10-Q: Quarterly report pursuant to Section 13 or 15(d)

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission file No. 1-7259

Southwest Airlines Co.
(Exact name of registrant as specified in its charter)

TEXAS 74-1563240
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

P.O. Box 36611, Dallas, Texas 75235-1611
(Address of principal executive offices) (Zip Code)

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

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

Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.

Number of shares of Common Stock outstanding as of the close of business
on July 27, 2001:

763,401,828

























SOUTHWEST AIRLINES CO.
FORM 10-Q
Part I - FINANCIAL INFORMATION

Item 1. Financial Statements

Southwest Airlines Co.
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)

June 30, 2001 December 31, 2000
ASSETS
Current assets:
Cash and cash equivalents $968,347 $522,995
Accounts and other receivables 153,511 138,070
Inventories of parts and supplies, at cost 79,570 80,564
Deferred income taxes 28,191 28,005
Fuel hedge contracts 59,512 22,515
Prepaid expenses and other current assets 40,236 39,387
Total current assets 1,329,367 831,536

Property and equipment:
Flight equipment 7,241,839 6,831,913
Ground property and equipment 856,627 800,718
Deposits on flight equipment purchase
contracts 325,204 335,164
8,423,670 7,967,795
Less allowance for depreciation 2,318,958 2,148,070
6,104,712 5,819,725
Other assets 34,579 18,311
$7,468,658 $6,669,572

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $336,029 $312,716
Accrued liabilities 632,479 499,874
Air traffic liability 510,103 377,061
Income taxes payable 40,203 -
Current maturities of long-term debt 110,501 108,752
Total current liabilities 1,629,315 1,298,403

Long-term debt less current maturities 752,602 760,992
Deferred income taxes 971,452 852,865
Deferred gains from sale and leaseback
of aircraft 199,933 207,522
Other deferred liabilities 93,802 98,470
Stockholders' equity:
Common stock 762,829 507,897
Capital in excess of par value 5,996 103,780
Retained earnings 3,020,813 2,902,007
Accumulated other comprehensive income 31,916 -
Treasury stock, at cost - (62,364)
Total stockholders' equity 3,821,554 3,451,320
$7,468,658 $6,669,572

See accompanying notes.









Southwest Airlines Co.
Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
(unaudited)

Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
OPERATING REVENUES:
Passenger $1,505,329 $1,415,958 $2,886,605 $2,615,843
Freight 24,869 27,968 50,650 55,034
Other 23,587 16,749 45,147 32,445
Total operating
revenues 1,553,785 1,460,675 2,982,402 2,703,322
OPERATING EXPENSES:
Salaries, wages, and
benefits 473,042 422,247 920,473 803,736
Fuel and oil 208,029 197,608 417,613 394,679
Maintenance materials
and repairs 102,910 90,311 201,434 183,876
Agency commissions 30,084 41,310 60,578 78,526
Aircraft rentals 47,879 49,023 95,924 98,370
Landing fees and
other rentals 77,156 64,982 147,174 130,001
Depreciation 78,213 68,523 155,905 135,221
Other operating expenses 245,610 212,113 482,282 408,947
Total operating
expenses 1,262,923 1,146,117 2,481,383 2,233,356
OPERATING INCOME 290,862 314,558 501,019 469,966
OTHER EXPENSES (INCOME):
Interest expense 16,460 17,442 33,471 34,665
Capitalized interest (5,640) (6,905) (11,839) (13,906)
Interest income (10,236) (10,511) (19,118) (17,160)
Other (gains) losses, net 2,827 3,667 14,552 (471)
Total other expenses
(income) 3,411 3,693 17,066 3,128
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING
PRINCIPLE 287,451 310,865 483,953 466,838
PROVISION FOR INCOME
TAXES 111,818 120,243 187,275 180,573
NET INCOME BEFORE
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE 175,633 190,622 296,678 286,265
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE (Net of
Income Taxes of $14.0
million) - - - (22,131)
NET INCOME $175,633 $190,622 $296,678 $264,134
NET INCOME PER SHARE,
BASIC BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ .23 $ .26 $ .39 $ .38
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE - - - (.03)
NET INCOME PER SHARE,
BASIC $ .23 $ .26 $ .39 $ .35
NET INCOME PER SHARE,
DILUTED BEFORE
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE $ .22 $ .24 $ .37 $ .36
CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE - - - (.03)
NET INCOME PER SHARE,
DILUTED $ .22 $ .24 $ .37 $ .33
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 762,139 745,943 761,188 745,839
Diluted 806,524 793,069 807,140 791,301
See accompanying notes.


Southwest Airlines Co.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

Six months ended June 30,
2001 2000
NET CASH PROVIDED BY OPERATING
ACTIVITIES $904,820 $811,538

INVESTING ACTIVITIES:
Net purchases of property
and equipment (460,761) (496,020)

FINANCING ACTIVITIES:
Payments of long-term debt
and capital lease
obligations (6,834) (7,790)
Payments of cash dividends (10,002) (8,247)
Proceeds from Employee
stock plans 18,129 25,947
Repurchases of common stock - (107,597)

NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 1,293 (97,687)

NET INCREASE IN CASH AND CASH
EQUIVALENTS 445,352 217,831
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 522,995 418,819

CASH AND CASH EQUIVALENTS AT
END OF PERIOD $968,347 $636,650

CASH PAYMENTS FOR:
Interest, net of amount
capitalized $22,530 $16,362
Income taxes $10,601 $21,328

See accompanying notes.



Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


1. Basis of presentation - The accompanying unaudited condensed
consolidated financial statements of Southwest Airlines Co. (Company) have
been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States for complete
financial statements. The condensed consolidated financial statements for
the interim periods ended June 30, 2001 and 2000 include all adjustments
(which include only normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the results for the
interim periods. The Condensed Consolidated Balance Sheet as of December
31, 2000 has been derived from the Company's audited financial statements
as of that date but does not include all of the information and footnotes
required by Generally Accepted Accounting Principles for complete financial
statements. Operating results for the three and six months ended June 30,
2001 are not necessarily indicative of the results that may be expected for
the year ended December 31, 2001. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Southwest Airlines Co. Annual Report on Form 10-K for the year ended
December 31, 2000.

2. Dividends - During the three months ended June 30, 2001 and March
31, 2001, dividends of $.0045 per share were declared on the 762.7 million
and 760.7 million shares of common stock then outstanding, respectively.
During the three months ended June 30, 2000 and March 31, 2000, dividends
of $.0037 per share were declared on the 746.5 million and 745.7 million
shares of common stock then outstanding, respectively.

3. Common stock - On January 18, 2001, the Company's Board of
Directors declared a three-for-two stock split, distributing 253.9 million
shares on February 15, 2001. All share and per share data presented in
the accompanying unaudited condensed consolidated financial statements
and notes thereto have been restated for the stock split.

4. Reclassifications - Certain prior year amounts have been
reclassified to conform to the current year presentation.

5. Net income per share - The following table sets forth the
computation of basic and diluted net income per share (in thousands except
per share amounts)(unaudited):



Three months ended June 30, Six months ended June 30,
2001 2000 2001 2000
NUMERATOR:

Net income before
cumulative effect
of change in
accounting
principle $175,633 $190,622 $296,678 $286,265
Cumulative effect of
change in
accounting
principle - - - (22,131)
Net income available
to common
stockholders $175,633 $190,622 $296,678 $264,134

DENOMINATOR:
Weighted-average
shares outstanding,
basic 762,139 745,943 761,188 745,839
Dilutive effect of
Employee stock
options 44,385 47,126 45,952 45,462
Adjusted weighted-
average shares
outstanding,
diluted 806,524 793,069 807,140 791,301

NET INCOME PER SHARE:
Basic, before
cumulative effect
of change in
accounting principle $.23 $.26 $.39 $.38
Cumulative effect of
change in accounting
principle - - - (.03)
Basic $.23 $.26 $.39 $.35

Diluted, before
cumulative effect of
change in accounting
principle $.22 $.24 $.37 $.36
Cumulative effect of
change in accounting
principle - - - (.03)
Diluted $.22 $.24 $.37 $.33


6. Accounting changes - Effective January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended (SFAS 133). SFAS
133 requires the Company to record all financial derivative instruments on
its balance sheet at fair value. Derivatives that are not designated as
hedges must be adjusted to fair value through income. If the derivative is
designated as a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives that are considered to be effective, as defined,
either offset the change in fair value of the hedged assets, liabilities,
or firm commitments through earnings or are recorded in accumulated other
comprehensive income until the hedged item is recorded in earnings. Any
portion of a change in a derivative's fair value that is considered to be
ineffective, as defined, is recorded immediately in Other (gains)/losses in
the Condensed Consolidated Statement of Income. Any portion of a change in
a derivative's fair value that the Company elects to exclude from its
measurement of effectiveness is required to be recorded immediately in
earnings.

Airline operators are inherently dependent upon energy to operate and,
therefore, are impacted by changes in jet fuel prices. The Company endeavors
to acquire jet fuel at the lowest prevailing prices possible. Because jet
fuel is not traded on an organized futures exchange, liquidity for hedging is
limited. However, the Company has found that crude oil contracts and heating
oil contracts are effective commodities for hedging jet fuel. The Company
has financial derivative instruments in the form of the types of hedges it
utilizes to decrease its exposure to jet fuel price increases. The Company
does not purchase or hold any derivative financial instruments for trading
purposes.

The Company utilizes financial derivative instruments for both short-term
and long-term time frames when it appears the Company can take advantage
of market conditions. At June 30, 2001, the Company had a mixture of
purchased call options, collar structures, and fixed price swap agreements
in place to hedge approximately 80 percent of its remaining 2001 total
anticipated jet fuel requirements, approximately 47 percent of its 2002
total anticipated jet fuel requirements, and small portions of its 2003-
2005 total anticipated jet fuel requirements. As of June 30, 2001,
nearly all of the Company's remaining 2001 hedges, and the majority of its
2002 hedges, are effectively heating oil-based positions. All other
remaining hedge positions are crude oil-based positions.

The Company accounts for its fuel hedge derivative instruments as cash
flow hedges, as defined. Upon adoption of SFAS 133, the Company recorded
the fair value of its fuel derivative instruments in the Condensed
Consolidated Balance Sheet and a deferred gain of $46.1 million, net of
tax, in accumulated other comprehensive income. The portion of the
transition adjustment in "Accumulated other comprehensive income" that was
recognized in earnings during second quarter 2001 was a gain of $10.0
million, net of tax. During second quarter 2001, the Company recognized
approximately $1.8 million as a net reduction of Other losses, related to
the ineffectiveness of its hedges, in the Condensed Consolidated Statement
of Income. During second quarter 2001, the Company recognized approximately
$4.7 million of net expense, related to amounts excluded from the Company's
measurements of hedge effectiveness, in Other (gains)/losses in the
Condensed Consolidated Statement of Income. The Company believes the
adoption of SFAS 133 will result in more volatility in its financial
statements than in the past.

Effective January 1, 2000, the Company adopted Staff Accounting Bulletin
101 (SAB 101) issued by the Securities and Exchange Commission in December
1999. As a result of adopting SAB 101, the Company changed the way it
recognizes revenue from the sale of flight segment credits to companies
participating in its Rapid Rewards frequent flyer program. Prior to the
issuance of SAB 101, the Company recorded revenue to "Other revenue" when
flight segment credits were sold, consistent with most other major airlines.
Beginning January 1, 2000, the Company recognizes "Passenger revenue" when
free travel awards resulting from the flight segment credits sold are earned
and flown or credits expire unused. Due to this change, the Company
recorded a cumulative adjustment in first quarter 2000 of $22.1 million (net
of income taxes of $14.0 million) or $.03 per share, basic and diluted.

7. Comprehensive income - Comprehensive income includes changes in
the fair value of certain financial derivative instruments, which qualify
for hedge accounting, and unrealized gains and losses on certain
investments. For the three and six months ended June 30, 2001,
comprehensive income totaled $171.8 million and $328.6 million,
respectively. The difference between net income and comprehensive income
for the three and six months ended June 30, 2001 is as follows (in
thousands):

Three months ended Six months ended
June 30, 2001 June 30, 2001

Net income $175,633 $296,678

Unrealized gain (loss) on
derivative instruments, net
of deferred taxes of ($2,556)
and $21,020 (3,956) 32,538
Other, net of deferred taxes of
$50 and ($402) 77 (622)
Total other comprehensive income (3,879) 31,916

Comprehensive income $171,754 $328,594


As of June 30, 2001, the Company had approximately $32.5 million in
unrealized gains, net of tax, in accumulated other comprehensive income
related to fuel hedges, of which approximately $30.0 million is expected
to be realized in earnings over the next twelve months following June 30,
2001. Upon the adoption of SFAS 133 on January 1, 2001, the Company
recorded unrealized fuel hedge gains of $46.1 million, net of tax, of
which approximately $45.1 million is expected to be realized in earnings
over the twelve months following January 1, 2001.

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

Accumulated
Fuel other
hedge comprehensive
derivatives Other income
Balance at December 31, 2000 - - -
January 1, 2001 transition
adjustment $ 46,089 - $ 46,089
First half 2001 changes in
value 13,565 ($622) 12,943
Reclassification to earnings (27,116) - (27,116)
Balance at June 30, 2001 $ 32,538 ($622) $ 31,916



Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition


Comparative Consolidated Operating Statistics

Relevant operating statistics for the three and six months ended June
30, 2001 and 2000 follow:

SOUTHWEST AIRLINES CO.
COMPARATIVE CONSOLIDATED
OPERATING STATISTICS

Three months ended June 30, Six months ended June 30,
2001 2000 Change 2001 2000 Change

Revenue
passengers
carried 17,526,753 16,501,441 6.2% 33,242,773 30,890,717 7.6%
Revenue
passenger
miles (RPMs)
(000s) 11,788,386 10,954,767 7.6% 22,450,777 20,407,968 10.0%
Available seat
miles (ASMs)
(000s) 16,443,810 14,744,769 11.5% 32,296,808 28,898,727 11.8%
Load factor 71.7% 74.3% (2.6)pts. 69.5% 70.6% (1.1)pts.
Average length
of passenger
haul 673 664 1.4% 675 661 2.1%
Trips flown 238,397 223,643 6.6% 470,190 442,258 6.3%
Average
passenger
fare $85.89 $85.81 0.1% $86.83 $84.68 2.5%
Passenger revenue
yield per RPM
(cents) 12.77 12.93 (1.2)% 12.86 12.82 0.3%
Operating revenue
yield per ASM
(cents) 9.45 9.91 (4.6)% 9.23 9.35 (1.3)%
Operating expenses
per ASM (cents) 7.68 7.77 (1.2)% 7.68 7.73 (0.6)%
Operating expenses
per ASM,
excluding fuel
(cents) 6.42 6.43 (0.2)% 6.39 6.36 0.5%
Fuel costs per
gallon,
excluding fuel
tax (cents) 74.96 78.02 (3.9)% 76.71 79.95 (4.1)%
Number of
Employees at
period-end 30,369 27,828 9.1% 30,369 27,828 9.1%
Size of fleet at
period-end 356 324 9.9% 356 324 9.9%


Operating expenses per ASM for the three and six months ended June 30,
2001 and 2000 are as follows (in cents except percent change):

Three months ended June 30, Six months ended June 30,
Percent Percent
2001 2000 Change 2001 2000 Change

Salaries, wages,
and benefits 2.46 2.38 3.4 2.48 2.39 3.8
Employee
retirement
plans .42 .48 (12.5) .37 .38 (2.6)
Fuel and oil 1.27 1.34 (5.2) 1.29 1.37 (5.8)
Maintenance
materials and
repairs .63 .61 3.3 .62 .64 (3.1)
Agency
commissions .18 .28 (35.7) .19 .27 (29.6)
Aircraft rentals .29 .33 (12.1) .30 .34 (11.8)
Landing fees and
other rentals .47 .44 6.8 .46 .45 2.2
Depreciation .48 .46 4.3 .48 .47 2.1
Other operating
expenses 1.48 1.45 2.1 1.49 1.42 4.9

Total 7.68 7.77 (1.2) 7.68 7.73 (.6)


Material Changes in Results of Operations

Comparison of Three Months Ended June 30, 2001 to Three Months Ended June 30,
2000

Consolidated net income for second quarter 2001 was $175.6 million
($.22 per share, diluted), as compared to second quarter 2000 net income
of $190.6 million ($.24 per share, diluted), a decrease of 7.9 percent.
The prior year's net income per share amounts have been restated for the
2001 three-for-two stock split (see Note 3 to the unaudited Condensed
Consolidated Financial Statements). Operating income for second quarter
2001 was $290.9 million, a decrease of 7.5 percent compared to 2000.

Consolidated operating revenues increased 6.4 percent primarily due
to a 6.3 percent increase in passenger revenues. The increase in passenger
revenues primarily resulted from the Company's increased capacity, as
available seat miles (ASMs) increased 11.5 percent. The increase in ASMs
resulted primarily from the net addition of 32 aircraft since second
quarter 2000, which represents a 9.9 percent increase in the Company's
fleet size. The increase in ASMs was partially offset by a decrease in the
Company's load factor of 2.6 points to 71.7 percent. The Company
experienced a 6.2 percent increase in revenue passengers carried, a 7.6
percent increase in RPMs, and a 1.2 percent decrease in passenger revenue
yield per RPM (passenger yield). The decrease in passenger yield is
primarily due to a 1.4 percent increase in average length of passenger
haul, while the average passenger fare remained basically flat.

Based on current traffic, booking, and revenue trends thus far in July,
the Company's third quarter 2001 unit revenues are expected to be below those
of third quarter 2000. The third quarter 2001 load factor is currently
expected to be strong relative to historical levels, but has been stimulated
by successful discount and promotional programs. As a result, the Company
also expects earnings to be below the third quarter 2000 level. (The
immediately preceding sentences are forward-looking statements that involve
uncertainties that could result in actual results differing materially from
expected results. Some significant factors include, but may not be limited
to, competitive pressure such as fare sales and capacity changes by other
carriers, general economic conditions, and variations in advance booking
trends.)

Consolidated freight revenues decreased 11.1 percent primarily due
to the current economic and industry environment. There were decreases in
both the number of freight shipments and revenue per shipment. Other
revenues increased 40.8 percent. Approximately 51.4 percent of the increase
in other revenues was from an increase in commissions earned from programs
the Company sponsors with certain business partners, such as the Company
sponsored First USA Visa card, while 25.4 percent of the increase was due
to an increase in charter revenues.

Operating expenses per ASM were $.0768, compared to $.0777 for 2000.
Excluding fuel expense, operating expenses per ASM decreased .2 percent to
$.0642. The Company currently expects that, excluding fuel, operating
expenses per ASM in third quarter 2001 will be slightly lower than last
year's third quarter performance. (The immediately preceding sentence is
a forward-looking statement which involves uncertainties that could result
in actual results differing materially from expected results. Some
significant factors include, but may not be limited to, wage and
productivity pressures from within the Company's work force and general
economic conditions).

Salaries, wages, and benefits per ASM increased 3.4 percent. The
increase was primarily due to an increase in benefits costs, primarily
health care and workers' compensation.

Employee retirement plans expense per ASM decreased 12.5 percent,
primarily due to the decrease in Company earnings available for
profitsharing.

Fuel and oil expense per ASM decreased 5.2 percent due to a 3.9
percent decrease in the average jet fuel cost per gallon compared to 2000.
The average jet fuel cost per gallon in second quarter 2001 was $.7496
compared to $.7802 in second quarter 2000, including the effects of hedging
activities. The Company's second quarter 2001 average jet fuel cost is net
of approximately $20.4 million in "effective" hedging gains, as defined.
See Note 6 to the Condensed Consolidated Financial Statements. The
Company's second quarter 2000 average jet fuel cost is net of approximately
$3.1 million in gains from hedging activities. As of June 30, 2001, the
Company had hedges in place for approximately 80 percent of its anticipated
jet fuel requirements for the remainder of 2001 at prices below market
prices as of June 30, 2001. Including estimated hedging gains and
considering current market prices and the continued effectiveness of the
Company's fuel hedges, we are forecasting our third quarter 2001 average
fuel price per gallon to be below second quarter 2001's average fuel cost
per gallon of $.7496. The Company's fuel hedging strategy could result
in the Company not fully benefiting from certain jet fuel price declines.
(The immediately preceding two sentences are forward-looking statements,
which involve uncertainties that could result in actual results
differing materially from expected results. Such uncertainties include,
but may not be limited to, the largely unpredictable levels of jet fuel
prices and the continued effectiveness of the Company's fuel hedges.)

Maintenance materials and repairs per ASM increased 3.3 percent.
An increase in airframe inspection and repairs expense per ASM was
partially offset by a slight decrease in engine repair expense per ASM.
The increase in airframe inspection and repairs was primarily a result of
more of these repairs being outsourced than in the prior year due to a
larger amount of this type of work than the Company could perform with
internal headcount and facilities. The decrease in engine repair expense
per ASM was primarily due to the Company's capacity growth exceeding the
increase in expense. Virtually all the Company's second quarter capacity
growth was accomplished with new aircraft, most of which have not yet begun
to incur any meaningful engine repair costs. The Company expects third
quarter 2001 maintenance materials and repairs per ASM to approximate
third quarter 2000 expense. (The immediately preceding sentence is a
forward-looking statement involving uncertainties that could result in
actual results differing materially from expected results. Such
uncertainties include, but may not be limited to, any unscheduled
required aircraft airframe or engine repairs and regulatory
requirements.)

Agency commissions per ASM decreased 35.7 percent, primarily due to
a change in the Company's commission rate policy effective January 1, 2001.
The Company reduced the commission rate paid to travel agents from ten
percent to eight percent for Ticketless bookings, and from ten percent
to five percent for paper ticket bookings. The percentage of
commissionable revenues decreased from approximately 28 percent in second
quarter 2000 to approximately 26 percent in second quarter 2001. Due to
the Company's commission policy change in 2001, we expect agency
commissions to continue to show year-over-year decreases throughout 2001
on a per-ASM basis. (The immediately preceding sentence is a forward-
looking statement involving uncertainties that could result in actual
results differing materially from expected results. Such uncertainties
include, but may not be limited to, changes in consumer ticket purchasing
habits.)

Aircraft rentals per ASM decreased 12.1 percent compared to second
quarter 2000 due to a lower percentage of the aircraft fleet being leased.
Approximately 26.4 percent of the Company's aircraft fleet was under
operating lease at June 30, 2001, compared to 29.3 percent at June 30,
2000. Based on the Company's current new aircraft delivery schedule and
scheduled aircraft retirements for 2001, we expect to continue to have
year-over-year decreases throughout 2001 for aircraft rentals expense on
a per-ASM basis. (The immediately preceding sentence is a forward-looking
statement involving uncertainties that could result in actual results
differing materially from expected results. Such uncertainties include,
but may not be limited to, changes in the Company's current schedule for
purchase and/or retirement of aircraft.)

Landing fees and other rentals per ASM increased 6.8 percent
primarily as a result of an increase in other rentals. This increase is
primarily due to the Company's expansion of facilities in several
airports.

Depreciation expense per ASM increased 4.3 percent primarily due
to a higher percentage of owned aircraft. All of the 33 aircraft added to
the Company's fleet over the past twelve months have been purchased. This,
combined with the retirement of one leased aircraft, has increased the
Company's percentage of aircraft owned or on capital lease from 70.7 percent
at June 30, 2000 to 73.6 percent at June 30, 2001.

Other operating expenses per ASM increased 2.1 percent primarily from
small increases in several areas, including system development projects,
insurance costs, and employee-related costs such as relocation, travel, and
non-essential training that had been previously deferred as part of a prior
year cost reduction effort.

Other expenses (income) include interest expense, capitalized interest,
interest income, and other gains and losses. Interest expense decreased 5.6
percent primarily due to a reduction in interest rates on the Company's
floating rate debt. Capitalized interest decreased 18.3 percent primarily
due to a reduction in progress payment balances for future aircraft
deliveries. Interest income decreased 2.6 percent as higher invested cash
balances were more than offset by a decrease in rates earned on investments.
Other losses in second quarter 2001 resulted primarily from the reduction
in the time value portion of financial derivative instruments, such as
premiums paid for option contracts, used in the Company's fuel hedging
program. See Note 6 to the Condensed Consolidated Financial Statements.
Other losses in second quarter 2000 were primarily due to a write-down
associated with a discontinued project.


Comparison of Six Months Ended June 30, 2001 to Six Months Ended June 30, 2000

Consolidated net income for the six months ended June 30, 2001 was
$296.7 million ($.37 per share, diluted), as compared to 2000 net income,
before the cumulative effect of change in accounting principle, of $286.3
million ($.36 per share, diluted), an increase of 3.6 percent. The prior
year's net income per share amounts have been restated for the 2001 three-
for-two stock split (see Note 3 to the unaudited Condensed Consolidated
Financial Statements). The cumulative effect of change in accounting
principle for the six months ended June 30, 2000 was $22.1 million, net
of taxes of $14.0 million (see Note 6 to the unaudited Condensed
Consolidated Financial Statements). Net income and diluted net income per
share, after the cumulative change in accounting principle, for the six
months ended June 30, 2000 were $264.1 million and $.33, respectively.
Operating income for the six months ended June 30, 2001 was $501.0 million,
an increase of 6.6 percent compared to 2000.

Consolidated operating revenues increased 10.3 percent primarily due
to a 10.4 percent increase in passenger revenues. The increase in
passenger revenues primarily resulted from the Company's increased
capacity. The Company experienced a 7.6 percent increase in revenue
passengers carried, a 10.0 percent increase in RPMs, and a .3 percent
increase in passenger revenue yield per RPM (passenger yield). The
increase in RPMs coupled with an 11.8 percent increase in ASMs resulting
in a load factor of 69.5 percent, or 1.1 points below the same prior year
period. The increase in ASMs resulted primarily from the net addition
of 32 aircraft since second quarter 2000, which represents a 9.9 percent
increase in the Company's fleet size.

Consolidated freight revenues decreased 8.0 percent primarily due to
the current economic and industry environment. There were decreases in
both the number of freight shipments and revenue per shipment. Other
revenues increased 39.1 percent. Approximately 51.3 percent of the
increase in other revenues was from an increase in commissions earned from
programs the Company sponsors with certain business partners, such as the
Company sponsored First USA Visa card, while 26.4 percent of the increase
was due to an increase in charter revenues.

Operating expenses per ASM were $.0768, compared to $.0773 for 2000.
Excluding fuel expense, operating expenses per ASM increased .5 percent
to $.0639.

Salaries, wages, and benefits per ASM increased 3.8 percent.
Approximately 57 percent of the increase was due to an escalation in
health benefits costs, while approximately 43 percent of the increase
was in salaries and wages.

Employee retirement plans expense per ASM decreased 2.6 percent,
primarily due to the increase in ASMs exceeding the increase in Company
earnings available for profitsharing.

Fuel and oil expense per ASM decreased 5.8 percent due to a 4.1
percent decrease in the average jet fuel cost per gallon compared to 2000.
The average jet fuel cost per gallon for the six months ended June 30, 2001
was $.7671 compared to $.7995 in 2000, including the effects of hedging
activities. The Company's 2001 average jet fuel cost is net of
approximately $44.8 million in "effective" hedging gains, as defined. See
Note 6 to the Condensed Consolidated Financial Statements. The Company's
2000 average jet fuel cost is net of approximately $6.3 million in gains
from hedging activities.

Maintenance materials and repairs per ASM decreased 3.1 percent. A
decrease in engine repair expense per ASM was partially offset by an
increase in airframe inspection and repairs expense per ASM. The
decrease in engine repair expense per ASM was primarily due to the
Company's capacity growth exceeding the increase in expense. Virtually
all the Company's 2001 capacity growth was accomplished with new aircraft,
most of which have not yet begun to incur any meaningful engine repair
costs. The increase in airframe inspection and repairs was primarily a
result of more of these repairs being outsourced than in the prior year
due to a larger amount of this type of work than the Company could perform
with internal headcount and facilities.

Agency commissions per ASM decreased 29.6 percent, primarily due to
a change in the Company's commission rate policy effective January 1, 2001.
The Company reduced the commission rate paid to travel agents from ten
percent to eight percent for Ticketless bookings, and from ten percent
to five percent for paper ticket bookings. The percentage of
commissionable revenues decreased from approximately 29 percent in 2000 to
approximately 27 percent in 2001.

Aircraft rentals per ASM decreased 11.8 percent due to a lower
percentage of the aircraft fleet being leased.

Landing fees and other rentals per ASM increased 2.2 percent primarily
as a result of an increase in other rentals. This increase is primarily due
to the Company's expansion of facilities in several airports.

Depreciation expense per ASM increased 2.1 percent primarily due to
a higher percentage of the aircraft fleet being owned.

Other operating expenses per ASM increased 4.9 percent primarily from
small increases in several areas that had previously been deferred as part
of a prior year cost reduction effort.

Other expenses (income) include interest expense, capitalized interest,
interest income, and other gains and losses. Interest expense decreased 3.4
percent primarily due to a reduction in interest rates on the Company's
floating rate debt. Capitalized interest decreased 14.9 percent primarily
due to a reduction in progress payment balances for future aircraft
deliveries. Interest income increased 11.4 percent primarily due to an
increase in invested cash balances. Other losses in 2001 resulted
primarily from the reduction in the time value portion of financial
derivative instruments, such as premiums paid for option contracts, used in
the Company's fuel hedging program. See Note 6 to the Condensed
Consolidated Financial Statements.

Liquidity and Capital Resources

Net cash provided by operating activities was $904.8 million for the
six months ended June 30, 2001 and $1,391.6 million for the 12 months
then ended. Cash generated for the 12 months ended June 30, 2001 was
primarily used to finance aircraft-related capital expenditures and
provide working capital.

During the 12 months ended June 30, 2001, net capital expenditures
were $1,099.4 million, which primarily related to the purchase of 33 new
737-700 aircraft, and progress payments for future aircraft deliveries.

The Company's contractual commitments consist primarily of
scheduled aircraft acquisitions. As of June 30, 2001, 13 737-700s are
scheduled for delivery in the remainder of 2001, 27 in 2002, 13 in 2003,
29 in 2004, five in 2005, and 47 thereafter. In addition, the Company
has options to purchase up to 87 737-700s during 2003-2008 and purchase
rights for an additional 217 737-700s during 2007-2012. The Company has
the option, which must be exercised two years prior to the contractual
delivery date, to substitute 737-600s or 737-800s for the 737-700s
scheduled subsequent to 2002. Aggregate funding needed for fixed
commitments at June 30, 2001 was approximately $3,675 million due as
follows: $348 million in 2001; $766 million in 2002; $472 million in 2003;
$641 million in 2004; $379 million in 2005; and $1,069 million thereafter.

The Company has various options available to meet its capital and
operating commitments, including cash on hand at June 30, 2001 of $968.3
million, internally generated funds, and a revolving credit line with a
group of banks of up to $475 million (none of which had been drawn at June
30, 2001). In addition, the Company will also consider various borrowing
or leasing options to maximize earnings and supplement cash requirements.

The Company currently has outstanding shelf registrations for the
issuance of $318.8 million in public debt securities, which it may utilize
for aircraft financing during 2001 and 2002.

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

The Company recently announced new service to Norfolk International
Airport in Norfolk, Virginia. Service will begin on October 7, 2001, with
daily nonstop flights from Baltimore/Washington, Jacksonville, Las Vegas,
and Orlando, plus direct or connecting service from 32 other cities.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See Item 7A. Quantitative and Qualitative Disclosures About Market Risk
in the Company's Annual Report on Form 10-K for the year ended December 31,
2000 and Note 6 to the Condensed Consolidated Financial Statements.




PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

The IRS similarly proposed to disallow deductions claimed by the Company
on its federal income tax returns for the taxable years 1992 through 1994
for the costs of certain aircraft inspection and maintenance expenses.
Although the examination of such returns has not been finally concluded,
the IRS has advised the Company that it will concede the proposed
adjustments to the deductions claimed for these aircraft inspection and
maintenance expenses. Management believes the final resolution of this
controversy will not have a material adverse effect upon the financial
position or results of operations of the Company.

Item 2. Changes in Securities and Use of Proceeds

Recent Sales of Unregistered Securities

None

Item 3. Defaults upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

The Company's Annual Meeting of Shareholders was held in Dallas, Texas
on Wednesday, May 16, 2001. The following matters were voted on at the
meeting:

(i) The following nominees were elected to the Company's Board of
Directors to hold office for a term expiring in 2004: C. Webb Crockett:
612,072,046 shares voted for and 49,410,553 shares withheld; William P.
Hobby: 612,356,815 shares voted for and 49,125,784 shares withheld;
Travis C. Johnson: 614,151,994 shares voted for and 47,330,605 shares
withheld. There were no broker non-votes on this matter.

(ii) A Company proposal to amend the Company's Articles of Incorporation
to increase the number of authorized shares was considered. A total of
610,752,557 shares were voted for the proposal, 48,303,507 shares were
voted against the proposal and 2,426,535 shares abstained from voting.
There were no broker non-votes on this matter.

(iii) A Company proposal to approve an officer's stock option agreements
was considered. A total of 534,355,956 shares were voted for the proposal,
122,778,161 shares were voted against the proposal and 4,348,482 shares
abstained from voting. There were no broker non-votes on this matter.

(iv) A Company proposal to amend the Company's Employee Stock Purchase
Plan was considered. A total of 647,745,993 shares were voted for the
proposal, 10,949,100 shares were voted against the proposal and 2,787,506
shares abstained from voting. There were no broker non-votes on this
matter.

(v) A shareholder proposal related to shareholder right to vote on the
Company's shareholder rights plan was considered. A total of 371,239,730
shares were voted for the proposal, 205,702,143 shares were voted against
the proposal and 7,026,161 shares abstained from voting. There were
77,514,565 broker non-votes on this matter.

(vi) A shareholder proposal related to annual election of directors
was considered. A total of 332,806,499 shares were voted for the proposal,
245,084,706 shares were voted against the proposal and 6,076,829 shares
abstained from voting. There were 77,514,565 broker non-votes on this
matter.

Item 5. Other Information

Effective June 19, 2001, Herbert D. Kelleher relinquished his duties
as President and Chief Executive Officer. In addition, Mr. Kelleher,
70, signed a new three-year employment contract to remain as Chairman
of the Board. Mr. Kelleher will continue his responsibilities for
the consideration and effectuation of board policies; longer range
strategic planning; Governmental Affairs; and from a marketing
standpoint, Schedule Planning.

Jim Parker, formerly Vice President-General Counsel, moved into Mr.
Kelleher's position as Chief Executive Officer with the additional
title of Vice Chairman. The President and Chief Operating Officer,
the Vice President-Revenue Management, and the Executive Vice
President-Chief Financial Officer (as to Finance and Fuel) will
report to Mr. Parker, 54, in his new duties.

Colleen Barrett, formerly Executive Vice President-Customers and
Corporate Secretary, moved into Mr. Kelleher's position as President
with the additional title of Chief Operating Officer and maintaining
her title as Corporate Secretary. The Executive Vice President-
Customers, Executive Vice President-Operations, and Executive Vice
President-Chief Financial Officer (as to Systems, Purchasing, and
Technical Services) will report to Ms. Barrett, 56, in her new
duties.

Gary Kelly, formerly Vice President-Finance and Chief Financial
Officer became Executive Vice President-Chief Financial Officer,
replacing John Denison, who previously announced his retirement. Mr.
Kelly, 46, has primary responsibilities for Finance, Fuel, Systems,
Purchasing, and Technical Services Departments.

Donna Conover, formerly Vice President-Inflight and Provisioning,
became Executive Vice President-Customers. Ms. Conover, 48, has
primary responsibilities for the People, Customer Relations and
Rapid Rewards, Reservations, and Inflight and Provisioning
Departments.

Jim Wimberly, Executive Vice President-Chief of Operations, 48, has
added supervisory responsibility for the Properties and Facilities
Department, in addition to his previous responsibilities for the
Maintenance, Ground Operations, Flight Operations, and Schedule
Planning (as to operational aspects) Departments.


Item 6. Exhibits and Reports on Form 8-K

a) Exhibits

(3.1) Articles of Amendment to the Articles of Incorporation
of Southwest dated as of May 21, 2001

(3.2) Bylaws of Southwest, as amended through May 2001

b) Reports on Form 8-K

None






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SOUTHWEST AIRLINES CO.

August 1, 2001 By /s/ Gary C. Kelly

Gary C. Kelly
Executive Vice President -
Chief Financial Officer
(Principal Financial and
Accounting Officer)