Can These New Fees Help Southwest’s Revenues Take Off?

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Southwest PlaneSouthwest Airlines (NYSE:LUV), well-known as the United States’ leading discount carrier, has found that its low-cost strategy needs to be amended. As the company’s Investor Day presentation revealed, the airline is finding it harder to stay profitable as labor and fuel costs rise and competition increases.

More Fees?

On Friday, Southwest Airlines told investors that the company would be implementing new fees next year in order to increase revenue by approximately $300 million. According to Reuters, the “bags fly free” carrier will increase fees on passengers’ third checked bag; raise ticket prices for flights on AirTran, which Southwest acquired last year; charge for premium boarding positions at airport gates; and levy a no-show fee for restricted tickets tickets that are not cancelled ahead of departure.

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The carrier also announced during the conference that the AirTran integration is expected to be completed on-time, by the end of 2014. In particular, the company said that network connectivity will begin “rolling out in the first quarter of 2013.” An important step in this process is code-sharing, which is an agreement that allows two or more airlines to share the same flight. This development means that travelers will only need to buy a single ticket for a Southwest flight with an AirTran connection rather than two. Since Southwest purchased AirTran in May 2011, the carriers have operated separate networks, but a test of the new system will begin on December 26.

CHEAT SHEET Analysis: Are Fee Increases a Negative Catalyst for Southwest’s Stock?

One of the core components of our CHEAT SHEET Investing Framework focuses on catalysts that will move a company’s stock. While fee increases may displease habitual Southwest customers who are well-acquainted with the carrier’s low-fee strategy, profitability is a much more important concern. As Reuters reported, carriers that have restructured in recent years are better positioned than Southwest, which has subsequently stressed its need to cut expenses to compete with its rivals. Southwest is the only major U.S. carrier that has not reorganized in bankruptcy.

“This is critical for our past success and of course critical for our future, to maintain our cost advantage,” said Chief Executive Gary Kelly regarding the fee increases, adding that the company’s cost advantage compared with rivals “is not as great as it was in the year 2000.”

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