SOUTHWEST AIRLINES CO - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2001 or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File No. 1-7259

SOUTHWEST AIRLINES CO.
(Exact name of registrant as specified in its charter)

TEXAS 74-1563240
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)

P.O. BOX 36611
DALLAS, TEXAS 75235-1611
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (214) 792-4000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------

Common Stock $(1.00 par value) New York Stock Exchange, Inc.
Common Share Purchase Rights New York Stock Exchange, Inc.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Aggregate market value of Common Stock held by nonaffiliates as of
December 31, 2001:

$14,155,000,000

Number of shares of Common Stock outstanding as of the close of
business on December 31, 2001:

766,773,730 shares

DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for Annual Meeting of
Shareholders, May 15, 2002: PART III

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

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PART I

ITEM 1. BUSINESS

DESCRIPTION OF BUSINESS

Southwest Airlines Co. ("Southwest") is a major domestic airline that
provides primarily shorthaul, high-frequency, point-to-point, low-fare service.
Southwest was incorporated in Texas and commenced Customer Service on June 18,
1971 with three Boeing 737 aircraft serving three Texas cities - Dallas,
Houston, and San Antonio.

At year-end 2001, Southwest operated 355 Boeing 737 aircraft and provided
service to 59 airports in 58 cities in 30 states throughout the United States.
Southwest commenced service to West Palm Beach, Florida in January 2001 and to
Norfolk, Virginia in October 2001. In March 2001, Southwest discontinued service
to San Francisco International Airport.

Based on data for second quarter 2001 (the latest available data),
Southwest Airlines is the 4th largest carrier in the United States based on
domestic passengers boarded and the second largest based on scheduled domestic
departures.

The business of the Company is somewhat seasonal. Quarterly operating
income and, to a lesser extent, revenues tend to be lower in the first quarter
(January 1 - March 31).

RECENT DEVELOPMENTS

On September 11, 2001, terrorists hijacked and used two American Airlines,
Inc. aircraft and two United Air Lines, Inc. aircraft in terrorist attacks on
the United States ("terrorist attacks"). As a result of these terrorist attacks,
the Federal Aviation Administration ("FAA") immediately suspended all commercial
airline flights on the morning of September 11. The Company resumed flight
activity on September 14 and was operating its normal pre-September 11 flight
schedule by September 18, 2001. From September 11 until the Company resumed
flight operations on September 14, Southwest canceled approximately 9,000
flights. Although flight operations were suspended, the Company continued to
incur nearly all of its normal operating expenses (with the exception of certain
direct trip-related expenditures such as fuel, landing fees, etc.). Once the
Company resumed operations, revenues were severely impacted and ticket refund
activity increased. In fourth quarter 2001, revenues recovered sufficiently for
the Company to report a profit. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".

On September 22, 2001, President Bush signed into law the Air
Transportation Safety and System Stabilization Act ("Stabilization Act"). The
Stabilization Act provides for up to $5 billion in cash grants and $10 billion
in loan guarantees to qualifying U.S. airlines and freight carriers to
compensate for direct and incremental losses, as defined in the Stabilization
Act, associated with the terrorist attacks. The Stabilization Act also provides
for other items such as protection against certain insurance coverage increases,
delaying payments of excise taxes, and certain protections against lawsuits for
the airlines directly involved in the attacks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for further
discussion of the cash grants provided by the Stabilization Act.

In response to the decrease in demand for air travel since the terrorist
attacks, the Company has modified its schedule for future aircraft deliveries
and the timing of its future capital expenditure commitments. See "Properties -
Aircraft" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" for further discussion
of the Company's long-term commitments for aircraft.

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FUEL

The cost of fuel is an item having significant impact on the Company's
operating results. The Company's average cost of jet fuel over the past five
years was as follows:

From October 1, 2001 through December 31, 2001, the average price per
gallon was $.6030. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of Southwest's fuel
hedging activities.

REGULATION

Economic. The Dallas Love Field section of the International Air
Transportation Competition Act of 1979, as amended in 1997 (commonly known as
the "Wright Amendment"), as it affects Southwest's scheduled service, provides
that no common carrier may provide scheduled passenger air transportation for
compensation between Love Field and one or more points outside Texas, except
that an air carrier may transport individuals by air on a flight between Love
Field and one or more points within the states of Alabama, Arkansas, Kansas,
Louisiana, Mississippi, New Mexico, Oklahoma, and Texas if (a) "such air carrier
does not offer or provide any through service or ticketing with another air
carrier" and (b) "such air carrier does not offer for sale transportation to or
from, and the flight or aircraft does not serve, any point which is outside any
such states." The Wright Amendment does not restrict flights operated with
aircraft having 56 or fewer passenger seats. Southwest does not interline or
offer joint fares with any other air carrier. The Wright Amendment does not
restrict Southwest's intrastate Texas flights or its air service from points
other than Love Field.

The Department of Transportation ("DOT") has significant regulatory
jurisdiction over passenger airlines. Unless exempted, no air carrier may
furnish air transportation over any route without a DOT certificate of public
convenience and necessity, which does not confer either exclusive or proprietary
rights. The Company's certificates are unlimited in duration and permit the
Company to operate among any points within the United States, its territories
and possessions, except as limited by the Wright Amendment, as do the
certificates of all other U.S. carriers. DOT may revoke such certificates, in
whole or in part, for intentional failure to comply with any provisions of
subchapter IV of the Federal Aviation Act of 1958, or any order or regulation
issued thereunder or any term of such certificate; provided that, with respect
to revocation, the certificate holder has first been advised of the alleged
violation and fails to comply after being given a reasonable time to do so.

DOT prescribes uniform disclosure standards regarding terms and conditions
of carriage and prescribes that terms incorporated into the Contract of Carriage
by reference are not binding upon passengers unless notice is given in
accordance with its regulations.

2

Safety. The Company is subject to the jurisdiction of the Federal Aviation
Administration ("FAA") with respect to its aircraft maintenance and operations,
including equipment, ground facilities, dispatch, communications, flight
training personnel, and other matters affecting air safety. To ensure compliance
with its regulations, the FAA requires airlines to obtain operating,
airworthiness, and other certificates, which are subject to suspension or
revocation for cause. The Company has obtained such certificates. The FAA,
acting through its own powers or through the appropriate U. S. Attorney, also
has the power to bring proceedings for the imposition and collection of fines
for violation of the Federal Air Regulations.

The Company is subject to various other federal, state, and local laws and
regulations relating to occupational safety and health, including Occupational
Safety and Health Administration (OSHA) and Food and Drug Administration (FDA)
regulations.

Security. On November 19, 2001, President Bush signed into law the
Aviation and Transportation Security Act ("Security Act"). The Security Act
generally provides for enhanced aviation security measures. The Security Act
established a new Transportation Security Administration ("TSA") within the
Department of Transportation to be headed by the new Under Secretary of
Transportation for Security with supervision by the new Transportation Security
Oversight Board. The TSA is to assume the aviation security functions previously
residing in the FAA and assume the passenger screening contracts at U.S.
airports by February 17, 2002. The TSA will provide for the screening of all
passengers and property, including cargo and baggage, which will be performed by
federal employees by November 19, 2002. The Security Act also requires that a
system be in operation to screen all checked baggage at U.S. airports by January
18, 2002; Southwest has complied with this requirement. Beginning February 1,
2002, a $2.50 per enplanement security fee is imposed on passengers (maximum of
$5.00 per one-way trip), with authority granted to the TSA to impose additional
fees on air carriers if necessary to cover additional federal aviation security
costs.

Environmental. Certain airports, including San Diego, Burbank, and Orange
County, have established airport restrictions to limit noise, including
restrictions on aircraft types to be used, and limits on the number of hourly or
daily operations or the time of such operations. In some instances, these
restrictions have caused curtailments in service or increases in operating costs
and such restrictions could limit the ability of Southwest to expand its
operations at the affected airports. Local authorities at other airports may
consider adopting similar noise regulations, but such regulations are subject to
the provisions of the Airport Noise and Capacity Act of 1990 and regulations
promulgated thereunder.

Operations at John Wayne Airport, Orange County, California, are governed
by the Airport's Phase 2 Commercial Airline Access Plan and Regulation (the
"Plan"). Pursuant to the Plan, each airline is allocated total annual seat
capacity to be operated at the airport, subject to renewal/reallocation on an
annual basis. Service at this airport may be adjusted annually to meet these
requirements.

The Company is subject to various other federal, state, and local laws and
regulations relating to the protection of the environment, including the
discharge or disposal of materials such as chemicals, hazardous waste, and
aircraft deicing fluid. Potential future regulatory developments pertaining to
such things as control of engine exhaust emissions from ground support equipment
and prevention of leaks from underground aircraft fueling systems could increase
operating costs in the airline industry. The Company does not believe, however,
that such environmental regulatory developments will have a material impact on
the Company's capital expenditures or otherwise adversely effect its operations,
operating costs, or competitive position. Additionally, in conjunction with
airport authorities, other airlines, and state and local environmental
regulatory agencies, the Company is undertaking voluntary investigation or
remediation of soil or groundwater contamination at several airport sites. While
the full extent of any contamination at such sites and the parties responsible
for such contamination have not been determined, the Company does not believe
that any environmental liability associated with such sites will have a material
adverse effect on the Company's operations, costs, or profitability.

3

Customer Service Commitment. During 1999, the airline transportation
industry faced possible legislation dealing with certain customer service
practices. As a compromise with Congress, the industry, working with the Air
Transport Association, responded by adopting and filing with the DOT written
plans disclosing how it would commit to improving performance. Southwest
Airlines formalized its dedication to Customer Satisfaction by adopting its
Customer Service Commitment, a comprehensive plan which embodies the Mission
Statement of Southwest Airlines: dedication to the highest quality of Customer
Service delivered with a sense of warmth, friendliness, individual pride, and
Company Spirit. The Customer Service Commitment can be reviewed by clicking on
"About SWA" at www.southwest.com. Congress is expected to monitor the effects of
the industry's plans, and there can be no assurance that legislation will not be
proposed in the future to regulate airline customer service practices.

MARKETING AND COMPETITION

Southwest focuses principally on point-to-point, rather than
hub-and-spoke, service in markets with frequent, conveniently timed flights and
low fares. For example, Southwest's average aircraft trip stage length in 2001
was 514 miles with an average duration of approximately 1.5 hours. At year-end,
Southwest served approximately 344 one-way nonstop city pairs.

Southwest's point-to-point route system, as compared to hub-and-spoke,
provides for more direct nonstop routings for Customers and, therefore,
minimizes connections, delays, and total trip time. Southwest focuses on
nonstop, not connecting, traffic. As a result, approximately 75 percent of the
Company's Customers fly nonstop. In addition, Southwest serves many conveniently
located satellite or downtown airports such as Dallas Love Field, Houston Hobby,
Chicago Midway, Baltimore-Washington International, Burbank, Manchester,
Oakland, San Jose, Providence, Ft. Lauderdale/Hollywood and Long Island
airports, which are typically less congested than other airlines' hub airports
and enhance the Company's ability to sustain high Employee productivity and
reliable ontime performance. This operating strategy also permits the Company to
achieve high asset utilization. Aircraft are scheduled to minimize the amount of
time the aircraft are at the gate, currently approximately 25 minutes, thereby
reducing the number of aircraft and gate facilities that would otherwise be
required. Southwest does not interline with other airlines, nor have any
commuter feeder relationships.

Southwest employs a relatively simple fare structure, featuring low,
unrestricted, unlimited, everyday coach fares, as well as even lower fares
available on a restricted basis. The Company operates only one aircraft type,
the Boeing 737, which simplifies scheduling, maintenance, flight operations, and
training activities.

In January 1995, Southwest was the first major airline to introduce a
Ticketless travel option, eliminating the need to print a paper ticket
altogether. Southwest also entered into an arrangement with SABRE, the computer
reservation system in which Southwest has historically participated to a limited
extent, providing for ticketing and automated booking on Southwest in a very
cost-effective manner. In 1996, Southwest began offering Ticketless travel
through the Company's home page on the Internet at http://www.southwest.com. For
the year ended December 31, 2001, approximately 85 percent of Southwest's
Customers chose the Ticketless travel option. For the year ended December 31,
2001, approximately 40 percent of Southwest's passenger revenues came through
its Internet site, which has become a vital part of the Company's distribution
strategy.

The airline industry is highly competitive as to fares, frequent flyer
benefits, routes, and service, and some carriers competing with the Company have
greater financial resources, larger fleets, and wider name recognition. Certain
major United States airlines have established marketing alliances with each
other, including Northwest Airlines/Continental Airlines, American
Airlines/Alaska Airlines, and Continental Airlines/America West Airlines. In
2001, AMR Corp., parent of American Airlines, completed its acquisition of the
assets of Trans World Airlines.

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Immediately after the terrorist acts of September 11, and in the face of
weak demand for air service, most major carriers (not including Southwest)
announced significant service reductions, grounded aircraft and furloughed
employees. Southwest's competitors have reduced service in several markets
served by Southwest. Some carriers have sought relief from certain financial
obligations and may seek additional protection from such obligations in
bankruptcy. On the other hand, some of the Company's competitors may qualify for
federal loan guarantees authorized by the Stabilization Act. Enhanced security
measures have had, and will continue to have, a significant impact on the
airport experience for passengers. Security requirements are still evolving on a
daily basis; however, to date, they have not impacted Southwest's aircraft
utilization. It is currently not possible to assess the impact of these events
on airline competition.

Profit levels in the air transport industry are highly sensitive to
changes in operating and capital costs and the extent to which competitors match
an airline's fares and services. The profitability of a carrier in the airline
industry is also impacted by general economic trends.

The Company is also subject to varying degrees of competition from surface
transportation in its shorthaul markets, particularly the private automobile. In
shorthaul air services that compete with surface transportation, price is a
competitive factor, but frequency and convenience of scheduling, facilities,
transportation safety and security procedures, and Customer Service may be of
equal or greater importance to many passengers.

INSURANCE

The Company carries insurance of types customary in the airline industry
and at amounts deemed adequate to protect the Company and its property and to
comply both with federal regulations and certain of the Company's credit and
lease agreements. The policies principally provide coverage for public and
passenger liability, property damage, cargo and baggage liability, loss or
damage to aircraft, engines, and spare parts, and workers' compensation.

After the September 11 terrorist attacks, the Company's insurers provided
notice that coverage for aircraft damage and for liability due to war and
terrorist activities would be canceled in seven days. In both cases, new
coverage was made available at significantly higher rates. The Company has
purchased the new coverage, which in the case of the third party liability
insurance contains a new sub-limit of $50 million. Pursuant to authority granted
in the Stabilization Act, the FAA has supplemented this insurance until March
21, 2002 with a third party liability policy covering losses in excess of $50
million. Further, the FAA has reimbursed the Company for the increased cost of
its insurance for the month of October 2001. While the FAA has authority to
provide reimbursement of premiums for a period of 180 days from September 11,
there is no assurance that any further reimbursements will be forthcoming.

The Company's existing insurance policies for war and terrorism coverage
continue to contain a seven day cancellation clause which the insurers may
invoke at any time. There is also no assurance that the FAA will be authorized
to continue to provide insurance for third party terrorism and war risk coverage
in excess of $50 million after March 21, 2002.

FREQUENT FLYER AWARDS

Southwest's frequent flyer program, Rapid Rewards, is based on trips flown
rather than mileage. Rapid Rewards Customers earn a flight segment credit for
each one-way trip flown or two credits for each round trip flown. Rapid Rewards
Customers can also receive flight segment credits by using the services of
non-airline partners, which include a telephone company, car rental agencies,
hotels, and credit card partners, including the Southwest Airlines First USA(R)
Visa card. Rapid Rewards offers two types of travel awards. The Rapid Rewards
Award Ticket ("Award Ticket") offers one free roundtrip travel award to any
Southwest destination

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after the accumulation of 16 flight segment credits within a consecutive
twelve-month period. The Rapid Rewards Companion Pass ("Companion Pass") is
granted after flying 50 roundtrips (or 100 one-way trips) on Southwest within a
consecutive twelve-month period. The Companion Pass offers unlimited free
roundtrip travel to any Southwest destination for a companion of the qualifying
Rapid Rewards member. In order for the companion to use this pass, the Rapid
Rewards member must purchase a ticket or use an Award Ticket. Additionally, the
Rapid Rewards member and companion must travel together on the same flight.

Trips flown are valid for flight segment credits toward Award Tickets and
Companion Passes for twelve months only; Award Tickets and Companion Passes are
automatically generated when earned by the Customer rather than allowing the
Customer to bank credits indefinitely; and Award Tickets and Companion Passes
are valid for one year with an automatic expiration date. "Black out" dates
apply during peak holiday periods.

The Company also sells flight segment credits to business partners
including credit card companies, phone companies, hotels, and car rental
agencies. These credits may be redeemed for Award Tickets having the same
program characteristics as those earned by flying.

Customers redeemed approximately 1.7 million, 1.6 million and 1.2 million
Award Tickets and flights on Companion Passes during 2001, 2000 and 1999,
respectively. The amount of free travel award usage as a percentage of total
Southwest revenue passengers carried was 5.4 percent in 2001, 4.9 percent in
2000 and 4.3 percent in 1999. The number of Award Tickets outstanding at
December 31, 2001 and 2000 was approximately 1,296,000 and 985,000,
respectively. These numbers do not include partially earned Award Tickets. The
Company currently does not have a system to accurately estimate partially earned
Award Tickets. However, these partially earned Award Tickets may equal 80
percent or more of the current outstanding Award Tickets. Since the inception of
Rapid Rewards in 1987, approximately 14 percent of all Award Tickets have
expired without being used. The number of Companion Passes for Southwest
outstanding at December 31, 2001 and 2000 was approximately 48,000 and 41,000,
respectively. The Company currently estimates that 3 to 4 trips will be redeemed
per outstanding Companion Pass.

The Company accounts for its frequent flyer program obligations by
recording a liability for the estimated incremental cost of flight awards the
Company expects to be redeemed (except for flight segment credits sold to
business partners). This method recognizes an average incremental cost to
provide roundtrip transportation to one additional passenger. The estimated
incremental cost includes direct passenger costs such as fuel, food and other
operational costs, but does not include any contribution to overhead or profit.
The incremental cost is accrued at the time an award is earned and revenue is
subsequently recognized, at the amount accrued, when the free travel award is
used. For flight segment credits sold to business partners prior to January 1,
2000 revenue was recognized when the credits were sold. Beginning January 1,
2000, revenue from the sale of flight segment credits and associated with future
travel is deferred and recognized when the ultimate free travel award is flown
or the credits expire unused. Accordingly, Southwest does not accrue incremental
cost for the expected redemption of free travel awards for credits sold to
business partners. The liability for free travel awards earned but not used at
December 31, 2001 and 2000 was not material.

EMPLOYEES

At December 31, 2001, Southwest had 31,580 active employees, consisting of
10,710 flight, 1,600 maintenance, 15,020 ground customer and fleet service and
4,250 management, accounting, marketing, and clerical personnel.

Southwest has ten collective bargaining agreements covering approximately
82 percent of its employees. The following table sets forth the Company's
employee groups and collective bargaining status:

6

ITEM 2. PROPERTIES

AIRCRAFT

Southwest operated a total of 355 Boeing 737 aircraft as of December 31,
2001, of which 92 and 7 were under operating and capital leases, respectively.
The remaining 256 aircraft were owned.

Southwest was the launch customer for the Boeing 737-700 aircraft, the
newest generation of the Boeing 737 aircraft type. The first 737-700 aircraft
was delivered in December 1997 and entered revenue service in January 1998. At
December 31, 2001, Southwest had 106 Boeing 737-700 aircraft in service.

In total, at December 31, 2001, the Company had firm orders and options to
purchase Boeing 737 Aircraft as follows:

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FIRM ORDERS AND OPTIONS TO PURCHASE BOEING 737-700 AIRCRAFT*

*Of the 32 Firm Orders indicated for 2002 and 2003, 19 aircraft are to be
acquired from a special purpose trust (rather than Boeing). The balance of 13
Firm Orders in those years, as well as the remaining aircraft orders described
in the above table, are directly with The Boeing Company. See Footnote 4 to the
Consolidated Financial Statements.

The Company currently intends to retire its fleet of 30 Boeing 737-200
aircraft over the next four years.

The average age of the Company's fleet at December 31, 2001 was 8.75
years.

GROUND FACILITIES AND SERVICES

Southwest leases terminal passenger service facilities at each of the
airports it serves to which it has added various leasehold improvements. The
Company leases land on a long-term basis for its maintenance centers located at
Dallas Love Field, Houston Hobby, and Phoenix Sky Harbor, its training center
near Love Field, which houses five 737 simulators, and its corporate
headquarters, also located near Love Field. The maintenance, training center,
and corporate headquarters buildings on these sites were built and are owned by
Southwest. At December 31, 2001, the Company operated nine reservation centers.
The reservation centers located in Little Rock, Arkansas; Chicago, Illinois;
Albuquerque, New Mexico; and Oklahoma City, Oklahoma occupy leased space. The
Company owns its Dallas, Texas; Houston, Texas; Phoenix, Arizona; Salt Lake
City, Utah; and San Antonio, Texas reservation centers.

The Company performs substantially all line maintenance on its aircraft
and provides ground support services at most of the airports it serves. However,
the Company has arrangements with certain aircraft maintenance firms for major
component inspections and repairs for its airframes and engines, which comprise
the majority of the annual aircraft maintenance costs.

ITEM 3. LEGAL PROCEEDINGS

The Company received a statutory notice of deficiency from the Internal
Revenue Service (IRS) in July 1995 in which the IRS proposed to disallow
deductions claimed by the Company on its federal income tax returns for the
taxable years 1989 through 1991 for the costs of certain aircraft inspection and
maintenance procedures. In response to the statutory notice of deficiency, the
Company filed a petition in the United States Tax Court on October 30, 1997,
seeking a determination that the IRS erred in disallowing the deductions claimed
by the Company and there is no deficiency in the Company's tax liability for the
taxable years in issue.

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On December 21, 2000, the national office of the IRS published a revenue ruling
in which it concluded that aircraft inspection and maintenance is currently
deductible as an ordinary and necessary business expense. In accordance with the
revenue ruling, the IRS conceded the proposed adjustments to the deductions
claimed by the Company for aircraft inspection and maintenance expense, and on
June 1, 2001, a decision was entered by the Tax Court holding that there is no
deficiency in income tax for the taxable years 1989 through 1991.

The IRS similarly proposed to disallow deductions claimed by the
Company on its federal income tax returns for the taxable years 1992 through
1994 primarily related to the costs of certain aircraft inspection and
maintenance expenses. During 2001, the IRS conceded the proposed adjustments to
the deductions claimed for aircraft inspection and maintenance expenses.
Management believes the final resolution of this controversy will not have a
material adverse effect upon the financial position or results of operations of
the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None to be reported.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of Southwest, their positions, and their
respective ages (as of January 1, 2002) are as follows:

Executive officers are elected annually at the first meeting of
Southwest's Board of Directors following the annual meeting of shareholders or
appointed by the President pursuant to Board authorization. Each of the above
individuals has worked for Southwest Airlines Co. for more than the past five
years, except Ross Holman, who joined the Company in March 1998. Prior to that
time, Mr. Holman was Chief Information Officer of PageNet since 1996.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's officers and directors to file reports of ownership and changes in
ownership in Company Common Stock with the Securities and Exchange Commission
and the New York Stock Exchange. During 2001, one report involving the
acquisition of 2,550 shares of Southwest Common Stock was filed five days late
by Gene H. Bishop, a member of the Board of Directors.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Southwest's common stock is listed on the New York Stock Exchange and is
traded under the symbol LUV. The high and low sales prices of the common stock
on the Composite Tape and the quarterly dividends per share paid on the common
stock, as adjusted for the February 2001 three-for-two stock split, were:

As of December 31, 2001, there were 11,324 holders of record of the
Company's common stock.

RECENT SALES OF UNREGISTERED SECURITIES

During 2001, Herbert D. Kelleher, President and Chief Executive Officer,
exercised unregistered options to purchase Southwest Common Stock as follows:

*These numbers do not take into account the February 2001 three-for-two stock
split.

The issuances of the above options and shares to Mr. Kelleher were deemed
exempt from the registration provisions of the Securities Act of 1933, as
amended (the "Securities Act"), by reason of the provision of Section 4(2) of
the Securities Act because, among other things, of the limited number of
participants in such transactions and the agreement and representation of Mr.
Kelleher that he was acquiring such securities for investment and not with a
view to distribution thereof. The certificates representing the shares issued to
Mr. Kelleher contain a legend to the effect that such shares are not registered
under the Securities Act and may not be transferred except pursuant

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to a registration statement which has become effective under the Securities Act
or to an exemption from such registration. The issuance of such shares was not
underwritten.

ITEM 6. SELECTED FINANCIAL DATA

The following financial information for the five years ended December 31,
2001 has been derived from the Company's consolidated financial statements. This
information should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included elsewhere herein. Share and per
share information in this Report has been adjusted for the effect of the
February 2001 three-for-two stock split.

- ----------

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

(2) Includes leased aircraft.

(3) Excludes cumulative effect of accounting change of $22.1 million ($.03 per
share).

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

YEAR IN REVIEW

In 2001, Southwest posted a profit for the 29th consecutive year in one of the
most challenging operating environments the air travel industry has ever faced.
During the year, Southwest also increased our domestic market share, made
enhancements that will improve our Customer Service, and ended the year with
more Employees and aircraft than we had when we began the year. Despite the
onset of a recession early in 2001 and the September 11, 2001 terrorist attacks
against the United States (the terrorist attacks), Southwest was profitable in
each quarter of the year, including the third and fourth quarters after
excluding federal grants recognized in these quarters under the Air
Transportation Safety and System Stabilization Act (the Act). (See Note 3 to the
Consolidated Financial Statements for further details on the terrorist attacks
and the Act.) Although we were unable to match some of the Company's
record-setting performance levels reached in 2000, our business strategy -
primarily short haul, high frequency, low fare, point-to-point, high quality
Customer Service - continued to serve us well during some difficult times in
2001.

In 2001, we continued to maintain our cost advantage over our industry while the
recession and events of September 11 put downward pressure on revenues. In
response to uncertainties following September 11 and the precipitous drop in
demand for air travel, Southwest amended its agreement with The Boeing Company
to defer aircraft deliveries (see Note 4 to the Consolidated Financial
Statements) but did not ground airplanes, reduce service, or furlough Employees.
Following the temporary FAA shutdown of U.S. air space following the terrorist
attacks, load factors have steadily improved to somewhat normal, average
historical levels. However, these load factors have resulted from significant
fare discounting, which continues to result in year-over-year declines in
passenger revenue yields per RPM (passenger yields) and operating revenue yields
per ASM.

As we begin 2002, in addition to the difficult revenue environment for
commercial airlines, the Company is faced with increased war risk insurance and
passenger security costs resulting from continually evolving security laws and
directives. In response to the terrorist attacks, the airline industry has
worked diligently with Congress, the DOT, the FAA, and law enforcement officials
to enhance security. During fourth quarter 2001, the Company was able to offset
these additional costs because of lower jet fuel prices and through internal
cost reduction initiatives implemented following the terrorist attacks. However,
there can be no assurance the Company will be able to continue to offset future
cost increases resulting from the changing commercial airline environment. (The
immediately preceding sentence is a forward-looking statement that involves
uncertainties that could result in actual results differing materially from
expected results. Some significant factors include, but may not be limited to,
additional laws or directives that could increase the Company's costs or result
in changes to the Company's operations, etc.)

During 2001, we began service to two new cities, West Palm Beach, Florida, and
Norfolk, Virginia, while also discontinuing service to San Francisco
International Airport due to airport congestion. We have been pleased with the
initial results in both of the new Southwest cities. Prior to September 11, the
Company also continued to add flights between cities already served. Southwest
ended 2001 serving 58 cities in 30 states. Immediately following the terrorist
attacks, Southwest suspended fleet growth. However, by the end of the year,
Southwest had announced plans for modest growth to resume in early 2002.

12

Currently, available seat mile (ASM) capacity is expected to grow approximately
3.5 percent in 2002 with the planned net addition of at least 8 aircraft. The
Company will place in service at least 11 new Boeing 737-700s scheduled for
delivery during the year and will retire three of the Company's older 737-200s.
(The immediately preceding sentences are forward-looking statements that involve
uncertainties that could result in actual results differing materially from
expected results. Some significant factors include, but may not be limited to,
future capacity decisions made by the Company, demand for air travel, changes in
the Company's aircraft retirement schedule, etc.)

RESULTS OF OPERATIONS

2001 COMPARED WITH 2000 The Company's consolidated net income for 2001 was
$511.1 million ($.63 per share, diluted), as compared to 2000 net income, before
the cumulative effect of change in accounting principle, of $625.2 million ($.79
per share, diluted), a decrease of 18.2 percent. The prior years' net income per
share amounts have been restated for the 2001 three-for-two stock split (see
Note 11 to the Consolidated Financial Statements). Consolidated results for 2001
included $235 million in gains that the Company recognized from grants under the
Act and special pre-tax charges of approximately $48 million arising from the
terrorist attacks (see Note 3 to the Consolidated Financial Statements).
Excluding the grant and special charges related to the terrorist attacks, net
income for 2001 was $412.9 million ($.51 per share, diluted). The cumulative
effect of change in accounting principle for 2000 was $22.1 million, net of
taxes of $14.0 million (see Note 2 to the Consolidated Financial Statements).
Net income and net income per share, diluted, after the cumulative change in
accounting principle, for 2000, were $603.1 million and $.76, respectively.
Operating income for 2001 was $631.1 million, a decrease of 38.2 percent
compared to 2000.

Following the terrorist attacks, all U.S. commercial flight operations were
suspended for approximately three days. However, the Company continued to incur
nearly all of its normal operating expenses (with the exception of certain
direct trip-related expenditures such as fuel, landing fees, etc.). The Company
cancelled approximately 9,000 flights before resuming flight operations on
September 14, although we did not resume our normal pre-September 11 flight
schedule until September 18, 2001. Once the Company did resume operations, load
factors and passenger yields were severely impacted, and ticket refund activity
increased. The Company estimates that from September 11 through September 30, it
incurred operating losses in excess of $130 million.

The effects of the terrorist attacks continued to be felt throughout fourth
quarter 2001. The Company's operating income during fourth quarter 2001 was
$37.1 million, a decrease of 85.2 percent compared to fourth quarter 2000.
Without consideration of any federal grant under the Act the Company expects to
recognize in first quarter 2002 (see Note 3 to the Consolidated Financial
Statements), it is not yet known whether the Company will be profitable in first
quarter 2002, due to uncertain economic conditions and the difficult airline
industry revenue environment.

OPERATING REVENUES Consolidated operating revenues decreased 1.7 percent due
primarily to a 1.6 percent decrease in passenger revenues. The decrease in
passenger revenues was a direct result of the terrorist attacks. Because of the
terrorist attacks, fluctuations in passenger revenue can best be explained by
discussing the year in two distinct time periods: January through August, 2001,
and September through December, 2001.

13

From January through August, 2001, passenger revenues were approximately 8.7
percent higher than the same period in 2000 due primarily to an increase in
capacity, as measured by ASMs, of 11.6 percent. The capacity increase was due to
the addition of 14 aircraft during 2001 (all prior to September 11) and was
partially offset by a decrease of 1.9 percent in passenger yield. Passenger
yields decreased as a result of fare discounting by the Company and the airline
industry in general as the United States economy weakened throughout the year.
The Company's load factor (RPMs divided by ASMs) over this time period was 71.2
percent, compared to 71.7 percent for the same period in 2000.

From September through December, 2001, passenger revenues were approximately
21.7 percent lower than the same period of 2000. Capacity increased 4.0 percent
and the Company's load factor fell to 62.0 percent, compared to 68.2 percent
during the same period of 2000. Passenger yields were 17.2 percent lower during
this period versus the same period of 2000 due to aggressive fare sales
following the terrorist attacks.

For the full year, the Company experienced a 1.2 percent increase in revenue
passengers carried, a 5.4 percent increase in revenue passenger miles (RPMs),
and a 9.0 percent increase in ASMs. The Company's load factor for 2001 was off
2.4 points to 68.1 percent and there was a 6.7 percent decrease in 2001
passenger yield.

Load factors in January 2002 continued to trail those experienced in January
2001. Additionally, passenger yields remain significantly below prior year
levels. As a result, the Company expects first quarter 2002 revenue per
available seat mile to continue to fall below first quarter 2001 levels. (The
immediately preceding sentence is a forward-looking statement, which involves
uncertainties that could result in actual results differing materially from
expected results. Some significant factors include, but may not be limited to,
additional incidents that could cause the public to question the safety and/or
efficiency of air travel, competitive pressure such as fare sales and capacity
changes by other carriers, general economic conditions, operational disruptions
as a result of bad weather, the impact of labor issues, and variations in
advance booking trends.) See Note 1 to the Consolidated Financial Statements for
further information on the Company's revenue recognition policy.

As a result of weak economic conditions throughout 2001, consolidated freight
revenues decreased 17.6 percent. There were decreases in both the number of
freight shipments and revenue per shipment. Following the September 11, 2001
terrorist attacks, the United States Postal Service made the decision to shift a
portion of the mail that commercial carriers had previously carried to freight
carriers. As a result of this decision, the Company expects to experience a
decrease in freight revenues during at least the first half of 2002 when
compared to 2001. (The immediately preceding sentence is a forward-looking
statement, which involves uncertainties that could result in actual results
differing materially from expected results. Some significant factors include,
but may not be limited to, general economic conditions, subsequent shifts in
business by the United States Postal Service, and capacity changes by other
carriers.) Other revenues increased 20.3 percent due primarily to an increase in
commissions earned from programs the Company sponsors with certain business
partners, such as the Company sponsored First USA Visa card.

OPERATING EXPENSES Consolidated operating expenses for 2001 increased 6.4
percent, compared to the 9.0 percent increase in capacity. Operating expenses
per ASM decreased 2.5 percent to $.0754, compared to $.0773 in 2000, due
primarily to a decrease in average jet fuel prices. The average fuel cost per
gallon in 2001 was $.7086, 10.0 percent lower than the average cost per gallon
in 2000 of $.7869. Excluding fuel expense, operating expenses per ASM decreased
.3 percent.

14

Operating expenses per ASM for 2001 and 2000 were as follows:

Approximately 59 percent of the increase in Salaries, wages, and benefits per
ASM was due to increases in salaries and wages from higher average wage rates
within certain workgroups and increased headcount due in part to the increased
security requirements following the September terrorist attacks. The remaining
41 percent of the increase in Salaries, wages, and benefits per ASM was due to
higher benefits costs, primarily health care costs.

The Company's Ramp, Operations, and Provisioning Agents are subject to an
agreement with the Transport Workers Union of America, (TWU), which became
amendable in December 2000. The Company reached an agreement with the TWU, which
was ratified by its membership in June 2001. The new contract becomes amendable
in June 2006.

The Company's Mechanics are subject to an agreement with the International
Brotherhood of Teamsters (the Teamsters), which became amendable in August 2001.
Southwest is currently in negotiations with the Teamsters for a new contract.

The Company's Flight Attendants are subject to an agreement with the TWU, which
becomes amendable in June 2002. The Company's Customer Service and Reservations
Agents are subject to an agreement with the International Association of
Machinists and Aerospace Workers, which becomes amendable in November 2002.

Employee retirement plans expense per ASM decreased 17.5 percent, due primarily
to the decrease in Company earnings available for profitsharing. The decrease in
earnings more than offset an increase in expense due to a 4th quarter amendment
made to the Company's profitsharing plan. This amendment enabled the Company to
take into consideration federal grants under the Act and special charges
resulting from the terrorist attacks in the calculation of profitsharing.

Fuel and oil expense per ASM decreased 11.9 percent, due primarily to a 10.0
percent decrease in the average jet fuel cost per gallon. The average cost per
gallon of jet fuel in 2001 was $.7086 compared to $.7869 in 2000, including the
effects of hedging activities. The Company's 2001 and 2000 average jet fuel
prices are net of approximately $79.9 million and $113.5 million in gains from
hedging activities, respectively. The Company's 2001 hedging gains were
calculated according to the requirements of Statement of Financial Accounting
Standards No. 133, as amended (SFAS 133), which the Company

15

adopted January 1, 2001. See Note 2 and Note 9 to the Consolidated Financial
Statements. As detailed in Note 9 to the Consolidated Financial Statements, the
Company has hedges in place for approximately 60 percent of its anticipated fuel
consumption in 2002. Considering current market prices and the continued
effectiveness of the Company's fuel hedges, we are forecasting our first quarter
2002 average fuel cost per gallon to be below first quarter 2001's average fuel
cost per gallon of $.7853. The majority of the Company's near term hedge
positions are in the form of option contracts, which should enable the Company
to continue to benefit to a large extent from a decline in jet fuel prices. (The
immediately preceding two sentences are forward-looking statements, which
involve uncertainties that could result in actual results differing materially
from expected results. Such uncertainties include, but may not be limited to,
the largely unpredictable levels of jet fuel prices, the continued effectiveness
of the Company's fuel hedges, and changes in the Company's overall fuel hedging
strategy.)

Maintenance materials and repairs per ASM decreased 3.2 percent. This decrease
was due primarily to the Company's capacity growth exceeding the increase in
expense. Virtually all of the Company's 2001 capacity growth versus the prior
year was accomplished with new aircraft, most of which have not yet begun to
incur any meaningful repair costs. The decrease in engine expense was partially
offset by an increase in expense for airframe inspections and repairs. In
addition to an increase in the number of airframe inspections and repairs, the
cost per event increased compared to 2000. Currently, the Company expects an
increase in maintenance materials and repairs expense per ASM in first quarter
2002 versus first quarter 2001. (The immediately preceding sentence is a
forward-looking statement involving uncertainties that could result in actual
results differing materially from expected results. Such uncertainties include,
but may not be limited to, any unscheduled required aircraft airframe or engine
repairs and regulatory requirements.)

Agency commissions per ASM decreased 40.7 percent, due primarily to a change in
the Company's commission rate policy. Effective January 1, 2001, the Company
reduced the commission rate paid to travel agents from ten percent to eight
percent for Ticketless bookings, and from ten percent to five percent for paper
ticket bookings. Effective October 15, 2001, the Company reduced the commission
paid to travel agents to five percent (with no cap), regardless of the type of
ticket sold. Due to this most recent commission policy change in October 2001,
we expect agency commissions to show a year-over-year decrease in first quarter
2002 on a per-ASM basis. (The immediately preceding sentence is a
forward-looking statement involving uncertainties that could result in actual
results differing materially from expected results. Such uncertainties include,
but may not be limited to, changes in consumer ticket purchasing habits.)

Aircraft rentals per ASM decreased 12.1 percent due primarily to a lower
percentage of the aircraft fleet being leased. Approximately 25.9 percent of the
Company's aircraft were under operating lease at December 31, 2001, compared to
27.3 percent at December 31, 2000. Based on the Company's current new aircraft
delivery schedule and scheduled aircraft retirements for 2001, we expect a
decline in aircraft rental expense per ASM in 2002. (The immediately preceding
sentence is a forward-looking statement involving uncertainties that could
result in actual results differing materially from expected results. Such
uncertainties include, but may not be limited to, changes in the Company's
current schedule for purchase and/or retirement of aircraft.)

Landing fees and other rentals per ASM increased 9.1 percent primarily as a
result of the Company's expansion of facilities at several airports, including
Baltimore-Washington International Airport and Chicago Midway Airport. As a
result of the terrorist attacks, most other major airlines have reduced their

16

flight schedules and/or have retired aircraft early due to the decrease in
demand for air travel. Since Southwest has not reduced the number of flights it
offers, the Company expects that the airport costs it shares with other airlines
on the basis of relative flights landed or passengers carried, such as landing
fees and common space rentals, will increase on a per-ASM basis in future
periods. In fourth quarter 2001, landing fees and other rentals per ASM
increased 21.4 percent. The Company currently expects a similar year-over-year
increase in first quarter 2002. (The immediately preceding sentence is a
forward-looking statement involving uncertainties that could result in actual
results differing materially from expected results. Such uncertainties include,
but may not be limited to, changes in competitors' flight schedules, demand for
air travel, etc.)

Depreciation expense per ASM increased 4.3 percent due primarily to the growth
in the Company's aircraft fleet prior to the September 11, 2001 terrorist
attacks. The Company had received delivery of 14 new 737-700 aircraft prior to
September 11, bringing the percentage of owned aircraft in the Company's fleet
to 74.1 percent by the end of 2001 compared to 72.7 percent at the end of 2000.

Other operating expenses per ASM increased 3.5 percent due primarily to a
significant increase in passenger liability, aircraft hull, and third party
liability insurance costs following the terrorist attacks. The Company's
insurance carriers cancelled their war risk and terrorism insurance policies
following the terrorist attacks and reinstated such coverage at significantly
higher rates than before. Although the Company was reimbursed for a portion of
the higher rates by the federal government for one month during fourth quarter
2001, we have assumed no further reimbursements. As a result, the Company
currently expects continued year-over-year increases in insurance costs for the
near term future, including first quarter 2002. (The immediately preceding
sentence is a forward-looking statement involving uncertainties that could
result in actual results differing materially from expected results. Such
uncertainties include, but may not be limited to, the financial stability of
companies offering insurance policies to the airline industry, the level of
competition within the insurance industry, etc.)

OTHER "Other expenses (income)" included interest expense, capitalized interest,
interest income, and other gains and losses. Interest expense was flat compared
to the prior year. Following the terrorist attacks, the Company borrowed the
full $475 million available under its revolving credit facility and issued
$614.3 million in long-term debt in the form of Pass-Through Certificates (see
Note 7 to the Consolidated Financial Statements.) The increase in expense caused
by these borrowings was offset by a decrease in interest rates on the Company's
floating rate debt and the July 2001 redemption of $100 million of unsecured
notes. Based on the Company's recent borrowings, we expect interest expense to
be higher on a year-over-year basis in first quarter 2002. (The immediately
preceding sentence is a forward-looking statement involving uncertainties that
could result in actual results differing materially from expected results. Such
uncertainties include, but may not be limited to, subsequent financing decisions
made by the Company.) Capitalized interest decreased 25.3 percent primarily as a
result of lower 2001 progress payment balances for scheduled future aircraft
deliveries compared to 2000. The lower progress payments were due in part to the
deferral of Boeing 737 aircraft firm orders and options following the terrorist
attacks. Interest income increased 6.2 percent due primarily to higher invested
cash balances, partially offset by lower rates of return. Other gains in 2001
resulted primarily from $235 million received as the Company's share of
government grant funds under the Act provided to offset the Company's direct and
incremental losses following the terrorist attacks, through the end of 2001. The
Company expects to receive up to an additional $50 million in 2002, but
determined that due to some uncertainties regarding the amount to be received,
accrual of any amounts in 2001 as a receivable was not proper. (The immediately
preceding sentence is a forward-looking statement involving uncertainties that
could result in actual results differing materially from expected results. Such
uncertainties include, but may not be limited

17

to, subsequent modifications or amendments to the Act, interpretations of the
meaning of direct and incremental losses, and changes in the government's
expected schedule of distributing grant funds, etc.) See Note 3 to the Company's
Consolidated Financial Statements for further discussion of the Act and grants
from the government.

INCOME TAXES The provision for income taxes, as a percentage of income before
taxes, decreased slightly to 38.24 percent in 2001 from 38.54 percent in 2000.
The decrease resulted primarily from lower effective state tax rates in 2001.

2000 COMPARED WITH 1999 The Company's consolidated net income for 2000 before
the cumulative effect of a change in accounting principle was $625.2 million
($.79 per share, diluted), an increase of 31.8 percent. The cumulative change in
accounting principle, related to the adoption of SEC Staff Accounting Bulletin
No. 101, was $22.1 million, net of taxes of $14.0 million (see Note 2 to the
Consolidated Financial Statements). Net income, after the cumulative change in
accounting principle, was $603.1 million. Net income per share, diluted, after
consideration of the accounting change, was $.76 compared to $.59 in 1999.
Operating income was $1,021.1 million, an increase of 30.7 percent compared to
1999.

OPERATING REVENUES Consolidated operating revenues increased 19.3 percent due
primarily to a 19.8 percent increase in passenger revenues. The increase in
passenger revenues primarily resulted from the Company's increased capacity,
strong demand for commercial air travel, and excellent marketing and revenue
management. The Company experienced a 10.7 percent increase in revenue
passengers carried, a 15.7 percent increase in RPMs, and a 3.6 percent increase
in passenger yield. The increase in passenger yield was due primarily to an 8.2
percent increase in average passenger fare, partially offset by a 4.6 percent
increase in average length of passenger haul. The increase in average passenger
fare was due primarily to modest fare increases combined with a higher mix of
full-fare passengers.

The increase in RPMs exceeded a 13.3 percent increase in ASMs resulting in a
load factor of 70.5 percent, or 1.5 points above the prior year. The increase in
ASMs resulted primarily from the net addition of 32 aircraft during the year.

Freight revenues increased 7.5 percent due primarily to an increase in capacity.
Other revenues, which consist primarily of charter revenues, increased 1.2
percent. This increase was less than the Company's increase in capacity due
primarily to the Company's decision to utilize more of its aircraft to satisfy
the strong demand for scheduled service and, therefore, make fewer aircraft
available for charters.

OPERATING EXPENSES Consolidated operating expenses for 2000 increased 17.1
percent, compared to the 13.3 percent increase in capacity. Operating expenses
per ASM increased 3.3 percent to $.0773, compared to $.0748 in 1999, due
primarily to an increase in average jet fuel prices. The average fuel cost per
gallon in 2000 was $.7869, which was the highest annual average fuel cost per
gallon experienced by the Company since 1984. Excluding fuel expense, operating
expenses per ASM decreased 2.6 percent.

Salaries, wages, and benefits per ASM increased slightly, as increases in
productivity in several of the Company's operational areas were more than offset
by higher benefits costs, primarily workers' compensation expense, and increases
in average wage rates within certain workgroups.

18

Employee retirement plans expense per ASM increased 11.1 percent, due primarily
to the increase in Company earnings available for profitsharing.

Fuel and oil expense per ASM increased 44.1 percent, due primarily to a 49.3
percent increase in the average jet fuel cost per gallon. The average price per
gallon of jet fuel in 2000 was $.7869 compared to $.5271 in 1999, including the
effects of hedging activities. The Company's 2000 and 1999 average jet fuel
prices are net of approximately $113.5 million and $14.8 million in gains from
hedging activities, respectively.

Maintenance materials and repairs per ASM decreased 10.0 percent primarily
because of a decrease in engine maintenance expense for the Company's 737-200
aircraft fleet as 1999 was an unusually high period for engine maintenance on
these aircraft. Engine repairs for the Company's 737-200 aircraft are expensed
on a time and materials basis. These engine repairs represented approximately 75
percent of the total decrease, while a decrease in airframe inspections and
repairs per ASM represented the majority of the remaining decrease. The decrease
in airframe inspections and repairs was due primarily to a greater amount of
this work being performed internally versus 1999, when a large portion of this
type of work was outsourced. Therefore, in 2000, a larger portion of the cost of
these repairs was reflected in salaries and wages.

Agency commissions per ASM decreased 10.0 percent, due primarily to a decrease
in commissionable revenue. Approximately 31 percent of the Company's 2000
revenues were attributable to direct bookings through the Company's Internet
site compared to approximately 19 percent in the prior year. The increase in
Internet revenues contributed to the Company's percentage of commissionable
revenues decreasing from 34.6 percent in 1999 to 29.1 percent in 2000.

Aircraft rentals decreased 13.2 percent due primarily to a lower percentage of
the aircraft fleet being leased. Approximately 27.3 percent of the Company's
aircraft were under operating lease at December 31, 2000, compared to 30.8
percent at December 31, 1999.

Landing fees and other rentals per ASM decreased 4.3 percent primarily as a
result of a decrease in landing fees per ASM of 6.7 percent, partially offset by
a slight increase in other rentals. Although landing fees declined on a per-ASM
basis, they were basically flat on a per-trip basis. The growth in ASMs exceeded
the trip growth due primarily to a 5.8 percent increase in stage length (the
average distance per aircraft trip flown).

Other operating expenses per ASM decreased 3.4 percent due primarily to
Company-wide cost reduction efforts. The Company also reduced its advertising
expense 9.5 percent per ASM, taking advantage of our national presence,
increasing brand awareness, and strong Customer demand.

OTHER "Other expenses (income)" included interest expense, capitalized interest,
interest income, and other gains and losses. Interest expense increased 29.1
percent due primarily to the Company's issuance of $256 million of long-term
debt in fourth quarter 1999. Capitalized interest decreased 11.9 percent
primarily as a result of lower 2000 progress payment balances for scheduled
future aircraft deliveries compared to 1999. Interest income increased 59.0
percent due primarily to higher invested cash balances and higher rates of
return. Other losses in 1999 resulted primarily from a write-down associated
with the consolidation of certain software development projects.

INCOME TAXES The provision for income taxes, as a percentage of income before
taxes, decreased slightly to 38.54 percent in 2000 from 38.68 percent in 1999.

19

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $1.5 billion in 2001 compared to
$1.3 billion in 2000. The increase in operating cash flows was due primarily to
the deferral of approximately $186 million in tax payments until January 2002,
as provided for in the Act, which more than offset the decrease in net income.
Net cash provided by financing activities was $1.3 billion in 2001 compared to a
net use of $59.5 million in 2000. Financing cash flows were generated from
borrowings the Company made from its $475 million revolving credit facility and
the issuance of $614.3 million in long-term debt. These borrowings were
partially offset by the redemption of $100 million unsecured notes in 2001. See
Note 6 and Note 7 to the Consolidated Financial Statements for more information
on these financing activities. Cash generated in 2001 was primarily used to
finance aircraft-related capital expenditures and provide working capital.

During 2001, net capital expenditures were $1.0 billion, which primarily related
to the purchase of 14 new 737-700 aircraft delivered to the Company, 11 new
737-700 aircraft the Company has effectively purchased via a special purpose
trust (the Trust), and progress payments for future aircraft deliveries. See
Note 4 to the Consolidated Financial Statements for more information on the
Trust. The Company's contractual commitments consist primarily of scheduled
aircraft acquisitions. As a result of the terrorist attacks, the Company was
able to modify its future aircraft delivery dates through the amendment of our
purchase contract with The Boeing Company and through the creation of the Trust.
Through the Trust, as of December 31, 2001, Southwest will take delivery and
place in service 11 new 737-700 aircraft in 2002 and eight new 737-700 aircraft
in 2003. Excluding aircraft scheduled to be delivered from the Trust, as of
December 31, 2001, the Company has no new 737-700 aircraft deliveries scheduled
for 2002, 13 in 2003, 23 in 2004, 24 in 2005, 22 in 2006, 25 in 2007, and 6 in
2008. The Company also has a total of 87 purchase options for new 737-700
aircraft for years 2004 through 2008 and purchase rights for an additional 217
737-700s during 2007-2012. In total, Southwest's Trust deliveries, firm orders,
options, and purchase rights through 2012 are at 436 aircraft. The Company has
the option, which must be exercised two years prior to the contractual delivery
date, to substitute 737-600s or 737-800s for the 737-700s. The following table
provides details regarding the Company's contractual cash obligations subsequent
to December 31, 2001:

(1) Includes amounts classified as interest for capital lease obligations

(2) Includes amounts payable to the Trust - see Note 4 to the Consolidated
Financial Statements.

The Company has various options available to meet its capital and operating
commitments, including cash on hand at December 31, 2001 of $2.28 billion and
internally generated funds. In addition, the Company will also consider various
borrowing or leasing options to maximize earnings and supplement cash
requirements. The Company believes it has access to a wide variety of financing
arrangements because of its excellent credit ratings and modest leverage.

20

The Company currently has outstanding shelf registrations for the issuance of
$704 million of public debt securities, which it may utilize for aircraft
financings in 2002 and 2003.

On September 23, 1999, the Company announced its Board of Directors had
authorized the repurchase of up to $250 million of the Company's common stock.
Repurchases are made in accordance with applicable securities laws in the open
market or in private transactions from time to time, depending on market
conditions, and may be discontinued at any time. As of December 31, 2001, in
aggregate, 18.3 million shares had been repurchased at a total cost of $199.2
million, of which $108.7 million was completed in 2000. No shares were
repurchased in 2001.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Southwest has interest rate risk in that it holds floating rate debt instruments
and has commodity price risk in that it must purchase jet fuel to operate its
aircraft fleet. The Company purchases jet fuel at prevailing market prices, but
seeks to minimize its average jet fuel cost through execution of a documented
hedging strategy. Southwest has market sensitive instruments in the form of
fixed rate debt instruments and derivative instruments used to hedge its
exposure to jet fuel price increases. The Company also operates 99 aircraft
under operating and capital leases. However, leases are not considered market
sensitive financial instruments and, therefore, are not included in the interest
rate sensitivity analysis below. Commitments related to leases are disclosed in
Note 8 to the Consolidated Financial Statements. The Company does not purchase
or hold any derivative financial instruments for trading purposes. See Note 2 to
the Consolidated Financial Statements for information on the Company's
accounting for its hedging program and Note 9 to the Consolidated Financial
Statements for further detail on the Company's financial derivative instruments.

The fair values of outstanding financial derivative instruments related to the
Company's jet fuel market price risk at December 31, 2001 were a net liability
of approximately $19.4 million, which is classified in accrued liabilities in
the Consolidated Balance Sheet. The fair values of the derivative instruments,
depending on the type of instrument, were determined by the use of present value
methods or standard option value models with assumptions about commodity prices
based on those observed in underlying markets. An immediate ten percent increase
or decrease in underlying fuel-related commodity prices from the December 31,
2001 prices would correspondingly change the fair value of the commodity
derivative instruments in place by approximately $55 million. Changes in the
related commodity derivative instrument cash flows may change by more or less
than this amount based upon further fluctuations in futures prices as well as
related income tax effects. This sensitivity analysis uses industry standard
valuation models and holds all inputs constant at December 31, 2001 levels,
except underlying futures prices.

Airline operators are inherently capital intensive, as the vast majority of the
Company's assets are expensive aircraft, which are long-lived. The Company's
strategy is to capitalize conservatively and grow capacity steadily and
profitably. While the Company uses financial leverage, it has maintained a
strong balance sheet and an "A" credit rating on its senior unsecured fixed-rate
debt with Standard & Poor's and Fitch ratings agencies, and a "Baa1" or
equivalent credit rating with Moody's rating agency. The Company's Aircraft
Secured Notes and French Credit Agreements do not give rise to significant fair
value risk but do give rise to interest rate risk because these borrowings are
floating-rate debt. Although there is interest rate risk associated with these
secured borrowings, the risk is somewhat mitigated by the

21

fact that the Company may prepay this debt on any of the semi-annual principal
and interest payment dates. See Note 7 to the Consolidated Financial Statements
for more information on these borrowings. As disclosed in Note 7 to the
Consolidated Financial Statements, the Company had outstanding senior unsecured
notes totaling $400 million at December 31, 2001. Also, as disclosed in Note 7,
the Company issued $614.3 million in long-term debt in November 2001 in the form
of Pass-Through Certificates (Certificates), which are secured by aircraft the
Company owns. The total of the Company's long-term unsecured notes represented
only 6.2 percent of total noncurrent assets at December 31, 2001. The unsecured
long-term debt currently has a weighted-average maturity of 9.0 years at fixed
rates averaging 7.6 percent at December 31, 2001, which is comparable to average
rates prevailing over the last ten years. The Certificates bear interest at a
combined weighted-average rate of 5.8 percent. The Company does not have
significant exposure to changing interest rates on its unsecured long-term debt
or its Certificates because the interest rates are fixed and the financial
leverage is modest.

The Company also has some risk associated with changing interest rates due to
the short term nature of its invested cash, which was $2.28 billion at December
31, 2001. The Company invests available cash in certificates of deposit and
investment grade commercial paper that generally have maturities of three months
or less; therefore, the returns earned on these investments parallel closely
with floating interest rates. The Company has not undertaken any additional
actions to cover interest rate market risk and is not a party to any other
material interest rate market risk management activities.

A hypothetical ten percent change in market interest rates as of December 31,
2001 would not have a material effect on the fair value of the Company's fixed
rate debt instruments. See Note 9 to the Consolidated Financial Statements for
further information on the fair value of the Company's financial instruments. A
change in market interest rates could, however, have a corresponding effect on
the Company's earnings and cash flows associated with its Aircraft Secured
Notes, French Credit Agreements, and invested cash because of the floating rate
nature of these items. Assuming floating market rates in effect as of December
31, 2001 were held constant throughout a twelve month period, a hypothetical ten
percent change in those rates would correspondingly change the Company's net
earnings and cash flows associated with these items by approximately $2.1
million. However, a ten percent change in market rates would not impact the
Company's earnings or cash flow associated with the Company's publicly traded
fixed-rate debt, or its Certificates.

22

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SOUTHWEST AIRLINES CO.
CONSOLIDATED BALANCE SHEETS

See accompanying notes.

23

SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENTS OF INCOME

See accompanying notes.

24

SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

See accompanying notes.

25

SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes.

26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION Southwest Airlines Co. (Southwest) is a major domestic
airline that provides primarily shorthaul, high-frequency, point-to-point,
low-fare service. The consolidated financial statements include the accounts of
Southwest and its wholly owned subsidiaries (the Company). All significant
intercompany balances and transactions have been eliminated. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates. Certain prior year amounts
have been restated to conform to the current year presentation.

CASH AND CASH EQUIVALENTS Cash equivalents consist of certificates of deposit
and investment grade commercial paper issued by major corporations and financial
institutions. Cash and cash equivalents are highly liquid and generally have
original maturities of three months or less. Cash and cash equivalents are
carried at cost, which approximates market value.

INVENTORIES Inventories of flight equipment expendable parts, materials, and
supplies are carried at average cost. These items are generally charged to
expense when issued for use.

PROPERTY AND EQUIPMENT Depreciation is provided by the straight-line method to
estimated residual values over periods ranging from 20 to 25 years for flight
equipment and 3 to 30 years for ground property and equipment. See Note 2 for
further information on aircraft depreciation. Property under capital leases and
related obligations are recorded at an amount equal to the present value of
future minimum lease payments computed on the basis of the Company's incremental
borrowing rate or, when known, the interest rate implicit in the lease.
Amortization of property under capital leases is on a straight-line basis over
the lease term and is included in depreciation expense. The Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows to be generated by those assets are less than the carrying amounts of
those assets.

AIRCRAFT AND ENGINE MAINTENANCE The cost of scheduled engine inspections and
repairs and routine maintenance costs for aircraft and engines are charged to
maintenance expense as incurred. Scheduled airframe inspections and repairs,
known as "D" checks, are generally performed every ten years. Costs related to
"D" checks are capitalized and amortized over the estimated period benefited,
presently the least of ten years, the time until the next "D" check, or the
remaining life of the aircraft. Modifications that significantly enhance the
operating performance or extend the useful lives of aircraft or engines are
capitalized and amortized over the remaining life of the asset.

REVENUE RECOGNITION Tickets sold are initially deferred as "Air traffic
liability". Passenger revenue is recognized when transportation is provided.
"Air traffic liability" primarily represents tickets sold for future travel
dates and estimated refunds, or exchanges, of tickets sold for past travel
dates. Estimated refunds and exchanges, including the underlying assumptions,
are evaluated each reporting period with resulting adjustments included in
"Passenger revenue". Factors which may affect estimated refunds include, but may
not be limited to, the Company's refund policy, the mix of refundable and
non-refundable fares, and fare sale activity. The Company's estimation
techniques have been consistently applied from year to year; however, as with
any estimates, actual refund and

27

exchange activity may vary from estimated amounts. The Company believes it is
unlikely that materially different estimates would be reported under different
assumptions or conditions.

FREQUENT FLYER PROGRAM The Company accrues the estimated incremental cost of
providing free travel for awards earned under its Rapid Rewards frequent flyer
program. The Company also sells flight segment credits and related services to
companies participating in its Rapid Rewards frequent flyer program. Prior to
2000, revenue from the sale of flight segment credits was recognized when the
credits were sold. However, beginning January 1, 2000, funds received from the
sale of flight segment credits and associated with future travel is deferred and
recognized as Passenger revenue when the ultimate free travel awards are flown
or the credits expire unused. See Note 2.

ADVERTISING The Company expenses the costs of advertising as incurred.
Advertising expense for the years ended December 31, 2001, 2000, and 1999 was
$147.6 million, $141.3 million, and $137.7 million, respectively.

STOCK-BASED EMPLOYEE COMPENSATION Pursuant to Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation", the
Company accounts for stock-based compensation plans utilizing the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees and related Interpretations". See Note 12.

FINANCIAL DERIVATIVE INSTRUMENTS The Company utilizes a variety of derivative
instruments, including both crude oil and heating oil based derivatives, to
hedge a portion of its exposure to jet fuel price increases. These instruments
consist primarily of purchased call options, collar structures, and fixed price
swap agreements. Prior to 2001, the net cost paid for option premiums and gains
and losses on all financial derivative instruments, including those terminated
or settled early, were deferred and charged or credited to fuel expense in the
same month that the underlying jet fuel being hedged was used. However,
beginning January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activities", as amended, which changed the way it accounts for financial
derivative instruments. See Note 2 and Note 9.

RECENT ACCOUNTING DEVELOPMENTS During 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 143, "Accounting for Asset Retirement Obligations",
which is effective for financial statements issued for fiscal years beginning
after June 15, 2002. The pronouncement addresses the recognition and
re-measurement of obligations associated with the retirement of tangible
long-lived assets. On October 3, 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets", which is effective for
financial statements issued for fiscal years beginning after December 15, 2001.
SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and applies to all
long-lived assets (including discontinued operations). The Company does not
expect these standards to have a material impact on future financial statements
or results of operations.

2. ACCOUNTING CHANGES

Effective January 1, 2001, the Company adopted SFAS 133. SFAS 133 requires the
Company to record all financial derivative instruments on its balance sheet at
fair value. Derivatives that are not designated as

28

hedges must be adjusted to fair value through income. If a derivative is
designated as a hedge, depending on the nature of the hedge, changes in its fair
value that are considered to be effective, as defined, either offset the change
in fair value of the hedged assets, liabilities, or firm commitments through
earnings or are recorded in "Accumulated other comprehensive income (loss)"
until the hedged item is recorded in earnings. Any portion of a change in a
derivative's fair value that is considered to be ineffective, as defined, is
recorded immediately in "Other (gains) losses, net" in the Consolidated
Statement of Income. Any portion of a change in a derivative's fair value that
the Company elects to exclude from its measurement of effectiveness is required
to be recorded immediately in earnings.

Under the rules established by SFAS 133, the Company has alternatives in
accounting for its financial derivative instruments. The Company primarily uses
financial derivative instruments to hedge its exposure to jet fuel price
increases and accounts for these derivatives as cash flow hedges, as defined. In
accordance with SFAS 133, the Company must comply with detailed rules and strict
documentation requirements prior to beginning hedge accounting. As required by
SFAS 133, the Company assesses the effectiveness of each of its individual
hedges on a quarterly basis. The Company also examines the effectiveness of its
entire hedging program on a quarterly basis utilizing statistical analysis. This
analysis involves utilizing regression and other statistical analysis which
compare changes in the price of jet fuel to changes in the prices of the
commodities used for hedging purposes (crude oil and heating oil). If these
statistical techniques do not produce results within certain predetermined
confidence levels, the Company could lose its ability to utilize hedge
accounting, which could cause the Company to recognize all gains and losses on
financial derivative instruments in earnings in the periods following the
determination that the Company no longer qualified for hedge accounting. This
could, in turn, depending on the materiality of periodic changes in derivative
fair values, increase the volatility of the Company's future earnings.

Upon adoption of SFAS 133, the Company recorded the fair value of its fuel
derivative instruments in the Consolidated Balance Sheet and a deferred gain of
$46.1 million, net of tax, in "Accumulated other comprehensive income (loss)".
See Note 10 for further information on Comprehensive income. During 2001, the
Company recognized approximately $8.2 million as a net expense in "Other (gains)
losses, net", related to the ineffectiveness of its hedges. During 2001, the
Company recognized approximately $17.5 million of net expense, related to
amounts excluded from the Company's measurements of hedge effectiveness, in
"Other (gains) losses, (net)". The 2001 adoption of SFAS 133 has resulted in
more volatility in the Company's financial statements than in the past due to
the changes in market values of its derivative instruments and some
ineffectiveness that has been experienced in its fuel hedges. See Note 9 for
further information on the Company's derivative instruments.

Effective January 1, 2000, the Company adopted Staff Accounting Bulletin 101
(SAB 101) issued by the Securities and Exchange Commission in December 1999. As
a result of adopting SAB 101, the Company changed the way it recognizes revenue
from the sale of flight segment credits to companies participating in its Rapid
Rewards frequent flyer program. Prior to the issuance of SAB 101, the Company
recorded revenue in "Other revenue" when flight segment credits were sold,
consistent with most other major airlines. Beginning January 1, 2000, the
Company recognizes Passenger revenue when free travel awards resulting from the
flight segment credits sold are flown or credits expire unused. Due to this
change, the Company recorded a cumulative effect charge in first quarter 2000 of
$22.1 million (net of income taxes of $14.0 million) or $.03 per share, basic
and diluted. Adopting this method of accounting for 1999 would have reduced the
Company's Net income by $3.9 million or $.01 per basic share. Net income per
share, diluted, would not have changed.

29

Effective January 1, 1999, the Company revised the estimated useful lives of its
737-300 and -500 aircraft from 20 years to 23 years. This change was the result
of the Company's assessment of the remaining useful lives of the aircraft based
on the manufacturer's design lives, the Company's increased average aircraft
stage (trip) length, and the Company's previous experience. The effect of this
change was to reduce depreciation expense approximately $25.7 million and
increase net income per share, diluted, by $.02 for the year ended December 31,
1999.

3. FEDERAL GRANTS AND SPECIAL CHARGES RELATED TO TERRORIST ATTACKS

On September 11, 2001, terrorists hijacked and used two American Airlines, Inc.
aircraft and two United Air Lines, Inc. aircraft in terrorist attacks on the
United States (terrorist attacks). As a result of these terrorist attacks, the
Federal Aviation Administration (FAA) immediately suspended all commercial
airline flights on the morning of September 11. The Company resumed flight
activity on September 14 and was operating its normal pre-September 11 flight
schedule by September 18, 2001. From September 11 until the Company resumed
flight operations on September 14, Southwest cancelled approximately 9,000
flights.

On September 22, 2001, President Bush signed into law the Air Transportation
Safety and System Stabilization Act (the Act). The Act provides for up to $5
billion in cash grants to qualifying U.S. airlines and freight carriers to
compensate for direct and incremental losses, as defined in the Act, from
September 11, 2001 through December 31, 2001, associated with the terrorist
attacks. Each airline's total eligible grant is being determined based on that
airline's percentage of ASMs during August 2001 to total eligible carriers' ASMs
for August 2001, less an undetermined amount set aside for eligible carriers
that provide services not measured by ASMs. The Department of Transportation
(DOT) will make the final determination of the amount of eligible direct and
incremental losses incurred by each airline. Direct and incremental losses,
while defined generally in the Act, are subject to interpretation by the DOT.
Lastly, final applications for grants must be accompanied by Agreed Upon
Procedures reports from independent accountants and may be subject to additional
audit or review by the DOT and Congress.

During third quarter and fourth quarter 2001, the Company recognized in "Other
gains" approximately $235 million from grants under the Act. The Company
believes its actual direct and incremental losses related to the September 11
terrorist attacks will exceed the total amount for which the Company will be
ultimately eligible. The Company may recognize up to approximately $50 million
in additional amounts during 2002 from the Act upon completion and approval of
the final application based on the DOT's final interpretations of the Act.
However, due to many uncertainties regarding the interpretation of the Act, the
Company believed that recognizing gains in excess of the $235 million in 2001
was not appropriate.

In addition, the Company recorded special charges of $48 million in 2001 arising
from the terrorist attacks. Total special charges included a $30 million
reduction in "Passenger revenue" resulting from refunds of nonrefundable fares,
$13 million in charges to "Other operating expenses" for write-downs of various
assets due to impairment, and other charges that are included in "Other (gains)
losses, net".

30

4. COMMITMENTS

In response to the decrease in demand for air travel since the terrorist
attacks, the Company modified its schedule for future aircraft deliveries and
the timing of its future capital expenditure commitments. In November 2001,
Southwest entered into a trust arrangement with a special purpose entity (the
Trust) and assigned its purchase agreement with Boeing to the Trust with respect
to 19 Boeing 737-700 aircraft originally scheduled to be delivered from
September 2001 through April 2002. Southwest subsequently entered into a
purchase agreement with the Trust to purchase the aircraft at new delivery dates
from January 2002 through April 2003. As of December 31, 2001, the Trust has
purchased a total of eleven completed aircraft, and the remaining eight aircraft
will be purchased by the Trust from Boeing when the aircraft are completed in
2002. Southwest has the option to accelerate purchases from the Trust at any
time.

Although Southwest does not have legal title to the assets of the Trust and has
not guaranteed the liabilities of the Trust, Southwest does exercise certain
rights of ownership over the Trust assets. Consequently, the assets (i.e.,
"Flight equipment" and "Deposits on flight equipment purchase contracts") and
associated liabilities (i.e., "Aircraft purchase obligations") of the Trust have
been recorded in the accompanying Consolidated Balance Sheet as of December 31,
2001.

The Company's contractual purchase commitments consist primarily of scheduled
aircraft acquisitions. Excluding the aircraft acquired or to be acquired by the
Trust, the Company has contractual purchase commitments with Boeing for no
737-700 aircraft deliveries in 2002, 13 scheduled for delivery in 2003, 23 in
2004, 24 in 2005, 22 in 2006, and 31 thereafter. In addition, the Company has
options to purchase up to 87 737-700s during 2004-2008 and purchase rights for
an additional 217 737-700s during 2007-2012. The Company has the option, which
must be exercised two years prior to the contractual delivery date, to
substitute 737-600s or 737-800s for the 737-700s. Including the amounts
associated with the Trust that are included as liabilities in the Company's
Consolidated Balance Sheet as of December 31, 2001, aggregate funding needed for
firm commitments is approximately $3.7 billion, subject to adjustments for
inflation, due as follows: $319 million in 2002, $689 million in 2003, $685
million in 2004, $719 million in 2005, $641 million in 2006, and $622 million
thereafter.

5. ACCRUED LIABILITIES

6. SHORT-TERM BORROWINGS

In September 2001, the Company borrowed the full $475 million available under
its unsecured revolving credit line with a group of banks. Borrowings under the
credit line bear interest at six-month LIBOR plus 17 basis points and amounts
are repayable on or before May 6, 2002. The interest rate (approximately 3.26%

31

as of December 31, 2001), however, may change based on changes in the Company's
credit rating. The Company intends to repay the borrowings in full prior to the
due date with either cash on hand or proceeds from the issuance of long-term
debt securities. The full $475 million is classified as a current liability in
the Consolidated Balance Sheet at December 31, 2001. There were no outstanding
borrowings under this agreement at December 31, 2000.

7. LONG-TERM DEBT

On October 30, 2001, the Company issued $614.3 million Pass Through Certificates
consisting of $150.0 million 5.1% Class A-1 certificates, $375.0 million 5.5%
Class A-2 certificates, and $89.3 million 6.1% Class B certificates. A separate
trust was established for each class of certificates. The trusts used the
proceeds from the sale of certificates to acquire equipment notes, which were
issued by Southwest on a full recourse basis. Payments on the equipment notes
held in each trust will be passed through to the holders of certificates of such
trust. The equipment notes were issued for each of 29 Boeing 737-700 aircraft
owned by Southwest and are secured by a mortgage on such aircraft. Interest on
the equipment notes held for the certificates is payable semiannually, beginning
May 1, 2002. Beginning May 1, 2002, principal payments on the equipment notes
held for the Class A-1 certificates are due semiannually until the balance of
the certificates mature on May 1, 2006. The entire principal of the equipment
notes for the Class A-2 and Class B certificates are scheduled for payment on
November 1, 2006.

In July 2001, the Company redeemed $100 million of senior unsecured 9.4% Notes
originally issued in 1991.

In fourth quarter 1999, the Company issued $200 million of floating rate
Aircraft Secured Notes (the Notes), due 2004. The Notes are funded by a bank
through a commercial paper conduit program and are secured by eight aircraft.
Interest rates on the Notes are based on the conduit's actual commercial paper
rate, plus fees, for each period and are expected to average approximately LIBOR
plus 36 basis points over the term of the Notes. Interest is payable monthly and
the Company can prepay the Notes in whole or in part prior to maturity.

32

Also in fourth quarter 1999, the Company entered into two identical 13-year
floating rate financing arrangements, whereby it effectively borrowed a total of
$56 million from French banking partnerships. For presentation purposes, the
Company has classified these identical borrowings as one $56 million
transaction. The effective rate of interest over the 13-year term of the loans
is LIBOR plus 32 basis points. Principal and interest are payable semi-annually
on June 30 and December 31 for each of the loans and the Company may terminate
the arrangements in any year on either of those dates, with certain conditions.
The Company has pledged two aircraft as collateral for the entire transaction.

On February 28, 1997, the Company issued $100 million of senior unsecured 7 3/8%
Debentures due March 1, 2027. Interest is payable semi-annually on March 1 and
September 1. The Debentures may be redeemed, at the option of the Company, in
whole at any time or in part from time to time, at a redemption price equal to
the greater of the principal amount of the Debentures plus accrued interest at
the date of redemption or the sum of the present values of the remaining
scheduled payments of principal and interest thereon, discounted to the date of
redemption at the comparable treasury rate plus 20 basis points, plus accrued
interest at the date of redemption.

During 1995, the Company issued $100 million of senior unsecured 8% Notes due
March 1, 2005. Interest is payable semi-annually on March 1 and September 1. The
Notes are not redeemable prior to maturity.

During 1992, the Company issued $100 million of senior unsecured 7 7/8% Notes
due September 1, 2007. Interest is payable semi-annually on March 1 and
September 1. The Notes are not redeemable prior to maturity.

During 1991, the Company issued $100 million of senior unsecured 8 3/4% Notes
due October 15, 2003. Interest on the Notes is payable semi-annually. The Notes
are not redeemable prior to maturity.

The net book value of the assets pledged as collateral for the Company's secured
borrowings, primarily aircraft and engines, was $958.0 million at December 31,
2001.

As of December 31, 2001, aggregate annual principal maturities for the five-year
period ending December 31, 2006 were $40 million in 2002, $130 million in 2003,
$232 million in 2004, $142 million in 2005, $541 million in 2006, and $291
million thereafter.

8. LEASES

Total rental expense for operating leases charged to operations in 2001, 2000,
and 1999 was $358.6 million, $330.7 million, and $318.2 million, respectively.
The majority of the Company's terminal operations space, as well as 92 aircraft,
were under operating leases at December 31, 2001. The amounts applicable to
capital leases included in property and equipment were:

33

Future minimum lease payments under capital leases and noncancelable operating
leases with initial or remaining terms in excess of one year at December 31,
2001, were:

The aircraft leases generally can be renewed at rates based on fair market value
at the end of the lease term for one to five years. Most aircraft leases have
purchase options at or near the end of the lease term at fair market value,
generally limited to a stated percentage of the lessor's defined cost of the
aircraft.

9. DERIVATIVE AND FINANCIAL INSTRUMENTS

Airline operators are inherently dependent upon energy to operate and,
therefore, are impacted by changes in jet fuel prices. Jet fuel and oil consumed
in 2001, 2000, and 1999 represented approximately 15.6, 17.4 percent, and 12.5
percent of Southwest's operating expenses, respectively. The Company endeavors
to acquire jet fuel at the lowest possible prices. Because jet fuel is not
traded on an organized futures exchange, liquidity for hedging is limited.
However, the Company has found that both crude oil and heating oil contracts are
effective commodities for hedging jet fuel. The Company has financial derivative
instruments in the form of the types of hedges it utilizes to decrease its
exposure to jet fuel price increases. The Company does not purchase or hold any
derivative financial instruments for trading purposes.

The Company utilizes financial derivative instruments for both short-term and
long-term time frames when it appears the Company can take advantage of market
conditions. At December 31, 2001, the Company had a mixture of purchased call
options, collar structures, and fixed price swap agreements in place to hedge
approximately 60 percent of its 2002 total anticipated jet fuel requirements,
approximately 47 percent of its 2003 total anticipated jet fuel requirements,
and a small portion of its 2004-2005 total anticipated jet fuel requirements. As
of December 31, 2001, the majority of the Company's 2002 hedges are effectively
heating oil-based positions in the form of option contracts. All remaining hedge
positions are crude oil-based positions.

34

During 2001, 2000, and 1999, the Company recognized gains in "Fuel and oil"
expense of $79.9 million, $113.5 million, and $14.8 million, respectively, from
hedging activities. At December 31, 2001 and 2000, approximately $8.2 million
and $49.9 million, respectively, was due from third parties from expired
derivative contracts, and accordingly, are included in "Accounts and other
receivables" in the accompanying Consolidated Balance Sheet. The Company
accounts for its fuel hedge derivative instruments as cash flow hedges, as
defined. Therefore, all changes in fair value that are considered to be
effective are recorded in "Accumulated other comprehensive income (loss)" until
the underlying jet fuel is consumed. The fair value of the Company's financial
derivative instruments at December 31, 2001, was a net liability of
approximately $19.4 million and is classified as "Accrued liabilities" in the
Consolidated Balance Sheet. The fair value of the derivative instruments,
depending on the type of instrument, was determined by the use of present value
methods or standard option value models with assumptions about commodity prices
based on those observed in underlying markets.

As of December 31, 2001, the Company had approximately $31.1 million in
unrealized losses, net of tax, in "Accumulated other comprehensive income
(loss)" related to fuel hedges. Included in this total are approximately $22.2
million in net unrealized losses that are expected to be realized in earnings
during 2002. Upon the adoption of SFAS 133 on January 1, 2001, the Company
recorded unrealized fuel hedge gains of $46.1 million, net of tax, of which
$45.5 million was realized in earnings during 2001.

Outstanding financial derivative instruments expose the Company to credit loss
in the event of nonperformance by the counterparties to the agreements. However,
the Company does not expect any of the counterparties to fail to meet their
obligations. The credit exposure related to these financial instruments is
represented by the fair value of contracts with a positive fair value at the
reporting date. To manage credit risk, the Company selects and periodically
reviews counterparties based on credit ratings, limits its exposure to a single
counterparty, and monitors the market position of the program and its relative
market position with each counterparty. At December 31, 2001, the Company had
agreements with five counterparties containing early termination rights and/or
bilateral collateral provisions whereby security is required if market risk
exposure exceeds a specified threshold amount or credit rating falls below
certain levels. Neither the Company nor the counterparties exceeded such
threshold amounts at December 31, 2001. The Company is in the process of
negotiating similar agreements with other counterparties.

The carrying amounts and estimated fair values of the Company's long-term debt
at December 31, 2001 were as follows:

The estimated fair values of the Company's long-term debt were based on quoted
market prices. The carrying values of all other financial instruments
approximate their fair value.

35

10. COMPREHENSIVE INCOME

Comprehensive income includes changes in the fair value of certain financial
derivative instruments, which qualify for hedge accounting, and unrealized gains
and losses on certain investments. Comprehensive income totaled $479.6 million
for 2001. The difference between Net income and Comprehensive income for 2001 is
as follows:

A rollforward of the amounts included in "Accumulated other comprehensive income
(loss)", net of taxes, is shown below:

11. COMMON STOCK

The Company has one class of common stock. Holders of shares of common stock are
entitled to receive dividends when and if declared by the Board of Directors and
are entitled to one vote per share on all matters submitted to a vote of the
shareholders.

At December 31, 2001, the Company had common stock reserved for issuance
pursuant to Employee stock benefit plans (140.3 million shares authorized of
which 40.2 million shares have not yet been granted) and upon exercise of rights
(323.0 million shares) pursuant to the Common Share Purchase Rights Agreement,
as amended (Agreement).

Pursuant to the Agreement, each outstanding share of the Company's common stock
is accompanied by one common share purchase right (Right). Each Right is
exercisable only in the event of a proposed takeover, as defined by the
Agreement. The Company may redeem the Rights at $.0022 per Right prior to the
time that 15 percent of the common stock has been acquired by a person or group.
If the Company is acquired, as

36

defined in the Agreement, each Right will entitle its holder to purchase for
$3.29 that number of the acquiring company's or the Company's common shares, as
provided in the Agreement, having a market value of two times the exercise price
of the Right. The Rights will expire no later than July 30, 2006.

On May 20, 1999, the Company's Board of Directors declared a three-for-two stock
split, distributing 168.0 million shares on July 19, 1999. On January 18, 2001,
the Company's Board of Directors declared a three-for-two stock split,
distributing 253.9 million shares on February 15, 2001. Unless otherwise stated,
all share and per share data presented in the accompanying consolidated
financial statements and notes thereto have been restated to give effect to
these stock splits.

On September 23, 1999, the Company's Board of Directors authorized the
repurchase of up to $250 million of its outstanding common stock. This program
to date has resulted in the repurchase of 18.3 million shares at an average cost
of $10.85 per share between October 1999 and December 2000. No shares were
repurchased in 2001. All of these acquired shares were subsequently reissued
under Employee stock plans.

12. STOCK PLANS

At December 31, 2001, the Company had twelve stock-based compensation plans,
excluding a plan covering the Company's Board of Directors and plans related to
employment contracts with certain Executive Officers of the Company. The Company
applies APB 25 and related Interpretations in accounting for its stock-based
compensation. Accordingly, no compensation expense is recognized for its fixed
option plans because the exercise prices of the Company's Employee stock options
equal or exceed the market prices of the underlying stock on the dates of grant.
Compensation expense for other stock options is not material.

Of the Company's twelve stock-based compensation plans, eleven are fixed option
plans that cover various Employee groups. Under these plans, the Company may
grant up to 141 million shares of common stock, of which 32.4 million shares
were available for granting in future periods as of December 31, 2001. Under
plans covered by collective bargaining agreements, options granted to Employees
generally have terms similar to the term of, and vest in annual increments over
the remaining life of, the respective collective bargaining agreement. Options
granted to Employees not covered by collective bargaining agreements have
ten-year terms and vest and become fully exercisable over three, five, or ten
years of continued employment, depending upon the grant type.

Aggregated information regarding the Company's eleven fixed stock option plans,
as adjusted for stock splits, is summarized below:

37

The following table summarizes information about stock options outstanding under
the eleven fixed option plans at December 31, 2001:

Under the amended 1991 Employee Stock Purchase Plan (ESPP), at December 31,
2001, the Company is authorized to issue up to a remaining balance of 7.8
million shares of common stock to Employees of the Company at a price equal to
90 percent of the market value at the end of each purchase period. Common stock
purchases are paid for through periodic payroll deductions. Participants under
the plan received 1,025,000 shares in 2001, 1,029,000 shares in 2000, and
974,000 shares in 1999 at average prices of $16.42, $13.34, and $10.83,
respectively.

Pro forma information regarding net income and net income per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
Employee stock-based compensation plans and other stock options under the fair
value method of SFAS 123. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following

38

weighted-average assumptions used for grants under the fixed option plans in
2001, 2000, and 1999, respectively: dividend yield of .065 percent, .10 percent,
and .12 percent; expected volatility of 34.80 percent, 34.87 percent, and 35.66
percent; risk-free interest rate of 4.46 percent, 5.04 percent, and 6.68
percent; and expected lives ranging from 5 years to 6 years, depending upon the
type of grant.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's Employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its Employee stock options.

The fair value of options granted under the fixed option plans during 2001
ranged from $5.69 to $9.11. The fair value of options granted under the fixed
option plans during 2000 ranged from $4.47 to $9.79. The fair value of options
granted under the fixed option plans during 1999 ranged from $4.17 to $5.87. The
weighted-average fair value of each purchase right under the ESPP granted in
2001, 2000, and 1999, which is equal to the ten percent discount from the market
value of the common stock at the end of each purchase period, was $1.82, $1.48,
and $1.17, respectively.

For purposes of pro forma disclosures, the estimated fair value of stock-based
compensation plans and other options is amortized to expense primarily over the
vesting period. The Company's pro forma net income and net income per share are
as follows:

As required, the pro forma disclosures above include only options granted since
January 1, 1995. Consequently, the effects of applying SFAS 123 for providing
pro forma disclosures may not be representative of the effects on reported net
income for future years until all options outstanding are included in the pro
forma disclosures.

13. EMPLOYEE RETIREMENT PLANS

The Company has defined contribution plans covering substantially all of
Southwest's Employees. The Southwest Airlines Co. Profitsharing Plan is a money
purchase defined contribution plan and Employee stock purchase plan. The Company
also sponsors Employee savings plans under section 401(k) of the

39

Internal Revenue Code, which include Company matching contributions. The 401(k)
plans cover substantially all Employees. Contributions under all defined
contribution plans are based primarily on Employee compensation and performance
of the Company.

Company contributions to all retirement plans expensed in 2001, 2000, and 1999
were $214.6 million, $241.5 million, and $192.0 million, respectively.

14. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of
deferred tax assets and liabilities at December 31, 2001 and 2000, are as
follows:

The provision for income taxes is composed of the following:

40

The Company received a statutory notice of deficiency from the Internal Revenue
Service (IRS) in July 1995 in which the IRS proposed to disallow deductions
claimed by the Company on its federal income tax returns for the taxable years
1989 through 1991 for the costs of certain aircraft inspection and maintenance
procedures. In response to the statutory notice of deficiency, the Company filed
a petition in the United States Tax Court on October 30, 1997, seeking a
determination that the IRS erred in disallowing the deductions claimed by the
Company and there is no deficiency in the Company's tax liability for the
taxable years in issue. On December 21, 2000, the national office of the IRS
published a revenue ruling in which it concluded that aircraft inspection and
maintenance is currently deductible as an ordinary and necessary business
expense. In accordance with the revenue ruling, the IRS conceded the proposed
adjustments to the deductions claimed by the Company for aircraft inspection and
maintenance expense, and on June 1, 2001, a decision was entered by the Tax
Court holding that there is no deficiency in income tax for the taxable years
1989 through 1991.

The IRS similarly proposed to disallow deductions claimed by the Company on its
federal income tax returns for the taxable years 1992 through 1994 primarily
related to the costs of certain aircraft inspection and maintenance expenses.
During 2001 the IRS conceded the proposed adjustments to the deductions claimed
for aircraft inspection and maintenance expenses. Management believes the final
resolution of this controversy will not have a material adverse effect upon the
financial position or results of operations of the Company.

The effective tax rate on income before income taxes differed from the federal
income tax statutory rate for the following reasons:

41

15. NET INCOME PER SHARE

The following table sets forth the computation of net income per share, basic
and diluted:

The Company has excluded 5.7 million, 11.7 million, and 6.7 million shares from
its calculations of net income per share, diluted, in 2001, 2000, and 1999,
respectively, as they represent antidilutive stock options for the respective
periods presented.

42

REPORT OF INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS AND SHAREHOLDERS
SOUTHWEST AIRLINES CO.

We have audited the accompanying consolidated balance sheets of Southwest
Airlines Co. as of December 31, 2001 and 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southwest Airlines
Co. at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

As discussed in Note 2 to the financial statements, in 2001 the Company changed
its method of accounting for derivative financial instruments and in 2000 the
Company changed its method of accounting for the sale of flight segment credits.

ERNST & YOUNG LLP

Dallas, Texas
January 16, 2002

43

QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

(1) Excludes cumulative effect of accounting change of $22.1 million ($.03 per
share, basic and diluted).

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

See "Election of Directors" incorporated herein by reference from the definitive
Proxy Statement for Southwest's Annual Meeting of Shareholders to be held May
15, 2002. See "Executive Officers of the Registrant" in Part I following Item 4
for information relating to executive officers.

44

ITEM 11. EXECUTIVE COMPENSATION

See "Compensation of Executive Officers," incorporated herein by reference from
the definitive Proxy Statement for Southwest's Annual Meeting of Shareholders to
be held May 15, 2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

See "Voting Securities and Principal Shareholders," incorporated herein by
reference from the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 15, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See "Election of Directors" incorporated herein by reference from the definitive
Proxy Statement for Southwest's Annual Meeting of Shareholders to be held May
15, 2002.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. Financial Statements:

The financial statements included in Item 8 above are filed as part of
this annual report.

2. Financial Statement Schedules:

There are no financial statement schedules filed as part of this annual
report, since the required information is included in the consolidated
financial statements, including the notes thereto, or the circumstances
requiring inclusion of such schedules are not present.

3. Exhibits:

3.1 Restated Articles of Incorporation of Southwest (incorporated by reference
to Exhibit 4.1 to Southwest's Registration Statement on Form S-3 (File No.
33-52155)); Amendment to Restated Articles of Incorporation of Southwest
(incorporated by reference to Exhibit 4.1 to Southwest's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996 (File No. 1-7259));
Amendment to Restated Articles of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 (File No. 1-7259)); Amendment to
Restated Articles of Incorporation of Southwest (incorporated by reference
to Exhibit 4.2 to Southwest's Registration Statement on Form S-8 (File No.
333-82735); Amendment to Restated Articles of Incorporation of Southwest
(incorporated by reference to Exhibit 3.1 to Southwest's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001 (File No. 1-7259).

3.2 Bylaws of Southwest, as amended through May 2001 (incorporated by
reference to Exhibit 3.2 to Southwest's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001 (File No. 1-7259).

4.1 Restated Credit Agreement dated May 6, 1997, between Southwest and Bank of
America National Trust and Savings Association, and the other banks named
therein, and such banks. (incorporated by reference to Exhibit 4.1 to
Southwest's Annual Report on Form 10-K for the year ended December 31,
1997 (File No. 1-7259)); First Amendment to Competitive Advance and
Revolving Credit Facility Agreement dated August 7, 1998 (incorporated by
reference to Exhibit 4.1 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 1-7259); Second Amendment to
Competitive Advance and Revolving Credit Facility Agreement dated January
20, 1999

45

(incorporated by reference to Exhibit 4.1 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1998 (File No. 1-7259)).

4.2 Specimen certificate representing Common Stock of Southwest (incorporated
by reference to Exhibit 4.2 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1- 7259)).

4.3 Amended and Restated Rights Agreement dated July 18, 1996 between
Southwest and Continental Stock Transfer & Trust Company, as Rights Agent
(incorporated by reference to Exhibit 1, Southwest's Registration
Statement on Form 8-A/A dated August 12, 1996 (File No. 1-7259));
Amendment No. 1 to Rights Agreement dated March 15, 2001 (incorporated by
reference to Exhibit 1 to Form 8-A Amendment No. 3 dated April 25, 2001
(File No. 1-7529)).

4.4 Indenture dated as of June 20, 1991 between Southwest Airlines Co. and
Bank of New York, successor to NationsBank of Texas, N.A. (formerly NCNB
Texas National Bank), Trustee (incorporated by reference to Exhibit 4.1 to
Southwest's Current Report on Form 8-K dated June 24, 1991 (File No.
1-7259)).

4.5 Indenture dated as of February 25, 1997 between the Company and U.S. Trust
Company of Texas, N.A. (incorporated by reference to Exhibit 4.1 to
Southwest's Annual Report on Form 10-K for the year ended December 31,
1996 (File No. 1-7259)).

Southwest is not filing any other instruments evidencing any indebtedness
because the total amount of securities authorized under any single such
instrument does not exceed 10% of its total consolidated assets. Copies of
such instruments will be furnished to the Securities and Exchange
Commission upon request.

10.1 Purchase Agreement No. 1810, dated January 19, 1994 between The Boeing
Company and Southwest (incorporated by reference to Exhibit 10.4 to
Southwest's Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-7259)); Supplemental Agreement No. 1. (incorporated by
reference to Exhibit 10.3 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1996 (File No. 1-7259)); Supplemental
Agreements No. 2, 3 and 4 (incorporated by reference to Exhibit 10.2 to
Southwest's Annual Report on form 10-K for the year ended December 31,
1997 (File No. 1-7259)); Supplemental Agreements Nos. 5, 6, and 7;
(incorporated by reference to Exhibit 10.1 to Southwest's Annual Report on
form 10-K for the year ended December 31, 1998 (File No. 1- 7259));
Supplemental Agreements Nos. 8, 9, and 10 (incorporated by reference to
Exhibit 10.1 to Southwest's Annual Report on form 10-K for the year ended
December 31, 1999 (File No. 1-7259)); Supplemental Agreements Nos. 11, 12,
13 and 14 (incorporated by reference to Exhibit 10.1 to Southwest's
Quarterly Report on form 10-Q for the quarter ended September 30, 2000
(File No. 1- 7259)); Supplemental Agreements Nos. 15, 16, 17, 18 and 19
(incorporated by reference to Exhibit 10.1 to Southwest's Quarterly Report
on form 10-Q for the quarter ended September 30, 2001 (File No. 1-7259)).

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted
and has been filed separately with the Securities and Exchange Commission
pursuant to a Confidential Treatment Application filed with the
Commission.

10.2 Aircraft Acquisition and Sale Agreement dated as of November 13, 2001
among The Amor Trust, Wilmington Trust Company, Wells Fargo Bank
Northwest, National Association and Southwest (incorporated by reference
to Exhibit 10.2 to Southwest's Quarterly Report on form 10-Q for the
quarter ended September 30, 2001 (File No. 1-7259)).

46

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted
and has been filed separately with the Securities and Exchange Commission
pursuant to a Confidential Treatment Application filed with the
Commission.

10.3 Purchase Agreement Assignment dated as of November 13, 2001 between The
Amor Trust and Southwest (incorporated by reference to Exhibit 10.3 to
Southwest's Quarterly Report on form 10-Q for the quarter ended September
30, 2001 (File No. 1-7259)).

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted
and has been filed separately with the Securities and Exchange Commission
pursuant to a Confidential Treatment Application filed with the
Commission.

The following exhibits filed under paragraph 10 of Item 601 are the
Company's compensation plans and arrangements.

10.4 Form of Executive Employment Agreement between Southwest and certain key
employees pursuant to Executive Service Recognition Plan (incorporated by
reference to Exhibit 28 to Southwest Quarterly Report on Form 10-Q for the
quarter ended June 30, 1987 (File No. 1-7259)).

10.5 1992 stock option agreements between Southwest and Herbert D. Kelleher
(incorporated by reference to Exhibit 10.8 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1991 (File No. 1-7259)).

10.6 1996 stock option agreements between Southwest and Herbert D. Kelleher
(incorporated by reference to Exhibit 10.8 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1996 (File No. 1-7259)).

10.7 2001 employment agreement and related stock option agreements between
Southwest and Herbert D. Kelleher (incorporated by reference to Exhibit 10
to Southwest's Quarterly Report on Form 10-Q for the quarter ended March
31, 2001 (File No. 1-7259)).

10.8 1991 Incentive Stock Option Plan (incorporated by reference to Exhibit 4.1
to Registration Statement on Form S-8 (File No. 33-40652)).

10.9 1991 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit
4.2 to Registration Statement on Form S-8 (File No. 33-40652)).

10.10 1991 Employee Stock Purchase Plan as amended September 21, 2000
(incorporated by reference to Exhibit 4 to Amendment No. 1 to Registration
Statement on Form S-8 (file No. 333-40653)).

10.11 Southwest Airlines Co. Profit Sharing Plan (incorporated by reference to
Exhibit 10.8 to Southwest's Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 1-729)); Amendment No. 1 to Southwest Airlines
Co. Profit Sharing Plan.

10.12 Southwest Airlines Co. 401(k) Plan.

10.13 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.14 to Southwest's Annual Report
on Form 10-K for the year ended December 31, 1994 (File No. 1-7259)).

10.14 1996 Incentive Stock Option Plan (incorporated by reference to Exhibit 4.1
to Registration Statement on Form S-8 (File No. 333-20275)).

47

10.15 1996 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit
4.2 to Registration Statement on Form S-8 (File No. 333-20275)).

10.16 Employment Agreement dated as of June 19, 2001 between Southwest and James
F. Parker.

10.17 Employment Agreement dated as of June 19, 2001 between Southwest and
Colleen C. Barrett.

22 Subsidiaries of Southwest (incorporated by reference to Exhibit 22 to
Southwest's Annual Report on form 10-K for the year ended December 31,
1997 (File No. 1-7259)).

23 Consent of Ernst & Young LLP, Independent Auditors.

A copy of each exhibit may be obtained at a price of 15 cents per page, $10.00
minimum order, by writing to: Director of Investor Relations, Southwest Airlines
Co., P.O. Box 36611, Dallas, Texas 75235-1611.

(b) The following reports on Form 8-K were filed during the fourth quarter of
2001.

On October 3, 2001, Southwest filed a Current Report on Form 8-K for the purpose
of filing the Company's October 3, 2001 press release reporting September 2001
traffic results as Exhibit 99.1.

On October 29, 2001, Southwest filed a Current Report on Form 8-K to file, under
Item 7-Financial Statements and Exhibits, certain documents related to its
Registration Statement on Form S-3 (File No. 333- 71392).

48

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

SOUTHWEST AIRLINES CO.

January 30, 2002
By /s/ Gary C. Kelly
-------------------------------------
Gary C. Kelly
Executive Vice President,
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on January 30, 2002 on behalf of
the registrant and in the capacities indicated.

INDEX TO EXHIBITS

Exhibit 10.2 to Southwest's Annual Report on form 10-K
for the year ended December 31, 1997 (File No.
1-7259)); Supplemental Agreements Nos. 5, 6, and 7;
(incorporated by reference to Exhibit 10.1 to
Southwest's Annual Report on form 10-K for the year
ended December 31, 1998 (File No. 1- 7259));
Supplemental Agreements Nos. 8, 9, and 10 (incorporated
by reference to Exhibit 10.1 to Southwest's Annual
Report on form 10-K for the year ended December 31,
1999 (File No. 1-7259)); Supplemental Agreements Nos.
11, 12, 13 and 14 (incorporated by reference to Exhibit
10.1 to Southwest's Quarterly Report on form 10-Q for
the quarter ended September 30, 2000 (File No. 1-
7259)); Supplemental Agreements Nos. 15, 16, 17, 18 and
19 (incorporated by reference to Exhibit 10.1 to
Southwest's Quarterly Report on form 10-Q for the
quarter ended September 30, 2001 (File No. 1-7259)).

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and has
been filed separately with the Securities and Exchange Commission pursuant to a
Confidential Treatment Application filed with the Commission.

10.2 Aircraft Acquisition and Sale Agreement dated as of
November 13, 2001 among The Amor Trust, Wilmington
Trust Company, Wells Fargo Bank Northwest, National
Association and Southwest (incorporated by reference to
Exhibit 10.2 to Southwest's Quarterly Report on form
10-Q for the quarter ended September 30, 2001 (File No.
1-7259)).

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and has
been filed separately with the Securities and Exchange Commission pursuant to a
Confidential Treatment Application filed with the Commission.

10.3 Purchase Agreement Assignment dated as of November 13,
2001 between The Amor Trust and Southwest (incorporated
by reference to Exhibit 10.3 to Southwest's Quarterly
Report on form 10-Q for the quarter ended September 30,
2001 (File No. 1-7259)).

Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and has
been filed separately with the Securities and Exchange Commission pursuant to a
Confidential Treatment Application filed with the Commission.

The following exhibits filed under paragraph 10 of Item 601 are the Company's
compensation plans and arrangements.

10.4 Form of Executive Employment Agreement between
Southwest and certain key employees pursuant to
Executive Service Recognition Plan (incorporated by
reference to Exhibit 28 to Southwest Quarterly Report
on Form 10-Q for the quarter ended June 30, 1987 (File
No. 1-7259)).

10.5 1992 stock option agreements between Southwest and
Herbert D. Kelleher (incorporated by reference to
Exhibit 10.8 to Southwest's Annual Report on Form 10-K
for the year ended December 31, 1991 (File No.
1-7259)).

10.6 1996 stock option agreements between Southwest and
Herbert D. Kelleher (incorporated by reference to
Exhibit 10.8 to Southwest's Annual Report on Form 10-K
for the year ended December 31, 1996 (File No.
1-7259)).

10.7 2001 employment agreement and related stock option
agreements between Southwest and Herbert D. Kelleher
(incorporated by reference to Exhibit 10 to Southwest's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2001 (File No. 1-7259)).

10.8 1991 Incentive Stock Option Plan (incorporated by
reference to Exhibit 4.1 to Registration Statement on
Form S-8 (File No. 33-40652)).

10.9 1991 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on
Form S-8 (File No. 33-40652)).

10.10 1991 Employee Stock Purchase Plan as amended September
21, 2000 (incorporated by reference to Exhibit 4 to
Amendment No. 1 to Registration Statement on Form S-8
(file No. 333-40653)).

10.11 Southwest Airlines Co. Profit Sharing Plan
(incorporated by reference to Exhibit 10.8 to
Southwest's Annual Report on Form 10-K for the year
ended December 31, 2000 (File No. 1-7259)), Amendment
No. 1 to Southwest Airlines Co. Profit Sharing Plan.

10.12 Southwest Airlines Co. 401(k) Plan.

10.13 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit 10.14
to Southwest's Annual Report on Form 10-K for the year
ended December 31, 1994 (File No. 1-7259)).

10.14 1996 Incentive Stock Option Plan (incorporated by
reference to Exhibit 4.1 to Registration Statement on
Form S-8 (File No. 333-20275)).

10.15 1996 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on
Form S-8 (File No. 333-20275)).

10.16 Employment Agreement dated as of June 19, 2001 between
Southwest and James F. Parker.

10.17 Employment Agreement dated as of June 19, 2001 between
Southwest and Colleen C. Barrett.

22 Subsidiaries of Southwest (incorporated by reference to
Exhibit 22 to Southwest's Annual Report on form 10-K
for the year ended December 31, 1997 (File No.
1-7259)).

23 Consent of Ernst & Young LLP, Independent Auditors.