Southwest Airlines to charge for baggage to lift earnings

Chicago — Southwest Airlines said on Tuesday it would start charging some customers for checked bags, ending a unique free policy, as the company looks for ways to shore up its earnings.

The changes mark another departure for the Texas-based airline’s passenger-friendly policies. Last year it announced plans to end open seating, which had been central to its brand image for more than 50 years.

Its “bags fly free” policy has been an outlier in the airline industry. Southwest is the only major US carrier that allows customers to check in two bags at no cost, a strategy that company executives have said differentiates it from rivals.

But the policy will change on May 28 as lacklustre earnings have fuelled pressure to revamp its business model. CEO Bob Jordan has set a goal to lift Southwest’s operating margin to at least 10% in 2027 from 2% last year — a standard investors had come to expect from the airline before the pandemic.

The policy shift suggests a growing influence of activist investor Elliott Investment Management at the airline. The hedge fund, whose nominees hold five of 15 board seats, had criticised the airline’s management for not charging a fee for checking in bags like other airlines to boost revenue.

Under the new policy, the airline will continue to offer two free checked bags to loyal customers with the highest status — A-List Preferred — and passengers who pay the most premium fare.

Customers with lower loyalty status, A-List, will get one free checked bag. The carrier will credit one checked bag for passengers who hold its co-branded credit card.

Those who do not qualify for its free bag options will be charged for their first and second checked bags.

Southwest said the changes are aimed at rewarding its most loyal customers and shoring up profits.

The new bag policy comes weeks after the airline carried out the first companywide layoffs in its nearly 54-year history.

Baggage fees produced more than $7bn in revenue in 2023 for major US airlines, but Southwest generated just $73.4m, according to the Bureau of Transportation Statistics.

The airline had been resisting investor pressure to charge for bags, saying its data showed that a no-bag fee policy was the main reason customers chose it.

Last year, it said while charging for bags could bring in $1.5bn in additional revenue every year, it would cost the airline $1.8bn in lost market share.

At its investor day last September, Southwest had warned that eliminating the “bags fly free” policy would have a significant impact on its brand as it would no longer be perceived as “customer first”.

Reuters