You have to give Southwest Airlines CEO Gary Kelly credit. Analysts are constantly prodding him to embrace tried-and-true approaches for generating ancillary revenue. For the most part, he resists. He doesn’t want to mess with the airline’s secret sauce. — Brian Sumers
With higher fuel prices likely to stick around for the foreseeable future, U.S. airlines know they must increase revenue, both from fares and ancillary opportunities like bag fees and premium seats.
Even airlines like Alaska Airlines and JetBlue Airways, which historically have avoided nickel-and-diming their customers, have been adding fees in an effort to raise ancillary sales. Not Southwest Airlines, though. Yes, in recent years, it has has been more aggressive with products like Early-Bird check-in, allowing customers to secure a better boarding position — and with that a better seat — by paying a fee. On Thursday, during Southwest’s second quarter earnings call, executives said that product is selling better than ever. Most of Southwest’s core value proposition remains intact, and on Thursday CEO Gary Kelly reiterated the carrier has no plans to alter it despite higher fuel prices. That means the airline is unlikely to assess bag fees, assign seats in advance, or add premium economy sections in the near-term. “I don’t think we need to change the essence of what Southwest Airlines is to find opportunities to drive revenues,” Kelly said. Southwest is more insulated from higher fuel prices than most airlines because it hedges more of its fuel, but it is not immune. For the second quarter, it said its fuel cost was up roughly 17 percent-year-over year, less than the roughly 40 percent it would have been without hedges yet still a considerable increase. (Next year it is 64 percent hedged and if fuel moves above $80 per barrel the airline will benefit significantly, CFO Tammy Romo said.) While Southwest is in a strong position, the higher fuel prices were a slight drag on earnings. The company reported net income of $733 million, down 1.3 percent year-over-year despite Flight 1380 in April, when a woman was killed after being pulled from a Boeing 737 after an engine failed. After that incident, Southwest executives said, passengers briefly booked away from the airline, and it needed to introduce a rare summer fare sale to make up for it. Southwest’s unit revenue was down partially because of that event. Its revenue per available set mile, which measures how much an airline makes for each seat flown one mile, decreased 3 percent, year-over year.ASSIGNED SEATING NOT NEEDED

Originally posted on Skift.com; written by Brian Sumers with Skift.com