Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / Why Southwest Airlines Stuck with Unassigned Seats
Transcript
- Lucas: Southwest Airlines has been flying passengers for over fifty years now, and for almost that entire stretch, one of its most distinctive features has been a total refusal to assign seats. You show up, you get a boarding group, you pick whatever seat is left. It's arguably the most polarizing policy in American aviation. Luna: And it's also the policy that a lot of business travelers absolutely hate. I've heard people say they would rather pay more to fly Delta than deal with the cattle-call boarding. Lucas: Right. And Southwest has heard that complaint for decades. But until very recently, their answer has always been: sorry, we're not changing. And that wasn't stubbornness for its own sake. There's a cold, hard financial logic behind open seating, and it goes right to the heart of how Southwest makes money. Luna: So let's unpack it. What's the actual economic argument for refusing to assign seats? Lucas: It comes down to one number: turnaround time. Southwest's entire business model is built on getting a plane back in the air as fast as humanly possible. Their average turnaround — the time between a plane pulling into the gate and pushing back for the next flight — used to be about twenty-five minutes. That's roughly half the industry average. Luna: And open seating helps with that how? It's not like boarding is the longest part of a turnaround. Lucas: It's not the longest, but it's the most variable. When you have assigned seats, you get bottlenecks in the aisle as people wrestle bags into overhead bins near their row. With open seating, passengers self-organize. People who want to get off quickly sit near the front. Families with kids can board early. The process is actually faster because there's no negotiation over seats — you just sit wherever is open. Studies have shown open boarding can shave three to five minutes off the process compared to traditional assigned seating. Luna: And three to five minutes per turn adds up when you're doing six or seven flights a day per plane. Lucas: Exactly. Southwest operates roughly four thousand flights a day. If each flight saves even three minutes on the ground, that's two hundred hours of additional aircraft utilization per day. That's effectively free capacity. And free capacity means you can add more flights without buying more planes. That's a huge structural cost advantage. Luna: So the pricing angle here is that those saved minutes let Southwest keep its cost per seat-mile lower than competitors, which lets them offer lower average fares and still make money. Lucas: Exactly right. And it's not just about the boarding process itself. Open seating is tied to a whole set of operational choices that reinforce each other. Southwest doesn't have interline baggage agreements. They don't use hub and spoke routing. They fly one aircraft type — the Boeing 737 — so pilots and mechanics are interchangeable. Everything is designed to minimize complexity and maximize speed. Luna: And open seating is part of that simplicity. No seat assignments to manage in the reservation system, no last-minute seat changes, no rebooking passengers because their seat was double-sold. Lucas: Precisely. The reservation system becomes simpler. The ground crew has fewer variables to deal with. It all sounds like small stuff, but Southwest's operating margin has historically been among the best in the industry — routinely in the mid-teens percent while legacy carriers were often in single digits. That margin gap is powered by a thousand small efficiencies, and open seating is one of the more visible ones. Luna: But now they're apparently reconsidering. I read last month that Southwest is testing assigned seating in some markets. What changed? Lucas: A couple of things. First, the competitive landscape has shifted. Ultra-low-cost carriers like Spirit and Frontier have adopted even more aggressive unbundling — they charge for carry-on bags, for seat selection, for everything. Southwest's value proposition has always been 'low fares, no hidden fees.' But they've faced pressure to add more revenue streams. Luna: And assigned seating is a gateway to charging for premium seats. Extra legroom, aisle preference, exit rows — that's a multi-billion dollar revenue pool that Southwest has deliberately left on the table. Lucas: Right. United Airlines alone generates something like one point two billion dollars a year from seat-selection fees. Southwest's total ancillary revenue is much smaller because they don't charge for bags or seat assignments. If they introduced a basic economy fare with assigned seats and then sold upgrades, analysts estimate it could add eight hundred million to one billion dollars annually in profit. Luna: But that would also undermine the operational simplicity. If you add seat assignments, you add complexity to the reservation system, the boarding process, the gate agent workflow. The twenty-five-minute turnaround could start creeping toward thirty or thirty-five minutes. Lucas: That's the trade-off. And it's the reason Southwest has resisted for so long. The question is whether the revenue gain from seat fees outweighs the cost of slower turns and potentially higher operating expenses. For a long time, the math said no. But now with labor costs rising and competition getting more aggressive, the calculus may be shifting. Luna: And there's also a customer experience dimension. Business travelers, who are the highest-value customers on many routes, have been begging for assigned seats. Southwest's customer mix has shifted toward more premium travelers, and their satisfaction scores among business fliers have lagged. Lucas: Absolutely. So the decision is not just about operations or revenue in isolation — it's about brand positioning. Southwest has built its identity on being the fun, no-frills, egalitarian airline. Open seating is part of that ethos. Everyone is treated the same, first come first served. Assigning seats introduces hierarchy, even if it's just a few inches of extra legroom. Luna: So they risk alienating their core customer base — the leisure travelers who love the system — while trying to attract a different segment. Lucas: And that's the classic pricing and product strategy dilemma: do you serve your existing customers better, or do you reshape the product to capture a different, more profitable segment? Southwest's founders, Herb Kelleher and Rollin King, were very clear that they wanted to be the airline of the people. Kelleher famously said, 'We are not an airline with great customer service. We are a great customer service organization that happens to be an airline.' Open seating was part of that service philosophy. Luna: But the people who loved that philosophy are now older, and the new generation of travelers has different expectations. They've been trained by every other airline to expect seat selection as a baseline. Lucas: Right. So Southwest is facing a classic innovator's dilemma type of problem. The very feature that made them disruptive and beloved is now potentially a liability. And the price they might pay for changing it is not just operational — it's emotional. There are customers who will genuinely be sad if Southwest starts assigning seats. Luna: Do you think they'll go through with it? Or is this just a test that will fizzle out? Lucas: I think they'll eventually adopt a hybrid model. They've already started testing assigned seating in a few airports, and the early data probably looks promising on revenue. But I suspect they'll try to preserve the speed advantage by keeping the boarding process streamlined — maybe something like 'assigned seats but still with the same rapid boarding groups.' The key is not to let the complexity metastasize. Luna: So the pricing power lesson from this episode is that some policies are not just about what customers want — they're about the underlying cost structure. And changing a customer-facing feature can ripple all the way down to operating margins. Lucas: Exactly. Southwest's open seating was never really about seating. It was about enabling a business model that delivered low costs and high aircraft utilization. The seat was just the most visible part. If they change it, they have to be sure the revenue gain is big enough to compensate for the loss in efficiency and the potential brand dilution. Luna: And that's a calculation that every business with a unique operational advantage has to make at some point. The thing that makes you special can also make you rigid. Lucas: It's a tension that never goes away. And for now, Southwest is still in the middle of figuring out which side of that tension to lean into. We'll see what the next few quarters bring.