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“The credit card is core to the airline business,” Andrew Watterson, Southwest’s chief revenue officer, said in an interview.
Southwest has long known its highest-value customers — both frequent flyers and consumers who have its Chase credit card — want free flights to Hawaii.
…“It’s not just for credit cards, but it is part and parcel of it,” Watterson said. “We view Hawaii expansion as something that will ignite credit card applications.”
Nearly 14% of miles flown by Southwest, the largest carrier of domestic passengers, are points redemptions which is more than double the percentage on American Airlines flights in 2017.
Indeed “Southwest has expanded into Mexico and the Caribbean in part for similar reasons.” Aspirational travel drives loyalty and accumulation behavior because loyalty programs are an intertemporal proposition, you change your behavior now for the promise of something you care about later, a washing machine or toaster oven doesn’t drive consumer behavior in the same way that resort vacations do. Indeed,
Yes, customers might be happy about redeeming a free flight from Chicago to Omaha for Thanksgiving, but what what gets them excited about applying for a new card is the chance to visit Cancun during spring break. “You have that kind of sexy place for the credit card,” Watterson said.
Sumers points out that Southwest’s profit from Rapid Rewards “didn’t pop until recently” and that the airline disclosed at investor day that “revenue from the Rapid Rewards program increased by $1.7 billion between 2011 and 2016.”
While Southwest says “it’s a post-Great Recession thing” in reality the run up in price that banks pay for points is a function of the hyper-competitive market that really accelerated with American Express losing Costco and paying desperate premiums to lock in Delta (and then Starwood) which was followed by Chase’s renewal deals for United and Southwest. Margins moved from the bank to the airline.While Southwest’s revenue is certainly up, it’s also relatively flat across 2016 to 2017.
Destinations can make Rapid Rewards more aspirational even as the points themselves have fixed value.
As it stands what I like about Southwest is that they have no change fees, you can use your points even to make a speculative booking. It’s always great to have Southwest points around, even if you book mostly international award tickets. You might need a domestic flight to get to the city your international award ticket leaves from. Or book the Southwest flight, and if award availability opens up to include a domestic flight on your other ticket, great, there’s no change fees. Southwest points are great insurance. They don’t have other fees either like checked bag fees or change fees.
Indeed Sumers quotes Southwest’s Chief Revenue Officer as saying “We encourage all the other airlines to have Basic Economy, we love competing against substandard products.”
And Hawaii is going to massively boost the desirability of what’s already arguably the single best value in travel, the Southwest Airlines companion pass which is earned after 110,000 eligible points in a year. You get to take your designated companion with you for the cost of security taxes whenever flying Southwest — whether on a paid ticket or even when you’re using points.
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