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Rating Action:

Moody's affirms Baa3 rating of Southwest Airlines Co; outlook stable

27 Feb 2013

Lowers rating of A-tranche of Southwest's Series 2007-1 EETC

New York, February 27, 2013 -- Moody's Investors Service affirmed the Baa3 Senior Unsecured rating assigned to Southwest Airlines Co Inc. ("Southwest"). Moody's also affirmed the Baa2 ratings assigned to the certain Equipment Trust Certificates of Southwest that mature through 2021, the Baa3 rating assigned to the B-tranche of Southwest's 2007-1 Enhanced Equipment Trust Certificates ("EETCs") and the ratings assigned to AirTran Airways' 1999-1 EETC, including the A-tranche at Baa1. Moody's downgraded the rating of the A-tranche of the Series 2007-1 EETC of Southwest to A3 from A2. The outlook is stable.

Downgrades:

..Issuer: Southwest Airlines Co.

....Senior Secured Enahnced Equipment Trust Certificates, Series 2007-1, Downgraded to A3 from A2

RATINGS RATIONALE

The lowering of the rating on the A-tranche of the 2007-1 EETC reflects the decline in the equity cushion in this transaction because of continuing pressure on the market value of Boeing B737-700 aircraft, according to Moody's estimates. The sixteen aircraft in the collateral of this financing represent almost 4% of the 424 B737-700s in Southwest's fleet and at about six years old on average are two years younger than the eight year average age for this aircraft type in its fleet. Moody's believes that the market values of the B737-700 are unlikely to experience a revival such that the loan-to-value of this tranche would meaningfully decline to a level that would support more than three notches above the company's unsecured rating under Moody's EETC Rating Methodology. Up-gauging by operators and a shrinking pool of potential operators because of order books at operators that in years past would have been prospective lessees are likely to crimp demand and thus values for these aircraft. The introduction of the A320Neo and B737MAX derivatives of the existing narrowbody line-ups of Airbus and Boeing can also sustain pressure on values of the incumbent models, particularly in later years after these aircraft begin to deliver in numbers. The ratings consider the credit quality of Southwest as obligor under the related equipment notes; the modest collateral protection of the Notes; the credit support provided by the liquidity facility, the benefits of the cross-subordination features to the A-tranche holders and the applicability of Section 1110 of Title 11 of the United States Code (the "Code")

Any combination of future changes in the underlying credit quality or ratings of Southwest and or an unexpected material change in the value of the B737-700 could cause Moody's' to change its ratings of the Certificates.

The Baa3 senior unsecured rating reflects the benefits of Southwest's significant brand equity, existing extensive route network and competitive cost structure. These characteristics helped Southwest maintain its leadership in originating domestic passengers among U.S. airlines prior to and since the 2009 recession. Moody's continues to believe that Southwest's business model should enable it to sustain its leading competitive position over economic cycles. The Baa3 rating also incorporates Moody's anticipation of further strengthening of credit metrics and free cash flow generation throughout 2013, because of Southwest's continuing focus on yield and cost management and ongoing integration of the AirTran and Southwest networks and operations. Removal of the higher unit cost Boeing B717s starting in August 2013, additional deliveries of the lower unit cost B737-800 and further integration of the AirTran operations should help the company manage its unit costs to support operating profitability. Moody's believes that the long-running shift of market share from the domestic networks of legacy to low-fare carriers, including Southwest, can continue in the next two years, as low fare carriers expand the number of markets they serve and as the legacy carriers continue their disciplined allocation of capacity. Good liquidity also supports the Baa3 rating.

The principal methodology used in this rating was the Global Passenger Airlies Industry Methodology published in May 2012 and Enhanced Equipment Trust And Equipment Trust Certificates Industry Methodology published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Southwest is the United States' largest carrier in terms of originating passengers boarded as measured by the U.S. Department of Transportation, and including wholly-owned subsidiary, AirTran Airways, operates the largest fleet of Boeing aircraft in the world to serve 97 destinations in 41 states, the District of Columbia, the Commonwealth of Puerto Rico, and six near-international countries. Based in Dallas, Texas, the two companies currently operate more than 3,800 flights a day.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jonathan Root
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Baa3 rating of Southwest Airlines Co; outlook stable
No Related Data.
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