Southwest Airlines risks losing customers over new bag policy, expert says

Southwest Airlines could lose a portion of leisure travelers to rivals with its latest decision to start charging for checked bags, according to an industry expert.

It was a policy – along with open seating – that helped the carrier differentiate itself from its competitors for over 50 years and appealed to a wide range of budget-conscious travelers. Southwest announced this week that it would only offer free checked bags to certain loyal and business class customers starting on May 28.

"While the idea of adding bag fees may work well on a spreadsheet, Southwest is at risk of losing share in the leisure travel market," Peter McNally, global head of sector analysts at Third Bridge, told FOX Business.

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The change came several months after the company warned that it would begin offering assigned seating and offering premium seating options on all flights, another move designed to boost profits by charging higher rates for premium seats across its entire network. 

Both moves highlight how the company's financial challenges have forced it to re-evaluate its approach. Southwest was also among several major U.S. airlines this week that dialed back their quarterly financial expectations as the industry contends with softer demand from economic uncertainty and other factors. 

With its latest change, Southwest could lose out to competition for longer-haul flights but not the entirety of its business.  

Southwest has many short-haul flights that cater to travelers who are typically going for a day or a one-night trip and don’t require checked luggage. For these types of quick trips, Southwest will continue to offer some of the most competitive fares in the market.

"The family of four that was flying to Orlando on Southwest now has more cost-competitive options, like American, when you add in the bag fees," McNally said.

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For instance, the "Big Three" airlines – Delta, American, and United – "have powerful loyalty programs that are making them more competitive in the U.S. leisure market while offering some premium options," McNally said.

Southwest also said this week that it plans to introduce a new basic fare for its lowest-priced tickets purchased on or after May 28 before it begins offering more premium seating with extra legroom for a higher fee. 

"While our experts do see the revenue opportunity from more premium options (e.g., extra legroom), those opportunities will take time to play out as cabins need to be reconfigured," McNally said, but "it's not the instantaneous revenue boost from saying, ‘We are now charging for those bags.’" 

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However, McNally said the basic economy fare will be fairly standard, as the airline won't be able to lower prices that much. 

"The low-cost end of the airline industry has found the lower bound on pricing. Spirit did go bankrupt, after all. Costs stepped up during the pandemic due to labor rates and have stayed there," he said, adding that these are contractual and won't change. 

Fuel costs have come down in the last few years, offering some relief, but the ability to offer extremely low fares is still limited. McNally said.