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Southwest Airlines this week reorganized its fare classes into three categories, including a new Business Select "product" that encompasses refundable fares and "guarantees" customers would be among the first to board. Business Select also provides bonus loyalty program credits and a free in-flight cocktail. The new fare structure goes live today. Southwest also revamped the presentation of fares on its Web site and added a new tier to its loyalty program. Dubbed the A-List, the new upper level recognizes the carrier's most frequent customers, who would be automatically checked in 24 hours before departure--increasing the chance of being in the first boarding group. These announcements follow other Southwest initiatives to appeal to the business travel community, including its participation in Galileo's Apollo global distribution system and sibling Worldspan GDS, and new boarding procedures. Those procedures maintain the open-seating approach but no longer require passengers to queue up in long lines at the gate. After announcing Southwest's newest policies, CEO Gary Kelly on Wednesday fielded questions from journalists regarding Business Select fares, corporate travel sales efforts and business travel demand. An excerpt follows.
Are these Business Select fares higher than any fares you currently have?
Yes they are. We have taken our existing fare structure and we are adding to that for the added value that is being offered through the Business Select product. It is not a fee. It is important to make that distinction. It is a fare, and of course, fares will vary. Arguably, they can vary based on day of week and time of day, and certainly they vary market to market. At least for now, we have some introductory Business Select fares that are as little as $10 more than our full fares, and range up to $25 and $30 higher, roughly. It is not a static fee across the board in every market. That is not the idea.
Can you talk about the revenue projections?
We are making these adjustments because we believe there is a good business reason to do it. From the combination of things we are introducing today--the improved fare presentation [on southwest.com], the Business Select product and the [loyalty program] changes--on aggregate we are expecting hundreds of millions of dollars in annual incremental revenue. I do not expect that it will kick in instantly, but we would be delighted if that is the case. It appears that annually we should expect at least $100 million from today's announcement. A lot of it, of course, is based on building our brand and making us a more attractive customer experience. That is an indirect effect--gathering up customers and making us a little more attractive, especially in new markets where customers may be shying away from trying us. We may not gain as much in new business in mature markets. But our overall revenue target is unchanged. In other words, we have already laid out a very ambitious goal of well over $1 billion in incremental revenue by 2009. This is essentially the first step. What we are detailing here are the customer experience enhancements; there are also revenue management enhancements that are going into place with [the new] schedule, effective in March. One of the reasons that Kevin [Krone, vice president of marketing, sales, and distribution] wanted to change the fare display is we are increasing the number of fare categories [behind the scenes] to be more industry-consistent. Today we have eight, tomorrow we'll have 15. So we didn't want 15 fares spread across southwest.com. We needed a more organized way to present that. It also sets the stage for a customer to pay more. With [fare brands] Wanna Get Away, Business and Business Select, the more you pay, the more you get.
Can you talk about changes to the sales force?
We are just at the beginning of that. This is the time to take all these new tools and benefits available to corporate travelers and get out there to see if we can land some more accounts. What we are looking for is a commitment for more travel, and then [the sales force] is empowered to negotiate from there. [Corporate discounted fares] are not necessarily the result. It is not so much a matter of the fares that corporations are looking for. They are looking for ways to make their employees more productive. We already offer a great product--lots of flights, terrific employees, the best customer service out there and an on-time performance that this year may very well end up better than a year ago. Now we are adding a new and improved boarding process and the ability to get the seat that you want. Taken together, all those things make a powerful corporate presentation. We have cities and corporations today asking us for more flights, because they like Southwest service. I do not know that that in itself will be the key in winning more business, and certainly we want to empower our sales force. If you give us a million extra trips a year, we might be willing to talk.
Are you expecting to generate more business travel or take some from your competitors?
I suspect it will be a combination of both. Clearly, we'll be going into corporations that are not utilizing Southwest Airlines today, and we'll ask, 'What is it going to take to win your business?' In that particular case, it could be taking market share from competitors because we think we have the better mousetrap. But it could be, because of our low fares, that we are also stimulating the market. We're happy to have the extra business either way.
Are you concerned that you are introducing this at a time when you may see corporate travel slowing, and are you seeing any evidence of demand slowing?
I am not concerned about introducing this at a softening period, because I think we need to make these enhancements regardless. We'll have ourselves positioned for the next generation, the next revolution of Southwest Airlines. No one knows, of course, when travel demand will soften. We are concerned about that. We have already taken steps that were effective in October to slow down our growth. With all the business headlines that we see and all the problems in the financial sector, we are very cautious about that aspect of our profit equation for next year. The other thing coincident to that is you wake up every morning to a new record for crude oil prices ... We are definitely reconsidering our growth rate for next year ... We have to get better at matching our supply to the demand. This is the kind of environment where we need to be addressing that and that is more important than being concerned about introducing these new features today. There still is going to be business travelers and we'll still be in a better position to fight for them.
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