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, 1997 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) 792-4000
(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 12, 1997:
145,583,242
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, 1997 December 31, 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $652,412 $581,841
Accounts receivable 84,493 73,440
Inventories of parts and supplies 50,171 51,094
Deferred income taxes 11,796 11,560
Prepaid expenses and other 24,245 33,055
Total current assets 823,117 750,990
Property and equipment:
Flight equipment 3,543,020 3,435,304
Ground property and equipment 538,358 523,958
Deposits on flight equipment
purchase contracts 188,924 198,366
4,270,302 4,157,628
Less allowance for depreciation 1,240,253 1,188,405
3,030,049 2,969,223
Other assets 4,079 3,266
$3,857,245 $3,723,479
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $143,718 $214,232
Accrued liabilities 397,821 380,747
Air traffic liability 184,178 158,098
Income taxes payable 17,517 -
Current maturities of long-term debt 18,192 12,327
Total current liabilities 761,426 765,404
Long-term debt less current maturities 739,188 650,226
Deferred income taxes 358,013 349,987
Deferred gains from sale and leaseback
of aircraft 270,281 274,891
Other deferred liabilities 28,465 34,659
Stockholders' equity:
Common stock 145,415 145,112
Capital in excess of par value 183,632 181,650
Retained earnings 1,370,825 1,321,550
Total stockholders' equity 1,699,872 1,648,312
$3,857,245 $3,723,479
</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,
1997 1996
<S> <C> <C>
Operating revenues:
Passenger $849,106 $741,100
Freight 21,354 18,980
Other 16,635 12,449
Total operating revenues 887,095 772,529
Operating expenses:
Salaries, wages, and
benefits 265,794 237,365
Fuel and oil 134,075 103,867
Maintenance materials
and repairs 57,238 62,199
Agency commissions 37,092 31,826
Aircraft rentals 50,382 44,997
Landing fees and other
rentals 49,011 45,443
Depreciation 48,386 44,014
Other operating expenses 157,914 145,425
Total operating expenses 799,892 715,136
Operating income 87,203 57,393
Other expenses (income):
Interest expense 15,225 14,902
Capitalized interest (4,422) (6,904)
Interest income (7,962) (4,053)
Nonoperating (gains)
losses, net 961 (1,323)
Total other expenses 3,802 2,622
Income before income taxes 83,401 54,771
Provision for income taxes 32,527 21,771
Net income $50,874 $33,000
Weighted average common
and common equivalent
shares outstanding 150,448 152,403
Net income per common and
common equivalent share $.34 $.22
</TABLE>
See accompanying notes.
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
1997 1996
<S> <C> <C>
Net cash provided by operating
activities $ 93,511 $141,715
Cash flows from investing
activities:
Net purchases of property and
equipment (115,850) (132,354)
Cash flows from financing
activities:
Issuance of long-term debt 98,764 -
Payment of long-term debt and
capital lease obligations (4,944) (6,558)
Payment of cash dividends (3,195) (3,029)
Proceeds from Employee stock
plans 2,285 7,543
Net cash provided by (used in)
financing activities 92,910 (2,044)
Net increase in cash
and cash equivalents 70,571 7,317
Cash and cash equivalents at
beginning of period 581,841 317,363
Cash and cash equivalents at end
of period $652,412 $324,680
Cash payments for:
Interest, net of amount
capitalized $20,827 $17,434
Income taxes $215 $396
</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, 1997 and 1996 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, 1997 are not necessarily indicative
of the results that may be expected for the year ended December
31, 1997. 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, 1996.
2. Dividends - During the three-month period ended March
31, 1997, $.01155 per share in dividends were declared on the
145,335,143 shares of common stock then outstanding. During the
three-month period ended March 31, 1996, $.011 per share in
dividends were declared on the 144,452,894 shares of common stock
then outstanding.
3. Long-term debt - During February 1997, the Company
issued $100 million of senior unsecured 7 3/8% Debentures due
March 1, 2027. Interest on the Debentures is payable semi-
annually on March 1 and September 1, commencing September 1, 1997.
The Debentures may be redeemed, at the option of the Company, in
whole at any time or in part from time to time, at a redemption
price equal to the greater of the principal amount of the
Debentures plus accrued interest at the date of redemption or the
sum of the present values of the remaining scheduled payments of
principal of the Debentures and interest thereon discounted to the
date of redemption plus accrued interest at the date of
redemption.
4. Recently issued accounting standard - In February 1997,
the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share, which is required to be adopted on December
31, 1997. At that time, the Company will be required to change
the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement 128 on
the calculation of primary and fully diluted earnings per share
for the first quarter ended March 31, 1997 and March 31, 1996 is
not expected to be material.
5. Reclassifications - Certain prior year amounts have been
reclassified for comparison purposes.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Comparative Consolidated Operating Statistics
Relevant operating statistics for the three-month periods
ended March 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Three months ended
March 31,
1997 1996 Change
<S> <C> <C> <C>
Revenue passengers carried 12,046,184 11,405,237 5.6%
Revenue passenger miles (RPMs) (000s) 6,533,046 5,837,118 11.9%
Available seat miles (ASMs) (000s) 10,517,635 9,641,403 9.1%
Load factor 62.1% 60.5% 1.6 pts.
Average length of passenger haul 542 512 5.9%
Trips flown 190,205 179,105 6.2%
Average passenger fare $70.49 $64.98 8.5%
Passenger revenue yield per RPM $.1300 $.1270 2.4%
Operating revenue yield per ASM $.0843 $.0801 5.2%
Operating expenses per ASM $.0761 $.0742 2.6%
Average fuel cost per gallon $.7145 $.5913 20.8%
Number of employees at period-end 23,544 20,804 13.2%
Size of fleet at period-end 246 229 7.4%
</TABLE>
Material Changes in Results of Operations
Consolidated net income for the first quarter ended March 31,
1997 was $50.9 million ($.34 per share), as compared to first
quarter 1996 net income of $33.0 million ($.22 per share), an
increase of 54.2%. 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 1997 consolidated operating revenues increased
14.8 percent compared to first quarter 1996 primarily due to a
14.6 percent increase in passenger revenues. The increase in
passenger revenues resulted from an 11.9 percent increase in RPMs
coupled with a 2.4 percent increase in yield per RPM.
While RPMs in first quarter 1997 increased 11.9 percent,
available seat miles (ASMs) increased 9.1 percent resulting in a
load factor of 62.1 percent versus 60.5 percent for the first
three months of 1996. The increase in ASMs resulted primarily
from the net addition of 17 aircraft since first quarter 1996.
The load factor for April 1997 was 60.8 percent, compared to
the April 1996 load factor of 64.7 percent. Management believes
the lower load factor for April 1997 was due to the 1997 Easter
holiday falling in March rather than April as it did in 1996,
coupled with modest fare increases in February 1997. Although
load factor trends have improved since the Easter holiday and
bookings for the remainder of the second quarter, at this point,
are good, we do not expect to match the load factor performance of
second quarter 1996. Additionally, the March 1997 reimposition of
the ten percent federal excise tax may adversely impact revenue
growth during second quarter 1997 versus second quarter 1996,
which was not subject to any federal excise tax. (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, and variations in advance booking trends.)
Consolidated freight revenues increased 12.5 percent in the
first quarter of 1997 as compared to the same period in 1996, due
to increased capacity, as well as an increase in United States
mail services. Other revenues increased 33.6 percent in first
quarter 1997, primarily due to increased revenues from the sale of
frequent flyer credits to participating partners in the Rapid
Rewards program.
Operating expenses per ASM for first quarter 1997 increased
2.6 percent to $.0761, compared to $.0742 for first quarter 1996,
primarily due to higher jet fuel prices and a $6.4 million
increase in Profitsharing and Employee savings plan contributions,
partially offset by lower 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
1997 1996 (decrease) change
<S> <C> <C> <C> <C>
Salaries, wages, and benefits 2.30 2.28 .02 .9
Employee profitsharing and savings plans .23 .19 .04 21.1
Fuel and oil 1.28 1.08 .20 18.5
Maintenance materials and repairs .54 .64 (.10) (15.6)
Agency commissions .35 .33 .02 6.1
Aircraft rentals .48 .47 .01 2.1
Landing fees and other rentals .47 .47 - -
Depreciation .46 .45 .01 2.2
Other operating expenses 1.50 1.51 (.01) (.7)
Total 7.61 7.42 .19 2.6
</TABLE>
The Company's flight attendants are subject to an agreement
with the Transport Workers Union of America, AFL-CIO (TWU), which
became amendable May 31, 1996. Southwest is currently in
negotiations with TWU to amend the contract.
Profitsharing and Employee savings plan expenses per ASM
increased 21.1 percent from first quarter 1996 to first quarter
1997, primarily due to higher earnings available for profitsharing
in 1997.
Fuel and oil expense per ASM increased 18.5 percent in first
quarter 1997 due to a 20.8 percent increase in the average jet
fuel cost per gallon from the same period in 1996. The average
price paid for jet fuel in first quarter 1997 was $.7145 per
gallon, compared to $.5913 per gallon in first quarter 1996.
Since the end of first quarter 1997, fuel prices have averaged
approximately $.62 per gallon.
Maintenance materials and repairs per ASM decreased 15.6
percent for the three months ended March 31, 1997 as compared to
the corresponding period of the prior year. The decrease was
primarily due to performing fewer aircraft engine overhauls in
first quarter 1997.
Agency commissions per ASM increased 6.1 percent for the
first quarter of 1997 as compared to the first quarter of 1996,
primarily due to increased passenger revenues. First quarter 1997
agency commissions as a percentage of revenue were flat year over
year.
Aircraft rentals per ASM increased 2.1 percent for first
quarter 1997 as compared to first quarter 1996 due to the sale-
leaseback of ten aircraft in second and third quarter 1996.
Depreciation expense per ASM increased 2.2 percent for first
quarter 1997 as compared to first quarter 1996 due to owned
aircraft representing a higher percentage of the total fleet.
Other expense (income) for the first quarter 1997 included
interest expense, capitalized interest, interest income, and
nonoperating gains and losses. Interest expense increased
slightly in the first quarter 1997 due to the February issuance of
$100 million of senior unsecured 7 3/8% Debentures due March 1,
2027. Capitalized interest decreased $2.5 million in first quarter
1997 as a result of certain amendments to aircraft purchase
contracts that deferred the timing of advance payments. Interest
income increased $3.9 million in first quarter 1997 due to higher
invested cash balances.
Material Changes in Financial Condition
Net cash provided by operating activities was $93.5 million
for the three months ended March 31, 1997 and $567.0 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, 1997, net capital
expenditures were $660.9 million, which primarily related to the
purchase of one previously leased 737-200 and 20 new 737-300
aircraft, of which six were subsequently sold and leased back, and
progress payments for future aircraft deliveries.
The Company opened service to Jacksonville, Florida on
January 15, 1997 and recently announced expansion to Jackson,
Mississippi beginning August 1997.
As of March 31, 1997, the Company had authority from its
Board of Directors to purchase up to 2,500,000 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. Twelve 737-300s are scheduled for
delivery in the remainder of 1997. Four 737-700s are scheduled for
delivery in 1997, 21 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 $2,015.4 million at March 31, 1997
due as follows: $457.7 million in 1997; $533.0 million in 1998;
$502.3 million in 1999; $318.1 million in 2000; and $204.3 million
in 2001.
The Company has various options available to meet its capital
and operating commitments, including cash on hand at March 31,
1997 of $652.4 million, internally generated funds, and a
revolving credit line with a group of banks, which has recently
been increased to $475 million (none of which had been drawn at
March 31, 1997). In addition, the Company will also consider
various borrowing or leasing options to maximize earnings and
supplement cash requirements.
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
Recent Sales of Unregistered Securities
The Company re-employed Herbert D. Kelleher, effective
as of January 1, 1996, as President and Chief Executive
Officer under a five-year Employment Contract. Pursuant
to this Contract, Mr. Kelleher was granted nonstatutory
options to purchase, subject to his employment for four
years, 144,395 shares at a purchase price of $23.50 per
share, representing the composite tape closing sales
price of the Common Stock on the New York Stock Exchange
on January 2, 1996. One-fifth of the options are not
subject to vesting and may be exercised at any time as
to the underlying shares. Provided Mr. Kelleher remains
in the continuous, full-time employ of the Company, the
balance of the options will become exercisable in
cumulative increments of one-fifth of the underlying
shares each January 1 beginning January 1, 1997;
provided that in the event of a change of control of the
Company all of the options become immediately
exercisable. Each of the options will expire ten years
after it becomes exercisable. The options are not
transferable by Mr. Kelleher other than by will or the
laws of descent and distribution, and are exercisable
during Mr. Kelleher's lifetime only by him.
During the first quarter of 1997, Mr. Kelleher exercised
unregistered options to purchase Southwest Common Stock
as follows:
<TABLE>
<CAPTION>
Number of Shares Date of
Purchased Exercise Price Exercise
<C> <C> <C>
123,750 $1.00 1/14/97
33,750 $4.8889 1/14/97
</TABLE>
The issuance of the above options and shares to Mr.
Kelleher were deemed exempt from the registration
provisions of the Securities Act of 1933, as amended
(the "Act"), by reason of the provision of Section 4(2)
of the Act because, among other things, of the limited
number of participants in such transactions and the
agreement and representation of Mr. Kelleher that he was
acquiring such securities for investment and not with a
view to distribution thereof. The certificates
representing the shares issued to Mr. Kelleher contain a
legend to the effect that such shares are not registered
under the Act and may not be transferred except pursuant
to a registration statement which has become effective
under the Act or to an exemption from such registration.
The issuance of such shares was not underwritten.
Item 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
The Company filed the following Reports on Form
8-K during the quarter:
- Form 8-K dated February 24, 1997 for the
purpose of filing certain exhibits, including
financial statements, in connection with the
issuance of $100,000,000 senior unsecured
debentures due March 1, 2027.
- Form 8-K dated February 27, 1997 for the
purpose of filing the Terms Agreement and Form
of Global Security as exhibits in connection
with the issuance of $100,000,000 senior
unsecured debentures due March 1, 2027.
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 14, 1997 /s/ Gary C. Kelly
Date Gary C. Kelly
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer
</TABLE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
(11.1) Computation of Earnings Per Share
(27) Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 652,412
<SECURITIES> 0
<RECEIVABLES> 84,493
<ALLOWANCES> 0
<INVENTORY> 50,171
<CURRENT-ASSETS> 823,117
<PP&E> 4,270,302
<DEPRECIATION> 1,240,253
<TOTAL-ASSETS> 3,857,245
<CURRENT-LIABILITIES> 761,426
<BONDS> 0
0
0
<COMMON> 145,415
<OTHER-SE> 1,554,457
<TOTAL-LIABILITY-AND-EQUITY> 3,857,245
<SALES> 0
<TOTAL-REVENUES> 887,095
<CGS> 0
<TOTAL-COSTS> 799,892
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,225
<INCOME-PRETAX> 83,401
<INCOME-TAX> 32,527
<INCOME-CONTINUING> 50,874
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,874
<EPS-PRIMARY> 0.34
<EPS-DILUTED> 0.34
</TABLE>
EXHIBIT (11.1)
Page 1 of 2
Southwest Airlines Co.
Computation of Earnings Per Share
For the Three Months Ended March 31, 1997
<TABLE>
<CAPTION>
Fully
Primary Diluted
<S> <C> <C>
Weighted average shares outstanding 145,313,882 145,313,882
Shares issuable upon exercise of outstanding
stock options (treasury stock method) 5,134,063 5,135,309
Weighted average common and common
equivalent shares 150,447,945 150,449,191
Earnings for per share computations $50,874,000 $50,874,000
Earnings per common and common equivalent share $0.34 $0.34
</TABLE>
EXHIBIT (11.1)
Page 2 of 2
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 commons and common equivalent share $0.22 $0.22
</TABLE>
