The “Southwest Effect” is Alive and Well Case Studies July 2015

Page 2 Southwest Effect Summary Southwest Effect is alive and applicable in different types of markets The Southwest Effect can be seen in different market examples: –Houston, TX: Established, longtime Southwest city with new nonstop markets –Charleston, SC: Small city with low service levels and high fares –Memphis, TN: Medium-sized city traditionally dominated by one airline –Philadelphia, PA: Large city dominated by one airline The Southwest Effect is good for all Southwest stakeholders: –More people get to fly to their favorite destinations at lower fares. –More traffic means more visitors that help stimulate local economies. –More traffic means more enplanements, which means more airport revenues. –Southwest welcomes more Customers and revenue.

Page 3 Houston, TX Established, longtime Southwest city with new nonstop markets While Southwest has served Houston for over 40 years, recent new nonstop Southwest markets continue to stimulate traffic and lower fares in the Houston area. In 82% of the 11 Houston markets started by Southwest since , the average industry fare fell after Southwest entry, stimulating traffic. On the aggregate, the fare in these 11 markets fell by an average of 8% after entry, growing traffic 24%. 1.New Southwest markets started since 2012 do not include service that converted from AirTran to Southwest (e.g., ATL-HOU). 2.“Before” reflects the four quarters ended prior to the beginning of Southwest service. “After” reflects the four quarters ended after the beginning of Southwest service. “Current” reflects the most recent year of available DOT data (year-ended December 31, 2014). 3.“Passengers” are origin and destination passengers per day each way, to/from Houston Hobby (HOU) and Bush (IAH) combined, for each period in question. 4.Data is based on nonstop flights. 5.Fares represent average purchased fare. Before 2 After 2 After vs Before % Change Current 2 Current vs Before % Change Service BeginsPassengers 3 FarePassengers 3 FarePassengersFarePassengers 3 FarePassengersFare Boston, MA 6/2/ $253610$185 44%-27% 663$177 56%-30% Charlotte, NC 4/14/ $263264$219 33%-17% 287$206 45%-22% Indianapolis, IN 11/4/ $226219$188 32%-17% 247$176 49%-22% Kansas City, MO 4/22/ $165265$194 -3%18% 319$166 17%1% Memphis, TN 11/3/ $182163$166 75%-9% 163$166 75%-9% New York, NY (LGA) 6/2/ $243882$228 19%-6% 941$224 27%-8% Orange County, CA 11/4/ $229308$222 33%-3% 304$225 31%-2% Pensacola, FL 11/3/ $22980$174 78%-24% 80$174 78%-24% Pittsburgh, PA 4/14/ $245311$258 7%5% 324$251 11%2% Raleigh-Durham, NC 4/22/ $207208$200 11%-3% 224$192 19%-7% Washington, D.C. (DCA) 8/4/ $232562$224 21%-3% 578$218 24%-6% Market Entry Avg 3,115 $231 3,872 $212 24%-8% 4,130 $204 33%-12% Source: DOT DB1B data

Page 4 Charleston, SC Low service levels, high fares Southwest stimulates traffic not only in large airports with service from multiple carriers, but also smaller, underserved airports. In the first year of Charleston service, Southwest was able to facilitate traffic growth of an average of 147% by lowering average fares by 27% in the four nonstop markets it served. After approximately three years of service, the traffic average has grown by 174%, and average fares remain 25% lower. Before 1 After 1 After vs Before % Change Current 1 Current vs Before % Change Service BeginsPassengers 2 FarePassengers 2 FarePassengersFarePassengers 2 FarePassengersFare Baltimore, MD 3/13/201149$182192$126295%-31%204$118320%-35% Chicago, IL 3 3/13/ $188206$156102%-17%232$162127%-14% Houston, TX 4 3/13/201160$20392$17754%-13%100$18367%-10% Nashville, TN 3/13/201120$23179$109294%-53%96$121380%-48% Market Entry Avg 230$194569$143147%-27%631$145174%-25% Source: DOT DB1B data 1. “Before” reflects the four quarters ended prior to the beginning of Southwest service. “After” reflects the four quarters ended after the beginning of Southwest service. “Current” reflects the most recent year of available DOT data (year-ended December 31, 2014). 2. “Passengers” are origin and destination passengers per day each way for the period 3. Chicago data combines MDW and ORD airports 4. Houston data combines HOU and IAH airports 5. Data is based on nonstop flights. 6. Fares represent average purchased fare.

Page 5 Memphis, TN Medium-sized city traditionally dominated by one airline Memphis traditionally had high fares when it served as a Delta/Northwest hub. Southwest entered key business and leisure routes and significantly stimulated the local demand in Memphis. Since Southwest service began, average traffic in these markets rose by 52%, while fares have decreased an average of 19%. 1. “Before” reflects the four quarters ended prior to the beginning of Southwest service. “After” reflects the four quarters ended after the beginning of Southwest service. “Current” reflects the most recent year of available DOT data (year-ended December 31, 2014). 2. “Passengers” are origin and destination passengers per day each way for the period 3. Chicago data combines MDW and ORD airports 4. Houston data combines HOU and IAH airports 5. Data is based on nonstop flights. 6. Fares represent average purchased fare. Before 1 After 1 After vs Before % Change Current 1 Current vs Before % Change Service BeginsPassengers 2 FarePassengers 2 FarePassengersFarePassengers 2 FarePassengersFare Baltimore, MD 8/11/201387$144155$12579%-13%142$13064%-10% Chicago, IL 3 8/11/ $231255$16657%-28%256$16357%-29% Houston, TX 4 11/3/201393$182163$16675%-9%163$16675%-9% Orlando, FL 8/11/ $164241$13331%-19%235$13728%-16% Tampa, FL 11/3/201389$170122$14038%-18%122$14038%-18% Market Entry Avg 615$183937$14752%-19%918$14949%-19% Source: DOT DB1B data

Page 6 Philadelphia-Pittsburgh: Effect of a Southwest market exit At times, Southwest has had to make the difficult decision to exit markets, and the reverse of the Southwest Effect can be seen as airlines raise fares. Philadelphia-Pittsburgh industry traffic Origin and destination passengers and fares, year-ending values Source: DOT DB1B data Average Fare Passengers Daily Each Way (PDEW) Since Southwest exited the market, average fares rose 88% and traffic fell an average 46% 1. Data is based on nonstop flights. 2. Fares represent average purchased fare.

Page 7 Southwest’s Current Philadelphia Markets Yet, in the Philadelphia markets Southwest still served in 2014, its fare was lower than industry average by 13% and lower than the hub competitor (American/US Airways) by 19% Average fares in Philadelphia to/from current 1 Southwest destinations Origin and Destination average fares, full year “Current” Philadelphia markets includes any nonstop market Southwest or AirTran was flying in 2014, which is the last year of available DOT data. 2. “WN” includes Southwest and AirTran; “AA” includes American and US Airways 3. Chicago data combines MDW and ORD airports 4. “Market Average” weights AA’s and Industry Average fares by the number of Southwest passengers in each Philadelphia market for a cleaner comparison. 5. Data is based on nonstop flights. 6. Fares represent average purchased fare. WN 2 AA 2 Industry AvgWN vs AAWN vs Industry Avg Atlanta, GA$131 $193$182-32%-28% Chicago, IL 3 $175 $204$195-14%-10% Denver, CO$190 $210$208-10%-9% Fort Lauderdale, FL$124 $163$151-24%-17% Fort Myers, FL$131 $175$166-25%-21% Las Vegas, NV$156 $204$175-24%-11% Nashville, TN$142 $186$163-24%-13% Orlando, FL$131 $152$144-14%-9% Phoenix, AZ$193 $253$234-24%-18% St. Louis, MO$169 $204$187-17%-10% Tampa, FL$132 $161$152-18%-13% West Palm Beach, FL$127 $174$163-27%-22% Market Average 4 $148$183$171-19%-13% Source: DOT DB1B data