Southwest Airlines will charge for checked bags for first time

It is occurring: Southwest Airways will begin charging passengers to test baggage for the primary time.

It is a gorgeous reversal that exhibits the low-cost pioneer is keen to half with a buyer perk executives have mentioned set it other than rivals in additional than half a century of flying in hopes of accelerating income.

Southwest’s modifications come after months of strain from activist Elliott Funding Administration. The agency took a stake within the airline final yr and received 5 board seats because it pushed for fast modifications on the firm, which held on for many years — till now — to perks like free checked baggage, changeable tickets and open seating.

For tickets bought on or after Might 28, Southwest prospects in all however the top-tier fare class should pay to test baggage, although there shall be exceptions. Elite frequent flyers who maintain “A-Listing Most popular” standing will nonetheless get two baggage and A-Listing degree members will get one free checked bag. Southwest bank card holders will even get one free checked bag.

“Two baggage fly free” is a registered trademark on Southwest’s web site. However its resolution to about-face on what executives lengthy solid as a sacrosanct passenger perk brings the most important U.S. home service in step with its rivals, which collectively generated greater than $5 billion from bag charges final yr, based on federal information.

Southwest did not say how a lot it plans to cost to test baggage nevertheless it a single bag prices $35 to test on Delta, American and United.

Southwest shares have been up about 9% in morning buying and selling Tuesday after its baggage-fee announcement and investor replace.

Southwest executives have lengthy mentioned they did not plan to cost for baggage, telling Wall Road analysts that it was a significant cause why prospects selected the airline.

At an investor day in September, Southwest mentioned that it will achieve between $1 billion and $1.5 billion from charging for baggage however lose $1.8 billion of market share. Southwest mentioned its “rigorous analysis” discovered that “our ‘baggage fly free’ coverage generates market share features in extra of potential misplaced income from bag charges,” the corporate mentioned in a presentation tied to its investor day.

Some airline executives see a possibility.

“I believe clearly, there are some prospects who [chose Southwest] due to that, and now these prospects are up for grabs,” Delta Air Strains president Glen Hauenstein mentioned at an investor convention on Tuesday, after Southwest’ announcement.  “We’ll see how that performs out over the following time frame as they proceed to implement a number of modifications to their merchandise.”

Southwest CEO Bob Jordan had cited the corporate’s bag coverage in an earnings name final July.

“After fare and schedule, baggage fly free is cited because the No. 1 situation by way of why prospects select Southwest,” Jordan mentioned.

However Southwest has modified its tune.

“What’s modified is that we have come to comprehend that we want extra income to cowl our prices,” COO Andrew Watterson mentioned in an interview with CNBC in regards to the baggage price modifications. “We predict that these modifications that we’re saying at this time will result in much less of that share shift than would have been the case in any other case.”

In September, Southwest’s then chief transformation officer, Ryan Inexperienced, informed analysts that an evaluation confirmed Southwest would lose more cash from passengers defecting to rivals if it began charging for baggage than it will make from the charges.

“The truth that free baggage is a key driver of selection creates the chance that prospects might select the competitors if we alter the coverage,” he mentioned.

Southwest mentioned final month that it had parted methods with Inexperienced.

The service is now attempting to develop its industrial attain, itemizing its tickets by outdoors platforms like Google Flights and Expedia.

The airline additionally mentioned Tuesday that it’ll launch a brand new, primary financial system fare, one thing rivals have provided for years.

Southwest, as well as, will change the way in which prospects earn Speedy Rewards: Clients will earn extra of the frequent flyer miles relying on how a lot they pay. Redemption charges will differ relying on flight demand, a dynamic pricing mannequin opponents use.

And flight credit for tickets bought on or after Might 28 will expire in a single yr, or earlier, relying on the kind of fare bought.

It is the newest in a string of large technique modifications at Southwest as its efficiency has fallen behind rivals.

Final July, Southwest shocked passengers when it introduced it will ditch its open seating mannequin for assigned seats and add “premium” further legroom choices, ending a long time of an single-class cabin.

The airline can be trying to slash its prices. Increased bills popping out of the pandemic have taken a chunk out of airline margins.

Final month, Southwest introduced its first mass layoff, slicing about 1,750 jobs roughly 15% of its company workers, a lot of them at its headquarters, a call CEO Jordan referred to as “unprecedented” within the service’s greater than 53 years of flying.

“We’re at a pivotal second as we remodel Southwest Airways right into a leaner, quicker, and extra agile group,” he mentioned final month.

Earlier this yr, Southwest introduced the retirement of its longtime finance chief, Tammy Romo, who was changed by Breeze govt Tom Doxey, and its chief administrative officer, Linda Rutherford. Each executives labored at Southwest for greater than 30 years.

Southwest has additionally lower unprofitable routes, summer time internships and worker team-building occasions its held for many years.