"Are peanuts no longer enough?" asked The New York Times on Sunday, March 7, in an article on Southwest Airlines (NYSE: LUV). The article commented on the increased competition in the low-fare segment of the airline industry that Southwest once dominated and highlighted some of the frills and comforts that new entrants are providing.
For example, Frontier Airlines (Nasdaq: FRNT) and JetBlue Airways (Nasdaq: JBLU) both offer in-flight entertainment systems, as do the low-fare arms of United (OTC BB: UALAQ.OB) and Delta (NYSE: DAL). Delta's Song offers high-quality food for purchase, including expensive chocolates from Dylan's Candy Bar, an upscale Manhattan store. In addition, most of the low-fare airlines pre-assign seats, something that Southwest has historically not done in order to maintain short turnaround times for its aircraft.
Without providing its opinion, the Times simply raised the question of whether Southwest should alter its "no-frills" approach and noted that management is seriously considering matching some of the competition's offerings such as in-flight entertainment systems.
In my opinion, Southwest should not change a thing. These perks are ephemeral attempts to create differentiation that go against the fundamental trend in air travel -- an airplane seat that was once a luxury good is quickly becoming a commodity.
In a commodity market, low-price always wins. Southwest has significant cost advantages from experience and economies of scale, which give it the ability to be the low-cost leader in this industry. While in-flight entertainment, food, and assigned seats are nice, if given a choice, customers have demonstrated that they would rather save a few bucks and forgo these perks.
If Southwest sticks to its original strategy of continuously driving operating costs lower, it will dominate this industry in the long term. By maintaining a cost advantage, it can choose to match or slightly undercut competitors' prices and generate high margins in selected markets. Or it can aggressively cut prices to attack particular markets or competitors who can't survive at a lower price point, then raise fares once it gains control of a market. It successfully drove US Airways (Nasdaq: UAIR) from its dominant position in Baltimore, and is preparing another attack in Philadelphia, an even larger market currently controlled by US Airways.
Southwest has a proven business model with a competitive advantage that gets stronger over time. Tinkering with it would be a mistake. For the majority of airline customers today, if the price of the ticket is right, peanuts are more than enough.
Now what?
Fool co-founder Tom Gardner is always searching for the next Southwest in his Hidden Gems newsletter. Take a free trial and see if your portfolio takes off. Also, tell us if you think Southwest should stick to peanuts on the Southwest Airlines discussion board. Is JetBlue the next Southwest? Will it and Frontier be able to move in on Southwest's turf?
Fool Contributor Salim Haji lives in Denver, Colo., and does not own shares in any companies mentioned.
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