Southwest Airlines CEO Talks About Fares, Fees And New Routes

When we look at our performance to date, we are either in line with the industry over the last five years or well above. Our judgment was that we would win more customers than we would gain in fees. So not only do the gross revenue results support that -- our revenues are up $5 billion a year on an apples-to-apples basis since 2007 -- but we've done some pretty sophisticated research into what defection rate we could expect. It shows, remarkably, that we would lose about the same number we have estimated we'd gain looking at market-share shifts.

Can you explain that research?

What we've done is equalize everything: take into account seat changes that carriers have made and what has happened to market shares in the country. We're up at least a point, and at times, we're up 2 points. That's taking every other factor out.

What I can't prove is that it's all attributable to bag fees. We admit that. But that's one of the main variables that have occurred.

Then, we follow that up, talking to customers, saying, "This is what we do today. What would you do if we offered this?" And the number comes back almost exactly the same.

We think it has helped us by about a billion dollars a year. The research we did shows that if we started charging for bags, we would lose about $800 million.

The other thing is that we have a great plan for 2013. We have a laser-like focus on completing five major initiatives in a five-year time period. I think it would be foolish to throw anything else into the mix. I don't think it would help from a common-sense perspective.

In the future, are there opportunities perhaps to offer something different and include a bag fee? I think customers will tell us that. Maybe there is a scenario in which customers prefer to have the pieces and parts unbundled. That's not what we sense today.

We'll continue to be mindful of how the market changes and how customer preferences might change.

I went back and found a Southwest leadership memo from the early 1980s. There was great pride in the fact that we offered no tickets that required advanced purchase. The world has changed. Now, 80 percent of our tickets are bought that way, and customers have no problem with that. We just need to be open-minded.

Southwest recently began to offer a same-day line upgrade fee that allows customers to pay to board earlier. How that's working for the company?

It's pretty much in line with what we thought. I don't think we'll see a large percentage of our customers wanting to do that, but it fills a hole in our product offering.

We updated our boarding process in 2007 and offered folks who want a Business Select-type product to purchase that. Roughly 6 to 7 percent of our customers consistently buy that, they like it. It's our highest fare and has some bundling features in it.

We offered Early Bird in 2009. I think for us, that was an innovation. For those customers who don't want to buy Business Select and simply want to move themselves up with the automated check-in and an earlier position in line, that product fills that need. About 10 to 15 percent of our customers buy Early Bird. It's a very popular product.

So this is a feature that needs to fit within those other two products. When you're at the airport and you decide, "I don't like my boarding position, I've had a hard day and I want to move up in line," you can, if we have those open boarding positions. It costs $40.

Ten to 15 percent? No wonder I always get a B boarding pass.

About 99 percent of the Early Birds are in A groups. I travel all the time, and A is a good boarding spot in terms of getting the good aisle or window seat that you want.

But I don't think we'll see anything near that number of customers buy day-of upgrades. It'll be a fraction of Early Bird in my opinion. It's just a product offering. It's a choice.

It doesn't really impact others in line because I don't think that many people are going to buy it. Besides, they spent $40.

That's the trick here -- to try to find ways to generate more revenue in a way that is customer friendly. If we do that, then it will help keep the rest of our fare structure down, and that's the goal. And not to do it with hidden fees that people just totally despise.

It's not a fee. It's a version of a fare that gives a few more amenities; i.e., you get to board earlier.

If we can generate $40 million a year with it, that would be great.

Southwest also plans to generate additional revenue by using a new seat design and adding a row of seats. What's the status of that change?