Are Southwest's Fare Sales Bad for Business?

tonyw

Well-Known Member
I've been saying for a long time that it's stupid for airlines to continue to slash fares to a point where they lose money on every sale in order to fill seats.

I've heard oh, but you don't understand revenue management. My response has been, uh, well, if you've got a system that causes you to file for chapter 11 time and again, maybe the system isn't working.

Now it seems like someone else who's got a pretty good track record at evaluating management decisions is on board with my way of thinking.

http://quicktake.morningstar.com/StockNet/MorningstarAnalysis.aspx?Symbol=LUV&Country=USA

Given that offering bargain fares has resulted in a razor-thin profit in the quarter and a cumulative net loss during the first half of 2009, we think Southwest's decision to continue offering drastic ticket sales to stimulate demand is the wrong approach.
 
Too high, you lose customers and lose money... Too low, more customers but you lose profit. It would seem to me that Southwest is got a perfect balance...

Kinda like pilot jobs... "Oh, you'll fly for me for $? I guess I better call the guy who would fly for $$$$ and tell him I don't need him." :sarcasm: but not really.
 
Southwest usually advertises their Fare Sales on Facebook, and I always get a kick out of people leaving a comment how they couldn't find a deal, how they still paid to much, blah blah.
 
And the problem for Southwest is they have very little opportunity to collect ancillary revenue like the big guys. For example, US can match Southwest fares and still expect to pick up bag fees, higher change fees, possible first class upgrade fees, etc.
 
I wasn't able to access the article without signing up for a free trial, but did it mention the volume of seats offered up for the fare sale? If they use the old car dealer trick of having only a couple of seats at rock-bottom prices on any given flight -- just to get people looking -- then it seems like a good occasional marketing move (after "occasionally" they start to set expectations about price and build animosity if those fares aren't available).

Did the article's author give any suggestions about what the airline should do while remaining competitive in the race to the bottom?
 
Southwest must be doing something right... the local news tonight reported that they are in the black again.
 
And the problem for Southwest is they have very little opportunity to collect ancillary revenue like the big guys. For example, US can match Southwest fares and still expect to pick up bag fees, higher change fees, possible first class upgrade fees, etc.

US is also losing money hand over fist and for all intensive purposes will be insolvent after the next few quarters.

SWA? Nope, I don't think they will have that problem.
 
Tony, SWA's fare sales may be bad for carriers that can't compete with them . . . and that's the whole idea, isn't it?
 
I don't recall Southwest ever filing Chapter 11? I do recall them being the most profitable airline year after year, having well paid pilots who are almost universally happy with their job and working conditions, and consistently having the lowest prices in the industry to boot. I guess you've got a valid point about the Legacies, but I'm not sure how that line of thinking applies to Southwest, who posted decent results considering we're in the midst of the worst economy since WWII.
 
Tony, SWA's fare sales may be bad for carriers that can't compete with them . . . and that's the whole idea, isn't it?

No, Morningstar is saying it is bad for Southwest itself. They say that instead of doing that, Southwest should pull capacity and cut costs.

I agree. Look at what most retailers have trained people to do. They'll wait for something they want to go on sale.

If you hold the line on your price, then you can say, you can pay it now and get it, or you can possibly pay more later. Your call.

Southwest is cheapening the value of their product in the public's mind.

That is NEVER a good business practice.
 
Doesn't matter how you or I feel, it's all about the financials.
 
Well, according to Morningstar, the first six months of the year have resulted in a cumulative loss for LUV.

And the operating margin dropped by 200 basis points.

Those are not good trends.

Cutting fares to stimulate demand is going to cause that operating margin to drop even more.
 
Southwest earned $54 million in the second quarter of 2009. How many others made a profit?

It is possible they will post a loss in the 3rd quarter, but that is no surpise how many other airlines are showing a profit at all right now? If they do post a loss, it will be the first third quarter loss since 1972!

Southwest is really not a "low fare" airline. They do however have a great marketing program. Yes they advertise cheap fares, but they limit the number of those cheap fares, and you have to be early to get one.
Most of the time their ticket prices are no less then AA's Ual, or CO's etc.

Southwest is growing (when everyone else is reducing) they are paying their pilots some of the highest wages in the industry right now. How is that bad for business?
 
Here comes the SWA bashing thread. Whatever their business plan is, it seems to be working alright for them. They get people from Point A to Point B without my complaining. Except the occasional roof blow outs, they seem to be doing alright.

RD
 
Southwest earned $54 million in the second quarter of 2009. How many others made a profit?

It is possible they will post a loss in the 3rd quarter, but that is no surpise how many other airlines are showing a profit at all right now? If they do post a loss, it will be the first third quarter loss since 1972!

Southwest is really not a "low fare" airline. They do however have a great marketing program. Yes they advertise cheap fares, but they limit the number of those cheap fares, and you have to be early to get one.
Most of the time their ticket prices are no less then AA's Ual, or CO's etc.

Southwest is growing (when everyone else is reducing) they are paying their pilots some of the highest wages in the industry right now. How is that bad for business?

:yeahthat:
 
I'm about to fly my ninth SWA segment in 3 weeks.

I have not paid a rock-bottom price for any of those fares, in fact, three of them have been full-fare tickets.

Every seat has been filled. Every. Single. Seat.

The PHX-AUS flight I was on a couple weeks ago was a brand-spanking new 737-700 - they had taken delivery recently on it and it entered fleet service the night before. I think we were the second group of pax ever to fly on it.

SWA's doing fine.
 
Southwest is cheapening the value of their product in the public's mind.

That is NEVER a good business practice.

I disagree.

Price is what you pay for something, value is what you perceive you got for that price. Whether the seat between PHX and AUS costs me $307 RT or $159 RT, the product delivered is consistently the same. The differences mainly come in whatever perks I happen to get with A+ status and early check-in. Not that big a deal.

Further, I think SWA is increasing their perceived value. Our CEO put out an email a week and a half ago to all of us encouraging us to use SWA whenever possible for travel - mostly because of the flexibility. I'll say it 'till I'm blue in the face - on an unrestricted full-fare - which is often what business travelers fly on (me, anyway) - there is absolutely no comparison.

It's not just the price of our tickets. It's the price of our time and schedules.
 
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