Good day and welcome to Southwest Airlines second quarter 2009 conference call. Today's call is being recorded. We have on the call today Gary Kelly, Southwest's Chairman, President and Chief Executive Officer, and Laura Wright, the company's Senior Vice President of Finance and Chief Financial Officer. Before we get started, please be advised that this call will include forward-looking statements. Because these statements are based on the company's current intent, expectations and projections, they are not guarantees of future performance and a variety of factors could cause actual results to differ materially. This call will also include references to non-GAAP results; therefore, please see our earnings press release in the Investor Relations section of our website at Southwest.com for further information regarding our forward-looking statements and for a reconciliation of our non-GAAP results to our GAAP results. At this time, I'd like to turn the call over to Gary Kelly for opening remarks. Please go ahead, sir.

Thanks, Tom. And good morning, everyone, and thank you for joining us for our second quarter call. Excluding special items, we reported a second quarter profit of $59 million and that was $0.08 a share. And I would say given the deep recession that that is a very solid performance and, of course, I'm very proud of our people on every front. We continue to manage through the economic crisis with a lot of change and all the while our folks are delivering a very high-quality operation and outstanding customer service, so I'm very, very proud of them. I'll just reiterate what our immediate focus is during this crisis. First of all is to make sure that we maintain sufficient liquidity and as of yesterday we had $2.4 billion of cash and short-term investments on hand plus our $600 million line of credit, which was fully available. The second priority is to boost revenues with new initiatives. We rolled out some new products in the second quarter. You should expect more in the third, more in the fourth, and at this point our intention is to roll out some additional products in the first quarter as well. Of course, we continue to work on our more strategic revenue initiatives with our Rapid Rewards frequent flyer program, Southwest.com, a new revenue management system and code sharing. In the meantime, of course, we're going to continue to block and tackle, which is leveraging our current fleet and that is with schedule optimization and pricing opportunities where we can find them. And then the third priority is to reduce spending. We've significantly reduced our capital spending over the next 24 months and we are addressing labor costs. You have the results in the press release of our Early Out program as an example.…

Thank you, Gary, and good morning, everyone, including our webcast listeners. Our second quarter GAAP net income included special non-cash charges totaling a net of $5 million relating to marked-to-market and other items associated with FAS 133, Accounting for Derivative Contracts and Fuel Hedging Activities. Excluding these special charges, our second quarter net income was $59 million or $0.08 per diluted share, and these results exceeded Wall Street's mean estimate of $0.07 per diluted share. Considering the difficult economic and revenue environment, we are proud of these results. And although our revenue trends outperformed the industry, our operating revenues were down almost 9%. Our freight revenues were also off significantly due to the weak economic environment and this trend is continuing so far in the third quarter. Even with the Easter benefit in April, our unit revenues declined 6% year-over-year on 3% less capacity. In June our unit revenues were down in the 9% to 10% range compared to the same time last year. This is the worst unit revenue decline we've experienced since the post-9/11 period, surpassing the PRASM declines from the 1991 recession. So far, based on current trends, we expect our July PRASM to be down year-over-year in a similar range as June or possibly slightly better. Overall, domestic demand for air travel is down dramatically, with industry traffic back at 2004 levels. Full-fare travel in particular has declined sharply. Our full-fare mix was down 5 points from a year ago to 18%. And while we have had some success with fare increases since April, heavy discounting has been necessary to stimulate the traffic due to the sharp falloff in business travel. Our aggressive discounting drove our second quarter load factor to 77%, which was close to a record. However, our passenger revenue yields per RPM declined…

Thank you. (Operator Instructions) Your first question comes from Gary Chase - Barclays Capital.

I wanted to just have you maybe describe, you know, obviously when you go into the fourth quarter there's a pretty significant, I mean, even in the third quarter, but it certainly accelerates in the fourth, a pretty significant change to the capacity outlook. If we carry that into 2010 it would be, of course, another reduction year-on-year of some significance. Should we think about it that way? I mean, are these reductions that you feel you're making on a permanent basis or do you think this is something much more temporary to deal with the current environment?

Gary, as we stand today when you roll these into next year - of course we have some seasonal adjustments - we're currently forecasting 2010 capacity to be down about 1% from full year 2009.

Okay, so a little bit of creep from where the schedule comes out for the fourth quarter.

And with more capacity coming out year-over-year in the first part of the year versus the second part. The only thing I would add to that is qualitatively we're going to continue for the indefinite future to optimize our flight schedules, Gary. So we'll be trimming out the unproductive, unprofitable flights. We'll be monitoring the previous changes that we made, so you should assume that we'll continue to be aggressive on that front. In that light, we will continue to look for new cities to add to the route map. I don't know that we'll have four more next year, but we're very pleased with the results we're seeing so far from Minneapolis/St. Paul and La Guardia, so we like that play. We think it's working very well. And, of course, there are a lot of places that we still don't serve in the U.S., some big cities, but even some of the smaller cities than average for us we might be able to productively add to our route map. So you should assume that we'll continue to keep the fleet flat. If variable costs continue to be high, we just might fly our airplanes less, as we have been on a daily basis, and we'll be looking for what we think will continue to be some good new market opportunities.

Guys, is there any data behind the concern for fall as you see it? Do you have enough bookings to mean anything to you? We hear it and I'm just wondering if it's supported by anything or it's just a concern given what's been happening this year.

Yes, Gary, I think I would put a lot of it in the concern category. Certainly, July is a peak month, July/August, and in every downturn we've always seen the peak months do very well; we saw that after 9/11 and other periods. So we know that post-August is a softer time and with what we know they're not seeing any rebound in our business travel yet. That really causes us to be cautious with respect to the fall outlook. I think our forward bookings we feel pretty good about. And Gary talked about the aggressive fare sale that we had, and we built a nice layer of bookings for the fall. I don't know if you have anything you want to add to that, Gary?

Well, I agree with everything Laura said there. And I think that we called, you know, back in April, I think we called the outlook for the second quarter spot on. The only thing we didn't know is that the flu was going to emerge. But I think the industry has evolved so far this year just as we expected. Now, from where we are I'd just reiterate that we do feel like we've seen some stability for roughly 90 days - May, June, July. We haven't seen a pickup from the swine flu yet, but the issue is business travel. And you know your history here. There's no reason to believe based on history that business travel will pick up sharply anytime soon. It certainly didn't in '91; it didn't in 2001. This recession seems to be much deeper and could be much more prolonged. And the job picture is still not bullish, it's bearish. If we're wrong, I think we'll all be pleasantly surprised and we'll be very happy about that, but I think that we're prudently planning a very cautious outlook for all of those reasons.

It makes you wonder with only 18% of the business traveling on full fares why we're focused on raising those when it seems we're just doing the discounting on the other side of it.

Well, I'm not sure exactly where you're heading with that comment, but clearly we're trying to manage all of the fares. But that's the way the demand has been coming in and it's not just, of course, what we see; we're affected by what our competitors are offering, too. So the fares have been very aggressive; it's a very low fare environment and that's very typical of a recessionary economic environment.

Your next question comes from Duane Pfennigwerth - Raymond James.

Just in terms of some assets that are up for sale in Denver, obviously in the past you've talked about some practical reasons why you might not have interest in that fleet type specifically, but can you comment at all if the environment has changed or if your posture has changed regarding some distressed assets that might be on the block now?

Well, I will just preface it by saying I won't comment specifically and I know you'll hopefully appreciate why that is. But just to repeat what we've been saying, I think, for several years, first of all, we're a growth company and the current environment just doesn't lend itself to that, but we still have ambitions to grow. And secondly, we have acknowledged that we are open to making an acquisition of assets, of airlines, whatever it might be. We have not found the right fit yet. Our desire is to maintain the integrity of our fleet, which is, of course, an all Boeing 737 fleet. We have absolutely no interest in any kind of a regional jet operation. So any opportunity out there is going to have to fit our operating style and obviously be accretive to earnings for us. So in summary I think we're open, but I certainly can't comment specifically on any particular situation.

And then just generally speaking with regard to your schedule, given your comments about trimming unproductive flying, how do you view your capacity in Denver, I guess, beyond what's in the current schedules?

Well, I won't comment beyond what's published. I will say that we've grown. Denver's a huge market, huge, and we have been pleasantly surprised at how fast we have been able to grow that market. We have strong demand in our Denver business. We carry close to 100 million passengers a year; Denver is a very attractive destination. So that is the reason, I think, that we've been able to accelerate our growth there, that our customers want to fly Southwest Airlines to Denver as a destination and slowly but surely we're building our presence with Denver and Colorado customers. So we're very happy with the current performance of that market and it's obviously under development. It's just a little over three years since we started service there. Right now overall, of course, we're not growing many of our cities just because of the current economic environment, so I think Denver would certainly fit into that overall comment. But beyond that, Duane, I can't tell you what our plans will be for schedules in Denver.

I think on the last call you stated that there was a reluctance to pull an offer that was on the table with your pilots. Obviously, that deal is now off the table. So given the environment, should we view this as an opportunity for Southwest to lower its labor costs going forward? And thanks for taking the questions.

Yes, sir. Well, I think, you know, we honored the offer to our pilots, which we felt was the appropriate thing to do. And those negotiations have been under way since 2006. In 2006, when we started having these discussions, Southwest Airlines had record earnings, so re-starting negotiations here in 2009 after our first losing quarter in 18 years, it's just a different environment. So I wouldn't say that we're trying to be opportunistic at all. I would say that we'll have to make commitments that we feel like we can afford and [we're beyond that,] so that's just kind of a framework. All discussions, of course, with our pilots need to take place at the bargaining table. So everything I've just described to you I've communicated with our pilots, so I feel very comfortable in repeating that to you, but otherwise we'll need to have all those specific discussions in private at the bargaining table.

Your next question comes from William Greene - Morgan Stanley.

Gary, you've had some experience now with putting in place some fees. I'm wondering if you can talk at all about maybe some of the, I don't know, were there any takeaways from that? Was the customer pushback so aggressive that you wouldn't consider bag fees now? When we think about a loss in the third quarter, it would seem that bag fees could go some way to helping you in that regard.

A great question, Bill, and good morning. I think the reaction we've had to the pets - which is not really a fee; that's really just offering a fare to a new category of customer, who we love and adore - but the fee for the unaccompanied minors, our customers, I think, I wouldn't say that they've embraced it, but they certainly haven't reacted negatively. I think people understand that there's an added cost associated with serving our younger flyers. So, no, I think that so far so good. With respect to fees in general, Bill, which I know is really the essence of your question, you know my personal feelings about bag fees. And I think in this environment we've got to be open minded to anything, quite frankly. You shouldn't interpret from that that we've made a decision to charge for bags because we have not. But I do think that now that the landscape has settled down and most all of our competitors are charging bag fees, it just puts us in a position where we can evaluate results, compare to ours and make an informed judgment about that. The one thing that we know is that our employees will likely not support bag fees if our customers don't, so if we are going to make a change we'll need to do it in the right way. But with our revenue performance over the last three quarters, four quarters in particular, there's just no strong evidence that I've seen that bag fees would be additive to the revenue line. So I would hate to do something that would damage our brand only to find that it really isn't revenue positive. But we're open to that and we're going to continue to study it.

In the past you talked about, I think, a $1 to $1.5 billion target in non-fare revenues. Where do we stand on that? I feel like we're not at the right run rate, but I'm not sure I have the full number in my head.

I may have to get Laura to help me on that one. The target, of course, still remains. That was absent an event like a recession, in fairness. I really felt like we had made significant progress in 2008 where we had a unit revenue boost of roughly $800 million last year, to the best of my recollection. But the big initiatives - Southwest.com, Rapid Rewards and codeshare - which were a component of that are still in front of us. In terms of the schedule optimization, I think that we're performing extraordinarily well in terms of boosting our RASM with that. We've introduced a new fare structure, as you know, and at least the results from last year were very strong. Now, we've given it all back because of the collapse of business travel, but otherwise I feel like we're in good shape now. And then what is somewhat new news to you all is what we've announced between quarters here, where we have some near-term revenue initiatives. Some of it's technology enabled and some of it's choices that we're pursuing. But the goal remains and we're falling far short of it now; our revenues are down 9%. But the goal still remains and we've got a lot of construction under way to deliver on that.

Just one quick question on liquidity. You mentioned in the first quarter conference call that you were not comfortable going as aggressive as you had in the past on hedges because of liquidity. The fact that you've started layering in again, should we take that to mean you're comfortable now, liquidity's okay, you can kind of go back to the old sort of patterns of layering in hedges?

Yes, I'm not sure I follow that comment, but we feel very good about our liquidity situation, Bill. And, as you know, as we reported, we have cash and short-term investments as of the close of yesterday of over $2.4 billion. As we move forward what we've disclosed to you is we've done more options in terms of layering on our hedges, which reduces the liquidity risk that we have in a falling market. In addition to that we've got some collateral facilities in place that really greatly limit exposure that we have from a liquidity or cash collateral perspective. So I think we feel like we're in good shape and reduced that risk significantly.

And we're probably not going to go out as far right now. We were out five years last year for obviously reasons. Crude oil, as far as the eye could see, was headed towards $150, and right now there's just a little bit different scenario. So I think we'll probably focus more in the 24 to 36-month time period.

Your next question comes from Michael Linenberg - Bank of America/Merrill Lynch. Michael Linenberg - Bank of America/Merrill Lynch: Just a couple questions here. Some of the new markets that you've started into, you know, La Guardia, Minneapolis, I guess you have bookings out there in Boston, any difference maybe in the mix in those markets versus your current system and are you getting maybe a larger percentage of business travelers?

Yes, I think business travel's down in all markets all across the country, so there's not anything that's discernable or we can see any real difference in the mix in those markets. Michael Linenberg - Bank of America/Merrill Lynch: Okay. And then just my next question here. I think, Laura, you said for the third quarter the fuel price is $2.15 and that includes, I guess, the marked-to-market loss. What's the underlying sort of market price that's embedded in that just for modeling purposes?

I agree with you it's confusing. And, as you know, our second quarter economic fuel cost with taxes was $1.79, which remarkably was only $0.03 higher than what we had in the first quarter despite a significant increase in underlying prices. One of the things that we saw in the second quarter was a pretty large lag benefit as prices rose throughout the quarter. So if you look at our third quarter forecast using yesterday's market close, the underlying crude assumption's around $65.60 a barrel. That's up from less than $60 on average in the second quarter. Heating oil cracks on the forward market are also up slightly from the second quarter average, and we're forecasting a higher jet differential, probably around $0.05 for the third quarter, than the second quarter because that's what we seasonally see. And we're actually forecasting - since prices have come off the end of June high, we actually are forecasting a fuel lag penalty. So it's very confusing to get all these pieces, but that's kind of how we get to - and then we also have our marked-to-market loss in there - so that kind of gets us to the $2.15 estimate. Michael Linenberg - Bank of America/Merrill Lynch: Back to, I know, Gary, you talked about bag fees and the like, when you think about some of the new technology that you guys are introducing, both on the Southwest.com, the re-launch, I guess of Rapid Rewards and the new res system, will you have the tools there and also the new product offering in such a way that maybe your best customers, bag fees aren't an issue and maybe it's just for customers in some of the low fare classes or maybe it's an a la carte additive, you know, the benefit of getting a lower price. I mean, just thoughts on that?

Well, Mike, that's exactly what we would desire to have, with our tools and our technology to have as much flexibility as possible. We've got to prioritize still because our appetite is far greater than what we can actually produce. And I've said this many times, at your conference in particular, that this is a transformative decade for us. We're going to be a substantially different customer experience in 2010 than we were in 2000. So I don't know that we will have every bit of flexibility that you are envisioning, but we are certainly building for the capability to charge for things like bags so that that becomes a policy decision and not something that we're driven to because we just don't have the capability for it. Clearly in the future, I will admit this, our technology is getting better every single year and that you should assume that whatever we're going to have in 2010 will better enable those kinds of things than what we had in 2008.

Your next question comes from Kevin Crissey - UBS.

Gary, maybe you could talk about how the extreme financial weakness of some of your competitors influences your overall strategy. Certainly some of them are short on cash and I wanted to understand how Southwest thinks of that from a competitive position.

Well, first of all, I think that that is a fact, that we are a very strong competitors, and historically that, of course, has benefited Southwest and our customers. So I don't see that any different today than we saw it in the 1990s or the earlier part of this decade. We've grown our fleet to be, not by design, but we've grown it to be now one of the largest in the world. And we have one of the strongest brands in the world and we carry more customers than any other airline in the United States. So we are mindful of that and trying to make choices here, even in the depths of this recession, that will take advantage of those very positive attributes that we have. I think it's just imperative that we keep our costs low so that we can support the low fare brand because I think that underpins the excellent operations that we have and the outstanding customer service. And our employees know that and they're working harder than ever, and I think that's one of the reasons that you see that we're more productive than ever. But by extension I don't think that means that we want to go out and take a lot of risk in this environment, so we're trying to manage our risk appropriately. Things like Minneapolis/St. Paul and La Guardia we don't consider to be high risk. We think that we've got a network that will support those kinds of additions to our route map and I think we're very encouraged by the very early returns there. So that is certainly a way to answer your question, that while we're not growing the fleet, we are growing our route system and obviously that is an aggressive competitive position to be taking.

Your next question comes from Daniel McKenzie - Next Generation Equity Research.

I guess my first question is for you, Laura, just one quick question. I believe the non-fuel cost guidance you gave for the third quarter was up 7% to 8% from third quarter 2008's $0.0687. And if I understood that correctly I'm just wondering if you could provide some more perspective about what might be behind some of those cost pressures?

Sure. I think the guidance that I gave, Dan, or I meant to give was up about 7% from third quarter last year. And the big driver of that is the fact that capacity is going to be down 6% in the third quarter; it was down 3% in the second quarter. So that's certainly driving increases in every single cost category. But we've got some increases in our labor that are coming forward. Some of those are just the result of our employees coming up the pay grade and becoming more senior. A little bit of impact from some of the labor contracts. Airport costs are another one that continue to grow every quarter. Certainly we're seeing, as capacities come out and more capacities come out of Southwest cities, that we're getting a disproportionate increase in some of those airport costs.

Understood. Okay, good. Thanks. And then, Gary, I think you touched on this with Kevin's question, but I guess as you think about your new markets I'm wondering if you can provide some more perspective about how you would characterize their importance? And I guess what I'm getting at is Southwest has gone into some markets and essentially stopped at 3% to 4% of the market share, which I believe has been the case at Detroit going back 15 years, whereas at others, such as Baltimore, you're able to grow to over 55% of the market. So I'm just wondering if there's any additional perspective you might be able to provide about sort of how you're thinking about, say, Boston-Logan. You know, Minneapolis, I know, you shared was low risk; perhaps Milwaukee as well.

Well, Dan, I think the one thing that's different in 2009 for Southwest Airlines versus 1989, just to provide a reference point, is what I mentioned before - we have a very large fleet, we have more seats offered on a daily basis than any other competitor. And it just provides for a significant amount of flexibility for us. We can add Minneapolis/St. Paul with just a handful of flights and, given that we have near 100 million customers a year, it just doesn’t take too many of them to fill up eight roundtrips into Minneapolis/St. Paul. Is that where we want to end up in Minneapolis? Not necessarily. But in the meantime, if we have a strong operation and it's additive to the bottom line, I think we're happy with that. So I think we're taking natural advantage of the route system and the customer base that we've developed and that's providing a lot of flexibility for us in the meantime and is part of the 4% RASM boost or $100 million that I mentioned earlier. That's part of our schedule optimization. Said a different way, flying eight roundtrips in Minneapolis/St. Paul is a superior alternative to where those eight roundtrips were previously deployed. There aren't too many airlines that have that kind of flexibility and strength, and I'm just very proud of our people, that they have developed those capabilities and that they are aggressively deploying them. And it's not just our schedule planning group; it is throughout the company. It's marketing and revenue management and airport operations, flight operations, in-flight operations, on and on and on there's a tremendous amount of adapting underway to the changes that are underway. And our customers are telling us they like it. These flights are full.

Your next question comes from Helane Becker - Jesup & Lamont Securities Corporation. Helane Becker - Jesup & Lamont Securities Corporation: Two questions. One is: Can you say when you did the big fare sale a couple of weeks ago how much of your inventory you were able to sell out for the third and fourth quarters?

You know, I don't know that off the top of my head. I'll give Laura some time to think. It's very, very small. I mean, we did a significant number of bookings this year for that time period compared to last year, but overall it's going to be a fraction of the total seats that will ultimately be sold. It is not going to make or break the quarter either way, but it certainly is a way - we spent no advertising dollars on the sale, we were almost overwhelmed with demand just through selling this on our website, quite frankly. So it was an inexpensive way to offer a sale and, as I mentioned before, with the added benefit of a boost in bookings in the corollary periods. But, I'm sorry, I just don't have a percentage off the top of my head.

I don't either. And the other thing to note is that the sale excluded peak travel days. So the sale fares weren't available on Friday and Sundays, and the rest of the days it's a pretty weak travel period.

Yes, it's far enough out where we don't have a concern that we have given up revenue here. I think it's really quite the opposite. We've got a good start. We've captured some discretionary travelers who are willing to commit early. And, as Laura said earlier, it just provides a nice foundation to build our future bookings on. So, no, we were delighted with those results. Helane Becker - Jesup & Lamont Securities Corporation: Okay. And then, Gary, I think you talked about changing some capacity, frequencies in terms of reducing capacity in some markets where maybe it didn't make sense, but you're not in anyway changing your view that every gate should be used something like 8 to 12 times a day?

That's right, Helane. Well, let me walk through that. I think with $20 crude oil it might make sense to fly an airplane 15 to 16 hours a day. With $70 crude oil I don't think it makes sense to fly that airplane beyond maybe 13 or 14 hours. And so there's a duty day of the aircraft that starts at, you pick it, 7:00 a.m. in the morning, and it goes until 8:00 p.m. at night. In the old days with lower fuel costs it could have started at 6:00 a.m. in the morning and gone until 10:00 p.m. at night. There's just not enough demand early morning, late evening, at $70 crude oil to justify flying those flights. So in that respect, yes, we might be getting fewer departures per gate because we're no longer having that 10:00 p.m. departure. But certainly during the meat of the day we have more of our flights scheduled in the meat of the day than ever before in our history. We're utilizing those gates like crazy, like we're famous for, absolutely. Helane Becker - Jesup & Lamont Securities Corporation: And then Dallas-Love Field, can you just say how much your through revenue is now?

Yes, we can. For the second quarter, Helane, it was $32 million and that was down from $45 million a year ago.

And that's the ride amendment.

The incremental. Helane Becker - Jesup & Lamont Securities Corporation: Yes, yes, that's what I was talking about.

Your final question comes from Jamie Baker - J.P. Morgan.

Here's my question: Why is business demand so bad? It just seems entirely inconsistent with the predictive model that I've developed based on GDP and fuel. I don't intend this to be a softball question; you know, everyone's got ideas when business travel demand may recover. But speaking for myself, I can't even explain how it got this bad in the first place, so that sort of makes my guess on when it comes back highly suspect. Do you have a good explanation?

Well, gosh, now you're just asking for sheer opinion and this is nothing that I can back up. I'll let Laura give you her views of that. I just think that having lived through '91 and 2001 that the sudden collapse of the financial markets in September/October just spooked the whole world. And I've heard many experts describe this as a credit-induced recession. So it's fear. And it's followed through with companies cutting back sharply and consumers also cutting their spending simultaneously. So to me it's as simple as that. It is a very deep recession; it was not anticipated by many. You're going to see the adjustments to that collapse rolling out over time. Just take Southwest Airlines, you know. We're just now beginning to downsize Southwest Airlines with our Early Out program, so those employees will be departing beginning in July and through next year. So we're just an example of exactly what happens in a recessionary environment. So I don't know that I can fully explain why, Jamie, but I can tell you for a fact, you look at our short haul, more business-oriented, high-frequency markets and they are off across the country in alarming numbers. And it's nothing that Southwest Airlines has done with its product to chase people off, as an example. So it is what it is. And fortunately we're a financially healthy company that can respond and react to these kinds of challenges and actually see this as a very significant competitive opportunity for us.

Tom, that concludes our analyst portion of this call. Thank you all for being here and our Investor Relations team is ready to take your calls. Thanks and have a great day.