typically a small business, but typically not a contract. So they’re coming at Southwest Airlines a different way. They may be offered a discount…they may have things like early bird, but we are not dealing with them technically the same way we’re dealing with the managed business.
And then third we’ve got corporate business that comes to us that we can detect that it’s corporate, but we have no literal relationship. So somebody is buying a business fare, or flying for business, but there’s no relationship with southwest airlines that we can detect. But we can detect you’re flying for business through symmetrics.
So you’ve got all three channels. And what I can tell you is that all three of those channels are growing faster than this entirety. So our corporate business is growing faster than our base business. The second thing I would tell you is that corporate managed business is growing substantially faster than the other corporate business. So we’re seeing double-digit growth in that managed corporate space. Again larger span, larger contracts, larger companies. And we’ve got a real focus there, so we got a team of people that work that like most carriers do. They have very aggressive goals. They have some marketing incentives that they can provide. So it’s definitely a focus area. But it comes down to if you don’t have the fare and you don’t have the service or the schedule or the network, you can’t win the business because you don’t have the product on the shelf without the buy. So that’s our biggest advantage-it’s just having the right fare and the right schedule.
I’m really pleased, I tell you, I’m really pleased with the corporate business. It’s just kind of like the rapport of oyster discussion. They’re both growing faster than the base business by a lot.
Network wise- this is going to be kind of my interpretation. I’m going to ask for sort of your response to it. So my interpretation of how you guys made yourself more prevalent in the business travel game is that you’ve always been there in places like Nashville, Baltimore, Washington- markets where you guys launched in mass in the ‘90’s. And you were sort of backfilling the loss of legacy hubs like US Air in Baltimore or Washington or American in Nashville or Raleigh-Durham. And you guys have always been sort of very compelling value proposition to business travelers in the secondary markets and kind of making sure they’re not- they have the wide range of network access that they need or would’ve lost without the HUB. Right, so then in recent years, places like ST Louis, Denver to a certain degree now that Frontier has sort of converted to an ultra-low class carrier in a quint network. You guys are playing sort of a similar role. So am I interpreting the role, the way you guys build some of your secondary markets in former legacy hubs correctly?
You know what? That’s a great question and we could talk for an hour because it’s- network theory and how we got to where we are is really interesting because we’re a combination of all of our history and all of the moves we made and we’ve done things for a lot of reasons and it’s funny because people think like well you avoid primary airports. Well of course we don’t. We’re the largest carrier in the US. We’re in primary airports all over. But I think it’s like anything- as the company and network expanded, you’ve got to take on multiple strategies. So we started just in Texas flying short haul, connecting (something) to Texas. And as you expand, a couple of things happen. You can’t avoid geographies because your customer base wants to get there so to be relevant in Houston, you have to serve Boston, for example. Second thing that happen is the legacy carriers consolidated their Hub structure, we worked not so much as a strategy to backfill them, but as a continuation of our expansions.
Inner cities that were under served, over fared- that has always been the strategy of the company. Go places where the fares are too high and the service is too low and attack. And as the legacies pulled out of places like St Louis and Reno and Raleigh and Cleveland…we have worked to backfill some of that service. I think within your question though, what about these kind of mid- tier cities. So not the New Yorks, but places like St Louis, Kansas City, Nashville, Orange County- a very long list- Austin, TX. We have had a…I think over the years those places have become natural points of strengths for us. I would say more recently we’ve had a more pretty determined strategy and focus to be very relevant in some of those mid-tier cities. So in other words, make sure we have absolutely the best offering out of Austin. To make sure we have absolutely the best offering out of St Louis, out of Nashville. For a couple reasons- number one, we want to own Austin. As a business you need to own something and we want to own those geographies. Second, to get all of someone’s business, you’ve got to serve the places they want to fly. You can’t be in Austin and not go to Washington, DC, as an example, because you won’t get that business. You might lose all of their business because you don’t go to Washington DC.
The last thing is that, if you look at our network history, you’ve seen in the last 6 to 7 years than any time [we] move into a larger demographic location. So a move into Boston, move into New York La Guardia, Newark. Those locations come with some complexity because a lot of those are tougher to serve. They’re congested airports. They’re on the east coast for example. But what you figure out at some point is that as the largest carrier, or as the largest network, you can’t not serve NY- because 80% of the domestic traffic is into and out of NY City. So you can’t be relevant to your other cities and not serve NY. So at some point you just have to serve those locations or you’ll lose someone’s business because that’s where they want to go primarily.
My last question is going to sort of get beyond the network aspect and the business side of evolution. I’m going to talk about fares, specifically the DOT data, which we both know has a lot of limitations as to what it covers. But at the end of the day, it’s the only data set that we as external observer have. So the DOT data set sort of tells the story that Southwest average fares have risen almost continuously in a lot of your different markets over the middle part of the last decade. If you look… sorry… excuse me, since the middle part of the last decade. If you look at your overall domestic fare figures, you guys have clearly diverged, I would say, from ultra-low cost carriers like Spirit and Frontier and Allegiant in your fare structure. And I think even though there’s sort of some skew for the stage length that you guys have gone on some of your routes in Texas and California, I think overall, even adjusting for stage length, there’s still a market rise.
So there’s three parts to my question about this one – The rise in fares is in average fares, I guess. So is part of that the different passenger mix? Then the second part of that question is does the rise in fares have to do with the fact that since 2005 or 2006 your fuel hedging strategy, which you know had given you guys by far the best fuel price input in the market, has the end of that skewed fares upwards? And the third one is, you know the DOT only gives us base fares. But as we know, other carriers have bag fees and lots of other fees that you don’t. So what is the rise in total out of pocket travel cost at Southwest relative to the other US airlines look like? And does that tell a better and fairer story than just looking at the base fares?
Yeah, that’s a really good question and the answer is yes to all. So let me take you to it and start by saying that our fares are lower and walk you through why. If nothing else, because that is our business. So our business is founded on two things- service and the ability to charge the right fare. And the ability to charge the right fare comes through the ability to have low cost and be efficient. And so if we don’t have low fares, we go out of business. That’s the mantra at Southwest airlines. But you’re right. Over the decade, the biggest shift in the industry has been the rise in fuel prices. And we had excellent fuel hedge protection for a long time. We still have excellent fuel hedge protection in terms of insurance, but we had a real strategic advantage for years. But our fuel cost per gallon has risen from 50 cents to over 3 dollars in that period. So our fuel bill as a company has risen by I think about 5 billion dollars in that period of time. So it’s moved from kind of 10 percent of our cost to 40% of our cost. So a gigantic change in just the structure of the business- that’s happened to every carrier. And they’ve done two things- they’ve raised their fares… they’ve raised they’re fees, not Southwest, but other carriers have raised their fees and then they’ve adapted their routes structure. So that’s why you’ve seen the industry pull capacity out or stay flat over that period of time. That’s one.
Second, you’re right, the (something near data) is deceiving because it doesn’t account for things like changes in stage length. So as our network has changed over the last decade and we have flown more longer haul flights, so basically it’s just two things. It’s a byproduct of flying across the country now. We have more longer haul flights and now second. The rise in fuel prices and fares has called an erosion of short haul traffic for everybody. It’s still a big piece of our business but it has eroded. So our business overall has shifted to longer haul, which has a higher fare because you’re carrying the passenger almost twice as far. So you know, that’s just a byproduct in the change in stage length. So you do have to consider that. And then the last piece is the gigantic difference in fees, or the all end price between ourselves and our competitors. So you know it’s very deceiving to look at, in two things on the fare, it’s very deceiving to look at just the fare, because number one- if you look at head to head markets, Southwest sets the price. Well we’re not…prices are 30-40% higher. So where we are, we get matched. But if we were to leave the market, fares would rise. So you don’t see that in the data because we’re there. So that’s very hard to sort of tease out. The second piece is you’ve got to consider the all end price. If you look at somebody like Spirit, which may publish a very low fare, they’re getting almost 60 dollars per passenger in fees. Bag fees, change fees, passenger convenience fees, booking fee, government security fee, nuisance fee- you know all kinds of things! You know, recently, they’ve gone to charge you to carry on your bag and put it in the overhead bin. So you’ve got to consider the all end price…we are still by far the lowest. And on average, we are, I think I’ve said this before, we’re on average about 30% lower across the board than our competitors. But you have to consider whether we’re in the market or not, second you have to consider the all end price because the price without all these fees is very deceiving. Because we don’t charge you those things and they do.
Hopefully all that made sense. It’s a lot of stuff. But the fare data on its own is very deceiving.
Right, and unfortunately carriers aren’t sort of asked to report any sort of per passenger and fee data and it’s something you kind of have to model…trying…
They aren’t yet but hopefully at some point.
That being said, I want to ask one quick clarification on that. So with regards to your answer with stage length and the shifting network…. so my understanding of this data, and you can certainly correct me if I’m wrong, is that shifting to longer stage lengths typically tends to drive down your overall sort of rise of numbers. And the data that I citing with regards to rising fares in markets was more about sort of year over year change in the same market, take Dallas, Austin or Las Vegas.
OK, so is it fare or is it, you know, revenues too. Those are two different….
I think if you’re looking at market to market comparison, then what you’re seeing is what the rise in fares really do to the rise in fuel prices. And what you’re going to see is that every carrier has experienced that rise on a market by market basis. But our relative fare difference to the other carriers has stayed about the same. So our discount to others, all in, is about what it was ten years ago. Really what I was speaking to, and again it’s how to use the data, if you look at sort of the blend of southwest airlines blended fare, it’s very deceptive because while unit revenues fall, so seats (RASM?) revenue (PRASM?) falls as you fly longer, the average fare on that stage, of course, still rises. It’s deceptive. The other thing too, which is very hard to tease out of the data, is what fare is available across what point in time. Because you’re seeing averages again, and we have a lot of data because we fare shop ourselves… one of the things we do is we fare shop ourselves across thousands of data points every month to make sure that we’re lowest.
And on average we’re offering as low or lower fares than our competitors. So we self-check ourselves here at Southwest and what’s very deceptive on the average is what fare was available when? So we know that not only do we have lower fares, we have more lower fares available. So we put more of that low fare inventory out there earlier and in larger quantities for our customers. The second this is at the tail end of the booking curve, when prices tend to rise significantly, and ours may as well, so the fare you would get day of, is going to be higher than the fare you would get you know 60 days out, that price differential from lowest to highest is far less on southwest than others. So you know, the other carriers might have a 2000 dollar one way fare to New York as the last minute price because they can get it. We would never do that. So you’ve got to take the data and look across the booking curve as well. So you really have to decompose it. But main point is, overall, we are still lower than our competitors. Particularly when you consider the all in price with fees.
Yeah, no I just wanted to make sure that I had sort of ….
Oh sure! There’s a lot in the DOT data and there’s a lot that’s not quite right in the DOT data too. And a lot of categories, carriers can choose to report what they report in a category as well.