Final CFA Challenge Trinity University Team Submission

CFA Institute Research Challenge
Hosted by:
CFA Societies Texas, Louisiana, New Mexico and
Oklahoma
Local Challenge- Southwest US
Trinity University

CFA Institute Research Challenge February 5, 2016
1
Sector: Transportation
Industry: Airline
Ticker: LUV (NYSE) 52 Week Range: $31.36 – $51.34
Current Price: $35.69 Recommendation: BUY
Investment Thesis
We issue a BUY recommendation at $35.00 (69% upside.) Based off our
multiple valuation, Southwest (LUV) has an intrinsic value of $59.21, yielding
downside risk of -20%.
Low-cost advantage
The foundation of LUV success has been its ability to keep its costs low. The
basis of this low-cost structure is their focus on operating only one type of plane,
as well as operating as a point-to-point carrier. Although the industry as a whole
is very capital intensive, LUV stands out as the most efficient capital allocator
within its peer group. Currently, LUV is undergoing fleet modernization, where
they are retiring some of their older planes and introducing newer planes that
have higher capacity and are thus more fuel efficient.
Industry Consolidation
During the recovery from the last recession, the airline industry as a whole
transformed to become much more cost efficient through consolidation. As
Southwest was created with the purpose of being a low-cost carrier, they were
untouched by the large scale industry consolidation and left the other carriers
chasing their low cost structure. LUV has grown into the largest carrier of
passengers in the US while continuing to demonstrate maintenance of their low
costs. Although their low-cost advantage against the industry is decreasing, they
have been the only airliner to post 43 consecutive years of profitability, a trend
that is not expected to change.
Market Growth Potential
Initially, LUV was limited to where they could operate, capping their market
exposure to mainly Texas because the Wright Amendment. In late 2004, the
restrictions from the Wright Amendment began to be lifted from LUV and they
were able to expand to neighboring states, and in 2014 all restrictions were lifted.
During the time of the restrictions, LUV was able to capture an immense amount
of market share because they were able to offer much lower fares due to their
low-cost structure. With all restrictions lifted, LUV can service all 50 states, as
well as expand internationally. The recent acquisition of AirTran also expands
their scope of operations, and will continue to enable them to capture more
market share.
Figure 1
Source: Estimates
Figure 2
Source: Southwest 10k
Figure 3
Source: FactSet

2
Business Description
Southwest (LUV) began operations in 1971 flying three Boeing 737 Aircrafts in
between Dallas, Houston, and San Antonio. Now LUV services 97 destinations
through 40 states and is considered the largest low-cost carrier in the United
States. LUV operates under the Southwest Airlines and AirTran Airways brands
and is the largest domestic US airline by number of passengers enplaned and
scheduled domestic departures, according to the Bureau of Transportation
Statistics.
Since 1971, LUV has expanded their fleet to 704 Boeing 737s and no other
models. This single aircraft type strategy contributes to the company's low-cost
business structure, allowing it to simplify scheduling routes, plane maintenance
and the training required to maintain the fleet. LUV also strays from the traditional
hub-and-spoke model of air travel, and focuses primarily on point-to-point travel.
This allows the company to keep the size of the fleet down as well as reduce time
spent on the ground. LUV also utilizes secondary airports in cities in an effort to
reduce travel delays and increase their presence in cities without directly
competing with legacy airlines, such as Delta and American Airlines. In 2001, the
company became the first airline to develop its own reservation system and now
sells a significant proportion of its seats through its own website. Through all of
these cost cutting innovations, LUV has had 43 consecutive years of profitability.
Recently, LUV purchased fellow low-cost airline AirTran Airlines for $1.4 billion in
2011. The purchase has expanded Southwest's international reach as AirTran
provides service to nine destinations in six near-international countries including
Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic and Bermuda.
Despite this expansion, revenue relevant to Southwest's international operations
accounts for less than 1.0% of the company's total revenue.
Macroeconomic Outlook
Given recent data, we are more pessimistic on GDP growth than other analysts.
Thus, we believe in Real Business Cycle Theory, where prolonged periods of
growth are followed by decline due to real shocks in the economy. If the economy
were to begin a decline, the airline industry would be adversely affected, driving
sales down. In the long-term, we expect business travel to stay constant relative
to economic activity. Leisure travel, on the other hand, correlates directly with GDP
growth. If the economy begins to decline, consumers will save more of their
discretionary income, leading to lower sales for airlines. Southwest, in particular,
has little exposure to international economic activity due to their focus on the
domestic market.
Industry overview
Competition is high, and increasing
Four of the major players in the Domestic Airline Industry make up 68.8% of the
total market share as is seen in Figure 5 while the three legacy airlines stated here
make up 64% of the market share of the international airline industry in the United
States. This high degree of market concentration is due to the acquisitions of
AirTran by Southwest and the merger of Continental and United. This high level of
competition also has caused smaller airlines to make an extended effort to
differentiate their product. Because of this, the industry has low cost carriers such
as Spirit Airlines and JetBlue, and then Legacy airliners such as Delta and
American. The combination of the legacy airlines merging, and the low cost
carriers finding ways to increase market share have cause the prices of airline
tickets to remain stagnant over the past five years when factoring in inflation which
is visible in Figure 6.
Figure 5
Source: IBIS World
Figure 4
Source: IBIS World

3
GDP and Retail Sales are main drivers for the industry
Passengers make up over 70% of the total revenue in the domestic airline industry
which is estimated to total at $157.1 billion dollars in 2014. As of now, discretionary
income is on the rise which can be see with the stable growth of GDP around 2%
a year for the past five years. On top of this, if airfare increases at a slower rate
than income growth, people will be more inclined to spend their discretionary
income on airfare. The high correlation between GDP, Retail Sales, and Industry
revenue can be seen in Appendix B.
OPEC drives the price of Oil to 15 year low
As OPEC continues to increase the supply of Oil in the market, prices have
dropped to a 15 year low. In the airline industry, purchases account for between
20 and 40% of all operating expense for the firms in the industry, but have declined
recently due to the bottoming out of the oil prices which can be seen at the bottom
of Figure 7. Being the most significant variable cost, this drop of oil to 30 dollars a
barrel means that Jet Fuel prices are the lowest they have been in almost 10 years.
While this drop in price is a positive for the airline industry short term, but these
companies could experience future losses due to an adverse locked in oil prices
due to hedging. Also, if oil prices rise again in 2016 those who are unhedged will
be at risk for a cost hike. For example, JetBlue had 17% of its 2015 fuel usage
costs hedged, while southwest had removed its hedging position in 2015, and has
recently done the same in 2016. For further reference, see Appendix N.
Industry wages continue to rise at a slower rate than revenue
Because the industry is subject to a large degree of unionized labor, there is no
expected large-scale employee cutbacks expected in the future. Wages paid out
to employees in the industry is expected to increase at an annualized rate of 1.6%
until 2020. If the unions fight for a greater increase in wages, the costs will go up
significantly more than expected, potentially stunting operating income growth.
Cyclical airline industry has stayed positive in recent years
Despite the airline industry's history of following a cyclical pattern, the airline
industry has maintained positive net income for five years in a row. This could be
due to a variety of factors, including decreasing oil prices, acquisitions to increase
size of the profitable airlines, and the lack of increase in employee wages over the
past five years. Although the industry returns have remained positive, they have
been in a trough of sales growth with the industry growing at around 4% over the
past three years as shown in Figure 8.
Technological advances in recent years help differentiate carriers
Smaller airliners now have the capability to differentiate from the giants of the
industry with technology such as on board Wi-Fi, Online third party booking,
personal entertainment devices, among others. The increase in technology in
regards to aircraft development allows an airline to differentiate their fleet. There
are companies like Delta who have 10 different aircrafts and 18 total models, while
LUV has just the B-737 in their fleet to simplify and streamline efficiency of the
travel.
Competitive Positioning
When analyzing the industry, we selected JBLU, ALK, DAL, and SAVE as our
comparable companies to reflect a balanced mix of legacy and low cost carriers
and market share holders to compare to LUV.
Southwest has seen greater stability than industry comparables
When looking at the past 20 years of sales of Southwest and the comparables,
LUV has the 2nd lowest standard deviation of the companies compared. This low
standard deviation combined with the 20 year sales average of 10.65% in
comparison with the 8.3% growth of the industry highlights the stability of
Figure 6
Source: Dept. of Transportation
Figure 7
Source: FactSet
Figure 8
Source: FactSet

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Southwest as a company. This 20 year sales average was taken for the four
comparable companies as well and it was seen that Southwest has the highest of
all the companies that have data that can be found from at least the past 20 years
which can be seen in figure 8. Other Sales metrics can be seen in appendix B
Use of smaller airports decreases Southwest market competition
Although Southwest has about 16% of the U.S. airline market share, they excel in
regards to competing in areas that are not as concentrated with the legacy
airliners. When looking at data for the U.S Bureau of Transportation, you see that
while Southwest has only 14.09% market share of the 10 largest airports in the
U.S. This compared with the 52.97% market share that the Legacy airliners have
shown that although Southwest is competitive in these regions, they are not the
market leaders. On the other hand, if you look at the top 10 grossing airports for
Southwest in this last year, you see that LUV has a market share of 55.19% which
easily outweighs the 28.51% market share of all the legacy airliners combined.
This gives SW greater control of pricing in their highest grossing areas because of
their monopoly position on airports such as HOU (92.18%), DAL (90.77%), and
MDW (94.76%).
Integration of AirTran proven successful as of 2015
Southwest Airlines completed the integration of AirTran destinations and fleet at
the beginning of 2015 and has since shown signs of operational improvement.
EBITDA Margin, ROA, ROE, and the RASM/CASM spread have continued to
improve since the acquisition as seen below. This integration has also opened up
the international market to Southwest and give Southwest more opportunity for
growth. During this time, Southwest has experienced a higher five year average
sales growth than other competitors.
Using one type of plane allows for lower maintenance costs than
competitors
Southwest’s operates 704 Boeing 737 aircrafts and does not differentiate outside
of this model. The single aircraft strategy allows for simplification of scheduling,
maintenance, and training for operating the aircraft's. When looking at the
comparable companies and their maintenance costs only Alaska Airlines who
follows the same model just at a smaller scale, has a lower maintenance cost than
LUV. These costs could decline further as they continue to retire the older fleet
and bring in the 737-800 model.
In Appendix B there is a Soft Factors analysis of LUV and competitors that looks
further into the competitive positioning of Southwest vs. the competitors.
Financial Statement Analysis
Pro Forma Financial Statements
In order to gauge Southwest’s future performance on an individual account basis,
we forecasted financial statements for FY 2016 through FY 2019. All financial
statement item forecasts are subject to our own assumptions and actual future
performance may differ. Even with the large amount of uncertainty regarding
allocation of funds to certain line items, especially those that involve derivative
hedging, we have obtained a target price based on corresponding Free Cash Flow
Figure 9
Figure 10
Column1 EBITDA Margin ROA ROE RASM/CASM spread
2011 11 1.1 2.7 -0.19
2012 9.7 2.3 6.1 -0.29
2013 12.3 4 10.6 0.23
2014 17.6 5.8 16.2 0.98
2015 28 10 30.9 1.84

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to the Firm that shows upside potential relative to the current trading price of
$35.69. This price incorporates pessimistic sales growth as well as a conservative
discount rate.
Sales
Sales were increased on a weighted average estimate from various databases to
an increase of 5%. This growth rate reflects our pessimistic perspective on
revenues due to stagnant short-term demand, economic uncertainty in the short
term, and conservative forward looking views. For every 1% increase or decrease
in the sales growth rate, net income increases or decreases in the same direction.
Share repurchases
Allocated the 500 million share repurchase plan in 2016, as given by management.
The assumption was made that the board would authorize management to buy
back more shares in the future, and a constant 250 million shares was assumed
for all three years.
Guidance
Accounts like current maturities of long-term debt, leases, and share repurchasing
were all forecasted in line with the guidance provided either in the annual report or
quarterly earnings calls.
Ratio Analysis
We analyzed historical and forecasted performance for LUV based on industry and
competitor ratios and statements to understand how well the company is managed
relative to its peers.
Debt management: Southwest had the highest TIE ratio in the industry in 2015.
Furthermore, EBIT is projected to increase steadily and sufficiently cover projected
interest payments that will come due as guided in the 2015 10-K. Such debt
management capability is crucial given the leases and debt obligations the
company has taken on to fund its fleet modernization and equipment purchases.
Liquidity: LUV has had a very low current ratio in the past and in comparison to
its competitors, indicating that it has an insufficient quantity of assets to cover its
current liabilities. This trend is not projected to change through 2019 as the
company maintains its asset management strategy.
Profitability: As of 2015, LUV had the second highest ROE in the industry at
30.9%, a strong position that is expected to wane in future years to approximately
the industry average of 27.5% due to economic stagnation. ROA is even with the
industry average and significantly behind ROA top-performer SAVE, though SAVE
is projected to lose this advantage as its cost structure matures. We projected LUV
ROA to remain approximately the same, given their historically adequate asset
management. Significant increases in EPS and slight increases in ROIC will
demonstrate continued profitability and shareholder returns via stock buybacks,
increasing revenues, and cost synergies from fleet modernization.
Margins: LUV has a net margin that is approximately the same as the industry
average. Net margin will stay the same in accordance with management guidance
given the combination of dependable cost management and a lagging economy.
Cost Structure Analysis
Profit
Profit in the industry is measured as earnings before interest and taxes (EBIT).
Profitability is highly volatile. Over the past five years, profit margins for this
industry have increased considerably from 4.0% of revenue in 2010 to an
estimated 10.7% in 2015. A 40.7% decrease in the price of crude oil in 2015 is
largely responsible for the increase in earnings across the industry.
Nevertheless, the drop in the price of fuel has impacted yield (which determines
fare prices) reducing the average fares by approx. 6.8%. In this lower oil prices
environment airlines are determined to reduce fare prices in order to gain market
share.
Figure 11
Source: CFA Conference

6
Operating costs
The point-to-point strategy has allowed low cost carriers to maintain lower CASM
(cost-per available seat mile, see Appendix N 1) than traditional Legacy Airlines.
Operating under this strategy, Southwest has been able to gain cost advantage
over some of its larger competitors.
LUV is the most fuel efficient airline in the industry with fuel expense of 18.24% of
sales while the industry average is 21.64%. Based on our estimated pro formas,
each 1% change in fuel and oil expense changes net income in the opposite
direction. The company will keep benefiting from this cost advantage in 2016
because they are accelerating plans to retire older fleet (Classic 737).
Simultaneously, the company will add newer and more fuel efficient planes
therefore improving CASM because there are going to be more seats on more fuel
efficient planes. The transition from the classic fleet to the Max fleet will increase
fuel efficiency by approx. 18%. Accelerating plans for new fleet is going to be
especially important if jet fuel prices were to increase significantly. It is important
to mention that the company will continue to benefit from lower fuel prices, and
currently estimates this year’s fuel costs to be more than $500 million lower than
2015, based on market prices and their current fuel hedge as of January 15, 2016.
However, other ultra-low cost carriers such as JetBlue, Spirit Airlines and Alaska
Airlines which also operate a point-to-point network have lower CASM than LUV.
There are two important reasons why these smaller competitors operate with lower
CASM. The first one is Southwest is the highest paying airline with approx. 37% of
sales destined to employee compensation because of the seniority of their
employees. The second reason is that smaller airlines have newer fleets and
therefore incur in less charges in the maintenance of planes. The Trend graphs of
RASM and CASM for the industry comparables can be seen in appendix
Valuation
Discounted Cash Flow Analysis
Discounted Cash Flow (DCF) analysis was applied to arrive at a present valuation
for the future free cash flows of LUV. This method assumes that the company will
have a high growth rate for a certain number of years, followed by a period of stable
growth.
This model yielded an intrinsic value of $43.31 relative to the 2/5/2016 closing price
of $35.69, representing upside potential of 21.3% based on the base case (App
E). The CAPM model was used to calculate a required rate of return, which was
then used to discount the cash flows rendered from team pro forma statements for
the years 2016 and 2017. As a component of CAPM, the 10-year USD treasury
rate of 2.32% as of 2/7/2016 was used for the risk-free rate. The team estimated
a beta of 1.25 based on the assumption that the stock is 25% more risky than the
market. Scenario analysis with FactSet’s 52-week adjusted beta of 1 produced a
higher implied stock price and upside (App E). The chosen base case calculates
a cost of equity of 8.57%. Within the DCF model, a super growth rate of 7% is
expected for 7 years as LUV is a mature company with fairly stable revenues but
is also facing economic headwinds. This scenario yielded a Free Cash Flow to the
Firm (FCFF) estimate of $1358M for 2016 and $1485M for 2017, leading to a final
implied stock price of $41.43.
Dividend Discount Model
We applied a Dividend Discount model to LUV to gauge its intrinsic value relative
to its current market price and calculate a target value. However the assumed cost
of equity is greater than the dividend growth rate, producing an impossible negative
stock price and rendering the model invalid.
Figure 12
Source: FactSet
Figure 13
Source: Team Estimates

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Multiples Valuation
We estimated bear and bull scenarios for valuation multiples based on LUV’s
current trading position and our economic forecast.
P/E NTM: We selected a bull case multiple of 14.5x versus a current multiple of
8.3x based on historical trends and multiplied it by FactSet’s estimated FY 2016
multiple of $4.29 for an intrinsic value of $62.21. This was discounted to the present
value using the calculated cost of equity of 8.57% for a discounted intrinsic value
of $57.29.
P/S: We selected a bull case multiple of 1.69x versus a current multiple of 1.2x
based on historical trends and multiplied it by the FY 2015 sales per share of
$30.50 for an intrinsic value of $51.55.
P/CF: We selected a bull case multiple of 10.5x versus a current multiple of 7.23x
based on historical trends and multiplied it by the FY 2015 cash flow per share of
$4.85 for an intrinsic value of $50.93.
P/E LTM: We selected a bull case multiple of 23.67x versus a current multiple of
10.91x based on historical trends and multiplied it by the FY 2015 EPS of $3.27
for an intrinsic value of $77.40.
We assigned weights to each calculated intrinsic value with particular emphasis
on P/E NTM because its trend most closely represents our perception of the
company’s position in the earnings cycle. We arrived at a weighted average price
target of $59.21. We selected this as the final price target given the risks
surrounding our pro forma financial statements and subsequent DCF analysis.
Risk Factors
Highly Unionized workforce
With nearly 80% of Southwest Airline’s labor force unionized, labor costs consume
a large portion of their operational expenses. Dealing with labor unions can be
extremely costly, as well as time consuming. The inability of reaching agreements
with their employees can pose significant threats to the company’s operations such
as strikes or demands for wage increases. Salaries, wages and benefits accounted
for approx. 32% of operational expenses in 2015, and are expected to keep rising.
With the ongoing labor disputes with the unions for LUV happening last year and
this year, there could be pay raises of up to 20% in some workforces.
Fuel Costs
One of the main drivers of profit in the industry is fuel costs. Although the industry
is experiencing higher profit margins from the current low energy cost environment,
the cost of fuel continues to be very volatile and subject to market conditions.
Taking into account the unhedged position of Southwest for 2016, for every cent
jet fuel rises, it could have an effect of upwards to 23 million dollars on costs. This
puts Southwest and other airlines with the same unhedged position in an adverse
position if OPEC decides to decrease the supply of crude oil they are pumping into
the market. Fewer resources, higher prices.
Probability of Economic Recession
Air travel demand is very unpredictable and particularly sensitive to negative
economic conditions because it is a luxury good. Not everyone travels by air for
long trips and flights for leisure are paid for with discretionary income. If GDP
decreases, there is less discretionary income, therefore less leisure travel.
Business travelers also have a cheaper substitute due to improved technology in
regards to conference calls.
International Expansion
By initiating international operations in 2014, the company is operating in a market
where it lacks the expertise and may be deviating from its core operations.
Operating in International markets require to compliance with regulation in these
countries which in turn will rise operating costs. Also, the new added risk of
exchange rates gets thrown into the equation with international expansion. Finally,
Figure 14
Source: Team Estimates

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the company lacks brand recognition in these markets so revenues abroad may
take longer than expected to grow.
Security Concerns
The industry as a whole has been subject to terrorist threats and attacks. Even
though, the risk is remote, in the event of such event a revenue will drop sharply
due to the decrease in demand for air travel. Additionally, costs will rise
significantly due to increased security measures, higher costs of insurance and
there will be less or no access to capital markets for debt financing.
Pending AirTran Litigation
AirTran is currently subject to pending antitrust litigation, and if judgment were to
be rendered against AirTran in the litigation, such judgment could adversely affect
the Company’s operating results.
Financial Modeling
Our financial models are based on assumptions from third party financial
databases and team estimates of best practices and may be subject to human
error, economic uncertainty, and other external factors that may cause them to
differ from realized financial results.

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Table of Contents
A) Company Statements (past 5 years)/pro formas (2015-2020)
a) Income Statement
b) Balance Sheet
c) Statement of Cash Flows
d) Ratios
B) Sales/Industry Analysis
C) Cost of Capital Calculation
D) FCFF/FCFE Calculation
E) DCF Model
F) LUV and Industry Ratios
G) Event History on Price History
H) Unit Cost Comparison
I) 50 vs 200-day MAV
J)Multiples Valuation
K) Multiples Price Impact Graphs
a) P/E NTM
b) P/E LTM
c) P/S
d) P/CF
e) P/B
L)Selected Competitors Price History
M) Airline Glossary
N) Competitor PRASM vs CASM graph comparison

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Appendix A: LUV Statements
Appendix A.a Income Statement
Southwest Airlines Co.
Income Statement ($M)
2010 2011 2012 2013 2014
Q1
2015
Q2
2015
Q3
2015
Q4
2015 2015
Q1
2016E
Q2
2016E
Q3
2016E
Q4
2016E 2016E
Q1
2017E
Q2
2017E
Q3
2017E
Q4
2017E 2017E 2018E 2019E
Total operating revenues 12104 15658 17088 17699 18605 4414 5111 5318 4977 19820 4635 5367 5584 5226 20811 4866 5635 5863 5487 21852 22944 24091
Passenger 11489 14754 16093 16721 17658 4178 4852 4716 4553 18299 4368 5070 5244 4913 19595 4587 5324 5506 5158 20575 21603 22684
Freight 125 139 160 164 175 44 46 44 45 179 45 48 48 49 190 47 50 50 52 199 209 220
Special revenue
adjustment -- -- -- -- -- -- -- 172 0 172 0 0 0 0 0 0 0 0 0 0 0 0
Other 490 765 835 814 772 192 213 386 379 1170 222 248 292 264 1026 233 261 307 277 1077 1131 1188
Total operating expenses -11116 -14965 -16465 -16421 -16380 -3634 -4026 -4093 -3951 -15704 -3792 -4224 -4291 -4142 -16542 -3981 -4435 -4506 -4349 -17272 -18237 -19042
Salaries, wages, and
benefits -3704 -4371 -4749 -5035 -5434 -1419 -1607 -1699 -1659 -6384 -1490 -1687 -1784 -1742 -6770 -1564 -1772 -1873 -1829 -7109 -7464 -7837
Fuel and oil -3620 -5644 -6120 -5763 -5293 -877 -1005 -936 -798 -3616 -921 -1055 -983 -838 -3797 -967 -1108 -1032 -880 -3987 -4186 -4395
Maintenance materials and
repairs -751 -955 -1132 -1080 -978 -229 -240 -259 -276 -1004 -240 -252 -272 -290 -1065 -252 -265 -286 -304 -1118 -1174 -1233
Aircraft rentals -180 -308 -355 -361 -295 -60 -59 -60 -59 -238 -63 -62 -63 -62 -252 -66 -65 -66 -65 -265 -278 -292
Landing fees and other
rentals -807 -959 -1043 -1103 -1111 -285 -299 -303 -279 -1166 -299 -314 -318 -293 -1237 -314 -330 -334 -308 -1298 -1363 -1431
Depreciation and
amortization -628 -715 -844 -867 -938 -244 -250 -258 -263 -1015 -256 -263 -271 -276 -1066 -269 -276 -284 -290 -1119 -1175 -1234
Other operating expenses -1426 -2013 -2222 -2212 -2331 -520 -566 -578 -617 -2281 -522 -591 -601 -642 -2355 -548 -621 -631 -674 -2473 -2597 -2726
Acquisition and
integration -8 -134 -183 -86 -126 -23 -3 -6 -6 -38 0 0 0 0 0 0 0 0 0 0 0 0
Other operating
expenses excluding
acquisition and integration -1418 -1879 -2039 -2126 -2205 -497 -563 -572 -611 -2243 -522 -591 -601 -642 -2379 -548 -621 -631 -674 -2498 -2623 -2623
Operating income / loss 988 693 623 1278 2225 780 1085 1225 1026 4116 843 1142 1293 1084 4269 885 1200 1357 1138 4580 4707 5049
Total other expenses /
income -243 -370 62 -69 -409 -57 -108 -292 -179 -636 -168 -208 -99 -114 -589 -175 -217 -102 -119 -613 -646 -672
Interest expense -167 -194 -147 -131 -130 -32 -29 -31 -28 -120 -32 -29 -31 -28 -120 -32 -29 -31 -28 -120 -120 -120
Capitalized interest 18 12 21 24 23 6 7 9 9 31 6 6 7 7 26 6 6 7 7 27 28 29
Interest income 12 10 7 6 7 1 2 2 4 9 1 2 2 4 9 1 2 2 4 9 9 9
Other gains / losses, net -106 -198 181 32 -309 -32 -88 -272 -164 -556 -143 -187 -77 -97 -504 -150 -196 -80 -102 -529 -562 -590
Income / loss before income
taxes 745 323 685 1209 1816 723 977 933 847 3480 675 935 1194 969 3680 710 983 1255 1019 3967 4061 4377
Provision / benefit for
income taxes -286 -145 -264 -455 -680 -270 -369 -349 -311 -1299 -252 -349 -446 -362 -1409 -265 -367 -469 -380 -1481 -1555 -1635
Net income / loss 459 178 421 754 1136 453 608 584 536 2181 423 586 748 607 2271 445 616 786 638 2485 2507 2742
Basic earnings per share 3.27 3.63 4.02 4.10 4.54
Diluted earnings per share 3.26 3.59 3.97 4.05 4.48
Cash dividends declared per
common share 0.29 0.34 0.41 0.49 0.59
Line Item Assumption
Total operating revenues 5% RASM growth (guided), average of FactSet, ValueLine; components estimated as historical percentage of total revenues
Total operating expenses Components estimated as historical percentage of total operating expenses
Salaries, wages, and benefits Held constant due to uncertainty
Fuel and oil Held constant due to uncertainty
Acquisition and integration Company does not expect to incur any further acquisition and integration costs beyond 2015 (Guided in 2015 10-K)

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Appendix A.b Balance Sheet
Southwest Airlines Co. Balance
Sheet ($M) 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E
Total assets 15463 18068 18596 19345 20200 21312 22366 23397 24419 25591
Total current assets 4279 4345 4227 4456 4404 4024 4262 4436 4639 4871
Cash and cash equivalents 1261 829 1113 1355 1282 1583 1699 1745 1825 1916
Short-term investments 2277 2315 1857 1797 1706 1468 1541 1618 1692 1777
Accounts and other receivables 195 299 332 419 365 474 498 523 546 574
Inventories of parts and
supplies, at cost 243 401 469 467 342 311 327 343 358 376
Fuel derivative contracts -- -- -- -- -- -- -- -- -- --
Prepaid expenses and other
current assets 89 238 210 250 232 188 197 207 217 228
Net property and equipment 10578 12127 12766 13389 14292 15601 16381 17200 17984 18883
Total property and equipment,
at cost 16343 18421 19497 20820 22513 24685 25919 27215 28455 29878
Flight equipment 13991 15542 16367 16937 18473 19462 20435 21457 22434 23556
Ground property and
equipment 2122 2423 2383 2666 2853 3219 3380 3549 3711 3896
Deposits on flight equipment
purchase contracts 230 456 416 764 566 1089 1143 1201 1255 1318
Assets constructed for others -- -- 331 453 621 915 961 1009 1055 1107
Allowance for depreciation and
amortization -5765 -6294 -6731 -7431 -8221 -9084 -9538 -10015 -10471 -10995
Goodwill 0 970 970 970 970 970 970 970 970 970
Other assets 606 626 633 530 534 717 753 790 827 868
Total liabilities and stockholders'
equity 15463 18068 18596 19345 20200 21312 22366 23397 24419 25591
Total current liabilities 3305 4533 4650 5676 5923 7406 7750 8165 7845 8684
Accounts payable 739 1057 1107 1247 1203 1188 1247 1310 1369 1438
Accrued liabilities 863 996 1102 1229 1565 2591 2721 2857 2987 3136
Air traffic liability 1198 1836 2170 2571 2897 2990 3140 3296 3447 3619
Current maturities of long-
term debt 505 644 271 629 258 637 643 321 42 491
Long-term debt less current
maturities 2875 3107 2883 2191 2434 2541 2459 2138 2096 1605
Deferred income taxes 2493 2566 2884 2934 2782 2490 2490 2490 2490 2490
Deferred gains from sale and
leaseback of aircraft 88 75 -- -- -- -- -- -- -- --
Construction obligation -- -- 331 437 554 757 795 795 873 1086
Other noncurrent liabilities 465 910 856 771 1255 760 798 798 876 920
0
Total stockholders' equity 6237 6877 6992 7336 6775 7358 8073 9011 10239 10806
Common stock 808 808 808 808 808 808 808 808 808 808
Capital in excess of par value 1183 1222 1210 1231 1315 1374 1374 1374 1374 1374
Retained earnings 5399 5395 5768 6431 7416 9409 10661 11849 13290 14107
Accumulated other
comprehensive income / loss -262 -224 -119 -3 -738 -1051 -1088 -1088 -1051 -1051
Treasury stock, at cost -891 -324 -675 -1131 -2026 -3182 -3682 -3932 -4182 -4432

12
Total assets
Based on historical 2015 allocation, in line with
increase in sales
Total current assets
We recognize that current assets and current
liabilities accounts likely higher than will be
realized due to losses on derivatives likely to be
realized (affecting prepaid, other, and other non-
current liabilities, accrued liabilities)
Cash and cash equivalents
Assumed percentage of assets based on 2015
quarterly allocation
Fuel derivative contracts Held constant due to uncertainty
Assets constructed for others
Balance plus 295M cost of Fort Lauderdale
expansion (Broken down evenly over 8 quarters-
construction started 2015, expected to end 2017.
Overestimating because some of the cost in 2015
(Q4) plus 526-148 already incurred (to 2018), held
constant in 2019 due to lack of guidance.
Allowance for depreciation and amortization
Goodwill Assumed constant based on historical stability
Current maturities of long-term debt Guided in 10-K
Long-term debt less current maturities Guided in 10-K
Deferred income taxes
Includes unpredictable items such as hedging
expenses. Plug from 2015 due to high historical
fluctuation (computed average of 4 quarters of
2015).
Deferred gains from sale and leaseback of
aircraft No leasebacks planned
Construction obligation
36.6% increase seen in 2015 (based on 10-K), at a
growing percentage. Conservatively high but not
accounting for future projects due to uncertainty
Accumulated other comprehensive income /
loss
Held constant due to uncertain outlook on hedging-
related gains and losses
Treasury stock, at cost
Repurchased $500M in 2016, $250M thereafter
assuming reauthorization from Board

13
Appendix A.c. Statement of Cash Flows
Southwest Airlines Co. Statement of Cash
Flows ($M)
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E
Net cash provided by / used in operating
activities 1561 1356 2064 2477 2902 3238 3128 3348 3474 3810
Net income / loss 459 178 421 754 1136 2181 2271 2485 2507 2742
Adjustments to reconcile net income / loss to
cash provided by / used in operating activities 886 928 906 912 1718 1019 1094 1147 1203 1262
Depreciation and amortization 628 715 844 867 938 1015 1066 1119 1175 1234
Unrealized / realized gain / loss on fuel
derivative instruments 139 90 -189 -5 279 113 28 28 28 28
Deferred income taxes 133 123 251 50 501 -109 -- -- -- --
Amortization of deferred gains on sale and
leaseback of aircraft -14 -- -- -- -- -- -- -- -- --
Share-based compensation expense -- -- -- -- -- -- -- -- -- --
Excess tax benefits / obligations from share-
based compensation arrangements -- -- -- -- -- -- -- -- -- --
Changes in certain assets and liabilities 216 250 737 811 48 38 -237 -285 -236 -195
Accounts and other receivables -26 -26 -33 -17 54 -88 -24 -25 -24 -27
Other assets -8 -196 -104 -46 142 103 -36 -38 -36 -41
Accounts payable and accrued liabilities 193 253 186 343 36 961 189 198 190 218
Air traffic liability 153 262 334 400 326 94 150 95 150 172
Cash collateral received from / provided to
derivative counterparties 265 -195 233 57 -233 -570 -285 -285 -285 -285
Other, net -361 152 121 74 -277 -462 -231 -231 -231 -231
Net cash used in / provided by investing
activities -1265 -1022 -833 -1384 -1727 -1913 -20 -712 -515 -307
Payment to acquire AirTran, net of AirTran
cash on hand 0 -35 -- -- -- -- -- -- -- --
Capital expenditures -493 -968 -1348 -1447 -1828 -2143 -2306 -2308 -2241 -2198
Capital expenditures excluding assets
constructed for others -- -- -1348 -1433 -1748 -2041 -2000 -2000 -2000 -2000
Assets constructed for others -- -- 0 -14 -80 -102 -306 -308 -241 -198
Purchases of short-term investments -5624 -5362 -2481 -3135 -3080 -1986 -1589 -1366 -1175 -1011
Proceeds from sales of short-term and other
investments 4852 5343 2996 3198 3181 2216 3875 2962 2901 2901
investments excluding other, net -- -- 2996 3198 3185 2223 3875 2962 2901 2901
Other, net -- -- -- -- -4 -7 -- -- -- --
Payment for assets of ATA Airlines, Inc. -- -- -- -- -- -- -- -- -- --
Debtor in possession loan to ATA Airlines, Inc. -- -- -- -- -- -- -- -- -- --
Net cash used in / provided by financing
activities -149 -766 -947 -851 -1248 -1024 -1409 -890 -1134 -1586
Proceeds from issuance of long-term debt -- -- 0 0 300 500 -82 321 -42 -491
Proceeds from credit line borrowing -- -- -- -- -- -- -- -- -- --
Proceeds from revolving credit facility -- -- -- -- -- -- -- -- -- --
Proceeds from sale leaseback transactions -- -- -- -- -- -- -- -- -- --
Proceeds from employee stock plans 55 20 27 96 110 46 13 13 13 13
Proceeds from termination of interest rate
derivative instruments -- 76 38 -- -- 24 -- -- -- --
Reimbursement for assets constructed for
others -- -- -- -- 27 12 3 3 3 3
Payments of long-term debt and capital lease
obligations -155 -540 -578 -313 -561 -213 -603 -591 -519 -452
Payments of convertible debt 0 -81 -- -- -- -- -- -100 -- --
Payment of revolving credit facility obligations -- -- -- -- -- -- -- -- -- --
Payment of credit line borrowing obligations -44 -- -- -- -- -- -- -- -- --
Payments of cash dividends -13 -14 -22 -71 -139 -180 -217 -263 -315 -386
Repurchase of common stock 0 -225 -400 -540 -955 -1180 -500 -250 -250 -250
Other, net 8 -2 -12 -23 -30 -33 -23 -23 -23 -23
Excess tax benefits / obligation from share-
based compensation arrangements -- -- -- -- -- -- -- -- -- --
Repayment of construction obligation -- -- -- -5 -11 -10 -- -- -- --
Other, net excluding excess tax benefits /
obligation from share-based compensation
arrangements and repayment of construction
obligation -- -2 -12 -18 -19 -23 -23 -23 -23 -23
Net change in cash and cash equivalents 147 -432 284 242 -73 301 116 46 80 91
Cash and cash equivalents at beginning of
period 1114 1261 829 1113 1355 1282 1583 1699 1745 1825
Cash and cash equivalents at end of period 1261 829 1113 1355 1282 1583 1699 1745 1825 1916
Cash payments for -- -- -- -- -- -- -- -- -- --
Interest, net of amount capitalized -135 -185 153 -133 -128 -- -94 -26 -23 -24
Income taxes -274 -13 100 -346 -155 -- -1409 -265 -367 -469
Noncash transactions -- -- -- -- -- -- -961 -1010 -1036 -1046
Noncash rights to airport gates acquired
through reduction in debtor in possession loan
to ATA Airlines, Inc. -- -- -- -- -- -- -- -- -- --
Flight equipment under capital leases -- -- -- -- -- -- -- -- -- --
Assets constructed for others -- 116 129 105 88 -- -961 -1010 -1036 -1046
Fair value of equity consideration given to
acquire AirTran -- 523 -- -- -- -- -- -- -- --
Fair value of common stock issued for
conversion of debt -- 78 -- -- -- -- -- -- -- --
Dividend Scenarios
Year 2015 2016 2017 2018 2019
Growth rate 0.2 0.2 0.2 0.2
Dividend 0.285 0.342 0.4104 0.49248 0.590976
Shares outstanding (non-diluted) 647.600 647.600 647.600 647.600 647.600
Total CF 184.566 -221.4792 -265.77504 -318.930048 -382.7160576

14
Appendix A.d LUV Ratios
Unrealized / realized gain / loss on fuel derivative
instruments Held constant due to uncertainty
Capital expenditures excluding assets constructed
for others $2B utilized in 2015, assumed same over near future
Purchases of short-term investments 5year average decrease by 14% Yoy, divided among quarters
investments excluding other, net Applied 4year historical average
Proceeds from issuance of long-term debt Guided in 10-K
Proceeds from sale leaseback transactions Assumed none since no leasebacks planned
Proceeds from employee stock plans 5year historical average in $
Reimbursement for assets constructed for others We acknowledge an undetermined schedule of reimbursement for various projects underway. No guidance given for forecasting purposes.
Payments of long-term debt and capital lease
obligations See lease schedule appendix
Payments of cash dividends Increased by 20% for all forecasted years based on projected decrease from 25% change from 2014-2015that has been decreasing over time
Excess tax benefits / obligation from share-based
compensation arrangements Assumed none based on historical trend
Ratio 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E Trend 5 Yr AVG
Operating Margin 3.30 1.06 -5.92 0.77 8.24 6.41 4.72 7.36 12.57 22.87 20.52 20.96 20.52 20.96 10.78
Net Margin 5.49 6.54 1.61 0.96 3.79 1.14 2.46 4.28 6.13 11.02 10.91 11.37 10.93 11.38 5.01
Return on Assets 3.61 4.27 1.15 0.69 3.09 1.06 2.30 3.99 5.77 10.53 10.16 10.62 10.27 10.72 4.73
Return on Equity 7.60 9.63 2.99 1.90 7.84 2.71 6.07 10.57 16.16 30.92 28.14 27.58 24.48 25.38 13.29
Return on Invested Capital 6.20 7.59 2.04 1.15 5.13 1.86 4.24 7.80 12.17 22.87 11.12 11.75 11.60 12.22 9.79
Dividend Yield (%) 0.12 0.15 0.21 0.16 0.14 0.21 0.34 0.69 0.52 0.66 0.29 0.30 0.32 0.36 0.48
EPS (recurring) 0.20 0.07 -0.75 0.17 0.72 0.50 0.48 1.20 2.28 4.26 3.47 3.83 3.95 4.32 1.74
Current Ratio 0.90 0.92 1.03 1.25 1.29 0.96 0.91 0.79 0.74 0.54 0.55 0.54 0.59 0.56 0.79
EBIT/Interest Expense (Int.
Coverage) 2.34 0.88 -5.02 0.43 5.97 5.17 5.48 8.19 16.83 44.88 35.58 38.16 39.22 42.08 16.11
Projected ASMGrowth (LUV): 5.00%
Year ASM
2016 147526
2017 154902
2018 162647
2019 170780
Year Shares Outstanding
2016 655
2017 649.4
2018 635.4
2019 635.4

15
Appendix B: Sales/Industry Analysis
YEAR OIL ($Barrel) UNEMP(%) GDP (%) CPI (Level) Retail sales
1994 15.66 6.1 4.0 148.20 2330235
1995 16.75 5.6 2.7 152.40 2450628
1996 20.46 5.4 3.8 156.90 2603794 SUMMARY OUTPUT
1997 18.64 4.9 4.5 160.50 2726131
1998 11.91 4.5 4.4 163.00 2852956 Regression Statistics
1999 16.56 4.2 4.8 166.60 3086990 Multiple R 0.996454199
2000 27.39 4.0 4.1 172.20 3287537 R Square 0.99292097
2001 23.00 4.7 1.1 177.10 3378906 Adjusted R Square 0.991151213
2002 22.81 5.8 1.8 179.88 3459077 Standard Error 81671.18856
2003 27.69 6.0 2.5 183.96 3612457 Observations 21
2004 37.66 5.5 3.5 188.90 3846605
2005 50.04 5.1 3.1 195.30 4085746 ANOVA
2006 58.30 4.6 2.7 201.60 4294359 df SS MS F Significance F
2007 64.20 4.6 1.9 207.34 4439733 Regression 4 1.49692E+13 3.7423E+12 561.049201 5.64015E-17
2008 91.48 5.8 -0.3 215.30 4392750 Residual 16 1.06723E+11 6670183041
2009 53.48 9.3 -3.1 214.54 4066822 Total 20 1.50759E+13
2010 71.21 9.6 2.4 218.06 4288339
2011 87.04 8.9 1.8 224.94 4601788 Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
2012 86.46 8.1 2.8 229.59 4831131 Intercept -2402564.049 268297.095 -8.954864193 1.24692E-07 -2971328.482 -1833799.616 -2971328.482 -1833799.616
2013 87.13 6.7 1.9 232.96 5011740 OIL ($Barrel) -1404.878994 1620.822028 -0.866769436 0.39888084 -4840.868201 2031.110212 -4840.868201 2031.110212
2014 53.27 5.6 2.4 234.81 5208443 UNEMP(%) -94170.10769 14312.89817 -6.579387807 6.33955E-06 -124512.0964 -63828.11902 -124512.0964 -63828.11902
GDP (%) 21242.82431 12845.88715 1.653667362 0.117677773 -5989.239922 48474.88855 -5989.239922 48474.88855
CPI (Level) 35109.12119 1610.165199 21.80467024 2.51563E-13 31695.72345 38522.51893 31695.72345 38522.51893

16
Map of the Impact of Industry Soft Factors to Sales via Demand (Volume) and Price
Sector = Transportation
Industry = Airlines
Life Cyle = Mature
Highly Correlated Economic Variables (list relevant) Pos/Neg Significance Outlook Reasoning
Retail Sales + medium neutral/positive
Discretionary income is where the majority of revenue earned comes from.
Therefore the hike in Retail Sales shows an increase in Airline Revenue
CPI + low neutral/positive
As inflation has increased in recent years, so have sales in the airline industry.
This is also affected by the hike in Retail Sales
Oil + medium neutral/positive
Oil price have fallen over the past three years. And since Oil is the main cost of
the Airline, this is allowing for better deals and increased flights
GDP + High Positive Cyclical indsutry forces it do depend on domesitc growth
Correlation with employment - driscretionary imployment check new regression pg
Pos/Neg Degree +/- Probable Impacts
Positive = + Low = 1 or 2 Low = 1 or 2 Demand
Negative = - Average = 3 Avg = 3 Costs
High = 4 or 5 High = 4 or 5 Price
External Factors Pos/Neg Degree+/- Probable Impacts Notes
Technology
Aircraft fuel efficiency changes + 4 3
Costs/Price - The fuel efficiency per available ton-mile has improved over time
because of increased aircraft size, while also making aircrafts more aerodynamik
and lighter
IBIS World Domestic Airlines
Aircraft capacity + 5 2
Cost/Price/Demand - The new A380 by Airbus can fly 853 passengers and is
allowed to fly over 10000 nonstop. This allows for the capability for direct
flights to almost anywhere in the world, which allows for convenience increases
for passengers while making the route more efficient for the airline
WiFi - 2 3
Cost - WiFi service is a positive for passengers, but it is a negative cost for the
airline
Online booking/payment/checkin + 4 5
Cost/Demand - An increase of simplicity and accessibility allows for the
increase of tickets sold while also eliminating paper costs and administration
labor costs. This is even more apparent with the increase in smart phones and
the ability to download tickets to your phone
Government
U.S. Environmental Protection Agnecy = 3 5 Costs, Make sure that airlines are up to date with emission requirements IBIS World Domestic Airlines
Aviation and Transportation Security Act = 3 5 Costs. Responsible for TSA, IBIS World Domestic Airlines
Federal Aviation Administration + 1 1
Costs. Assist airlines in solving congestion problems caused by air traffic control
systems. Paid companies affected adversely by 9/11 disruption of markets. Also
enforces noise standards for aircrafts set from the Airport Noise and Capacity
Act of 1990
Social
Demographic
Business Travel + 3 3
Price - Much less responsive to price change. Demand for business travel only
increases or decreases when the economy is doing well, so business is doing
well.
Leisure Travel - 2 2
Demand/Price - When Factors such as disposable income grow, more
consumers will spend more money on interstate travel. Cheaper prices tend to
attract more passengers.
Foreign
Highly globalized IBIS World Domestic Airlines
Oil Markets
Because of volatility of the market for oil globally, the domestic airline market is
affected IBIS World Domestic Airlines
Pricing Factors
Product Segmentation (Generic v. Brand Industry)
All offer the same service
Degree of Industry Concentration (Monopolistic)
Highly concentrated
Ease of Entry (Monopolistic)
Huge barriers
Limited Input Suppliers/Materials
Very limited
Industry Sales Forecasts
Source 2016 2017 2018 2019
IBISWorld Forecast
% growth 4.20% 4.80% 4.40% 4.80%
FactSet Forecast
% growth 0.79% 4.30% 5.35% 5.42%
First Research Forecast
% growth 5% 4% 4% 5%
Based on Correlations and Soft Factors - Industry Sales Forecast 2016 2017 2018 2019
Amount
% growth 4.20% 4.37% 4.58% 5.07%
Legend
Legend

17
Map of Economic/Industry to Firm-Level Sales - Hard Factors - Growth Forecast
Levels
Industry LUV JBLU ALK DAL SAVE
Year Sales ($M) Sales Sales Sales Sales Sales
1994 16,267 2,592 1,316 12,359
1995 16,259 2,973 1,418 11,868
1996 17,135 3,406 1,592 12,137
1997 18,615 3,817 1,739 13,059
1998 20,200 4,164 1,898 14,138
1999 21,529 4,736 0 2,082 14,711
2000 24,673 5,650 105 2,177 16,741
2001 21,895 5,555 320 2,141 13,879
2002 21,686 5,522 635 2,224 13,305
2003 22,683 5,937 998 2,445 13,303
2004 25,522 6,530 1,266 2,724 15,002
2005 28,451 7,584 1,701 2,975 16,191
2006 32,143 9,086 2,363 3,334 17,360
2007 36,126 9,861 2,842 3,506 19,154 763
2008 41,558 11,023 3,388 3,663 22,697 787
2009 45,799 10,350 3,286 3,400 28,063 700
2010 52,251 12,104 3,779 3,832 31,755 781
2011 60,727 15,658 4,504 4,318 35,176 1,071
2012 64,690 17,088 4,982 4,657 36,670 1,293
2013 67,396 17,699 5,441 4,964 37,638 1,654
2014 71,926 18,605 5,817 5,368 40,204 1,932
2015 74,634 19,820 6,416 5,598 40,704 2,096
Company vs. Company vs.
Year GDP Industry LUV JBLU ALK DAL SAVE GDP Industry
1995 2.70% -0.05% 14.70% 7.75% -3.97% 14.75%
1996 3.80% 5.39% 14.56% 12.27% 2.27% 11.86% 9.18%
1997 4.50% 8.64% 12.07% 9.23% 7.60% 8.27% 3.43%
1998 4.50% 8.51% 9.09% 9.14% 8.26% 4.59% 0.58%
1999 4.70% 6.58% 13.74% 9.69% 4.05% 9.24% 7.16%
2000 4.10% 14.60% 19.30% 4.56% 13.80% 14.60% 4.70%
2001 1.00% -11.26% -1.68% 204.76% -1.65% -17.10% -5.78% 9.58%
2002 1.80% -0.95% -0.59% 98.44% 3.88% -4.14% -1.59% 0.36%
2003 2.80% 4.60% 7.52% 57.17% 9.94% -0.02% 5.72% 2.92%
2004 3.80% 12.52% 9.99% 26.85% 11.41% 12.77% 7.19% -2.53%
2005 3.30% 11.48% 16.14% 34.36% 9.21% 7.93% 12.34% 4.66%
2006 2.70% 12.98% 19.80% 38.92% 12.07% 7.22% 16.50% 6.83%
2007 1.80% 12.39% 8.53% 20.27% 5.16% 10.33% 5.83% -3.86%
2008 -0.30% 15.04% 11.78% 19.21% 4.48% 18.50% 3.15% 9.98% -3.25%
2009 -2.80% 10.21% -6.11% -3.01% -7.18% 23.64% -11.05% -5.81% -16.31%
2010 2.50% 14.09% 16.95% 15.00% 12.71% 13.16% 11.57% 19.75% 2.86%
2011 1.60% 16.22% 29.36% 19.18% 12.68% 10.77% 37.13% 26.86% 13.14%
2012 2.20% 6.53% 9.13% 10.61% 7.85% 4.25% 20.73% 7.53% 2.61%
2013 1.50% 4.18% 3.58% 9.21% 6.59% 2.64% 27.92% 1.38% -0.61%
2014 2.40% 6.72% 5.12% 6.91% 8.14% 6.82% 16.81% 3.62% -1.60%
2015 0.76% 3.76% 6.53% 10.30% 4.28% 1.24% 8.49% 4.13% 2.77%
Mean (all years) 2.35% 7.72% 10.45% 37.88% 7.25% 6.19% 14.34% 7.81% 2.73%
Mean (5 years) 1.69% 7.48% 10.74% 11.24% 7.91% 5.14% 22.22% 8.70% 3.26%
Mean (3 years) 1.55% 4.89% 5.08% 8.81% 6.34% 3.57% 17.74% 3.04% 0.19%
GDP Industry
Year Forecast* Forecast All Year 5 year 3 year All Years 5 years 3 Years
2016 4.14% 4.20% 11.95% 12.85% 7.18% 6.93% 7.46% 4.39%
2017 4.24% 4.37% 12.05% 12.95% 7.29% 7.10% 7.63% 4.55%
2018 4.60% 4.58% 12.42% 13.31% 7.65% 7.31% 7.84% 4.77%
2019 4.76% 5.07% 12.57% 13.46% 7.80% 7.80% 8.33% 5.26%
Year Min Max Mean Median Value Line FactSet
2016 4.39% 12.85% 8.46% 7.32% 11.82% 4.99%
2017 4.55% 12.95% 8.59% 7.46% 5.28%
2018 4.77% 13.31% 8.88% 7.75% 13.23%
2019 5.26% 13.46% 9.20% 8.07%
Year Real GDP CPI *Nominal GDP
2016 1.90% 2.20% 4.14%
2017 2.00% 2.20% 4.24%
2018 2.35% 2.20% 4.60%
2019 2.50% 2.20% 4.76%
Percentage Growth
GDP Forecast + Company Difference Industry + Company Difference
Range Published Forecasts

18
Soft Factors Affecting the Company's Position within the Industry (Ultimately Sales Growth)
Company = Southwest Airlines Co. (LUV)
Competitor 1 = JetBlue Airways Corporation (JBLU)
Competitor 2 = Alaska Air Group, Inc. (ALK)
Competitor 3 = Delta Air Lines, Inc. (DAL)
Competitor 4 = Spirit AeroSystems Holdings Inc. (SPR)
Pos/Neg = current attribute + -
Degree = intensity of attribute Low= 1-2 Avg=3 High=4-5
Total = Pos/Neg * Degree
Trend in the Future + = -
Pos/Neg Degree Total Trend Pos/Neg Degree Total Trend Pos/Neg Degree Total Trend Pos/Neg Degree Total Trend Pos/Neg Degree Total Trend
Factor
Previous Industry Factors that Vary by Company
Degree of Industry Concentration (Monopolistic) - 5 -5 = - 5 -5 = - 5 -5 = - 5 -5 = - 5 -5 =
Sales Patterns (see previous tab)
Sales Stability - Low Standard Deviation + 4 4 = = 0 0 = + 5 5 = + 4 4 = = 0 0 0
Negative Sales Growth + 2 2 = + 5 5 - + 1 1 = = 1 1 = = 3 3 -
Products, Innovation, and Technology
Product Mix N/A 0 N/A 0 N/A 0 N/A 0 N/A 0
Product Quality + 2 2 = + 4 4 = + 4 4 = + 4 4 + = 0 0 =
Reputation for Producing Safe Products + 4 4 = + 4 4 + + 5 5 = + 5 5 = = 3 3 +
New product Introductions N/A 0 N/A 0 N/A 0 N/A 0 N/A 0
R&D Plans N/A 0 N/A 0 N/A 0 N/A 0 N/A 0
Management Quality + 4 4 = + 5 5 + 4 4 = + 5 5 = + 1 1 =
Customer Satisfaction + 5 5 = + 2 2 = + 5 5 = + 3 3 + + 2 2 =
Marketing/Advertising + 4 4 = + 4 4 = + 2 2 = + 1 1 = = 0 0 0
Customer Base
Loyalty + 4 4 + 5 5 + 5 5 + 2 2 0
Sum of Totals, % Positive Trend 24 24 26 20 4
Legend
LUV JBLU ALK DAL SAVE

19
Appendix C: Cost of Capital
Cost of Debt Capital
Cost of Debt (Rd) = 4.33%
Cost of Equity Sensitivity Bear Base Bull
Beta Assumption 0.8 1 1.25
Cost of Equity Capital Re 6.32% 7.32% 8.57%
Risk Premium Approach Source: FactSet and Team Estimates
Risk Premium = 5.00% 3-5%
Cost of Equity (Re) = 9.33%
Base Bull Bear
CAPM Approach CAPM Approach CAPM Approach
Risk-free Rate = 2.32% Risk-free Rate = 2.32% Risk-free Rate = 2.32%
Beta = 1 Beta = 1.25 Beta = 0.8
Market Risk Premium = 5.00% Market Risk Premium = 5.00% Market Risk Premium = 5.00%
Cost of Equity (Re) = 7.32% Cost of Equity (Re) = 8.57% Cost of Equity (Re) = 6.32%
WACC WACC WACC
Weight of Debt = 30.16% Weight of Debt = 30.16% Weight of Debt = 30.16%
Weight of Equity = 69.84% Weight of Equity = 69.84% Weight of Equity = 69.84%
Cost of Debt = 4.33% Cost of Debt = 4.33% Cost of Debt = 4.33%
Cost of Equity = 7.32% Cost of Equity = 8.57% Cost of Equity = 6.32%
Tax Rate = 37% Tax Rate = 37% Tax Rate = 37%
WACC = 5.93% WACC = 6.80% WACC = 5.23%

20
Appendix D: Free Cash Flow Calculation
Southwest Airlines Co.
Free Cash Flow Calculation
All figures in millions of U.S. Dollar, except per share items.
2016 Free Cash Flow 2016 Inputs
Net Income CF from OperationsEBIT(1-t) EBITNCC(1-t) Item Location Input
Beginning Number 2271 3128 2308 2994 Net Income IS 2271
Non-cash charges 1094 1094 408 CF from Operations CF 3128
Interest Expense (1-t) 75 75 Non-Cash Charges CF 1094
-Investment in NWC 237 237 237 Interest Expense IS 120
-Investment in FC 1846 1846 1846 1846 Investment in NWC CF 237
FCFF 1358 1358 1319 1319 Investment in FC CF 1846
-Interest Expense (1-t) 75 75 75 75 Tax Rate IS 37.3%
+Net Borrowing -972 -972 -972 -972 EBIT IS 3680
FCFE 311 311 271 271 EBITNCC IS/CF 4774
Net Borrowing CF -972
2017 Free Cash Flow
Net Income CF from OperationsEBIT(1-t) EBITNCC(1-t) 2017 Inputs
Beginning Number 2485 3348 2487 3206 Item Location Input
Non-cash charges* 1147 1147 428 Net Income IS 2485
Interest Expense (1-t) 75 75 CF from Operations CF 3348
-Investment in NWC 285 285 285 Non-Cash Charges CF 1147
-Investment in FC 1938 1938 1938 1938 Interest Expense IS 120
FCFF 1485 1485 1411 1411 Investment in NWC CF 285
-Interest Expense (1-t) 75 75 75 75 Investment in FC CF 1938
+Net Borrowing 415 415 415 415 Tax Rate IS 37.3%
FCFE 1825 1825 1751 1751 EBIT IS 3967
EBITNCC IS/CF 5114
Net Borrowing CF 415

21
Appendix E: DCF Model

22

23
Appendix F: LUV vs Industry Ratios
Company Ticker LUV DAL JBLU ALK SAVE
Competitors
Average
Current Ratio 0.54 0.68 0.73 0.93 1.97 1.08
Gross Margin 34.2% 28.1% 22.4% 33.2% 27.4% 27.8%
Net margin 11.0% 7.0% 9.2% 14.6% 14.3% 11.2%
Net margin NTM 13.3% 12.9% 13.0% 16.2% 12.7% 13.7%
ROA 10.5% 5.4% 7.0% 12.6% 16.2% 10.3%
ROA NTM 12.4% 9.0% 10.1% 12.3% 10.0% 10.3%
ROE 30.9% 25.0% 21.3% 35.0% 28.5% 27.5%
ROE NTM 28.0% 34.0% 21.1% 30.5% 20.0% 26.4%
ROIC 22.9% 14.6% 11.3% 27.3% 23.0% 19.1%
Net Income (M) 2,185 2,834 575 805 299 1,128
Net Income NTM (M) 2,780 5,249 913 953 304 1,855

24
Appendix G: Event History on Price History
Note: Late 2009 was failed acquisition of Frontier Airlines
Note: late 2010 was acquisition of AirTran Airlines

25
Appendix H: Unit Cost Comparison
Southwest
Airlines Average Median JetBlue
Alaska Air
Group
Spirit
Airlines
Delta Air
Lines
Fiscal Period 12/31/2015 09/30/2015 09/30/2015 09/30/2015 09/30/2015
ASM LTM 141,207.0 89,529.6 44,922.0 49,695.9 40,148.0 21,649.2 246,625.0
LTM Growth 7.2% 13.0% 10.2% 9.6% 10.8% 28.9% 2.6%
ASM NTM 148,698.0 92,123.9 48,511.8 54,362.9 42,660.7 25,919.4 245,553.0
CASM LTM 11.16 10.53 10.61 10.52 10.70 7.68 13.23
LTM Growth -9.9% -14.2% -13.7% -10.0% -11.4% -19.4% -16.0%
CASM NTM 11.02 9.97 10.10 10.11 10.09 7.44 12.24
Fees 1 Yr Growth 4.9% 11.7% 7.9% 4.7% 10.3% 26.4% 5.4%
Landing Fees 1,166.0 567.3 313.0 337.0 289.0 126.0 1,517.0
Factor LTM 83.61 84.60 84.71 84.67 84.10 84.75 84.89
Factor NTM 83.68 84.53 84.59 84.44 84.11 84.73 84.83
PRASM LTM 13.01 10.85 11.95 11.93 11.97 5.40 14.08
LTM Growth -3.5% -7.6% -4.4% 0.5% -5.3% -22.3% -3.5%
PRASM NTM 12.89 10.49 11.63 11.71 11.55 4.82 13.88
RASM LTM 13.96 13.33 13.46 12.99 13.94 9.99 16.42
LTM Growth -1.6% -5.8% -4.2% 0.6% -5.9% -15.3% -2.5%
RASM NTM 13.77 12.67 12.83 12.65 13.02 9.36 15.64
RPM LTM 118,111.0 75,925.0 37,924.1 42,074.8 33,773.4 18,345.7 209,506.0
LTM Growth 8.7% 12.3% 10.0% 10.4% 9.5% 26.2% 3.0%
RPM NTM 124,562.0 78,097.7 40,920.6 45,969.4 35,871.7 21,934.5 208,615.0
Wages/Sales 36.97% 23.88% 24.96% 27.84% 25.38% 17.75% 24.53%
1 Yr Growth 20.6% 20.1% 16.9% 33.3% 13.8% 20.1% 13.1%
Wages 7,328.0 3,372.8 1,574.0 1,745.0 1,403.0 372.1 9,971.0
Yield LTM 15.56 12.81 14.15 14.11 14.20 6.39 16.54
LTM Growth -4.8% -7.2% -4.1% -0.2% -4.3% -20.6% -3.9%
Yield NTM 15.43 12.29 13.71 13.88 13.54 5.64 16.10
ASM
CASM
Landing
PRASM
RASM
RPM
Yield
Wages

26
Appendix I: LUV Weekly 200-day MAV vs 50-Day MAV
This demonstrates a hold signal as the current price has been intertwining with the moving averages and is indicating
resistance in not breaking above the 52-week high of $49.41 in 2015. This is likely to change in the near term given fleet
modernization benefits and growth into untapped domestic and international markets.

27
Appendix J: Relative Multiples Valuation
Cost of Equity 8.57% Cost of Equity 8.57%
EPS '16 4.29 Upside/Downside CF/share '15 4.85 Upside/Downside
P/E NTM 8.05 34.5345 31.81 -3.1% P/CF LTM 3.75 18.1875 18.19 -92.8%
8.3 35.607 32.80 7.23 35.0655 35.07
14.5 62.205 57.29 74.7% 10.5 50.925 50.93 45.2%
Cost of Equity 8.57%
EPS '15 3.27 Upside/Downside Cost of Equity 8.57%
P/E LTM 9 29.43 29.43 -21.2% EBITDA/share '15 5548 Upside/Downside
10.91 35.6757 35.68 EV/EBITDA LTM 3.58 19861.84 19861.84 -15.4%
23.67 77.4009 77.40 117.0% 4.13 22913.24 22913.24
7.13 39557.24 39557.24 72.6%
Cost of Equity 8.57%
Sales/share '15 30.5 Upside/Downside
P/S LTM 0.94 28.67 28.67 -27.7%
1.2 36.6 36.60
1.69 51.545 51.55 40.8%

28
WAV Target Price (Bull)
Multiple Target Price Weight
Calculated
WAV Intrinsic
Value
P/E NTM 57.29 45% 25.8
P/S 51.55 20% 10.3
P/CF 50.93 15% 7.6
P/E LTM 77.40 20% 15.5
Final Price 59.21
WAV Target Price (Base)
Calculated
WAV Intrinsic
Value
P/E NTM 35.07 45% 15.8
P/S 36.60 20% 7.3
P/CF 35.07 15% 5.3
P/E LTM 35.68 20% 7.1
Final Price 35.49
WAV Target Price (Bear)
Calculated
WAV Intrinsic
Value
P/E NTM 31.81 45% 14.3
P/S 28.67 20% 5.7
P/CF 18.19 15% 2.7
P/E LTM 29.43 20% 5.9
Final Price 28.66
Base Current 35.69 -
Bull Upside 59.21 66%
Bear Downside 28.66 -20%

29
Appendix K: Multiples Price Impact Graphs
Appendix K. a P/E NTM
Appendix K. b P/E LTM

30
Appendix K. c P/S

31
Appendix K. d P/CF

32
Appendix K. e P/B

33
Appendix L: Competitor Price History

34
Appendix M: Airline Glossary
Aircraft Utilization – The hours and minutes in a day an aircraft is used.
ASM (Available Seat Mile) – One seat (empty or full) flown one mile. Often referred to as the airlines industry’s measures
of capacity.
Average Length of Haul – The average distance in miles a paying passenger is flown.
Average Passenger Fare – The average amount of passenger revenue per Revenue Passenger Carried.
Average Stage Length – The average distance in miles the aircraft is flown.
CASM (Operating Expenses (Cost) per Available Seat Mile) – The average cost of flying an aircraft seat (empty or
full) one mile. Often referred to as a “unit cost” measurement. Calculated as Total Operating Expenses/Total Available
Seat Miles.
DOT (Department of Transportation) – Established by an act of Congress on October 15, 1966, the DOT consists of
the Office of the Secretary and eleven individual operating administrations. Leadership of the DOT is provided by the
Secretary of Transportation, who is the principal adviser to the President in all matters relating to federal transportation
programs.
Enplaned Passenger – One passenger, originating or connecting, boarded on an aircraft.
Load Factor – The percentage of a plane filled with paying passengers. Calculated as Revenue Passenger
Miles/Available Seat Miles.
Passenger Yield (Passenger Revenue Yield per Revenue Passenger Mile) – The average amount of revenue
received per paying passenger flown one mile. Calculated as Passenger Revenues/Revenue Passenger Miles.
PRASM (Passenger Revenue per Available Seat Mile) – Passenger Revenue per seat (empty or full) flown one mile.
Often referred to as a “passenger unit revenue” measurement. Calculated as Passenger Revenues/Available Seat Miles.
RASM (Revenue per Available Seat Mile) – Total Operating Revenue per seat (empty or full) flown one mile. Often
referred to as a “unit revenue” measurement. Calculated as Total Operating Revenues/Available Seat Miles.
Revenue Passengers Carried – The number of Origination and Destination (O&D) paying passengers. (O&D – a
measure of the point of origination of a passenger to the final destination).
RPM (Revenue Passenger Mile) – One paying passenger flown one mile. Often referred to as the airline industry’s
measure of “traffic”.
Trips Flown – Number of one-way nonstop flights by all aircraft.

35
Appendix N: Competitor PRASM vs. CASM Graph Comparison

36

37

38
References
https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CDIQFjAA&url=http
%3A%2F%2Fwww.bea.gov%2Fnational%2Fxls%2Fgdpchg.xls&ei=fWEUUeCiDcSvyQGXyYCYCQ&usg
=AFQjCNFe70KjeZ-G8b1adaOvkdSHj0KkHw&bvm=bv.42080656,d.aWc
http://www.bls.gov/cps/cpsaat01.htm
http://www.federalreserve.gov/releases/h15/data.htm
http://inflationdata.com/Inflation/Consumer_Price_Index/HistoricalCPI.aspx?reloaded=true
http://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp
http://www.census.gov/construction/nrc/historical_data/
http://clients1.ibisworld.com/reports/us/industry/industryoutlook.aspx?entid=1125
http://www.theacsi.org/index.php?option=com_content&view=article&id=147&catid=&Itemid=212&
i=Airlines
http://investor.jetblue.com/~/media/Files/J/Jetblue-IR/Annual%20Reports/2014-ar-10-k.pdf
http://ir.delta.com/stock-and-financial/sec-filings/
file:///C:/Users/athiesse/Downloads/FINAL%202015%20PROXY%20AND%202014%20ANNUAL%2
0REPORT.PDF
http://files.shareholder.com/downloads/ABEA-5PAQQ9/1446530844x0x818446/85F2240B-211D-
46BD-B789-37B88FB5935E/Spirit_10K.pdf
http://commons.erau.edu/aqrr/25/
http://www.jdpower.com/press-releases/2015-airline-loyaltyrewards-program-satisfaction-report
http://www.atlanta-airport.com/fifth/atl/operation_statistics.aspx
http://www.lawa.org/LAXMarketShare.aspx
https://skyharbor.com/About/Information/AirportStatistics
http://www.flydenver.com/about/financials/passenger_traffic
http://fly2houston.com/about-traffic-updates
FactSet LUV, JBLU, ALK, SAVE, DAL Company, Economic, and Airline Industry Reports and Charting
Southwest Airlines - Investor Relations, Earnings Calls 2015 Q1, Q2, Q3, Q4

39
Disclosures:
Ownership and material conflicts of interest:
The author(s), or a member of their household, of this report does not hold a financial interest in the
securities of this company. 
The author(s), or a member of their household, of this report does not know of the existence of any
conflicts of interest that might bias the content or publication of this report. 
Receipt of compensation: Compensation of the author(s) of this report is not based on investment
banking revenue. 
Position as a officer or director: The author(s), or a member of their household, does not serve as an
officer, director or advisory board member of the subject company. 
Market making: The author(s) does not act as a market maker in the subject company’s securities. 
Disclaimer: The information set forth herein has been obtained or derived from sources generally
available to the public and believed by the author(s) to be reliable, but the author(s) does not make any
representation or warranty, express or implied, as to its accuracy or completeness. The information is not
intended to be used as the basis of any investment decisions by any person or entity. This information
does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any
security. This report should not be considered to be a recommendation by any individual affiliated with
CFA Societies of Texas, Louisiana, and Oklahoma CFA Institute or the CFA Institute Research Challenge
with regard to this company’s stock.

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