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Southwest Airlines considers ending ‘Bags Fly Free’ amid investor pressure

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Southwest Airlines considers ending ‘Bags Fly Free’ amid investor pressure
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Southwest Airlines is initiating redeye flights and exploring premium seating and assigned seats. The airline, known for its gradual approach to changes, faces increased pressure from an activist investor pushing for faster reforms. Among the potential changes being considered is the elimination of free checked bags for all passengers, a core element of Southwest's value proposition.

Southwest Airlines Co. has started surveying customers about possible modifications to its policy of allowing free checked bags, hinting at a possible shift in one of its hallmark perks. The survey targets select loyalty members and consumers, presenting hypothetical scenarios where bag fees would apply to lower-cost fares.

The survey outlines a scenario where Wanna Get Away fares, the most affordable option, would include only a personal item and carry-on bag. In contrast, Wanna Get Away Plus would offer one free checked bag. Higher-cost categories such as Anytime and Business Select would continue to provide two free checked bags.

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An anonymous source suggests that Southwest might be conducting these surveys expecting negative feedback from customers. "Many of the things under consideration," said the source, "and being pushed by Elliott Capital which is engaged in a proxy battle for control of the airline, are a bad idea."

Southwest has historically limited ticket sales to direct channels like its website, avoiding online travel agencies (OTAs) like Expedia to reduce costs and prevent price comparisons that don't account for included benefits such as free checked bags. However, recent regulatory changes may require airlines to display fares inclusive of fees like carry-on and checked bags.

The Department of Transportation (DOT) rules aimed at making fare comparisons more transparent have been delayed by federal court rulings. Nonetheless, Southwest has started allowing its fares to be displayed on platforms like Google Flights and Kayak.

International partnerships are another area Southwest has explored but not fully implemented. While it operates some international flights to nearby destinations, it lacks the extensive network reach of competitors like United, Delta, and American Airlines.

In terms of premium products, Southwest is considering offering more legroom seats and greater seat width through blocked middle seats or assigned seating throughout their cabins. This move could attract customers willing to pay extra for enhanced comfort and create stronger loyalty benefits.

During a second-quarter earnings call, Southwest indicated it would still offer free checked bags despite these considerations. The airline carries significantly more baggage than legacy carriers or ultra-low-cost carriers—a fact they believe demonstrates customer preference for this perk.

However, any basic economy-style product might limit passengers to one free checked bag instead of two. This change could narrow the gap between Southwest's fares and those of competitors when displayed through broader channels.

Eliminating 'Bags Fly Free' could also impact Southwest financially due to federal excise taxes on domestic fares that do not apply to ancillary fees such as bag charges—potentially saving competitors millions in taxes annually.

Elliott Management's involvement adds another layer of complexity as they push for new board appointments from various industry backgrounds. CEO Bob Jordan must navigate these pressures while maintaining the airline's unique brand identity.

Surveys can often serve as tools to support pre-determined decisions rather than genuine exploratory exercises. With Elliott Management exerting influence amid financial performance concerns, Jordan needs compelling arguments for any strategic direction he chooses.

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