“Southwest has grabbed nearly $1 billion in annual market share – thanks in large part to people avoiding bag fees.” – Southwest Airlines CEO Gary Kelly

• • •

Don’t you just love it when a company lives up to its brand? When you truly know who you are the marketplace, competitors, and events sooner or later will provide special windows to reveal and reaffirm your identity. Southwest Airlines recently discerned just such an opening. Yet as is often the case, it would have been very easy to miss the real opportunity because of the allure of easy, new fee income.

The background story: A number of airlines began to charge for bags as a source of additional revenue. The business case was compelling when viewed through the prism of math and accounting. Southwest could earn an estimated additional $300 million in annual recurring revenue without undermining a core part of the Southwest brand, their low cost fare structure. While customers might not like the fees, they could choose to fly with or without bags and avoid the charge if they so elected. Fewer bags meant less labor and fuel cost. The competition was employing the fees so there was no competitive downside with other airlines. Let’s see: more revenue, no loss of market share, less cost and customer choice. What’s not to like?

Southwest chose to forego the bag fees. They ran ads headlined “Bags Fly Free.”

Actually, for Southwest this straightforward decision was not so straightforward. As a public company they were under immense pressure from Wall Street to take this proposition and the baggage fees and run. Dallas Morning News business columnist Cheryl Hall wrote of their view of Southwest CEO Kelly: “Wall Street analysts nailed him as irresponsible, nuts, naive or all of the above.”

Yet Kelly viewed the opportunity not as a revenue grab but as an employee, customer and brand building opportunity which, if handled correctly, could grow revenue. Southwest is legendary for the esprit de corps of its (yes, unionized) employee base. After all of these years this group still makes flying fun – even as a discount airline.

As Hall wrote, Kelly worried about employees having to face the wrath of customers for something they would feel – he felt – went against the essence of Southwest. On the surface, bag charges simply look like a way to charge more for the same old service. But strong relationships are eroded when customers get nickel-and-dimed. It might be billed as a choice, but for passengers traveling overnight, traveling without a bag is hardly feasible, so not really a choice. At a deeper level separating the fare to fly from the fee for bags is unwelcoming – disingenuous. It is as if your bags, a key part of you, are a nuisance and you should really be ashamed for having them along. The genius of the Southwest ads was showing their love for your bags – an extension of their love for the customer. In essence it transformed a bag from a negative to positive and in the process promoted a stronger customer bond.

An executive decision that undermines what the company stands for has long-term consequences: fee income shows up immediately, the decline in employee morale and eventually performance occurs slowly but predictably.

Rather than joining the chorus of beat-up and weary employees handling unwelcome and taxed bags like the other airlines, Southwest differentiated themselves by standing up to the angry mob on behalf of its customers. In a very mature, undifferentiated market of competitors they did some serious brand building. They reinforced their standing as a maverick, customer-focused, low-cost, employee-centric airline.

They went beyond the simple math of fee-based revenue by calculating the relational math of strong employee morale, dynamic customer behavior that responds to price but also to an expression of affinity for the relationship. They weighed the uncertain value of a gain in market share and an enhanced brand.

As they say, the rest is history. They have been reward for their boldness. Kelly, an accountant by training and background, admits that early on, he worried about his decision. One of his key challenges was to make the case to a doubting Wall Street on the wisdom and financial value of their contrarian position. But now he has been vindicated. He estimates their increase in market share translates into an annualized value of around a billion dollars. The feedback on their “Bags Fly Free” advertising call is among the best campaigns they have ever run. This looks like a much better outcome than $300 million in fees, frustrated customers, dispirited employees, and a battered, undifferentiated brand.

What do you call this kind of executive leadership – from a trained accountant no less? It could be called many things but I would call it Relational Leadership. Relational Leadership calculates the value of employee, customer, and marketplace relationships – treating them as markets. It is not a form of leadership inattentive to revenue and profits but is in fact, very attuned to the financial value that relationship can produce. Relational leaders create and grow their culture to build strong, profitable employee, customer and brand relationships. It is not for the faint of heart because these attributes develop slowly, must be sold boldly to those in the public markets who are relationally challenged and require special insight into the drivers of business success.

Differentiation in financial performance ultimately requires differentiated in the marketplace – and differentiation in the marketplace requires differentiated leadership.

We have spent the last two decades pumping out leaders who speak the math of fee increases and cost reduction and dance to the tune of quarterly Wall Street targets. Going forward, leaders will still have to be disciplined earnings producers and cost managers but they must also master the skill of making relationships highly productive. Southwest did that by freeing their employees and customers from the tyranny of unwise and smaller-minded competition. At Southwest, bags fly free and so do relationships.

(Column appeared originally in ABA Bank Marketing magazine – September 2010)

By ROBERT E. HALL

Not to be reproduced without written permission. All rights reserved. © Copyright Robert E. Hall 2010