SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
March 31, 1996 OR
____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
________ TO ________
Commission file No. 1-7259
SOUTHWEST AIRLINES CO.
(Exact name of registrant as specified in its charter)
TEXAS 74-1563240
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 36611, Dallas, Texas 75235-1611
(Address of principal executive offices) (Zip Code)
(214) 904-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of shares of Common Stock outstanding as of the close
of business on May 9, 1996:
144,706,891
SOUTHWEST AIRLINES CO.
FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Southwest Airlines Co.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $324,680 $317,363
Accounts receivable 97,473 79,781
Inventories of parts and supplies 47,940 41,032
Deferred income taxes 10,931 10,476
Prepaid expenses and other 21,936 24,484
Total current assets 502,960 473,136
Property and equipment:
Flight equipment 3,176,248 3,024,702
Ground property and equipment 451,017 435,822
Deposits on flight equipment
purchase contracts 289,698 323,864
3,916,963 3,784,388
Less allowance for depreciation 1,054,191 1,005,081
2,862,772 2,779,307
Other assets 3,559 3,679
$3,369,291 $3,256,122
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $125,891 $117,473
Accrued liabilities 346,161 348,476
Air traffic liability 198,426 131,156
Current maturities of long-term debt 11,448 13,516
Total current liabilities 681,926 610,621
Long-term debt less current maturities 657,263 661,010
Deferred income taxes 293,600 281,650
Deferred gains from sale and leaseback
of aircraft 239,638 245,154
Other deferred liabilities 30,592 30,369
Stockholders' equity:
Common Stock 144,574 144,033
Capital in excess of par value 169,706 162,704
Retained earnings 1,151,992 1,120,581
Total stockholders' equity 1,466,272 1,427,318
$3,369,291 $3,256,122
</TABLE>
See accompanying notes.
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1996 1995
<S> <C> <C>
Operating revenues:
Passenger $741,100 $596,828
Freight 18,980 14,885
Other 12,449 9,286
Total operating revenues 772,529 620,999
Operating expenses:
Salaries, wages, and
benefits 237,365 203,572
Fuel and oil 103,867 83,176
Maintenance materials
and repairs 62,199 51,673
Agency commissions 31,826 29,515
Aircraft rentals 44,997 38,415
Landing fees and other
rentals 45,443 40,533
Depreciation 44,014 37,347
Other operating expenses 145,425 113,359
Total operating expenses 715,136 597,590
Operating income 57,393 23,409
Other expenses (income):
Interest expense 14,902 13,686
Capitalized interest (6,904) (8,485)
Interest income (4,053) (1,892)
Nonoperating (gains)
losses, net (1,323) 66
Total other expenses 2,622 3,375
Income before income taxes 54,771 20,034
Provision for income taxes 21,771 8,208
Net income $33,000 $11,826
Weighted average common
and common equivalent
shares outstanding 152,403 146,532
Net income per common and
common equivalent share $.22 $.08
</TABLE>
see accompanying notes
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1996 1995
<S> <C> <C>
Net cash provided by operating
activities $141,715 $104,411
Cash flows from investing
activities:
Net purchases of property and
equipment (132,354) (201,274)
Cash flows from financing
activities:
Issuance of long-term debt - 98,811
Payment of long-term debt and
capital lease obligations (6,558) (3,412)
Payment of cash dividends (3,029) (2,867)
Proceeds from Employee stock
plans 7,543 2,542
Net cash (used in) provided by
financing activities (2,044) 95,074
Net increase (decrease) in cash
and cash equivalents 7,317 (1,789)
Cash and cash equivalents at
beginning of period 317,363 174,538
Cash and cash equivalents at end
of period $324,680 $172,749
Cash payments for:
Interest, net of amount
capitalized $17,434 $13,213
Income taxes $396 $1,831
</TABLE>
See accompanying notes.
SOUTHWEST AIRLINES CO.
Notes to Condensed Consolidated Financial Statements
1. Basis of presentation - The accompanying unaudited
condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. The condensed consolidated financial statements for
the interim periods ended March 31, 1996 and 1995 include all
adjustments (which include only normal recurring adjustments)
which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods. Operating
results for the three months ended March 31, 1996 are not
necessarily indicative of the results that may be expected for
the year ended December 31, 1996. For further information, refer
to the consolidated financial statements and footnotes thereto
included in the Southwest Airlines Co. annual report on Form 10-K
for the year ended December 31, 1995.
2. Dividends - During the three month periods ended March
31, 1996 and 1995, $.01 per share in dividends were declared on
the 144,452,894 and 143,411,223 shares of common stock then
outstanding, respectively.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Material Changes in Results of Operations
Consolidated net income for the first quarter ended March
31, 1996 was $33.0 million ($.22 per share),compared to first
quarter 1995 net income of $11.8 million ($.08 per share). The
increase in earnings was principally due to increased passenger
revenues resulting from year-over-year increases in revenue
passenger miles (RPMs)and passenger revenue yield per RPM.
First quarter 1996 operating revenues increased 24.4 percent
compared to first quarter 1995 due to a 24.2 percent increase in
passenger revenues. The increase in passenger revenues resulted
from a 12.1 percent increase in RPMs and a 10.8 percent increase
in passenger revenue yield per RPM. Passenger revenue yield per
RPM increased from $.1146 in first quarter 1995 to $.1270 in
first quarter 1996, the majority of which was due to the
expiration of the ten percent domestic ticket tax at December 31,
1995.
While RPMs in first quarter 1996 increased 12.1 percent,
available seat miles (ASMs) increased 13.1 percent during the
same period, resulting in a load factor of 60.5 percent versus
61.1 percent for the first three months of 1995. The increase in
ASMs resulted primarily from the addition of 25 aircraft since
first quarter 1995. The first quarter 1996 load factor was
adversely affected, in part, by severe winter weather conditions
in January.
The load factor for April 1996 was 64.7 percent, compared to
the April 1995 load factor of 66.0 percent. This lower load factor
for April 1996 was offset by a strong passenger revenue yield,
which has continued to compare favorably on a year over year basis.
Traffic thus far in May and bookings for the remainder of second
quarter, at this point, are good. Yield per RPM should continue
to exceed year ago levels, although at a lower rate of growth than
first quarter 1996. (The immediately preceding two sentences are
forward-looking statements which involve uncertainties that could
result in actual results differing materially from expected results.
Some significant factors include, but may not be limited to,
competitive pressure such as fare sales and capacity changes by other
carriers, general economic conditions, the reimposition of the
federal excise tax or its equivalent, and variations in advance
booking trends.)
Freight revenues increased 27.5 percent in the first quarter
of 1996 as compared to the same period in 1995, due to an
increase in air freight and United States mail services. Other
revenues increased 34.1 percent in the first quarter 1996,
primarily due to higher charter activity.
Operating expenses per ASM for first quarter 1996 increased
5.8 percent to $.0742, compared to $.0701 for first quarter 1995,
primarily due to higher jet fuel prices; the recently implemented
jet fuel tax; a $7.5 million increase in Profitsharing and
Employee savings plan contributions; advertising and other start-
up costs associated with the addition of Tampa, Ft. Lauderdale,
and Orlando, Florida; and increased aircraft engine overhaul
costs.
Southwest Airlines Co.
Operating Expenses per ASM
(in cents except percent change)
<TABLE>
<CAPTION>
Three months ended
March 31,
Increase Percent
1996 1995 (decrease) change
<S> <C> <C> <C> <C>
Salaries, wages, and benefits 2.28 2.27 .01 .4
Employee profitsharing and savings
plans .19 .12 .07 58.3
Fuel and oil 1.08 .98 .10 10.2
Maintenance materials and repairs .64 .61 .03 4.9
Agency commissions .33 .34 (.01) (2.9)
Aircraft rentals .47 .45 .02 4.4
Landing fees and other rentals .47 .47 - -
Depreciation .45 .44 .01 2.3
Other operating expenses 1.51 1.33 .18 13.5
Total 7.42 7.01 .41 5.8
</TABLE>
Profitsharing and Employee savings plan expenses per ASM
increased 58.3 percent from first quarter 1995 to first quarter
1996, primarily due to higher earnings available for
profitsharing in 1996.
Fuel and oil expense per ASM increased 10.2 percent in first
quarter 1996 due to an 11.4 percent increase in the average jet
fuel cost per gallon from the same period in 1995. The
escalation in fuel prices was caused by oil industry efforts to
maintain low inventory levels in the face of Iraq's return to the
market, coupled with high demand for heating oil and winter
diesel as a result of a prolonged cold weather period. The
average price paid for jet fuel in first quarter 1996 was $.5913
per gallon, compared to $.5309 per gallon in first quarter 1995.
Since the end of first quarter 1996, fuel prices have averaged
approximately $.6475 per gallon. Based on current fuel prices,
anticipated summer demand and present oil industry inventory
levels, the Company expects that second quarter 1996 fuel costs
will continue to exceed year ago levels. This forward-looking
statement involves uncertainties that could result in actual
results differing materially from expected results. Some of the
significant factors that could affect ultimate fuel costs include
changes in general economic conditions and jet fuel supply and
demand.
Maintenance materials and repairs per ASM increased 4.9
percent for the three months ended March 31, 1996 as compared to
the corresponding period of the prior year. The increase was
primarily due to performing more aircraft engine overhauls in
first quarter 1996.
Agency commissions per ASM decreased 2.9 percent for the
first quarter of 1996 as compared to the first quarter of 1995,
primarily due to a lower mix of travel agency sales. The year-
over-year travel agency sales mix continued to be impacted,
although less significantly than previous quarters, by 1994 and
first quarter 1995 enhancements to Southwest's ticket delivery
systems for direct Customers, as described below.
In response to actions taken in 1994 by our competitor-owned
reservations systems, during 1994 and first quarter 1995, we
reduced our operating costs and enhanced our ticket delivery
systems by developing our own Southwest Airlines Air Travel
("SWAT") system, allowing high-volume travel agents direct access
to reservations; introduced overnight ticket delivery for travel
agents; reduced to three the number of advance days reservations
required for overnight delivery of tickets to customers (Ticket
By Mail); developed our own Ticketless system, which was rolled
out system-wide on January 31, 1995; and effective March 30,
1995, subscribed to a new level of service with SABRE that
automates the booking process for SABRE travel agencies. We also
continue to actively pursue other cost-effective solutions for
automating non-SABRE travel agency bookings, such as direct
bookings through the Internet which became available via
Southwest Airlines' "Home Gate" in April 1996.
Aircraft rentals per ASM increased 4.4 percent for first
quarter 1996 as compared to first quarter 1995 due to a higher
percentage of the fleet consisting of leased aircraft in 1996.
Other operating expenses per ASM increased 13.5 percent for
the three months ended March 31, 1996 as compared to the same
period in 1995. This increase was primarily due to the recently
implemented jet fuel tax, which resulted in approximately $7.5
million of additional expense in first quarter, and a 21.7
percent per ASM increase in advertising expense associated with
the addition of service to Tampa, Ft. Lauderdale, and Orlando,
Florida.
Other expenses (income) decreased $753,000 (22.3 percent)
from first quarter 1995 to first quarter 1996, due primarily to
interest income on higher invested cash balances.
Material Changes in Financial Condition
Net cash provided by operating activities was $141.7 million
for the three months ended March 31, 1996 and $493.7 million for
the 12 months then ended. This cash was primarily used to
finance aircraft-related capital expenditures and provide working
capital.
During the 12 months ended March 31, 1996, net capital
expenditures were $659.7 million, which primarily related to the
purchase of 23 737-300 aircraft, and progress payments for future
aircraft deliveries.
As of March 31, 1996 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's contractual commitments consist primarily of
scheduled aircraft acquisitions. Fifteen 737-300s are scheduled
for delivery in the remainder of 1996, and seventeen 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 sixty-seven 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-
600s or 737-800s for the 737-700s delivered subsequent to 1999.
Aggregate funding needed for these commitments was approximately
$2,513.0 million at March 31, 1996 due as follows: $362.0 million
in 1996; $575.4 million in 1997; $446.9 million in 1998; $551.2
million in 1999; $351.0 million in 2000; and $226.5 million in
2001.
The Company has various options available to meet its
capital and operating commitments, including cash on hand at
March 31, 1996 of $324.7 million, internally generated funds, and
a revolving credit line with a group of banks of up to $460
million (none of which had been drawn at March 31, 1996). In
addition, the Company will also consider various borrowing or
leasing options to maximize earnings and supplement cash
requirements.
The Company currently has outstanding shelf registrations
for the issuance of $260.6 million public debt securities which
it currently intends to substantially utilize for aircraft
financings during the remainder of 1996.
The lapse of the ten percent domestic ticket tax and its
presumed reinstatement, proposed deferral or elimination of the
jet fuel tax, and looming prospect of FAA reform present
uncertainty for 1996 and future periods. At the current time,
Southwest is unable to predict how these issues will be resolved
and what impact, if any, resolution of these uncertainties will
have on future operating results or financial condition.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has received examination reports from the
Internal Revenue Service proposing certain adjustments
to Southwest's income tax returns for 1987 through
1991. The adjustments relate to certain types of
aircraft financings consummated by Southwest, as well
as other members of the aviation industry, during that
time period. Southwest intends to vigorously protest
the adjustments made with which it does not agree.
The industry's difference with the IRS involves complex
issues of law and fact which are likely to take a
substantial period of time to resolve. Management
believes that final resolution of such protest will not
have a materially adverse effect upon the results of
operations of Southwest. This forward-looking
statement is based on management's current
understanding of the relevant law and facts; it is
subject to various contingencies including the views of
legal counsel, changes in the IRS' position, the
potential cost and risk associated with litigation and
the actions of the IRS, judges and juries.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(11.1) Computation of Earnings Per Share
(27) Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed
during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SOUTHWEST AIRLINES CO.
<TABLE>
<S> <C>
May 13, 1996 /s/ Gary C. Kelly
Date Gary C. Kelly
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit
<S> <C>
(11.1) Computation of Earnings Per Share
(27) Financial Data Schedule
</TABLE>
Southwest Airlines Co.
Computation of Earnings Per Share
For the Three Months Ended March 31, 1996
<TABLE>
<CAPTION>
Fully
Primary Diluted
<S> <C> <C>
Weighted average shares outstanding 144,315,573 144,315,573
Shares issuable upon exercise of outstanding
stock options (treasury stock method) 8,087,207 9,133,447
Weighted average common and common
equivalent shares 152,402,780 153,449,020
Earnings for per share computations $33,000,000 $33,000,000
Earnings per common and common equivalent share $0.22 $0.22
</TABLE>
EXHIBIT (11.1)
Page 2 of 2
Southwest Airlines Co.
Computation of Earnings Per Share
For the Three Months Ended March 31, 1995
<TABLE>
<CAPTION>
Fully
Primary Diluted
<S> <C> <C>
Weighted average shares outstanding 143,367,603 143,367,603
Shares issuable upon exercise of outstanding
stock options (treasury stock method) 3,164,628 3,164,628
Weighted average common and common
equivalent shares 146,532,231 146,532,231
Earnings for per share computations $11,826,000 $11,826,000
Earnings per common and common equivalent share $0.08 $0.08
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 324,680
<SECURITIES> 0
<RECEIVABLES> 97,473
<ALLOWANCES> 0
<INVENTORY> 47,940
<CURRENT-ASSETS> 502,960
<PP&E> 3,916,963
<DEPRECIATION> 1,054,191
<TOTAL-ASSETS> 3,369,291
<CURRENT-LIABILITIES> 681,926
<BONDS> 0
0
0
<COMMON> 144,574
<OTHER-SE> 1,321,698
<TOTAL-LIABILITY-AND-EQUITY> 3,369,291
<SALES> 0
<TOTAL-REVENUES> 772,529
<CGS> 0
<TOTAL-COSTS> 715,136
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,902
<INCOME-PRETAX> 54,771
<INCOME-TAX> 21,771
<INCOME-CONTINUING> 33,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,000
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
