Southwest’s Bag Fees and Other Changes Could Backfire, Fitch Warns
Dallas, April 3, 2025 – Southwest Airlines’ recent overhaul of its customer-friendly policies—including new checked bag fees, assigned seating, and a basic economy fare—may jeopardize its financial recovery and market position, according to a cautionary report from Fitch Ratings released Wednesday, April 2. The credit agency, while affirming Southwest’s BBB rating with a stable outlook, warned that the carrier’s shift away from its trademark “bags fly free” ethos and open seating could alienate loyal customers, increase operational chaos, and fail to deliver the projected $1.7 billion profit boost by 2026.
A Risky Rebrand
Southwest’s decision to end its 54-year policy of two free checked bags for most passengers, effective May 28, follows intense pressure from activist hedge fund Elliott Investment Management, which seized an 11% stake in 2024 and pushed for revenue-focused changes. Announced March 11, the airline will charge for the first and second checked bags—likely $35-$45 each, aligning with rivals Delta, United, and American—except for A-List Preferred members, Business Select travelers, and select credit card holders. The move, paired with last summer’s shift to assigned seating and a new “Basic” fare class with fewer perks, aims to lift earnings by $800 million this year alone.
Fitch, however, sees peril in this pivot. “Southwest risks losing its long-standing competitive edge tied to customer-friendly policies that drove loyalty,” the report states, noting that its historical 47-year profit streak—shattered by Covid in 2020—rested on a distinct identity. The agency points to a March 26 Airlines Confidential interview with EVP Justin Jones, who admitted bag fees could clog gates with carry-ons, delay flights, and strain operations. “The operational complexity could offset revenue gains,” Fitch warns, echoing fears of a repeat of the 2022 holiday meltdown that stranded 2 million passengers due to outdated IT.
Customer Backlash and Market Share
The backlash has been swift. Posts on X decry Southwest’s “betrayal,” with users lamenting, “They’re just another airline now,” and vowing to switch to Delta or United, which offer free Wi-Fi or better seats. A USA Today survey found loyalists like Maddi Bourgerie reconsidering their allegiance after years of choosing Southwest for its perks. Fitch highlights this sentiment, citing internal Southwest data from September 2024 that pegged a $1.8 billion market share loss from bag fees—outweighing the $1.5 billion revenue gain—though CEO Bob Jordan now claims newer booking trends justify the shift.
Rivals are pouncing. Delta’s Glen Hauenstein and United’s Scott Kirby, speaking at a JPMorgan conference, predicted Southwest’s “sacred cow” slaughter could send budget-conscious flyers their way. Frontier Airlines even launched a “free bag” promotion to lure defectors. “Competitors see an opening to capture Southwest’s base,” Fitch notes, projecting a potential 5-7% passenger drop if loyalty erodes.
Operational and Financial Strain
Fitch also flags operational risks. Southwest checks two to three times more bags than peers, per DOT stats—$73 million in fees in 2023 versus American’s $1.4 billion. Charging for bags may flood cabins with carry-ons, slowing boarding and prompting gate-checking chaos. Jones told Airlines Confidential the airline won’t heavily police bag sizes, risking further delays. Retrofitting Boeing 737s with bigger bins and equipping staff with mobile printers—steps Southwest outlined to CNBC—may not keep pace with demand, especially after 1,750 layoffs (15% of corporate staff) last month thinned resources.
Financially, the gamble is steep. Southwest’s $300 million bet hinges on retaining market share while boosting margins to 10% by 2027 from 2% in 2024. Fitch warns that Trump’s tariff wars—hitting steel, aluminum, and autos—could spike fuel and maintenance costs, squeezing profits further. A Tax Foundation model suggests a 0.4% U.S. GDP hit from tariffs, amplifying inflationary pressures Southwest can’t fully offset with fees.
A Brand at a Crossroads
Southwest’s stock jumped 8% post-announcement, but Fitch remains skeptical. “The near-term revenue lift may not outweigh long-term brand damage,” the report cautions, citing Harvard’s Frances Frei, who told CNBC the operational “harm” could be underestimated. With Elliott’s five board seats driving a Wall Street agenda—slashing what founder Herb Kelleher built—Southwest risks becoming a generic carrier, losing the “LUV” that defined it.
As May 28 nears, the airline faces a test: Can it adapt without unraveling? Fitch’s warning is clear—Southwest’s bold changes could backfire, turning a customer darling into just another fee-charging flyer, with delays and defections as the price. For now, the jury’s out, but the skies ahead look turbulent.
