By Rajesh Kumar Singh
CHICAGO (Reuters) -Southwest Airlines said on Tuesday it would start charging some customers for checked bags, ending a unique free policy, as the company’s lackluster earnings have fueled pressure to revamp its business model.
The changes mark yet another departure for the Texas-based carrier’s passenger-friendly policies. Last year, Southwest 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 U.S. carrier that allows customers to check two bags at no cost, a strategy that company executives have said differentiates it from rivals.
But the policy change, which would take effect on May 28, runs the risk of driving away customers. Delta Air Lines President Glen Hauenstein said on Tuesday some of Southwest’s customers are now up for grabs.
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 had been defending its no-bag fee policy, saying it was the No. 1 reason customers chose it.
Last September, it had warned investors that eliminating the policy would impact its “customer first” brand image. Its analysis showed while charging for bags could bring in $1.5 billion in additional revenue every year, it would cost the airline $1.8 billion in lost market share.
CEO Bob Jordan defended the about-turn on Tuesday, saying Southwest’s new booking data did not show that it was getting the same benefit from its free-bags policy.
Baggage fees produced more than $7 billion in revenue in 2023 for major U.S. airlines, but Southwest generated just $73.4 million, according to the Bureau of Transportation Statistics.
NEW BAG POLICY
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.
Jordan said the new policy is expected to drive up enrollments to Southwest’s co-branded credit card program and bring in operational benefits.
“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 CUTS, REVENUE INITIATIVES
The decision to charge for bags comes weeks after the airline carried out the first company-wide layoffs in its nearly 54-year history.
It 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 criticized Southwest’s leadership for not charging a fee for checking bags like other airlines to boost its revenue.
Jordan is trying to cut costs and drive up revenue to lift Southwest’s operating margin to at least 10% in 2027 from 2% last year.
The airline will launch a new basic economy fare product and will end its policy of hedging against swings in fuel prices, which cost it about $150 million last year.
Jordan said Southwest now aims to produce more than a billion dollars in cost savings by 2027, up from the $500 million target earlier.
The new initiatives would contribute an incremental $800 million in earnings before interest and taxes (EBIT) this year and $1.7 billion in 2026, he said.
(Reporting by Rajesh Kumar Singh; Editing by Gerry Doyle and Andrea Ricci)
