Change Fees? “Southwest would ‘never’ do that.” Oh, really?

Southwest’s recent ad campaigns aimed directly at the booming ancillary fee market that has created net positive margins for airlines has for the most part accurately portrayed the truth:  Southwest has, as stated by this scribe many times, the lowest overall fees in the US aviation market.  But their latest claims, shown here sequentially on theboardingarea.com, make some pretty blunt statements that may come back to haunt that airline.   Why?  As always, I’m pleased as punch you asked.

Positioning Joe (or Josephine) public versus the stuffy, eye-ball rolling executive is clever to say the least.  And that $150.00 change fee is indeed a painful fact of life for most travelers on restricted coach tickets.  But could there be reasons beyond the implied greed of most carriers as to why they charge those fees and why Southwest may have little choice but to do the same in the future?  Well, let’s just say that as certain as I am that Southwest will need to address the lingering issue of removing first class from its AirTran-marketed planes, so am I hedging that by acquiring AirTran the issue of change fees will be parked at Southwest’s corporate offices sooner rather than later.  And here’s why.

Let’s look at the nature of why change fees are imposed by airlines and assume, correctly, that unlike the Southwest ads, they’re really not just about mouse clicks and how much work it takes to change the ticket.  What they are is a hedge against the domino effect of a customer’s desire to change his ticket.  First, let’s start with this fact about airline seats:  Airline seats are a perishable commodity, meaning, once a flight leaves a gate, any empty seat on that flight is a lost revenue opportunity that cannot be recovered. Under this model, consider this example, when a consumer purchases a ticket to fly from Sarasota to Seattle, he is in fact not just purchasing a ticket for himself, but also blocking a seat that could potentially be sold to someone else.  Indeed, not only is he blocking the seat from SRQ to ATL (using Delta as an example), but he’s also now blocked the seat from ATL to SEA.  This ATL to SEA seat cannot be bought by anyone else who may be wanting to fly to SEA from anywhere that must connect through ATL to get there.  So, the traveler who wants to go from Charlotte or Savannah to SEA now has one fewer connection seat available to him for his ATL to SEA leg.

So if the customer in SRQ decides to change his flight plans, the seat that now opens up to the Charlotte or Savannah customer may no longer be needed because that customer purchased his own seat either on another Delta flight or perhaps, worse, on another airline because the seat had been reserved by the customer in SRQ and was not in the available inventory for the ATL to SEA portion.  Not only is the original SRQ to SEA seat now in danger of going unsold, but so are the return seats for that SRQ customer.  Therefore, 4 reserved seats may now go empty just because the SRQ customer changed his flight plans.  Empty seats = lost revenue = need for a change fee to protect that lost revenue.  In the hub-and-spoke system employed by virtually all US carriers, the revenue at risk by ticket changes multiplies the more complicated the connection.  Indeed, the same passenger in SRQ who may want to go skiing in Jackson Hole, Wyoming, now has 6 flight legs that he could impact.  SRQ-ATL-SLC-JAC and the return.    Any business owner who would not want to recoup some portion of this lost revenue would quickly have his business acumen questioned – at best.  So practically speaking, the airlines have two very real and easily identifiable reasons why they impose change fees on the cheaper fares (some would say those change fees are built into the more expensive, unrestricted and first class tickets):  1)  build in a revenue protection component to offset customers whose travel plans change therefore opening up seats for which demand may have perished and 2) influence travelers to keep to their scheduled travel plans so all goes as planned for the airline.  No empty seats = maximized revenue = no change fees.

Now we get to Southwest who has traditionally employed a point-to-point system.  Eschewing the legacy model of gathering passengers in large catchment areas and funneling them through extensive hub systems, Southwest has opted for a point-to-point model where customers are not required to fly through hubs.  Instead, Southwest’s route map shows that our Sarasota to SEA passenger does not even exist for Southwest.  Instead, that passenger would need to drive to Tampa or to Fort Myers and fly direct to SEA.  (Forget about that SRQ to JAC passenger…for as those Mainers would say “you can’t get there from here.”)  The resulting model for Southwest carries with it much less vulnerability to ticket changes.   Getting from point A to point B is just that.  One ticket.  One seat.  No connections.  No domino effect of the passenger who has booked 1 seat on three separate legs to get from point A to point B.  I would ask, though, with the absorption of AirTran’s hub and spoke model into its portfolio, can Southwest’s model of point-to-point flying and no change fees co-exist with AirTran’s (who imposes a $75.00 change fee plus any airfare difference)?  And should it?

I think not.  The absorption of AirTran is a fundamental shift in strategy for Southwest.  Its point-to-point model worked for decades, but stimulating traffic in high density areas using secondary airports was until recently being subsidized by Southwest’s aggressive and brilliant fuel hedging policies.  Those days are over.  Southwest’s fairly recent entry into Philadelphia, Boston, and LaGuardia were the first indications the old model was withering.  With its entry into Delta-saturated Atlanta, Southwest has officially stamped its old model as moribund at best.  And as the industry continues to consolidate, more pressure will be put on Southwest to get every available revenue penny that the industry can muster.  With that will be increased demands for assigned seating, in-flight amenities like wi-fi and A/V equipment, and yes, first or business class seating.  And now with AirTran’s route structure being absorbed, its hub-and-spoke model may portend a sea change in Southwest’s approach to getting people from point A to point B.  Letting those seats go unfilled in a hub system has far different results on revenue than point-to-point flying.

My advice, Southwest, be careful of making promises now that could carry a mighty bite in the future.  The need to charge ticket change fees may be much closer than you think.

Chris