Southwest Airlines (LUV 1.62%) is making a number of moves designed to boost profitability, including abandoning its decades-long practice of not charging for checked bags.
Investors cheered the news, sending Southwest shares up 16% at the open and up 8% as of 10 a.m. Eastern.
Reversing course on bags
Southwest has always positioned itself as an outsider in the cutthroat airline industry, building its business by flying to underserved airports and offering customer-friendly policies that other airlines didn't match.
But as the airline has grown, it has found outperformance harder, and last year the company came under pressure from an activist investor. Southwest has responded with several policy changes designed to improve financial results, including initiatives announced Tuesday.
Southwest said it will offer free checking of bags only to upper tiers of its frequent-flier program, those who purchased business-class tickets, and those who have a Southwest credit card. The airline is also changing the way its frequent-flier program works, and said it will begin listing flights through online travel agencies.
"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.
NYSE: LUV
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Is Southwest Airlines a buy?
The move is not without risk, since Southwest for years has built its marketing campaign around its free-bags policy. At a September investor day, Jordan and other execs called the bags-fly-free policy "the most important feature" differentiating Southwest from rivals.
They also said that while charging for bags would add about $1.5 billion in annual revenue, it could cost the airline as much as $1.8 billion in lost business.
There are also macro headwinds on the horizon. Southwest warned that first-quarter revenue was likely to come in below previous guidance. Other carriers, including Delta Air Lines (DAL 0.01%), have also recently warned of slowing demand.
The latest moves were likely inevitable, but they are not without risk. Given all the uncertainty surrounding Southwest in particular and airlines in general right now, investors would be wise not to buy into this rally.
