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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File No. 1-7259
SOUTHWEST AIRLINES CO.
(Exact name of registrant as specified in its charter)
TEXAS 74-1563240
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
P.O. BOX 36611
DALLAS, TEXAS 75235-1611
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (214) 792-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock ($1.00 par value) New York Stock Exchange, Inc.
Common Share Purchase Rights New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of Common Stock held by nonaffiliates as of
February 29, 2000:
$9,045,708,531
Number of shares of Common Stock outstanding as of the close of
business on February 29, 2000:
497,413,174 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of
Shareholders, May 17, 2000: PART III
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PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Southwest Airlines Co. ("Southwest") is a major domestic airline that
provides primarily shorthaul, high-frequency, point-to-point, low-fare service.
Southwest was incorporated in Texas and commenced Customer Service on June 18,
1971 with three Boeing 737 aircraft serving three Texas cities - Dallas,
Houston, and San Antonio.
At yearend 1999, Southwest operated 312 Boeing 737 aircraft and
provided service to 56 airports in 55 cities in 29 states throughout the United
States. Southwest commenced service to Islip, New York in March 1999,
Raleigh-Durham, North Carolina in June 1999, Hartford, Connecticut in October
1999, and will commence service to Albany, New York in May 2000.
Based on data for 1999, Southwest Airlines is the 4th largest carrier
in the United States based on domestic passengers boarded and second largest
based on departures.
The business of the Company is somewhat seasonal. Quarterly operating
income and, to a lesser extent, revenues tend to be lower in the first quarter
(January 1 - March 31).
FUEL
The cost of fuel is an item having significant impact on the Company's
operating results. The Company's average cost of jet fuel per gallon for
scheduled carrier service over the past five years was as follows:
1995 $.55
1996 $.65
1997 $.62
1998 $.46
1999 $.53
In January 2000, jet fuel prices averaged approximately $.78 per
gallon, including gains from hedging activities. The Company is unable to
predict the extent of future fuel cost changes. The Company has standard
industry arrangements with major fuel suppliers. Standard industry fuel
contracts do not provide material protection against price increases or for
assured availability of supplies. Although market conditions can significantly
impact the price of jet fuel, at present these conditions have not resulted in
an inadequate supply of jet fuel.
Prior to 1999, the Company's principal hedging program utilized the
purchase of crude oil call options at a nominal premium and at volumes of up to
30 percent of its quarterly fuel requirements. However, in order to provide
greater protection against increasing fuel costs, the Company significantly
increased its hedging activities during the first half of 1999. During the
second half of 1999, the Company did not have a significant portion of its fuel
purchases hedged. As of February 24, 2000, the Company had hedged its exposure
to fuel price increases for approximately 57 percent and 85 percent for first
and second quarter 2000, respectively, and 100 percent for the third and fourth
quarters. For more discussion of current fuel costs, the impact of these costs
on the Company's operations, and the effect of hedging transactions, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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REGULATION
Economic. The Dallas Love Field section of the International Air
Transportation Competition Act of 1979, as amended in 1997 (commonly known as
the "Wright Amendment"), as it affects Southwest's scheduled service, provides
that no common carrier may provide scheduled passenger air transportation for
compensation between Love Field and one or more points outside Texas, except
that an air carrier may transport individuals by air on a flight between Love
Field and one or more points within the states of Alabama, Arkansas, Kansas,
Louisiana, Mississippi, New Mexico, Oklahoma, and Texas if (a) "such air carrier
does not offer or provide any through service or ticketing with another air
carrier" and (b) "such air carrier does not offer for sale transportation to or
from, and the flight or aircraft does not serve, any point which is outside any
such states." Southwest does not interline or offer joint fares with any other
air carrier. The Wright Amendment does not restrict Southwest's intrastate Texas
flights or its air service from points other than Love Field.
The Department of Transportation ("DOT") has significant regulatory
jurisdiction over passenger airlines. Unless exempted, no air carrier may
furnish air transportation over any route without a DOT certificate of
authorization, which does not confer either exclusive or proprietary rights. The
Company's certificates are unlimited in duration and permit the Company to
operate among any points within the United States, its territories and
possessions, except as limited by the Wright Amendment, as do the certificates
of all other U.S. carriers. DOT may revoke such certificates, in whole or in
part, for intentional failure to comply with any provisions of subchapter IV of
the Federal Aviation Act of 1958, or any order, rule or regulation issued
thereunder or any term, condition or limitation of such certificate; provided
that, with respect to revocation, the certificate holder has first been advised
of the alleged violation and has been given a reasonable time to effect
compliance.
DOT prescribes uniform disclosure standards regarding terms and
conditions of carriage, and prescribes that terms incorporated into the Contract
of Carriage by reference are not binding upon passengers unless notice is given
in accordance with its regulations.
Safety. The Company is subject to the jurisdiction of the Federal
Aviation Administration ("FAA") with respect to its aircraft maintenance and
operations, including equipment, ground facilities, dispatch, communications,
flight training personnel, and other matters affecting air safety. To ensure
compliance with its regulations, the FAA requires airlines to obtain operating,
airworthiness, and other certificates, which are subject to suspension or
revocation for cause. The Company has obtained such certificates. The FAA,
acting through its own powers or through the appropriate U. S. Attorney, also
has the power to bring proceedings for the imposition and collection of fines
for violation of the Federal Air Regulations.
The Company is subject to various other federal, state, and local laws
and regulations relating to occupational safety and health, including
Occupational Safety and Health Administration (OSHA) and Food and Drug
Administration (FDA) regulations.
Environmental. Certain airports, including San Diego, Burbank, and
Orange County, have established airport restrictions to limit noise, including
restrictions on aircraft types to be used and limits on the number of hourly or
daily operations or the time of such operations. In some instances, these
restrictions have caused curtailments in service or increases in operating
costs, and such restrictions could limit the ability of Southwest to expand its
operations at the affected airports. Local authorities at other airports may
consider adopting similar noise regulations, but such regulations are subject to
the provisions of the Airport Noise and Capacity Act of 1990 and regulations
promulgated thereunder.
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Operations at John Wayne Airport, Orange County, California, are
governed by the Airport's Phase 2 Commercial Airline Access Plan and Regulation
(the "Plan"). Pursuant to the Plan, each airline is allocated total annual seat
capacity to be operated at the airport, subject to renewal/reallocation on an
annual basis. Service at this airport may be adjusted annually to meet these
requirements.
The Company is subject to various other federal, state, and local laws
and regulations relating to the protection of the environment, including the
discharge or disposal of materials such as chemicals, hazardous waste, and
aircraft deicing fluid. Potential future regulatory developments pertaining to
such things as control of engine exhaust emissions from ground support equipment
and prevention of leaks from underground aircraft fueling systems could increase
operating costs in the airline industry. The Company does not believe, however,
that such environmental regulatory developments will have a material impact on
the Company's capital expenditures or otherwise adversely effect its operations,
operating costs, or competitive position. Additionally, in conjunction with
airport authorities, other airlines, and state and local environmental
regulatory agencies, the Company is undertaking voluntary investigation or
remediation of soil or groundwater contamination at several airport sites. While
the full extent of any contamination at such sites and the parties responsible
for such contamination have not been determined, the Company does not believe
that any environmental liability associated with such sites will have a material
adverse effect on operations, costs, or profitability.
Customer Service Commitment. During 1999, the airline transportation
industry faced possible legislation dealing with certain customer service
practices. As a compromise with Congress, the industry, working with the Air
Transport Association, responded by adopting and filing with the DOT written
plans disclosing how it would commit to improving performance. Southwest
Airlines formalized its dedication to Customer satisfaction by adopting its
Customer Service Commitment, a comprehensive plan which embodies the Mission
Statement of Southwest Airlines: dedication to the highest quality of Customer
Service delivered with a sense of warmth, friendliness, individual pride, and
Company Spirit. The Customer Service Commitment can be reviewed by clicking on
"About SWA" at www.southwest.com. Congress is expected to monitor the effects of
the industry's plans, and there can be no assurance that legislation will not be
proposed in the future to regulate airline practices.
MARKETING AND COMPETITION
Southwest focuses principally on point-to-point, rather than
hub-and-spoke, service in shorthaul markets with frequent, conveniently timed
flights, and low fares. For example, Southwest's average aircraft trip length in
1999 was 465 miles with an average duration of approximately 1.5 hour. At
yearend, Southwest served approximately 280 one-way nonstop city pairs.
Southwest's point-to-point route system, as compared to hub-and-spoke,
provides for more direct nonstop routings for shorthaul customers and,
therefore, minimizes connections, delays, and total trip time. Southwest focuses
on nonstop, not connecting, traffic. As a result, approximately 76 percent of
the Company's Customers fly nonstop. In addition, Southwest serves many
conveniently-located satellite or downtown airports such as Dallas Love Field,
Houston Hobby, Chicago Midway, Baltimore-Washington International, Burbank,
Manchester, Oakland, San Jose, Providence, Ft. Lauderdale/Hollywood and Long
Island airports, which are typically less congested than other airlines' hub
airports and enhance the Company's ability to sustain high Employee productivity
and reliable ontime performance. This operating strategy also permits the
Company to achieve high asset utilization. Aircraft are scheduled to minimize
the amount of time the aircraft is at the gate, currently less than 25 minutes,
thereby reducing the number of aircraft and gate facilities that would otherwise
be required. Southwest does not interline with other airlines, nor have any
commuter feeder relationships.
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Southwest employs a very simple fare structure, featuring low,
unrestricted, unlimited, everyday coach fares. The Company operates only one
aircraft type, the Boeing 737, which simplifies scheduling, maintenance, flight
operations, and training activities.
In January 1995, Southwest was the first major airline to introduce a
Ticketless travel option, eliminating the need to print a paper ticket
altogether. Southwest also entered into an arrangement with SABRE, the computer
reservation system in which Southwest has historically participated to a limited
extent, providing for ticketing and automated booking on Southwest in a very
cost-effective manner. In 1996, Southwest began offering Ticketless travel
through the Company's home page on the Internet's World Wide Web at
http://www.southwest.com. At the end of 1999, approximately 80% of Southwest's
Customers chose the Ticketless travel option. In January 2000, approximately 25%
of Southwest's passenger revenues came through its Internet site.
The airline industry is highly competitive as to fares, frequent flyer
benefits, routes, and service, and some carriers competing with the Company have
greater financial resources, larger fleets, and wider name recognition. Several
of the Company's larger competitors offer low-cost, shorthaul service in markets
served by the Company, which represents a more direct threat in Southwest's
market niche. Certain major United States airlines have established marketing
alliances with each other, including Northwest Airlines/Continental Airlines,
American Airlines/Alaska Airlines, and Continental Airlines/America West
Airlines. Profit levels in the air transport industry are highly sensitive to
changes in operating and capital costs and the extent to which competitors match
an airline's fares and services. The profitability of a carrier in the airline
industry is also impacted by general economic trends.
The Company is also subject to varying degrees of competition from
surface transportation in its shorthaul markets, particularly the private
automobile. In shorthaul air services that compete with surface transportation,
price is a competitive factor, but frequency and convenience of scheduling,
facilities, transportation safety, and Customer Service may be of equal or
greater importance to many passengers.
INSURANCE
The Company carries insurance of types customary in the airline
industry and at amounts deemed adequate to protect the Company and its property
and to comply both with federal regulations and certain of the Company's credit
and lease agreements. The policies principally provide coverage for public and
passenger liability, property damage, cargo and baggage liability, loss or
damage to aircraft, engines, and spare parts, and workers' compensation.
FREQUENT FLYER AWARDS
Southwest's frequent flyer program, Rapid Rewards, is based on trips
flown rather than mileage. Rapid Rewards Customers earn a flight credit for each
one-way trip flown or two flight credits for each round trip flown. Rapid
Rewards Customers can also receive flight credits by using the services of
non-airline partners, which include credit card partners, a telephone company,
car rental agencies, hotels, and the Southwest Airlines First USA(R) Visa card.
Rapid Rewards offers two types of travel awards. The Rapid Rewards Award Ticket
("Award Ticket") offers one free roundtrip travel award to any Southwest
destination after the accumulation of 16 flight credits within a consecutive
twelve-month period. The Rapid Rewards Companion Pass ("Companion Pass") is
granted after flying 50 roundtrips (or 100 one-way trips) on Southwest within a
consecutive twelve-month period. The Companion Pass offers unlimited free
roundtrip travel to any Southwest destination for a companion of the qualifying
Rapid Rewards member. In order for the companion to use this pass, the Rapid
Rewards member must purchase a ticket or use an Award Ticket. Additionally, the
Rapid Rewards member and companion must travel together on the same flight.
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Trips flown are valid for flight credits toward Award Tickets and
Companion Passes for twelve months only; Award Tickets and Companion Passes are
automatically generated when earned by the Customer rather than allowing the
Customer to bank trip credits indefinitely and Award Tickets and Companion
Passes are valid for one year with an automatic expiration date. "Black out"
dates apply during peak holiday periods.
The Company also sells flight credits to business partners including
credit card companies, phone companies, hotels, and car rental agencies. These
flight credits may be redeemed for Award Tickets having the same program
characteristics as those earned by flying.
Customers redeemed approximately 1,248,000, 927,000 and 782,000 Award
Tickets and flights on Companion Passes during 1999, 1998 and 1998 respectively.
The amount of free travel award usage as a percentage of total Southwest revenue
passengers carried was 4.3 percent in 1999, 3.5 percent in 1998 and 3.1 percent
in 1997. The number of Award Tickets outstanding at December 31, 1999 and 1998
was approximately 846,000 and 688,000, respectively. These numbers do not
include partially earned Award Tickets. The Company currently does not have a
system to accurately estimate partially earned Award Tickets. However, these
partially earned Award Tickets may equal approximately 45 to 55 percent of the
current outstanding Award Tickets. Since the inception of Rapid Rewards in 1987,
approximately, 14 percent of all Award Tickets have expired without being used.
The number of Companion Passes for Southwest outstanding at December 31, 1999
and 1998 was approximately 32,000 and 21,000, respectively. The Company
currently estimates that 3 to 4 trips will be redeemed per outstanding Companion
Pass. The Company's frequent flyer program has not had a material impact on its
results of operations or financial condition.
The Company accounts for its frequent flyer program obligations by
recording a liability for the estimated incremental cost of flight awards the
Company expects to be redeemed (except for credits sold to business partners).
This method recognizes an average incremental cost to provide roundtrip
transportation to one additional passenger. The estimated incremental cost
associated with a flight awards does not include any contribution to overhead or
profit. The estimated incremental costs include direct passenger costs such as
fuel, food and other operational costs. The incremental cost is accrued at the
time an award is earned and revenue is subsequently recognized, at the amount
accrued, when the free travel award is used. For credits sold to business
partners prior to January 1, 2000 revenue was recognized when the credits were
sold. Subsequent to January 1, 2000, Southwest does not accrue incremental cost
for the expected redemption of free travel awards for credits sold to business
partners since revenue from the sale of these credits is deferred until the
credits are utilized as part of an Award Ticket. The liability for free travel
awards earned but not used at December 31, 1999 and 1998 was not material.
EMPLOYEES
At December 31, 1999, Southwest had 27,653 active employees, consisting
of 8,916 flight, 1,316 maintenance, 14,017 ground customer and fleet service and
3,404 management, accounting, marketing, and clerical personnel.
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Southwest has ten collective bargaining agreements covering
approximately 83 percent of its employees. The following table sets forth the
Company's employee groups and collective bargaining status:
Employee Group Represented by Agreement amendable on
-------------- -------------- ----------------------
Customer Service and International Association of November 2002
Reservations Machinists and Aerospace
Workers, AFL-CIO ("IAM")
Flight Attendants Transportation Workers of May 2002
America, AFL-CIO ("TWU")
Ramp, Operations and TWU December 1999
Provisioning (in negotiations)
Pilots Southwest Airlines Pilots' September 2004
Association ("SWAPA")
Flight Dispatchers Southwest Airlines Employee November 2009
Association
Appearance Technicians International Brotherhood of August 2000
Teamsters ("Teamsters")
Stock Clerks Teamsters August 2000
Mechanics Teamsters August 2001
Flight Simulator Technicians Teamsters October 2000
Flight/Ground School Southwest Airlines Professional December 2010
Instructors and Flight Crew Instructors Association
Training Instructors
ITEM 2. PROPERTIES
AIRCRAFT
Southwest operated a total of 312 Boeing 737 aircraft as of December
31, 1999, of which 96 and 7 were under operating and capital leases,
respectively. The remaining 209 aircraft were owned.
Southwest was the launch customer for the Boeing 737-700 aircraft, one
of the newest generation of the Boeing 737 aircraft type. The first 737-700
aircraft was delivered in December 1997 and entered revenue service in January
1998. At December 31, 1999, Southwest had 57 737-700 aircraft in service.
In total, at December 31, 1999, the Company had 85 firm orders to
purchase Boeing 737 Aircraft as follows:
Type Seats 2000 2001 2002 2003 2004
---- ----- ---- ---- ---- ---- ----
737-700 137 31 23 21 5 5
The Company also has 62 options for deliveries in 2003 through 2006.
The average age of the Company's fleet at December 31, 1999 was 8.2
years.
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GROUND FACILITIES AND SERVICES
Southwest leases terminal passenger service facilities at each of the
airports it serves to which it has added various leasehold improvements. The
Company leases land on a long-term basis for its maintenance centers located at
Dallas Love Field, Houston Hobby, and Phoenix Sky Harbor, its training center
near Love Field, which houses five 737 simulators, and its corporate
headquarters, also located near Love Field. The maintenance, training center,
and corporate headquarters buildings on these sites were built and are owned by
Southwest. At December 31, 1999, the Company operated nine reservation centers.
The reservation centers located in Little Rock, Arkansas; Chicago, Illinois;
Albuquerque, New Mexico; and Oklahoma City, Oklahoma occupy leased space. The
Company owns its Dallas, Texas; Houston, Texas; Phoenix, Arizona; Salt Lake
City, Utah; and San Antonio, Texas reservation centers.
The Company performs substantially all line maintenance on its aircraft
and provides ground support services at most of the airports it serves. However,
the Company has arrangements with certain aircraft maintenance firms for major
component inspections and repairs for its airframes and engines, which comprise
the majority of the annual maintenance costs.
ITEM 3. LEGAL PROCEEDINGS
The Company received a statutory notice of deficiency from the Internal
Revenue Service (the "IRS") in which the IRS proposed to disallow deductions
claimed by the Company on its federal income tax returns for the taxable years
1989 through 1991 for the costs of certain aircraft inspection and maintenance
procedures. The IRS has proposed similar adjustments to the tax returns of
numerous other members of the airline industry. In response to the statutory
notice of deficiency, the Company filed a petition in the United States Tax
Court on October 30, 1997, seeking a determination that the IRS erred in
disallowing the deductions claimed by the Company and that there is no
deficiency in the Company's tax liability for the taxable years in issue. The
Company cannot predict when the Tax Court's decision will be entered. Management
believes that the final resolution of this controversy will not have a
materially adverse effect upon the financial condition or results of operations
of the Company. This forward-looking statement is based on management's current
understanding of the relevant law and facts; it is subject to various
contingencies including the views of legal counsel, changes in the IRS'
position, the potential cost and risk associated with litigation, and the
actions of the IRS, judges and juries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to be reported.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Southwest, their positions, and their
respective ages (as of March 1, 2000) are as follows:
EXECUTIVE
OFFICER CONTINUOUSLY
NAME POSITION AGE SINCE
---- -------- --- -----
Herbert D. Kelleher Chairman of the Board, President, 68 1967
and Chief Executive Officer
Colleen C. Barrett Executive Vice President-Customers 55 1978
and Corporate Secretary
John G. Denison Executive Vice President- 55 1986
Corporate Services
James C. Wimberly Executive Vice President, 47 1985
Chief Operations Officer
Gary C. Kelly Vice President-Finance, 44 1986
Chief Financial Officer
James F. Parker Vice President-General Counsel 53 1986
Ron Ricks Vice President-Governmental Affairs 50 1986
Dave Ridley Vice President-Ground Operations 47 1998
Joyce C. Rogge Vice President - Marketing 42 1997
Elizabeth P. Sartain Vice President - People 45 1999
Executive officers are elected annually at the first meeting of
Southwest's Board of Directors following the annual meeting of shareholders or
appointed by the President pursuant to Board authorization.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
No applicable disclosure.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Southwest's common stock is listed on the New York Stock Exchange and
is traded under the symbol LUV. The high and low sales prices of the common
stock on the Composite Tape and the quarterly dividends per share paid on the
common stock, as adjusted for the August 1998 and July 1999 three-for-two stock
splits, were:
PERIOD DIVIDEND HIGH LOW
------ -------- ---- ---
1999
1st Quarter $ .00500 $22.92 $14.92
2nd Quarter 0.00550 23.58 19.54
3rd Quarter 0.00550 22.29 14.38
4th Quarter 0.00550 18.81 15.00
1998
1st Quarter $ .00445 $14.28 $10.22
2nd Quarter 0.00445 13.81 11.22
3rd Quarter 0.00500 15.58 11.46
4th Quarter 0.00500 15.83 10.21
As of February 29, 2000, there were 10,548 holders of record of the
Company's common stock.
RECENT SALES OF UNREGISTERED SECURITIES
During 1999, Herbert D. Kelleher, President and Chief Executive
Officer, exercised unregistered options to purchase Southwest Common Stock as
follows (the numbers have not been adjusted for the subsequent stock split):
Number of Shares Purchased Exercise Price Date of Exercise
-------------------------- -------------- ----------------
303,750 $1.00 1/15/99
75,938 $1.32 1/15/99
The issuance of the above options and shares to Mr. Kelleher were
deemed exempt from the registration provisions of the Securities Act of 1933, as
amended (the "Act"), by reason of the provision of Section 4(2) of the Act
because, among other things, of the limited number of participants in such
transactions and the agreement and representation of Mr. Kelleher that he was
acquiring such securities for investment and not with a view to distribution
thereof. The certificates representing the shares issued to Mr.
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Kelleher contain a legend to the effect that such shares are not registered
under the Act and may not be transferred except pursuant to a registration
statement which has become effective under the Act or to an exemption from such
registration. The issuance of such shares was not underwritten.
ITEM 6. SELECTED FINANCIAL DATA
The following financial information for the five years ended December
31, 1999 has been derived from the Company's consolidated financial statements.
This information should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included elsewhere herein.
YEARS ENDED DECEMBER 31,(1)
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
FINANCIAL DATA:
(in thousands except per share amounts)
Operating revenues..................... $4,735,587 $4,163,980 $3,816,821 $3,406,170 $2,872,751
Operating expenses..................... 3,954,011 3,480,369 3,292,585 3,055,335 2,559,220
---------- ---------- ---------- ---------- ----------
Operating income....................... 781,576 683,611 524,236 350,835 313,531
Other expenses(income), net............ 7,965 (21,501) 7,280 9,473 8,391
---------- ---------- ---------- ---------- ----------
Income before income taxes............. 773,611 705,112 516,956 341,362 305,140
Provision for income taxes............. 299,233 271,681 199,184 134,025 122,514
---------- ---------- ---------- ---------- ----------
Net income ............................ $ 474,378 $ 433,431 $ 317,772 $ 207,337 $ 182,626
========== ========== ========== ========== ==========
Net income per share, basic(1)......... $ .94 $ .87 $ .64 $ .42 $ .38
Net income per share, diluted(1)....... $ .89 $ .82 $ .62 $ .41 $ .37
Cash dividends per common share(1)..... $ .0215 $ .0189 $ .0147 $ .0130 $ .0119
Total assets at period-end............. $5,652,113 $4,715,996 $4,246,160 $3,723,479 $3,256,122
Long-term obligations at period-end.... $ 871,717 $ 623,309 $ 628,106 $ 650,226 $ 661,010
Stockholders' equity at period-end..... $2,835,788 $2,397,918 $2,009,018 $1,648,312 $1,427,318
OPERATING DATA:
Revenue passengers carried............. 57,500,213 52,586,400 50,399,960 49,621,504 44,785,573
Revenue passenger miles (RPMs) (000s).. 36,479,322 31,419,110 28,355,169 27,083,483 23,327,804
Available seat miles (ASMs) (000s)..... 52,855,467 47,543,515 44,487,496 40,727,495 36,180,001
Load factor (2)........................ 69.0% 66.1% 63.7% 66.5% 64.5%
Average length of passenger haul (miles) 634 597 563 546 521
Trips flown............................ 846,823 806,822 786,288 748,634 685,524
Average passenger fare................. $ 78.25 $ 75.38 $ 72.21 $ 65.88 $ 61.64
Passenger revenue yield per RPM........ 12.33(cent) 12.62(cent) 12.84(cent) 12.07(cent) 11.83(cent)
Operating revenue yield per ASM........ 8.96(cent) 8.76(cent) 8.58(cent) 8.36(cent) 7.94(cent)
Operating expenses per ASM............. 7.48(cent) 7.32(cent) 7.40(cent) 7.50(cent) 7.07(cent)
Fuel cost per gallon (average)......... 52.71(cent) 45.67(cent) 62.46(cent) 65.47(cent) 55.22(cent)
Number of Employees at year-end........ 27,653 25,844 23,974 22,944 19,933
Size of fleet at year-end (3).......... 312 280 261 243 224
- ------------------
(1) On May 20, 1999 the Company's Board of Directors declared a three for
two stock split on the Company's Common Stock, distributed on July 19,
1999. Except as specifically noted elsewhere, all share and per share
data in this annual report have been restated to give effect to the
stock split, as well as prior stock splits previously disclosed.
(2) Revenue passenger miles divided by available seat miles.
(3) Includes leased aircraft.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR IN REVIEW
In 1999, Southwest posted a profit for the 27th consecutive year. The Company
posted record operating revenues; record operating income; the highest
operating profit margin since 1981 of 16.5 percent; and a record load factor of
69.0 percent. The Company also experienced a record annual profit for the
eighth consecutive year. We experienced strong revenue growth and continued
strong demand for our product. Fuel prices in fourth quarter 1999 rose to their
highest levels since 1991.
At the end of 1999, Southwest served 55 cities in 29 states. We targeted the
East Coast for our 1999 expansion, adding service to Islip, New York, on Long
Island in March 1999, Raleigh-Durham, North Carolina, in June 1999, and
Hartford, Connecticut, in October 1999 and have been very pleased with the
results in each of these new Southwest cities. The Company recently announced
plans to commence service to Albany, New York, in May 2000 and will begin
serving at least one other new city in 2000. In addition, we plan to continue
to add flights between cities we already serve.
Capacity is expected to grow approximately 12 percent in 2000 with the net
addition of at least 30 aircraft. The Company will purchase 31 new Boeing
737-700s scheduled for delivery during the year and has agreed to a long-term
lease arrangement to acquire another 737-700 in March of 2000. In addition, two
of the Company's older 737-200s are scheduled for retirement during the year.
RESULTS OF OPERATIONS
1999 COMPARED WITH 1998 The Company's consolidated net income for 1999 was
$474.4 million ($.89 per share, diluted), as compared to the corresponding 1998
amount of $433.4 million ($.82 per share, diluted), an increase of 9.4 percent.
The prior years' earnings per share amounts have been restated for the 1999
three-for-two stock split (see Note 8 to the Consolidated Financial
Statements). Operating income increased 14.3 percent for 1999 to $781.6
million.
OPERATING REVENUES Consolidated operating revenues increased 13.7 percent in
1999 primarily due to a 13.5 percent increase in passenger revenues. The
increase in passenger revenues was primarily due to a 9.3 percent increase in
revenue passengers carried and a 16.1 percent increase in revenue passenger
miles (RPMs). The passenger revenue yield per RPM decreased 2.3 percent to
$.1233 for 1999 primarily due to an increase in average length of passenger
haul of 6.2 percent partially offset by a 3.8 percent increase in average
passenger fare. The Company expects the trend toward gradually increasing
lengths of passenger haul to continue in 2000. (The immediately preceding
sentence is a forward-looking statement involving uncertainties that could
result in actual results differing materially from expected results. Such
uncertainties include, but may not be limited to, competitive responses from
other air carriers and general economic conditions.)
The 16.1 percent increase in RPMs in 1999 exceeded the 11.2 percent increase in
available seat miles (ASMs), resulting in an increase in load factor from 66.1
percent in 1998 to 69.0 percent in 1999. The 1999 ASM growth resulted from the
net addition of 32 aircraft during the year. Favorable load factor and revenue
trends continued in January 2000. The load factor for January 2000 was 60.1
percent, up .9 points from January 1999's load factor of 59.2 percent.
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Freight revenues increased 4.6 percent in 1999 compared to 1998 primarily due
to added capacity and modest rate increases. Other revenues increased 31.0
percent in 1999 compared to 1998. Approximately 54 percent of the increase was
due to increased revenues from the sale of flight segment credits to marketing
partners in the Company's Rapid Rewards frequent flyer program, and
approximately 33 percent of the increase was due to an increase in charter
revenue. Beginning January 1, 2000, the Company will change its method of
accounting for the sale of flight segment credits. See Recent Accounting
Developments in Note 1 to the Consolidated Financial Statements.
OPERATING EXPENSES Consolidated operating expenses for 1999 were $3,954.0
million, compared to $3,480.4 million in 1998, an increase of 13.6 percent,
compared to the 11.2 percent increase in capacity. Operating expenses per ASM
increased 2.2 percent in 1999 primarily due to a 15.4 percent increase in
average jet fuel prices. Excluding fuel expense, operating expenses per ASM for
1999 increased 0.8 percent.
Based on current trends, unit costs are expected to continue to reflect year
over year unfavorable comparisons in first quarter 2000 as a result of higher
jet fuel prices. Excluding jet fuel costs, the Company is expecting nonfuel
unit cost declines in first quarter 2000 compared to first quarter 1999. (The
immediately preceding two sentences are forward-looking statements involving
uncertainties that could result in actual results differing materially from
expected results. Such uncertainties include, but may not be limited to, the
largely unpredictable levels of jet fuel prices and any unscheduled required
aircraft airframe or engine repairs.)
Operating expenses per ASM for 1999 and 1998 were as follows:
OPERATING EXPENSES PER ASM
- -------------------------------------------------------------------------------------------------------
Increase Percent
1999 1998 (Decrease) Change
- -------------------------------------------------------------------------------------------------------
Salaries, wages, and benefits 2.39(cent) 2.35(cent) .04(cent) 1.7%
Employee profitsharing and
savings plans .36 .35 .01 2.9
Fuel and oil .93 .82 .11 13.4
Maintenance materials and
repairs .70 .64 .06 9.4
Agency commissions .30 .33 (.03) (9.1)
Aircraft rentals .38 .43 (.05) (11.6)
Landing fees and other rentals .46 .45 .01 2.2
Depreciation .47 .47 -- --
Other 1.49 1.48 .01 0.7
---------- ---------- ---------- ---------
Total 7.48(cent) 7.32(cent) .16(cent) 2.2%
========== ========== ========== =========
Salaries, wages, and benefits per ASM increased 1.7 percent in 1999. This
increase resulted primarily from increases in benefits costs, specifically
workers' compensation and health care expense.
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Employee profitsharing and savings plans expense per ASM increased slightly due
to higher earnings available for profitsharing.
Fuel and oil expenses per ASM increased 13.4 percent in 1999, primarily due to
a 15.4 percent increase from 1998 in the average jet fuel cost per gallon. The
average price paid for jet fuel in 1999 was $.5271, including the effects of
hedging activities, compared to $.4567 in 1998. The Company's 1999 average jet
fuel price is net of approximately $14.8 million in gains from hedging
activities. Hedging activities in 1998 were not significant. For fourth quarter
1999, the average cost per gallon increased 54.5 percent to $.6713 compared to
$.4346 in fourth quarter 1998, including the effects of hedging activities. As
of February 24, 2000, the Company had hedged its exposure to fuel price
increases with combinations of purchased crude oil call options, crude oil
collars, and/or fixed price swap agreements approximating the following
percentages of 2000 anticipated fuel requirements: 57 percent for first
quarter; 85 percent for second quarter; 100 percent for third quarter; and 100
percent for fourth quarter. However, the Company is expecting significantly
higher jet fuel prices for first quarter 2000 compared to first quarter 1999
due to the historically low prices experienced in first quarter 1999. (The
immediately preceding sentence is a forward-looking statement involving
uncertainties that could result in actual results differing materially from
expected results. Such uncertainties include, but may not be limited to, the
largely unpredictable levels of jet fuel prices.) In January 2000, jet fuel
prices averaged approximately $.78 per gallon, including gains from hedging
activities. The average cost of jet fuel in January 1999 was $.3812 per gallon.
Maintenance materials and repairs per ASM increased 9.4 percent in 1999
compared to 1998. Routine heavy maintenance or airframe inspections and repairs
represented approximately 74 percent of the increase, while engine inspection
and repair costs represented approximately 25 percent of the increase. The
increase in airframe inspections and repairs was due primarily to a heavier
volume of routine airframe checks scheduled for 1999 versus 1998. Further, a
portion of the Company's scheduled airframe checks was outsourced in 1999 as
the volume of work exceeded the available internal headcount and facilities
necessary to perform such maintenance. In 1998, the Company performed all of
this type of routine heavy maintenance internally; thus, the majority of these
costs was reflected in salaries and wages. The increases in engine inspection
and repair costs were primarily related to the Company's 737-200 aircraft. The
Company's 737-200 aircraft engine inspections and repairs are performed on a
time and materials basis and are not covered by the Company's power-by-the-hour
engine maintenance contract with General Electric Engine Services, Inc. The
737-200 aircraft experienced an increase both in the number of engine
inspections and repairs and the average cost per repair. Currently, we expect
no material change in unit cost for maintenance materials and repairs in 2000
versus 1999. (The immediately preceding sentence is a forward-looking statement
involving uncertainties that could result in actual results differing
materially from expected results. Such uncertainties include, but may not be
limited to, any unscheduled required aircraft airframe or engine repairs.)
Agency commissions per ASM decreased 9.1 percent in 1999 compared to 1998,
primarily due to a decrease in the percentage of commissionable sales to 34.8
percent of total sales in 1999 compared to 39.8 percent in 1998. Based on
recent trends, the Company expects agency commissions to decrease on a per ASM
basis in 2000. (The immediately preceding sentence is a forward-looking
statement involving uncertainties that could result in actual results differing
materially from expected results. Such uncertainties include, but may not be
limited to, changes in passenger revenue levels and/or consumer ticket
purchasing habits.)
13
15
Aircraft rentals per ASM decreased 11.6 percent in 1999 compared to 1998,
primarily due to a lower percentage of the aircraft fleet being leased.
Approximately 30.8 percent of the Company's aircraft fleet were under operating
lease at December 31, 1999, compared to 35.4 percent at December 31, 1998.
Depreciation expense per ASM was flat for 1999 compared to 1998. Although the
Company owned a higher percentage of its aircraft fleet in 1999 versus 1998,
unit cost was flat due to a change in the estimated useful lives of the
Company's Boeing 737-300/-500 aircraft from 20 years to 23 years. See Note 2 to
the Consolidated Financial Statements. This change in accounting estimate was
made January 1, 1999, and resulted in a decrease to depreciation expense of
approximately $25.7 million for 1999. As the Company's fleet ownership
percentage continues to increase in 2000 compared to 1999, the Company
anticipates an increase in depreciation expense per ASM. (The immediately
preceding sentence is a forward-looking statement involving uncertainties that
could result in actual results differing materially from expected results. Such
uncertainties include, but may not be limited to, a change in the Company's
aircraft financing strategy.)
Other operating expenses per ASM increased 0.7 percent in 1999 compared to
1998. This increase was primarily due to increased credit card processing costs
resulting from a higher percentage of the Company's ticket sales purchased with
credit cards.
OTHER "Other expenses (income)" included interest expense, capitalized
interest, interest income, and other gains and losses. Interest expense
decreased 3.8 percent in 1999 primarily due to the February 1998 redemption of
$100 million of senior unsecured 9 1/4% Notes originally issued in February
1991. Capitalized interest increased 22.2 percent in 1999 as a result of higher
1999 progress payment balances for scheduled future aircraft deliveries.
Interest income for 1999 decreased 18.9 percent primarily due to lower invested
cash balances. Other losses in 1999 resulted primarily from a write-down
associated with the consolidation of certain software development projects.
Other gains in 1998 primarily consisted of contractual penalties received from
Boeing due to delays in the delivery of 737-700 aircraft.
INCOME TAXES The provision for income taxes, as a percentage of income before
taxes, increased slightly to 38.68 percent in 1999 from 38.53 percent in 1998.
1998 COMPARED WITH 1997 The Company's consolidated net income for 1998 was
$433.4 million ($.82 per share, diluted), as compared to the corresponding 1997
amount of $317.8 million ($.62 per share, diluted), an increase of 36.4
percent. Both of the earnings per share amounts have been restated for the 1999
three-for-two stock split (see Note 8 to the Consolidated Financial
Statements).
OPERATING REVENUES Consolidated operating revenues increased by 9.1 percent in
1998, compared to 1997, primarily from an 8.9 percent increase in passenger
revenues. The increase in passenger revenues was primarily a result of a 10.8
percent increase in revenue passenger miles (RPMs) offset by a 1.7 percent
decrease in passenger revenue yield per RPM. While Southwest's passenger
revenues increased 8.9 percent in 1998, the RPM yield decline resulted from
higher load factors, a 6.0 percent increase in passenger trip lengths, and
higher federal excise taxes on domestic tickets.
The 10.8 percent increase in RPMs in 1998 exceeded the 6.9 percent increase in
available seat miles (ASMs), resulting in an increase in load factor from 63.7
percent in 1997 to 66.1 percent in 1998. The 1998 ASM growth resulted from the
net addition of 19 aircraft during the year.
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16
Freight revenues increased 3.9 percent in 1998 compared to 1997, which fell
short of the 6.9 percent increase in ASMs for the same period. United States
mail revenue declined 2.5 percent in 1998 and 9.4 percent for fourth quarter
1998 as the postal service shifted business away from commercial carriers.
Other air freight revenues increased 8.5 percent in 1998 due to increased
capacity.
Other revenues increased 22.7 percent in 1998 to $101.7 million, compared to
$82.9 million in 1997. This increase was primarily due to increased revenues
from the sale of flight segment credits to companies participating in the
Company's Rapid Rewards frequent flyer program.
OPERATING EXPENSES Consolidated operating expenses for 1998 were $3,480.4
million, compared to $3,292.6 million in 1997, an increase of 5.7 percent,
compared to the 6.9 percent increase in capacity. Operating expenses per ASM
decreased 1.1 percent in 1998, compared to 1997, primarily due to a 26.9
percent decrease in average jet fuel cost per gallon. The decrease in average
jet fuel prices was offset by a $36.1 million increase in Employee
profitsharing and savings plan contributions and an increase in maintenance
costs primarily due to unusually low aircraft engine inspection and repair
costs in the first half of 1997.
Salaries, wages, and benefits per ASM increased 4.0 percent in 1998. This
increase resulted primarily from a 6.9 percent increase in 1998 average salary
and benefits cost per Employee. The increase in average salary and benefits
cost per Employee primarily is due to higher effective wage rates, lower
productivity in 1998 caused by Boeing aircraft delivery delays, and increased
health care and workers' compensation costs.
Employee profitsharing and savings plans expense per ASM increased 16.7 percent
in 1998, primarily due to higher earnings available for profitsharing.
Fuel and oil expenses per ASM decreased 26.1 percent in 1998, primarily due to
a 26.9 percent decrease from 1997 in the average jet fuel cost per gallon. The
average price paid for jet fuel in 1998 was $.4567 compared to $.6246 in 1997.
Maintenance materials and repairs per ASM increased 10.3 percent in 1998,
compared to 1997, primarily as a result of an unusually low number of aircraft
engine inspections and repairs in the first six months of 1997.
Agency commissions per ASM decreased 5.7 percent in 1998, when compared to
1997, primarily due to a decrease in the percentage of commissionable sales.
Aircraft rentals per ASM decreased 4.4 percent in 1998, compared to 1997,
primarily due to a lower percentage of the aircraft fleet being leased.
Depreciation expense per ASM increased 6.8 percent in 1998, compared to 1997,
primarily due to a higher percentage of the aircraft fleet being owned.
Other operating expenses per ASM increased 2.1 percent in 1998, compared to
1997, primarily due to increased costs resulting from the Year 2000 remediation
program and increased revenue- related costs such as credit card processing and
communications, partially offset by lower insurance costs.
15
17
OTHER "Other expenses (income)" included interest expense, capitalized
interest, interest income, and other gains and losses. Interest expense
decreased $7.2 million in 1998 primarily due to the February 1998 redemption of
$100 million of senior unsecured 9 1/4% Notes originally issued in February
1991. Capitalized interest increased $5.8 million in 1998 as a result of higher
1998 progress payment balances. Interest income for 1998 decreased primarily
due to lower invested cash balances. Other gains in 1998 primarily included
contractual penalties due from Boeing as a result of aircraft delivery delays.
INCOME TAXES The provision for income taxes, as a percentage of income before
taxes, was unchanged from 1997 to 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1,001.7 million in 1999 compared
to $886.1 million in 1998. Also, during fourth quarter 1999, additional funds
of $256 million were generated from two separate financing transactions. See
Note 5 to the Consolidated Financial Statements for further information on
these borrowings. Cash generated in 1999 was primarily used to finance
aircraft-related capital expenditures and provide working capital.
During 1999, net capital expenditures were $1,167.8 million, which primarily
related to the purchase of 32 new 737-700 aircraft, four used 737-300 aircraft,
five used 737-200 aircraft, and progress payments for future aircraft
deliveries. The five 737-200 aircraft were previously on lease by the Company
prior to being purchased.
At December 31, 1999, capital commitments of the Company primarily consisted of
scheduled aircraft acquisitions and related flight equipment. As of December
31, 1999, Southwest had 85 new 737-700s on firm order, including 31 to be
delivered in 2000, with options to purchase another 62 737-700s during
2003-2006. Aggregate funding required for firm commitments approximated
$1,965.7 million through the year 2004, of which $687.9 million related to
2000. See Note 3 to the Consolidated Financial Statements for further
information on commitments.
On September 23, 1999, the Company announced its Board of Directors had
authorized the repurchase of up to $250 million of the Company's common stock.
Repurchases will be made in accordance with applicable securities laws in the
open market or in private transactions from time to time, depending on market
conditions, and may be discontinued at any time. As of December 31, 1999, 5.6
million shares had been repurchased at a total cost of $90.5 million.
The Company has various options available to meet its capital and operating
commitments, including cash on hand at December 31, 1999, of $418.8 million,
internally generated funds, and a revolving credit line with a group of banks
of up to $475 million (none of which had been drawn at December 31, 1999). In
addition, the Company will also consider various borrowing or leasing options
to maximize earnings and supplement cash requirements.
The Company currently has outstanding shelf registrations for the issuance of
$318.8 million of public debt securities, which it may utilize for aircraft
financings in 2000 and 2001.
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MARKET RISK
Southwest has interest rate risk in that it holds floating rate debt
instruments and has commodity price risk in that it must purchase jet fuel to
operate its aircraft fleet. To the extent the Company does not have hedges in
place, jet fuel will be purchased at prevailing market prices. Southwest also
has market sensitive instruments in the form of the types of hedges it utilizes
to decrease its exposure to jet fuel price increases in addition to its debt
instruments. The Company also operates 103 aircraft under operating and capital
leases. However, leases are not considered market sensitive financial
instruments and, therefore, are not included in the interest rate sensitivity
analysis below. Commitments related to leases are disclosed in Note 6 to the
Consolidated Financial Statements. The Company does not purchase or hold any
derivative financial instruments for trading purposes.
Airline operators are inherently dependent upon energy to operate and,
therefore, are impacted by changes in jet fuel prices. Jet fuel consumed in
1999 and 1998 represented approximately 12.5 and 11.2 percent of Southwest's
operating expenses, respectively. Southwest endeavors to acquire jet fuel at
the lowest prevailing prices possible.
Prior to December 1998, the Company hedged its exposure to jet fuel market
price risk primarily with purchased, "out of the money," crude oil call
options. In December 1998, in order to take advantage of historically low jet
fuel prices, Southwest increased its fuel hedging activity by entering into
fixed price swap agreements hedging approximately 77 percent and 56 percent of
its jet fuel needs in first and second quarter 1999, respectively. In January
1999, the Company increased its hedging position for second quarter 1999 to 74
percent. During the second half of 1999, the Company did not have a significant
portion of its fuel purchases hedged as futures prices were substantially
higher than then-current prices.
Since mid-1999, energy markets and prices have changed radically. As a result,
the Company has adjusted its hedge strategy. The Company utilizes financial
derivative instruments for both short-term and long-term time frames when it
appears the Company can take advantage of market conditions. At December 31,
1999, the Company had a mixture of purchased crude oil call options and fixed
price swap agreements in place to hedge approximately 10.1 percent of its 2000
total anticipated jet fuel requirements. The Company had also entered into
fixed price swap agreements to hedge a small percentage of its 2001 and 2005
anticipated requirements. See Note 7 to the Consolidated Financial Statements.
In January and February 2000, the Company increased its hedging position by
adding fixed price swap agreements and crude oil collars. As of February 24,
2000, the Company's total positions were approximately 57 percent for first
quarter 2000, 85 percent for second quarter 2000, 100 percent for third quarter
2000, 100 percent for fourth quarter 2000, 50 percent for first quarter 2001,
50 percent for second quarter 2001, and 20 percent for third quarter 2001. The
Company's fuel hedging strategy could result in the Company not fully
benefiting from certain fuel price declines.
The fair values of outstanding fixed price swap agreements and purchased crude
oil call options related to the Company's jet fuel market price risk at
December 31, 1999 and 1998, and during the year ended 1998, were not material.
For 1999, the Company realized approximately $14.8 million in gains from
hedging activities. A hypothetical ten percent increase or decrease in the
underlying fuel-related commodity prices from the December 31, 1999, prices
would correspondingly change the fair value of the derivative commodity
instruments in place and their related cash flows by approximately $3 million.
17
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Airline operators are also inherently capital intensive, as the vast majority
of the Company's assets are aircraft, which are long lived. The Company's
strategy is to capitalize itself conservatively and grow capacity steadily and
profitably. While Southwest does use financial leverage, it has maintained a
strong balance sheet and "A-" or equivalent credit ratings on its senior
unsecured fixed-rate debt with three rating agencies (Standard & Poor's,
Moody's, and Duff & Phelps). The Company's Aircraft Secured Notes ($200
million) do not give rise to significant fair value risk but do give rise to
interest rate risk because these borrowings are effectively floating-rate debt.
The Company's $56 million in secured borrowings completed in 1999 does not give
rise to significant fair value risk because these borrowings are also
floating-rate debt. Although there is interest rate risk associated with these
secured borrowings, the risk is somewhat mitigated by the fact that the Company
may prepay this debt on any of the semi-annual principal and interest payment
dates. See Note 5 to the Consolidated Financial Statements for more information
on these 1999 borrowings.
As disclosed in Note 5 to the Consolidated Financial Statements, the Company
had outstanding senior unsecured notes totaling $500 million at December 31,
1999, and at December 31, 1998. These long-term notes represent only 10.0
percent and 12.1 percent of total noncurrent assets at December 31, 1999 and
1998, respectively. The unsecured long-term debt currently has an average
maturity of nine years at fixed rates averaging 8.3 percent at December 31,
1999, which is comparable to average rates prevailing over the last ten years.
The Company does not have significant exposure to changing interest rates on
its unsecured long-term debt because the interest rates are fixed and the
financial leverage is modest.
Additionally, the Company does not have significant exposure to changing
interest rates on invested cash, which was $419 million and $379 million at
December 31, 1999 and 1998, respectively. The Company invests available cash in
certificates of deposit and investment grade commercial paper that have
maturities of three months or less. As a result, the interest rate market risk
implicit in these investments at December 31, 1999, is low, as the investments
mature within three months. The Company has not undertaken any additional
actions to cover interest rate market risk and is not a party to any other
interest rate market risk management activities.
A hypothetical ten percent change in market interest rates over the next year
would not have a material effect on the fair value of the Company's debt
instruments or its short-term cash investments. See Note 7 to the Consolidated
Financial Statements for further information on the fair value of the Company's
financial instruments. Because of the floating rate nature of the Company's
secured borrowings, a ten percent change in market interest rates as of
December 31, 1999, would correspondingly change the Company's earnings and cash
flows by approximately $1.4 million in 2000. However, a ten percent change in
market rates would not impact the Company's earnings or cash flow associated
with the Company's publicly traded fixed-rate debt or its cash investments.
IMPACT OF THE YEAR 2000
The Company has completed all significant aspects of its Year 2000 project. The
Company's Year 2000 project encompassed information technology systems as well
as embedded technology assets along with assessments of material third-party
relationships and associated risks.
All of the Company's internal systems and software, including virtually all
software and services provided by third parties, appropriately handled the Year
2000 date changeover and the Company's
18
20
operations were also unaffected. While the Company has experienced no Year 2000
related disruptions to date, there are remaining risks associated with the Year
2000 issue and the Company continues to monitor possible future implications of
Year 2000 issues. Based on currently available information, management believes
that Year 2000 related disruptions, if any, will not have a material adverse
effect on the Company's financial condition or results of operations.
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21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation-Market Risk".
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
SOUTHWEST AIRLINES CO.
We have audited the accompanying consolidated balance sheets of Southwest
Airlines Co. as of December 31, 1999 and 1998, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southwest Airlines
Co. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Dallas, Texas
January 18, 2000
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SOUTHWEST AIRLINES CO.
CONSOLIDATED BALANCE SHEET
DECEMBER 31,
(In thousands except per share amounts) 1999 1998
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 418,819 $ 378,511
Accounts receivable 73,448 88,799
Inventories of parts and supplies, at cost 65,152 50,035
Deferred income taxes (Note 11) 20,929 20,734
Prepaid expenses and other current assets 52,657 36,076
------------ ------------
Total current assets 631,005 574,155
Property and equipment, at cost (Notes 3, 5, and 6):
Flight equipment 5,768,506 4,709,059
Ground property and equipment 742,230 720,604
Deposits on flight equipment purchase contracts 338,229 309,356
------------ ------------
6,848,965 5,739,019
Less allowance for depreciation 1,840,799 1,601,409
------------ ------------
5,008,166 4,137,610
Other assets 12,942 4,231
------------ ------------
$ 5,652,113 $ 4,715,996
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 156,755 $ 157,415
Accrued liabilities (Note 4) 535,024 477,448
Air traffic liability 256,942 200,078
Current maturities of long-term debt (Note 5) 7,873 11,996
Other current liabilities 3,872 3,716
------------ ------------
Total current liabilities 960,466 850,653
Long-term debt less current maturities (Note 5) 871,717 623,309
Deferred income taxes (Note 11) 692,342 549,207
Deferred gains from sale and leaseback of aircraft 222,700 238,412
Other deferred liabilities 69,100 56,497
Commitments and contingencies (Notes 3, 6, and 11)
Stockholders' equity (Notes 8 and 9):
Common stock, $1.00 par value: 1,300,000 shares authorized;
505,005 and 335,904 shares issued in 1999
and 1998, respectively 505,005 335,904
Capital in excess of par value 35,436 89,820
Retained earnings 2,385,854 2,044,975
Treasury stock, at cost: 5,579 and 5,402 shares in
1999 and 1998, respectively (90,507) (72,781)
------------ ------------
Total stockholders' equity 2,835,788 2,397,918
------------ ------------
$ 5,652,113 $ 4,715,996
============ ============
See accompanying notes.
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SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31,
(In thousands except per share amounts) 1999 1998 1997
------------ ------------ ------------
OPERATING REVENUES:
Passenger $ 4,499,360 $ 3,963,781 $ 3,639,193
Freight 102,990 98,500 94,758
Other 133,237 101,699 82,870
------------ ------------ ------------
Total operating revenues 4,735,587 4,163,980 3,816,821
OPERATING EXPENSES:
Salaries, wages, and benefits (Note 10) 1,455,237 1,285,942 1,136,542
Fuel and oil 492,415 388,348 494,952
Maintenance materials and repairs 367,606 302,431 256,501
Agency commissions 156,419 157,766 157,211
Aircraft rentals 199,740 202,160 201,954
Landing fees and other rentals 242,002 214,907 203,845
Depreciation (Note 2) 248,660 225,212 195,568
Other operating expenses 791,932 703,603 646,012
------------ ------------ ------------
Total operating expenses 3,954,011 3,480,369 3,292,585
------------ ------------ ------------
OPERATING INCOME 781,576 683,611 524,236
OTHER EXPENSES (INCOME):
Interest expense 54,145 56,276 63,454
Capitalized interest (31,262) (25,588) (19,779)
Interest income (25,200) (31,083) (36,616)
Other (gains) losses, net 10,282 (21,106) 221
------------ ------------ ------------
Total other expenses (income) 7,965 (21,501) 7,280
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 773,611 705,112 516,956
PROVISION FOR INCOME TAXES (NOTE 11) 299,233 271,681 199,184
------------ ------------ ------------
NET INCOME $ 474,378 $ 433,431 $ 317,772
============ ============ ============
NET INCOME PER SHARE, BASIC (NOTES 8, 9, AND 12) $ .94 $ .87 $ .64
============ ============ ============
NET INCOME PER SHARE, DILUTED (NOTES 8, 9, AND 12) $ .89 $ .82 $ .62
============ ============ ============
See accompanying notes.
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25
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
---------------------------------------------------------------------------
COMMON CAPITAL IN EXCESS RETAINED TREASURY
(In thousands except per share amounts) STOCK OF PAR VALUE EARNINGS STOCK TOTAL
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 $ 145,112 $ 181,650 $ 1,321,550 $ -- $ 1,648,312
Three-for-two stock split (Note 8) 73,578 (73,578) -- -- --
Issuance of common stock upon
exercise of executive stock
options and pursuant to
Employee stock option and
purchase plans (Note 9) 2,517 37,818 -- -- 40,335
Tax benefit of options exercised -- 9,806 -- -- 9,806
Cash dividends, $.0147 per share -- -- (7,207) -- (7,207)
Net income - 1997 -- -- 317,772 -- 317,772
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 221,207 155,696 1,632,115 -- 2,009,018
Three-for-two stock split (Note 8) 111,894 (111,894) -- -- --
Purchase of shares of treasury stock (Note 8) -- -- -- (100,000) (100,000)
Issuance of common and treasury
stock upon exercise of executive
stock options and pursuant to
Employee stock option and
purchase plans (Note 9) 2,803 24,434 (10,184) 27,219 44,272
Tax benefit of options exercised -- 21,584 -- -- 21,584
Cash dividends, $.0189 per share -- -- (10,387) -- (10,387)
Net income - 1998 -- -- 433,431 -- 433,431
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1998 335,904 89,820 2,044,975 (72,781) 2,397,918
Three-for-two stock split (Note 8) 167,954 (89,878) (78,076) -- --
Purchase of shares of treasury stock (Note 8) -- -- -- (90,507) (90,507)
Issuance of common and treasury
stock upon exercise of executive
stock options and pursuant to
Employee stock option and
purchase plans (Note 9) 1,147 7,811 (45,134) 72,781 36,605
Tax benefit of options exercised -- 27,683 -- -- 27,683
Cash dividends, $.0215 per share -- -- (10,289) -- (10,289)
Net income - 1999 -- -- 474,378 -- 474,378
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1999 $ 505,005 $ 35,436 $ 2,385,854 $ (90,507) $ 2,835,788
============ ============ ============ ============ ============
See accompanying notes.
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SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(In thousands) 1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 474,378 $ 433,431 $ 317,772
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 248,660 225,212 195,568
Deferred income taxes 142,940 108,335 81,711
Amortization of deferred gains on sale and leaseback of aircraft (15,172) (15,251) (15,414)
Amortization of scheduled airframe inspections & repairs 28,949 22,763 20,540
Changes in certain assets and liabilities:
Accounts receivable 15,421 (12,269) (3,090)
Other current assets (31,698) 1,589 6,243
Accounts payable and accrued liabilities 64,335 53,194 8,751
Air traffic liability 56,864 46,737 (4,757)
Other current liabilities 156 19,293 (4,204)
Other 16,877 3,101 7,468
------------ ------------ ------------
Net cash provided by operating activities 1,001,710 886,135 610,588
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,167,834) (947,096) (688,927)
------------ ------------ ------------
Net cash used in investing activities (1,167,834) (947,096) (688,927)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 255,600 -- 98,764
Payment of long-term debt and
capital lease obligations (12,107) (118,859) (12,665)
Payment of cash dividends (10,842) (9,284) (6,593)
Proceeds from Employee stock plans 64,288 44,272 40,335
Repurchase of common stock (90,507) (100,000) --
------------ ------------ ------------
Net cash provided by (used in) financing activities 206,432 (183,871) 119,841
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 40,308 (244,832) 41,502
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 378,511 623,343 581,841
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 418,819 $ 378,511 $ 623,343
============ ============ ============
CASH PAYMENTS FOR:
Interest, net of amount capitalized $ 26,604 $ 33,384 $ 42,372
Income taxes $ 131,968 $ 147,447 $ 107,066
See accompanying notes.
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27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Southwest Airlines Co. (Southwest) is a major domestic
airline that primarily provides shorthaul, high-frequency, point-to-point,
low-fare service. The consolidated financial statements include the accounts of
Southwest and its wholly owned subsidiaries (the Company). All significant
intercompany balances and transactions have been eliminated. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from these estimates. Certain prior year amounts have been restated
to conform to the current year presentation.
CASH AND CASH EQUIVALENTS Cash equivalents consist of certificates of deposit
and investment grade commercial paper issued by major corporations and financial
institutions. Cash and cash equivalents are highly liquid and have original
maturities of three months or less. Cash and cash equivalents are carried at
cost, which approximates market value.
INVENTORIES Inventories of flight equipment expendable parts, materials, and
supplies are carried at average cost. These items are charged to expense when
issued for use.
PROPERTY AND EQUIPMENT Depreciation is provided by the straight-line method to
estimated residual values over periods ranging from 20 to 25 years for flight
equipment and 3 to 30 years for ground property and equipment. See Note 2 for
further information on aircraft depreciation. Property under capital leases and
related obligations are recorded at an amount equal to the present value of
future minimum lease payments computed on the basis of the Company's incremental
borrowing rate or, when known, the interest rate implicit in the lease.
Amortization of property under capital leases is on a straight-line basis over
the lease term and is included in depreciation expense. The Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows to be generated by those assets are less than the carrying amounts of
those assets.
AIRCRAFT AND ENGINE MAINTENANCE The cost of scheduled engine inspections and
repairs and routine maintenance costs for aircraft and engines are charged to
maintenance expense as incurred. Scheduled airframe inspections and repairs,
known as "D" checks, are generally performed every ten years. Costs related to
"D" checks are capitalized and amortized over the estimated period benefited,
presently the least of ten years, time until the next "D" check, or the
remaining life of the aircraft. Modifications that significantly enhance the
operating performance or extend the useful lives of aircraft or engines are
capitalized and amortized over the remaining life of the asset.
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28
REVENUE RECOGNITION Passenger revenue is recognized when transportation is
provided. Tickets sold but not yet used are included in "Air traffic liability,"
which includes estimates that are evaluated and adjusted periodically. Any
adjustments resulting therefrom are included in results of operations for the
periods in which the evaluations are completed.
FREQUENT FLYER PROGRAM The Company accrues the estimated incremental cost of
providing free travel awards earned under its Rapid Rewards frequent flyer
program. The Company also sells flight segment credits and related services to
companies participating in its Rapid Rewards frequent flyer program. The revenue
related to the sale of flight segment credits is recognized when the credits are
sold (see Recent Accounting Developments).
ADVERTISING The Company expenses the costs of advertising as incurred.
Advertising expense for the years ended December 31, 1999, 1998, and 1997 was
$137.7 million, $119.7 million, and $113.0 million, respectively.
STOCK-BASED EMPLOYEE COMPENSATION Pursuant to Statement of Financial Accounting
Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, the
Company accounts for stock-based compensation plans utilizing the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued
to Employees and related Interpretations. See Note 9.
DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes purchased crude oil call
options and fixed price swap agreements to hedge a portion of its exposure to
fuel price increases. The cost of purchased crude oil call options and gains and
losses on fixed price swap agreements, including those terminated or settled
early, are deferred and charged or credited to fuel expense in the same month
that the underlying fuel being hedged is used. The Company recognized gains of
$14.8 million in 1999 from hedging activities. The gains are recorded as a
reduction of fuel and oil expense. Gains and losses on hedging transactions for
1998 and 1997 were not material.
In 1998, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative
Instruments and Hedging Activities. In 1999, the FASB issued SFAS 137, which
delayed the effective date of SFAS 133 by one year. SFAS 133 is required to be
adopted in years beginning after June 15, 2000. SFAS 133 permits early adoption
as of the beginning of any fiscal quarter after its issuance. The Company
expects to adopt the new Statement effective January 1, 2001. SFAS 133 will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company has not
yet determined what the effect of SFAS 133 will be on the earnings and financial
position of the Company.
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29
RECENT ACCOUNTING DEVELOPMENTS In December 1999, the Securities and Exchange
Commission issued Staff Accounting Bulletin 101 (SAB 101), Revenue Recognition
in Financial Statements. This statement gives specific guidance and
clarification on the conditions that must be met before an entity may recognize
revenue. SAB 101 must be adopted no later than the first fiscal quarter of the
fiscal year beginning after December 15, 1999. The Company will adopt SAB 101
effective January 1, 2000, and change its method of accounting used to recognize
revenue for the sale of flight segment credits to companies participating in its
Rapid Rewards frequent flyer program. Prior to the issuance of SAB 101, the
Company recorded revenue to Other Revenue when flight segment credits were sold,
which is a commonly used method of accounting within the airline industry.
However, in accordance with SAB 101, revenue received from the sale of flight
segment credits and associated with future travel will be deferred and
recognized as the ultimate free travel awards are flown. Also as part of this
change, this revenue will be classified as Passenger Revenue in the Company's
Consolidated Statement of Income.
As of January 1, 2000, the cumulative effect of this accounting change will
reduce first quarter 2000 net income by approximately $22.1 million (net of
provision for income taxes of approximately $14.0 million). Adopting this new
method of accounting for 1999, 1998, and 1997, would have produced the following
pro forma results: Net income would have been reduced by $3.9 million, $5.0
million, and $5.5 million, respectively (net of provision for income taxes and
profitsharing of approximately $2.5 million, $3.1 million, and $3.5 million,
respectively). Earnings per share, basic and diluted, would have been reduced by
$.01 per share for each year, except 1999 basic earnings per share would not
change. However, while pro forma amounts will be presented in future financial
statements, these years will not be restated.
2. CHANGE IN ACCOUNTING ESTIMATE
Effective January 1, 1999, the Company revised the estimated useful lives of its
737-300 and -500 aircraft from 20 years to 23 years. This change was the result
of the Company's assessment of the remaining useful lives of the aircraft based
on the manufacturer's design lives, the Company's increased average aircraft
stage (trip) length, and the Company's previous experience. The effect of this
change was to reduce depreciation expense approximately $25.7 million and
increase net income $.03 per diluted share for the year ended December 31, 1999.
3. COMMITMENTS
The Company's contractual purchase commitments consist primarily of scheduled
aircraft acquisitions. Thirty-one 737-700 aircraft are scheduled for delivery in
2000, 23 in 2001, 21 in 2002, five in 2003, and five in 2004. In addition, the
Company has options to purchase up to 62 737-700s during 2003-2006. The Company
has the option, which must be exercised two years prior to the contractual
delivery date, to substitute 737-600s or 737-800s for the 737-700s scheduled
subsequent to 2001. Aggregate funding needed for fixed commitments is
approximately $1,965.7 million, subject to adjustments for inflation, due as
follows: $687.9 million in 2000, $520.1 million in 2001, $515.8 million in 2002,
$152.8 million in 2003, and $89.1 million in 2004.
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4. ACCRUED LIABILITIES
- -------------------------------------------------------------------------------
(In thousands) 1999 1998
------------ ------------
Employee profitsharing and
savings plans (Note 10) $ 138,566 $ 123,195
Aircraft rentals 131,219 121,868
Vacation pay 62,937 54,781
Other 202,302 177,604
------------ ------------
$ 535,024 $ 477,448
============ ============
5. LONG-TERM DEBT
- -------------------------------------------------------------------------------
(In thousands) 1999 1998
------------ ------------
9.4% Notes due 2001 $ 100,000 $ 100,000
8 3/4% Notes due 2003 100,000 100,000
Aircraft Secured Notes due 2004 200,000 --
8% Notes due 2005 100,000 100,000
7 7/8% Notes due 2007 100,000 100,000
French Credit Agreements 55,844 --
7 3/8% Debentures due 2027 100,000 100,000
Capital leases (Note 6) 123,834 133,190
Other 1,886 4,481
------------ ------------
881,564 637,671
Less current maturities 7,873 11,996
Less debt discount 1,974 2,366
------------ ------------
$ 871,717 $ 623,309
============ ============
In fourth quarter 1999, the Company issued $200 million of floating rate
Aircraft Secured Notes, due 2004. The Notes are funded by a bank through a
commercial paper conduit program and are secured by eight aircraft. Interest
rates on the Notes are based on the conduit's actual commercial paper rate, plus
fees, for each period and are expected to average approximately LIBOR plus 36
basis points, over the term of the Notes. Interest is payable monthly and the
Company can prepay the Notes in whole or in part prior to maturity.
Also in fourth quarter 1999, the Company entered into two identical 13-year
floating rate financing arrangements, whereby it effectively borrowed a total of
$56 million from French banking partnerships. For presentation purposes, the
Company has classified these identical borrowings as one $56 million
transaction. The effective rate of interest over the 13-year term of the loans
is LIBOR plus 32 basis points. Principal and interest are payable semi-annually
on June 30 and
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31
December 31 for each of the loans and the Company may terminate the arrangements
in any year on either of those dates, with certain conditions. The Company has
pledged two aircraft as collateral for the entire transaction.
On February 28, 1997, the Company issued $100 million of senior unsecured 7 3/8%
Debentures due March 1, 2027. Interest is payable semi-annually on March 1 and
September 1. The Debentures may be redeemed, at the option of the Company, in
whole at any time or in part from time to time, at a redemption price equal to
the greater of the principal amount of the Debentures plus accrued interest at
the date of redemption or the sum of the present values of the remaining
scheduled payments of principal and interest thereon, discounted to the date of
redemption at the comparable treasury rate plus 20 basis points, plus accrued
interest at the date of redemption.
On March 7, 1995, the Company issued $100 million of senior unsecured 8% Notes
due March 1, 2005. Interest is payable semi-annually on March 1 and September 1.
The Notes are not redeemable prior to maturity.
On September 9, 1992, the Company issued $100 million of senior unsecured 7 7/8%
Notes due September 1, 2007. Interest is payable semi-annually on March 1 and
September 1. The Notes are not redeemable prior to maturity.
During 1991, the Company issued $100 million of senior unsecured 9.4% Notes and
$100 million of senior unsecured 8 3/4% Notes due July 1, 2001 and October 15,
2003, respectively. Interest on the Notes is payable semi-annually. The Notes
are not redeemable prior to maturity.
In addition to the credit facilities described above, Southwest has an unsecured
Bank Credit Agreement with a group of banks that permits Southwest to borrow
through May 6, 2002, on a revolving credit basis, up to $475 million. Interest
rates on borrowings under the Credit Agreement can be, at the option of
Southwest, the greater of the agent bank's prime rate or the federal funds rate
plus .5 percent, .17 percent over LIBOR, or a fixed rate offered by the banks at
the time of borrowing. The commitment fee is .08 percent per annum. There were
no outstanding borrowings under this agreement, or prior similar agreements, at
December 31, 1999 or 1998.
6. LEASES
Total rental expense for operating leases charged to operations in 1999, 1998,
and 1997 was $318.2 million, $305.2 million, and $296.5 million, respectively.
The majority of the Company's terminal operations space, as well as 96 aircraft,
was under operating leases at December 31, 1999. The amounts applicable to
capital leases included in property and equipment were:
- -------------------------------------------------------------------------------
(In thousands) 1999 1998
------------ ------------
Flight equipment $ 164,957 $ 230,486
Less accumulated depreciation 85,722 133,073
------------ ------------
$ 79,235 $ 97,413
============ ============
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Future minimum lease payments under capital leases and noncancelable operating
leases with initial or remaining terms in excess of one year at December 31,
1999, were:
- --------------------------------------------------------------------------
(In thousands) CAPITAL OPERATING
LEASES LEASES
--------- -----------
2000 $ 16,871 $ 278,328
2001 17,391 261,419
2002 17,561 235,601
2003 17,750 210,667
2004 17,650 186,500
After 2004 102,399 1,832,541
--------- -----------
Total minimum lease payments 189,622 $ 3,005,056
===========
Less amount representing interest 65,788
---------
Present value of minimum lease payments 123,834
Less current portion 4,384
---------
Long-term portion $ 119,450
---------
The aircraft leases generally can be renewed, at rates based on fair market
value at the end of the lease term, for one to five years. Most aircraft leases
have purchase options at or near the end of the lease term at fair market value,
but generally not to exceed a stated percentage of the lessor's defined cost of
the aircraft.
7. FINANCIAL INSTRUMENTS
The Company has historically utilized purchased crude oil call options and fixed
price swap agreements to hedge a portion of its exposure to fuel price
increases. During 1999, the Company recognized gains of $14.8 million from
hedging activities. At December 31, 1999, the Company had hedged positions in
place to limit its exposure to fuel price increases at the following levels:
APPROXIMATE % OF APPROXIMATE TYPE
EXPECTED REQUIREMENTS GALLONS OF HEDGE
PERIOD HEDGED HEDGED INSTRUMENT
- --------------------------------------------------------------------------------
First Quarter 2000 27% 63.0 million options
Second Quarter 2000 -- -- --
Third Quarter 2000 5% 13.7 million swaps
Fourth Quarter 2000 10% 26.3 million swaps
First Quarter 2001 9% 23.1 million swaps
The fair value of these agreements at December 31, 1999, representing the amount
the Company would receive if the agreements were settled early, was not
material.
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Any outstanding call options or fixed swap agreements expose the Company to
credit loss in the event of nonperformance by the counterparties to the
agreements, but the Company does not expect any of the counterparties to fail to
meet their obligations. The credit exposure related to these financial
instruments is represented by the fair value of contracts with a positive fair
value at the reporting date. To manage credit risks, the Company selects
counterparties based on credit ratings, limits its exposure to a single
counterparty, and monitors the market position of the program and its relative
market position with each counterparty. At December 31, 1999, the Company had an
agreement with one counterparty containing a bilateral collateral provision
whereby cash deposits are required if market risk exposure exceeds a specified
threshold amount. Neither the Company nor the counterparty exceeded the
threshold amount at December 31, 1999. The Company is in the process of
negotiating similar agreements with other counterparties.
The Company does not hold or issue any financial instruments for trading
purposes.
The carrying amounts and estimated fair values of the Company's long-term debt
at December 31, 1999, were as follows:
- ----------------------------------------------------------------------
(In thousands) CARRYING VALUE FAIR VALUE
-------------- ----------
9.4% Notes due 2001 $100,000 $103,330
8 3/4% Notes due 2003 100,000 104,160
Aircraft Secured Notes due 2004 200,000 200,000
8% Notes due 2005 100,000 101,460
7 7/8% Notes due 2007 100,000 100,730
French Credit Agreements 55,844 55,844
7 3/8% Debentures due 2027 100,000 92,680
The estimated fair values of the Company's long-term debt were based on quoted
market prices. The carrying values of all other financial instruments
approximate their fair value.
8. COMMON STOCK
The Company has one class of common stock. Holders of shares of common stock are
entitled to receive dividends when and if declared by the Board of Directors and
are entitled to one vote per share on all matters submitted to a vote of the
shareholders.
At December 31, 1999, the Company had common stock reserved for issuance
pursuant to Employee stock benefit plans (97.9 million shares) and upon exercise
of rights (602.9 million shares) pursuant to the Common Stock Rights Agreement,
as amended (Agreement).
Pursuant to the Agreement, each outstanding share of the Company's common stock
is accompanied by one common share purchase right (Right). Each Right entitles
its holder to
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purchase one additional share of common stock at an exercise price of $4.94 and
is exercisable only in the event of a proposed takeover, as defined by the
Agreement. The Company may redeem the Rights at $.0033 per Right prior to the
time that 15 percent of the common stock has been acquired by a person or group.
If the Company is acquired, as defined in the Agreement, each Right will entitle
its holder to purchase for $4.94 that number of the acquiring company's or the
Company's common shares, as provided in the Agreement, having a market value of
two times the exercise price of the Right. The Rights will expire no later than
July 30, 2006.
On September 25, 1997, the Company's Board of Directors declared a three-for-two
stock split, distributing 73.6 million shares on November 26, 1997. On July 22,
1998, the Company's Board of Directors declared a three-for-two stock split,
distributing 111.9 million shares on August 20, 1998. On May 20, 1999, the
Company's Board of Directors declared a three-for-two stock split, distributing
168.0 million shares on July 19, 1999. Unless otherwise stated, all per share
data presented in the accompanying consolidated financial statements and notes
thereto have been restated to give effect to the stock splits.
During third quarter 1998, the Company completed a $100 million common stock
repurchase program, resulting in the repurchase of 7.3 million shares at an
average cost of $13.65 per share. All of the acquired shares were subsequently
reissued under the Employee stock option and purchase plans.
As of September 23, 1999, the Company's Board of Directors authorized the
Company to repurchase up to $250 million of its outstanding common stock. As of
December 31, 1999, this program had resulted in the repurchase of 5.6 million
shares at an average cost of $16.22 per share. All of the acquired shares are
held as common stock in treasury, less shares reissued under the Employee stock
option and purchase plans. When treasury shares are reissued, the Company uses a
first-in, first-out method and the excess of repurchase cost over reissuance
price, if any, is treated as a reduction of retained earnings.
9. STOCK PLANS
At December 31, 1999, the Company had eight stock-based compensation plans and
other stock options outstanding, which are described below. The Company applies
APB 25 and related Interpretations in accounting for its stock-based
compensation. Accordingly, no compensation expense is recognized for its fixed
option plans because the exercise prices of the Company's Employee stock options
equal or exceed the market prices of the underlying stock on the dates of grant.
Compensation expense for other stock options is not material.
The Company has seven fixed option plans. Under the 1991 Incentive Stock Option
Plan, the Company may grant options to key Employees for up to 30.4 million
shares of common stock. Under the 1991 Non-Qualified Stock Option Plan, the
Company may grant options to key Employees and non-employee directors for up to
2.5 million shares of common stock. All
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35
options granted under these plans have ten-year terms and vest and become fully
exercisable at the end of three, five, or ten years of continued employment,
depending upon the grant type.
Under the 1995 Southwest Airlines Pilots' Association Non-Qualified Stock Option
Plan (SWAPA Plan), the Company may grant options to Pilots for up to 60.8
million shares of common stock. An initial grant of approximately 49.2 million
shares was made on January 12, 1995, at an option price of $5.93 per share,
which exceeded the market price of the Company's stock on that date. Options
granted under the initial grant vest in ten annual increments of ten percent. On
September 1 of each year of the agreement beginning in 1996, additional options
will be granted to Pilots who become eligible during that year. Additional
options granted on September 1, 1999, 1998, and 1997, vest in five annual
increments of 20.0 percent, six annual increments of 16.7 percent, and seven
annual increments of 14.3 percent, respectively. Options under all grants must
be exercised prior to January 31, 2007, or within a specified time upon
retirement or termination.
Under the 1996 Incentive Stock Option Plan, the Company may grant options to key
Employees for up to 20.3 million shares of common stock. Under the 1996
Non-Qualified Stock Option Plan, the Company may grant options to key Employees
and non-employee directors for up to 1.9 million shares of common stock. All
options granted under these plans have ten-year terms and vest and become fully
exercisable at the end of three, five, or ten years of continued employment,
depending upon the grant type.
Under the 1998 Southwest Airlines Employee Association Non-Qualified Stock
Option Plan (SAEA Plan), the Company may grant options to Dispatchers for up to
1.6 million shares of common stock. An initial grant of 1.1 million shares was
made on September 10, 1998, at an option price of $13.08 per share, which
exceeded the market price of the Company's stock on that date. Options granted
under the initial grant vest in annual increments of varying percentages,
depending on seniority level, through 2006. On December 1 of each year of the
agreement beginning in 1998 and through December 1, 2008, additional options
will be granted to Dispatchers who become eligible during that year. No options
were granted on December 1, 1998 or 1999. Options under all grants must be
exercised prior to June 30, 2012, or within a specified time upon retirement or
termination.
Under the 1999 Southwest Airlines Professional Instructors' Association
Non-Qualified Stock Option Plan (SWAPIA Plan), the Company may grant options to
Professional Instructors for up to 525,000 shares of common stock. An initial
grant of approximately 229,500 shares was made on May 20, 1999, at an option
price of $22.60 per share, which exceeded the market price of the Company's
stock on that date. Options granted under the initial grant vest in ten annual
increments of ten percent. On January 1 of each year of the agreement beginning
in 2001, additional options will be granted to Professional Instructors who
become eligible during that year. Options under all grants must be exercised
prior to June 30, 2012, or within a specified time upon retirement or
termination.
Under all fixed option plans, except the SWAPA, SAEA, and SWAPIA Plans, the
exercise price of each option equals the market price of the Company's stock on
the date of grant. Under the
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36
SWAPA, SAEA, and SWAPIA Plans, for additional options granted each September 1,
December 1, and January 1, respectively, the exercise price will be equal to 105
percent of the fair value of such stock on the date of the grant.
Information regarding the Company's seven fixed stock option plans, as adjusted
for stock splits, is summarized below:
- ---------------------------------------------------------------------------------------------------
INCENTIVE PLANS NON-QUALIFIED PLANS
------------------------ ------------------------
AVERAGE AVERAGE
EXERCISE EXERCISE
(In thousands, except exercise prices) OPTIONS PRICE OPTIONS PRICE
---------- ---------- ---------- ----------
Outstanding December 31, 1996 21,046 $ 4.90 50,639 $ 5.94
Granted - Incentive Plans 5,524 6.45 -- --
Granted - SWAPA Plan -- -- 1,984 8.79
Granted - Other Non-Qualified Plans -- -- 327 6.45
Exercised (2,592) 4.02 (3,987) 5.90
Surrendered (1,507) 6.48 (223) 6.04
---------- ----------
Outstanding December 31, 1997 22,471 5.27 48,740 6.06
Granted - Incentive Plans 4,108 11.81 -- --
Granted - SWAPA Plan -- -- 1,354 12.91
Granted - SAEA Plan -- -- 1,107 13.08
Granted - Other Non-Qualified Plans -- -- 384 11.79
Exercised (3,541) 4.18 (3,782) 6.05
Surrendered (1,252) 7.01 (371) 6.63
---------- ----------
Outstanding December 31, 1998 21,786 6.59 47,432 6.46
Granted - Incentive Plans 3,064 17.56 -- --
Granted - SWAPA Plan -- -- 1,306 17.52
Granted - SAEA Plan -- -- -- --
Granted - SWAPIA Plan -- -- 230 22.60
Granted - Other Non-Qualified Plans -- -- 303 17.46
Exercised (3,197) 4.55 (2,313) 6.31
Surrendered (1,102) 8.14 (440) 7.07
---------- ----------
Outstanding December 31, 1999 20,551 $ 8.46 46,518 $ 6.92
========== ==========
Exercisable December 31, 1999 5,279 $ 6.86 22,174 $ 6.50
Available for granting in future periods 15,981 9,279
The following table summarizes information about stock options outstanding under
the seven fixed option plans at December 31, 1999:
35
37
- -------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------------
OPTIONS WTD-AVERAGE OPTIONS
RANGE OF EXERCISE OUTSTANDING AT REMAINING WTD-AVERAGE EXERCISABLE AT WTD-AVERAGE
PRICES 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE 12/31/99 EXERCISE PRICE
- ----------------- -------------- ---------------- -------------- -------------- --------------
$ 1.78 TO $ 2.31 3,182 1.1 yrs $ 1.85 1,664 $ 1.92
$ 3.36 TO $ 3.57 606 2.1 yrs 3.56 245 3.57
$ 5.57 TO $ 8.06 50,132 6.8 yrs 6.13 22,246 6.06
$ 8.80 TO $13.08 8,484 8.1 yrs 11.48 2,633 11.26
$15.72 TO $22.60 4,665 8.6 yrs 17.80 665 17.73
---------- ----------
$ 1.78 TO $22.60 67,069 6.7 yrs $ 7.40 27,453 $ 6.57
========== ==========
The Company has granted options to purchase the Company's common stock related
to employment contracts with the Company's president and chief executive
officer. Depending upon the grant, these options have terms of ten years from
the date of grant or ten years from the date exercisable and vest and become
fully exercisable over three or four years. No options were granted in 1999,
1998, or 1997. At December 31, 1999, 1998, and 1997, total options of 5.0
million, 5.5 million, and 5.9 million were outstanding, respectively. At
December 31, 1999, total options of 4.5 million were exercisable at exercise
prices ranging from $1.00 to $6.96 per share. Options for 570,000, 342,000, and
531,000 shares were exercised in 1999, 1998, and 1997, respectively.
Under the 1991 Employee Stock Purchase Plan (ESPP), at December 31, 1999, the
Company is authorized to issue up to a balance of 1.3 million shares of common
stock to Employees of the Company at a price equal to 90 percent of the market
value at the end of each purchase period. Common stock purchases are paid for
through periodic payroll deductions. Participants under the plan received
649,000 shares in 1999, 677,000 shares in 1998, and 990,000 shares in 1997 at
average prices of $16.24, $11.63, and $7.11, respectively.
Pro forma information regarding net income and net income per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
Employee stock-based compensation plans and other stock options under the fair
value method of SFAS 123. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants under the fixed option
plans in 1999, 1998, and 1997, respectively: dividend yield of .12 percent, .16
percent, and .22 percent; expected volatility of 35.66 percent, 38.20 percent,
and 38.23 percent; risk-free interest rate of 6.68 percent, 4.66 percent, and
5.80 percent; and expected lives of 5.0 years for all periods. Assumptions for
the stock options granted to the Company's president and chief executive officer
were the same as for the fixed option plans except for the weighted-average
expected lives of 8.0 years.
The weighted-average fair value of options granted under the fixed option plans,
except the SAEA and SWAPIA Plans, during 1999, 1998, and 1997 was $7.45, $4.78,
and $2.72,
36
38
respectively, for the incentive plans; $6.79, $4.76, and $3.41, respectively,
for the SWAPA Plan; and $7.39, $4.77, and $2.72, respectively, for other
non-qualified plans. The weighted-average fair value of options granted in 1998
under the SAEA Plan was $4.83. The weighted-average fair value of options
granted in 1999 under the SWAPIA Plan was $8.81. The weighted-average fair value
of each purchase right under the ESPP granted in 1999, 1998, and 1997, which is
equal to the ten percent discount from the market value of the common stock at
the end of each purchase period, was $1.75, $1.29, and $0.79, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's Employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its Employee stock options.
For purposes of pro forma disclosures, the estimated fair value of stock-based
compensation plans and other options is amortized to expense primarily over the
vesting period. The Company's pro forma net income and net income per share is
as follows:
- ---------------------------------------------------------------------------
(In thousands except per share amounts) 1999 1998 1997
--------- --------- ---------
NET INCOME:
As reported $ 474,378 $ 433,431 $ 317,772
Pro forma $ 459,669 $ 421,097 $ 306,553
NET INCOME PER SHARE, BASIC:
As reported $ .94 $ .87 $ .64
Pro forma $ .91 $ .84 $ .62
NET INCOME PER SHARE, DILUTED:
As reported $ .89 $ .82 $ .62
Pro forma $ .86 $ .79 $ .60
As required, the pro forma disclosures above include only options granted since
January 1, 1995. Consequently, the effects of applying SFAS 123 for providing
pro forma disclosures may not be representative of the effects on reported net
income for future years until all options outstanding are included in the pro
forma disclosures.
37
39
10. EMPLOYEE PROFITSHARING AND SAVINGS PLANS
Substantially all of Southwest's Employees are members of the Southwest Airlines
Co. Profitsharing Plan. Total profitsharing expense charged to operations in
1999, 1998, and 1997 was $138.3 million, $120.7 million, and $91.3 million,
respectively.
The Company sponsors Employee savings plans under Section 401(k) of the Internal
Revenue Code. The plans cover substantially all full-time Employees. The amount
of matching contributions varies by Employee group. Company contributions
generally vest over five years with credit for prior years' service granted.
Company matching contributions expensed in 1999, 1998, and 1997 were $53.7
million, $46.4 million, and $39.7 million, respectively.
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of
deferred tax assets and liabilities at December 31, 1999 and 1998, are as
follows:
- -------------------------------------------------------------------------------
(In thousands) 1999 1998
------------ ------------
DEFERRED TAX LIABILITIES:
Accelerated depreciation $ 782,341 $ 641,673
Scheduled airframe maintenance 47,168 40,073
Other 110,638 95,485
------------ ------------
Total deferred tax liabilities 940,147 777,231
DEFERRED TAX ASSETS:
Deferred gains from sale and
leaseback of aircraft 101,960 107,157
Capital and operating leases 64,704 61,275
Other 102,070 80,326
------------ ------------
Total deferred tax assets 268,734 248,758
------------ ------------
Net deferred tax liability $ 671,413 $ 528,473
============ ============
The provision for income taxes is composed of the following:
38
40
- ----------------------------------------------------------------------------
(In thousands) 1999 1998 1997
------------ ------------ ------------
CURRENT:
Federal $ 137,393 $ 143,989 $ 102,938
State 18,900 19,357 14,535
------------ ------------ ------------
Total current 156,293 163,346 117,473
DEFERRED:
Federal 128,984 96,237 75,990
State 13,956 12,098 5,721
------------ ------------ ------------
Total deferred 142,940 108,335 81,711
------------ ------------ ------------
$ 299,233 $ 271,681 $ 199,184
============ ============ ============
The Company received a statutory notice of deficiency from the Internal Revenue
Service (IRS) in July 1995 in which the IRS proposed to disallow deductions
claimed by the Company on its federal income tax returns for the taxable years
1989 through 1991 for the costs of certain aircraft inspection and maintenance
procedures. The IRS has proposed similar adjustments to the tax returns of
numerous other members of the airline industry. In response to the statutory
notice of deficiency, the Company filed a petition in the United States Tax
Court on October 30, 1997, seeking a determination that the IRS erred in
disallowing the deductions claimed by the Company and there is no deficiency in
the Company's tax liability for the taxable years in issue. It is expected that
the Tax Court's decision will not be entered for several years. Management
believes the final resolution of this controversy will not have a material
adverse effect upon the financial position or results of operations of the
Company.
The effective tax rate on income before income taxes differed from the federal
income tax statutory rate for the following reasons:
- ------------------------------------------------------------------------------
(In thousands) 1999 1998 1997
------------ ------------ ------------
Tax at statutory
U.S. tax rates $ 270,764 $ 246,789 $ 180,935
Nondeductible items 6,664 5,099 5,893
State income taxes,
net of federal benefit 21,356 20,445 13,166
Other, net 449 (652) (810)
------------ ------------ ------------
Total income
tax provision $ 299,233 $ 271,681 $ 199,184
============ ============ ============
39
41
12. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
- ------------------------------------------------------------------------------------------------
(In thousands except per share amounts) 1999 1998 1997
------------ ------------ ------------
NUMERATOR:
Net income, available to
common stockholders $ 474,378 $ 433,431 $ 317,772
============ ============ ============
DENOMINATOR:
Weighted-average shares
outstanding, basic 503,065 500,013 492,947
Dilutive effect of
Employee stock options 32,862 29,736 18,836
------------ ------------ ------------
Adjusted weighted-average
shares outstanding,
diluted 535,927 529,749 511,783
============ ============ ============
NET INCOME PER SHARE:
Basic $ 0.94 $ 0.87 $ 0.64
============ ============ ============
Diluted $ 0.89 $ 0.82 $ 0.62
============ ============ ============
The Company has excluded 259,700, and 1,141,355 shares from its calculations of
dilutive earnings per share in 1999 and 1997, respectively, as they represent
antidilutive stock options for the respective periods presented. There were no
antidilutive stock options in 1998.
40
42
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
-----------------------------------------------------------
1999 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------
Operating revenues $1,075,571 $1,220,432 $1,235,166 $1,204,481
Operating income 166,617 254,331 206,463 154,165
Income before income taxes 156,102 256,598 207,949 152,962
Net income 95,847 157,757 126,978 93,796
Net income per share, basic .19 .31 .25 .19
Net income per share, diluted .18 .29 .24 .18
1998 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------
Operating revenues $942,653 $1,078,841 $1,094,830 $1,047,656
Operating income 111,693 208,548 203,919 159,451
Income before income taxes 114,057 216,547 211,055 163,453
Net income 70,008 133,393 129,645 100,385
Net income per share, basic .14 .27 .26 .20
Net income per share, diluted .13 .25 .24 .19
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
41
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Election of Directors" incorporated herein by reference, from
pages 1-3 of the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 17, 2000. See "Executive Officers of the Registrant"
in Part I following Item 4 for information relating to executive officers.
ITEM 11. EXECUTIVE COMPENSATION
See "Compensation of Executive Officers," incorporated herein by
reference, from pages 7-12 of the definitive Proxy Statement for Southwest's
Annual Meeting of Shareholders to be held May 17, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Voting Securities and Principal Shareholders," incorporated herein
by reference, from pages 7-12 of the definitive Proxy Statement for Southwest's
Annual Meeting of Shareholders to be held May 17, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Election of Directors" incorporated herein by reference, from
pages 1-3 of the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 17, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The financial statements included in Item 8 above are filed as part of
this annual report.
2. Financial Statement Schedules:
There are no financial statement schedules filed as part of this annual
report, since the required information is included in the consolidated
financial statements, including the notes thereto, or the circumstances
requiring inclusion of such schedules are not present.
3. Exhibits:
3.1 Restated Articles of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Registration
Statement on Form S-3 (File No. 33-52155)); Amendment to
Restated Articles of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 (File No.
1-7259)); Amendment to Restated Articles of Incorporation of
Southwest (incorporated by reference to Exhibit 4.1 to
Southwest's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 (File No. 1-7259)); Amendment to Restated
Articles of Incorporation of Southwest (incorporated by
reference to Exhibit 4.2 to Southwest's Registration Statement
on Form S-8 (File No. 333-82735).
3.2 Bylaws of Southwest, as amended through March 2000.
4.1 Restated Credit Agreement dated May 6, 1997, between Southwest
and Bank of America National Trust and Savings Association,
and the other banks named therein, and such banks.
(incorporated by reference to Exhibit 4.1 to Southwest's
Annual Report on Form 10-K for
42
44
the year ended December 31, 1997 (File No. 1-7259)); First
Amendment to Competitive Advance and Revolving Credit Facility
Agreement dated August 7, 1998 (incorporated by reference to
Exhibit 4.1 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 1-7259); Second
Amendment to Competitive Advance and Revolving Credit Facility
Agreement dated January 20, 1999 (incorporated by reference to
Exhibit 4.1 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 1-7259)).
4.2 Specimen certificate representing Common Stock of Southwest
(incorporated by reference to Exhibit 4.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 1-7259)).
4.3 Indenture dated as of December 1, 1985 between Southwest and
MBank Dallas, N.A., Trustee, relating to an unlimited amount
of Debt Securities (incorporated by reference to Exhibit 4.1
of Southwest's Current Report on Form 8-K dated February 26,
1986 (File No. 1-7259)) and First Supplemental Indenture dated
as of January 21, 1988, substituting MTrust Corp, National
Association, as Trustee, thereunder (incorporated by reference
to Exhibit 4.3 on Southwest's Annual Report on Form 10-K for
the year ended December 31, 1987 (File 1-7259)).
4.4 Amended and Restated Rights Agreement dated July 18, 1996
between Southwest and Continental Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit
1, Southwest's Registration Statement on Form 8-A/A dated
August 12, 1996 (File No. 1-7259)).
4.5 Indenture dated as of June 20, 1991 between Southwest Airlines
Co. and Bank of New York, successor to NationsBank of Texas,
N.A. (formerly NCNB Texas National Bank), Trustee
(incorporated by reference to Exhibit 4.1 to Southwest's
Current Report on Form 8-K dated June 24, 1991 (File No.
1-7259)).
4.6 Indenture dated as of February 25, 1997 between the Company
and U.S. Trust Company of Texas, N.A. (incorporated by
reference to Exhibit 4.1 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 1-7259)).
Southwest is not filing any other instruments evidencing any
indebtedness because the total amount of securities authorized
under any single such instrument does not exceed 10% of its
total consolidated assets. Copies of such instruments will be
furnished to the Securities and Exchange Commission upon
request.
10.1 Purchase Agreement No. 1810, dated January 19, 1994 between
The Boeing Company and Southwest (incorporated by reference to
Exhibit 10.4 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 1993 (File No. 1-7259)); Supplemental
Agreement No. 1. (incorporated by reference to Exhibit 10.3 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 1-7259)); Supplemental Agreements
No. 2, 3 and 4 (incorporated by reference to Exhibit 10.2 to
Southwest's Annual Report on form 10-K for the year ended
December 31, 1997 (File No. 1-7259)); Supplemental Agreements
Nos. 5, 6, and 7; (incorporated by reference to Exhibit 10.1
to Southwest's Annual Report on form 10-K for the year ended
December 31, 1998 (File No. 1-7259)); Supplemental Agreements
Nos. 8, 9, and 10.
Pursuant to 17 CFR 240.24b-2, confidential information has
been omitted and has been filed separately with the Securities
and Exchange Commission pursuant to a Confidential Treatment
Application filed with the Commission.
43
45
The following exhibits filed under paragraph 10 of Item 601
are the Company's compensation plans and arrangements.
10.2 Form of Executive Employment Agreement between Southwest and
certain key employees pursuant to Executive Service
Recognition Plan (incorporated by reference to Exhibit 28 to
Southwest Quarterly Report on Form 10-Q for the quarter ended
June 30, 1987 (File No. 1-7259)).
10.3 1992 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.8 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 1-7259)).
10.4 1996 employment contract between Southwest and Herbert D.
Kelleher and related stock option agreements (incorporated by
reference to Exhibit 10.8 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 1-7259)).
10.5 1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
33-40652)).
10.6 1991 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 33-40652)).
10.7 1991 Employee Stock Purchase Plan as amended May 20, 1992
(incorporated by reference to Exhibit 10.13 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 1-7259)).
10.8 Southwest Airlines Co. Profit Sharing Plan (incorporated by
reference to Exhibit 10.13 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1991 (File No.
1-7259)).
10.9 Southwest Airlines Co. 401(k) Plan (incorporated by reference
to Exhibit 10.14 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 1-7259)).
10.10 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.14 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-7259)).
10.11 1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-20275)).
10.12 1996 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 333-20275)).
22 Subsidiaries of Southwest (incorporated by reference to
Exhibit 22 to Southwest's Annual Report on form 10-K for the
year ended December 31, 1997 (File No. 1-7259)).
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
A copy of each exhibit may be obtained at a price of 15 cents per page,
$10.00 minimum order, by writing to: Director of Investor Relations, Southwest
Airlines Co., P.O. Box 36611, Dallas, Texas 75235-1611.
(b) There were no Form 8-K's filed during the fourth quarter of 1999.
44
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
SOUTHWEST AIRLINES CO.
March 16, 2000
By /s/ Gary C. Kelly
-------------------------
Gary C. Kelly
Vice President-Finance,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on March 16, 2000 on
behalf of the registrant and in the capacities indicated.
Signature Capacity
--------- --------
/s/ Herbert D. Kelleher Chairman of the Board of Directors,
- ------------------------------------- President and Chief Executive Officer
Herbert D. Kelleher
/s/ Gary C. Kelly Vice President-Finance
- ------------------------------------- (Chief Financial and Accounting Officer)
Gary C. Kelly
/s/ Samuel E. Barshop Director
- -------------------------------------
Samuel E. Barshop
/s/ Gene H. Bishop Director
- -------------------------------------
Gene H. Bishop
/s/ C. Webb Crockett Director
- -------------------------------------
C. Webb Crockett
/s/ William P. Hobby, Jr. Director
- -------------------------------------
William P. Hobby, Jr.
/s/ Travis C. Johnson Director
- -------------------------------------
Travis C. Johnson
/s/ R. W. King Director
- -------------------------------------
R. W. King
/s/ Walter M. Mischer, Sr. Director
- -------------------------------------
Walter M. Mischer, Sr.
/s/ June M. Morris Director
- -------------------------------------
June M. Morris
47
INDEX TO EXHIBITS
3.1 Restated Articles of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Registration
Statement on Form S-3 (File No. 33-52155)); Amendment to
Restated Articles of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 (File No.
1-7259); Amendment to Restated Articles of Incorporation of
Southwest (incorporated by reference to Exhibit 4.1 to
Southwest's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 (File No. 1-7259)); Amendment to Restated
Articles of Incorporation of Southwest (incorporated by
reference to Exhibit 4.2 to Southwest's Registration Statement
on Form S-8 (File No. 333-82735).
3.2 Bylaws of Southwest, as amended through March, 2000.
4.1 Restated Credit Agreement dated May 6, 1997, between Southwest
and Bank of America National Trust and Savings Association,
and the other banks named therein, and such banks.
(incorporated by reference to Exhibit 4.1 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1997 (File No. 1-7259)); First Amendment to Competitive
Advance and Revolving Credit Facility Agreement dated August
7, 1998 (incorporated by reference to Exhibit 4.1 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 1-7259)); Second Amendment to
Competitive Advance and Revolving Credit Facility Agreement
dated January 20, 1999 (incorporated by reference to Exhibit
4.1 to Southwest's Annual Report on Form 10-K for the year
ended December 31, 1998 (File No. 1-7259)).
4.2 Specimen certificate representing Common Stock of Southwest
(incorporated by reference to Exhibit 4.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 1-7259)).
4.3 Indenture dated as of December 1, 1985 between Southwest and
MBank Dallas, N.A., Trustee, relating to an unlimited amount
of Debt Securities (incorporated by reference to Exhibit 4.1
of Southwest's Current Report on Form 8-K dated February 26,
1986 (File No. 1-7259)) and First Supplemental Indenture dated
as of January 21, 1988, substituting MTrust Corp, National
Association, as Trustee, thereunder (incorporated by reference
to Exhibit 4.3 on Southwest's Annual Report on Form 10-K for
the year ended December 31, 1987 (File 1-7259)).
4.4 Amended and Restated Rights Agreement dated July 18, 1996
between Southwest and Continental Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit
1, Southwest's Registration Statement on Form 8-A/A dated
August 12, 1996 (File No. 1-7259)).
4.5 Indenture dated as of June 20, 1991 between Southwest Airlines
Co. and Bank of New York, successor to NationsBank of Texas,
N.A. (formerly NCNB Texas National Bank), Trustee
(incorporated by reference to Exhibit 4.1 to Southwest's
Current Report on Form 8-K dated June 24, 1991 (File No.
1-7259)).
4.6 Indenture dated as of February 25, 1997 between the Company
and U.S. Trust Company of Texas, N.A. (incorporated by
reference to Exhibit 4.1 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 1-7259)).
Southwest is not filing any other instruments evidencing any
indebtedness because the total amount of securities authorized
under any single such instrument does not exceed 10% of
E-1
48
its total consolidated assets. Copies of such instruments will
be furnished to the Securities and Exchange Commission upon
request.
10.1 Purchase Agreement No. 1810, dated January 19, 1994 between
The Boeing Company and Southwest (incorporated by reference to
Exhibit 10.4 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 1993 (File No. 1-7259)); Supplemental
Agreement No. 1. (incorporated by reference to Exhibit 10.3 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 1-7259)).; Supplemental Agreements
No. 2, 3 and 4 (incorporated by reference to Exhibit 10.2 to
Southwest's Annual Report on form 10-K for the year ended
December 31, 1997 (File No. 1-7259)); Supplemental Agreements
Nos. 5, 6, and 7 (incorporated by reference to Exhibit 10.1 to
Southwest's Annual Report on form 10-K for the year ended
December 31, 1998 (File No. 1-7259)), Supplemental Agreements
Nos. 8, 9, and 10.
Pursuant to 17 CFR 240.24b-2, confidential information has
been omitted and has been filed separately with the Securities
and Exchange Commission pursuant to a Confidential Treatment
Application filed with the Commission.
The following exhibits filed under paragraph 10 of Item 601
are the Company's compensation plans and arrangements.
10.2 Form of Executive Employment Agreement between Southwest and
certain key employees pursuant to Executive Service
Recognition Plan (incorporated by reference to Exhibit 28 to
Southwest Quarterly Report on Form 10-Q for the quarter ended
June 30, 1987 (File No. 1-7259)).
10.3 1992 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.8 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 1-7259)).
10.4 1996 employment contract between Southwest and Herbert D.
Kelleher and related stock option agreements (incorporated by
reference to Exhibit 10.8 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 1-7259)).
10.5 1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
33-40652)).
10.6 1991 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 33-40652)).
10.7 1991 Employee Stock Purchase Plan as amended May 20, 1992
(incorporated by reference to Exhibit 10.13 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 1-7259)).
10.8 Southwest Airlines Co. Profit Sharing Plan (incorporated by
reference to Exhibit 10.13 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1991 (File No.
1-7259)).
10.9 Southwest Airlines Co. 401(k) Plan (incorporated by reference
to Exhibit 10.14 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 1-7259)).
E-2
49
10.10 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.14 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-7259)).
10.11 1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-20275)).
10.12 1996 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 333-20275)).
22 Subsidiaries of Southwest (incorporated by reference to
Exhibit 22 to Southwest's Annual Report on form 10-K for the
year ended December 31, 1997 (File No. 1-7259)).
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
A copy of each exhibit may be obtained at a price of 15 cents per page,
$10.00 minimum order, by writing to: Director of Investor Relations, Southwest
Airlines Co., P.O. Box 36611, Dallas, Texas 75235-1611.
(b) There were no Form 8-K's filed during the fourth quarter of 1999.
E-3