Southwest’s Stock Rises as Airline Reveals New Fees in Bid to Stay Competitive

Southwest Airlines (NYSE: LUV) has ended its decades-long free checked bag policy, implementing a $35 fee for the first checked bag starting May 28, 2025. This marks a significant departure from the airline’s “bags fly free” trademark slogan as the company faces pressure from activist investors to boost profitability and modernize its service model.

Southwest Abandons Iconic “Bags Fly Free” Policy

Southwest Airlines has officially ended its longstanding free checked bag policy, a cornerstone of its service model for nearly six decades. Beginning with flights booked on May 28, 2025, and thereafter, passengers will pay $35 for their first checked bag and $45 for the second piece of luggage.

However, customers who purchased tickets before Wednesday will still receive two free checked bags under the previous policy.

The airline has built extensive marketing campaigns around its trademarked “bags fly free” slogan, which executives had previously described as key to differentiating the budget carrier from its rivals. The policy change represents one of the most significant shifts in Southwest’s operational model since the company’s founding.

Several passenger categories remain exempt from the new charges, including A-List tier members of the Rapid Rewards loyalty program, holders of Southwest’s branded credit card, and those traveling on Business Select fares.

A-List preferred members and Business Select customers will continue receiving two free checked bags, while A-List members and select customers get one free checked bag. Credit card holders will receive a credit covering one checked bag fee.

Southwest’s new pricing aligns with industry standards, as Delta Air Lines (NYSE: DAL), American Airlines (NYSE: AAL), and United Airlines (NYSE: UAL) all charge between $35 to $40 for the first checked bag.

Other carriers like JetBlue Airways (NYSE: JBLU) and Frontier Airlines (NASDAQ: implement variable pricing based on factors such as online purchase timing and departure dates.

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Revenue Impact and Competitive Positioning

The implementation of baggage fees represents a substantial revenue opportunity for Southwest, which handles two to three times as many checked bags as other airlines due to its historically generous policy. Despite offering free checked bags, Southwest still collected $83 million in baggage fees during 2024 from charges on third bags ($150) and overweight luggage (up to $200), according to Department of Transportation statistics.

This figure pales in comparison to competitors’ baggage revenue streams. American Airlines collected $1.5 billion in baggage fees in 2024, while United Airlines pulled in $1.3 billion and Delta garnered $1 billion. The airline estimated in September 2024 that charging bag fees would generate approximately $1.5 billion annually, though it anticipated losing $1.8 billion in business from customers who previously chose Southwest specifically for its generous baggage allowance.

The fee structure change coincides with Southwest’s introduction of “basic economy” fares beginning Wednesday, replacing the famous “Wanna Get Away” fare. These low-priced tickets come with extensive restrictions and represent the airline’s effort to compete with ultra-low-cost carriers while generating additional ancillary revenue through fee-based services.

Activist Investor Pressure Drives Transformation at Southwest

Southwest’s policy changes stem from mounting pressure to boost profitability following activist investor Elliott Investment Management’s acquisition of a $1.9 billion stake in the carrier in 2024. The airline reached a truce with Elliott in October to avoid a proxy fight, but the hedge fund secured several seats on Southwest’s board of directors.

The baggage fee implementation represents just one element of Southwest’s broader operational transformation. The company previously announced it would abandon its open-seating policy in 2026, retrofitting planes with assigned seats that include premium options with extra legroom for additional charges. According to Southwest, open seating represents the primary reason passengers cite when switching from Southwest to competitors.

These changes reflect Southwest’s evolution from a low-cost carrier focused on operational simplicity to a more traditional airline model that generates revenue through ancillary services. The airline has also expanded its distribution channels, recently beginning to sell tickets through Expedia after traditionally limiting sales to its own website, aiming to attract more customers through broader market reach.

The transformation comes as Southwest faces financial pressures, having announced in February 2025 the elimination of 1,750 jobs, representing 15% of its corporate workforce in the first major layoffs in the company’s 53-year history.

The airline has also introduced additional service changes, including requirements for passengers to keep portable chargers in plain sight due to concerns about lithium-ion battery fires.

LUV Stock Gains Over 5% in Early Morning Trading

As of 11:12 AM EDT on May 27, 2025, Southwest Airlines stock (NYSE: LUV) was trading at $32.55, up $1.60 (+5.17%) with the market open. The stock showed strong upward momentum throughout the trading session, with the day’s range between $31.44 and $32.58, indicating investor approval of the revenue-generating policy changes.

Southwest’s stock performance reflects broader airline sector strength, with the company maintaining a market capitalization of $18.555 billion. The stock has demonstrated resilience over the past year with a 24.20% gain, though it remains down 2.58% year-to-date. Over longer periods, LUV has struggled with a 24.78% decline over three years, highlighting the importance of the current transformation strategy.

The airline’s financial metrics show both challenges and strengths, with a trailing P/E ratio of 34.78 and forward P/E of 23.81. Southwest maintains $8.25 billion in total cash against a debt-to-equity ratio of 85.37%, providing financial flexibility during its operational transition. However, the company reported negative levered free cash flow of $837.25 million, underscoring the urgency behind revenue-enhancement initiatives.

Analyst sentiment remains mixed, with price targets ranging from a low of $19.00 to a high of $40.00, averaging $29.42. The current trading level above the average target suggests market optimism about Southwest’s transformation strategy, with the baggage fee implementation serving as a tangible demonstration of management’s commitment to profitability improvements demanded by activist investors.

Disclaimer: The author does not hold or have a position in any securities discussed in the article. All stock prices were quoted at the time of writing.