By Rajesh Kumar Singh
CHICAGO (Reuters) – Southwest Airlines (LUV) cut its unit revenue growth forecast on Tuesday, citing weaker discretionary spending amid tariff pressures and government spending uncertainties affecting domestic travel. The carrier now expects first-quarter unit revenue growth of 2% to 4%, down from its previous estimate of 5% to 7%.
The group also announced plans to start charging some customers for checked bags, ending its long-standing free policy as it looks to boost earnings.
The move marks another shift from Southwest’s passenger-friendly approach. Last year, the airline said it would end open seating, a key part of its brand for over 50 years.
Its “bags fly free” policy has been an outlier in the airline industry. Southwest is the only major U.S. carrier that allows customers to check two bags at no cost, a strategy that company executives have said differentiates it from rivals.
But the policy would change on May 28 as lackluster earnings have fueled pressure to revamp its business model. CEO Bob Jordan has set a goal to lift Southwest’s operating margin to at least 10% in 2027 from 2% last year – a standard investors had come to expect from the airline before the pandemic.
The policy shift suggests a growing influence of activist investor Elliott Investment Management at the airline. The hedge fund, whose nominees hold five of 15 board seats, had criticized Southwest’s leadership for not charging a fee for checking bags like other airlines to boost its revenue.
Under the new policy, the airline will continue to offer two free checked bags to loyal customers with the highest status, A-List Preferred, and passengers who pay the most premium fare.
Customers with lower loyalty status, A-List, will get one free checked bag. The carrier will credit one checked bag for passengers who hold its co-branded credit card.
Those who do not qualify for its free bag options will be charged for their first and second checked bags.
Southwest said the changes are aimed at rewarding its most loyal customers and shoring up profits.
The new bag policy comes weeks after the airline carried out the first company-wide layoffs in its nearly 54-year history.
Baggage fees produced more than $7 billion in revenue in 2023 for major U.S. airlines, but Southwest generated just $73.4 million, according to the Bureau of Transportation Statistics.
Until now, the airline had been resisting investor pressure to start charging for bags, saying its data showed that a no-bag fee policy was the number one reason customers chose it.
