Southwest Axes Commission, Mulls Tweaks To Biz Model
Low-fare champion Southwest Airlines is contemplating possible changes to its age-old business model in part to respond to rapid growth among its low-cost brethren. Though some items remain off the table—pre-assigned seating and onboard meals, for example—the carrier is exploring a new fleet type, Internet checkin and the possibility of an inflight entertainment system. It also will eliminate travel agency commissions and press ahead with 7 percent growth in 2004 by adding frequencies and at least one new city.
"With 30 new planes coming next year, we can open more than one new city if we choose," said executive vice president and CFO Gary Kelly, who would not identify the new destination or the timing of the announcement. Dozens of cities are known to be pursuing actively Southwest service. "We do have some fast-growing competitors, and there potentially is an advantage in being first to market," he said. However, Kelly added that "we want to take care of existing markets first" and specifically cited St. Louis—a market in which American Airlines is retrenching—as a potentially "significant growth opportunity." Southwest already ranks number two in St. Louis share behind American.
Also on tap is the elimination of all traditional travel agency commissions. Southwest on Dec. 15 will become the last major U.S. carrier to take that step. The airline, which said only 15 percent of its third-quarter reservations came through the traditional travel agency channel, will continue until that date paying 5 percent, uncapped commissions across the board.
"We waited this long to make the change in our commission policy to give all agencies—large and small—ample time to shift their business model to the industry norm of fee-based services," said Southwest CEO Jim Parker, noting the change will save the airline $40 million annually.
Southwest said 55 percent of all revenues now are generated via online channels. The Swabiz corporate booking portal, for example, has experienced "huge growth and is still a huge opportunity for Southwest," according to Kelly.
He added that the airline had not seen evidence of a revenue advantage by keeping commissions intact and that the decision was driven from a cost-savings perspective. Sabre is the only global distribution system in which Southwest participates, and, despite the declining travel agency mix, Kelly said, "we have a great relationship with Sabre that we are intending to continue."
In the airport environment, Southwest last year finally abandoned its trademark plastic boarding cards in favor of a new automated system, including gate reader technology that "is beyond testing and into the deployment phase."
The carrier since last summer has installed more than 400 self-service kiosks around the network and currently is evaluating the idea of issuing boarding passes via southwest.com, an innovation already embraced by most major airlines.
In the air, Southwest is considering two potential developments that would alter dramatically its consistent, single-fleet type, no-frills strategy. "We are exploring a new fleet type, smaller than the 737 but not a regional jet per se, in order to make service to several smaller markets more feasible," Kelly said. Southwest currently operates 385 Boeing 737 aircraft, the fleet workhorse during the past three decades.
Either on the new planes or across the entire fleet, Southwest may add an inflight entertainment system, an idea it has explored "in earnest" throughout 2003. Fellow low-cost carriers, including JetBlue Airways and Frontier Airlines, already offer television programming and other entertainment options. Delta Air Lines' low-cost subsidiary Song this month also is scheduled to begin installing an inflight entertainment system.
"We are wide open and have to look at customer needs and wants, what is feasible with our equipment and what our costs are," Kelly said, citing a growing number of transcontinental flights and a high mix of business passengers that would benefit from potential inflight Internet connectivity and power outlets. "It is too early to tell if it will be an evolution or a revolution."