Southwest Airlines Co. (LUV) Needs to Reinvent Its “Low-Cost Carrier” Image: JetBlue Airways Corporation (JBLU), Spirit Airlines Incorporated (SAVE)

Focus on customer service
Low prices historically helped attract customers to Southwest Airlines Co. (NYSE:LUV) and JetBlue. They kept costs down by using just one or two aircraft types, offering a single class of service (no business class or first class), and ensuring high aircraft and labor productivity. Moreover, they were able to convert these customers into loyal followers by providing top-notch customer service at a time when legacy carriers were particularly unreliable.

Today, the focus on customer service at Southwest and JetBlue Airways Corporation (NASDAQ:JBLU) is the distinguishing feature of these companies, not low prices. While virtually every other U.S. carrier charges for checked bags, JetBlue will still check a bag for free, and Southwest offers two free checked bags. Southwest is unique in having no flight change fees, while JetBlue offers far more legroom than any other carrier, as well as free satellite TV and satellite radio at every seat.

These customer-friendly policies come at a cost. Offering more leg room means putting fewer seats on each airplane, thus reducing the number of tickets that can be sold. Allowing free itinerary changes makes it harder to predict how many ticket holders will actually show up for a given flight. Providing free TV and satellite radio at every seat is costly. Lastly, allowing customers to check bags for free means giving up a potentially significant stream of ancillary revenue.

Monetizing the premium experience
Offering premium amenities should theoretically create pricing power. However, JetBlue Airways Corporation (NASDAQ:JBLU)has been better at monetizing its “premium” atmosphere than Southwest Airlines Co. (NYSE:LUV). Customers are willing to pay a little extra for more space and better entertainment options. By contrast, Southwest still leads with “low fares” when describing the Southwest experience, and it promotes its policies of no bag fees and no flight change fees. However, Southwest’s messaging does not give customers a good reason to fly Southwest if they can find lower fares somewhere else.

Southwest’s meager 2.5% profit margin last year shows that the additional costs imposed by its no-fee policies are not producing commensurate revenue benefits. Thus, Southwest should consider rebranding itself to put more emphasis on high-quality service; it should also consider adding premium amenities, such as complementary in-flight Wi-Fi. (Alternatively, Southwest could drop prices to reinvigorate its “low-cost” image, while introducing bag fees and flight change fees to offset the lost revenue.) JetBlue has been able to grow profitably even as its prices have approached those of competitors because it offers premium amenities that can attract customers who aren’t as concerned with price. Southwest Airlines Co. (NYSE:LUV) probably cannot regain its status as the lowest-cost airline, and so management should aim to reinvigorate the business by moving toward a “premium service” model as well.

The article Southwest Needs to Reinvent Its “Low-Cost Carrier” Image originally appeared on Fool.com.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines. The Motley Fool owns shares of Spirit Airlines.

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