Southwest Airlines has just announced a very big change. (It all boils down to 1 powerful word)
When I heard the news of the big policy change at Southwest Airlines this week (first announced during Southwest’s earnings call on Thursday), I started thinking about the math.
Then, the more I thought about Southwest’s decision in the context of the whole industry (and the harder I tried to do the math), the more intrigued I became.
Changing to Southwest is quite simple. In short, Southwest has announced as of now that flight credits with the airline will never expire.
Never. No. To infinity and beyond, so to speak.
To steal my favorite Southwest slogan over the years: “You are now free to roam the country.” (Said in pilot’s voice on PA.)
Basically, if you buy a qualifying low-fare ticket on Southwest Airlines and cancel your plans more than 10 minutes before departure, you get flight credit. With this new announcement, these credits are valid forever.
Now, of course, I’m unaware of all the math problems and predictions Southwest used to come up with this new plan. But let me usemy well-honed thinking powers for a while:
- For one thing, Southwest just increased the monetary value of a flight credit. A credit that never expires is simply worth more than one with an expiration date.
- On the other hand, it could mean more passengers traveling instead of having their credits expire, which would mean for Southwest a reduction in what is called “breakage revenue”, basically when a customer pays you but never use your service.
- On the other hand, if we do have one, it’s worth noting that Southwest’s most expensive fare classes (those marketed to business travelers) are generally not part of this calculation, as they usually already get cash refunds instead of credits. .
- Also, the marginal cost of adding an extra passenger to a flight that was already going to fly anyway is not as high as outsiders might assume. I don’t know Southwest’s incremental cost per additional passenger, and it would vary by flight, but some estimates put the industry figure as low as $20.
- On top of that, the biggest contributor to the marginal cost per passenger is jet fuel. But, as I wrote earlier, Southwest is the only airline among the 4 major US airlines to cover its fuel costs, which means that its fuel costs are much lower than other airlines.
- And, on top of that, making the credits valid forever might paradoxically make it less likely that some passengers will actually use them. If they never expire, there’s no pressure to use them before a deadline.
- Additionally, the mere fact that Southwest credits will now never expire may well tempt some passengers to choose Southwest over another airline. But, a large percentage of those passengers won’t end up canceling their flights, and so they’ll never have credits anyway!
- On top of that, you also have passengers who could use their credits, but would have used them in the old expiration period.
Well, the calculations are exhausting me. Welcome to my world. The bottom line here is I can’t predict the bottom line.
I suspect that Southwest, which of course has a full team of quants and financial professionals, calculated the loss of breakage revenue that would result from this new policy against the other factors. But otherwise, it’s an example of what my old boss called “a glittering hand grenade.”
It was his way of describing an agent of chaos in a business that can either result in a lot of joy and happiness, or a big (but not fatal) mess that someone has to clean up.
Why? Because as far as I know, Southwest is the only US airline to offer this policy on their flight credits.
(Southwest calls this an industry-leading move, and I’ve scoured other airlines’ fine print and contacted them to confirm; no one has contradicted this at press time.)
And that means it’s one of the most helpful examples I can find of why, as I write in my free ebook, Flying business class: 10 rules for US airline executivesbusiness leaders in any industry should follow the airlines.
The lesson for today? When you’re essentially selling the same thing as everyone else, find a way to stand out.