Southwest says no-luggage-fee policy is paying off in new customers

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CHICAGO — Southwest Airlines is landing new customers with
its “bags fly free” strategy, even as passenger volume declines at
other airlines.

The carrier’s no-fee ad blitz persuaded Jen Benzer and her
brother and sister, Aaron and Robin Hazelwood, to fly Southwest.

They arrived at Chicago’s Midway Airport on Thursday from
Dallas with six large suitcases, including an empty one they planned to fill
with Chicago Bears merchandise.

“It would have cost $300 to check all these bags (on
another carrier),” said Benzer, 31.

Southwest is the lone U.S. carrier to buck the trend of
introducing fees to make up for ticket prices that have fallen to historic
lows, and some analysts and investors remain skeptical of that contrarian
course charted by Southwest CEO Gary Kelly.

For them, the $500 million question is whether the
Dallas-based discounter can attract a sufficient number of passengers to offset
the money it is forgoing as other airlines roll out charges for everything from
luggage to access to shorter security lines.

Southwest would gain $450 million to $500 million per year
if it charged for the first and second checked bags, estimated AirlineForecasts
LLC, a Virginia-based market research firm.

“There’s no way Southwest is going to pick up enough
traffic to compensate for the amount of revenue that the other airlines are
garnering because of the baggage fees,” said Robert Herbst, a commercial
airline pilot and founder of AirlineFinancials.com.

Yet Southwest is confident its strategy is paying off. It
believes about 2 percent to 3 percent of its customers are defectors from other
carriers because of fees, said Kevin Krone, the carrier’s vice president of
marketing, sales and distribution.

“When you step back and look at the whole
picture,” Krone said, “to me it shows we’re winning here, and winning
new customers. To us, that’s much more profitable than charging an existing
customer to bring along their luggage.”

Vaughn Cordle, a former airline pilot who is managing
director and chief analyst at AirlineForecasts, calls Southwest’s moves “a
smart strategy.” The discounter is gaining market share, even as it
reduces its overall flying, by exploiting a competitive weakness at other
airlines: the perception they are out to “nickel and dime” passengers
with fees for services that were once part of the base airfare.

For Southwest, the bags-fly-free campaign caps a long
history of moving aggressively during industry turmoil. This decade the
discounter has emerged as the nation’s largest domestic carrier by one measure,
carrying about 20 percent of people who fly within the U.S. each year. Delta
Air Lines, the world’s largest carrier, still holds a slight lead over Southwest
in domestic capacity measured by available seat miles, according to
AirlineForecasts.

Taking advantage of fuel hedges, light debt and high
employee-productivity rates that kept its costs low, Southwest added planes and
kept prices low. That pressure forced other airlines to also reduce pricing, to
outsource domestic flying and shift resources to more lucrative international
routes where low-cost carriers have little or no presence.

Since 1999, Southwest’s domestic market share has increased
by 48 percent, while the five network carriers have seen their combined
passenger base shrink 20 percent. This year, Southwest will fly about 28
million more people than it did in 1999, while its rivals will haul a total of
62 million fewer passengers.

“It’s indicative of Southwest winning the war of
attrition in the domestic marketplace,” Cordle said.

Still, Southwest has lost some of its luster. This year it
reported quarterly losses for the first time in its history, reduced flying and
saw its fuel hedges become a drag on earnings. Analysts ridiculed Southwest’s
latest scheme to win market share when consumers initially were slow to
respond.

But that changed over the summer, as Southwest blanketed the
airwaves with commercials pointing out that checking two bags could add $100 to
the cost of flying on other airlines.

The airline, which advertises far more heavily than any
other U.S. carrier, boosted its ad spending by 20 percent, to $112.6 million,
during the first six months of 2009 as it hammered home the “bags fly free”
message, according to The Nielsen Co.

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“This is a complex thought: That you have to pay for
your bags,” Krone said. It didn’t resonate with leisure travelers until
they took their annual, or semi-annual, vacation and encountered luggage fees
for the first time, he said.

“I think we’re really starting to really build up a lot
of momentum. People are now really searching out an alternative,” Krone
said.

Southwest’s passenger traffic increased by about 5 percent
during the third quarter versus 2008 totals, even as it reduced flying by 6
percent.

Passenger volumes headed in the opposite direction for
Southwest’s five largest competitors: Delta, American, United, Continental and
US Airways, all which introduced or increased fees over the past year.

Revenue passenger miles, a common traffic measure, declined
by 6 percent during the third quarter for the five network carriers, combined,
according to AirlineForecasts.

Representatives for the five legacy carriers say that
neither their new charges nor Southwest’s contrarian strategy have appreciably
changed passengers’ purchasing decisions.

Instead, they say a host of other factors also affected
traffic: Southwest also gained passengers with a midsummer fare sale, while
traffic declines at the network carriers could also reflect the fact that they
have made far deeper cuts to flight operations than Southwest did in response
to the economic downturn.

“We are not seeing any shift in market share from one
to another as a result of our decision on fees versus Southwest,” said
Greg Kaldahl, vice president for resource planning at United Airlines.

United’s internal data show that customers tend to rate
their experience on United more highly than their peers if they purchase one of
the new services, including charges for roomier seats and fees for access to
check-in and security lines reserved for elite frequent fliers, Kaldahl said.

Customers of Texas-based American Airlines, meanwhile, are
checking less luggage: one bag per customer, on average. That is down from the
1.1 to 1.2 checked bags that American saw before implementing its luggage fees
last year, said American spokesman Tim Smith.

“The bottom line: The implementation of service charges
for services customers choose to use has gone well and is generally
accepted,” he added.

Via McClatchy-Tribune News Service.