Southwest expects $100M from fee changes

Southwest Airlines Co., the discount carrier with the "Bags Fly Free" slogan, forecast $100 million in annual revenue from fee changes that will include the first charges for no-shows on flights and premium boarding positions.

But the airline gave no indication Friday during its Investor Day in New York when it might begin long-anticipated service to Hawaii.

"We’re preparing Southwest for the next phase, and we’re acknowledging that the world has changed," Southwest Chairman, President and CEO Gary Kelly said. "We were very much a short-haul carrier as late as 1996. We began to fly a little bit longer after that, but long haul for us, really, we needed to change some planes. And so now we have a more comprehensive strategy that takes into account the needs of the long-haul markets, whether it’s equipment or service scheduling, whatever it might be, from fares, the whole array of things."

Southwest now has Boeing 737-800s that are capable of flying to Hawaii. Kelly said Southwest is focused on completing its AirTran integration by Jan. 1, 2015, as well as reaching a 15 percent return on invested capital.

"Hawaii and Mexico and other places are (large) opportunities," Kelly said. "As long as we live up to the value proposition with low cost and low fares, as long as we hit our profit target and as long as we keep our customer service levels high, we ought to be able to think of all of those as viable growth options."

Southwest’s new fees and increases to existing charges will start in the first quarter, Chief Commercial Officer Bob Jordan said. Dallas-based Southwest expects to boost revenue by $1.1 billion in 2013 as it works to cover rising labor and jet-fuel costs amid growing competition.

Southwest’s fee moves mark a departure from its reputation as a no-frills carrier that bucked the rest of the industry by letting passengers check two bags for free and change flights without penalty. The no-show fee would be levied on passengers who don’t cancel tickets before a flight.

"This one is pretty industry standard," Kelly said. "Customers understand we could all benefit from the opportunity to resell a seat. Once the airplane takes off and it’s empty, we can’t ever resell it."

Kelly didn’t rule out that other fees may be added in the future, saying, "We don’t have a first-bag-fee idea for 2013 or a change fee."

With the changes, Southwest expects "a doubling or more of earnings year over year" in 2013, Kelly said, without giving details. The forecast is based on unchanged economic conditions and fuel prices. Southwest’s net income through 2012’s first nine months was $343 million on $12.9 billion in sales.

Passengers can still check two pieces of luggage for free, although charges for a third checked bag will increase an unspecified amount, said Jordan, who is also president of the AirTran unit. The overweight-bag fee will double to $100.

Southwest already has a charge to reserve an early boarding slot, and will increase that fee to $12.50 from $10. Starting next year, passengers can get an early-boarding slot by paying a fee at the gate.

At AirTran the fee for the first checked bag will rise to $25 from $20 and a second bag to $35 from $25, Jordan said.

"These are real, valuable and noteworthy changes, considering Southwest’s historical aversion to an unbundled product," Hunter Keay, a Wolfe Trahan & Co. analyst, said Friday in a note. Keay, based in New York, maintained an underperform rating on Southwest.

Southwest rose less than 1 percent to $10.19 at the close of New York trading. Shares have climbed 19 percent this year, compared with a 27 percent increase on the Bloomberg U.S. Airlines Index.

The elimination of 300 jobs by not filling open positions and anticipated retirements is part of $100 million in savings planned for 2013, Kelly said. The carrier had 46,048 employees at the end of September and has never laid off workers.

Kelly declared rising expenses Southwest’s enemy a year ago, after larger carriers such as Delta Air Lines Inc. restructured in bankruptcy. The changes by competitors cut Southwest’s cost advantage in half and pushed its employee pay rates to the highest in the industry.

"We are managing as aggressively as we dare to evolve the Southwest Airlines customer experience and operations to be successful in this environment," Kelly said today.

The airline expects to meet its goal of a 15 percent return on invested capital in 2013, he said.

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Bloomberg News contributed to this story.