ex10_3.htm


    
      Exhibit
        10.3

      


      EMPLOYMENT
        CONTRACT

      


      THIS
        EMPLOYMENT CONTRACT (hereinafter referred to as this “Agreement”),
        dated as of July 15, 2007, by and between HERBERT D. KELLEHER
        (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 an officer of Southwest since February
        1,
        1982, initially pursuant to an Employment Contract dated as of February 1,
        1982,
        later pursuant to Employment Contracts dated as of January 1, 1985, January
        1,
        1988, January 1, 1992, January 1, 1996, January 1, 2001 and most recently
        pursuant to an Employment Contract dated as of July 15, 2004 (such Employment
        Contracts being referred to collectively as the “Old Contracts”);
        and

      WHEREAS
        the Employee and Southwest desire to enter into a successor agreement for
        the
        continuing services of the Employee and to amend and restate certain provisions
        of the Old Contracts;

      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;
                  RETIREMENT FROM OFFICE; AND CONTINUED EMPLOYMENT.  The
                  Employee shall perform such corporate duties and discharge such
                  corporate
                  responsibilities as are designated by the Board of Directors and
                  he shall
                  serve as both Chairman of the Board and Chairman of the Executive
                  Committee of the Board without additional compensation
                  hereunder.  Effective at the Annual Meeting of Shareholders for
                  Southwest to be held in May 2008, the Employee shall retire from
                  the Board
                  of Directors of Southwest and from his positions as Chairman of
                  the Board
                  and Chairman of the Executive Committee of the
                  Board.  Notwithstanding such retirements, Employee shall remain
                  an employee of Southwest through July 14, 2013, and during the
                  period of
                  such employment the Employee shall discharge the obligations set
                  forth in
                  Paragraph I-B of this Agreement.  The Employee may elect to
                  terminate his employment at any time prior to July 15, 2013 as
                  provided in
                  Paragraph V-E of this Agreement.

              


      

      
        	
                B.

              	
                DUTIES.  For
                  so long as Employee remains Chairman of the Board of Directors
                  hereunder,
                  the Employee’s duties shall include responsibility for overseeing the
                  implementation of Southwest’s current and long range business policies and
                  programs and handling such other functions or segments of Southwest’s
                  business as may be directed from time to time by the Board of
                  Directors.  Thereafter, the Employee agrees that he shall make
                  himself generally available at the offices of Southwest in order
                  to
                  consult, upon request, with the Chief Executive Officer of Southwest,
                  or
                  his designees, as to the business, properties or operations of
                  Southwest.  At all times during his employment the Employee
                  shall generally conform to all policies of Southwest as they may
                  apply to
                  an employee of his level of duties and
                  obligations.

              


      

      
        	
                C.

              	
                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.

              


      

      
        	
                D.

              	
                NECESSARY
                  SUPPORT AND ENVIRONMENT.  Throughout the term of this
                  Agreement, the Employee shall be provided with the office suite
                  and
                  appurtenances thereto that he occupied, and utilized, on July 15,
                  2007 and
                  with the staff support that he received as of such
                  date.

              


      

       

      
        
          
          

        

        
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      II.  EMPLOYEE’S
        OBLIGATIONS

      
        	
                A.

              	
                TIME
                  AND EFFORTS.  During the term of his employment
                  hereunder, the Employee shall devote such time and effort as is
                  required
                  to discharge his duties hereunder.

              


      

      
        	
                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,
                  Rhode Island, Connecticut, North Carolina, Virginia, Pennsylvania,
                  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 July 15, 2013, 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 for each
                  year during the term of this Agreement shall be $400,000.  The
                  Employee’s Base Salary shall be payable to the Employee in equal
                  semi-monthly installments and 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 each of the Old Contracts,
                  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).

              


      

       

      
        
          
          

        

        
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      The
        Deferred Compensation credited to the Account (including the Interest
        hereinafter provided) shall be paid to the Employee (or to the executors
        or
        administrators of his estate) 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 attain the age of eighty-two (82) 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
        Contracts, 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.  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
        each of the
        Old Contracts is hereby amended and restated to conform to the provisions
        set
        forth herein.

      
        	
                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 eighty-two (82).  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 and his spouse
                  under
                  any such Southwest plan or program during the term of this
                  Agreement.

              


      

      
        	
                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 60,000 shares of its common stock. Such options were granted
                  pursuant to the Company’s 2007 Equity Incentive Plan and became
                  exercisable with respect to 100% of the shares of Common Stock
                  covered
                  thereby on the date of grant.  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 July 15, 2013 (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 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/   Herbert
                  D. Kelleher

              
	 	 	
                Herbert
                  D. Kelleher

              
	 	 	 
	 	 	
                Address:  P.O.
                  Box 36611

              
	 	 	
                Dallas,
                  Texas 75235-1611

              
	 	 	 
	 	 	 
	 	 	 


      

      


      


      


      


      

        
          
            
                   

            

            
            

          

          
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