ex10_4.htm


    Exhibit
      10.4

    


    EMPLOYMENT
      CONTRACT

    


    THIS
      EMPLOYMENT CONTRACT (hereinafter referred to as this “Agreement”),
      dated as of July 15, 2007, by and between GARY C. KELLY
(hereinafter referred to as the “Employee”), a resident of Dallas,
      Texas, and SOUTHWEST AIRLINES CO. (hereinafter referred to as
“Southwest”, which term shall include its subsidiary companies where
      the context
      so admits), a Texas corporation,

    W
      I T N E S S E T H:

    WHEREAS
      the Employee has served as Chief Executive Officer of Southwest since
      July 15, 2004, pursuant to an Employment Contract dated as of such date (the
      “Old Contract”); and

    WHEREAS
      the Employee and Southwest desire to enter into a successor agreement for the
      continuing full-time services of the Employee, and to amend and restate certain
      provisions of the Old Contract;

    NOW,
      THEREFORE, for and in consideration of the premises and the mutual
      covenants and promises contained herein, Southwest and the Employee agree as
      follows:

    I.  POSITION,
      DUTIES AND AUTHORITY

    
      	
              A.

            	
              POSITIONS,
                DUTIES AND RESPONSIBILITIES.  The Employee shall serve
                as Chief Executive Officer of Southwest, and, for so long as he shall
                be
                elected to the Board of Directors of Southwest and so designated
                by the
                Board, he shall serve as Vice Chairman of the Board without additional
                compensation hereunder.  The Employee’s duties and
                responsibilities as Chief Executive Officer shall include general
                oversight of the operational performance of Southwest; managing costs
                and
                generating revenues in order to achieve excellent financial performance;
                representing Southwest to its multitude of exterior constituencies;
                implementing Southwest’s current and long range business policies and
                programs; handling, or overseeing, major contract negotiations; and,
                in
                general, maintaining employee morale and esprit de
                corps.  In addition, he shall perform such other corporate
                duties and discharge such other corporate responsibilities as are
                specified in the bylaws of Southwest or are designated from time
                to time
                by either the Chairman of the Board of Directors of Southwest or
                the full
                Board of Directors.

            


    

    
      	
              B.

            	
              AUTHORITY.  The
                Employee shall be vested with all authority reasonably necessary
                to carry
                out his duties and responsibilities as set forth in this Article
                I.

            


    

    
      	
              C.

            	
              NECESSARY
                SUPPORT AND ENVIRONMENT.  The Employee shall be
                provided with the secretarial and other support personnel (including
                a
                full-time administrative assistant) and general working environment
                (including a private, furnished office) reasonably necessary for
                him to
                carry out his duties and responsibilities as set forth in this Article
                I.

            


    

     

    
      
        
        

      

      
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    II.  EMPLOYEE’S
      OBLIGATIONS

    
      	
              A.

            	
              TIME
                AND EFFORT.  During the term of his employment
                hereunder, the Employee shall devote such time and effort as is required
                to perform his duties and to discharge his responsibilities
                hereunder.  The Employee shall generally conform with all
                policies of Southwest as they apply to a person of his level of duties
                and
                responsibilities.

            


    

    
      	
              B.

            	
              NON-COMPETITION.  The
                Employee recognizes and understands that in performing the duties
                and
                responsibilities of his employment as outlined in this Agreement
                and
                pursuant to his employment at Southwest prior to the execution of
                this
                Agreement, the Employee has occupied and will occupy a position of
                trust
                and confidence, pursuant to which the Employee has developed and
                acquired
                and will develop and acquire experience and knowledge with respect
                to
                various aspects of the business of Southwest and the manner in which
                such
                business is conducted.  It is the expressed intent and agreement
                of the Employee and Southwest that such knowledge and experience
                shall be
                used in the furtherance of the business interests of Southwest and
                not in
                any manner which would be detrimental to such business interests
                of
                Southwest.  The Employee therefore agrees that, so long as the
                Employee is employed pursuant to this Agreement, unless he first
                secures
                the consent of the Board of Directors of Southwest, the Employee
                will not
                invest, engage or participate in any manner whatsoever, either personally
                or in any status or capacity (other than as a shareholder of less
                than one
                percent [1%] of the capital stock of a publicly owned corporation),
                in any
                business or other entity organized for profit engaged in significant
                competition with Southwest in the conduct of its air carrier operations
                anywhere in the States of Texas, Louisiana, Oklahoma, New Mexico,
                Missouri, Arizona, Nevada, California, Arkansas, Alabama, Tennessee,
                Kentucky, Michigan, Indiana, Ohio, Maryland, Illinois, Utah, Washington,
                Oregon, Nebraska, Florida, Idaho, Mississippi, New Hampshire, New
                York,
                Pennsylvania, Rhode Island, Connecticut, North Carolina, Virginia,
                and
                Colorado.  Although the Employee and Southwest regard such
                restrictions as reasonable for the purpose of preserving Southwest
                and its
                proprietary rights, in the event that the provisions of this Paragraph
                II-B should ever be deemed to exceed the time or geographic limitations
                permitted by applicable laws, then such provisions shall be reformed
                to
                the maximum time or geographic limitations permitted by applicable
                laws.

            


    

    III.  TERM

    
      	
              A.

            	
              TERM.  This
                Agreement and the Employee’s employment hereunder shall commence and
                become effective on and as of July 15, 2007.  The term of such
                employment shall expire on February 1, 2011, unless extended by consent
                of
                the parties hereto or earlier terminated pursuant to the provisions
                of
                Article V.

            


    

    IV.  EMPLOYEE’S
      COMPENSATION

    
      	
              A.

            	
              BASE
                SALARY.  The Employee’s annual Base Salary shall be
                $424,065.  The Board of Directors of Southwest (or the
                Compensation Committee thereof) may grant a raise to the Employee
                at such
                times and in such amounts as such Board (or Committee) may determine.
                The
                Employee’s Base Salary shall be payable to the Employee in equal
                semi-monthly installments.  The Employee’s Base Salary
                installment payments shall be subject to such payroll and withholding
                deductions as may be required by
                law.

            


    

    
      	
              B.

            	
              PERFORMANCE
                BONUS.  The Board of Directors of Southwest (or the
                Compensation Committee thereof) may grant a Performance Bonus to
                the
                Employee, in addition to his Base Salary, at such times and in such
                amounts as such Board (or Committee) may
                determine.

            


    

    
      	
              C.

            	
              DEFERRED
                COMPENSATION.  In addition to the Base Salary provided
                for in Paragraph IV-A above, Southwest shall continue to set aside on
                its books, as provided in Paragraph IV-C of the Old Contract,  a
                special ledger Deferred Compensation Account (the “Account”) for the
                Employee, and shall credit thereto Deferred Compensation determined
                as
                hereinafter provided.  (Southwest at its election may fund the
                payment of Deferred Compensation by setting aside and investing such
                funds
                as Southwest may from time to time determine.  Neither the
                establishment of the Account, the crediting of Deferred Compensation
                thereto, nor the setting aside of any funds shall be deemed to create
                a
                trust.  Legal and equitable title to any funds set aside shall
                remain in Southwest, and the Employee shall have no security or other
                interest in such funds.  Any funds so set aside or invested
                shall remain subject to the claims of the creditors of Southwest,
                present
                and future.)  For each full or partial calendar year as the
                Employee shall remain in the employment of Southwest under this Agreement,
                Deferred Compensation shall accumulate in an amount  equal to
                any contributions (including forfeitures but excluding any elective
                deferrals actually returned to the Employee) which would otherwise
                have
                been made by Southwest on behalf of the Employee to the Southwest
                Airlines
                Co. Profitsharing Plan and Southwest Airlines Co. 401(k) Plan, but
                which
                exceed the amount permitted to be so contributed due to the limitations
                under Sections 415(c) (the “415(c) Excess Amount”) and 401(a)(17) of the
                Internal Revenue Code..  If such employment shall terminate
                prior to December 31 in any calendar year, then Deferred Compensation
                shall accumulate and be calculated as provided under the terms of
                Southwest’s Profitsharing Plan.  Employee hereby elects not to
                invest the 415(c) Excess Amount in Southwest’s 2005 Excess Benefit Plan
                (or any successor plan).  

                  The
                Deferred Compensation credited to the Account (including the Interest
                hereinafter provided) shall be paid to the Employee  at the rate
                of $200,000 per calendar year (subject to such payroll and withholding
                deductions as may be required by law), commencing with the calendar
                year
                following the year in which (i) the Employee shall become sixty-five
                (65)
                or (ii) the Employee’s employment with Southwest shall terminate (whether
                such termination is under this Agreement or otherwise and whether
                it is
                before, on or after the expiration of the initial term set forth
                in
                Paragraph III-A above, and irrespective of the cause thereof), whichever
                shall occur later, and continuing until the entire amount of Deferred
                Compensation and Interest credited to the Account shall have been
                paid.  Although the total amount of Deferred Compensation
                ultimately payable to the Employee hereunder shall be computed in
                accordance with the provisions set forth above, there shall be accrued
                and
                credited to the Account, beginning on January 1, 2007 (if not so
                accrued
                and credited pursuant to the Old Contract, and if so accrued and
                credited,
                then beginning on January 1, 2008) and continuing annually thereafter
                until the entire balance of the account has been distributed (whether
                such
                distribution takes place during the term of this Agreement or thereafter),
                amounts equal to simple interest at the rate of ten percent (10%)
                per
                annum, compounded annually (“Interest”), on the accrued and unpaid balance
                of the Deferred Compensation credited to the Account as of the preceding
                December 31.  The Deferred Compensation and Interest to be paid
                in any one calendar year shall be paid on the first business day
                of such
                calendar year; provided, however, that if the event triggering
                commencement of payment of Deferred Compensation and Interest is
                Employee’s termination of employment with Southwest, payment of the first
                of such annual Deferred Compensation and Interest payments shall
                be
                deferred to the extent necessary to cause such payment to comply
                with the
                six month deferral rule described in Section 409A(a)(2)(B) of the
                Internal
                Revenue Code if Employee at his termination of employment with Southwest
                is a “specified employee” within the meaning of such
                section.  Notwithstanding the foregoing, in the event of the
                Employee’s death, then the unpaid balance of the Deferred Compensation
                (together with any accrued Interest thereon) shall be paid to the
                executors or administrators of the Employee’s estate in cash in one lump
                sum on the first business day of the calendar year next following
                the
                calendar year in which the Employee shall have died.  No right,
                title, interest or benefit under this Paragraph IV-C shall ever be
                liable
                for or charged with any of the torts or obligations of the Employee
                or any
                person claiming under him, or be subject to seizure by any creditor
                of the
                Employee or any person claiming under him.  Neither the Employee
                nor any person claiming under him shall have the power to anticipate
                or
                dispose of any right, title, interest or benefit under this Paragraph
                IV-C
                in any manner until the same shall have been actually distributed
                by
                Southwest.

            


    

    Except
      with respect to the 415(c) Excess Amount elections, Paragraph IV-C of the Old
      Contract is hereby amended and restated to conform to the provisions set forth
      herein.

     

    
      
        
        

      

      
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              D.

            	
              DISABILITY
                INSURANCE.  During the term of this Agreement,
                Southwest shall provide long term disability insurance providing
                for
                payment, in the event of disability of the Employee, of $10,000 per
                month
                to age seventy (70).  Except as to amounts payable, the terms
                and conditions of such policy shall be identical, or substantially
                similar, to the disability insurance provided by Southwest for its
                other
                officers as of the date of this
                Agreement.

            


    

    
      	
              E.

            	
              MEDICAL
                AND DENTAL EXPENSES.  During the term of this
                Agreement, the Employee shall remain eligible to participate in any
                medical benefit plan or program that Southwest makes available to
                its
                employees generally. Upon termination of his employment with Southwest,
                the Employee shall be eligible to participate in any non-contract
                retiree
                medical benefit plan or program that Southwest may then make available
                to
                its retirees generally. Southwest shall reimburse the Employee for
                all his
                out-of-pocket expenses (including specifically all premiums and
                deductibles) that the Employee may incur for himself, his spouse
                and his
                children under any such Southwest plan or program during the term
                of this
                Agreement.  In addition, Southwest shall pay Employee the sum of
                $10,000 per year to be applied to any supplemental insurance needs
                he may
                have, such amount to be payable on August 1 of each year during the
                term
                of this Agreement, beginning August 1,
                2007.

            


    

    
      	
              F.

            	
              STOCK
                OPTION GRANT.  In connection with its approval of the
                terms of this Agreement on July 19, 2007, the Compensation Committee
                of
                the Board of Directors granted to the Employee ten-year options to
                purchase 150,000 shares of its common stock. Such options were granted
                pursuant to the Company’s 2007 Equity Incentive Plan and one-third of such
                options were exercisable immediately and one-third will become exercisable
                on each of July 15, 2008 and July 15, 2009.  Such options shall
                be incentive stock options to the maximum extent permissible under
                the
                terms of the 2007 Equity Incentive Plan.  The exercise price of
                such options shall be the fair market value of Southwest’s common stock on
                July 19, 2007 or the date of approval of the form of this Agreement
                by the
                Compensation Committee, whichever is
                higher.

            


    

    
      	
               G.

            	
              OTHER
                BENEFITS.  The Employee shall be eligible to continue
                to participate in all employee pension, profit-sharing, stock purchase,
                group insurance and other benefit plans or programs in effect for
                Southwest managerial employees generally to the extent of and in
                accordance with the rules and agreements governing such plans or
                programs,
                so long as same shall be in effect, with full service credit where
                relevant for the Employee’s prior employment by
                Southwest.  Southwest shall reimburse the Employee for
                reasonable expenses incurred by him in the performance of his duties
                and
                responsibilities hereunder.  The Employee shall be entitled to
                vacation of three (3) weeks per year or such longer period as may
                be
                established from time to time by Southwest for its managerial employees
                generally.

            


    

     

    
      
        
        

      

      
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    V.  TERMINATION
      PROVISIONS

    
      	
              A.

            	
              EXPIRATION
                OR DEATH.  The Employee’s employment hereunder shall
                terminate on February 1, 2011 (or such later date to which the term
                of
                this Agreement may be extended by consent of the parties hereto,
                in either
                case without prejudice to the Employee’s privilege to remain an employee
                of Southwest thereafter), or upon the Employee’s death, whichever shall
                first occur, without further obligation or liability of either party
                hereunder, except for Southwest’s obligation to pay Deferred Compensation
                as provided in Paragraph IV-C of this
                Agreement.

            


    

    
      	
              B.

            	
              TERMINATION
                FOR CAUSE.  Southwest may terminate the Employee’s
                employment hereunder upon the determination by a majority of its
                whole
                Board of Directors that the Employee has willfully failed and refused
                to
                perform his duties and to discharge his responsibilities
                hereunder.  Such determination shall be final and
                conclusive.  If the Board of Directors of Southwest makes such
                determination, Southwest may (a) terminate the Employee’s employment,
                effective immediately or at a subsequent date, or (b) condition his
                continued employment upon the circumstances and place a reasonable
                limitation upon the time within which the Employee shall comply with
                such
                considerations or requirements.  If termination is so effected,
                Southwest shall have no further liability to the Employee hereunder
                except
                for the obligation to pay Deferred Compensation as provided in
                Paragraph IV-C hereof.

            


    

    
      	
              C.

            	
              TERMINATION
                FOR DISABILITY.  Southwest may terminate the Employee’s
                employment hereunder on account of any disabling illness, hereby
                defined
                to include any emotional or mental disorders, physical diseases or
                injuries as a result of which the Employee is, for a continuous period
                of
                ninety (90) days, unable to perform his duties
                hereunder.  Southwest shall give to the Employee ninety (90)
                days’ notice of its intention to effect such termination pursuant to this
                Paragraph V-C.  If, within such notice period, the Employee
                shall have recovered from his disability sufficiently well to resume
                performance of his duties (although still undergoing treatment or
                rehabilitation), Southwest shall not have the right to effect such
                termination.  If such disabling illness occurs as a result of a
                job-related cause, Southwest shall continue to pay the Employee regular
                installments of his Base Salary in effect at the time of such termination
                for the remainder of the term of this Agreement in accordance with
                Southwest’s regular payroll practices; provided that, payment shall be
                deferred to the extent necessary to cause such payment to comply
                with the
                six month deferral rule described in Section 409A(a)(2)(B) of the
                Internal
                Revenue Code if Employee at his termination of employment with Southwest
                is a “specified employee” as defined in such section. It is expressly
                understood and agreed, however, that any obligation of Southwest
                to
                continue to pay the Employee his Base Salary pursuant to this
                Paragraph V-C shall be reduced by the amount of any proceeds of
                long-term disability insurance provided for the Employee pursuant
                to
                Paragraph IV-D above, and shall also be reduced by the amount of the
                proceeds of any worker’s compensation or other benefits which the Employee
                receives as a result of or growing out of his disabling
                illness.

            


    

    
      	
              D.

            	
              CHANGE
                OF CONTROL TERMINATION.  In the event of any change of
                control of Southwest, the Employee may, at his option, terminate
                his
                employment hereunder by giving to Southwest notice thereof no later
                than
                sixty (60) days after the Employee shall have determined or ascertained
                that such change has occurred, irrespective whether Southwest shall
                have
                purported to terminate this Agreement after such event but prior
                to
                receipt of such notice.  If termination is so effected, no later
                than the date of such termination Southwest shall pay the Employee
                as
                “severance pay” a lump sum equal to (i) $750,000 plus (ii) an
                amount equal to the unpaid installments of his Base Salary in effect
                at
                the time of such termination for the remaining term of this Agreement;
                provided, however, that if Employee is at his termination of employment
                with Southwest a “specified employee” within the meaning of Section
                409A(a)(2)(B) of the Internal Revenue Code, payment of the “severance pay”
                shall be deferred to the extent necessary to cause such payment to
                comply
                with the six month deferral rule described in such section.  If
                termination is so effected, Southwest shall have no other further
                liability to the Employee hereunder except for its obligation to
                pay
                Deferred Compensation as provided in Paragraph IV-C
                above.  For purposes of this Paragraph V-D, a “change of
                control of Southwest” shall be deemed to occur if (i) a third person,
                including a “group” as determined in accordance with Section 13(d)(3) of
                the Securities Exchange Act of 1934, becomes the beneficial owner
                of
                shares of Southwest having twenty percent (20%) or more of the total
                number of votes that may be cast for the election of directors of
                Southwest, or (ii) as a result of, or in connection with, any cash
                tender or exchange offer, merger or other business combination, sale
                of
                assets or contested election, or any combination of the foregoing
                transactions (herein called a “Transaction”), the persons who were
                directors of Southwest before the Transaction shall cease to constitute
                a
                majority of the Board of Directors of Southwest or any successor
                to
                Southwest.

            


    

    
      	
              E.

            	
              VOLUNTARY
                TERMINATION.  The Employee’s employment hereunder shall
                terminate forthwith upon his resignation and its acceptance by Southwest,
                without further obligation or liability of either party hereunder,
                except
                for Southwest’s obligation to pay Deferred Compensation as provided in
                Paragraph IV-C above.

            


    

     

    
      
        
        

      

      
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    VI.  MISCELLANEOUS

    
      	
              A.

            	
              ASSIGNABILITY,
                ETC.  The rights and obligations of Southwest hereunder
                shall inure to the benefit of and shall be binding upon the successors
                and
                assigns of Southwest; provided, however, Southwest’s obligations hereunder
                may not be assigned without the prior approval of the
                Employee.  This Agreement is personal to the Employee and may
                not be assigned by him.

            


    

    
      	
              B.

            	
              NO
                WAIVERS.  Failure to insist upon strict compliance with
                any provision hereof shall not be deemed a waiver of such provision
                or any
                other provision hereof.

            


    

    
      	
              C.

            	
              AMENDMENTS.  This
                Agreement may not be modified except by an agreement in writing executed
                by the parties hereto.

            


    

    
      	
              D.

            	
              NOTICES.  Any
                notice required or permitted to be given under this Agreement shall
                be in
                writing in the English language and shall be deemed to have been
                given to
                the person affected by such notice when personally delivered or when
                deposited in the United States mail, certified mail, return receipt
                requested and postage prepaid, and addressed to the party affected
                by such
                notice at the address indicated on the signature page
                hereof.

            


    

    
      	
              E.

            	
              SEVERABILITY.  The
                invalidity or unenforceability of any provision hereof shall not
                affect
                the validity or enforceability of any other provision
                hereof.

            


    

    
      	
              F.

            	
              COUNTERPARTS.  This
                Agreement may be executed in multiple counterparts, each of which
                shall be
                deemed an original but all of which taken together shall constitute
                a
                single instrument.

            


    

    
      	
              G.

            	
              ENTIRE
                AGREEMENT.  This Agreement contains all of the terms
                and conditions agreed upon by the parties hereto respecting the subject
                matter hereof, and all other prior agreements, oral or otherwise,
                regarding the subject matter of this Agreement shall be deemed to
                be
                superseded as of the date of this Agreement and not to bind either
                of the
                parties hereto.

            


    

    
      	
              H.

            	
              GOVERNING
                LAW.  This Agreement shall be subject to and governed
                by the laws of the State of
                Texas.

            


    


    
      
                  

        
        

      

      
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    IN
      WITNESS WHEREOF, the Employee has set his hand hereto and Southwest has
      caused this Agreement to be signed in its corporate name and behalf by the
      Chairman of the Compensation Committee of the Board of Directors who is
      thereunto duly authorized, all as of the day and year first above
      written.

    


                                                      
      SOUTHWEST AIRLINES CO.

    


    
      	 	 
	 	
              By

            	
              /s/   David
                Biegler

            
	 	 	
              David
                Biegler

            
	 	 	
              Chairman,
                Compensation Committee of the

            
	 	 	
              Board
                of Directors

            
	 	 	 
	 	 	 
	 	 	 
	 	 	 


    

    


    


    


                                                      
      THE EMPLOYEE

    


    
      	 	 
	 	
              By

            	
              /s/   Gary
                C. Kelly

            
	 	 	
              Gary
                C. Kelly

            
	 	 	 
	 	 	
              Address:  P.O.
                Box 36611

            
	 	 	
              Dallas,
                Texas 75235-1611

            
	 	 	 
	 	 	 
	 	 	 


    

    
 

    
 

     

    
      
        
               

        

        
        

      

      
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