Southwest Said Bag Fees Would Lose $300 Million A Year—Changed Its Rules Lawsuits

Southwest Airlines once said charging for checked bags would cost it $300 million a year. After they started charging anyway, a shareholder accused directors of sacrificing the airline’s interests to save their own jobs under pressure from an activist investor who took control of the board. The airline beat the suit by changing who was allowed to sue: under a new Texas law, they adopted a rule requiring a 3% ownership stake. At the time, that meant more than half a billion dollars in stock. The plaintiff owned just 100 shares. His case was dismissed. He’s appealing, and the U.S. Chamber of Commerce and Texas Association of Business are now urging the Fifth Circuit to kill the suit. Did Southwest’s Directors Protect Their Jobs At The Airline’s Expense? The complaint alleges a breach of fiduciary duty. He’s suing directors on Southwest’s behalf, seeking money from them for the company. This isn’t a securities fraud case seeking reimbursement for investment losses alleging the board made a “disloyal decision to put their own positions and income over the good of the Company.” The claimed harm includes at least $300 million annually, impaired goodwill and reputation, and compensation paid to directors for breaching their duties. The losses were what Southwest had forecast from charging bag fees before they implemented the policy, not an estimate of actual losses incurred. The old calculation was roughly $1.5 billion in bag fees against $1.8 billion in lost ticket sales. Maybe that research was wrong! Southwest used to argue that lost ticket sales would outweigh the revenue from charging for bags. They now highlight total fees received without netting out the tradeoffs and are silent about offsets. Southwest’s New Revenue Doesn’t Prove The Fees Are Working I’ve argued that Southwest is presenting its changes as more successful than the numbers justify. Their second-quarter revenue growth looked impressive until you compared it with other airlines, which were also reporting similar increases. If fees were additive, they should have done better and any overperformance was actually their revised Chase credit card deal and an adjustment for expiring travel credits. A customer who pays a bag fee shows up in the fee revenue. A customer who books another airline doesn’t show up as a negative bag fee. Neither does a lower ticket price from unbundling. That Doesn’t Mean Southwest Could Keep Its Old Model Southwest had reached the end of the model that made it great. Costs rose, technology aged, and management was slow to innovate. They needed customers who weren’t already starting every airfare search at Southwest.com. They needed something to sell passengers willing to pay more for a better experience. Broader distribution made the bundled fare harder to sustain. A $179 fare with bags included looks expensive next to a $149 fare before bags. The Transportation Department’s fee-disclosure rule would have helped Southwest defend free bags by requiring airlines and ticket agents to show key charges upfront. That would have preserved much more of the commercial case for keeping bags included, but the Fifth Circuit blocked the rule in 2024 and vacated it in February 2026. Management’s years of moving slowly left them with fewer credible alternatives when Elliott arrived. They’d lost the argument over whether the airline needed to change, which made it harder to win the argument over which changes made sense. Elliott, meanwhile, started cashing out as the changes took hold. They sold shares into the rally. Two Elliott-backed directors, David Cush and Gregg Saretsky, left in February, reducing their representation on the board. Management is now committed to the strategy through pricing, credit card benefits, seat assignments and promises to investors. Reversing it would involve much more than announcing that bags are free again. None of this automatically proves disloyalty. There were new directors with different assumptions, directors can change their minds, and make expensive mistakes and none of that means they’re putting their own interests over those of the company. I personally believe Bob Jordan did, though, and it’s never made sense to me. He was rich enough already. Regardless, the case needed to prove self-interested decisionmaking, but it never got the chance because of the ownership requirement. Texas Let Southwest Decide Which Shareholders Could Bring The Case Texas Senate Bill 29 allowed publicly traded Texas corporations to require shareholders bringing derivative suits to own a minimum stake, up to 3%. Southwest adopted that maximum allowable threshold. Shareholders can pool their holdings to reach it, but even an investor with hundreds of millions of dollars committed to Southwest can fall well short. Southwest has a $20.3 billion market cap 3% is $609 million Companies got to choose the threshold up to 3%. A 3% threshold seems pretty high for a very large company like Southwest. In some sense, Southwest adopting the 3% threshold was itself acting for their own interest rather than the interests of the company’s owners. The judge dismissed the case with prejudice on March 17, 2026. Topics on this page