<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
______________
Date of Report (Date of earliest event reported): N/A
SOUTHWEST AIRLINES CO.
(Exact name of registrant as specified in its charter)
TEXAS 1-7259 74-1563240
(State or other jurisdiction (Commission (I.R.S. employee
of incorporation) file number) identification no.)
P.O. Box 36611
Love Field, Dallas, Texas 75235
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, include area code: (214) 904-4000
N/A
(Former name or former address, if changed
since last report)
<PAGE> 2
Item 5. Other Events.
The Registrant files herewith those exhibits listed in Item 7 below.
Item 7. Financial Statements and Exhibits.
The following exhibits, all of which are for the fiscal year ended
December 31, 1994, are furnished in accordance with Item 601 of
Regulation S-K.
Exhibits
12 Calculation of Ratio of Earnings to Fixed Charges
23 Consent of Independent Auditors
99.1 Consolidated Financial Statements and Notes to Consolidated
Financial Statements
99.2 Report of Independent Auditors
99.3 Management's Discussion and Analysis of Results of Operations
and Financial Condition
99.4 Financial Data Schedule
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHWEST AIRLINES CO.
February 27, 1995 /s/ Gary C. Kelly
Gary C. Kelly
Vice President - Finance
and Chief Financial Officer
<PAGE> 4
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<S> <C> <C>
12 Calculation of Ratio of Earnings to Fixed Charges
23 Consent of Independent Auditors
99.1 Consolidated Financial Statements and Notes to Consolidated
Financial Statements
99.2 Report of Independent Auditors
99.3 Management's Discussion and Analysis of Results of Operations
and Financial Condition
99.4 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 12
SOUTHWEST AIRLINES CO.
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
($ in millions)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings
Income before income taxes
and cumulative effect of
accounting changes $299.5 $259.6 $157.4 $ 53.9 $ 80.4
Add: Fixed charges 119.7 114.3 101.0 75.1 50.6
Less: Interest capitalized 26.3 17.8 15.4 15.3 13.7
------ ------ ------ ------ ------
Total $392.9 $356.1 $243.0 $113.7 $117.3
====== ====== ====== ====== ======
Fixed charges
Interest expense $ 27.1 $ 40.7 $ 43.7 $ 28.8 $ 18.3
Add: Interest capitalized 26.3 17.8 15.4 15.3 13.7
------ ------ ------ ------ ------
Gross interest expense 53.4 58.5 59.1 44.1 32.0
Add: Interest factor of
operating lease expense 66.3 55.8 41.9 31.0 18.6
------ ------ ------ ------ ------
Total $119.7 $114.3 $101.0 $ 75.1 $ 50.6
====== ====== ====== ====== ======
Ratio of earnings to fixed charges 3.28 3.12 2.41 1.51 2.32
====== ====== ====== ====== ======
</TABLE>
<PAGE> 1
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, 33-50930 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. for the year ended December 31, 1994,
included in the Current Report on Form 8-K.
ERNST & YOUNG LLP
Dallas, Texas
February 24, 1995
<PAGE> 1
EXHIBIT 99.1
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, 6, 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.
<PAGE> 2
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 (Note 2) . . . . . . . . . . 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 losses(gains), 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 INCOMES 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.
<PAGE> 3
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
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.
<PAGE> 4
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
-------- -------- -------
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.
<PAGE> 5
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."
<PAGE> 6
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.
<PAGE> 7
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).
<PAGE> 8
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.
<PAGE> 9
5. ACCRUED LIABILITIES
(in thousands)
<TABLE>
<CAPTION>
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
========= =========
</TABLE>
6. LONG-TERM DEBT
(in thousands)
<TABLE>
<CAPTION>
1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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>
<PAGE> 10
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, 1993, or 1992.
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 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>
<PAGE> 11
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 $ 2,368,161
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 defined lessor's
cost of the aircraft.
<PAGE> 12
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.
<PAGE> 13
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........................... 198,474 142,575
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
1993........................... $7.14 $7.37
1992........................... $6.10 $11.36
</TABLE>
<PAGE> 14
* 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 bargaining agreement amendable on
or before September 1, 1999, any unexercised options will be canceled on
December 1, 1999.
<PAGE> 15
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
-------- --------
<S> <C> <C>
Deferred tax liabilities:
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>
<PAGE> 16
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:
Federal 46,470 48,524 18,144
State 3,417 4,676 3,116
-------- -------- -------
Total deferred 49,887 53,200 21,260
-------- -------- -------
$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, were 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>
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.
<PAGE> 17
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:
<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 1,645 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 4,537 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.
<PAGE> 1
Exhibit 99.2
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
<PAGE> 1
Exhibit 99.3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INDUSTRY CONDITIONS
The 1990s have been devastating financially for the passenger domestic 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 of 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.
<PAGE> 2
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.
<PAGE> 3
Operating expenses per ASM for 1994 and 1993 (excluding 1993 merger expenses)
were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Operating expenses per ASM
(expressed in cents) Increase Percent
1994 1993 (decrease) change
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries, wages,
and benefits . . . . 2.13 2.12 .01 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 . . . . . . . . . . . 7.08 7.25 (.17) (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 $0.51 to $0.56 per gallon. Since year-end, fuel prices have
averaged approximately $0.54 per gallon.
<PAGE> 4
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 consumers (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) and primarily associated with the start-up of seven new cities and new
competitive pressures in 1994.
<PAGE> 5
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 the 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 increase resulted from the conversion of
the Morris system from charter to scheduled service and the addition of 16
aircraft to the
<PAGE> 6
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 profit-sharing 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 Morris than for Southwest contributing
to the decrease in consolidated salaries, wages, and benefits per ASM.
<PAGE> 7
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-related litigation
for $1.7 million.
<PAGE> 8
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 Company will also consider various borrowing or leasing options
to maximize earnings and supplement cash requirements.
<PAGE> 9
The Company currently has 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.
<PAGE> 1
[ARTICLE] 5
[MULTIPLIER] 1,000
<TABLE>
<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
[PREFERRED-MANDATORY] 0
[PREFERRED] 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>
