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Southwest Targets Frequent Flyers' Wallets

Posted on October 16, 2009 at 1:48 pm ET by Tim Winship
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Dollar bills on a line (Photo: Index Open)

In the industry everyone loves to hate, one airline has managed to stay on consumers' good side: Southwest.

Among the airline's endearing traits has been its refusal to join other airlines in the fee-for-all that has cost consumers hundreds of millions of dollars.

But in a conference call yesterday to discuss its third-quarter results with industry analysts, Southwest's chief executive Gary Kelly hinted that more fees are in the pipeline. And the new fees will come from an unexpected source.

Acknowledging the airline's fourth quarterly loss in the past five reporting periods, and announcing that 2010 will likely be another no-growth year, Kelly's outlook was generally grim. But he saw light in a previously unexploited corner of Southwest's operations. According to Kelly:

"... there are substantial ancillary revenue opportunities besides bag fees that we are continuing to pursues and admittedly, the one that we have earmarked, that we are most enthused about is the move to the next generation of frequent flyer program. So we have very substantial ancillary revenue opportunity associated with that."

("Ancillary revenue" is industry-speak for what travelers call nuisance fees—surcharges for anything an airline can hang a price tag on.)

It's no secret that Southwest has been working on a replacement for its current frequent flyer program, unofficially nicknamed Rapid Rewards 2.0.

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The consensus, to the extent there is one, is that with the launch of 2.0 sometime in 2010, Southwest will move toward a strict revenue-based program, along the lines of Virgin America's Elevate. Such programs award points according to the cost of a ticket rather than the distance flown, and prices award tickets according to supply and demand rather than on regional categories.

But this is the first time the airline has suggested that Rapid Rewards might be mucked up with fees. And it raises the obvious question: Exactly how might those fees be generated? Among the possibilities:

  • Award Co-Pays - Much as some airlines have done with upgrade awards, Southwest could introduce an award chart that required a cash co-payment together with miles for an award ticket. Or a cash co-pay to book an award with no blackout dates or capacity controls.
  • Cash and Credits - Not to be confused with an award co-pay, the option to combine cash and miles for award tickets is another potential revenue-generator.
  • Selling A-List Elite Status - Elite status, for a price? It wouldn't be popular with travelers who earned their status the old-fashioned way—by flying, that is—but profit is a powerful motivator.
  • A-La-Carte Tickets - On Air Canada, it's possible to purchase tickets that do not earn frequent flyer miles. Mileage-eligible tickets cost more. Southwest customers might be given a similar choice.
  • Credits for Sale - Most airlines sell frequent flyer miles. Southwest doesn't, but could.

The above are nothing more than possible scenarios. To date, the airline hasn't divulged any specifics, so we can only speculate. And worry, that Southwest, faced with a choice between its customers' love and their money, will forgo the former in pursuit of the latter.

Reality Check

Do you think Southwest will add a significant number of fees to its new program? If so, would that affect your perception of Southwest and its Rapid Rewards program?

Post your comments below.

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Archived Comments:

  • Walter - October 19, 2009

    I sure hope Southwest doesn't muddy the waters with fees like all the rest of them. Hey SOUTHWEST...stay different!!! That's part of your charm!

  • Fshea - October 19, 2009

    I travel to Florida 50 r/t per year with an additional 7-8 trips to other cities. S/W has always been consumer friendly with no change fees etc. If thagt were to change I would opt for Jet Blue who has assigned boarding, comparable on sometimes better prices and the on-board entertainment. There are other choices-don't blow it S/W. And while I'm at it--do something about the abuse on the preboarding. FX

  • jelllen - October 19, 2009

    I fly SWA at least once a month. I appreciate their efficiency, friendlyness and simpleness. I compare all other airlines to SWA. Should they change or add additional charges what would be my incentive to fly with them? I dread flying other airlines and can't wait to board with SWA, that may change!

  • OperaBeth - October 19, 2009

    I fly a lot, and up until now, SW has been my first choice, but if they implement changes like the ones you mentioned (especially tying credits to the cost of a ticket), I'll look elsewhere for my air travel. I don't even want to see Rapid Rewards go from a credit-based system to a miles-based one (as your scenarios imply). It was bad enough when they changed the rules and made reward tickets more difficult to use! Oh, and the airlines may call them "ancillary revenue," and you might call them "nuisance fees," but I call it gouging!! I agree with Walter; SW should stay different! Don't abandon the "LUV," Southwest!

  • Sandy - October 19, 2009

    Southwest!! Say it isn't so!! As a LOYAL customer for many years, I have sung your praises to my many friends groaning about the other airlines. You ARE different.....and that is why your customers LUV you! If changes are coming, I will have to look hard at my choices, and I don't want to leave my happy days with your fine team! Where else would my great flight crew sing the emergency info?? Where else could I find a flight quickly with miles in a family emergency? What other airline seems to care? Don't Change!!

  • paws10 - October 19, 2009

    No change fees and no baggage fees set your airline apart from all the others. Everyone can name Southwest as the carrier that still does this. Don't change it up after you've built up such a loyal following! I know the airline industry is suffering, but the revenue you may gain may not be worth the customers you will lose in the long run. The word of mouth advertising from past passengers is money you've saved. I'm sure SW has come out way ahead in canceled bookings with credits passengers forget to use or can't use within a year. I think consumers will start driving again for short haul routes to avoid extra fees and the wait at airports. Don't become one of the pack!

  • Maureen - October 19, 2009

    I don't fly enough to benefit from Rapid Rewards as it exists now, so that doesn't really affect me. That said, Southwest is treading on dangerous grounds if they think there will be no backlash for their policy changes regarding fees. (Which is especially heinous considering their "No Fee" ads!) The reason Southwest has lost money is that there are fewer people traveling period, due to the bad economy--have they really lost their market share? They are sure to lose market share if they start to appear like every other airline out there. Maybe others travel to hear the flight attendants hokey jokes every trip, but not me. I want to get from Point A to Point B, nonstop, for the lowest price and the least hassle. Once SWA stops being that airline, I will look elsewhere, simple as that--and that's how you lose market share.

  • spyyyyyke - October 19, 2009

    Southwest will have to add a whole lot of fees to make up for the loss in business this change will cost. Whatever competitive edge Southwest now has due to customer preference will dwindle, or perhaps crash, as soon as the airline looks just like all the others. I fly southwest at least twice per month, and frequently four times per month; if Southwest becomes like the other airlines, there is no reason for me to be loyal, and I will start shopping around. LISTEN UP SOUTHWEST! These are your frequent flyers talking . . . and you are poised to lose us.

  • jjj98052 - October 20, 2009

    I agree with most of the comments above. I switched to SWA from Alaska Air because of the no-nonsense, no-fee rewards program. But if SWA adds fees, especially to its RR program, then there's no point in me flying them anymore - I'd rather fly Alaska and have a reserved, comfortable seat and better schedules.

  • Tim - October 20, 2009

    It's called "Rapid Rewards" and is simple and effective as is. You know what you have to do to earn a ticket and you know that you can use it almost anytime, on any flight. As soon as they muddy it up the program is far less attractive and my "no fees" incentive to fly with them is gone.

  • Life - October 20, 2009

    SWA has recently started charging a $10 one way fee to upgrade your seating choice to the 'A' class and I can see that eventually that extra $10 is not going to get you into an 'A' seat once everyone begins paying for it. I expect they will start trying to add in more fees and I understand their need to do something for their bottom line but it will mean that they will lose the loyalty of frequent fliers of SWA such as myself. Just as the airlines look for ways to save money so do we consumers. We too have to watch our pocket books and weigh the conveniences provided by the airlines. Sorry SWA, I will remain loyal only until you make it so that it becomes more convenient for me to go elsewhere. I wish I knew the answers to your woes.

  • queen travelsalot - October 20, 2009

    If rapid rewards is their only change it won't affect us. We use SWA for our airline but we just don't fly that much. We do enjoy and like all the other 'differences' on SWA-- and check their routes first when traveling.

  • Daisy Mae - October 20, 2009

    SWA does not operate from our local airport. It's a three hour drive to board one of their flights. However, we love the airline so much we are willing to make the drive when flying long distances. We sing the praises of SWA to all or friends. If thet start adding additional fees, we will just use our local airline service, and forget the long drive.

  • JMK - October 21, 2009

    I drive over 2 hours to use SWA but continuing to find ways to add fees will make me look at airlies closer to home. Full flights that depart & arrive on time are a real asset - but to drive 2 hours for about the same cost - I'll probably start flying from another airport. I understand the bottom line is the driving factor, but customer loyalty will decline and SWA woes will only increase. Change Rapid Rewards????? That is one of the greatest things they have going for us frequent flyers . PS - I HATE THE ADDITIONAL $10 FOR "EARLY CHECK-IN" If you have the personnel to take care of that, why not just assign seats!

  • Chris - October 21, 2009

    SWA has been our airline of choice. We often fly between MA, VA , NC, TX and FL. If there are changes that resemble other airlines there will be no reason to stay with SWA. Perks can be better elsewhere as they do have first class options for frequent flyers. How about 1 free bag? Most of the flights I take people carry on their bags anyway (I don't). Jet Blue and Air Tran are both starting to look OK.

  • frequent flyer - October 21, 2009

    southwest, I understand your situation and realize you have to make changes to stay in the air. Be careful the options you chose to add to your bottom line. I would personally prefer if you increase the cost of the tickets instead of adding fees

  • artist - October 21, 2009

    Southwest is the last chance for average people to visit their family regularly. If it becomes too expensive, it'll be just like all the others. We'll fly less and pick the most convenient airline -which isn't Southwest!

  • Kevin M - October 22, 2009

    It cracks me up to read these posts as though Southwest were simultaneously planning to toss out every advantage it has over the dinosaur airlines. Get real, people! Their fares will continue to be among the lowest of the low wherever they fly, they'll still operate on a much more "on-time" schedule, and they've announced no plans to charge fees for the first 2 checked bags. My guess is that Southwest won't go to a strict mile-based system, but they'll break things into tiers: if you're only flying from New Orleans to Houston, why SHOULD that give you as much credit as flying from New York to Los Angeles? Or from Seattle to Fort Lauderdale? And as for fees for rewards: let's be realistic: would it really kill you to pay a nominal fee, say $10 each way, to cash in the ticket on a free flight? Particularly a transcontinental one? Would you rather pay a $25 booking fee to talk with an agent at the legacy carriers, plus a $50 short-notice fee, plus $20 for your first bag and $30 for the second, all for your "free" ticket that took you twice as long to earn?

  • Rich - October 22, 2009

    While I generally fly SW for most of my travel, for Florida travel, I fly AirTran. Comfy seats and my own "reserved" seat (not just a hunting license). I look at the ROI of each trip that I take when considering which airline to fly. So far, SW has been the "winner" most of the time. Implement nuisance fees and the SW ROI drops considerably. The fact that RR credits and tickets die after a year is a distinct minus. They should have a useful life of at least 5 years, if not more. And, yes, as noted above, I fly less these days due to the overall hassle of flying (security, stupidly long lines, delayed flights, fewer flights (packed planes), etc. I drive for anything under 500 miles these days. SW, consider carefully how much you have to lose if flyers start counting you among the rest of the airline "enemies of customers".

  • inkmaker - October 22, 2009

    As much as it concerns me that any business has to survive by adding extra fees, remember that if Southwest adds extra charges to its Rapid Rewards program it will still have less "clutter fees" than the other airlines. Leaving Southwest and going to other carriers who will still charge more fees (baggage anyone?) just because Southwest adds a fee to their frequent flier program is not a smart move. Besides its not like the other arlines aren't doing something similar. Look at United's new rules for 2010!

  • Charles - October 22, 2009

    I am happy to finally see sensible posts like those from Kevin and inkmaker. It is truly amazing that SW has been able to 'hold the line' for as long as they can. SW management is aware of customer dissatisfaction resulting from changes to the current RR program, but I am confident they will seek to minimize the impact on the flying public while maintaining lower prices and on-time schedules. Try the other guys...you will be back to SW for sure!

  • LRL - October 2, 2009

    Southwest' risks losing it's position as my current airline business partner with any actions which decrease their value to me. There are other airlines including start-ups a micro-product lines in larger airlines against which I judge all business travel purchases. I have no loyalty to any airline or hotel program. Everytime I buy a ticket I evaluate many choices (briefly) and "hire" the airline which meets my business needs. Mostly it's Southwest because they have flights going where I need to travel, have low fees and do not charge for last-minute changes and cancellations. Don't care for the bad jokes. Don't care about fees for bags which I never check. Don't care about free drinks cause I don't drink (and nine peanuts in tear-resistant bag are always refused.) Free flights are nice because I can still charge clients an ticket fee and that increases my profits. As airlines change their value to my business then I change airlines (and hotels and car rental co's and etc. )

  • holtz - October 22, 2009

    When they become less competitive I will move to the competitor

  • daves - October 27, 2009

    I agree with most of the comments that Southwest should not change to become like the others, or they will lose customers like myself. They did a great job with their new boarding process by making changes that addressed people's complaints (the order of boarding) without losing what makes them unique (being able to choose your seat and having an efficient boarding process). So this gives me hope they will design the changes to RR in a fair way that hopefully makes it better. HOWEVER, they have made negative changes to their rapid reward program year after year which have lessened the value of it and I expect that they will continue to do the same. In the "old" days you could use a rapid reward award for ANY open seat on ANY flight at ANY time. Since then they have made changes that have made it harder and harder to use awards, including blackouts, having less award seats available on each flight (this is the biggest problem), then allowing you to combine 2 awards to use on certain flights but still not all open flights, etc. It has become very difficult for me to use these awards on any flights I want to take, even when they are not around holidays or popular flight times. While they can explain all the advantages of using 2 awards for 1 seat on certain flghts, I know from experience that the limitation of awards on any flight makes it difficult to use them when you need to, which was a reason I stopped trying to earn miles on other airlines, I c ould hardly ever use them, and only at the higher award levels (not saver, but only standard). I see how other airlines are still upping the number of miles required for certain flights, it's sad but I think Southwest will probably do the same kind of things to make it take longer to earn awards and make them even harder to use.

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