- Southwest Airlines (LUV) will begin charging for checked bags for most passengers, ending its long-standing free bag policy, while introducing basic economy tickets, aligning with industry norms under pressure from activist investor Elliott to boost revenue.
- The airline also slashed its first-quarter revenue forecast to a 2% to 4% increase from 5% to 7%, mirroring downward revisions by competitors like American Airlines (AAL) and Delta (DAL), amid a shift toward premium flying trends.
CNBC’s Phil LeBeau joined ‘Squawk Box’ this morning to discuss the latest developments in the airline industry, with a particular focus on Southwest Airlines’ decision to charge for checked bags for the first time in its history and introduce basic economy tickets. LeBeau began by referencing the JPMorgan (JPM) conference taking place that day, noting that several airlines, including American Airlines (AAL) and Southwest (LUV), had released updated financial guidance. American Airlines announced it was slashing its first-quarter expectations, now anticipating flat revenue compared to an earlier projection of a 3% to 5% increase. The airline also widened its expected loss per share from a range of $0.20 to $0.40 to a larger deficit of $0.60 to $0.80, aligning with a similar downward revision from Delta (DAL) the previous day.
Turning to Southwest Airlines, LeBeau highlighted a parallel story of reduced revenue expectations. Southwest now projects its first-quarter revenue to rise by 2% to 4%, down from an earlier forecast of 5% to 7%. However, the bigger news came with the airline’s decision to end its long-standing policy of free checked bags. LeBeau clarified that this change will not affect all passengers: those in the top-tier Business Select category or on the A-List in Southwest’s Rapid Rewards program will still receive one or two free checked bags. For the average traveler, though, checking bags will now come with a fee, marking a significant shift in Southwest’s business model.
The moderators interjected, pointing out that other major airlines like American, Delta, and JetBlue (JBLU) already charge for checked bags on their cheapest fares, suggesting Southwest’s move brings it in line with industry norms. LeBeau agreed, recalling how Southwest’s founder, Herb Kelleher, once adamantly opposed such fees, a stance echoed by former CEO Gary Kelly and maintained by current CEO Bob Jordan until recently. He attributed the policy shift to pressure from activist investor Elliott, which emphasized the billions of dollars in potential revenue Southwest was leaving on the table by not charging for bags. LeBeau noted that this change reflects broader industry trends toward premium flying, where airlines are increasingly capitalizing on passengers willing to pay more for enhanced services.
The discussion took an interesting turn when one of the moderators suggested an alternative approach: charging passengers to bring carry-on bags onto the plane instead of checking them, arguing that this could speed up boarding and reduce in-flight conflicts. The moderator proposed letting checked bags fly free to incentivize passengers to avoid clogging the cabin, thereby streamlining operations and addressing delays. LeBeau acknowledged the idea but pointed out that no airline has yet figured out how to implement such a system effectively. LeBeau’s coverage clearly underscores a pivotal moment for Southwest as it adapts to competitive pressures and evolving passenger expectations in a rapidly changing industry landscape.
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