Southwest estimates 1% share shift from its no bag fee policy

Washington DC
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Southwest Airlines believes it has seen a roughly 1% share shift in the domestic USA resulting from its decision not to charge passengers checked bag fees.

The low-fare carrier has built a massive marketing and advertising campaign around its no fee policy.

During a 21 January earnings call Southwest chief executive officer Gary Kelly supplied the share shift estimate, citing traffic growth during the fourth quarter even as capacity fell 7%. He also cited record load factors during a typically weak quarter.

"It is very clear we are seeing a share shift," says Kelly. He explains Southwest management "has made several calculations on this [share shift]", and it points to the 1% figure.

He estimates that shift translates to "somewhere to a half a billion and a billion dollars of additional customers". Taking that into account Kelly declares: "We're not going to be charging for bags."

Southwest's fourth quarter revenue passenger miles grew 5% as enplaned passengers increased 6% and revenue passengers carrierd grew 3%. Load factors soared from 68% to 77% as average fares also fell 5% to $120.

Kelly also cites record unit revenue growth of 7% during the fourth quarter of 2009 despite the global recession.

Most of the revenue traction during the fourth quarter was driven by capacity cuts and schedule optimisation, says Southwest chief financial officer Laura Wright. The carrier's full fare mix was 18% during the fourth quarter, which Wright says is below pre-recession levels. A more normal number, she says, is in the mid-20 range.

The carrier is seeing the revenue traction continue in the first quarter as passenger unit revenues month-to-date for January are up 14% to 15% on a 7% decline in capacity. Targeted capacity reductions in February and March are 4% to 5%.