Leaked: How Southwest May Radically Transform Business Model

We know that Southwest Airlines is planning some major changes to its business model. While nothing is set in stone yet, I have some insights as to what could be changing at the airline, and it represents a major departure from the way the company currently does business.

Why Southwest Airlines is changing its business model

Historically, Southwest Airlines has been known for its unconventional business model among US airlines. The airline has no change fees on any fares, allows all passengers to take a carry-on and two free checked bags, and has a controversial open seating model (which people either love or hate).

More from OMAAT Southwest Airlines Considers Boeing 787 Order, Plans Long Haul Flights Read more

For decades, Southwest has been one of the most profitable US airlines, but the carrier seems to be losing its financial edge, as consumer travel patterns have shifted. Southwest isn’t able to capitalize on the premium travel boom, plus the demand for long haul travel.

Recently, Southwest CEO Bob Jordan made it clear that the airline was considering overhauling its business model. He made it clear that the only thing that definitely isn’t changing at the airline is that all passengers get two free checked bags, since he views that as being a key part of the carrier’s value proposition.

However, changes to everything else are on the table, from assigned seating, to change fees.

The major changes Southwest Airlines is considering

Southwest has had some customer focus groups recently about potential changes to its business model, and some of these details have been shared with me.

Let me emphasize that of course what’s shared in a focus group isn’t necessarily going to be the final decision that’s made. However, it’s also clear that this was more than just throwing random ideas out there, as those participating in the focus group were shown the new technology that enables this, which suggests to me that this is under serious consideration, at a minimum.

The changes being considered are more substantial than I would have expected, and to me seem way overly complicated. Let me share some of the key things that are being considered (and again, let me emphasize that this may or may not come to fruition).

Southwest could break airplane cabin into three parts

There had been talk of Southwest introducing an extra legroom economy section on its jets, given that the airline is soon introducing new seats. However, there was no mention of Southwest having an extra legroom economy section, so I’m actually inclined to believe that might not be happening. After all, Southwest only plans to install new seats on newly delivered aircraft, and not existing ones.

With that in mind, Southwest is considering breaking the cabin into three parts:

• The front third of the plane would be branded as Premium/Premier
• The middle third of the plane would be branded as Select (exit row seats would still be considered Premium/Premier, if they fall in this zone)
• The back third of the plane would be branded as Standard

So there’s not actually much difference between seats, it’s just how far forward you can sit. While this could of course change, the price ranges shown for assigning these seats were $15-25 for Standard seats, $30-50 for Select seats, and $50-75 for Premium/Premier seats.

Southwest could evolve fare bundles & ticket flexibility

Southwest is considering keeping the same fare bundles it currently has — Wanna Get Away, Wanna Get Away Plus, Anytime, and Business Select. However, what’s included with each bundle could change. Here’s one version of the evolved fares that the airline presented:

• Wanna Get Away fares would include two free checked bags, but wouldn’t include any seat assignments, and these tickets would have no flexibility, so couldn’t be changed even for a fee
• Wanna Get Away Plus fares would include two free checked bags, free ticket changes, and the ability to select Standard seats for free
• Anytime fares would include two free checked bags, free ticket changes, and the ability to select Standard or Select seats for free
• Business Select Fares would include two free checked bags, full ticket flexibility, the ability to select Standard, Select, or Premium/Premier seats for free, and free early boarding

As you can see, these bundles do allow certain seats to be assigned at no extra cost. However, arguably the most radical change is that Southwest is considering completely eliminating flexibility on Wanna Get Away fares. It’s interesting this is being considered now, while at the same we’re seeing ultra low cost carrier Spirit Airlines completely eliminate change fees on all fares.

Southwest could aggressively charge for seats

Above I talked about how certain fare bundles could include seat assignments in certain zones. Wanna Get Away fares are Southwest’s most popular fares, so what would happen if you booked one of those fares?

Long story short, at no point in the booking process would you be allowed to select a specific seat at no cost. You could pay for a specific seat any time between the time you make a reservation and check-in.

What happens if you choose not to pay for a specific seat? At the 72-hour mark, you would be able to state your preference for the type of seat you’d like, whether it’s in the front, middle, or back of the plane, and whether it’s a window, middle, or aisle seat. You could also then state whether you prioritize sitting next to your travel companion, or having your preferred type of seat.

Based on that, you would then be assigned a seat. If you don’t like the seat and want to change it, you’d have to pay a fee to assign a specific seat.

Southwest could keep same “cattle call” boarding

How would Southwest’s boarding process evolve with this system? Southwest could keep its same “cattle call” boarding that it currently has, with some modifications. Those in Premium/Premier seats would still get boarding group A, those in Select seats would still get boarding group B, and those in Standard seats would get boarding group C.

Generally there can be up to 60 people in each boarding group, and each person is assigned a number within that group, which determines the order in which you line up. The number you receive within each group would be determined by whether you paid for a seat or not. In other words, if you’re on a Wanna Get Away fare in a Standard seat, a person who paid for their seat might be in position C1, while a person who didn’t pay for their seat might be in position C60.

Southwest would still sell early boarding positions, to generate further revenue.

Southwest’s plans seem way too complicated

We’ll see how this situation evolves. As I said at the beginning of the post, this was what was shared in a focus group, so this isn’t necessarily the finished product. However, all the technology was there for this new system, which also suggests that the airline wasn’t just throwing out totally random ideas.

Based on what I’ve been told, the feedback to this concept was overwhelmingly negative, and reportedly the folks from Southwest were surprised by how negative the reaction was.

I have several thoughts here:

• It goes without saying that Southwest would be a radically different airline if these changes were implemented, from not allowing changes to the most basic tickets, to basically having a punitive seat assignment policy (where those on Wanna Get Away fares can’t even choose a specific seat at check-in)
• While I can appreciate the desire (and even need) to generate more ancillary revenue, this new system seems unnecessarily complicated, and like it’s sure to just cause confusion among consumers, and eliminate the goodwill that makes people choose Southwest over competitors
• It seems to me like one of Southwest’s main objectives here is to make “Wanna Get Away” fares undesirable, so that people “buy up” to the next fare type, which isn’t something the airline has historically done; this is something the US global carriers have been successful with, using their basic economy models
• Southwest’s problem is that even the carrier’s cheapest fares are often aggressively priced compared to the competition, given all that those fares include; Southwest would need to lower Wanna Get Away fares considerably to remain competitive, because no ticket flexibility and the need to always pay for seats is a major departure from what passengers expect
• It’s interesting that Southwest didn’t share plans to introduce extra legroom economy, since that has been speculated; while it’s still possible that’s happening, I wouldn’t be surprised if it doesn’t, since the airline doesn’t have public plans to retrofit existing aircraft
• Southwest has long claimed that its open seating policy is the most efficient and allows the airline to make fast turns; conversely, what’s proposed here sounds like it would be the opposite of that, as boarding would essentially be front to back

Bottom line

We know that Southwest Airlines is considering major updates to its business model, to generate more revenue. While the airline has long been popular with consumers, it’s not generating the revenue premium that it needs to anymore. Executives at the airline have made it clear that all changes are on the table, with the exception of checked bags — the airline will continue to offer those on all fares.

While we’ll see what ends up happening, Southwest seems to be considering assigned seats that break the cabin into three, fees for seat selection, and even eliminating all flexibility on the most basic fares.

What do you make of these potential Southwest changes?