Southwest Says Passengers Flee Bag Fees

The discount airline says passengers are switching to escape checked-bag fees at other carriers. Wall Street isn't convinced

By Justin Bachman

The $15 you fork over at the airport to check a suitcase helps a financially ailing airline's bottom line. Perhaps it persuades some families to drive instead. But can this $15—and the other fees airlines are piling on—be prompting passengers to switch airlines?

That, at least, is what some fee-less airlines are reading into September passenger traffic figures. All U.S. carriers aggressively pushed cheap fares this summer to fill seats. They largely succeeded, even if profits suffered. For much of the industry, traffic last month fell off, as vacations wound down and most legacy airlines cut seats from their networks. The bulk of U.S. airlines are likely to report losses for the summer, quarter while a few are expected to show small profits.

But there were a couple of notable outliers in the traffic data for last month: Southwest (LUV) and JetBlue (JBLU) saw outsize traffic gains. Southwest reported an 8.8% increase in revenue passenger miles (RPM), while JetBlue saw a 9.8% jump in passenger miles. (An RPM is a standardized industry metric of one paying passenger flown one mile.) Southwest's load factor, the percentage of seats that were filled, surged more than 11 percentage points from a year ago, to 74.7%—a stunning increase for a month in which schools reopen and summer vacation travels stop.

"That was an incredible load factor," says Stifel Nicolaus analyst Hunter Keay, considering that Southwest for years had September loads of 60% to 67%. JetBlue's load factor rose about one percentage point from the prior year, to 77.6%.

Southwest and JetBlue are also the most prominent airlines to eschew first-checked-bag fees.

Wall Street favors airline bag fees

"You're starting to see that connecting of the dots" between bag fees and traffic, contends Kevin Krone, Southwest's vice-president for marketing and sales. "That's something we're seeing here, and it's bolstering our resolve."

It's in Southwest's interest to make that connection: The airline has built its marketing strategy around its "Bags Fly Free" message, drawing a bit of a pounding from some Wall Street analysts who question why Southwest would forgo revenue others are collecting. (The company has imposed new fees in recent months, covering set assignments and pet travel.) Those questions may return on Oct. 15, when Southwest reports its third-quarter results.

Back-of-the-envelope math—the sort Krone says most analysts fail to look beyond—suggests Southwest is forgoing as much as $500 million per year by eschewing bag fees. "I do think when you're an airline our size, it's pretty easy to do the math pretty quick and say: 'Wow that's a lot of money,'" he says. "Unfortunately, I think that's where a lot of people stop."

The Dallas company says it has commissioned several comprehensive market studies that show the public has not accepted baggage fees, even as it pays them. Company officials also believe that passengers are still sorting out the idea that not every airline charges a fee for luggage, and they believe Southwest ultimately will benefit as public awareness spreads. "If [bag fees] were accepted, then I think we'd have to think really hard about it," Krone says. "But our research shows that people are upset by [fees]. It is emotional. It's hard to avoid it."

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