"Southwest Airlines seeks a revenue lift"

Friday, March 30, 2007

Southwest Airlines seeks a revenue lift
Carrier considers adding options such as meals and charging for them
By BILL HENSEL JR.
The Houston (TX) Chronicle 


As fuel costs remain stubbornly high and bookings flat, Southwest Airlines
is doing what its competitors have been doing for years: looking for new
ways to make money.

"It is pretty basic," spokeswoman Paula Berg said. "Costs are rising, and we
are a low-fare airline, so how do we reconcile those two things?"

The options include charges for some things the airline has never offered
before, like assigned seats or meals.

Those are two examples of what the Dallas-based carrier is considering, Berg
said.

"Some customers might like to have those options and might pay a small
charge for those additional services," she said.

The airline already has programs in place to boost its cargo revenue, chief
executive Gary Kelly said at a conference last week.

Southwest has tremendous potential to generate added revenue by selling
merchandise and services to passengers, Jim Parker, an airline analyst with
Raymond James, said in a recent report.

Such sales "are on the verge of becoming pervasive in the airline industry
because it enables airlines to diversify their revenue bases," Parker wrote.

The analyst said a fee for assigned seating or priority boarding - to
replace the current open seating and boarding by categories - is likely near
the top of Southwest's list.

Change is in the air at Southwest.

"There is a transformation process under way," Kelly said. "It is far from
done. It will take place over several years."

The airline's goal, Kelly said, is to find ways to enhance its low-fare and
strong customer service brand by offering even more options for passengers.

No final decisions have been made, and the list of possible options is long,
according to Berg.

But the carrier could announce some offerings by year's end.

The carrier won't be taking anything away and will continue to provide items
like snacks, pillows and blankets at no charge, Berg added.

Travelers who fly Southwest a lot, particularly on business, might find
paying a bit extra for good seats worthwhile.

For the airline, this could be a big moneymaker.

That's because if 20 percent of Southwest's 92 million passengers each paid
an extra $10 for an assigned seat, it could add $184 million in revenue,
Parker said.

It wouldn't be the first U.S. airline to charge extra to book assigned
seats. AirTran Airways offers assigned seats at the time of booking for its
higher fares.

Softness in bookings

Southwest's timing on considering new revenue generation is partially the
result of the recent softness in Southwest's bookings, Parker noted. 

He said the slowdown could make it difficult to achieve management's goal of
15 percent annual earnings growth from passenger ticket sales.

Also factored into the equation is the steady decline of Southwest's fuel
hedges, which have given it a big edge over competitors by reducing its
overall fuel costs.

But the airline is sticking to its aggressive profit goal, Kelly said,
despite the drag from high fuel prices.

"We need revenues to improve so we can overcome high fuel prices," Kelly
said.

Fuel hedges dwindle

Southwest's fuel hedges - essentially insurance against higher fuel prices -
continue to aid the airline, but those positions are less and less of a
cushion. This year, more than 85 percent of its fuel cost is locked in at
less than $50 a barrel, but that falls to 17 percent at $63 by 2010. 

Kelly said that in addition to high fuel prices, it is facing tough
competition.

But he vowed that Southwest would continue to expand, looking to increase
its capacity 8 percent to 10 percent annually.

"We want to be prepared to grow this airline, perhaps more rapidly," he
said. "Our No. 1 priority is growth."

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