In 2007, Spirit Airlines became the first U.S. airline to start charging for the first two checked bags, an idea imported from Ireland’s low-cost carrier Ryanair. At the time, I was working for Consumer Reports, and I called every passenger airline in the country to ask if they would match Spirit’s move. Every company’s communications staff laughed: Charge for bags? Ridiculous!
It took 18 years, but this week the final “ridiculous” domino fell. For more than 50 years, Southwest Airlines never charged for first two checked bags. The carrier even trademarked the phrase “two bags fly free.” But on Tuesday, it became the final domestic carrier to begin charging for all checked bags, effective May 28.
It’s a seemingly odd choice by Southwest, the airline famously known for serving only peanuts, to further strip its service.
The airline also announced other service changes, including reduced Rapid Rewards loyalty points on the lowest fares and new expirations on flight credits. Worse, Southwest is also introducing its own version of Basic Economy class, the draconian effort by larger airlines to emulate low-fare competitors. Think tighter seats, no snacks, more restrictions, less overhead bin space, no mileage credit. The frills are so few that online reservation sites even warn customers what they’re getting into.
It’s a seemingly odd choice by Southwest, until recently known for serving only peanuts, to further strip its service. And it follows another downgrade, the elimination of Southwest’s historic “open seating” policy last year.
Why is this happening? The answer is both disturbing and predictable: Wall Street greed.
Last year, activist hedge fund Elliott Investment Management purchased a $1.9 billion stake in Southwest and effectively took over the company’s board room. Since then, the fund has displayed all the subtlety of Elon Musk wielding a chainsaw because Wall Street is convinced the airline “leaves money on the table” by not imposing junk fees for bags and ticket changes. But Southwest’s unique qualities — including, in recent years, free bags — made it beloved to many of its customers.
Under legendary CEO and co-founder Herb Kelleher, Southwest became far and away the darling of the aviation industry, capturing the elusive triumvirate of happy customers, happy employees and happy shareholders.
During the 1980s and 1990s, Southwest expanded significantly nationwide. When it entered new markets, average fares went down and traffic went up. A 1993 U.S. Department of Transportation study even gave this phenomenon a name: “The Southwest Effect.” In those years, Southwest routinely led all domestic carriers in on-time performance and consumer satisfaction, primarily by adhering to a rigid “quick-turn” philosophy of maximum use of aircraft and crews and an avoidance of many congested airports.
Analysts warned Southwest’s growth bubble would burst, and it certainly did.
All this success made Southwest — with its stock ticker LUV — the most profitable airline in the country over the last half century. Until Covid hit in 2020, it posted a record 47 years of black ink. The company managed to avoid bankruptcy filings in recent decades even as dozens of U.S. airlines reorganized or even shut down, including Allegiant, Aloha, America West, American, Continental, Delta, Eastern, Frontier, Hawaiian, Northwest, Pan Am, TWA, US Airways and United.
But analysts warned Southwest’s growth bubble would burst, and it certainly did. Prices went up and profits went down. The fabled customer service declined, especially as Southwest launched in crowded airports Kelleher once swore he would never enter, like New York’s LaGuardia. Dissatisfaction culminated during the historic holiday meltdown of December 2022, when Southwest stranded more than 2 million passengers, something it initially blamed on bad weather but was, in fact, largely due to outdated IT.
Still, while Southwest is not as flush it was in the past, it remains a profitable company. Yet that’s no longer good enough for Wall Street. The unthinkable occurred last month when Southwest cut 15% of its workforce, the first layoffs since its 1971 launch.
But it’s not a lock that Wall Street’s preferred plan to increase revenues with new fees will work for Southwest.
Yes, revenue from formerly free services is surging at the legacy air carriers; in 2023, bag fees totaled $33.3 billion worldwide. At the same time, the domestic industry has concentrated to levels we haven’t seen since the 1910s, via dozens of mergers. And as the American Economic Liberties Project documented in a recent paper, Southwest has contributed to that consolidation by allegedly engaging in predatory pricing against Hawaiian Airlines on inter-island flights within Hawaii, contributing to the smaller airline being forced to choose between bankruptcy or merging with Alaska Airlines.
But while American, Delta and United offer basic economy as a means to compete alongside lower fares online, like car salespeople they upsell customers on higher classes of service. Unfortunately, Southwest’s Extra Legroom seats and Business Select product can’t compete with the Big Three’s premium cabins, meals, inflight entertainment, sleeper seats, airport lounges and ubiquitous domestic and international route maps.
Southwest built its brand by offering customers reliable service, guaranteed low fares, and no nickel-and-diming. One by one, these qualities have eroded. Perhaps a better strategy for its investors would be rebuilding the product itself rather than squeezing the last dollars from an already angry customer base. For now though, it seems that once again greed has been rewarded. Within hours of the bag fee announcement, LUV’s stock went up 8%. Isn’t that what flying is all about these days?
Become a member to join the discussion