How Can Southwest Compete With Cheaper Low-Cost Carriers?

by Josh Lew
Last updated: 1:00 AM ET, Wed January 13, 2016

Photo courtesy of Southwest Airlines

Southwest Airlines has always been able to compete with legacy carriers because it could offer low fares. Thanks to its no-frills service and savvy use of secondary airports, the Dallas-based airline has become one of the world's most successful commercial carriers. It was able to fly high even when its competitors were dealing with debt, bailouts and bankruptcy.

Now, however, other airlines have taken the no-frills business model a step further. Compared to the likes of fee-happy airlines such as Spirit, Allegiant and Frontier, Southwest is often seen as the more expensive option. How can the established low-cost carrier compete with these cheaper upstarts and retain control of a market that it has dominated for so long?

According to CEO Gary Kelly, it will take a combination of things to keep Southwest at the top of the budget-flying heap.

Competing with ultra-budget carriers

Last week, Kelly was in Colorado to celebrate his airline's 10th anniversary at Denver International. While there, he spoke about being very wary of emerging competition in the budget air travel marketplace. He also talked about the need to make changes so that Southwest can remain competitive when it comes to price:

"I don't think there is a really dramatic impact in the short term for that type of competition. But over the long term, we would be foolish to ignore any competition. We need to do everything we can to make sure our costs are not higher than theirs… And we still have to find a way to make sure that we are the low-cost provider. And they're bringing really low cost and significant cost competition to us."

Cheaper overall cost

At least for the foreseeable future, Southwest will continue to be one of the only U.S. carriers to not charge any fees for checked baggage on domestic routes. You might expect the airline to do away with this policy if it wants to develop another revenue stream so that it can lower its fares. That will not be the case for the time being, however. Southwest's execs seem to be banking on the idea that customers will understand the difference between the price of an airline ticket and the overall cost of air travel. In the era of a la carte pricing, this is a very important distinction.

Southwest has shown that it is quite savvy when it comes to marketing its no frills fares ("Wanna get away?"). It should be able to craft a message that will sell the idea that it is a more transparent low cost carrier, and that it is actually cheaper when it comes to the overall cost of travel (fare plus fees).

Every dollar counts

If it is not going to start charging for baggage, Southwest will need to find other ways to decrease operating costs and increase revenue so that it can compete with the ultra-budgets in the long term while keeping its current fee policies in place. Southwest recently updated its fleet, adding an extra row of seats to its planes so that they can now hold 143 passengers. Capacity used to be 137. The airline is also trying to further streamline its ground and gate operations so that its planes can have a quicker turn-around time and get back in the air faster.

Southwest's image and business model are both dependent on it being able to offer low fares. That won't change. However, the airline, and other established low cost carriers who don't fall into the ultra-budget category, will need to convince fliers that they are the most customer-friendly option and the cheapest choice when it comes to the overall cost of a trip.

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