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SOUTHWEST AIRLINES CO - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[October 29, 2014]

SOUTHWEST AIRLINES CO - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) Relevant comparative operating statistics for the three and nine months ended September 30, 2014 and 2013 are included below. The Company provides these operating statistics because they are commonly used in the airline industry and, as such, allow readers to compare the Company's performance against its results for the prior year period, as well as against the performance of the Company's peers.



Three months ended September 30, 2014 2013 Change Revenue passengers carried 28,391,882 27,015,866 5.1 % Enplaned passengers 35,255,248 33,792,804 4.3 % Revenue passenger miles (RPMs) (000s)(1) 28,522,164 27,009,604 5.6 % Available seat miles (ASMs) (000s)(2) 33,785,824 33,425,087 1.1 % Load factor(3) 84.4 % 80.8 % 3.6 pts Average length of passenger haul (miles) 1,005 1,000 0.5 % Average aircraft stage length (miles) 728 708 2.8 % Trips flown 319,250 332,991 (4.1 )% Average passenger fare $ 160.74 $ 159.39 0.8 % Passenger revenue yield per RPM (cents)(4) 16.00 15.94 0.4 % Operating revenue per ASM (cents)(5) 14.21 13.60 4.5 % Passenger revenue per ASM (cents)(6) 13.51 12.88 4.9 % Operating expenses per ASM (cents)(7) 12.39 12.43 (0.3 )% Operating expenses per ASM, excluding fuel (cents) 8.29 8.09 2.5 % Operating expenses per ASM, excluding fuel and profitsharing (cents) 7.99 7.88 1.4 % Fuel costs per gallon, including fuel tax $ 2.97 $ 3.10 (4.2 )% Fuel costs per gallon, including fuel tax, economic $ 2.94 $ 3.06 (3.9 )% Fuel consumed, in gallons (millions) 466 466 - % Active fulltime equivalent Employees 45,750 45,148 1.3 % Aircraft at end of period(8) 685 688 (0.4 )% 27-------------------------------------------------------------------------------- Nine months ended September 30, 2014 2013 Change Revenue passengers carried 82,602,805 81,180,167 1.8 % Enplaned passengers 101,701,969 100,036,208 1.7 % Revenue passenger miles (RPMs) (000s)(1) 81,267,478 78,695,853 3.3 % Available seat miles (ASMs) (000s)(2) 98,356,618 98,457,754 (0.1 )% Load factor(3) 82.6 % 79.9 % 2.7 pts Average length of passenger haul (miles) 984 969 1.5 % Average aircraft stage length (miles) 721 703 2.6 % Trips flown 946,231 995,097 (4.9 )% Average passenger fare $ 160.39 $ 154.28 4.0 % Passenger revenue yield per RPM (cents)(4) 16.30 15.91 2.5 % Operating revenue per ASM (cents)(5) 14.21 13.48 5.4 % Passenger revenue per ASM (cents)(6) 13.47 12.72 5.9 % Operating expenses per ASM (cents)(7) 12.58 12.57 0.1 % Operating expenses per ASM, excluding fuel (cents) 8.38 8.11 3.3 % Operating expenses per ASM, excluding fuel and profitsharing (cents) 8.12 7.95 2.1 % Fuel costs per gallon, including fuel tax $ 3.03 $ 3.19 (5.0 )% Fuel costs per gallon, including fuel tax, economic $ 3.01 $ 3.13 (3.8 )% Fuel consumed, in gallons (millions) 1,357 1,376 (1.4 )% Active fulltime equivalent Employees 45,750 45,148 1.3 % Aircraft at period-end(8) 685 688 (0.4 )% (1) A revenue passenger mile is one paying passenger flown one mile. Also referred to as "traffic," which is a measure of demand for a given period.

(2) An available seat mile is one seat (empty or full) flown one mile. Also referred to as "capacity," which is a measure of the space available to carry passengers in a given period.


(3) Revenue passenger miles divided by available seat miles.

(4) Calculated as passenger revenue divided by revenue passenger miles. Also referred to as "yield," this is the average cost paid by a paying passenger to fly one mile, which is a measure of revenue production and fares.

(5) Calculated as operating revenue divided by available seat miles. Also referred to as "operating unit revenues," this is a measure of operating revenue production based on the total available seat miles flown during a particular period.

(6) Calculated as passenger revenue divided by available seat miles. Also referred to as "passenger unit revenues," this is a measure of passenger revenue production based on the total available seat miles flown during a particular period.

(7) Calculated as operating expenses divided by available seat miles. Also referred to as "unit costs" or "cost per available seat mile," this is the average cost to fly an aircraft seat (empty or full) one mile, which is a measure of cost efficiencies.

(8) Aircraft in the Company's fleet at period end, less Boeing 717-200s removed from service in preparation for transition out of the fleet.

28 --------------------------------------------------------------------------------Reconciliation of Reported Amounts to Non-GAAP Financial Measures (unaudited) (in millions, except per share and per ASM amounts) Three months ended September 30, Percent Nine months ended September 30, Percent 2014 2013 Change 2014 2013 Change Fuel and oil expense, unhedged $ 1,395 $ 1,435 $ 4,171 $ 4,282 Add (Deduct): Fuel hedge (gains) losses included in Fuel and oil expense (9 ) 15 (46 ) 114 Fuel and oil expense, as reported $ 1,386 $ 1,450 $ 4,125 $ 4,396 Deduct: Net impact from fuel contracts (12 ) (21 ) (27 ) (71 ) Fuel and oil expense, non-GAAP (economic) $ 1,374 $ 1,429 (3.8)% $ 4,098 $ 4,325 (5.2)% Total operating expenses, as reported $ 4,186 $ 4,155 $ 12,372 $ 12,378 Deduct: Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period settled contracts (5 ) (17 ) (5 ) (10 ) Deduct: Contracts settling in the current period, but for which gains have been recognized in a prior period* (7 ) (4 ) (22 ) (61 ) Deduct: Acquisition and integration costs (23 ) (28 ) (78 ) (66 ) Total operating expenses, non-GAAP $ 4,151 $ 4,106 1.1% $ 12,267 $ 12,241 0.2% Operating income, as reported $ 614 $ 390 $ 1,605 $ 893 Add: Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period settled contracts 5 17 5 10 Add: Contracts settling in the current period, but for which gains have been recognized in a prior period* 7 4 22 61 Add: Acquisition and integration costs 23 28 78 66 Operating income, non-GAAP $ 649 $ 439 47.8% $ 1,710 $ 1,030 66.0% Net income, as reported $ 329 $ 259 $ 946 $ 542 Add (Deduct): Mark-to-market impact from fuel contracts settling in future periods 44 (76 ) 5 (112 ) Add (Deduct): Ineffectiveness from fuel hedges settling in future periods 11 15 (31 ) 27 Add: Other net impact of fuel contracts settling in the current or a prior period (excluding reclassifications) 7 4 22 61 Add (Deduct): Income tax impact of fuel contracts (23 ) 22 2 10 Add: Acquisition and integration costs, net (a) 14 17 49 41 Net income, non-GAAP $ 382 $ 241 58.5% $ 993 $ 569 74.5% Net income per share, diluted, as reported $ 0.48 $ 0.37 $ 1.36 $ 0.75 Add (Deduct): Net impact to net income above from fuel contracts divided by dilutive shares (a) 0.05 (0.05 ) (0.01 ) (0.02 ) Add: Impact of special items, net (a) 0.02 0.02 0.07 0.06 Net income per share, diluted, non-GAAP $ 0.55 $ 0.34 61.8% $ 1.42 $ 0.79 79.7% Operating expenses per ASM (cents) 12.39 ¢ 12.43 ¢ 12.58 ¢ 12.57 ¢ Deduct: Fuel expense divided by ASMs (4.10 ) (4.34 ) (4.20 ) (4.46 ) Deduct: Impact of special items (0.07 ) (0.08 ) (0.08 ) (0.07 ) Operating expenses per ASM, non-GAAP, excluding fuel and special items (cents) 8.22 ¢ 8.01 ¢ 2.6% 8.30 ¢ 8.04 ¢ 3.2% * As a result of prior hedge ineffectiveness and/or contracts marked to market through earnings.

(a) Amounts net of tax.

29-------------------------------------------------------------------------------- Return on Invested Capital (ROIC) (unaudited) (in millions) Twelve Months Ended Twelve Months Ended September 30, 2014 September 30, 2013 Operating income, as reported $ 1,991 $ 984 Net impact from fuel contracts 40 100 Acquisition and integration costs 97 81 Operating income, non-GAAP $ 2,128 $ 1,165 Net adjustment for aircraft leases (1) 136 134 Adjustment for fuel hedge accounting (70 ) (42 ) Adjusted Operating income, non-GAAP $ 2,194 $ 1,257 Average invested capital (2) $ 11,616 $ 11,769 Equity adjustment for hedge accounting (61 ) 81 Adjusted average invested capital $ 11,555 $ 11,850 ROIC, pre-tax 19.0 % 10.6 % (1) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of eliminating aircraft rent expense and replacing with estimated depreciation expense for those same aircraft).

(2) Average invested capital represents a five quarter average of debt, net present value of aircraft leases, and equity.

30 --------------------------------------------------------------------------------Note Regarding Use of Non-GAAP Financial Measures The Company's unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP. These GAAP financial statements include (i) unrealized non-cash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges the Company believes are not indicative of its ongoing operational performance.

As a result, the Company also provides financial information in this filing that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information, including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides greater transparency to investors as supplemental information to its GAAP results. The Company's economic financial results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis reflects the Company's actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts are reflected as a component of Other (gains) losses, net, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide a better measure of the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, non-cash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company's management, as well as investors, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, the measures are susceptible to varying calculations, and not all companies calculate the measures in the same manner.

As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.

Further information on (i) the Company's fuel hedging program, (ii) the requirements of accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments is included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, and Note 3 to the unaudited Condensed Consolidated Financial Statements.

In addition to its "economic" financial measures, as defined above, the Company has also provided other non-GAAP financial measures, including results that it refers to as "excluding special items," as a result of items that the Company believes are not indicative of its ongoing operations. These include expenses associated with the Company's acquisition and integration of AirTran. The Company believes that evaluation of its financial performance can be enhanced by a presentation of results that exclude the impact of these items in order to evaluate the results on a comparative basis with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods. As a result of the Company's acquisition of AirTran, which closed on May 2, 2011, the Company has incurred and expects to continue to incur substantial charges associated with integration of the two companies. While the Company cannot predict the exact timing or amounts of such charges, it does expect to treat the charges as special items in its future presentation of non-GAAP results.

The Company has also provided return on invested capital, which is a non-GAAP financial measure. The Company believes return on invested capital is a meaningful measure because it quantifies how well the Company generates operating income relative to the capital it has invested in its business.

Although return on invested capital is commonly used as a measure of capital efficiency, definitions of return on invested capital may differ; therefore, the Company is providing an explanation of its calculation for return on invested capital (before taxes and excluding special items) in the accompanying reconciliation.

31 --------------------------------------------------------------------------------Financial Overview The Company recorded third quarter and year-to-date GAAP and non-GAAP results for 2014 and 2013 as follows: Three months ended Nine months ended (in millions, except per share amounts) September 30, September 30, GAAP 2014 2013 Percent Change 2014 2013 Percent Change Operating income $ 614 $ 390 57.4 % $ 1,605 $ 893 79.7 % Net income $ 329 $ 259 27.0 % $ 946 $ 542 74.5 % Net income per share, diluted $ 0.48 $ 0.37 29.7 % $ 1.36 $ 0.75 81.3 % Non-GAAP Operating income $ 649 $ 439 47.8 % $ 1,710 $ 1,030 66.0 % Net income $ 382 $ 241 58.5 % $ 993 $ 569 74.5 % Net income per share, diluted $ 0.55 $ 0.34 61.8 % $ 1.42 $ 0.79 79.7 % Third quarter 2014 net income was a Company third quarter record $329 million, or $0.48 per diluted share, a 27.0 percent increase year-over-year. This increase primarily was due to a 5.6 percent increase in Operating revenues, driven by strong demand for air travel and successful execution of the Company's strategic initiatives. The Company's Operating expenses increased 0.7 percent, also as a result of the Company's strategic initiatives and from lower fuel prices offsetting small increases in certain cost categories. Excluding special items in both years, which consisted primarily of Acquisition and integration expense and unrealized non-cash adjustments from hedge accounting, non-GAAP Net income was a third quarter record of $382 million, or $0.55 per diluted share, a 58.5 percent increase year-over-year. This marked the sixth consecutive quarter for which the Company produced record non-GAAP Net income for the applicable fiscal quarter. Third quarter 2014 Operating income was $614 million and third quarter 2014 non-GAAP Operating income was $649 million. Both GAAP and non-GAAP Operating income results were Company third quarter records and significantly surpassed the prior year performance.

For the twelve months ended September 30, 2014, the Company's exceptional earnings performance, combined with its actions to prudently manage invested capital, produced a 19.0 percent pre-tax Return on invested capital, excluding special items ("ROIC"). This represents a significant increase compared to the Company's pre-tax ROIC of 10.6 percent for the twelve months ended September 30, 2013.

For the nine months ended September 30, 2014, Net income was $946 million, or $1.36 per diluted share, a 74.5 percent increase year-over-year, and non-GAAP Net income was $993 million, or $1.42 per diluted share, also a 74.5 percent increase year-over-year. These increases primarily were due to a 5.3 percent increase in Operating revenues, driven by continued strong demand for air travel and successful execution of the Company's strategic initiatives. Operating expenses were flat year-over-year also as a result of the Company's strategic initiatives and from lower jet fuel prices offsetting small increases in certain cost categories. Operating income for the nine months ended September 30, 2014, was $1.6 billion, and non-GAAP Operating income for the nine months ended September 30, 2014, was $1.7 billion.

See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Company Overview In September 2014, the Company introduced a new Heart aircraft livery, airport experience, and logo. The intent with this launch was to remain cost-neutral by using a phased roll-out across both its fleet and its network. Aircraft already in the Company's fleet are scheduled to receive the newly painted livery within the aircraft's existing repainting schedule, while new aircraft will be delivered in the Heart livery. In addition, many of the future airport conversions will be integrated into existing and upcoming airport improvement projects.

32 -------------------------------------------------------------------------------- The Company launched Southwest's international service on July 1, 2014, with its inaugural flights to three Caribbean destinations, Aruba, Nassau, and Montego Bay, followed by service to Cabo San Lucas and Cancun which commenced on August 10, 2014. Southwest service to the two remaining AirTran international destinations, Mexico City and Punta Cana, is scheduled to begin on November 2, 2014. In addition, during third quarter 2014, the Company announced its first destination in Central America with Southwest daily roundtrip service between Baltimore/Washington Thurgood Marshall International Airport (BWI) and Juan Santamaria International Airport (SJO) in San Jose, Costa Rica, beginning March 7, 2015, subject to government approval.

The historic launch of Southwest international service marked a significant achievement in the Company's more than three-year full integration of Southwest's and AirTran's networks, fleets, systems, and People, which remains on track to be effectively completed by December 31, 2014.

With the repeal of the Wright Amendment federal flight restrictions at Dallas Love Field on October 13, 2014, to destinations within the 50 States or to the District of Columbia, Southwest commenced service to seven new nonstop destinations from Love Field. Service from Love Field to eight additional nonstop destinations is scheduled to begin on November 2, 2014, with service to two additional nonstop destinations scheduled to begin on January 6, 2015. This will bring the total number of nonstop destinations out of Love Field to 33 compared to 16 prior to the repeal.

During third quarter 2014, the Company continued to return significant value to its Shareholders through a $200 million accelerated share repurchase program, launched in August 2014 ("Third Quarter ASR Program"), and dividend payments totaling $41 million. See Part II, Item 2 for further information on the Company's share repurchase authorizations. As of September 30, 2014, the Company's cumulative repurchases under the $1 billion share repurchase program authorized by the Company's Board of Directors in May 2014 have totaled $420 million, or approximately 13 million shares of common stock.

The Company has a significant amount of fleet activity planned during the remainder of 2014, as it winds down the AirTran brand and continues to modernize its fleet, resulting in a larger than normal number of aircraft out of scheduled service. The Company currently expects its fourth quarter ASMs to increase approximately two to three percent year-over-year and full year 2014 ASMs to be less than one percent year-over-year. The Company expects to continue to optimize its network through the addition of new markets and itineraries while also pruning less profitable flights from its schedule.

During third quarter 2014, the Company took delivery of 13 aircraft: 11 737-800 aircraft from Boeing, and two 737-700 aircraft from other parties. The Company currently expects to take delivery of an additional eight 737-800 aircraft from Boeing and 11 737-700 aircraft from other parties during fourth quarter of 2014.

The Company's fleet of 685 aircraft at September 30, 2014, also reflects one Boeing 737-500 retirement during third quarter 2014. The Company currently plans to retire three more Classic (737-300 and 737-500) aircraft during fourth quarter 2014, bringing total Classic retirements to six aircraft in 2014. In connection with the lease/sublease agreement entered into between the Company, Delta Air Lines, Inc., and Boeing Capital Corp. on July 9, 2012, the Company continued to transition the 717-200 aircraft out of its fleet for conversion and delivery to Delta. As of September 30, 2014, 51 717-200 aircraft had been removed from active service for conversion and 45 of those had been delivered to Delta, out of an original total of 88. See Note 6 to the unaudited Condensed Consolidated Financial Statements for further information. Also, the Company has continued the conversion of AirTran 737-700 aircraft to the Southwest livery. As of September 30, 2014, 34 AirTran 737-700 aircraft had completed the conversion process and re-entered service as Southwest aircraft, and the remaining 18 AirTran 737-700s are planned to be removed from service, the majority of which will have completed the conversion to Southwest by the end of 2014.

33 --------------------------------------------------------------------------------Material Changes in Results of Operations Comparison of three months ended September 30, 2014 and September 30, 2013 Operating revenues Passenger revenues for third quarter 2014 increased $258 million, or 6.0 percent, year-over-year. Holding other factors constant, approximately 75 percent of the increase was attributable to a 3.6 point increase in load factor with the remainder due to an increase in capacity, both driven by strong Customer demand for air travel and successful execution of the Company's strategic initiatives. Thus far, revenue momentum has continued, and October 2014 passenger unit revenues are expected to increase in the two to three percent range, compared to October 2013. Current bookings for November and December are also good.

Freight revenues for third quarter 2014 increased by $4 million, or 9.8 percent, compared to third quarter 2013, primarily due to increased pounds shipped. Based on current trends, the Company expects fourth quarter 2014 Freight revenues to increase, compared to fourth quarter 2013.

Other revenues for third quarter 2014 decreased by $7 million, or 3.5 percent, year-over-year, primarily due to a decline in ancillary revenues. The majority of the decline in ancillary revenues was due to the adoption of Southwest's more Customer-friendly fee policies for Customers who purchase travel on AirTran through southwest.com, and the overall reduction in AirTran flights as a result of the integration process. The Company currently expects this trend to continue as the integration process moves toward completion by the end of 2014. This decline was partially offset by an increase in certain Southwest specific ancillary revenues, such as EarlyBird Check-in® and A1-15 select boarding positions sold at the gate. Based on current trends and expected discontinuation of all AirTran flights by the end of 2014, the Company expects fourth quarter 2014 Other revenues to decrease, compared to fourth quarter 2013.

Operating expenses Operating expenses for third quarter 2014 increased by $31 million, or 0.7 percent, compared to third quarter 2013, while capacity increased 1.1 percent over the same period. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines are driven by changes in capacity, or ASMs. The following table presents the Company's Operating expenses per ASM for the third quarter of 2014 and 2013, followed by explanations of these changes on a per ASM basis and dollar basis: Three months ended September 30, Per ASM Percent (in cents, except for percentages) 2014 2013 change change Salaries, wages, and benefits 4.04 ¢ 3.81 ¢ 0.23 ¢ 6.0 % Fuel and oil 4.10 4.34 (0.24 ) (5.5 ) Maintenance materials and repairs 0.73 0.81 (0.08 ) (9.9 ) Aircraft rentals 0.21 0.28 (0.07 ) (25.0 ) Landing fees and other rentals 0.86 0.87 (0.01 ) (1.1 ) Depreciation and amortization 0.70 0.66 0.04 6.1 Acquisition and integration 0.07 0.08 (0.01 ) (12.5 ) Other operating expenses 1.68 1.58 0.10 6.3 Total 12.39 ¢ 12.43 ¢ (0.04 )¢ (0.3 )% Operating expenses per ASM decreased 0.3 percent for third quarter 2014 compared to third quarter 2013 primarily due to lower jet fuel prices. Operating expenses per ASM for third quarter 2014, excluding fuel and special items (a non-GAAP financial measure), increased 2.6 percent year-over-year. This increase was due to higher Salaries, wages, and benefits expense and higher Other operating expenses, partially offset by lower Aircraft rentals and Maintenance materials and repairs expense. Based on current cost trends, the Company expects its fourth quarter 2014 unit costs, 34 -------------------------------------------------------------------------------- excluding fuel and oil expense, profitsharing, and special items to increase approximately two percent from fourth quarter 2013. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Salaries, wages, and benefits expense for third quarter 2014 increased by $92 million, or 7.2 percent, compared to third quarter 2013. On a per ASM basis, third quarter 2014 Salaries, wages, and benefits expense increased 6.0 percent, compared to third quarter 2013. On both a dollar and per ASM basis, approximately 60 percent of the increase was due to higher Salaries primarily as the result of increased training for international operations and other strategic initiatives. The remaining 40 percent of the increase, on both a dollar and per ASM basis, was the result of higher profitsharing expense due to increased profits in third quarter 2014. The Company's profitsharing expense is based on profits that exclude the unrealized gains and/or losses the Company records for its fuel hedging program. Additionally, pursuant to the terms of the Company's ProfitSharing Plan (the "Plan"), acquisition and integration costs were excluded from the calculation of profitsharing expense from April 1, 2011, through December 31, 2013. These costs, totaling $385 million, are being amortized on a pro rata basis as a reduction of operating profits, as defined by the Plan, from 2014 through 2018. In addition, Acquisition and integration costs incurred during 2014 and in future periods will reduce operating profits, as defined, in the calculation of profitsharing. Based on current cost trends and anticipated capacity, the Company expects Salaries, wages, and benefits expense per ASM, excluding profitsharing, in fourth quarter 2014 to increase compared to fourth quarter 2013.

Fuel and oil expense for third quarter 2014 decreased by $64 million, or 4.4 percent, compared to third quarter 2013. On a per ASM basis, third quarter 2014 Fuel and oil expense decreased 5.5 percent, compared to third quarter 2013.

Excluding the impact of hedging, both the dollar and unit cost decreases were attributable to lower jet fuel prices. The Company's average economic jet fuel cost per gallon decreased 3.9 percent year-over-year, from $3.06 for third quarter 2013 to $2.94 for third quarter 2014. In addition, fuel gallons consumed remained flat as compared to third quarter 2013, while year-over-year capacity increased 1.1 percent. As a result of the Company's fuel hedging program, the Company recognized net gains totaling $9 million in Fuel and oil expense for third quarter 2014, compared to net losses totaling $15 million for third quarter 2013. These totals include cash settlements realized from the settlement of fuel derivative contracts totaling $21 million received from counterparties for third quarter 2014, compared to $6 million received from counterparties for third quarter 2013. Additionally, these totals exclude gains and/or losses from hedge ineffectiveness and from derivatives that do not qualify for hedge accounting. These impacts are recorded as a component of Other (gains) losses, net. See Note 3 to the unaudited Condensed Consolidated Financial Statements.

As of October 17, 2014, on an economic basis, the Company had derivative contracts in place related to expected future fuel consumption as follows: Average percent of estimated fuel consumption covered by fuel derivative contracts at varying WTI/Brent Crude Oil, Heating Oil, and Gulf Coast Jet Fuel-equivalent price Period levels Fourth quarter 2014 Approx. 20% 2015 Approx. 40% 2016 Approx. 40% 2017 Approx. 40% 2018 Approx. 5% 35-------------------------------------------------------------------------------- As a result of applying hedge accounting in prior periods, the Company has amounts "frozen" in Accumulated other comprehensive income (loss) ("AOCI"), and these amounts will be recognized in earnings in future periods when the underlying fuel derivative contracts settle. The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties- See Note 3 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the amount of deferred gains/losses in AOCI at September 30, 2014, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions): Fair value (liability) of fuel Amount of gains (losses) derivative contracts at September deferred in AOCI at September Year 30, 2014 30, 2014 (net of tax) Remainder of 2014 $ (5 ) $ (4 ) 2015 (22 ) (89 ) 2016 56 (22 ) 2017 21 2 2018 $ 3 $ - Total $ 53 $ (113 ) Based on forward market prices and the amounts in the above table (and excluding any other subsequent changes to the fuel hedge portfolio), the Company's jet fuel costs per gallon could exceed market (i.e., unhedged) prices during some of these future periods. This is based primarily on expected future cash settlements associated with fuel derivatives, but excludes any impact associated with the ineffectiveness of fuel hedges or fuel derivatives that are marked to market because they do not qualify for hedge accounting. See Note 3 to the unaudited Condensed Consolidated Financial Statements for further information.

Assuming no changes to the Company's current fuel derivative portfolio, but including all previous hedge activity for fuel derivatives that have not yet settled, and considering only the expected net cash payments related to hedges that will settle, the Company is providing a sensitivity table for fourth quarter 2014 jet fuel prices at different crude oil assumptions as of October 17, 2014, and for expected premium costs associated with settling contracts each period.

Estimated economic jet fuel price per gallon, including taxes Average Brent Crude Oil 4Q 2014 (2) price per barrel $70 $2.30 - $2.35 $80 $2.50 - $2.55 Current Market (1) $2.70 - $2.75 $100 $3.00 - $3.05 $110 $3.20 - $3.25 Estimated Premium Costs (3) $13 million (1) Brent crude oil average market price as of October 17, 2014, was approximately $87 per barrel for fourth quarter 2014.

(2) The Company has approximately 20 percent of its fourth quarter 2014 estimated fuel consumption covered by fuel derivative contracts with approximately 10 percent at varying crude oil-equivalent prices and the remainder at varying Gulf Coast jet fuel and heat-equivalent prices. The economic fuel price per gallon sensitivities provided above assume the relationship between Brent crude oil and refined products based on market prices as of October 17, 2014.

(3) Premium costs are recognized as a component of Other (gains) losses, net.

Maintenance materials and repairs expense for third quarter 2014 decreased by $23 million, or 8.5 percent, compared to third quarter 2013. On a per ASM basis, Maintenance materials and repairs expense decreased 9.9 percent, compared to third quarter 2013. On both a dollar and a per ASM basis, approximately 50 percent of the decrease was attributable to reduced engine and avionic repair expense due to the continued transition of the Boeing 717-200 aircraft out of the 36 -------------------------------------------------------------------------------- Company's fleet. The remainder of the decrease, on both a dollar and per ASM basis, was primarily attributable to fewer Classic aircraft engine repairs. The Company currently expects Maintenance materials and repairs expense per ASM for fourth quarter 2014 to increase slightly, compared to fourth quarter 2013.

Aircraft rentals expense for third quarter 2014 decreased by $21 million, or 22.8 percent, compared to third quarter 2013. On a per ASM basis, Aircraft rentals expense decreased by 25.0 percent, compared to third quarter 2013. On both a dollar and per ASM basis, the decrease primarily was due to the transition of leased Boeing 717-200 aircraft out of the Company's fleet for conversion and delivery to Delta. The Company currently expects Aircraft rentals expense per ASM for fourth quarter 2014 to be comparable to third quarter 2014.

Landing fees and other rentals expense for third quarter 2014, on both a dollar and per ASM basis, were relatively flat, compared to third quarter 2013. The Company currently expects Landing fees and other rentals expense per ASM for fourth quarter 2014 to decrease slightly, compared to third quarter 2014.

Depreciation and amortization expense for third quarter 2014 increased by $17 million, or 7.7 percent, compared to third quarter 2013. On a per ASM basis, Depreciation and amortization expense increased 6.1 percent, compared to third quarter 2013. On both a dollar and per ASM basis, approximately 50 percent of the increase was due to the purchase of new and used aircraft since third quarter 2013 and the remainder of the increase was primarily due to depreciation associated with technology projects that have been placed into service since third quarter 2013. The Company currently expects Depreciation and amortization expense per ASM for fourth quarter 2014 to increase, compared to fourth quarter 2013, for these same reasons.

The Company incurred $23 million of Acquisition and integration costs during third quarter 2014 related to the AirTran integration, compared to $28 million in third quarter 2013. The third quarter 2014 costs primarily consisted of fleet integration and costs associated with the transition of 717-200s to Delta, Employee training, and facilities integration expenses. See Note 6 to the unaudited Condensed Consolidated Financial Statements for further information.

Other operating expenses for third quarter 2014 increased by $36 million, or 6.8 percent, compared to third quarter 2013. On a per ASM basis, Other operating expenses increased 6.3 percent, compared to third quarter 2013. On both a dollar and per ASM basis, approximately 25 percent of the increase was the result of higher contract programming and consulting expenses, primarily associated with ongoing technology projects, approximately 20 percent was related to higher advertising and promotions expense, and the remainder was due to individually insignificant items. The Company currently expects Other operating expenses per ASM for fourth quarter 2014 to increase, compared to fourth quarter 2013.

Other Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses. Interest expense for third quarter 2014 decreased by $4 million, or 11.4 percent, compared to third quarter 2013, primarily due to the Company's continued extinguishment of debt.

37 -------------------------------------------------------------------------------- Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities. See Note 3 to the unaudited Condensed Consolidated Financial Statements for further information on the Company's hedging activities. The following table displays the components of Other (gains) losses, net, for the three months ended September 30, 2014 and 2013: Three months ended September 30, (in millions) 2014 2013 Mark-to-market impact from fuel contracts settling in future periods $ 44 $ (76 ) Ineffectiveness from fuel hedges settling in future periods 11 15 Realized ineffectiveness and mark-to-market (gains) or losses (5 ) (17 ) Premium cost of fuel contracts 15 22 Other 1 (3 ) $ 66 $ (59 ) Income Taxes The Company's effective tax rate was approximately 37.3 percent in third quarter 2014, compared to 38.2 percent in third quarter 2013. The Company projects a full year 2014 effective tax rate of 37 to 38 percent based on currently forecasted financial results.

Comparison of nine months ended September 30, 2014 to nine months ended September 30, 2013 Passenger revenues for the nine months ended September 30, 2014, increased $725 million, or 5.8 percent, compared to the first nine months of 2013. Holding other factors constant, approximately 60 percent of the increase was attributable to a 2.7 point increase in load factor and approximately 40 percent of the increase was attributable to higher passenger yields, both driven by strong Customer demand for air travel and successful execution of the Company's strategic initiatives.

Freight revenues for the nine months ended September 30, 2014, increased by $5 million, or 4.1 percent, compared to the first nine months of 2013, primarily due to benefits from new and maturing markets as a result of the AirTran integration.

Other revenues for the nine months ended September 30, 2014, decreased by $24 million, or 3.8 percent, compared to the first nine months of 2013, primarily due to a decline in ancillary revenues. The majority of the decline in ancillary revenues was due to the adoption of Southwest's more Customer-friendly fee policies for Customers who purchase travel on AirTran through southwest.com, and the overall reduction in AirTran flights as a result of the integration process.

This decline was partially offset by an increase in certain Southwest specific ancillary products, such as EarlyBird Check-in® and A1-15 select boarding positions sold at the gate.

38 --------------------------------------------------------------------------------Operating expenses Operating expenses and capacity for the nine months ended September 30, 2014, remained flat, compared to the first nine months of 2013. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines are largely driven by changes in capacity, or ASMs. The following table presents the Company's Operating expenses per ASM for the first nine months of 2014 and 2013, followed by explanations of these changes on a per ASM basis and dollar basis: Nine months ended September 30, Per ASM Percent (in cents, except for percentages) 2014 2013 change change Salaries, wages, and benefits 4.10 ¢ 3.81 ¢ 0.29 ¢ 7.6 % Fuel and oil 4.20 4.46 (0.26 ) (5.8 ) Maintenance materials and repairs 0.75 0.85 (0.10 ) (11.8 ) Aircraft rentals 0.23 0.28 (0.05 ) (17.9 ) Landing fees and other rentals 0.86 0.86 - - Depreciation and amortization 0.70 0.65 0.05 7.7 Acquisition and integration 0.08 0.07 0.01 14.3 Other operating expenses 1.66 1.59 0.07 4.4 Total 12.58 ¢ 12.57 ¢ 0.01 ¢ 0.1 % Operating expenses per ASM for the first nine months of 2014 remained flat, compared to the first nine months of 2013. Operating expenses per ASM, excluding fuel and special items (a non-GAAP financial measure), increased 3.2 percent for the first nine months of 2014, compared to the same period in 2013. These increases primarily were due to higher Salaries, wages, and benefits expense and higher Other operating expenses, partially offset by lower Aircraft rentals and Maintenance materials and repairs expense. See the previous Note Regarding Use of Non-GAAP Financial Measures.

Salaries, wages, and benefits expense for the first nine months of 2014 increased by $293 million, or 7.8 percent, compared to the first nine months of 2013. Salaries, wages, and benefits expense per ASM for the first nine months of 2014 increased 7.6 percent, compared to the first nine months of 2013. On both a dollar and per ASM basis, approximately 55 percent of these increases were the result of higher wages primarily due to contractual increases and the majority of the remainder was the result of higher profitsharing expense due to increased profits for the first nine months of 2014.

Fuel and oil expense for the first nine months of 2014 decreased by $271 million, or 6.2 percent, compared to the first nine months of 2013. On a per ASM basis, Fuel and oil expense for the first nine months of 2014 decreased 5.8 percent, compared to the first nine months of 2013. Excluding the impact of hedging, both the dollar and unit cost decreases were approximately 75 percent attributable to lower jet fuel prices and approximately 25 percent attributable to better fuel efficiency. The Company's average economic jet fuel cost per gallon decreased 3.8 percent, on a year-over-year basis, from $3.13 during the first nine months of 2013 to $3.01 during the first nine months of 2014. In addition, fuel gallons consumed decreased 1.4 percent, compared to the first nine months of 2013, while year-over-year capacity was flat. The improvement in fuel efficiency was primarily due to the Company's continued replacement of 717-200 and Classic aircraft with Next Generation 737-700 and 737-800 aircraft, coupled with the implementation of improved flight planning initiatives. As a result of the Company's fuel hedging program, the Company recognized net gains totaling $46 million in Fuel and oil expense for the first nine months of 2014, compared to net losses totaling $114 million for the first nine months of 2013.

These totals include cash settlements realized from the settlement of fuel derivatives totaling $72 million received from counterparties for the first nine months of 2014, compared to $44 million paid to counterparties in the first nine months of 2013. Additionally, these totals exclude gains and/or losses recognized from hedge ineffectiveness and from derivatives that do not qualify for hedge accounting, which impacts are recorded as a component of Other (gains) losses, net. See Note 3 to the unaudited Condensed Consolidated Financial Statements.

39 -------------------------------------------------------------------------------- Maintenance materials and repairs expense for the first nine months of 2014 decreased by $108 million, or 12.8 percent, compared to the first nine months of 2013. On a per ASM basis, Maintenance materials and repairs expense decreased 11.8 percent, compared to the first nine months of 2013. On both a dollar and per ASM basis, approximately 40 percent of the decrease was attributable to reduced expense due to the completion of the Evolve aircraft interior retrofit program during third quarter 2013; approximately 40 percent was due to reduced engine and avionic repair expense due to the impact of 717-200 aircraft transitioning out of the Company's fleet; and the remainder primarily was due to a decrease in airframe and component expense due to timing of regular maintenance checks.

Aircraft rentals expense for the first nine months of 2014 decreased by $50 million, or 18.1 percent, compared to the first nine months of 2013. On a per ASM basis, Aircraft rentals expense decreased by 17.9 percent, compared to the first nine months of 2013. On both a dollar and per ASM basis, the decrease primarily was due to the transition of leased 717-200 aircraft out of the Company's fleet for conversion and delivery to Delta.

Depreciation and amortization expense for the first nine months of 2014 increased by $44 million, or 6.8 percent, compared to the first nine months of 2013. On a per ASM basis, Depreciation and amortization expense increased 7.7 percent, compared to the first nine months of 2013. On both a dollar and per ASM basis, approximately 60 percent of the increase was attributable to technology projects that have been placed into service over the last twelve months and the remainder was due to the purchase of new and used aircraft since third quarter 2013.

The Company incurred $78 million of Acquisition and integration expense for the first nine months of 2014, compared to $66 million for the first nine months of 2013. The 2014 costs primarily consisted of fleet integration and costs associated with the transition of 717-200s to Delta, Employee training, and facilities integration expenses.

Other operating expenses for the first nine months of 2014 increased by $73 million, or 4.7 percent, compared to the first nine months of 2013. On a per ASM basis, Other operating expenses increased 4.4 percent, compared to the first nine months of 2013. On both a dollar and per ASM basis, approximately 50 percent of the increase was the result of higher contract programming and consulting expenses, with the remainder of the increase due to individually insignificant items.

Other Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses.

Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities. See Note 3 to the unaudited Condensed Consolidated Financial Statements for further information on the Company's hedging activities. The following table displays the components of Other (gains) losses, net, for the nine months ended September 30, 2014 and 2013: Nine months ended September 30, (in millions) 2014 2013 Mark-to-market impact from fuel contracts settling in future periods $ 5 $ (112 ) Ineffectiveness from fuel hedges settling in future periods (31 ) 27 Realized ineffectiveness and mark-to-market (gains) or losses (5 ) (10 ) Premium cost of fuel contracts 49 39 Other (2 ) (2 ) $ 16 $ (58 ) Income Taxes The Company's effective tax rate was approximately 37.6 percent for the first nine months of 2014, compared to 38.1 percent for the first nine months of 2013.

40 --------------------------------------------------------------------------------Liquidity and Capital Resources Net cash provided by operating activities was $240 million for the three months ended September 30, 2014, compared to $428 million provided by operating activities in the same prior year period. For the nine months ended September 30, 2014, net cash provided by operating activities was $2.7 billion, compared to $2.2 billion provided by operating activities in the first nine months of 2013. The operating cash flows for the nine months ended September 30, 2014, were largely impacted by the Company's net income (as adjusted for noncash items) and an $806 million increase in Air traffic liability as a result of bookings for future travel and sales of frequent flyer points to business partners. For the nine months ended September 30, 2013, there was an $811 million increase in Air traffic liability as a result of bookings for future travel. Net cash provided by operating activities is primarily used to finance capital expenditures, repay debt, fund stock repurchases, pay dividends, and provide working capital.

Net cash used in investing activities was $44 million during the three months ended September 30, 2014, compared to $359 million used in investing activities in the same prior year period. For the nine months ended September 30, 2014, net cash used in investing activities was $1.3 billion, compared to $1.1 billion used in the same prior year period. Investing activities in both years included capital expenditures, as well as changes in the balance of the Company's short-term and noncurrent investments. During the nine months ended September 30, 2014, capital expenditures were $1.3 billion, which included the payment for slots acquired at Washington Reagan National Airport and payments for new and previously owned aircraft delivered to the Company, compared to $995 million in Capital expenditures during the same prior year period. During the nine months ended September 30, 2014, the Company's transactions in short-term and noncurrent investments resulted in a net cash inflow of $83 million, compared to a net cash outflow of $135 million during the same prior year period. See Note 5 to the unaudited Condensed Consolidated Financial Statements for further information on the Company's purchase of additional slots at Washington Reagan National Airport.

Net cash used in financing activities was $246 million during the three months ended September 30, 2014, compared to $225 million used in financing activities for the same prior year period. For the nine months ended September 30, 2014, net cash used in financing activities was $962 million, compared to $838 million used in the same prior year period. During the nine months ended September 30, 2014, the Company repaid $167 million in debt and capital lease obligations and repurchased approximately $755 million of its outstanding common stock, through the share repurchase programs. During the nine months ended September 30, 2013, the Company repaid $267 million in debt and capital lease obligations and repurchased approximately $501 million of its outstanding common stock through share repurchase programs.

In July 2014, the Company's Board of Directors declared a dividend of $.06 per share, which was paid to Shareholders during September 2014. Although the Company currently intends to continue paying dividends on a quarterly basis for the foreseeable future, the Company's Board of Directors may change the timing, amount, and payment of dividends on the basis of results of operations, financial condition, cash requirements, future prospects, and other factors deemed relevant by the Board of Directors.

The Company is a "well-known seasoned issuer" and has an effective shelf registration statement registering an indeterminate amount of debt and equity securities for future sales. The Company currently intends to use the proceeds from any future securities sales off this shelf registration statement for general corporate purposes. The Company has not issued any securities under this shelf registration statement to date.

The Company has access to a $1 billion unsecured revolving credit facility, which expires in April 2018. Interest on the facility is based on the Company's credit ratings at the time of borrowing. At the Company's current ratings, the interest cost would be LIBOR plus a spread of 125 basis points. The facility contains a financial covenant, requiring a minimum coverage ratio of adjusted pre-tax income to fixed obligations, as defined. As of September 30, 2014, the Company was in compliance with this covenant and there were no amounts outstanding under the revolving credit facility.

41 -------------------------------------------------------------------------------- On August 5, 2014, Moody's upgraded the Company's senior unsecured debt rating to "Baa2" from "Baa3," the five pass-through trust certificates ("PTCs") to "Baa1," and the A and C tranches of the AirTran Airways Series 1999-1 Enhanced Equipment Trust Certificates ("EETC") to "A3" from "Baa1" and to "Baa3" from "Ba1," respectively. The upgrade of the Company's senior unsecured debt rating was based on Moody's expectations of further strengthening of the Company's credit metrics, building on the improvements in cash flow, earnings and financial leverage that the Company has achieved since the end of 2012. The upgrade of the Company's ratings on its PTCs reflects Moody's estimates that the loan-to-value ("LTVs") for the two transactions maturing within the next 24 months are about 60 percent and 70 percent, while the three subsequent maturities have estimated LTVs at between 115 percent and 150 percent as older Boeing B737-700 aircraft secure these instruments. The upgrade of the AirTran Series 1999-1 EETC reflects that both tranches are guaranteed by Southwest and that two Boeing B717-200 aircraft that will be sub-leased to Delta Air Lines secure this financing. Moody's estimates the LTVs of this financing at between 50 percent and 60 percent.

On September 22, 2014, Fitch affirmed the Company's debt rating of "BBB" and revised the rating outlook from stable to positive. The positive outlook reflects Fitch's view that a positive rating action could be warranted over the intermediate term should the Company continue to strengthen its operating margins, control unit cost inflation, generate solid free cash flow, and exhibit stable or declining leverage. Fitch also noted that the operating risks relating to the integration of AirTran are now largely in the past as the Company expects to effectively complete the integration process by year-end 2014.

The Company expects to incur an aggregate of approximately $550 million in Acquisition and integration costs associated with the AirTran acquisition, of which approximately $488 million has been incurred through September 30, 2014.

These costs have been, and are expected to be, funded with cash from operations.

The Company believes that its current liquidity position, including unrestricted cash and short-term investments of $3.6 billion as of September 30, 2014, anticipated future internally generated funds from operations, and its fully available, unsecured revolving credit facility of $1 billion that expires in April 2018, will enable it to meet these future expenditures. If a liquidity need were to arise, the Company believes it has access to financing arrangements because of its investment grade credit ratings, large value of unencumbered assets, and modest leverage, which should enable it to meet its ongoing capital, operating, and other liquidity requirements. The Company will continue to consider various borrowing or leasing options to maximize liquidity and supplement cash requirements, as necessary.

On May 14, 2014, the Company's Board of Directors authorized the repurchase of up to $1 billion of the Company's common stock in a new share repurchase program. During August 2014, pursuant to the Third Quarter ASR Program, the Company advanced $200 million to a financial institution in a privately negotiated transaction, and received approximately five million shares of common stock, representing an estimated 75 percent of the shares to be purchased by the Company under the Third Quarter ASR Program. The purchase was recorded as a treasury share purchase for purposes of calculating earnings per share. As of September 30, 2014, the Company's cumulative repurchases under the May 2014 $1 billion Board authorization have totaled $420 million, or approximately 13 million shares of common stock. During October 2014, the Third Quarter ASR Program was settled, and the third party financial institution delivered one million additional shares of common stock to the Company.

42 --------------------------------------------------------------------------------Contractual Obligations and Contingent Liabilities and Commitments The Company has contractual obligations and commitments primarily with regard to future purchases of aircraft, repayment of debt, and lease arrangements. As of September 30, 2014, the Company had scheduled deliveries for Boeing 737-700, 737-800, 737 MAX 7, and 737 MAX 8 aircraft as follows: The Boeing Company The Boeing Company 737 NG 737 MAX -700 -800 -7 -8 Firm Firm Additional Firm Firm Orders Orders Options -700 A/C Orders Orders Options Total 2014 - 33 - 22 - - - 55 (3) 2015 - 19 - 14 - - - 33 2016 31 - 10 4 - - - 45 2017 15 - 12 - - 14 - 41 2018 10 - 12 - - 13 - 35 2019 - - - - 15 10 - 25 2020 - - - - 14 22 - 36 2021 - - - - 1 33 18 52 2022 - - - - - 30 19 49 2023 - - - - - 24 23 47 2024 - - - - - 24 23 47 2025 - - - - - - 36 36 2026 - - - - - - 36 36 2027 - - - - - - 36 36 Total 56 (1) 52 34 40 30 170 (2) 191 573 (1) The Company has flexibility to substitute 737-800s in lieu of 737-700 firm orders.

(2) The Company has flexibility to substitute MAX 7 in lieu of MAX 8 firm orders beginning in 2019.

(3) Includes 25 737-800s and 11 737-700s delivered as of September 30, 2014.

The Company's financial commitments associated with the firm orders and additional 737-700 aircraft in the above aircraft table are as follows: $286 million remaining in 2014, $827 million in 2015, $1.2 billion in 2016, $1.2 billion in 2017, $1.0 billion in 2018, and $6.8 billion thereafter.

For aircraft commitments with Boeing, the Company is required to make cash deposits towards the purchase of aircraft. These deposits are classified as Deposits on flight equipment purchase contracts in the unaudited Condensed Consolidated Balance Sheet until the aircraft is delivered, at which time deposits previously made are deducted from the final purchase price of the aircraft and are reclassified as Flight equipment.

43 --------------------------------------------------------------------------------The following table details information on the aircraft in the Company's fleet as of September 30, 2014: Average Number Number Number Type Seats Age (Yrs) of Aircraft Owned Leased 717-200 117 13 37 10 27 737-300 137 or 143 21 122 (a) 76 46 737-500 122 23 13 10 3 737-700 137 or 143 10 436 (b) 383 53 737-800 175 1 77 70 7 TOTALS 685 549 136 (a) Of the total, 78 737-300 aircraft have 143 seats and 44 have 137 seats.

(b) Of the total, 418 737-700 aircraft have 143 seats and 18 have 137 seats.

Cautionary Statement Regarding Forward-Looking Statements This Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on, and include statements about, the Company's estimates, expectations, beliefs, intentions, and strategies for the future, and the assumptions underlying these forward-looking statements. Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, statements related to the following: •the Company's launch of a new visual expression of its brand and its related initiatives and cost expectations; •the Company's network plans and expectations, including its network optimization plans and expectations; •the Company's expectations with respect to the integration of AirTran, including anticipated timeframes and costs associated with the integration; •the Company's fleet and capacity plans, including its fleet modernization plans; •the Company's financial outlook and projected results of operations; •the Company's plans and expectations with respect to managing risk associated with changing jet fuel prices; •the Company's expectations with respect to liquidity and capital expenditures, including anticipated needs for, and sources of, funds; •the Company's assessment of market risks; and •the Company's plans and expectations related to legal proceedings.

While management believes these forward-looking statements are reasonable as and when made, forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual results may differ materially from what is expressed in or indicated by the Company's forward-looking statements or from historical experience or the Company's present expectations. Factors that could cause these differences include, among others: •changes in demand for the Company's services and the impact of economic conditions, fuel prices, actions of competitors (including, without limitation, pricing, scheduling, and capacity decisions and consolidation and alliance activities), and other factors beyond the Company's control, on the Company's business decisions, plans, and strategies; •the impact of governmental regulations and other actions related to the Company's operations; •the Company's ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives; •the Company's ability to effectively complete the integration of AirTran and realize the expected results from the acquisition; •the Company's ability to timely and effectively prioritize its strategic initiatives and related expenditures; •the Company's dependence on third parties, in particular with respect to its fleet plans; •changes in the price of aircraft fuel, the impact of hedge accounting, and any changes to the Company's fuel 44-------------------------------------------------------------------------------- hedging strategies and positions; •other factors as set forth in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

Caution should be taken not to place undue reliance on the Company's forward-looking statements, which represent the Company's views only as of the date this report is filed. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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