Although Southwest Airlines Co. customers may be upset about paying for something that was previously free for decades, at least one Wall Street analyst thinks it will increase the company’s earnings and stock price.
After announcing in March that it would be discontinuing its bags-fly-free policy, Southwest said Tuesday that a single piece of checked luggage would cost $35 and a second piece would cost an extra $10. Except for “A-List Preferred” members of the Rapid Rewards reward program and Business Select tickets, the surcharges will take effect on May 28.
Southwest’s shares (LUV) rose 5.6% in afternoon trading, suggesting that investors were pleased with the announcement. The stock is currently on course to have its highest monthly return since it surged 21.2% in June 2023, having risen 16.9% in May.
Sheila Kahyaoglu, an analyst at Jefferies, was pleased with the news as well, upgrading the carrier’s shares from underperform to neutral. Kahyaoglu estimates that this year’s earnings, before interest and taxes, will increase by roughly $430 million due to the increased bag fees that customers must pay.
In response to criticism from activist shareholder Elliott Management, she also raised the target price of Southwest’s stock from $24 to $33 per share, partly because of the company’s total program to earn about $1.8 billion.
Southwest has estimated $1 billion in new revenue-generating initiatives, $370 million in cost savings, and up to $500 million in fleet-related activities, according to Kahyaoglu.
According to her, only around 15% of Southwest’s customers buy the lowest tickets they can find online; the majority usually spend more. Southwest has an opportunity to upsell customers on additional services and benefits as a result.
According to Kahyaoglu, the market dynamic “stimulates low-end competition while still offering loyalty” benefits.
In 2025, including Tuesday’s actions, Southwest’s stock has decreased 2.8%, the S&P 500 index SPX has increased 0.6%, and the U.S. Global Jets ETF JETS has decreased 10.4%.
