One month ago I was in Atlanta listening to a panel on trends in the travel industry. During the Q&A, the Delta representative was asked for their opinion of the Southwest acquisition of AirTrain and if Delta thought the merger threatened its market share or current price points. While the representative first pointed out that Delta competes with Southwest on more than price (e.g., Delta offers a first class cabin, assigned seats, a large international network), she also said something very peculiar: Southwest’s entry into Atlanta may actually help increase the prices for some routes.
But isn’t Southwest a “low-cost discount airline”? Perhaps it carries that perception for consumers, but its ticket prices are no longer the lowest in the market. In fact, the average Southwest ticket price has jumped 39% in the past five years while the average ticket price for the domestic industry was up only 10% (Source: WSJ “Can’t Call Southwest a Discount Airline These Days”).
So how has Southwest raised prices but still maintained its reputation as a discount airline? Some of its marketing, but a lot of it is due with Southwest’s pricing strategy.
In its marketing campaigns, Southwest proudly proclaims that “Bags Fly Free” and customers face “No Change Fees”. Other carriers charge ~$30 per bag checked and change fees are typically $150 on major carriers like Delta and United. While consumers complain that bag fees are petty charges, the dollars add up for the airlines (last year checked bag revenue totaled $22 billion and was 14% of United’s total revenue). Airlines have unbundled their ticket prices (i.e., they charge for bags) in order to keep ticket price points low. Southwest on the other hand has chosen not to participate in this pricing strategy, and instead, it uses an upfront pricing strategy that presents a transparent and simple value proposition to the consumer.
One major reason that Southwest has higher prices than other airlines is that bag fees are baked into the ticket price. This means a round-trip ticket on Southwest that is slightly more expensive can still be worth the extra cash for a passenger checking bags. With that said, Southwest makes it very difficult to comparison shop, and that is the beauty of its pricing strategy.
Southwest does not make its tickets available on popular travel sites like Orbitz.com, Hipmunk.com, and kayak.com. This means to buy or view the price of a Southwest ticket, a customer must go to Southwest.com. While this sales tactic limits its potential audience, it also makes it a little bit more difficult for its potential customers to comparison shop (it also allows Southwest to reduce its fare price as it pays no booking fees).