The Airline Industry Challenges
Cyclical Capital-intensive Labor-intensive Energy-intensive!!! Technology-intensive Heavily regulated Heavily taxed Customer Service demands Brutally competitive
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
The Southwest Brand
Low fares Lots of flights Simplicity Reliable Friendly Safe
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
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)
Best Customer Service
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
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
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
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
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%
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
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.
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)
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
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%
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.
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
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)