With activist hedge fund Elliott Management in the pilot's seat at Southwest Airlines, the budget airline's popular "bags fly free" policy is under scrutiny.
If Paul Singer gets his way, the airline's popular "bags fly free" policy could end. This policy is a huge value proposition for customers when choosing a carrier to fly across the US.
According to Bloomberg...
"Elliott appears to have a different view, noting in a website presentation that Southwest has "written off" revenue opportunities implemented across the industry over the past 15 years, including assigned seating, premium products, a bare bones basic economy fare and checked bag fees."
Southwest's policy clearly stated on its website: "Each Customer is allowed two free checked bags."
Elliott is right to consider scrapping the policy to boost additional revenue for the struggling carrier, which recently withdrew its 2024 fiscal outlook due to delays in Boeing jet deliveries.
According to the US Transportation Department, in 2023, the airline only collected $73 million in checked bag fees, while American Airlines took in $1.4 billion. Spirit Airlines collected $988 million, and Frontier Group collected about $880 million.
Data from IdeaWorks and CarTrawler show that airlines globally collected $33.3 billion in baggage fees last year, up nearly 15% from 2023.
President of IdeaWorks, Jay Sorensen said if Southwest were to drop its "bags fly free" policy because of pressure from Elliot, that could trigger an exodus from loyal customers.
Sorensen said such a change could be "traumatic" to the airline's customers, culture, and employees.
Conor Cunningham, a Melius Research analyst, said the policy is "so ingrained in the culture" that he "can't imagine that they'd give up on it."
Southwest's "value proposition and something customers know they are getting when they travel with us," Cunningham said.
Henry Harteveldt, a travel industry analyst and founder of Atmosphere Research Group, said, "I don't think Southwest can dismiss not charging for bags anymore, not when you have an activist investor sitting on $1.9 billion of your stock."
In markets year-to-date, Southwest shares have broadly underperformed the S&P airline index.
"There are going to be decisions that Elliott may force on the airline, with Southwest holding its nose. You cannot ignore that shareholder," Harteveldt concluded.
