If you thought United’s 10-point plan to deal with the Dr Dao dragging incident was a bit much, just look at what Southwest has done. In what looked like a surprise announcement, CEO Gary Kelly said on CNBC that Southwest would stop overbooking. Later comments during the airline’s earnings call indicated this was in the works before, but the timing was directly related to the United incident. Everything I know says this is a bad idea, but I spoke with Andrew Watterson, Chief Revenue Officer at Southwest, and he says otherwise.
I’ve defended overbooking before, but for an airline like Southwest, it should be even more important than for others. Overbooking is a great way to compensate for the fact that people don’t always take the flight they book. Leisure travelers? More often than not they do. And that’s why when JetBlue was starting up with entirely non-refundable fares and a highly leisure-focused crowd, it might have seemed like a more minimal risk to get the PR benefit of not overbooking. But Southwest is quite different.
Southwest may have started as a low cost carrier, but it was always a business-focused airline. Remember, when it started, it put a whole bunch of frequencies into the Texas triangle (Dallas-Houston-San Antonio). Having high frequency encourages people to make changes since there are so many options. Meeting finish early? Grab an earlier flight. With a high percentage of people flying on a refundable fare at Southwest, there is often no cost to making that change. And even for those on discounted fares, there’s no change fee; just the fare difference applies. A recent policy change now allows A-List elite members on those cheapie fares to standby with no charge. With high frequencies and low fees, Southwest is an airline built for people to switch off flights at the last minute. And that means overbooking should be important for filling seats and keeping fares low.
What Andrew explained, however, is that those high frequency routes where that behavior is most prevalent, like in Texas or from LA to the Bay Area, don’t usually have a need to overbook anyway. Those routes tend to have lower load factors, so in most cases, overbooking wouldn’t add much to the bottom line. It’s the less frequent, longer routes like, say, Caribbean flying or Vegas/Florida stuff that are going to be prime targets. But those are full of leisure travelers so the rate of people not showing up or switching at the last minute is minimal.
As someone who’s been in the industry a long time, Andrew empathized with my disbelief at what he was saying. In fact, he said that even a couple of years ago he wouldn’t have believed this would be the right path. But in the last 5 years alone, he says the revenue benefit from overbooking at Southwest has been cut in half. That’s a dollar amount, not a percentage, so the decrease is magnified when you consider Southwest’s growth in the last 5 years. Once they looked at the numbers, they balanced that against the operational issues with handling overbooking situations and decided it wasn’t worth it. Working an oversold flight is time-consuming for a gate agent, and to be fair, Southwest isn’t very good at overbooking so it makes for a higher burden at the gate.
Wait, Southwest isn’t good at this? Last year Southwest bumped more people involuntarily than Alaska, American, Delta, and United combined. Its rate of having basically 1 person involuntarily bumped for every 10,000 flying was the second worst in the industry behind ExpressJet. That’s not good, but let’s keep this in perspective. We’re still talking about maybe 40 people a day, and I’d bet in most cases there were decent reaccommodation options.
The big open question for me, however, is whether Southwest could simply do a better job of overbooking, reducing the operational burden and providing a greater revenue benefit. With its old reservation system being put out to pasture next week, Southwest will have a shiny new system that should provide better data and help the airline make more accurate forecasts. To me, this seems like the right way forward, but Southwest still doesn’t think there’s enough there. The airline would rather simplify its operation. No question it also gets brownie points in Washington for this since Congress is starting to stir on the issue. In fact, this move could have added fuel to that fire, making life harder for the big 3 if it gets any traction.
This, of course, doesn’t mean Southwest will never bump another person. It will need to substitute smaller airplanes, block broken seats, and get saddled with weight restrictions. When that happens, people will get bumped. Just ask JetBlue which has a rate of involuntary denied boarding that’s not much better than Southwest despite the fact that it doesn’t overbook. Still, for Southwest, the number of instances where this is an issue will drop significantly. And yes, that little PR bump right now can’t hurt.
This does mean that Southwest will be selling fewer tickets for the same number of seats. The revenue benefit may not have been huge, but it’s still a benefit nonetheless. The airline has no 1st or 2nd checked bag fees, no change fees, and now no overbooking. That’s a lot that has to get baked into the fare.
Everything I know tells me this is a bad idea, and my version of this post last week was a lot harsher. But I also know Andrew knows what he’s doing, and he felt the same way until he looked at the data. In this case, he says Southwest is letting the data drive the decision, and the data says it’s ok to stop overbooking. If you need me, I’ll be in the corner in the fetal position trying to make sense of the world.