Allow Customers to Cut in Line...Boost Profits by 10%
I love flying on Southwest Airlines…fun people, efficient service, and they always seem to be on time. That said, one major drawback of flying on Southwest is its policy of not offering assigned seating. To get a shot at the best seats, you have to check in early. The airline’s boarding policy is as follows: the first third of check-ins receive an “A” boarding pass, the next third get a “B” pass, and the rest are stuck with a “C” (you’ll be sitting in a middle seat) boarding pass. “A” passengers are boarded first and have their choice of any seat on the plane, “B” passes are let on next, and then finally, “C” passes. Being a “C” pass holder is no fun: once you board the airplane, no one dares to look you in the eye for fear that you’ll interpret this gesture as an invitation to sit in the middle seat of their row.
Last week Southwest made a major change to its “first to check in, get the best seat” policy. It is now offering a new “business select” ticket version. For $10 - $30 more per flight, “business select” passengers are guaranteed an “A” pass. Jumping on the pricing bandwagon, Southwest CEO Gary C. Kelly told the New York Times (“Southwest Changes Open Boarding Policy” by Jeff Bailey) that the changes are intended “to create a reason for people to give us more money…we’ve not done that in the past very well.” Mr. Kelly doesn’t mince his words, does he?
In addition to priority boarding, “business select” ticket holders receive a free alcoholic beverage and bonus frequent flier credits. Southwest expects this new ticket version to bring in an extra $100 million in annual revenue. Let’s ballpark the costs of this new version at $20 million (this accounts for the 1 free drink and extra frequent flier credit), this leaves $80 million in extra profits.
What’s so powerful about better pricing is that its benefits drop directly to the bottom line. Here’s what this small pricing change will do for Southwest’s bottom line. According to the airline’s latest annual report (2006), its full year operating profits were $790 million. Adding the additional $80 million in profits garnered by allowing well heeled passengers to cut lines will boost Southwest’s operating profits by 10%.
Pretty amazing isn't it? I never tire of seeing how small pricing changes can lead to big profit windfalls!
