Southwest CEO says changes like charging for seat bookings and checked bags will make it over $4 billion next year
Kevin Carter/Getty Images
- Southwest Airlines is overhauling its business model, getting rid of its signature "Two bags fly free."
- The host of changes is expected to generate $4.3 billion, said CEO Bob Jordan.
- Wall Street is encouraged by the moves, with Deutsche Bank analysts upgrading their rating.
Southwest Airlines expects to make over $4 billion from the array of changes it's introducing.
That includes scrapping its signature policies of unassigned seating and the trademarked "Two bags fly free."
At the Bernstein Strategic Decisions Conference on Thursday, CEO Bob Jordan said the airline expects an incremental EBIT contribution of $4.3 billion in 2026.
"It's hugely impactful to the business and to our margins," he added.
On Wednesday, Southwest started charging $35 for a first checked bag and $45 for a second one, although all loyalty members and credit card holders can get one for free.
"Bag fees, credit exploration, [and] changes to the loyalty program" are expected to contribute $800 million, Jordan said.
While changing the seating system is still "months away," it is expected to generate another $1.5 billion in 2026.
Introducing assigned seating is designed to encourage passengers to pay to choose their seat and for premium options like extra legroom.
"85% of the customers who won't choose us want assigned seating," Jordan said, adding it is also the biggest reason they don't fly with Southwest.
The other $2 billion is split between cost-cutting measures and "base business changes," such as improving the airline's revenue management system.
Budget airlines like Southwest have seen their profits tumble since the pandemic.
Increased fuel and labor costs, plus domestic overcapacity, have made it harder to fill planes, while fliers are more interested in paying for premium options.
As Jordan said on Thursday: "Let's answer the question of what do customers want? And they want segmentation of the cabin. They want a variety of product offerings. They want access to premium."
Southwest has also faced pressure from the activist firm Elliott Investment Management.
The new changes seem to be encouraging Wall Street. Southwest's share price has risen over 20% in the past month.
Deutsche Bank analysts upgraded the stock from a Hold rating to a Buy on Thursday.
"Southwest is in the middle of the largest transformation in company history and we are confident that its new board and management team will execute its transformation plan with considerable success," they wrote in a report.