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
September 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 November 11, 1998:
336,360,194
<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>
September 30, 1998 December 31, 1997
<S>
ASSETS
Current assets: <C> <C>
Cash and cash equivalents $452,184 $623,343
Accounts receivable 109,811 76,530
Inventories of parts and supplies 48,814 52,376
Deferred income taxes 19,966 18,843
Prepaid expenses and other current
assets 28,428 35,324
Total current assets 659,203 806,416
Property and equipment:
Flight equipment 4,464,429 3,987,493
Ground property and equipment 697,982 601,957
Deposits on flight equipment
purchase contracts 305,534 221,874
5,467,945 4,811,324
Less allowance for depreciation 1,544,809 1,375,631
3,923,136 3,435,693
Other assets 3,949 4,051
$4,586,288 $4,246,160
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $197,378 $160,891
Accrued liabilities 444,931 426,950
Air traffic liability 206,584 153,341
Income taxes payable 33,685 -
Current maturities of long-term debt 10,708 121,324
Other current liabilities 2,923 6,007
Total current liabilities 896,209 868,513
Long-term debt less current maturities 622,000 628,106
Deferred income taxes 516,295 438,981
Deferred gains from sale and leaseback
of aircraft 242,873 256,255
Other deferred liabilities 38,239 45,287
Stockholders' equity:
Common stock 335,904 221,207
Capital in excess of par value 68,802 155,696
Retained earnings 1,958,087 1,632,115
Treasury stock at cost (92,121) -
Total stockholders' equity 2,270,672 2,009,018
$4,586,288 $4,246,160
</TABLE>
See accompanying notes.
<PAGE>
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
<S>
Operating revenues: <C> <C> <C> <C>
Passenger $1,042,813 $949,540 $2,967,840 $2,710,327
Freight 23,360 25,613 72,785 69,350
Other 28,657 22,088 75,699 61,551
Total operating revenues 1,094,830 997,241 3,116,324 2,841,228
Operating expenses:
Salaries, wages, and benefits 335,654 293,032 954,425 841,463
Fuel and oil 96,619 119,062 294,138 370,698
Maintenance materials
and repairs 77,373 72,430 224,073 185,688
Agency commissions 40,087 39,902 120,064 117,578
Aircraft rentals 51,547 50,402 152,711 151,250
Landing fees and other rentals 54,773 51,966 159,369 152,454
Depreciation 59,575 49,873 165,551 145,768
Other operating expenses 175,283 168,804 521,833 480,949
Total operating expenses 890,911 845,471 2,592,164 2,445,848
Operating income 203,919 151,770 524,160 395,380
Other expenses (income):
Interest expense 13,459 16,428 42,731 47,872
Capitalized interest (6,093) (5,709) (18,810) (14,448)
Interest income (8,533) (9,478) (24,821) (26,973)
Nonoperating losses (gains), net (5,969) 142 (16,599) 1,318
Total other expenses (income) (7,136) 1,383 (17,499) 7,769
Income before income taxes 211,055 150,387 541,659 387,611
Provision for income taxes 81,410 57,876 208,613 150,394
Net income $129,645 $92,511 $333,046 $237,217
Net income per share
Basic $.39 $.28 $1.00 $.72
Diluted $.37 $.27 $.94 $.70
Weighted average shares outstanding
Basic 333,342 328,741 333,829 327,767
Diluted 353,561 342,457 353,521 338,808
</TABLE>
See accompanying notes.
<PAGE>
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997
<S> <C> <C>
Net cash provided by operating
activities $692,312 $440,884
Investing activities:
Net purchases of property and
equipment (672,992) (577,514)
Financing activities:
Issuance of long-term debt - 98,764
Payment of long-term debt and
capital lease obligations (116,877) (10,182)
Payment of cash dividends (9,284) (6,565)
Proceeds from Employee stock plans 35,682 26,890
Repurchase of common stock (100,000) -
Net cash provided by (used in)
financing activities (190,479) 108,907
Net decrease in cash and
cash equivalents (171,159) (27,723)
Cash and cash equivalents at
beginning of period 623,343 581,841
Cash and cash equivalents at end of
period $452,184 $554,118
Cash payments for:
Interest, net of amount
capitalized $34,450 $42,446
Income taxes $91,151 $72,984
</TABLE>
See accompanying notes.
<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 September 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 nine month periods ended September 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 period ended
September 30, 1998, dividends of $.0075 per share were declared
on the 331,374,534 shares of common stock then outstanding.
During the three month periods ended June 30, 1998 and March 31,
1998, dividends of $.0067 per share were declared on the
334,853,669 and 334,021,185 shares of common stock then
outstanding, respectively. During the three month periods ended
September 30, 1997, June 30, 1997, and March 31, 1997, dividends
of $.0051 per share were declared on the 328,745,502,
327,698,634, and 327,004,073 shares of common stock then
outstanding, respectively.
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. On July 22,
1998, the Company's Board of Directors declared a three-for-two
stock split, distributing 111,894,315 shares on August 20, 1998.
All share and per share data presented in the accompanying
consolidated financial statements and notes thereto have been
restated for these stock splits.
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. Southwest completed this repurchase
program during third quarter 1998, resulting in the repurchase of
approximately 4.9 million shares.
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 Nine months ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
NUMERATOR:
Net income, available to common
stockholders - numerator for basic and
diluted earnings per share $129,645 $92,511 $333,046 237,217
DENOMINATOR:
Weighted-average shares
outstanding, basic 333,342 328,741 333,829 327,767
Dilutive effect of Employee stock
options 20,219 13,716 19,692 11,041
Adjusted weighted-average shares
outstanding, diluted 353,561 342,457 353,521 338,808
NET INCOME PER SHARE:
Basic $.39 $.28 $1.00 $.72
Diluted $.37 $.27 $.94 $.70
</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 does not
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
Relevant operating statistics for the three and nine month
periods ended September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three months ended
September 30,
1998 1997 Change
<S> <C> <C> <C>
Revenue passengers carried 13,680,772 13,019,325 5.1 %
Revenue passenger miles
(RPMs) (000s) 8,463,510 7,565,832 11.9 %
Available seat miles
(ASMs) (000s) 12,279,921 11,492,134 6.9 %
Load factor 68.9% 65.8% 3.1 pts.
Average length of passenger haul 619 581 6.5 %
Trips flown 206,424 200,942 2.7 %
Average passenger fare $76.22 $72.93 4.5 %
Passenger revenue yield
per RPM $.1232 $.1255 (1.8)%
Operating revenue yield
per ASM $.0892 $.0868 2.8 %
Operating expenses per ASM $.0726 $.0736 (1.4)%
Average fuel cost per gallon $.4418 $.5841 (24.4)%
Number of employees at period-end 25,019 23,840 4.9 %
Size of fleet at period-end 276 258 7.0 %
</TABLE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1997 Change
<S> <C> <C> <C>
Revenue passengers carried 39,295,796 37,787,869 4.0 %
Revenue passenger miles
(RPMs) (000s) 23,587,499 21,113,381 11.7 %
Available seat miles
(ASMs) (000s) 35,263,000 32,990,974 6.9 %
Load factor 66.9% 64.0% 2.9 pts.
Average length of passenger haul 600 559 7.3 %
Trips flown 602,578 587,153 2.6 %
Average passenger fare $75.53 $71.72 5.3 %
Passenger revenue yield
per RPM $.1258 $.1284 (2.0)%
Operating revenue yield
per ASM $.0884 $.0861 2.7 %
Operating expenses per ASM $.0735 $.0741 (0.8)%
Average fuel cost per gallon $.4643 $.6318 (26.5)%
Number of employees at period-end 25,019 23,840 4.9 %
Size of fleet at period-end 276 258 7.0 %
</TABLE>
Material Changes in Results of Operations
Consolidated net income for third quarter 1998 was $129.6
million ($.37 per share, diluted) compared with $92.5 million
($.27 per share, diluted) earned in third quarter 1997.
Consolidated net income for the nine months ended September 30,
1998 was $333.0 million ($.94 per share, diluted) compared with
$237.2 million ($.70 per share, diluted) earned for the nine
months ended September 30, 1997.
Consolidated operating revenues increased 9.8 percent for
the third quarter of 1998 and 9.7 percent for the nine months
ended September 30, 1998, as compared to the corresponding
periods of the prior year, primarily as a result of 9.8 percent
and 9.5 percent increases, respectively, in consolidated
passenger revenues. The increases in passenger revenues resulted
from 11.9 percent and 11.7 percent increases in revenue passenger
miles (RPMs) for the three and nine month periods ended September
30, 1998, respectively. The passenger revenue yield per RPM
decreased 1.8 percent to $.1232 and 2.0 percent to $.1258 for the
three and nine months ended September 30, 1998, primarily due to
an increase in average length of passenger haul of 6.5 percent
and 7.3 percent offset by 4.5 percent and 5.3 percent increases
in average passenger fares, respectively.
The increases in RPMs of 11.9 percent and 11.7 percent for
the three and nine months ended September 30, 1998, respectively,
exceeded the increases in available seat miles (ASMs) of 6.9
percent for these same periods resulting in a 3.1 point increase
in load factor to 68.9 percent for third quarter 1998 and a 2.9
point increase to 66.9 percent for the nine months ended
September 30, 1998. The increases in ASMs resulted primarily
from the net addition of 18 aircraft since third quarter 1997.
The load factor for October 1998 was 64.6 percent, up 1.5
points from October 1997's load factor of 63.1 percent. Thus
far, bookings for November and December are also good. Fourth
quarter passenger revenue yield per RPM is expected to continue
to fall below year-ago levels due to higher load factors and
longer passenger trip lengths. (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, competitive pressure such as fare
sales and capacity changes by other carriers, general economic
conditions, and variations in advance booking trends.)
Consolidated freight revenues decreased 8.8 percent, despite
increases in capacity, in the third quarter of 1998 primarily due
to an 18.5 percent decrease in U.S. Mail revenue as the postal
service shifts away from commercial carriers. Freight revenues
increased 5.0 percent for the nine months ended September 30,
1998 primarily due to increased capacity and retention of
increased business in the first six months of 1998 resulting, in
part, from the United Parcel Service labor strike in third
quarter 1997. Other revenues increased 29.7 and 23.0 percent in
the three and nine months ended September 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.
Operating expenses per ASM decreased 1.4 percent for third
quarter 1998 and was essentially flat for the nine months ended
September 30, 1998, primarily due to respective 24.4 percent and
26.5 percent decreases in average jet fuel prices from year-ago
levels, offset by $10.9 million and $28.9 million increases in
Profitsharing and Employee savings plan contributions. Operating
expenses in the first half of 1998 experienced increases in
maintenance costs primarily due to unusually low aircraft engine
overhaul costs in the first half of 1997. Third quarter
maintenance cost comparisons are flat.
Southwest Airlines Co.
Consolidated Operating Expenses per ASM
(in cents except percent change)
<TABLE>
<CAPTION>
Three months ended
September 30,
Increase Percent
1998 1997 (decrease) change
<S> <C> <C> <C> <C>
Salaries, wages, and benefits 2.34 2.23 .11 4.9
Profitsharing and Employee
savings plans .39 .32 .07 21.9
Fuel and oil .78 1.04 (.26) (25.0)
Maintenance materials
and repairs .63 .63 - -
Agency commissions .33 .35 (.02) (5.7)
Aircraft rentals .42 .44 (.02) (4.5)
Landing fees and other rentals .45 .45 - -
Depreciation .49 .43 .06 14.0
Other operating expenses 1.43 1.47 (.04) (2.7)
Total 7.26 7.36 (.10) (1.4)
</TABLE>
Southwest Airlines Co.
Consolidated Operating Expenses per ASM
(in cents except percent change)
<TABLE>
<CAPTION>
Nine months ended
September 30,
Increase Percent
1998 1997 (decrease) change
<S> <C> <C> <C> <C>
Salaries, wages, and benefits 2.35 2.25 .10 4.4
Profitsharing and Employee
savings plans .36 .30 .06 20.0
Fuel and oil .83 1.12 (.29) (25.9)
Maintenance materials
and repairs .64 .56 .08 14.3
Agency commissions .34 .36 (.02) (5.6)
Aircraft rentals .43 .46 (.03) (6.5)
Landing fees and other rentals .45 .46 (.01) (2.2)
Depreciation .47 .44 .03 6.8
Other operating expenses 1.48 1.46 .02 1.4
Total 7.35 7.41 (.06) (0.8)
</TABLE>
Salaries, wages, and benefits per ASM increased 4.9 percent
and 4.4 percent for the three and nine month periods ended
September 30, 1998, respectively, as compared to the same periods
of the prior year, primarily due to higher effective wage rates,
increased health care and workers' compensation 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.
Profitsharing and Employee savings plans expense per ASM
increased 21.9 percent and 20.0 percent for the three and nine
months ended September 30, 1998 as compared to year-ago periods
due to higher earnings available for profitsharing in 1998.
Fuel and oil expense per ASM decreased 25.0 percent and 25.9
percent in third quarter 1998 and the nine month period then
ended due to corresponding decreases in the average jet fuel cost
per gallon for the same periods. The average price paid for jet
fuel in the three and nine month periods ended September 30, 1998
was $.4418 and $.4643 per gallon, respectively, compared to
$.5841 and $.6318 for the corresponding periods in 1997. The
average price paid for jet fuel in October 1998 was $.4670 per
gallon.
Maintenance materials and repairs per ASM remained flat in
third quarter 1998 and increased 14.3 percent in the nine month
period ended September 30, 1998 as compared to the same periods
in 1997. The year-to-date 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.
Agency commissions per ASM decreased 5.7 percent and 5.6
percent for the three and nine months ended September 30, 1998 as
compared to the same periods of 1997, primarily due to a decrease
in the percentage of commissionable sales.
Aircraft rentals per ASM decreased 4.5 percent and 6.5
percent for the quarter and nine months ended September 30, 1998,
compared to the corresponding periods of 1997 primarily due to a
lower percentage of the aircraft fleet being leased.
Landing fees and other rentals per ASM remained flat in
third quarter 1998 and decreased 2.2 percent for the nine month
period ended September 30, 1998 when compared to the
corresponding year-ago periods. The year-to-date decrease is
primarily due to a 4.0 percent increase in average aircraft stage
length in the nine months ended September 30, 1998, offset by
increases in other rentals in third quarter 1998.
Depreciation expense per ASM increased 14.0 percent for
third quarter 1998 and 6.8 percent for the nine months ended
September 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 decreased 2.7 percent in
third quarter 1998 and increased 1.4 percent for the nine month
periods ended September 30, 1998, respectively. The third
quarter decrease was primarily due to lower advertising spending
in third quarter 1998 and lower insurance and property tax costs,
offset by increased revenue related costs. The increase for the
nine months ended September 30, 1998 was primarily due to
increased costs resulting from the Year 2000 remediation program
and increased revenue related costs such as credit card
processing and communications, offset by lower insurance and
property tax costs.
During third quarter 1998, Boeing continued to experience
production delays related to the 737 production line. However,
the delays have shortened in that all aircraft contracted to be
delivered in third quarter were received during their contract
month. Boeing will continue to compensate Southwest for delivery
delays, however, management expects this compensation to decrease
in fourth quarter 1998 due to Boeing's improving delivery
schedule.
Other expenses (income) for the three months and nine months
ended September 30, 1998 included interest expense, capitalized
interest, interest income, and nonoperating gains and losses.
Interest expense decreased for the three and nine months ended
September 30, 1998 as compared to same periods in 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 for the three and six month periods ended
September 30, 1998 as a result of higher 1998 progress payment
balances caused by Boeing 737-700 aircraft delivery delays.
Interest income decreased for the three and nine months ended
September 30, 1998 due to lower invested cash balances.
Nonoperating gains in the third quarter and the first nine months
of 1998 primarily included 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 $183.9 million
for the three months ended September 30, 1998 and $862.0 million
for the twelve months ended September 30, 1998. This cash was
primarily used to finance aircraft-related expenditures, provide
working capital, and repurchase approximately 4.9 million shares
of the Company's outstanding common stock.
For the twelve months ended September 30, 1998, net capital
expenditures were $784.4 million, which were primarily for the
purchase of seventeen new 737-700 aircraft and three used 737-300
aircraft and progress payments for future aircraft deliveries.
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. Southwest completed this repurchase
program during third quarter 1998, resulting in the repurchase
of approximately 4.9 million shares.
The Company's contractual commitments consist primarily of
scheduled aircraft acquisitions. As of September 30, 1998, six
737-700s are scheduled for delivery in the remainder of 1998, 29
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 $2,809.4 million
at September 30 due as follows: $162.2 million in 1998; $651.7
million in 1999; $599.5 million in 2000; $502.5 million in 2001;
$515.8 million in 2002, $288.6 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
September 30, 1998 of $452.2 million, internally generated funds,
and revolving credit line with a group of banks of up to $425
million, none of which had been drawn at September 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 in the process of converting its computer
systems to be Year 2000 ready. This project encompasses
information technology systems as well as embedded technology
assets. The project also includes an assessment of material
third-party relationships and associated risks. The project as
it relates to internal systems and equipment consists of four
phases: identification, assessment, remediation, and testing.
This project is expected to be substantially completed by June
30, 1999.
Flight Safety Systems
The Company has completed all phases of its Year 2000
project as it relates to its aircraft fleet and onboard support
systems. The Company has determined that there are no safety
issues with these systems.
The Company also utilizes ground computer systems and
equipment essential for the maintenance of aircraft and the
management of flight operations. The identification, assessment,
and remediation phases of the project with respect to these
systems and equipment are nearing completion. The Company
expects to complete testing by mid-1999.
Internal Systems
The Company's critical internal systems include computer
hardware, software, and related equipment for customer
reservations, ticketing, flight and crew scheduling, revenue
management, accounting functions, and payroll, as well as airport
activities including aircraft ground handling, bag handling, and
security. The computing hardware and telecommunications in the
Company's central data center are essentially Year 2000 ready at
this time. Many of the Company's software systems are either in
testing or have already been made Year 2000 ready. While some
systems are currently in the testing phase with a small number in
the remediation phase, the Company expects all systems to be Year
2000 ready by mid-1999.
Third-Parties
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 November 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, to share
information and resources regarding vendors which are common to
the entire industry.
In management's experience, it is not always possible to
obtain written certification 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.
Year 2000 Costs
The Company has expensed $7.9 million ($1.3 million in third
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 $13.2 million, which will be
expensed as incurred.
Risk of Year 2000 Issues
The Company believes that its project to convert its
computer systems to be Year 2000 ready will be completed in a
timely manner and that Year 2000 issues will not have a material
adverse effect on operations. However, it is possible that the
Company's or third parties' systems and equipment could fail and
result in the reduction or suspension of the Company's
operations. The Company is currently in the process of
developing contingency plans related to internal business
critical systems and for those critical relationships with third
parties. There can be no guarantee, however, that the Company's
systems and equipment or third parties' systems and equipment on
which Southwest relies will be Year 2000 ready in a timely manner
or that contingency plans will mitigate the impact of any failure
to complete plans in a timely manner.
The costs of the project, the dates on which the Company
believes it will complete the Year 2000 modifications and
assessments, and the Company's analysis of its risk in this area,
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 third 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 July
1995 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 and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
In September 1998, Southwest's pilots voted to keep
their ten-year contract which originally became
effective in 1994. The ten-year agreement, which froze
the pilots' pay for the first five years of the
contract in exchange for stock options, contained a
unilateral provision which allowed pilots to reopen
contract negotiations at the midpoint of the agreement
in 1999. The agreement now becomes amendable September
1, 2004.
In October 1998, Southwest's dispatch Employees signed
a twelve-year contract which will be effective through
November 30, 2009. The contract provides for the
issuance of up to 1,050,000 shares of stock options
distributed to dispatch Employees over the term of the
agreement.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(27) Financial Data Schedule
b) Reports on Form 8-K
None
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.
November 12, 1998 /s/ Gary Kelly
Date Gary C. Kelly
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 452,184
<SECURITIES> 0
<RECEIVABLES> 109,811
<ALLOWANCES> 0
<INVENTORY> 48,814
<CURRENT-ASSETS> 659,203
<PP&E> 5,467,945
<DEPRECIATION> 1,544,809
<TOTAL-ASSETS> 4,586,288
<CURRENT-LIABILITIES> 896,209
<BONDS> 0
0
0
<COMMON> 335,904
<OTHER-SE> 1,934,768
<TOTAL-LIABILITY-AND-EQUITY> 4,586,288
<SALES> 0
<TOTAL-REVENUES> 3,116,324
<CGS> 0
<TOTAL-COSTS> 2,592,164
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,731
<INCOME-PRETAX> 541,659
<INCOME-TAX> 208,613
<INCOME-CONTINUING> 333,046
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 333,046
<EPS-PRIMARY> 1.00
<EPS-DILUTED> .94
</TABLE>
