CHARLOTTE, N.C. -- More and more,
is becoming just like all the other airlines.
Want proof? Just check the two airports on the Southwest expansion list. One is
, a fortress hub for Northwest, where Southwest will begin service in March. The other is New York's LaGuardia, a poster child for congestion and delays, where Southwest has bid for 14 slots previously operated by bankrupt ATA Airlines.
For years, Southwest distinguished itself by specifically avoiding such airports, but no more.
Airport selection is just one indication that Southwest, after decades as an industry outlier, is moving rapidly toward the center -- even as it defiantly proclaims that it remains unique.
The Southwest dilemma was in evidence at the recent Credit Suisse airline investment conference, where CEO Gary Kelly was lunchtime speaker. Even as he displayed a graphic showing
to be the industry's low-cost leader, Kelly could not resist saying what he has been saying for so long, that the distinction belongs to Southwest.
"We're the low-cost producer; it's part of our DNA. That is who we are and who we want to be in the future," said Kelly, just before acknowledging that in fact AirTran has lower costs. "My friends at AirTran, congratulations," he said. "You guys do a great job. Now they're the ones to beat."
For the record, according to a Southwest compilation of cost per available seat mile excluding fuel costs and adjusted for stage length, both carriers spend just over 6 cents. AirTran's third-quarter costs were lower, while 12 month CASM was nearly equal.
The problem does not, however, end with CASM. Financially, Southwest has been unique not only because its CASM was the lowest, but also because its fuel hedging was the best, ensuring profitability as oil prices soared. Since 2003, Southwest has enjoyed a cash benefit from fuel hedging of $4.2 billion.
Now, falling fuel prices are erasing this advantage. With oil at $50 a barrel, Kelly said, Southwest would have a fourth-quarter cash gain of $45 million. (The third-quarter gain was $448 million.) For 2009, assuming oil at $57 a barrel, Southwest would have hedging losses in the range of $100 million to $150 million.
"Southwest Airlines today reported its 70th consecutive quarterly operating profit," was the first sentence in the press release as the carrier reported results in October. In fact, Southwest was profitable in the third quarter, as well as in the second quarter, only because it recorded fuel-hedging gains.
In the cabin, the quality that has long set Southwest apart is a spirit of equality among passengers. Among the 10 airlines, only Southwest and
do not differentiate among passengers by offering first-class seating.
However commendable in terms of social engineering, the strategy has the obvious defect that it fails to optimize a potential profit center. In the past year, this realization has struck both carriers. Both now sell a premium product.
At JetBlue, it is extra legroom -- a puzzling choice, given that JetBlue already offers far more coach legroom than anybody else. At Southwest, recently introduced BizSelect comes with preferred boarding, a free drink, extra frequent-flier miles and higher fares. Meanwhile, Southwest is also adding code-shares, enabling it to provide international destinations through partner airlines.
Despite all the changes, Southwest is today locked into a defiant effort to differentiate itself through a heavily promoted advertising campaign, focused on its "no hidden fees" strategy. This strategy is fraught with risk. The primary one is that while airline passengers seem to enjoy complaining about fees, evidence is scant that they book away from airlines who charge them.
In fact, during the five months that
eschewed the first-bag fees charged by peers, it found that many of its passengers nonetheless assumed that it charged them -- and carried on more baggage in an effort to avoid paying them.
At the conference, Kelly detailed this aspect of the Southwest dilemma. "Every company wants to be different, and would hope to be remarkably different, especially in customers' minds," he said. "It's not so much about hidden fees as it is a golden opportunity to drive home the fact that we are remarkably different and we are devoted to low fares and we don't want to screw the customer."
On the other hand, he acknowledged, "Time will tell if that translates into more money and more customers for Southwest Airlines. And it has to. If it doesn't, we probably will have to change that."
Aviation consultant Robert Mann says the airline industry's new economics -- lower costs at most carriers, tumbling fuel prices, and now a recession -- combine with Southwest's now-large size and rising costs to create pressure for Southwest do things it never did before.
"At this stage of the business cycle, Gary Kelly has concluded that he has a (cost) problem and that simply trying to grow his way won't successfully solve it," Mann says. "So Southwest is making major changes."
Looking ahead, Mann says two drastic changes are likely. For one, no place is off limits for an airline willing to fly to LaGuardia in search of high passenger concentrations. "You'll see Southwest in (Boston) Logan, (Washington) National and Atlanta," says Mann. "They will get on the bandwagon."
Secondly, he says, Southwest cannot continue forever to forego fees for first-bag handling and other services.
"My proxy will be their advertisements," he says. "When they stop advertising 'no fees,' I will know they are 30 days away."