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?
they should have just left it alone and added baggage fees only!! I fly them one reason is because the seats as they stand now are much more comfortable than any other airline and I can stay in my seat for a much longer period of time.
Every time I fly on SW, there are between 10 to 18 wheelchair passengers on board, and upon landing, only 3-5 need wheelchairs. What are SW’s plans for dealing with this issue? The free checked luggage made flying with SW convenient and cost-effective. With these perks gonna away, SW would lose business. If the business model is working, try to improve it rather than destroying it in the hope of additional profit. Congratulations to Elliot’s management for setting up SW for bankruptcy.
It does not make sense. They are no longer unique. I am A list preferred with companion pass but my bookings for our company will decrease because they are usually more expensive than American with different airport options and less direct flights. The free bags made up for it when booking employees. Oh well
I agree with AC. Only what Wallstreet wants counts. Butt hurt blog-o-flyers will.pound sand.
seriously… the melodrama with WN has gone over the top.
WN gave away too much for not enough revenue for too long.
Nobody else is doing any better.
No first class, no blocked middle seats, no hot meals
just like everyone except AA, DL, UA and AS.
No seatback entertainment, and device power is USB-only and only on some planes
only DL and B6 have seatback entertainment across the majority of their fleet.
Wifi isn’t free, and functionally performs worse than with any other U.S. carrier
only B6 and DL offer ANY free WiFi.
Legroom is being reduced on planes to make room for the extra legroom seats they plan to sell
exactly what B6 is doing
but will be better than AA on many planes and comparable to what B6 is doing.
WN is not being unique – there is no argument about that.
They are going to have to compete for the same pool of passengers as everyone else but they are hardly at a disadvantage.
it’s been a rough week for WN but let’s maintain just a tad of perspective.
@ Tim Dunn – WN in combination with DL, AA, UA, and AS comprises roughly 75% of the U.S. domestic market. The other 25% is comprised of a hodgepodge of smaller, mostly financially struggling carriers that do not command much premium revenue on any kind of sustained basis (Spirit, Frontier, Jetblue). To claim that WN is not at a significant competitive disadvantage relative to the other 58% that also have a significant domestic network while lacking a bona fide first class, an international partner network, interline agreements for IRROPs, lounges, etc. is a pretty significant miscalculation in my estimation.
I wonder if the real play here is gaming for a merger. Reducing differentiation reduces the operational adjustment costs in the case of a merger. Southwest lacks the ability to grow into a full-scale international airline given the widebody airplane construction bottleneck. Many analysts believe that the Trump DOJ will generally finish the antitrust cases brought by the Biden administration to maintain credibility, but take a more permissive approach going forward (with a few token exceptions for public spectacle).
Unfortunately there is a loophole in the merger law which you could colloquially call the “exigency exception”. A company can claim financial hardship and likely future bankruptcy as a justification for a merger in a highly concentrated industry. While this is not a guarantee (the judge can consider other factors as well as happened in the Jet Blue-Spirit case), it can often result in a successful merger that would otherwise never be approved.
This exception creates a perverse incentive for activist investors to partially “tank” a company they want to be acquired, but to tank it only part of the way (enough to secure merger approval but not so much as to dramatically reduce the merger price). Cerberus Capital tried this trick with Albertson’s, announcing a “special dividend” pulling out nearly all of the company’s reserves and then trying to use that artificially-created exigency to ram through a merger with Kroger. Thankfully in that case the judges saw through the ruse and blocked both the special dividend and the merger. I’m not saying that is necessarily the case here (maybe Elliott truly believes that unbundling and breaking the company’s long held unwritten promises to Southwest loyalists will improve profitability), but it is an alternative explanation that would be consistent with all of the announced changes.
Just seeing if I can post — for a few days it would TELL me I’ve posted, but my post would not appear. It wouldn’t even say “pending moderation” AND it would tell me I made a duplicate post if I tried again.
Maybe I’ve offended the Points and Miles gods somehow…
WN has failed to “dance with the one that brought you.” Note to Elliott Management: that means to be loyal and supportive of the people who have been loyal customers. Questions about that . . . listen to Shania Twain. (Even though she is not a Texan, we still like her)
Couldn’t they just reduce it to one bag flies free? Customers would still stay with them. I just flew a week ago and vowed to keep them forever, now I won’t. I don’t like the hassle of paying for bags.
@GM: The change to seat assignment should take care of the “Jetway Jesus” phenomenon. With each passenger having an assigned seat, there will no longer be any need for that passenger to fake the need for a wheelchair boarding assist in order to board early and get a better pick of first-come-first-served seats.
The change to charging for checked baggage is indeed going to slow down boarding and deplaning because it will greatly increase the number of carry-on bags, resulting in fights for bin space, gate checking the excess, and delays getting off while passengers horse their baggage out of the bins.
Buh-Bye SWA. Spirit with DL prices.
@Steven – That is a very compelling hypothesis and from all available information I’d wager to guess you are on exactly the correct track here.
I love it! Southwest greatly dominates at my closet airport BWI. I hated the old way they operated and haven’t flown with them since 1997. I still wish they would add first class seats but an assigned extra legroom seats will help. I’ve been mostly flying out of DCA or PHL as I refused to get in a cattle call to board a plane and not have an assigned seat.. I will just get a Southwest credit card to avoid baggage fees. I will be happy to give them another chance once the new rules go into effect.
Mike,
the vast majority of economy passengers are not focused on international travel and are not getting any real benefit from their loyalty now anyway.
Do you read about how many people aren’t getting first class upgrades on the big 3 because those airlines are monetizing their first class seats?
WN has an enormous network and carries as much business traffic as it does because of its size in many markets.
It will compete for passengers the same way it did before. It will clearly lose the pre-boarding scammers and the people that only flew WN for the free bags at cheap fares or to buy tickets that could be easily cancelled.
WN will compete for the connecting passengers and those in competitive markets alongside the rest of the industry.
They will be fine.
Change is hard and WN has dished it out in spades but they will likely be stronger in a couple years than everyone except for DL and UA.
and when you consider that AA has yet to figure out how to turn itself around, it bodes very poorly for them that WN could well become a much stronger competitor in the very markets where AA is strong including Texas and Florida.
I’m i the only one here having to read sentences two or three times?
@Tim Dunn – We can certainly agree to disagree. Time will tell, but I suspect you can’t see the forest for the trees.
I get people saying that the free bags do nothing for the company. But as someone who only flew Southwest kinda because of the open seating and way more because of the free checked bags out of/into places with other options, there’s no reason for me to ever go Southwest again. I will pay (slightly to moderately) more on a different airline to spite them for taking away the benefits I enjoyed. I don’t think I’m alone in that thinking, and I think that’s going to be tough for them to overcome.
I agree with the overall sentiment of the article, if there’s nothing to differentiate them from the competition, there’s no reason for me to be loyal to Southwest anymore. It’s sad to see it go, but they chose to do this to themselves.
I have Gold status for life on UA and hence 2 x 70lbs bags free but I do occasionally fly other airlines when route or non stop flights make it advantageous. I have flown South West, Jet Blue and Even Spirit. It’s pretty sad when Spirit’s Big Seats Up Front look like the best value.
I’ll now have even less reason to fly Southwest. I predict their race to the bottom will be just that.
Also, just to add:
Most of the disadvantages listed aren’t what Southwest customers have ever been looking for. It’s not people looking for reliable WiFi or seatback entertainment or an upgraded experience.
We want to be able to check in and get a decent chance at a window seat or a cluster of family seating without paying more. We want to be able to fly across the country for a vacation and not have to pay for the baggage fees.
The people willing to pay more for legroom or blocked middle seats or hot meals can find that anywhere else. But remember, it’s the people who aren’t willing to pay for those “perks” that drive traffic and thus flights. You only have your flights due to those of use who fly pure economy, let us have what we want. We don’t want what Southwest is morphing into, and it’s gonna suffer for it.
Glad they are having Assigned Seating. Big deal. BUT now flight credits are expiring and that is a dealbreaker for me and the differentiator of the airlines. Good they are limiting free bags because it simply not economical and shepherding people to their credit cards. What SW Corporate doesn’t know but only experienced flyers know… SW customers are some of the dumbest out there and they are inefficient at boarding and being efficient in actions while at the gate and in the plane.
Expiration of flight credit is causing me to move to United or Delta, esp since SW airport terminals are some of the worst with least amenities.
I have flown SWA for decades out of Orlando. They have drastically cut non stop flights everywhere I go… and noticed Delta has picked up the slack.. I will be flying delta now! Good bye SWA you are letting your customer base down! That’s what happens when investors take over. Look at at other airlines and also look at hospitals and doctor offices …. All have gone down hill!
I suspect Steven (posted yesterday) has read Elliott’s playbook. A similar scenario Steven has laid out was played when WN bought MuseAir (MC) in 1985. WN agreed to operate MC as a separate company for 2 years. MC was in a steep descent (but then the only time it made money was before it stated flying and invested the startup capital.) WN wasn’t really interested in bolstering MC operations but more to eliminate the competition out of Love Field and Hobby, to acquire the airport real estate and to obtain the additional slots at LAX and SFO. Two years later, almost to the date, MC was liquidated and WN got what it wanted out of the deal. Steven may be correct and whoever “merges” with Elliott Management’s airline will get what they want out of the deal and so will Elliott. My question is will Alaska Airlines change it’s name to Southwest?
Back to United I go! SW was a good choice for the free checked bags and choice of seating. Prices for the actual flight are similar to United. The only other advantage was not having to make connections at ORD.
Well, looks like the new head honchos, Elliott Management, are only concerned about stockholders and their own executive perks. Typical at most corporations these days.
I have only flown once, years ago, on Southwest, a short hop from LAX to LAS and did not enjoy the pre-boarding carnival atmosphere at the gate area, and how people scrambled for seats. It should get interesting when passengers try to board with all sorts of items to avoid baggage fees.