The real reason Southwest is charging for bags now

Yahoo

18-03-2025

Southwest could be pushing for more credit card sign-ups by offering cardholders a free checked bag.
Experts say Southwest could draw more loyalty revenue but also lose some customers to competitors.
Airlines cash in billions of dollars through their lucrative credit card partnerships.
Southwest Airlines did a complete 180 when it announced the end of its popular "two bags fly free" policy this month — officially undoing much of what made it unique among airlines.
Bags will now cost extra on most tickets, but two key groups will keep the perk: those with high status and people who hold the airline's Rapid Rewards credit cards.
Southwest likely hopes the lure of this freebie— despite the $69 to $149 annual fee for its personal credit cards — will garner more signups and, in turn, a boost in loyalty-related revenue.
In 2024, the program brought in some $2.2 billion, according to regulatory filings, making up about 8% of Southwest's total operating revenue.
It currently has $4.8 billion worth of points on its balance sheet, including those sold for its credit cards, that customers have not yet redeemed.
For years, loyalty programs have grown into a lucrative source of revenue for airlines. Carriers sell miles in bulk to credit card companies, which in turn offer them to customers when they make purchases. Airlines get a portion of the annual fees and a bonus when new users sign up for the co-branded card.
In many cases, they offer free or heavily discounted flights, airport lounge access, priority boarding, access to seat upgrades, and other perks.
With no lounges to dangle as carrots for sign-ups and only nascent plans for extra-legroom front-of-the-plane seats launching in 2026, a free bag is one of the few perks Southwest can offer to potential cardholders (in addition to coveted early-boarding spots and free assigned seats).
And as rising costs eat into airline profits as travel demand appears to be weakening, Southwest is likely chasing a bigger cut of the moneymaking credit card business and a chance to take more "wallet share," as some analysts call it.
Southwest declined to comment when asked about any future plans for its credit cards and potential benefits. But its social media team appeared to be ready to use the new policy to promote credit cards.
In a now-deleted comment on Instagram, Southwest responded to someone who suggested the first checked bag should be free. "Great idea! We'll do that… for our credit card holders," they said, according to screenshots posted online.
Southwest declined to comment about the comment's deletion.
Bloomberg Intelligence analyst George Ferguson told BI that a free bag as a credit card perk could push people into the program and boost loyalty revenue.
"Southwest is becoming more like a full-service carrier," he said. "Part of the grow-up phase is to get a real loyalty program that's going to support the bottom line."
He added that the backlash about bags is likely to be short-lived since Southwest is just aligning itself with the norm of the US airline industry.
"You can complain all day long, but at the end of the day, it's not going to change the environment," he said. Southwest's stock has rallied since the announcement.
Henry Harteveldt, an aviation analyst at Atmosphere Research Group, told BI that Southwest is likely to extend its credit card benefits beyond free flight perks to further attract interest.
But he warned Southwest may struggle to compete against American, Delta, and United, which have more robust networks, premium cabins, and airport lounges.
"A traveler who may have been loyal to Southwest up until now may be more open to flying other airlines — and could sign up for those carriers' credit cards, if they feel they offer compelling value," he said.
Airline credit cards can be as lucrative as a carrier's basic business of flying people from A to B.
Delta brought in $7.4 billion, or about 12% of its total operating revenue, through its partnership with American Express in 2024, according to filings. At American, the share was about 11%, and at United about 5%.
The airline loyalty system may seem counterintuitive. "Free" flight redemptions (which can be bought with points) suggest an airline lost potential revenue from that seat.
However, the miles were created out of essentially nothing — meaning the airline doesn't have to put up any actual assets — and the airline received real money from the bank.
Chasing status and points via a membership program or credit card creates loyalty to a brand, so people are more likely to book on a specific airline — further bringing in revenue.
"Having an airline credit card tends to make you a stickier customer," Raymond James analyst Savanthi Syth told BI.
Airlines also rely on customers forgetting about points earned through flying, meaning any potentially redeemed seat is put back into inventory once any accrued points vanish.
Because points are essentially a controllable currency, airlines can change their loyalty systems to maximize their potential earnings.
Delta, for example, adjusted its SkyMiles program in 2023 to be based on dollars spent rather than miles flown. This made earning status more expensive.
Southwest's restructured program may similarly impact customers. Instead of saving their points for flights, loyalty members may find themselves spending them on seat upgrades, or checked bags that that were previously free.
Still, Southwest has one trick up its sleeve: its popular companion pass.
This allows customers to bring a buddy on every flight they take for free, paying only taxes and fees. It's one of the only airlines to offer such a wide-ranging companion pass.
Southwest's credit card promo through March 28 is offering the pass as part of a sign-on bonus — making the perk temporarily more attainable. The pass usually requires customers to earn 135,000 points or take 100 one-way flights in a single year.
Credit card spending and bonuses can help customers more quickly earn the popular companion pass — which offers among the best value in the industry — and potentially give Southwest a competitive edge over other carriers.
Only time will tell how the bet pays off.
Read the original article on Business Insider