Southwest is going to charge for checked bags and start expiring flight credits and introduce no seat assignment basic economy.
That means the end of a ‘differentiated product’ for the airline, and when they’re just like everyone else it becomes obvious that their product is at the bottom of the pack. Yet once most of the decisions have been made, maybe it actually makes sense to charge for checked bags?
There are several (obvious) reasons why charging for checked bags is going to be hard on the airline.
- It was a real product differentiator. Customers chose Southwest because of this benefit, they usually booked direct (lower distribution cost), and Southwest will lose ticket sales because of it. The airline recently estimated that they’d generate $1.5 billion from the change, while losing $1.8 billion, for a net loss of $300 million.
- It makes their flying less efficient. People are going to be bringing on a lot more carry-on bags, as they try to avoid checked bag fees. Currently Southwest checks more bags than anyone else – by a lot. Pushing bags into the cabin slows down boarding. It means longer turn times, at a time when the airline has been saying their path towards profitability is more efficient and shorter times on the ground that lets them fly planes more and generate more revenue without greater capital expense.
- It is going to mean a lot more unhappy customers in the cabin, and delayed flights. All those carry-ons will mean full overhead bins and customers having to gate check bags, something that is a problem on other airlines but much less often on Southwest. Gate checking bags is also going to mean short flight delays, perhaps dethroning Southwest’s reliability achievements.
Yet there’s actually a strong case for charging separately for checked bags at Southwest Airlines, once management capitulated to all of the other changes that their new bosses demanded. There was simply no longer going to be enough differentiation at the airline for checked bags to create enough customer loyalty to outweigh the benefits.
- They’re already changing the product in multiple ways, for instance they’re going to charge for seat assignments, which also reduces the incentive to queue up before the flight and board quickly. The product is already going to be less small-d democratic with extra legroom ‘premium’ seats and other seats that have less legroom than today on many aircraft.
- Their fares are going to be compared against restricted fares at other airlines. They need to distribute their fares more broadly. Customers in places like Dallas, Houston and Chicago know to go to Southwest’s website to search for tickets. But in smaller markets there isn’t the same awareness. So smaller newer markets are dominated by passengers living at their hubs, rather than being spread more equally on both ends of a route. Distributing through Expedia, Google Flights, et al will help – but means that Southwest fares will be directly compared against airlines offering basic economy and unbundling services, creating an incentive for Southwest to match fares with similar restrictions.
- $100 million in annual tax benefits. Domestic airfares are subject to a 7.5% federal excise tax. Unbundling the fare means the money they collect that they call fees they keep in full, rather than turning over to the feds. Southwest has been giving up this tax benefit by not charging for bags. They estimate $1.5 billion in checked bag fees, but not all of that is for domestic flying. Order of magnitude tax savings will be $100 million. If you don’t like checked bag fees at any airline, blame your Congressperson for incentivizing the charges.
If checked bag fees will no longer be enough to differentiate Southwest, they might as well pick up any incremental revenue there may be from unbundling since the amount of lost revenue has already been reduced by each of the changes they’ve decided to make! And there’s no longer a reason to leave the tax savings on the table. The federal government is subsidizing their decision to charge for checked bags.
This all leaves the airline in a rather troubling predicament, however. Outside of Companion Pass, the loyalty program is not generous or especially rewarding (and becoming even less so). They’re trying to mimic JetBlue and others with an inflight product that is inferior.
- No first class, no blocked middle seats, no hot meals
- No seatback entertainment, and device power is USB-only and only on some planes
- Wifi isn’t free, and functionally performs worse than with any other U.S. carrier
- Legroom is being reduced on planes to make room for the extra legroom seats they plan to sell
That leaves Southwest’s only compelling value proposition as schedule and price. If you live in St. Louis or Kansas City you’re still going to fly Southwest a bit! But anywhere that they compete against Frontier (or even troubled Spirit) they’re going to have difficulty, because their costs have risen markedly – and even Spirit offers good wifi and something of a premium product offering now!
Maybe Southwest Airlines is turning itself into a worse version of Spirit – without the low costs or low fares – but at least they’ll have the $100 million tax subsidy.
The airline is seeing operating income dwindle. I looked for 2024 it was $321 million compared to just over $1 billion for 2022. It nosedived by two thirds in just two years.
Free bags might be great for consumers, particularly families, but does nothing for the airline’s bottom line. Unlike the US3, Southwest doesn’t have lucrative long haul premium.
So in the interest of shareholders something had to be done and baggage fees would be the lowest hanging fruit. Ultimately, Southwest like JetBlue is stuck in the middle. Doesn’t have the network and amenities of a global airline but not the cost structure and product line of an ULCC.
The real answer would be a merger.
Gary, I understand the rationale for bag fees. But why add basic economy and funds expiration? To make a clean sweep of destroying the Southwest brand?
Too much, too late.
Jumping on the premium travel trend just in time for consumer sentiment and disposable income to tank.
Only question is who the remains will be merged into.
Possibly Alaska as it continues its transition into the American Motors Corp of US aviation.
“a worse version of Spirit” — Gary, that says it all.
And who benefits? Not the crews. Not the passengers. Not the card members. Nope. None of them. The only winners are top executives and the majority-shareholder hedge-fund a-holes. Only they win. Bonuses and obscene profits over people.
We have a serious problem in our country right now. This example of cruelty and greed is a microcosm. We know better. It doesn’t have to be this way. I long for better days.
@Ralph, I believe a merger is Elliott Management’s true goal, after they strip down the airline and sell what there is of value. I a few weeks, Elliott has destroyed $LUV’s brand equity and the goodwill of devoted Southwest stans (of which I count myself as one). Once these changes kick in, I don’t believe there will be enough product differentiation between Southwest and the other airlines to make it worth your while to choose them over a more convenient airline with better amenities in most cases. Just my opinion….
Living in Atlanta, I have used SW primarily for flights to LGA and LAS,. I have a SW card so can get one free checked bag. If fares and schedules are not significantly better than Delta on the same routes I’ll fly them less. I still have $1500 in banked travel funds that won’t expire and 52K RR points to use up.
It’s sad when Spirit becomes a valid alternative for nonstop routes.
Their stock went up in the news yesterday while most airline stocks were down so the street likes it which is the most important factor.
BTW free bags and the lowest fares attracted cheap infrequent flyers. No airline really wants those people. If assigned seats and extra legroom gets more higher paying business travelers these we all good moves. No reason an airline should chase cheap, infrequent flyers.
@Ralph – An AS merger would be very interesting indeed. But if the Antitrust Division of the DOJ is smart it will require that all the liquidated bits be auctioned off piecemeal across several carriers. There’s just been far too much industry consolidation over the last four decades, and at some point, a line must be drawn in the sand.
@AC — Rule of thumb, if ‘the street’ likes it, probably horrible for consumers, for most people.
@Mike Hunt — Antitrust? Sir, read the room, there’s going to be no enforcement of any regulations. If they want to merge, they’ll pay $5 million for a lunch with the king, like the other CEOs and oligarchs. Done. Approved. Merged. Consolidation, collusion, monopolies, etc. are all basically inevitable under this regime. We’ll ‘draw a line in the sand’ once (and if) we get these jabronis out of power. Wake up!
@Gary: Several of asked asked this on OMAAT, but received no reply:
“regarding the new expiration policy of 6 or 12 months depending on the type of fare purchased: will the expiration only apply to tickets purchased after May 28, or retroactively as well, like those credits I already have?”.
Do you by any chance know the answer to this? Thank you.
@Mike Hunt. You would be making a good point, but what makes you think there’s still an Antitrust Division at the DOJ?
@AC hit the nail on the head. Infrequent flyers looking for the cheapest fare possible on Google flights, even with a 30 minute or near four connection, can’t make an airline money. It can fill otherwise empty seats and add incremental revenue but it can’t be the profit model.
The legacies have built a profit model on partner, mainly credit card income, and lucrative premium long haul and of course fees. Southwest had only the credit card income, the ULCC only the ancillary revenue. There are some niche airlines but as they try to grow they will hit this same wall.
There will be more consolidation if antitrust stays favorable to merger and acquisitions. Or there will be bankruptcies.
Southwest is dead meat as their current award airfares are as much as 50% more than AS.
Good night Gracie for tomorrow you will be homeless.
@Gary – have they formally announced what their version of “premium” seating is going to look like ? Is it just some additional legroom seats ? Blocked middle seats ? True premium cabin ? They have referred to a more premium cabin but there don’t seem to be any details . The only “premium” offering that would move the needle for me is a true premium cabin. F9 tried to do the blocked middle seat for a bit but seemingly realized that is not considered competitive in the domestic marketplace . Heck , even NK realized that they needed to make Big Front Seat a distinct and differentiated experience.
Holding lifetime elite status at a few programs I never flew Southwest primarily for free bags
but now the price would have to be substantially lower and I doubt it will be
Frequently southwest is higher than others
I flew because flight credits didn’t expire and without elite status my bags flew free
Mostly I used southwest to gift seats to family and friends who didn’t hold status
I do not see that happening now as I might as well gift others with a better hard product and chargers at their seat.This will be interesting to see if they swim or sink going forward.
My perception they will sink badly.There are a number of things they could have done to soften the blow.But they didn’t.
How long til SWA drops point to point and go Hub/Spoke?
Might as well, what the hell…
@Jason – Point-to-point and thusly nonstop offerings in limited markets may be their only remaining competitive advantage (e.g. who else are you gonna fly from LAS to PSP?)
@Maxie Dean – extra legroom, no blocked middle, no first class, not really a separate cabin
@Daniel B – it is expected that the policy will not be applied retroactively, however Southwest has not answered this officially
@nsx at FlyerTalk – they needed to offer unbundled fares if they were going to appear side-by-side on Expedia et al, as for credit funds expiration that’s pure balance sheet shenanigans.
Daniel B – I believe Southwest answers this question in Q&A. Existing travel credits prior to May 28 will NOT expire in 6 or 12 months. However, once you elect to use one of these pre-existing travel credits for a flight booked after May 28, then any cancellation from that new flight which creates a flight credit will be subject to the new expiration policy.
It was always curious to me that one of their biggest perks (“free” bags) was most appealing to families. Get their open seating made them my last choice when flying with my family because if I didn’t get a good group assignment I’d end up sitting apart from my children. I used to love them as a solo traveler but not for family travel. Even on Spirit I always end up with my kids even if I don’t pay for seats. These changes are tough though because now they really don’t have any differentiation from others. And I’m not sure what they do better than the others.
@Ken. Thank you, that is reassuring. Can you tell me where can I find this info on their website?
@Gary: Thank you!
I will be curious to see/understand what their overhead bin space capacity is and if they thought that seemingly obvious concern through. My experience (limited) with Southwest is that their bins are smaller than what AA is using now….are they ready for all the “new” bags in the passenger cabin?