Are Extra Fees in Southwest's Future?; CEO Says Airline Needs More Revenue

CEO Gary Kelly says the airline needs to generate more revenue without "nickel-and-diming our customers" or raising fares again.


Discount king Southwest Airlines, appreciated by fliers for not charging the kinds of fees common at other carriers, may start charging for extra services.

CEO Gary Kelly says the airline needs to generate more revenue without "nickel-and-diming our customers" or raising fares again.

"Things will be different in the future," he said in a speech last week at an investors conference.

Kelly was mum on specifics. But he said that Southwest's operating costs have jumped 25% in the past five years because of higher fuel prices, and that it needs to generate more revenue to offset those and other rising costs. Southwest's year-over-year revenue rose only 1% in January and February. After six price increases last year, Southwest's average one-way fare is now $104, a record high for the airline.

Jim Parker, a Raymond James & Associates analyst who closely follows Southwest, says it will have to change. In a report, he says that Southwest, which does not assign seats now, could soon start using technology to sell assigned seats for an extra $10 to customers who want them.

"Ancillary sales" soon will be "pervasive" among U.S. carriers, Parker said.

It would be a turnabout for Southwest. In recent TV ads, Southwest has poked fun at competitors for extra fees. One ad shows a passenger asked to insert coins in a slot to open the overhead compartment.

No airline has gone that far. But many charge for boxed meals, booking a ticket through a telephone reservationist or changing an already purchased ticket.

Some have gone further. Europe's Ryanair charges separately for almost everything beyond a basic seat. Privately owned U.S. discounter Spirit Airlines last month said it will begin charging $10 each for checked bags -- $5 if the fee is paid online -- in June.

To boost revenue, Southwest already has:

*Focused growth in large, high-demand business travel markets. Southwest entered the Denver market a year ago, returned to New Orleans last year after a post-Katrina hiatus, and is beefing up service in the densely populated East and at Chicago's Midway Airport. This fall, it plans to resume service to San Francisco International. It pulled out in 2001.

*Emphasized cargo service. While Southwest has always carried some cargo, its emphasis on fast turnaround times made it tough to load lots of cargo on its planes.

*Sold ancillary services. It is trying to sell hotel rooms, rental cars, vacation packages and other travel services on its website.

*Improved technology. By 2009, Southwest will have a new computer system that could allow it to offer not only assigned seats but also foreign itineraries.

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