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Page 1: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily
Page 2: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

The Airline Industry Challenges

Cyclical Capital-intensive Labor-intensive Energy-intensive!!! Technology-intensive Heavily regulated Heavily taxed Customer Service demands Brutally competitive

Page 3: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Southwest Airlines’ Success

36 years of consecutive profitability (1973 – 2008) Largest airline in the world in terms of originating

passengers (as of June 30, 2009) 20% of domestic passenger market share 3,200+ daily flights Service to 67 airports in 34 states (MKE – November) Over 500 Boeing aircraft Nearly 35,000 Employees Never furloughed Employees (most heavily unionized

airline ~80%) World famous Culture

Page 4: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily
Page 5: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily
Page 6: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily
Page 7: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

The Southwest Brand

Low fares Lots of flights Simplicity Reliable Friendly Safe

Page 8: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Southwest Business Strategy

Best Customer Service Low Fare leader Low Cost producer Dominant market leader Excellent labor relations Consistent financial performance Strong balance sheet Direct Customer relationship Safe, clean, efficient operation

Page 9: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Best Customer Service

DOT Metrics #1 in Customer Satisfaction OnTime Baggage handling

Fewest cancelled flights Fewest denied boardings Generous frequent flyer program Easy ticket terms

All tickets reusable Two free checked bags, free snacks, etc.

Great schedule Lots of flights Expanding network (MSP, BOS, LGA, MKE, PFN)

Page 10: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Best Customer Service

Page 11: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Low Cost Producer

Point-to-point route network High asset utilization (Aircraft, Airports) High Employee productivity Common fleet strategy (Boeing 737) Lower distribution costs Primarily avoid congested/restricted airports High quality execution Successful fuel hedging program Work hard Culture Low Costs are not low wages, old aircraft, lousy

service

Page 12: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Fuel Hedging

% hedged

4Q09 over 45%

2010 over 65%

2011 to 2013 modest positions

Estimated Fuel Cost per gallon, incl. taxes

(based on current market prices)

in the $2.25 range

in the $2.40 range

Page 13: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Sustainable Low CostsCost per Available Seat Mile (CASM)

9.98 10.15 10.24

9.65

9.62 9.52

10.44

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

1Q 2008 2Q 2008 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009

Cen

ts p

er

AS

M

SOUTHWEST AIRTRAN JETBLUE LEGACIES ALASKA

Page 14: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Dominant Market Share

“The Southwest Effect”

Select underserved/overpriced markets Lower coach fares by two-thirds Significantly increase flights Traffic explodes Quick market penetration Favorably impacts local economies Southwest in high demand

Page 15: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Dominant Market Share

Top Ten Airports Market Share(based on daily departures) (based on O&D pax)

Las Vegas 39%Chicago Midway 78%

Phoenix 38%Baltimore 48%

Houston Hobby 85%Dallas Love Field 95%

Los Angeles 23%Oakland 76%Denver 22%

San Diego 40%

Page 16: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Dominant Market Share

#1 share in 90 of our top 100 O&D markets 60% share in our top 100 O&D markets 66% share of Intra-Texas traffic 69% share of Intra-California traffic 47% share of Intra-Florida traffic 38% share of Las Vegas traffic 39% share of Phoenix traffic

Page 17: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Excellent Labor Relations

THE MISSION OF SOUTHWEST AIRLINES The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.

TO OUR EMPLOYEES We are committed to provide our Employees a stable workenvironment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer.

Page 18: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Consistent Profitability(excludes special items)

$0

$100

$200

$300

$400

$500

$600

$700

2000 2001 2002 2003 2004 2005 2006 2007 2008

(in

mill

ion

s)

Page 19: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Strong Balance Sheet

Investment grade balance sheet BBB – S&P and Fitch (senior unsecured rating) Baa3 – Moody’s

Modest debt Leverage under 50% Strong cash balance of $2.4 billion Revolving credit facility fully available – $600 million Access to capital

Unencumbered aircraft worth $6 to $7 billion Reduced capital spending Able to withstand “shocks” Prepared

Page 20: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Direct Customer Relationship

Distribution today vs. ten years ago

Internet (southwest.com)

Travel Agents

Direct (Res & Other)

1999 19% 35% 46%

3Q 2009 82% 7% 11%

Page 21: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Direct Customer Relationship

Nielsen/Netratings recently reported that southwest.com was the largest airline site in the world in terms of unique visitors.

southwest.com is the 4th largest travel site in terms of unique visitors (source: Comscore MediaMetrix).

Approximately 80 percent of Southwest Customers are checking in online or at a kiosk.

More than 7 million people subscribe to Southwest’s weekly Click ‘N Save e-mails.

Page 22: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Strong Safety Record

Robust data analysis/sharing programs Top down commitment to Safety from Senior

Leadership Work with Union groups and the FAA to foster a

proactive Safety Culture No accidents resulting in an onboard fatality in

SWA history

Page 23: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily

Southwest Airlines Co.

The Future Challenging environment Reengineering business model for higher costs Well prepared to adjust

Among the Lowest Cost structures Fuel hedge protection Committed and engaged Employees Operational excellence Strong Brand rankings Tops in Customer service rankings More “Value” approach (No 1st and 2nd Bag Fees)

Page 24: The Airline Industry Challenges  Cyclical  Capital-intensive  Labor-intensive  Energy-intensive!!!  Technology-intensive  Heavily regulated  Heavily