Dear readers,
Earlier this month I criticized Southwest for its lounge plans, arguing that it erred by making them more luxurious than the egalitarian brand that the airline has cultivated for decades. I wonder if CFO Tom Doxey read my story, because he spoke last week about why he’s not concerned about the potential mismatch, telling investors that Southwest hasn’t lost its connection with its history as it has changed its model.
“We’ve done [it while] maintaining the things that have been core to Southwest for 50-plus years now around hospitality and the culture and the customer centricity,” he said.
So far, he’s probably right. I don’t know that assigned seats and an extra-legroom section put Southwest’s brand equity in peril. Lounges are a different story, and I’ll be watching closely to see how customers that don’t have access handle them.
But that brand stuff isn’t Doxey’s problem. He’s the money man,1 an executive who leads the team that calculates NPV. As he explained last week at Morgan Stanley’s Laguna Conference, the economic reasons behind lounges make them a slam dunk — a rare airline decision that pretty much cannot fail, so long as access is paired with a premium credit card. Alaska, United, American, Delta and even JetBlue have proven the model. Mostly, Southwest is just copying them.
“We’re not going to do things unless we feel that they would be accretive to the business,” Doxey said.
As it moves upmarket, Southwest had other products it could have introduced, including first class, but nothing else is as much of an economic no-brainer as lounges, especially because the airline isn’t taking on that much risk.
As recently as 15 years ago, Southwest probably would have had to build lounges on its own, at great expense, and then try to sell memberships to road warriors — the model most airlines used for decades.
Now it has a very skilled partner. Chase helps design and build the lounges, and issues the premium credit card that customers will need to access them. So far, Southwest has said passengers only will get in if they have that card.
“We haven’t built lounges before, but they have, and they do a great job with it,” Doxey said. “There’s this great synergistic partnership.”2
Southwest plans to open its first four lounges next year — in Austin, Baltimore, Honolulu, and Nashville. It plans to open three more soon after, and Doxey said the locations should not surprise industry insiders. “It’s going to appear very logical as we continue to announce more and more of these locations,” he said.
Next, Southwest might try more products. “We’re not done — we’ve just announced lounges and there’s more to come,” Doxey said, sounding a lot like his boss, who loves to tease analysts about enhancements that may or may not be coming. But if lounges are as successful as management hopes, I bet we’ll see Southwest try other premium products.