• Southwest could be pushing for more credit card sign-ups by offering cardholders a free checked bag.
• Experts say Southwest could draw more loyalty revenue but also lose some customers to competitors.
• Airlines cash in billions of dollars through their lucrative credit card partnerships.

Southwest Airlines did a complete 180 when it announced the end of its popular "two bags fly free" policy this month — officially undoing much of what made it unique among airlines.

Bags will now cost extra on most tickets, but two key groups will keep the perk: those with high status and people who hold the airline's Rapid Rewards credit cards.

Southwest likely hopes the lure of this freebie— despite the $69 to $149 annual fee for its personal credit cards — will garner more signups and, in turn, a boost in loyalty-related revenue.

In 2024, the program brought in some $2.2 billion, according to regulatory filings, making up about 8% of Southwest's total operating revenue.

It currently has $4.8 billion worth of points on its balance sheet, including those sold for its credit cards, that customers have not yet redeemed.

For years, loyalty programs have grown into a lucrative source of revenue for airlines. Carriers sell miles in bulk to credit card companies, which in turn offer them to customers when they make purchases. Airlines get a portion of the annual fees and a bonus when new users sign up for the co-branded card.

In many cases, they offer free or heavily discounted flights, airport lounge access, priority boarding, access to seat upgrades, and other perks.

With no lounges to dangle as carrots for sign-ups and only nascent plans for extra-legroom front-of-the-plane seats launching in 2026, a free bag is one of the few perks Southwest can offer to potential cardholders (in addition to coveted early-boarding spots and free assigned seats).

And as rising costs eat into airline profits as travel demand appears to be weakening, Southwest is likely chasing a bigger cut of the moneymaking credit card business and a chance to take more "wallet share," as some analysts call it.

Southwest declined to comment when asked about any future plans for its credit cards and potential benefits. But its social media team appeared to be ready to use the new policy to promote credit cards.

In a now-deleted comment on Instagram, Southwest responded to someone who suggested the first checked bag should be free. "Great idea! We'll do that… for our credit card holders," they said, according to screenshots posted online.

Southwest declined to comment about the comment's deletion.

Industry experts say people could flock to Southwest or jump ship

Bloomberg Intelligence analyst George Ferguson told BI that a free bag as a credit card perk could push people into the program and boost loyalty revenue.

"Southwest is becoming more like a full-service carrier," he said. "Part of the grow-up phase is to get a real loyalty program that's going to support the bottom line."

He added that the backlash about bags is likely to be short-lived since Southwest is just aligning itself with the norm of the US airline industry.

"You can complain all day long, but at the end of the day, it's not going to change the environment," he said. Southwest's stock has rallied since the announcement.

Henry Harteveldt, an aviation analyst at Atmosphere Research Group, told BI that Southwest is likely to extend its credit card benefits beyond free flight perks to further attract interest.

But he warned Southwest may struggle to compete against American, Delta, and United, which have more robust networks, premium cabins, and airport lounges.

"A traveler who may have been loyal to Southwest up until now may be more open to flying other airlines — and could sign up for those carriers' credit cards, if they feel they offer compelling value," he said.

Why credit cards are so lucrative to airlines

Airline credit cards can be as lucrative as a carrier's basic business of flying people from A to B.

Delta brought in $7.4 billion, or about 12% of its total operating revenue, through its partnership with American Express in 2024, according to filings. At American, the share was about 11%, and at United about 5%.

The airline loyalty system may seem counterintuitive. "Free" flight redemptions (which can be bought with points) suggest an airline lost potential revenue from that seat.

However, the miles were created out of essentially nothing — meaning the airline doesn't have to put up any actual assets — and the airline received real money from the bank.

Chasing status and points via a membership program or credit card creates loyalty to a brand, so people are more likely to book on a specific airline — further bringing in revenue.

"Having an airline credit card tends to make you a stickier customer," Raymond James analyst Savanthi Syth told BI.

Airlines also rely on customers forgetting about points earned through flying, meaning any potentially redeemed seat is put back into inventory once any accrued points vanish.

Airlines can control the value of their loyalty

Because points are essentially a controllable currency, airlines can change their loyalty systems to maximize their potential earnings.

Delta, for example, adjusted its SkyMiles program in 2023 to be based on dollars spent rather than miles flown. This made earning status more expensive.

Southwest's restructured program may similarly impact customers. Instead of saving their points for flights, loyalty members may find themselves spending them on seat upgrades, or checked bags that that were previously free.

Still, Southwest has one trick up its sleeve: its popular companion pass.

This allows customers to bring a buddy on every flight they take for free, paying only taxes and fees. It's one of the only airlines to offer such a wide-ranging companion pass.

Southwest's credit card promo through March 28 is offering the pass as part of a sign-on bonus — making the perk temporarily more attainable. The pass usually requires customers to earn 135,000 points or take 100 one-way flights in a single year.

Credit card spending and bonuses can help customers more quickly earn the popular companion pass — which offers among the best value in the industry — and potentially give Southwest a competitive edge over other carriers.

Only time will tell how the bet pays off.

• Frontier will offer free checked bags this summer to capitalize on Southwest's policy change.
• Southwest is ending its famous "two bags fly free" policy on May 28.
• Frontier is not the first airline to take a jab at Southwest amid the backlash.

One airline's loss is another one's gain.

Budget competitor Frontier Airlines announced on Tuesday that all nonstop flights departing between March 18 and August 18 will receive a free carry-on bag, seat selection, and flight changes.

Those between May 28 and August 18 will receive a free checked bag. Bookings must be complete by March 24.

Frontier's starting date for the free checked luggage is no coincidence — it's the exact same day Southwest Airlines will end its popular "two bags fly free" policy.

Southwest's 180-degree switch has left some customers reeling. The airline says the change is good for business as it tries to cut costs and boost revenue. Shares have rallied since the announcement.

Some loyal flyers online have said the move feels like a money grab. The only Southwest customers who will get a free checked bag are those with elite status or the company's co-branded credit card.

Clearly capitalizing on that discourse, Frontier suggested that Southwest customers should "file for divorce" and that Frontier would be the welcoming "rebound."

Frontier, which is going through its own overhaul to offer more premium perks, said it may even make the free bags permanent if enough people take advantage of the temporary deal.

"We've always had heart," Frontier CEO Barry Biffle said in a press release, alluding to Southwest's famous heart logo. "Some airlines are walking away from what travelers love, but we're running towards it."

Southwest did not immediately respond to a request for comment from Business Insider.

Southwest has more than just a Frontier problem

Fortunately for Southwest, Frontier's less comfortable seats and fee-heavy business model may cause some loyalists to hesitate to book the rival competitor.

Still, the "LUV" airline has another problem: keeping the mainline carriers from siphoning off customers.

Airline CEOs said at a JPMorgan conference on March 11 that Southwest's more price-sensitive customers may jump ship to other carriers.

"It will be a really big deal for Southwest," United CEO Scott Kirby said. "It would be good for everyone else."

Delta CEO Ed Bastian had a similar sentiment, saying Southwest's customers are now "up for grabs."

Aviation expert Harteveldt told Business Insider that Southwest simply isn't as appealing as rivals American Airlines, Delta, or United.

He said Southwest doesn't have as robust a domestic route network or offer premium cabins, airport lounges, or long-haul international flights.

"A traveler who may have been loyal to Southwest up until now may be more open to flying other airlines," he said.

• Southwest Airlines has axed virtually everything that once set it apart from competitors.
• The airline announced an end to its famous free checked bags policy on Tuesday.
• The change comes amid other measures to cut costs and increase revenue, like assigning seats.

The final shoe just dropped at Southwest Airlines.

Following intense pressure from an activist investor to shore up revenues and cut costs, Southwest announced on Tuesday that it would end its popular "two bags fly free" policy.

It's a 180-degree shift for Southwest, which found success in a unique business model for nearly 60 years with longtime hallmarks like free open seating, free bags, and a unique corporate culture.

Southwest has since abandoned virtually all of those famous policies and now largely resembles any other airline thanks to assigned seating, basic economy fares, premium seats available for purchase, and bag add-ons.

The changes will likely help boost revenues and, executives say, help Southwest regain its footing as it competes with more airlines than ever in a notoriously competitive industry. It also laid off 15%, or about 1,750, of its corporate staff in February, breaking a decadeslong streak without mass layoffs.

Taken together, all of the changes could spell trouble for Southwest as it aims to keep frequent flyers loyal to the "LUV" brand.

Executives once said the new bag policy was not an option

In July 2024, CEO Bob Jordan said that checked bags were the "No. 1 issue in terms of why customers choose Southwest." The company doubled down on its stance during a September Investor Day.

Former chief transformation officer Ryan Green, who will depart from the company in April, said at the time that Southwest would lose more money from lower demand than it would gain in checked bag revenue.

That's not how things played out.

"In contrast to our previous analysis, actual customer booking behavior through our new booking channels … did not show that we are getting the same benefit from our bundled offering with free bags," Jordan told investors on Tuesday at a conference hosted by JPMorgan.

Starting May 28, only customers with Southwest's credit card or those who hold "A-List" loyalty status will get one free bag.

Top-tier "A-List Preferred" members and customers who book the high-priced Business Select fare will get two free checked bags. It's unclear what the bag fees will look like for everyone else.

A checked bag on American Airlines, Delta Air Lines, and United Air Lines regular domestic tickets starts at $35. Prices vary depending on the bag size and weight.

"We've also benefited from the additional experience of leaders that have direct experience implementing bag fees at multiple airlines, and that's also helped further validate the new assumptions," Jordan said.

Virtually everything is changing at Southwest

The airline also announced basic economy fares that will be offered starting in May. These tickets typically come with strict restrictions on changes or refunds, for example, in exchange for a cheaper price.

According to Southwest, these fares will not be refundable, allow free changes, or offer same-day standby, but they will allow free cancellations.

Southwest is likely trying to better compete with low-cost rivals like Frontier Airlines and Spirit Airlines — both of which are also overhauling their cabins to stoke more demand.

If the price is right, Southwest's new coach fare could also poach customers from American, Delta, and United, which all offer their own versions of basic economy.

Flight credits for most fares will now expire in one year, Southwest said, while basic economy flight credits will expire after six months. These previously never expired.

Other previously announced changes have already taken effect or will also take effect soon:

• Southwest flights are now available to search on sites like Google Flights, Kayak, and Expedia.
• Red-eye flights launched in February, allowing Southwest to better utilize its fleet of planes.
• A partnership with Icelandair now allows Southwest passengers to connect to Europe on a single ticket for the first time.
• Premium seats, including those at the front of the plane and with extra legroom, will launch in 2026. This could help Southwest attract more business and high-paying leisure travelers.
• Assigned seats will launch in 2026. The airline said that 80% of customers surveyed said they preferred assigned seating.

The company's unique boarding system, where most passengers board based on check-in time, remains unchanged — for now. Customers can still pay to upgrade their boarding position.

Southwest also remains one of a shrinking number of airlines to offer a companion pass with some of the most valuable benefits.

• Southwest Airlines is set to charge passengers to check bags for the first time.
• The new policy takes effect from May 28, and is the latest fundraising move from the airline.
• As recently as September 2024, the airline said it wouldn't make customers pay for checked bags.

Southwest Airlines announced Tuesday that it will start charging passengers to check bags for the first time.

The offer of checking two bags for free has long been a popular foundation for the airline. "Two bags fly free" is listed as a registered trademark on Southwest's website.

But from May 28, passengers who aren't part of a loyalty program or traveling on its most expensive fare, Business Select, will have to pay to check a bag.

Frequent flyers with "A-List Preferred" status will still get two bags, while A-List level members and Southwest credit card holders will get one free checked bag.

The airline said the move was intended to "deepen and reward loyalty" for its "most engaged customers."

It added that it would also introduce a basic economy fare, with additional options for assigned seating and extra legroom.

Charging for luggage is the latest move in the budget carrier's shake-up of its business model — as it has faced pressure from the activist investing firm Elliott Management. Just six months ago, the airline said it would not start charging for bags.

Last July, Southwest ended its long-standing open-seating model, which allowed passengers to choose their seats upon boarding. It also announced plans to let customers pay for seats with extra legroom.

But "two bags fly free" appeared to be an untouchable perk.

In an earnings call the same month, CEO Bob Jordan told analysts the airline wasn't planning "at this point" to start charging for checked bags.

"After fare and schedule, bags fly free is cited as the No. 1 issue in terms of why customers choose Southwest," he added.

The airline also stood firm on the policy as it outlined a three-year plan last September.

It said research showed this set Southwest apart from its competition, and removing it would reduce demand and "far outweigh any revenue gains created by imposing and collecting bag fees."

Like its previous moves, introducing checked bag fees brings Southwest in line with its competitors.

According to the Bureau of Transportation Statistics, US airlines made $5.5 billion from baggage fees in the first three quarters of 2024.