Comparative Consolidated Operating Statistics

Relevant Southwest comparative operating statistics for the three months ended
March 31, 2009 and 2008 are as follows:

                                                        Three months ended March 31,
                                                           2009                2008           Change

Revenue passengers carried                                19,759,690         21,504,821           (8.1 )%
Enplaned passengers                                       23,049,990         24,708,615           (6.7 )%
Revenue passenger miles (RPMs) (000s)                     16,891,629         17,592,159           (4.0 )%
Available seat miles (ASMs) (000s)                        24,171,675         25,193,437           (4.1 )%
Load factor                                                     69.9 %             69.8 %          0.1  pts
Average length of passenger haul (miles)                         855                818            4.5 %
Average aircraft stage length (miles)                            635                627            1.3 %
Trips flown                                                  279,135            294,790           (5.3 )%
Average passenger fare                                       $113.97            $112.24            1.5 %
Passenger revenue yield per RPM (cents)                        13.33              13.72           (2.8 )%
Operating revenue yield per ASM (cents)                         9.75              10.04           (2.9 )%
Operating expenses per ASM (cents)                              9.96               9.69            2.8 %
Fuel costs per gallon, including fuel tax                      $1.99              $2.13           (6.6 )%
Fuel consumed, in gallons (millions)                             349                373           (6.4 )%
Full-time equivalent Employees at period-end                  35,512             34,793            2.1 %
Size of fleet at period-end                                      539                527            2.3 %

* Headcount is defined as "Active" fulltime equivalent Employees for both periods presented.

Material Changes in Results of Operations

Summary

Southwest recorded a first quarter 2009 net loss of $91 million, or $.12 loss per share, diluted, versus the Company's first quarter 2008 net income of $34 million, or $.05 per share, diluted. The net loss in first quarter 2009 was primarily due to a decline in demand for domestic air travel as a result of the current ongoing U.S. recession. Although the Company, as well as most other airlines, reduced capacity versus the prior year, demand was weak, resulting in a significant increase in discounting of seats and a reduction in full-fare demand. This resulted in a 2.7 percent decrease in passenger revenue yield per available seat mile (ASM). This result was exacerbated by the year-over-year impact relating to the timing of the Easter holiday-Easter fell in March of 2008, thereby providing a boost to first quarter 2008 revenues, but falls in April of the current year, which will provide a benefit to second quarter 2009. The Company's overall 6.8 percent year-over-year decrease in operating revenues more than offset savings realized as a result of lower jet fuel prices versus first quarter 2008. The Company's average jet fuel cost per gallon (including related fuel taxes) decreased 6.6 percent compared to first quarter 2008, inclusive of gains and/or losses from fuel contract settlements and related SFAS 133 adjustments included in "Fuel and oil" expense. 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. For first quarter 2009, the Company had an operating loss of $50 million compared to first quarter 2008 operating income of $88 million.

Despite the ongoing U.S. recession and reduction in demand for air travel, the Company is continuing to push forward with its strategy to grow revenues. The Company has differentiated itself from most other domestic carriers with its aggressive promotion of its No Hidden Fees, Low Fare brand. The Company also continues to add new markets, including Minneapolis-St. Paul (in March 2009), New York's LaGuardia airport (in June 2009), and Boston's Logan International airport (in August 2009). Although the Company does not plan to grow its fleet in 2009, it is able to add flights to these new markets through a continual flight schedule optimization, which involves trimming unproductive and less popular flights and reallocating capacity to fund market growth opportunities such as Denver and the aforementioned cities. Other potential revenue initiatives include codeshare agreements with Canadian carrier WestJet and Mexican carrier Volaris, and the Company's current ongoing test of wireless internet connectivity ("Wi-Fi") aboard its aircraft. The Company and WestJet plan to announce codeshare flight schedules and additional features regarding the relationship by late 2009. The Company and Volaris plan to announce codeshare flight schedules and additional features regarding the relationship by early 2010. Certain details of these alliances are subject to approvals by both the U.S. and Canadian/Mexican governments. The Company is also continuing to consider codeshare opportunities with other carriers. The Company currently has Wi-Fi installed on four of its Boeing 737 aircraft, and expects to soon make a decision regarding plans to offer this service aboard a larger portion of its fleet.

On the cost side, the Company remains diligent in its efforts to control expenses and remain a low-cost leader in the industry. On April 16, 2009, the Company announced an early retirement option available for the vast majority of its Employees. This voluntary separation program provides cash bonuses, health care coverage for a specified period of time, and certain extended flight privileges to eligible Employees who elect early retirement under the program. The Company also has recently reached agreement regarding many of its collective-bargaining agreements which are currently amendable. During the first quarter of 2009, the Company's Ramp, Operations, Provisioning, and Freight Agents and its Mechanics voted to ratify their agreements. The Company's Flight Attendants and Pilots will vote on their tentative agreements in second quarter 2009. These contracts contain modest raises and improved benefits for the Company's productive Employees, but also contain provisions that should result in efficiency improvements that could boost the Company's bottom line. The Company has also significantly reduced planned capital spending by approximately $1.4 billion for 2009 and 2010 combined from what was planned at the beginning of 2008, by deferring aircraft deliveries, accelerating aircraft retirements, and suspending plans to grow capacity.

In first quarter 2009, the Company received three new Boeing 737-700s and retired one Boeing 737-300 aircraft. The Company has ten additional deliveries of new Boeing 737-700s scheduled during the remainder of 2009, but also plans to sell, retire and/or return from lease 14 of its existing Boeing 737 aircraft during the remainder of 2009. Overall, the Company currently expects to end 2009 with 535 aircraft, which is a net reduction of two aircraft for the year, and to fly approximately five percent fewer ASMs than it flew in 2008. Based on current plans, the Company expects its second quarter 2009 ASM capacity to decrease approximately three percent versus second quarter 2008. The Company believes this cautious strategy will enable it to match flights with expected demand in the current economic environment. However, the Company believes it has retained the flexibility to enable it to begin growing again once economic conditions improve.

Comparison of three months ended March 31, 2009, to three months ended March 31, 2008

Revenues

Consolidated operating revenues decreased by $173 million, or 6.8 percent, primarily due to a $162 million, or 6.7 percent, decrease in Passenger revenues. Approximately 60 percent of the overall decrease in Passenger revenues was due to the 4.1 percent reduction in capacity (ASMs) versus the prior year. The remainder of the Passenger revenue decrease was primarily due to a 2.8 percent decrease in Passenger yield per Revenue Passenger Mile (RPM yield), as full fare bookings are down versus the prior year and the Company increased the amount of fare discounting and fare sales in response to the decline in demand for air travel amid current domestic economic conditions. As a result of the Company's fare discounting efforts and overall reduction in ASM capacity, load factors were slightly higher than first quarter 2008 levels, and represented a record for the first quarter of any year in the Company's history. The overall decline in operating revenues combined with the lower capacity led to a 2.9 percent decline in operating revenue yield per ASM (unit revenue).

Based on the Company's recent actions to reduce fares, current revenue and booking trends, and based on the Company's and its competitors' announced capacity reductions for second quarter 2009 versus second quarter 2008, the Company currently expects continued higher load factors versus the prior year, but at lower passenger revenue yields. Second quarter 2009 will benefit from the Easter holiday, but based on current revenue and booking trends, the Company expects another decline in operating unit revenues for second quarter 2009 versus second quarter 2008.

Operating expenses

Consolidated operating expenses for first quarter 2009 decreased $35 million, or 1.4 percent, compared to first quarter 2008, versus a 4.1 percent decrease in capacity compared to first quarter 2008. 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 first quarter 2009 and first quarter 2008 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 March 31,             Per ASM         Percent
                                        2009                       2008            Change          Change

Salaries, wages, and benefits                3.46                       3.17             .29             9.1
Fuel and oil                                 2.89                       3.17            (.28 )          (8.8 )
Maintenance materials
and repairs                                   .76                        .57             .19            33.3
Aircraft rentals                              .19                        .15             .04            26.7
Landing fees and other rentals                .69                        .68             .01             1.5
Depreciation                                  .62                        .58             .04             6.9
Other operating expenses                     1.35                       1.37            (.02 )          (1.5 )
Total                                        9.96                       9.69             .27             2.8

Operating expenses per ASM for the three months ended March 31, 2009, were 9.96 cents, a 2.8 percent increase compared to 9.69 cents for first quarter 2008. The majority of this increase primarily was due to higher wages, as a result of higher wage rates. In addition, the decline in capacity versus first quarter 2008 has caused the Company's fixed costs to be spread over a smaller quantity of ASMs. Mostly offsetting these increases, however, was a reduction in fuel costs, as the Company's average cost per gallon of fuel decreased 6.6 percent versus the prior year, net of hedging. On a dollar basis, the majority of the decrease was due to a $102 million decline in Fuel and oil. Approximately half of this decrease was due to a lower fuel cost per gallon and half was due to the reduction in fuel consumption. Partially offsetting this decrease were a $41 million increase in Maintenance materials and repairs and a $36 million increase in Salaries, wages, and benefits. Based on current unit operating cost trends, the Company expects second quarter 2009 unit costs, excluding fuel and any charges associated with the Company's voluntary retirement program, to be in line with first quarter 2009. See Note 13 to the unaudited condensed consolidated financial statements for more information on Freedom '09.

Salaries, wages, and benefits expense per ASM for the three months ended March 31, 2009, increased 9.1 percent compared to first quarter 2008, and on a dollar basis increased $36 million. These increases primarily were due to wage rate increases. These rate increases were a result of both completed and ongoing labor contract negotiations with various unionized Employee workgroups and rate increases associated with promotions and increased seniority of existing Employees. This increase was partially offset by a decrease in profitsharing expense versus first quarter 2008. 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 first quarter 2009 was zero, versus $13 million in first quarter 2008. Based on current trends and considering ongoing labor negotiations, the Company expects second quarter 2009 salaries, wages, and benefits expense per ASM, excluding any potential charges associated with the Company's voluntary retirement program, to decline from first quarter 2009's 3.46 cents per ASM.

The Company's Mechanics, totaling approximately 1,700 Employees, are subject to an agreement between the Company and the Aircraft Mechanics Fraternal Association ("AMFA"). During first quarter 2009, the Company's Mechanics ratified a new agreement that extends to 2012.

The Company's Pilots, totaling approximately 5,600 Employees, are subject to an agreement between the Company and the Southwest Airlines Pilots' Association ("SWAPA"), which became amendable during September 2006. During first quarter 2009, the Company and SWAPA came to a tentative agreement on a new contract extending to 2011. The tentative agreement is expected to be voted on by SWAPA membership during second quarter 2009.

The Company's Flight Attendants, totaling approximately 9,300 Employees, are subject to an agreement between the Company and the Transportation Workers of America, AFL-CIO Local 556 ("TWU 556"), which became amendable in June 2008. During first quarter 2009, the Company and TWU 556 came to a tentative agreement on a new contract extending to 2012. The tentative agreement is expected to be voted on by TWU 556 membership during second quarter 2009.

The Company's Ramp, Operations, Provisioning, and Freight Agents, totaling approximately 7,100 Employees, are subject to an agreement between the Company and the Transportation Workers of America, AFL-CIO Local 555 ("TWU 555"), which became amendable in July 2008. During first quarter 2009, the Company and TWU 555 came to a tentative agreement on a new contract that will become amendable in 2011. The tentative agreement was approved by TWU 555 membership during first quarter 2009.

As of April 15, 2009, for second quarter 2009, the Company primarily has "above-market" purchased call option instruments in place and has increased its fuel hedge position to approximately 50 percent of its expected fuel consumption, the majority of which effectively cap prices at approximately $66 per barrel of crude oil. Since these instruments are "above-market," they do not provide any cash benefit to the Company unless average market crude oil prices for second quarter exceed the call option price of the instrument. Prior to 2009, the Company had more derivative instruments in place related to expected 2009 through 2013 fuel consumption. However, in fourth quarter 2008, the Company entered into offsetting positions related to the majority of these hedges, effectively fixing some losses associated with these instruments. At that time, the associated hedges, as defined in Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (SFAS 133), were undesignated, and any amounts previously held in "AOCI" will remain until the underlying contracts settle in future periods. The Company's current "hedge" position for second quarter 2009 excludes these previously undesignated fuel contracts.

As a result of these previously fixed losses, the Company expects to pay higher than market prices for fuel for these future periods associated with the "sold" instruments. In addition, as a result of previous hedges that have been "undesignated" as defined in SFAS 133, the Company has significant amounts "frozen" in AOCI that will be recognized in earnings in future periods when the underlying fuel derivative contracts settle. As discussed in Note 6 to the unaudited condensed consolidated financial statements, the Company has deferred losses in AOCI of $888 million, net of tax, related to fuel derivative contracts. The estimated fair market value (as of March 31, 2009) of the Company's net fuel derivative contracts for the remainder of 2009 through 2013 reflects a net liability of approximately $631 million, including the effect of $300 million in cash collateral that had been provided to a counterparty as of March 31, 2009, which has been netted against the Company's liability in the unaudited Condensed Consolidated Balance Sheet. The following table displays the Company's estimated fair value of remaining fuel derivative contracts (excluding the $300 million in cash collateral provided to a counterparty) as well as the amount of deferred losses in AOCI at March 31, 2009, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

              Fair value                 Amount of
          (liability) of fuel        (losses) deferred
         derivative contracts       in AOCI at March 31,
 Year      at March 31, 2009         2009 (net of tax)
 2009    $                (156 )   $                 (250 )
 2010    $                (213 )   $                 (245 )
 2011    $                (251 )   $                 (160 )
 2012    $                (165 )   $                 (118 )
 2013    $                (146 )   $                 (115 )
 Total   $                (931 )   $                 (888 )

Based on this liability at March 31, 2009 (and precluding any other subsequent changes to the fuel hedge portfolio), the Company's jet fuel costs per gallon are expected to exceed market (or unhedged) prices by approximately $.15 to $.16 in 2009 and 2010, $.19 in 2011, $.12 in 2012, and $.10 in 2013. These estimates are based on expected future cash settlements from fuel derivatives, but exclude any SFAS 133 impact associated with the ineffectiveness of fuel hedges or fuel derivatives that are marked to market value because they do not qualify for special hedge accounting. See Note 5 to the unaudited condensed consolidated financial statements for further information. Based on this derivative position and market prices as of April 14, 2009, the Company is currently estimating its second quarter 2009 jet fuel cost per gallon to be in the $1.75 range, excluding the effects of any ineffectiveness from the Company's fuel hedging program.

The Company has also continued its efforts to conserve fuel and, by the end of 2009, expects to complete the installation of Aviation Partners Boeing Blended Winglets on a significant number of its 737-300 aircraft (all 737-700 aircraft have already been equipped with winglets). This and other fuel conservation efforts resulted in an approximate 2.7 percent decrease in the Company's fuel burn rate per ASM for first quarter 2009 versus first quarter 2008.

Aircraft rentals per ASM for the three months ended March 31, 2009, increased 26.7 percent compared to first quarter 2008, and, on a dollar basis, increased $7 million. Both of these increases primarily were due to the Company's recent sale and leaseback transactions involving a total of ten Boeing 737-700 aircraft. See Note 9 to the unaudited condensed consolidated financial statements for further information. As a result of these transactions and additional sale and leaseback transactions that were executed in April 2009 or will be executed later in second quarter 2009, the Company expects aircraft rentals per ASM in second quarter 2009 to approximate the .19 cents experienced during first quarter 2009.

Landing fees and other rentals for the three months ended March 31, 2009, decreased $5 million on a dollar basis, and on a per ASM basis was effectively flat compared to first quarter 2008. The majority of the decrease on a dollar basis primarily was due to credits received in first quarter 2009 as a result of airports' audits of prior periods versus audit settlement charges paid to airports in first quarter 2008. Excluding these credits and charges from both years, Landing fees and other rentals were higher both on a dollar basis and a per ASM basis in first quarter 2009, primarily due to higher space rentals in airports as a result of higher rates charged by those airports for gate and terminal space. A portion of these higher rates charged by airports are due to the fact that other airlines reduced capacity at a faster pace than the Company, resulting in the Company incurring a higher percentage of total airport-related costs. As a consequence, the Company currently also expects Landing fees and other rentals per ASM in second quarter 2009 to be higher than the .69 cents per ASM recorded in first quarter 2009, primarily due to the fact that the Company does not expect to receive a comparable amount of audit settlement credits from airports that were received in first quarter 2009.

Depreciation expense for the three months ended March 31, 2009, increased by $5 million on a dollar basis compared to first quarter 2008, and increased 6.9 percent on a per-ASM basis. The increase on a dollar basis primarily was due to the Company's net addition of 12 Boeing 737s to its fleet over the past twelve months. This included the purchase of 17 new Boeing 737-700s from Boeing, net of five 737-300s returned from lease. In addition, the Company executed sale and leasebacks of ten 737-700 aircraft. See Note 9 to the unaudited condensed consolidated financial statements. The increase on a per-ASM basis primarily was due to the increase in the Company's fleet size combined with a decrease in ASMs as a result of the Company's decision to slow its growth given current economic conditions. For second quarter 2009, the Company expects Depreciation expense per ASM to decline slightly versus first quarter 2009's .62 cents as a result of recent sale and leaseback transactions.

Other operating expenses per ASM for the three months ended March 31, 2009, decreased 1.5 percent compared to first quarter 2008, and on a dollar basis, decreased $17 million. On both a per ASM basis and a dollar basis, the decrease was related to a decline in bad debts related to revenues from credit card sales. For second quarter 2009, the Company currently expects Other operating expenses per ASM to be higher than first quarter 2009's 1.35 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 August 31, 2009. 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 March 31, 2009, increased $16 million, or 57.1 percent, compared to first quarter 2008, primarily due to the Company's borrowing under its $600 million term loan in May 2008, its borrowing of $400 million of the available $600 million under its revolving credit facility in October 2008, and the Company's December 2008 issuance of $400 million of secured notes. As a result of these past transactions, the Company . . .