Correct: Fitch Places Southwest On Rating Outlook Neg.

Business Editors

CHICAGO--(BUSINESS WIRE)--Oct. 11, 2001

As a result of the reduction in U.S. air travel demand following last month's attacks, Fitch has placed Southwest Airlines Co. (Southwest) on Rating Outlook Negative.

Concurrent with this action, Southwest has been removed from Rating Watch Negative. This Rating Outlook applies to Southwest's senior unsecured debt, equipment trust certificates (ETCs) and equipment pass-through certificates. The current Fitch ratings of 'A' on the senior unsecured debt and 'A+' on ETCs and pass-through certificates have been affirmed.

The placement of Southwest on Rating Outlook reflects, in large part, Fitch's overriding concern that the demand environment (following Sept. 11 events) will reduce cash flow generation throughout the U.S. airline industry for the next several quarters. Although Southwest entered this crisis in a uniquely strong financial position, it will certainly see revenue and cash flow decline significantly relative to pre-September 11 forecasts. The company has already indicated that it is working to scale back capacity growth in response to the softer demand environment.

Still, Fitch believes that it is important to emphasize the high degree of financial flexibility that Southwest possesses in its effort to adapt to new competitive conditions. In terms of liquidity, Southwest now has approximately $1.6 billion in cash on hand -- a level that should allow the company to weather a protracted traffic downturn. The current cash balance reflects the impact of a complete draw-down on Southwest's $475 million bank credit facility and the arrival of $144 million in government grants (roughly half of the amount of direct cash payments earmarked in the September 22 airline assistance bill). The $1.6 billion in cash is comfortably higher than the approximately $1 billion on hand at the start of the third quarter. Although the $475 million credit facility matures in May 2002, Southwest is currently negotiating a new credit agreement with its banks.

Southwest has also shown its commitment to cash preservation by reconsidering growth plans for the remainder of 2001 and full-year 2002. The company is working with Boeing -- its only aircraft supplier -- to find solutions that make economic sense for both companies regarding future aircraft deliveries. Boeing 737 (B737) deliveries originally planned for 4Q01 have not as yet been incorporated into the Southwest winter schedule. Assuming an agreement with Boeing is reached, aircraft capital spending levels will be pulled down quickly to preserve liquidity.

Fitch believes that Southwest's financial position is the strongest in the U.S. airline industry, driven not only by its current liquidity position but also by the large number of owned and unencumbered B737 aircraft in its fleet. With an estimated $5 billion in unencumbered aircraft available as collateral in aircraft securitization deals, Southwest is in a position to quickly raise additional cash in the capital markets if necessary.

Fitch will continue to monitor Southwest's ability to limit unit revenue declines over the next several quarters as it attempts to stimulate demand through major fare sales. Evidence to date suggests that traffic is rebounding somewhat more quickly than had been anticipated in the immediate aftermath of September 11. With load factors returning to levels not far below those seen before the attacks, Fitch expects Southwest to see positive operating cash flow both in 4Q01 and 1Q02. With capital expenditures being deferred as part of the fleet plan changes mentioned above, this should allow Southwest to generate positive free cash flow -- an achievement that will not be matched by any other major U.S. airline.

Southwest Airlines Co. is the seventh-largest U.S. passenger airline in terms of revenue passenger miles flown. Since its start as an intra-Texas carrier 30 years ago, the company has grown to serve 58 cities in 29 states. Southwest's fleet consists entirely of Boeing 737 aircraft, which numbered 368 on Sept. 30, 2001.