Southwest Airlines Two Free Checked Bags: Here To Stay

Southwest Airlines is currently under a lot of pressure to make changes to its business model, to improve financial performance. There had been talk of whether the airline might change its free checked bag policy, since it’s arguably the biggest potential source of ancillary revenue. Well, there’s now an update, and it’s that the status quo will be maintained.

Southwest is undergoing major changes

It’s an interesting time at Southwest. Historically, the carrier has had the best financial performance of any US airline, and was most consistently profitable, even during challenging times. The carrier largely did this by not looking at what the competition was doing, and by keeping a steady business model.

However, times have changed. The US airline industry is more competitive than ever, and demand patterns have shifted, with a heavy focus on premium leisure and long haul demand. Southwest isn’t as profitable as it used to be. Management has been working on making major changes, and is now under even more pressure, after an activist investor swooped in, pushing for radical changes.

Southwest’s current management team has already committed to introducing assigned seating, adding an extra legroom economy cabin, starting redeye flying, and listing flights on airfare comparison fares.

Southwest’s activist investor, Elliott Investment Management, has been pushing hard for the airline to start charging for checked bags. While Southwest’s management had in recent months insisted this wouldn’t change, many wondered if that was actually the case, especially with how much pressure Elliott is applying. Well, there’s now an update…

Southwest won’t charge for checked bags

Southwest has provided an update to investors today, and with this, the airline has announced that it plans to continue to keep its two free checked bag policy on all fares. In recent months, Southwest executives have answered questions about bags when asked, but haven’t highlighted specifically that this is here to stay. That’s different now, as Southwest is specifically calling it out.

Southwest claims that extensive research has reinforced the carrier’s current checked bag policy as remaining the most important feature that sets Southwest apart from the competition. Management believes that any changes to the current policy that provides every customer with two free checked bags would drive down demand and far outweigh any revenue gains created by imposing and collecting bag fees.

Here’s what Ryan Green, Southwest’s EVP of Commercial Transformation, had to say:

“We’ve spent the past few years laying a foundation that serves as the base of our transformation. We’ve already started rolling out modernized cabins with improved WiFi, in-seat power, larger overhead bins, enhanced operational efficiencies, and optimized flight schedules. We will continue to build upon our unique competitive advantages, while adapting to consumer priorities in today’s dynamic environment.”

Interestingly in recent weeks, Southwest has been surveying customers about the possibility of charging for checked bags. In these surveys, many scenarios were presented, including the carrier’s cheapest Wanna Get Away fares only including free carry-ons, Wanna Get Away Plus fares including one free checked bag, etc.

This was part of a larger survey, which also included questions about status benefits, travel habits, and more.

Hot take: Southwest should charge for checked bags

I’m sure a lot of people will disagree with me on this, but I’ll make my case regardless — I think Southwest is making a mistake by not charging checked bags fees on its lowest Wanna Get Away fares. I’m coming at this from the angle that I think this would maximize Southwest’s profitability.

Now, of course if you ask consumers if they want free checked bags or not, they’ll say yes. I mean, who doesn’t want something for “free?” But given the current dynamics of the industry, how people shop for flights, and how low margins are in the airline industry, I think starting to charge for checked bags is the logical direction to take.

As Southwest states, free checked bags is the top reason that passengers book Southwest, after schedule and fare. I agree that of course the top reasons people book Southwest are because of the schedule and fare, as the airline has a huge route network. On top of that, Southwest is operationally reliable, and people typically like flying with the airline. So unlike some ultra low cost carriers, not many people “book away” from Southwest.

Of course those who regularly check bags also like the free checked bag aspect of Southwest, but that’s not to say that the policy makes sense.

The way I view it, there are countless reasons that Southwest should charge for checked bags. Among other things:

• Checked bag fees are a huge source of revenue — in 2023, US airlines generated $7.1 billion in checked bag fees, and Southwest would probably generate more in bag fees than any other airline, given how many passengers it carries
• With Southwest fares now appearing on more airfare aggregator sites, it’s important for Southwest to have more competitive pricing, which the airline historically hasn’t had (Southwest has been more about overall value than having the lowest price)
• Free checked bags could be added as a benefit on co-branded Southwest cards, which could considerably increase Southwest’s revenue from its loyalty program, and make these cards more compelling
• By just not including a free checked bag on the lowest fare, Southwest would create an incentive to buy-up to the next higher fare, which is a way other airlines have done a great job increasing revenue (though Southwest’s lowest fare wouldn’t be as punitive as basic economy on other airlines)
• Even if Southwest eliminated free checked bags on its cheapest fares, it would still have a more compelling cheaper fare than any other US airlines, so it’s not like consumers have another airline they can go to for free checked bags
• The reality is that there’s no such thing as a “free” checked bag, and those not checking bags are subsidizing those who are checking bags

I get that the default is to resist change, and that we’d all prefer that airlines would include more for less. But personally I’d be willing to bet that charging for checked bags, at least on Wanna Get Away fares, would contribute to improved financial performance for Southwest.

I think the added bag fee revenue, plus people potentially booking more expensive fares, would outweigh any lost business. Of course there will be (endless) examples of people saying “well I’d stop flying Southwest.” And while that’s totally valid, let’s be honest about how consumer behavior actually works. Booking Southwest would still be compelling for most consumers.

Let me close by saying these two things:

• I think that executives in the rest of the industry (including at legacy airlines and low cost carriers) are thrilled to see that Southwest is maintaining its policy
• I can’t help but wonder if Southwest’s stubbornness here might cause Elliott to “flex” a bit more, and I wonder if this issue is actually fully settled

Bottom line

Southwest is in the process of making all kinds of changes. The airline is introducing extra legroom economy seating, will add assigned seating, and more. However, executives at the airline are once again reiterating that the airline will keep its two free checked bag policy on all fares.

Personally I think charging for checked bags is the right move in terms of maximizing profitability. I think the airline has a lot more to gain by charging for checked bags than it has to lose, especially at a time when the carrier is completely changing its customer experience anyway. It would make sense for the airline to introduce a basic economy fare that doesn’t include checked bags.

But the airline insists that because people love free checked bags, the policy won’t change.

What do you make of Southwest maintaining its policy on free checked bags?