The winds of change are producing turbulence for Southwest Airlines. On Nov. 7 the iconic airline unveiled a new fare structure that gives preferential treatment to customers who pay more for their tickets, a huge departure for Southwest (BusinessWeek.com, 11/7/07), which is famous for its lack of elitism. And the customer reaction has been surprisingly critical for a company more accustomed to abundant praise.
On the company's blog, blogsouthwest.com, negative comments have outnumbered positive remarks by more than five to one. "Not since Coke tried to change its formula years ago has a major corporation made such a marketing blunder," screeched one writer. "Herb, an SOS is needed," wrote another, addressing Southwest co-founder and Chairman Herbert Kelleher, who plans to retire next year. "We need you back."
The comments on other blogs and Web sites have been just as pointed. On Yahoo!'s financial message board one writer dubbed the changes "Kelly's Folly," a reference to Southwest Chief Executive Gary Kelly. Many comments echo those of technology consultant Vinnie Mirchandani, a Southwest frequent flier who fears that by creating different classes of passengers the Dallas company is losing the quirkiness that made it unique. "They've added a level of complexity," Mirchandani says. "The other airlines have all these analysts tweaking fares. I don't want them to be like the other airlines."
Competing for business travelers
The customer reaction illustrates the challenges managers face when they try to introduce change at a company famous for not changing. For years Southwest has been a model of consistency — flying just one type of plane, with no assigned seats, and lightning-fast turnaround at the gate. It has also been the most consistently profitable airline. Kelly, a Southwest veteran who became chief executive in 2004, still believes the company needs a remodeling, however.
Other big airlines have slashed expenses, often through bankruptcy court, he notes. A new generation of low-cost carriers such as Virgin America is gaining altitude. Southwest has bought itself some time by hedging a large portion of its fuel purchases, but its labor costs are now among the highest in the industry and its stock price has been flat for seven years. "The competitive landscape has changed," Kelly told BusinessWeek shortly before introducing the new fare structure. "We're going to need to compete less on price and more on something else."
Kelly and his management team have been planning that something else for the past two years. His goal is to add more than $1 billion a year in new revenues by 2009, in large part by luring lucrative business travelers. Southwest is upgrading the waiting areas at its gates, adding cushy leather chairs with built-in outlets for plugging in computers and recharging cell phones, a process the company is calling its "extreme gate makeover."
Kelly also hopes to unveil international connections to Mexico and the Caribbean as well as in-flight Internet connectivity, offerings that might particularly appeal to business travelers who want to work on the plane and use frequent-flier points for vacations later. "You can get people traveling on their own nickel with lower fares," Kelly says. "The business traveler who's getting reimbursed has more needs."
Changing Southwest's boarding process was also among Kelly's top priorities. With no assigned seats, customers often waited in line at the gate for an hour to get the best spots on the plane. Lines often snaked confusingly into the common areas of the airport. Sometimes fistfights ensued. Colleen Barrett, Southwest's president and head of customer service, says the lines have been the airline's top customer complaint since it was founding 36 years ago.
In June, 2006, Kelly posted on the Southwest blog about a possible switch to assigned seats. More than 700 people responded, the vast majority indicating they thought it was a bad idea. Southwest tested assigned seats last year in San Diego with predictable results — it took longer to board. Kelly says passengers often tell him they like choosing whom they sit next to. Some have even met future spouses on flights and gotten married on the company's planes.
A compromise was worked out and tested again in San Antonio in August. Passengers now board in groups of five according to numbers assigned to them when they check in, anytime in the 24 hours before the flight. The process has jokingly been called "bingo boarding" because of the seat letters and numbers that pop up on screens installed at the gates. Kelly says the more orderly boarding process will be a win for passengers. Rather than standing in line, they can get a bite to eat or get more work done at the airport, making their trip more productive and enjoyable.
Kelly also saw the change as a way to achieve his goal of generating more revenues by offering business customers something more exclusive. Travelers who pay up to $30 more than a full-fare ticket get to board first. This "Business Select" fare also includes a free cocktail and bonus frequent-flier points. "They are our true road warriors, and they should be rewarded," Kelly says.
Despite the reaction of some folks on the Web, other observers seem to favor the changes. "If they become labor and shareholder obsessed and lose their customer focus, it could be an issue," says Kevin Mitchell, founder of the Business Travel Coalition, which advises corporate travel buyers. "But I don't think it's them being more like the older carriers. It's a natural evolution for them."
To quell any confusion or discontent, Southwest has called on a "Volunteer Army" of staffers who will stick around the airports on their own time, helping to educate passengers about the new boarding system. Southwest's vice-president of marketing, Kevin Krone, has been responding to customer complaints on the blog. "All I can say is, please be patient with us," he wrote in one response. "We are working very hard to enhance our product to bring ALL of our Customers more value and an even better experience."
Company spokeswoman Beth Harbin says the comments from people upset that Southwest is losing its egalitarian culture are similar to those the company heard years ago when it introduced online check-in. "They said people with computers would have an unfair advantage," she says. The controversy eventually passed.
Chairman Kelleher says he is on board. He has been making the rounds of employee meetings with a blunt message. "A lot of this will be shocking," he says. "The whole company has to change — it's imperative for our survival." Adds Kelly: "We'll still be that friendly, fun airline but in a position where we can provide more."