Southwest CEO Lays Out First Class, Lounges And Long-Haul Roadmap — Credit Card Money Is Why

Southwest Airlines CEO Bob Jordan talked about his plans for first class, airport lounges, and international long haul flying on Thursday at the Bernstein 42nd Annual Strategic Decisions Conference. And the reason for all of this is credit card revenue from Chase.

Customers Want To Spend More Money

Jordan said this is “the first quarter that you have everything in place” with all of the changes they’ve made to their product (like checked bag fees, seat fees, basic economy, and extra legroom seats). But he made clear they aren’t done making changes, saying that “over time, [they’ll] connect that to more and more and more products that our customers and our non-customers want.”

Asked “what’s going to be most different about” Southwest “in three or four years,” Jordan responded: “Well, and again, you’re talking about fees and all. Again.” So more fees! But he says they’ve only added fees for things people want and that’s “very different than I’m just slapping a fee on top of a product we already had.” The CEO of Southwest Airlines must not know that checked bags used to be free on Southwest and now they aren’t.

First Class, Airport Lounges And International Flying Are Coming

Returning to what’s different in the next few years he’s clearly talking abouth Southwest Airlines with first class, airport lounges and international flying:

Where I think we’ll be if we’re sitting here talking five years from now is we will have continued to greatly expand the product offering. Not just to expand it for ego’s sake, as an example, but we’re expanding it because I want to give you fewer and fewer reasons to book another airline or feel like you need to travel on another airline…

I think we’ll have more optionality within the cabin, could include true first class.

…We’ll also offer you access to destinations that we don’t serve today. I think it’s likely that we’ll, over that period of time, delve into long-haul international.

…[W]e now have seven partnerships with other airlines, and we can get you to nearly any place in the world connecting with those partners.

And he identifies Baltimore as “a natural…hopping off point” for Southwest’s long haul flights.

Southwest Says They’ll Have Starlink Faster Than United

Jordan is basically acknowledging that Southwest has become just like every other airline, but worse (except for the front line people). Southwest charges fees like United, American and Delta but doesn’t offer first class, lounges, seat back entertainment screens, or high speed wifi on very many planes.

They have announced a plan to bring Starlink to their fleet, says the first aircraft is “a natural…hopping off point” that 300 planes will have it by the end of the year and he thinks they’re going to beat United to full fleet penetration:

It’s going to be neck and neck, but I think we’ll be the first to have our full fleet converted to LEO.

Airport Lounges Are The Next-Highest Priority After Starlink

Though Southwest hasn’t formally announced airport lounges they have at least 5 in the pipeline at Honolulu, Nashville, Denver, Dallas Love Field and Austin. I even surfaced a permit for Austin after flagging their commitment to lounge space in the new airport use and lease agreement.

Jordan though was the most public he’s been yet with the lounge plan, saying it’s the number two thing customers want Southwest to do after fast wifi, and acknowledged leasing space for lounges.

[T]he next thing that we see our customers want are a lounge network. It’s not just business customers, it is leisure and business. I’ve been very public that we’re working on that.

Not ready to announce or say anything today, but just it is public that we’re out there leasing space. Those are the top two things. As you can tell, we’re tackling both of those.

The lack of these products are reasons why customers would choose another airline. And Southwest no longer has customer-friendly policies like no changed bag fees and no seat fees. Since they’re just like everyone else, they need to actually be just like everyone else.

The Reason For Doing Lounges And Long Haul Is The Credit Card

While Jordan says that “Rapid Rewards enrollments were up 37% in the first quarter. Our tier qualification was up 60% year-over-year in the first quarter” these data points do not tell us very much.

• Rapid Rewards enrollment is a requirement for free wifi. This doesn’t mean the funnel of customers who prefer Southwest, collect their points and acquire their credit card has grown.

• Tier qualification in the first three months of the year is not a meaningful metric and is measured off a very low base. Almost nobody qualifies for their status for the year in the first quarter of the year.

• This comes after Southwest significantly devalued Rapid Rewards points and reported to the SEC that customers have suddenly stopped redeeming their points.

It’s Rapid Rewards – and in particular credit card revenue – that’s actually much of the motivation for lounges. That’s why we will see both a new premium credit card and lounges, and why Jordan talks about them in the same sentence – along with long haul travel. Southwest launched Hawaii flying in part to give members motivation to spend on their cobrand credit cards to earn and redeem points, and that’s also much of the logic for long haul flying too.

The desire is to meet our consumers’ needs, offer them the things that we can’t offer you today, and it just logically means that things like lounges and a credit card that goes with that and more premium and more destinations, including more long-haul destinations.

…I said we don’t have to become Delta, United, American, but a handful of destinations, eight to 10 to 12, pick off the vast majority of the traffic, the vast majority of the places that our customers want to go.

Jordan goes on to make the connection between credit card revenue and the reason to do long haul flying explicit – going so far as to suggest offering the destination matters more than customers actually flying it, because it’s aspriational as a place a credit card customer might go in the future and so drives their spending on the product.

The loyalty programs and co-brand are a huge part of the financials of an airline, and having long haul, aspirational destination kind of routes really, really enhances the co-brand program as well. It’s as much a part of that. That’s as much the reason as it is even destinations that our customers want.

Southwest Isn’t Going To Merge With JetBlue (Outside Of Bankruptcy)

JetBlue has explored selling itself to Southwest but Jordan says “given the debt load, I don’t see necessarily a lot of interest there” not just from them, but from anyone. (It would be a deal that has to get done in a prepackaged bankruptcy).

He sees airlines like Breeze as too small to bother with, and the large network carriers as too big to pass antitrust muster “historically.” So for Southwest he says “there’s nothing that we’re working on.” And then semi-hedges, but still says there’s nothing going on right now.

[Y]ou’ve got to be open to things that might make sense, that would be good for the company, good for our shareholders. There’s nothing obvious. It’s not a no, it’s just I don’t have a clue what that would be because nothing comes to mind.

The Transformation To Network Carrier Would Be Complete In Five Years

Following Bob Jordan’s outline, Southwest Airlines will have more global airline partners and 8-12 long haul destinations (probably Europe out of Baltimore).

Paris and Amsterdam are probably a stretch for the 737 MAX 8. Could they reliably manage London westbound in winter? I’m not so sure.

Their current aircraft might limit them to Reykjavik; Shannon; Dublin; Glasgow; Edinburgh; Manchester; and Porto. So it seems like Southwest either needs to:

• Fly from further in the Northeast like the Boston area to reach places like London, Paris, and Madrid
  
• Fly the not-yet-certified Boeing 737 MAX 7 to Europe
  
• Order new planes, ne it the Airbus A321XLR, waiting for a new Boeing aircraft, or the Boeing 787.

Regardless, with lounges and a premium front cabin, this is going to be a very different airline than the one that Herb knew. But we already learned it when Jordan imposed the airline’s first-ever layoffs, after not doing one even during Covid.