By AP|
American company Southwest Airlines will begin charging customers a fee to check bags, abandoning a decades-long practice that executives had described last fall as key to differentiating the budget carrier from its rivals.
Southwest, which built years of advertising campaigns around its policy of letting passengers check up to two bags for free, said on Tuesday that people who haven't either reached the upper tiers of its Rapid Rewards loyalty program, bought a business class ticket, or hold the airline's credit card will have to pay for checked bags.
The airline did not outline the fee schedule but said the new policy would start with flights booked on May 28.
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“We have tremendous opportunity to meet current and future customer needs, attract new customer segments we don’t compete for today, and return to the levels of profitability that both we and our shareholders expect,” CEO Bob Jordan said in a statement.
Less than a year ago, the Dallas-based airline announced it was doing away with another tradition, the open-boarding system it has used for more than 50 years.
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Southwest expects to begin operating flights with passengers in assigned seats next year.
Southwest has struggled recently and is under pressure from activist investors to boost profits and revenue.
The airline reached a truce in October with hedge fund Elliott Investment Management to avoid a proxy fight, but Elliott won several seats on the company board.
The airline announced last month that it was eliminating 1750 jobs, or 15 per cent of its corporate workforce, in the first major layoffs in the company’s 53-year history.
The job cuts, which were scheduled to be mostly completed by the end of June, are part of a plan to slash costs and transform the company into a “leaner, faster, and more agile organization,” Jordan said at the time.
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Southwest’s stock rose more than nine per cent on Tuesday.
As recently as Southwest's investor day in late September, airline executives described the bags-fly-free as the most important feature in setting Southwest apart from rivals.
All other leading US airlines charge for checked luggage, and Wall Street has long argued that Southwest was leaving money behind.
The airline estimated in September that charging bag fees would bring in about $2.3 billion a year but cost the airline $2.8 billion in lost business from customers who chose to fly Southwest because of its generous baggage allowance.
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Southwest said on Tuesday that it would continue to offer two free checked bags to Rapid Rewards A-List preferred members and customers traveling on Business Select fares, and one free checked bag to A-List members and other select customers.
Passengers with Rapid Rewards credit cards will receive a credit for one checked bag.
People who don't qualify for those categories will get charged to check bags.
The airline said that it also would roll out a new, basic fare on its lowest priced tickets when the change takes effect.
“I would rather have the free checked bags, that’s for sure," said customer Dorothy Severson, who was awaiting a flight on Tuesday at Chicago Midway International Airport.
"It’s one of the main reasons I still fly Southwest.”
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Southwest is betting that the added bag fees will outweigh the loss of business from travellers who look closely at the costs on top of ticket prices.
Rivals on Tuesday saw an opening.
“I think clearly there are some customers who chose them because of that, and now those customers are up for grabs,” said Delta Airlines President Glen Hauenstein, speaking at the JP Morgan Industrials Conference.
Yet in the current economic environment, keeping travel affordable may play an outsized roll in staying competitive.
The trade war initiated by President Donald Trump is roiling US markets and dampening the high-flying optimism prevalent last year among businesses and households.
To start the week, Delta slashed its quarterly earnings and revenue expectations, saying that a recent decline in consumer and corporate confidence over the economy is weakening domestic demand. Shares of Delta have tumbled 24 per cent this year.
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Shares of United have slumped 22 per cent, JetBlue per cent and American Airlines a whopping 32 per cent.
On Tuesday, Southwest cut its own expectations for the quarter. The airline now anticipates revenue per available seat mile will rise between two per cent and four per cent.
That is down sharply from its previous projections of a five per cent to seven per cent increase.
The airline said it expects capacity to be down about two per cent.
The airline announced last year that along with giving passengers assigned seats, it would charge them extra for with more legroom and offer red-eye flights.
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