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.