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Southwest: Record Profits and Low Prices?

Southwest: Record Profits and Low Prices?

The past week has seen a spate of quarterly earning reports from the airlines.

For most carriers, the third quarter was a very good one indeed. Solid profits were the rule, with both American and Southwest reporting their highest-ever profits for the period.

In American’s case, the strong financial performance is largely attributable to its reorganization in bankruptcy. The cost-cutting and operational streamlining have had their desired effect.

At Southwest, on the other hand, it’s been business as usual. So how has the airline that aggressively self-promotes as a low-fare leader managed to squeeze extra profits from its operations?

On the cost side, fuel costs were down 5.7 percent year-over-year. But any savings there were probably offset by the airline’s aircraft-replacement program, and by expenses related to the integration of AirTran.

As for capacity, Southwest’s available seat miles are only up by 1 percent over last year’s third quarter.

The difference-maker was the airline’s operating revenue per available seat mile, which increased 4.5 percent. In other words, that extra profit looks to be coming from higher airfares.

All companies want to raise their prices; it’s in their DNA. But in doing so, they risk losing market share. And longer term, for a company that hangs its hat on low prices, higher prices can destabilize its very identity, weakening the branding that has made the company economically viable.

Which brings us back to Southwest, and the legitimacy of its claims to be a low-price leader.

A recent MIT study, “Evolving Trends of U.S. Domestic Airfares: the Impacts of Competition, Consolidation, and Low-Cost Carriers,” contends that “while a Southwest effect on average fares still exists at U.S. airports, it has diminished over time.” The study notes that, between 2007 and 2012, while average fares increased by 8.7 percent at large airports, and 11.9 percent at medium-sized airports, Southwest’s average fares were up around 25 percent.

Southwest may still have the best fare on a particular route, on a given day. But it’s hardly a given.

Travelers looking for the lowest price can no longer assume that they’ll find it on Southwest’s website.

Reader Reality Check

Is Southwest still your go-to airline for low fares?

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  • John Hill

    Of course, it’s not just low fares that attract customers. Usually I fly Southwest and my experience with the ultra-cheap, unbundled carriers is going to keep it that way. A lower-than-average, fair price along with good service will keep me a WN customer for a long time.

  • Deon Charles

    The Southwest experience has gone downhill. New seats are more tightly packed, WiFi is generally a terrible experience, and Southwest has spewed double points then increased point award requirements to the extent that every time I see a bonus point promtion I think now is the time to switch before another devaluation comes along.

  • Art

    Southwest continues to fool it Koolaid drinkers by only selling seats on its website, making it more difficult for less savvy consumers to compare fares. Particularly on the West Coast, where we have few to no options, fares have risen significantly, frequency has decreased.

    Frequent travelers, credit card holders on most airlines don’t have to pay for checked bags, pre-reserved seats, priority boarding, which may explain the absence of bags fly free advertisements – unless of course they plan to also start charging for checking bags – as they already charge a fee to board earlier, do not offer reserved seats.

  • Rahul Krishnan

    I’ll continue to love Southwest so long as I get the lowest price combined with their friendly service. I’ve changed flight dates on Southwest multiple times in the last few months. The cost: free. I can check bags for longer trips. Free. If that’s drinking Kool-Aid, serve me more. Sounds more like sacrificing extra revenue for a better customer experience.

    Even on the most crowded flights, I’ve been able to get my seat type of choice by checking in up to 12 hours of flight time.

    Posting fares through their site cuts both ways, since those “less savvy” customers won’t buy their fares either. If that’s your biggest complaint about them, I’d say they’re doing quite well.

  • Art

    I believe Thomas Gray is credited with coining the phrase “ignorance is bliss”; based on their policies and advertising, it appears to be how WN views their customers.

    Complaints – I have LOTS of them, just attempting to help clarify the facts.

    Where shall I start?

    Being based in San Diego, I have no choice on several intra-California routes, Las Vegas, fly WN enough to earn A-List status; even when checking in at T-24, I end up with high A boarding positions, undesirable seats on afternoon through flights. Those who pay the $12.50 fee to Southwest to avoid the T-24 check in are behind me in line, $40 early boarding fee guarantees little on crowded through flights.

    How about taking an earlier flight on the same day – WN requires purchase of a new ticket, which can mean an extra $100 or more, which is free on other carriers. This also applies to your change of date – assumes the same fare is available.

    Shall I continue?

    We fortunately have lots of alternatives to WN on longer flights, which offer reserved seats and inflight entertainment at competitive prices, first class upgrade options.

  • Rahul Krishnan

    Without question, certain luxuries and better elite perks are available with competitors. The point is that they’re a low cost carrier. I pay out of pocket for travel (not compensated by business) so any such legacy carrier perks are not worth the accompanying bump in ticket price in my opinion.

    Can’t comment on the California routes but flying in and out of Texas, Chicago and NY metro area, I save thousands a year with WN vs. legacy carriers. Personally, the $12.50 is trivial in comparison. And unless you want the front 5 rows, it’s entirely unnecessary if you want an aisle/window seat.

    Yes, WN will be devaluing points by 15% next year but it’s transparent pricing and never a shortage of availability. Compare that to Delta where they gouge you with 40,000 miles award tickets starting on most routes. Or with United where a single flight change can run $150 dollars.

    My point is, WN does a great job of saving individuals and families money with some cheap fares. Elite flyer perks may not compare but I’m willing to part with them for good customer service and value any day.

  • Mark

    Funny, every time we try to book fares on Southwest, I see the highest prices of all the carriers. I have yet to find the cheapie prices I see on their site. For what we would pay on Southwest, I would rather have an assigned seat as opposed to the cattle car mentality we saw on our most recent flights. Checked baggage is not an issue as we finally learned how to travel with a single 22″ suitcase

  • NewYorkCentral

    I used to earn a couple of free tickets on WN every year…now, with points so devalued, I’m lucky if I earn one every other year. While I understand that “everyone else is doing it”, it definitely erodes my loyalty to them.

  • Ejody

    It is VERY rare that Southwest has the best prices anymore unless you book a couple of months out (good luck on that.) Heck, fabulous Virgin America just beat their price from LAX to Dallas. I like the free bags, but unless it’s a short route (LAX or BUR to Vegas, for ex.) bought WAY in advance, I have no luck getting one of those handful of “cheap” seats. It’s become a marketing scam.

  • Mordock

    I like to fly Southwest for 2 reasons. 1) generally more friendly, courteous personnel. 2) I know that I will get where I am going. SW is the only airline that I have seen consistently hold flights for connecting customers whose inbound flights were delayed. I have even seen them wait for the baggage too. On the other hand, I have been refused boarding on other airlines when I got to the gate 2 minutes before the designated boarding time, but they had already closed the gate.

    But I have to admit that SW is not a discount airline and has not been one for some time. I am elite on both United and US Air because they are often cheaper and I have never quite been able to get A-List status on SW even though they are the biggest carrier out of my home town (KC).

  • cowboyinbrla

    If a person is capable of looking up a fare on a site like Orbitz or Expedia or Travelocity, he can look up a fare at Southwest.com. Having to look in two places is a little extra work, granted. But if anything, that should work AGAINST Southwest as “less savvy consumers” are more likely to go to a site that compares multiple carriers.

    Yes, it’s true that credit card holders don’t have to pay for the FIRST checked bag on most other airlines. Second, if you have one? Not so much. And if you fly more than one airline, do you want to have a card affiliated with each one, especially since many such cards carry fees? And that’s assuming someone can qualify for all those cards.

    If the range of service on the west coast has declined in recent years, that’s probably more due to the recession than anything else – and it’s not as though all the airlines haven’t slashed capacity and flights over the last five years. And I’ll take your “few to no options” on the west coast over the choices that those of us in smaller markets get any day. As I’ve pointed out elsewhere on this forum, I live in the largest city in the largest parish (county) in the state of Louisiana, with a metro area population of over 800,000 people. We are served by four airlines, all dinosaurs (United, American, USAir, and Delta), each only flying to a single hub (Houston, Dallas, Charlotte, and Atlanta, respectively). So unless you want major backtracking, going east you get two choices, going west you get two choices, and unless you’re going to the hub as a destination, there are no non-stops and no direct flights from here – just back and forth.

  • cowboyinbrla

    What do you mean – “good luck on that” – with booking a couple of months out? Do you never plan ahead for a trip? I can understand if it’s business, and you have to fly on short notice, but that’s the point: short notice costs more on ANY airline.

  • cowboyinbrla

    That’s the point I think WN detractors miss, John: I have never had bad service on a Southwest flight and doubt I ever will. On the other hand, while I completely understand why the FA’s on legacy carriers can be in shitty moods (I would be too, if I were treated the way the legacies treat their employees), it still affects my experience flying.

    The last time I had to fly Delta (from Baton Rouge to Atlanta) – roughly an hour’s flight – the FA’s announced there wasn’t time on this flight to do a drink service so they were just going to pass out (small) bottles of water. No cups, no ice, just one bottle. A week later, I was flying Southwest out of New Orleans and had a stop in Birmingham – which technically makes that flight even shorter. But the WN FA’s found time to do a full drink and snack service and return for drink refills, plus come pick up the trash (on Delta, we were asked to bring our bottles to the front of the plane to a bin there).

    Again – I can’t blame the FA’s personally. But the service that they can give, in the constraints put on them by the airlines, is frequently crappy. I’ll pay the same or extra on WN gladly, even having to line up to get a seat, to buy from a company that treats me right.

  • Ejody

    How far in advance IS reasonable to get the “low” fares? 2 weeks? 4 weeks? 8 weeks? Yes, I do travel a lot of business, but come on — 4-6 weeks out and ALL the low fares are already gone? The airlines control that– not me.