Southwest Airlines Co. - MgmtSouthWest -...

Southwest Airlines Co.

Company Profile

Publication Date: 4 Nov 2010

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Southwest Airlines Co.

TABLE OF CONTENTS

Company Overview..............................................................................................4

Key Facts...............................................................................................................4

Business Description...........................................................................................5

History...................................................................................................................6

Key Employees.....................................................................................................8

Key Employee Biographies..................................................................................9

Major Products and Services............................................................................13

Revenue Analysis...............................................................................................14

SWOT Analysis...................................................................................................15

Top Competitors.................................................................................................21

Company View.....................................................................................................22

Locations and Subsidiaries...............................................................................25


Southwest Airlines Co.TABLE OF CONTENTS

COMPANY OVERVIEW

Southwest Airlines (or the company or Southwest) is a passenger airline that provides scheduledair transportation in the US. The company primarily provides point-to-point, low-fare services in the68 cities in 35 states throughout the US. It is headquartered in Dallas, Texas and employs 34,726people.

The company recorded revenues of $10,350 million during the financial year ended December 2009(FY2009), a decrease of 6.1% compared to FY2008. The operating profit of the company was $262million during FY2009, a decrease of 41.6% compared to FY2008. The net profit was $99 million inFY2009, a decrease of 44.4% compared to FY2008.

KEY FACTS

Southwest Airlines Co.Head Office2702 Love Field DriveDallasTexas 75235USA

1 214 792 4000Phone

1 214 792 5015Fax

http://www.southwest.comWeb Address

10,350.0Revenue / turnover(USD Mn)

DecemberFinancial Year End

34,726Employees

LUVNew York StockExchange Ticker


Southwest Airlines Co.Company Overview

BUSINESS DESCRIPTION

Southwest Airlines (or the company or Southwest) is a passenger airline that provides scheduledair transportation in the US. The company is a domestic US airline that provides point-to-point,low-fare services rather than hub-and-spoke service.

As of December 2009, the company operated 537 Boeing 737 aircraft and provided service to 68cities in 35 states throughout the US. Moreover, Southwest served 437 non-stop city pairs. Thecompany serves short-haul routes with high frequencies. It complements this service with moremedium to long-haul routes, including transcontinental service. In FY2009, the enplaned passengersstood at 101.3 million. During the year, the revenue passenger miles and available seat miles were74,456.7 million and 98,001.5 million respectively. The load factor was 76.0% during FY2009. Thecompany’s fleet has an average age of approximately 11 years. Southwest aircraft fly an averageof 6.25 flights per day, or almost 10 hours and 47 minutes per day. The company’s average aircrafttrip length is 633 miles with an average duration of one hour and 52 minutes.

Southwest serves many secondary or downtown airports, such as Dallas Love Field, Houston Hobby,Chicago Midway, Baltimore-Washington International, Burbank, Manchester, Oakland, San Jose,Providence, Ft. Lauderdale/Hollywood and Long Island Islip airports.

The company's frequent flyer program, Rapid Rewards awards members with a roundtrip ticket aftercollecting 16 credits. The customers earn a credit for each one-way trip covered or two credits foreach roundtrip.

In addition, the company launched international air transportation services in five Mexico cities inpartnership with Mexican airline Volaris.


Southwest Airlines Co.Business Description

HISTORY

Southwest Airlines (or the company or Southwest) originated in 1971 when Rollin King and HerbKelleher joined forces to start an airline. In the same year, the company began services betweenDallas, Houston and San Antonio.

In 1974, the company re-modeled its terminal at Houston airport.The company was given clearanceto extend its fly zones across the southwest in 1976 and it was listed on the New York Stock Exchangein 1977.

Southwest introduced a ticket-less travel option, eliminating the need to print a paper ticket altogether,in 1995. In the same year, the company started using the SABRE computer reservation system forproviding ticketing and automated booking. In the following year, Southwest began offering internetticket-less travel sales.

In 2000, the company added services to Buffalo-Niagara International Airport. The company beganoperating several new non-stop services in 2003. In the same year, Southwest consolidated its ninereservations centers into six.

The company closed three centers located in Dallas (Texas), Salt Lake City (Utah) and Little Rock(Arkansas) in 2004. In the same year, the company added three new flight services: Philadelphia(Pennsylvania) - Hartford (Connecticut); Philadelphia (Pennsylvania)-Jacksonville (Florida); andPhiladelphia (Pennsylvania)-Oakland (California). Later in 2004, Southwest started offering WaltDisney World Resort tickets on southwest.com.

In the following year, Southwest began offering code shared flights with ATA Airlines. In the sameyear, the company launched a movie downloading service on southwest.com under a co-brandingagreement with MovieLink. Also in the same year, Southwest acquired leasehold rights to fouradditional gates at Chicago Midway.

The company began services to Denver in 2006. In the same year, the company began selling'ATA-only service' to selected destinations. In 2007, Southwest added four daily nonstop flights toPhoenix, Manchester, Las Vegas, Raleigh-Durham and Salt Lake City. In the same year, Southwestand Galileo, a leading global distribution system (GDS) and technology provider, announced a10-year, content distribution agreement. Through the agreement, all of the company's publishedfares and inventory, with the exception of Southwest exclusive web fares, are available toGalileo-connected travel agencies in North America.

Later in 2007, the company launched service with 18 daily nonstop flights from San FranciscoInternational Airport (SFO) to Chicago Midway (daily three); San Diego (daily eight); and Las Vegas(daily seven).


Southwest Airlines Co.History

In 2008, the company expanded its Denver service with six new nonstop flights and two newdestinations. In the same year, Southwest’s carrier frequent flyer program, Rapid Rewards, addedAvis Rent A Car as a new preferred partner. During the same year, Southwest added Thrifty CarRental as a new preferred partner to its frequent flyer program, Rapid Rewards.

Southwest began new nonstop air service between Denver and Boston Logan; Denver and Spokane;and Denver and Reno/Tahoe in September 2009.

In April 2010, Southwest announced its intent to terminate the agreement with WestJet to offerconnecting service between the US and Canada. In September 2010, the company entered into adefinitive agreement to acquire all of the outstanding common stock of AirTran Holdings, the parentcompany of AirTran Airways, for a combination of cash and Southwest's common stock.

Southwest launched international service to five Mexico Cities by connecting with Volaris, an airlinecompany based in Mexico, in October 2010.


Southwest Airlines Co.History

KEY EMPLOYEES

CompensationBoardJob TitleName

1559431 USDExecutive BoardChairman, President and ChiefExecutive Officer

Gary C. Kelly

Non Executive BoardDirectorDouglas H. Brooks

129763 USDNon Executive BoardDirectorWilliam H. Cunningham

69140 USDNon Executive BoardDirectorJohn G. Denison

87156 USDNon Executive BoardDirectorTravis C. Johnson

55837 USDNon Executive BoardDirectorNancy B. Loeffler

139532 USDNon Executive BoardDirectorJohn T. Montford

63295 USDNon Executive BoardDirectorDaniel D. Villanueva

976720 USDSenior ManagementExecutive Vice President Strategyand Planning

Robert E. Jordan

1044835 USDSenior ManagementExecutive Vice President CorporateServices and Corporate Secretary

Ron Ricks

1037602 USDSenior ManagementExecutive Vice President and ChiefOperating Officer

Michael G. Van De Ven

Senior ManagementSenior Vice President Culture andCommunications

Ginger C. Hardage

Senior ManagementSenior Vice President ProcurementDaryl Krause

Senior ManagementSenior Vice President Administrationand Chief People Officer

Jeff Lamb

Senior ManagementSenior Vice President OperationsGreg Wells

819844 USDSenior ManagementSenior Vice President Finance andChief Financial Officer

Laura H. Wright

Senior ManagementVice President Director ofOperations

Gregory N. Crum

Senior ManagementVice President Technology andChief Information Officer

Jan Marshall


Southwest Airlines Co.Key Employees

KEY EMPLOYEE BIOGRAPHIES

Gary C. Kelly

Board: Executive BoardJob Title: Chairman, President and Chief Executive OfficerSince: 2008Age: 54

Mr. Kelly has been the Chairman, President and Chief Executive Officer at Southwest since 2008.He has been the Chief Executive Officer at the company since 2004. Mr. Kelly also served asSouthwest’s Executive Vice President and Chief Financial Officer from 2001 to 2004 and as its VicePresident, Finance and Chief Financial Officer from 1989 to 2001. He joined the company in 1986as its Controller.

Douglas H. Brooks

Board: Non Executive BoardJob Title: DirectorSince: 2010Age: 57

Mr. Brooks has been a Non Executive Director at Southwest since 2010. He also serves as theChairman of the Board, President and Chief Executive Officer at Brinker International.

William H. Cunningham


Mr. Cunningham has been a Non Executive Director at Southwest since 2000. He was the Chancellorof The University of Texas System from 1992 to 2000.

John G. Denison



Southwest Airlines Co.Key Employee Biographies

Mr. Denison has been a Non Executive Director at Southwest since 2008. He served as the Chairmanat Global Aero Logistics, from 2006 to 2008. Mr. Denison joined Global Aero Logistics in 2005 asits Co-Chief Restructuring Officer. He also served as the President and Chief Executive Officer atATA Airlines, from 2005 to 2006.

Travis C. Johnson


Mr. Johnson has been a Non Executive Director at Southwest since 1978. He practiced law as anAttorney since 2001. Prior to that, Mr. Johnson was a Partner in the law firm of Johnson & Bowen.He served as a Director at J.P. Morgan Chase Bank, El Paso from 1984 to 2005 and was Founderand Chairman of the Board, Texas Commerce Bank, Border City from 1971 to 1987. Mr. Johnsonis a former County Judge and served as a member of the University of Houston Board of Regentsfor 12 years. He serves as the Vice Chairman at El Paso Museum of Art Foundation.

Nancy B. Loeffler


Ms. Loeffler has been a Non Executive Director at Southwest since 2003. She also currently servesas the Chair of The University of Texas M.D. Anderson Cancer Center Foundation. Ms. Loeffler alsoserves on the Board of Regents at St. Mary’s University, the National Cowgirl Museum and Hall ofFame, the Vice President’s Residence Foundation in Washington, D.C., and the Capitol AdvisoryCommittee for Texas Lutheran University. She also serves on the Board of the Blanton Museum ofArt located on The University of Texas at Austin campus.

John T. Montford


Mr. Montford has been a Non Executive Director at Southwest since 2002. He has been the SeniorVice President, State Legislative Affairs for AT&T Services, since 2009. Previously, Mr. Montfordserved as the President, Western Region for AT&T Services, from 2007 to 2009 and as the SeniorVice President, Western Region Legislative and Regulatory Affairs for AT&T Services, from 2005



to 2007. From 2001 to 2005, Mr. Montford served as the Senior Vice President of Governmentaland External Affairs for SBC Communications. Prior to that, he served as Chancellor of the TexasTech University System from 1996 to 2001. Mr. Montford served in the Texas Senate from 1983 to1996. He also served as the Chairman of the Senate Finance Committee and Chairman of theSenate State Affairs Committee. He serves as a Director at Fleetwood Enterprises.

Daniel D. Villanueva


Mr. Villanueva has been a Non Executive Director at Southwest since 2008. He has been a partnerat RC Fontis since 2005. Previously, Mr. Villanueva was the Managing Partner of Bastion Capital,from 1993 to 2005. He had served as a Director at Fleetwood Enterprises, from 2003 until 2009.

Robert E. Jordan

Board: Senior ManagementJob Title: Executive Vice President Strategy and PlanningSince: 2008Age: 49

Mr. Jordan has been the Executive Vice President Strategy and Planning at Southwest since 2008.He also served as the company’s Executive Vice President Strategy and Technology from 2006 to2008, Senior Vice President Enterprise Spend Management from 2004 to 2006, and Vice PresidentTechnology from 2002 to 2004.

Ron Ricks

Board: Senior ManagementJob Title: Executive Vice President Corporate Services and Corporate SecretarySince: 2008Age: 60

Mr. Ricks has been the Executive Vice President, Corporate Services and Corporate Secretary atSouthwest since 2008. He served as the company’s Executive Vice President Law, Airports, andPublic Affairs from 2006 to 2008, and Senior Vice President Law, Airports, and Public Affairs from2004 to 2006. Prior to that, Mr. Ricks served as the Vice President Governmental Affairs forSouthwest.

Michael G. Van De Ven



Board: Senior ManagementJob Title: Executive Vice President and Chief Operating OfficerSince: 2008Age: 48

Mr. Van de Ven has been the Executive Vice President and Chief Operating Officer at Southwestsince 2008. He also served as the company’s Chief of Operations from 2006 to 2008, ExecutiveVice President, Aircraft Operations from 2005 to 2006, Senior Vice President Planning from 2004to 2005, and Vice President Financial Planning and Analysis from 2001 to 2004.

Laura H. Wright

Board: Senior ManagementJob Title: Senior Vice President Finance and Chief Financial OfficerSince: 2004Age: 49

Ms. Wright has been the Senior Vice President, Finance and Chief Financial Officer at Southwestsince 2004. She also served as the company’s Vice President, Finance & Treasurer from 2001 to2004, and as its Treasurer from 1998 to 2001.



MAJOR PRODUCTS AND SERVICES

Southwest Airlines is a domestic US airline that provides point-to-point, low-fare services. The company's key services include the following:

Domestic flightsArrival suitesFrequent flier loyalty programCargo transportation servicesContract flight trainingOnline ticket booking servicesAirport lounge


Southwest Airlines Co.Major Products and Services

REVENUE ANALYSIS

Overview

Southwest recorded revenues of $10,350 million during FY2009, a decrease of 6.1% compared toFY2008. The company derives all its revenues from the US market.

The company generates revenues through three business divisions: passenger (95.6% of the totalrevenues in FY2009), freight (1.1%) and other (3.3%).

Revenue by division

During FY2009, the passenger division recorded revenues of $9,892 million, a decrease of 6.2%compared to FY2008.

The freight division recorded revenues of $118 million in FY2009, a decrease of 18.6% comparedto FY2008.

The other division recorded revenues of $340 million ($340 million) in FY2009, an increase of 3.3%over FY2008.

Revenue by geography

The company derives all its revenues from the US market.


Southwest Airlines Co.Revenue Analysis

SWOT ANALYSIS

Southwest Airlines (or the company or Southwest) is one of the leading low cost airlines' in the US.The company provides scheduled air transportation in the US. It focuses mainly on point-to-pointservice, rather than the hub-and-spoke service provided by major US airlines. Strong operatingstrategy allowed the company to achieve high asset utilization and reliable on-time performance.Also, it helped the company to increase its revenues and to tap profitable markets. However, increasedcompetition may have material adverse effect on the company's results of operations, financialcondition and liquidity.

WeaknessesStrengths

Contractual obligationsFirm operating strategyDeclining profits and marginsStrong fleet operationsHeavy dependence on passenger revenuesDominant market position in North America

ThreatsOpportunities

Intense competitionRecovery of US airline industryRegulatory conditionsAcquisition of AirTran HoldingsPrice volatility in petroleum marketsRecovery of the US tourism industry

International expansion

Strengths

Firm operating strategy

Southwest focuses mainly on point-to-point service, rather than the hub-and-spoke service providedby major US airlines. Point-to-point service allows for direct nonstop routing by minimizing connections,delays and total trip time. As a result, approximately 76% of Southwest's customers fly nonstop. Asof December 2009, the company's average aircraft trip stage length was 639 miles with an averageduration of approximately 1.8 hours. This service also enables the company to provide its marketswith frequent, conveniently timed flights and low fares. The company offers services such as: DallasLove Field to Houston Hobby 27 weekday roundtrips; Phoenix to Las Vegas, 15 weekday roundtrips,and Los Angeles International to Oakland, 16 weekday roundtrips. It also complements high-frequencyshort-haul routes with long-haul nonstop service between markets including Los Angeles andNashville, Las Vegas and Orlando, and San Diego and Baltimore.

In addition, the company serves downtown airports, which include Dallas Love Field, Houston Hobby,Chicago Midway, Baltimore-Washington International, Burbank, Manchester, Oakland, San Jose,Providence, Ft. Lauderdale/Hollywood, and Long Island Islip airports. These airports are less


Southwest Airlines Co.SWOT Analysis

congested than other airlines' hub airports. This operating strategy allowed Southwest to achievehigh asset utilization and reliable on-time performance. It also helped the company to increase itsrevenues and to tap profitable markets.

Strong fleet operations

The company has a strong fleet base to complement its strong route network. In FY2009, Southwestprovided service to 68 cities in 35 states throughout the US. Also, Southwest served 437 nonstopcity pairs. During the year, the company operated a fleet of 537 Boeing 737 aircraft, of which 88 and9 were under operating and capital leases, respectively. The remaining 440 aircraft were owned.The company also had four owned Boeing 737 aircraft in long-term storage in FY2009. During theyear, the company added 13 Boeing 737-700s aircraft to its fleet and it removed 13 older 737-300sfrom active service. It removed unproductive and less popular flights and reallocated capacity tofund other market growth opportunities, such as Minneapolis-St. Paul, New York LaGuardia, BostonLogan, and Milwaukee, all of which were new destinations for the company in FY2009.

In addition, as of December 2009, the company had firm orders for a total of 91 737-700 aircraft forthe years 2010 through 2016. It also had options for 59 737-700 aircraft from 2011 through 2017,with an additional 54 purchase rights for 737-700 aircraft through 2018. The company is able tosimplify scheduling, maintenance, flight operations, and training activities by operating only one typeof aircraft, the Boeing 737. The strong fleet operation of Southwest helps the company attain acompetitive advantage over its peers.

Dominant market position in North America

Southwest is the largest domestic carrier by total passengers, carrying over 101.3 million passengersin 2009. In FY2009, Southwest recorded revenue passenger miles and available seat miles of74,456.7 million and 98,001.5 million, respectively. The load factor was 76.0% during the year.According to the US Department of Transportation (DOT), as of June 30, 2009, the company wasthe largest air carrier in the US, as measured by the number of originating passengers boarded. InFY2009, the company ranked second in North America in terms of number of passenger carried,first being Delta Air Lines. Dominant market position provides a competitive advantage to the companyover its peers in North America.

Weaknesses

Contractual obligations

Southwest has significant contractual obligations and commitments primarily with regard to futurepurchases of aircraft, payment of debt, and lease arrangements. In FY2014, the company’s totalcontractual obligations are estimated to be $2,510 million, as compared to $1,208 million in FY2010.Furthermore, the company witnessed a decline in its credit rating. In FY2009, Standard & Poor’sand Fitch both downgraded Southwest’s credit rating from BBB+ to BBB based on lower demand,



especially among business travelers, and continued volatility in fuel prices. Moody’s also downgradedthe company’s rating from Baa1 to Baa3 and also lowered the ratings of the company’s PTCs andEETCs.

Southwest's high level of contractual obligations and lowering credit rating could impact its ability toobtain additional financing to support its expansion plans. In addition, it will also lead to the diversionof its cash flows from operations and expansion plans to service the fixed obligations.

Declining profits and margins

The company has witnessed declining profits and margins since FY2007. The operating profits ofthe company have decreased at a compounded annual rate of change (CARC) (2007-09) of 42%,from $791 million in FY2007 to $262 million in FY2009. The decline in operating results is due tothe significant increase of fuel and oil expenses, from $2,690 million in FY2009 to $3,044 million inFY2009. The operating margin of the company decreased from 8% in FY2007 to 2.5% in FY2009.

The net profit of the company also followed a similar pattern. The net profit of Southwest declinedat a CARC of 61%, from $645 million in FY2007 to $99 million in FY2009.The net profit margin ofthe company also declined from 6.5% in FY2007 to 0.9% in FY2009. Therefore, declining profitsand margins indicates that the company has not been able to manage its cost structure efficiently,which can adversely impact its long term financial position.

Heavy dependence on passenger revenues

The company is heavily dependent on passenger revenues. In FY2009, the company derived only1.1% of its revenues from freight operations, compared to 95.6% and 3.3% from passenger transportand other operations, respectively. Southwest has not yet leveraged its strong domestic networktowards increasing its cargo revenues, which may lend more stability to its revenues. Furthermore,according to IATA, the worldwide cargo demand up by 28.1% in March 2010 compared to the samemonth last year. Also IATA predicts the growth of air cargo between 6%-7% in 2010 and 2011.Therefore, a low level of cargo/freight operations exposes the company's dependence on passengerrevenues, which increases its risks of operating in an environment characterized by volatile fuelcosts and very low profit margins.

Opportunities

Recovery of US airline industry

The US regional airline industry has witnessed fluctuating growth rates in 2008 and in 2009. Theindustry was affected by the global economic downturn.The industry is expected to recover in 2010,posting strong growth thereafter. According to Federal Aviation Administration (FAA), passengertraffic will pick up in 2010, with domestic boardings growing 2.3% a year to reach 690.2 million by2025. International boardings on the big carriers and smaller regionals will grow 4.3% a year from



2010 through 2025. The FAA forecasts that total enplanements will hit 1.1 billion in 2025, up from757.4 million in 2008. It also expects that the general-aviation fleet will grow 1% a year, from 234,015in 2008 to 275,230 aircraft in 2025.

Southwest offers scheduled passenger transportation services in the US. Therefore, the companyis well positioned to benefit from recovery of US airline industry and it would help the company togenerate additional revenues.

Acquisition of AirTran Holdings

Southwest pursues acquisitions that supplement its existing businesses. For instance, in September2010, the company entered into a definitive agreement to acquire all of the outstanding commonstock of AirTran Holdings for a combination of cash and Southwest's common stock. AirTran Holdingsis the parent company of AirTran Airways, one of the largest low cost scheduled airlines in the US.As of February 2010, the company operated 138 aircrafts. Further, the acquisition would createmore employment opportunities for its combined employee group, and it will also place the companyin a strong position to respond to any economic and competitive challenges in its industry. Theacquisition would also provide the company to extend its network and diversify into new markets,including significant opportunities to and from Atlanta, the busiest airport in the US, and strengthenits presence in key markets, such as New York LaGuardia, Boston Logan, and Baltimore/Washington.

The acquisition will significantly expand Southwest's low-fare service in many more domestic markets.

Recovery of the US tourism industry

The US tourism industry faced a challenging year due to the downturn but the future looks bright.The results of recent months suggest that recovery is underway and at a stronger pace than initiallyexpected. UNWTO predicts growth of between 3% and 4% in 2010. In 2009, the US had 54.9 millionarrivals and 23.8 million of those were from overseas. The number of arrivals is forecast to increaseto 55.8 million and reach 66.3 million by the end of 2010. The growth in the US tourism industry willenhance airline business. Southwest is well positioned to benefit from increasing global tourismindustry. This in turn would help the company to generate additional revenues.

International expansion

Southwest is expanding its operations to Mexico with the launch international service. In October2010, the company announced the commencement international flights to five Mexico Cities inpartnership with Volaris, an airline company based in Mexico. The service connects Southwestcustomers from 20 Southwest cities to five Volaris Mexican destinations (Cancun, Guadalajara,Morelia, Toluca/Mexico City, and Zacatecas). The new service will connect through Los AngelesInternational Airport, Oakland International Airport, and San Jose International Airport and will createup to 85 additional flight itineraries. This will enable Southwest to expand its business and add toits topline.



Threats

Intense competition

The US airline industry is highly competitive. Southwest competes on the basis of price, customerservice, costs, frequency and convenience of scheduling, frequent flier benefits, efficiency andproductivity. The company competes with other airlines on all of its routes. Its major competitors areAirTran, American Airlines, AMR, Continental Airlines, JetBlue Airways, MAIR, Northwest Airlinesand UAL. Some of these airlines have larger fleet and wider name recognition in certain marketsthan Southwest. In addition, some of the major US airlines have established extensive marketingand code-sharing alliances. The company is also subject to competition from surface transportationin its short-haul markets. This competition could be more significant during economic downturns.Increased competition may have material adverse effect on the company's results of operations,financial condition and liquidity.

Regulatory conditions

As an interstate air carrier, the company is subject to the economic jurisdiction, regulation andcontinuing air carrier fitness requirements of the Department of Transportation (DOT), which includerequired levels of financial, managerial and regulatory fitness. To provide passenger transportationin the US, a domestic airline is required to hold a "Certificate of Public Convenience and Necessity"issued by the DOT.

Also, the company is subject to the jurisdiction of the Federal Aviation Administration (FAA) withrespect to its aircraft maintenance and operations, including equipment, ground facilities, dispatch,communication, training, weather observation, flight personnel and other matters affecting air safety.FAA requirements also cover other issues like retirement of older aircraft, security measures, collisionavoidance systems, airborne wind shear avoidance systems, noise abatement, commuter aircraftsafety and increased inspection, and maintenance procedures to be conducted on older aircraft. Toensure compliance with its regulations, the FAA requires airlines to obtain an operating certificate,which is subject to suspension or revocation for cause, and provides for regular inspections. Thecompany incurs substantial costs in maintaining certifications and otherwise complying with the laws,rules and regulations. The increased regulations by the DOT and FAA or comparable agencies inthe US may increase significant additional costs to the company and impose restrictions.

Price volatility in petroleum markets

The demand for petroleum and related products has historically been cyclical and sensitive to theavailability and prices of oil and related feedstock. Historically, international prices of crude oil andrefined products have fluctuated widely due to many factors that are beyond the control of companieslike MAS. Fuel prices and availability are subject to wide price fluctuations based on geopoliticalissues and supply and demand, which can neither be controlled nor accurately predicted. According



to IATA, jet fuel price as of August 2010 was $92.4 per barrel, an increase of 12.6% over August2009 jet fuel price. It is forecasted that the average jet fuel price in 2010 would be $88.3 per barrel.

Fuel has been one of the largest operating expenses for the last several years. In FY2009, Southwestincurred $3,044 as fuel and oil expense, representing about 30.2% of the total operating expenses.The volatility of global and regional oil prices exposes the company to extreme fluctuations in earnings,which is likely to have an adverse consequence on its growth initiatives. Any inability to obtain jetfuel at competitive prices would materially have an impact on the Southwest's results of operationand financial condition.



TOP COMPETITORS

The following companies are the major competitors of Southwest Airlines Co.

AMR CorporationNorthwest Airlines CorporationUAL CorporationMAIR HoldingsJetBlue Airways CorporationContinental Airlines, Inc.American Airlines Inc.AirTran Holdings, Inc.


Southwest Airlines Co.Top Competitors

COMPANY VIEW

A statement by Gary C. Kelly, the Chairman, President and Chief Executive Officer at SouthwestAirlines is given below. The statement has been taken from the company’s 2009 annual report.

To our Shareholders:

The year 2009 will forever be remembered as the “Great Recession.” It was a year where the airlineindustry, as a whole, lost billions of dollars. Despite the severe economic collapse, Southwestremained profitable, producing our 37th consecutive year of profitability, largely due to a series ofaggressive adjustments leading to a remarkable fourth quarter rally. The economy did not improveduring the year to produce that result; it was our People. I could not be more proud of them, as ourPeople have consistently outperformed our competition, in most every way.

Our 2009 net income was $99 million, or $.13 per diluted share, compared to $178 million, or $.24per diluted share for 2008. Each year includes special items (primarily noncash, mark-to-market andother items required for a portion of the Company’s fuel hedge portfolio). Excluding special itemsfrom both years, our yearover- year profit declined 51 percent to $143 million, or $.19 per dilutedshare for 2009, compared to $294 million, or $.40 per diluted share for 2008.

Economic recession leads to a decline in travel demand, especially business travel. Ultimately, 2009proved to be the worst year on record for U.S. Airlines, in terms of year-over-year revenue declines.We began to see weakness in business travel in February. By May, we were experiencingyear-over-year unit revenue declines of close to ten percent. Revenues in some short-haul, businesstravel markets were off as much as 35 percent. Accordingly, we called several “audibles” mid-yearto try and salvage what was destined, otherwise, to become our first annual loss since Southwest’sstart-up years. New technology, years in the making, was launched in 2009 that enabled enormouslysuccessful fall fare sales, as well as a restructuring of core fares to account for less full-coachdemand. New (unplanned) products were introduced, including Pets onboard, Unaccompanied Minorservice charges, and Early Bird Check-in. We continued optimizing our flight schedules to allow formore published itineraries, with enhanced connecting opportunities. While still a point-to-pointschedule, with three-fourths of our passengers flying nonstop, we were able to boost our connectingtraffic by several percentage points and revenues by tens of millions of dollars.

Perhaps most significantly, we reaffirmed our commitment to Customer Service. Specifically, wedeclined to join our competitors in charging for the first and second checked bag, and we launchedan aggressive television advertising campaign to affirm that Bags Fly Free only on Southwest. Theresults have been impressive as Customers express their distaste for our competitors’ fees. Wehave experienced a domestic market share shift worth close to a billion dollars in 2009. Our secondhalf 2009 revenue results were impressive, especially given the recession. Starting in July andcontinuing through February 2010, the most recent month reported, we reported a record load factorevery month. We reported record load factors for third quarter, fourth quarter, and full year 2009.We reported record unit quarterly revenue in fourth quarter 2009. We significantly outperformed the


Southwest Airlines Co.Company View

industry in 2009 revenue production and believe the 2009 record load factors and revenues dwarfwhat we would otherwise have collected in bag fees.

We prepared for record-high energy prices and recession by avoiding fleet growth in 2009 and byaggressively trimming unpopular and unprofitable flights. All told, this led to reduced seat miles flownin 2009 compared to 2008 of approximately five percent, net. A significant amount of the unprofitablecapacity was “harvested” and redeployed to developing markets with high Customer demand (Denver)and large new markets (Minneapolis/St. Paul, New York La Guardia, and Boston Logan). Given thedifficult economic environment, we did not desire to take on significant new market risk and,consequently, scheduled a modest number of daily departures to these large new cities in order tofeed our existing network.This conservative strategy proved out, as these new markets boosted ourprofits in 2009. Given our early success with these new cities, we decided to launch Milwaukee inNovember, which is a very competitive market. We want Milwaukee on our route map and judgeddeferral of service not in our best long-term interests. While it carries more risk than the other threenew cities, it has exceeded our expectations, and we are pleased with the results.

In July, we made the decision to bid for Frontier Airlines, which was for sale pursuant to a bankruptcycourt-supervised auction process. Ultimately, our bid was not selected, primarily due to contingenciesin the bid that were designed to protect our Culture and the best interests of our Employees,Customers, and Shareholders. As with any prospective buying opportunity, we reached our limit andchose not to remove our contingencies. In the meantime, we boosted our presence, our Customers,and our revenues in Denver. We have surpassed Frontier as the second largest airline servingDenver (based on originating passengers boarded). By August 2010, we expect Denver to be thefifth largest departure point on our system. Without a doubt, Denver is the most successful city everadded to the Southwest route system, in terms of rapid capacity and revenue growth, in the first fiveyears of service. In summary, we are not disappointed with our position in Denver or the outcomeof the Frontier bankruptcy auction.

The year ahead is challenging, still. Energy prices are double year-ago levels, and the economicrecovery is halting and tepid. While 2010 earnings may improve from last year’s meager results,they may not justify further investment in fleet growth. Until earnings are generating sufficient returnson capital, we have no plans to organically grow the fleet. Instead, we will focus on improving ourprofitability through containing costs, maximizing productivity, improving the Customer Experience,winning more Customers, delivering new revenue-generating products, and driving more revenues.In particular, we plan to focus on the following revenue initiatives in 2010 and 2011:

• Continued schedule optimization, enabling the May 2010 opening of Panama City Beach, Florida,an innovative opportunity to collaborate with the St. Joe Company

• Launch of onboard wireless internet access beginning in spring 2010 and targeting early 2012 asour completion date for fleet-wide implementation

• Development of international marketing partnerships

• Development of the next generation Rapid Rewards frequent flyer program



• Continued deployment of enhancements to southwest.com

• Continued revenue management enhancements

In addition, we will continue to focus on keeping Southwest financially strong. Currently, our totalliquidity exceeds $3 billion, including cash on-hand, short-term investments, and our fully-availablebank line-of-credit. Based on our current projection for operations, capital spending, and debt service,we expect our liquidity to increase further in 2010.

Our balance sheet remains investment-grade strong, with debt-to-total capital of 45 percent. As withliquidity, based on our current projections, we expect our balance sheet to strengthen further in 2010,with no material financing requirements. Finally, we have significant fuel hedge protection in place,if prices increase from current levels, as detailed in our year-end financial statements. We arefinancially strong and believe we are well-prepared for the continued tough times ahead of us.

I will forever be grateful to our People for what they achieved in 2009.They persevered, with dramaticchallenges, continuous change, and amid much economic anxiety. Despite that, they producedoutstanding results in ontime performance, baggage handling, and Customer satisfaction. OurCustomers rate Southwest service levels, arguably, higher than ever. And, we remain among thetop low-cost producers of major airlines, and America’s preferred Low Fare airline. Our Employeesare the best and the reason Southwest continues to outperform our competitors.



LOCATIONS AND SUBSIDIARIESHead Office

Southwest Airlines Co.2702 Love Field DriveDallasTexas 75235USAP:1 214 792 4000F:1 214 792 5015http://www.southwest.com

Other Locations and Subsidiaries

Southwest Airlines VacationsMilwaukeeWisconsin 53201USA


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