Comparative Consolidated Operating Statistics

Relevant Southwest comparative operating statistics for the three and six months
ended June 30, 2009 and 2008 are as follows:

                                                          Three months ended June 30,
                                                            2009                2008           Change
Revenue passengers carried                                  22,676,171        23,993,342           (5.5 )%
Enplaned passengers                                         26,505,438        27,550,957           (3.8 )%
Revenue passenger miles (RPMs) (000s)                       19,683,479        19,811,541           (0.6 )%
Available seat miles (ASMs) (000s)                          25,552,927        26,335,085           (3.0 )%
Load factor                                                       77.0 %            75.2 %      1.8 pts
Average length of passenger haul (miles)                           868               826            5.1 %
Average aircraft stage length (miles)                              647               636            1.7 %
Trips flown                                                    289,573           303,432           (4.6 )%
Average passenger fare                                 $        110.52      $     114.48           (3.5 )%
Passenger revenue yield per RPM (cents)                          12.73             13.86           (8.2 )%
Operating revenue yield per ASM (cents)                          10.24             10.89           (6.0 )%
Operating expenses per ASM (cents)                                9.76             10.12           (3.6 )%
Fuel costs per gallon, including fuel tax              $          1.95      $       2.42          (19.4 )%
Fuel consumed, in gallons (millions)                               371               388           (4.4 )%
Full-time equivalent Employees at period-end*                   35,296            34,936            1.0 %
Aircraft in service at period-end**                                543               535            1.5 %

* Headcount is defined as "Active" fulltime equivalent Employees for both periods presented. ** Excludes any aircraft that have been removed from service and are held for sale or for return to the lessor.

                                                              Six months ended June 30,
                                                               2009                   2008           Change
Revenue passengers carried                                       42,435,861         45,498,163           (6.7 )%
Enplaned passengers                                              49,555,428         52,259,572           (5.2 )%
Revenue passenger miles (RPMs) (000s)                            36,575,108         37,403,700           (2.2 )%
Available seat miles (ASMs) (000s)                               49,724,602         51,528,522           (3.5 )%
Load factor                                                            73.6 %             72.6 %      1.0 pts
Average length of passenger haul (miles)                                862                822            4.9 %
Average aircraft stage length (miles)                                   641                632            1.4 %
Trips flown                                                         568,708            598,222           (4.9 )%
Average passenger fare                                 $             112.13       $     113.42           (1.1 )%
Passenger revenue yield per RPM (cents)                               13.01              13.80           (5.7 )%
Operating revenue yield per ASM (cents)                               10.00              10.48           (4.6 )%
Operating expenses per ASM (cents)                                     9.85               9.91           (0.6 )%
Fuel costs per gallon, including fuel tax              $               1.97       $       2.28          (13.6 )%
Fuel consumed, in gallons (millions)                                    721                761           (5.3 )%
Full-time equivalent Employees at period-end*                        35,296             34,936            1.0 %
Aircraft in service at period-end**                                     543                535            1.5 %

* Headcount is defined as "Active" fulltime equivalent Employees for both periods presented. ** Excludes any aircraft that have been removed from service and are held for sale or for return to the lessor.

Material Changes in Results of Operations

Summary

During second quarter 2009, Southwest recorded net income of $91 million, or $.12 income per share, diluted, versus the Company's second quarter 2008 net income of $321 million, or $.44 per share, diluted. More than 70 percent of the reduction in net income versus the same prior year period was due to a difference in recorded adjustments related to derivative contracts the Company utilizes in attempting to hedge against jet fuel price increases. In second quarter 2008, the Company recorded significant unrealized gains from marking to market derivatives used for hedging purposes, but that do not qualify for special hedge accounting, as defined in SFAS 133. 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. Primarily as a result of second quarter 2008 increases in prices for fuel derivatives that have or will subsequently settle after June 30, 2008, that were ineffective, as defined, or that did not qualify for special hedge accounting, the Company recorded $361 million in net gains, which are included in "Other (gains) losses, net." In second quarter 2009, the Company recorded a total of $63 million in net gains associated with fuel derivatives that were ineffective, as defined, or that did not qualify for special hedge accounting, in "Other (gains) losses, net." The majority of the remainder of the decrease in net income versus second quarter 2008 was due to a decline in demand for domestic air travel as a result of the current U.S. and global recession. This decline in demand resulted in fewer full-fare passengers and more fare discounting, which depressed yields, and occurred despite the Company, as well as most other airlines, reducing capacity versus the prior year. The Company experienced a 5.9 percent decrease in passenger revenue yield per available seat mile (ASM) versus second quarter 2008.

The Company's operating expenses declined 6.4 percent versus second quarter 2008, the majority of which was attributable to lower fuel prices. Overall, for second quarter 2009, the Company's average jet fuel cost per gallon (including related fuel taxes) decreased 19.4 percent compared to second quarter 2008, inclusive of gains and/or losses from fuel contract settlements and related SFAS 133 adjustments included in "Fuel and oil" expense. Cash settlements associated with fuel hedging were a loss of $60 million in second quarter 2009 versus cash settlement gains of $511 million in second quarter 2008. However, despite this disparity, overall fuel expense declined year-over-year primarily due to the dramatic decline in physical jet fuel prices. For second quarter 2009, the Company had operating income of $123 million compared to second quarter 2008 operating income of $205 million as the reduction in revenues exceeded the benefit of lower Fuel and oil expenses.

The Company continues its diligent cost control efforts and remains committed to maintaining its competitive cost advantage to sustain its strong low fare brand. In addition to other cost containment measures, the Company has a hiring freeze in place, as well as a pay freeze for all Company officers and senior management. Also, during second quarter 2009, the Company announced an early out 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 program was offered due to overstaffing created by the Company's prior decisions to reduce its capacity during 2009. A total of 1,404 Employees elected to accept this early out offer, which will result in approximately $70 million in nonrecurring cost to the Company in third quarter 2009. The Company currently expects annual savings in subsequent years from the program to eventually exceed the cost incurred. See Note 13 to the unaudited condensed consolidated financial statements for further information. Despite the Company's overall reduction in capacity during 2009, it continues to add flights and new markets through a continual flight schedule optimization, which involves trimming unproductive and less popular flights and reallocating capacity to fund market growth opportunities. During the first half of 2009, the Company began service to Minneapolis-St. Paul (in March) and New York's LaGuardia airport (in June). During the second half of the year, the Company expects to begin service to Boston's Logan International Airport (in August) and to Milwaukee International Airport (in November.)

For the six months ended June 30, 2009, the Company had breakeven results on both a net basis and a per share, diluted, basis versus first half 2008 net income of $355 million, or $.48 per share, diluted. Results in each year were also impacted by adjustments related to derivative contracts the Company utilizes in attempting to hedge against jet fuel price increases. 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. For the six months ended June 30, 2009, the Company had operating income of $73 million versus first half 2008 operating income of $293 million. The decline of $220 million or 75.1 percent primarily was attributable to a 7.9 percent decrease in operating revenues as a result of lower passenger yields, which more than offset realized savings from lower fuel prices.

In second quarter 2009, the Company received eight new Boeing 737-700s and retired four Boeing 737-300 aircraft from service. The Company has only two additional deliveries of new Boeing 737-700s scheduled during the remainder of 2009, but also plans to sell, retire and/or return from lease ten 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 to six percent fewer ASMs than it flew in 2008. Based on current plans, the Company expects its third quarter 2009 ASM capacity to decrease approximately six to seven percent versus third quarter 2008. The Company's cautious strategy is designed to 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 June 30, 2009, to three months ended June 30, 2008

Revenues

Consolidated operating revenues decreased by $253 million, or 8.8 percent, primarily due to a $241 million, or 8.8 percent, decrease in Passenger revenues. The majority of the overall decrease in Passenger revenues was due to an 8.2 percent decrease in Passenger yield per Revenue Passenger Mile (RPM yield), as full fare bookings were 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 3.0 percent reduction in ASM capacity (ASMs), load factors increased 1.8 points to 77.0 percent in second quarter 2009. The overall decline in operating revenues, combined with the lower capacity led to a 6.0 percent decline in operating revenue yield per ASM (unit revenue).

The Company has recently implemented several programs and processes that it believes will create substantial opportunities for revenue growth, and has more planned for the fall, including the launch of a new and improved southwest.com, and several related products and initiatives. However, demand for business travel remains weak, and the Company continues to stimulate traffic with more discounted and promotional fares. Unless demand rebounds significantly, the Company expects third quarter 2009 unit revenues to decline year-over-year more than the second quarter 2009 decline of six percent due to more difficult comparisons.

Consolidated freight revenues decreased by $8 million, or 21.6 percent, primarily due to fewer shipments as a result of the ongoing worldwide recession. The Company expects a comparable decrease in consolidated freight revenues for third quarter 2009 compared to third quarter 2008. Other revenues decreased by $4 million, or 4.7 percent, compared to second quarter 2008. The majority of the decrease was due to lower charter revenues. Second quarter 2008 charter revenues were unusually high due to bankruptcies and discontinuation of service by some of the Company's competitors. The Company expects Other revenues for third quarter 2009 to improve versus third quarter 2008, due to a number of revenue improvement initiatives, such as fees recently announced for unaccompanied minors and pets, as well as an increase in fees already charged for Customers checking a third bag.

Operating expenses

Consolidated operating expenses for second quarter 2009 decreased $171 million, or 6.4 percent, compared to second quarter 2008, versus a 3.0 percent decrease in capacity compared to second 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 second quarter 2009 and second 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 June 30,           Per ASM        Percent
                                               2009                   2008             Change         Change

Salaries, wages, and benefits                       3.38                    3.19            .19            6.0
Fuel and oil                                        2.84                    3.59           (.75 )        (20.9 )
Maintenance materials
and repairs                                          .74                     .73            .01            1.4
Aircraft rentals                                     .19                     .14            .05           35.7
Landing fees and other rentals                       .70                     .60            .10           16.7
Depreciation                                         .59                     .56            .03            5.4
Other operating expenses                            1.32                    1.31            .01             .8
Total                                               9.76                   10.12           (.36 )         (3.6 )

Operating expenses per ASM for the three months ended June 30, 2009, were 9.76 cents, a 3.6 percent decrease compared to 10.12 cents for second quarter 2008. The decrease primarily was due to a decline in fuel and oil expense. The Company's fuel cost per gallon, net of hedging, declined 19.4 percent versus second quarter 2008. Excluding fuel and oil, the Company's operating expense per ASM increased versus second quarter 2008 primarily due to higher wage rates. In addition, the decline in capacity versus second quarter 2008 has caused many of the Company's fixed costs to be spread over a smaller quantity of ASMs. On a dollar basis, the majority of the $171 million overall decrease in operating expenses was due to a $219 million decline in Fuel and oil expense, the majority of which was due to a lower fuel cost per gallon. Partially offsetting this decrease was a $24 million increase in salaries, wages, and benefits and a $20 million increase in landing fees and other rentals. Excluding fuel and third quarter 2009 charges associated with Freedom '09, the Company's voluntary out program, and based on current cost trends and lower available seat miles, the Company expects third quarter 2009 unit costs to increase approximately 7 percent from third quarter 2008's 6.67 cents. Furthermore, the Company is not immune to the effects of the debilitating economic environment. Based on weak travel demand and fuel price volatility, and excluding the impact of Freedom '09 and any ineffectiveness or mark to market adjustments associated with fuel derivative instruments, the Company cannot predict a profitable third 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 June 30, 2009, increased 6.0 percent compared to second quarter 2008, and on a dollar basis increased $24 million. The majority of the increase per ASM was 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 second quarter 2008. The Company's profitsharing accruals are based on year-to-date income before taxes, primarily excluding unrealized gains and losses from fuel derivative contracts; therefore, profitsharing expense for second quarter 2009 was $12 million, versus $37 million in second quarter 2008. On a dollar basis, there was a $31 million increase in salaries, primarily as a result of higher wage rates, and an $18 million increase in health benefits expense. These were partially offset by the $25 million decline in profitsharing expense. Based on current trends and considering ongoing labor negotiations, the Company expects third quarter 2009 salaries, wages, and benefits expense per ASM, excluding charges associated with the Company's voluntary out program, to increase from third quarter 2008's 3.25 cents per ASM.

The Company's Pilots, totaling approximately 5,600 active 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 was voted down by SWAPA membership during second quarter 2009, and the Company has restarted negotiations with SWAPA.

The Company's Customer Service and Reservations Agents, totaling approximately 4,700 active Employees, are subject to an agreement between the Company and the International Association of Machinists and Aerospace Workers, AFL-CIO ("IAM"), which became amendable in November 2008. During second quarter 2009, the Company and IAM came to a tentative agreement on a new contract extending to 2012. The tentative agreement was approved by IAM membership during second quarter 2009.

The Company's Flight Attendants, totaling approximately 9,300 active 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 was approved by TWU 556 membership during second quarter 2009.

Fuel and oil expense for the three months ended June 30, 2009, decreased $219 million, and on a per ASM basis decreased 20.9 percent, primarily due to lower average prices. Excluding hedging, but including related fuel taxes in both years, the Company's average fuel cost per gallon in second quarter 2009 was $1.63 versus $3.64 in second quarter 2008. However, the Company had a worse performance from its fuel hedging program in second quarter 2009 versus the same prior year period. As a result of these positions, and overall lower physical prices for crude oil, jet fuel, and related products compared to second quarter 2008, the Company had hedging losses reflected in Fuel and oil expense totaling $119 million, while second quarter 2008 hedging gains recorded in Fuel and oil expense were $475 million. Including the effects of hedging activities, the Company's average fuel cost per gallon in second quarter 2009 was $1.95, which was 19.4 percent lower than second quarter 2008.

As of June 30, 2009, the Company had fuel derivative instruments in place for approximately 30 percent of its expected third quarter 2009 jet fuel consumption on an economic basis, the majority of which effectively cap prices in the low $70 per barrel range of crude oil. In addition to these positions, the Company also had unsettled fuel derivative instruments relating to fourth quarter 2009 through 2013 whereby it has previously fixed some losses that will impact earnings in these future periods. The Company's current "economic hedge" position for third quarter 2009 excludes these previously "fixed" fuel contracts.

              Fair value                Amount of
          (liability) of fuel       (losses) deferred
         derivative contracts      in AOCI at June 30,
 Year      at June 30, 2009         2009 (net of tax)
                                      (As restated)
 2009    $                 (92 )   $               (154 )
 2010    $                (160 )   $               (238 )
 2011    $                (221 )   $               (164 )
 2012    $                (155 )   $               (117 )
 2013    $                (135 )   $               (112 )
 Total   $                (763 )   $               (785 )

Based on this liability at June 30, 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 (i.e., unhedged prices) during each of these periods. This is based primarily on expected future cash settlements associated with fuel derivatives, but excludes any SFAS 133 impact associated with the ineffectiveness of fuel hedges or fuel derivatives that are marked to market value because they did not qualify for special hedge accounting. See Note 5 to the unaudited condensed consolidated financial statements for further information. Based on the Company's derivative position and market prices as of July 20, 2009, the Company is currently estimating its third quarter 2009 jet fuel cost per gallon to decline significantly year-over-year to approximately $2.15 per gallon, including fuel related taxes, but excluding the effects of any ineffectiveness and mark to market adjustments from the Company's fuel hedging program. For full year 2009, the Company currently estimates its jet fuel cost per gallon, including fuel related taxes, but excluding the effects of any ineffectiveness and mark to market adjustments from the Company's fuel hedging program, to be less than $2.00.

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 total of 112 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 1.4 percent decrease in the Company's fuel burn rate per ASM for second quarter 2009 versus second quarter 2008.

Maintenance materials and repairs expense for the three months ended June 30, 2009, was approximately flat on a dollar basis compared to second quarter 2008, but increased 1.4 percent on a per-ASM basis compared to second quarter 2008. The increase on a per-ASM basis primarily was associated with a larger decrease in ASMs than the decrease in expense. In late June 2008, the Company transitioned to a new engine repair agreement related to its 737-700 aircraft fleet and expense is now based on flight hours associated with 737-700 engines. Considering the new agreement, the Company expects Maintenance materials and repairs per ASM for third quarter 2009 to be in the high .70s cents per ASM range, based on currently scheduled airframe maintenance events and projected engine hours flown.

Landing fees and other rentals for the three months ended June 30, 2009, increased $20 million on a dollar basis, and increased 16.7 percent on a per ASM basis compared to second quarter 2008. The majority of these increases were 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 is due to the fact that other airlines reduced capacity at a faster pace than the Company's 3.0 percent reduction, 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 third quarter 2009 to be higher than the .70 cents per ASM recorded in second quarter 2009, primarily due to these higher rates.

Depreciation expense for the three months ended June 30, 2009, increased by $2 million on a dollar basis compared to second quarter 2008, and increased 5.4 percent on a per-ASM basis. Both of these increases primarily were due to capitalized software costs associated with various Company projects. On a dollar basis, this increase was mostly offset by the Company's execution of sale and . . .