Southwest chases add-ons besides bag fees

updated 9:03 a.m. ET Oct. 16, 2009

Southwest Airlines Co. is the only big U.S. airline that doesn't charge baggage fees, but that's not going to stop it from looking for other add-ons to sell to travelers, its CEO said on Thursday.

Southwest reported a small third-quarter loss and said there's no rebound in sight for business travel. The vanishing business traveler has hurt revenue at all airlines. The blow has been cushioned by fees for things like checking bags and reserving the most desirable seats.

Southwest has moved in that direction, too, and it isn't done.

"There are substantial ancillary revenue opportunities besides bag fees that we are continuing to pursue," said Gary Kelly, Southwest's chairman, president, and CEO.

He said the most noteworthy new revenue would come through changes to Southwest's "Rapid Rewards" frequent flier program. He offered no details. But he drew a distinction between baggage fees, which he said are not really voluntary, versus a frequent flier program, people volunteer to sign up for.

"We would much prefer to explore opportunities to provide more service to customers and give them the choice to spend more money with Southwest Airlines," he said. "Our frequent-flier program and Southwest.com both position us well to pursue that strategy."

Kelly said the changes would not happen this year.

Already this year Southwest has begun charging for handling children who fly alone, and for taking pets in the cabin (which it didn't allow before). It also expects to take in about $40 million a year for heavy bags or bags beyond the first two. Other carriers have claimed ten times that much in baggage revenues. Kelly thinks they are driving customers to Southwest.

Fares at Southwest and other airlines have been running lower than a year ago, and those discounts have helped to fill planes. But many of those travelers have been vacationers. Freer-spending corporate travelers have dropped off sharply, making it hard for airlines to turn a profit even on strong traffic.

Kelly said that while the economy appears to be stabilizing, "there's no reason to believe business travel will return anytime soon to help bail us out."

The airline reported that about 17 percent of its passengers paid the full fare instead of discounted fares, down from 24 percent during the same period last year.

Dallas-based Southwest lost $16 million in the third quarter, or 2 cents per share. Not counting special items it would have shown a $23 million profit, or 3 cents per share, a penny ahead of the expectations of analysts surveyed by Thomson Reuters.

During the same period last year Southwest lost $120 million.

Traffic rose 4.7 percent for the quarter. Even with more customers, Southwest trimmed unprofitable routes and capacity dropped 5.8 percent for the quarter. It can be hard to cut costs as fast as flying, though, and Southwest's unit costs — the expense in flying one person one mile — rose 6.6 percent from a year ago, not counting fuel. Southwest said its unit costs will keep rising as it cuts fourth-quarter capacity by 8 percent.

Southwest said its 2009 capacity will be down about 5 percent compared with last year. The airlines expects it to stay unchanged next year.

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