When I heard the news about the big new policy change at Southwest Airlines this week (first announced during the Southwest earnings call Thursday), I started thinking about math.
Then, the more I thought about Southwest’s decision in the context of the entire industry (and the more mathematical calculations I tried to work out), the more intrigued I grew.
The change at Southwest is pretty straightforward. In short, Southwest announced as of now, flight credits with the airline will never expire.
Never. nada. To infinity and beyond, so to speak.
To steal my favorite Southwest tagline over the years: “You are now free to move about the country.” (Said in pilot-over-PA voice.)
Basically, if you buy a qualifying low-fare ticket on Southwest Airlines, and you wind up canceling your plans more than 10 minutes before departure, you get a flight credit. With this new announcement, those credits are good forever.
Now, of course I’m not privy to all of the math problems and predictions Southwest used in crafting this new plan. But allow me to usemy well-honed overthinking powers for a moment:
- One the one hand, Southwest just increased the monetary value of a flight credit. A credit that never expires is simply worth more than one with an expiration date.
- On the other hand, that might mean more passengers flying instead of having their credits expire, which would mean Southwest a reduction in what’s known as “breakage revenue,” basically when a customer pays you but never uses your service.
- On yet another hand, if we have one, it’s worth noting that the more expensive mouse classes at Southwest (the ones marketed at business travelers), aren’t usually a part of this calculation, since they already usually get cash refunds instead of credits .
- Also, the marginal cost of adding an additional passenger to a flight that was already going to fly anyway isn’t as much as outsiders might assume. I don’t know Southwest’s marginal cost per additional passenger, and it would vary based on the flight, but some estimates put the industry number as low as $20.
- On top of that, the biggest contributors to marginal cost per passenger is jet fuel. But, as I wrote earlier, Southwest is the only airline among the Big 4 US airlines to hedge its fuel costs, which means its fuel costs are much lower than for other airlines.
- And, on top of that, making credits valid forever might paradoxically make it less likely that some passengers ever actually use them. If they never expire, there’s no pressure to use them before a deadline.
- Moreover, the mere fact that Southwest credits will now never expire might well entice some passengers to choose Southwest over another airline. But, a big percentage of those passengers won’t wind up canceling their flights, and so they’ll never have credits anyway!
- On top of that, you also have passengers who might use their credits, but who would have used them within the old expiration period.
OK, the calculations exhaust me. Welcome to my world. The bottom line here is that I can’t predict the bottom line.
I do suspect that Southwest, which of course has a full staff of quants and finance pros, has calculated the loss in breakage revenue that would result from this new policy against the other factors. But otherwise, it’s an example of what my old boss used to call, “a glitter hand grenade.”
This was her way of describing a chaos agent in a business that can either result in a lot of joy and happiness, or a big mess (but not a fatal one) that somebody has to clean up.
Why? Because as far as I can tell, Southwest is the only US airline to offer this policy on its flight credits.
(Southwest calls it an industry-leading move, and I’ve scoured the other airlines’ fine print and reached out to them to confirm; nobody has contradicted this as of publication.)
And that means it’s one of the most useful examples I can come up with for why, as I write in my free ebook, Flying Business Class: 10 Rules for Leaders From the US Airlinesbusiness leaders in any industry should follow the airlines.
The lesson for today? When you’re selling basically the same thing as everyone else, find a way to stand out.