Southwest Airlines recently moved away from an iconic feature – free checked bags. This is expected to generate $800 million in earnings this year and their shares rose ~10%.
Activist investor Elliott Management had disclosed a $2B stake and understandably pushed the airline to find ways to grow profits. Cue: the company’s first ever layoff and then the removal of free checked bags.
For a company that trademarked the phrase “Bags Fly Free” and repeatedly said it stood out from competitors because of this feature, this is a massive move. The big question, of course, is its long-term impact.
I’m not here to speculate – I don’t know enough about the industry or Southwest’s financials to claim I have the answer. Instead, this is a beautiful case study in decision making and trade-offs.
On the face of it, $800 million in earnings every year might seem like a big win. But that ignores the long-term cost of the move – which both exist and are likely substantial.
There’s no free lunch.
