By Kathy Fieweger and David Bailey CHICAGO, May 20 (Reuters) - Low-cost carrier Southwest Airlines (LUV) has offered an immediate pay raise and an extension of its pilots' contract until 2006, but a union executive said on Monday the plan falls short of union goals for industry-leading wages. The only major U.S. airline to report a profit since the Sept. 11 attacks, No. 7 Southwest offered to extend the 10-year agreement at a lengthy meeting Thursday, said Wayne Stamps, vice president of the Southwest Airlines Pilots' Association. "There is enough substance to this offer that we really need to examine it, but as an interim step," Stamps said. "It still falls short of the union's ultimate goal of an industry-leading contract." The proposal calls for raises of about 20 percent above the pilots' current contractual rates between now and September 2004, when the existing contract will become amendable, Stamps said. Southwest Chief Executive James Parker declined in an interview to comment on the size of the proposed pay hikes, but said they would be triggered in part by performance on operating margins. Rather than being paid hourly, Southwest pilots are paid on the basis of trips flown. In normal industry conditions, Southwest aims for 15-percent operating margins, Parker said. The contract extension also includes stock options, he said. "I can confirm that we've made an offer to our pilots for a two-year contract extension," Parker said. "Rather than let this issue become a festering problem, we just decided to address it early on." Southwest, which is about 85 percent unionized, in the first quarter reported a cost per available seat mile, or unit cost, of 7.3 cents, well below that of bigger rivals. Its low costs let it absorb weaker revenues better than others as demand for air travel remains below year-ago levels. Pilots at Southwest had no pay raises between 1993 and 1999 and instead were compensated with stock options. Since 1999, they have gotten 3 percent raises a year. As a result, pilots' pay rates are now well behind those of other top carriers. POSTING PROFITS, WATCHING COSTS Unlike other carriers, Southwest has been profitable since the Sept. 11 attacks. Others have posted sizable and in some cases, record losses as revenues remain well below normal. Dallas-based Southwest's agreement with the 4,100 pilots represented by the independent union is scheduled to become amendable in September 2004. Parker said he did not yet know what the impact of the pay raises would be on unit costs. The new proposal has been circulated to the pilots and the union board has set a special meeting for June 10 and June 11 to complete a review and schedule a member vote, Stamps said. The two sides have been negotiating for over a year to narrow the gap between pay for pilots at Southwest and pilots at other major U.S. carriers who fly narrowbody jets. Southwest uses Boeing Co. (BA) 737s exclusively. Northwest Airlines (NWAC), the No. 4 U.S. carrier, and its pilots tentatively agreed in April to a one-year extension of their agreement, which would then become amendable in September 2003. Pilots vote on the agreement from Monday to June 3. Shares of Southwest Airlines fell 47 cents, or 2.7 percent, to $17.16 on the New York Stock Exchange, racking up losses along with most other major U.S. carriers. ©2002 Reuters Limited.