Due to its customer-friendly policy of no bag fees and no change fees, Southwest Airlines (NYSE:LUV) doesn't have the same ancillary revenue opportunities as its rivals. Nevertheless, it has still managed to build up a substantial stream of nonticket revenue, led by its co-branded credit card program and its EarlyBird priority check-in.
Revenue from the EarlyBird option has increased significantly over the past five years, driven by the expansion of Southwest's route network and a pair of price increases. On Wednesday, Southwest Airlines increased EarlyBird prices again as it looks to keep pushing ancillary revenue higher.
Upgraded seating, the Southwest way
Unlike other U.S. airlines, Southwest doesn't have assigned seating. Instead, customers are assigned boarding positions and can choose any available seat once they are on board. Those who buy pricey Business Select tickets go to the front of the line. Other passengers' boarding positions are determined by when they check in.
Normally, check-in opens 24 hours before your first flight. But in 2009, Southwest introduced EarlyBird check-in. For a fee, the EarlyBird system checks customers in 36 hours ahead, allowing them to board earlier -- and presumably get better seats.
EarlyBird is thus equivalent to when other airlines offer exit-row seats or seats closer to the front of the aircraft for an extra fee. Recently, Southwest has charged $15 one way for EarlyBird check-in, up from $10 when the program began in 2009.
Prices are increasing on most routes
On Aug. 17, travel website The Points Guy reported that Southwest planned to change its EarlyBird pricing scheme, effective Aug. 29. (Southwest confirmed the changes in a blog post a few days later.) Instead of a fixed price of $15, EarlyBird now has three price points: $15, $20, and $25. Each route has a consistent price, depending on its length and the historical popularity of EarlyBird check-in on that route.
A USA Today analysis found that very few routes still have $15 EarlyBird check-in. EarlyBird now appears to cost $20 on the vast majority of Southwest's routes. Routes where it's $25 tend to be longer and often connect two markets where Southwest has a strong presence.
The pricing changes are obviously designed to boost Southwest's ancillary revenue and profitability. But the carrier also indicated that it wants to "protect the value [EarlyBird] offers" in light of rising demand for the option.
To put it a different way, if a large number of customers on a particular flight buy EarlyBird check-in, some of them will inevitably end up pretty far back in the boarding order. Raising the price will encourage customers who don't value early boarding as much to use the regular check-in process. As a result, those who continue to buy EarlyBird check-in will be able to get better seats (on average).
The impact will be meaningful
Southwest's earnings-per-share growth has slowed recently, due to a variety of headwinds. However, the low-fare airline expects unit revenue growth to accelerate by the fourth quarter, boosting its earnings momentum.
The recent change to EarlyBird pricing will bolster unit revenue growth for Southwest next quarter, and will have an even bigger impact in 2019. Last year, EarlyBird revenue reached $358 million -- or 1.7% of Southwest's total revenue -- up 8.7% year over year. For comparison, in 2012, Southwest generated only $219 million in revenue from EarlyBird and several other service charges combined.
Even if the EarlyBird price increases have a modest negative impact on uptake, higher pricing combined with Southwest's expansion will likely push EarlyBird revenue comfortably past $500 million in 2019. This could lift unit revenue (and pre-tax margin) by 0.5 percentage points or more next year, adding fuel to Southwest Airlines' earnings growth.