Gary Kelly - Chairman, President and CEO Tammy Romo - Senior VP, Finance and CFO Bob Jordan - EVP and Chief Commercial Officer Michael Van De Ven - EVP and Chief Operating Officer Linda Rutherford – VP, Communication & Outreach

Julie Yates - Credit Suisse Hunter Keay - Wolfe Research Duane Pfennigwerth - Evercore ISI Jamie Baker - J.P. Morgan Savi Syth - Raymond James Darryl Genovesi – UBS Dan McKenzie - Buckingham Research Helane Becker - Cowen and Company Terry Maxon - Dallas Morning News Andrea Ahles - Fort Worth Star Jeffrey Dastin - Thomson Reuters

Welcome to the Southwest Airlines First Quarter 2015 conference call. My name is Matt and I'll be moderating today's call. This call is being recorded and a replay will be available on southwest.com in the Investor Relations section. During the call today we have Gary Kelly, Chairman, President and CEO; Tammy Romo, Senior Vice President of Finance and CFO; Bob Jordan, Executive Vice President and Chief Commercial Officer; Michael Van De Ven, Executive Vice President & Chief Operating Officer; Ron Ricks, Executive Vice President and Chief Legal & Regulatory Officer; and Marcy Brand, Senior Director of Investor Relations. Please note today’s 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. As this call will include references to non-GAAP results excluding special items, please reference this morning’s press release in Investor Relations section at southwest.com for further information regarding the forward-looking statements and a reconciliation of non-GAAP results to GAAP results. At this time, I will go ahead and turn the call over to Mr. Kelly for opening remarks. Please go ahead sir.

Thank you very much Matt and thanks everybody for joining us for our first quarter earnings call. It was a great first quarter. I want to start by congratulating our Southwest employees for these exceptional results. Southwest is doing well because of their hard work and their perseverance and their outstanding customer service. And I'm delighted to report that each employee earned their share of a total $125 million profit sharing related to our first quarter profits and it’s far greater than any prior first quarter in our history. And of course lower fuel prices were a big part of the first quarter story. Our economic fuel price per gallon was down 35% to $2 a gallon year-over-year and that alone contributed over $450 million in fuel cost savings. 15% of every fuel dollar savings dollar goes to our employees. So again, a very, very big thank you to our Southwest family. But besides lower fuel prices, there is a lot more to the story and a lot to be pleased with. Our unit revenues were flat while our core unit cost that is excluding fuel, special items and profit sharing were down 3.6%. So, even if fuel prices had remained constant, our earnings would have been up roughly 80%. So we're beginning to more fully realize the benefit of our strategic initiatives and that is the AirTran merger, the 737-800, our fleet modernization efforts and our renewed frequent flyer plan. We are also seeing more fully the benefits from our aggressive route schedule optimization over the last five years. And these results are really strong, despite our renewed low cost capacity growth, but the unusually high percentage of routes that are in development. And that's primarily a function of AirTran integration but we also have capacity added strategically to Dallas Love Field, Washington Reagan and New York LaGuardia. So given all that we are intentionally growing new markets which are mostly newer international at a slow and measured pace. We want to carefully manage our future capacity growth, continue our revenue momentum and continue to hit our return on capital targets and reward shareholders. So our focus for the near-term will be on the basics and that is operational reliability, hospitable customer service, manageable capacity growth and healthy shareholder returns. Our top event for this year is the completion of a construction of the Houston International Terminal and the launch of international flights in October of this year to six non-stop Latin American destinations. This year, we have a larger than normal increase in flying as we increase the utilization of our roughly 700 aircraft fleet from a low 88% to a more normal 93% by year’s end and that is aircraft that are scheduled to be in service out of our total fleet. Now that's the equivalent of about 40 airplanes from January to December. So next year we'll be back to a more normal fleet growth of approximately 2%. Of course next year we’ll also get the full year benefit of this year's increase and return to our normal historical utilization rates. The cost penalty of underutilizing the fleet essentially disappears by year-end. I'm very pleased with the performance of our strategic initiatives; I'm very pleased with our current performance; I'm very excited about our future plans; and I hope that lower, stable energy prices are here to stay. But all-in-all, a fantastic quarter. And with that I will turn it over to Tammy Romo, our CFO, to take us through all this good news.

Thanks Gary and thanks to every one for joining us. We are absolutely thrilled to report on our tremendous first quarter results today. Net income excluding special items was a first quarter records, $451 million or $0.66 per share which was by far the best first quarter in our history. It was only $34 million shy of being an all-time quarterly record and even surpass our annual 2012 and 2013 profits, which is just a tremendous performance. First quarter GAAP net income was slightly higher at $453 million. Our strong first quarter results were driven by another quarter of record revenues, substantially lower fuel prices and our continued focus on our non-fuel cost of particularly our fleet modernization efforts. Our operating income ex-special items was also a first quarter record at $770 millions and we expanded our operating margin by more than a 1000 basis points to 17.4%. Our pretax return on invested capitals excluding special items for the 12 months ended March 31st was an exceptional 25.6% or 16.1% on an after tax basis. So, congratulations to all our wonderful employees for these exceptional first quarter results which march our eight quarter of consecutive record profitability. Turning to revenues, we were very pleased to report another record performance there as well. Our first quarter operating revenues increased 6% year-over-year to $4.4 billion, driven largely by record passenger revenues of $4.2 billion. Overall, we are very pleased with the revenue strength across our networks, especially considering 22% of our network was underdevelopment which is substantial. We continue to be pleased with the performance of our new Dallas; Washington Reagan and LaGuardia service and international also continues to do well and meet or exceed our expectations. And our Rapid Rewards program continues to contribute significantly with nearly $100 million incremental revenue year-over-year in the first quarter. We are very pleased with the performance of our frequent flyer program and continue to seek opportunities to drive additional returns from it as well. On a unit basis, our total operating revenues grew in line with our 6% increase year-over-year in capacity as we guided, which resulted in a first quarter record passenger unit revenue performance. While our revenue yields declined just slightly, our strong demand for low fares resulted in record traffic and load factors on 1% fewer trips year-over-year. Our unit revenue performance was outstanding especially when you consider the roughly 4 % increase in stage length and 2.6% increase in seats per trip, both compared to first quarter last year, which combined was estimated to impact unit revenues by two to three points which of course, more than offset by favorable benefit to a unit cost. And as I mentioned before, we had a significant portion of our first quarter capacity under development with more than half of markets converted from AirTran. Thus far in April, we're placed with the continuation of solid revenue and booking trends which are trending in line with normal sequential trends. And based on these trends, we expect strong passenger revenue growth in April and on approximately 6% to 7% year-over-year ASM growth. We currently expect April PRASM, passenger revenue per available seat mile to decline 2% year-over-year. Keep in mind, year-over-year unit revenue comparisons for second quarter will be more challenging than third due to the 7% versus 6% year-over-year ASM growth with second quarter stage length estimated to increase little over 4% and gauge to increase over 2% both year-over-year. And as a reminder we have a significant spoilage adjustments in second quarter ‘14 when normalized across, resulted in year-over-year PRASM trends, 9% for April; 10% from May last year and up 8% for June. We are also pleased with our freight and other revenue. Our award winning cargo team, recently recognized by Air Cargo World for the sixth consecutive year .They produced a double-digit increase in freight revenues in first quarter. We currently expect second quarter’s 2015 freight revenues to increase slightly from first quarter 2015. Other revenues declined slightly year-over-year from the elimination of AirTran fees with the integration completed in December last year. And this was largely offset by a strong performance in certain ancillary revenues such as EarlyBird Check-In and A1 through a 15 upgraded boarding positions sold at a gate. Our EarlyBird revenues increased 25% year-over-year to $68 million and other ancillary revenues were approximately $40 million. We expect second quarter 2015 other revenues to increase from first quarter level but decline year-over-year. Turning to our cost performance, our first quarter unit cost excluding special items decreased 12.4% on a year-over-year basis, largely due to lower fuel prices as well as ongoing cost control efforts. Our first quarter economic jet fuel price per gallon declined 35% year-over-year to $2 which resulted in over $450 million in fuel savings in just first quarter. Based on our hedge position and market prices as of last Thursday, we expect our second quarter fuel price per gallon to also be approximately $2 which is significantly below second quarter 2014’s $3.02. And we currently estimate year-over-year fuel cost savings for full year 2015 to approach $1.4 billion, based on current market prices. Excluding special items in fuel, our unit costs were comparable to first quarter last year and this does include over 100% increase in profit sharing and 401(k) Savings Plan's expense just over $200 million compared with $99 million in first quarter last year. Excluding profit sharing and special items, our non-fuel unit cost decreased 3.6% year-over-year which reflects the benefit of our fleet modernization. Maintenance unit cost in particular declined 30% year-over-year, primarily due to the retirement of the 717 fleet. But based on our current cost trends, we expect second quarter 2015 unit cost excluding fuel, special items and profit sharing to decrease year-over-year in the 1% to 2% range as compared with second quarter 2014 7.776. And for full year 2015, unit cost excluding fuel, special items, and profit sharing, they are estimated to decrease approximately 2% year-over-year which is slightly better than our previous guidance. So moving to our balance sheet and cash flow. We ended the quarter with $3.4 billion in cash and short-term investments and we also have our $1 billion revolving credit line fully available. We continue to generate tremendous free cash flows which allows us to make prudent investments in the business while returning value to our shareholders. Our first quarter operating cash flows grew 30% year-over-year to $1.45 billion which exceeded our CapEx of $573 million and assets constructed for others a net of reimbursement of $20 million to result in first quarter free cash flow of $859 million. We returned $381 million to our shareholders during first quarter through $300 million in share repurchases and $81 million in dividend payments. We have $80 million remaining under our $1 billion share repurchase authorization which we intend to complete next month. We also repaid $51 million in debt and capital lease obligations during first quarter and we intend to repay an additional $133 million during the remainder of 2015. Our balance sheet is strong with leverage including off balance sheet aircraft leases up 34% as of the end of the quarter and we remain the only investment grade U.S. airline by all three credit agencies. For 2015, we continue to expect to our cap spending to fall in the $1.7 billion to $1.8 billion range, excluding our assets constructed for others which is estimated to be in the $50 million to $100 million range net. We continue to carefully manage our invested capital which we've reduced by $1.3 billion since 2012. Overall, we remain very pleased with the consistent strength of our balance sheet and strong cash flow generation which allows us to maintain a balanced approach to cap deployment which includes the ability to reach our significant value back to our shareholders, our employees and customers alike. And that brings me to a quick recap of our first quarter 2015 fleet activity. We ended the quarter with 679 aircrafts in our fleet. We took delivery of seven dash 800s from Boeing and eight pre-owned dash 700s and we retired one dash 500s. We have transitioned a 63 717s to Delta which brings us to 25 remaining that we will be transitioned to Delta by the end of this year. All 52 AirTran dash 700s are converted to the Southwest livery with last five completed during first quarter. We continue to manage to baseline of roughly 700 aircraft by the end of this year and we expect our second quarter 2015 ASMs to increase year-over-year approximately 7%. And our full year 2015 capacity growth remains on pace to also increase 7% year-over-year target, again largely on Dallas with the smaller portion on Washington Reagan, LaGuardia and international. The response to our new markets has been very gratifying and our development markets continue to perform at or ahead of expectation. Also keep in mind, there will be a carryover impact of our 2015 ASM growth into 2016. The full year effect of 2015's expansion is estimated to increase 2016 ASMs by 5% year-over-year. We expect any further 2016 growth above that to be modest. And we expect our 2016 year-over-year fleet growth to be approximately 2%. So in conclusion, I'd like to once again thank our 47,000 employees for their tremendous efforts and congratulating them on exceptional first quarter performance which is a strong start to what is shaping up to be just a spectacular year. Our revenue and booking trends remain strong thus far into second quarter and our cost performance was solid. We are continuing to benefit from substantially lower year-over-year jet fuel prices and our ongoing cost control efforts are also delivering results. We have a low cost structure and we will continue our rigorous efforts to improve efficiency. We have a strong financial foundation and strong cash flow and we remain focused on prudent capital allocation. We are reinvesting in our business with the focus on generating strong returns and we have continued our aggressive management of our invested capital through share repurchases and cash dividend. Coming off a record 2014, we’re delighted with the strong start to this year. And based on current trends, we expect another record performance, profit performance in second quarter. And with that overview, Matt we’re ready to take questions.

[Operator Instructions]. We will now begin with our first question from Julie Yates with Credit Suisse.

Gary, thanks for the color on the 2016 capacity. How should we think about the mix between domestic and international as we assume a mid-single-digit growth rate next year? Would it be roughly half and half, or how should we think about that?

Well, I think at least the way I'm thinking about it, I’ll get Tammy to cleanup anything I mess up here. You’ve got this carryover effect of year-over-year growth in 2016, based on the increased flying activity that we have taking place in 2015. And as an illustration, we’re really not adding any new flights that I recall at least in Washington Reagan in 2015, but yet the -- since that was really done in the latter half of 2014, Reagan is showing up is a fairly significant impact on our growth rate here in 2015. So, you will have those kinds of things flowing through 2016. Just isolating the new part, the new flying that we will be adding in 2016, it is roughly split between domestic and international. So, we will be adding flights late this year of course in Houston. Tammy, I want to say that next year we’re looking at roughly one point of additional flying for international that would be on top of the full year effect of what you would be saying added to Houston later on this year. So in total, it will be very -- I don't know the exact number off the top of my head but it’d be some kind of low single-digits and then on top of that we will have some additional domestic flying that we will add next year. But pretty modest incremental growth planned for 2016 above the running rate that’s established here in 2015.

And then Tammy, one for you, when we think about the down 2% unit revenue guidance for April, are the headwinds that you called out, the tough compare stage and gauge and spoilage. Are those the extent of the headwinds or are you seeing fair compression, increases in competitive capacity as some other carries have mentioned that are pressuring unit revenues as well?

Julie, I would say that our pressure on unit revenues is exactly what you said is largely driven from stage and gauge, and of course just a large percentage of our network under development. So that we always have some movement in competitive capacity but the majority of that pressure is driven from just longer haul flying and increased gauge.

Obviously the timing of Easter is always a little tricky in these trends and comps. So, we've taken all that into account. If you will just compare, I think just our trend argument comparing second quarter to first quarter, the trend looks very normal. And that is again taking into account the holiday timing. But we feel like everything is looking good and as Tammy has been very clear in pointing out, we have lot of developing markets that we are staying on top of and carefully managing and our hope of course is that those continue to improve over time. I can’t guarantee that but we are very pleased with the developing markets progress that we’ve seen so far.

Directionally, how do you expect May and June to trend relative to April on a year-on-year basis?

Well, we gave you the guidance, I guess I’ve shared with you already the -- when you just look at the comparisons last year, April was up about 9%; May was up about 10%; and June was up a little bit less, about 8%. So, not too much is there the across the months in terms of comparisons relative to last year.

We’ll go next to Hunter Keay with Wolfe Research.

I'm not sure, if Bob Jordan is on the line or this is a question for Gary. But as we think about IT, how much is IT holding you guys back from implementing things that you think your customers want? Whether that's an unbundled, more of an unbundled product or not, or maybe things that help optimize returns without feeling you're taking something away from your customers. If I could maybe get you to sort of think about it on a scale of 1 to 10 right now in terms of where you are in the investment horizon as it relates to specifically IT, I'd love to hear your thoughts on that.

Hunter, Bob, he’s here. So, certainly want Bob and Mike may want to chime in as well. But we’re all impatient and have opportunities that are before us that we would love to be able to capitalize on. We have operational improvements that we’re very desirous of and we’ve got customer experience improvement. So, it really covers all three categories, financial; service; and operations. I think what is exciting is we know that we’ve got opportunities to continue to invest that will generate very handsome returns. I am a little reluctant to put a number on it. I’ll defer to Bob and Mike to see if there is something they want to share there, but the headline of course is a new reservation system which comes with enhanced capabilities that really address all three of those objectives and we have been forthcoming that we think that’s worth a lot of money, some things fall into revenue management techniques which we for competitive reasons we leave that as a rather vague headline. But I think we’re very happy with our product; I think we’re happy with our customer experience; I don’t see that there is anything that is dramatic, it's being held back from what we’re doing. I will fully admit that a new revenue reservation system will come with capabilities that will explore whether it's code sharing or whether it's signing seats and things like that. But we’re not at this point committed to making any of those kinds of changes yet either. So, I feel like we’re doing really good. And clearly what I hope to communicate here is absolutely we know there is returns on investment as we continue to invest in IT.

I think I’d say the same thing; there is always more technology work to do than you can do in a year. If you can, may waive the magic wand, there would be things we would do I think tomorrow. But I think we have a really good program as we have very measured implementations across ‘15, ‘16, ‘17; biggest of course is the new reservation platform. The other thing is the big initiatives that are contributing a lot right now, fleet modernization; network optimization maturing the markets; the big contribution from the Rapid Rewards program. None of those items are being held up by IT at all. So, the things that are really contributing, so actually Rapid Rewards, they are not burden a lack of IT investment, in fact most of that’s behind us. As Gary mentioned, we’ve got big things that will contribute coming on as we -- especially as we get the new reservation system in place. So more robust fare rules, more robust access to some ancillary items, some continued O&D revenue management improvement some of that’s already in place. So, I think another way to look at that is we’ve got items that will contribute across the next three to five years as we implement technology. So, I think we’ll see a continued boost as we bring those online as well. But there are always things you should love to do, but I feel really good about where we are especially with the things that are contributing again and are not dependent on IT at this point.

Thank you, Bob. And a question again for Gary here is you guys have made comments in the last couple years about keeping your growth roughly in line with GDP. But 7% this year, even if you look at that on a seat basis, we'll say it's up four and then next year you're going to have probably be a little bit above GDP as well. So, I understand you guys are earning your cost of capital and things are going real well for you, but why is the growth at Love Field and Reagan incremental? And why is it not replacing underperforming routes which would make your growth opportunities still exciting in new markets and whatnot but it would make the overall growth rate maybe a little bit less disruptive from an overall capacity growth perspective? Where is that growth that goes away in the event that fuel goes back up again?

Well, I think we’re not -- we haven’t changed our high level growth plans over the last six months. So in other words, the change in fuel prices has not had an impact at least that’s material on our plans. Said it different way, we're continuing to think about the future with our higher fuel cost assumption which just speaking for Southwest, I think that’s wise, one would hate to order whole bunch of airplanes only to find that fuel prices have gone the wrong way. So that’s point number one. The rule of thumb is to try to guess what traffic growth is going to be. The best proxy we've got of that is GDP. And right now, we’re growing ahead of that Hunter, because we can’t ;and we've got right opportunities that we have been investing in to create over the last five years and now we want to take advantage of them. The other point is that we have 700 airplanes. And we don't want to downsize the airline. So, the fact of the matter is that the airline has been underutilizing its fleet for the past several years, now we've wonderful opportunities to improve our unit cost production and profitably deploy additional flying. I will just point out here in the first quarter, we added seats to the tune of about 1.6% and our O&Ds, not RPMs; our O&Ds were up 5.7%. So as long as we can continue to match or outpace our seat growth, I think that’s the main thing. If we find that we’re not able to do that, well then we’ll start turning dial so that we can adjust. And the increment to the fleet that we’re planning for 2016 right now, and that’s a little p plan is quite modest for next year. So, what I would expect -- what I'm assuming, let me say it that way right now for growth 2015, 2016, 2017 is that the peak in the growth rate is here in 2015 and it begins to diminish next year and then it diminishes growth rate-wise again in 2017. So, we try to explain why we’re little bit over indexing on the growth this year and it does feel like it will revert to the mean here in future years.

We will go next to Duane Pfennigwerth with Evercore ISI.

Just on the used aircraft side, and the dash 700s that you've been adding, can you just refresh our memory a little bit about how many you're adding this year, how the retirement schedule has changed, and really how you think about the economics of used aircraft versus new aircraft right now?

If you look at our order book with Boeing here for 2015, we have 19 firms and 17 dash 700s in the pre-owned market and we’re managing to that 700 fleet count. So, we are -- and as you know that we have 88 717s that we’re essentially replacing from AirTran. So that we’re using a combination of new aircraft and aircraft from the pre-owned market. And really at this point, the economics on the pre-owned we've been able to augment orders from Boeing to fulfill our aircraft need. So, as we look ahead, we will continue to do just what makes sense overall to drive the best economics there. Beyond that and at least what we have, we’re still working through our fleet plans. But for 2016, we have 31 firm orders with Boeing and right now four pre-owned aircraft from Boeing. So we’re just -- we’re looking at essentially -- we’re just using a combination to meet our needs here in 2015 but obviously looking for the best economics for Southwest.

Just a follow-up there, if you had to guess which one would change for 2016, the 31 firm or the four pre-owned, it seems like the four probably would move higher, if things stay about where they are?

The pre-owned market, we have plenty of opportunity there to supplement our needs. So I think that's a reasonable assumption.

And we've got a large number of potential retirements next year as well. So, there we have -- obviously we have some flexibility with the timing of the retirements. So, I think we've made this point over the last year. We've got more fleet flexibility today than I think we’ve had in our history. So it's, we're just trying to do our best to optimize the financial and operational performance to the extent that we have alternatives with the fleet choices.

And then just for my second question on the other revenue line, I think you guided to about a 9% decline in the first quarter and it came in roughly down 1% and just wonder if you could give us more detail, maybe we're getting beyond some of the loss of the AirTran fees that you’re not going to lose going forward. Why wouldn't other revenue be kind of more firm relative to the trend that we've seen over the last couple of years?

Yes, I think that we have -- our first quarter, our ancillary revenues that really came in strong and offset essentially the loss that we're seeing from the lost fees from Air Trans. So, we were really pleased with those trends. So, I agree with you I think that that we would expect those trends to continue to firm.

We go next to Jamie Baker with J.P. Morgan.

Gary, a question on consolidation; I'm trying to find a common denominator behind the deals that you've done or tried to do in the past. So you've got Muse, Frontier and I guess maybe we could include ATA, those were all struggling competitors. Morris struck me at the time as mostly about aircraft. And I don't AirTran might fall between those two examples that was likely influenced by what was going on at the industry level. You may have different opinions. What I'm getting at is what would influence your decision to turn to M&A again; would you consider during an airline bull market or should we assume that Southwest's interest is only likely to be peaked if there is a competitor with its back against the wall.

Well, I agree Jamie with your historical analysis there. And I'm just going to talk hypothetically here, just give you a tendency, so a tendency would -- is very clear in a period where our organic growth opportunities are less either because of cost pressures or cost uncertainties or we just run out of geography. Then I think you know any company would be wise to consider what other growth options it has, and M&As is one way to do that. That’s certainly fit for us with the AirTran acquisition, our organic growth opportunities were in need of some refreshing and through the acquisition of AirTran, plus the other strategic initiatives that we embarked upon, we changed that. So the other thing that was attractive strategically about AirTran is the geography that it added. It added us to, rather it allowed us to accelerate our development of the 48 state route map and that of course is proven to be very successful. And then to some degree it launched us in international, I think the most important part of the international piece is it gave us real live experience in international markets for us to begin to formulate future plans. So that sort of describes the kind of scenario that would -- that interested us in the past and I think would logically interest us again in the future. Now what's different of course in 2015 than in 2010 when all that was going on, is that now we have more places to go; more places to grow than we'd had probably at any given point in time in our history. So, I would fully admit that M&A would be a distraction to pursuing our current growth opportunities, and one would have to have a really good reason to be distracted. I'm not suggesting that that couldn't be possible but it's certainly a lower priority as we think about all the things that we want to do today with our current system.

And a follow-up on the profit sharing topic, yours is a simple formula that I believe has remained unchanged longer than the competition. I'm actually trying to recall the last time you made any revisions, you can help me out with that one, but looking forward -- what was that?

It was 1989.

Okay, all right, helpful; so, clearly unchanged the longest. Looking forward though, is profit sharing a topic where you consider what the market is doing or does it fall more into that kind of Southwest marching to its own drum type category, like other facets of your business model?

Well, it has to factor in what the external realities are. So whether it's healthcare, whether it's retirement, whether it's salaries and wages, everything has to be informed to some degree by the market.

We’ll go next to Savi Syth with Raymond James.

I just wanted to follow-up on one thing on the 2016 growth that I'm not clear on. So, is the 2% of fleet growth, is that incremental to kind of the 5% of annualized growth that's coming from annualizing what you're introducing this year? And then also just kind of curious, as you look to next year, is the split between seat and stage going to be similar to what you saw this year?

On the first question Savi, yes the -- it's we’re talking about a base of 700 airplanes and along that base, 2% would be 14. So, we’re talking about somewhere in the teens in terms of a net increase to the fleet with as Tammy has pointed out, there is quite a few moving parts. So this year, we’ll get all of the 717s retired, the 717s are on top of the reported numbers that you hear from us in financial reporting. So, you add roughly 25 airplanes that I call them -- in my mind they are still in the fleet. They are just in the process of being retired, but that’s not the way we reported to you. But yes in any event, we’re talking about more airplanes in 2016. And now I talked long enough, I forgot your second question.

The mix between stage length and fees.

Mix, well that depends. So what is in the press release today are from 700s. We haven’t taken any 700 delivery from Boeing’s since 2011. So, we’re in the midst of making that choice. So that -- if we switch that choice to 800s; well then obviously the gauge will continue to grow somewhat. I don’t think it would be, Tammy, at the same rate that we’ve been seeing it grow. This year you’ve got a pretty big swap out of 717s either for 700s or 800s, depending on how you want to match all that up. But you’ve got a pretty significant gauge effect in ‘15, so it should be less in 2016, if we convert those to 800s. What is on the press release for the pre-owned are 700s for next year. And I don’t -- we might pick up some pre-owned 800s but we’ve really been looking to replace our 300s with 700s. And then the stage length piece of it, again will be somewhat obviously dependent upon where we go, but the odds are that we’ll continue to add longer than average trips, you’ll get the full year effect of launching international service to Houston. The Houston service is going to be longer haul by definition to Latin America. So, yes, I think the stage continues to grow; the gauge continues to grow, but probably at lesser rate than what you're experiencing right now.

And for my second question, I wonder if you could talk a little bit more on how Dallas is progressing? And one question I had was, I mean I know you've mentioned in the past that you're seeing 90% load factors there and I'm wondering, does that signal that maybe you're leaving some revenue on the table by having such high load factors?

Well they are coming down, so Tammy you want to that?

Sure, yes, we’re still seeing fantastic load factors out of Dallas and they are above system average load factors. And what we have said before is we have some markets hitting 90%. So yes, so we’re very pleased with our Dallas performance; it continues to be very strong with very, very substantial increases in traffic year-over-year.

Tammy, I know in the past, you mentioned maybe that's the market that matures faster. How is that progressing versus other markets that you've entered into?

Well, I think if you look at our new markets, I mean normally you would expect those can take years to two, three, sometimes even more years, but certainly at least what the results we’re seeing thus far with our new markets suggest that yes, we’ll have some our markets that would progress at a faster than normal rate. And certainly Dallas will hopefully fall into that category. So, we’re monitoring all that very closely, but so far as we said, our new markets are meeting or exceeding our expectation. So some will mature very quickly and there will probably be some that take a little bit longer, but in the aggregate, we’re very pleased that the rate in which those are progressing.

Dallas is unusual and you're right, I mean it's developing very rapidly. There are some city pairs that look more normal for a new market, but that’s not the majority. And I was asked by a reporter earlier this morning about Dallas because it’s such a raging success and we knew it would be. In fact we were kind of surprise to some of the pundits that were saying that the Southwest effect was gone and oh no, it's been a raging success and it has a 20 gate cap. And it's very clear that the demand is much greater than 20 gates. So, we're very pleased with that service and very pleased with the new airport and we've got work to continue to do but now it is certainly the exception as for new growth.

And Savi, just in terms of as you are thinking ahead as well. So historically the development markets have been I would say 4% to 5% of the system. And that is close to where we would expect to trend by 2016. So, we will have a heavy percentage of our markets; it will trend down here from the first quarter; I would guess it would be around 11% by the end of the year and then it would be more in line as we get into next year which is more normal percentage of development markets.

This somewhat ties in to Hunter's question too, one might challenge why would you allow yourself to have a such large percentage in developing markets? Part of this again is just ingesting or integrating AirTran. But there was also a confidence on our part that Dallas would perform well. And said it different way, while the 22% is a large percentage in development, the quality of those -- the performance of those markets is certainly better than what would one would normally expect for a developing market as a whole.

Yes Savi, I will share one other bit of information just again. It really is a testament to how well our markets are performing. If you adjust for stage length, I guess just looking at unit revenues to drag on our first quarter results is under 1 point. So again just very strong performance.

We will go next to Darryl Genovesi with UBS.

Tammy, you had about a $500 million benefit on the cash flow statement in 2014 from deferred taxes. I guess I was thinking we might see some of that start to reverse here. Can you just give some color around what drove that? Is that related to new aircraft deliveries and accelerated depreciation for tax purposes or is it something else and what happens to that number in 2015?

The big driver in our preferred taxes is exactly is depreciation -- accelerated depreciation related to our aircraft delivery. And unless there is another extension of the bonus depreciation, we would -- which we’re helpful for, we got it this year; it's just again these are yearly extensions. So, if there is an extension, we would expect our cash tax rate to converge closer to our book taxes. And again that’s really driven by the bonus depreciation.

And then just on your comment regarding, I think you said prudent capital allocation, just trying to get some sense of maybe if you could give some more color on what that means? Because I think based on my numbers here, I've got you covering your fixed charges by about 12 times or something at this point and just wondering if it kind of beyond the $130 million number that you said you still have for this year in terms of debt paydown, is that kind of aided this point or is there kind of further debt paydown to go over the next couple of years? And how are you thinking about the potential to perhaps re-lever a little bit before interest rates might go back up?

We do have a large bullet payments coming due in 2016 and 2017 and about $300 million in each year. So yes, that certainly will factor in. And our balance sheet is in great shape; it’s just in terms of the guidepost, we definitely want a strong balance sheet. We want to maintain our investment grade quality. So certainly, we would want to manage our debt levels so that we’re maintaining our balance sheet strength. Outside of that, we just continued to aggressively manage our capital spending as you can see with our cap spending guidance that we have for the year, we will continue -- that will continue to be a focus here as we move forward. And then of course the lever that we have beyond that our share repurchases and our dividends. And I think our past results here speak to the fact that we want to continue to return value to our shareholders.

So, on the two debt maturities that you mentioned in 2016 and 2017, is the current view that you would cash settle those or that you would try to term them out?

I would expect that we'd do some level of financing here over the next year or so, but again we want to maintain fairly modest debt levels like we have today.

Yes, but nothing early, we wouldn't try to -- we've looked at all of that, it’s just not economic to take any debt out beyond what we've already done.

Yes. To Gary's point, we've looked at that and we've already done what it makes sense to do.

We go next to Dan McKenzie with Buckingham Research.

The GBTA revised down its outlook for business travel spend this year, so my question really is on that. So first, the Rapid Rewards program is of course evolved pretty dramatically over the past five years. And I'm wondering if how you measure this, the demand segment has evolved and then secondly you know what have you seen year-to-date, and what are you seeing looking ahead.

So Dan, you were kind of faint there, so you just talking about business travel?

Right.

Well, I can't really tell that there's been a change in business travel personally. And you're right, it's tough to get a read on, we have -- we try to triangulate that by multiple methods. And there's a fairly wide variance between the methods, but it looks to me like it’s stable. You just look at our Rapid Rewards program, it's been a phenomenal success. So, Tammy can cite numbers there but it all looks good to us. And again, you just look at the overall results, you know what’s going on within our route network, it's very aggressive and still we have really strong results. We've got some exposure to the oil patch, we've been paying very close attention to that and that all looks fine though -- pretty much all the way around it looks good. We have a large exposure to leisure. The near international Latin American expansion we have is very heavily weighted towards leisure. So mix wise, you might see a little bit of change because of that but we're not seeing a decline in our business travel, same-store kind of levels if you will.

The only thing I’d add to that Gary is just -- we're very pleased with our corporate sales. Those outpaced our capacity and we're up almost double-digit. And I agree with you, our business mix is still roughly a third of our passengers. So considering again the mix of development markets and everything that we have going on in our network, we're really pleased with the trends.

The frequent flyer, you didn't specifically ask it this way but just as further empirical evidence for I guess your question, the utilization of our frequent flyer program, utilization of frequent flyer program card, credit card just continues to outperform our expectations, year-on-year. And I'm just delighted with that program change, the execution, customer reaction, the financial results that we have, it's just gone really, really well.

And I guess you know just following up on that and I'm going back a bit in time here but at Southwest Investor Day last November, the view was that revenue could grow online with capacity as this year. And as we stand here today, Southwest has added some additional capacity and second quarter aside, I'm wondering if you still feel that revenue for the year can still grow in line with the capacity adds, or has the world changed.

Yes, I'd be happy to comment on that one. Our goal certainly hasn't changed, that's not guidance of course but at least starting out here this year we feel really good about the trends and of course we're starting out with flat unit revenue. I acknowledge we have added since Investor Day though, I would point out that we have ticked up our capacity just a bit, mainly for the two additional gates that we picked up at Love Field. So, our capacity's up about a percentage point. So, admittedly that puts a little more pressure on us to achieve that for the year. So, we'll just have to see how all that plays out but obviously what we're trying to do at the end of the day is manage to continue to strengthen in our earnings and in our margins.

We’re off to a good start. And I would just -- we thought about it in multiple ways, and just remind everybody that if you adjust for stage length and gauge in the first quarter, it's a 3%, almost a 3% effect. So, I think a lot of the answer to your question will be dependent upon just how much stage change and gauge change we ultimately realize because everybody's looking at static unit numbers. So adjusted, I feel like will grow unit revenues. And to me that's the way I look at it. Dallas Love Field, Tammy I'm not sure what the stage length change is year-over-year with Dallas Love Field but you have to look at it, because it's just such an obvious dramatic change in the distance of the flights. But we're off to a great start here in the first quarter; we're dead on with capacity; I'm very, very proud of our folks for pulling that off. And they got a really tough comp in the second quarter. And I think it's a little too soon to give you any real firm direction there. We admit that's the goal and we're going to try to get there. So, so far so good.

Good commentary, thanks. I wonder if I could squeeze one more in. Southwest has highlighted 60% as an average percent of free cash flow return to shareholders, again at its Investor Day. And as we look ahead, I'm just wondering if that's still a good level to think about, again as we look ahead here.

Did you say 60, I didn’t hear what your question was…

Yes, correct. So, at the Investor Day, Southwest…

I think what we said was more than 50, but yes, I mean really no big difference, no big change in our philosophy since Investor Day.

We have time for one more question. We’ll take our last question from Helane Becker with Cowen and Company.

You guys had done a lot of work on the Evolve seating in the new aircraft and the reconfiguration and so on. And then with the new aircraft, I saw that you're going with a completely new redesigned seat. So, is that because the Evolve seat didn't measure up to expectations or is this more cost effective seat? How should we think about this new seat?

I think it is the latter. The Evolve seat is great. We did not have B/E Aerospace seat; it was not on the market when we were looking for seats earlier. I think Mike De Ven found a better seat. Mike, do you want to talk about the advantages of going to the new seat?

Yes. The seat is a redesigned seat. There has been a lot in terms of seat technology over the last four or five years. So, the seat frames actually fit closer to the walls of the airplane that gives us almost the half an inch width in the seat, because there is about an inch and half -- the seat's at about an inch and half closer to the walls. In addition to all of that, it creates a little bit more leg room for you as a result of that, the way some of the seat frames are designed. And on top of it, all the seats are wider. So, it was just new seat technology. It gave us better economics, more comfort, more personal space and it was just kind of no brainer to go to.

And you're launching this seat, right, Mike?

Yes, we're launching the seat and we’ll start rolling out on the fleet in mid 2016.

Just another opportunity to offer something new and improved.

And then, just Gary, I have one question for you with respect to your aircraft order, the large customer for the MAXes and so on. Have any of your -- have you thought about selling any of your delivery positions given how low fuel costs are?

Mike, would you like to speak to that?

No, we haven’t thought about selling any of our delivery positions. In fact we’d like to have maybe, not more positions, but getting them sooner as we have them in our order book. So, we’re very excited about the airplane. It gives us of course none of the fuel burn but it gives us greater range, it gives is better performance with the airplane and I think it's going to give us more route flexibility than we have today.

That concludes the analyst portion of today’s call. Thank you for joining. Ladies and gentlemen, we’ll now begin our media portion of today’s call. I would like to first introduce Linda Rutherford, Vice President of Communication & Outreach.

Good day, Matt and welcome to the members of the media who are on our call today. We’re going to go ahead and get geared up to take some of your questions. So, Matt if you could give them some instructions on how to queue up, we’ll get started.

[Operator Instructions]. We’ll now begin with our first question from Terry Maxon from The Dallas Morning News.

Let me start out with asking a left field question. You've got Delta saying it needs continued space to do five flights a day and you've got the lawsuit going on in the District of Columbia. What is your degree of confidence that you'll be able to operate the 180 flights as of whatever it is, August 9 and not have to accommodate Delta? And what will you do if you have to accommodate Delta?

Well, we’re confident that we can execute on our flight schedule, we would not have published it otherwise and we’ll just leave accommodation upto the owner of the airport, the City of Dallas. We’ll be fully utilizing our 18 gates that we have worked really hard over a long period of time to get up and running. And obviously they’re very successful flights and customers are benefitting from more competition and lower fare. So, we’re very, very pleased with where we are and looking forward to adding flights in August.

Does thatassume or not assume Delta is wiggling into your gates?

We will be very busy in fully utilizing our 18 gates.

If I could ask follow-up question, your FTEs increased nearly 2,000 year-over-year. Where did that come from? Are you just staffing up at airports? Is there some transfer of part-times to FTEs or contract employees to FTEs? Where did such a large increase come from?

Terry, it’s pretty much of pure increase; in other words, there is no shifting going on; it's operational. We have some corporate increases for project related needs but the vast majority of the increase is with flight attendants, primarily to serve the larger aircraft, the 800s; it requires as you know a four flight attendant as compared to three on the other aircraft types. And then we have seen a very welcome and very nice surge in traffic and in passengers. And so our ground operations at the airports are also seeing staffing increases. We want to make sure that our employees are in a great position to serve our customers. We don't want to have excessive -- we don't have to rely on excessive amounts of overtime as an example and have some opportunities invest further in the operation and in customer service. So, it's really those two sources driving our headcount increases.

And we will go next to Andrea Ahles with the Fort Worth Star.

I was wondering if you could talk a little bit more in terms of Love Field. You've talked about how successful it's been, but can you break out is that more business travelers that you're seeing or is that leisure? Do you have any color you can give about the mix of passengers that you're seeing as you've increased flights at Love Field?

Off the cuff, I don't know that I can have a lot. We obviously have some traditional business markets like New York and Washington that we’ve added. And I would at least guess off the top of my head that we’re seeing a larger mix of business travelers there. But Andrea, I think it's just a natural mix of people flying for business and pleasure. What our rule of thumb has been historically is the short-haul flights were more dominated by people traveling on business. So, I think these longer-haul flights that we’re having a probably more normal mix of roughly 40%ish plus or minus business and the balance being leisure would be my guess, but I don't know. Tammy, I don't know if you have any more specific insight there?

No, I don't have specific numbers to give you. But yes, I would agree…

I know the flights are full. That I know.

I don’t think it will be far off from what our system numbers are.

I could just give you maybe a little more color just on Dallas. We added a number of new markets on April the 8th and they were added with a much shorter booking window; we announced them later. And even those markets and those 13 new flights are full. So, a lot of those are running over 90% load factors, just like the overall Dallas mix, again with a much shorter booking window. And then Dallas in total was running a higher local mix, so attracting the local Dallas customer, so fewer connections. So that really answers your business leisure question, which I think and what Gary I think is probably more average given the longer-haul but it just demonstrates another point to demonstrate just the strengthened Dallas that we’re seeing with every new flight that we add.

But that would I think the inference is that might imply that it's more heavily weighted towards business.

I think so, and then lot of the markets we've added are more typical business markets too and we’re seeing again 90 plus percent load factors in lot of those markets.

[Operator Instructions]. We go next to Jeffrey Dastin with Thomson Reuters.

Might Southwest accelerate the addition of international destinations, so leisure travelers can take advantage of the stronger U.S. dollar and more generally, has the strong U.S. dollar changed your international strategy at all?

As usual, Southwest is different. So and the fundamental answer to your question, the short answer is, no. I don't see us changing our plans at least right now; over time obviously we will continue to adjust our plans. But all of our sales are dollar denominated. So, we’re not dealing with a foreign currency challenge in terms of the stronger dollar. It might have some impact on people that are -- international demand if you will. But we don't have any foreign currency challenges. We are also flying to near international destinations, so we’re flying to Mexico, we’re flying to the Caribbean; we just launched service to our Costa Rica. And again, I think they are just less impacted by some of the issues that you raised. For us, these are -- we’re adding service to cities where -- we try to add them to cities where customers will know us. Most of the traffic on these international flights are U.S. citizens, they're our customers already; we're giving them more product. It is pretty, I wouldn't call it easy but it's easier for us to penetrate those new markets. As compared to launching service to a new country where we're dependent upon travelers from that country knowing who we are and booking on Southwest that's a much bigger challenge. And then finally, we're new at this. So, want to expand our international presence at a very measured pace for operational learnings and also to continue to support the other expansion that we already have underway which is number one, converting former AirTran markets into Southwest, in many cases that's new Southwest service; and then number two, launching a lot of new service out of Dallas Love Field; number three, flying the slots that we acquired from American Airlines. So that's a lot to take on already. And we're really augmenting that core growth if you will with some additional flying to international markets. And we've been very pleased with how that's gone so far but we're going to walk there before we run and have no intention of changing our plans at this point.

Thank you, and if I also may ask separately, is Southwest looking to add to it its fuel hedge book now?

Well, I think yes, we'll always want to continue to look for opportunities to improve our hedging program and philosophically it's an insurance program. Prices have dropped; it just allows for us another opportunity to come back in with better insurance coverage than what we had before. I would say that -- just using that analogy, the insurance has gotten more expensive because we've already bought at once, now we've got to unwind that and go in and buy it again. But at least directionally that's exactly what Tammy and her team, are thoughtful about. I'll leave it up to Tammy to report any changes that she has to the program at this point, I think we're pretty much up to date with what's reported in the press release.

That's right Gary.

And with no additional questions, at this time, I’d like to turn the call back over to Ms. Rutherford for any additional or closing remarks. A - Gary Kelly: Matt, I just wanted to share based on feedback I've gotten from Linda this morning that there was some confusion perhaps that I created earlier with my comment about assigned seating. I was simply offering up an example of the kinds of new capabilities that we’ll get with new technology just as color commentary. We’ve looked at assigned seating very carefully before and dismissed that. We could have built that capability on our own. I was simply pointing out that we’ll have that in the future; it would make it easy for us to relook at that at some point in the future but we have absolutely no thought; no plans; no desire to assign seats whatsoever. And with that I will turn it back over to Ms. Rutherford now. End of Q&A:

Thank you, Gary. The communications group is standing by if you all have any follow up questions. The number to reach us is 214-792-4847 or you can certainly send an inquiry to SWA Media at wunco.com, thanks so much everyone.

That concludes today's call. Thank you for joining.