LUV

Southwest Airlines Co.

Southwest Airlines Co. (the “Company”) is a major passenger airline that provides scheduled air transportation in the United States. The Company commenced service on June 18, 1971, with three Boeing 737 aircraft serving three Texas cities: Dallas, Houston, and San Antonio. The Company ended 2009 with 537 active Boeing 737 aircraft serving 68 cities in 35 states throughout the United States, and, despite what has been reported to be one of the worst years in aviation history from an economic standpoint, the Company began service during 2009 to four new airports: Minneapolis-St. Paul (in March), New York’s LaGuardia Airport (in June), Boston’s Logan International Airport (in August), and Milwaukee International Airport (in November). The Company also announced its intent to begin service from Northwest Florida Beaches International Airport near Panama City, Florida in May 2010. Based on the most recent data available from the U.S. Department of Transportation, as of June 30, 2009, the Company was the largest air carrier in the United States, as measured by the number of originating passengers boarded.

The Company principally provides point-to-point, rather than hub-and-spoke, service. This allows the Company to maximize the use of key assets, including aircraft, gates, and Employees, and also facilitates the Company’s ability to provide its markets with frequent, conveniently timed flights and low fares.

The Company has predominantly served short-haul routes with high frequencies. Over recent years, the Company has complemented this service with medium to long-haul routes, including transcontinental service.

Industry

A difficult U.S. economic environment continued to negatively impact the airline industry during 2009. This reduced business demand, as companies tightened corporate travel policies, resulting in a decline in business travel and a decrease in the percentage of full-fare purchases. This also resulted in a decrease in discretionary spending by leisure travelers. As a result, many airlines, including the Company, responded with capacity cuts and fare discounting.

Fuel prices also continued to impact the industry. Although fuel prices were lower overall than in 2008, prices remained much higher than long-term historical averages.

Company Operations

General

The Company principally provides point-to-point service, rather than the “hub-and-spoke” service provided by most major U.S. airlines (often referred to as “legacy airlines”), in order to minimize connections, delays, and total trip time. Point-to-point service allows for more direct non-stop routing than hub-and-spoke service because the hub-and-spoke system concentrates most of an airline’s operations at a limited number of hub cities and serves most other destinations in the system by providing one-stop or connecting service through the hub. Approximately 76 percent of the Company’s Customers flew non-stop during 2009, and the Company’s average aircraft trip stage length in 2009 was 639 miles with an average duration of approximately 1.8 hours. Approximately 78 percent of the Company’s Customers flew non-stop during 2008, and the Company’s average aircraft trip stage length in 2008 was 636 miles with an average duration of approximately 1.8 hours.

The Company’s point-to-point service also enables it to provide its markets with frequent, conveniently timed flights. Examples of markets offering frequent daily flights are: Dallas Love Field to Houston Hobby, 27 weekday roundtrips; Phoenix to Las Vegas, 15 weekday roundtrips; and Los Angeles International to Oakland, 16 weekday roundtrips. The Company complements these high-frequency short-haul routes with long-haul, nonstop service between markets such as Los Angeles and Nashville, Las Vegas and Orlando, and San Diego and Baltimore. As of December 31, 2009, the Company served 437 non-stop city pairs.

The Company operates with a low cost structure that is designed to allow it to charge low fares. Adjusted for stage length, the Company has lower unit costs, on average, than most major carriers. The Company’s low cost structure is facilitated by the Company’s reliance upon a single aircraft type, its operationally efficient point-to-point route structure, and its highly productive Employees. The Company’s use of a single aircraft type, the Boeing 737, enables it to simplify scheduling, maintenance, flight operations, and training activities. The Company’s point-to-point route structure includes service to and from 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. These conveniently located airports are typically less congested than other airlines’ hub airports, which enables the Company to achieve high asset utilization because aircraft can be scheduled to minimize the amount of time they are on the ground. This in turn reduces the number of aircraft and gate facilities that would otherwise be required and allows for high Employee productivity (headcount per aircraft) and a strong on-time performance record.

Employees

At December 31, 2009, the Company had 34,726 active fulltime equivalent Employees, consisting of 15,345 flight, 2,488 maintenance, 11,943 ground, Customer, and fleet service, and 4,950 management, accounting, marketing, and clerical personnel.