Bags No Longer Fly Free: Southwest’s Strategic Gamble

This Week’ Focus: Southwest Ends Free Checked Bags

Southwest Airlines announced an end to its long-standing policy of free checked bags—a move signaling a significant shift in strategy. The airline's pioneering approach to customer service for years has left a lasting imprint on its identity, making the execution of this strategy crucial in the effort to mitigate any long-lasting negative impact. As Southwest retracts this core benefit, how will the airline redefine its brand without risking customer loyalty? This week, we explore the reasons behind Southwest's initial decision to let bags fly free, the factors prompting the current change, and the complexities that surface when a brand decides to move away from its core identity.

Earlier this week, Southwest announced that they will begin charging checked bags.

The end of an era, no less.

Long time readers of this newsletter know that this is a topic I’ve been following for many years (15 to be exact).

I wrote my first post while still at Kellogg, commenting on Ryanair’s decision to charge for luggage and considering charging to use the lavatories, which triggered a paper that Marty Lariviere, Achal Bassamboo, and I worked on—code named Φ2P.

Our point was to show it makes sense for airlines to charge for ancillary services when the decisions of certain passengers inflict costs on others. We also tried to explain why Southwest was the only airline to resist bag fees.

But now that the other shoe has finally dropped, Southwest has joined the crowd, and customers are anything but happy:

“The move, announced Tuesday, is triggering strong reactions from travelers on social media, with some even threatening to stop flying with Southwest if they can no longer receive free checked bags.

‘Call it what you will — boycott, mass exodus, defecting. Can we do that in a massive wave right now?’ one person wrote in a Southwest Reddit thread. ‘Nail in the coffin,’ another person wrote. ‘This was literally the last reason I still flew Southwest. Now it’s just Spirit with different colors,’ another user commented in a different thread.”

In today’s article we attempt to explain why Southwest had then made the right choice to let bags fly free and why it’s changing course now, and explore the complexities that arise when brand promises diverge from operational realities.

Let’s (nose) dive in.

Why Southwest Continued the Free Bag Policy During its Early Growth Phase

The best firms are those where marketing and operations are fully aligned, i.e., when brand identity is fully supported by operations. And for many years, Southwest exhibited exactly that.

Marketing Differentiation and Loyalty: Southwest leveraged its free checked baggage policy as a key differentiator to build customer loyalty and brand equity.

In 2008–2009, as most U.S. carriers introduced baggage fees, Southwest famously bucked the trend. It launched its “Bags Fly Free” campaign (tagline: “Grab your bag, it’s on!”), turning its no-fee stance into a marketing asset. This move helped Southwest stand out against competitors and appeal to cost-conscious travelers frustrated by the new fees.

By refusing to “nickel-and-dime” on baggage, Southwest cultivated goodwill and customer trust. Indeed, company executives long claimed that free bags were a top reason customers chose Southwest. The policy reinforced Southwest’s “customer-friendly” brand image and likely contributed to its high customer satisfaction rankings and loyal following. In effect, free bags served as a quasi-loyalty program, attracting travelers who valued transparent pricing.

Operational Simplicity and Efficiency: Maintaining free checked bags also conferred operational benefits, especially in Southwest’s early growth phase. Southwest’s low-fare business model historically relied on quick airport turnarounds and high aircraft utilization. Industry studies confirm that baggage fees can slow operations: when airlines charge for checked bags, more passengers bring overstuffed carry-ons, making overhead bin space “a precious commodity” and creating a “boarding stampede” that can delay departures. Southwest avoided this above-the-cabin chaos by keeping bags free, which helped preserve its efficient turnaround times and streamline the boarding process—faster boarding and deplaning, less aisle crowding, and fewer last-minute gate-check hassles.

Additionally, a single, all-inclusive fare (two bags included) simplified the customer experience and internal processes. There was no need to collect bag payments at the gate or reconcile complex fee tiers, keeping operations and pricing structure simple. In short, when Southwest was smaller, the free baggage policy aligned well with its low-cost, high-efficiency strategy: it differentiated the airline in the market, fostered customer loyalty, and supported operational speed and simplicity.

Why Southwest is Stopping Bags Fly Free

So what changed?

Rising Costs and Scale Challenges: As Southwest grew to become one of the largest U.S. airlines, the once-manageable costs of its free bag policy swelled dramatically. What was a clever perk at a smaller scale became a significant expense at tens of millions of passengers. Southwest eventually found itself hauling far more luggage than competitors—“nearly two times the bags” of other airlines, according to CEO Bob Jordan—which is “costly on many fronts.”

Southwest’s policy stimulated higher baggage volume as passengers increasingly chose Southwest fee-free policy, highlighting a constant operational trade-off: while free bags eased cabin boarding, they added complexity below the wing—more bags to screen, sort, load, and transfer within tight turnaround windows. Those back-end complications grew with Southwest’s size, driving up costs and making the policy harder to sustain without eroding on-time performance. In essence, as the airline scaled, what once gave it a productivity edge (fast boarding) began to bite into its efficiency elsewhere (ramp and connection delays).

Financial Pressures and Ancillary Revenue Needs: By the 2020s, baggage fees had become an industry norm and a lucrative revenue stream for airlines—U.S. carriers collectively amassed over $3.5 billion in baggage fees in 2014 and this ballooned to well over $7 billion by 2023.

Southwest’s fee-free stance meant leaving a huge amount of money on the table. While peers steadily padded their bottom lines with bag fees, Southwest earned only a token amount (just $73 million in baggage revenue in 2023, mostly from additional bags and overweight fees).

As Southwest expanded, the opportunity cost of free bags grew ever larger, and investors took notice. In recent years, Southwest has faced lackluster earnings and margin pressure, causing analysts and shareholders to question its reluctance to monetize baggage like everyone else.

An activist investor, Elliott Management, amassed influence on Southwest’s board and explicitly criticized management for not charging bag fees “like other airlines” to boost revenue. This investor pressure coincided with Southwest’s first-ever company-wide layoffs and a broader cost-cutting initiative, highlighting the urgency to improve financial performance.

In theory, charging for bags could bring Southwest an estimated $1.5 billion in additional annual revenue, a massive influx that could help fund operations, new initiatives, or margin improvements.

When Loyalty Hits Limits: The Academic Case Behind Southwest’s Policy Shift

Southwest’s decision to shift its policy is supported by insights drawn from academic research, which illuminate both the economic and operational justifications for it.

From a competitive perspective, airlines that adopted baggage fees experienced significant pricing dynamics. Lei He et al. analyze the impact when Spirit Airlines introduced carry-on baggage fees, finding that Spirit’s rivals reduced their base ticket prices by approximately 5.8% to remain competitive. Particularly noteworthy was the response from carriers that subcontract operations to regional airlines; these carriers reduced their fares even more, around 14.5%, demonstrating heightened sensitivity to competitive pressures due to their cost structures. Such price responses suggest that unbundling services—i.e., introducing baggage fees—allows airlines greater pricing flexibility, thereby potentially increasing their overall competitiveness.

Operationally, evidence from Nicolae et al. highlights the positive impact baggage fees have on operational efficiency (interestingly, I’m writing this newsletter in the United Lounge in Newark, and just ran into Vanayak Deshpande, one of the authors of this paper).

This study empirically demonstrates that airlines that charged baggage fees experienced notable improvements in departure delay performance. Specifically, second checked bag fees led to an average improvement of 1.3 minutes per departure, and subsequent implementation of first checked bag fees improved departure delays by another 2 minutes. These operational gains were most pronounced during peak evening departure times and at hub airports, emphasizing the reduced operational complexity related to luggage handling.

For Southwest, which prided itself on operational efficiency, these findings offer a compelling operational rationale for the policy change. While Southwest’s free checked bag policy simplified operations by minimizing carry-on baggage congestion, the academic evidence clearly indicates a tipping point.

Implications of Moving Away from a Core Brand Identity

Southwest’s decision to charge for bags carries significant brand risks, as it entails moving away from a core element of its identity.

For decades, “Bags Fly Free” was not just a marketing slogan but a promise that symbolized Southwest’s unique customer-centric ethos. Renouncing this promise could erode the brand’s differentiation and goodwill. Industry observers immediately noted the danger: the airline “runs the risk of driving away customers,” and competitors like Delta are openly gleeful at the prospect of poaching disenchanted Southwest loyalists once bags are no longer free. Southwest recognized how integral free bags were to its image—as recently as 2024, executives warned that eliminating the policy would damage its “customer first” brand positioning and potentially cost an estimated $1.8 billion in lost market share. In essence, Southwest is gambling with a piece of its brand equity—the airline built a trustable image as the “no hidden fees” carrier and breaking that implicit contract can provoke feelings of betrayal among customers who have staunchly supported the airline for that very reason.

A 2014 study on ancillary fees found that among various add-on charges, baggage fees elicited the strongest sense of betrayal from customers, often leading to frustration and outrage. That feeling of betrayal was shown to directly increase complaints and negative word-of-mouth—outcomes that can rapidly undermine customer loyalty.

A recent parallel can be seen in JetBlue’s brand experience, which similarly prided itself on passenger amenities and resisted checked bag fees for years. However, financial pressures forced it to adopt a first-bag fee in 2015, and the reaction was telling: in the month following their bag fee announcement, customer satisfaction scores plummeted, and in one survey, JetBlue’s rating dropped by 11+ points (on a 100-point scale).

Analysts attributed this to the negative publicity around JetBlue “eliminating its first bag free” policy, which overshadowed any positive news and tarnished its previously strong reputation. This case illustrates how modifying a long-held promise can upset consumers and dent a brand’s stature, even if the change is economically rational. Southwest may face a similar trajectory: an initial wave of customer anger, social media blowback, and possibly a dip in its J.D. Power customer satisfaction rankings.

However, much depends on how Southwest manages this transition. The airline is attempting to soften the blow by retaining free bags for its most loyal customers and pitching the change as part of a broader enhancement of its offerings (for example, linking bag perks to its credit card and loyalty program). This framing seeks to shift the narrative from “taking away a benefit” to “rewarding our best customers,” essentially rebranding the free bag privilege as a loyalty incentive rather than a universal right. Such a strategy might contain some of the fallout by assuring core customers that Southwest still values them. Additionally, over time, consumer sentiment may adjust as travelers become accustomed to the new norm—just as they eventually did with other airlines post-2008.

In the long run, customers often recalibrate their expectations and airlines can recover brand trust if they continue to compete well on price, reliability, and service quality. Some airlines have even successfully reframed their brand after major policy shifts (for instance, legacy carriers now emphasize product quality and global networks, having long abandoned “free bags” as a selling point).

That said, there is no doubt that Southwest is navigating a delicate moment. The company built a cult-like loyalty in part by defying practices that customers hate.

By embracing fees, Southwest risks blurring the very identity that sets it apart and will need to compensate with other strengths (e.g., low fares, friendly service, on-time performance) to avoid a slide toward commoditization. Every communication with customers will matter to persuade them that Southwest is “still Southwest” even without the free bags. In marketing terms, the airline is undertaking a brand repositioning, moving from “the airline that includes bags for free” to “the airline that gives you more perks if you’re loyal (and charges you if you’re not).” This is a subtler value proposition that might take time for customers to fully accept. If mishandled, the change could undermine the brand equity Southwest amassed over years of customer-focused policies. If handled well, Southwest may retain most of its customers by highlighting that the fundamental offering (low fares, no change fees, etc.) remains competitive, and that the new fee revenue will enable reinvestment in better services.

Empirical Evidence on Delayed Brand Adaptation and Performance

Let’s also take a contrarian view: the firm had to change its brand. The brand was right when the airline was small, but it’s no longer right or sustainable.

Zhao et al. examined stock market reactions to corporate rebranding, and showed that investors generally reward firms that align their brand identity with their strategic reality. For example, an event-study analysis of 215 rebranding announcements found an average abnormal stock return of +2.5% around announcement dates, suggesting investors interpret brand adjustments as positive signals of strategic alignment. However, the research emphasizes that not all rebrands are equally effective: purely cosmetic changes without substantive strategic shifts produce weaker or even negative market reactions, while brand identity updates genuinely matched by strategic actions yield stronger financial gains.

In other words, the market can tell whether a brand update is mere “window dressing” or a credible signal of operational improvement. These findings echo earlier research by Horsky and Swyngedouw (1987), who examined 58 companies that changed their corporate names. They found name changes were associated with improved financial performance, especially for firms that had been underperforming. The greatest positive stock reactions occurred when the firm’s prior identity had become a liability (e.g., legacy industrial businesses) and the name change signaled a new strategic direction.

Notably, Horsky and Swyngedouw observed that a name change by itself did not boost demand for products; rather, it served as a credible signal that deeper changes (new products, structural fixes) were underway. This reinforces the point that brand identity shifts create value only if grounded in real operational change, helping a firm “reset” expectations and regain investor confidence.

What was the market reaction to Southwest? An 8.5% increase on the first day of trading.

I’ve often mentioned that markets better respond to short term improvements in financials and tend to underestimate the long term losses in capabilities, so one must be cautious.

Brand Misalignment and Consumer Response: On the consumer side, research highlights risks when brand identity stays static despite changing offerings or norms. Studies on brand extensions and brand consistency are particularly illuminating.

Classic experiments by Aaker and Keller (1990) demonstrated that consumers evaluate new products more favorably when they “fit” the parent brand’s image; when there is a poor fit (e.g., a luxury watch brand releasing a cheap plastic accessory), consumers show confusion or rejection. This implies that if a firm’s operations shift into areas that don’t match its established identity, the brand needs to be repositioned to redefine what the brand stands for, or else consumer acceptance will lag.

Case Study: Kodak’s Delayed Identity Shift

Kodak provides a cautionary example of a brand that remained tied to an outdated identity despite significant technological and market changes.

Known for capturing iconic “Kodak moments” through film photography, Kodak enjoyed near-monopoly dominance in the 20th century, controlling roughly 90% of the U.S. film market in the 1970s. Although Kodak pioneered digital imaging technology—developing one of the first digital cameras in 1975—it operationally and culturally remained deeply committed to its profitable film business. Throughout the digital revolution of the 1980s and 1990s, Kodak failed to fully embrace digital imaging, choosing instead to cling to branding that emphasized traditional film photography and physical prints. Its hesitation, fueled by internal fears of cannibalizing existing profits, prevented the company from convincingly repositioning itself as a leader in the digital era.

This delayed identity shift had severe financial and consumer consequences. Kodak’s market dominance eroded sharply as consumers migrated toward brands like Canon, Nikon, and Apple, who were perceived as digital innovators.

Once among the world's most valuable brands, Kodak saw its brand equity and stock price collapse; its market capitalization fell dramatically from $31 billion in 1997 to under $100 million by the time it declared bankruptcy in 2012. Late-stage attempts at rebranding lacked credibility and were viewed by consumers and investors as insufficient and belated. Ultimately, Kodak’s inability to reconcile its operational realities with its brand identity caused it to lose relevance with a new generation of consumers, squandering decades of accumulated goodwill.

Final Thoughts

In summary, Southwest’s decision to end its free checked baggage policy reflects a classic strategic trade-off between brand differentiation and revenue generation. When Southwest was smaller, “Bags Fly Free” was a savvy strategy that fueled its growth through marketing buzz, customer loyalty, and operational convenience. But as the airline grew and industry economics shifted, the cost of that policy—in foregone revenue and rising handling burden—became too great under investor scrutiny.

The shift may bolster Southwest’s financial performance and appease shareholders in the coming years, aligning Southwest with an industry practice that has proven profitable. Yet, this gain does not come without pain: the airline must carefully manage the brand implications of moving away from a beloved aspect of its identity.

Southwest will be closely watched by both analysts and academics as a live case study of strategic unbundling: Can a company remove a core benefit and successfully reframe its brand without significant long-term damage? The answer will hinge on how well Southwest executes this pivot and communicates value to its customers beyond the “free bags” era. One thing is certain: the airline’s bold experiment of keeping bags free for all these years has left an indelible mark on its brand, and undoing that promise will be a complex journey fraught with risks and opportunities.