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Southwest Airlines (NYSE:LUV) just dropped a bombshell, signaling a major shift in its strategy. The airline is scrapping its long-standing fuel hedging programonce a billion-dollar safety netand rolling out baggage fees for the first time in over 50 years. The move to end hedging cuts costly premium payments, while charging for checked bags aligns Southwest with industry norms, unlocking a potential multi-billion-dollar revenue stream. The airline's leadership, under pressure from Elliott Investment Management, is making aggressive changes to reverse declining profits, including adding basic economy fares, restructuring its loyalty program, and tweaking flight credit policies.
For decades, Southwest prided itself on bags fly free, a policy so integral to its identity that it was trademarked. That era is officially over. With competitors raking in $7 billion in baggage fees last year, Southwest finally caved, betting that increased revenue will outweigh customer pushback. The airline is also rolling out assigned seating and premium cabin sections, breaking away from its long-held open seating model. CEO Bob Jordan acknowledged the backlash but framed the changes as necessary, arguing that Southwest must evolve to stay competitive. Despite these bold moves, one big question lingers: Will passengerswho have long favored Southwest for its simplicity and perksstick around?
Investors, at least, are loving the transformation. Southwest's stock jumped 8.5% at 1.42pm, after the announcement, a clear signal that Wall Street approves of the airline's more profit-focused approach. With Elliott Investment Management securing board seats last year, the pressure to boost earnings has only intensified. The real test? Whether these changes can improve Southwest's bottom line without eroding customer loyalty. As rivals eye an opportunity to poach disillusioned travelers, Southwest is walking a tightrope between profitability and identity. Whether this gamble pays off remains to be seen.
This article first appeared on GuruFocus.