[Source – cnbc.com]
Southwest Airlines faces major changes as it considers ending one of its most beloved perks: the “bags fly free” policy, which has long been a hallmark of its passenger-friendly approach. This policy, which sets Southwest apart as the only major U.S. airline not to charge for checked bags, is under threat following a recent investor shakeup. Activist investor Elliott Investment Management, which now holds a significant 10% stake in the airline, is advocating for the removal of the two-free checked bags policy. This move could generate significant additional revenue for the financially struggling airline but at the cost of alienating its loyal customer base.
The potential policy change comes on the heels of Southwest’s recent decision to abandon its open seating policy, a hallmark of the airline for nearly 50 years. Starting soon, the airline will assign seats, and passengers will have the option to pay extra to select their seats early. These changes mark a significant departure from the airline’s traditional business model, which has long emphasized low costs and customer flexibility.
Activist Investor Pushes for Major Overhaul
Southwest Airlines faces major changes as Elliott Investment Management’s growing influence sparks a push for broader transformations within the company. The hedge fund, which manages $70 billion in assets, has been vocal about what it views as the airline’s mismanagement, citing a more than 50% drop in Southwest’s stock price over the past three years. In a letter to Southwest’s board, Elliott demanded the ousting of CEO Robert Jordan and Executive Chairman Gary Kelly, blaming them for the airline’s recent struggles.
Jordan, who became CEO in 2022, has firmly stated that he will not step down and has rallied his executive team to resist Elliott’s pressures. The investor’s recent acquisition of a 10% ownership stake now allows it to call for a special shareholder meeting, a rare move that would escalate its fight with the airline’s leadership. Such a meeting would enable Elliott to push for immediate changes rather than waiting for the next annual shareholder gathering.
Financial Pressures and Industry Comparisons
Southwest Airlines faces major changes that could impact its appeal to budget-conscious travelers, as the airline has long been known for not charging for checked bags or reservation changes. However, the competitive landscape has shifted, with rivals like Delta and American Airlines improving their appeal to upscale travelers through premium seats and amenities. These airlines, along with others like United, Spirit, and Frontier, have also capitalized on charging fees for checked baggage—a lucrative source of income that brought in billions of dollars last year.
Analysts suggest that introducing fees of $30 to $50 per bag on Southwest flights could provide a much-needed financial boost for the airline, potentially generating an extra $100 per flight for two bags. Despite the potential revenue, abandoning the free baggage policy could significantly alter Southwest’s brand identity, which has prominently featured the perk in its advertising campaigns.
The broader industry has seen a significant rise in baggage fees, with U.S. airlines earning $33.3 billion from baggage fees alone in 2023, up 15% from the previous year. These fees accounted for 4.1% of global airline revenue, highlighting the financial impact of such charges. As Southwest contemplates this potential shift, the airline faces a critical decision on balancing financial recovery with maintaining its unique customer appeal.
