Southwest's Profits Dive: Could Checked Baggage Fees Be Coming?

For years, Southwest Airlines (LUV) has taken pride in being the only U.S. airline left that lets travelers check two bags for free. But in the wake of Thursday's first-quarter earnings report, in which the airline reported a 40% dip in profits and cited lower-than-expected passenger revenue for March, we're wondering if it might be reconsidering that stance.

The idea that Southwest would abandon its long-standing bag-fee policy isn't as crazy as it might sound. While Southwest and JetBlue (JBLU) have been the only domestic airlines not to jump unreservedly onto the baggage-fee bandwagon, Southwest has indicated in recent months that it could be wavering. In January, for instance, CEO Gary Kelly told CNBC that there were no plans to add fees in 2013, but added that he would "never say never."

"The customers will tell us whether they would prefer to have extra fees or whether they would prefer to have everything bundled," he told the network.

And with Southwest's profits starting to lag, it stands to reason that it may want to re-examine its business model. Fees have been a huge profit engine for the industry, with airlines making $3.4 billion on checked bags alone in 2011. If Southwest wanted to boost profits, charging for checked bags would be an obvious way to steer some extra cash in the coffers.

Of course, doing so would also run the risk of alienating its customers, many of whom have been attracted by the consumer-friendly no-fee policy. As such, industry analysts suspect that the airline will try to find other ways to gin up revenue.

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"Southwest may explore instituting some 'fees,' such as fees to change tickets, which could help it generate revenue," says Henry Harteveldt, an airline industry analyst at Hudson Crossing. "The airline may view these types of fees as more acceptable to consumers, and less damaging to its brand and reputation, than charging to check bags."

James Shillinglaw, editor-in-chief of industry trade publication Travel Pulse, agrees that such a move would do real damage to Southwest's brand.

"The dip in profits could lead Southwest to start charging for first bags," he says. "But the airline has spent so much money on marketing the fact that they don't charge for bags that I doubt they would do so at this point."

Still, it's worth noting that Southwest's marketing has begun to shift its emphasis away from the no-fee policy. The airline's latest ad campaign drops the "bags fly free" message, and shies away from attacking competitors for charging baggage fees. That, says the Los Angeles Times, suggests that Southwest could be changing its branding in preparation for eventually following its major domestic rivals. (JetBlue gives passengers one free checked bag.)

Southwest insists that isn't the case, with a spokesperson telling the Times, "We don't have a plan to charge for bags."

Maybe not for now. But we're guessing the airline is giving it some serious thought.

Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.


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