Pure Genius: Southwest Airlines Baggage Strategy

Dear blog visitor, watch this video of a Southwest Airlnes television commercial...then lets talk. 

What you see above is pure marketing genius. 

Heres why:  Southwest Airlines flies a network within the United States that uses basically one airplane.  The Boeing 737.  For this reason, baggage capacity is fairly consistent with passenger load.  Also anyone making a connection is likely to make a connection to another SWA 737, so baggage load factor remains fairly consistent across the network.  This has major advantages.

By inspiring customers to check bags, aircraft can be loaded and unloaded much faster than if passengers carry bags onto the main deck and put them in the overhead bin.  Anyone who has been on a fully loaded jet recently knows it can take 15-20 minutes just to get the passengers off the plane. The bigger the jet, the longer this takes.  Time spent on the ground means time not in the air.  Airlines only make money when the jet is flying.  By encouraging passengers to check bags and by operating a homogeneous network, SWA can turn flights faster and thus create more profit for the airline.   

What you are actually witnessing is an extension of Southwests fuel strategy.  SWA has always done a brilliant job of fuel cost hedging.  That is buying futures in jet fuel against probable market cost at time of consumption.   Turning aircraft faster means more revenue for the fuel already purchased.  Consider this a post hedge leverage on the gas in the tank. 

 Other airlines either dont get it, or can't.  Look at Continental and Delta as examples.  If I fly Delta from Phoenix, Az to Savannah, Ga, I am going to fly on a Boeing 757 to Atlanta, then change planes to a regional jet operated by a 3rd party commuter airline like Chautauqua.  If I pack golf clubs, a suit case, and maybe my wife does the same, there will be more baggage than the feeder aircraft can accommodate.   This is a big problem especially to vacation destinations where scuba gear, skis, golf clubs etc, are part of the bag mix.  For this reason, the majors discourage checked baggage.

They don't want you to bring luggage in the first place because you screw up their network planning.  Most majors don't want you to have ANY bags.  They don't want to carry them and especially they don't want the liability for tracking and reuniting you with a bag left behind because of network mismatch.

 Consumers think the airlines lost the luggage. In fact many times the airline couldn't accommodate it so they chose to pay a premium to deliver it to you later, often at the cost of your loyalty and future business.

This is exactly why I had to pay $25.00 for one checked bag today on a Continental regional jet flight from Houston to Atlanta.  I rarely fly Continental any more because my travels most often take me where Delta flies.  DAL has its largest hub in Atlanta, so I have travel status with them.  As a frequent flyer, I dont pay the extra baggage fees for checked bags I would on other less frequently flown carriers.  This incites loyalty as a function of consumer cost and convenience, but it also is a major cover up for airline network inefficiency. 

Southwest is leveraging the HELL out of this opportunity.  Folks like me who fly weekly and spend business dollars to do so, need to get there efficiently and as conveniently as possible.  If I can check a bag and know its going to get there, and not pay any extra, I will skip the frequent flyer loyalty in order to make the flight that best suits my business interests.   Im not a vacation traveler. Im the guy whose money pays for the flight.

SWA's network allows all this to work.  Consistently sized aircraft, carefully selected destinations and a desire to compete with the big guys only where they can win, has made Southwest profitable where the big guys have failed.

The advertising campaign is a very clever leverage of the weakness of big air carriers.  However, it has complex reasons as described above.  Nevertheless, the big guys (or any air carrier) could fight this another way.

What if an air carrier said...rather than charge you a fee to check a bag,  They would PAY you to do so?  Maybe not in cash, but in additional frequent flyer mileage or another perk?    What if that same airline also said that they would enable you to track your bags enroute so that you KNEW that your bag was on the same airplane you were on, that the bag also made your connection and that the bag finally was enroute to the bag carousel at the destination.  And what if all that was sent to your cell phone, PDA, Blackberry or whatever.

I think what would happen is that customers would immediately start to check luggage and flight turn times would improve measurably.  Enough to avoid government imposed fines for late departures as well as save millions in fuel costs.   The cost to enable this kind of program is to treat baggage the same way the express carriers (UPS, DHL, FedEx, etc.) treat packages.   You track it and milestone enable scanning technology.   Scan the bags at specific milestones like checked in, onboard, deplaned, at destination, etc.  Sending to a PDA is common technology nowadays.

If I were a competitor to Southwest, this is what I would do. However, if SWA does it first, the goodwill created as a first mover on the advertising campaign, coupled with the tracking technology described, would be very powerful.

Eric

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Comments

[Carry On Luggage]

Perhaps the most popular carry on luggage style is a small wheeled suitcase. Todays shape and style owe's its design to Travelpro who originally came up with the "Rollaboard", the difference to other on board luggage at the time was the upright shape and the positioning of the wheel on the 2 bottom outer edges. Other brands such as Samsonite and Antler soon adopted this shape and style and now virtually every wheeled carry on suitcase is this shape. Some brands such as Victorinox have done away with the double tubing trolley and replaced it with a monopole trolley or single stem.

[George Batchelor]

I booked flight on line from Tampa to Louisville in Feb. I just looked at confirmation and on May 13th [flignt #396] I arrive Baltimore 11:45 and depart[flight770]at12;10. I am trusting that gives enough time for our baggage to transfer or you would not post this flight. Am I correct?

[Eric]

Thomas your comments border a little bit towards spam...

Eric

[Tom Horn]

Great points. Just started reading your blog. Becoming a big fan! By the way, if you ever need a car shipped overseas or anywhere for a matter of fact, look up Auto Shipping Network. They did a great job for me.

[Eric]

Tweet, your point is well taken, but I suspect there are quite a few people who would take a fare reduction or rebate of some kind in exchange for checked bags. I would. I check a bag most of the time anyway because I pack medications that wont pass the TSA size limits on the bottles.

Eric

[Tweetrific]

What the airlines found was turn times almost 10 minutes faster than when bags were hauled aboard.

So passengers should collectively waste an extra half hour each checking bags (because that's what would happen if everybody checked bags) to save the airline 10 minutes at the gate? There's almost no fare reduction that could compensate me for the waste of my time.

[Patrick C]

What is the elasticity here? Is there a sweet spot where an airline can charge a fee for checked bags and not suffer a material change in the checked/carry-on mix?

It's interesting that this approach hasn't been copied by any of the low cost European airlines.

[Eric]

Dear Anonymous, thanks for this great and thoughtful post. The additional input is well appreciated.

I'd agree that all advertising is defensive. but at the same time letting customers know that a feature is available is also offensive. The "Its ON" motto in some SWA advertising is indicative of an aggressive intent to differentiate on the basis of free baggage carriage. That message resonates with passengers. Especially those without frequent flyer status.

Your comment on the CFO taking a gamble is interesting. I recall a Delta CFO making a similar gamble by selling all the Delta hedges for approx 80 million dollars about 4 years ago because she had to make payroll.
SWA was buying fuel during this same period for about 26 dollars a barrel due to hedging. Whats interesting is that I specifically recall a Delta pilot complaining about this when talking to him while waiting to get off a delta plane. (struck me as weird at the time but the pilots were unhappy with mgt at the time.)

Bags vs airplanes is a quite real issue. As a parcel carrier guy I have had more than one strategic level conversation with at least two major US air carriers who struggled with this issue. its real. Especially to vacation destinations.

Eric

[Anonymous]

Full disclosure: I work for a legacy carrier that competes with Southwest and charges for bags.

1)Your observation that Southwest is a "marketing genius" is correct. But I would not consider their decision to not charge for bags -- and then spend money advertising the fact -- as a proactive brilliant business strategy. It's a defensive move; their image as a 'discount' airline would be undermined if they were to ask for more money than the base fare (and whether they really are the low fare airline they claim to be...subject of another debate). Look at the mess they found themselves in when asking for heavy passengers to buy two seats. The other defensive element of the "no fee for bags" marketing is to try to deflect criticism from the investor community for leaving something like $200 million annually on the table as a result of this policy. But I guess passengers don't care about that.

2) Hedging. The purpose of hedging commodities is to lock in costs over a planning horizon, not to speculate, unless you're a professional commodity speculator. Southwest's CFO at the time, now their CEO, made an extremely large bet that fuel would go up, a move many would view as well outside the boundary of reasonable commodity hedging strategy because if he bet wrong it would have (ok, could have) brought down the company. He got lucky, and so Southwest saw huge hedging gains that masked underlying structural costs increases (labor) that are now becoming apparent as the hedges run their course (see their recent stock price trends). I don't see any connection between their bag and fuel hedging strategies.

3)Airline networks and bags. Network strategies really don't hinge upon bag volumes or whether or not the carrier charges for bags. Modern aircraft whether full size or regional are designed to handle expected passengers and their bags. Sure, sometimes not everything fits but that is rare. Whether a fee for a bag is charged or not, the main reason to check a bag is that the chances of the airline -- even the worst among us -- losing the bag is extremely rare, like 1/1000. You don't have to deal with the overhead space issue, have more room for your legs and other must-carrys, and the wait at baggage claim really isn't that much longer.

[Andrew]

They could've made so many jokes involving body bags and teabags and whatnot in that commercial. I'm almost disappointed at the lost comedy opportunities.

:C

[Andrew Sansone]

Great post. Very informative. We featured you and your site on our show today http://bit.ly/aKZJoa

[Eric]

Johny, I may be misguided, but not on this.

I did research work with another airline some years ago now, back when the TSA temporarily stopped ALL liquids from going onboard passenger aircraft. This was back when the British "terrorist" passenger tried to blow his feet off...2003 I think.

During that summer, almost all bags were stowed in the cargo hold and very few carried aboard. What the airlines found was turn times almost 10 minutes faster than when bags were hauled aboard.

The net was that those 10 minutes were spent flying rather than sitting. Meaning more revenue was generated and with fuel being at an all time high, more fuel was burned moving passengers than in burning APU time.

Sitting Still has a cost.

[johny d]

I think you grossly overestimate the benefits from checking bags. There are benefits from people enjoying traveling with more luggage, but you're idea that this is an extension of their fuel strategy is misguided.

[Geoff Fox]

Let me add one point. If you think Southwest's baggage strategy is good, you should try their frequent flier program! It is by far easier to get flights (fewer miles/segments necessary) and easier to redeem flights than any other airline! Very frequent fliers receive a companion pass, meaning I can fly my spouse for free any time I fly--even when I am on a free ticket myself!

Here's a SWA story where their agents bent the rules for me: http://www.geofffox.com/MT/archives/2006/01/03/southwest-airlines-may-i-kiss-you-on-the-lips.php .

After I wrote a note thanking them I got a reply from Southwest's president--a copy of the note she sent to the agent thanking her for taking the initiative to help a customer! That was much more powerful than just replying to me.

[jerry]

Neil, aircraft generally spend a lot of time on the ground with engines idling while the ground crew turns the plane around. If the fuel is used in-flight, the airline is making money on the fuel spent. If the fuel is used idling, the airline is wasting that money.

[Jacob]

Great post. Really interesting and informative.

[Eric]

An airline who already has gained advantage through good hedging gets to make more use of the fuel by turning airplanes faster with an improved baggage strategy.

[Neil]

Interesting posting. The only thing I didn't understand was this:

"Turning aircraft faster means more revenue for the fuel already purchased. Consider this a post hedge leverage on the gas in the tank."

Turning aircraft faster doesn't make them more fuel efficient. If aircraft are turning faster then they are flying more and using more fuel. I don't understand this "more revenue for the fuel already purchased" comment, because it makes no sense. There is only more revenue when there are more flights, and when there are more flights then more fuel is used.

[Eric]

Rah, who the heck wants to fly 12,000 miles on a small plane? YUCK! I dont like flying international on 767's! Gimme a 747 any day!

I dont think a smaller long distance jet would work well internationally anyway. That kind of airplane would not be able to carry air freight, which sustains a major portion of the transportation cost today.

The regional jet used today domestically basically killed domestic heavyweight air. Today, domestic HW air...is a TRUCK.

[rah]

So, what happens when jet design efficiency (Dreamliner's just the beginning) makes more, smaller, point-to-point non-stop planes possible? When, someday, something the size of a Jungle Jet can fly 12k miles, loaded, how does that effect what you're talking about?

[Kristin]

you should be charged to carry on luggage to put in the overheads instead of charging for checking luggage!

[Jen]

Anyone who flies a lot might be interested in this http://flightcaster.com/

[Eric]

Matt, I think you're missing the point. by getting passengers to check bags, Southwest realizes millions of dollars in savings in fuel and in aircraft asset usage.

[Matt Rutledge]

this seems uninformed without acknowledging the revenue obtained by other airlines for baggage fees put them at an advantage at time of ticket purchase. additionally, swa is paying money to try and inform it's audience that it is not charging fees. while this seems smart to you, as someone who does not ever have baggage unless absolutely required, I would rather swa charge for baggage and give me a lower ticket price. also, by not advertising their freebie service, more savings could be found.

[ShortTrip]

The only reason I check baggage on a business trip is if I have to much stuff to fit in a carry on. The reasons I carry on in order are:
1. I don't want to take the time to wait for checked luggage at baggage claim.
2. I want to have my luaggage when I arrive.

I would assume the majority of business travel is short enough that the travelers stuff can fit in a (legal size) carry on. Maybe not.

When I travel and have to check bags I would definitely choose a carrier that offered the services you described.

[Adam Siegel]

This was a great post. I've recently converted to SWA after having flown United for years and being a 1k several of those. The experience of a non-status flyer on United vs. Southwest is night and day. Being able to spend $15 to board the plane among the first 15 people is beautiful. The way they board is genius and as you've mentioned here, the baggage policy is also smart. Someone has their head on straight at SWA.

At the same time I've always assumed the need to charge for bags was to 1) increase revenue, but 2) be able to have far fewer gate agents. At O'Hare for example, the number of gate agents has gone down dramatically from a few years ago. I assume the cost savings isn't nearly as close to still needing 30-40 minute turnaround times on the ground minimum, but I'm curious if you've considered that aspect as part of their strategy?