No 'Luv' for Southwest's Changes

As negative feedback flies about the airline's new preferential boarding, it tries to accentuate the positive, including gates updated for business travelers

by Christopher Palmeri

The winds of change are producing turbulence for Southwest Airlines (LUV). On Nov. 7 the iconic airline unveiled a new fare structure that gives preferential treatment to customers who pay more for their tickets, a huge departure for Southwest (BusinessWeek.com, 11/7/07), which is famous for its lack of elitism. And the customer reaction has been surprisingly critical for a company more accustomed to abundant praise.

On the company's blog, blogsouthwest.com, negative comments have outnumbered positive remarks by more than five to one. "Not since Coke tried to change its formula years ago has a major corporation made such a marketing blunder," screeched one writer. "Herb, an SOS is needed," wrote another, addressing Southwest co-founder and Chairman Herbert Kelleher, who plans to retire next year. "We need you back."

The comments on other blogs and Web sites have been just as pointed. On Yahoo!'s (YHOO) financial message board one writer dubbed the changes "Kelly's Folly," a reference to Southwest Chief Executive Gary Kelly. Many comments echo those of technology consultant Vinnie Mirchandani, a Southwest frequent flier who fears that by creating different classes of passengers the Dallas company is losing the quirkiness that made it unique. "They've added a level of complexity," Mirchandani says. "The other airlines have all these analysts tweaking fares. I don't want them to be like the other airlines."

Competing for Business Travelers

The customer reaction illustrates the challenges managers face when they try to introduce change at a company famous for not changing. For years Southwest has been a model of consistency—flying just one type of plane, with no assigned seats, and lightning-fast turnaround at the gate. It has also been the most consistently profitable airline. Kelly, a Southwest veteran who became chief executive in 2004, still believes the company needs a remodeling, however.

Other big airlines have slashed expenses, often through bankruptcy court, he notes. A new generation of low-cost carriers such as Virgin America is gaining altitude. Southwest has bought itself some time by hedging a large portion of its fuel purchases, but its labor costs are now among the highest in the industry and its stock price has been flat for seven years. "The competitive landscape has changed," Kelly told BusinessWeek shortly before introducing the new fare structure. "We're going to need to compete less on price and more on something else."

Kelly and his management team have been planning that something else for the past two years. His goal is to add more than $1 billion a year in new revenues by 2009, in large part by luring lucrative business travelers. Southwest is upgrading the waiting areas at its gates, adding cushy leather chairs with built-in outlets for plugging in computers and recharging cell phones, a process the company is calling its "extreme gate makeover."

Kelly also hopes to unveil international connections to Mexico and the Caribbean as well as in-flight Internet connectivity, offerings that might particularly appeal to business travelers who want to work on the plane and use frequent-flier points for vacations later. "You can get people traveling on their own nickel with lower fares," Kelly says. "The business traveler who's getting reimbursed has more needs."