Southwest has done a very good job of keeping itself differentiated from the rest of the industry. From a public relations standpoint, when any other US-based airline announces fare changes (higher or lower), the next paragraph in the article is always how the other US-based legacy carriers are expected to respond. Southwest is never named.
At the consumer level, Southwest also keeps itself distanced by not participating in travel search engines such as cheaptickets.com, travelocity.com, expedia.com, or any other. If you want to book a ticket on Southwest, or even research a fare, you will do it at Southwest.com.
I believe all of the points made above are valid, concerning how Southwest's operations differ from those of so-called legacy carriers. But I also believe a deeper look at how Southwest operates reveals the reasons for their success. In a lot of ways, Southwest is the Apple Computer of the aviation industry; while other industry members are cutting back and laying off, it manages not only to survive, but also expand. And it does so with a great amount of perceptual distance from the rest of the industry.
Over the last couple of years, it is the mainstream news media that largely convinced the American people that a recession was in full swing, and this led to sharply reduced levels of consumer confidence, house-buying, shopping, etc. Domino effect. Yes, banks were in trouble, and yes, perhaps some signs of a recession were around, but it wasn't until the media started using the R-word that the nation as a whole really began to panic. So when one legacy airline announces something bad, and other airlines respond, the other airlines are immediately grouped together with the first to be in trouble. Southwest never plays that game. I'm sure Southwest is not without its struggles, but they (like Apple) cultivate a sense of consumer confidence by not showing any cards whatsoever.
Now, about the lack of luggage charges: this is, again, more media brilliance on the part of Southwest. Here's my proof. Over the last 9 years that Melanie and I have been married, we have flown from PDX to SJC to see her family many, many times. More than I can count. Southwest has typically been our airline of choice, until about the last year or so. Southwest is still an option, but the "web special fares" and Ding Fares are no longer all that special. At this point, it's pretty much a wash between Southwest and Alaska in terms of fares; sometimes, Alaska will even be cheaper. Five years ago, this was not the case. Even three years ago, this was not the case. So while hedge-betting has served Southwest well on fuel prices, and other operational costs have risen in proportion with other airlines' costs, Southwest has quietly taken full advantage of the current industry trend of rising fares to meet "skyrocketing fuel costs." Yes, there is no bag fee, but the fare prices have definitely gone up.