Luv Final Presentation

We Dont Believe in LUV at First Sight
The University of Texas at Dallas

James, Tyler, Trevor
1
Company Overview
Industry Analysis
Executive Summary
Recommendation: HOLD
Current Price: $37.54
Target Price: $34.53 (8% Downside)
Valuation
Risk Analysis
Conclusion
$60
$50
LUV $37.54
$40
$30
LUV $34.53
$20
$10
Close Price
Current Price
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
Apr-15
$0
Mar-15
Market Profile (as of 02/04/2016)

Closing Price:
$37.54
52-Week High-Low:
$31.36 / $51.34
Diluted Shares Out. :
679.55 M
Average Volume (6M):
8.44 M
Market Cap:
$ 22.78 B
LTM Dividend Yield:
0.76%
Short Interest (%) Float:
3.77%
Beta:
1.11
EV/EBITDAR*:
5.0 x
P/E*:
12.7 x
Institutional Holders:
82.94%
Insider Holdings:
0.28%
*Multiples adjusted for Operating Leases
Feb-15
NYSE: LUV
Industry: Airlines
Sector: Transportation
Financial Analysis
Investment Themes:
Low Cost, No Frill Approach
Conservative Operating Philosophy
Declining Competitive Advantage
Strained Employee Relations
May-15
Investment Highlights
Target Price
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Historical Competitive Advantage

A
C
Cost Structure
E
D
F
D
E
G
C
Vs.
Hub and
Spoke
The Southwest Effect

Traffic Demand In New Markets
Average Fares in New Markets
Low Cost
Structure
Point to
Point
Low Fares
Employee Relations
Each route serves

a single city-pair
Hub connections
significantly
increase CASM
Higher aircraft
utilization and
turnaround times
Routes are
interdependent
for connecting
passengers
Brand Image
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Executive Council
Conclusion
* denotes company tenure

11
EVP of Corporate
Services
EVP/Chief
Commercial
Officer
28
Jeff Lamb
EVP Strategy &

Innovation
Robert E. Jordan
Thomas M. Nealon
29*
Chairman of the
Board, CEO
Gary C. Kelly
12
24
EVP/Chief
Financial Officer
Tammy Romo
15
EVP/Chief
Operating Officer
SV P Gen. Counsel,
Corporate Secr etary
Mark R. Shaw
Michael G. Van de Ven
Your people come first, and if you treat them right, theyll treat the customers right.
- Herb Kelleher, Founder of Southwest Airlines
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Major Markets, Pre-AirTran Acquisition (2011)
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Major Markets, After AirTran Acquisition (2014)

PORTLAND
GRAND
RAPIDS
FLINT
ROCHESTER
RICHMOND
WICHITA
BRANSON
CHARLOTTE
MEMPHIS
BERMUDA
ATLANTA
PENSACOLA
PARADISE ISLAND
CABO SAN LUCAS
SAN JUAN
PUNTA CANA
CANCN
MONTEGO BAY
MEXICO CITY
ARUBA
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Major Markets, After Wright Amendment Repeal (2014)
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Porters Five Forces

Power of
Suppliers
Threat of
New
Entrants
Industry
Rivalry
Threat of
Substitutes
Power of
Buyers
8
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Changing Dynamics
Deregulation
Weakened
Barriers
Laissez-faire
Pricing
Bankruptcy
Converging Interests
Average Fares
$500
$450
Legacy
Legacy
$400
$350
LCCs
ULCCs
$300
$250
Before 1978
2016
$200
1979
1986
1993
2000
2007
2014
9
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Industry Timeline
American West/US
Airways Merger
AAL/TWA MetroJet 9/11 Terror

Merger Liquidation Attacks
2001
DAL/Northwest Financial
Merger
Crisis
2008
2005
UAL/Continental LUV/AirTran AAL/US Airways

Merger
Merger
Merger
2010
2011
2013
Improving Operating Margin
Strengthening Z scores
$200 B
18%
16%
14%
$150 B
2
12%
10%
$100 B
8%
6%
$50 B
-1
4%
2%
-2
1997
1999
2001
AAL
2003
2005
DAL
2007
2009
UAL
2011
2013
LUV
2015
$0 B
0%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Revenue
Operating Margin
10
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Evolving Structures
Operating Cost Structure
Streamlined Labor Costs % of Revenue
45%
40%
40%
35%
35%
30%
30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
1998
0%
2001
2000
2002
2004
Labor
2006
2008
Other Costs
2010
2012
2014
2003
2005
Wages
2007
Fuel
2009
2011
2013
2015
Other Costs
The industry dynamics have changed substantially since the Deregulation Act
11
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Current Dynamics
Supply Imbalance vs Crude Oil
3.0 M
$120
2.5 M
$100
2.0 M
44% Jet fuel price per gallon

Oil Supply Surplus
$80
1.5 M
1.0 M
$60
0.5 M
Global energy demand
$40
0.0 M
$20
-0.5 M
-1.0 M
$0
Supply-Demand Spread (mbpd)
Alleviate debt obligations

Increase shareholder returns
WTI Spot Price
Fuel tailwinds have created ROIC levels above WACC

12
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Macroeconomic Drivers
Contracting PMI levels
Corporate Earnings vs Airline Traffic

90,000 B
6%
80,000 B
5%
70
60
4%
70,000 B
50
3%
60,000 B
Correlation = 84%
50,000 B
2%
40
1%
40,000 B
30
0%
30,000 B
-1%
20,000 B
-2%
10,000 B
-3%
0B
0B
500 B
1,000 B
1,500 B
2,000 B
2,500 B
-4%
1986
20
10
0
1991
1996
2001
PMI Index
PMI
*78%
Non-PMI
*80%
Corp. Earnings
*84%
2006
2011
2016
Real GDP YoY
Traffic
* Denotes correlation
13
Company Overview
Industry Analysis
Financial Analysis
Industry Drivers
Valuation
Risk Analysis
Conclusion
Yield = Passenger Revenue/Revenue Passenger Mile
Yield
Passenger Revenue per Available Seat Mile
20%
14.0
15%
12.0
10.0
10%
8.0
5%
6.0
0%
4.0
-5%
-10%
2010
2.0
2011
2012
Legacy
2013
LCC's
ULCC's
2014
2015
0.0
03/06
10/07
PRASM
05/09
12/10
Fuel Cost pASM
07/12
02/14
09/15
Labor Cost pASM
Short-term industry yields are expected to stabilize

14
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Revenue Analysis
Historical Yield
Capacity Expansion vs Traffic

40%
20%
35%
15%
30%
10%
25%
20%
5%
15%
10%
0%
5%
-5%
0%
-10%
-5%
-10%
2006
2008
2010
ASM YoY Growth
2012
2014
2016
-15%
2002
2005
2008
2011
2014
2017
RPM YoY Growth
15
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Growth Opportunity
4%
Domestic
6%
Capacity
Expansion
2%
International
16
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Cost Efficiency Analysis

Significantly Above-average Labor Costs
Industry's CASM Ex-fuel compared to LUV

= -19%
40%
Industry
35%
= -15%
30%
= 10%
25%
ULCC's
= -8%
20%
LCC's
15%
= -11%
10%
Legacy
5%
0%
1997
2000
2003
2006
Industry Wages
2009
2012
LUV Wages
2015
2018
-60%
-40%
-20%
09/2015
0%
20%
40%
12/2009
17
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Cost Efficiency Analysis

Late Arrival Ratio
Industry's CASM Ex-fuel compared to LUV

= -19%
14%
Industry
12%
= -15%
10%
ULCC's
8%
= -8%
6%
= 34%
LCC's
4%
= -11%
2%
0%
2011
Legacy
2012
2013
Southwest*
2014
2015
-60%
-40%
-20%
09/2015
Industry*
0%
20%
40%
12/2009
Not only has the world changed, but our relative position within the industry on costs has changed.
- Gary Kelly, CEO of Southwest Airlines
18
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Labor Cost Uncertainty
Percent of Workers Unionized
17%
5Representing
Labor Costs % Operating Expenses
Union Work Groups
83%
Unionized
Current Negotiations:
Non-Unionized
57%
43%
55.8% Employees
Labor Expenses
Other Expenses
19
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Fading Competitive Advantage
Legacy
Other
LCCs
ULCCs
CostCost
Quality of Service
Quality of Service
LUV
Legacy
LUV
ULCCs
Other
LCCs
Cost
LUV no longer remains a low cost leader

This graph is illustrative purposes
20
Company Overview
Industry Analysis
Profitability Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Historical EBITDAR
FASB Operating Leases Adjustment
6,000
Add back Aircraft & Other Rentals
4,000
5,000
3,000
2,000
1,000
Before Adjustment
After Adjustment
27.4% EBITDAR
28.9% EBITDAR
24.1% ROIC
20.3% ROIC
+2.7B Debt
30%
25%
20%
15%
10%
5%
0%
-5%
ROIC
Reported ROIC
Adjusted ROIC
21
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Capital Structure Analysis

Total Debt/EBITDAR
Historical Debt to Capital
12.0 x
70 %
60 %
10.0 x
50 %
8.0 x
40 %
6.0 x
30 %
4.0 x
20 %
2.0 x
10 %
0%
FY05A
NM
FY07A
FY09A
FY11A
As reported
FY13A
FY15A
FY17E
Adjusted
Conservative Operating Philosophy

22
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Valuation Overview
DCF Analysis
Price: $38.81
Relative Valuation
Price: $30.24
(50%)
(50%)
Terminal EV/EBITDAR
Adj. for Operating Leases
EV/EBITDAR
Normalized P/E
LUV
$34.53
8% Potential Downside
23
Company Overview
Industry Analysis
Financial Analysis
Valuation
Revenue Assumptions
Risk Analysis
Conclusion
Revenue Projection
25 B
35%
30%
Assumption Breakdown
YoY Capacity Growth:
Load Factor:
Change in Yield:
Passenger Revenue:
Freight:
Other Revenue:
Total Operating Revenue:
YoY Growth Rate:
FY16E
5.5%
83.6%
-1.5%
19,023
180
1,257
20,460
4.1%
FY17E
4.0%
83.6%
0.5%
19,882
184
943
21,009
2.7%
FY18E
3.0%
83.6%
1.0%
20,684
180
971
21,835
3.9%
20 B
25%
20%
15 B
15%
10%
10 B
5%
0%
5B
-5%
0B
-10%
FY09A
FY10A
FY11A
FY12A
FY13A
FY14A
FY15A
FY16E
FY17E
FY18E
Historical Earnings vs Reinvesment Need

3B
2B
1B
~82%
Average Annual
Reinvestment Need
0B
-1 B
-2 B
-3 B
FY05A FY06A FY07A FY08A FY09A FY10A FY11A FY12A FY13A FY14A FY15A
Reinvestment Need
After-tax Adjusted EBIT
24
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
WACC Assumptions
Cost of Debt
2016-2019 Terminal
Risk-free Rate*:
2.25%
3.00%
BBB+ Default Spread:
2.00%
2.00%
Cost of Debt:
4.25%
5.00%
*Expected 10-Y U.S. Treasury
WACC:
Cost of Equity
2016-2019 Terminal
Risk-free Rate*:
2.25%
3.00%
Risk Premium:
5.00%
5.00%
Adjusted Beta:
1.32
1.16
Cost of Equity:
8.84%
8.78%
2016-2019 Terminal
7.11%
7.60%
25
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
DCF Outputs
Base
$38.54
$45 - $55 - $65

Brent
$45 - $55 - $65 Brent
+ 650 bps SPE FY 2016
+6.5% SPE
$54.70
$65
Brent
- $75
$35
- $45 - $55
Brent
Bull$55 - +5.1%
$45 - $55 - $65 Brent
SPE
Bear
+ 510 bps SPE FY 2016

+6.5% SPE
DCF
$55 - $65 - $75 Brent
Target Price
+7.6% SPE
$38.81
$23.72
$55 - $65 - $75

Brent
$45 - $55 - $65 Brent
+ 760 bps SPE FY 2016
+6.5% SPE
SPE = Salaries per Employee
26
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Average Per-employee
Expense
Sensitivity Analysis
$120,862
$123,884
$125,092
$126,301
$127,510
$128,718
$129,927
$131,136
$132,344
$133,553
2.5%
3.5%
4.5%
5.5%
6.5%
7.5%
8.5%
9.5%
10.5%
$ 25.00 $
$ 1.21 $
$ 48.75 $
47.25
45.72
44.17
42.58
40.97
39.32
37.65
35.95
30.00 $
1.30 $
47.71 $
46.21
44.68
43.13
41.54
39.93
38.29
36.61
34.91
35.00
1.39
46.68
45.18
43.65
42.09
40.51
38.89
37.25
35.58
33.88
Jet Fuel Expense

$ 40.00 $ 45.00 $
$ 1.48 $ 1.57 $
$ 45.64 $ 44.60 $
44.14
43.10
42.61
41.57
41.05
40.02
39.47
38.43
37.85
36.82
36.21
35.17
34.54
33.50
32.84
31.80
50.00 $
1.66 $
43.56 $
42.06
40.54
38.98
37.39
35.78
34.14
32.47
30.76
55.00 $
1.75 $
42.53 $
41.03
39.50
37.94
36.36
34.74
33.10
31.43
29.73
60.00 $
1.84 $
41.49 $
39.99
38.46
36.90
35.32
33.71
32.06
30.39
28.69
65.00
1.93
40.45
38.95
37.42
35.87
34.28
32.67
31.03
29.35
27.65
27
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Relative Valuation
North American
Airlines
Screening
Criteria
Comparable Valuation
Multiple
Turn
Price
2016E EBITDAR:
4.4 x $30.47
2017E EBITDAR:
4.5 x $26.64
Market Cap >1.5B
Normalized P/E Valuation

Comparable P/E:
24.7 x
Normalized EPS (LUV): $ 1.37
Implied Price (LUV):
$ 33.84
Historical LUV EV/EBITDAR

25.0 x
Revenue >1.5B
20.0 x
15.0 x
10.0 x
5.0 x
0.0 x
28
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Valuation Summary
Team Analysis
Consensus
Adjust for Operating Leases (BOTH

(Some) Adjust for Operating Leases
LUV and Peers)
Add back only Aircraft Rentals $45 - $55 - $65 Brent
+6.5% SPE
Add back full Operating Lease
Wait for new contract releases and
Expenses (Aircraft + Facility + Others)
then revise investment thesis
Integrate the impacts of labor contracts
$55 - $65
- $75 Brent normalized
Cycle-average
EV/EBITDAR,
+7.6% SPE
P/E
DCF Analysis
$38.81
Relative Valuation
$30.24
(50%)
(50%)
Target Price
$34.53
(8% Downside)
29
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
OR1
Medium
Probability
High
Risk Analysis
Company Overview
OR2
MR2
MR3
MR1
UC
Low
OR3
Low
Legend
OR1: Operational Risk
Balancing Employee Compensation
Medium
High
Impact
MR1: Market Risk Economic Uncertainty

MR2: Market Risk Commodity Price Volatility
UC: Uncertain Catastrophes
30
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Market Risk
Economic Fuel Price vs Market Price
$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
2000
Carrier
Southwest
Delta
American
United
Alaskan
JetBlue
Virgin
Spirit
Allegiant Air
Manufacturing PMI vs Non-Manufacturing PMI

65
60
55
50
2003
2015
40%
40%
0%
22%
42%
17%
27%
35%
0%
2006
2016
20%
5%
0%
35%
33%
0%
0%
0%
0%
2009
2012
2015
45
Comments
Most heavily hedged (65% through 2017)
Owns refinary to offset flucuations
Does not hedge
Opportunity to gain philosophy
Uses call options as insurance
Opportunity to gain philosophy
Hedged 31% H1' 16
No hedging target
Does not hedge
40
35
30
NAPMPMI Index
NAPMNMI Index
31
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Uncertain Catastrophes
Thunderstorm
Cybersecurity
Frequency
Geopolitical
Tension
Tornado
Hurricane
Volcanoes
H1N1
MERS
-CoV
Zika
TB
H7N9
Ebola
War
Hezbollah
ISIS
Al-Qaeda
Regulation
Impact
32
Company Overview
Industry Analysis
Financial Analysis
Valuation
Risk Analysis
Conclusion
Investment Summary
Tenuous Pricing Power
Low-cost Structure
Strained Labor Relations

Customer Service
Conservative Operating
Philosophy
HOLD
Target Price
$34.53
(8% Downside)
Air travel
Commoditization
Cyclicality
33

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We Dont Believe in LUV at First Sight

The University of Texas at Dallas

Market Profile (as of 02/04/2016)

Historical Competitive Advantage

The Southwest Effect

Each route serves

* denotes company tenure

EVP Strategy &

Michael G. Van de Ven

Major Markets, Pre-AirTran Acquisition (2011)

Major Markets, After AirTran Acquisition (2014)

CABO SAN LUCAS

Major Markets, After Wright Amendment Repeal (2014)

Porters Five Forces

AAL/TWA MetroJet 9/11 Terror

UAL/Continental LUV/AirTran AAL/US Airways

Improving Operating Margin

Streamlined Labor Costs % of Revenue

44% Jet fuel price per gallon

Global energy demand

Supply-Demand Spread (mbpd)

Alleviate debt obligations

WTI Spot Price

Fuel tailwinds have created ROIC levels above WACC

Corporate Earnings vs Airline Traffic

Real GDP YoY

Yield = Passenger Revenue/Revenue Passenger Mile

Passenger Revenue per Available Seat Mile

Fuel Cost pASM

Labor Cost pASM

Short-term industry yields are expected to stabilize

Capacity Expansion vs Traffic

ASM YoY Growth

RPM YoY Growth

Cost Efficiency Analysis

Industry's CASM Ex-fuel compared to LUV

Cost Efficiency Analysis

Industry's CASM Ex-fuel compared to LUV

Labor Cost Uncertainty

Percent of Workers Unionized

Labor Costs % Operating Expenses

Union Work Groups

Fading Competitive Advantage

LUV no longer remains a low cost leader

FASB Operating Leases Adjustment

Add back Aircraft & Other Rentals

Capital Structure Analysis

Historical Debt to Capital

Conservative Operating Philosophy

Historical Earnings vs Reinvesment Need

After-tax Adjusted EBIT

$45 - $55 - $65

+ 510 bps SPE FY 2016

$55 - $65 - $75

Jet Fuel Expense

Market Cap >1.5B

Normalized P/E Valuation

Historical LUV EV/EBITDAR

Adjust for Operating Leases (BOTH

MR1: Market Risk Economic Uncertainty

Manufacturing PMI vs Non-Manufacturing PMI

Strained Labor Relations