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PART I
Item 1. Business
Company Overview
Southwest Airlines Co. (the “Company” or “Southwest”) operates Southwest Airlines, a major passenger
airline that provides scheduled air transportation in the United States and near-international markets. For
the 43rd consecutive year, the Company was profitable, earning $2.2 billion in net income.
Southwest commenced service on June 18, 1971, with three Boeing 737 aircraft serving three Texas
cities: Dallas, Houston, and San Antonio. The Company ended 2015 serving 97 destinations in
40 states, the District of Columbia, the Commonwealth of Puerto Rico, and seven near-international
countries including Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, and
Belize. During 2015, the Company added its first three destinations in Central America (San Jose,
Costa Rica, Belize City, Belize, and Liberia, Costa Rica) and also commenced Southwest service to a
fourth destination in Mexico (Puerto Vallarta). At December 31, 2015, Southwest operated a total of
704 Boeing 737 aircraft.
During 2015, the Company also added 20 domestic nonstop destinations from Dallas Love Field.
These routes were made possible by the repeal of certain federal flight restrictions at Dallas Love Field
in October 2014. At year-end 2015, Southwest offered a total of 180 weekday departures to 50 nonstop
destinations from Dallas Love Field. In addition, the Company added eight international nonstop
destinations from a newly constructed five-gate international terminal at Houston’s William P. Hobby
Airport. Based on the most recent data available from the U.S. Department of Transportation, as of
June 30, 2015, Southwest was the largest domestic air carrier in the United States, as measured by the
number of domestic originating passengers boarded.
Industry
The airline industry has historically been an extremely volatile industry subject to numerous
challenges. Among other things, it has been cyclical, energy intensive, labor intensive, capital
intensive, technology intensive, highly regulated, heavily taxed, and extremely competitive. The airline
industry has also been particularly susceptible to detrimental events such as acts of terrorism, poor
weather, and natural disasters.
The U.S. airline industry benefited from moderate economic growth during 2015 and was further aided
by a significant drop in fuel prices. The U.S. airline industry, including Southwest, has increased
available seat miles (also referred to as “capacity,” an available seat mile is one seat, empty or full,
flown one mile and is a measure of space available to carry passengers in a given period), and has
increased the number of seats per trip (or “gauge”) through slimline seat retrofits and the use of larger
aircraft.
Company Operations
Route Structure
General
Southwest principally provides point-to-point service, rather than the “hub-and-spoke” service
provided by most major U.S. airlines. The hub-and-spoke system concentrates most of an airline’s
1