<PAGE>
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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 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1994 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of 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) 904-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
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. Yes [X] No [ ]
Aggregate market value of Common Stock held by nonaffiliates as of February
28, 1995:
$2,472,861,013
Number of shares of Common Stock outstanding as of the close of business on
February 28, 1995:
143,360,669 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of
Shareholders, May 18, 1995: 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 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 1994, Southwest operated 199 Boeing 737 aircraft and provided
service to 45 airports in 44 cities primarily in the midwestern, southwestern,
and western regions of the United States.
On December 31, 1993, Southwest acquired Morris Air Corporation (Morris) in
a stock-for-stock exchange, issuing approximately 3.6 million shares of
Southwest Common Stock in exchange for all of the outstanding shares of Morris.
During 1994, the operations of Morris were substantially integrated with those
of Southwest. As a result of that process, Southwest commenced service to seven
new cities in 1994: Tucson, Arizona; Santa Ana (Orange County), California;
Boise, Idaho; Portland, Oregon; Salt Lake City, Utah; Seattle, and Spokane,
Washington. Unless the context requires otherwise, references in this annual
report to the "Company" include Southwest and Morris.
The business of the Company is somewhat seasonal. Quarterly operating
income and, to a lesser extent, revenues tend to be somewhat 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:
<TABLE>
<S> <C>
1990 $.78
1991 $.66
1992 $.61
1993 $.59
1994 $.54
</TABLE>
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. The Company uses
various price-risk management techniques, including derivative products such as
fixed-price swaps, caps, and collars, to help protect against price increases.
To date, not more than 11 percent of then-current usage was hedged in this
manner. 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. For more discussion of current jet fuel costs and the impact of these
costs on the Company's operations, 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 (Competition Act), 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 Arkansas, Louisiana, 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 Competition Act does not restrict
Southwest's intrastate Texas flights or its air service from points other than
Love Field to points beyond Texas and the four contiguous states.
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 Love Field section of the Competition Act,
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.
Environmental. The Airport Noise and Capacity Act of 1990 (ANCA) requires
the phase out of Stage 2 airplanes (which meet less stringent noise emission
standards than later model Stage 3 airplanes) in the contiguous 48 states by
December 31, 1999. FAA rules establish interim compliance dates for ANCA of
December 31, 1994, December 31, 1996, and December 31, 1998. An operator may
comply by either implementing a reduction of the operator's base level, as
defined in ANCA, of Stage 2 aircraft by at least 25 percent increments by the
end of the three interim compliance dates or by operating a fleet that is at
least 55 percent Stage 3 by December 31, 1994, 65 percent by December 31, 1996,
and 75 percent by December 31, 1998. Selection of one of the two alternative
compliance techniques is not irrevocable and operators are free to opt for one
method at one compliance date and another at the next. Operation of Stage 2
aircraft after December 31, 1999 is prohibited, subject, however, to an
extension of the final compliance date to December 31, 2003, if at least 85
percent of the aircraft used by the operator in the contiguous United States
will comply with Stage 3 noise levels by July 1, 1999 and the operator
successfully obtains a waiver from the FAA of the December 31, 1999 final
phaseout date. Statutory requirements to obtain a waiver include a
determination by the FAA that the waiver is in the
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public interest or would enhance competition or benefit service to small
communities. There is no assurance that such a waiver is obtainable.
The Company's fleet, as of December 31, 1994, consisted of 50 Stage 2
aircraft and 149 Stage 3 aircraft, yielding a Stage 3 percentage of 74.9
percent. Accordingly, the Company exceeds the Stage 3 fleet percentage
requirement for the December 31, 1994 and December 31, 1996 interim compliance
dates.
As of December 31, 1994, of the 50 Stage 2 aircraft operated by the
Company, 30 are leased from third parties and 20 are owned by the Company. The
Company can comply with the rules by acquiring additional Stage 3 aircraft,
returning Stage 2 aircraft to the lessors as the leases terminate according to
their terms, retiring owned Stage 2 aircraft, or hushkitting Stage 2 aircraft.
Because the Company already complies with the December 31, 1998 interim
compliance requirement of a 75 percent Stage 3 fleet, the Company could operate
all 50 of its Stage 2 aircraft until December 31, 1999. Based upon the
Company's current schedule for delivery of new Stage 3 aircraft, including
options, the Company could achieve 85 percent compliance by July 1, 1999 through
the retirement of only seven of the 50 Stage 2 aircraft, assuming no
hushkitting. This would qualify the Company to apply for a waiver from the
final compliance date, which, if obtained, could permit the Company to continue
operation of the remaining 43 Stage 2 aircraft until, at the latest, December
31, 2003.
ANCA also requires the FAA to establish parameters within which any new
Stage 2 and Stage 3 noise or access restrictions at individual airports must be
developed. The published rules generally provide that local noise restrictions
on Stage 3 aircraft first effective after October 1990 require FAA approval, and
establish a regulatory notice and review process for local restrictions on Stage
2 aircraft first proposed after October 1990. Certain airports, including
Dallas Love Field, Los Angeles, San Diego, San Francisco, 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 are considering
adopting similar noise regulations.
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. The airport's governing body completed the reallocation process
on February 7, 1995. The Company was allocated seat capacity to operate only 14
daily flights, rather than the 21 flights being operated as of January 15, 1995,
thereby necessitating a reduction of seven daily flights by the Company. To
comply with the Plan, the Company will maintain seven daily flights to San Jose
and Oakland, California, respectively, and will eliminate non-stop service to
Salt Lake City, Utah (two daily flights) and Phoenix, Arizona (four daily
flights) and one daily flight to San Jose, all effective April 1, 1995.
The Company is subject to various other federal, state, and local laws and
regulations relating to the protection of the environment, including the
discharge of materials into the environment.
MARKETING AND COMPETITION
Southwest focuses 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 1994 was 391 miles with an
average duration of approximately one hour. At yearend, Southwest served 298
nonstop city pairs with an average weekday frequency of six roundtrips per city
pair.
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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 local, not connecting, traffic. As a result, approximately 80
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, Burbank, Oakland, and San Jose
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, approximately 20 minutes, thereby
reducing the number of aircraft and gate facilities that would otherwise be
required. Southwest does not interline with other jet airlines, nor have any
commuter feeder relationships.
Southwest employs a very simple fare structure, maintaining 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 May 1994, the computer reservations systems (CRSs) used by travel
agencies owned by United Airlines (Apollo) and Continental Airlines (System One)
disabled automated ticketing for Southwest travel. Rather than pay the fees
associated with CRS participation in Apollo and System One, Southwest has taken
the following actions: Southwest has provided direct access to its own
reservation system and ticketing for the 50 largest travel agencies (SWAT);
instituted overnight delivery of Southwest-produced tickets for approximately
300 large travel agencies; improved access to Ticket By Mail for direct
Customers by reducing the time limit from seven days out from the date of travel
to three days; and introduced a Ticketless travel option, eliminating the need
to print a paper ticket altogether. Southwest has also entered into a new
arrangement with SABRE, the CRS in which Southwest has historically participated
to a limited extent, providing for ticketing and automated booking on Southwest
in a very cost-effective manner.
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 have initiated low-cost, shorthaul service
in markets served by the Company, which represents a more direct threat in
Southwest's market niche. 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.
For more discussion on the current competitive environment for Southwest, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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 which 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 in 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.
4
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FREQUENT FLYER AWARDS
Southwest's frequent flyer program, The Company Club, is based on trips
flown rather than mileage. The Company Club offers one free roundtrip travel
award to any Southwest destination after flying eight roundtrips (or 16 one-way
trips) on Southwest within a consecutive twelve-month period.
The trips flown as credit towards a free travel award certificate are valid
for twelve months only; the free travel award is automatically generated when
earned by the Customer rather than allowing the Customer to bank the trip
credits indefinitely; and the free travel award is valid for one year with an
automatic expiration date. Based on the issuance of free travel awards to
qualified members, coupled with the foregoing program characteristics and the
use of "black out" dates for the free travel awards during peak holiday periods,
the financial impact of free travel awards used on the Company's consolidated
financial statements has not been material. Free travel awards redeemed were
approximately 279,000, 256,000, and 209,000 during 1994, 1993, and 1992,
respectively. The amount of free travel award usage as a percentage of total
Southwest revenue passengers carried was 1.4 percent in 1994 and 1.5 percent in
both 1993 and 1992.
The Company accounts for free travel awards using the incremental cost
method, consistent with the other major airlines. This method recognizes an
average incremental cost to provide roundtrip transportation to one additional
passenger. The incremental cost to provide free transportation 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. The estimated incremental
costs include passenger costs such as beverage and snack supplies, baggage
claims, baggage handling, and liability insurance; operations costs such as
security services, airport rentals, fuel, oil, and into-plane charges; and
reservations costs, such as communications and system operations fees. The
liability for free travel awards earned but not used at December 31, 1994 and
1993 was not material.
The number of free travel awards for Southwest outstanding at December 31,
1994 and 1993 was approximately 248,000 and 178,000, respectively. These
numbers do not include partially earned awards. The Company currently does not
have a system to accurately estimate partially earned awards. However, these
partially earned awards may equate to approximately 60-70 percent of the current
outstanding awards. Since the inception of The Company Club in 1987,
approximately 15 percent of all award certificates have expired without being
used.
EMPLOYEES
At December 31, 1994, Southwest (including Morris) had 16,818 employees,
consisting of 4,894 flight, 747 maintenance, 9,237 ground customer service and
1,940 management, accounting, marketing, and clerical personnel.
Southwest has nine collective bargaining agreements covering approximately
83 percent of its employees. Southwest's 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. Customer
service and reservation employees are subject to an agreement with the
International Association of Machinists and Aerospace Workers, AFL-CIO (IAM),
which becomes amendable in November 1997. Flight attendants are subject to an
agreement with the Transportation Workers Union of America, AFL-CIO, which
becomes amendable May 31, 1996. The pilots are subject to an agreement with the
Southwest Airlines Pilots' Association (SWAPA), which becomes amendable in
September 1999 (described below). Flight dispatchers are represented by the
Southwest Airlines Employees Association, pursuant to an agreement which becomes
amendable in November 1997. Mechanics, aircraft cleaners
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and stock clerks are subject to agreements with the International Brotherhood of
Teamsters, with both agreements becoming amendable in August 1995. The flight
simulator technicians are represented by the International Brotherhood of
Teamsters pursuant to an agreement which becomes amendable in October 1995. The
flight/ground school instructors are subject to an agreement with the Southwest
Airlines Professional Instructors Association which becomes amendable in
December 1995.
The Company recently entered into two labor contracts with large employee
groups. In November 1994, Southwest entered into an agreement with the IAM
covering Customer service and reservation employees. In January 1995,
Southwest's pilots ratified a ten-year labor contract that calls for no wage
increases in the first five years and three percent annual wage increases in
three of the last five years of the contract. Initially, the pilots will
receive options to purchase approximately 14.5 million shares of Southwest
common stock at $20 per share over the term of the contract; pilots hired
subsequently will receive additional grants at a five percent premium over then
current fair market value, up to a total of 18,000,000 shares that can be issued
under the stock option plan. Pilots will be eligible for profitability bonuses
of up to three percent of compensation in three of the first five years and
profitability-based pay increases up to three percent in two of the second five
years of the contract. The pilot group may choose to reopen the contract in
five years, in which event all unexercised options will terminate.
ITEM 2. PROPERTIES
AIRCRAFT
Southwest and Morris operated a total of 199 Boeing 737 aircraft as of
December 31, 1994, of which 89 and 13 were under operating and capital leases,
respectively. The remaining 97 aircraft are owned.
In January 1994, Southwest entered into an agreement with The Boeing
Company, pursuant to which Southwest is the launch customer for the Boeing 737-
700 aircraft, the newest generation of the Boeing 737 aircraft type. As the
launch customer, Southwest has agreed to purchase sixty-three Boeing 737-700
aircraft from 1997 to 2001, with options for an additional 63 737-700 aircraft
from 1998 to 2004. As a part of this transaction, 42 of the 53 options for 737-
300 aircraft from 1997 to 1999 were canceled.
In total, including an agreement in principle to lease two used aircraft in
second quarter 1995, at December 31, 1994, the Company had 118 firm orders and
74 options as follows:
<TABLE>
<CAPTION>
Type Seats 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
---- ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
737-200 122 50 --- --- --- --- --- --- --- --- --- ---
737-300 137 124 27 18 21 --- --- --- --- --- --- ---
737-500 122 25 --- --- --- --- --- --- --- --- --- ---
737-700 137 --- --- --- 4 21 21 21 18 18 18 5
</TABLE>
The average age of the Company's fleet at December 31, 1994 was 7.6 years.
For information regarding the Company's obligations under capital leases and
noncancelable operating leases see Notes 6 and 7 to the Consolidated Financial
Statements.
For information concerning Southwest's aircraft purchase commitments, see
Note 4 to the Consolidated Financial Statements.
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The Company has an agreement with CFM International, Inc. (a joint company
of SNECMA (France) and General Electric Company) dated May 28, 1981, as amended,
for the supply of spare engines for its Boeing 737-300, -500, and -700 aircraft.
CFM also supplies the engines to The Boeing Company for original installation on
such aircraft. CFM is the sole manufacturer of engines for use on the Boeing
737-300, -400, -500, and -700 aircraft.
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 three 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, 1994, the Company operated seven reservation
centers. The reservation centers located in Chicago, Illinois; Albuquerque, New
Mexico; and Salt Lake City, Utah occupy leased space. The Company owns its
Dallas, Texas; Houston, Texas; Phoenix, Arizona; and San Antonio, Texas
reservation centers. In January 1995, the Company opened its newest reservation
center in Little Rock, Arkansas on leased land and has announced an intention to
locate an additional reservation center on leased land in Oklahoma City,
Oklahoma.
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 overhauls and repairs for its airframes and engines, which comprise
the majority of the annual maintenance cost.
In recent years, many airports have increased or sought to increase the
rates charged to airlines. The extent to which such charges are limited by
statute and the ability of airlines to contest such charges has been subject to
litigation, including a case recently decided against certain carriers by the
United States Supreme Court. To the extent the limitations on such charges are
relaxed or the ability of airlines to challenge such charges is restricted, the
rates charged by airports to airlines may increase substantially. Management
cannot predict the magnitude of any such increase.
ITEM 3. LEGAL PROCEEDINGS
In January 1994, Southwest received an examination report from the Internal
Revenue Service proposing certain adjustments to Southwest's income tax returns
for 1987 and 1988. 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 differences with
the IRS involve 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 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, 1995) are as follows:
<TABLE>
<CAPTION>
OFFICER
CONTINUOUSLY
NAME POSITION AGE SINCE
---- -------- --- ------------
<S> <C> <C> <C>
Herbert D. Kelleher Chairman of the Board, President, 63 1967
and Chief Executive Officer
Colleen C. Barrett Executive Vice President-Customers 50 1978
and Corporate Secretary
Gary A. Barron Executive Vice President, 50 1978
Chief Operations Officer
John G. Denison Executive Vice President- 50 1986
Corporate Services
Gary C. Kelly Vice President-Finance, 39 1986
Chief Financial Officer
James F. Parker Vice President-General Counsel 48 1986
Ron Ricks Vice President-Governmental Affairs 45 1986
James C. Wimberly Vice President-Ground Operations 42 1985
</TABLE>
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. All of the executive officers
have held their current positions with Southwest for more than five years except
Ms. Barrett. On November 21, 1990, Ms. Barrett was appointed Executive Vice
President - Customers. Ms. Barrett had served as Vice President -
Administration since July 1985, and Corporate Secretary of Southwest since
March 28, 1978.
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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 July 1993 three-for-two stock split were:
<TABLE>
<CAPTION>
PERIOD DIVIDEND HIGH LOW
------ -------- ---- ---
<S> <C> <C> <C>
1994
1st Quarter $.01000 $39.00 $31.25
2nd Quarter .01000 34.38 24.13
3rd Quarter .01000 29.63 21.63
4th Quarter .01000 23.63 15.50
1993
1st Quarter $.00933 $25.17 $18.17
2nd Quarter .00933 30.00 22.17
3rd Quarter .01000 37.63 28.00
4th Quarter .01000 37.63 29.88
</TABLE>
As of February 28, 1995, there were 10,720 holders of record of the
Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following financial information for the five years ended December 31,
1994 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.
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA:
(in thousands except per share amounts)
Operating revenues........................ $2,591,933 $2,296,673 $1,802,979 $1,379,286 $1,237,276
Operating expenses........................ 2,275,224 2,004,700 1,609,175 1,306,675 1,150,015
--------- --------- --------- --------- ----------
Operating income.......................... 316,709 291,973 193,804 72,611 87,261
Other expenses, net....................... 17,186 32,336 36,361 18,725 6,827/(4)/
--------- --------- --------- --------- ---------
Income before income taxes and cumula-
tive effect of accounting changes...... 299,523 259,637 157,443 53,886 80,434
Provision for income taxes /(1)/.......... 120,192 105,353 60,058 20,738 29,829
--------- --------- --------- --------- ---------
Income before cumulative effect of
accounting changes /(1)/............... 179,331 154,284 97,385 33,148 50,605
Cumulative effect of accounting changes... - 15,259/(2)/ 12,538/(3)/ -- --
---------- ---------- ---------- ---------- ----------
Net income /(1)/.......................... $ 179,331 $ 169,543 $ 109,923 $ 33,148 $ 50,605
========== ========== ========== ========== ==========
Net income per common and common
equivalent share before cumulative
effect of accounting changes /(1)/..... $1.22 $1.05 $0.68 $0.25 $0.39
Cash dividends per common share........... $.04000 $.03867 $.03533 $.03333 $.03223
Total assets at period-end................ $2,823,071 $2,576,037 $2,368,856 $1,854,331 $1,480,813
Long-term obligations at period-end....... $583,071 $639,136 $735,754 $617,434 $327,553
Stockholders' equity at period-end........ $1,238,706 $1,054,019 $879,536 $635,793 $607,294
OPERATING DATA:
Revenue passengers carried................ 42,742,602/(6)/ 36,955,221/(6)/ 27,839,284 22,669,942 19,830,941
Revenue passenger miles (RPMs) (000s)..... 21,611,266 18,827,288 13,787,005 11,296,183 9,958,940
Available seat miles (ASMs) (000s)........ 32,123,974 27,511,000 21,366,642 18,491,003 16,411,115
Load factor............................... 67.3% 68.4% 64.5% 61.1% 60.7%
Average length of passenger haul (miles).. 506 509 495 498 502
Trips flown............................... 624,476 546,297 438,184 382,752 338,108
Average passenger fare.................... $58.44 $59.97 $58.33 $55.93 $57.71
Passenger revenue yield per RPM........... 11.56c 11.77c 11.78c 11.22c 11.49c
Operating revenue yield per ASM........... 8.07c 8.35c 7.89c 7.10c 7.23c
Operating expenses per ASM................ 7.08c 7.25c/(7)/ 7.03c 6.76c 6.73c
Fuel cost per gallon (average)............ 53.92c 59.15c 60.82c 65.69c 77.89c
Number of employees at period-end......... 16,818 15,175 11,397 9,778 8,620
Size of fleet at period-end /(5)/......... 199 178 141 124 106
</TABLE>
________________________________
/(1)/ Proforma prior to 1993, assuming Morris, an S-Corporation prior to 1993,
was taxed at statutory rates.
/(2)/ Includes the net cumulative effect of adopting Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" and Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions." For additional information,
see the Consolidated Financial Statements of the Company and the
accompanying notes thereto.
/(3)/ Includes one-time adjustment for the cumulative effect of a change in the
method of accounting for scheduled airframe overhaul costs from the direct
expense method to that of capitalizing and amortizing the costs over the
periods benefited. For additional information, see the Consolidated
Financial Statements of the Company and the accompanying notes thereto.
/(4)/ Includes $2.6 million gains on sales of aircraft and $3.1 million from
the sale of certain financial assets. (Footnotes continued on next page)
10
<PAGE>
/(5)/ Includes leased aircraft.
/(6)/ Includes certain estimates for Morris.
/(7)/ Excludes merger expenses of $10.8 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis listed in the accompanying Index to
Consolidated Financial Statements on Page F-1 is filed as part of this annual
report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements, and Report of Ernst & Young LLP, Independent Auditors, listed in the
accompanying Index to Consolidated Financial Statements on page F-1 are filed as
part of this annual report.
The amounts shown on the following table differ from those previously
reported in Southwest's Form 10-Q's filed in respect of the 1993 periods shown
below. These differences are solely due to Southwest's acquisition of Morris,
which was accounted for as a pooling of interests. See Note 2 to the
Consolidated Financial Statements.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
1994 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating revenues.......... $619,412 $661,056 $685,289 $626,176
Operating income............ 76,046 101,834 101,710 37,119
Income before income taxes.. 69,538 97,156 97,128 35,701
Net income.................. 41,847 58,522 58,619 20,343
Net income per common and
common equivalent share.. $ .28 $ .40 $ .40 $ .14
THREE MONTHS ENDED
-----------------------------------------
1993 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating revenues.......... $498,943 $568,251 $620,918 $608,561
Operating income............ 48,784 75,812 95,820 71,557
Income before income taxes.. 40,393 68,241 86,214 64,789
Net income.................. 24,933/(1)/ 42,149 48,833 38,369
Net income per common and
common equivalent share.. $ .17/(1)/ $ .29 $ .33 $ .26
</TABLE>
________________
/(1)/ Excludes cumulative effect of accounting changes.
11
<PAGE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None to be reported.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Election of Directors," incorporated herein by reference, from pages
1-4 of the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 18, 1995. 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 6-9 of the definitive Proxy Statement for Southwest's Annual Meeting
of Shareholders to be held May 18, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Voting Securities and Principal Shareholders," incorporated herein by
reference, from pages 4-5 of the definitive Proxy Statement for Southwest's
Annual Meeting of Shareholders to be held May 18, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Election of Directors" incorporated herein by reference, from pages 1-
4 of the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 18, 1995.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: The financial statements listed in the
accompanying Index to Consolidated Financial Statements on page
F-1 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.
12
<PAGE>
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)).
3.2 Bylaws of Southwest, as amended through February 1994
(incorporated by reference to Exhibit 3.2 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1993 (File
No. 1-7259)).
4.1 Credit Agreement dated December 15, 1990, between Southwest and
Texas Commerce Bank - Dallas, N.A., as agent for itself and
four other banks named therein, and such banks (incorporated by
reference to Exhibit 4.1 on Southwest's Current Report on Form
8-K dated February 14, 1991 (File No. 1-7259)); First Amendment
to Credit Agreement, dated April 4, 1991 and Second Amendment
to Credit Agreement, dated December 14, 1991 (incorporated by
reference to Exhibit 4.1 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1991 (File No. 1-7259));
Third Amendment to Credit Agreement, dated December 14, 1992
(incorporated by reference in Exhibit 4.1 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1992 (File
No. 1-7259)); Fourth Amendment to Credit Agreement, dated
December 14, 1993.
4.2 Specimen certificate representing Common Stock of Southwest.
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 Rights Agreement dated July 14, 1986 between Southwest and
MBank Dallas, N.A., as Rights Agent (incorporated by reference
to Exhibit 1, Southwest's Registration Statement on Form 8-A
dated July 15, 1986 (File No. 1-7259)) and Amendment No. 1 to
Rights Agreement, dated as of December 1, 1990 between
Southwest and Ameritrust Texas N.A. (incorporated by reference
to Exhibit 4.2 on Southwest's Current Report on Form 8-K dated
February 14, 1991 (File No. 1-7259)).
4.5 Indenture dated as of June 20, 1991 between Southwest Airlines
Co. and 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 Form of 9.4 percent Note due 2001 (incorporated by reference to
Exhibit 4.2 to Southwest's Current Report on Form 8-K dated
June 24, 1991 (File No. 1-7259)).
13
<PAGE>
4.7 Form of 8-3/4 percent Note due 2003 (incorporated by reference
to Exhibit 4.2 to Southwest's Current Report on Form 8-K dated
October 4, 1991 (File No. 1-7259)).
4.9 Form of 9-1/4 percent Note due 1998 (incorporated by reference
to Exhibit 4.9 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 1-7259)).
4.10 Form of 7-7/8 percent Note due 2007 (incorporated by reference
to Exhibit 4.10 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1992 (File No. 1-7259)).
4.11 Form of Global Security representing all 8 percent Notes due
2005 (incorporated by reference to Exhibit 4 to Southwest's
current Report on Form 8-K dated March 6, 1995 (File No. 1-
7259)).
10.1 Purchase Agreement No. 1510, dated July 22, 1988 between The
Boeing Company and Southwest (with all amendments through March
29, 1990) (incorporated by reference to Exhibit 10.1 on
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1989 (File No. 1-7259)); Amendments from April 1,
1990 through March 29, 1993 (incorporated by reference to
Exhibit 10.1 on Southwest's Annual Report on Form 10-K for the
year ended December 31, 1992 (File No. 1-7259)).
10.2 General Terms Agreement between CFM International, Inc. and
Southwest (with all amendments through March 29, 1990) dated
May 28, 1981 (incorporated by reference to Exhibit 10.2 on
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1989 (File No. 1-7259)); Amendments from November
6, 1989 through March 29, 1993 (incorporated by reference to
Exhibit 10.2 on Southwest's Annual Report on Form 10-K for the
year ended December 31, 1992 (File No. 1-7259)); Amendments
from March 29, 1993 through March 29, 1994 (incorporated by
reference to Exhibit 10.2 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1993 (File No. 1-7259));
Amendment No. 7 and Letter Agreement No. 11, each dated as of
January 19, 1994.
10.3 Purchase Agreement No. 1405, dated July 23, 1987 between The
Boeing Company and Southwest (with all amendments through March
29, 1990) (incorporated by reference to Exhibit 10.3 on
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1989 (File No. 1-7259)); Amendments from April 1,
1990 through March 29, 1993 (incorporated by reference to
Exhibit 10.3 on Southwest's Annual Report on Form 10-K for the
year ended December 31, 1992 (File No. 1-7259)); Amendments
from March 29, 1993 through March 29, 1994 (incorporated by
reference to Exhibit 10.3 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1993 (File No. 1-7259));
Amendments from March 30, 1994 through March 29, 1995.
10.4 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)).
14
<PAGE>
The following exhibits filed under paragraph 10 of Item 601 are the
Company's compensation plans and arrangements.
10.5 1985 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.1 to
Southwest's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1985 (File No. 1-7259)).
10.6 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)).
10.7 1992 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, 1991 (File No. 1-7259)).
10.8 1987 stock option agreement between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.11 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1987 (File No. 1-7259)).
10.9 1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No. 33-
40652)).
10.10 1991 Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 4.2 to Registration Statement on Form S-8 (File No.
33-40652)).
10.11 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)).
10.12 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)).
10.13 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)).
10.14 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option
Plan.
11 Computation of earnings per share.
22 Subsidiaries of Southwest.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
Southwest will furnish to the Commission supplementally upon request a copy
of each other instrument with respect to the long-term debt of the Company.
15
<PAGE>
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 reports on Form 8-K filed during the fourth quarter of 1994.
16
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Management's Discussion and Analysis F-2
Consolidated Financial Statements F-11
Report of Independent Auditors F-17
</TABLE>
F-1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INDUSTRY CONDITIONS
The 1990s have been devastating financially for the domestic passenger airline
industry, with Southwest as the sole exception among larger carriers. Since
1990, the industry has been shrinking and we have been expanding. We are now
carrying more than twice the number of passengers annually than in 1990, an
annualized growth rate of 21 percent. In 1993, with the advent of Continental
Lite and plans laid for the United Shuttle, the competitive trend away from
Southwest began to reverse. In 1994, in the face of our own aggressive
expansion, we experienced a massive increase of new competitive service from
United, Continental, Reno, and TWA. We also were negatively impacted by the
industry's use of persistent fare sales during the fourth quarter, which
occurred at a time when we were aggressively converting Morris Air Corporation
(Morris) to Southwest's operations and were experiencing operating difficulties
of our own in reservations and revenue management. The result was a 47 percent
decline in earnings in fourth quarter 1994 as compared to fourth quarter 1993.
Many of the operational issues that surfaced during fourth quarter 1994 have
been, or will soon be, addressed, most notably reservations capacity. However,
some of their effects will carry over into the first two quarters of 1995, and,
further, we cannot predict the actions of our competitors.
In response to these increasing competitive pressures, we implemented several
measures. However, we face significantly more competition than we did a year
ago, which may also continue to adversely affect comparisons to 1994 quarterly
performances, particularly in first half 1995.
As compared to year ago levels, load factors and passenger revenue yields are
currently down (the consolidated load factor for January 1995 was 57.8 percent,
compared with 63.1 percent for the same month a year ago). Our expectation is
that this trend will continue at least during first half 1995. As expected, the
integration of Morris into Southwest during 1994, which included 21 aircraft and
seven new cities, resulted in our immediate competitive presence in the
northwestern region of the U.S. and Salt Lake City. However, these new markets,
which are in the development stage and, therefore, understandably low-yielding,
will need to improve for overall yields to compare favorably to year ago levels.
While there is no way to predict precisely how fast these markets will develop,
we are encouraged by the pace thus far. We have also been encouraged with
Customer acceptance of recent price increases, which may improve yield
comparisons.
F-2
<PAGE>
From an operating cost perspective, we have been pleased with recent favorable
trends versus year ago levels, including fuel prices. Our goal is to continue
this trend in 1995, despite our basic lack of control over fuel prices.
Significant cost reduction opportunities lie in distribution costs. Ticketless
travel, the new SABRE Basic Booking Request, our enhanced Ticket By Mail
product, and expanded reservations operations should all combine to help reduce
distribution costs. During 1995, we currently plan to add twenty-seven 737-300
aircraft to our fleet and one new city, Omaha, Nebraska, to our route system,
which will allow us to focus on strengthening our existing route system.
RESULTS OF OPERATIONS
1994 COMPARED WITH 1993 The Company's consolidated net income for 1994 was
$179.3 million ($1.22 per share), as compared to the corresponding 1993 amount
(before the cumulative effect of accounting changes) of $154.3 million ($1.05
per share), an increase of 16.2 percent. The increase in earnings was primarily
attributable to an increase in operating income of 8.5 percent and a decrease in
other expenses (nonoperating) of 46.9 percent.
Operating Revenues Consolidated operating revenues increased by 12.9 percent in
1994 to $2,591.9 million, compared to $2,296.7 million for 1993. This increase
in 1994 operating revenues was derived from a 12.7 percent increase in passenger
revenues. Revenue passenger miles (RPMs) increased 14.8 percent in 1994,
compared to a 16.8 percent increase in available seat miles (ASMs), resulting in
a decrease in load factor from 68.4 percent in 1993 to 67.3 percent in 1994.
The 1994 ASM growth resulted from the addition of 21 aircraft during 1994.
Freight revenues in 1994 were $54.4 million, compared to $42.9 million in 1993.
The 26.9 percent increase in freight revenues exceeded the 16.8 percent increase
in ASMs for the same period primarily due to increased air freight volumes and
United States mail services.
Operating Expenses Consolidated operating expenses for 1994 were $2,275.2
million, compared to $2,004.7 million in 1993, an increase of 13.5 percent,
compared to the 16.8 percent increase in ASMs. On a per-ASM basis, operating
expenses (excluding 1993 merger expenses) decreased 2.3 percent in 1994. The
primary factors contributing to this decrease were an 8.8 percent decrease in
average jet fuel cost per gallon and lower agency commission costs, offset by
increased aircraft rentals.
F-3
<PAGE>
Operating expenses per ASM for 1994 and 1993 (excluding 1993 merger expenses)
were as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
Operating expenses per ASM
Increase Percent
1994 1993 (decrease) change
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries, wages,
and benefits________ 2.13c 2.12c .01c 0.5%
Profitsharing and Employee
savings plans_______ .22 .21 .01 4.8
Fuel and oil_____________ 1.00 1.11 (.11) (9.9)
Maintenance materials and
repairs_____________ .59 .59 - -
Agency commissions_______ .47 .53 (.06) (11.3)
Aircraft rentals_________ .42 .39 .03 7.7
Landing fees and
other rentals_______ .46 .47 (.01) (2.1)
Depreciation_____________ .43 .44 (.01) (2.3)
Other 1.36 1.39 (.03) (2.2)
----------------------------------------------------------------
TOTAL 7.08c 7.25c (.17)c (2.3)%
----------------------------------------------------------------
</TABLE>
Salaries, wages, and benefits per ASM increased only .5 percent in 1994. This
increase resulted from a 3.0 percent increase in average salary and benefits
cost per Employee, partially offset by slower average headcount growth, which
increased only 13.8 percent in 1994 versus the 1994 capacity (ASM) increase of
16.8 percent. The majority of the increase in average salary and benefits cost
related to increased health benefits and workers' compensation costs. Employee
productivity improved from 2,633 passengers handled per Employee in 1993 to
2,676 in 1994.
Profitsharing and Employee savings plan expenses per ASM increased 4.8 percent
in 1994. The increase is primarily the result of increased matching
contributions to Employee savings plans resulting from increased Employee
participation and higher matching rates in 1994 for Flight Attendants and
Customer Service Employees under their respective collective bargaining
agreements.
Fuel and oil expenses per ASM decreased 9.9 percent in 1994, primarily due to an
8.8 percent reduction in the average jet fuel cost per gallon from 1993. Jet
fuel prices remained relatively stable throughout 1994, with quarterly averages
ranging from
F-4
<PAGE>
$0.51 to $0.56 per gallon. Since year-end, fuel prices have averaged
approximately $0.54 per gallon.
In August 1993, the Revenue Reconciliation Act of 1993 was enacted, which, among
other things, included an increase of 4.3 cents per gallon in transportation
fuel tax, which becomes effective September 30, 1995, for jet fuel used in
commercial aviation. This additional fuel tax will increase fuel expenses
approximately $7.5 million in fourth quarter 1995.
Maintenance materials and repairs per ASM was unchanged in 1994 compared to
1993.
Agency commissions per ASM decreased 11.3 percent due to a lower mix of travel
agency sales and lower 1994 passenger revenue per ASM. The lower travel agency
sales mix resulted from 1994 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 subscribed to a new level of service with SABRE that will
automate the booking process for SABRE travel agencies effective May 1, 1995.
We also continue to actively pursue other cost-effective solutions for
automating non-SABRE travel agency bookings.
Aircraft rentals per ASM increased 7.7 percent in 1994. The increase primarily
resulted from a third quarter 1994 sale/leaseback transaction involving ten new
737-300 aircraft and a lease of three used aircraft under long-term operating
leases. At December 31, 1994, 44.7 percent of the Company's fleet was subject to
operating leases, compared to 43.3 percent at December 31, 1993.
Other operating expenses per ASM decreased 2.2 percent in 1994 compared to 1993.
The overall decrease is primarily attributable to operating efficiencies
resulting from the transition of Morris operational functions to Southwest,
primarily contract services which decreased $8.8 million (24.4 percent per ASM),
offset by an increase in advertising costs of $24.1 million (22.9 percent per
ASM) primarily associated with the start-up of seven new cities and new
competitive pressures in 1994.
F-5
<PAGE>
Other "Other expenses (income)" included interest expense, interest income, and
nonoperating gains and losses. Interest expense decreased $5.1 million in 1994
due to the March 1, 1993 redemption of $100 million senior unsecured notes due
1996 and the repayment of approximately $54.0 million of Morris long-term debt
during first quarter 1994. Capitalized interest increased $8.6 million in 1994
as a result of higher levels of advance payments on aircraft compared to 1993.
Interest income for 1994 decreased $1.9 million primarily due to lower cash
balances available for short-term investment.
Income Taxes The provision for income taxes decreased in 1994 as a percentage
of income before taxes, including cumulative effect of accounting changes, to
40.1 percent from 40.6 percent in 1993. The 1993 rate was higher due to
deferred tax adjustments in 1993 related to the 1993 increase in the federal
corporate income tax rate from 34 percent to 35 percent(see Note 11 to the
Consolidated Financial Statements). This was offset by increased 1994 effective
state income tax rates.
1993 COMPARED WITH 1992 Prior to 1993, Morris operated as a charter carrier.
In 1993, Morris began operating as a FAR 121 Certificated Air Carrier, or
scheduled service carrier, consistent with Southwest. For comparability from
1993 to 1992, the statistical and operating data for 1992 are based on scheduled
passenger service only (i.e., Southwest). Accordingly, RPMs and ASMs for 1992
relate only to scheduled carrier operations.
The Company's consolidated income for the year 1993 was $154.3 million ($1.05
per share), before the cumulative effect of accounting changes, compared to pro
forma consolidated income of $97.4 million ($.68 per share) for 1992, an
increase of 58.4 percent. The increase in earnings was primarily attributable to
an increase in operating income of 50.7 percent and was achieved despite an
increase in the federal income tax rate, which increased the provision for
income taxes $6.5 million, or $.04 per share.
Operating Revenues Consolidated operating revenues increased by 27.4 percent
in 1993 to $2,296.7 million. Operating revenue per ASM for scheduled service
carrier operations increased in 1993 to $.0835 from $.0789 in 1992. The
increase in consolidated operating revenues was primarily related to a 36.5
percent increase in passenger revenues, which accounted for 96.5 percent of
total operating revenues in 1993 versus 90.1 percent in 1992.
Consolidated RPMs increased 36.6 percent in 1993, which exceeded
the 28.8 percent increase in ASMs, resulting in an increase in the
load factor from 64.5 percent to 68.4 percent. The 1993 ASM
F-6
<PAGE>
increase resulted from the conversion of the Morris system from charter to
scheduled service and the addition of 16 aircraft to the Southwest fleet. The
additional 16 Southwest aircraft were primarily used to expand California, St.
Louis, and Chicago markets and to initiate service from Louisville, Baltimore,
and San Jose.
Freight revenues increased in 1993 to $42.9 million from $33.1 million in 1992.
The 29.6 percent increase in freight revenues exceeded the 28.8 percent ASM
increase primarily due to further expansion of United States mail services and
increased freight marketing programs.
Charter and other revenues decreased in 1993 from 1992 on a consolidated basis
as Morris converted its operations in 1993 to scheduled service from charter
operations. In 1993, consistent with the beginning of scheduled carrier service,
Morris revenues were primarily derived from scheduled operations and,
accordingly, classified as "passenger" revenues. Morris charter revenues totaled
$117.8 million in 1992.
Operating Expenses Consolidated operating expenses increased 24.6 percent to
$2,004.7 million from $1,609.2 million in 1992. The primary factors contributing
to the increase were the 28.8 percent increase in ASMs; increased contributions
to profitsharing and Employee savings plans; higher agency commissions; higher
aircraft rentals; and increased maintenance costs.
On a consolidated basis, the Company incurred $10.8 million of one-time merger
expenses in connection with the December 1993 Morris acquisition. These expenses
included $1.9 million of various professional fees; $4.7 million for disposal of
duplicate or incompatible property and equipment; and $4.2 million for Employee
relocation and severance costs related to elimination of duplicate or
incompatible operations. As required for financial reporting purposes, these
expenses have been reported as operating expenses.
Salaries, wages, and benefits per ASM decreased 2.3 percent in 1993. Excluding
the effects of Morris, Southwest's cost per ASM for salaries, wages, and
benefits increased .9 percent from 1992 to 1993. This increase resulted from a
2.2 percent increase in salaries and wages, offset by a 5.0 percent decrease in
health benefit and workers' compensation costs per ASM. Headcount for Southwest
increased 17.0 percent in 1993, slightly more than the 15.9 percent increase in
ASMs. However, Employee productivity improved to 2,633 passengers handled per
Employee in 1993 from 2,597 in 1992.
Morris contracted out all ground handling services, which are included in "other
operating expenses." Consequently, salaries, wages, and benefits on a per-ASM
basis are considerably lower for
F-7
<PAGE>
Morris than for Southwest contributing to the decrease in consolidated salaries,
wages, and benefits per ASM.
Profitsharing and Employee savings plan expenses per ASM increased 16.7 percent
in 1993. The increase was primarily the result of higher earnings in 1993. For
additional information, see Note 10 to the Consolidated Financial Statements.
Fuel and oil expenses per ASM decreased 2.6 percent in 1993 due to a 2.7 percent
reduction in the average cost per gallon of jet fuel from 1992. Jet fuel prices
remained relatively stable throughout 1993, continuing the trend which began in
1992, with quarterly averages ranging from $0.57 to $0.63 per gallon.
Maintenance materials and repairs per ASM increased 5.4 percent in 1993. This
increase was primarily the result of higher airframe component repairs and
higher amortization of capitalized scheduled airframe overhauls.
Agency commissions per ASM increased 6.0 percent in 1993 primarily due to
increased passenger revenues per ASM.
Aircraft rentals per ASM increased 30.0 percent in 1993. The increase was
primarily attributable to the expansion of Morris scheduled operations, which
leased 18 of its 21 aircraft, 11 of which were leased in 1993. Additionally, the
increase partially resulted from the sale/leaseback financing by Southwest,
since late 1992, of seven 737-300 aircraft with long-term operating leases. Also
in 1993, Southwest leased one used 737-300 aircraft under a long-term operating
lease and one used 737-200 aircraft under a short-term operating lease.
Depreciation expense per ASM decreased 8.5 percent in 1993 due to the expansion
of Morris, which, as stated above, consisted primarily of a leased aircraft
fleet.
Other operating expenses per ASM increased 13.8 percent from 1992 to 1993. This
increase is primarily the result of higher usage of contract services at Morris.
As previously discussed, Morris contracted for all ground handling service,
along with various other services that are handled internally at Southwest.
Other "Other expenses(income)" included interest expense, interest income, and
nonoperating gains and losses. Interest expense, net of capitalized interest,
decreased 7.0 percent in 1993 due to the March 1, 1993 early redemption of $100
million in senior unsecured 9% Notes due 1996. See Note 6 to the Consolidated
Financial Statements for further information. Net nonoperating losses in 1993
resulted from the write-down of certain internal system development costs and
the settlement of certain employment-
F-8
<PAGE>
related litigation for $1.7 million.
Income Taxes The provision for income taxes increased in 1993, as a percentage
of income before income taxes and cumulative effect of accounting changes, to
40.6 percent from pro forma 38.1 percent in 1992. The increase was primarily the
result of the increase in the federal income tax rate. See Note 11 to the
Consolidated Financial Statements for further information.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations was $412.7 million in 1994, compared to $392.7
million in 1993. During 1994, additional funds of $315.0 million were generated
from the sale and leaseback of ten new 737-300 aircraft subject to long-term
operating leases (increasing total commitments for operating leases by $619.0
million).
During 1994, capital expenditures of $788.6 million were primarily for the
purchase of 18 new 737-300 aircraft, one used 737-300 aircraft previously leased
by Morris, and progress payments for future aircraft deliveries. At December 31,
1994, capital commitments of the Company consisted primarily of scheduled
aircraft acquisitions.
As of January 1995, Southwest had one-hundred-sixteen 737s on firm order,
including twenty-five to be delivered in 1995, with options to purchase another
seventy-four. Aggregate funding required for firm commitments approximated
$3,042.7 million through the year 2001 of which $602.6 million related to 1995.
See Note 4 to the Consolidated Financial Statements for further information.
The Company recently completed the construction of a $10.0 million reservation
center in Little Rock, Arkansas, which began accepting calls on January 24,
1995, and announced that it will build an additional reservation center in
Oklahoma City scheduled to open in second quarter 1995. Total estimated cost of
the new Oklahoma City reservation center is approximately $10.0 million.
As of December 31, 1994 and since 1990, the Company had authority from its Board
of Directors to purchase 3,750,000 shares of its common stock from time-to-time
on the open market. No shares have been purchased since 1990.
The Company has various options available to meet its capital and operating
commitments, including cash on hand at December 31, 1994 of $174.5 million,
internally generated funds, and a revolving credit line with a group of banks of
up to $300 million (none of which had been drawn at December 31, 1994). In
addition, the
F-9
<PAGE>
Company will also consider various borrowing or leasing options to maximize
earnings and supplement cash requirements.
At yearend, the Company had outstanding shelf registrations for the issuance of
$100 million senior unsecured notes and $98 million pass-through certificates
relating to sale/leaseback transactions. The Company presently intends to
utilize these sources of financing during 1995.
Cash provided from operations was $392.7 million in 1993 as compared to $282.1
million in 1992. During 1993, additional funds of $90.0 million were generated
from the sale and leaseback of three new 737-300 aircraft subject to long-term
operating leases (increasing total commitments for operating leases by $145.0
million). Morris also generated $17.8 million from certain bank borrowings.
These proceeds were primarily used to finance aircraft-related capital
expenditures and to provide working capital.
F-10
<PAGE>
SOUTHWEST AIRLINES CO.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
1994 1993
===================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents________________ $ 174,538 $ 295,571
Accounts receivable______________________ 75,692 70,484
Inventories of parts and supplies,
at cost________________________________ 37,565 31,707
Deferred income taxes (Note 11)__________ 9,822 10,475
Prepaid expenses and other current
assets_________________________________ 17,281 23,787
--------- -------
Total current assets_________________ 314,898 432,024
Property and equipment, at cost
(Notes 3, 4, and 7):
Flight equipment_________________________ 2,564,551 2,257,809
Ground property and equipment____________ 384,501 329,605
Deposits on flight equipment
purchase contracts_____________________ 393,749 242,230
--------- ---------
3,342,801 2,829,644
Less allowance for depreciation__________ 837,838 688,280
--------- ---------
2,504,963 2,141,364
Other assets_______________________________ 3,210 2,649
--------- ---------
$ 2,823,071 $ 2,576,037
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable_________________________ $ 117,599 $ 94,040
Accrued liabilities (Note 5)_____________ 288,979 265,333
Air traffic liability____________________ 106,139 96,146
Income taxes payable_____________________ - 7,025
Current maturities of long-term
debt___________________________________ 9,553 16,068
------- -------
Total current liabilities____________ 522,270 478,612
Long-term debt less current
maturities (Note 6)______________________ 583,071 639,136
Deferred income taxes (Note 11)____________ 232,850 183,616
Deferred gains from sale and
leaseback of aircraft____________________ 217,677 199,362
Other deferred liabilities_________________ 28,497 21,292
Commitments and contingencies
(Notes 4, 7, and 11)
Stockholders' equity (Notes 8 and 9):
Common stock, $1.00 par value:
500,000,000 shares authorized;
143,255,795 shares issued and
outstanding in 1994 and
142,756,308 shares in 1993_____________ 143,256 142,756
Capital in excess of par value___________ 151,746 141,168
Retained earnings________________________ 943,704 770,095
--------- ---------
Total stockholders' equity_________ 1,238,706 1,054,019
--------- ---------
$ 2,823,071 $ 2,576,037
========= =========
</TABLE>
SEE ACCOMPANYING NOTES.
F-11
<PAGE>
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years ended December 31,
1994 1993 1992
--------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES:
Passenger_____________________ $2,497,765 $2,216,342 $1,623,828
Freight_______________________ 54,419 42,897 33,088
Charter and other_____________ 39,749 37,434 146,063
---------- ---------- ----------
Total operating revenues____ 2,591,933 2,296,673 1,802,979
OPERATING EXPENSES:
Salaries, wages, and
benefits (Note 10)__________ 756,023 641,747 512,983
Fuel and oil__________________ 319,552 304,424 257,481
Maintenance materials and
repairs_____________________ 190,308 163,395 122,561
Agency commissions____________ 151,247 144,941 113,504
Aircraft rentals______________ 132,992 107,885 77,472
Landing fees and other
rentals____________________ 148,107 129,222 105,929
Depreciation__________________ 139,045 119,338 101,976
Other operating expenses______ 437,950 382,945 317,269
Merger expenses (Note 2)______ - 10,803 -
---------- ---------- ----------
Total operating expenses___ 2,275,224 2,004,700 1,609,175
---------- ---------- ----------
OPERATING INCOME________________ 316,709 291,973 193,804
OTHER EXPENSES (INCOME):
Interest expense______________ 53,368 58,460 59,084
Capitalized interest__________ (26,323) (17,770) (15,350)
Interest income_______________ (9,166) (11,093) (10,672)
Nonoperating (gains) losses,
net____________ (693) 2,739 3,299
---------- ---------- ----------
Total other expenses_______ 17,186 32,336 36,361
---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES____________ 299,523 259,637 157,443
PROVISION FOR INCOME TAXES
(NOTE 11)_____________________ 120,192 105,353 55,816
---------- ---------- ----------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING
CHANGES_______________________ 179,331 154,284 101,627
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES
(NOTE 3)______________________ - 15,259 12,538
---------- ---------- ----------
NET INCOME______________________ $ 179,331 $ 169,543 $ 114,165
========== ========== ==========
PER SHARE AMOUNTS (NOTES 3, 8,
AND 12):
Income before cumulative
effect of accounting
changes_____________________ $ 1.22 $ 1.05 $ .71
Cumulative effect of
accounting changes__________ - .10 .09
---------- ---------- ----------
Net income____________________ $ 1.22 $ 1.15 $ .80
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES.
F-12
<PAGE>
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Capital
in excess
Common of Retained Treasury
stock par value earnings stock Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1991__________ $45,265 $79,240 $515,885 $ (4,597) $635,793
Public common stock offering
(Note 8)__________________________ 2,328 82,094 - 2,524 86,946
Conversion of debentures
(Note 6)__________________________ 1,371 34,678 - - 36,049
Two-for-one stock split
(Note 8)__________________________ 46,180 (46,180) - - -
Sale (retirement) of
treasury stock, pooled
company___________________________ (307) 60 - 1,434 1,187
Issuance of common and treasury
stock upon exercise of
executive stock options and
pursuant to Employee stock
option and purchase plans and
related tax benefit
(Note 9)__________________________ 156 3,359 - 553 4,068
Sale of preferred stock, pooled
company__________________________ 1,054 13,584 - - 14,638
Cash dividends, $.03533 per
share_____________________________ - - (4,890) - (4,890)
Cash distributions of pooled
company (Note 2)__________________ - - (5,388) - (5,388)
Reclassification of retained
earnings, pooled company
(Note 2)__________________________ - 13,844 (13,844) - -
Reinstatement of deferred
taxes, pooled company
(Note 2)__________________________ - (3,032) - - (3,032)
Net income - 1992___________________ - - 114,165 - 114,165
------- ------- -------- -------- --------
Balance at December 31, 1992__________ 96,047 177,647 605,928 (86) 879,536
Three-for-two stock split
(Note 8)__________________________ 46,325 (46,325) - - -
Issuance of common and treasury
stock upon exercise of
executive stock options and
pursuant to Employee stock
option and purchase plans and
related tax benefit
(Note 9)__________________________ 384 9,846 - 86 10,316
Cash dividends, $.03867 per
share____________________________ - - (5,376) - (5,376)
Net income - 1993__________________ - - 169,543 - 169,543
------- ------- ------- ---------- ---------
Balance at December 31,1993___________ 142,756 141,168 770,095 - 1,054,019
</TABLE>
F-13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Issuance of common stock upon
exercise of executive stock
options and pursuant to Employee
stock option and purchase plans
and related tax benefit
(Note 9)__________________________ 500 10,578 - - 11,078
Cash dividends, $.04000 per
share_____________________________ - - (5,722) - (5,722)
Net income - 1994___________________ - - 179,331 - 179,331
-------- -------- -------- -------- ----------
Balance at December 31,1994___________ $143,256 $151,746 $943,704 $ - $1,238,706
======== ======== ======== ======== ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-14
<PAGE>
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1994 1993 1992
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income_______________________________ $ 179,331 $ 169,543 $ 114,165
Cumulative effect of accounting changes (Note 3)______ - (15,259) (12,538)
--------- --------- ---------
Income before cumulative effect of accounting changes___ 179,331 154,284 101,627
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation____________________________ 139,045 119,338 101,976
Deferred income taxes_______________________ 49,887 53,200 21,260
Amortization of deferred gains on sale and leaseback
of aircraft___________________________ (30,341) (32,509) (32,719)
Amortization of scheduled airframe overhauls________ 14,216 11,630 6,930
Changes in certain assets and liabilities:
Increase in accounts receivable____________ (5,208) (14,253) (7,440)
Decrease (increase) in other current assets 648 (9,641) (12,000)
Increase in accounts payable and accrued
liabilities______________________ 52,679 67,585 65,706
Increase in air traffic liability__________ 9,993 30,212 18,602
Increase (decrease) in other current liabilities_ (4,690) 2,393 12,179
Other_______________________________ 7,106 10,440 5,978
--------- --------- ---------
Net cash provided by operating activities_____ 412,666 392,679 282,099
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment_______________ (788,649) (524,169) (432,528)
--------- --------- ---------
Net cash used in investing activities_____ (788,649) (524,169) (432,528)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt______________________ - 17,810 113,827
Proceeds from public common stock offering
(Note 8)____________________________ - - 86,946
Proceeds from aircraft sale and leaseback transactions__ 315,000 90,000 120,000
Proceeds from sale of preferred stock, pooled company_____ - - 14,638
Payment of long-term debt and capital lease obligations__ (63,071) (120,098) (10,358)
Payment of cash dividends______________________ (5,722) (5,376) (4,890)
Cash distributions of pooled company (Note 2)__________ - - (5,389)
Proceeds from Employee stock plans__________________ 8,743 6,743 3,517
Other__________________________________ - (7) 803
--------- --------- ---------
Net cash provided by (used in) financing activities__ 254,950 (10,928) 319,094
--------- --------- ---------
</TABLE>
F-15
<PAGE>
<TABLE>
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS________ (121,033) (142,418) 168,665
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD___________ 295,571 437,989 269,324
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD-_____________ $ 174,538 $ 295,571 $ 437,989
--------- --------- ---------
CASH PAYMENTS FOR:
Interest, net of amount capitalized________ $ 26,598 $ 43,161 $ 39,936
Income taxes___________________________ 80,461 45,292 27,728
</TABLE>
SEE ACCOMPANYING NOTES.
F-16
<PAGE>
SOUTHWEST AIRLINES CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation The consolidated financial statements include the
accounts of Southwest Airlines Co. (Southwest) and its wholly owned subsidiaries
(the Company). All significant intercompany balances and transactions have been
eliminated. Certain prior year amounts have been reclassified for comparison
purposes.
Cash and cash equivalents Cash equivalents consist of investment grade
commercial paper issued by major financial institutions that are highly liquid
and have original maturity dates 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
residual values over periods ranging from 15 to 20 years for flight equipment
(see Note 3) and 3 to 30 years for ground property and equipment. 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
lessee'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.
Aircraft and engine maintenance The cost of engine overhauls and routine
maintenance costs for aircraft and engine maintenance are charged to maintenance
expense as incurred. Scheduled airframe overhaul costs are capitalized at
amounts not to exceed the fair market value of the related aircraft and
amortized over the estimated periods benefited, presently 8 years.
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.
Revenue recognition Passenger revenue is recognized when the transportation
is provided. Tickets sold but not yet used are included in "Air traffic
liability."
F-17
<PAGE>
Frequent flyer awards The Company accrues the estimated incremental cost of
providing free travel awards earned under its Company Club Frequent Flyer
program.
Advertising The Company expenses the production costs of advertising as
incurred. Advertising expense for the years ended December 31, 1994, 1993, and
1992 was $79,475,000, $55,344,000, and $42,068,000, respectively.
2. ACQUISITION
On December 31, 1993, Southwest exchanged 3,574,656 newly issued shares of its
common stock for all of the outstanding stock of Morris Air Corporation
(Morris), a low-fare commercial/charter air carrier based in Salt Lake City.
The acquisition was accounted for as a pooling of interests and, accordingly,
the Company's consolidated financial statements were restated to include the
accounts and operations of Morris for all periods prior to the acquisition.
Prior to 1993, Morris was treated as an S-Corporation for federal and state
income tax purposes under applicable provisions of the Internal Revenue Code and
various state tax laws. Therefore, no provision for income taxes was made prior
to 1993. Morris made regular cash distributions to its shareholders sufficient
to meet their tax liabilities. Upon termination of S-Corporation status on
December 31, 1992, the undistributed S-Corporation retained earnings were
reclassified to capital in excess of par value. Additionally, Morris
established $3,032,000 of deferred income taxes for the cumulative differences
in the timing of reporting certain items for financial statement and income tax
purposes. These deferred taxes related primarily to depreciation. The
establishment of deferred taxes was offset by a reduction of capital in excess
of par value.
Merger expenses of $10,803,000 relating to the merger of Southwest and Morris
have been included in 1993 operating expenses as required for financial
reporting purposes; however, these expenses have been separately reported as
"merger expenses" to reflect the impact of the nonrecurring expenses on
operating results. Included in these one-time costs resulting from the merger
were $1,900,000 of various professional fees; $4,703,000 for disposal of
duplicate or incompatible property and equipment; and $4,200,000 for Employee
relocation and severance costs related to elimination of duplicate or
incompatible operations. During 1994, the integration of Morris into Southwest
was substantially completed, including the disposal of incompatible property and
equipment and settlement of Employee relocation and severance costs.
F-18
<PAGE>
3. ACCOUNTING CHANGES
Income Taxes Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). As a result of adopting SFAS 109, the Company recorded deferred tax assets
of $6,977,000 and reduced deferred tax liabilities by $9,048,000 at January 1,
1993, which resulted in an increase to the Company's 1993 net income of
$16,025,000 ($.11 per share) for the cumulative effect of the accounting change.
Postretirement Benefits Effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106). The cumulative effect
of this change in accounting method at January 1, 1993 reduced 1993 net income
by $766,000 (net of benefit from income taxes of $469,000) or $.01 per share.
The effect of adopting SFAS 106 on 1993 income before cumulative effect of
accounting changes was not material.
Scheduled Airframe Overhauls Prior to January 1, 1992, the Company expensed
scheduled airframe overhaul costs as incurred. This practice was adopted at a
time when costs were relatively constant from year to year and consistent with
the growth of the fleet.
Given the significant growth of the Company's fleet and the Company's 1991
modification of its airframe overhaul maintenance program with the Federal
Aviation Administration (FAA), Southwest changed its method of accounting for
scheduled airframe overhauls costs from the direct expense method to that of
capitalizing and amortizing the costs over the periods benefited. The Company
believes this method is preferable because it results in charges to expense that
are consistent with the growth in the fleet; improves financial reporting; and
better matches revenues and expenses.
For the year ended December 31, 1992, the Company recognized approximately
$6,900,000 in amortization of airframe overhaul expense. Had the direct expense
method been used to provide for scheduled airframe overhaul costs during the
year ended December 31, 1992, income before cumulative effect of accounting
change would have been reduced by approximately $9,800,000 (net of provision for
income taxes and profitsharing of approximately $8,800,000), or approximately
$.07 per share.
This change in accounting principle had the effect of a one-time adjustment
increasing net income for the year ended December 31, 1992 by approximately
$12,538,000 (net of provision for income taxes and profitsharing of
approximately $11,500,000).
F-19
<PAGE>
Change in Accounting Estimate Effective January 1, 1992, the Company revised
the estimated useful lives of its 737-200 aircraft from 15 years to 15-19 years.
This change was the result of the Company's assessment of the remaining useful
lives of its 737-200 aircraft following the recent promulgation of rules by the
FAA for the phase out of Stage 2 aircraft by December 31, 1999. The effect of
this change was to reduce depreciation expense approximately $3,680,000, or $.03
per share, for the year ended December 31, 1992.
4. COMMITMENTS
The Company's contractual purchase commitments consist primarily of scheduled
aircraft acquisitions. Twenty-five 737-300 aircraft are scheduled for delivery
in 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 $3,042.7 million, subject to adjustments
for inflation, due as follows: $602.6 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. In addition, the Company has an
agreement in principle to lease two used 737-300 aircraft in 1995.
The Company uses jet fuel fixed price swap arrangements to hedge its exposure to
price fluctuations on approximately 5 percent of its annual fuel requirements.
As of December 31, 1994, the Company had jet fuel swap agreements with broker-
dealers to exchange monthly payments on notional quantities amounting to
2,100,000 gallons per month, over the ensuing three months. Under the swap
agreements, the Company pays or receives the difference between the daily
average jet fuel price and a fixed price of approximately $.518 per gallon.
Gains and losses on such transactions are recorded as adjustments to fuel
expense and have been insignificant. Although the agreements expose the Company
to credit loss in the event of nonperformance by the other parties to the
agreements, the Company does not anticipate such nonperformance.
F-20
<PAGE>
<TABLE>
<CAPTION>
5. ACCRUED LIABILITIES
(in thousands)
1994 1993
---------------------------------------------------------------------
<S> <C> <C>
Aircraft rentals_____________ $ 67,407 $ 55,459
Profitsharing and savings plans
(Note 10)____________ 53,512 45,691
Aircraft maintenance costs___ 37,330 37,853
Vacation pay_________________ 31,801 26,781
Taxes, other than income_____ 25,001 19,183
Interest_____________________ 20,270 21,311
Merger expenses______________ - 8,527
Other________________________ 53,658 50,528
------------------------------------
$288,979 $265,333
====================================
6. LONG-TERM DEBT
(in thousands)
1994 1993
---------------------------------------------------------------------
9 1/4% Notes due 1998_______ $100,000 100,000
9.4% Notes due 2001_________ 100,000 100,000
8 3/4% Notes due 2003_______ 100,000 100,000
7 7/8% Notes due 2007_______ 100,000 100,000
Capital leases (Note 7)_____ 195,756 204,904
Secured notes payable to
financial institutions, repaid in
1994 - 53,950
Industrial Revenue Bonds,
repaid in 1994 - 375
Other_______________________ 435 13
-----------------------------------
596,191 659,242
Less current maturities_____ 9,553 16,068
Less debt discount__________ 3,567 4,038
-----------------------------------
$ 583,071 $ 639,136
===================================
</TABLE>
F-21
<PAGE>
On March 1, 1993, the Company redeemed the $100 million in senior unsecured 9%
Notes due March 1, 1996 issued in March 1986. The Notes were redeemed at par
plus accrued interest.
On September 9, 1992, Southwest 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 1/4% Notes,
$100 million of senior unsecured 9.4% Notes, and $100 million of senior
unsecured 8 3/4% Notes due February 15, 1998, July 1, 2001, and October 15,
2003, respectively. Interest on the Notes is payable semi-annually. The Notes
are not redeemable by the Company prior to maturity.
The fair values, based on quoted market prices, of these Notes at December 31,
1994, were as follows (in thousands):
<TABLE>
<S> <C>
9 1/4% Notes due 1998_______________ $102,000
9.4% Notes due 2001_________________ 103,820
8 3/4% Notes due 2003_______________ 100,670
7 7/8% Notes due 2007_______________ 93,070
</TABLE>
In 1992, certain Convertible Subordinated Debentures issued by Southwest
Airlines Eurofinance N.V. were redeemed. The principal amount of $35,000,000
was converted into 1,370,902 shares (unadjusted for the 1993 and 1992 stock
splits) of Southwest's common stock at the conversion price of $25.53 per share.
The conversion was primarily a noncash transaction and, therefore, was excluded
from the Statement of Cash Flows.
In addition to the credit facilities described above, Southwest has an unsecured
Bank Credit Agreement with a group of domestic banks that permits Southwest to
borrow through December 14, 1996 on a revolving credit basis up to $300 million.
Interest rates on borrowings under the Credit Agreement can be, at the option of
Southwest, the agent bank's prime rate, .30% over LIBOR, or .50% over domestic
certificate of deposit rates. The commitment fee is 0.1875% per annum. There
were no outstanding borrowings under this agreement at December 31, 1994 or
1993.
7. LEASES
Total rental expense for operating leases charged to operations in 1994, 1993,
and 1992 was $198,987,000, $167,303,000, and $125,835,000, respectively. The
majority of the Company's terminal
F-22
<PAGE>
operations space, as well as 89 aircraft, were under operating leases. The
amounts applicable to capital leases included in property and equipment were (in
thousands):
<TABLE>
<CAPTION>
1994 1993
------------------------------------------------------------------------
<S> <C> <C>
Flight equipment_________________ $233,324 $232,853
Less accumulated amortization____ 88,656 74,234
-----------------------------------
$144,668 $158,619
===================================
</TABLE>
Future minimum lease payments under capital leases and noncancelable operating
leases, with initial or remaining terms in excess of one year, at December 31,
1994, were (in thousands):
<TABLE>
<CAPTION>
Capital Operating
leases leases
------------------------------------------------------------------------
<S> <C> <C>
1995_____________________ $ 26,282 $ 176,439
1996_____________________ 28,897 178,253
1997_____________________ 26,843 168,132
1998_____________________ 32,903 148,017
1999_____________________ 20,999 137,845
After 1999_____________________ 191,096 1,559,478
-----------------------------------
Total minimum lease payments 327,020 $ 2,368,164
======================
Less amount representing
interest____________________ 131,264
------------
Present value of minimum
lease payments______________ 195,756
Less current portion___________ 9,542
------------
Long-term portion______________ $ 186,214
============
</TABLE>
The aircraft leases can generally 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.
F-23
<PAGE>
8. COMMON STOCK
At December 31, 1994, the Company had common stock reserved for issuance
pursuant to Employee stock benefit plans (12,009,293 shares) and upon exercise
of rights pursuant to the Common Stock Rights Agreement (Agreement), as amended
(155,265,088 shares).
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 purchase one share of common stock at an exercise price of $16.67
and is exercisable only in the event of a proposed takeover, as defined by the
Agreement. The Company may redeem the Rights at $.0111 per Right prior to the
time that 20 percent of the common stock has been acquired by a person or group.
If the Company is acquired or if certain self-dealing transactions occur, as
defined in the Agreement, each Right will entitle its holder to purchase for
$16.67 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, 1996.
On May 19, 1993, the Company's Board of Directors declared a three-for-two stock
split, distributing 46,325,147 shares on July 15, 1993. On May 20, 1992, the
Company's Board of Directors declared a two-for-one stock split, distributing
46,180,531 shares on July 15, 1992.
In February 1992, the Company sold 2,500,000 shares (unadjusted for the
subsequent 1993 and 1992 stock splits) of its common stock (2,327,892 new shares
and 172,108 shares from treasury) in a public offering. Net proceeds from the
sale of approximately $86,946,000 were added to the working capital of the
Company for general corporate purposes, including the acquisition of aircraft
and related equipment.
9. STOCK PLANS
In May 1991, the Company's stockholders approved the Incentive Stock Option Plan
and the Non-Qualified Stock Option Plan. Under the Incentive Stock Option Plan,
options to purchase a maximum of 9,000,000 shares of Southwest common stock may
be granted to key Employees. Under the Non-Qualified Stock Option Plan, options
to purchase up to 750,000 shares of Southwest common stock may be granted to key
Employees and non-employee directors. Under each plan, the option price per
share may not be less than the fair market value of a share on the date the
option is granted and the maximum term of an option may not exceed 10 years.
F-24
<PAGE>
Information regarding the stock option plans is summarized below:
<TABLE>
<CAPTION>
Incentive Non-Qualified
Plan Plan
---------- -------------
<S> <C> <C>
Outstanding December 31, 1991____ 3,948,957 282,825
Granted__________________________ 430,974 97,950
Exercised________________________ (251,817) (4,350)
Surrendered______________________ (111,210) (1,800)
------------------------------
Outstanding December 31, 1992____ 4,016,904 374,625
Granted__________________________ 724,646 22,512
Exercised________________________ *(198,285) **(94,810)
Surrendered______________________ (230,978) (1,050)
------------------------------
Outstanding December 31, 1993____ 4,312,287 301,277
Granted__________________________ 794,714 63,918
Exercised________________________ (190,159) (9,940)
Surrendered______________________ (104,880) -
-------------- --------------
Outstanding December 31, 1994____ 4,811,962 355,255
-------------- --------------
Exercisable______________________
1994_________________________
572,244 163,936
1993_________________________
314,322 108,509
1992_________________________ 142,575
198,474
Available for granting in
future periods:
1994_________________________ 3,447,694 279,165
1993_________________________ 4,137,528 343,083
1992_________________________ 4,631,196 364,545
Average price of exercised
options:
1994_________________________ $8.23 $7.85
</TABLE>
F-25
<PAGE>
<TABLE>
<S> <C> <C>
1993_________________________ $7.14 $7.37
1992_________________________ $6.10 $11.36
</TABLE>
*Includes 108,113 pre-split shares and 36,115 post-split shares, of
which 5,476 pre-split shares and 72 post-split shares were issued from
treasury.
**Includes 12,740 pre-split shares and 75,700 post-split shares.
The exercise price of outstanding options ranged from $6.02 to $37.44 in 1994,
$6.02 to $19.71 in 1993, and $6.02 to $12.06 in 1992.
In 1991, the Company's stockholders also approved the Employee Stock Purchase
Plan that provides for the sale of common stock to Employees of the Company at a
price equal to 90% 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 290,054 shares in 1994, 182,459 shares
(59,442 pre-split shares and 93,296 post-split shares) in 1993 and 166,436
shares in 1992 at average prices of $24.98, $25.25, and $12.89, respectively.
At December 31, 1994, 1993, and 1992, 1,489,753, 1,504,752, and 1,512,252
options to purchase the Company's common stock were also outstanding related to
employment contracts with the Company's president and chief executive officer.
Exercise prices range from $1.00 to $11.33 per share. Options for 15,000 shares,
7,500 shares (5,000 pre-split shares, of which 968 shares were issued from
treasury), and 22,500 shares were exercised in 1994, 1993, and 1992,
respectively.
Effective January 12, 1995, the Company adopted, pursuant to a collective
bargaining agreement between the Company and the Southwest Airlines Pilots'
Association (SWAPA), the 1995 SWAPA Non-Qualified Stock Option Plan (SWAPA
Plan). Under the terms of the SWAPA Plan, 18,000,000 common shares have been
reserved for issuance. An initial grant of approximately 14.5 million shares
was made on the effective date at an option price of $20.00 per share. On
September 1 of each year of the agreement, commencing September 1, 1996,
additional options will be granted to Pilots that became eligible during that
year at an option price equal to the fair market value of the common stock of
the Company on the date of grant plus 5 percent. Options vest in ten annual
increments of 10 percent and must be exercised prior to January 31, 2007, or
within a specified time upon retirement or termination. In the event that SWAPA
exercises its option to make the collective
F-26
<PAGE>
bargaining agreement amendable on or before September 1, 1999, any unexercised
options will be canceled on December 1, 1999.
10. EMPLOYEE PROFITSHARING AND SAVINGS PLANS
Substantially all of Southwest's Employees are members of the Southwest Airlines
Co. Profitsharing Plan (the Plan). Total profitsharing expense charged to
operations in 1994, 1993, and 1992 was $52,782,000, $44,959,000, and
$26,363,000, respectively. The Company also elected to contribute $3,605,000 in
1992 as a result of an accounting change (see Note 3).
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 1994, 1993, and 1992 were
$19,817,000, $13,986,000, and $11,611,000, respectively.
11. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method as required by
SFAS 109 (see Note 3).
Under SFAS 109, 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, 1994 and 1993 are as
follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
-------- --------
Deferred tax liabilities:
<S> <C> <C>
Accelerated depreciation____________ $343,585 $299,195
Scheduled airframe overhauls________ 23,966 21,512
Other_______________________________ 55,953 45,734
-------- --------
Total deferred tax liabilities___ 423,504 366,441
Deferred tax assets:
Deferred gains from sale and
leaseback of aircraft____________ 95,602 87,358
Capital and operating leases________ 38,240 33,637
Alternative minimum tax credit
carry forward___________________ 22,778 32,122
Other_______________________________ 43,856 40,183
-------- --------
Total deferred tax assets________ 200,476 193,300
-------- --------
Net deferred tax liability_______ $223,028 $173,141
======== ========
</TABLE>
F-27
<PAGE>
In August 1993, the Revenue Reconciliation Act of 1993 (the "1993 Act") was
enacted, which contains numerous provision changes including an increase in the
federal corporate income tax rate from 34 percent to 35 percent effective
January 1, 1993. As a result, the Company recognized approximately $4.0 million
of additional expense related to deferred tax liabilities existing on January 1,
1993.
The provision for income taxes before the cumulative effect of accounting
changes is comprised of the following (in thousands):
<TABLE>
<CAPTION>
Liability Deferred
Method Method
-----------------------------------------------------
1994 1993 1992
================================================================================
<S> <C> <C> <C>
Current:
Federal_____________ $ 59,603 $ 46,744 $30,586
State______________ 10,702 5,409 3,970
------ ------ ------
Total current_____ 70,305 52,153 34,556
Deferred: 46,470 48,524 18,144
Federal_____________ 3,417 4,676 3,116
------ ------ ------
State_______________ 49,887 53,200 21,260
------ ------ ------
Total deferred____ $120,192 $105,353 $55,816
======= ======== =======
</TABLE>
The components of the provision for deferred income taxes as reported under the
previous method of accounting for the year ended December 31, 1992 are as
follows (in thousands):
<TABLE>
<CAPTION>
1992
================================================================================
<S> <C>
Depreciation_________ $27,947
Deferred gains on
sale\leasebacks_____ (4,275)
Scheduled airframe
overhauls__________ 6,336
Vacation pay__________ (1,220)
Alternative minimum
tax_________________ (10,645)
Other, net____________ 3,117
------
$21,260
=======
</TABLE>
F-28
<PAGE>
In January 1994, Southwest received an examination report from the Internal
Revenue Service proposing certain adjustments to Southwest's income tax returns
for 1987 and 1988. 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 proposed with which it does not agree. The industry's difference
with the IRS involves complex issues of law and fact that 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.
The effective tax rate on income before cumulative effect of accounting changes
differed from the federal income tax statutory rate for the following reasons
(in thousands):
<TABLE>
<CAPTION>
Liability Deferred
Method Method
------------------------------------------------
1994 1993 1992
================================================================================
<S> <C> <C> <C>
Tax at statutory
U.S. tax rates_____ $104,833 $ 90,873 $53,531
Less amount associated
with S-Corporation
earnings of Morris
(Note 2)___________ - - (3,607)
-------- --------- --------
104,833 90,873 49,924
Nondeductible items__ 3,689 1,361 1,131
State income taxes,
net of federal
benefit____________ 9,177 6,632 5,124
Effect of increase
in U.S. statutory
rates________ - 3,957 -
Other, net__________ 2,493 2,530 (363)
-------- -------- --------
Total income tax
provision____________ $120,192 $105,353 $ 55,816
======= ======== =======
</TABLE>
12. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is computed based on the
weighted average number of common and common equivalent shares outstanding
(147,305,374 in 1994, 147,144,568 in 1993, and 142,945,890 in 1992). Fully
diluted earnings per share have not been presented as the fully dilutive effect
of shares issuable upon the exercise of options under the Company's Stock Option
Plans or conversion of Convertible Subordinated Debentures is anti-dilutive or
is not material.
F-29
<PAGE>
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, 1994 and 1993, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1994. 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 generally accepted auditing
standards. 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, 1994 and 1993, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 3, during 1993, the Company changed its method of
accounting for income taxes and postretirement benefits. Also as discussed in
Note 3, during 1992, the Company changed its method of accounting for scheduled
airframe overhauls.
ERNST & YOUNG LLP
Dallas, Texas
January 26, 1995
F-30
<PAGE>
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 20, 1995
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 20, 1995 on
behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ HERBERT D. KELLEHER Chairman of the Board of Directors,
------------------------------
Herbert D. Kelleher President and Chief Executive Officer
/s/ GARY C. KELLY Vice President-Finance
------------------------------ (Chief Financial and Accounting Officer)
President-Finance
Gary C. Kelly
/s/ Samuel E. Barshop Director
------------------------------
Samuel E. Barshop
/s/ Gene H. Bishop Director
------------------------------
Gene H. Bishop
/s/ Webb Crockett Director
------------------------------
C. Webb Crockett
/s/ William P. Hobby Director
------------------------------
William P. Hobby
/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
</TABLE>
<PAGE>
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)).
3.2 Bylaws of Southwest, as amended through February 1994
(incorporated by reference to Exhibit 3.2 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1993 (File
No. 1-7259)).
4.1 Credit Agreement dated December 15, 1990, between Southwest and
Texas Commerce Bank - Dallas, N.A., as agent for itself and
four other banks named therein, and such banks (incorporated by
reference to Exhibit 4.1 on Southwest's Current Report on Form
8-K dated February 14, 1991 (File No. 1-7259)); First Amendment
to Credit Agreement, dated April 4, 1991 and Second Amendment
to Credit Agreement, dated December 14, 1991 (incorporated by
reference to Exhibit 4.1 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1991 (File No. 1-7259));
Third Amendment to Credit Agreement, dated December 14, 1992
(incorporated by reference in Exhibit 4.1 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1992 (File
No. 1-7259)); Fourth Amendment to Credit Agreement, dated
December 14, 1993.
4.2 Specimen certificate representing Common Stock of Southwest.
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 Rights Agreement dated July 14, 1986 between Southwest and
MBank Dallas, N.A., as Rights Agent (incorporated by reference
to Exhibit 1, Southwest's Registration Statement on Form 8-A
dated July 15, 1986 (File No. 1-7259)) and Amendment No. 1 to
Rights Agreement, dated as of December 1, 1990 between
Southwest and Ameritrust Texas N.A. (incorporated by reference
to Exhibit 4.2 on Southwest's Current Report on Form 8-K dated
February 14, 1991 (File No. 1-7259)).
4.5 Indenture dated as of June 20, 1991 between Southwest Airlines
Co. and 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 Form of 9.4 percent Note due 2001 (incorporated by reference to
Exhibit 4.2 to Southwest's Current Report on Form 8-K dated
June 24, 1991 (File No. 1-7259)).
4.7 Form of 8-3/4 percent Note due 2003 (incorporated by reference
to Exhibit 4.2 to Southwest's Current Report on Form 8-K dated
October 4, 1991 (File No. 1-7259)).
4.9 Form of 9-1/4 percent Note due 1998 (incorporated by reference
to Exhibit 4.9 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 1-7259)).
E-1
<PAGE>
4.10 Form of 7-7/8 percent Note due 2007 (incorporated by reference
to Exhibit 4.10 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1992 (File No. 1-7259)).
4.11 Form of Global Security representing all 8 percent Notes due
2005 (incorporated by reference to Exhibit 4 to Southwest's
current Report on Form 8-K dated March 6, 1995 (File No. 1-
7259)).
10.1 Purchase Agreement No. 1510, dated July 22, 1988 between The
Boeing Company and Southwest (with all amendments through March
29, 1990) (incorporated by reference to Exhibit 10.1 on
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1989 (File No. 1-7259)); Amendments from April 1,
1990 through March 29, 1993 (incorporated by reference to
Exhibit 10.1 on Southwest's Annual Report on Form 10-K for the
year ended December 31, 1992 (File No. 1-7259)).
10.2 General Terms Agreement between CFM International, Inc. and
Southwest (with all amendments through March 29, 1990) dated
May 28, 1981 (incorporated by reference to Exhibit 10.2 on
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1989 (File No. 1-7259)); Amendments from November
6, 1989 through March 29, 1993 (incorporated by reference to
Exhibit 10.2 on Southwest's Annual Report on Form 10-K for the
year ended December 31, 1992 (File No. 1-7259)); Amendments
from March 29, 1993 through March 29, 1994 (incorporated by
reference to Exhibit 10.2 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1993 (File No. 1-7259));
Amendment No. 7 and Letter Agreement No. 11, each dated as of
January 19, 1994.
10.3 Purchase Agreement No. 1405, dated July 23, 1987 between The
Boeing Company and Southwest (with all amendments through March
29, 1990) (incorporated by reference to Exhibit 10.3 on
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1989 (File No. 1-7259)); Amendments from April 1,
1990 through March 29, 1993 (incorporated by reference to
Exhibit 10.3 on Southwest's Annual Report on Form 10-K for the
year ended December 31, 1992 (File No. 1-7259)); Amendments
from March 29, 1993 through March 29, 1994 (incorporated by
reference to Exhibit 10.3 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1993 (File No. 1-7259));
Amendments from March 30, 1994 through March 29, 1995.
10.4 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)).
The following exhibits filed under paragraph 10 of Item 601 are the
Company's compensation plans and arrangements.
10.5 1985 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.1 to
Southwest's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1985 (File No. 1-7259)).
10.6 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)).
E-2
<PAGE>
10.7 1992 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, 1991 (File No. 1-7259)).
10.8 1987 stock option agreement between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.11 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1987 (File No. 1-7259)).
10.9 1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No. 33-
40652)).
10.10 1991 Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 4.2 to Registration Statement on Form S-8 (File No.
33-40652)).
10.11 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)).
10.12 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)).
10.13 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)).
10.14 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option
Plan.
11 Computation of earnings per share.
22 Subsidiaries of Southwest.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
E-3
<PAGE>
Exhibit 4.1
FOURTH AMENDMENT TO COMPETITIVE ADVANCE AND
-------------------------------------------
REVOLVING CREDIT FACILITY AGREEMENT
-----------------------------------
THIS AMENDMENT is entered into as of December 14, 1993, among SOUTHWEST
AIRLINES CO., a Texas corporation (the "COMPANY"), the banks listed on the
signature pages hereof ("BANKS"), TEXAS COMMERCE BANK NATIONAL ASSOCIATION
(formerly TEXAS COMMERCE BANK, NATIONAL ASSOCIATION), a national banking
association, as agent for the Banks (in such capacity, "AGENT"), TEXAS COMMERCE
BANK NATIONAL ASSOCIATION, a national banking association, as Funds
Administrator (in such capacity, "FUNDS ADMINISTRATOR"), and CHEMICAL BANK, a
New York banking corporation, as auction administration agent (in such capacity,
"AUCTION ADMINISTRATION AGENT").
The Company, Banks, Agent, Funds Administrator and Auction Administration
Agent have entered into the Competitive Advance and Revolving Credit Facility
Agreement dated as of December 14, 1990 (as amended as of April 4, 1991,
December 14, 1991, and December 14, 1992, and as further renewed, extended,
amended, or supplemented, the "CREDIT AGREEMENT"). Pursuant to SECTION 2.20 of
the Credit Agreement, the Company has provided Agent with Notice of Extension
requesting an extension of the Termination Date, and Agent has notified the
Banks of the contents thereof. The Company also has requested certain
amendments to the Credit Agreement in order add The Boatmen's National Bank of
St. Louis and First Security Bank of Utah, N.A. as Banks, each with a Commitment
of $25,000,000.
NOW, THEREFORE, in consideration of the premises and other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Company, Banks, Agent, Funds Administrator and Auction Administration Agent
agree as follows:
1. Unless otherwise specified herein, terms defined in the Credit
Agreement have the same meaning when used herein and all references to
"Sections" and "Schedules" are references to sections and schedules of or to the
Credit Agreement.
2. The Boatmen's National Bank of St. Louis and First Security Bank of
Utah, N.A. are hereby added as Banks, effective April 12, 1994, and the
Commitment of each of them as of that date is $25,000,000.
3. Effective April 12, 1994, wherever in the Agreement and Exhibits
thereto "$250,000,000" appears, it is hereby amended to be "$300,000,000," and
wherever "Two Hundred Fifty Million" appears, it is hereby amended to be "Three
Hundred Million."
4. The definition of Original Termination Date in SECTION 1.101 of the
Credit Agreement is amended to read "December 14, 1996," instead of "December
14, 1995."
5. SCHEDULE I is amended, effective April 12, 1994, to add the following
information with respect to The Boatmen's National Bank of St. Louis and First
Security Bank of Utah, N.A.:
<PAGE>
<TABLE>
<CAPTION>
NAME LENDING OFFICE NOTICE
---- -------------- ------
INFORMATION
-----------
<S> <C> <C>
THE BOATMEN'S NATIONAL The Boatmen's National Bank The Boatmen's National Bank
BANK OF ST. LOUIS 800 Market Street 800 Market Street
St. Louis, MO 63166-0236 St. Louis, MO 63166-0236
Attn: Dwight D. Erdbruegger,
Vice President
(314)466-7053
(314)466-6499 FAX
FIRST SECURITY BANK OF First Security Bank of Utah First Security Bank of Utah
UTAH, N.A. 15 East 100 South 15 East 100 South
2nd Floor 2nd Floor
Salt Lake City, UT 84111 Salt Lake City, UT 84111
Attn: Jeffrey J. Jensen,
Vice President
(801)246-5019
(801)246-5532 FAX
</TABLE>
6. Effective December 14, 1993, the definition of Facility Fee
Percentage in SECTION 1.01 of the Agreement is hereby amended to read as
follows:
"Facility Fee Percentage" means the following percentages in the
------------------------
following contexts:
Company's senior unsecured long-term debt
as rated by Standard & Poors Corporation
("S&P") or Moody's Investor Service, Inc.,
("MOODY'S"), whichever is higher
<TABLE>
<CAPTION>
Percentage
----------
<S> <C>
A or above .1625
A- or BBB+/1/ .1875
BBB/2/ or below .2875
</TABLE>
7. Effective December 14, 1993, SECTION 2.09(A)(II) is amended in its
entirety as follows:
_________________________
/1/BBB+ is the S&P rating designation. The rating from Moody's which
corresponds to BBB+ is Baa1.
/2/BBB is the S&P rating. The rating from Moody's which corresponds
to BBB is Baa2.
2
<PAGE>
(ii) the LIBO Rate for the Interest Period in effect for such Loan
(A) plus or minus, as the case may be, in the case of each Competitive Loan, the
Margin specified by a Bank with respect to such Loan in its Competitive Bid
submitted pursuant to SECTION 2.02(B) or (B) plus, in the case of each Committed
Loan, 0.30% per annum (or 0.425% per annum if the Company's senior unsecured
long-term debt is rated BBB or lower by Standard & Poor's Corporation and Baa2
or lower by Moody's Investor Service, Inc.).
8. Effective December 14, 1993, SECTION 2.09(B)(II) is amended in its
entirety as follows:
(ii) the CD Rate for the Interest Period in effect for such Loan,
plus 0.50% per annum (or 0.625% per annum if the Company's senior unsecured
long-term debt is rated BBB or lower by Standard & Poor's Corporation and
Baa2 or lower by Moody's Investor Services, Inc.).
9. Effective December 14, 1993, the "90" on the first line of SECTION
5.10(A) is amended to be "120".
10. CONDITIONS PRECEDENT. The foregoing shall not become effective until
---------------------
all of the following conditions have been satisfied:
(a) Each of The Boatmen's National Bank of St. Louis and First
Security Bank of Utah, N.A. shall have received a Committed Note, and each Bank
shall have received a Competitive Note, properly dated and executed by the
Company payable to the order of such Banks, in the amount of its Commitment, in
the case of the Committed Notes to The Boatmen's National Bank of St. Louis and
First Security Bank of Utah, N.A., and in the amount of the Total Commitment in
the case of the Competitive Notes to all Banks.
(b) (i) Agent shall have received, in sufficient copies for each
Bank, a copy of this amendment executed by the Company together with Officers'
Certificates dated the date hereof certifying inter alia, (A) true and correct
copies of resolutions adopted by the Board of Directors or Executive Committee,
as appropriate, of the Company authorizing the Company to borrow and effect
other transactions pursuant to the Credit Agreement as amended hereby, (B) the
incumbency and specimen signatures of the Persons executing any documents on
behalf of the Company, (C) the truth as of the date first written above of the
representations and warranties made by the Company in the Credit Agreement, as
amended hereby, and (D) the absence of the occurrence and continuance of any
Default or Event of Default; (ii) Existence and Good Standing Certificates of
the Company, from the Secretary of State and the Comptroller of Public Accounts
of Texas; (iii) completed Administrative Questionnaires from The Boatmen's
National Bank of St. Louis and First Security Bank of Utah, N.A.; (iv) the
written opinion of counsel to the Company substantially in the form set out as
EXHIBIT E-1 to the Credit Agreement, modified to include the transactions
contemplated hereby; and (v) the written opinion
3
<PAGE>
of counsel for Agent and Banks substantially in the form set out as EXHIBIT E-2
to the Credit Agreement, modified to include the transactions contemplated
hereby.
11. RATIFICATIONS. Except as herein specifically amended and modified,
--------------
(a) the Credit Agreement is unchanged and continues in full force and effect,
and (b) the Company hereby confirms and ratifies the Credit Agreement's
existence and each and every term, condition, and covenant therein contained, to
the same extent and as though the same were set out herein in full.
12. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and
-------------------------------
warrants to Banks, Agent, Funds Administrator, and Auction Administration Agent
that (a) this amendment and the Loan Papers to be delivered hereunder have been
duly executed and delivered by the Company, (b) no action of, or filing with,
any Tribunal is required to authorize, or is otherwise required in connection
with, the execution, delivery, and performance by the Company of this amendment
and the Loan Papers to be delivered hereunder, (c) this amendment and the Loan
Papers to be delivered hereunder are valid and binding upon the Company and are
enforceable against the Company in accordance with their respective terms,
except as limited by the Bankruptcy Code of the United States of America and all
other similar Laws affecting the rights of creditors generally, (d) the
execution, delivery and performance by the Company of this amendment and the
Loan Papers to be delivered hereunder do not require the consent of any other
Person and do not and will not constitute a violation of any laws, agreement, or
understanding to which the Company is a party or by which the Company is bound,
(e) the representations and warranties contained in the Credit Agreement, as
amended hereby, and any other Loan Paper are true and correct in all material
respects on and as of the date of execution hereof as though made as of the date
of execution hereof, and (f) as of the date of this amendment, no default or
Event of Default has occurred and is continuing.
13. REFERENCES. All references in the Loan Papers to the Credit
-----------
Agreement shall refer to the Credit Agreement as amended by this amendment, and,
because this amendment is a "LOAN PAPER" referred to in the Credit Agreement,
then the provisions relating to Loan Papers set forth in the Credit Agreement
are incorporated herein by reference, the same as if set forth herein verbatim.
14. COUNTERPARTS. This amendment may be executed in a number of
-------------
identical counterparts, each of which shall be deemed an original. In making
proof of this instrument, it shall not be necessary for any party to account for
all counterparts, and it shall be sufficient for any party to produce but one
such counterpart.
15. PARTIES BOUND. This amendment shall be binding upon and shall inure
--------------
to the benefit of the Company, Agent, and each Bank, and, subject to SECTION
8.11, their respective successors and assigns.
16. ENTIRETY. THIS AMENDMENT, THE CREDIT AGREEMENT AS AMENDED HEREBY,
---------
AND THE OTHER LOAN PAPERS REPRESENT THE FINAL
4
<PAGE>
CREDIT AGREEMENT BETWEEN THE PARTIES FOR THE TRANSACTIONS THEREIN, AND MAY NOT
BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS BY THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK. SIGNATURE PAGES FOLLOW.]
5
<PAGE>
EXECUTED as of the date and year first stated above.
SOUTHWEST AIRLINES CO.
By /s/ John D. Owen
-------------------------------------
John D. Owen
Treasurer
$70,000,000 TEXAS COMMERCE BANK NATIONAL
ASSOCIATION, individually, as
Agent and as Funds Administrator
By /s/ Mark J. Denton
-------------------------------------
Mark J. Denton, Senior Vice
President
CHEMICAL BANK, as Auction
Administration Agent
By /s/ Janet Beldin
-------------------------------------
Janet Beldin, Vice President
$45,000,000 NATIONSBANK OF TEXAS, N.A.
By /s/ Donald L. Harrison Jr.
-------------------------------------
Donald L. Harrison Jr., Senior Vice
President
6
<PAGE>
$40,000,000 BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
By /s/ Patrick P. Horan
-------------------------------------
Patrick P. Horan, Senior Vice President
$40,000,000 BANK ONE, TEXAS, N.A.
By /s/ Michael R. Silverman
-------------------------------------
Michael R. Silverman, Vice President
$30,000,000 FIRST INTERSTATE BANK OF
TEXAS, N.A.
By /s/ Connor J. Duffey
-------------------------------------
Connor J. Duffey, Vice President
$25,000,000 THE FIRST NATIONAL BANK OF CHICAGO
By /s/ David Dixon
-------------------------------------
David Dixon, Vice President
$25,000,000 THE BOATMEN'S NATIONAL BANK OF
ST. LOUIS
By /s/ Dwight D. Erdbruegger
-------------------------------------
Dwight D. Erdbruegger, Vice President
7
<PAGE>
$25,000,000 FIRST SECURITY BANK OF UTAH, N.A.
By /s/ Jeffrey J. Jensen
-------------------------------------
Jeffrey J. Jensen, Vice President
8
<PAGE>
EXHIBIT 4.2
INCORPORATED UNDER THE LAWS THIS CERTIFICATE IS TRANSFERABLE IN
OF THE STATE OF TEXAS DALLAS, TEXAS AND NEW YORK, NEW YORK
COMMON STOCK CUSIP 844741 10 8
PAR VALUE $1.00 EACH SEE REVERSE FOR CERTAIN DEFINITIONS
SOUTHWEST AIRLINES CO.
THIS CERTIFIES THAT
SPECIMEN
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Southwest Airlines Co. transferable on the books of the Corporation by the
holder hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be subject to all the provisions of the Articles of
Incorporation of the Corporation, as now or hereafter amended, to all of which
the holder hereof by acceptance hereof assents. This Certificate is not valid
unless countersigned and registered by the Transfer Agent and Registar.
Witness the facsimile seal of the Corporation and the
facsimile signatures of its duly authorized officers.
[SEAL APPEARS HERE]
DATED:
/s/ Herbert D. Kelleher COUNTERSIGNED AND REGISTERED:
CHAIRMAN OF THE BOARD Continental Stock Transfer
AND PRESIDENT and Trust Co. TRANSFER AGENT
AND REGISTRAR
/s/ Colleen C. Barrett AUTHORIZED SIGNATURE
SECRETARY
<PAGE>
SOUTHWEST AIRLINES CO.
Reference is made to Article Four of the Articles of Incorporation of
the corporation, and all amendments thereto, now or hereafter on file with the
Secretary of State of the State of Texas, for a statement of the designations,
preferences, limitations, and relative rights of the shares of each class of
stock authorized to be issued by the Corporation and the denial of pre-emptive
rights of shareholders.
Copies of such Articles of Incorporation, as amended, are also on file
with each Transfer Agent, and copies thereof may be obtained by any shareholder,
without charge, from the Corporation or from any such Transfer Agent.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations;
TEN COM -as tenants in common UNIF GIFT MIN ACT-- .....Custodian....
TEN ENT -as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right under Uniform
of survivorship and not as Gifts to Minors
tenants in common Act..........
(State)
Additional abbreviations may also be used though not in the
above list.
For Value Received, _________________________________ hereby sell,
assign and transfer unto
[_________________]_____________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESSEE,
INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _______________________
________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UP ON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER
<PAGE>
Exhibit 10.2
AMENDMENT NO. 7
---------------
Whereas, CFM International, Inc., (hereinafter referred to as "CFM") and
Southwest Airlines Co. (hereinafter referred to as "Airline") have entered into
(a) General Terms Agreement 6-3418 dated May 19, 1981, as previously amended,
(the "GTA") heretofore consisting of terms and conditions with respect to (i)
CFM's support (including warranty) of CFM56 equipment purchased by The Boeing
Company (hereinafter referred to as "Boeing") and sold to Airline as installed
equipment on Boeing model 737-300, 737-400, and/or 737-500 aircraft and (ii) the
sale and support by CFM and the purchase by Airline from CFM of spare turbofan
engines, engine modules, spare parts, and other specified equipment, all in
support of the above referenced aircraft powered by CFM56-3-B1, CFM56-3B-2,
and/or CFM56-3C-1 engines and (b) ten (10) Letter Agreements which accompany the
GTA (the GTA and Letter Agreements being collectively referred to as the
"Agreement"); and
Whereas, the Agreement has heretofore included a cumulative total of one-
hundred-forty-four (144) Firm and fifty-three (53) Option 737-300, 737-400,
and/or 737-500 aircraft for delivery through 1999; and
Whereas, (a) only eleven (11) of such 53 Option aircraft (3 in April 1997, 2 in
August 1997, 2 in September 1997 and 4 in October 1997) continue to be scheduled
for delivery to Airline (the "Eleven aircraft") and (b) the remainder of such 53
Option aircraft are replaced by a purchase agreement with Boeing (the "Aircraft
Purchase Agreement") for CFM56-7 (22,000 lbs. SlS thrust to 86 degreesF)
powered 737- 700 aircraft as set forth in Attachment I to this Amendment No. 7
(the aircraft set forth in Attachment I being collectively referred to as the
"Aircraft"); and
Whereas, sixty-three (63) of the Aircraft (as defined in such Attachment I
hereto) are Firm Aircraft (the "Firm Aircraft").
Now, in consideration of Airline (a) entering int the Aircraft Purchase
Agreement and (b) actually purchasing and taking delivery of all of the Firm
Aircraft as set forth in such Attachment I hereto, the parties agree that (i)
the applicable terms heretofore set forth in the GTA shall continue to apply to
the Eleven aircraft, (ii) the applicable terms hereinafter set forth shall apply
to the Aircraft, and (iii) the GTA is further amended by this Amendment No. 7 as
follows:
First: The following paragraph D is added to Article I (Equipment):
D. Except for (a) the prices heretofore set forth in Article II, as
amended, of the GTA, (b) the payment
<PAGE>
terms as set forth in Article V of the GTA, (c) the special guarantees
set forth in Section XIII, as amended, of Exhibit B of the GTA, (d)
Letter Agreements Nos. 1 through 10 to the GTA, or (e) unless
otherwise agreed to the contrary in writing by the parties, (i)
applicable terms and conditions of the GTA shall hereafter likewise
apply to CFM56-7 installed engines purchased from Boeing, spare
engines, engine modules, spare parts, and other specified equipment
purchased from CFM in support of Airline's 737-700 aircraft fleet and
(ii) such equipment shall be included under the term Products as used
in the GTA and applicable letter Agreements subsequent to letter
Agreement No. 10.
Second: Article II (Prices) is further amended to include the following part
K:
K. Base prices for new CFM56-7 spare engines, engine modules, and
optional equipment rated at SlS thrusts to 86 degreesF of 20,000
lbs. and 22,000 lbs. ordered within lead time for delivery to Airline
by CFM prior to December 31, 2003 in support of the Aircraft are shown
in Attachment II to this Amendment No. 7.
Third: In support of the above CFM56-7 pricing, the escalation provisions set
forth in Exhibit D of the Aircraft Purchase Agreement are hereby
incorporated by referenced into the GTA and such CFM56-7 pricing shall
be escalated to the time of Product delivery in the same manner as the
aircraft price is escalated to the time of aircraft delivery.
However, such escalation provisions shall not be applicable to CFM56-3
pricing set forth in the Agreement.
Fourth: Payment terms for CFM56-7 spare engines, engine modules and optional
equipment are shown in Attachment III to this Amendment No. 7.
Fifth: The Special Guarantees set forth in Attachment IV to this Amendment
No. 7 are added as a separate section (SECTION XIV) of Exhibit B
(Product Support Plan) of the GTA exclusively for Airline's CFM56-7
powered 737-700 aircraft as defined in Attachment I to this Amendment
No. 7:
Nothing contained in the Aircraft Purchase Agreement or any other documentation
with respect to CFM56-7 powered 737-700 aircraft shall, unless stated to the
contrary in either the Aircraft Purchase Agreement or the Agreement, (i) subject
CFM to any liability, obligation or duplication of obligations to which it would
not otherwise be subject under the terms of the Agreement or (ii) otherwise
modify the respective contract rights of CFM and Airline under the terms of the
Agreement.
<PAGE>
Except as expressly set forth herein, all other provisions of the GTA, as
previously amended, and associated letter Agreements shall remain in full force
and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the
19th day of January, 1994.
SOUTHWEST AIRLINES CO. CFM INTERNATIONAL, INC.
By:/s/ Gary A. Barron By: /s/ Gilbert R. Eckler
------------------------- --------------------------
Typed Name: Gary A. Barron Typed Name: Gilbert R. Eckler
--------------- -----------------
Title: Executive V.P. - COO Title: Director Airline Sales
-------------------- ----------------------
Date: January 15, 1994 Date: January 19, 1994
---------------------- ------------------------
<PAGE>
ATTACHMENT I
------------
737-700 DELIVERY PERIOD
-----------------------
(ALL AIRCRAFT POWERED BY CFM56-7 ENGINES RATED AT 22,000 LBS.)
--------------------------------------------------------------
The Aircraft Purchase Agreement contains the delivery schedule described below
and delivery of Firm Aircraft described therein are subject only to excusable
delay caused by events beyond the reasonable control of Airline:
1. Delivery Positions - Firm Aircraft
----------------------------------
<TABLE>
<CAPTION>
J F M A M J J A S O N D Total
- - - - - - - - - - - - -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 2 2 4
1998 2 3 2 2 2 1 2 2 16
1999 4 4 4 4 16
2000 4 4 4 3 15
2001 3 3 3 3 12
--
Total Firm Aircraft 63
</TABLE>
2. Delivery Positions - Option Aircraft
------------------------------------
<TABLE>
<CAPTION>
J F M A M J J A S O N D Total
- - - - - - - - - - - - -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1 2 2 5
1999 2 2 1 5
2000 3 3 6
2001 3 3 6
2002 4 4 2 4 4 18
2003 4 4 2 4 4 18
2004 2 3 5
--
Total Option Aircraft 63
</TABLE>
3. Delivery Positions -- Rollover Option Aircraft
----------------------------------------------
<TABLE>
<CAPTION>
Year Quantity
---- --------
<S> <C>
2004 13
2005 18
2006 18
--
Total Rollover Option Aircraft 49
</TABLE>
<PAGE>
ATTACHMENT II
-------------
BASE PRICES FOR CFM56-7
-----------------------
SPARE ENGINES, OPTIONAL EQUIPMENT AND MODULES
---------------------------------------------
<TABLE>
<CAPTION>
Base Price
Item July 1993 U.S. Dollars
---- ----------------------
<S> <C> <C>
1. Basic CFM56-7 Engine (20,000 lb.) $3,540,000
--------------------
Associated Equipment 150,000
Max Climb Thrust Increase 115,000
2. Basic CFM56-7 Engine (22,000 lb.) $3,894,000
--------------------
Associated Equipment 150,000
Max Climb Thrust Increase 57,500
3. Optional Equipment
------------------
Engine Condition Monitoring Hardware 78,527
4. Modules
-------
Core Engine 3,133,577
LPT 1,406,987
Accessory Gearbox 369,797
</TABLE>
A. The above base prices are effective for Firm orders received by CFM within
quoted lead time for basic spare engines (including associated equipment
and max. climb thrust increase), optional equipment and engine modules for
delivery to Airline by CFM on or before December 31, 2003 in support of the
Aircraft defined in Amendment No. 7 to the GTA. The base prices are FOB
Evendale, Ohio or point of manufacture and are subject to adjustment for
escalation as further defined in Amendment No. 7 to the GTA.
B. For the above base prices, the base ECI is 123.7 and the base ICI is 118.3
(ECI and ICI being as defined in Exhibit D of the Aircraft Purchase
Agreement for July 1993 deliveries).
C. The selling price of CFM56-7 basic spare engines, optional equipment and
modules ordered for delivery after the period set forth in Paragraph A
above shall be the base price then in effect and as set forth in each
purchase order as accepted by CFM, which base price shall be subject to
adjustment for escalation in accordance with CFM's then-current escalation
provisions.
<PAGE>
ATTACHMENT III
--------------
PAYMENT
-------
Airline shall pay CFM with respect to each purchase order hereunder, in
United States Dollars as follows:
1. For Engines, Engine Modules, and Associated/Optional Equipment
therefor:
a. Ten percent (10%) of the total purchase order base price,
escalated to the month payment is due, shall be paid eighteen
(18) months prior to scheduled delivery date thereof;
b. Ten percent (10%) of the base price of each item, escalated to
the month payment is due, shall be paid twelve (12) months prior
to scheduled delivery date thereof; and
c. Ten percent (10%) of the base price of each item, escalated to
the month payment is due, shall be paid six (6) months prior to
scheduled delivery date thereof; and
d. Payment of the balance, including amount for price escalation to
the month of scheduled delivery, shall be paid within thirty (30)
days after delivery of each item.
Any payment following the first payment in a. above which becomes
due prior to or at the time of purchase order placement, shall be
paid concurrently therewith.
2. For Spare Parts, payment of the selling price shall be made thirty
(30) days after delivery thereof.
3. For Special Tools and Test Equipment, payment of the selling price
shall be made thirty (30) days after delivery thereof.
B. All invoicing and payments (including payment details) hereunder shall be
transmitted electronically.
C. If delivery hereunder is delayed by Airline, payment shall be made based on
the delivery schedule set forth in the purchase order as accepted by CFM.
D. In the event of delay in the payments to be made by Airline hereunder, CFM
shall be entitled, without prejudice to any other rights to CFM, to claim
interest on the amounts due, computed at the current rates of the monetary
market in New York (The New York Prime Rate) or the then-prevailing
equivalent in force on the day last payment is due, plus two
<PAGE>
percent. Interest will cover the whole period of delayed payment.
E. In the event of a material adverse change in the financial condition of
Airline, CFMI may require payment of an amount due under A.d above at the
time of Product delivery.
<PAGE>
ATTACHMENT IV
-------------
SECTION XIV - SPECIAL GUARANTEES FOR CFM56-7 ENGINES
----------------------------------------------------
The following Special Guarantees have been tailored to Airline's 737-700 fleet
average flight conditions. The delivery schedule upon which such Special
Guarantees are conditioned is set forth in Attachment I to Amendment No. 7 to
the GTA (the "Aircraft"), and the basis for such guarantees is described in
Attachment V to this Amendment No. 7 to the GTA.
A. Material Cost Guarantee
-----------------------
CFM guarantees that the ten-year cumulative net material cost, including
Life Limited parts material, for all engine Parts supported through CFM56
Engine Spare parts Catalog sales for Airline's fleet of CFM56-7 engines
will not exceed the following values per engine flight hour:
$51.10, based on an average Aircraft utilization of
3600 hours per year; or
$48.90, based on an average Aircraft utilization of
3200 hours per year.
The appropriate guaranteed rate will be adjusted for escalation annually in
the month of July in accordance with the provisions set forth in Exhibit D
of the Aircraft Purchase Agreement using a base ECI of 123.7 and a base ICI
of 118.3 (July 1993).
Such guaranteed rates are based on a stub life of 4,000 flight cycles for
each module at the same guaranteed rate of $51.10 or $48.90 per engine
flight hour, as appropriate. To the extent the fleetwide average exceeds
4,000 flight cycles, costs attributable to such excess shall not be
included in Airline's cumulative net material cost for purposes of
calculating the material cost guarantee. Excess costs due to stub lifes
greater than 4,000 cycles shall be calculated component by component and
excluded on a prorate cycle basis for those cycles greater than 4,000
cycles. This reconciliation shall be completed on a yearly basis.
The cumulative net material cost is based on the actual price of
replacements for Parts scrapped during the guarantee period, less any
material credits issued under warranty, other guarantee, or other program
considerations. All other costs, including material handling fees, are
excluded.
Parts scrapped due to service bulletin compliance will be included in the
guarantee at 100% less any credits, provided the service bulletins are
agreed to by Airline and CFM.
<PAGE>
In cases where a Parts repair procedure is required and is not available
within six (6) months from receipt of Airline's request for such repair
procedure, the Part may be scrapped unless CFM and Airline agree otherwise.
Settlement of the ten (10) year net cumulative Material Cost Guarantee
will be on a yearly basis. If at the time of any yearly settlement,
Airline's cumulative net material cost under this guarantee exceeds the
guarantee level, CFM will provide airline a credit against purchases from
CFM in the amount of 65 percent (65%) of the actual cost overrun incurred
by Airline since the last settlement. In the event that (a) at the time of
any yearly settlement the guarantee level is not met, (b) CFM provides
Airline a credit, and (c) subsequently the guarantee overrun is reduced
such that the cumulative guarantee level is met, then Airline shall return
to CFM all credits previously issued under the guarantee, without interest.
B. Performance Retention Guarantee
-------------------------------
CFM guarantees that the cumulative fleet average cruise fuel consumption
deterioration of new CFM56-7 engines will not exceed an average of two
percent (2%) during the first five (5) years of Airline's 737-700 revenue
service. This includes installed and spare engines to support all Aircraft
delivered during the period of this guarantee. Attachment VI to Amendment
No. 7 to the GTA describes the method of measurement to be used.
If at the end of the five-year guarantee period the guarantee level is
exceeded, CFM will provide Airline with:
1) Reimbursement for the excess fuel consumed for that portion of the
guarantee period during which the guarantee is exceeded, computed at
Airline's average monthly cost of fuel; and
2) An extension of the guarantee to ten (10) years at a cumulative fuel
consumption level of two and one half percent (2.5%), with
reimbursement for the excess fuel consumed for the portion of years 6
through 10 inclusive during which the guarantee is exceeded.
This reimbursement will be in the form of a credit against purchases
from CFM.
C. New Engine EGt Deterioration Guarantee
--------------------------------------
CFM guarantees that each new CFM56-7 engine delivered to Airline either as
an installed or spare engine will operate the first 7,000 engine flight
hours without removal due to exceeding the certified maximum takeoff EGT
limit. Available on-wing performance restoration techniques to
<PAGE>
regain EGT margin will be employed prior to engine removal. If an engine
is removed from an Aircraft during the guarantee period solely for
exceeding the takeoff EGT limit, CFM will provide Airline a credit against
purchases from CFM equivalent to Airline's cost of restoration, less fees,
to restore adequate EGT margin to meet the guarantee. As with the
"Restored Engine EGT Deterioration Guarantee", a mutually agreed to
workscope shall apply. Any material credit issued under this guarantee
will be applied as credit under the Material Cost Guarantee.
D. Restored Engine EGT Deterioration Guarantee
-------------------------------------------
CFM guarantees that for five (5) years beginning with delivery of Airline's
first 737-700 Aircraft, each CFM56-7 engine operated by Airline since
original delivery thereof and restored to a mutually agreed to workscope
will operate for 5,000 engine flight hours following installation without
removal due to exceeding the certified maximum takeoff EGT limit. If an
engine is removed from an Aircraft during the guarantee period solely for
exceeding the takeoff EGT limit, CFM will provide Airline a credit against
purchases from CFM equivalent to Airline's cost of restoration, less fees,
to restore adequate EGT margin to meet the guarantees. Any material credit
issued under this guarantee will be applied as credit under the Material
Cost Guarantee.
<PAGE>
ATTACHMENT V
------------
BASIS FOR CFM56-7 SPECIAL GUARANTEES
------------------------------------
The special guarantees set forth in Attachment IV to Amendment No. 7 to the GTA
(the "Special Guarantees") have been developed specifically for Airline's new
installed and spare CFM56-7 (22,000 lbs.) engines (the "Engines"). Such 737-700
fleet based guarantees are contingent upon Airline accepting delivery of sixty-
three (63) firm, sixty-three (63) option, and forty-nine (49) rollover option
CFM456-7 powered 737-700 aircraft (the "Aircraft") in the time period described
in Attachment I to Amendment No. 7 to the GTA, and upon Airline procuring a
mutually agreed upon number of spare CFM56-7 engines and engine modules. Such
Special Guarantees are also contingent upon Airline's Engines being identified
and maintained separately from other operators' engines at the repair agency,
and upon agreement between Airline and CFM regarding administration of the
Special Guarantees.
The Special Guarantees are based on an average flight leg of 0.95 hours or
greater, an average takeoff thrust derate of 10 percent or greater, and an
average Aircraft utilization of 3600 or 3200, as appropriate, hours per year
maximum. Operation under different conditions including delivery of a lesser
number of aircraft, changes in delivery schedule from that described in
Attachment I to Amendment No. 7 to the GTA, and/or introduction of 737-700
aircraft with greater than 22,000 lb. thrust may require adjustment of the
guaranteed values.
The Special Guarantees require that Airline and CFM agree upon the workscope
necessary during each shop visit, that available on-wing maintenance and
performance restoration procedures are used to avoid unnecessary shop visits,
and that service bulletins agreed to between Airline and CFM are incorporated in
a timely manner.
The Material Cost Guarantee includes Foreign Object Damage (FOD) caused by birds
or hail.
Unless stated otherwise in the specific Special Guarantee, such Special
Guarantees commence with delivery of Airline's first Aircraft.
CFM will, with Airline's assistance, conduct an accounting at least annually to
determine the status of each of such Special Guarantees.
Special Guarantees shall not be the subject of claims and/or administration
directly between Airline and CFM under the GTA in the event (i) Airline accepts
a 737-700 aircraft maintenance cost guarantee from Boeing or any other third
party and (ii) such guarantee includes an integration of such Special Guarantees
as assigned by Airline to such third party and consented to by CFM.
<PAGE>
Also, in the event Airline accepts a proposal independent of Amendment No. 7
(including from GE or SOCHATA) for any type of power-by-the-hour service
contract for the Engines, Airline hereby agrees to assign all of the Special
Guarantees (except the Performance Retention Guarantee which would remain
between CFM and Airline even though such guarantee would be assignable by
Airline subject to administration in the case of an aircraft maintenance cost
guarantee) to the successful contractor for integration into said power-by-the-
hour service contract.
The General Conditions of the CFM Product Support Plan included in the GTA apply
to the Special Guarantees unless stated otherwise herein.
<PAGE>
ATTACHMENT VI
-------------
CFM56-7 CUMULATIVE FLEET AVERAGE
--------------------------------
PERFORMANCE RETENTION GUARANTEE
-------------------------------
METHOD OF MEASUREMENT
---------------------
1. Base point for the cumulative fleet average fuel flow guarantee is the
average of the first twenty (20) revenue flight cruise points of each
CFM56-7 engine covered by the GTA.
2. Performance Retention (fuel consumption deterioration) is determined
quarterly by comparing the cumulative fleet average of the quarterly data
points with the base point.
3. The period covered by this guarantee starts from the first revenue flight
of the first Aircraft.
4. CFM also requests Airline to submit to CFM on a monthly basis copies of
performance trending printed out from the ADEPT (Aircraft Data Engine
Performance Trending) or GEM's (Ground-base Engine Monitoring) fleet
average program.
5. Cruise data reported quarterly must include the following:
A/C Number; Engine Serial Number (ESN); Date; Flight Number; Engine
Position; Altitude; Mach Number; Total Air Temperature (TAT); and at Cruise
Point; N1, Exhaust Gas Temperature (EGT), N2, Fuel Flow, and Bleed
Configuration.
6. If the deterioration of the cumulative fleet average fuel flow at N1
exceeds the guarantee or if the deterioration trend suggests that the
guarantee might be exceeded, then, the following actions may be initiated:
a) CFM Flight Audits.
b) Test Cell confirmation runs on specific engines, adjusted to account
for sea level to altitude effects plus installation loss. If the test
cell run on a sample of engines shows more than this amount from new,
this would support that the inflight guarantee has been exceeded.
7. If, as a result of incorporation of service bulletins (other than mandatory
campaign change) or other modifications, the initially established
relationship of Engine fuel flow, thrust and fan speed (N1) is altered, the
measured, calibrated fuel consumption shall be suitably corrected as
mutually agreed to account for the effect of such change.
<PAGE>
CFM INTERNATIONAL
LETTER AGREEMENT NO. 11
Southwest Airlines Co.
P.O.Box 37611
Love Field
Dallas, Texas 75235
Gentlemen:
WHEREAS, CFM International, Inc. ("CFM") and Southwest Airlines Co.
("Southwest") have entered into General Terms Agreement No. 6-3418 dated May 29,
1981, as amended ("GTA"). The GTA contains applicable terms and conditions
governing the sale by CFM and the purchase by Southwest from CFM of spare CFM56
engines and associated equipment in support of its Boeing 737 series aircraft
powered by CFM engines; and
WHEREAS, CFM and Southwest have, concurrent herewith, entered into Amendment No.
7 to the GTRA and therein defined sixty-three (63) Firm CFM56-7 powered 737-700
aircraft (the "Firm Aircraft") plus a complement of Option and Rollover Option
aircraft which are collectively set forth in Attachment I thereto (all of the
aircraft set forth in such Attachment I being collectively referred to as the
"Aircraft).
NOW, THEREFORE, in consideration of Airline (i) actually purchasing and taking
delivery of all of the Firm Aircraft as set forth in such Attachment I and (ii)
agreeing that, in the event Southwest exercises any of its Option and Rollover
Option aircraft set forth in such Attachment I, all such aircraft shall be
powered by CFM56-7 engines, the parties agree as follows:
A. Spare Engine Allowance
----------------------
Southwest agrees to order from CFM CFM56-7 spare engines, in a quantity as
mutually agreed to by CFM and Southwest, to support the Firm Aircraft. CFM
agrees to sell to Southwest up to twenty (20) such spare engines with a
rating of 22,000 lbs. at the 20,000 lb. price level as set forth in
Attachment II to Amendment No. 7 to the GTA, escalated, as defined in
Amendment No. 7 to the GTA, to the delivery date of each respective spare
engine, such delivery to occur no later than December 31, 2003.
================================================================================
CFM INTERNATIONAL INCORPORATED a joint company of SNECMA (FRANCE) and GENERAL
ELECTRIC Company (U.S.A.)
CINCINNATI, OHIO 45215-0514 * p.o.b. 15514 * Tel: (513)563-4180 * Tlx: 212078 GE
AEG
<PAGE>
LETTER AGREEMENT NO. 11
Southwest Airlines Co.
Page 2
B. Maximum Climb Thrust Increase Allowance
---------------------------------------
CFM will provide Southwest a per-engine allowance equal to the net invoice
price of the appropriate Max Climb Thrust Increase identified in Attachment
II to Amendment No. 7 to the GTA for each spare engine purchased from CFM
by Southwest in support of the Aircraft.
C. Compensation for Additional Thrust
----------------------------------
The engine model designation specified for all of the 737-700 aircraft and
spare engines in support thereof reflects intended use and application by
Southwest of the thrust ratings authorized for such engine model by the
certification nameplate affixed to it. Additional compensation to CFM
shall be made by Southwest for use or application of the engine at a higher
thrust level model designation. For example, except as set forth in
paragraph A above, additional compensation for engines purchased at the
20,000 lb. thrust level under the pricing set forth in Attachment II to
Amendment No. 7 to the GTA but used by Southwest for up to 20,000 lb.
thrust shall be the price difference between the 20,000 lb. engine model
specified in such Attachment II and the 22,000 lb. engine model specified
therein, escalated to the time the 20,000 lb. thrust level is exceeded.
Any hardware modification required to effect the higher thrust model
designation is not included in this compensation and shall be quoted
separately. The price of additional thrust usage beyond 22,000 lbs. shall
be as quoted by CFM.
The terms of this Letter Agreement No. 11 are subject to the conditions set
forth in Attachment I hereto.
The obligations set forth in this Letter Agreement No. 11 are in addition to the
obligations set forth in the GTA.
Please indicate your agreement with the foregoing by signing the original and
one (1) copy in the space provided below.
Very truly yours,
SOUTHWEST AIRLINES CO. CFM INTERNATIONAL, INC.
By:/s/ Gary A. Barron By: /s/ Gilbert R. Eckler
------------------------- --------------------------
Typed Name: Gary A. Barron Typed Name: Gilbert R. Eckler
--------------- -----------------
Title: Executive V.P. - COO Title: Director Airline Sales
-------------------- ----------------------
Date: January 19, 1994 Date: January 19, 1994
---------------------- ------------------------
<PAGE>
ATTACHMENT I
------------
CONDITIONS FOR DELAY/CANCELLATION OF SPARE ENGINES
--------------------------------------------------
1. Cancellation of Spare Engines
-----------------------------
In the event Southwest cancels any purchase order for, or otherwise fails
to take delivery of, spare CFM engine(s), the parties agree that harm or
damage will be sustained by CFM as a result. The parties agree that if
written notice of cancellation is not received at least 12 months prior to
the scheduled delivery date of a spare engine to Southwest, any
cancellation or failure to accept delivery thereafter will subject
Southwest to a cancellation charge of 10% of the spare engine price
(determined as of the date of scheduled engine delivery) which the parties
acknowledge to be a reasonable estimate of the harm or damage to CFM.
CFM shall retain any engine progress payments or other deposits (not to
exceed 10% as noted above) made to CFM for such cancelled engine, and such
progress payments will be applied to the above-described liquidated
damages.
2. Delay Charge for Spare Engines.
-------------------------------
In the event Southwest delays the scheduled delivery date of a spare engine
for which CRFM has received a purchase order from Southwest, for a period,
or cumulative period, of more than 24 months, such delay shall be
considered a cancellation, and the applicable provisions hereof regarding
the effect of cancellation shall apply.
<PAGE>
Exhibit 10.3
Supplemental Agreement No. 17
to
Purchase Agreement No. 1405
between
The Boeing Company
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of the 8th day of June,
1994, by and between THE BOEING COMPANY, a Delaware corporation (hereinafter
called Boeing), and SOUTHWEST AIRLINES CO., a Texas corporation with its
principal office in the City of Dallas, State of Texas, (hereinafter called
Buyer);
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the parties hereto entered into that certain Purchase
Agreement No. 1405, dated July 23, 1987, relating to the purchase and sale of
certain Boeing Model 737 aircraft (the "Aircraft"), which agreement, as amended,
together with all exhibits and specifications attached thereto and made a part
thereof, is hereinafter called the "Purchase Agreement;" and
WHEREAS, Buyer has agreed to purchase twelve (12) additional aircraft
delivering in 1995 and 1996;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
S17-1
<PAGE>
1. Article 1, entitled "Subject Matter of Sale" is deleted in its
----------------------
entirety and replaced by the following new Article 1:
ARTICLE 1. Subject Matter of Sale.
----------------------
ARTICLE 1. Subject Matter of Sale.
----------------------
Subject to the provisions of this Agreement, Boeing shall sell
and deliver to Buyer, and Buyer shall purchase from Boeing eighteen (18) Boeing
Model 737-5H4 aircraft (hereinafter sometimes referred to as the "Block A and
Block B" Aircraft) to be manufactured by Boeing in accordance with Boeing Detail
Specification D6-38500-3 (which includes CFM International, Inc. CFM56-3-B1
engines), dated July 23, 1987 (as described in Exhibit A attached to the
Purchase Agreement), twenty-three (23) Boeing Model 737-3H4 Aircraft
(hereinafter sometimes referred to as the Block C-1 and Block D-1 Substitute
Aircraft) to be manufactured by Boeing in accordance with Boeing Detail
Specification D6-76300-2 Rev. T (which includes CFM International, Inc. CFM56-3-
B1 engines), dated September 19, 1989 (as described in Exhibit A-1 attached to
the Purchase Agreement), seven (7) Boeing Model 737-5H4 aircraft (hereinafter
sometimes referred to as the "Block C Aircraft) to be manufactured by Boeing in
accordance with Boeing Detail Specification D6-38500-3 (which includes CFM
International, Inc. CFM56-3-B1 engines), dated June 7, 1989, thirty-four (34)
Model 737-3H4 aircraft (hereinafter referred to as the "Block E Aircraft" to be
manufactured by Boeing in accordance with Boeing Detail Specification D6-76300-2
Rev. W (which includes CFM International, Inc. CFM56-3-B1 engines) dated May 22,
1992, (as described in Exhibit A-2 attached to the Purchase Agreement), three
(3) Model 737-3H4 aircraft (hereinafter referred to as the "Block F Aircraft")
to be manufactured by Boeing in accordance with Boeing Detail Specification D6-
76300-2 Rev. X (which includes CFM International, Inc. CFM56-3-B1 engines) dated
February 26, 1993, (as described in Exhibit A-3 attached to the Purchase
Agreement) and twelve (12) Model 737-3H4 aircraft (hereinafter referred to as
the "Block G Aircraft") to be manufactured by Boeing in accordance with Boeing
Detail Specification D6-76300-2 Rev. Z (which includes CFM International, Inc.
CFM56-3-B1 engines) dated February 15, 1994 (as further described in Exhibit A-4
attached to the Purchase Agreement) as such Detail Specifications may be
modified from time to time in accordance with the terms and conditions of
Article 7 herein. Such Detail Specifications as so modified are by this
reference incorporated in this Agreement and are hereinafter referred to as the
"Detail Specification." In connection with the sale and purchase of the
Aircraft, Boeing shall also deliver to Buyer such other things as may be
required by this Agreement including data, documents,
S17-2
<PAGE>
training and services. All Block A, Block B, Block C, Block C-1 Substitute,
Block D-1 Substitute, Block E, Block F and Block G Aircraft are referred to
individually and collectively as the "Aircraft" or "AIRCRAFT."
2. Article 2.1, entitled "Time of Delivery" is deleted in its entirety
----------------
and replaced by the following new article 2.1 which adds the Block G Aircraft:
2.1 Time of Delivery. Each Aircraft shall be delivered to Buyer
----------------
assembled and ready for flight, and Buyer shall accept delivery of such
Aircraft, during the months set forth in the following schedule or such earlier
months as mutually agreed between Boeing and Buyer:
<TABLE>
<CAPTION>
Month and Year
of Delivery Quantity of Aircraft
-------------- --------------------
Block A
<S> ------- <C>
February 1990 One (1)
March 1990 Two (2)
April 1990 Two (2)
May 1990 One (1)
August 1990 Two (2)
September 1990 Two (2)
May 1991 Two (2)
September 1991 One (1)
Block B
-------
February 1991 One (1)
May 1991 Two (2)
September 1991 Two (2)
Block C
-------
February 1992 Three (3)
May 1992 Four (4)
Block C-1
Substitute Aircraft
-------------------
June 1992 Two (2)
July 1992 One (1)
February 1993 Three (3)
May 1993 Four (4)
August 1993 Two (2)
September 1993 One (1)
</TABLE>
S17-3
<PAGE>
<TABLE>
<CAPTION>
Block D-1
Substitute Aircraft
-------------------
<S> <C>
February 1994 Three (3)
May 1994 Four (4)
September 1994 Three (3)
Block F Aircraft
----------------
July 1994 Two (2)
September 1994 One (1)
Block E Aircraft
----------------
January 1995 Two (2)
April 1995 Three (3)
May 1995 Two (2)
September 1995 Two (2)
October 1995 Three (3)
March 1996 Two (2)
April 1996 Three (3)
May 1996 Two (2)
July 1996 Two (2)
August 1996 One (1)
September 1996 Two (2)
January 1997 Four (4)
June 1997 Four (4)
August 1997 Two (2)
Block G Aircraft
----------------
July 1995 Two (2)
August 1995 Two (2)
September 1995 Two (2)
January 1996 Three (3)
March 1996 One (1)
June 1996 Two (2)
</TABLE>
3. Article 3.1, entitled "Basic Price" is deleted in its entirety and
-----------
replaced by the following new article 3.1 which adds the Basic Price for the
Block G Aircraft:
3.1 Basic Price. The basic price of each Aircraft shall be equal to
-----------
the sum of (i) Twenty Million Five Hundred Seventy-Three Thousand One Hundred
Twenty-Six Dollars ($20,573,126) for the Block A and Block B Aircraft, Twenty
Million, Six Hundred Three Thousand, Seven Hundred Twenty-Six Dollars
($20,603,726) for the Block C Aircraft, Twenty-Three Million Seven Hundred
Forty-One Thousand Eight Hundred Seventy-Six Dollars ($23,741,876) for the Block
C-1 Substitute Aircraft, Twenty-Three Million, Eight Hundred Eighty Thousand One
Hundred Seventy-Six Dollars ($23,880,176) for the Block D-1 Substitute Aircraft,
S17-4
<PAGE>
Twenty-Nine Million Five Hundred Seventy-Three Thousand One Hundred Seventy-
Eight Dollars ($29,573,178) for the Block E Aircraft, Thirty Million Three
Hundred Three Thousand Six Hundred Seventy-Eight Dollars ($30,303,678) for the
Block F Aircraft and Thirty-One Million Six Hundred Twenty-Eight Thousand Eight
Hundred Sixty-Six Dollars ($31,628,866) for the Block G Aircraft, and (ii) such
price adjustments applicable to such Aircraft as may be made pursuant to the
provisions of this Agreement, including Article 7 (changes to Detail
Specification) and Article 8 (FAA Requirements) or other written agreements
executed by Buyer and Boeing.
4. Article 5.1, entitled "Advance Payment Base Price" is revised by
inserting after the Block F Aircraft the following:
<TABLE>
<CAPTION>
Block G Aircraft
----------------
Month and Year of Advance Payment Base
Scheduled Delivery Price per Aircraft
------------------ --------------------
<S> <C>
July 1995 $33,455,000
August 1995 $33,550,000
September 1995 $33,639,000
January 1996 $34,026,000
March 1996 $34,349,000
June 1996 $34,914,000
</TABLE>
5. Article 5.2, entitled "Advance Payment Schedule" is revised by
inserting after the Block F Aircraft the following schedules for the Block G
Aircraft:
<TABLE>
<CAPTION>
Amount Due per Aircraft
Due Date of Payment Block G 1995 Aircraft
------------------- -----------------------
<S> <C>
Upon execution of Supplemental 15%
Agreement No. 17
12 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
9 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
6 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft ---
Total 30%
</TABLE>
S17-5
<PAGE>
<TABLE>
<CAPTION>
Amount Due per Aircraft
Due Date of Payment Block G January and March 1996 Aircraft
------------------- ---------------------------------------
<S> <C>
Upon execution of Supplemental 10%
Agreement No. 17
18 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
12 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
9 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
6 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft ---
Total 30%
<CAPTION>
Due Date of Payment Block G June 1996 Aircraft
------------------- --------------------------
<S> <C>
Upon execution of Supplemental 5%
Agreement No. 17
21 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
18 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
12 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
9 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
6 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft ---
Total 30%
</TABLE>
S17-6
<PAGE>
6. The first sentence in Article 7.3.2 is revised to be written as "The
Block E, F and G Aircraft."
7. A new Exhibit A-4, entitled "Aircraft Configuration - the Block G
------------------------------------
Aircraft," attached hereto, is incorporated into the Purchase Agreement by this
--------
reference.
8. A new Exhibit D-3, entitled "Airframe and Engine Price Adjustment - the
------------------------------------------
Block G Aircraft" attached hereto, is incorporated into the Purchase Agreement
----------------
by this reference.
9. Letter Agreement No. 6-1162-STE-1364 entitled "Additional Contractual
----------------------
Matters" is revised by inserting a new article 2.5 as follows:
-------
"2.4 Block G Aircraft
----------------
At time of delivery of each of the Block G Aircraft, Boeing will
provide a credit memorandum in the amount of $7,500,000."
10. Boeing and Buyer agree that the provisions of Letter Agreement No. 6-
1162-STE-1363 , dated July 23, 1987, shall apply to paragraph 9 of this
Supplemental Agreement.
The Purchase Agreement shall be deemed to be supplemented to the extent herein
provided and as so supplemented shall continue in full force and effect.
EXECUTED IN DUPLICATE as of the day and year first above written.
THE BOEING COMPANY SOUTHWEST AIRLINES CO.
By: /s/ R. Leo Lyons By: /s/ Gary A. Barron
---------------------------- ------------------------
Its: Attorney-In-Fact Its: Executive V.P. & COO
--------------------------- -----------------------
S17-7
<PAGE>
EXHIBIT A-4
to
PURCHASE AGREEMENT NO. 1405
Dated______________________
between
THE BOEING COMPANY
and
SOUTHWEST AIRLINES CO.
AIRCRAFT CONFIGURATION
BLOCK G AIRCRAFT
MODEL 737-3H4
The Detail Specification, referred to in Article 1 of the Purchase
Agreement, is Boeing Detail Specification D6-76300-2 Revision Z dated February
15, 1994, as amended to incorporate the applicable specification language to
reflect the effect of the changes set forth in the Master Changes listed below,
including the effects of such changes on Manufacturer's Empty Weight (MEW) and
Operating Empty Weight (OEW). As soon as practicable, Boeing will furnish to
Buyer copies of the Detail Specification, which copies will reflect the effect
of such changes. The Aircraft Basic Price reflects and includes all effects of
such changes of price.
A-4-8
<PAGE>
Exhibit A-4 to
Purchase Agreement No. 1405
Page 2
<TABLE>
<CAPTION>
PRICE PER
CHANGE REQUEST AIRCRAFT
NO./TITLE (1993 STE $)
-------------- ------------
<S> <C>
2320MP3016 $7,100
ATSCAL Installation
2523MP3102 N/C
Bilingual Placard Installation
3040MP3033 N/C
Window Heat Control Unit P/N 1231-1
</TABLE>
A-4-2
<PAGE>
AIRFRAME AND ENGINE PRICE ADJUSTMENT
between
THE BOEING COMPANY
and
Southwest Airlines Co.
Exhibit D-3 to Purchase Agreement Number 1405
D-3
<PAGE>
Exhibit D-3
Page 1
PRICE ADJUSTMENT DUE TO
-----------------------
ECONOMIC FLUCTUATIONS
---------------------
AIRFRAME PRICE ADJUSTMENT
-------------------------
(July 1993 Base Price)
--------------------
The Block G Aircraft
--------------------
1. Formula.
The Airframe Price Adjustment will be determined at the time of
Aircraft delivery in accordance with the following formula:
Pa = (P)(L + M - 1)
Where:
Pa = Airframe Price Adjustment.
L = .65 x ECI
-----
123.7
M = .35 x ICI
-----
118.3
P = Aircraft Basic Price (as set forth in Article 3.2 of this
Agreement) less the base price of Engines (as defined in this
Exhibit D-3) in the amount of $6,154,566.
ECI = A value using the "Employment Cost Index for workers in
aerospace manufacturing" (aircraft manufacturing, standard
industrial classification code 3721, compensation, base month
and year June 1989 = 100), as released by the Bureau of Labor
Statistics, U.S. Department of Labor on a quarterly basis for
the months of March, June, September and December, calculated as
follows: A three-month arithmetic average value (expressed as a
decimal and rounded to the nearest tenth) will be determined
using the months set forth in the table below for the applicable
Aircraft, with the released Employment Cost Index value
described above for the month of March also being used for the
months of January and February; the value for June also used for
April and May; the value for September also used for July and
August; and the value for December also used for October and
November.
<PAGE>
Exhibit D-3
Page 2
ICI = The three-month arithmetic average of the released monthly
values for the Industrial Commodities Index as set forth in the
"Producer Prices and Price Index" (Base Year 1982 = 100) as
released by the Bureau of Labor Statistics, U.S. Department of
Labor values (expressed as a decimal and rounded to the nearest
tenth) for the months set forth in the table below for the
applicable Aircraft.
In determining the value of L, the ratio of ECI divided by 123.7 will be
expressed as a decimal rounded to the nearest ten-thousandth and then multiplied
by .65 with the resulting value also expressed as a decimal and rounded to the
nearest ten-thousandth.
In determining the value of M, the ratio of ICI divided by 118.3 will be
expressed as a decimal rounded to the nearest ten-thousandth and then multiplied
by .35 with the resulting value also expressed as a decimal and rounded to the
nearest ten-thousandth.
<TABLE>
<CAPTION>
Months to be Utilized
Month of Scheduled in Determining the
Aircraft Delivery Value of ECI and ICI
----------------- -------------------------
<S> <C>
January June B, July B, Aug. B
February July B, Aug. B, Sept. B
March Aug. B, Sept. B, Oct. B
April Sept. B, Oct. B, Nov. B
May Oct. B, Nov. B, Dec. B
June Nov. B, Dec. B, Jan. D
July Dec. B, Jan. D, Feb. D
August Jan. D, Feb. D, Mar. D
September Feb. D, Mar. D, Apr. D
October Mar. D, Apr. D, May D
November Apr. D, May D, June D
December May D, June D, July D
</TABLE>
The following definitions of B and D will apply:
B = The calendar year before the year in which the scheduled month of
------
delivery as set forth in Article 2.1 occurs.
D = The calendar year during which the scheduled month of delivery as
------
set forth in Article 2.1 occurs.
<PAGE>
Exhibit D
Page 3
2. If at the time of delivery of an Aircraft Boeing is unable to determine
the Airframe Price Adjustment because the applicable values to be used to
determine the ECI and ICI have not been released by the Bureau of Labor
Statistics, then:
2.1 The Airframe Price Adjustment, to be used at the time of delivery
of each of the Aircraft, will be determined by utilizing the escalation
provisions set forth above. The values released by the Bureau of Labor
Statistics and available to Boeing 30 days prior to scheduled Aircraft
delivery will be used to determine the ECI and ICI values for the applicable
months (including those noted as preliminary by the Bureau of Labor
Statistics) to calculate the Airframe Price Adjustment. If no values have been
released for an applicable month, the provisions set forth in Paragraph 2.2
below will apply. If prior to delivery of an Aircraft the U.S. Department of
Labor changes the base year for determination of the ECI or ICI values as
defined above, such rebased values will be incorporated in the Airframe Price
Adjustment calculation. The payment by Buyer to Boeing of the amount of the
Purchase Price for such Aircraft, as determined at the time of Aircraft
delivery, will be deemed to be the payment for such Aircraft required at the
delivery thereof.
2.2 If prior to delivery of an Aircraft the U.S. Department of Labor
substantially revises the methodology used for the determination of the values
to be used to determine the ECI and ICI values (in contrast to benchmark
adjustments or other corrections of previously released values), or for any
reason has not released values needed to determine the applicable Aircraft
Airframe Price Adjustment, the parties will, prior to delivery of any such
Aircraft, select a substitute for such values from data published by the
Bureau of Labor Statistics or other similar data reported by non-governmental
United States organizations, such substitute to lead in application to the
same adjustment result, insofar as possible, as would have been achieved by
continuing the use of the original values as they may have fluctuated during
the applicable time period. Appropriate revision of the formula will be made
as required to reflect any substitute values. However, if within 24 months
from delivery of the Aircraft the Bureau of Labor Statistics should resume
releasing values for the months needed to determine the Airframe Price
Adjustment, such values will be used to determine any increase or decrease in
the Airframe Price Adjustment for the Aircraft from that determined at the
time of delivery of such Aircraft.
<PAGE>
Exhibit D-3
Page 4
2.3 In the event escalation provisions are made non-enforceable or
otherwise rendered null and void by any agency of the United States
Government, the parties agree, to the extent they may lawfully do so, to
equitably adjust the Purchase Price of any affected Aircraft to reflect an
allowance for increases or decreases in labor compensation and material costs
occurring since February, 1993, which is consistent with the applicable
provisions of paragraph 1 of this Exhibit D-3.
3. For the calculations herein, the values released by the Bureau of Labor
Statistics and available to Boeing 30 days prior to scheduled Aircraft
delivery will be used to determine the ECI and ICI values for the applicable
months (including those noted as preliminary by the Bureau of Labor
Statistics) to calculate the Airframe Price Adjustment.
Note: Any rounding of a number, as required under this Exhibit D-3 with respect
---- to escalation of the airframe price, will be accomplished as follows: if
the first digit of the portion to be dropped from the number to be
rounded is five or greater, the preceding digit will be raised to the
next higher numbe r.
<PAGE>
ENGINE PRICE ADJUSTMENT - CFM INTERNATIONAL, INC.
-------------------------------------------------
(1993 BASE PRICE)
-----------------
(a) The Aircraft Basic Price of each Aircraft set forth in Article 3.1 of
this Agreement includes an aggregate price for CFM56-3-B1 engines and all
accessories, equipment and parts therefor provided by the engine manufacturer
(collectively in this Exhibit D-3 called "Engines") of Six Million One Hundred
Fifty-Four Thousand Five Hundred Sixty-Six Dollars ($6,154,566). The adjustment
in Engine price applicable to each Aircraft ("Engine Price Adjustment" herein)
will be determined at the time of Aircraft delivery in accordance with the
following formula:
D1 = (Pb x CPI ) - Pb
------
130.51
(b) The following definitions will apply herein:
D1 = Engine Price Adjustment
Pb = Aggregate Engine Base Price as set forth in Paragraph (a) above.
CPI = The Composite Price Index as determined in accordance with the
formula set forth below. The Index values referred to below, to be
used in determining the CPI, will be for the ninth month prior to
the month of scheduled Aircraft delivery. Such Index values will
be those prepared by the Bureau of Labor Statistics, U.S.
Department of Labor.
CPI = L + M1 + M2 + M3
L = The Labor Index for such month will be the quotient,
expressed as a decimal and rounded to the nearest
thousandth, of the "Hourly Earnings of Aircraft Engines and
Engine Parts Production Workers" SIC 3724, for such month
divided by Eleven Dollars and Sixteen Cents ($11.16). Such
quotient will be multiplied by 100 and then by fifty-five
percent (55%) with the value resulting from the latter
multiplication expressed as a decimal and rounded to the
nearest hundredth.
<PAGE>
M1 = The Industrial Commodities Index for such month will be
equal to ten percent (10%) of the Producer Price Index for
"all commodities other than Farm and Foods," Code 3-15,
(Base Year 1982 = 100) for such month, expressed as a
decimal and rounded to the nearest hundredth.
M2 = The Metals and Metal Products Index for such month will be
equal to twenty-five percent (25%) of the Producer Price
Index for "Metals and Metal Products," Code 10, (Base Year
1982 = 100) for such month expressed as a decimal and
rounded to the nearest hundredth.
M3 = The Fuel Index for such month will be equal to ten percent
(10%) of the Producer Price Index for "Fuel and Related
Products and Power," Code 5, (Base Year 1982 = 100) for
such month expressed as a decimal and rounded to the
nearest hundredth.
130.51 = Composite Price Index for October, 1992.
The factor (CPI divided by 130.51) by which the Aggregate Engine Base Price is
to be multiplied will be expressed as a decimal and rounded to the nearest
thousandth.
The Engine Price Adjustment will not be made if it would result in a decrease
in the aggregate Engine base price.
(c) The values of the Average Hourly Earnings and Producer Price Indices used
in determining the Engine Price Adjustment will be those published by the Bureau
of Labor Statistics, U.S. Department of Labor as of a date 30 days prior to the
scheduled Aircraft delivery to Buyer. Such values will be considered final and
no Engine Price Adjustment will be made after Aircraft delivery for any
subsequent changes in published Index values.
(d) If the U.S. Department of Labor, Bureau of Labor Statistics (i)
substantially revises the methodology (in contrast to benchmark adjustments or
other corrections of previously published data) or (ii) discontinues publication
of any of the data referred to above, CFMI agrees to meet jointly with Boeing
and Buyer to jointly select a substitute for the revised or discontinued data;
such substitute data to lead in application to the same adjustment result,
<PAGE>
insofar as possible, as would have been achieved by continuing the use of the
original data as it may have fluctuated had it not been revised or
discontinued.
Appropriate revision of the Engine Price Adjustment provisions set forth above
will be made to accomplish this result for the affected Engines.
In the event the Engine price escalation provisions are made non-enforceable or
otherwise rendered null and void by any agency of the United States Government,
CFMI agrees to meet with Boeing and Buyer to jointly agree, to the extent such
parties may lawfully do so, to adjust equitably the purchase price of any
affected Engine(s) to reflect an allowance for increases in labor, material and
fuel costs that have occurred from the period represented by the CPI to the
ninth month preceding the month of scheduled delivery of the applicable
aircraft.
NOTE: Any rounding of a number, as required under this Exhibit D-3 with respect
---- to escalation of the Engine price, will be accomplished as follows: if
the first digit of the portion to be dropped from the number to be
rounded is five or greater, the preceding digit will be raised to the
next higher number.
<PAGE>
CHANGE ORDER NO. 14
DATED
JUNE 6, 1994
TO
PURCHASE AGREEMENT NO. 1405
BETWEEN
THE BOEING COMPANY
AND
SOUTHWEST AIRLINES
[This paragraph to be filled in by contracts:]
Purchase Agreement No. 1405, dated September 17, 1987, between The Boeing
Company and Southwest Airlines, is hereby amended/ in accordance with Article
7.1 as follows:
I. Changes To Detail Specification D6-76300-2.
The effects of the changes listed below are hereby incorporated into Detail
Specification D6-76300 under Revision "AA" dated May 11, 1994 and described in
Exhibit A of the Purchase Agreement.
CHANGE NO./TITLE/AFFECTED AIRCRAFT:
----------------------------------
<TABLE>
<CAPTION>
MASTER CHANGES
--------------
<S> <C> <C>
2320MP3016 ATSCAL Installation 32 Block E
Aircraft
2523MP3102 Installation of PS779-PS780 &
Bilingual Placards - 32 Block E
Courtesy Signs Only Aircraft
3040MP3033 PED Window Heat Control 22 Block E
Unit P/N 1231-1 Aircraft
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Affected MEW OEW
Cumulative Weight Effect: Aircraft lbs. lbs.
------------------------ -------- ---- ----
<S> <C> <C> <C>
The cumulative effect of PS779-PS780 +4 +4
the foregoing changes, 32 Block E +4 +4
except Rapid Revisions, on Aircraft
the weight of the affected
Model 737-3H4 Aircraft,
as reflected in Paragraph
3-60-00 of the Detail
Specification is:
</TABLE>
II. Effect of Changes on Purchase Agreement No. 1510.
------------------------------------------------
The effects of the foregoing changes, except Rapid Revisions, on the scheduled
month of delivery, Aircraft Basic Price and Advance Payment Base Price of each
affected Aircraft, as described in Articles 2 and 3. respectively, of the
Purchase Agreement, are set forth below:
<TABLE>
<CAPTION>
Effect On Effect On Basic
Affected Delivery Price Per Aircraft
Aircraft Month (Art.2)$) $Aircraft(Art.3)
-------- --------------- ----------------
<S> <C> <C>
PS779-780 None $ 6,500 increase
32 Block E None $13,100 increase
</TABLE>
SIGNED as of the day and year first above written.
THE BOEING COMPANY SOUTHWEST AIRLINES
By /s/ R. Leo Lyons By /s/ Gary A. Barron
--------------------------- ------------------
Title Attorney - In - Fact Title Executive V.P. & CO
----------------------- -------------------
<PAGE>
WEIGHT AND PRICE TABULATION
CHANGE ORDER NO. 14
TO
PURCHASE AGREEMENT NO. 1405
SOUTHWEST AIRLINES
MODEL 737-3H4 AIRCRAFT
<TABLE>
<CAPTION>
Basic Price
Change Affected MEW OEW per Aircraft
Number Aircraft lbs lbs 1991 ECI $
------ -------- --- --- ------------
<S> <C> <C> <C> <C>
A. Master Changes
--------------
1. 2320MP3016 32 Block E +4 +4 $6,600
2. 2523MP3102 PS779-PS780
32 Block E 0 0 N/C
3. 3040MP3033 22 Block E 0 0 N/C
Price Effect only:
1. 2350MP3021 PS779-PS880, 32 Block E 1,400
2. 2520MP3196 PS779-PS880, 32 Block E 1,900
3. 2525MP3008 PS779-PS880, 32 Block E N/C
4. 2530MP3212 PS779-PS880, 32 Block E 1,400
5. 3131MP3368 PS779-PS880, 32 Block E N/C
6. 3131MP3445 PS779-PS880, 32 Block E IB
7. 3131MP3471 PS779-PS880, 32 Block E N/C
8. 3443MP3070 PS779-PS880, 32 Block E 1,800
9. 3445MP3002 PS779-PS880, 32 Block E IB
10. 3445MP3036 PS779-PS880, 32 Block E IB
Basic price
Affected MEW OEW per Aircraft
Aircraft lbs. lbs. 1991 ECI $
-------- ---- ---- ------------
Totals:
PS779-PS780 0 0 6,500
32 Block E +4 +4 13,100
</TABLE>
<PAGE>
CHANGE SUMMARY
DEVELOPMENT CHANGE NO.25
DETAIL SPECIFICATION D6-76300-2
SOUTHWEST AIRLINES
MODEL 737-3H4 AIRCRAFT
1. Coffee Makers
Appendix II, Galley 1 and Galley 4, is revised to reflect the correct part
number and effectivity in accordance with Boeing Telex number R-7200-9401507,
dated April 1, 1994, for Aircraft PS766 and on.
2. Miscellaneous Revisions
- Paragraph 1-60 is updated to reflect current airplanes and
identification.
- Figure 1-4 is revised to reflect the accurate armrest orientation.
- Appendix I, Chapter 21, the effectivity of the Nord Micro part numbers
is revised to reflect the accurate incorporation.
- The entire Detail Specification has been revised to our standard
format.
S18-6
<PAGE>
Supplemental Agreement No. 18
to
Purchase Agreement No. 1405
between
The Boeing Company
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of the 13th day of July,
1994, by and between THE BOEING COMPANY, a Delaware corporation (hereinafter
called Boeing), and SOUTHWEST AIRLINES CO., a Texas corporation with its
principal office in the City of Dallas, State of Texas, (hereinafter called
Buyer);
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the parties hereto entered into that certain Purchase Agreement
No. 1405, dated July 23, 1987, relating to the purchase and sale of certain
Boeing Model 737 aircraft (the "Aircraft"), which agreement, as amended,
together with all exhibits and specifications attached thereto and made a part
thereof, is hereinafter called the "Purchase Agreement;" and
WHEREAS, Buyer has agreed to purchase four (4) additional aircraft
delivering in February 1995 and to revise the delivery month of two (2) aircraft
from January 1995 to November 1994;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
S18-7
<PAGE>
1. Article 1, entitled "Subject Matter of Sale" is deleted in its entirety
----------------------
and replaced by the following new Article 1:
ARTICLE 1. Subject Matter of Sale.
----------------------
ARTICLE 1. Subject Matter of Sale.
----------------------
Subject to the provisions of this Agreement, Boeing shall sell and
deliver to Buyer, and Buyer shall purchase from Boeing eighteen (18) Boeing
Model 737-5H4 aircraft (hereinafter sometimes referred to as the "Block A and
Block B" Aircraft) to be manufactured by Boeing in accordance with Boeing Detail
Specification D6-38500-3 (which includes CFM International, Inc. CFM56-3-B1
engines), dated July 23, 1987 (as described in Exhibit A attached to the
Purchase Agreement), twenty-three (23) Boeing Model 737-3H4 Aircraft
(hereinafter sometimes referred to as the Block C-1 and Block D-1 Substitute
Aircraft) to be manufactured by Boeing in accordance with Boeing Detail
Specification D6-76300-2 Rev. T (which includes CFM International, Inc. CFM56-3-
B1 engines), dated September 19, 1989 (as described in Exhibit A-1 attached to
the Purchase Agreement), seven (7) Boeing Model 737-5H4 aircraft (hereinafter
sometimes referred to as the "Block C Aircraft) to be manufactured by Boeing in
accordance with Boeing Detail Specification D6-38500-3 (which includes CFM
International, Inc. CFM56-3-B1 engines), dated June 7, 1989, thirty-four (34)
Model 737-3H4 aircraft (hereinafter referred to as the "Block E Aircraft" to be
manufactured by Boeing in accordance with Boeing Detail Specification D6-76300-2
Rev. W (which includes CFM International, Inc. CFM56-3-B1 engines) dated May 22,
1992, (as described in Exhibit A-2 attached to the Purchase Agreement), three
(3) Model 737-3H4 aircraft (hereinafter referred to as the "Block F Aircraft")
to be manufactured by Boeing in accordance with Boeing Detail Specification D6-
76300-2 Rev. X (which includes CFM International, Inc. CFM56-3-B1 engines) dated
February 26, 1993, (as described in Exhibit A-3 attached to the Purchase
Agreement), twelve (12) Model 737-3H4 aircraft (hereinafter referred to as the
"Block G Aircraft") to be manufactured by Boeing in accordance with Boeing
Detail Specification D6-76300-2 Rev. Z (which includes CFM International, Inc.
CFM56-3-B1 engines) dated February 15, 1994 (as further described in Exhibit A-4
attached to the Purchase Agreement) and four (4) Model 737-3H4 aircraft
(hereinafter referred to as the "Block H Aircraft") to be manufactured by Boeing
in accordance with Boeing Detail Specification D6-76300-2 Rev. Z (which includes
CFM International, Inc. CFM56-3-B1 engines) dated February 15, 1994 (as further
described in Exhibit A-5 attached to the Purchase Agreement) and as such Detail
Specifications may be modified from time to time in accordance with the terms
and conditions of Article 7
S18-6
<PAGE>
herein. Such Detail Specifications as so modified are by this reference
incorporated in this Agreement and are hereinafter referred to as the "Detail
Specification." In connection with the sale and purchase of the Aircraft, Boeing
shall also deliver to Buyer such other things as may be required by this
Agreement including data, documents, training and services. All Block A, Block
B, Block C, Block C-1 Substitute, Block D-1 Substitute, Block E, Block F, Block
G and Block H Aircraft are referred to individually and collectively as the
"Aircraft" or "AIRCRAFT."
2. Article 2.1, entitled "Time of Delivery" is deleted in its entirety and
replaced by the following new article 2.1 which revises the contract delivery
month of the January 1995 aircraft to November 1994 and adds the Block H
Aircraft:
2.1 Time of Delivery. Each Aircraft shall be delivered to Buyer
assembled and ready for flight, and Buyer shall accept delivery of such
Aircraft, during the months set forth in the following schedule or such earlier
months as mutually agreed between Boeing and Buyer:
<TABLE>
<CAPTION>
Month and Year
of Delivery Quantity of Aircraft
-------------- --------------------
Block A
-------
<S> <C>
February 1990 One (1)
March 1990 Two (2)
April 1990 Two (2)
May 1990 One (1)
August 1990 Two (2)
September 1990 Two (2)
May 1991 Two (2)
September 1991 One (1)
Block B
-------
February 1991 One (1)
May 1991 Two (2)
September 1991 Two (2)
Block C
-------
February 1992 Three (3)
May 1992 Four (4)
</TABLE>
S18-7
<PAGE>
<TABLE>
<CAPTION>
Block C-1
Substitute Aircraft
-------------------
<S> <C>
June 1992 Two (2)
July 1992 One (1)
February 1993 Three (3)
May 1993 Four (4)
August 1993 Two (2)
September 1993 One (1)
Block D-1
Substitute Aircraft
-------------------
February 1994 Three (3)
May 1994 Four (4)
September 1994 Three (3)
Block F Aircraft
----------------
July 1994 Two (2)
September 1994 One (1)
Block E Aircraft
----------------
November 1994 Two (2)
April 1995 Three (3)
May 1995 Two (2)
September 1995 Two (2)
October 1995 Three (3)
March 1996 Two (2)
April 1996 Three (3)
May 1996 Two (2)
July 1996 Two (2)
August 1996 One (1)
September 1996 Two (2)
January 1997 Four (4)
June 1997 Four (4)
August 1997 Two (2)
Block G Aircraft
----------------
July 1995 Two (2)
August 1995 Two (2)
September 1995 Two (2)
January 1996 Three (3)
March 1996 One (1)
June 1996 Two (2)
Block H Aircraft
----------------
February 1995 Four (4)
</TABLE>
S18-6
<PAGE>
3. Article 3.1, entitled "Basic Price" is deleted in its entirety and
-----------
replaced by the following new article 3.1 which adds the Basic Price for the
Block H Aircraft:
3.1 Basic Price. The basic price of each Aircraft shall be equal to
-----------
the sum of (i) Twenty Million Five Hundred Seventy-Three Thousand One Hundred
Twenty-Six Dollars ($20,573,126) for the Block A and Block B Aircraft, Twenty
Million, Six Hundred Three Thousand, Seven Hundred Twenty-Six Dollars
($20,603,726) for the Block C Aircraft, Twenty-Three Million Seven Hundred
Forty-One Thousand Eight Hundred Seventy-Six Dollars ($23,741,876) for the Block
C-1 Substitute Aircraft, Twenty-Three Million, Eight Hundred Eighty Thousand One
Hundred Seventy-Six Dollars ($23,880,176) for the Block D-1 Substitute Aircraft,
Twenty-Nine Million Five Hundred Seventy-Three Thousand One Hundred Seventy-
Eight Dollars ($29,573,178) for the Block E Aircraft, Thirty Million Three
Hundred Three Thousand Six Hundred Seventy-Eight Dollars ($30,303,678) for the
Block F Aircraft, Thirty-One Million Six Hundred Twenty-Eight Thousand Eight
Hundred Sixty-Six Dollars ($31,628,866) for the Block G Aircraft and Thirty-One
Million Six Hundred Twenty One Thousand Seven Hundred Sixty Six Dollars
($31,621,766) for the Block H Aircraft, and (ii) such price adjustments
applicable to such Aircraft as may be made pursuant to the provisions of this
Agreement, including Article 7 (changes to Detail Specification) and Article 8
(FAA Requirements) or other written agreements executed by Buyer and Boeing.
4. Article 5.1, entitled "Advance Payment Base Price", for the Block E
--------------------------
aircraft is revised by deleting the January 1995 aircraft and the associated
advance payment base price and inserting the following:
November 1994 $33,509,000
5. Article 5.1, entitled "Advance Payment Base Price" is revised by
--------------------------
inserting after the Block G Aircraft the following:
<TABLE>
<CAPTION>
Block H Aircraft
----------------
Month and Year of Advance Payment Base
Scheduled Delivery Price per Aircraft
------------------ --------------------
<S> <C>
February 1995 $32,692,000
</TABLE>
S18-7
<PAGE>
6. Article 5.2, entitled "Advance Payment Schedule" is revised by
------------------------
inserting after the Block G Aircraft the following schedule for the Block H
Aircraft:
<TABLE>
<CAPTION>
Amount Due per Aircraft
Due Date of Payment Block H Aircraft
------------------- ----------------
<S> <C>
Upon execution of Supplemental 25%
Agreement No. 18
6 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft ---
Total 30%
</TABLE>
7. The title and the first sentence in Article 7.3.2 is revised to be
written as "The Block E, F, G and H Aircraft."
8. A new Exhibit A-5, entitled "Aircraft Configuration - the Block H
------------------------------------
Aircraft," attached hereto, is incorporated into the Purchase Agreement by this
--------
reference.
9. Exhibit D-3, entitled "Airframe and Engine Price Adjustment - the Block
------------------------------------------------
G Aircraft" is revised by adding "and Block H" after the letter G and before
----------
Aircraft in the title on page 1.
10. Letter Agreement No. 6-1162-STE-1364 entitled "Additional Contractual
----------------------
Matters" is revised by adding "and Block H" after the letter G and before
-------
Aircraft in the title of Article 2.5 and in the text of Article 2.5.
11. Boeing and Buyer agree that the provisions of Letter Agreement No. 6-
1162-STE-1363 , dated July 23, 1987, shall apply to paragraph 10 of this
Supplemental Agreement.
S18-6
<PAGE>
The Purchase Agreement shall be deemed to be supplemented to the extent herein
provided and as so supplemented shall continue in full force and effect.
EXECUTED IN DUPLICATE as of the day and year first above written.
THE BOEING COMPANY SOUTHWEST AIRLINES CO.
By: /s/ R. Leo Lyons By: /s/ Gary A. Barron
------------------------------- --------------------
Its: Attorney-In-Fact Its: Executive V.P. & COO
------------------------------ ---------------------
S18-7
<PAGE>
EXHIBIT A-5
to
PURCHASE AGREEMENT NO. 1405
Dated July 13, 1994
--------------
between
THE BOEING COMPANY
and
SOUTHWEST AIRLINES CO.
AIRCRAFT CONFIGURATION
BLOCK H AIRCRAFT
MODEL 737-3H4
The Detail Specification, referred to in Article 1 of the Purchase
Agreement, is Boeing Detail Specification D6-76300-2 Revision Z dated February
15, 1994, as amended to incorporate the applicable specification language to
reflect the effect of the changes set forth in the Master Changes listed below,
including the effects of such changes on Manufacturer's Empty Weight (MEW) and
Operating Empty Weight (OEW). As soon as practicable, Boeing will furnish to
Buyer copies of the Detail Specification, which copies will reflect the effect
of such changes. The Aircraft Basic Price reflects and includes all effects of
such changes of price.
A-5-1
<PAGE>
Exhibit A-5 to
Purchase Agreement No. 1405
Page 2
2523MP3102 N/C
BILINGUAL PLACARD INSTALLATION
S19-6
<PAGE>
Supplemental Agreement No. 19
to
Purchase Agreement No. 1405
between
The Boeing Company
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of the 21st day of November,
1994, by and between THE BOEING COMPANY, a Delaware corporation (hereinafter
called Boeing), and SOUTHWEST AIRLINES CO., a Texas corporation with its
principal office in the City of Dallas, State of Texas, (hereinafter called
Buyer);
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the parties hereto entered into that certain Purchase Agreement
No. 1405, dated July 23, 1987, relating to the purchase and sale of certain
Boeing Model 737 aircraft (the "Aircraft"), which agreement, as amended,
together with all exhibits and specifications attached thereto and made a part
thereof, is hereinafter called the "Purchase Agreement;" and
WHEREAS, Buyer has agreed to purchase five (5) additional aircraft
delivering in July 1995 (1), October 1995 (2) and November 1995 (2) and to
revise the delivery month of one (1) aircraft from April 1995 to March 1995;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
1. Article 1, entitled "Subject Matter of Sale" is deleted in its entirety
----------------------
and replaced by the following new Article 1:
S19-7
<PAGE>
ARTICLE 1. Subject Matter of Sale.
----------------------
ARTICLE 1. Subject Matter of Sale.
----------------------
Subject to the provisions of this Agreement, Boeing shall sell and
deliver to Buyer, and Buyer shall purchase from Boeing eighteen (18) Boeing
Model 737-5H4 aircraft (hereinafter sometimes referred to as the "Block A and
Block B" Aircraft) to be manufactured by Boeing in accordance with Boeing Detail
Specification D6-38500-3 (which includes CFM International, Inc. CFM56-3-B1
engines), dated July 23, 1987 (as described in Exhibit A attached to the
Purchase Agreement), twenty-three (23) Boeing Model 737-3H4 Aircraft
(hereinafter sometimes referred to as the Block C-1 and Block D-1 Substitute
Aircraft) to be manufactured by Boeing in accordance with Boeing Detail
Specification D6-76300-2 Rev. T (which includes CFM International, Inc. CFM56-3-
B1 engines), dated September 19, 1989 (as described in Exhibit A-1 attached to
the Purchase Agreement), seven (7) Boeing Model 737-5H4 aircraft (hereinafter
sometimes referred to as the "Block C Aircraft) to be manufactured by Boeing in
accordance with Boeing Detail Specification D6-38500-3 (which includes CFM
International, Inc. CFM56-3-B1 engines), dated June 7, 1989, thirty-four (34)
Model 737-3H4 aircraft (hereinafter referred to as the "Block E Aircraft" to be
manufactured by Boeing in accordance with Boeing Detail Specification D6-76300-2
Rev. W (which includes CFM International, Inc. CFM56-3-B1 engines) dated May 22,
1992, (as described in Exhibit A-2 attached to the Purchase Agreement), three
(3) Model 737-3H4 aircraft (hereinafter referred to as the "Block F Aircraft")
to be manufactured by Boeing in accordance with Boeing Detail Specification D6-
76300-2 Rev. X (which includes CFM International, Inc. CFM56-3-B1 engines) dated
February 26, 1993, (as described in Exhibit A-3 attached to the Purchase
Agreement), twelve (12) Model 737-3H4 aircraft (hereinafter referred to as the
"Block G Aircraft") to be manufactured by Boeing in accordance with Boeing
Detail Specification D6-76300-2 Rev. Z (which includes CFM International, Inc.
CFM56-3-B1 engines) dated February 15, 1994 (as further described in Exhibit A-4
attached to the Purchase Agreement), four (4) Model 737-3H4 aircraft
(hereinafter referred to as the "Block H Aircraft") to be manufactured by Boeing
in accordance with Boeing Detail Specification D6-76300-2 Rev. Z (which includes
CFM International, Inc. CFM56-3-B1 engines) dated February 15, 1994 (as further
described in Exhibit A-5 attached to the Purchase Agreement) and five (5) Model
737-3H4 aircraft (hereinafter referred to as the "Block I Aircraft") to be
manufactured by Boeing in accordance with Boeing Detail Specification D6-76300-2
Rev. AA (which includes CFM International, Inc. CFM56-3-B1 engines) dated May
11, 1994 as further described in Exhibit A-6 attached to the Purchase Agreement
and as such Detail
S19-6
<PAGE>
Specifications may be modified from time to time in accordance with the terms
and conditions of Article 7 herein. Such Detail Specifications as so modified
are by this reference incorporated in this Agreement and are hereinafter
referred to as the "Detail Specification." In connection with the sale and
purchase of the Aircraft, Boeing shall also deliver to Buyer such other things
as may be required by this Agreement including data, documents, training and
services. All Block A, Block B, Block C, Block C-1 Substitute, Block D-1
Substitute, Block E, Block F, Block G, Block H and Block I Aircraft are referred
to individually and collectively as the "Aircraft" or "AIRCRAFT."
2. Article 2.1, entitled "Time of Delivery" is deleted in its entirety and
replaced by the following new article 2.1 which revises the contract delivery
month of one (1) of the April 1995 aircraft to March 1995 and adds the Block I
Aircraft:
2.1 Time of Delivery. Each Aircraft shall be delivered to Buyer
assembled and ready for flight, and Buyer shall accept delivery of such
Aircraft, during the months set forth in the following schedule or such earlier
months as mutually agreed between Boeing and Buyer:
<TABLE>
<CAPTION>
Month and Year
of Delivery Quantity of Aircraft
-------------- --------------------
Block A
-------
<S> <C>
February 1990 One (1)
March 1990 Two (2)
April 1990 Two (2)
May 1990 One (1)
August 1990 Two (2)
September 1990 Two (2)
May 1991 Two (2)
September 1991 One (1)
Block B
-------
February 1991 One (1)
May 1991 Two (2)
September 1991 Two (2)
Block C
-------
February 1992 Three (3)
May 1992 Four (4)
</TABLE>
S19-7
<PAGE>
<TABLE>
<CAPTION>
Block C-1
Substitute Aircraft
-------------------
<S> <C>
June 1992 Two (2)
July 1992 One (1)
February 1993 Three (3)
May 1993 Four (4)
August 1993 Two (2)
September 1993 One (1)
Block D-1
Substitute Aircraft
-------------------
February 1994 Three (3)
May 1994 Four (4)
September 1994 Three (3)
Block F Aircraft
----------------
July 1994 Two (2)
September 1994 One (1)
Block E Aircraft
----------------
November 1994 Two (2)
March 1995 One (1)
April 1995 Two (2)
May 1995 Two (2)
September 1995 Two (2)
October 1995 Three (3)
March 1996 Two (2)
April 1996 Three (3)
May 1996 Two (2)
July 1996 Two (2)
August 1996 One (1)
September 1996 Two (2)
January 1997 Four (4)
June 1997 Four (4)
August 1997 Two (2)
Block G Aircraft
----------------
July 1995 Two (2)
August 1995 Two (2)
September 1995 Two (2)
January 1996 Three (3)
March 1996 One (1)
June 1996 Two (2)
Block H Aircraft
----------------
February 1995 Four (4)
</TABLE>
S19-6
<PAGE>
<TABLE>
<CAPTION>
Block I Aircraft
----------------
<S> <C>
July 1995 One (1)
October 1995 Two (2)
November 1995 Two (2)
</TABLE>
3. Article 3.1, entitled "Basic Price" is deleted in its entirety and
-----------
replaced by the following new article 3.1 which adds the Basic Price for the
Block I Aircraft:
3.1 Basic Price. The basic price of each Aircraft shall be equal to
-----------
the sum of (i) Twenty Million Five Hundred Seventy-Three Thousand One Hundred
Twenty-Six Dollars ($20,573,126) for the Block A and Block B Aircraft, Twenty
Million, Six Hundred Three Thousand, Seven Hundred Twenty-Six Dollars
($20,603,726) for the Block C Aircraft, Twenty-Three Million Seven Hundred
Forty-One Thousand Eight Hundred Seventy-Six Dollars ($23,741,876) for the Block
C-1 Substitute Aircraft, Twenty-Three Million, Eight Hundred Eighty Thousand One
Hundred Seventy-Six Dollars ($23,880,176) for the Block D-1 Substitute Aircraft,
Twenty-Nine Million Five Hundred Seventy-Three Thousand One Hundred Seventy-
Eight Dollars ($29,573,178) for the Block E Aircraft, Thirty Million Three
Hundred Three Thousand Six Hundred Seventy-Eight Dollars ($30,303,678) for the
Block F Aircraft, Thirty-One Million Six Hundred Twenty-Eight Thousand Eight
Hundred Sixty-Six Dollars ($31,628,866) for the Block G Aircraft, Thirty-One
Million Six Hundred Twenty One Thousand Seven Hundred Sixty Six Dollars
($31,621,766) for the Block H Aircraft, Thirty-Two Million Sixty-Five Thousand
Four Hundred Fifty Eight Dollars ($32,065,458) for the Block I Aircraft and (ii)
such price adjustments applicable to such Aircraft as may be made pursuant to
the provisions of this Agreement, including Article 7 (changes to Detail
Specification) and Article 8 (FAA Requirements) or other written agreements
executed by Buyer and Boeing.
4. Article 5.1, entitled "Advance Payment Base Price", for the Block E
--------------------------
aircraft is revised by inserting the March 1995 aircraft and the associated
advance payment base price:
March 1995 $32,879,000
5. Article 5.1, entitled "Advance Payment Base Price" is revised by
--------------------------
inserting after the Block H Aircraft the following:
S19-7
<PAGE>
<TABLE>
<CAPTION>
Block I Aircraft
----------------
Month and Year of Advance Payment Base
Scheduled Delivery Price per Aircraft
------------------ ---------------------
<S> <C>
July 1995 $33,376,000
October 1995 $33,637,000
November 1995 $33,726,000
</TABLE>
6. Article 5.2, entitled "Advance Payment Schedule" is revised by inserting
------------------------
after the Block H Aircraft the following schedule for the Block I Aircraft:
<TABLE>
<CAPTION>
Amount Due per Aircraft
Block I Aircraft
--------------------
Due Date of Payment Jul 1995 Oct 1995 Nov 1995
-------------------
<S> <C> <C> <C>
Upon execution of 25% 20% 20%
Supplemental
Agreement No. 19
12 months prior to the --- --- ---
first day of the scheduled
delivery month of the
Aircraft
9 months prior to the first --- 5% 5%
day of the scheduled delivery
month of the Aircraft
6 months prior to the first 5% 5% 5%
day of the scheduled delivery
month of the Aircraft
-----------------------------------------
Total 30% 30% 30%
</TABLE>
7. The title and the first sentence in Article 7.3.2 is revised to be
written as "The Block E, F, G H and I Aircraft."
8. A new Exhibit A-6, entitled "Aircraft Configuration - the Block I
------------------------------------
Aircraft," attached hereto, is incorporated into the Purchase Agreement by this
--------
reference.
9. Exhibit D-4, entitled "Airframe and Engine Price Adjustment - the Block
------------------------------------------------
I Aircraft" attached hereto, is incorporated into the Purchase Agreement by this
----------
reference.
10. Letter Agreement No. 1405-6R3 entitled "Option Aircraft" is revised in
Article 5, paragraph 5.1 by deleting the phrase "thirty (30) months" and
inserting the phrase "twenty (20) months."
S19-6
<PAGE>
11. Letter Agreement No. 6-1162-STE-1364 entitled "Additional Contractual
----------------------
Matters" is revised in the title of Article 2.5 and in the text of Article 2.5
-------
by deleting the word "and" and inserting a comma after the letter G and adding
"and Block I" after the letter H and before Aircraft
12. A new paragraph 12 is incorporated into Letter Agreement No. 6-1162-
STE-1364, dated July 23, 1987, by this reference. "Boeing will issue to Buyer
at the time of delivery of the July 1995 Block I Aircraft a credit memorandum in
the amount of $153,000. Such credit memorandum will be applied to the final
delivery price of the July 1995 Block I Aircraft. The credit memorandum is for
Buyer's 737-300 simulator data for the Heads Up Display System."
13. Boeing and Buyer agree that the provisions of Letter Agreement No. 6-
1162-STE-1363 , dated July 23, 1987, shall apply to paragraph 11 and 12 of this
Supplemental Agreement.
The Purchase Agreement shall be deemed to be supplemented to the extent herein
provided and as so supplemented shall continue in full force and effect.
EXECUTED IN DUPLICATE as of the day and year first above written.
THE BOEING COMPANY SOUTHWEST AIRLINES CO.
By: /s/ R. L, Lyons By: /s/ Gary J. Barron
-------------------------------- ----------------------
Its: Attorney-In-Fact Its: Executive V.P. & COO
-------------------------------- ---------------------
S19-3
<PAGE>
EXHIBIT A-6
to
PURCHASE AGREEMENT NO. 1405
Dated______________________
between
THE BOEING COMPANY
and
SOUTHWEST AIRLINES CO.
AIRCRAFT CONFIGURATION
BLOCK I AIRCRAFT
MODEL 737-3H4
The Detail Specification, referred to in Article 1 of the Purchase
Agreement, is Boeing Detail Specification D6-76300-2 Revision AA dated May 11,
1994 as amended to incorporate the applicable specification language to reflect
the effect of the changes set forth in the Master Changes listed below,
including the effects of such changes on Manufacturer's Empty Weight (MEW) and
Operating Empty Weight (OEW). As soon as practicable, Boeing will furnish to
Buyer copies of the Detail Specification, which copies will reflect the effect
of such changes. The Aircraft Basic Price reflects and includes all effects of
such changes of price.
A-6-1
<PAGE>
Exhibit A-6 to
Purchase Agreement No. 1405
Page 2
<TABLE>
<CAPTION>
PRICE PER
CHANGE REQUEST AIRCRAFT
NO./TITLE (1994 STE $)
-------------- ------------
<S> <C>
3342MP3018 N/C
Illuminated Sidewall
Mounted overwing
Exit Sign - Reposition
</TABLE>
A-6-2
<PAGE>
AIRFRAME AND ENGINE PRICE ADJUSTMENT
between
THE BOEING COMPANY
and
SOUTHWEST AIRLINES CO.
Exhibit D-4 to Purchase Agreement Number 1405
<PAGE>
PRICE ADJUSTMENT DUE TO
-----------------------
ECONOMIC FLUCTUATIONS
---------------------
AIRFRAME PRICE ADJUSTMENT
-------------------------
(July 1994 Base Price)
--------------------
The Block I Aircraft
--------------------
1. Formula.
-------
The Airframe Price Adjustment will be determined at the time of Aircraft
delivery in accordance with the following formula:
Pa = (P)(L + M - 1)
Where:
Pa = Airframe Price Adjustment.
L = .65 x ECI
-----
125.9
M = .35 x ICI
-----
118.5
P = Aircraft Basic Price (as set forth in Article 3.2 of this
Agreement) less the base price of Engines (as defined in this
Exhibit D) in the amount of $6,277,658.
ECI = A value using the "Employment Cost Index for workers in
aerospace manufacturing" (aircraft manufacturing, standard
industrial classification code 3721, compensation, base month
and year June 1989 = 100), as released by the Bureau of Labor
Statistics, U.S. Department of Labor on a quarterly basis for
the months of March, June, September and December, calculated as
follows: A three-month arithmetic average value (expressed as a
decimal and rounded to the nearest tenth) will be determined
using the months set forth in the table below for the applicable
Aircraft, with the released Employment Cost Index value
described above for the month of March also being used for the
months of January and February; the value for June also used for
April and May; the value for September also used for July and
August; and the value for December also used for October and
November.
D-4-1
<PAGE>
ICI = The three-month arithmetic average of the released monthly
values for the Industrial Commodities Index as set forth in the
"Producer Prices and Price Index" (Base Year 1982 = 100) as
released by the Bureau of Labor Statistics, U.S. Department of
Labor values (expressed as a decimal and rounded to the nearest
tenth) for the months set forth in the table below for the
applicable Aircraft.
In determining the value of L, the ratio of ECI divided by 125.9 will be
expressed as a decimal rounded to the nearest ten-thousandth and then multiplied
by .65 with the resulting value also expressed as a decimal and rounded to the
nearest ten-thousandth.
In determining the value of M, the ratio of ICI divided by 118.5 will be
expressed as a decimal rounded to the nearest ten-thousandth and then multiplied
by .35 with the resulting value also expressed as a decimal and rounded to the
nearest ten-thousandth.
<TABLE>
<CAPTION>
Months to be Utilized
Month of Scheduled in Determining the
Aircraft Delivery Value of ECI and ICI
----------------- -------------------------
<S> <C>
January June B, July B, Aug. B
February July B, Aug. B, Sept. B
March Aug. B, Sept. B, Oct. B
April Sept. B, Oct. B, Nov. B
May Oct. B, Nov. B, Dec. B
June Nov. B, Dec. B, Jan. D
July Dec. B, Jan. D, Feb. D
August Jan. D, Feb. D, Mar. D
September Feb. D, Mar. D, Apr. D
October Mar. D, Apr. D, May D
November Apr. D, May D, June D
December May D, June D, July D
</TABLE>
The following definitions of B and D will apply:
B = The calendar year before the year in which the scheduled month of
------
delivery as set forth in Article 2.1 occurs.
D = The calendar year during which the scheduled month of delivery as
------
set forth in Article 2.1 occurs.
D-4-2
<PAGE>
Exhibit D-4
Page 3
2. If at the time of delivery of an Aircraft Boeing is unable to determine
the Airframe Price Adjustment because the applicable values to be used to
determine the ECI and ICI have not been released by the Bureau of Labor
Statistics, then:
2.1 The Airframe Price Adjustment, to be used at the time of delivery
of each of the Aircraft, will be determined by utilizing the escalation
provisions set forth above. The values released by the Bureau of Labor
Statistics and available to Boeing 30 days prior to scheduled Aircraft delivery
will be used to determine the ECI and ICI values for the applicable months
(including those noted as preliminary by the Bureau of Labor Statistics) to
calculate the Airframe Price Adjustment. If no values have been released for an
applicable month, the provisions set forth in Paragraph 2.2 below will apply. If
prior to delivery of an Aircraft the U.S. Department of Labor changes the base
year for determination of the ECI or ICI values as defined above, such rebased
values will be incorporated in the Airframe Price Adjustment calculation. The
payment by Buyer to Boeing of the amount of the Purchase Price for such
Aircraft, as determined at the time of Aircraft delivery, will be deemed to be
the payment for such Aircraft required at the delivery thereof.
2.2 If prior to delivery of an Aircraft the U.S. Department of Labor
substantially revises the methodology used for the determination of the values
to be used to determine the ECI and ICI values (in contrast to benchmark
adjustments or other corrections of previously released values), or for any
reason has not released values needed to determine the applicable Aircraft
Airframe Price Adjustment, the parties will, prior to delivery of any such
Aircraft, select a substitute for such values from data published by the Bureau
of Labor Statistics or other similar data reported by non-governmental United
States organizations, such substitute to lead in application to the same
adjustment result, insofar as possible, as would have been achieved by
continuing the use of the original values as they may have fluctuated during the
applicable time period. Appropriate revision of the formula will be made as
required to reflect any substitute values. However, if within 24 months from
delivery of the Aircraft the Bureau of Labor Statistics should resume releasing
values for the months needed to determine the Airframe Price Adjustment, such
values will be used to determine any increase or decrease in the Airframe Price
Adjustment for the Aircraft from that determined at the time of delivery of such
Aircraft.
D-4-3
<PAGE>
Exhibit D
Page 4
2.3 In the event escalation provisions are made non-enforceable or
otherwise rendered null and void by any agency of the United States Government,
the parties agree, to the extent they may lawfully do so, to equitably adjust
the Purchase Price of any affected Aircraft to reflect an allowance for
increases or decreases in labor compensation and material costs occurring since
February, 1994, which is consistent with the applicable provisions of paragraph
1 of this Exhibit D.
3. For the calculations herein, the values released by the Bureau of Labor
Statistics and available to Boeing 30 days prior to scheduled Aircraft delivery
will be used to determine the ECI and ICI values for the applicable months
(including those noted as preliminary by the Bureau of Labor Statistics) to
calculate the Airframe Price Adjustment.
Note: Any rounding of a number, as required under this Exhibit D-4 with respect
---- to escalation of the airframe price, will be accomplished as follows: if
the first digit of the portion to be dropped from the number to be
rounded is five or greater, the preceding digit will be raised to the
next higher number.
D-4-4
<PAGE>
Exhibit D
Page 7
ENGINE PRICE ADJUSTMENT - CFM INTERNATIONAL, INC.
-------------------------------------------------
(1994 BASE PRICE)
-----------------
(a) The Aircraft Basic Price of each Aircraft set forth in Article 3.1 of
this Agreement includes an aggregate price for CFM56-3-B1 engines and all
accessories, equipment and parts therefor provided by the engine manufacturer
(collectively in this Exhibit D called "Engines") of Six Million Two Hundred
Seventy-Seven Thousand Six Hundred Fifty Eight Dollars ($6,277,658). The
adjustment in Engine price applicable to each Aircraft ("Engine Price
Adjustment" herein) will be determined at the time of Aircraft delivery in
accordance with the following formula:
D1 = (Pb x CPI ) - Pb
------
133.18
(b) The following definitions will apply herein:
D1 = Engine Price Adjustment
Pb = Aggregate Engine Base Price as set forth in Paragraph (a) above.
CPI = The Composite Price Index as determined in accordance with the
formula set forth below. The Index values referred to below, to be
used in determining the CPI, will be for the ninth month prior to
the month of scheduled Aircraft delivery. Such Index values will
be those prepared by the Bureau of Labor Statistics, U.S.
Department of Labor.
CPI = L + M1 + M2 + M3
L = The Labor Index for such month will be the quotient,
expressed as a decimal and rounded to the nearest
thousandth, of the "Hourly Earnings of Aircraft Engines and
Engine Parts Production Workers" SIC 3724, for such month
divided by Eleven Dollars and Sixteen Cents ($11.16). Such
quotient will be multiplied by 100 and then by fifty-five
percent (55%) with the value resulting from the latter
multiplication expressed as a decimal and rounded to the
nearest hundredth.
D-7
<PAGE>
Exhibit D
Page 6
M1 = The Industrial Commodities Index for such month will be
equal to ten percent (10%) of the Producer Price Index for
"all commodities other than Farm and Foods," Code 3-15,
(Base Year 1982 = 100) for such month, expressed as a
decimal and rounded to the nearest hundredth.
M2 = The Metals and Metal Products Index for such month will be
equal to twenty-five percent (25%) of the Producer Price
Index for "Metals and Metal Products," Code 10, (Base Year
1982 = 100) for such month expressed as a decimal and
rounded to the nearest hundredth.
M3 = The Fuel Index for such month will be equal to ten percent
(10%) of the Producer Price Index for "Fuel and Related
Products and Power," Code 5, (Base Year 1982 = 100) for
such month expressed as a decimal and rounded to the
nearest hundredth.
133.18 = Composite Price Index for October, 1993.
The factor (CPI divided by 133.18) by which the Aggregate Engine Base Price is
to be multiplied will be expressed as a decimal and rounded to the nearest
thousandth.
The Engine Price Adjustment will not be made if it would result in a decrease
in the aggregate Engine base price.
(c) The values of the Average Hourly Earnings and Producer Price Indices used
in determining the Engine Price Adjustment will be those published by the Bureau
of Labor Statistics, U.S. Department of Labor as of a date 30 days prior to the
scheduled Aircraft delivery to Buyer. Such values will be considered final and
no Engine Price Adjustment will be made after Aircraft delivery for any
subsequent changes in published Index values.
(d) If the U.S. Department of Labor, Bureau of Labor Statistics (i)
substantially revises the methodology (in contrast to benchmark adjustments or
other corrections of previously published data) or (ii) discontinues publication
of any of the data referred to above, CFMI agrees to meet
D-6
<PAGE>
Exhibit D
Page 7
jointly with Boeing and Buyer to jointly select a substitute for the revised or
discontinued data; such substitute data to lead in application to the same
adjustment result, insofar as possible, as would have been achieved by
continuing the use of the original data as it may have fluctuated had it not
been revised or discontinued.
Appropriate revision of the Engine Price Adjustment provisions set forth above
will be made to accomplish this result for the affected Engines.
In the event the Engine price escalation provisions are made non-enforceable or
otherwise rendered null and void by any agency of the United States Government,
CFMI agrees to meet with Boeing and Buyer to jointly agree, to the extent such
parties may lawfully do so, to adjust equitably the purchase price of any
affected Engine(s) to reflect an allowance for increases in labor, material and
fuel costs that have occurred from the period represented by the CPI to the
ninth month preceding the month of scheduled delivery of the applicable
aircraft.
NOTE: Any rounding of a number, as required under this Exhibit D-4 with respect
---- to escalation of the Engine price, will be accomplished as follows: if
the first digit of the portion to be dropped from the number to be
rounded is five or greater, the preceding digit will be raised to the
next higher number.
D-7
<PAGE>
Exhibit 10.14
SOUTHWEST AIRLINES CO.
1995 SWAPA NON-QUALIFIED
------------------------
STOCK OPTION PLAN
-----------------
SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), hereby
formulates and adopts the following 1995 SWAPA Non-Qualified Stock Option Plan.
1. PURPOSE. This Plan is adopted pursuant to the Collective Bargaining
--------
Agreement (the "Agreement") between the Company and the Southwest Airlines
Pilots Association ("SWAPA") ratified on January 12, 1995.
2. ADMINISTRATION. This Plan shall be administered by an Administrative
---------------
Committee (the "Committee") consisting of not more than five (5) persons
designated from time to time by the Chief Executive Officer of the Company,
including as one of its members the President of SWAPA or his or her designee.
Members of the Committee may be removed or replaced at any time by the Chief
Executive Officer of the Company. The Administrative Committee shall select one
of its members as Chairman and shall adopt such rules and regulations as it
shall deem appropriate concerning the holding of its meetings, the transaction
of its business and the administration of this Plan. A majority of the whole
Committee shall constitute a quorum, and the act of a majority of the members of
the Committee present at a meeting at which a quorum is present shall be the act
of the Committee; any decision or determination reduced to writing and signed by
a majority of the members of the Administrative Committee shall be fully as
effective as if made by a majority vote at a meeting duly called and held.
3. GRANT OF OPTIONS; PERSONS ELIGIBLE. The Stock Option Committee of
-----------------------------------
the Board of Directors of the Company, or such other committee as may be
appointed by the Board, shall have the authority and responsibility, within the
limitations of this Plan, to grant options from time to time to persons employed
as pilots (including pilots in management positions retaining seniority numbers)
by the Company or Morris Air Corporation pursuant to the Agreement and as set
forth in the schedule attached as Exhibit A and made a part hereof. Initial
Grants (as defined in Exhibit A) shall be granted at an exercise price of $20
per share; thereafter, Options shall be granted at an exercise price equal to
the fair market value of the Common Stock of the Company on the date of the
grant of the option plus five percent (5%). Only persons who are employed as
pilots of SWA or Morris Air Corporation on the date of the grant may be granted
options under this Plan; under no circumstances shall executive officers of the
Company be eligible to receive options hereunder.
<PAGE>
4. DEFINITIONS. An employee receiving any option under this Plan is
------------
hereinafter referred to as an "Optionee." Any reference herein to the
employment of an Optionee with the Company shall include only employment with
the Company or Morris Air Corporation. The fair market value of the Common
Stock on any day shall be the mean between the highest and lowest quoted selling
prices of the Common Stock on such day as reported by the primary national stock
exchange on which such stock is listed. If no sale shall have been made on that
day, or if the Common Stock is not listed on a national exchange at that time,
fair market value will be determined by the Committee.
5. STOCK SUBJECT TO OPTIONS. Subject to the provisions of paragraph 12,
-------------------------
the number of shares of the Company's Common Stock subject at any one time to
options, plus the number of such shares then outstanding pursuant to exercises
of options, granted under this Plan, shall not exceed 18,000,000 shares. If,
and to the extent the options granted under this Plan terminate or expire
without having been exercised, new options may be granted with respect to the
shares covered by such terminated or expired options; provided that the granting
and terms of such new options shall in all respects comply with the provisions
of this Plan.
Shares sold or distributed upon the exercise of any option granted under
this Plan may be shares of the Company's authorized and unissued Common Stock,
shares of the Company's issued Common Stock held in the Company's treasury, or
both.
There shall be reserved at all times for sale or distribution under this
Plan a number of shares of Common Stock (either authorized and unissued shares
or shares held in the Company's treasury, or both) equal to the maximum number
of shares which may be purchased or distributed upon the exercise of options
granted under this Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of shares of Common Stock which may thereafter be available, both for
purposes of this Plan and for sale to any one individual, by the number of
shares as to which the Option is exercised.
6. EXPIRATION AND TERMINATION OF THE PLAN. This Plan will expire on
---------------------------------------
January 31, 2007.
No modification, extension, renewal or other change in any option granted
under this Plan shall be made after the grant of such option unless the same is
consistent with the provisions of this Plan.
================================================================================
1995 SWAPA NON-QUALIFIED STOCK OPTION PLAN Page 2
<PAGE>
7. EXERCISABILITY AND DURATION OF OPTIONS.
---------------------------------------
(a) Exercisability. Options granted under this Plan shall become
--------------
exercisable pursuant to the vesting schedule and requirements set forth in
Exhibit A attached hereto.
(b) Duration. The unexercised portion of any option granted under this
--------
Plan shall automatically and without notice terminate and become null and void
at the time of the earliest to occur of the following:
(1) January 31, 2007;
(2) The expiration of three months from the date of termination
of the Optionee's employment with the Company (unless such termination was as a
result of the circumstances set forth in subparagraphs (3) or (4) below);
provided that if the Optionee shall die during such 3-month period the
provisions of subparagraph (3) below shall apply;
(3) The expiration of 12 months following the issuance of letters
testamentary or letters of administration to the executor or administrator of a
deceased Optionee, if the Optionee's death occurs either during his employment
with the Company, during the three-month period following the date of
termination of such employment, or during the 24-month period following
retirement as a result of FAA-imposed mandatory retirement age;
(4) The expiration of 24 months following the retirement of the
Optionee as a result of FAA-imposed mandatory retirement age; provided that if
the Optionee shall die during such 24-month period, the provisions of
subparagraph (3) above shall apply; or
(5) December 1, 1999 in the event the Agreement is made
amendable by SWAPA on or before September 1, 1999.
In the case of subparagraphs (2), (3) and (4) above, the Optionee shall have the
right to exercise any Option prior to such expiration to the extent it was
exercisable at the date of such termination of employment and shall not have
been exercised.
8. EXERCISE OF OPTIONS.
--------------------
(a) Procedure. The option granted herein shall be exercised by the
---------
Optionee (or by the person who acquires such options by will or the laws of
descent and distribution or otherwise by reason of the death of the Optionee) as
to all or part of the shares covered by the option (but in no event less than
100 shares, unless such exercise is for all remaining shares) by giving written
notice of the exercise thereof (the "Notice") to the Company. From time to time
the Committee may establish
================================================================================
1995 SWAPA NON-QUALIFIED STOCK OPTION PLAN Page 3
<PAGE>
procedures relating to effecting such exercises. No fractional shares shall be
issued as a result of exercising an Option.
(b) Payment. In the Notice, the Optionee shall elect whether he or she is
-------
to pay for his or her shares in cash or in Common Stock of the Company, or both.
If payment is to be made in cash, the Optionee shall deliver to the Company a
cashier's check or electronic funds transfer in the amount of the exercise price
on or before the exercise date. If payment is to be made in Common Stock, (a)
it shall be valued at its fair market value on the date of such notice, as
determined pursuant to Paragraph 4 hereof; (b) such Common Stock must have been
owned by the Optionee for at least six months prior to the exercise date; and
(c) the Notice shall be accompanied by a certificate for at least the number of
shares of Common Stock to be used as payment.
(c) Irrevocable Election. The giving of such written notice to the
--------------------
Company shall constitute an irrevocable election to purchase the number of
shares specified in the notice on the date specified in the notice.
(d) Withholding Taxes. To the extent that the exercise of any Option
-----------------
granted pursuant to this Plan or the disposition of shares of Common Stock
acquired by exercise of an Option results in compensation income to the Optionee
for federal or state income tax purposes, the Optionee shall deliver to the
Company at the time of such exercise or disposition such amount of money as the
Company may require to meet its obligation under applicable tax laws or
regulations, and, if the Optionee fails to do so, the Company is authorized to
(a) withhold delivery of certificates upon exercise and (b) withhold from
remuneration then or thereafter payable to Optionee any tax required to be
withheld by reason of such resulting compensation income.
(e) Delivery of Shares. The Company shall cause shares to be delivered to
------------------
the Optionee (or the person exercising the Optionee's options in the event of
death) as soon as practicable after the exercise date.
9. NONTRANSFERABILITY OF OPTIONS. No option granted under this Plan or
------------------------------
any right evidenced thereby shall be transferable by the Optionee other than by
will or the laws of descent and distribution. During the lifetime of an
Optionee, only the Optionee (or his or her guardian or legal representative) may
exercise his or her options.
In the event of the Optionee's death during his or her employment with the
Company, during the three-month period following the date of termination of such
employment, or during the 24-month period following FAA-mandated retirement, the
Optionee's options shall thereafter be exercisable, as provided in paragraph
7(b), by his or her executor or administrator, or by the person who acquires
such options by will or the laws of descent and distribution or otherwise by
reason of the death of the Optionee.
================================================================================
1995 SWAPA NON-QUALIFIED STOCK OPTION PLAN Page 4
<PAGE>
10. RIGHTS OF OPTIONEE. Neither the Optionee nor his or her executors,
-------------------
administrators, or legal representatives shall have any of the rights of a
shareholder of the Company with respect to the shares subject to an option
granted under this Plan until certificates for such shares shall have been
issued upon the exercise of such option.
11. RIGHT TO TERMINATE EMPLOYMENT. Nothing in this Plan or in any option
------------------------------
granted under this Plan shall confer upon any Optionee the right to continue in
the employment of the Company or affect the right of the Company or any of its
subsidiaries to terminate the Optionee's employment at any time; subject,
however, to the provisions of the Agreement.
12. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC.
-----------------------------------------------
(a) The existence of the Plan and the options granted hereunder shall not
affect in any way the right or power of the Board of Directors or the
shareholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's capital
structure or its business, any merger or consolidation of the Company, any issue
of debt or equity securities ahead of or affecting Common Stock or the rights
thereof, the dissolution or liquidation of the Company or any sale, lease,
exchange or other disposition of all or any part of its assets or business or
any other corporate act or proceeding.
(b) The shares with respect to which options may be granted are shares of
Common Stock as presently constituted, but if, and whenever, prior to the
expiration of an option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Common Stock or the payment of a stock
dividend on Common Stock without receipt of consideration by the Company, the
number of shares of Common Stock with respect to which such option may
thereafter be exercised (i) in the event of an increase in the number of
outstanding shares shall be proportionately increased, and the purchase price
per share shall be proportionately reduced, and (ii) in the event of a reduction
in the number of outstanding shares shall be proportionately reduced, and the
purchase price per share shall be proportionately increased; likewise, the
number of shares to be granted pursuant to the schedule set forth in Exhibit A
shall be appropriately adjusted. In the event of any such change in the
outstanding Common Stock, the aggregate number of shares available under the
Plan shall be appropriately adjusted by the Board of Directors of the Company,
whose determination shall be conclusive.
(c) If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise of an option theretofore granted the
Optionee shall be entitled to purchase under such option, in lieu of the number
of shares of Common Stock as to which such option shall then be exercisable, the
number and class of shares of stock and securities to which the Optionee would
have been entitled pursuant to the terms of the recapitalization if, immediately
prior to such recapitaliza-
================================================================================
1995 SWAPA NON-QUALIFIED STOCK OPTION PLAN Page 5
<PAGE>
tion, the Optionee had been the holder of record of the number of shares of
Common Stock as to which such option is then exercisable. If the Company shall
not be the surviving entity in any merger or consolidation (or survives only as
a subsidiary of an entity other than a previously wholly-owned subsidiary of the
Company) or if the Company is to be dissolved or liquidated, then unless a
surviving corporation assumes or substitutes new options for Options then
outstanding hereunder (i) the time at which such Options may be exercised shall
be accelerated and such Options shall become exercisable in full on or before a
date fixed by the Company prior to the effective date of such merger or
consolidation or such dissolution or liquidation, and (ii) upon such effective
date Options shall expire.
(d) Except as hereinbefore expressly provided, the issuance by the
Company of shares of stock of any class or securities convertible into shares of
stock of any class, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to options theretofore granted or to be granted
or the purchase price per share.
13. PURCHASE FOR INVESTMENT AND LEGALITY. The Optionee, by acceptance of
------------------------------------
any option granted under this Plan, shall represent and warrant to the Company
that the purchase or receipt of shares of Common Stock upon the exercise thereof
shall be for investment and not with a view to distribution, provided that such
representation and warranty shall be inoperative if, in the opinion of counsel
to the Company, a proposed sale or distribution of such shares is pursuant to an
applicable effective registration statement under the Securities Act of 1933 or
is, without such representation and warranty, exempt from registration under
such Act. The Company shall file a Registration Statement on Form S-8 pursuant
to the Securities Act of 1933, as amended, covering the shares to be offered
pursuant to the Plan and will use its best efforts to maintain such registration
at all times necessary to permit holders of options to exercise them.
The obligation of the Company to issue shares upon the exercise of an
option shall also be subject as conditions precedent to compliance with
applicable provisions of the Securities Act of 1933, the Securities Exchange Act
of 1934, state securities laws, rules and regulations under any of the foregoing
and applicable requirements of any securities exchange upon which the Company's
securities shall be listed.
The Company may endorse an appropriate legend referring to the foregoing
restrictions upon the certificate or certificates representing any shares issued
or transferred to the Optionee upon the exercise of any option granted under
this Plan.
14. EFFECTIVE DATE OF PLAN. This Plan shall become effective on January
-----------------------
12, 1995 upon its adoption by the Board of Directors of the Company.
================================================================================
1995 SWAPA NON-QUALIFIED STOCK OPTION PLAN Page 6
<PAGE>
Exhibit 11
Page 1 of 3
Southwest Airlines Co.
Computation of Earnings Per Share
For the Year Ended December 31, 1994
<TABLE>
<CAPTION>
Fully
Primary Diluted
--------------- --------------
<S> <C> <C>
Weighted average shares outstanding 143,046,509 143,046,509
Shares issuable upon exercise of outstanding
stock options (treasury stock method) 4,258,865 4,259,233
--------------- --------------
Weighted average common and common
equivalent shares 147,305,374 147,305,742
=============== ==============
Earnings for per share computations $179,331,000 $179,331,000
=============== ==============
Earnings per common and common equivalent $1.22 $1.22
share
=============== ==============
</TABLE>
<PAGE>
Exhibit 11
Page 2 of 3
Southwest Airlines Co.
Computation of Earnings Per Share
For the Year Ended December 31, 1993
<TABLE>
<CAPTION>
Fully
Primary Diluted
--------------- -------------
<S> <C> <C>
Weighted average shares outstanding 142,622,160 142,622,160
Shares issuable upon exercise of outstanding
stock options (treasury stock method) 4,522,408 4,676,476
--------------- -------------
Weighted average common and common
equivalent shares 147,144,568 147,298,636
=============== =============
Earnings for per share computation before
cumulative $154,284,000 $154,284,000
effect of accounting changes
Cumulative effect of accounting change 15,259,000 15,259,000
--------------- -------------
Earnings for per share computation after
cumulative effect of accounting changes $169,543,000 $169,543,000
=============== =============
Earnings for per common and common
equivalent
share before cumulative effect of accounting $1.05 $1.05
change =============== =============
Earnings for per common and common
equivalent share after cumulative effect of $1.15 $1.15
accounting change =============== =============
</TABLE>
Note: The share and per share amounts have been adjusted to reflect the three-
for-two stock split distributed July 15, 1993.
<PAGE>
Exhibit 11
Page 3 of 3
Southwest Airlines Co.
Computation of Earnings Per Share
For the Year Ended December 31, 1992
<TABLE>
<CAPTION>
Fully
Primary Diluted
-------------- --------------
<S> <C> <C>
Weighted average shares outstanding 138,967,858 138,967,858
Shares issuable upon exercise of outstanding stock
options (treasury stock method) 3,978,032 4,148,157
Shares applicable to subordinated debentures coverted
in first quarter 1992 -- 1,013,918
--------------- --------------
Weighted average common and common
equivalent shares 142,945,890 144,129,933
=============== ==============
Pro forma earnings before cumulative effect of
accounting change $ 97,385,000 $ 97,385,000
Add: Interest on $35,000,000 convertible
debentures N/A 443,000
Less: Tax effect @ 38.5% N/A (170,000)
--------------- --------------
Pro forma earnings for per share computations before
cumulative effect of accounting change $ 97,385,000 $ 97,658,000
Cumulative effect of accounting change 12,538,000 12,538,000
--------------- --------------
Pro forma earnings for per share computations after
cumulative effect of accounting change $109,923,000 $110,196,000
=============== ==============
Pro forma earnings for per common and common
equivalent share before cumulative effect of
accounting $0.68 $0.68
change
=============== ==============
Pro forma earnings for per common and common
eqivalent share after cumulative effect of accounting
change $0.77 $0.76
=============== ==============
</TABLE>
Note: The share and per share amounts have been adjusted to reflect the three-
for-two stock and the two-for-one stock splits distributed July 15, 1993
and July 15, 1992, respectively.
<PAGE>
Exhibit 22
Southwest Airlines Co.
Subsidiaries of the Company
Southwest Airlines Co. has five wholly owned subsidiaries:
TranStar Airlines Corporation, Southwest Jet Fuel Co., Southwest ABQ RES
Center, Inc., which are incorporated under the laws of Texas; Southwest Airlines
Eurofinance N.V., which is incorporated under the laws of Netherlands Antilles;
and Morris Air Corporation, which is incorporated under the laws of Delaware.
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements Form S-3 (Nos. 33-54587 and 33-52155) and Form S-8 (Nos. 33-48178,
33-57327, 33-40652 and 33-40653) and in the related Prospectuses of our report
dated January 26, 1995, with respect to the Consolidated Financial Statements of
Southwest Airlines Co. included in this Annual Report (Form 10-K) for the year
ended December 31, 1994.
ERNST & YOUNG LLP
Dallas, Texas
March 28, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 174,538
<SECURITIES> 0
<RECEIVABLES> 75,692
<ALLOWANCES> 0
<INVENTORY> 37,565
<CURRENT-ASSETS> 314,898
<PP&E> 3,342,801
<DEPRECIATION> 837,838
<TOTAL-ASSETS> 2,823,071
<CURRENT-LIABILITIES> 522,270
<BONDS> 0
<COMMON> 143,256
0
0
<OTHER-SE> 1,095,450
<TOTAL-LIABILITY-AND-EQUITY> 2,823,071
<SALES> 0
<TOTAL-REVENUES> 2,591,933
<CGS> 0
<TOTAL-COSTS> 2,275,224
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,368
<INCOME-PRETAX> 299,523
<INCOME-TAX> 120,192
<INCOME-CONTINUING> 179,331
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 179,331
<EPS-PRIMARY> 1.22
<EPS-DILUTED> 1.22
</TABLE>
