SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
March 31, 1995 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)
(214) 904-4000
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of shares of Common Stock outstanding as of the close
of business on May 9, 1995:
143,579,198
<PAGE>
SOUTHWEST AIRLINES CO.
FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Southwest Airlines Co.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $172,749 $174,538
Accounts receivable 96,589 75,692
Inventories of parts and supplies 36,927 37,565
Deferred income taxes 9,822 9,822
Prepaid expenses and other 21,265 17,281
Total current assets 337,352 314,898
Property and equipment:
Flight equipment 2,753,427 2,564,551
Ground property and equipment 403,212 384,501
Deposits on flight equipment
purchase contracts 388,805 393,749
3,545,444 3,342,801
Less allowance for depreciation 878,842 837,838
2,666,602 2,504,963
Other assets 3,798 3,210
$3,007,752 $2,823,071
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $137,843 $117,599
Accrued liabilities 296,371 288,979
Air traffic liability 158,500 106,139
Income taxes payable 1,644
Current maturities of long-term debt 12,841 9,553
Total current liabilities 607,199 522,270
Long-term debt less current maturities 675,949 583,071
Deferred income taxes 237,288 232,850
Deferred gains from sale and leaseback
of aircraft 211,371 217,677
Other deferred liabilities 24,305 28,497
Stockholders' equity:
Common Stock 143,477 143,256
Capital in excess of par value 154,067 151,746
Retained earnings 954,096 943,704
Total stockholders' equity 1,251,640 1,238,706
$3,007,752 $2,823,071
</TABLE>
See accompanying notes.
<PAGE>
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31
1995 1994
<S> <C> <C>
Operating revenues:
Passenger $596,828 $597,002
Freight 14,885 12,799
Other 9,286 9,611
Total operating revenues 620,999 619,412
Operating expenses:
Salaries, wages, and
benefits 203,572 177,915
Fuel and oil 83,176 74,970
Maintenance materials
and repairs 51,673 49,902
Agency commissions 29,515 34,538
Aircraft rentals 38,415 30,825
Landing fees and other
rentals 40,533 36,124
Depreciation 37,347 32,476
Other operating expenses 113,359 106,616
Total operating expenses 597,590 543,366
Operating income 23,409 76,046
Other expenses (income):
Interest expenses 13,686 13,979
Capitalization interest (8,485) (5,509)
Interest income (1,892) (2,114)
Nonoperating losses, net 66 152
Total other expenses 3,375 6,508
Income before income taxes 20,034 69,538
Provision for income taxes 8,208 27,691
Net income $11,826 $41,847
Weighted average common
and common equivalent
shares outstanding 146,532 147,600
Net income per common and
common equivalent share $.08 $.28
</TABLE>
See accompanying notes.
<PAGE>
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31
1995 1994
<S> <C> <C>
Net cash provided by operating
activities $104,411 $122,594
Cash flows from investing
activities:
Net purchases of property and
equipment (201,274) (121,265)
Cash flows from financing
activities:
Issuance of long-term debt 98,811
Payment of long-term debt and
capital lease obligations (3,412) (57,867)
Payment of cash dividends (2,867) (1,428)
Proceeds from Employee stock
plans 2,542 2,644
Net cash provided by financing
activities 95,074 (56,651)
Net (decrease) in cash and
cash equivalents (1,789) (55,322)
Cash and cash equivalents at
beginning of period 174,538 295,571
Cash and cash equivalents at end
of period $172,749 $240,249
Cash payments for:
Interest, net of amount
capitalized $13,213 $16,734
Income taxes $1,831 $9,196
</TABLE>
See accompanying notes.
<PAGE>
SOUTHWEST AIRLINES CO.
Notes to Condensed Consolidated Financial Statements
1. Basis of presentation - The accompanying unaudited
condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. The condensed consolidated financial statements for
the interim periods ended March 31, 1995 and 1994 include all
adjustments (which include only normal recurring adjustments)
which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods. Operating
results for the three months ended March 31, 1995 are not
necessarily indicative of the results that may be expected for
the year ended December 31, 1995. For further information, refer
to the consolidated financial statements and footnotes thereto
included in the Southwest Airlines Co. annual report on Form 10-K
for the year ended December 31, 1994.
2. Dividends - During the three-month periods ended March
31, 1995 and 1994, $.01 per share in dividends were declared on
the 143,411,223 and 142,856,850 shares of common stock then
outstanding, respectively.
3. Long-term Debt - During March 1995, the Company issued
$100 million of 8% senior unsecured notes due March 2005.
Interest on the Notes is payable semi-annually on March 1 and
September 1, commencing September 1, 1995. The Notes may not be
redeemed prior to maturity.
4. Leases - Subsequent to the end of first quarter 1995,
the Company completed a transaction for the sale and leaseback of
six new Boeing 737 aircraft. The lease terms, which require
periodic lease payments through 2019, increased the Company's
commitments for operating leases by $371 million.
5. Reclassifications - Certain prior year amounts have
been reclassified for comparison purposes.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Material Changes in Results of Operations
Consolidated net income for the first quarter ended March
31, 1995 was $11.8 million ($.08 per share),compared to first
quarter 1994 net income of $41.8 million (.28 per share).
First quarter 1995 operating revenues were $621.0 million,
compared to $619.4 million for first quarter 1994. Revenue
passenger miles (RPMs) increased 3.3 percent in first quarter
1995, compared to a 13.0 percent increase in available seat miles
(ASMs), resulting in a load factor of 61.1 percent versus the
first quarter 1994 load factor of 66.9 percent. The passenger
revenue yield per RPM decreased 3.2 percent to $.1146 from $.1184
in first quarter 1994. The decline in load factor and yield was
principally caused by aggressive industry fare sales; increased
shorthaul, low-fare competition; reservation system capacity
constraints; and our own aggressive expansion. The Company
expects second quarter 1995 load factors and RPM yields to
continue to lag 1994 levels; however, the year over year
comparisons should improve as a result of the following recent
developments:
1. Significant enhancements to our reservation system were
completed during first quarter 1995 and it is now
operating exceptionally well.
2. Our yields per RPM have improved significantly since
fourth quarter 1994, supported by modest fare
increases.
3. In the aggregate, our new markets are developing very
well with extremely high load factors and steadily
improving yields per RPM.
4. The expansion of shorthaul, low-fare competition in our
markets has stabilized, and, in some cases receded.
Continental Airlines recently announced it will
discontinue its Continental Lite product.
Freight revenues increased 16.3 percent in the first quarter of
1995 as compared to the same period in 1994, due to an increase
in air freight and United States mail services. Other revenues
decreased 3.4 percent in the first quarter 1995, primarily due to
higher charter activity at Morris in first quarter 1994.
Operating expenses per ASM for first quarter 1995 decreased 2.8
percent to $.0701, compared to $.0721 for first quarter 1994,
primarily due to lower agency commissions and profitsharing
expenses.
<PAGE>
Southwest Airlines Co.
Operating Expenses per ASM
(in cents except percent change)
<TABLE>
<CAPTION>
Three months ended
March 31,
Increase Percent
1995 1994 (Decrease) Change
<S> <C> <C> <C> <C>
Salaries, wages, and benefits 2.27 2.14 .13 6.1
Profitsharing and Employee savings plans .12 .22 (.10) (45.5)
Fuel and oil .98 .99 (.01) (1.0)
Maintenance materials and repairs .61 .66 (.05) (7.6)
Agency commissions .34 .46 (.12) (26.1)
Aircraft rentals .45 .41 .04 9.8
Landing fees and other rentals .47 .48 (.01) (2.1)
Depreciation .44 .43 .01 2.3
Other operating expenses 1.33 1.42 (.09) (6.3)
Total 7.01 7.21 (.20) (2.8)
</TABLE>
Salaries, wages, and benefits per ASM increased 6.1 percent
in first quarter 1995. This increase resulted primarily from
increased headcount necessary to transition Morris operational
functions, which in some instances were performed by outside
vendors, to Southwest.
Fleet service employees are subject to an agreement with the
Ramp, Operations and Provisioning Association, which became
amendable in December 1994 and is currently in negotiation.
Profitsharing and Employee savings plan expenses per ASM
decreased 45.5 percent from first quarter 1994 to first quarter
1995, primarily due to lower earnings available for profitsharing
in 1995.
Fuel and oil expenses per ASM decreased 1.0 percent in first
quarter 1995 due to a 1.5 percent decrease in the average jet
fuel cost per gallon from the same period in 1994. The average
price paid for jet fuel in first quarter 1995 was $.5309 per
gallon, as compared to $.5391 per gallon in first quarter 1994.
Since the end of first quarter 1995, fuel prices have averaged
approximately $.5250 per gallon.
Maintenance materials and repairs per ASM decreased 7.6
percent for the three months ended March 31, 1995 as compared to
the corresponding period of the prior year. The decrease was
primarily due to higher maintenance costs incurred in first
quarter 1994 as a result of the Morris acquisition.
<PAGE>
Agency commissions per ASM decreased 26.1 percent for the
first quarter of 1995 as compared to the first quarter of 1994,
primarily due to lower revenue per ASM and a lower mix of travel
agency sales. The lower travel agency sales mix resulted from
1994 and first quarter 1995 enhancements to Southwest's ticket
delivery systems for direct Customers, as described below.
In response to actions taken by our competitor-owned
reservations systems, we reduced our operating costs and enhanced
our ticket delivery systems by developing our own Southwest
Airlines Air Travel ("SWAT") system, allowing high-volume travel
agents direct access to reservations; introduced overnight ticket
delivery for travel agents; reduced to three the number of
advance days reservations required for overnight delivery of
tickets to customers (Ticket By Mail); developed our own
Ticketless system, which was rolled out system-wide on January
31, 1995; and effective March 30, 1995, subscribed to a new level
of service with SABRE that allows SABRE travel agencies to
electronically access our reservation system. We also continue
to actively pursue other cost-effective solutions for automating
non-SABRE travel agency bookings.
Aircraft rentals per ASM increased 9.8 percent for the first
quarter of 1995 as compared to the first quarter of 1994. During
both first quarter 1995 and 1994, approximately 43 percent of the
Company's fleet was subject to operating leases. However, 63
percent of the 1995 leased aircraft are 737-300s, compared to 58
percent in 1994. The newer 737-300 aircraft have higher per
aircraft lease rates than older 737-200s.
Other operating expenses per ASM decreased 6.3 percent for
the three months ended March 31, 1995 as compared to the same
period ended March 31, 1994. These decreases were primarily due
to operating efficiencies resulting from the transition of Morris
operational functions to Southwest, commencing first quarter
1994, offset by higher advertising and promotional costs
associated with the roll out of ticketless travel and the
addition of one new city, Omaha, Nebraska, in first quarter 1995.
Other expenses (income) decreased $3.1 million (48.1
percent) from first quarter 1994 to first quarter 1995, due to a
54.0 percent increase in capitalized interest primarily
associated with aircraft progress payments.
Material Changes in Financial Condition
<PAGE>
Net cash provided by operating activities was $104.4 million
for the three months ended March 31, 1995. During March 1995, the
Company generated additional funds of $98.8 million from the
issuance of $100 million of 8 percent senior unsecured debt due
March 2005. During the 12 months ended March 31, 1995, cash of
$394.5 million was provided from operations. This cash was
primarily used to finance aircraft-related capital expenditures
and provide working capital.
During the 12 months ended March 31, 1995, net capital
expenditures were $868.7 million, which primarily related to the
purchase of 22 737-300 aircraft, including 20 new, one used, and
one previously leased aircraft, and progress payments for future
aircraft deliveries.
As of March 31, 1995, the Company had 3,750,000 shares
available from a 1990 authorization by its Board of Directors to
purchase shares of its common stock from time-to-time on the open
market. No shares have been purchased since 1990.
The Company's contractual commitments consist primarily of
scheduled aircraft acquisitions. Twenty 737-300s are scheduled
for delivery in the remainder of 1995, 18 in 1996, and ten in
1997. Four 737-700s are scheduled for delivery in 1997, 16 in
1998, 16 in 1999, 15 in 2000, and 12 in 2001. In addition, the
Company has options to purchase up to eleven 737-300s in 1997 and
up to sixty-three 737-700s during 1998-2004. The Company has the
option, which must be exercised two years prior to the
contractual delivery date, to substitute 737-400s or 737-500s for
the 737-300s to be delivered during 1997 and 737-600s or 737-800s
for the 737-700s delivered subsequent to 1999. Aggregate funding
needed for these commitments was approximately $2,912.6 million
at March 31, 1995 due as follows: $472.5 million in 1995; $489.5
million in 1996; $447.8 million in 1997; $445.4 million in 1998;
$452.9 million in 1999; $366.0 million in 2000; and $238.5
million in 2001.
The Company has various options available to meet its
capital and operating commitments, including cash on hand at
March 31, 1995 of $172.7 million, $191.7 million form the April
1995 sale/leaseback of six new 737-300 aircraft, internally
generated funds, and a $300 million unused revolving credit line
with a group of banks. In addition, the Company will also
consider various borrowing or leasing options to maximize
earnings and supplement cash requirements.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has received examination reports from the
Internal Revenue Service proposing certain adjustments
to Southwest's income tax returns for 1987 through
1991. The adjustments relate to certain types of
aircraft financings consummated by Southwest, as well
as other members of the aviation industry, during that
time period. Southwest intends to vigorously protest
the adjustments made with which it does not agree.
The industry's difference with the IRS involves complex
issues of law and fact which are likely to take a
substantial period of time to resolve. Management
believes that final resolution of such protest will not
have a materially adverse effect upon the results of
operations of Southwest.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(11) Computation of Earnings Per Share
(27) Financial Data Schedule
b) Reports on Form 8-K
The following reports on Form 8-K
were filed during the quarter:
(i) Form 8-K dated February 27, 1995, filed for
the purpose of filing the following exhibits:
12 Calculation of Ratio of Earnings to
Fixed Charges
23 Consent of Independent Auditors
99.1 Consolidated Financial Statements
99.2 Report of Independent Auditors
99.3 Management's Discussion and Analysis
of Results of Operations and Financial
Condition
99.4 Financial Data Schedule
(ii) Form 8-K dated March 3, 1995, filed for the
purpose of filing the following exhibits:
1.1 Terms Agreement dated February 28,
1995 between the Company and Solomon
Brothers Inc, Lehman Brothers, and
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
4.1 Form of Global Security representing
8% Notes due 2005
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities 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.
<TABLE>
<S> <C>
May 10, 1995 /s/ Gary C. Kelly
Date Gary C. Kelly
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
<S> <C>
(11) Computation of Earnings Per Share
(27) Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 172,749
<SECURITIES> 0
<RECEIVABLES> 96,589
<ALLOWANCES> 0
<INVENTORY> 36,927
<CURRENT-ASSETS> 337,352
<PP&E> 3,545,444
<DEPRECIATION> 878,842
<TOTAL-ASSETS> 3,007,752
<CURRENT-LIABILITIES> 607,199
<BONDS> 0
<COMMON> 143,477
0
0
<OTHER-SE> 1,108,163
<TOTAL-LIABILITY-AND-EQUITY> 3,007,752
<SALES> 0
<TOTAL-REVENUES> 620,999
<CGS> 0
<TOTAL-COSTS> 597,590
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,686
<INCOME-PRETAX> 20,034
<INCOME-TAX> 8,208
<INCOME-CONTINUING> 11,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,826
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
EXHIBIT (11)
Page 1 of 2
Southwest Airlines Company
Computation of Earnings Per Share
For the Three Months Ended March 31, 1995
<TABLE>
<CAPTION>
Fully
Primary Diluted
<S> <C> <C>
Weighted average shares outstanding 146,367,603 143,367,603
Shares issuable upon exercise of
outstanding stock options
(treasury stock method) 3,164,628 3,164,628
Weighted average common and common
equivalent shares 146,532,231 146,532,231
Earnings for per share computations $11,826,000 $11,826,000
Earnings per common and common
equivalent share $0.08 $0.08
</TABLE>
EXHIBIT (11)
Page 2 of 2
Southwest Airlines Company
Computation of Earnings Per Share
For the Three Months Ended March 31, 1994
<TABLE>
<CAPTION>
Fully
Primary Diluted
<S> <C> <C>
Weighted average shares outstanding 142,858,363 142,858,363
Shares issuable upon exercise of
outstanding stock options
(treasury stock method) 4,741,909 4,743,379
Weighted average common and common
equivalent shares 147,600,272 147,601,742
Earnings for per share computations $41,847,000 $41,847,000
Earnings per common and common
equivalent share $0.28 $0.28
</TABLE>
