Updated Oct. 24, 2013 9:02 p.m. ET
The chief executive of Southwest Airlines Co. LUV +0.35% Southwest Airlines Co. U.S.: NYSE $17.16 +0.06 +0.35% Oct. 29, 2013 4:00 pm Volume (Delayed 15m) : 7.92M U.S.: NYSE $17.39 +0.23 +1.34% Oct. 29, 2013 5:08 pm Volume (Delayed 15m): 57,596 P/E Ratio 19.72 Market Cap $12.08 Billion Dividend Yield 0.93% Rev. per Employee $380,389 10/29/13 Boeing: 737 Max Fuel Efficienc... 10/24/13 Southwest CEO Hints That Bag F... 10/14/13 Southwest Airlines Tabs New Ex... More quote details and news » LUV in 
Your Value Your Change Short position hinted Thursday that the carrier could soon start charging for checked baggage if the flying public comes to accept the fees that other airlines charge.
Southwest and JetBlue Airways Corp. JBLU -3.85% JetBlue Airways Corp. U.S.: Nasdaq $7.24 -0.29 -3.85% Oct. 29, 2013 4:00 pm Volume (Delayed 15m) : 10.62M U.S.: Nasdaq $7.23 -0.01 -0.07% Oct. 29, 2013 7:18 pm Volume (Delayed 15m): 50,966 P/E Ratio 16.69 Market Cap $2.12 Billion Dividend Yield N/A Rev. per Employee $485,766 10/29/13 JetBlue's Profit Up 58%, Unvei... 10/04/13 U.S. Airways Jet Delivery Dela... 10/03/13 Airlines Prep Jets for Wider U... More quote details and news » JBLU in Your Value Your Change Short position are the last two big airlines in the U.S. that allow travelers to check at least one bag free on domestic flights.
Customer service agents check in passengers at Southwest Airlines counter. Associated Press
Southwest has made its "bags fly free" policy a pillar of its advertising campaigns. And on an earnings conference call Thursday, Chief Executive Gary Kelly said the carrier has no plans to charge for bags at least through next year, in part because he believes its policy of two free checked bags per passenger brings the airline business.
But, in one of his strongest hints to date that the policy could change, Mr. Kelly said that if fliers come to better understand and maybe even prefer "an a la carte approach…we'd be crazy not to provide our customers with what they want."
Any change would be an about-face for an airline long known for bucking industry trends. That Southwest would even consider charging for checked bags is a sign of how far the industry—and flying public—have come on the issue of fees for previously free airline services. U.S. carriers collected nearly $3.5 billion in bag fees last year, up from $464 million in 2007, according to government figures.
By hauling all those free bags around, Southwest is missing out on tens of millions of dollars a year or more in fee revenue and potential fuel-cost savings, said Wolfe Research airline analyst Hunter Keay. "There's no reason why [charging for bags] wouldn't make sense," he said. "The competitive landscape has changed."
Southwest's Mr. Kelly has long stressed the importance that Southwest places on free bags, though in some past comments he also has indicated flexibility on the question, based on a potential shift in fliers' attitudes. On a conference call in April, he declared that "our brand includes bags fly free. Period." But he conceded that customers might grow more accustomed to buying airline services a la carte, "so I don't want us to be pinned down into perpetuity on what we might or might not do."
Bag fees do appear to be gaining acceptance with consumers. A poll of nearly 12,000 passengers by J.D. Power & Associates, released in May, showed that 37% of respondents who pay for bags found the fees reasonable, up from just 18% in 2011.
Robert Hartfield, an investment adviser in Philadelphia, said he has changed his mind about bag fees in recent years, as he has watched Southwest increase its fares more than airlines that charge for bags. Mr. Hartfield, who rarely checks a bag, reckons that Southwest rolls the cost of free bags into the ticket price. "It's a service I don't use, so I don't want to pay for it," he said.
Mr. Kelly said in April that charging for bags "would negatively impact our revenues by close to $1 billion a year through defections of customers."
Since other airlines began charging for first checked bags in 2008, Southwest's planes have gotten about 10 percentage points fuller, reaching nearly 81% of capacity in the third quarter.
Many customers go out of their way to fly Southwest for its bag policy. Thomas Arthur, a corporate-asset manager from Jackson, Miss., said he has flown to a Southwest airport and then rented a car to drive to his final destination just to save on baggage. "If you go anywhere with my wife, you're bringing two checked bags," he said. On other airlines, "that adds 100 to 200 bucks" to the round-trip price.
Southwest's AirTran Airways unit, which it bought in 2011, continues to charge for bags. Late last year, Southwest raised the fee for checking one bag on AirTran by $5 to $25, and raised the fee for a second bag by $10 to $35. Southwest plans to eliminate those fees once it fully folds AirTran into the Southwest brand by the end of 2014.
Mr. Kelly said Southwest is "right on schedule" to begin flying internationally next year. This week, Southwest filed to renew AirTran's rights to fly between several cities in the U.S. and Latin America, and to add Southwest's name to the rights. The applications suggest what Southwest's international route map could look like, including flights to Cancun from Atlanta, Chicago, Denver, Baltimore, Milwaukee, San Antonio and Austin, Texas. The airline also applied for rights to serve San Jose del Cabo, Mexico, from Denver, Austin and Orange County, California, and Mexico City from San Antonio and Orange County.
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Baggage fees and other ancillary fees have helped lift the fortunes of most U.S. airlines for the past five years. But carriers didn't need much help in the just-ended quarter. Most soared financially, aided by relatively tame fuel prices, higher revenue and strong demand, except during the 16-day government shutdown earlier this month.
If the final quarter of 2013 goes as hoped—and several carriers are forecasting brisk holiday bookings—the industry could produce the best annual results in at least seven years. It is expected to earn a combined $6.6 billion this year, compared with just $200 million in 2012.
Delta Air Lines Inc. DAL +0.80% Delta Air Lines Inc. U.S.: NYSE $26.35 +0.21 +0.80% Oct. 29, 2013 4:00 pm Volume (Delayed 15m) : 9.57M U.S.: NYSE $26.32 -0.03 -0.11% Oct. 29, 2013 4:22 pm Volume (Delayed 15m): 38,094 P/E Ratio 10.80 Market Cap $22.54 Billion Dividend Yield 0.91% Rev. per Employee $505,975 10/22/13 Delta Air Profit Up 31% Amid I... 10/22/13 Stocks to Watch: Delta, Whirlp... 10/11/13 J.P. Morgan's Legal Reserves A... More quote details and news » DAL in Your Value Your Change Short position and Alaska Air Group Inc. ALK +0.63% Alaska Air Group Inc. U.S.: NYSE $70.55 +0.44 +0.63% Oct. 29, 2013 4:01 pm Volume (Delayed 15m) : 724,695 U.S.: NYSE $70.55 0.00 0.00% Oct. 29, 2013 4:24 pm Volume (Delayed 15m): 2,361 P/E Ratio 10.43 Market Cap $4.91 Billion Dividend Yield 1.13% Rev. per Employee $392,693 08/19/13 The FAA's $40 Billion Adventur... 08/06/13 Pension Relief, Currency Ills More quote details and news » ALK in Your Value Your Change Short position reported their best quarterly results ever in the third quarter. Southwest delivered its best third-quarter results in history. US Airways Group Inc. LCC +1.64% US Airways Group Inc. U.S.: NYSE $22.37 +0.36 +1.64% Oct. 29, 2013 4:00 pm Volume (Delayed 15m) : 5.75M U.S.: NYSE $22.20 -0.17 -0.76% Oct. 29, 2013 7:14 pm Volume (Delayed 15m): 20,942 P/E Ratio 6.82 Market Cap $4.34 Billion Dividend Yield N/A Rev. per Employee $460,302 10/23/13 The Daily Docket: Detroit to M... 10/23/13 US Airways Profit Down 12% On ... 10/17/13 AMR Swings to Profit on Lower ... More quote details and news » LCC in Your Value Your Change Short position posted record pretax profit and American Airlines parent AMR Corp. AAMRQ +7.03% AMR Corp. U.S.: OTCBB $7.00 +0.46 +7.03% Oct. 29, 2013 3:59 pm Volume (Delayed 15m) : 19.38M U.S.: OTCBB $7.02 +0.02 +0.29% Oct. 29, 2013 4:50 pm Volume (Delayed 15m): 18.07M P/E Ratio 5.37 Market Cap $2.35 Billion Dividend Yield N/A Rev. per Employee $325,556 10/23/13 The Incredible Shrinking Plane... 10/23/13 Feeling Squeezed in Coach Clas... 10/23/13 US Airways Profit Down 12% On ... More quote details and news » AAMRQ in Your Value Your Change Short position would have posted a quarterly record if special items related to its bankruptcy and pending merger with US Airways were stripped out.
United Continental Holdings Inc. UAL +5.57% United Continental Holdings Inc. U.S.: NYSE $33.91 +1.79 +5.57% Oct. 29, 2013 4:00 pm Volume (Delayed 15m) : 9.59M U.S.: NYSE $33.99 +0.08 +0.24% Oct. 29, 2013 7:15 pm Volume (Delayed 15m): 3,677 P/E Ratio N/A Market Cap $11.62 Billion Dividend Yield N/A Rev. per Employee $427,864 10/29/13 United Continental Employees R... 10/24/13 United Continental's Results M... 10/17/13 United Applies for Right to Se... More quote details and news » UAL in Your Value Your Change Short position brought up the rear, with muted revenue performance and outsize cost increases. "It appears that United is headed in the opposite direction of that of the industry, in our view," J.P. Morgan JPM +0.09% JPMorgan Chase & Co. U.S.: NYSE $52.73 +0.05 +0.09% Oct. 29, 2013 4:00 pm Volume (Delayed 15m) : 23.05M U.S.: NYSE $52.77 +0.04 +0.08% Oct. 29, 2013 7:57 pm Volume (Delayed 15m): 311,256 P/E Ratio 11.85 Market Cap $198.03 Billion Dividend Yield 2.88% Rev. per Employee $430,201 10/29/13 Twitter IPO Offers Banks an En... 10/29/13 Troubles for J.P. Morgan in It... 10/29/13 Shopping-Center Owner Brixmor ... More quote details and news » JPM in Your Value Your Change Short position Chase & Co. airline analyst Jamie Baker said in a research note Thursday.
The operating-margin gap between United and its six largest rivals widened 4.2 percentage points since last year's third quarter, "a level of year-over-year deterioration not witnessed since…March 2012," he said. It was then that United's passenger-reservation system was migrated to Continental's, leading to weeks of technical problems for customers of the merged airline.
United's challenges, however, seem to be peculiar to the Chicago-based airline, the nation's largest by traffic. Executives said they are moving with quickly to such problems as erroneous demand forecasting, a fleet redeployment that hurt revenue, increased competitive pressure in China and finding efficiencies to lower the company's high costs.
But unit revenue—the amount taken in for each passenger flown a mile—is expected to decline in October and to be flat to 2% lower in the fourth quarter, a sign that the turnaround may take a bit of time.
United did lift its net income to $379 million from just $6 million a year earlier. Excluding $211 million of special charges, it reported net profit of $590 million, which still missed Wall Street's diminished estimates.
Revenue rose 3.2% to $10.22 billion, also missing consensus forecasts. Jeff Smisek, chief executive, said the results "fell far short of what we can and should deliver."
By contrast, Delta, the No. 2 U.S. carrier by traffic, earlier this week posted net profit of $1.4 billion, increased its revenue by 6% to $10.5 billion, and said it expects to achieve operating margin growth of 7% to 9% in the current quarter. While it took a $25 million revenue hit from the government shutdown, Delta's performance seemed more in line with the rest of the industry—only more so.
Southwest's third-quarter profit soared to a record $259 million, up from $16 million a year prior, as its average paid fare increased by 11%.
Alaska Air Group, parent of Seattle-based Alaska Airlines, on Thursday reported its best quarter ever and its 18th consecutive quarterly profit. Even stripping out a one-time gain of $192 million, the company earned $157 million, up from adjusted income of $150 million a year earlier, beating estimates. Passenger revenue rose 6% and total revenue was up 22%, including the special one-time gain.
Last week, AMR posted stronger than expected results and this week US Airways weighed in with bullish numbers and a 9% increase in revenues.
Write to Jack Nicas at jack.nicas@wsj.com
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