Southwest Airlines in Trouble over TV Ads - Analyst Blog

Southwest Airlines Co. LUV has been reportedly fined $200,000 for misleading customers through deceptive TV commercials.

According to the U.S. Department of Transportation (DOT), Southwest Airlines advertised flight fares for a mere $59 from Atlanta to New York, Chicago and Los Angeles. However, no seats were booked at that price. Consequently, regulators charged the company for violating rules related to advertising of airline fares.

For several years, carriers have attracted customers by creating a mirage of low fares (minus taxes and other fees) and this continues to be one of the finest advertisement strategies till date. It is estimated that carriers conceal approximately 20% of the additional fare costs while advertising prices. In recent times, a rapid upsurge has been witnessed in such practices given online promotion on various websites including social networking sites.

However, this does not seem to go down well with consumer forums. Several of them have allegedly charged airlines for misleading customers. Way back in 2011, Spirit Airlines, Inc. SAVE was fined approximately $50,000 on similar grounds.

To resolve such issues, and more importantly, prevent them from resurfacing, DOT brought into existence a new law in Dec 2011 that required airline companies to highlight all government taxes and surcharges while advertising the prices for their flights.

Top discounted carriers like Southwest Airlinesand Spirit Airlines had then stood against the law enforcement citing violation of free speech rights on a commercial platform.

For an industry with current market capitalization of over $30 billion, the new rule then had indeed come as a major setback. On the bright side however, the changed regulation meant positive impact on customer satisfaction for an industry struggling to stabilize its customer services that shrunk when carriers implemented several cost control measures.

Southwest Airlines currently sports a Zacks Rank #1 (Strong Buy).

Other Stock

Stocks worth considering with a similar Zacks Rank #1 are American Airlines Group Inc. AAL and Delta Air Lines Inc. DAL.