No-frills Southwest might start charging for some

Southwest Airlines Co. Chief Executive Officer Gary Kelly piqued investor curiosity recently when he said new ways to generate revenue are “under construction.” Kelly won’t go into specifics, and Southwest declined to provide additional comment. That’s fueling a guessing game on Wall Street about what he has up his sleeve to boost revenue as Southwest grapples with an increase in costs. Southwest will have to tread carefully to avoid damaging the brand it has cultivated for transparency in fares and not peppering passengers with a slew of fees.

Here are some likely options:

Perks

While Southwest flies just coach cabins and has no assigned seats, it does have several fare categories, including Business Select, which comes with a free drink and a spot among the first 15 passengers to board.

Southwest could provide additional perks at higher prices, said Adam Hackel, an Imperial Capital analyst. The extras could be sold separately, like Southwest’s Early Bird boarding option, or built into fare categories along the lines of Business Select.

Forward seating

Southwest could also take Business Select a step further — think perhaps business-class lite.

The carrier always has dismissed the idea of offering a first- or business-class cabin, so it isn’t expected to add seats with more legroom for a higher fare.

It could, however, charge more for guaranteed access to as many as four rows near the front of the plane, said Jamie Baker, an analyst at JPMorgan Chase.

Up-selling opportunities

Instead of — or in addition to — adding perks on the high end, Southwest could reduce benefits in cheaper fare categories. One possibility, for example, would be not allowing a passenger who cancels a ticket to use the amount paid toward another flight.

Seller beware

Ancillary fees accounted for just 3.1 percent of Southwest’s passenger revenue through the first nine months of last year, lagging well behind Delta Air Lines Inc. and United Continental Holdings Inc.

U.S. carriers as a whole took in more than $3.6 billion in checked-bag fees alone during the period, according to the U.S. Transportation Department.