nsx

United's latest salvo in the fee vs. no fee war was to raise the second bag fee to $50.

Southwest has already updated its fee comparison chart.

This will be a GREAT business school study some day in the near future. United believes that it can make more money by keeping base fares down and piling on fees. Southwest believes that it can make more money by attracting customers who are repelled by junk fees.

It's fairly easy to hit your customers with these fees the first time. Not many customers pay attention to changes in the fee structure unless they happened to read the newspaper stories. Most customers will learn about the fee at the baggage counter. At that point the customer might develop a distaste for the airline. As soitgoes put it:United's challenge is to retain customers after they have had to pay these fees. Southwest's challenge is to attract customers either before of after they have paid baggage fees. This requires informing the traveling public that there is a no-fee alternative, and making it easy to compare total price.

Southwest has stepped up to the first part of the challenge with a clever and extensive ad campaign focused tightly on Southwest's lack of junk fees. The lack of fees is becoming the new core of Southwest's brand identity. For example, http://twitpic.com/bte8 has a photo of Southwest's latest effort to draw attention to its lack of fees: Yellow striped "no fee" zones.

The second part of the challenge is more difficult. Travel booking web sites don't show the complete trip cost. United and others are counting on this. Worse, the travel booking web sites don't show Southwest Airlines as an option. It's as if Southwest does not exist. Therefore Southwest needs an ad campaign to inform people that if they haven't gone to southwest.com, they haven't finished their shopping. The ads can explain that Southwest keeps its fares low by not appearing on Orbitz or Travelocity or Expedia, so you have to take the extra step of going to southwest.com or phoning Southwest. This may be obvious to FTers, but it's not obvious to casual travelers.

Will customers remember that Southwest has no fees, and to go to southwest.com rather than just Expedia, and will customers do the mental addition to accurately compare all-in cost? That, ladies and gentlemen, is a tall order for a non-FTer.

One thing's for sure: winning customers repelled by junk fees will take time. Certainly months, possibly years. Southwest will need to hold its no-fee ground for at least 2 years before we know for sure whether United has accurately pegged its customers as unsophisticated and either uncaring about fees or unable to learn. Southwest has the financial strength to conduct a lengthy siege against junk fees, but United might turn out to be correct.

A wild card is whether Orbitz or Travelocity or Expedia will decide to show all-in pricing and add Southwest (which is already the number one domestic airline in tickets sold). The travel sites would need to add pull-down options for checked bags and perhaps even pillows. Populate those fields when requesting your itinerary and you get the all-in price.

How much does it actually cost to carry a bag? One poster in the UA forum said the fuel consumption .04 pounds per hour per incremental pound of freight. Fuel weighs 6 pounds per gallon. That equates to one gallon burned per 3 hours of flight for a 50-pound bag. At this rate, the handling costs still exceed the fuel cost.

If the airline discourages checking bags and has extra space in the baggage compartment, can the airline make money on freight? That's unlikely: Southwest dropped its contract with the US Postal Service because the rates were too low.

There is a practical reason for Southwest not to charge baggage fees. Customers will respond by increasing their use of carry-on baggage, increasing the incidence of carry-on bags having to be taken off the plane at the gate and put in the cargo hold. That will increase turn times, which costs money. The revenue from baggage fees could be lost if overflowing carry-on bins add even 2 minutes to the turn time. So the right answer to the fee question might be different for United than it is for Southwest.

Now for an analysis based on economic principles. As explained here, movie theaters discovered long ago that customers who are less price-sensitive will buy extra goodies like popcorn. Penny pinchers won't. Therefore they can make more money and attract more customers by overcharging for popcorn and undercharging for admission.

Does this well-known economic analysis apply to baggage fees? Yes, but I believe that United has gotten it exactly backwards: People who check bags are likely to be more price-sensitive than the people who don't. Economic principles say that United is doing exactly the wrong thing by overcharging its more price-sensitive customers. A free baggage allowance is a form of undercharging your more price-sensitive customers, so Southwest appears to be on solid economic ground.

I'll bet WN thought long and hard about all the above before launching the "no fees" ads. WN tends to make excellent decisions and reverses itself very rarely. The "no fee" ads demonstrate a serious commitment to keeping fees to a minimum.

It's rare in business to see two companies adopt diametrically opposed product strategies. I can't wait to see how this movie ends, but I guess I'll just have to buy some popcorn and grab a seat.

Beckles

You seem to be ignoring the fact that WN was "winning" before this "war", and nothing that has occurred during this "war" weakens WN's position, only strengthens it, so I'm not sure how you could possibly believe that WN will "lose".

mile ho

I do think they'll win this war, meaning many more customers through their straightforward pricing which is shown clearly through their 'no fee' ads. I appreciate their honest attitude toward me, the customer.

Furthermore, one of the very best WN attributes is the no fee change. This is just one of the reasons I fly WN.

AA in D/FW has much to fear when they truly are, in the future, able to go head to head.


Rock on, SWA!

nsx

If customers begin booking away from Southwest because other airlines offer lower base fares, then Southwest will have lost and will have to institute matching junk fees. This will be sad, because it will prove that customers behave unintelligently.

My hope is that most customers know a travel expert who can help them make intelligent decisions. Then Southwest can win if it sticks to its position long enough.

ClueByFour

Other airlines already undercut LUV from time to time. They seem to be doing okay.

I think the fee thing is like so many other things LUV does it it's business--they are aware of what everyone else is doing, but they do what they feel is in their best interests. The "war," such as it is, may just be noise.

LUV has gotten by for quite some time (and some might say quite deliberately) going way out of their way to limit their distribution channels to those they control. Again, I think the idea of an "all in cost" is probably noise--you have to go to LUV's website today to get their pricing. I don't see a change here.

With that said, Southwest occasionally still does things relative to everyone else that is unique to them (and at a glance, potentially competitively damaging)--the big one that comes to mind is when the legacies allowed free standby, you still had to "buy up" at LUV. I always assumed that the boys and girls in DAL ran the numbers, and did it for a particular reason, although I don't pretend to know why. I think that same ethos is what will drive the baggage fees, if any.

Beckles

I have seen no indication that other airlines' base fares have gotten lower relative to WN's since the other airlines have begun implementing the myriad of additional fees, maybe your experience is different. I believe that WN is still dictating price in most markets it serves, when WN reaises fares, the legacies are happy to follow.

nsx

See the 7th bullet item at http://flyerguide.com/wiki/index.php....2C_and_why.3F

uastarflyer

No way a) this will happen and b) this should happen.

The customer can decide at the last second to NOT take a bag (or take a 2nd one).

And there's no incentive to send business to WN if WN won't play on the major travel sites.

But mostly my first point. "All in" pulldown system is misleading.

ClueByFour

I'm not entirely sure I agree with the #4 point about why other airlines do what they do. Other than that, your point is well taken.

num1bearsfan

Actually, mail and freight are 2 completely different things and one has nothing to do with the other.. The mail was a contract from fed and was paid on a fixed rate based on volume moved. FORTUNATELY that was done away with because is was an incredible "bog down" on the operation, and Southwest was not even being fully paid for the mail that was moved due to many issues with the way it was registered/scanned which resulted in probably 20% of ALL of the mail being flown for free (that's my estimate, but I had a good look).

The mail was done away with in favor of increasing the freight volume. Basically, someone figured out that flying mail made no sense when they could displace the payload with freight, which yielded much more profit.

Probably not too many people in this forum are very aware of it, but other than being an airline that flies people and bags for cheap, Southwest Airlines also has a VERY large air freight operation, and makes a great deal of money flying air freight. And it is very profitable indeed.

I suggest that if you're going to try and disect Southwest's operation and nail down details such as cost per pound, and fuel burn, and profitablility per flight, you should definitely take into account freight as well, because it's definitely more than a trivial blurb to be mentioned in passing. It's often the difference whether a flight booked to 30 is profitable or not. I can tell you first hand that we take advantage of low booked flights and cram in as much freight as possible headed that way. Those late night flights where you're sitting in your own row, and the nearest passenger is 3 rows up or behind, and you'd be certain that the flight is operating at a loss, you can be sure that the flight is packed to the gills with freight.

nsx

Very interesting. I wonder why Bill Owen didn't mention this in his blogsouthwest article about the new compressed winter schedule.

iahphx

So far, it would seem, WN is clearly LOSING the fee wars. The other airlines have seen absolutely no decrease in demand -- even US, which has the odious "no free water" policy now. Indeed, it is WN's traffic that has looked the weakest, and is the reason why WN recently cut its winter schedule rather significantly. So the reality is that WN's competitors are raking in the extra money (fee income is substantial: CO estimates the $15 bag fee is worth $100 million), while WN gets nothing (and indeed is spending lots of money advertising its no-fee virtues).

This is not to say the strategy won't EVENTUALLY work. I mean, how pleased are you going to be when you get hit up two bucks for water? Clearly, at some level, customers should recognize the value of the free benefits, and the true costs of flying an airline with a la carte pricing (of course WN's advertising exagerates these costs -- most customers will simply forego the services they don't want to pay for).

But whether the forgone revenue at least equals the additional revenue from new happy passengers -- well, I guess we'll have to wait and see. If WN eventually institutes some fees, we'll know it didn't (and I wouldn't expect WN to give up for quite some time).

ClueByFour

Every other airline has been yanking down capacity for a longer period of time and with greater gusto than WN. I find a statement of "no decrease in demand," under those circumstances to be, well, propaganda at best.

Well, no, but you are entitled to your opinion.

SW High

It's funny that I was about to start a thread today about this, motivated by two discussions with people who told me they purchased tickets, one on AA and one on UA because WN was more expensive. They each told me that the fares for one was $80 more & $95 for the other round trip. One has a family of four and the other, five. Each emphasized the total savings of about $400. Both are fairly intelligent yet could not grasp the add on costs for luggage which alone will cost each almost double the savings.

If this is representative of the general population, WN will lose on this as was indicated today in the Wall Street Journal "Middle Seat" column that they are not benefiting. It should be remembered that advertising is aimed at the 6 year old. That large, extra revenue that they are passing on for luggage is considerable and could be big to the bottom line.

Southwest can still continue the other freebies that don't cost as much and are more visible such as snacks and drinks which would differentiate them from the others. But don't pass on the suggested billion dollars for bags.

LarryJ

They've won it with me...