Welcome to Southwest Airlines fourth quarter 2007 earnings conference call. Today’s conference is being recorded. We have on the call today Gary Kelly, Southwest’s CEO and Laura Wright, the company’s Senior VP Finance and CFO. As a reminder this morning’s call includes forward-looking statements. Such statements are based on the company’s current intent, expectations, and projections and are not guarantees of future performance. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Actual results may differ materially from those expressed in forward-looking statements due to many factors. For additional information regarding these factors, please refer to the company’s earnings press release, as well as its periodic filings with the Securities and Exchange Commission. This morning’s call will also include references to economic results as well as certain other non-GAAP results. A reconciliation of these results with GAAP results is included in the company’s earnings press release, which is posted on Southwest.com. At this time I would like to turn the call over to Gary Kelly for opening remarks. Please go ahead, sir.

Thanks a lot, Steve and we’re sorry to work you so hard there on that opening script, but it’s very important. Thank you all for joining us today as well. First of all I want to thank all of our Southwest employees. We accomplished a great deal in 2007, especially in the fourth quarter. Excluding special items our fourth quarter 2007 was flat compared to 2006 at $0.12 a share. Comparatively, that was the best quarter of the year. Of course, those results fall well below our goals and they must improve but given the financial challenges presented to us in the fourth quarter it was still a very significant accomplishment. Again, I’m very, very proud of our people. It represents our 67th consecutive quarterly profit. 2007 represents our 35th consecutive year of profits. Both of those are unprecedented in the airline industry and truly remarkable in what has been the worst decade in the history of the airline industry. First of all, I was pleased with our improved unit revenue trends in fourth quarter; we were up 3.7%. We had a little bit of softness around the holidays, but overall a really good performance. December showed the most improvement on a monthly year-over-year basis and it was also the best performing month of the year. Obviously we like those kinds of trends. Excluding fuel I was pleased with our cost performance. Our employees deserve all the credit for that. Productivity continues to improve and at the same time our service levels remain very high. Of course, it is critically important that we continue to do everything we can to control our salaries and benefits cost to mitigate higher aircraft engine maintenance costs. I was also very pleased with the performance of our fuel hedging. Laura Wright and our finance…

Thank you, Gary and good morning, everyone including our webcast listeners. With what proved to be significantly more challenging year than anticipated, we’re pleased to report our 35th consecutive year and 67th consecutive quarter of profitability. Despite a softer domestic economy and rising energy costs which had a dampening effect on demand for air travel, we had a record annual operating revenue performance of $9.9 billion. Although our 2007 unit revenues did not improve as much as we had hoped going into the year, we ended the year on an encouraging note with our fourth quarter unit revenues up year over year almost 4%. Our 2007 cost per available seat mile, excluding special items, increased 3.3% over 2006 to $0.0904. This increase was driven largely by an 11.3% increase in our economic fuel prices which reflected $727 million and $675 million in cash hedging gains in 2007 and 2006 respectively. Excluding fuel and special items our capital was up only 0.8%, to $0.0654 for 2007. We’ve done a great job managing our overall cost structure holding our unit costs relatively flat over the last few years. With respect to our 2008 unit cost outlook, we are expecting some inflation, especially in our maintenance area and to a lesser degree our port costs. Moving to our fourth quarter results, our GAAP net income was $111 million or $0.15 per diluted share compared to $57 million or $0.07 per diluted share last year. Excluding FAS 133 Out of Period Items, our fourth quarter 2007 net earnings were $87 million or $0.12 per diluted share. These results exceeded Wall Street’s mean estimate of $0.10 per diluted share and were flat with last year’s EPS. Our fourth quarter 2007 operating revenues grew almost 10% to $2.49 billion. Passenger revenues increased 9% to $2.39 billion.…

Your next question comes from William Green - Morgan Stanley.

I’m wondering if you can comment a little bit about some of the efforts in the industry recently to raise prices. I’m not sure with Southwest how you reacted to that, I know you are somewhat independent in how you approach pricing. I would have thought you might have matched some of it, at least, just given your cost pressures and the fact that your fuel is also becoming a bit more of a challenge now?

That’s obviously a question that we get often in this kind of an environment. Our objective is to raise our revenue production. We have launched some very significant changes for us and for our customers, so our objective right now is to try to prefect that. We have a new fare structure. We’ve got obviously the new Business Select product that you’re familiar with. We have new revenue management techniques that we’re using. The environment, in our view, has been and continues to be a low fare environment. Obviously, the industry has slowed capacity growth and as Laura was reporting in markets that we serve, we’ve actually seen reductions in the supply of seats. So that’s obviously helping better match the demand but if we see opportunities to raise fares we’re going to do that. I think we’ve been pretty clear that our strategy going forward is to try our best to minimize that. Again, I think the economic environment was softer in 2007 than we thought it would be. I don’t think anybody believes that they can raise prices in a recessionary environment. So we’re evaluating the demand and making those kinds of choices on an ongoing basis but prospectively I can’t give you much more. I can’t tell you when or whether we’ll increase fares in the future but pretty happy with what we’re doing on the revenue front since the changes were introduced in November.

If I can shift to labor, do you have any updates that you can share with us? I’m particularly curious, we’ve seen some comments recently here from I think one of your unions about pushing for, it seemed to be compensation but maybe I misunderstood their point. I’m just curious if it’s realistic for us to believe that the contracts that you may be able to negotiate in the future, is there a way for you to get more productivity out of the folks who wish to get labor wage increases or have we really pushed to the limit on that? I don’t know how much productivity has left to go.

Great questions. Our company is very lean and very productive. One of the concerns that I have is that in some of our work groups we are too thinly staffed and we’re incurring too much overtime so we will need to make some adjustment in those cases and that’s not necessarily a new thought. But overall we’ll continue to find opportunities to improve our productivity, Bill. I don’t know that they’ll be as dramatic over the next five years as they have been over the last five years. I don’t think any of us expect that; but there are clearly opportunities to continue to get better. Just to give you a more specific answer to your question, we have two contracts under negotiation and our pile ups have been in negotiation for about a year-and-a-half so obviously I’m hopeful that we can get that wrapped up soon. Our TW555 union that represents our ramp operations and provisioning agents just started a week ago and that’s probably what you’re referring to, Bill, that you heard recently. I think they have communicated what their desires in terms of negotiations but I want those negotiations to take place among our leaders at the bargaining table and not play that out through the media. We have a long history of working very, very well together. I’m proud of the fact that our Southwest people are arguably the best compensated in the airline industry. We’ve never had a pay cut, we’ve never had a layoff and their job security is one of my top priorities. That’s been the case and that will continue to be so and that will be our guidepost here as we negotiate.

Just one quick question for Laura. Can you just clarify, did you say CASM in the first quarter would be up 3% including or excluding fuel?

That’s excluding fuel and special items.

Your next question comes from Mike Lindenberg - Merrill Lynch.

Two questions just right off the top, when you think about some of the economic reports that are out there it seems like the prevailing view is that the States of Arizona, Nevada and California are three of the five states that are in a recession. When you look at the traffic trends and demand in those states and I think, Gary, you guys probably carry more passengers within and probably to and from those states than any other carrier. Can you give us some color on what you’re seeing in demand trends in that part of the country versus elsewhere and your response to it as a proxy for if and when the entire US goes into a recession?

Sure, Mike. I think that we’ve done a lot to be better prepared for changes in the environment in 2007 than ever before. We’ve tried to move off of a fixed fleet schedule, if you will, and therefore a fixed flight schedule to something that is more quickly responsive to economic conditions. We made a lot of progress there, it may not be visible to the outside world but that’s one of the reasons that Laura and I think it’s important to point out that the schedule changes we made in the fourth quarter have turned out to be highly productive and that’s a little different for us. We’re following that up with, for us again a very aggressive pruning of the May schedule and so what we’re talking about right now is what do we do next? Which will be our August 3rd schedule. We’ve got, I don’t know, five, six, seven weeks before we have to produce that. With respect to what we’re seeing, I think our caution looking into 2008 is just more generic. I don’t know that we have seen anything like we did in the first quarter of last year where we saw pretty widespread trend changes that worried us. We’re not seeing that at all right now and that’s what Laura said and what I have said. When we talked about Arizona and California in particular, there’s nothing to report there other than we’ve launched brand new service to San Francisco. We had a 69% plus overall load factor for Southwest Airlines in the fourth quarter and San Francisco matched that so that’s probably the only anecdotal evidence that I can think to offer you that I think is meaningful. The only other thing to perhaps add some color there is we’ve growth Denver…

Regarding the CapEx number, the $1.3 billion for 2008 presumably that’s a gross number and doesn’t reflect the net CapEx as airplanes are sold. If we look at the 22 airplanes, Laura, that you were planning to dispose of in 2008, what would be the mix of aircraft that are just coming off lease versus aircraft that you’re going into the market and selling? Should we anticipate any booked gains on the airplanes that are sold?

Mike, the initial reduction was to reduce our fleet by ten airplanes and we’re in the process of that now and that’s going to be the six leased aircraft being returned and we’ve got four 700s that we’re selling. The second decision to slowdown growth in December is an additional 12 airplanes and as it stands right now it will probably be a mix of about half 737 300 lease returns and half aircraft sales. So in total we are going to have about ten airplanes that will be sold this year between the first, second and third quarter. We will generate pretty significant proceeds which will reduce our net CapEx for the year by $200 million to $300 million. We do anticipate booked gains when we sell those airplanes as well.

I hope they’re big gains too.

Your next question comes from Ray Neidl - Calyon Securities.

Yes, I want to verify a couple of things that you said. Laura, was the number of shares in the first quarter were they basic 736 million?

The outstanding shares and then we had a diluted adjustment for the diluted share adjustment was about 7.5 million shares so I think it was 744 million total.

The $2 per gallon guidance you gave us for the first quarter, is that good for the whole year?

Yes, I think you know our hedge position right now is relatively equal throughout the year, over 70% hedged at $51 a barrel and if you look at the forward curve throughout 2008, where it stands today it’s relatively pretty even across the year so I’d say with what we know today we are in that range.

The last thing, the tax rate was varying a little bit. What should we be using this year? 39% or 40%?

About 39% but remember we will have an adjustment in the first quarter. We’re going to have an $11 million credit for the State of Illinois reversal of that tax that was enacted last August.

That’s one time, correct?

Yes.

Your next question comes from Jamie Baker – JP Morgan. Jamie Baker – JP Morgan : My math has $2 jet fuel and 3% ex- CASM depending on how you treat that tax issue. Does that imply the potential of a loss in the first quarter? Hardly shocking from an industry perspective but something a bit unusual for Southwest. Is this something you’d care to address?

I be happy to. I wouldn’t say that we aren’t at risk at all for a loss in the first quarter, obviously that’s not our goal, it’s not our plan. If indeed the results on the cost side $2 jet fuel plus CASM ex-fuel unit cost increases of 3% or more, then the obvious point is that we’re going to have to drive some revenues to offset that. That’s harder for us to be precise with predictions on but clearly our goal for the year Jamie is as per usual, to drive earnings increases. It will be harder in the first quarter because of that cost hurdle, but we’re not telling you that we’re not going to strive to increase our earnings for the year 15%. So certainly it’s not a foregone conclusion that will have a loss in the first quarter, but yes, as the costs are going up the revenues will have to follow or we’ll be at risk there. Jamie Baker – JP Morgan : That’s actually a good segue into the second part of my question, Gary. Despite the best fuel hedge in the business, you did appear to miss the targets for 2007 so I’m wondering if you’ve looked at any areas other than the traditional airline where you could potentially reallocate your capital? For example, I’m assuming your aircraft purchase costs are the best on the planet and for argument sake, is there anything to keep you from going into the leasing business where fundamentals and returns at least for the moment seem to be stronger than the tradition airline model?

Well Jamie, I think that both Laura and I have allowed that that is something we’re considering, particularly in this environment where just walking through the logic with us; we’re trying to put our schedule planning function in a position where they have more flexibility. That has to start with, in other words, if we’re going to schedule the airline according to demand, well then we also have to be able to do something with surplus aircraft. I think it leads very naturally into that kind of a thought process. I think Laura and I are indifferent as to whether we sell an aircraft versus lease it on a net present value basis, assuming that the result is neutral. So that’s part of what we’re exploring. The other thing we’re not oblivious to is that business is cyclical as well but indeed it certainly makes sense for us to seriously consider that and we are seriously considering that.

Your next question comes from Dan McKenzie - Credit Suisse.

Just looking at the income growth target in the first quarter, can you provide some more color on your confidence in reporting a profit in the first quarter here?

I don’t know if I said anything other than we are not planning for a loss but because costs are increasing and especially fuel I can’t completely discount the risk of a loss any more than we could last year. I think basically we had a pretty thin profit in the first quarter of ‘07 as well. So I don’t think we’re trying to alert or alarm anyone other than to say I can’t give you a guarantee that there won’t be a loss in the first quarter. What is clear and has been clear for years is that the costs are increasing which simply means that the revenues have to keep pace. So that’s what we are straining and striving to do and based on the January trends we’ve reported to you thus far we’re again not predicting a loss but at the same time I’m not going to tell you that we’re not at some risk here.

It appears the industry is on the cusp of consolidation here and I was wondering if you could talk a little bit about how your fleet needs might change under that scenario?

That’s a perfect set up and I think a more thorough answer to Jamie’s question too which is, we would love nothing more than to keep all these airplanes and put them to good use and profitable service. So we don’t know what kind of opportunities will be unveiled where we’ll need more aircraft. As I mentioned in my comments, there is no lack of demand for more Southwest service, it’s just we’ve got to get it at the right revenue level. So if we’ve get opportunities, Dan, that present themselves in 2008 the good news is if we don’t get too far down the line in committing these airplanes we’ll be in a very good position to take advantage of it. So obviously that’s our preferred route and our first priority will be to grow the airline as long as we can do it in a way we think will be incrementally profitable.

Your next question comes from Gary Chase - Lehman Brothers.

This is the first time I heard you reference $1.5 billion as the required revenue gain in order to meet the satisfactory level of return. I think I’ve heard you address that in the past in the billion-dollar range and I just wondered if you could elaborate a little on that. Is $1.5 billion the new official goal? Are there more initiatives that you are planning now as a result of what has happened with the fuel? Have you just had better take up? What’s driving that change?

I think the difference between $1 billion and $1.5 billion at this stage is arithmetic but the reality is since our New York Stock Exchange presentation in June, fuel prices have gone up dramatically. We’re not oblivious to that. Therefore for us to hit our profit target in 2009 our revenues are going to have to increase as well. Now in fairness to this whole discussion, we’ve got a portfolio of revenue ideas that are well in excess of $1 billion, well in excess of $1.5 billion. I think that’s the only point I was trying to make with my comment which is we’ll just have to take this in incremental steps, launch our initiatives and see what they really produce and adjust accordingly. But at this stage, I think the clear message is that our revenue targets will need to be higher than they were earlier in 2007 and right now we’ve pegged that at $1.5 billion.

So it’s well in excess of $.15 billion in the 2009 timeframe?

We don’t know. The other thing I was trying to illustrate this morning is that there is a tremendous amount of technology being deployed this year. That is pretty far along. Therefore I think you could say it has a lower risk of execution. Now the technology that’s being developed this year for next year is not as far along and really that’s where a lot of the more direct benefits will flow in terms of revenues: Southwest.com enhancements, Rapid Rewards enhancements, additional code share partners, etcetera. We’ll just have to get from here to there before we can give you a lot more precision to answer your question.

What you’re trying to convey here -- because I think this is an important point -- is you think the opportunity set is large enough that you can deal with a change in fuel we’ve seen since you did your New York Stock Exchange presentation?

I absolutely do. I think what we have tried to consistently convey is that we are very confident of our ability to increase our revenues; we are not as confident as to the timing of when those benefits will flow or exactly what benefits will flow from each individual one; but collectively, I think we have a very large opportunity out there. And again, there is nothing really new to report. I think we have been very transparent about the themes that we are pursuing. We have been obviously vetting out some of the details within those themes, but hopefully what we’ve done in the fourth quarter of last year gives you some indication that we have a lot underway and we are going to deliver and we are going to execute.

And just to be crystal clear, this is above and beyond industry, right? This is independent of industry revenue?

In fairness to us, we don’t know how these benefits are going to flow, so the best way I can think to describe it is from where we are, we need unit revenue improvements of 15% so if we can raise 15% and get them there, I think we ought to declare victory but we just don’t think that is going to be possible and we don’t think that is going to be the scenario. But in any event, we are looking for new sources of revenue in combination with what you might call more organic growth in RASM. It would all add up to be about 15% unit revenue.

Just to elaborate a little bit, if I walk through what you are talking about for the first quarter, it suggests that the revenue environment will get better than plus four in order not to have a loss. I may be doing that a little bit wrong. What I am driving at, is there something competitively that is changing or is it just that the comps get easier month by month? I am obviously cognizant of the Easter shift, I know that is a big deal for you. Beyond that, is there anything we should be thinking is happening competitively through the course of the quarter that is going to be a tailwind?

Gary, I think there are a lot of things. I think clearly initiatives we put out in the fourth quarter are just ramping up. We expect those to accelerate during the quarter. There are some new initiatives but clearly March will be very significantly impacted by a very, very early Easter this year as well. The other thing is we have additional capacity with some of our competitors in the fourth quarter versus first quarter as well.

Laura, what is the spot fuel underlying $2?

It is looking at the current [inaudible].

$89. Thanks very much.

Your next question comes from Jim Parker – Raymond James Jim Parker – Raymond James : Good morning. Just looking at your fourth quarter increase of 3.7%, at the same time you had a 6% cut in capacity, competitive seats. Perhaps that is a little bit disappointing given that in ’06 I think your RASM was up 10% and the fleets that came out against you were either minus 7 or maybe 10. So just in light of that, is this not a bit disappointing, a RASM increase of 3.7% on a 6% decline in seats?

I think so Jim, but in what context? So our disappointment dates all the way back to the first quarter. So relative to the first quarter we’ve actually done better by the time we get to the fourth quarter. I think we have been very open about that during all of 2007. We are just adjusted to that reality today. The bottom line is the domestic air traffic growth has been anemic throughout 2006 and 2007 and it has taken capacity adjustments by the industry to produce the kinds of results that we are all seeing. We are in now way satisfied with that performance and obviously and again, there is a lot of work underway to improve it from there and we have not even the full 60 days worth of the new and improved features – and some of those are brand oriented which will take longer to win customers over to Southwest Airlines and the Business Select, we didn’t even promote or push. Still we are able to bring out $7 million. The other thing I was very pleased with was from a trend perspective, the changes that were made to the flight schedule were very productive in October and November. This is a building process and we have to do better than plus 3.7%. Jim Parker – Raymond James : With regard to ancillaries and the systems that you are putting in place perhaps to sell passengers something other than just the seat, it looks like some airlines are doing very well and realizing some very nice margins on marketing hotel rooms to passengers. What are you doing in this regard to increase that marketing of hotel rooms?

Our focus right now is on what was delivered in the fourth quarter and I want our company to perfect that. So we’ve got some follow-on that we will want to do with our fare structure, with our enhanced boarding process, with our advertising message. That is very, very important to get that right and that is where our emphasis is. Now, in the background there is design work and construction work underway that is more on point to your question. We will need some significant enhancements to Southwest.com to generate the kinds of ancillary revenues that we want and I think you would also be excited about. That will not come probably before 2009, although we will be doing what we can in the meantime to use what we’ve got, to find more partners, find better ways to sell. I am not ready to promise anything there yet. That is clearly a goal and clearly something I am very excited about, but that is not the top priority today.

Your final question comes from Frank Roche – Bear Stearns. Frank Roche – Bear Stearns: Gary, I was wondering if you could give us – you talked a little bit about potential consolidation and how Southwest would look at any assets that may come up. Have you had any discussions with anyone about any assets in the last little while?

Frank, you know I can answer that question. What I would say is we are trying to look at whatever opportunities become available here in 2008 and I think it is going to be a wild year. I think the industry is in terrible shape and we are in great shape. This is pure speculation on my part, whether it means we will have opportunities to buy assets, I couldn’t really say. All I can tell you is we are prepared for that and I think we have our fleet and schedule in a position where we can move pretty quick to take advantage of some opportunities. But as to whether or not we will buy anybody or anybody is talking to us, I can’t comment directly on that, of course. Frank Roche – Bear Stearns: Gary, I think you had said before in a press interview that for the full year ’08 you were thinking that unit costs ex-fuel would be up in the single digits. Is that – what is the latest thinking for full year ’08 and fuel?

The guidance that we’ve given today is really what our ex fuel CASM and certainly we know that the pressure that we are going to have against higher [inaudible] based on what we think are events that are going to occur, but we do anticipate that we are going to be up ex-fuel ex-special items for the full year. I thank you all for listening and if you have any questions, Tammy, Marci and I are available for calls. Have a great day.