OAG Travel News

Would Southwest Airlines have turned a profit the past quarter if it had charged checked-baggage fees? That was the interesting question posed during the company’s conference call to discuss its $91 million first-quarter loss, which was a penny per share worse than Wall Street had expected. A year ago, Southwest earned $34 million. Operating revenue dropped 7% to $2.4 billion from $2.5 billion. The company’s vaunted oil-hedging strategy turned sour late last year when oil prices collapsed, and caused another $65 million hit in the most recent quarter.

Moreover, the airline anticipates second-quarter revenue to fall short of the same quarter of 2008, although CEO Gary Kelly said weekly sales declines that accelerated throughout March have stabilized. Southwest is offering all employees but senior management a buyout package to leave, but says it has no targets on how many of its 35,500 workers it wants to shed. Southwest is working to align staffing to capacity reductions. “Honestly, we don’t how many people will take this offer in this environment,” chief financial officer Laura Wright said. “We think that whatever number takes it will be good.”

But it is the bag fee issue that cuts to the heart of why Southwest will succeed or, if the lousy economy turns truly draconian, becomes yet another ailing airline where the revenues don’t match the costs. The question was proffered by Morgan Stanley airline analyst William Green and spurred a somewhat spirited discussion (by the relative standard of a Wall Street earnings call). In the aggregate, $91 million is not a large sum for a huge airline like Southwest to amass across its system and a $15 fee certainly would have yielded far more in the first quarter. If one figures that only half of Southwest’s 19.7 million revenue-producing passengers had checked a bag, the take totals $148 million. “Why not put those in place?” Green asked.

Save for JetBlue, every other major carrier has imposed a fee -- and they have been pleased greatly by the new revenue. So why won’t Southwest do it? “I’m not at all convinced it would be revenue positive and it would certainly be disruptive to all the things we’re trying to do on behalf of the brand,” Kelly said. “It is a very competitive environment out there. We know that for a fact.”

What’s more, Southwest operates firmly committed to the belief that it stands alone in the airline industry with a unique relationship to its customers, who are extraordinarily price sensitive – Southwest’s average one-way fare is under $114 – but fiercely loyal. “If you lose one customer … that’s the equivalent of a handful, if not ten or 12, bag fees.” Southwest also thinks its ubiquitous “No Hidden Fees” campaign is taking hold among consumers and reaping positive business results.

Mike Linenberg, a Bank of America analyst, further suggested that bag fees could help Southwest maintain its financial lead over the rest of the industry. As many others restructured in bankruptcy, the cost advantages Southwest once enjoyed have eroded, and its once-stellar revenue performance is no longer remarkable. Kelly bristled at that line of argument. “The bottom line … is that we don’t believe it would be revenue positive anymore than we could argue that we could push through a $10 fare increase in this environment,” he said. “There’s just so much that can be done there.”

The airline stressed repeatedly that it has no plans to charge bag check fees. But if 2009 continues along the same dismal path in terms of traffic, revenues and red ink, Kelly can expect the chorus calling for a checked bag fee to grow increasingly persistent.

Source: www.businessweek.com