Southwest Airlines keeping free checked bags policy amid major changes
DALLAS – Leaders of Southwest Airlines explained Thursday how they plan to remodel the airline to change with consumer tastes, as they seek to reverse shrinking profits and slumping stock price.
CEO Bob Jordan and other executives gave a presentation at an investor meeting in Dallas about dumping so-called open seating, charging a premium for the best seats, launching red-eye flights and more.
One key feature leadership does not plan to change is charging for checked bags. In documents outlining Thursday's presentation filed with the SEC ahead of Thursday's meeting, the Dallas-based airline said the costs would outweigh the benefits after the company has spent decades building its brand around not charging for luggage.
Customers are currently allowed two free checked bags, up to 50 pounds each.
Southwest estimates it could bring in as much as $1.5 billion in additional revenue every year if it charged passengers to check bags, but doing so would cost $1.8 billion in lost market share, as the airline would lose one of its main differentiators with its competitors.
"It was very clear," Jordan said. "Our customers put very high value on bags fly free. It's very well known, and the revenue trade wasn't positive either."
One policy that is changing, however, is related to seating. Passengers will be able to choose assigned seats in the second half of 2025 and launch flights under the new model in the first half of 2026. A third of seats on its flights will be reserved for passengers who would pay a premium to get up to five extra inches of legroom.
The presentation documents say that 80% of Southwest flyers would prefer assigned seats, and the open seating policy is the No. 1 reason that passengers do not return.
"When you have 800 aircraft to retrofit, we have technology work to do," Jordan said. " I think it's moving very quickly. At the same time, there's a lot of risk if you do this poorly. I mean, think of waking up, and you can't change your seat at the gate, those kinds of things on the day of implementation."
The airline expects the changes to boost annual revenue by $1.5 billion by 2027, according to the presentation documents.
Adding the new offerings means Southwest will be overhauling the interiors of its fleet of Boeing 737s. New seats will have a new look, adjustable headrests and personal device holders, the presentation says. Fifty to 100 planes will be retrofitted each month starting early next year.
Southwest is also adding red-eye flights to its schedule and reducing the time between flights, known as "turn," to use its planes more efficiently. The changes would amount to freeing up 18 planes next year, the airline is expected to tell shareholders.
Another change passengers will feel: Service will be reduced at some underperforming airports, including Atlanta and Oakland. Last month, the airline pulled out of four airports, including Bush Intercontinental in Houston.
The changes could result in an airline that bears little resemblance to Southwest over the last 50 years — a carrier that still has a core of rabid fans. Southwest has been contemplating an overhaul for months, but the push for radical change became even more important to management over the summer when Elliott Investment Management targeted the company for its dismal stock performance since early 2021.
Before Thursday's event started, Southwest announced a $2.5 billion share-buyback program designed to make existing shares more valuable. It also said that a third-quarter revenue ratio will rise by up to 3% instead of being between flat and down 2%. Shares of the company's stock rose by as much as 8%, and finished the day up about 5%.
Elliott now owns more than 10% of Southwest shares and is the airline's second-biggest shareholder. The hedge fund wants to fire Chairman Gary Kelly and CEO Robert Jordan and replace two-thirds of Southwest's board. Elliott has a slate of 10 director candidates, including former airline CEOs.
Southwest gave ground this month, when it announced that six directors will leave in November and Kelly will step down next year. The airline is digging in to protect Jordan, however. In a letter announcing his planned retirement earlier this month, Kelly praised Jordan's tenure as CEO and said a leadership change during "Southwest's largest transformation to date is simply a risk that the Company and its Shareholders do not need and cannot afford."
A new addition to the board of directors came on Thursday morning. The company announced longtime airline executive Robert Fornaro was appointed to the board of directors. His resume includes stints as president and CEO of Spirit Airlines from 2016-2018, and AirTrain, until it was acquired by Southwest in 2011.
