Southwest plans big changes to increase profits

This week, Southwest Airlines announced that in the fourth quarter of 2007 it will cut flights and make “enhancements” to its low-fare structure, frequent flyer program, and boarding process in an attempt to boost revenue and attract more business travelers. Although the airline has been profitable for 34 consecutive years, its rate of growth has decreased in the current volatile air market.

“Given the slowing U.S. economy and fuel cost pressures, we are taking these steps to adjust our capacity growth rate, which will help to restore profit growth,” said Southwest Airlines CEO Gary Kelly in a press release sent out yesterday.

The airline plans to cut 39 daily flights by October 4, including the elimination of six cross-country routes: Baltimore-Los Angeles, Baltimore-Oakland, Chicago (Midway)-Orange County, Cleveland-Phoenix, Philadelphia-Los Angeles, and Philadelphia-Oakland. However, Southwest also plans to add 46 new routes in November, including a significant number to/from Denver and New Orleans, which it sees as growth markets.

Kelly says he expect fares will fall on the new routes: “Southwest continues to grow and enjoy the classic ‘Southwest Effect’ that occurs when the airline enters a new market: fares fall and passenger traffic rises.” Given that assumption, passengers who fly Southwest’s canceled routes can expect higher prices and tougher competition for desirable seats on flights operated by other airlines after Southwest discontinues service.

Southwest gave no specific details for what “enhancements” it has in store for its fare structure, frequent flyer program, and boarding process. However, in a conference call interview given to members of the media, Kelly indicated that changes would be designed to attract more business travelers. He admitted that Southwest’s “cattle call” boarding process with no seat assignments and other airlines’ more appealing frequent flyer programs may be keeping some business customers away from Southwest.

The CEO didn’t elaborate, but Southwest has been testing assigned seating on some flights, so one can assume that the days of Southwest’s mad-dash seat grab at boarding time may be numbered. And good riddance—in my experience, Southwest’s current system adds more stress to the already painful process of boarding. Let’s hope, however, that the airline doesn’t start charging for better seats as others have done.

As for frequent flyer enhancements, it shouldn’t be too hard for Southwest to match the low standards of the legacy airlines’ programs. But, if they were smart, Southwest’s executives would use this as an opportunity to create a superior product to attract travelers who’ve grown disenchanted with other airlines’ loyalty programs. So, while Southwest may be struggling a bit now, as most airlines are, it could use these challenges to make itself more appealing in the long term.