Southwest Airlines Introduces Paid Baggage Policy to Boost Revenue.
Southwest Airlines announced on Tuesday that it will begin charging certain customers for checked baggage, thereby discontinuing a distinctive policy that previously allowed free checked bags. This decision comes in response to the airline's disappointing earnings, which have intensified the need to revise its business strategy.
This shift represents yet another change in the Texas-based airline's approach to customer-friendly practices. Last year, Southwest revealed its intention to eliminate open seating, a hallmark of its brand for over five decades.
The airline's "bags fly free" policy has set it apart within the industry, as Southwest remains the only major U.S. airline permitting customers to check two bags without charge, a tactic that company leaders have claimed distinguishes it from competitors. However, the impending policy change, set to take effect on May 28, poses the risk of alienating customers. Delta Air Lines President Glen Hauenstein remarked on Tuesday that some of Southwest's clientele may now be available to other airlines.
Some analysts also expressed concerns about its impact on the airline's brand. "We were not supporters of bag fees," said Savanthi Syth, an analyst at Raymond James.
Southwest Airlines has been staunchly supporting its no-bag fee policy, asserting that it is the primary reason customers prefer their services.
In September of the previous year, the airline cautioned investors that discontinuing this policy would adversely affect its "customer first" brand image. Their analysis indicated that while implementing bag fees could yield an additional $1.5 billion in annual revenue, it would simultaneously result in a $1.8 billion loss in market share.
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On Tuesday, CEO Bob Jordan justified the recent policy shift, stating that the latest booking data did not reflect the anticipated advantages of maintaining the free-bag policy.
In 2023, baggage fees generated over $7 billion in revenue for major U.S. airlines; however, Southwest reported only $73.4 million in this category, as per the Bureau of Transportation Statistics.
New Baggage Policy
The airline's updated policy will maintain the provision of two complimentary checked bags for its most loyal customers, specifically those with A-List Preferred status, as well as for passengers who purchase the highest fare options.
Customers with a lower loyalty tier, A-List, will be entitled to one free checked bag. Additionally, passengers who possess the airline's co-branded credit card will receive a credit for one checked bag.
For those who do not meet the criteria for complimentary baggage, fees will apply for both the first and second checked bags.
Jordan indicated that this new policy is anticipated to increase enrollments in Southwest's co-branded credit card program and yield operational advantages.
"We carry nearly two times the bags as compared to the competition, which is costly on many fronts," he said at a JPMorgan industry conference.
Cost Cutting & New Revenue Initiatives
The decision to implement charges for checked bags follows the airline's first comprehensive layoffs in its nearly 54-year history. This move indicates the increasing influence of activist investor Elliott Investment Management within the company. The hedge fund, which has five representatives on the 15-member board, has previously criticized Southwest's management for not adopting a baggage fee policy similar to that of other airlines, which could enhance revenue.
Jordan is focused on reducing expenses and increasing revenue to elevate Southwest's operating margin to a minimum of 10% by 2027, a significant rise from the 2% recorded last year.
The airline plans to introduce a new basic economy fare option and will discontinue its practice of hedging against fluctuations in fuel prices, a strategy that resulted in approximately $150 million in losses last year.
Jordan stated that Southwest now aims to achieve over a billion dollars in cost reductions by 2027, an increase from the previous target of $500 million.
These new strategies are expected to generate an additional $800 million in earnings before interest and taxes (EBIT) this year and $1.7 billion by 2026, according to his remarks.
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Southwest Airlines’ decision to scrap its beloved “bags fly free” policy marks the end of an era for budget-conscious travelers. For years, Southwest stood out as the only major U.S. airline that prioritized customer value over extra fees, but financial struggles have now forced a painful shift.
The airline, once a symbol of simplicity and fairness, is now following the industry trend of squeezing more revenue from passengers. Loyal customers who once praised Southwest for its no-hidden-fee approach may now feel betrayed. As Southwest moves toward profitability, it risks losing the very travelers who made it successful in the first place.
