Analyst: Southwest Missing Out on $800 Million in Bag Fees

Southwest CEO Gary Kelly is steadfast in his conviction that Southwest’s no-checked-bag-fee policy is the right one for the airline. However, he has recently suggested he would consider adding fees if it was “the right thing to do for Southwest and its customers.”

Well, from a financial standpoint, it seems adding a checked-bag fee would not only be the right thing for the airline, but a no-brainer at that.

The Airline Biz blog reports that one analyst thinks Southwest is leaving nearly a billion dollars in annual revenue—$825 million, to be exact— on the table. “We see no net competitive advantage to ‘Bags Fly Free,'” writes Bob McAdoo, who analyzes the airline industry for Avondale Partners. Now, here comes the scary part: McAdoo writes, “Given some of [Southwest’s] comments, we believe this program could end in coming months.”

I can’t pretend to know what Southwest’s future plans are, but let’s break this down a little. First, as one commenter at the Airline Biz blog notes, the $825 million estimate is likely a bit off. To get that number, McAdoo simply multiplied the probable number of checked bags Southwest will process this year (55 million) by the standard first-bag fee of $15. Voila: $825 million. But most airlines exempt certain passengers from the fee, often frequent flyers or customers on full-fare tickets. But McAdoo also points out that “with less bags checked, airlines see less bags lost or misconnected and thus operating costs decline as well.” This would likely more than make up for any deviation in the revenue projection.

But no matter how you slice it, we’re still talking about several hundred million dollars per year in unrealized revenue for an airline dealing with its first real financial rough patch. Is that simply too much money for Southwest to ignore, even though bag fees would almost certainly tick off Southwest’s legions of loyal customers? McAdoo thinks so, saying the fees could “quadruple” Southwest’s earnings, and even suggests the risk of losing passengers is minimal: “Customers who might jump ship generally only have airlines with bag fees as the alternative.”

Well, then!

So while we’ll have to wait and see what Southwest does, I want your take on this. We have a lot of Southwest fans here at SmarterTravel, but how would you feel if Southwest added bag fees? Would the airline become just another carrier? Leave a comment below, and thanks!