Ground operations employees load baggage onto a Southwest Airlines Boeing 737 aircraft on the tarmac at John Wayne Airport in Santa Ana, California.
Thank you for reading this post, don't forget to subscribe!Patrick T. Fallon | Bloomberg | Getty Images
It’s happening: Southwest Airlines will start charging passengers to check bags for the first time.
It’s a stunning reversal that shows the low-cost pioneer is willing to part with a customer perk executives have said set it apart from rivals for more than half a century of flying in hopes of increasing revenue.
Southwest’s changes come after months of pressure from activist Elliott Investment Management. The firm took a stake in the airline last year and won five board seats as it pushed for quick changes at the company, which held on for decades — until now — to perks like free checked bags, changeable tickets and open seating.
For tickets purchased on or after May 28, Southwest customers in all but the top-tier fare class will have to pay to check bags, though there will be exceptions. Elite frequent flyers who hold A-List Preferred status will still get two bags, and A-List level members will get one free checked bag. Southwest credit card holders will also get one free checked bag.
“Two bags fly free” is a registered trademark on Southwest’s website. But its decision to about-face on what executives long cast as a sacrosanct passenger perk brings the largest U.S. domestic carrier in line with its rivals, which together generated more than $5 billion from bag fees last year, according to federal data.
Southwest didn’t say how much it plans to charge to check bags, but a single bag costs $35 to check on Delta, American and United.
Southwest shares rose 8% Tuesday after its baggage fee announcement and investor update, while other large carriers’ shares and the broader market fell.
Read more CNBC airline news
Southwest executives have long said they didn’t plan to charge for bags, telling Wall Street analysts that it was a major reason why customers chose the airline.
At an investor day in September, Southwest said that it would gain between $1 billion and $1.5 billion from charging for bags but lose $1.8 billion of market share. Southwest said its “rigorous research” found that “our ‘bags fly free’ policy generates market share gains in excess of potential lost revenue from bag fees.”
Some airline executives see an opportunity.
“I think, clearly, there are some customers who [chose Southwest] because of that, and now those customers are up for grabs,” Delta Air Lines President Glen Hauenstein said at an investor conference on Tuesday, after Southwest’s announcement. “We’ll see how that plays out over the next period of time as they continue to implement multiple changes to their products.”
United Airlines CEO Scott Kirby, speaking at the same conference, likened Southwest’s baggage policy change to “the slaying of a sacred cow” and said lower-paying customers will be most affected.
“I view it as a big deal because it’s more — it feels more financially driven — a results-driven airline than it’s ever been before,” he said.
No. 1 issue
Pristine Floyde searches for a friend’s suitcase in a baggage holding area for Southwest Airlines at Denver International Airport on December 28, 2022 in Denver, Colorado.
Michael Ciaglo | Getty Images
Southwest CEO Bob Jordan had cited the company’s long-standing bag policy in an earnings call last July.
“After fare and schedule, bags fly free is cited as the No. 1 issue in terms of why customers choose Southwest,” Jordan said.
But Southwest has changed its tune.
“What’s changed is that we’ve come to realize that we need more revenue to cover our costs,” COO Andrew Watterson said in an interview with CNBC about the baggage fee changes. “We think that these changes that we’re announcing today will lead to less of that share shift than would have been the case otherwise.”
Jordan said Tuesday that the new baggage policy will likely help drive sign-ups for its co-branded credit card and that it made sense because of its commercial reach, listing its tickets through outside platforms like Google Flights and Expedia.
“In contrast to our previous analysis, actual customer booking behavior through our new booking channels such as metasearch, did not show that we are getting the same benefit from our bundled offering with free bags, which has led us to update the assumptions,” he said.
Jordan said the carrier has new executives with “direct experience implementing bag fees at multiple airlines and that’s also helped further validate the new assumptions.”
Southwest said the changes it announced Tuesday will add $800 million in earnings before interest and taxes this year and $1.7 billion in 2026, bringing 2026 total increases, including other initiatives, to $4.3 billion, up from a $2.6 billion target it shared at its investor day in September.
During those presentations in September, Southwest’s then chief transformation officer, Ryan Green, told analysts that an analysis showed Southwest would lose more money from passengers defecting to rivals if it started charging for bags than it would make from the fees.
“The fact that free bags is a key driver of choice creates the risk that customers may choose the competition if we change the policy,” he said.
Southwest said last month that it had parted ways with Green.
Other changes
The airline also said Tuesday that it will launch a new, basic economy fare, something rivals have offered for years.
Southwest, in addition, will change the way customers earn Rapid Rewards: Customers will earn more of the frequent flyer miles depending on how much they pay. Redemption rates will vary depending on flight demand, a dynamic pricing model competitors use.
And flight credits for tickets purchased on or after May 28 will expire in one year, or earlier, depending on the type of fare purchased.
It’s the latest in a string of massive strategy changes at Southwest as its performance has fallen behind rivals.
Last July, Southwest shocked passengers when it announced it would ditch its open seating model for assigned seats and add “premium” extra legroom options, ending decades of an single-class cabin.
The airline is also looking to slash its costs. Higher expenses coming out of the pandemic have taken a bite out of airline margins.
Last month, Southwest announced its first mass layoff, cutting about 1,750 jobs roughly 15% of its corporate staff, many of them at its headquarters, a decision CEO Jordan called “unprecedented” in the carrier’s more than 53 years of flying.
“We are at a pivotal moment as we transform Southwest Airlines into a leaner, faster, and more agile organization,” he said last month.
Earlier this year, Southwest announced the retirement of its longtime finance chief, Tammy Romo, who was replaced by Breeze executive Tom Doxey, and its chief administrative officer, Linda Rutherford. Both executives worked at Southwest for more than 30 years.
Southwest has also cut unprofitable routes, summer internships and employee team-building events its held for decades.
