<PAGE>
<PAGE>
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
June 30, 1998 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 August 11, 1998:
223,848,853
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<PAGE>
SOUTHWEST AIRLINES CO.
FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Southwest Airlines Co.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
<S>
ASSETS
Current assets: <C> <C>
Cash and cash equivalents $567,173 $623,343
Accounts receivable 112,064 76,530
Inventories of parts and supplies 47,242 52,376
Deferred income taxes 19,584 18,843
Prepaid expenses and other current assets 31,077 35,324
Total current assets 777,140 806,416
Property and equipment:
Flight equipment 4,338,411 3,987,493
Ground property and equipment 645,387 601,957
Deposits on flight equipment
purchase contracts 287,555 221,874
5,271,353 4,811,324
Less allowance for depreciation 1,483,915 1,375,631
3,787,438 3,435,693
Other assets 4,030 4,051
$4,568,608 $4,246,160
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $165,468 $160,891
Accrued liabilities 486,674 426,950
Air traffic liability 218,819 153,341
Income taxes payable 42,440 -
Current maturities of long-term debt 15,196 121,324
Other current liabilities 2,827 6,007
Total current liabilities 931,424 868,513
Long-term debt less current maturities 622,616 628,106
Deferred income taxes 485,639 438,981
Deferred gains from sale and leaseback of
aircraft 247,334 256,255
Other deferred liabilities 47,786 45,287
Stockholders' equity:
Common stock 223,430 221,207
Capital in excess of par value 179,322 155,696
Retained earnings 1,831,057 1,632,115
Total stockholders' equity 2,233,809 2,009,018
$4,568,608 $4,246,160
</TABLE>
See accompanying notes.
<PAGE>
<PAGE>
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating revenues:
Passenger $1,030,238 $911,681 $1,925,027 $1,760,787
Freight 24,283 22,383 49,425 43,737
Other 24,320 22,828 47,042 39,463
Total operating revenues 1,078,841 956,892 2,021,494 1,843,987
Operating expenses:
Salaries, wages, and benefits 320,539 282,637 618,771 548,431
Fuel and oil 96,043 117,561 197,519 251,636
Maintenance materials and repairs 75,211 56,020 146,700 113,258
Agency commissions 41,529 40,584 79,977 77,676
Aircraft rentals 50,747 50,466 101,164 100,848
Landing fees and other rentals 54,042 51,477 104,596 100,488
Depreciation 53,996 47,509 105,976 95,895
Other operating expenses 178,186 154,231 346,550 312,145
Total operating expenses 870,293 800,485 1,701,253 1,600,377
Operating income 208,548 156,407 320,241 243,610
Other expenses (income):
Interest expense 13,561 16,219 29,272 31,444
Capitalized interest (6,481) (4,317) (12,717) (8,739)
Interest income (8,473) (9,533) (16,288) (17,495)
Nonoperating losses (gains), net (6,606) 215 (10,630) 1,176
Total other expenses (gains) (7,999) 2,584 (10,363) 6,386
Income before income taxes 216,547 153,823 330,604 237,224
Provision for income taxes 83,154 59,991 127,203 92,518
Net income $133,393 $93,832 $203,401 $144,706
Net income per share:
Basic $.60 $.43 $.91 $.66
Diluted $.57 $.42 $.86 $.64
Weighted average shares
outstanding:
Basic 223,184 218,389 222,718 218,181
Diluted 236,049 225,821 235,670 224,651
See accompanying notes.
</TABLE>
<PAGE>
<PAGE>
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
1998 1997
<S> <C> <C>
Net cash provided by operating activities $508,424 $314,115
Investing activities:
Net purchases of property and equipment (471,815) (412,474)
Financing activities:
Issuance of long-term debt - 98,764
Payment of long-term debt and
capital lease obligations (111,959) (6,572)
Payment of cash dividends (6,669) (4,877)
Proceeds from Employee stock plans 25,849 6,987
Net cash provided by (used in) financing
activities (92,779) 94,302
Net decreases in cash and cash equivalents (56,170) (4,057)
Cash and cash equivalents at
beginning of period 623,343 581,841
Cash and cash equivalents at end of
period $567,173 $577,784
Cash payments for:
Interest, net of amount capitalized $20,351 $22,606
Income taxes $31,251 $13,125
See accompanying notes.
</TABLE>
<PAGE>
<PAGE>
SOUTHWEST AIRLINES CO.
Notes to Condensed Consolidated Financial Statements
1. Basis of presentation - The accompanying unaudited
condensed consolidated financial statements of Southwest Airlines
Co. (Company) 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 June 30, 1998 and 1997 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 and six month periods ended June 30, 1998 are not
necessarily indicative of the results that may be expected for
the year ended December 31, 1998. 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, 1997.
2. Dividends - During the three month periods ended June
30, 1998 and March 31, 1998, $.01 per share in dividends were
declared on the 223,235,779 and 222,680,790 shares of common
stock then outstanding. During the three month periods ended
June 30, 1997 and March 31, 1997, $.0077 per share in dividends
were declared on the 218,465,756 and 218,002,715 shares of common
stock then outstanding.
3. Long-term debt - During February 1998, the Company
redeemed $100 million in senior unsecured 9 1/4% Notes due
February 15, 1998, originally issued February 1991. The Notes
were redeemed at par plus accrued interest.
4. Common stock - On September 25, 1997, the Company's
Board of Directors declared a three-for-two stock split,
distributing 73,577,983 shares on November 26, 1997. All per
share data presented in the accompanying consolidated financial
statements and notes thereto have been restated for the stock
split. On July 22, 1998, the Company's Board of Directors
declared a three-for-two stock split of the Company's common
stock which will be distributed on August 20, 1998. In addition,
the Board increased the regular quarterly dividend 11.9 percent
to $.0075 per share (post split) effective with the dividend
recently declared to be paid September 23, 1998.
<PAGE>
<PAGE>
5. Net income per share - The following table sets
forth the computation of basic and diluted earnings per share (in
thousands except per share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
<S>
NUMERATOR:
Net income, available to common
stockholders - numerator for basic <C> <C> <C> <C>
and diluted earnings per share $133,393 $93,832 $203,401 $144,706
DENOMINATOR:
Weighted-average shares
outstanding, basic 223,184 218,389 222,718 218,181
Dilutive effect of Employee stock
options 12,865 7,432 12,952 6,470
Adjusted weighted-average shares
outstanding, diluted 236,049 225,821 235,670 224,651
NET INCOME PER SHARE:
Basic $.60 $.43 $.91 $.66
Diluted $.57 $.42 $.86 $.64
</TABLE>
6. Recently issued accounting standards - In 1997, the
Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130) and Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information" (SFAS 131), both effective for years
beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and display of comprehensive income and
its components in a full set of financial statements and is not
expected to have any impact on the Company as the Company does
not currently have any transactions which give rise to
differences between net income and comprehensive income. SFAS
131 establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim
financial reports. The Company is subject to the new
requirements retroactively in 1998; however, SFAS 131 does not
currently result in additional reported segment disclosures.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Comparative Consolidated Operating Statistics
<PAGE>
<PAGE>
Relevant operating statistics for the three and six month
periods ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three months ended
June 30,
1998 1997 Change
<S> <C> <C> <C>
Revenue passengers carried 13,766,338 12,722,360 8.2%
Revenue passenger miles 8,225,141 7,014,502 17.3%
(RPMs) (000s)
Available seat miles 11,712,905 10,981,206 6.7%
(ASMs) (000s)
Load factor 70.2% 63.9% 6.3 pts.
Average length of
passenger haul 597 551 8.3%
Trips flown 200,977 196,006 2.5%
Average passenger fare $74.84 $71.66 4.4%
Passenger revenue yield
per RPM $.1253 $.1300 (3.6)%
Operating revenue yield
per ASM $.0921 $.0871 5.7%
Operating expenses per ASM $.0743 $.0729 1.9%
Average fuel cost per
gallon $.4513 $.6017 (25.0)%
Number of Employees at 24,387 23,777 2.6%
period-end
Size of fleet at
period-end 273 252 8.3%
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
1998 1997 Change
<S> <C> <C> <C>
Revenue passengers carried 25,615,024 24,768,544 3.4%
Revenue passenger miles
(RPMs) (000s) 15,123,988 13,547,548 11.6%
Available seat miles
(AMSs) (000s) 22,983,079 21,498,841 6.9%
Load factor 65.8% 63.0% 2.8 pts.
Average length of
passenger haul 590 547 7.9%
Trips flown 396,154 386,211 2.6%
Average passenger fare $75.15 $71.09 5.7%
Passenger revenue yield
per RPM $.1273 $.1300 (2.1)%
Operating revenue yield
per ASM $.0880 $.0858 2.6%
Operating expenses per ASM $.0740 $.0744 (0.5)%
Average fuel cost per
gallon $.4762 $.6570 (27.5)%
Number of Employees at
period-end 24,387 23,777 2.6%
Size of fleet at
period-end 273 252 8.3%
</TABLE>
<PAGE>
<PAGE>
Material Changes in Results of Operations
Consolidated net income for the second quarter ended June
30, 1998 was $133.4 million ($.57 per share, diluted), as
compared to the second quarter 1997 net income of $93.8 million
($.42 per share, diluted), an increase of 42.2 percent.
Consolidated operating revenues increased 12.7 percent for
the second quarter of 1998 and 9.6 percent for the six months
ended June 30, 1998 as compared to the corresponding periods of
the prior year as a result of 13.0 percent and 9.3 percent
increases, respectively, in consolidated passenger revenues. The
increases in passenger revenue resulted from 17.3 percent and
11.6 percent increases in revenue passenger miles (RPMs) for the
three and six month periods ended June 30, 1998, respectively.
The passenger revenue yield per RPM decreased 3.6 percent to
$.1253 for the three months ended June 30, 1998 and 2.1 percent
to $.1273 for the six months ended June 30, 1998 primarily due to
a 4.4 and 5.7 percent increase in average passenger fare offset
by an increase in average length of passenger haul of 8.3 percent
and 7.9 percent, respectively.
The increase in RPMs of 17.3 percent and 11.6 percent for
the three and six months ended June 30, 1998, respectively,
exceeded the increase in available seat miles (ASMs) of 6.7
percent and 6.9 percent for these same periods resulting in a 6.3
<PAGE>
<PAGE>
point increase in load factor to 70.2 percent for second quarter
1998 and a 2.8 point increase to 65.8 percent for the six months
ended June 30, 1998. The increases in ASMs resulted primarily
from the net addition of 21 aircraft since second quarter 1997.
The load factor for July 1998 was 73.1 percent, up 6.3
points from July 1997's load factor of 66.8 percent. Unit
revenue growth in July was comparable to the year-over-year
growth rate in second quarter 1998. Thus far, bookings for
August and September are also good.
Consolidated freight revenues increased 8.5 percent in the
second quarter of 1998 and 13.0 percent for the six months ended
June 30, 1998 as compared to the same periods of the prior year,
primarily due to increased capacity and retention of increased
business resulting, in part, from the United Parcel Service labor
strike in third quarter 1997. Other revenues increased 6.5
percent in the second quarter 1998 and 19.2 percent for the six
months ended June 30, 1998 primarily due to increased revenues
from the sale of frequent flyer segment credits to participating
partners in the Company's Rapid Rewards frequent flyer program,
partially offset by a decrease in military charter revenue.
Operating expenses per ASM increased 1.9 percent for the three
months ended June 30, 1998 and remained relatively unchanged for the
six months ended June 30, 1998. Operating expenses for these periods
experienced increases in maintenance costs primarily due to unusually
low aircraft engine overhaul costs in the year-ago periods, higher
advertising and Year 2000 remediation spending in 1998, and $11.4
million and $17.9 million increases in Profitsharing and Employee
savings plan contributions in the three and six months ended June
30, 1998, respectively. These costs were partially offset by 25.0
percent and greater declines in average jet fuel prices from year-ago
levels. Excluding jet fuel costs and related taxes, operating expenses
per ASM for the three and six month periods ended June 30, 1998, were
up 6.3 percent and 4.3 percent, respectively. Although unit costs
are expected to continue benefiting from lower fuel prices in third
quarter 1998 versus third quarter 1997, operating expenses per ASM
excluding fuel are expected to increase based on current trends.
However, the year-over-year increase is expected to be less than the
year-over-year increase experienced in second quarter. (The immediately
preceding two sentences are forward-looking statements which involve
uncertainties that could result in actual results differing materially
from expected results. Such uncertainties include, but may not be
limited to, the largely unpredictable levels of jet fuel prices and
general economic conditions.)
<PAGE>
<PAGE>
Southwest Airlines Co.
Consolidated Operating Expenses per ASM
(in cents except percent change)
<TABLE>
<CAPTION>
Three months ended
June 30,
Increase Percent
1998 1997 (decrease) change
<S> <C> <C> <C> <C>
Salaries, wages, and benefits 2.32 2.24 .08 3.6
Profitsharing and Employee
savings plans .42 .34 .08 23.5
Fuel and oil .83 1.07 (.24) (22.4)
Maintenance materials
and repairs .64 .51 .13 25.5
Agency commissions .35 .37 (.02) (5.4)
Aircraft rentals .43 .46 (.03) (6.5)
Landing fees and other rentals .46 .47 (.01) (2.1)
Depreciation .46 .43 .03 7.0
Other operating expenses 1.52 1.40 .12 8.6
Total 7.43 7.29 .14 1.9
</TABLE>
<TABLE>
<CAPTION>
Six months ended
June 30,
Increase Percent
1998 1997 (decrease) change
<S> <C> <C> <C> <C>
Salaries, wages, and benefits 2.34 2.26 .08 3.5
Profitsharing and Employee
savings plans .35 .29 .06 20.7
Fuel and oil .85 1.17 (.32) (27.4)
Maintenance materials
and repairs .64 .53 .11 20.8
Agency commissions .35 .36 (.01) (2.8)
Aircraft rentals .44 .47 (.03) (6.4)
Landing fees and other rentals .46 .47 (.01) (2.1)
Depreciation .46 .45 .01 2.2
Other operating expenses 1.51 1.44 .07 4.9
Total 7.40 7.44 ( .04) ( 0.5)
</TABLE>
Salaries, wages, and benefits per ASM increased 3.6 percent
and 3.5 percent in the three and six month periods ended June 30,
1998. These increases are primarily due to higher effective wage
rates, increased health care costs, and lower productivity caused
by Boeing aircraft delivery delays.
The Company's Customer Service and Reservations Sales Agents
are subject to an agreement with the International Association of
Machinists and Aerospace Workers, AFL-CIO (IAM), which became
amendable in November 1997 and is currently under negotiation.
Flight Dispatchers are represented by the Southwest Airlines
Employees Association, pursuant to an agreement which became
amendable in November 1997 and is also currently under
negotiation.
Profitsharing and Employee savings plans expense per ASM
increased 23.5 percent and 20.7 percent for the three and six
month periods ended June 30, 1998, respectively, as compared to
the corresponding periods of the prior year primarily due to
higher earnings available for profitsharing in 1998.
Fuel and oil expense per ASM decreased 22.4 percent and 27.4
percent for the three and six month periods ended June 30, 1998,
respectively, as compared to the corresponding periods of the
prior year primarily due to a corresponding decrease in the
average jet fuel cost per gallon for the same periods in 1998.
The average price paid for jet fuel in the three and six month
periods ended June 30, 1998 was $.4513 per gallon and $.4762 per
gallon, respectively, compared to $.6017 and $.6570 for the same
periods in 1997. The average price paid for jet fuel in July
1998 was $.4315 per gallon.
Maintenance materials and repairs per ASM increased 25.5
percent and 20.8 percent for the three and six month periods
ended June 30, 1998, respectively, as compared to the
corresponding periods of 1997. The increase was primarily due to
higher engine overhaul costs in the first six months of 1998,
when compared to the same period in 1997, as the Company had an
unusually low number of aircraft engine overhauls in the first
six months of 1997. Second half 1997 engine costs were more in
line with historical levels.
Agency commissions per ASM decreased 5.4 percent and 2.8
percent for the three and six month periods ended June 30, 1998
as compared to the same periods of 1997, primarily due to a
decrease in the percentage of commissionable sales.
Commissionable sales represented 40.1 percent of total sales in
second quarter 1998, down from 44.3 percent in second quarter
1997.
Aircraft rentals per ASM decreased 6.5 percent for second
quarter 1998 and 6.4 percent for the six months ended June 30,
1998 as compared to the same periods of 1997, primarily due to a
lower percentage of the aircraft fleet being leased.
Landing fees and other rentals decreased 2.1 percent for the
three and six month periods ended June 30, 1998 as compared to
the same periods of 1997 primarily due to a 3.8 percent increase
in the average aircraft stage length in the three and six months
ended June 30, 1998.
Depreciation expense per ASM increased 7.0 percent for
second quarter 1998 and 2.2 percent for the six months ended June
30, 1998 as compared to the same periods of 1997 primarily due to
a higher percentage of the aircraft fleet being owned.
Other operating expenses per ASM increased 8.6 percent for
second quarter 1998 and 4.9 percent for the six months ended June
30, 1998 as compared to the same periods of 1997. These
increases were primarily due to revenue related costs such as
credit card processing, communications, and passenger costs;
increased advertising costs related to the opening of service to
Manchester, New Hampshire; increased costs resulting from the
Year 2000 remediation program; and increased costs resulting from
the Company's general office expansion.
In July 1998, Southwest extended its contract with The Sabre
Group (Sabre) to provide reservations system services to the
Company for two to five years. Sabre will continue to provide
the Company with data processing services including computerized
reservations and inventory control, flight availability
information, schedules, fares and pricing. The agreement also
includes systems development work, specific Year 2000 related
upgrades, as well as system upgrades needed to accommodate the
Company's projected growth.
Since 1995, the Company has been developing its own
reservations system, which could be completed and implemented in
the next 18 months. However, there is a risk that the Company's
new reservations system will not be ready for implementation by
January 2000. Accordingly, the Company has deferred the
implementation of its new reservations system with its extension
of its contract with Sabre to insure the Company has a Year 2000
compliant reservations system by July 1, 1999. The Company
currently intends to complete and implement its new reservations
system on a yet-to-be determined timetable. No material
impairment of the software development costs has occurred or is
expected to occur and the amounts invested to date are not
material to the Company's consolidated results of operations.
During second quarter 1998, Boeing continued to experience
production delays related to the 737 production line. During the
first six months of 1998, Southwest leased or purchased five used
737-300 aircraft which became available on the open market.
These additional aircraft partially mitigate the impact of the
Boeing delays on operations. Boeing has been able to accelerate
the scheduled delivery of two 737-700s originally scheduled for
2003 to 1999. Although improving, Boeing currently expects
delays to continue in second half 1998, which will also delay
further expansion to new cities to 1999. Boeing will continue to
compensate Southwest for these delivery delays, however,
management expects this compensation to decrease in third and
fourth quarters 1998 due to Boeing's improving delivery schedule.
Other expenses (income) for the three and six month periods
ended June 30, 1998, included interest expense, capitalized
interest, interest income, and nonoperating gains and losses.
Interest expense decreased during the second quarter and in the
first half of 1998 as compared to the second quarter and the
first half of 1997 due to the February 1998 redemption of $100
million of senior unsecured 9 1/4 % Notes originally issued
in February 1991. Capitalized interest increased $2.2 million
and $4.0 million for the three and six month periods ended June
30, 1998, respectively, as a result of higher 1998 progress
payment balances caused by Boeing 737-700 aircraft delivery
delays. Interest income decreased for the three and six months
ended June 30, 1998 due to lower invested cash balances.
Nonoperating gains in the second quarter and the first half of
1998 include contractual penalties due from Boeing as a result of
the aircraft delivery delays.
Material Changes in Financial Condition
Net cash provided by operating activities was $293.2 million
for the three months ended June 30, 1998 and $804.9 million for
the twelve months ended June 30, 1998. This cash was primarily
used to finance aircraft-related capital expenditures and provide
working capital.
For the twelve months ended June 30, 1998, net capital
expenditures were $748.3 million, which were primarily for the
purchase of thirteen new 737-700 aircraft, six new 737-300
aircraft, three used 737-300 aircraft and progress payments for
future aircraft deliveries.
The Company opened service to Manchester, New Hampshire on
June 7, 1998, with nonstop service to Baltimore/Washington,
Chicago Midway, Nashville, and Orlando.
As of July 22, 1998, the Board of Directors increased the
Company's authorization to repurchase shares of its outstanding
common stock to $100 million. The Company currently expects to
repurchase these shares prior to December 31, 1998. Repurchases
will be made in accordance with applicable securities laws in the
open market or in private transactions, from time to time,
depending on market conditions, and may be discontinued at any
time. As of August 12, 1998, 1,118,500 shares had been repurchased
at a cost of $35.4 million.
The Company's contractual commitments consist primarily of
scheduled aircraft acquisitions. As of July 31, 1998, ten 737-
700s are scheduled for delivery in the remainder of 1998, 27 in
1999, 24 in 2000, 21 in 2001, 21 in 2002, six in 2003, and five
in 2004. In addition, the Company has options to purchase up to
sixty-two 737-700s during 2003-2006. 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 $2,759.7 million at July 31,
1998 due as follows: $241.6 million in 1998; $788.6 million in
1999; $592.7 million in 2000; $502.4 million in 2001; $415.5 million
in 2002, $129.8 million in 2003, and $89.1 million in 2004.
The Company has various options available to meet its
capital and operating commitments, including cash on hand at June
30, 1998 of $567.2 million, internally generated funds, and a
revolving credit line with a group of banks of up to $425
million, none of which had been drawn at June 30, 1998. (In
August 1998, the Company opted to reduce the bank credit line to
$425 million from $475 million based on its strong operating
performance, financial condition, and overall liquidity.) 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 $318.8 million of public debt securities
which it may utilize for aircraft financings during the remainder
of 1998, 1999, and 2000.
Impact of the Year 2000
The Company is currently converting its computer systems to
be Year 2000 ready and expects to have the conversion
substantially completed by June 30, 1999.
In addition the Company has inventoried its embedded
technology assets and is in the process of evaluating its Year
2000 exposure in that area; at the current time, the Company has
not encountered any material risk to results of operations
related to embedded technology issues.
Finally, the Company has categorized its third party vendors
with respect to their potential impact on Company operations in
the event any such third party vendor has Year 2000 issues which
are not dealt with on a timely basis. The Company expects
to complete initial contacts with all of its material third party
vendors by the end of September this year and is in the process
of evaluating their statements of Year 2000 compliance. In addition,
the Company is working with other members of the Air Transport
Association, the airline industry trade group, on vendors which
are common to the entire industry, to share information and
resources. In our experience, it is not always possible to obtain
written confirmation of Year 2000 compliance from third party
vendors. Accordingly, in such cases, the Company is basing its
assessment on its own testing, other materials made available
by such vendors and other publicly available information. Upon
the conclusion of such assessment, the Company will evaluate the need
for contingency plans which may be needed in the event any such
vendor cannot demonstrate to the Company, on a timely basis, its
Year 2000 compliance. The Company currently intends to substantially
complete assessment and contingency planning of sole providers
and other vital and critical vendors by the end of 1998.
The Company has expensed $6.6 million ($1.5 million in
second quarter 1998) of costs incurred to date related to the
Year 2000 issue. The total remaining cost of the Year 2000
project is presently estimated at approximately $14 million,
which will be expensed as incurred.
The costs of the project and the dates on which the Company
believes it will complete the Year 2000 modifications and
assessments are based on management's best estimates, which were
derived utilizing numerous assumptions of future events,
including the continued availability of certain resources. There
can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated.
Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of
personnel trained in this area and the ability to locate and
correct all relevant computer code, as well as the cooperation
needed from third party vendors and others upon whom the Company
must rely.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
There have been no material changes in information required
to be provided under this Item during second quarter 1998. See
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company received a statutory notice of deficiency
from the Internal Revenue Service (the "IRS") in which
the IRS proposed to disallow deductions claimed by the
Company on its federal income tax returns for the
taxable years 1989 through 1991 for the costs of
certain aircraft inspection and maintenance procedures.
The IRS has proposed similar adjustments to the tax
returns of numerous other members of the airline
industry. In response to the statutory notice of
deficiency, the Company filed a petition in the United
States Tax court on October 30, 1997, seeking a
determination that the IRS erred in disallowing the
deductions claimed by the Company and that there is no
deficiency in the Company's tax liability for the
taxable years in issue. It is expected that the Tax
Court's decision will not be entered for several years.
Management believes that the final resolution of this
controversy will not have a materially adverse effect
upon the results of operations of the Company. 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.
The Company's Annual Meeting of Shareholders was held
in Dallas, Texas on Thursday, May 21, 1998. The
following matters were voted on at the meeting:
(a) An Amendment to the Company's Articles of
Incorporation to increase the authorized number of
shares of Common Stock was approved by the
shareholders. 181,570,394 shares were voted for
the amendment; 17,617,554 shares were voted
against the amendment; 517,601 shares abstained
from voting.
(b) A shareholder proposal related to the Company's
dividend was defeated. 7,052,890 shares were
voted for the amendment; 156,812,389 shares
were voted against the amendment; 1,518,145 shares
abstained from voting and there were 34,322,125
broker non-votes.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation of
Southwest (incorporated by reference to Exhibit
4.1 to Southwest's Registration Statement on Form
S-3 (File No. 33-52155)); Amendment to Restated
Articles of Incorporation of Southwest
(incorporated by reference to Exhibit 4.1 to
Southwest's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 (File No. 1-7259);
Amendment to Restated Articles of Incorporation of
Southwest filed with the Secretary of State on
July 2, 1998.
(b) Reports on Form 8-K
A Report on Form 8-K dated May 21, 1998 was filed
for the purpose of filing the following exhibits
in connection with, and incorporated by reference
into, Southwest Airlines Co.'s Registration
Statement on Form S-3 (File No. 333-29257), as
declared effective on July 15, 1997, relating to
Pass Through Certificates, Series 1998-A.
Exhibit 1.3 Form of Underwriting
Agreement relating to the issuance of Pass
Through Certificates, Series 1998-A.
Exhibit 4.3 Form of Pass Through Trust
Supplement No. 1998-A between Southwest and
the Trustee relating to the Pass Through
Certificates.
Exhibit 4.4 Form of Trust Agreement
between the Owner Participant and the Owner
Trustee relating to the Equipment Notes with
respect to Boeing 737-3H4 Aircraft,
Registration Nos. N620SW, N621SW, N622SW and
N623SW.
Exhibit 4.5 Form of Trust Indenture
and Security Agreement between the Owner
Trustee and the Loan Trustee relating to the
Equipment Notes with respect to Boeing
737-3H4 Aircraft, Registration Nos. N620SW,
N621SW, N622SW and N623SW.
Exhibit 4.6 Form of First Amendment to
Trust Indenture and Security Agreement
between the Owner Trustee and the Loan
Trustee relating to the Equipment Notes with
respect to Boeing 737-3H4 Aircraft,
Registration Nos. N620SW, N621SW, N622SW and
N623SW.
Exhibit 4.7 Form of Equipment Notes
with respect to Boeing 737-3H4 Aircraft,
Registration Nos. N620SW, N621SW, N622SW and
N623SW (included as Exhibit A-1 in Exhibit
4.6).
Exhibit 4.8 Form of Participation
Agreement among Southwest, the Owner
Participant, the Loan Trustee, the Original
Loan Participant, and the Owner Trustee with
respect to Boeing 737-3H4 Aircraft,
Registration Nos. N620SW, N621SW, N622SW and
N623SW.
Exhibit 4.9 Form of First Amendment to
Participation Agreement among Southwest, the
Owner Participant, the Owner Trustee, the
Loan Trustee and the Trustee with respect to
Boeing 737-3H4 Aircraft, Registration Nos.
N620SW, N621SW, N622SW and N623SW.
Exhibit 4.10 Form of Sale and Lease
Agreement between Southwest and the Owner
Trustee with respect to Boeing 737-3H4
Aircraft, Registration Nos. N620SW, N621SW,
N622SW and N623SW.
Exhibit 4.11 Form of First Amendment
to Sale and Lease Agreement between Southwest
and the Owner Trustee with respect to Boeing
737-3H4 Aircraft, Registration Nos. N620SW,
N621SW, N622SW and N623SW.
Exhibit 4.12 Form of Refinancing
Agreement among Southwest, the Trustee,
the Owner Participant, the Owner Trustee,
the Loan Trustee and the Original Loan
Participant relating to the Equipment Notes
for each of four Boeing 737-3H4 Aircraft,
Registration Nos. N620SW, N621SW, N622SW
and N623SW.
Exhibit 23 Consent of Independent Auditors.
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>
August 13, 1998 /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
(27) Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000092380
<NAME> SOUTHWEST AIRLINES CO.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 567,173
<SECURITIES> 0
<RECEIVABLES> 112,064
<ALLOWANCES> 0
<INVENTORY> 47,242
<CURRENT-ASSETS> 777,140
<PP&E> 5,271,353
<DEPRECIATION> 1,483,915
<TOTAL-ASSETS> 4,568,608
<CURRENT-LIABILITIES> 931,424
<BONDS> 0
0
0
<COMMON> 223,430
<OTHER-SE> 2,010,379
<TOTAL-LIABILITY-AND-EQUITY> 4,568,608
<SALES> 0
<TOTAL-REVENUES> 2,021,494
<CGS> 0
<TOTAL-COSTS> 1,701,253
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,272
<INCOME-PRETAX> 330,604
<INCOME-TAX> 127,203
<INCOME-CONTINUING> 203,401
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 203,401
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.86
</TABLE>
