Performance

The Southwest Network: California Strong

Southwest began 2018 with a fleet deficit compared with 2017 as a result of the accelerated retirement of the Boeing 737-300 (Classic) fleet that was completed in third quarter 2017. With fewer aircraft in the fleet, the flight schedule was extended farther into the shoulders of the day—the early morning and the late evening—than is customary, allowing us to preserve the strength of our point-to-point network. The suboptimal schedule was a headwind to our financial performance in the first half of 2018, but with more than 40 737 Next Generation and MAX aircraft added to the fleet throughout the year, we were able to better optimize the network and eliminate the inefficiencies by fourth quarter 2018. The new aircraft are part of our ongoing fleet modernization efforts, with more seats and improved fuel efficiency compared with the Classic aircraft.

Given the challenge of a fleet deficit, we had to be more selective with our capacity additions, and we sought opportunities that would be particularly beneficial for California flyers. During 2018, we connected new cities, added additional daily flights, and invested in Reliability to better serve our Customers in the Golden State. Southwest is California’s largest carrier, carrying more than 25 percent of passengers who fly to, from, and within California.1717) As measured by the U.S. DOT’s O&D Survey for the 12 months ended Sept. 30, 2018 based on domestic originating passengers. O&D stands for Origin & Destination. In 2018 we built on our position of strength by adding more than 2.9 million seats that touch California, representing almost 60 percent of our 2018 growth.2020) Percentage of year-over-year ASM 7 growth that touched California.

Southwest is California’s largest carrier, carrying more than 25 percent of passengers who fly to, from, and within California.

We were proud to announce new weekday nonstop destinations from nearly all of our California cities in 2018. From intra-state hops to New York nonstops, our California Customers now have more destinations to choose from than ever before. New daily nonstop flights connect Californians with New Orleans, Omaha, St. Louis, Indianapolis, Minneapolis, and many other domestic and international destinations across the Southwest system. For example, during 2018 Southwest seized the opportunity to grow capacity at the slot-constrained2121)A slot is the right of an air carrier, pursuant to regulations by the Federal Aviation Administration, to operate a takeoff or landing at a specific time at certain airports. Long Beach Airport by 38 percent,2222) Growth in weekday flights as a percentage, for fourth quarter 2018 compared with fourth quarter 2017. including; adding three new nonstop flights to Las Vegas, and both Oakland and Sacramento received frequency increases. Among California’s many new flights were brand new nonstops which further connected the major technology hubs of Austin, Texas and all four of Southwest’s Northern California cities. In total, we added more than 20 new nonstop daily weekday California routes to the network in 2018.

While we added many new nonstop routes to California, we also continued to invest in our existing Golden State routes. Throughout the year, Southwest added nearly 30 additional frequencies in California, further supporting our industry-leading Intra-California market share in California of more than 60 percent.1717) As measured by the U.S. DOT’s O&D Survey for the 12 months ended Sept. 30, 2018 based on domestic originating passengers. O&D stands for Origin & Destination. The operational performance of our modernized aircraft allows California Customers to experience an unmatched level of service and a schedule that can be relied on.

This recent growth in the Golden State is just the beginning of Southwest’s continued investment in California. We expect to continue launching new destinations, adding additional frequencies, and improving our Reliability to further solidify Southwest’s position as the official airline of the West Coast.11) The 2018 Southwest Airlines One Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Specific forward-looking statements include, without limitation, statements related to (i) the Company’s Vision; (ii) the Company’s financial position, outlook, goals, targets, strategies, plans, expectations, and projected results of operations, including specific factors expected to impact the Company’s results of operations; (iii) the Company’s network, growth, and capacity plans, strategies, opportunities, and expectations; (iv) the Company’s expectations and goals with respect to enhancing Shareholder value and returning value to Shareholders; (v) the Company’s fleet plans, strategies, and expectations, including its fleet modernization initiatives, and the Company’s related financial and operational expectations; (vi) the Company’s operational initiatives and related plans and expectations, including with respect to its technology and innovation initiatives; and (vii) the Company’s other initiatives, including construction, safety, fuel, and environmental initiatives, and related plans and expectations. These statements involve risks, uncertainties, assumptions, and other factors that are difficult to predict and that could cause actual results to vary materially from those expressed in or indicated by them. Factors include, among others, (i) changes in demand for the Company’s services and other changes in consumer behavior; (ii) the impact of a continually changing business environment, economic conditions, fuel prices, actions of competitors (including without limitation pricing, product, scheduling, capacity, and network decisions, and consolidation and alliance activities), and other factors beyond the Company’s control, on the Company’s business decisions, plans, strategies, and results; (iii) the impact of governmental actions and governmental regulations related to the Company’s operations, in particular with respect to the grounding of the Company’s 737 MAX 8 fleet; (iv) the Company’s dependence on third parties, in particular with respect to its fleet and technology plans and expectations, and the impact on the Company’s operations and results of operations of any related third party delays or non-performance; (v) 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; (vi) the Company’s ability to timely and effectively prioritize its initiatives and related expenditures; (vii) the impact of labor matters on the Company’s business decisions, plans, strategies, and costs; (viii) changes in aircraft fuel prices, the volatility of commodities used by the Company for hedging jet fuel, and any changes to the Company’s fuel hedging strategies and positions; and (ix) other factors, as described 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 fiscal year ended Dec. 31, 2018. In fact, in April 2018 we announced our intent to serve to Daniel K. Inouye International Airport in Honolulu, Kahului Airport on Maui, Lihue Airport on Kauai, and Ellison Onizuka Kona International Airport at Keahole on the island of Hawaii, from Oakland Metropolitan Airport, San Diego International Airport, Mineta San José International Airport, and Sacramento International Airport, thus further expanding the list of destinations with nonstop routes to California.

As we continued to optimize our route network, we made the difficult decision to end service to Flint, Michigan in June 2018. After carefully analyzing travel patterns in the area it was found we could better serve Customers with flights from Detroit and Grand Rapids. Southwest continues to offer more than 20 daily weekday departures from the Wolverine State. Also, in March 2019, we announced our decision to cease operations to Benito Juárez Mexico City International Airport in order to reallocate resources to better opportunities within our existing route network.

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