Southwest Airlines To Reap $430 Million In Profit From New Baggage Fees, Says Analyst
The decision by Southwest Airlines Co (NYSE:LUV) to introduce baggage fees is expected to significantly boost its profits, according to a Wall Street analyst.
What Happened: On Tuesday, Southwest Airlines announced that it would be charging for checked luggage, with the new policy set to take effect on May 28. Despite potential customer dissatisfaction, Jefferies analyst Sheila Kahyaoglu predicts that this move will add nearly $430 million to earnings, before interest and taxes, in 2025, reported MarketWatch.
The analyst stated that Southwest anticipates $1 billion from new revenue-generating initiatives, $370 million in cost reductions and up to $500 million from projects related to its aircraft fleet.
Kahyaoglu noted that only around 15% of Southwest customers buy the lowest-priced tickets found in searches, with most opting to spend more. This allows the airline to upsell additional services and perks. This strategy, she explained, “stimulates low-end competition while still offering loyalty” benefits.
Kahyaoglu has upgraded Southwest’s stock to neutral from underperform, citing the potential earnings boost from the new baggage fees. She has also raised the stock price target to $33 per share from $24.
Why It Matters: The decision to charge for checked luggage marks a significant shift in Southwest’s business model, which has historically offered a “two bags fly free” policy for over 50 years. This change is part of a broader strategy that includes the introduction of basic-economy tickets and the abandonment of its open seating policy.
Despite the macroeconomic uncertainty, Southwest Airlines reported better-than-expected Q1 results, with a 1.6% year-over-year increase in operating revenue and a 3.5% year-over-year increase in revenue per available seat mile (RASM), primarily driven by yield improvements from revenue management actions and capacity moderation.
Benzinga's Edge Rankings place Southwest Airlines in the 79th percentile for momentum and the 67th percentile for value, reflecting its strong performance in both areas. Check the detailed report here.
Southwest’s shares rose by 5.53% on Tuesday following the announcement, marking a 22.55% increase for the past month.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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