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Southwest Targets Frequent Flyers’ Wallets

In the industry everyone loves to hate, one airline has managed to stay on consumers’ good side: Southwest.

Among the airline’s endearing traits has been its refusal to join other airlines in the fee-for-all that has cost consumers hundreds of millions of dollars.

But in a conference call yesterday to discuss its third-quarter results with industry analysts, Southwest’s chief executive Gary Kelly hinted that more fees are in the pipeline. And the new fees will come from an unexpected source.

Acknowledging the airline’s fourth quarterly loss in the past five reporting periods, and announcing that 2010 will likely be another no-growth year, Kelly’s outlook was generally grim. But he saw light in a previously unexploited corner of Southwest’s operations. According to Kelly:

“… there are substantial ancillary revenue opportunities besides bag fees that we are continuing to pursues and admittedly, the one that we have earmarked, that we are most enthused about is the move to the next generation of frequent flyer program. So we have very substantial ancillary revenue opportunity associated with that.”

(“Ancillary revenue” is industry-speak for what travelers call nuisance fees—surcharges for anything an airline can hang a price tag on.)

It’s no secret that Southwest has been working on a replacement for its current frequent flyer program, unofficially nicknamed Rapid Rewards 2.0.

The consensus, to the extent there is one, is that with the launch of 2.0 sometime in 2010, Southwest will move toward a strict revenue-based program, along the lines of [% 2749856 | | Virgin America’s Elevate %]. Such programs award points according to the cost of a ticket rather than the distance flown, and prices award tickets according to supply and demand rather than on regional categories.

But this is the first time the airline has suggested that Rapid Rewards might be mucked up with fees. And it raises the obvious question: Exactly how might those fees be generated? Among the possibilities:

  • Award Co-Pays
    Much as some airlines have done with upgrade awards, Southwest could introduce an award chart that required a cash co-payment together with miles for an award ticket. Or a cash co-pay to book an award with no blackout dates or capacity controls.
  • Cash and Credits
    Not to be confused with an award co-pay, the option to combine cash and miles for award tickets is another potential revenue-generator.
  • Selling A-List Elite Status
    Elite status, for a price? It wouldn’t be popular with travelers who earned their status the old-fashioned way—by flying, that is—but profit is a powerful motivator.
  • A-La-Carte Tickets
    On Air Canada, it’s possible to purchase tickets that do not earn frequent flyer miles. Mileage-eligible tickets cost more. Southwest customers might be given a similar choice.
  • Credits for Sale
    Most airlines sell frequent flyer miles. Southwest doesn’t, but could.

The above are nothing more than possible scenarios. To date, the airline hasn’t divulged any specifics, so we can only speculate. And worry, that Southwest, faced with a choice between its customers’ love and their money, will forgo the former in pursuit of the latter.

Reality Check

Do you think Southwest will add a significant number of fees to its new program? If so, would that affect your perception of Southwest and its Rapid Rewards program?

Post your comments below.

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