<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
March 31, 1999 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 7, 1999:
335,571,191
<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>
March 31, 1999 December 31, 1998
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $405,574 $378,511
Accounts receivable 116,124 88,799
Inventories of parts and supplies 52,108 50,035
Deferred income taxes 20,971 20,734
Prepaid expenses and other current assets 24,639 36,076
Total current assets 619,416 574,155
Property and equipment:
Flight equipment 4,924,175 4,709,059
Ground property and equipment 715,294 720,604
Deposits on flight equipment purchase
contracts 355,029 309,356
5,994,498 5,739,019
Less allowance for depreciation 1,649,481 1,601,409
4,345,017 4,137,610
Other assets 4,438 4,231
$4,968,871 $4,715,996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $160,987 $157,415
Accrued liabilities 499,162 477,448
Air traffic liability 294,710 200,078
Income taxes payable 32,289 -
Current maturities of long-term debt 8,922 11,996
Other current liabilities 2,988 3,716
Total current liabilities 999,058 850,653
Long-term debt less current maturities 619,068 623,309
Deferred income taxes 560,691 549,207
Deferred gains from sale and leaseback of
aircraft 234,084 238,412
Other deferred liabilities 45,972 56,497
Stockholders' equity:
Common stock 335,937 335,904
Capital in excess of par value 89,878 89,820
Retained earnings 2,099,876 2,044,975
Treasury stock at cost (15,693) (72,781)
Total stockholders' equity 2,509,998 2,397,918
$4,968,871 $4,715,996
</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
March 31,
1999 1998
<S> <C> <C>
OPERATING REVENUES:
Passenger $1,019,296 $894,789
Freight 25,093 25,142
Other 31,182 22,722
Total operating revenues 1,075,571 942,653
OPERATING EXPENSES:
Salaries, wages, and benefits 344,012 298,232
Fuel and oil 85,668 101,476
Maintenance materials and repairs 89,491 71,489
Agency commissions 39,081 38,448
Aircraft rentals 49,806 50,417
Landing fees and other rentals 57,983 50,554
Depreciation 56,786 51,980
Other operating expenses 186,127 168,364
Total operating expenses 908,954 830,960
OPERATING INCOME 166,617 111,693
OTHER EXPENSES (INCOME):
Interest expense 13,387 15,711
Capitalized interest (6,984) (6,236)
Interest income (5,535) (7,815)
Other (gains) losses, net 9,647 (4,024)
Total other expenses (income) 10,515 (2,364)
INCOME BEFORE INCOME TAXES 156,102 114,057
PROVISION FOR INCOME TAXES 60,255 44,049
NET INCOME $95,847 $70,008
NET INCOME PER SHARE:
Basic $ .29 $ .21
Diluted $ .27 $ .20
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 334,103 333,375
Diluted 357,282 352,934
</TABLE>
See accompanying notes.
<PAGE>
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
<S> <C> <C>
Net cash provided by operating
activities $310,652 $215,269
Investing activities:
Net purchases of property and
equipment (289,096) (235,972)
Financing activities:
Payment of long-term debt and
capital lease obligations (7,413) (110,089)
Payment of cash dividends (5,001) (4,437)
Proceeds from Employee stock plans 17,921 18,834
Net cash provided by (used in)
financing activities 5,507 (95,692)
Net increase (decrease) in cash and
cash equivalents 27,063 (116,395)
Cash and cash equivalents at
beginning of period 378,511 623,343
Cash and cash equivalents at
end of period $405,574 $506,948
Cash payments for:
Interest, net of amount
capitalized $14,611 $20,821
Income taxes $1,009 $635
</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 March 31, 1999 and 1998 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, 1999 are not necessarily indicative
of the results that may be expected for the year ended December
31, 1999. 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, 1998.
2. Dividends - During the three month period ended March
31, 1999, dividends of $.0075 per share were declared on the
334,633,126 shares of common stock then outstanding. During the
three month period ended March 31, 1998, dividends of $.0067 per
share were declared on the 334,021,185 shares of common stock then
outstanding.
3. Common stock - 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 per share data
presented in the accompanying consolidated financial statements
and notes thereto have been restated for the stock split.
<PAGE>
4. Net income per share - The following table sets forth the
computation of basic and diluted earnings per share (in thousands
except per share amounts):
[CAPTION]
<TABLE>
Three months ended
March 31,
1999 1998
<S> <C> <C>
NUMERATOR:
Net income, available to common
stockholders - numerator for basic and
diluted earnings per share $95,847 $70,008
DENOMINATOR:
Weighted-average shares
outstanding, basic 334,103 333,375
Dilutive effect of Employee stock
options 23,179 19,559
Adjusted weighted-average shares
outstanding, diluted 357,282 352,934
NET INCOME PER SHARE:
Basic $0.29 $0.21
Diluted $0.27 $0.20
</TABLE>
<PAGE>
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, 1999 and 1998 are as follows:
[CAPTION]
<TABLE>
Three months ended
March 31,
1999 1998 Change
<S> <S> <S> <S>
Revenue passengers carried 12,933,578 11,848,686 9.2%
Revenue passenger miles (RPMs) (000s) 8,046,484 6,898,847 16.6%
Available seat miles (ASMs) (000s) 12,392,978 11,270,174 10.0%
Load factor 64.9% 61.2% 3.7 pts
Average length of passenger haul 622 582 6.9%
Trips flown 202,546 195,177 3.8%
Average passenger fare $78.81 $75.52 4.4%
Passenger revenue yield per RPM 12.67 12.97 (2.3)%
Operating revenue yield per ASM 8.68 8.36 3.8%
Operating expenses per ASM 7.33 7.37 (0.5)%
Fuel costs per gallon, excluding fuel tax 39.32 50.22 (21.7)%
Number of Employees at period-end 26,961 24,151 11.6%
Size of fleet at period-end 287 264 8.7%
Material Changes in Results of Operations
</TABLE>
Consolidated net income for the first quarter ended March 31,
1999 was $95.8 million ($.27 per share, diluted), as compared to
first quarter 1998 net income of $70.0 million ($.20 per share,
diluted), an increase of 36.9 percent. The prior year's earnings
per share amounts have been restated for the 1998 three-for-two
stock split (see Note 3 to the Condensed Consolidated Financial
Statements).
First quarter 1999 consolidated operating revenues increased
14.1 percent compared to first quarter 1998 primarily due to a
13.9 percent increase in passenger revenues. The increase in
passenger revenues primarily resulted from a 9.2 percent increase
in revenue passengers carried and a 16.6 percent increase in RPMs
partially offset by a 2.3 percent decrease in passenger revenue
yield per RPM ("passenger yield"). The slight decrease in
passenger yield is primarily due to a 6.9 percent increase in
average length of passenger haul compared to first quarter 1998,
partially offset by a 4.4 percent increase in average passenger
fare.
The increase in RPMs and a 10.0 percent increase in ASMs
resulted in a load factor of 64.9 percent, or 3.7 points above
first quarter 1998. The increase in ASMs resulted primarily from
the net addition of 23 aircraft since first quarter 1998.
<PAGE>
The load factor for April 1999 was 72.0 percent, compared to
the April 1998 load factor of 68.3 percent. Management believes
the higher load factor for April 1999 was primarily due to strong
demand and promotional activity in late March 1999. Thus far,
bookings for May and June are also good. (The immediately
preceding sentence is a forward-looking statement which involves
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 decreased slightly in first
quarter 1999 as compared to the same period in 1998 due to a
decrease in U.S. mail revenue as the postal service continues to
shift business away from commercial carriers. The Company expects
the trend in decreasing U.S. Mail revenue to continue throughout
1999. Other revenues increased 37.2 percent in first quarter 1999
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 for first quarter 1999 decreased
.5 percent to $.0733, compared to $.0737 for first quarter 1998,
primarily due to a decline in average jet fuel prices, partially
offset by higher profitsharing and Employee savings plan
contributions and higher maintenance costs. Excluding jet fuel
costs and related taxes, operating expenses per ASM were up 2.6
percent in first quarter 1999 when compared to first quarter 1998.
Unit costs are expected to continue benefiting from lower fuel
prices in second quarter 1999 versus second quarter 1998.
Additionally, based on current trends, the Company expects nonfuel
unit cost growth to recede in second quarter 1999 compared to the
year-over-year growth experienced in first quarter 1999. (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.)
<PAGE>
Southwest Airlines Co.
Operating Expenses per ASM
(in cents except percent change)
<TABLE>
<CAPTION>
Three months ended
March 31,
Inc/ Percent
1999 1998 (Dec) Change
<S> <C> <C> <C> <C>
Salaries, wages, and benefits 2.44 2.38 .06 2.5
Employee profitsharing and
savings plans .34 .27 .07 25.9
Fuel and oil .69 .90 (.21) (23.3)
Maintenance materials
and repairs .72 .63 .09 14.3
Agency commissions .31 .34 (.03) (8.8)
Aircraft rentals .40 .45 (.05) (11.1)
Landing fees and other rentals .47 .45 .02 4.4
Depreciation .46 .46 - -
Other operating expenses 1.50 1.49 .01 .7
Total 7.33 7.37 (.04) (.5)
</TABLE>
Salaries, wages, and benefits per ASM increased 2.5 percent
in first quarter 1999 due primarily to increased health care and
workers' compensation costs.
Profitsharing and Employee savings plan expenses per ASM
increased 25.9 percent from first quarter 1998 to first quarter
1999, primarily due to increased earnings available for
profitsharing in 1999.
Fuel and oil expense per ASM decreased 23.3 percent in first
quarter 1999 due to a 21.7 percent decrease in the average jet
fuel cost per gallon from the same period in 1998. The average
price paid for jet fuel in first quarter 1999 was $.3932 per
gallon, compared to $.5022 per gallon in first quarter 1998.
Although jet fuel prices have increased since the end of first
quarter 1999, (approximately $.4870 per gallon for April, 1999,
excluding the effects of the Company's hedging positions), the
Company expects a year-over-year decrease in average jet fuel
prices in second quarter 1999 due to fuel hedging positions
entered into by the Company during fourth quarter 1998. The
Company has hedged its exposure to fuel price increases for a
significant portion of second quarter 1999 anticipated fuel
requirements at prices below second quarter 1998. (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, the largely
unpredictable levels of jet fuel prices.)
<PAGE>
Maintenance materials and repairs per ASM increased 14.3
percent for first quarter 1999 compared to the same prior year
period. This increase was primarily due to higher engine overhaul
costs and an increase in outsourced routine maintenance due to
temporary headcount shortages. The increase in engine maintenance
was primarily related to the Company's 737-200 aircraft, which are
not covered by the Company's maintenance contract with General
Electric Engine Services, Inc.
Agency commissions per ASM decreased 8.8 percent for first
quarter 1999 compared to first quarter 1998, primarily due to a
decrease in the percentage of commissionable sales.
Aircraft rentals per ASM decreased 11.1 percent for first
quarter 1999 compared to first quarter 1998 due to a lower
percentage of the aircraft fleet being leased.
Landing fees and other rentals per ASM increased 4.4 percent
for first quarter 1999 compared to first quarter 1998. Although
landing fees were flat on a unit basis, other rental expense
increased primarily due to the Company's expansion of facilities
in several airports.
Depreciation expense per ASM was flat for first quarter 1999
compared to first quarter 1998. Although the Company experienced
an increase in depreciation expense per ASM due to a higher
percentage of owned aircraft, this increase was offset by an
increase in the estimated useful lives of the Company's Boeing 737-
300/500 aircraft from 20 years to 23 years. This change in
accounting estimate was made January 1, 1999 and resulted in a
decrease in depreciation expense of approximately $6.4 million for
first quarter 1999. This revision will result in similar savings
for remaining 1999 periods when comparing to 1998.
Other expense (income) for first quarter 1999 included
interest expense, capitalized interest, interest income, and other
gains and losses. Interest expense decreased in first quarter
1999 primarily due to the February 1998 $100 million repayment of
9 1/4% notes and less capital lease interest expense in first
quarter 1999 than in first quarter 1998 due to the expiration of
six aircraft capital leases. Five of the leased aircraft were
purchased and one was converted to an operating lease.
Capitalized interest increased 12.0 percent as a result of higher
first quarter 1999 progress payment balances for scheduled future
aircraft deliveries. Interest income decreased in first quarter
1999 due to lower invested cash balances. Other losses in first
quarter 1999 resulted primarily from a write-down associated with
the consolidation of certain software development projects;
whereas other gains in first quarter 1998 primarily consisted of
<PAGE>
contractual penalties received from Boeing due to delays in the
delivery of 737-700 aircraft.
Liquidity and Capital Resources
Net cash provided by operating activities was $310.7 million
for the three months ended March 31, 1999 and $981.5 million for
the 12 months then ended. Cash generated for the 12 months ended
March 31, 1999 was primarily used to finance aircraft-related
capital expenditures, provide working capital, and repurchase
approximately $100 million of the Company's outstanding common
stock. The Company completed this repurchase program during third
quarter 1998, resulting in the repurchase of approximately 4.9
million post-split shares.
During the 12 months ended March 31, 1999, net capital
expenditures were $1,000.2 million, which primarily related to the
purchase of 25 new 737-700 aircraft, three used 737-300 aircraft,
five used 737-200 aircraft, and progress payments for future
aircraft deliveries. The five 737-200 aircraft were previously on
lease by Southwest prior to being purchased. During February
1998, the Company redeemed the $100 million senior unsecured 9 1/4%
Notes due February, 15, 1998 issued in February 1991.
The Company's contractual commitments consist primarily
of scheduled aircraft acquisitions. The Company recently exercised
options to purchase six Boeing 737-700 aircraft for accelerated
delivery in the year 2000, and options for six additional Boeing
737-700 aircraft for accelerated delivery in late 2000 and early
2001. In addition, the Company has acquired two used Boeing 737-
300s thus far in 1999. As of April 30, 1999, 26 737-700s are
scheduled for delivery in the remainder of 1999, 31 in 2000, 23 in
2001, 21 in 2002, five in 2003, and five in 2004. In addition,
the Company has options to purchase up to 62 737-700s 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 scheduled subsequent to 1999.
Aggregate funding needed for fixed commitments at April 30, 1999
was approximately $2,595 million 1999 due as follows: $627.8 million
in 1999; $689.4 million in 2000; $520.1 million in 2001; $515.8
million in 2002; $152.8 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 March 31,
1999 of $405.6 million, internally generated funds, and a
revolving credit line with a group of banks of up to $475 million
(none of which had been drawn at March 31, 1999). In addition,
the Company will also consider various borrowing or leasing
options to maximize earnings and supplement cash requirements.
<PAGE>
The Company currently has outstanding shelf registrations for
the issuance of $318.8 million in public debt securities which it
may utilize for aircraft financing during 1999 and 2000.
The Company began service to Islip, New York on Long Island
on March 14, 1999 with daily nonstop service to
Baltimore/Washington, Chicago Midway, Nashville, and Tampa Bay.
The Company recently announced new service to Raleigh-Durham
beginning June 6, 1999, with nonstop service to
Baltimore/Washington, Chicago Midway, Tampa Bay, and Orlando.
Year 2000 Readiness Disclosure
The Year 2000 issue results from the fact that many computer
programs were previously written using two digits rather than four
to define the applicable year. Programs written in this way may
recognize a date ending in "00" as the year 1900 rather than the
year 2000. This could result in a system failure or
miscalculations causing business delays and disruptions of
operations. The Company is following an enterprise-wide Year 2000
program to take the necessary actions to become Year 2000 ready
and ensure business continuity now and into the next century.
This program encompasses information technology systems as well as
embedded technology assets and an assessment of material third-
party relationships and associated risks.
The Company's program consists of five phases:
identification of all products, services, vendors, etc. to
determine if they could potentially be affected by the Year 2000
issue; assessment includes the prioritization of each item
according to its significance to the Company's operations and the
determination of a strategy for remediation; remediation entails
the execution of plans to make an item Year 2000 ready including
replacement, modifying computer codes, retirement, or verification
of whether or not an item has date codes; testing includes the
validation of whether something is Year 2000 ready by using date
simulation techniques; and implementation, which involves putting
an item in use in the Company's operations.
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 does not believe there are
any safety issues in regard to these systems and believes they are
Year 2000 ready. 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 essentially completed. The
Company expects to complete testing and implementation of the
majority of these items by mid-1999.
<PAGE>
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. Also
included are non-information systems that support airport
activities such as aircraft ground handling, bag handling, and
security. Although some of these systems are still currently in
the testing phase, the Company expects all vital and critical
systems to be Year 2000 ready by mid-1999. Additionally, the
Company has established procedures to review all new potential
vital and critical hardware and software purchases to ensure they
are Year 2000 ready.
The Company's non-information systems primarily include
electrical systems, telephone systems, elevators, security
systems, etc. For non-information systems, the Company has
performed some internal testing, but has primarily relied on
assurances received from original manufacturers or suppliers of
those non-information systems where no date logic is involved.
THIRD PARTIES As part of its Year 2000 assessment, the Company
must also consider the compliance of third parties with which the
Company has a material relationship, namely its vendors and
governmental agencies such as the Federal Aviation Administration
("FAA"). 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 is also identifying
and assessing the impact of Year 2000 issues as they may affect
the vendors' businesses (which, in turn, could affect the
Company). The Company has made initial contacts with all of its
material third party vendors and is in the process of evaluating
their statements of Year 2000 compliance. The Company has
utilized many different methods in obtaining assurances from third
parties including questionnaires, written statements, obtaining
publicly filed documents, etc., and continually updates
information received as new data becomes available. The Company
has also visited several of its vital and critical third party
vendors for the sole purpose of observing Year 2000 testing and
processes.
The Company is not aware of any Year 2000 issues within the
FAA. The FAA has stated that all of their internal systems, as
well as the airport systems for which it is responsible will be
Year 2000 compliant by June 30, 1999. The airport systems, which
are directly involved with air safety, include radar screens and
radio transmissions, ground traffic control, airport weather
reports, and remote radio beacons. In addition, the Company
continues to work 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.
<PAGE>
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. The
timetables disclosed are all based on the most recent information
that has been made available to the Company, including oral and
written assurances from third party vendors. The Company does not
currently expect any material impact on its operations as a result
of third party products; however, this expectation is based on the
timeliness and accuracy of those assurances. The Company expects
the evaluation and assessment of third parties will be an ongoing
process through the balance of 1999.
YEAR 2000 COSTS The Company currently anticipates it will
spend approximately $16 million on Year 2000 compliance, of which
approximately $12.8 million has been spent through March 31, 1999
($1.8 million in first quarter 1999). The majority of the
previously expensed amounts have been for third party Year 2000
consultants, full-time associates, and new hardware and software
purchases. The Company also purchased Year 2000 hardware and
software testing and data aging tools that it has utilized on
internal systems. The majority of the remaining expense is
expected to be for full-time associates dedicated to the Year 2000
compliance effort. All previous as well as future expenditures on
Year 2000 compliance have or will be expensed as incurred from
operating cash flow.
RISK OF YEAR 2000 ISSUES The Company believes its project to
ensure Year 2000 readiness will be completed in a timely manner
and Year 2000 issues will not have a material adverse effect on
operations. However, it is possible the Company's or third
parties' systems and equipment could fail and result in the
reduction or suspension of the Company's operations. This could
in turn have a material adverse effect on the Company's
operations. The Company has developed contingency plans to deal
with situations that occur from time to time in the normal course
of business, including weather emergencies, system and power
outages, etc. The Company is in the process of augmenting those
plans to include plans that deal with different Year 2000
scenarios the Company believes could possibly occur. The Company
continues to work closely with each of the airports it serves to
ensure all potential Year 2000 related issues are addressed in a
timely manner. The Company is also in the process of business
continuity planning to be utilized in the event any vendor cannot
<PAGE>
demonstrate to the Company, on a timely basis, its Year 2000
compliance. 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
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, 1998.
<PAGE>
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.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the first quarter of 1999, Herbert D. Kelleher
exercised unregistered options to purchase Southwest
Common Stock as follows:
Number of Shares Date of
Purchased Exercise Price Exercise
303,750 $1.00 1/15/99
75,938 $1.321 1/15/99
The issuance of the above 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
<PAGE>
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
(27) Financial Data Schedule
b) Reports on Form 8-K
None
<PAGE>
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.
May 13, 1999 /s/ Gary C. Kelly
Date Gary C. Kelly
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
(27) Financial Data Schedule
<PAGE>
[ARTICLE] 5
[CIK] 0000092380
[NAME] SOUTHWEST AIRLINES CO.
[MULTIPLIER] 1000
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-START] JAN-01-1999
[PERIOD-END] MAR-31-1999
[CASH] 405,574
[SECURITIES] 0
[RECEIVABLES] 116,124
[ALLOWANCES] 0
[INVENTORY] 52,108
[CURRENT-ASSETS] 619,416
[PP&E] 5,994,498
[DEPRECIATION] 1,649,481
[TOTAL-ASSETS] 4,968,871
[CURRENT-LIABILITIES] 999,058
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 335,937
[OTHER-SE] 2,174,061
[TOTAL-LIABILITY-AND-EQUITY] 4,968,871
[SALES] 0
[TOTAL-REVENUES] 1,075,571
[CGS] 0
[TOTAL-COSTS] 908,594
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 13,387
[INCOME-PRETAX] 156,102
[INCOME-TAX] 60,225
[INCOME-CONTINUING] 95,847
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 95,847
[EPS-PRIMARY] 0.29
[EPS-DILUTED] 0.27
</TABLE>
