Comparative Consolidated Operating Statistics

Relevant Southwest comparative operating statistics for the three and nine
months ended September 30, 2008 and 2007 are as follows:

                                                       Three months ended September 30,
                                                           2008                  2007            Change

Revenue passengers carried                                  22,243,013          23,553,366           (5.6 )%
Enplaned passengers                                         25,686,181          27,242,613           (5.7 )%
Revenue passenger miles (RPMs) (000s)                       18,822,810          19,685,690           (4.4 )%
Available seat miles (ASMs) (000s)                          26,287,035          25,715,957            2.2 %
Load factor                                                       71.6 %              76.6 %        (5.0) pts.
Average length of passenger haul (miles)                           846                 836            1.2 %
Average aircraft stage length (miles)                              642                 633            1.4 %
Trips flown                                                    300,537             297,782            0.9 %
Average passenger fare                                         $124.38             $105.37           18.0 %
Passenger revenue yield per RPM (cents)                          14.70               12.61           16.6 %
Operating revenue yield per ASM (cents)                          11.00               10.06            9.3 %
Operating expenses per ASM (cents)                               10.67                9.09           17.4 %
Fuel costs per gallon, excluding fuel tax                        $2.60               $1.69           53.8 %
Fuel consumed, in gallons (millions)                               382                 388           (1.5 )%
Full-time equivalent Employees at period-end                    34,545              33,787            2.2 %
Size of fleet at period-end                                        538                 511            5.3 %

                                                       Nine months ended September 30,
                                                           2008                 2007            Change

Revenue passengers carried                                 67,741,176          66,956,318            1.2 %
Enplaned passengers                                        77,945,753          77,035,110            1.2 %
Revenue passenger miles (RPMs) (000s)                      56,226,510          54,813,530            2.6 %
Available seat miles (ASMs) (000s)                         77,815,557          74,377,009            4.6 %
Load factor                                                      72.3 %              73.7 %        (1.4) pts
Average length of passenger haul (miles)                          830                 819            1.3 %
Average aircraft stage length (miles)                             635                 630            0.8 %
Trips flown                                                   898,759             865,329            3.9 %
Average passenger fare                                        $117.02             $105.57           10.8 %
Passenger revenue yield per RPM (cents)                         14.10               12.90            9.3 %
Operating revenue yield per ASM (cents)                         10.65                9.91            7.5 %
Operating expenses per ASM (cents)                              10.16                9.01           12.8 %
Fuel costs per gallon, excluding fuel tax                       $2.30               $1.64           40.2 %
Fuel consumed, in gallons (millions)                            1,143               1,114            2.6 %
Full-time equivalent Employees at period-end                   34,545              33,787            2.2 %
Size of fleet at period-end                                       538                 511            5.3 %

Material Changes in Results of Operations

Summary

Southwest recorded a third quarter 2008 net loss of $120 million, or $.16 per share, diluted, versus the Company's third quarter 2007 net income of $162 million, or $.22 per share, diluted. The net loss in third quarter 2008 was attributable to adjustments related to a decline in market value of the derivative contracts the Company utilizes in attempting to hedge against jet fuel price increases. In third quarter 2008, these unrealized losses primarily were associated with marking to market derivatives used for hedging purposes, but that do not qualify for special hedge accounting, or ineffectiveness associated with hedges, as defined in SFAS 133. As a result of the third quarter 2008 significant decreases in market prices for fuel derivatives that will settle in future periods or that were ineffective, as defined, or that did not qualify for special hedge accounting, the Company recorded $247 million in net pre-tax charges, which are included in "Other (gains) losses, net." In third quarter 2007, the Company recorded a total of $48 million in net pre-tax gains associated with fuel derivatives that were ineffective, as defined, or did not qualify for special hedge accounting. See Note 5 to the unaudited condensed consolidated financial statements for further information on the Company's hedging activities and accounting associated with derivative instruments.

Third quarter 2008 operating income was $86 million compared to third quarter 2007 operating income of $251 million. This represented the Company's 70th consecutive quarter of profitability from an operating income perspective. The operating income decrease of $165 million, or 65.7 percent, primarily was due to an increase in operating expenses, most notably fuel and oil expense, which exceeded the 11.7 percent increase in operating revenues. Due to the significant unrealized adjustments recorded to "Other (gains) losses, net," which is below the operating income line, the Company believes operating income provides a better indication of the Company's financial performance in both years than does net income (loss). Although the Company's fuel hedging program has resulted in significant unrealized gains and losses being recorded to "Other (gains) losses, net" for several years, it also continues to provide excellent economic benefits to the Company. The Company's hedging program resulted in the realization of approximately $448 million in cash settlements for third quarter 2008 compared to $189 million in cash settlements for third quarter 2007. The majority of the $448 million in third quarter 2008 cash settlements were reflected as a reduction to Fuel and oil expense. However, approximately $88 million of cash gains related to derivatives settling during third quarter 2008 had already been reflected in the Company's earnings in previous periods, representing hedge ineffectiveness and derivatives marked to market due to nonqualification for hedge accounting in prior reported results. Even including the Company's strong third quarter 2008 fuel derivative cash settlements, its jet fuel cost per gallon increased 53.8 percent versus third quarter 2007. Despite the decline in market value of its fuel hedging portfolio, the Company believes it continues to retain a strong fuel hedge position. The net fair value of the Company's remaining unsettled fuel derivative instruments as of September 30, 2008, was $2.5 billion.

The 20.0 percent increase in the Company's operating costs for third quarter 2008 versus third quarter 2007, which primarily was driven by fuel costs, largely overshadowed the continuation of strong revenue trends. Despite a capacity increase of only 2.2 percent compared to third quarter 2007, the Company was able to generate strong revenue growth. Operating revenues grew 11.7 percent as a result of several Company initiatives: a slowing of capacity growth to under two percent in second half 2008, which has enabled gradual fare increases; a continual flight schedule optimization involving trimming unproductive and less popular flights and reallocating capacity to fund market growth opportunities such as Denver, and the upcoming addition of the Company's newest announced city, Minneapolis-St. Paul (beginning in March 2009); enhanced revenue management technologies, processes, and techniques; and aggressive promotion of the Company's No Hidden Fees, Low Fare brand.

For the nine months ended September 30, 2008, net income was $234 million ($.32 per share, diluted), which represented a 56.1 percent decrease compared to the same 2007 period. However, both periods also included significant unrealized gains from hedge ineffectiveness and marking to market derivatives the Company uses for hedging purposes, but that do not qualify for special hedge accounting, as defined in SFAS 133. These gains totaled $91 million and $265 million for the nine months ended September 30, 2008 and 2007, respectively. Operating income for the nine months ended September 30, 2008 was $380 million, a 42.8 decrease compared to the nine months ended September 30, 2007. This decrease primarily was due to a 40.2 percent increase in the Company's average fuel cost per gallon, including hedging, which counteracted a 12.5 percent increase in operating revenues.

During early July 2008, the Company announced its intention to enter into a codeshare agreement with Canadian carrier WestJet. This relationship is intended to allow the carriers to offer Customers a seamless travel experience to a wide array of destinations. The Company and WestJet plan to announce codeshare flight schedules and additional features regarding the relationship by late 2009. Certain details of the codeshare and elements of the alliance are subject to approvals by both the U.S. and Canadian governments. The Company is also continuing to consider codeshare opportunities with other carriers, both domestic and international.

For the current year, as of September 30, 2008, the Company has received a total of 26 new Boeing 737-700s. The Company has three additional deliveries of new Boeing 737-700s scheduled for delivery in fourth quarter 2008, but will likely not take delivery during that period due to an ongoing machinists' strike at Boeing. Based on current plans, the Company expects its fourth quarter 2008 ASM capacity to increase approximately one percent versus fourth quarter 2007. Based on economic conditions, demand for air travel, competitor capacity decisions, and fuel prices, the Company continues to evaluate its 2009 capacity plans. At the current time, first quarter 2009 ASMs are expected to decline on a year-over-year basis in the five to six percent range. The Company does not currently anticipate the Boeing strike impacting its flight schedule in the short term, due to the Company's flexibility with regards to its current fleet of owned and leased aircraft.

Comparison of three months ended September 30, 2008, to three months ended September 30, 2007

Revenues

Consolidated operating revenues increased by $303 million, or 11.7 percent, primarily due to a $285 million, or 11.5 percent, increase in Passenger revenues. This represented an increase in operating revenue yield per ASM (unit revenue) of 9.3 percent. The increase in unit revenue primarily was due to a 16.6 percent increase in Passenger yield per Revenue Passenger Mile (RPM yield), as the Company has been able to institute gradual fare increases and enhanced revenue management techniques and processes. Average passenger fares increased 18.0 percent compared to third quarter 2007. This increase was partially offset by a decrease in load factor of 5.0 points versus third quarter 2007 due to the Company's efforts to raise fares as well as the weak economy. The Company estimates that Hurricanes Gustav and Ike, which both hit the United States Gulf Coast during third quarter 2008, caused an approximate $11 million reduction in third quarter 2008 passenger revenue as a result of flight cancellations.

Based on the Company's recent actions to boost revenues, domestic competitor capacity reductions, and current revenue and booking trends, the Company currently expects another solid increase in fourth quarter 2008 operating unit revenues. Thus far, the Company's operating revenue per ASM growth rate in October 2008 has surpassed its third quarter 2008 year-over-year increase of 9.3 percent and its September 2008 operating revenue per ASM growth rate of 11.0 percent. However, the current world-wide financial crisis does create uncertainty about future demand.

Consolidated freight revenues increased by $5 million, or 15.6 percent, primarily as a result of higher rates charged. The Company expects a comparable increase in consolidated freight revenues for fourth quarter 2008 compared to fourth quarter 2007. Other revenues increased by $13 million, or 17.6 percent, compared to third quarter 2007, primarily due to higher charter revenues. The Company expects Other revenues for fourth quarter 2008 to increase versus fourth quarter 2007, but at a lower rate than the third quarter 2008 increase versus third quarter 2007.

Operating expenses

Consolidated operating expenses for third quarter 2008 increased $468 million, or 20.0 percent, compared to third quarter 2007, versus a 2.2 percent increase in capacity compared to third quarter 2007. Historically, except for changes in the price of fuel, changes in operating expenses for airlines are typically driven by changes in capacity, or ASMs. The following presents Southwest's operating expenses per ASM for third quarter 2008 and third quarter 2007 followed by explanations of these changes on a per-ASM basis and/or on a dollar basis (in cents, except for percentages):

                                    Three months ended September 30,     Per ASM        Percent
                                    2008                  2007            Change         Change

Salaries, wages, and benefits           3.25                   3.23            .02             .6
Fuel and oil                            3.80                   2.57           1.23           47.9
Maintenance materials
and repairs                              .72                    .62            .10           16.1
Aircraft rentals                         .15                    .15              -              -
Landing fees and other rentals           .64                    .57            .07           12.3
Depreciation                             .58                    .54            .04            7.4
Other operating expenses                1.53                   1.41            .12            8.5
Total                                  10.67                   9.09           1.58           17.4

Operating expenses per ASM for the three months ended September 30, 2008, were 10.67 cents, a 17.4 percent increase compared to 9.09 cents for third quarter 2007. Almost 80 percent of the increase per ASM was due to higher fuel costs, as the Company's average cost per gallon of fuel increased 53.8 percent versus the prior year, net of hedging. On a dollar basis, nearly 75 percent of the increase was due to higher fuel and oil expense, primarily as a result of the significant increase in fuel cost per gallon. The majority of the remainder of the dollar increase was due to higher maintenance expense and higher airport costs, such as space rentals, versus third quarter 2007. Based on current unit operating cost trends, the Company expects fourth quarter 2008 unit costs to be higher than fourth quarter 2007's 9.37 cents per ASM, primarily due to higher fuel and oil expense and the Company's decision to slow ASM growth. Since a portion of the Company's operating costs are fixed, the slowdown in growth results in these fixed costs being spread over a reduced number of ASMs versus the Company's prior ASM forecast. However, as a result of recent declines in fuel prices, the fourth quarter year-over-year cost per ASM increase is expected to be lower than the third quarter year-over-year increase of 17.4 percent.

Salaries, wages, and benefits expense per ASM for the three months ended September 30, 2008, increased .6 percent compared to third quarter 2007, and on a dollar basis increased $24 million. Third quarter 2007 expense included the impact of a $25 million charge associated with the early retirement program offered by the Company during the prior year. See Note 9 to the unaudited condensed consolidated financial statements. Excluding this prior year charge, Salaries, wages, and benefits increased on both a per-ASM and a dollar basis, primarily due to wage accruals related to ongoing labor contract negotiations with various Employee workgroups. This increase was partially offset by a decrease in profitsharing expense versus third quarter 2007. The Company's profitsharing contributions are based on income before taxes, primarily excluding unrealized gains and losses from fuel derivative contracts; therefore, profitsharing expense for third quarter 2008 decreased 56.4 percent. Excluding the impact of profitsharing, the Company currently expects Salaries, wages, and benefits per ASM in fourth quarter 2008 to be in line with the third quarter 2008 level.

Fuel and oil expense for the three months ended September 30, 2008, increased $340 million, and on a per ASM basis increased 47.9 percent, primarily due to higher average prices, excluding hedging. Excluding hedging, the Company's average fuel cost per gallon in third quarter 2008 was $3.61 versus $2.18 in third quarter 2007. Also, in third quarter 2008, the Company held fuel derivative instruments that hedged a smaller portion of its fuel consumption (approximately 80 percent) than in third quarter 2007 (over 90 percent). As a result of these positions, for third quarter 2008, the Company's hedging gains reflected in Fuel and oil expense totaled $387 million, while third quarter 2007 hedging gains recorded in Fuel and oil expense were $188 million. Including the effects of hedging activities, the Company's average fuel cost per gallon in third quarter 2008 was $2.60, which was 53.8 percent higher than third quarter 2007.

As of October 15, 2008, for fourth quarter 2008, the Company has fuel derivatives in place for approximately 85 percent of its expected fuel consumption with a combination of derivative instruments that effectively cap prices at approximately $62 per barrel of crude oil and has added refinery margins on the majority of those positions. These positions primarily consist of collar contracts with average crude oil equivalent floors of approximately $53 per barrel. Based on this derivative position and market prices as of October 15, 2008, the Company is currently estimating its fourth quarter 2008 jet fuel cost per gallon to be in the $2.00 range, excluding the effects of any ineffectiveness from the Company's fuel hedging program. Also, as of October 15, 2008, the Company has derivative positions for over 75 percent of anticipated jet fuel needs for 2009 at approximately $73 per barrel (primarily collars with floors averaging approximately $61 per barrel), approximately 50 percent for 2010 at approximately $90 per barrel, approximately 40 percent for 2011 at approximately $93 per barrel, over 35 percent for 2012 at approximately $90 per barrel, and a modest position in 2013.

At September 30, 2008, the estimated fair value of the Company's fuel derivative contracts was $2.5 billion; however, due to October 2008 declines in prices for crude oil and other commodities, the estimated fair value of the Company's fuel derivative contracts had decreased to approximately $550 million as of October 15, 2008. See Note 5 to the unaudited condensed consolidated financial statements for further discussion of the Company's hedging activities.

The Company has also continued its efforts to conserve fuel, and in 2007, began installing Aviation Partners Boeing Blended Winglets on a significant number of its 737-300 aircraft (all 737-700 aircraft are already equipped with winglets). Installations on these 737-300 aircraft are expected to be completed in late 2008 or early 2009. This and other fuel conservation efforts resulted in an approximate 3.5 percent decrease in the Company's fuel burn rate per ASM for third quarter 2008 versus third quarter 2007.

Maintenance materials and repairs for the three months ended September 30, 2008, increased $30 million or 18.8 percent on a dollar basis compared to third quarter 2007, and increased 16.1 percent on a per-ASM basis compared to third quarter 2007. Approximately 75 percent of the dollar increase compared to third quarter 2007 was due to an increase in engine costs related to the Company's 737-700 aircraft. The Company entered into a new engine repair agreement for these aircraft and, as noted below, expense is now based on flight hours associated with 737-700 engines for third quarter 2008 versus being based on actual repair events in prior periods. The majority of the remainder of the increase on a dollar basis was due to a planned increase in inspection and repair events for airframes. The increase in maintenance materials and repairs per ASM for third quarter 2008 compared to third quarter 2007 primarily was due to the increase in expense related to the Company's 737-700 aircraft engines.

In June 2008, the Company transitioned from its previous 737-700 engine repair agreement with GE Engines Services, Inc. (GE Engines), under which repairs were done pursuant to a combination of fixed pricing and time and material terms, to a new agreement with GE Engines that provides for engine repairs to be done on a rate per flight hour basis. The previous agreement was set to expire in 2013, while the new agreement will expire in 2018. The new agreement covers all engines currently in the Company's 737-700 fleet as well as future firm deliveries for this aircraft type. Under this new agreement, the Company has effectively transferred risk for specified future repairs and maintenance on these engines to the service provider and Southwest will pay GE Engines a contractually stated rate per hour flown, as stated in the agreement. Since expense for these engine repairs is now based on engine hours flown, as it is for the Company's 737-300 and 737-500 fleet, this new agreement allows the Company to more reliably predict future engine repair costs. This new agreement resulted in higher expense for 737-700 engines in third quarter 2008 on a flight hour basis, than did expense for these engines for third quarter 2007 on a time and materials basis. Considering the new agreement, the Company expects Maintenance materials and repairs per ASM for fourth quarter 2008 to be in line with the 16.1 percent increase experienced in third quarter 2008, based on currently scheduled airframe maintenance events and projected engine hours flown.

Landing fees and other rentals for the three months ended September 30, 2008, increased $22 million on a dollar basis, and on a per ASM basis increased 12.3 percent compared to third quarter 2007. The majority of the increases on both a dollar basis and a per ASM basis were due to higher space rentals in airports as a result of both space increases by the Company to accommodate new flight activity and higher rates charged by those airports for gate and terminal space. A portion of these higher rates charged by airports are due to other airlines reduced capacity, as airport costs are then allocated among a fewer number of total flights. As a consequence, the Company currently also expects Landing fees and other rentals per ASM in fourth quarter 2008 to be slightly higher than the .64 cents per ASM recorded in third quarter 2008.

Depreciation expense for the three months ended September 30, 2008, increased by $12 million on a dollar basis compared to third quarter 2007, and increased 7.4 percent on a per-ASM basis. The increase on a dollar basis primarily was due to the Company's net addition of 27 Boeing 737s to its fleet over the past twelve months. The increase on a per-ASM basis primarily was due to the increase in the Company's fleet size exceeding the increase in ASMs as a result of the Company's recent decision to slow its growth. For fourth quarter 2008, the Company expects Depreciation expenses per ASM to be in line with third quarter 2008's .58 cents.

Other operating expenses per ASM for the three months ended September 30, 2008, increased 8.5 percent compared to third quarter 2007, and, on a dollar basis, increased $40 million. Approximately 40 percent of the increase per ASM was due to higher fuel sales taxes associated with the significant increase in fuel costs, excluding the impact of hedging. The largest items contributing to the dollar increase were a $13 million increase in fuel sales taxes, a $7 million increase in contract programming and consulting fees associated with several technology projects the Company has in progress, and a $6 million increase in credit card processing fees associated with the increase in passenger revenues. For fourth quarter 2008, the Company currently expects Other operating expenses per ASM to be comparable to third quarter 2008's 1.53 cents.

Through the 2003 Emergency Wartime Supplemental Appropriations Act, the federal government has continued to provide renewable, supplemental, first-party war-risk insurance coverage to commercial carriers, at substantially lower premiums than prevailing commercial rates and for levels of coverage not available in the commercial market. The government-provided supplemental coverage from the Wartime Act is currently set to expire on December 31, 2008. Although another extension beyond this date is expected, if such coverage is not extended by the government, the Company could incur substantially higher insurance costs or unavailability of adequate coverage in future periods.

Other

Interest expense for the three months ended September 30, 2008, increased $7 million, or 25.0 percent, compared to third quarter 2007, primarily due to the Company's issuance of $500 million Pass Through Certificates in October 2007 and the Company's borrowing under its $600 million term loan in May 2008. See Notes 5 and 10 to the unaudited condensed consolidated financial statements for more information.

Capitalized interest for the three months ended September 30, 2008, decreased $7 million, or 53.8 percent, compared to the same period in the prior year primarily due to a decline in both interest rates and a decrease in progress payment balances for scheduled future aircraft deliveries.

Interest income for the three months ended September 30, 2008, decreased by $2 million, or 22.2 percent, compared to the same prior year period, primarily due to a decrease in rates earned on invested cash and short-term investments. The Company's cash and cash equivalents and short-term investments as of September 30, 2008 and 2007, included $2.5 billion and $1.1 billion, respectively, in collateral deposits received from the counterparties of the Company's fuel derivative instruments. Although these amounts are not restricted in any way, the Company generally must remit the investment earnings from these amounts back to the counterparties. Depending on the fair value of the Company's fuel derivative instruments, the amounts of collateral deposits held at any point in time can fluctuate significantly. Therefore, the Company generally excludes the cash collateral deposits in its decisions related to long-term cash planning and forecasting. See Item 3 of Part I for further information on these . . .