Southwest Airlines still flying high

The airline industry is in full retreat against overpowering fuel prices — slashing flights, raising fares and slapping consumers with new fees for everything from checked bags to a packet of peanuts.

All the airlines, that is, except Southwest Airlines. The Dallas-based low-fare carrier still allows passengers to check luggage, munch on snacks and sit where they like without doling out extra cash. And while it has raised fares this year, the airline continues to set the lowest prices in the industry on most routes.

It’s all part of a very different strategy for dealing with the run-up in fuel prices. Rather than sharply raising fares across the board, Southwest is trying to attract more higher-paying business travelers. Instead of hitting customers with multiple new charges, the airline is trying to draw more travelers by marketing itself as the “no-fee airline.” And while others are shrinking, Southwest is continuing to grow and take advantage of opportunities on routes vacated by competitors.

“Southwest is perfectly positioned competitively with the network airlines in full retreat,” said Michael Derchin, an airline analyst with FTN Midwest Securities, in a recent report on the airline.

The carrier has “a unique ability to generate strong revenue growth in a weak economic setting, while maintaining the lowest cost structure in the industry, despite a high fuel-cost environment,” he said.

The strategy’s architect, Gary Kelly, recently solidified his position at Southwest by assuming the position of chairman as well as chief executive officer. In July, he will become the company’s president as well.

He takes those titles from two of the industry’s titans — Herb Kelleher, Southwest’s legendary co-founder and chairman, and Colleen Barret, who rose to the president’s job by helping to build the airline’s employee- and customer-centric corporate culture.

“It’s obviously a very challenging time for the industry,” Kelly said. “We’ve got a lot of work ahead of us.”

The airline’s biggest advantage right now is its hedging program, which allows it to purchase much of its jet fuel at lower prices. While Southwest still feels the sting of the spike in prices, it is far more muted than at competitors such as American and United.

Analyst Kevin Crissey of UBS predicts that Southwest will be the only large airline to turn a profit this year, largely because of its fuel hedges.

That partial shield has allowed Southwest the breathing room to plan a long-term strategy rather than making desperate moves to stem the bleeding. Indeed, some of Kelly’s plans to bring in more money, such as in-flight Internet service and partnering with another airline to offer international flights, won’t be rolled out until next year at the earliest.

And there are no guarantees that the carrier’s course will mean a smoother flight.

“We’re in a transformational phase,” he said. “We have great enthusiasm that [our plans] are going to work, but there’s still a risk.”

No frills, no fees

American recently announced plans to begin charging $15 each way to check the first piece of baggage, and other airlines are considering similar changes. American also increased fees for a host of services, including flying with pets, having overweight luggage and unaccompanied minors.

U.S. Airways said Thursday that it will no longer provide free snacks in coach. Northwest has begun to charge passengers extra to sit in the exit row, while AirTran Airways charges to reserve a seat in advance.

But Kelly is skeptical that so-called unbundling of charges is the answer.

“Customers hate all that stuff,” he said. The airline has a 37-year history of providing low-price service, he said, “and we’re going to live up to that and deliver what our customers have come to expect.”

Instead, Southwest has been using its refusal to levy extra charges as a marketing weapon. A commercial features a flight attendant from an unnamed rival reading a long list of fees and says customers with questions can press the attendant call button “for a minimum fee of $1.”