Skip to main content



) -- There's a debate raging over whether


(LUV) - Get Free Report

is gaining hundreds of millions of dollars annually from passengers who switch carriers because of its "bags fly free" policy.

Southwest CEO Gary Kelly insists that's the case. "It is very clear that we are seeing a share shift," he said in

an earnings conference call

. "Our folks have made several different calculations on this, but it all points to a roughly 1% share shift in the domestic U.S., which is huge, somewhere between $500 million and $1 billion worth of additional customers." Industry domestic revenue was

$80 billion in 2008.

Southwest's Secret Bags of Cash

Image placeholder title

But several carriers are publicly disputing the claim, which was a hot topic on several fourth-quarter earnings calls.

Because of Southwest's current "bags fly free" advertising campaign, "you can'tfind a customer now who isn't aware that Southwest doesn't charge for bags," Kelly said. "We're getting a lot of credit for that and I think that, of course, is certainly one of the reasons that we're seeing a pretty significant share shift."

The best evidence of the shift, Kelly said, is the 7.4% increase in Southwest's revenue-per-available-seat mile, a key industry metric that measures the amount of revenue for each seat that is flown one mile. That is "an all-time record in terms of quarterly unit revenue in the fourth quarter of a recession," he said.


( AAI) sees it differently. On AirTran's earnings call, Senior Vice President Kevin Healy discussed the increase in Southwest RASM after an analyst suggested that differing bag policies contributed to a gap in RASM performance. While Southwest showed a 7.4% gain, AirTran reported a 10.3% decline.

"There are a lot of things driving the numbers at Southwest," Healy responded. One is that Southwest reduced capacity, he said: Ideally, that would enable it to carry a similar number of passengers despite fewer seats, which would increase the revenue-per-seat mile, and to eliminate some of its lowest-priced tickets.

Healy also noted that Southwest has managed to increase its load factor, which has historically been below the industry norm, and that it has made a series of schedule changes, eliminating its least successful flights. Either move would also be expected to result in a RASM increase.

"We spend a fair amount of time trying to understanding what is driving purchase decisions, and I don't know if I would conclude or wouldn't conclude that baggage is the only thing going on there," Healy said.

On the

US Airways


call, President Scott Kirby agreed with Healy, noting: "There is a lot more to the Southwest results than just bags." Kirby said the main contributor to Southwest's improved RASM is likely capacity cuts. In the fourth quarter, Southwest shrank by 7.7%, while the industry dropped about 2%.

Yet Kelly has denied that capacity cutbacks fueled the RASM increase. "You might say it's because we adjusted our capacity, but that doesn't explain it because our traffic was actually up," despite the 7.7% capacity decline, he said, on the earnings call.

Kirby also offered a second explanation for Southwest gains. Although US Airways cannot detect any share shift to Southwest, "We may be at a point where Southwest is getting some market share shift from all of the big carriers and the smaller ones like Air Tran (that) isn't measurable or meaningful to us, but when you add it all together it is meaningful to them," he said. In that case, "Southwest is going to see larger positive benefit than the rest of us see negative benefit."



(AMR) - Get Free Report

spokesman Tim Smith also said the carrier has seen no change in its traffic related to Southwest's policy on bags. A recent study comparing American, Southwest and


(CAL) - Get Free Report

market shares "shows nothing except that the recession is happening," Smith said. "It shows all three were moving up and down in tandem along with the economy."

The study by consultant Robert Herbst, founder of, compared revenue-passenger miles and load factors for the three airlines for the 12 preceding months. It concludes that "at the time American and Continental were steadily increasing add-on baggage fees, Southwest did not have any consistent increase in market share."

More recently, after reviewing year-end results, Herbst concluded that "it's likely true some passengers are booking toward Southwest because of the baggage fees," but he added: "It's also true competing airlines are setting record load-factors and collecting billions in revenue from their ancillary/baggage fees."

Southwest spokeswoman Linda Rutherford said Southwest was the only major carrier to see an increase in 2009 traffic, despite its annual capacity decline of 5.1%, similar to cuts at the legacy carriers."We clearly had different results," she said. "Our competitors' comments just aren't matching up with the black and white results."

-- Written by Ted Reed in Charlotte, N.C.