SOUTHWEST AIRLINES BACKGROUND Southwest was founded by Texas businessman Rollin King and lawyer Herb Kelleher.

The fateful day came in 1966 when a banker client named Rollin King, recently returned from a trip to California, walked into Kelleher's office and declared that Texas could benefit from a short-haul commuter airline similar to Pacific Southwest Airlines, then a major player in the California market. The two men proceeded to map out the basic plan, a low-cost intrastate airline carrier that would link Houston and San Antonio from a Dallas base. The two main intra-Texas carriers of the time, Braniff and Texas International, were less than thrilled by the prospect of a new competitor and were able to tie up Kelleher's dream in litigation. It took almost five years of legal battle with Braniff, Texas International and Continental over its right to fly before the airline actually took flight. Kelleher brought in a handful of airline veterans, and Southwest finally got aloft in 1971, operating out of ramshackle old Love Field, near downtown Dallas, using three Boeing 737 aircraft, and started flying on June 18, 1971. When Southwest began flying to three Texas cities, the firm had three aircraft and 25 employess. Initial flights were out of Dallas older Love Field airport and Houstons Hobby Airport, both of which were closer to downtown than the major international airports. Southwest management quickly discovered that there were two types of travelers: convinience, time-oriented business travelers, and price-sensitive leisure travlers. To cater to both groups, Southwest was charging $20 to fly between Houstan, Dallas, and San Antonio, undercutting the $28 fares of the other carriers. After an experiment with $1o fares, Southwest decided to sell seats on weekdays until 7:00 p.m. for $26 and after 7:00 p.m. and on weekends for $13. So, Southwest offered to travelers the opportunity to pay $13 or $26 and receive a free bottle of liquor. More than 75% of the passengers chose the $26 fare, and Southwest became the largest distributor of Chivas Regal scotch whiskey in Texas. In 1975, Braniff abandoned the Dallas Houston Hobby route. When Southwest entered the Cleveland market, the unrestricted one-way fare between Cleveland and Chicago was $310 on other carriers; Southwests fare was $59.

Southwest 33 years Comparison 1971 Size of fleet Number of Employees Number of Passengers carried Number of cities served Total Operating Revenues Net Income 4 195 108,554 3 $2,133,000 ($3,753,000) 1999 306 29,005 52.6 million 55 $4.16 billion $433 million 2004 417 32,000 70.9 million 59 $6.5 billion $313 million

SOUTHWEST AIRLINES OPERATIONS Southwest grew to one of the largest airlines company in the USA, and the company did not change their focus since started in 1971 up to today, and their focuses are high frequent flight with low fares and no international flights. As of today, the Company's fleet has an average age of about 9 years. The average aircraft trip length is 576 miles with an average duration of more than one and one-half hours for year end of 2004. Southwest aircraft fly an average of about 7 flights per day, or about 12.5 hours per day. Southwest was the launch customer for the Boeing 737-700 in 1997. Southwest was also a launch customer for the Boeing 737-500 and -300 series aircraft. Southwest is updating its traditional gold, red and orange paint scheme by adding canyon blue. All new aircraft will have the updated colors and interior. Existing aircraft will be retrofitted in 2005. Performance-enhancing Blended Winglets have been added to approximatley 92 percent of our fleet of 737-700s. The installations on the remaining 737-700s will be completed in 2005. All new 737-700 aircraft now arrive from Boeing with Blended Winglets installed.

Southwest's average passenger airfare is $88.57, and the average passenger trip length is about 753 miles with an average duration of about one hour and 35 minutes as of year end of 2004. This trip length was up from 462 in 1999 and 394 in 1996. Southwest Airlines currently operates six reservations centers located in Albuquerque, Chicago, Houston, Oklahoma City, Phoenix, and San Antonio. Southwest tday had about 2,900 flights per day and serving 59 cities. Each plane has flew about eight flights daily, almost twice the industry average. Planes were used an average of 12 hours a day, compared with the industrys 8.6 hours-per day average. Southwests cost per avaliable seat mile was the lowest in the industry and the average age of its fleet was nine years, the lowest for the major carriers. Southwest also had the best safety record in the airline business. Average Fleet Age and Size Airline Alaska America West American Continental Delta Midwest Northwest Southwest United USAirways Average Age 9.37 10.29 10.46 7.35 11.22 26.83 20.19 9.60 8.76 11.42 Fleet Size 103 141 836 379 594 36 431 417 561 241

Southwest airlines relatively to the other major airlines, it had a no frills approach to services: reserved seating was not offered and meals were not served. Customer were handed numbered or color-coded boarding pases based upon their check-in order. Seating was first come, first served. As cost saving measure, the color coded passes were reusable. Southwest also has a succesfull hedging program, which saved them $171 million in jet fuel cost during year 2003. They are also targeting well protected in 2004 and 2005 with over 80 and 70 percent, respectively, of their anticipated fuel requierements hedged with prices capped at approximately $24 per barrel of crude oil. The main strenghts of Southwest airlines company are low fares, and frequent flights. Low Fares: Low fares has been their philosophy since day one every seat, every flight and every day. Since they started operation in 1971, they have fought to keep their costs low so that they could make flying affordable instead of a luxury for a few.

Frequent Flights: Southwest offers lots of flights to the cities they serve and continued to increase flights in 2003. They have approximately 2900 flights daily frequencies to 59 airports. The high frequencies and expansive route system offer to the customers convenience and reliability with lots of options to get where they want to go, when they want to get there. As a result of the combination of low fares and high frequencies, they dominate the majority of the markets they serve. They consistently rank first in market share in approximately 90% of their top 100 city-pair markets and in the aggregate, hold around 65% of the total market share in those markets. Althought their revenues have been soft since September 11, 2001, their market share has increased in many of their markets as most of their major competitors have been forced to shrink their operations. SWOT ANALYSIS OF SOUTHWEST AIRLINES COMPANY Strengths Strong tangible and intangible resources Sustainable competitive advantage Strong operating and financial performance Strong leadership with proper organizational structure Proper customers response program Open communications with employees Culture/Values/Spirit

Weaknesses Dependence on single aircraft supplier (Boeing) New Company president

Opportunities New destinations to the northeast International routes

Threats New challenging competitors Buyer and supplier power Intense rivalry in industry Concern about terrorism among travelers