Continental and Southwest both reported quarterly financials last week, but after seeing some comments from Dennis Schaal regarding Southwest, I decided to read the analyst transcript in full on Seeking Alpha. It definitely contained a lot of interesting information.
Firstly, some numbers on recent ancillary revenue initiatives.
Our Early Bird [priority check-in and boarding] revenues which are included in “other revenues” were approximately $13 million in the fourth quarter. Our business select revenue in the fourth quarter held steady at about $18 million and for the full year was $72 million. In addition to that we generated over $10 million in other revenues for our new pet fare, unaccompanied minor charges and excess heavy bag fees.
From CFO Laura Wright
I am not sure we have given any real guidance out there. We definitely saw a nice increase in our other revenues per passenger in the fourth quarter and we have a lot of initiatives we still have underway with Southwest.com. We have talked about some of the things we have to improve our sales, cars, hotels and so forth. That work is still in the plan. So we think there is a significant opportunity to increase our other revenues per passenger. I am just not sure we are ready to give you a target yet.
And then followup comments from CEO Gary Kelly
I agree. The only thing I think that we have done some modest things on the ancillary revenue area this past year with Early Bird, pets, the much needed fee for unaccompanied minors. The big opportunity out in front of us is with our Rapid Rewards program. We are looking for a very significant revenue contribution there. Off the top of my head I can’t convert that to a per passenger target but I can at least tell you where the source of the increase in ancillary and that is clearly within our frequent flyer program.
Back in April 2009 the financial community wasn’t buying into the Southwest no bags strategy. Virtually every stock analyst was betting against Southwest’s ability to benefit from their stance on bag fees, and they were all guessing when Southwest would cave in and follow the crowd. At that time I wrote:
But the point with Southwest above is that as much as the incremental revenue from a la carte fees will be a good thing for the airline industry, there will always be branding positions that if well enough defined and properly appreciated by consumers, mean that one or a few airlines can go against this trend, and maybe even benefit.
Almost a year later, and now we have this vindication from Gary Kelly
I think you should cheer on our competitors to charge really high bag fees and you will continue to see record load factors at Southwest Airlines. Again I will repeat that we reduced capacity in the fourth quarter 8% and at the same time we grew our passengers, grew our RPMs and achieved record load factors. It is very clear we are seeing a share shift. Those are the facts. My guess is and our folks have made several different calculations on this but it all sort of points to roughly 1% share shift in the domestic US which is huge. Somewhere between half a million and $1 million worth of additional customers. That is what we are trying to do. We are trying to win more customers and we would love to sell them more stuff. So we have all that work underway as well. We are not going to be charging for bags. I hope they charge $100 per bag. That would be terrific. We will have 100% load factors. It would be great.
In recent weeks I’ve been starting to see some travel industry writers use the term merchandising in a way that could confuse it with a la carte fees, and in some cases implying it is synonymous with ancillary revenue. Where I see the difference is that merchandising is much more than ancillary revenue. In my view, airline merchandising is making passengers understand and value the differences between branded fare families, thereby facilitating upsell into higher fare families. The competitors of Southwest should have seen this coming, and should have been using their lowest fare family as a fighting brand – a fare family that was unbundled to the extreme. But to unbundle every fare (or close to it), that would be a case study in very poor merchandising for any airline other than a pure LCC play. In fact I’m surprised to hear Ryanair even use that term, albeit in a different context.
Back to the Southwest analyst call, and Daniel McKenzie from Next Generation Equity Research mentioned something I was not previous aware of.
I know on the website when you book your ticket one of the questions that Southwest prompts everybody buying the ticket is whether the trip is for business or for leisure.
CFO Laura Wright implied that they were doing 18% of revenue in the full fare category, down from 24% a year ago, but as we all know, plenty of business travellers buy discounted and restricted tickets. Actually having the passenger indicate the nature of their trip would give Southwest some pretty powerful marketing data to play with; especially as she also indicated above the current work Southwest are doing on increasing ancillary revenue from car and hotel sales. But the best quote of the call has to go to CEO Gary Kelly when asked by William Greene of Morgan Stanley what he now considers normal:
Flat is the new up.