Southwest Airlines is scrapping its decades-old “bags fly free” policy, one of the most stunning reversals to its business model in recent months.
For bookings made on or after May 28, only passengers with top Southwest loyalty status or those buying the most expensive fares will get to check two bags for no extra charge.
In a statement, the airline said the move would create choice for customers, as well as “support business objectives.”
Southwest Rapid Rewards A-List Preferred members and passengers traveling on Business Select fares will continue to have an allowance of two checked bags.
Those flying on other Select fares and A-List status members will be able to check in one bag without extra charge. In a huge break from Southwest’s current policy, all other passengers will be charged for checked baggage. The airline has not disclosed the new luggage pricing structure.
“We have tremendous opportunity to meet current and future customer needs, attract new customer segments we don’t compete for today, and return to the levels of profitability that both we and our shareholders expect,” CEO Bob Jordan said in a statement.
A Stunning Change
The ability for all Southwest passengers to check in two bags at no extra change has long been a unique selling proposition for the carrier.
The stunning changes come as Southwest laid off about 15% of its corporate workforce, a first for the company.
Southwest is upending its business model following a bitter battle with activist investor Elliott Investment Management. After building a nearly $2 billion economic stake in Southwest, the hedge fund pushed for a senior leadership overhaul.
Ultimately, the two companies reached a settlement to give Elliott five board seats — just short of control — while Jordan stays on CEO. The latest set of changes signify the hedge fund’s influence on the carrier.
Southwest described the moves as “strategic,” adding that they are aimed to deepen and reward loyalty for its most engaged customers. It says the changes will also “create new opportunities to reach consumers who value fare above everything else.”
To coincide with the changes, Southwest is launching a new Basic fare for its lowest-price tickets booked on or after May 28. This will be the most restrictive option and comes ahead of the carrier introducing assigned seating on its aircraft.
Speaking at the Skift Aviation Forum last November, Jordan emphasized why the carrier’s approach made it distinctive from competitors: “We have had the industry’s best set of customer-leaning, customer-friendly policies forever,” he said.
Policies mentioned by Jordan included Southwest’s credits and Rapid Rewards points that don’t expire and no fees for checked bags.
“We have been the champion for the consumer and the customer from the start, hands down, period,” Jordan told the Skift Forum.
Southwest Resists Bag Fees for a Long Time
Elliott has long pushed for bag fees as a way for Southwest to boost its revenues. In a presentation from June about its case for changes at Southwest, Elliott said the carrier had “written off key commercial innovations and revenue opportunities.” Those key opportunities included checked baggage fees, assigned seating, basic economy and premium products.
Jordan, for the past year, had long said baggage fees was something that Southwest would never implement. Multiple Southwest executives have said that the company’s “bags fly free policy” has long set it apart from competitors.
“Just to be real clear on bags fly free as a policy, I mean, we’re not looking at this point to change that policy,” Jordan said during an earnings call in July. “Our industry-leading set of initiatives of customer-friendly policies, and you know the list, is a big part of what attracts people to Southwest Airlines. And after fare and schedule, bags fly free is cited as the #1 issue in terms of why customers choose Southwest.”
During Southwest’s investor day, executive vice president for transformation Ryan Green — who announced his resignation last month — said the carrier conducted a survey on the matter and found that revenue from baggage fees wouldn’t make up for the loss in passengers.
“It is far and away the top feature that differentiates Southwest from our competitors, and it is one of the top criteria in why customers choose Southwest Airlines,” Green said.
Industry Reacts to Southwest’s Change
The announcement quickly became one of the most wide-discussed in the airline industry Tuesday morning. During the JPMorgan conference, executives of Delta Air Lines and United Airlines were both asked about what they thought about Southwest introducing bag fees.
Delta president Glen Hauenstein said he believed there are now Southwest customers that are “up for grabs.
“We’ll see how that plays out over the next period of time as they continue to implement multiple changes to their products,” he said at the conference.
United CEO Scott Kirby said bag fees would make Southwest “more competitive,” but will impact “low-end customers.”
“I think it will raise the tide for Southwest across the board,” Kirby said at the conference. “The relative margins will be worse in competitive markets because it will cause some customers at the margins to switch to competing airlines.”
However, Kirby added that he believed the change made Southwest “a results-driven airline than it’s been before.”
“I think the far bigger thing is like it’s the slaying of a sacred cow,” Kirby said.
Watch Bob Jordan, Southwest CEO, at the Skift Aviation Forum 2024:
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