You probably wouldn’t expect someone who makes a living partly by pushing the concept of increasing airline ancillary revenue to actually admire a company offering bundled pricing, but please read on. Gary C. Kelly – Chairman of the Board, President and Chief Executive Officer of Southwest Airlines was asked a question a few days ago by a stock analyst and he gave a very good answer:

Bill Greene – Morgan Stanley

I am wondering, Gary, if we can talk a little bit about the ancillary opportunities. You sort of talked about the non-fare opportunities. If you look at the loss this quarter, I could be wrong, but I would guess that if you had had bag fees in place you could have actually gotten to a profit, because it wouldn’t have been that big of a jump. Given what the other airlines have experienced, bag fees certainly contributed to the revenue line. So, what is the thinking: why not put those in place given that most of the airlines now have that bag fee in place?

Gary Kelly

Well again, a very fair question. I think from the top down I would argue that our revenue results would demonstrate that we are somehow doing something different than our peers, because the revenue results are better. Number one, you have to either agree or reject that argument, but we would argue to you that our load factors and our revenue production is superior to what we’re seeing and especially compared to the legacy carriers. Then, of course, it becomes a question of answering well why? I think we would acknowledge that there are a number of things that we’re doing that will contribute to the revenue performance and arguably a superior revenue performance. But, the bottom line assessment that we’re making today is based on all of the research that we’re doing. We believe that we’re having a meaningful impact in creating awareness among customers that we are virtually alone in not charging the bag fee. That is translating to higher demand for Southwest Airline. This is an environment, as you well know, where of your two basic pools of passengers, business and leisure, we are more dependent upon people on personal business than ever and they’re the most price sensitive and, of course, the bag fees hit the most price sensitive people the most. It doesn’t take too many additional customers to pay for the bag fee charges. In other words, if you lose one customer that is sort of the equivalent of, however you want to add it up Bill, but it is certainly a handful with not 10 or 12 bag fees. It is just our view that customers are becoming actually more price sensitive than ever. Southwest Airlines is a very well known, value brand, if not a low fare brand, and we are getting all kinds of recognition on that point today. Finally, it is at least my personal view that if we were to begin charging bag fees, than I am not at all convinced that it would be revenue positive and it would certainly be disruptive to all of the things that we’re trying to do to build the brand. Again, in this environment where you are more dependant than ever on personal travel, you just really risk losing customers to competitors. It is a very, very competitive environment out there. We know that for a fact and we just need to make sure that customers are giving us credit for the fact that we don’t charge the bag fee. Again, the bottom line argument is we think that we’re getting that credit.

When I think back to companies over history that the stock market has fallen in love with, I see a history of CEO’s ramping up the stock and managing the company for the analysts maybe as often as I’ve seen good managers who really understand the business and manage the company in the long term interest of the shareholders. The key difference is that the love affair with the first category of CEO is always shorter, and always ends in tears.

Gillian Gibson from Amadeus made some good points at the Travolution conference in London yesterday (click here for a good summary of the other presenters), but don’t interpret that as contradicting what I have written above. She makes the point that there is more money in a la carte than in traditional forms of ancillary revenue like hotels and cars. Obviously this is the case when you can modify the GDS to sell a la carte via the travel agency channel, whilst most of the traditional ancillary revenue commissions only come from direct channel customers. Make no mistake about it, Amadeus is investing millions in a la carte technology, as clearly the airlines want to be able to sell it via all channels. 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.

I’m not recommending other airlines automatically follow Southwest, as to do so slavishly would be a huge mistake, but I am recommending that any move into a la carte and ancillary revenue or any type of significant change made by the airline should be done with the brand in mind. This is just common sense. It seems Gillian made a similar point about airline brand integrity when talking about choice of third party ancillary revenue partners in her presentation.