By Jon Sindreu

Southwest Airlines is heading for clearer skies, but shouldn't leave the value of its brand on the ground.

On Tuesday, the Dallas-based carrier aped its legacy peer Delta Air Lines in saying that business will be slower than anticipated in the first quarter. Its shares still surged.

Investors are encouraged by the direction of travel: Southwest, which is undergoing a radical transformation shepherded by activist hedge-fund firm Elliott Investment Management, recently unveiled its first-ever mass layoffs. It said Tuesday that cost-cutting plans are bearing fruit, and will be accelerated.

What solidified the carrier's commitment to change in the eyes of investors, however, was the news it will start charging non-preferred customers for checking luggage. That overturns a "bags fly free" policy that has been at the core of the airline's identity. Last year, Elliott pushed Southwest to ditch its signature open seating in favor of assigned cabins.

While fliers bemoan paying for add-ons, the clear success of no-frills specialists such as Ireland's Ryanair shows they don't usually put their wallet where their mouth is. So-called ancillary revenues, like charging for snacks, have become a big revenue source for budget carriers.

Yet baggage fees make up just 3% of U.S. airline revenues. And Southwest is in a different position to Ryanair, because it is the only big airline not charging them. Just months ago, executives pointed to surveys suggesting 60% of customers were lured in by free luggage checking, and research estimating attrition could cut $300 million from its sales. Several Wall Street analysts have come to similar conclusions.

That makes the new bags policy look like a mistake. Elliott is right to push for a modernized and streamlined Southwest, but should beware of making the airline unrecognizable. The paint on the aircraft isn't enough to retain a loyal customer base.

This analysis comes from the Journal's Heard on the Street team. Subscribe to their free daily afternoon newsletter here.

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March 11, 2025 11:57 ET (15:57 GMT)

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