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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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)
Registrant's telephone number, including area code: (214) 792-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock ($1.00 par value) New York Stock Exchange, Inc.
Common Share Purchase Rights New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of Common Stock held by nonaffiliates as of
March 1, 1999:
$9,947,471,987
Number of shares of Common Stock outstanding as of the close of
business on March 1, 1999:
334,405,787 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of
Shareholders, May 20, 1999: PART III
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PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Southwest Airlines Co. ("Southwest") is a major domestic airline that
provides primarily shorthaul, high-frequency, point-to-point, low-fare service.
Southwest was incorporated in Texas and commenced Customer Service on June 18,
1971 with three Boeing 737 aircraft serving three Texas cities - Dallas,
Houston, and San Antonio.
At yearend 1998, Southwest operated 280 Boeing 737 aircraft and
provided service to 53 airports in 52 cities in 26 states throughout the United
States. Southwest commenced service to Manchester, New Hampshire in June 1998,
and will commence service to Islip, New York in March 1999 and Raleigh-Durham,
North Carolina in June, 1999.
On December 31, 1993, Southwest acquired Morris Air Corporation
("Morris") in a stock-for-stock exchange, issuing approximately 3.6 million
shares (not adjusted for subsequent stock splits) of Southwest Common Stock in
exchange for all of the outstanding shares of Morris. During 1994, the
operations of Morris were substantially integrated with those of Southwest, and
Morris ceased service as a certificated air carrier in March 1995. Unless the
context requires otherwise, references in this annual report to the "Company"
include Southwest and Morris.
The business of the Company is somewhat seasonal. Quarterly operating
income and, to a lesser extent, revenues tend to be lower in the first quarter
(January 1 - March 31).
FUEL
The cost of fuel is an item having significant impact on the Company's
operating results. The Company's average cost of jet fuel per gallon for
scheduled carrier service over the past five years was as follows:
<TABLE>
<S> <C>
1994 $.54
1995 $.55
1996 $.65
1997 $.62
1998 $.46
</TABLE>
The Company is unable to predict the extent of future fuel cost
changes. The Company has standard industry arrangements with major fuel
suppliers. Standard industry fuel contracts do not provide material protection
against price increases or for assured availability of supplies. Although market
conditions can significantly impact the price of jet fuel, at present these
conditions have not resulted in an inadequate supply of jet fuel.
Historically, the Company's principal hedging program utilizes the
purchase of crude oil call options at a nominal premium and at volumes of up to
30% of its quarterly fuel requirements. However, in order to provide greater
protection against increasing fuel costs during this time of exceedingly low
fuel prices, the Company has significantly increased its hedging activities. As
of January 1999, the Company had outstanding fixed price swap agreements for
hedging fuel prices on 77 percent and 74 percent of its fuel needs in first and
second quarter 1999, respectively. For more discussion of current fuel costs,
the impact of these costs on the Company's operations, and the effect of hedging
transactions, see Management's Discussion and Analysis of Financial Condition
and Results of Operations.
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REGULATION
Economic. The Dallas Love Field section of the International Air
Transportation Competition Act of 1979, as amended in 1997, (commonly known as
the "Wright Amendment"), as it affects Southwest's scheduled service, provides
that no common carrier may provide scheduled passenger air transportation for
compensation between Love Field and one or more points outside Texas, except
that an air carrier may transport individuals by air on a flight between Love
Field and one or more points within the states of Alabama, Arkansas, Kansas,
Louisiana, Mississippi, New Mexico, Oklahoma, and Texas if (a) "such air carrier
does not offer or provide any through service or ticketing with another air
carrier" and (b) "such air carrier does not offer for sale transportation to or
from, and the flight or aircraft does not serve, any point which is outside any
such states." Southwest does not interline or offer joint fares with any other
air carrier. The Wright Amendment does not restrict Southwest's intrastate Texas
flights or its air service from points other than Love Field to points beyond
Texas and the other seven aforementioned states.
The Department of Transportation ("DOT") has significant regulatory
jurisdiction over passenger airlines. Unless exempted, no air carrier may
furnish air transportation over any route without a DOT certificate of
authorization, which does not confer either exclusive or proprietary rights. The
Company's certificates are unlimited in duration and permit the Company to
operate among any points within the United States, its territories and
possessions, except as limited by the Wright Amendment, as do the certificates
of all other U.S. carriers. DOT may revoke such certificates, in whole or in
part, for intentional failure to comply with any provisions of subchapter IV of
the Federal Aviation Act of 1958, or any order, rule or regulation issued
thereunder or any term, condition or limitation of such certificate; provided
that, with respect to revocation, the certificate holder has first been advised
of the alleged violation and has been given a reasonable time to effect
compliance.
DOT prescribes uniform disclosure standards regarding terms and
conditions of carriage, and prescribes that terms incorporated into the Contract
of Carriage by reference are not binding upon passengers unless notice is given
in accordance with its regulations.
Safety. The Company is subject to the jurisdiction of the Federal
Aviation Administration ("FAA") with respect to its aircraft maintenance and
operations, including equipment, ground facilities, dispatch, communications,
flight training personnel, and other matters affecting air safety. To ensure
compliance with its regulations, the FAA requires airlines to obtain operating,
airworthiness and other certificates which are subject to suspension or
revocation for cause. The Company has obtained such certificates. The FAA,
acting through its own powers or through the appropriate U. S. Attorney, also
has the power to bring proceedings for the imposition and collection of fines
for violation of the Federal Air Regulations.
Environmental. The Airport Noise and Capacity Act of 1990 ("ANCA")
requires the phase out of Stage 2 airplanes (which meet less stringent noise
emission standards than later model Stage 3 airplanes) in the contiguous 48
states by December 31, 1999. Operation of Stage 2 aircraft after December 31,
1999 is prohibited, subject, however, to an extension of the final compliance
date to December 31, 2003, if at least 85 percent of the aircraft used by the
operator in the contiguous United States will comply with Stage 3 noise levels
by July 1, 1999 and the operator successfully obtains a waiver from the FAA of
the December 31, 1999 final phaseout date. Statutory requirements to obtain a
waiver include a determination by the FAA that the waiver is in the public
interest or would enhance competition or benefit service to small communities.
There is no assurance that such a waiver is obtainable.
The Company's fleet, as of December 31, 1998, consisted of 23 Stage 2
aircraft and 257 Stage 3 aircraft, yielding a Stage 3 percentage of over 90
percent. As of December 31, 1998, of the 23 Stage 2 aircraft operated by the
Company, 12 are leased from third parties and 11 are owned by the Company. Based
upon the Company's current schedule for delivery of new Stage 3 aircraft,
including options, and the Company's
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planned retirement schedule for Stage 2 aircraft, assuming no hushkitting, the
Company will exceed the 85 percent compliance requirement by July 1, 1999;
however, the Company currently intends to hushkit at least 17 additional
aircraft. The Company plans to achieve 100 percent compliance by December 31,
1999.
ANCA also requires the FAA to establish parameters within which any new
Stage 2 and Stage 3 noise or access restrictions at individual airports must be
developed. The published rules generally provide that local noise restrictions
on Stage 3 aircraft first effective after October 1990 require FAA approval, and
establish a regulatory notice and review process for local restrictions on Stage
2 aircraft first proposed after October 1990. Certain airports, including San
Diego, Burbank, and Orange County, have established airport restrictions to
limit noise, including restrictions on aircraft types to be used and limits on
the number of hourly or daily operations or the time of such operations. In some
instances, these restrictions have caused curtailments in service or increases
in operating costs and such restrictions could limit the ability of Southwest to
expand its operations at the affected airports. Local authorities at other
airports are considering adopting similar noise regulations.
Operations at John Wayne Airport, Orange County, California, are
governed by the Airport's Phase 2 Commercial Airline Access Plan and Regulation
(the "Plan"). Pursuant to the Plan, each airline is allocated total annual seat
capacity to be operated at the airport, subject to renewal/reallocation on an
annual basis. Service at this airport may be adjusted annually to meet these
requirements.
The Company is subject to various other federal, state, and local laws
and regulations relating to the protection of the environment, including the
discharge of materials into the environment.
MARKETING AND COMPETITION
Southwest focuses principally on point-to-point, rather than
hub-and-spoke, service in shorthaul markets with frequent, conveniently timed
flights, and low fares. For example, Southwest's average aircraft trip length in
1998 was 441 miles with an average duration of approximately one hour. At
yearend, Southwest served approximately 245 one-way nonstop city pairs.
Southwest's point-to-point route system, as compared to hub-and-spoke,
provides for more direct nonstop routings for shorthaul customers and,
therefore, minimizes connections, delays, and total trip time. Southwest focuses
on nonstop, not connecting, traffic. As a result, approximately 75 percent of
the Company's Customers fly nonstop. In addition, Southwest serves many
conveniently-located satellite or downtown airports such as Dallas Love Field,
Houston Hobby, Chicago Midway, Baltimore, Burbank, Manchester, Oakland, San
Jose, Providence and Ft. Lauderdale airports, which are typically less congested
than other airlines' hub airports and enhance the Company's ability to sustain
high employee productivity and reliable ontime performance. This operating
strategy also permits the Company to achieve high asset utilization. Aircraft
are scheduled to minimize the amount of time the aircraft is at the gate,
approximately 20 minutes, thereby reducing the number of aircraft and gate
facilities that would otherwise be required. Southwest does not interline with
other airlines, nor have any commuter feeder relationships.
Southwest employs a very simple fare structure, featuring low,
unrestricted, unlimited, everyday coach fares. The Company operates only one
aircraft type, the Boeing 737, which simplifies scheduling, maintenance, flight
operations, and training activities.
In January 1995, Southwest was the first major airline to introduce a
Ticketless travel option, eliminating the need to print a paper ticket
altogether, and improved access to Ticket By Mail for direct Customers by
reducing the time limit from seven days out from the date of travel to three
days. Southwest also entered into a new arrangement with SABRE, the computer
reservation system in which Southwest has historically participated to a limited
extent, providing for ticketing and automated booking on Southwest in a very
cost-effective manner. In 1996, Southwest began offering Ticketless travel
through the Company's home page on
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the Internet's World Wide Web at http://www.southwest.com. At December 31, 1998,
approximately 70% of Southwest's Customers were choosing the Ticketless travel
option.
The airline industry is highly competitive as to fares, frequent flyer
benefits, routes, and service, and some carriers competing with the Company have
greater financial resources, larger fleets, and wider name recognition. Several
of the Company's larger competitors have initiated or are studying low-cost,
shorthaul service in markets served by the Company, which represents a more
direct threat in Southwest's market niche. Profit levels in the air transport
industry are highly sensitive to changes in operating and capital costs and the
extent to which competitors match an airline's fares and services. The
profitability of a carrier in the airline industry is also impacted by general
economic trends.
The Company is also subject to varying degrees of competition from
surface transportation in its shorthaul markets, particularly the private
automobile. In shorthaul air services which compete with surface transportation,
price is a competitive factor, but frequency and convenience of scheduling,
facilities, transportation safety, and Customer Service may be of equal or
greater importance to many passengers.
INSURANCE
The Company carries insurance of types customary in the airline
industry and at amounts deemed adequate to protect the Company and its property
and to comply both with federal regulations and certain of the Company's credit
and lease agreements. The policies principally provide coverage for public and
passenger liability, property damage, cargo and baggage liability, loss or
damage to aircraft, engines, and spare parts, and workers' compensation.
FREQUENT FLYER AWARDS
Southwest's frequent flyer program, Rapid Rewards, is based on trips
flown rather than mileage. Rapid Rewards Customers can also receive flight
credits by using the services of non-airline partners, which include credit card
partners, a telephone company, car rental agencies, and the Southwest Airlines
Visa card. Rapid Rewards offers two types of travel awards. The Rapid Rewards
Award Ticket ("Award Ticket") offers one free roundtrip travel award to any
Southwest destination after flying eight roundtrips (or 16 one-way trips) on
Southwest within a consecutive twelve-month period. The Rapid Rewards Companion
Pass ("Companion Pass") is granted after flying 50 roundtrips (or 100 one-way
trips) on Southwest within a consecutive twelve-month period. The Companion Pass
offers unlimited free roundtrip travel to any Southwest destination for a
companion of the qualifying Rapid Rewards member. In order for the companion to
use this pass, the Rapid Rewards member must purchase a ticket or use an Award
Ticket. Additionally, the Rapid Rewards member and companion must travel
together on the same flight.
The trips flown as credit towards a free travel award are valid for
twelve months only; the free travel awards are automatically generated when
earned by the Customer rather than allowing the Customer to bank the trip
credits indefinitely; and the free travel awards are valid for one year with an
automatic expiration date. Based on the issuance of free travel awards to
qualified members, coupled with the foregoing program characteristics and the
use of "black out" dates for the free travel awards during peak holiday periods,
the financial impact of free travel awards used on the Company's consolidated
financial statements has not been material. Free travel awards redeemed were
approximately 927,000, 782,000, and 494,000, during 1998, 1997, and 1996,
respectively. The amount of free travel award usage as a percentage of total
Southwest revenue passengers carried was 3.5 percent in 1998, 3.1 percent in
1997, and 2.0 percent in 1996.
The Company accounts for free travel awards using the incremental cost
method, regardless of the source of the credit (such as credit for flights or
use of business partner services), consistent with the other major airlines.
This method recognizes an average incremental cost to provide roundtrip
transportation to one additional passenger. The incremental cost to provide free
transportation is accrued at the time an award is
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earned and revenue is subsequently recognized, at the amount accrued, when the
free travel award is used. The estimated incremental costs include passenger
costs such as beverage and snack supplies, baggage claims, baggage handling, and
liability insurance; operations costs such as security services, airport
rentals, fuel, oil, and into-plane charges; and reservations costs, such as
communications and system operations fees. The liability for free travel awards
earned but not used at December 31, 1998 and 1997 was not material.
The number of Award Tickets for Southwest outstanding at December 31,
1998 and 1997 was approximately 688,000 and 485,000, respectively. These numbers
do not include partially earned Award Tickets. The Company currently does not
have a system to accurately estimate partially earned Award Tickets. However,
these partially earned Award Tickets may equate to approximately 50-60 percent
of the current outstanding Award Tickets. Since the inception of Rapid Rewards
in 1987, approximately 15 percent of all Award Tickets have expired without
being used. The number of Companion Passes for Southwest outstanding at December
31, 1998 and 1997 was approximately 21,000 and 20,000, respectively. The Company
currently estimates that three to four trips will be redeemed per outstanding
Companion Pass.
EMPLOYEES
At December 31, 1998, Southwest had 25,844 active employees, consisting
of 7,898 flight, 1,163 maintenance, 13,719 ground customer service and 3,064
management, accounting, marketing, and clerical personnel.
Southwest has ten collective bargaining agreements covering
approximately 83 percent of its employees. Southwest's Customer service and
Reservation employees are subject to an agreement with the International
Association of Machinists and Aerospace Workers, AFL-CIO ("IAM"), which becomes
amendable in November 2002. Flight attendants are subject to an agreement with
the Transportation Workers Union of America, AFL-CIO ("TWU"), which becomes
amendable in May 2002. Fleet service employees are subject to an agreement with
the TWU which becomes amendable in December 1999. The pilots are subject to an
agreement with the Southwest Airlines Pilots' Association ("SWAPA"), which
becomes amendable in September 2004 (described below). Flight dispatchers are
represented by the Southwest Airlines Employees Association, pursuant to an
agreement which will become amendable in November 2009. Aircraft cleaners and
stock clerks, mechanics, and flight simulator technicians are represented by the
International Brotherhood of Teamsters pursuant to separate agreements which
become amendable in August 2000, August 2000, August 2001, and October 2000,
respectively. The flight/ground school instructors and flight crew training
instructors are subject to an agreement with the Southwest Airlines Professional
Instructors Association which becomes amendable in December 2000.
In January 1995, Southwest's pilots ratified a ten-year labor agreement,
effective through August 2004, subject to a right by the pilots to terminate the
agreement as of August 1999. After a vote of its membership, in September 1998
SWAPA notified the Company that it would not exercise its right to terminate the
agreement early, and the parties have executed a side letter providing that the
agreement will remain in effect through August 2004. Pilots have received no
wage increases (other than seniority and upgrade increases) in the first five
years of the agreement, and pursuant to the agreement and side letter will
receive three percent wage increases in each of the last five years of the
agreement. Initially, the pilots received options to purchase approximately 32.8
million shares of Southwest common stock at $8.89 per share (adjusted for stock
splits) over the term of the contract. The exercise price reflected a premium of
approximately five percent over the fair market value of the stock on the date
of the grant. Pilots hired subsequently receive additional grants at a five per
cent premium over the then current fair market value. Up to 40,500,000 shares
ultimately can be issued under the pilot stock option plan.
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ITEM 2. PROPERTIES
AIRCRAFT
Southwest operated a total of 280 Boeing 737 aircraft as of December 31,
1998, of which 99 and 13 were under operating and capital leases, respectively.
The remaining 168 aircraft were owned.
Southwest is the launch customer for the Boeing 737-700 aircraft, the
newest generation of the Boeing 737 aircraft type. The first 737-700 aircraft
was delivered in December 1997 and entered revenue service in January 1998. At
December 31, 1998, Southwest had 25 737-700 aircraft in service.
In total, at December 31, 1998, the Company had 105 firm orders to
purchase Boeing 737 Aircraft as follows:
<TABLE>
<CAPTION>
Type Seats 1999 2000 2001 2002 2003 2004
---- ----- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
737-700 137 32 21 21 21 5 5
</TABLE>
The Company also has 62 options for deliveries in 2003 through 2006. The
Company has also contracted to purchase two used Boeing 737-300 aircraft for
delivery in the second quarter 1999.
The average age of the Company's fleet at December 31, 1998 was 8.4 years.
GROUND FACILITIES AND SERVICES
Southwest leases terminal passenger service facilities at each of the
airports it serves to which it has added various leasehold improvements. The
Company leases land on a long-term basis for its maintenance centers located at
Dallas Love Field, Houston Hobby, and Phoenix Sky Harbor, its training center
near Love Field which houses five 737 simulators, and its corporate headquarters
also located near Love Field. The maintenance, training center, and corporate
headquarters buildings on these sites were built and are owned by Southwest. At
December 31, 1998, the Company operated nine reservation centers. The
reservation centers located in Little Rock, Arkansas; Chicago, Illinois;
Albuquerque, New Mexico; and Oklahoma City, Oklahoma occupy leased space. The
Company owns its Dallas, Texas; Houston, Texas; Phoenix, Arizona; Salt Lake
City, Utah; and San Antonio, Texas reservation centers.
The Company performs substantially all line maintenance on its aircraft
and provides ground support services at most of the airports it serves. However,
the Company has arrangements with certain aircraft maintenance firms for major
component inspections and repairs for its airframes and engines, which comprise
the majority of the annual maintenance costs.
In recent years, many airports have increased or sought to increase the
rates charged to airlines. The extent to which such charges are limited by
statute and the ability of airlines to contest such charges has been subject to
litigation and to administrative proceedings before the Department of
Transportation. To the extent the limitations on such charges are relaxed or the
ability of airlines to challenge such charges is restricted, the rates charged
by airports to airlines may increase substantially. Management cannot predict
the magnitude of any such increase.
ITEM 3. 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
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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 financial condition or
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to be reported.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Southwest, their positions, and their respective
ages (as of March 1, 1999) are as follows:
<TABLE>
<CAPTION>
EXECUTIVE
OFFICER
CONTINUOUSLY
NAME POSITION AGE SINCE
---- -------- --- ------------
<S> <C> <C> <C>
Herbert D. Kelleher Chairman of the Board, President, 67 1967
and Chief Executive Officer
Colleen C. Barrett Executive Vice President-Customers 54 1978
and Corporate Secretary
John G. Denison Executive Vice President- 54 1986
Corporate Services
James C. Wimberly Executive Vice President, 46 1985
Chief Operations Officer
Gary C. Kelly Vice President-Finance, 43 1986
Chief Financial Officer
James F. Parker Vice President-General Counsel 52 1986
Ron Ricks Vice President-Governmental Affairs 49 1986
Dave Ridley Vice President-Ground Operations 46 1998
Joyce C. Rogge Vice President - Marketing 41 1997
Elizabeth P. Sartain Vice President - People 44 1999
</TABLE>
Executive officers are elected annually at the first meeting of
Southwest's Board of Directors following the annual meeting of shareholders or
appointed by the President pursuant to Board authorization.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
June Morris, a Director of the Company, filed a Form 4 reporting
transactions pursuant to one sell order in a report due five months earlier and
transactions pursuant to one sell order in a report one month late.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Southwest's common stock is listed on the New York Stock Exchange and is
traded under the symbol LUV. The high and low sales prices of the common stock
on the Composite Tape and the quarterly dividends per share paid on the common
stock, as adjusted for the November 1997 and August 1998 three-for-two stock
splits, were:
<TABLE>
<CAPTION>
PERIOD DIVIDEND HIGH LOW
------ -------- ---- ---
<S> <C> <C> <C> <C>
1998
1st Quarter $.00667 $21.42 $15.33
2nd Quarter .00667 20.71 16.83
3rd Quarter .00750 23.38 17.19
4th Quarter .00750 23.75 15.31
1997
1st Quarter $.00513 $11.11 $9.45
2nd Quarter .00513 12.45 9.55
3rd Quarter .00513 14.75 11.55
4th Quarter .00667 17.50 12.55
</TABLE>
As of March 1, 1999, there were 9,741 holders of record of the
Company's common stock.
RECENT SALES OF UNREGISTERED SECURITIES
During 1998, Herbert D. Kelleher, President and Chief Executive
Officer, exercised unregistered options to purchase Southwest Common Stock as
follows (the numbers have not been adjusted for the subsequent stock split):
<TABLE>
<CAPTION>
Number of Shares Purchased Exercise Price Date of Exercise
-------------------------- -------------- ----------------
<S> <C> <C>
151,875 $1.00 1/9/98
</TABLE>
The issuance of the above options and shares to Mr. Kelleher were
deemed exempt from the registration provisions of the Securities Act of 1933, as
amended (the "Act"), by reason of the provision of Section 4(2) of the Act
because, among other things, of the limited number of participants in such
transactions and the agreement and representation of Mr. Kelleher that he was
acquiring such securities for investment and not with a view to distribution
thereof. The certificates representing the shares issued to Mr. Kelleher contain
a legend to the effect that such shares are not registered under the Act and may
not be transferred except pursuant to a registration statement which has become
effective under the Act or to an exemption from such registration. The issuance
of such shares was not underwritten.
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ITEM 6. SELECTED FINANCIAL DATA
The following financial information for the five years ended December
31, 1998 has been derived from the Company's consolidated financial statements.
This information should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,(1)
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
FINANCIAL DATA:
(in thousands except per share amounts)
Operating revenues ..................... $ 4,163,980 $ 3,816,821 $ 3,406,170 $ 2,872,751 $ 2,591,933
Operating expenses ..................... 3,480,369 3,292,585 3,055,335 2,559,220 2,275,224
----------- ----------- ----------- ----------- -----------
Operating income ....................... 683,611 524,236 350,835 313,531 316,709
Other expenses, net .................... (21,501) 7,280 9,473 8,391 17,186
----------- ----------- ----------- ----------- -----------
Income before income taxes ............. 705,112 516,956 341,362 305,140 299,523
Provision for income taxes ............. 271,681 199,184 134,025 122,514 120,192
----------- ----------- ----------- ----------- -----------
Net income ............................. $ 433,431 $ 317,772 $ 207,337 $ 182,626 $ 179,331
=========== =========== =========== =========== ===========
Net income per share, basic(1) ......... $ 1.30 $ .97 $ .64 $ .56 $ .56
Net income per share, diluted(1) ....... $ 1.23 $ .93 $ .61 $ .55 $ .54
Cash dividends per common share(1) ..... $ .02834 $ .02206 $ .01955 $ .01778 $ .01778
Total assets at period-end ............. $ 4,715,996 $ 4,246,160 $ 3,723,479 $ 3,256,122 $ 2,823,071
Long-term obligations at period-end .... $ 623,309 $ 628,106 $ 650,226 $ 661,010 $ 583,071
Stockholders' equity at period-end ..... $ 2,397,918 $ 2,009,018 $ 1,648,312 $ 1,427,318 $ 1,238,706
OPERATING DATA:
Revenue passengers carried ............. 52,586,400 50,399,960 49,621,504 44,785,573 42,742,602(3)
Revenue passenger miles (RPMs) (000s) .. 31,419,110 28,355,169 27,083,483 23,327,804 21,611,266
Available seat miles (ASMs) (000s) ..... 47,543,515 44,487,496 40,727,495 36,180,001 32,123,974
Load factor ............................ 66.1% 63.7% 66.5% 64.5% 67.3%
Average length of passenger haul (miles) 597 563 546 521 506
Trips flown ............................ 806,822 786,288 748,634 685,524 624,476
Average passenger fare ................. $ 75.38 $ 72.21 $ 65.88 $ 61.64 $ 58.44
Passenger revenue yield per RPM ........ 12.62(cent) 12.84(cent) 12.07(cent) 11.83(cent) 11.56(cent)
Operating revenue yield per ASM ........ 8.76(cent) 8.58(cent) 8.36(cent) 7.94(cent) 8.07(cent)
Operating expenses per ASM ............. 7.32(cent) 7.40(cent) 7.50(cent) 7.07(cent) 7.08(cent)
Fuel cost per gallon (average) ......... 45.67(cent) 62.46(cent) 65.47(cent) 55.22(cent) 53.92(cent)
Number of employees at year-end ........ 25,844 23,974 22,944 19,933 16,818
Size of fleet at year-end (2) .......... 280 261 243 224 199
</TABLE>
- ------------------
(1) On July 22, 1998 the Company's Board of Directors declared a three for
two stock split on the Company's Common Stock, distributed on August
20, 1998. Except as specifically noted elsewhere, all share and per
share data in this annual report have been restated to give effect to
the stock split, as well as prior stock splits previously disclosed.
(2) Includes leased aircraft.
(3) Includes certain estimates for Morris.
10
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
YEAR IN REVIEW
In 1998, Southwest posted a record annual profit for the seventh consecutive
year and a profit for the 26th consecutive year. The Company also posted record
operating revenues; record operating income; the highest net profit margin since
1981 of 10.4 percent; and the highest operating profit margin since 1981 of 16.4
percent. The Company experienced strong revenue growth, low unit costs, and
continued strong demand for our product.
At the end of 1998, Southwest served 52 cities in 26 states. We added service to
Manchester, New Hampshire, in June 1998 and have been very pleased with the
results. We have plans to add new service to Islip, New York, on Long Island in
March 1999 and will begin serving at least one other new city in 1999. With the
net addition of at least 28 aircraft in 1999 (32 new Boeing 737-700s, two used
- -300s, and the retirement of six older -200s), we will also continue to add
additional flights to cities we already serve. We are actively pursuing the
acquisition of additional used 737-300s that would add to our 1999 expansion
efforts.
During 1998, Boeing experienced production delays related to the 737 production
line. These production delays, for the most part, have been remedied by Boeing
and we currently do not anticipate any significant delays in 1999.
Also during 1998, the Company's Customer Service and Reservations Sales Agents,
represented by the International Association of Machinists and Aerospace
Workers, AFL-CIO, and Flight Dispatchers, represented by the Southwest Airlines
Employees Association, ratified collective bargaining agreements which will run
through the years 2002 and 2009, respectively. In addition, in September 1998,
the Company's pilots voted to continue their ten-year agreement with the Company
which next becomes amendable in 2004.
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997 The Company's consolidated net income for 1998 was
$433.4 million ($1.23 per share, diluted), as compared to the corresponding 1997
amount of $317.8 million ($.93 per share, diluted), an increase of 36.4 percent.
The prior years' earnings per share amounts have been restated for the 1998
three-for-two stock split (see Note 7 to the Consolidated Financial Statements).
11
<PAGE> 13
OPERATING REVENUES Consolidated operating revenues increased by 9.1 percent in
1998 to $4,164.0 million, compared to $3,816.8 million for 1997. This increase
in 1998 operating revenues was derived primarily from an 8.9 percent increase in
passenger revenues as a result of a 10.8 percent increase in revenue passenger
miles (RPMs) offset by a 1.7 percent decrease in passenger revenue yield per
RPM. While Southwest's passenger revenues increased 8.9 percent in 1998, the RPM
yield decline resulted from the higher load factors, a 6.0 percent increase in
passenger trip lengths, and higher federal excise taxes on domestic tickets.
Assuming load factors and passenger trip lengths continue to be above year-ago
levels, RPM yields will continue this trend. (The immediately preceding sentence
is a forward-looking statement which involves uncertainties that could result in
actual results differing materially from expected results. Such uncertainties
include, but may not be limited to, competitive responses from other air
carriers and general economic conditions.)
The 10.8 percent increase in RPMs in 1998 exceeded the 6.9 percent increase in
available seat miles (ASMs), resulting in an increase in load factor from 63.7
percent in 1997 to 66.1 percent in 1998. The 1998 ASM growth resulted from the
net addition of 19 aircraft during the year. The load factor was 59.2 percent in
January 1999, up 5.2 points from January 1998.
Freight revenues in 1998 were $98.5 million, compared to $94.8 million in 1997.
The 3.9 percent increase in freight revenues fell short of the 6.9 percent
increase in ASMs for the same period. United States mail revenue declined 2.5
percent in 1998 and 9.4 percent for fourth quarter 1998 as the postal service
continues to shift away from commercial carriers. This trend is expected to
continue in 1999. Other air freight revenues increased 8.5 percent in 1998 due
to increased capacity.
Other revenues increased by 22.7 percent in 1998 to $101.7 million, compared to
$82.9 million in 1997. This increase is 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 Consolidated operating expenses for 1998 were $3,480.4
million, compared to $3,292.6 million in 1997, an increase of 5.7 percent,
compared to the 6.9 percent increase in capacity. Operating expenses per ASM
decreased 1.1 percent in 1998, compared to 1997, primarily due to a 26.9 percent
decrease in average jet fuel price. The decrease in average jet fuel prices was
offset by a $36.1 million increase in Profitsharing
12
<PAGE> 14
and Employee savings plan contributions and an increase in maintenance costs
primarily due to unusually low aircraft engine overhaul costs in the first half
of 1997.
Unit costs are expected to continue to benefit in first quarter 1999, versus
first quarter 1998, from lower jet fuel prices. Excluding jet fuel costs,
operating expenses per ASM are expected to increase in first quarter 1999
compared to first quarter 1998 primarily due to higher Profitsharing and
Employee savings plan contributions and increased advertising primarily related
to the opening of Islip, New York, on Long Island on March 14, 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.)
Operating expenses per ASM for 1998 and 1997 were as follows:
OPERATING EXPENSES PER ASM
<TABLE>
<CAPTION>
INCREASE PERCENT
1998 1997 (DECREASE) CHANGE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Salaries, wages,
and benefits......... 2.35(cent) 2.26(cent) .09(cent) 4.0%
Employee profitsharing
and savings plans.... .35 .30 .05 16.7
Fuel and oil.................. .82 1.11 (.29) (26.1)
Maintenance materials and
repairs.............. .64 .58 .06 10.3
Agency commissions............ .33 .35 (.02) (5.7)
Aircraft rentals.............. .43 .45 (.02) (4.4)
Landing fees and
other rentals........ .45 .46 (.01) (2.2)
Depreciation.................. .47 .44 .03 6.8
Other......................... 1.48 1.45 .03 2.1
- --------------------------------------------------------------------------------
Total....................... 7.32(cent) 7.40(cent) (.08)(cent) (1.1)%
- --------------------------------------------------------------------------------
</TABLE>
Salaries, wages, and benefits per ASM increased 4.0 percent in 1998. This
increase resulted primarily from a 6.9 percent increase in 1998 average salary
and benefits cost per Employee. The increase in average salary and benefits cost
per Employee primarily is due to higher effective wage rates, lower productivity
in 1998 caused by Boeing aircraft delivery delays, and increased health care and
workers' compensation costs.
13
<PAGE> 15
Profitsharing and Employee savings plans expense per ASM increased 16.7 percent
in 1998, primarily due to higher earnings available for profitsharing.
Fuel and oil expenses per ASM decreased 26.1 percent in 1998, primarily due to a
26.9 percent decrease from 1997 in the average jet fuel cost per gallon. The
average price paid for jet fuel in 1998 was $.4567 compared to $.6246 in 1997.
During fourth quarter 1998, the average cost per gallon decreased 28.0 percent
to $.4346 compared to $.6040 in fourth quarter 1997. In January 1999, fuel
prices averaged approximately $.38 per gallon. Year-over-year decreases in jet
fuel prices are expected to continue in first quarter 1999 due to the continued
oversupply of crude oil and related products, along with the effects of the
Company's current fuel hedging positions. (The immediately preceding sentence is
a forward-looking statement which involves 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.)
Maintenance materials and repairs per ASM increased 10.3 percent in 1998,
compared to 1997, primarily as a result of an unusually low number of aircraft
engine overhauls in the first six months of 1997. Fourth quarter 1998
maintenance materials and repairs per ASM increased 3.2 percent over fourth
quarter 1997. We expect modest year-over-year unit-cost growth for maintenance
materials and repairs in 1999. (The immediately preceding sentence is a
forward-looking statement which involves uncertainties that could result in
actual results differing materially from expected results. Such uncertainties
include, but may not be limited to, any unanticipated required aircraft airframe
or engine repairs.)
Agency commissions per ASM decreased 5.7 percent in 1998, when compared to 1997,
primarily due to a decrease in the percentage of commissionable sales.
Aircraft rentals per ASM decreased 4.4 percent in 1998, compared to 1997,
primarily due to a lower percentage of the aircraft fleet being leased.
Depreciation expense per ASM increased 6.8 percent in 1998, compared to 1997,
primarily due to a higher percentage of the aircraft fleet being owned.
Effective January 1, 1999, the Company will revise its estimated useful lives of
its Boeing 737-300/500 aircraft from 20 years to 23 years. This change in
accounting estimate will decrease aircraft depreciation by approximately $25
million in 1999.
14
<PAGE> 16
Other operating expenses per ASM increased 2.1 percent in 1998, compared to
1997, 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 costs. Advertising costs are expected
to increase in first quarter 1999 as a result of opening a new city in March
1999. (The immediately preceding sentence is a forward-looking statement which
involves uncertainties that could result in actual results differing materially
from expected results. Such uncertainties include, but may not be limited to,
competitive responses from other air carriers and general economic conditions.)
OTHER "Other expenses (income)" included interest expense, capitalized interest,
interest income, and nonoperating gains and losses. Interest expense decreased
$7.2 million in 1998 primarily due to the February 1998 redemption of $100
million of senior unsecured 9 1/4% Notes originally issued in February 1991.
Capitalized interest increased $5.8 million in 1998 as a result of higher 1998
progress payment balances. Interest income for 1998 decreased primarily due to
lower invested cash balances. Nonoperating gains in 1998 primarily included
contractual penalties due from Boeing as a result of aircraft delivery delays.
INCOME TAXES The provision for income taxes, as a percentage of income before
taxes, was unchanged from 1997 to 1998.
1997 COMPARED WITH 1996 The Company's consolidated net income for 1997 was
$317.8 million ($.93 per share, diluted), as compared to the corresponding 1996
amount of $207.3 million ($.61 per share, diluted), an increase of 53.3 percent.
OPERATING REVENUES Consolidated operating revenues increased by 12.1 percent in
1997 to $3,816.8 million, compared to $3,406.2 million for 1996. This increase
in 1997 operating revenues was derived primarily from an 11.3 percent increase
in passenger revenues as a result of a 4.7 percent increase in RPMs and a 6.4
percent increase in passenger revenue yield per RPM. Southwest's passenger
revenues benefited from a strong U.S. economy, strong demand for air travel,
increased fares, and a favorable mix of higher yielding fares.
The 4.7 percent increase in RPMs in 1997, coupled with a 9.2 percent increase in
ASMs, resulted in a decrease in load factor from 66.5 percent in 1996 to 63.7
percent in 1997. The decrease in load factor was primarily the result of less
promotional fare
15
<PAGE> 17
activity in 1997. The 1997 ASM growth resulted from the addition of 18 aircraft
during the year.
Freight revenues in 1997 were $94.8 million, compared to $80.0 million in 1996.
The 18.4 percent increase in freight revenues exceeded the 9.2 percent increase
in ASMs for the same period primarily due to an increase in United States mail
services and increased air freight volumes resulting, in part, from the United
Parcel Service labor strike during third quarter 1997.
Other revenues increased by 45.6 percent in 1997 to $82.9 million, compared to
$56.9 million in 1996. This increase is primarily due to the sale of frequent
flyer segment credits to participating partners in the Company's Rapid Rewards
frequent flyer program.
OPERATING EXPENSES Consolidated operating expenses for 1997 were $3,292.6
million, compared to $3,055.3 million in 1996, an increase of 7.8 percent,
compared to the 9.2 percent increase in capacity. Operating expenses per ASM
decreased 1.3 percent in 1997, compared to 1996, primarily due to lower jet fuel
prices; lower aircraft engine repair costs; and favorable results from numerous
Companywide cost reduction efforts.
Salaries, wages, and benefits per ASM increased 1.8 percent in 1997. This
increase resulted primarily from a 2.4 percent increase in 1997 average salary
and benefits cost per Employee, partially offset by slower growth in the number
of Employees. The increase in average salary and benefits cost per Employee
primarily is due to increased health care costs.
The Company's Flight Attendants are subject to an agreement with the Transport
Workers Union of America, AFL-CIO (TWU), which became amendable May 31, 1996.
The Company reached an agreement with the TWU, which was ratified by its
membership in December 1997. The new contract becomes amendable in May 2002.
Profitsharing and Employee savings plans expense per ASM increased 30.4 percent
in 1997, primarily due to higher earnings available for profitsharing.
Fuel and oil expenses per ASM decreased 6.7 percent in 1997, primarily due to a
4.6 percent decrease from 1996 in the average jet fuel cost per gallon, coupled
with a slight decrease in the average fuel burn rate from 1996. The average
price paid for jet fuel in 1997 was $.6246 compared to $.6547 in 1996. During
fourth quarter 1997, the average cost per gallon decreased 17.5 percent to
$.6040 compared to $.7323 in fourth quarter 1996.
16
<PAGE> 18
Maintenance materials and repairs per ASM decreased 6.5 percent in 1997,
compared to 1996, primarily as a result of lower engine overhaul costs in the
first three quarters of 1997, when compared to the same periods in 1996.
On August 1, 1997, the Company signed a ten-year engine maintenance contract
with General Electric Engine Services, Inc. (General Electric). Under the terms
of the contract, Southwest will pay General Electric a rate per flight hour in
exchange for General Electric performing substantially all engine maintenance
for the CFM56-3 engines on the 737-300 and 737-500 aircraft. The Company has a
similar agreement with General Electric with respect to the engines on the
737-700 aircraft. Maintenance on the Pratt & Whitney JT8-D engines on the
737-200 aircraft will continue to be performed by General Electric on a time and
materials basis. By consolidating its engine repair work and committing to ten
years, Southwest believes it will spend substantially less over the course of
the contract versus what it would have spent absent this new agreement. (The
immediately preceding sentence is a forward-looking statement which involves
uncertainties that could result in actual results differing materially from
expected results; such uncertainties include the number of unscheduled engine
removals, labor rates, and competition in the engine overhaul market.)
Agency commissions per ASM remained unchanged in 1997, when compared to 1996, as
the mix of commissionable sales was relatively unchanged.
Aircraft rentals per ASM decreased 4.3 percent in 1997, compared to 1996,
primarily due to a lower percentage of the aircraft fleet being leased.
Depreciation expense per ASM decreased 2.2 percent in 1997, compared to 1996,
due to an increase in the average life of depreciable assets.
Other operating expenses per ASM decreased 4.0 percent in 1997, compared to
1996, primarily due to lower credit card processing costs, insurance rates,
passenger costs, communications costs, and favorable results from numerous other
Companywide cost reduction efforts.
OTHER "Other expenses (income)" included interest expense, capitalized interest,
interest income, and nonoperating gains and losses. Interest expense increased
$4.2 million in 1997 primarily due to the February 1997 issuance of $100 million
of senior unsecured 7 3/8% Debentures due March 1, 2027. Capitalized interest
decreased $2.5 million in 1997 as a result
17
<PAGE> 19
of the timing of payments related to aircraft purchase contracts. Interest
income for 1997 increased $10.8 million primarily due to higher invested cash
balances.
INCOME TAXES The provision for income taxes, as a percentage of income before
taxes, decreased in 1997 to 38.5 percent from 39.3 percent in 1996. The decrease
resulted from lower effective state tax rates, including a reduced California
income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations was $886.1 million in 1998, compared to $610.6
million in 1997.
During 1998, capital expenditures of $947.1 million primarily were for the
purchase of 22 new 737-700 aircraft and four used 737-300 aircraft along with
progress payments for future aircraft deliveries. In February 1998, the Company
redeemed $100 million of senior unsecured 9 1/4% Notes originally issued in
February 1991. At December 31, 1998, capital commitments of the Company
primarily consisted of scheduled aircraft acquisitions and related flight
equipment.
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 completed this repurchase program during third quarter
1998, resulting in the repurchase of approximately 4.9 million post-split
shares.
As of December 31, 1998, Southwest had 105 new 737-700s on firm order, including
32 to be delivered in 1999, with options to purchase another 62. Aggregate
funding required for firm commitments approximated $2,492.5 million through the
year 2004, of which $715.9 million related to 1999. See Note 2 to the
Consolidated Financial Statements for further information.
The Company has various options available to meet its capital and operating
commitments, including cash on hand at December 31, 1998, of $378.5 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 December 31, 1998). 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 currently intends to utilize
for aircraft financings in 1999 and 2000.
18
<PAGE> 20
MARKET RISK
In 1997, the Securities and Exchange Commission issued new rules (Item 305 of
Regulation S-K) which require disclosure of material risks, as defined in Item
305, related to market risk sensitive financial instruments. As defined,
Southwest currently has market risk sensitive instruments related to jet fuel
prices and interest rates.
Airline operators are inherently dependent upon energy to operate and,
therefore, are impacted by changes in jet fuel prices. Jet fuel consumed in 1998
and 1997 represented approximately 11.2 and 15.0 percent of Southwest's
operating expenses, respectively. Southwest endeavors to acquire jet fuel at the
lowest prevailing prices possible.
The Company has historically hedged its exposure to jet fuel price market risk
only on a conservative, limited basis. In December 1998, in order to take
advantage of historically low jet fuel prices, Southwest increased its fuel
hedging activity by entering into fixed price swap agreements hedging
approximately 77 percent and 56 percent of its jet fuel needs in first and
second quarter 1999, respectively. In January 1999, the Company increased its
hedging position for second quarter 1999 to 74 percent. During 1999, the Company
may continue its fuel hedging activities at these higher levels to take
advantage of the historically low jet fuel prices.
The fair values of outstanding fixed price swap agreements and purchased crude
oil call options related to the Company's jet fuel price market risk at December
31, 1998 and 1997, and during the years then ended, were not material. A
hypothetical ten percent increase or decrease in the underlying fuel related
commodity prices from the December 31, 1998, prices would correspondingly change
the fair value of these derivative commodity instruments and their related cash
flows by approximately $10 million.
Airline operators are also inherently capital intensive, as the vast majority of
the Company's assets are aircraft, which are long lived. The Company's strategy
is to capitalize itself conservatively and grow capacity steadily and
profitably. While Southwest does use financial leverage, it has maintained a
strong balance sheet and "A-" or equivalent credit ratings on its senior
unsecured debt with three rating agencies (Standard & Poor's, Moody's, and Duff
& Phelps).
As disclosed in Note 4 to the Consolidated Financial Statements, the Company had
outstanding unsecured debt of $500 million and
19
<PAGE> 21
$600 million at December 31, 1998 and 1997, respectively, of which only $500
million was long-term at December 31, 1997. This long-term debt represents only
12.1 percent and 14.5 percent of total noncurrent assets at December 31, 1998
and 1997, respectively. The Company currently has an average maturity of ten
years for the long-term debt at fixed rates averaging 8.3 percent, which is
comparable to average rates prevailing over the last ten years.
At December 31, 1998, the Company operated 112 aircraft under operating and
capital leases at rates that are substantially fixed. As defined in Item 305,
leases are not market risk sensitive financial instruments and, therefore, are
not included in the interest rate sensitivity analysis below. Commitments
related to leases are disclosed in Note 5 to the Consolidated Financial
Statements.
The Company does not have significant exposure to changing interest rates on its
long-term debt because the interest rates are fixed and the financial leverage
is modest. Additionally, the Company does not have significant exposure to
changing interest rates on invested cash, which was $379 million and $623
million at December 31, 1998 and 1997, respectively. The Company invests
available cash in certificates of deposit and investment grade commercial paper
that have maturities of three months or less. As a result, the interest rate
market risk implicit in these investments at December 31, 1998, is low, as the
investments mature within three months. The Company has not undertaken any
additional actions to cover interest rate market risk and is not a party to any
other interest rate market risk management activities.
A hypothetical ten percent change in market interest rates over the next year
would not impact the Company's earnings or cash flow as the interest rates on
the Company's long-term debt are fixed and its cash investments are short-term.
A ten percent change in market interest rates would not have a material effect
on the fair value of the Company's publicly traded long-term debt or its
short-term cash investments.
The Company does not purchase or hold any derivative financial instruments for
trading purposes.
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
20
<PAGE> 22
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 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 completed. 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 equipment
in the Company's central data center are essentially Year 2000 ready at this
time. The majority of the Company's vital and critical 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 the majority of vital and critical 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 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. 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.
In management's experience, it is not always possible to obtain written
certification of Year 2000 compliance from third party
21
<PAGE> 23
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 expects this evaluation and assessment will be an ongoing process
through the balance of 1999.
YEAR 2000 COSTS The Company has expensed $11.0 million ($7.1 million in 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 $7 million,
which will be expensed as incurred.
RISK OF YEAR 2000 ISSUES The Company believes its project to convert its
computer systems to be Year 2000 ready 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. 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.
22
<PAGE> 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operation-Market Risk".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
SOUTHWEST AIRLINES CO.
We have audited the accompanying consolidated balance sheets of Southwest
Airlines Co. as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southwest Airlines
Co. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
/s/ ERNST & YOUNG LLP
Dallas, Texas
January 20, 1999
23
<PAGE> 25
SOUTHWEST AIRLINES CO.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 378,511 $ 623,343
Accounts receivable ............................ 88,799 76,530
Inventories of parts and supplies,
at cost ...................................... 50,035 52,376
Deferred income taxes (Note 10) ................ 20,734 18,843
Prepaid expenses and other current
assets ....................................... 36,076 35,324
----------- -----------
Total current assets ....................... 574,155 806,416
Property and equipment, at cost
(Notes 2 and 5):
Flight equipment ............................... 4,709,059 3,987,493
Ground property and equipment .................. 720,604 601,957
Deposits on flight equipment
purchase contracts ........................... 309,356 221,874
----------- -----------
5,739,019 4,811,324
Less allowance for depreciation ................ 1,601,409 1,375,631
----------- -----------
4,137,610 3,435,693
Other assets ..................................... 4,231 4,051
----------- -----------
$ 4,715,996 $ 4,246,160
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 157,415 $ 160,891
Accrued liabilities (Note 3) ................... 477,448 426,950
Air traffic liability .......................... 200,078 153,341
Current maturities of long-term
debt (Note 4) ................................ 11,996 121,324
Other current liabilities ...................... 3,716 6,007
----------- -----------
Total current liabilities .................. 850,653 868,513
Long-term debt less current
maturities (Note 4) ............................ 623,309 628,106
Deferred income taxes (Note 10) .................. 549,207 438,981
Deferred gains from sale and
leaseback of aircraft .......................... 238,412 256,255
Other deferred liabilities ....................... 56,497 45,287
Commitments and contingencies (Notes 2, 5, and 10)
Stockholders' equity (Notes 7 and 8):
Common stock, $1.00 par value:
850,000,000 shares authorized;
335,904,306 and 221,207,083
shares issued in 1998 and
1997, respectively ........................... 335,904 221,207
Capital in excess of par value ................. 89,820 155,696
Retained earnings .............................. 2,044,975 1,632,115
Treasury stock, at cost: 3,601,121
shares in 1998 ............................... (72,781) --
----------- -----------
Total stockholders' equity .................. 2,397,918 2,009,018
----------- -----------
$ 4,715,996 $ 4,246,160
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
24
<PAGE> 26
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................ $ 433,431 $ 317,772 $ 207,337
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation .......................... 225,212 195,568 183,470
Deferred income taxes ................. 108,335 81,711 67,253
Amortization of deferred gains
on sale and leaseback of
aircraft ......................... (15,251) (15,414) (18,263)
Amortization of scheduled
airframe overhauls ................... 22,763 20,540 20,539
Changes in certain assets and
liabilities:
Accounts receivable .............. (12,269) (3,090) 6,341
Other current assets ............. 1,589 6,243 (19,534)
Accounts payable and
accrued liabilities .......... 53,194 8,751 132,096
Air traffic liability ............ 46,737 (4,757) 26,942
Other current liabilities ........ 19,293 (4,204) 5,334
Other ................................. 3,101 7,468 3,713
--------- --------- ---------
Net cash provided by
operating activities ........ 886,135 610,588 615,228
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ....... (947,096) (688,927) (677,431)
Net cash used in investing
activities .................. (947,096) (688,927) (677,431)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt ................ -- 98,764 --
Proceeds from aircraft sale and
leaseback transactions ................ -- -- 330,000
Payment of long-term debt and capital
lease obligations ..................... (118,859) (12,665) (12,695)
Payment of cash dividends ................. (9,284) (6,593) (6,216)
Proceeds from Employee stock plans ........ 44,272 40,335 15,592
Repurchase of common stock .................... (100,000) -- --
--------- --------- ---------
Net cash provided by (used in)
financing activities ........ (183,871) 119,841 326,681
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .......................... (244,832) 41,502 264,478
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ................................. 623,343 581,841 317,363
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD .................................... $ 378,511 $ 623,343 $ 581,841
========= ========= =========
CASH PAYMENTS FOR:
Interest, net of amount capitalized ............ $ 33,384 $ 42,372 $ 36,640
Income taxes ................................... 147,447 107,066 66,447
</TABLE>
SEE ACCOMPANYING NOTES.
25
<PAGE> 27
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
CAPITAL
IN EXCESS
COMMON OF RETAINED TREASURY
STOCK PAR VALUE EARNINGS STOCK TOTAL
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 .......... $ 144,033 $ 162,704 $ 1,120,581 $ -- $ 1,427,318
Issuance of common stock upon
exercise of executive stock
options and pursuant to Employee
stock option and purchase plans
(Note 8) .......................... 1,079 14,513 -- -- 15,592
Tax benefit of options exercised .... -- 4,433 -- -- 4,433
Cash dividends, $.0195 per share .... -- -- (6,368) -- (6,368)
Net income - 1996 ................... -- -- 207,337 -- 207,337
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 .......... 145,112 181,650 1,321,550 -- 1,648,312
Three-for-two stock split (Note 7) .. 73,578 (73,578) -- -- --
Issuance of common stock upon
exercise of executive stock
options and pursuant to Employee
stock option and purchase plans
(Note 8) .......................... 2,517 37,818 -- -- 40,335
Tax benefit of options exercised .... -- 9,806 -- -- 9,806
Cash dividends, $.0221 per share .... -- -- (7,207) -- (7,207)
Net income - 1997 ................... -- -- 317,772 -- 317,772
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 .......... 221,207 155,696 1,632,115 -- 2,009,018
Three-for-two stock split (Note 7) .. 111,894 (111,894) -- -- --
Purchase of shares of treasury
stock (Note 7) ................... -- -- -- (100,000) (100,000)
Issuance of common and treasury stock
upon exercise of executive stock
options and pursuant to Employee
stock option and purchase plans
(Note 8) .......................... 2,803 24,434 (10,184) 27,219 44,272
Tax benefit of options exercised .... -- 21,584 -- -- 21,584
Cash dividends, $.0283 per share .... -- -- (10,387) -- (10,387)
Net income - 1998 ................... -- -- 433,431 -- 433,431
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 .......... $ 335,904 $ 89,820 $ 2,044,975 $ (72,781) $ 2,397,918
=========== =========== =========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
26
<PAGE> 28
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES:
Passenger ...................... $ 3,963,781 $ 3,639,193 $ 3,269,238
Freight ........................ 98,500 94,758 80,005
Other .......................... 101,699 82,870 56,927
----------- ----------- -----------
Total operating revenues .... 4,163,980 3,816,821 3,406,170
OPERATING EXPENSES:
Salaries, wages, and
benefits (Note 9) ............ 1,285,942 1,136,542 999,719
Fuel and oil ................... 388,348 494,952 484,673
Maintenance materials and
repairs ...................... 302,431 256,501 253,521
Agency commissions ............. 157,766 157,211 140,940
Aircraft rentals ............... 202,160 201,954 190,663
Landing fees and other
rentals ...................... 214,907 203,845 187,600
Depreciation ................... 225,212 195,568 183,470
Other operating expenses ....... 703,603 646,012 614,749
----------- ----------- -----------
Total operating expenses .... 3,480,369 3,292,585 3,055,335
----------- ----------- -----------
OPERATING INCOME ................. 683,611 524,236 350,835
OTHER EXPENSES (INCOME):
Interest expense ............... 56,276 63,454 59,269
Capitalized interest ........... (25,588) (19,779) (22,267)
Interest income ................ (31,083) (36,616) (25,797)
Nonoperating (gains) losses,
net ........................... (21,106) 221 (1,732)
----------- ----------- -----------
Total other expenses (income) (21,501) 7,280 9,473
----------- ----------- -----------
INCOME BEFORE INCOME TAXES ....... 705,112 516,956 341,362
PROVISION FOR INCOME TAXES
(NOTE 10) ...................... 271,681 199,184 134,025
----------- ----------- -----------
NET INCOME ....................... $ 433,431 $ 317,772 $ 207,337
=========== =========== ===========
NET INCOME PER SHARE, BASIC
(NOTES 7, 8, AND 11) ........... $ 1.30 $ .97 $ .64
=========== =========== ===========
NET INCOME PER SHARE, DILUTED
(NOTES 7, 8, AND 11) ............. $ 1.23 $ .93 $ .61
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
27
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Southwest Airlines Co. (Southwest) is a major domestic
airline that provides shorthaul, high-frequency, point-to-point, low-fare
service. The consolidated financial statements include the accounts of Southwest
and its wholly owned subsidiaries (the Company). All significant intercompany
balances and transactions have been eliminated. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from these estimates. Certain prior year amounts have been reclassified for
comparison purposes.
CASH AND CASH EQUIVALENTS Cash equivalents consist of certificates of deposit
and investment grade commercial paper issued by major corporations and financial
institutions that are highly liquid and have original maturities of three months
or less. Cash and cash equivalents are carried at cost, which approximates
market value.
INVENTORIES Inventories of flight equipment expendable parts, materials, and
supplies are carried at average cost. These items are charged to expense when
issued for use.
PROPERTY AND EQUIPMENT Depreciation is provided by the straight-line method to
estimated residual values over periods ranging from 20 to 25 years for flight
equipment and 3 to 30 years for ground property and equipment. Property under
capital leases and related obligations are recorded at an amount equal to the
present value of future minimum lease payments computed on the basis of the
Company's incremental borrowing rate or, when known, the interest rate implicit
in the lease. Amortization of property under capital leases is on a
straight-line basis over the lease term and is included in depreciation expense.
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows to be generated by those assets are less than the
carrying amounts of those assets.
AIRCRAFT AND ENGINE MAINTENANCE The cost of engine overhauls and routine
maintenance costs for aircraft and engines are charged to maintenance expense as
incurred. Scheduled airframe overhaul costs are capitalized and amortized over
the estimated period
28
<PAGE> 30
benefited, presently the lesser of ten years or the remaining life of the
aircraft. Modifications that significantly enhance the operating performance or
extend the useful lives of aircraft or engines are capitalized and amortized
over the remaining life of the asset.
REVENUE RECOGNITION Passenger revenue is recognized when transportation is
provided. Tickets sold but not yet used are included in "Air traffic liability,"
which includes estimates that are evaluated and adjusted periodically. Any
adjustments resulting therefrom are included in results of operations for the
periods in which the evaluations are completed.
FREQUENT FLYER PROGRAM The Company accrues the estimated incremental cost of
providing free travel awards earned under its Rapid Rewards frequent flyer
program. The Company also sells flight segment credits to companies
participating in its Rapid Rewards frequent flyer program. The revenue from the
sale of flight segment credits is recognized when the credits are sold.
ADVERTISING The Company expenses the costs of advertising as incurred.
Advertising expense for the years ended December 31, 1998, 1997, and 1996 was
$119,739,000, $112,961,000, and $109,136,000, respectively.
STOCK-BASED EMPLOYEE COMPENSATION Pursuant to Statement of Financial Accounting
Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, the
Company accounts for stock-based compensation plans utilizing the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued
to Employees and related Interpretations.
DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes purchased crude oil call
options and fixed price swap agreements to hedge a portion of its exposure to
fuel price fluctuations. The cost of purchased crude oil call options and gains
and losses on fixed price swap agreements are deferred and charged or credited
to fuel expense in the same month that the underlying fuel being hedged is used.
Gains and losses resulting from hedging positions terminated or settled early
are recorded to fuel expense in the month of termination or settlement. Gains
and losses on hedging transactions have not been material.
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments
and Hedging Activities, which is required to be adopted in years beginning after
June 15, 1999. SFAS 133 permits early adoption as of the beginning of any fiscal
quarter after its issuance. The Company expects to adopt the new
29
<PAGE> 31
Statement effective January 1, 2000. SFAS 133 will require the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company has not yet determined what the effect of
SFAS 133 will be on the earnings and financial position of the Company.
2. COMMITMENTS
The Company's contractual purchase commitments consist primarily of scheduled
aircraft acquisitions. Thirty-two 737-700 aircraft are scheduled for delivery in
1999, 21 in 2000, 21 in 2001, 21 in 2002, five in 2003, and five in 2004. In
addition, the Company has options to purchase up to 62 -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 -700s
scheduled subsequent to 2000. Aggregate funding needed for firm commitments is
approximately $2,492.5 million, subject to adjustments for inflation, due as
follows: $715.9 million in 1999, $520.2 million in 2000, $498.7 million in 2001,
$515.8 million in 2002, $152.8 million in 2003, and $89.1 million in 2004.
3. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
(In thousands) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Employee profitsharing and
savings plans (Note 9)...... $ 123,195 $ 92,857
Aircraft rentals ................ 121,868 123,669
Vacation pay .................... 54,781 50,812
Other ........................... 177,604 159,612
-------------------------
$ 477,448 $ 426,950
=========================
</TABLE>
30
<PAGE> 32
4. LONG-TERM DEBT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
(In thousands) 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
9 1/4% Notes due 1998 .... $ -- $100,000
9.4% Notes due 2001 ...... 100,000 100,000
8 3/4% Notes due 2003 .... 100,000 100,000
8% Notes due 2005 ........ 100,000 100,000
7 7/8% Notes due 2007 .... 100,000 100,000
7 3/8% Debentures due 2027 100,000 100,000
Capital leases (Note 5) .. 133,190 152,324
Other .................... 4,481 --
----------------------------
637,671 752,324
Less current maturities .. 11,996 121,324
Less debt discount ....... 2,366 2,894
----------------------------
$623,309 $628,106
============================
</TABLE>
On February 28, 1997, the Company issued $100 million of senior unsecured 7 3/8%
Debentures due March 1, 2027. Interest is payable semi-annually on March 1 and
September 1. The Debentures may be redeemed, at the option of the Company, in
whole at any time or in part from time to time, at a redemption price equal to
the greater of the principal amount of the Debentures plus accrued interest at
the date of redemption or the sum of the present values of the remaining
scheduled payments of principal and interest thereon, discounted to the date of
redemption at the comparable treasury rate plus 20 basis points, plus accrued
interest at the date of redemption.
On March 7, 1995, the Company issued $100 million of senior unsecured 8% Notes
due March 1, 2005. Interest is payable semi-annually on March 1 and September 1.
The Notes are not redeemable prior to maturity.
On September 9, 1992, the Company issued $100 million of senior unsecured 7 7/8%
Notes due September 1, 2007. Interest is payable semi-annually on March 1 and
September 1. The Notes are not redeemable prior to maturity.
During 1991, the Company issued $100 million of senior unsecured 9 1/4% Notes,
$100 million of senior unsecured 9.4% Notes, and
31
<PAGE> 33
$100 million of senior unsecured 8 3/4% Notes due February 15, 1998, July 1,
2001, and October 15, 2003, respectively. Interest on the Notes is payable
semi-annually. The 9 1/4% Notes due February 15, 1998, were paid in full upon
maturity. The remaining Notes are not redeemable prior to maturity.
In addition to the credit facilities described above, Southwest has an unsecured
Bank Credit Agreement with a group of banks that permits Southwest to borrow
through May 6, 2002, on a revolving credit basis, up to $475 million. Interest
rates on borrowings under the Credit Agreement can be, at the option of
Southwest, the greater of the agent bank's prime rate or the federal funds rate
plus .5 percent, .17 percent over LIBOR, or a fixed rate offered by the banks at
the time of borrowing. The commitment fee is .08 percent per annum. There were
no outstanding borrowings under this agreement, or prior similar agreements, at
December 31, 1998 or 1997.
5. LEASES
Total rental expense for operating leases charged to operations in 1998, 1997,
and 1996 was $306,629,000, $297,158,000, and $280,389,000, respectively. The
majority of the Company's terminal operations space, as well as 99 aircraft,
were under operating leases at December 31, 1998. The amounts applicable to
capital leases included in property and equipment were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Flight equipment........................... $230,486 $227,803
Less accumulated amortization.............. 133,073 122,346
-----------------------------------
$ 97,413 $105,457
===================================
</TABLE>
Future minimum lease payments under capital leases and noncancelable operating
leases with initial or remaining terms in excess of one year at December 31,
1998, were:
32
<PAGE> 34
<TABLE>
<CAPTION>
- ----------------------------------------------------------
CAPITAL OPERATING
(In thousands) LEASES LEASES
- ----------------------------------------------------------
<S> <C> <C>
1999 ................. $ 20,245 $ 247,208
2000 ................. 16,871 235,955
2001 ................. 17,391 222,688
2002 ................. 17,561 208,311
2003 ................. 17,750 190,925
After 2003 ................. 120,049 1,901,005
-------------------------
Total minimum lease payments 209,867 $3,006,092
==========
Less amount representing
interest ................ 76,677
----------
Present value of minimum
lease payments .......... 133,190
Less current portion ....... 9,400
----------
Long-term portion .......... $ 123,790
==========
</TABLE>
The aircraft leases generally can be renewed, at rates based on fair market
value at the end of the lease term, for one to five years. Most aircraft leases
have purchase options at or near the end of the lease term at fair market value,
but generally not to exceed a stated percentage of the lessor's defined cost of
the aircraft.
6. FINANCIAL INSTRUMENTS
The Company utilizes purchased crude oil call options and fixed price swap
agreements to hedge a portion of its exposure to fuel price fluctuations. Prior
to December 1998, outstanding call options and swap agreements were not
material. At December 31, 1998, the Company had hedged its exposure to fuel
price fluctuations on approximately 77 percent of its first quarter 1999 and 56
percent of its second quarter 1999 anticipated fuel requirements, or 290 million
gallons of fuel products. The fair value of these agreements at December 31,
1998, representing the amount the Company would receive if the agreements were
settled early, was not material.
33
<PAGE> 35
Any outstanding call options or fixed swap agreements expose the Company to
credit loss in the event of nonperformance by the counterparties to the
agreements, but the Company does not expect any of the counterparties to fail to
meet its obligations. The credit exposure related to these financial instruments
is represented by the fair value of contracts with a positive fair value at the
reporting date. To manage credit risks, the Company selects counterparties based
on credit ratings, limits its exposure to a single counterparty, and monitors
the market position of the program and its relative market position with each
counterparty. At December 31, 1998, the Company had no collateral or other
security interests supporting these agreements but was in the process of
negotiating such agreements with a majority of the counterparties.
The Company does not hold or issue any financial instruments for trading
purposes.
The fair values of the Company's long-term debt were based on quoted market
prices. The carrying amounts and estimated fair values of the Company's
long-term debt at December 31, 1998, were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
(In thousands) CARRYING VALUE FAIR VALUE
- -----------------------------------------------------------------------
<S> <C> <C>
9.4% Notes due 2001 ......................... $100,000 $108,929
8 3/4% Notes due 2003 ....................... 100,000 112,702
8% Notes due 2005 ........................... 100,000 109,648
7 7/8% Notes due 2007 ....................... 100,000 111,390
7 3/8% Debentures due 2027................... 100,000 106,657
</TABLE>
The carrying values of all other financial instruments approximate their fair
value.
7. COMMON STOCK
The Company has one class of common stock. Holders of shares of common stock are
entitled to receive dividends when and if declared by the Board of Directors and
are entitled to one vote per share on all matters submitted to a vote of the
shareholders.
At December 31, 1998, the Company had common stock reserved for issuance
pursuant to Employee stock benefit plans (69,453,206 shares) and upon exercise
of rights (405,357,512 shares) pursuant to the Common Stock Rights Agreement, as
amended (Agreement).
34
<PAGE> 36
Pursuant to the Agreement, each outstanding share of the Company's common stock
is accompanied by one common share purchase right (Right). Each Right entitles
its holder to purchase one share of common stock at an exercise price of $7.41
and is exercisable only in the event of a proposed takeover, as defined by the
Agreement. The Company may redeem the Rights at $.0049 per Right prior to the
time that 15 percent of the common stock has been acquired by a person or group.
If the Company is acquired, as defined in the Agreement, each Right will entitle
its holder to purchase for $7.41 that number of the acquiring company's or the
Company's common shares, as provided in the Agreement, having a market value of
two times the exercise price of the Right. The Rights will expire no later than
July 30, 2006.
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. Unless otherwise stated, all
per share data presented in the accompanying consolidated financial statements
and notes thereto have been restated to give effect to the stock splits.
As of July 22, 1998, the Company's Board of Directors increased the Company's
authorization to repurchase shares of its outstanding common stock to $100
million. The Company completed this repurchase program during third quarter
1998, resulting in the repurchase of 4,885,763 shares at an average cost of
$20.47 per share. All of the acquired shares are held as common stock in
treasury, less shares reissued under the Employee stock option and purchase
plans. When treasury shares are reissued, the Company uses a first-in, first-out
method and the excess of repurchase cost over reissuance price, if any, is
treated as a reduction of retained earnings.
8. STOCK PLANS
At December 31, 1998, the Company had seven stock-based compensation plans and
other stock options outstanding, which are described below. The Company applies
APB 25 and related Interpretations in accounting for its stock-based
compensation. Accordingly, no compensation expense is recognized for its fixed
option plans because the exercise prices of the Company's Employee stock options
equal or exceed the market prices of the underlying stock on the dates of the
grants. Compensation expense for other stock options is not material.
35
<PAGE> 37
The Company has six fixed option plans. Under the 1991 Incentive Stock Option
Plan, the Company may grant options to key Employees for up to 20,250,000 shares
of common stock. Under the 1991 Non-Qualified Stock Option Plan, the Company may
grant options to key Employees and non-employee directors for up to 1,687,500
shares of common stock. All options granted under these plans have ten-year
terms and vest and become fully exercisable at the end of three, five, or ten
years of continued employment, depending upon the grant type.
Under the 1995 Southwest Airlines Pilots' Association Non-Qualified Stock Option
Plan (SWAPA Plan), the Company may grant options to Pilots for up to 40,500,000
shares of common stock. An initial grant of approximately 32,788,000 shares was
made on January 12, 1995, at an option price of $8.89 per share, which exceeded
the market price of the Company's stock on that date. Options granted under the
initial grant vest in ten annual increments of ten percent. On September 1 of
each year of the agreement beginning in 1996, additional options will be granted
to Pilots that become eligible during that year. Additional options granted on
September 1, 1998, 1997, and 1996, vest in six annual increments of 16.7
percent, seven annual increments of 14.3 percent, and eight annual increments of
12.5 percent, respectively. Options under all grants must be exercised prior to
January 31, 2007, or within a specified time upon retirement or termination.
Under the 1996 Incentive Stock Option Plan, the Company may grant options to key
Employees for up to 13,500,000 shares of common stock. Under the 1996
Non-Qualified Stock Option Plan, the Company may grant options to key Employees
and non-employee directors for up to 1,293,750 shares of common stock. All
options granted under these plans have ten-year terms and vest and become fully
exercisable at the end of three, five, or ten years of continued employment,
depending upon the grant type.
Under the 1998 Southwest Airlines Employee Association Non-Qualified Stock
Option Plan (SAEA Plan), the Company may grant options to Dispatchers for up to
1,050,000 shares of common stock. An initial grant of 738,000 shares was made on
September 10, 1998, at an option price of $19.62 per share, which exceeded the
market price of the Company's stock on that date. Options granted under the
initial grant vest in annual increments of varying percentages, depending on
seniority level, through 2006. On December 1 of each year of the agreement
beginning in 1998 and through December 1, 2008, additional options will be
granted to Dispatchers that become eligible during that year. No options were
granted on December 1, 1998. Options under all grants must
36
<PAGE> 38
be exercised prior to June 30, 2012, or within a specified time upon retirement
or termination.
Under all fixed option plans, except the SWAPA and SAEA Plans, the exercise
price of each option equals the market price of the Company's stock on the date
of grant. Under the SWAPA and SAEA Plans, for additional options granted each
September 1 and December 1, respectively, the exercise price will be equal to
105 percent of the fair value of such stock on the date of the grant.
Information regarding the Company's six fixed stock option plans, as adjusted
for stock splits, is summarized below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
INCENTIVE PLANS NON-QUALIFIED PLANS
-------------------------------------------------------------------
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding December 31, 1995 .......... 11,726,729 $ 5.99 33,421,656 $ 8.83
Granted - Incentive Plans ........... 3,758,274 11.19 -- --
Granted - SWAPA Plan ................ -- -- 1,048,950 10.59
Granted - Other Non-Qualified Plans . -- -- 155,525 11.19
Exercised ........................... (890,658) 4.57 (653,367) 7.95
Surrendered ......................... (563,504) 8.96 (213,716) 8.89
---------- ----------
Outstanding December 31, 1996 .......... 14,030,841 7.35 33,759,048 8.91
Granted - Incentive Plans ........... 3,682,737 9.67 -- --
Granted - SWAPA Plan ................ -- -- 1,323,000 13.19
Granted - Other Non-Qualified Plans -- -- 218,109 9.67
Exercised ........................... (1,727,889) 6.03 (2,657,746) 8.85
Surrendered ......................... (1,005,019) 9.72 (148,818) 9.06
---------- ----------
Outstanding December 31, 1997 .......... 14,980,670 7.91 32,493,593 9.09
Granted - Incentive Plans ........... 2,738,597 17.72 -- --
Granted - SWAPA Plan ................ -- -- 902,475 19.36
Granted - SAEA Plan ................. -- -- 738,013 19.62
Granted - Other Non-Qualified Plans -- -- 256,191 17.69
Exercised ........................... (2,360,733) 6.27 (2,521,455) 9.07
Surrendered ......................... (834,289) 10.52 (247,252) 9.95
---------- ----------
Outstanding December 31, 1998 .......... 14,524,245 $ 9.89 31,621,565 $ 9.69
========== ==========
Exercisable December 31, 1998 .......... 3,132,557 12,271,309
Available for granting in future periods 11,995,971 6,768,712
</TABLE>
37
<PAGE> 39
The following table summarizes information about stock options outstanding under
the six fixed option plans at December 31, 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------------
WEIGHTED-
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING -AVERAGE NUMBER -AVERAGE
RANGE OF EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.68 to $3.47 3,307,850 2.03 yrs. $ 2.74 1,195,748 $ 2.86
$5.04 to $7.50 485,476 3.07 5.35 141,557 5.36
$8.36 to $10.83 32,844,404 7.85 8.97 12,009,216 8.94
$11.19 to $16.64 5,061,066 6.85 12.23 1,472,115 12.99
$17.71 to $19.62 4,447,014 9.59 18.37 585,230 18.57
------------- -------------
$2.68 to $19.62 46,145,810 7.44 yrs. $ 9.75 15,403,866 $ 9.19
============= =============
</TABLE>
The Company has granted options to purchase the Company's common stock related
to employment contracts with the Company's president and chief executive
officer. Depending upon the grant, these options have terms of ten years from
the date of grant or ten years from the date exercisable and vest and become
fully exercisable over three or four years. No options were granted in 1998 or
1997. In 1996, the Company granted 325,000 options with an exercise price of
$1.00 per share and 1,125,000 options with an exercise price of $10.44 per share
related to the 1996 employment agreement. At December 31, 1998, 1997, and 1996,
total options of 3,688,000, 3,916,000, and 4,270,000 were outstanding,
respectively. At December 31, 1998, total options of 3,108,000 were exercisable
at exercise prices ranging from $1.00 to $10.44 per share. Options for 228,000,
354,000, and 379,500 shares were exercised in 1998, 1997, and 1996,
respectively.
Under the 1991 Employee Stock Purchase Plan (ESPP), at December 31, 1998, the
Company is authorized to issue up to a balance of 855,000 shares of common stock
to Employees of the Company at a price equal to 90 percent of the market value
at the end of each purchase period. Common stock purchases are paid for through
periodic payroll deductions. Participants under the plan received 451,000 shares
in 1998, 660,000 shares in 1997, and 696,000 shares in 1996 at average prices of
$17.45, $10.67, and $10.25, respectively.
Pro forma information regarding net income and net income per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
Employee stock-based compensation plans and other stock options under the fair
value method of SFAS 123. The fair value of each option grant is estimated on
the
38
<PAGE> 40
date of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants under the fixed option plans in
1998, 1997, and 1996, respectively: dividend yield of .16 percent, .22 percent,
and .16 percent; expected volatility of 38.20 percent, 38.23 percent, and 35.37
percent; risk-free interest rate of 4.66 percent, 5.80 percent, and 5.89
percent; and expected lives of 5.0 years for all periods. Assumptions for the
stock options granted in 1996 to the Company's president and chief executive
officer were the same as for the fixed option plans except for the
weighted-average expected lives of 8.0 years.
The weighted-average fair value of options granted under the fixed option plans,
except the SAEA Plan, during 1998, 1997, and 1996 was $7.17, $4.08, and $4.52,
respectively, for the incentive plans; $7.14, $5.11, and $4.11, respectively,
for the SWAPA Plan; and $7.15, $4.08, and $4.52, respectively, for other
non-qualified plans. The weighted-average fair value of options granted in 1998
under the SAEA Plan was $7.25. The weighted-average fair value of options
granted in 1996 to the Company's president and chief executive officer relative
to an employment contract was $6.21. No such options were granted in 1998 or
1997. The weighted-average fair value of each purchase right under the ESPP
granted in 1998, 1997, and 1996, which is equal to the ten percent discount from
the market value of the common stock at the end of each purchase period, was
$1.94, $1.19, and $1.14, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's Employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its Employee stock options.
For purposes of pro forma disclosures, the estimated fair value of stock-based
compensation plans and other options is amortized to expense primarily over the
vesting period. The Company's pro forma net income and net income per share is
as follows:
39
<PAGE> 41
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
(In thousands except per share amounts)
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCOME:
As reported $433,431 $317,772 $207,337
Pro forma $421,097 $306,553 $196,478
NET INCOME PER SHARE, BASIC:
As reported $ 1.30 $.97 $.64
Pro forma $ 1.26 $.93 $.60
NET INCOME PER SHARE, DILUTED:
As reported $ 1.23 $.93 $.61
Pro forma $ 1.20 $.90 $.60
</TABLE>
As required, the pro forma disclosures above include only options granted since
January 1, 1995. Consequently, the effects of applying SFAS 123 for providing
pro forma disclosures may not be representative of the effects on reported net
income for future years until all options outstanding are included in the pro
forma disclosures.
9. EMPLOYEE PROFITSHARING AND SAVINGS PLANS
Substantially all of Southwest's Employees are members of the Southwest Airlines
Co. Profitsharing Plan. Total profitsharing expense charged to operations in
1998, 1997, and 1996 was $120,697,000, $91,256,000, and $59,927,000,
respectively.
The Company sponsors Employee savings plans under Section 401(k) of the Internal
Revenue Code. The plans cover substantially all full-time Employees. The amount
of matching contributions varies by Employee group. Company contributions
generally vest over five years with credit for prior years' service granted.
Company matching contributions expensed in 1998, 1997, and 1996 were
$46,415,000, $39,744,000, and $35,125,000, respectively.
10. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of
deferred tax assets and liabilities at December 31, 1998 and 1997 are as
follows:
40
<PAGE> 42
<TABLE>
<CAPTION>
(In thousands) 1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Accelerated depreciation ........ $641,673 $543,547
Scheduled airframe maintenance .. 40,073 33,202
Other ........................... 95,485 83,607
Total deferred tax liabilities 777,231 660,356
DEFERRED TAX ASSETS:
Deferred gains from sale and
leaseback of aircraft ........ 107,157 112,659
Capital and operating leases .... 61,275 61,747
Other ........................... 80,326 65,812
Total deferred tax assets .... 248,758 240,218
Net deferred tax liability ... $528,473 $420,138
</TABLE>
The provision for income taxes is composed of the following:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT:
Federal .................. $143,989 $102,938 $ 59,101
State .................... 19,357 14,535 7,671
-------- -------- --------
Total current ...... 163,346 117,473 66,772
DEFERRED:
Federal .................. 96,237 75,990 60,967
State .................... 12,098 5,721 6,286
-------- -------- --------
Total deferred ..... 108,335 81,711 67,253
-------- -------- --------
$271,681 $199,184 $134,025
======== ======== ========
</TABLE>
The Company received a statutory notice of deficiency from the Internal Revenue
Service (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
41
<PAGE> 43
several years. Management believes the final resolution of this controversy will
not have a material adverse effect upon the results of operations of the
Company.
The effective tax rate on income before income taxes differed from the federal
income tax statutory rate for the following reasons:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory U.S.
tax rates ....................... $ 246,789 $ 180,935 $ 119,477
Nondeductible items ............... 5,099 5,893 5,168
State income taxes,
net of federal benefit .......... 20,445 13,166 9,072
Other, net ........................ (652) (810) 308
--------- --------- ---------
Total income tax provision ..... $ 271,681 $ 199,184 $ 134,025
========= ========= =========
</TABLE>
11. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(In thousands except per share amounts)
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
NUMERATOR:
Net income, available to common
stockholders-numerator for basic
and diluted earnings per share $433,431 $317,772 $207,337
DENOMINATOR:
Weighted-average shares
outstanding, basic 333,342 328,631 325,676
Dilutive effect of Employee stock
options 19,824 12,557 11,810
-------- -------- --------
Adjusted weighted-average shares
outstanding, diluted 353,166 341,188 337,486
======== ======== ========
NET INCOME PER SHARE:
Basic $ 1.30 $ .97 $ .64
Diluted $ 1.23 $ .93 $ .61
======== ======== ========
</TABLE>
42
<PAGE> 44
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------
1998 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating revenues $942,653 $1,078,841 $1,094,830 $1,047,656
Operating income 111,693 208,548 203,919 159,451
Income before income taxes 114,057 216,547 211,055 163,453
Net income 70,008 133,393 129,645 100,385
Net income per share, basic .21 .40 .39 .30
Net income per share, diluted .20 .38 .37 .29
</TABLE>
<TABLE>
<CAPTION>
1997 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- -------- ------- -------- -------
<S> <C> <C> <C> <C>
Operating revenues $887,095 $956,892 $997,241 $975,593
Operating income 87,203 156,407 151,770 128,856
Income before income taxes 83,401 153,823 150,387 129,345
Net income 50,874 93,832 92,511 80,555
Net income per share, basic .16 .29 .28 .24
Net income per share, diluted .15 .28 .27 .23
</TABLE>
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
43
<PAGE> 45
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Election of Directors" incorporated herein by reference, from pages
1-4 of the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 20, 1999. See "Executive Officers of the Registrant"
in Part I following Item 4 for information relating to executive officers.
ITEM 11. EXECUTIVE COMPENSATION
See "Compensation of Executive Officers," incorporated herein by
reference, from pages 6-9 of the definitive Proxy Statement for Southwest's
Annual Meeting of Shareholders to be held May 20, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Voting Securities and Principal Shareholders," incorporated herein by
reference, from pages 4-5 of the definitive Proxy Statement for Southwest's
Annual Meeting of Shareholders to be held May 20, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Election of Directors" incorporated herein by reference, from pages
1-4 of the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 20, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The financial statements included in Item 8 above are filed as part of
this annual report.
2. Financial Statement Schedules:
There are no financial statement schedules filed as part of this annual
report, since the required information is included in the consolidated
financial statements, including the notes thereto, or the circumstances
requiring inclusion of such schedules are not present.
3. 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 (incorporated by reference to Exhibit 4.1 to
Southwest's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 (File No. 1-7259)).
3.2 Bylaws of Southwest, as amended through February 1994.
(Incorporated by reference to Exhibit 3.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-7259)).
4.1 Restated Credit Agreement dated May 6, 1997, between Southwest
and Bank of America National Trust and Savings Association,
and the other banks named therein, and such banks.
44
<PAGE> 46
(incorporated by reference to Exhibit 4.1 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1997 (File No. 1-7259)); First Amendment to Competitive
Advance and Revolving Credit Facility Agreement dated August
7, 1998; Second Amendment to Competitive Advance and Revolving
Credit Facility Agreement dated January 20, 1999.
4.2 Specimen certificate representing Common Stock of Southwest
(incorporated by reference to Exhibit 4.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 1-7259)).
4.3 Indenture dated as of December 1, 1985 between Southwest and
MBank Dallas, N.A., Trustee, relating to an unlimited amount
of Debt Securities (incorporated by reference to Exhibit 4.1
of Southwest's Current Report on Form 8-K dated February 26,
1986 (File No. 1-7259)) and First Supplemental Indenture dated
as of January 21, 1988, substituting MTrust Corp, National
Association, as Trustee, thereunder (incorporated by reference
to Exhibit 4.3 on Southwest's Annual Report on Form 10-K for
the year ended December 31, 1987 (File 1-7259)).
4.4 Amended and Restated Rights Agreement dated July 18, 1996
between Southwest and Continental Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit
1, Southwest's Registration Statement on Form 8-A/A dated
August 12, 1996 (File No. 1-7259)).
4.5 Indenture dated as of June 20, 1991 between Southwest Airlines
Co. and Bank of New York, successor to NationsBank of Texas,
N.A. (formerly NCNB Texas National Bank), Trustee
(incorporated by reference to Exhibit 4.1 to Southwest's
Current Report on Form 8-K dated June 24, 1991 (File No.
1-7259)).
4.6 Indenture dated as of February 25, 1997 between the Company
and U.S. Trust Company of Texas, N.A. (incorporated by
reference to Exhibit 4.1 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 1-7259)).
Southwest is not filing any other instruments evidencing any
indebtedness because the total amount of securities authorized
under any single such instrument does not exceed 10% of its
total consolidated assets. Copies of such instruments will be
furnished to the Securities and Exchange Commission upon
request.
10.1 Purchase Agreement No. 1810, dated January 19, 1994 between
The Boeing Company and Southwest (incorporated by reference to
Exhibit 10.4 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 1993 (File No. 1-7259)); Supplemental
Agreement No. 1. (incorporated by reference to Exhibit 10.3 to
Southwest's Annual Report on Form 10- K for the year ended
December 31, 1996 (File No. 1-7259)).; Supplemental Agreements
No. 2, 3 and 4 (incorporated by reference to Exhibit 10.2 to
Southwest's Annual Report on form 10-K for the year ended
December 31, 1997 (File No. 1-7259)); Supplemental Agreements
Nos. 5, 6, and 7.
Pursuant to 17 CFR 240.24b-2, confidential information has
been omitted and has been filed separately with the Securities
and Exchange Commission pursuant to a Confidential Treatment
Application filed with the Commission.
The following exhibits filed under paragraph 10 of Item 601
are the Company's compensation plans and arrangements.
45
<PAGE> 47
10.2 Form of Executive Employment Agreement between Southwest and
certain key employees pursuant to Executive Service
Recognition Plan (incorporated by reference to Exhibit 28 to
Southwest Quarterly Report on Form 10-Q for the quarter ended
June 30, 1987 (File No. 1- 7259)).
10.3 1992 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.8 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 1-7259)).
10.4 1996 employment contract between Southwest and Herbert D.
Kelleher and related stock option agreements (incorporated by
reference to Exhibit 10.8 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 1-7259)).
10.5 1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
33-40652)).
10.6 1991 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 33-40652)).
10.7 1991 Employee Stock Purchase Plan as amended May 20, 1992
(incorporated by reference to Exhibit 10.13 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 1-7259)).
10.8 Southwest Airlines Co. Profit Sharing Plan (incorporated by
reference to Exhibit 10.13 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1991 (File No.
1-7259)).
10.9 Southwest Airlines Co. 401(k) Plan (incorporated by reference
to Exhibit 10.14 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 1-7259)).
10.10 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.14 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-7259)).
10.11 1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-20275)).
10.12 1996 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 333-20275)).
22 Subsidiaries of Southwest (incorporated by reference to
Exhibit 22 to Southwest's Annual Report on form 10-K for the
year ended December 31, 1997 (File No. 1-7259)).
23 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
27.2 Restated 1998 Financial Data Schedule
27.3 Restated 1997 Financial Data Schedule
27.4 Restated 1996 Financial Data Schedule
A copy of each exhibit may be obtained at a price of 15 cents per page,
$10.00 minimum order, by writing to: Director of Investor Relations, Southwest
Airlines Co., P.O. Box 36611, Dallas, Texas 75235- 1611.
(b) There were no Form 8-K's filed during the fourth quarter of 1998.
46
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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.
March 18, 1999
By /s/ GARY C. KELLY
----------------------------
Gary C. Kelly
Vice President-Finance,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 18, 1999 on
behalf of the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ HERBERT D. KELLEHER Chairman of the Board of Directors,
- ------------------------------- President and Chief Executive Officer
Herbert D. Kelleher
/s/ GARY C. KELLY Vice President-Finance
- ------------------------------- (Chief Financial and Accounting Officer)
Gary C. Kelly
/s/ SAMUEL E. BARSHOP Director
- -------------------------------
Samuel E. Barshop
/s/ GENE H. BISHOP Director
- -------------------------------
Gene H. Bishop
/s/ C. WEBB CROCKETT Director
- -------------------------------
C. Webb Crockett
/s/ WILLIAM P. HOBBY, JR. Director
- -------------------------------
William P. Hobby, Jr.
/s/ TRAVIS C. JOHNSON Director
- -------------------------------
Travis C. Johnson
/s/ R.W. KING Director
- -------------------------------
R. W. King
/s/ WALTER M. MISCHER, SR. Director
- -------------------------------
Walter M. Mischer, Sr.
/s/ JUNE M. MORRIS Director
- -------------------------------
June M. Morris
</TABLE>
<PAGE> 49
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
---------- -----------
<S> <C>
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 (incorporated by reference to Exhibit 4.1 to
Southwest's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 (File No. 1-7259)).
3.2 Bylaws of Southwest, as amended through February 1994
(incorporated by reference to Exhibit 3.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-7259)).
4.1 Restated Credit Agreement dated May 6, 1997, between Southwest
and Bank of America National Trust and Savings Association,
and the other banks named therein, and such banks.
(incorporated by reference to Exhibit 4.1 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1997 (File No. 1-7259)); First Amendment to Competitive
Advance and Revolving Credit Facility Agreement dated August
7, 1998; Second Amendment to Competitive Advance and Revolving
Credit Facility Agreement dated January 20, 1999.
4.2 Specimen certificate representing Common Stock of Southwest
(incorporated by reference to Exhibit 4.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 1-7259)).
4.3 Indenture dated as of December 1, 1985 between Southwest and
MBank Dallas, N.A., Trustee, relating to an unlimited amount
of Debt Securities (incorporated by reference to Exhibit 4.1
of Southwest's Current Report on Form 8-K dated February 26,
1986 (File No. 1-7259)) and First Supplemental Indenture dated
as of January 21, 1988, substituting MTrust Corp, National
Association, as Trustee, thereunder (incorporated by reference
to Exhibit 4.3 on Southwest's Annual Report on Form 10-K for
the year ended December 31, 1987 (File 1-7259)).
4.4 Amended and Restated Rights Agreement dated July 18, 1996
between Southwest and Continental Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit
1, Southwest's Registration Statement on Form 8-A/A dated
August 12, 1996 (File No. 1-7259)).
4.5 Indenture dated as of June 20, 1991 between Southwest Airlines
Co. and Bank of New York, successor to NationsBank of Texas,
N.A. (formerly NCNB Texas National Bank), Trustee
(incorporated by reference to Exhibit 4.1 to Southwest's
Current Report on Form 8-K dated June 24, 1991 (File No.
1-7259)).
4.6 Indenture dated as of February 25, 1997 between the Company
and U.S. Trust Company of Texas, N.A. (incorporated by
reference to Exhibit 4.1 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 1-7259)).
Southwest is not filing any other instruments evidencing any
indebtedness because the total amount of securities authorized
under any single such instrument does not exceed 10% of its
total consolidated assets. Copies of such instruments will be
furnished to the Securities and Exchange Commission upon
request.
</TABLE>
<PAGE> 50
<TABLE>
<S> <C>
10.1 Purchase Agreement No. 1810, dated January 19, 1994 between
The Boeing Company and Southwest (incorporated by reference to
Exhibit 10.4 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 1993 (File No. 1-7259)); Supplemental
Agreement No. 1. (incorporated by reference to Exhibit 10.3 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 1-7259)).; Supplemental Agreements
No. 2, 3 and 4 (incorporated by reference to Exhibit 10.2 to
Southwest's Annual Report on form 10- K for the year ended
December 31, 1997 (File No. 1-7259)); Supplemental Agreements
Nos. 5, 6, and 7.
Pursuant to 17 CFR 240.24b-2, confidential information has
been omitted and has been filed separately with the Securities
and Exchange Commission pursuant to a Confidential Treatment
Application filed with the Commission.
The following exhibits filed under paragraph 10 of Item 601
are the Company's compensation plans and arrangements.
10.2 Form of Executive Employment Agreement between Southwest and
certain key employees pursuant to Executive Service
Recognition Plan (incorporated by reference to Exhibit 28 to
Southwest Quarterly Report on Form 10-Q for the quarter ended
June 30, 1987 (File No. 1- 7259)).
10.3 1992 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.8 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 1-7259)).
10.4 1996 employment contract between Southwest and Herbert D.
Kelleher and related stock option agreements (incorporated by
reference to Exhibit 10.8 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 1-7259)).
10.5 1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
33-40652)).
10.6 1991 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 33-40652)).
10.7 1991 Employee Stock Purchase Plan as amended May 20, 1992
(incorporated by reference to Exhibit 10.13 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 1-7259)).
10.8 Southwest Airlines Co. Profit Sharing Plan (incorporated by
reference to Exhibit 10.13 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1991 (File No.
1-7259)).
10.9 Southwest Airlines Co. 401(k) Plan (incorporated by reference
to Exhibit 10.14 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 1-7259)).
10.10 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.14 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-7259)).
10.11 1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-20275)).
</TABLE>
<PAGE> 51
<TABLE>
<S> <C>
10.12 1996 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 333-20275)).
22 Subsidiaries of Southwest (incorporated by reference to
Exhibit 22 to Southwest's Annual Report on form 10-K for the
year ended December 31, 1997 (File No. 1-7259)).
23 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
27.2 Restated 1998 Financial Data Schedule
27.3 Restated 1997 Financial Data Schedule
27.4 Restated 1996 Financial Data Schedule
</TABLE>
A copy of each exhibit may be obtained at a price of 15 cents per page,
$10.00 minimum order, by writing to: Director of Investor Relations, Southwest
Airlines Co., P.O. Box 36611, Dallas, Texas 75235- 1611.
(b) There were no Form 8-K's filed during the fourth quarter of 1998.
<PAGE> 1
EXHIBIT 4.1
FIRST AMENDMENT TO COMPETITIVE ADVANCE AND
REVOLVING CREDIT FACILITY AGREEMENT
THIS FIRST AMENDMENT TO COMPETITIVE ADVANCE AND REVOLVING CREDIT
FACILITY AGREEMENT (this "Amendment") is entered into as of August 7, 1998,
among SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), the banks
listed on the signature pages hereof (collectively, the "Banks"), CHASE BANK OF
TEXAS, NATIONAL ASSOCIATION (formerly known as Texas Commerce Bank National
Association), a national banking association, as administrative agent for the
Banks (in such capacity, the "Administrative Agent"), THE CHASE MANHATTAN BANK,
a New York banking corporation, as auction administration agent for the Banks
(in such capacity, the "Auction Administration Agent"), BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, a national banking association, as documentation
agent for the Banks (in such capacity, the "Documentation Agent"), and
NATIONSBANK, N.A. (successor in interest by merger to NationsBank of Texas,
N.A.), a national banking association, as syndication agent for the Banks (in
such capacity, the "Syndication Agent").
The Administrative Agent, the Auction Administration Agent, the
Documentation Agent, the Syndication Agent (collectively, the "Agents"), the
Company, and the Banks have entered into that certain Competitive Advance and
Revolving Credit Facility Agreement dated as of May 6, 1997 (the "Credit
Agreement").
The Company, the Agents and the Banks desire to amend the Credit
Agreement to reduce the Total Commitment and to remove ABN AMRO Bank N.V. as a
Bank.
NOW, THEREFORE, in consideration of the premises and other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Company, the Banks, and the Agents agree as follows:
1. Definitions. Unless otherwise specified herein, terms defined in the
Credit Agreement have the same meaning when used herein.
2. Reduction of Total Commitment. Effective as of the date hereof, the
Total Commitment is hereby reduced from $475,000,000 to $425,000,000.
Accordingly, wherever in the Credit Agreement and Exhibits thereto the amount
"$475,000,000" appears, such amount is hereby amended to be "$425,000,000."
3. Removal of ABN AMRO. Effective as of the date hereof, (a) ABN AMRO
Bank N.V. is hereby removed as a Bank and shall no longer be a party to the
Credit Agreement; (b) the Commitment of ABN AMRO Bank N.V. is hereby terminated;
and (c) Schedule I to the Credit Agreement is amended to delete ABN AMRO Bank
N.V. as a Bank.
4. Remaining Banks. The Commitments of the Banks other than ABN AMRO
Bank N.V. shall remain unchanged, and the respective pro rata shares of such
Banks shall be adjusted accordingly effective as of the date hereof.
<PAGE> 2
5. Waiver of Notice. The Agents and the Banks hereby waive any notice
required for a reduction of the Total Commitment under Section 2.6(a) of the
Credit Agreement.
6. Conditions Precedent. The effectiveness of this Amendment is subject
to the satisfaction of each of the following conditions precedent:
(a) ABN AMRO Bank N.V. shall return to the Administrative
Agent, for delivery to the Company, the original Committed Note and
Competitive Note, if any, payable to ABN AMRO Bank N.V., which
Committed Note and Competitive Note shall be marked "cancelled," or
shall confirm to the Administrative Agent in writing that ABN AMRO Bank
N.V. does not hold a Committed Note or a Competitive Note.
(b) The Administrative Agent shall have received, in
sufficient copies for each Bank, a copy of this Amendment executed by
(i) the Banks and (ii) the Company, together with an Officer's
Certificate from the Company dated the date hereof certifying true and
correct copies of resolutions adopted by the Board of Directors or
Executive Committee, as appropriate, of the Company authorizing the
Company to effect the transactions contemplated by this Amendment.
(c) The Company shall have paid to the Administrative Agent
for the account of ABN AMRO Bank the accrued Facility Fees on the
amount of the ABN AMRO Bank's Commitment which is terminated by this
Amendment.
7. Ratifications. Except as herein specifically amended and modified,
(a) the Credit Agreement is unchanged and continues in full force and effect,
and (b) the Company hereby confirms and ratifies the Credit Agreement's
existence and each and every term, condition, and covenant therein contained, to
the same extent and as though the same were set out herein in full.
8. Representations and Warranties. The Company hereby represents and
warrants to the Banks and the Agents that (a) this Amendment has been duly
executed and delivered by the Company, (b) no action of, or filing with, any
Tribunal is required to authorize, or is otherwise required in connection with,
the execution, delivery, and performance by the Company of this Amendment, (c)
this Amendment is valid and binding upon the Company and is enforceable against
the Company in accordance with its terms, except as limited by the Bankruptcy
Code of the United States of America and all other similar Laws affecting the
rights of creditors generally, (d) the execution, delivery and performance by
the Company of this Amendment does not require the consent of any other Person
and do not and will not constitute a violation of any laws, agreement, or
understanding to which the Company is a party or by which the Company is bound,
(e) the representations and warranties contained in the Credit Agreement, as
amended hereby, and any other Loan Paper are true and correct in all material
respects on and as of the date of execution hereof as though made as of the date
of execution hereof, and (f) as of the date of this Amendment, no Default or
Event of Default has occurred and is continuing.
9. References. All references in the Loan Papers to the Credit
Agreement shall refer to the Credit Agreement as amended by this Amendment, and,
because this amendment is a "Loan
2
<PAGE> 3
Paper" referred to in the Credit Agreement, then the provisions relating to Loan
Papers set forth in the Credit Agreement are incorporated herein by reference,
the same as if set forth herein verbatim.
10. Expenses of the Agents. As provided in the Agreement, Borrower
agrees to pay (i) all reasonable costs and expenses of the Agents in connection
with (A) the preparation, execution, delivery, and administration of this
Amendment, including, without limitation, the reasonable fees and out-of-pocket
expenses of counsel for the Agents with respect thereto and with respect to
advising the Agents as to their respective Rights and responsibilities under
this Amendment and the other Loan Papers, and (B) any amendment, modification,
supplement, or waiver of any of the terms of this Amendment or the other Loan
Papers, and (ii) all reasonable costs and expenses of the Banks and the Agents
(including reasonable counsel's fees, and including reasonable allocated
in-house counsel fees for any Bank or any Agent) in connection with the
enforcement of this Amendment and the other Loan Papers. In addition, the
Company shall pay any and all Taxes payable or determined to be payable in
connection with the execution and delivery of this Amendment and the other Loan
Papers, and agrees to save the Agents and each Bank harmless from and against
any and all liabilities with respect to or resulting from any delay in paying or
omitting to pay such Taxes, if any, which may be payable or determined to be
payable in connection with the execution and delivery of this Amendment.
11. Severability. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
12. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN PAPERS EXECUTED
PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN
DALLAS, DALLAS COUNTY, TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
13. Counterparts. This Amendment may be executed in a number of
identical counterparts, each of which shall be deemed an original. In making
proof of this instrument, it shall not be necessary for any party to account for
all counterparts, and it shall be sufficient for any party to produce but one
such counterpart.
14. Headings. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
15. Parties Bound. This Amendment shall be binding upon and shall inure
to the benefit of the Company, each Agent, and each Bank, and, subject to
Section 8.11 of the Credit Agreement, their respective successors and assigns.
16. ENTIRETY. THIS AMENDMENT, THE CREDIT AGREEMENT AS AMENDED HEREBY,
THE FEE LETTERS BETWEEN THE COMPANY AND THE RESPECTIVE AGENTS, AND THE OTHER
LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES FOR THE
TRANSACTIONS THEREIN, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
SOUTHWEST AIRLINES CO.
By: /s/ GARY C. KELLY
-----------------------------------
Name: Gary C. Kelly
------------------------------
Title: Vice President & CFO
----------------------------
CHASE BANK OF TEXAS, N.A. (formerly known
as Texas Commerce Bank National
Association), as a Bank and as
Administrative Agent
By: /s/ ALLEN K. KING
-----------------------------------
Name: Allen K. King
------------------------------
Title: Vice President
----------------------------
THE CHASE MANHATTAN BANK,
as Auction Administration Agent
By: /s/ CHRISTOPHER CONSOMER
-----------------------------------
Name: Christopher Consomer
------------------------------
Title: Assistant Vice President
----------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Bank and as
Documentation Agent
By: /s/ Craig S. Munro
-----------------------------------
Name: Craig S. Munro
------------------------------
Title: Managing Director
----------------------------
NATIONSBANK, N.A. (successor in interest
by merger to NationsBank of Texas, N.A.),
as a Bank and as Syndication Agent
By: /s/ S.A.B.
-----------------------------------
Name:
------------------------------
Title: Vice President
----------------------------
<PAGE> 5
BANK OF TOKYO-MITSUBISHI
By: /s/ JOHN W. MCGHEE
---------------------------------------
Name: John W. McGhee
---------------------------------
Title: Vice President & Manager
---------------------------------
LANDESBANK SCHESWIG-HOLSTEIN
By: /s/ RICHARD NIX B. CLAUSSEU
---------------------------------------
Name: Richard Nix B. Clausseu
-------------------------------
Title: Vice President Assistant VP
-------------------------------
THE MITSUBISHI TRUST AND BANKING
CORPORATION, NEW YORK BRANCH
By: /s/ SCOTT J. PAIGE
---------------------------------------
Name: Scott J. Paige
--------------------------------
Title: Senior Vice President
--------------------------------
BANK ONE, TEXAS, N.A.
By: /s/ GINA A. NORRIS
---------------------------------------
Name: Gina A. Norris
--------------------------------
Title: Vice President
--------------------------------
FIRST SECURITY BANK, N.A.
By: /s/ STEVEN M. KOHLER
---------------------------------------
Name: Steven M. Kohler
--------------------------------
Title: Vice President
--------------------------------
WACHOVIA BANK OF GEORGIA, N.A.
By: /s/ PAIGE D. MESAROS
---------------------------------------
Name: Paige D. Mesaros
--------------------------------
Title: Vice President
--------------------------------
<PAGE> 6
ABN AMRO BANK N.V.
By: /s/ W. VAN DER HOEF
----------------------------------------
Name: W. van der Hoef
---------------------------------
Title: Vice President
---------------------------------
By: /s/ CLAUDIA C. HELDRING
----------------------------------------
Name: Claudia C. Heldring
---------------------------------
Title: Vice President
---------------------------------
<PAGE> 7
SECOND AMENDMENT TO COMPETITIVE ADVANCE AND
REVOLVING CREDIT FACILITY AGREEMENT
THIS SECOND AMENDMENT TO COMPETITIVE ADVANCE AND REVOLVING CREDIT
FACILITY AGREEMENT (this "Amendment") is entered into as of January 20, 1999,
among SOUTHWEST AIRLINES CO., a Texas corporation (the "Company"), the banks
listed on the signature pages hereof (collectively, the "Banks"), CHASE BANK OF
TEXAS, NATIONAL ASSOCIATION (formerly known as Texas Commerce Bank National
Association), a national banking association, as administrative agent for the
Banks (in such capacity, the "Administrative Agent"), THE CHASE MANHATTAN BANK,
a New York banking corporation, as auction administration agent for the Banks
(in such capacity, the "Auction Administration Agent"), BANK OF AMERICA NATIONAL
TRUST AND SAVINGS ASSOCIATION, a national banking association, as documentation
agent for the Banks (in such capacity, the "Documentation Agent"), and
NATIONSBANK, N.A. (successor in interest by merger to NationsBank of Texas,
N.A.), a national banking association, as syndication agent for the Banks (in
such capacity, the "Syndication Agent").
The Administrative Agent, the Auction Administration Agent, the
Documentation Agent, the Syndication Agent (collectively, the "Agents"), the
Company, and the Banks have entered into that certain Competitive Advance and
Revolving Credit Facility Agreement dated as of May 6, 1997, as amended by that
certain First Amendment to Competitive Advance and Revolving Credit Facility
Agreement dated as of August 7, 1998 (as amended, the "Credit Agreement").
The Company, the Agents and the Banks desire to amend the Credit
Agreement to increase the Total Commitment and to add Citibank, N.A. as a Bank.
NOW, THEREFORE, in consideration of the premises and other valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Company, the Banks, and the Agents agree as follows:
1. Definitions. Unless otherwise specified herein, terms defined in the
Credit Agreement have the same meaning when used herein.
2. Increase of Total Commitment. Effective as of the date hereof, the
Total Commitment is hereby increased from $425,000,000 to $475,000,000.
Accordingly, wherever in the Credit Agreement and Exhibits thereto the amount
"$425,000,000" appears, such amount is hereby amended to be "$475,000,000."
3. Addition of Citibank, N.A.. Effective as of the date hereof, (a)
Citibank, N.A. is hereby added as a Bank and shall be a party to the Credit
Agreement in its capacity as a Bank and shall have all of the rights and
obligations of a Bank thereunder and under the other Loan Papers; (b) the
Commitment of Citibank, N.A. shall be $50,000,000; and (c) Schedule I to the
Credit Agreement is amended to add Citibank, N.A. as a Bank as follows:
<PAGE> 8
<TABLE>
<CAPTION>
Name Lending Office *** Notice Information
- ---- ------------------ ------------------
<S> <C> <C>
Citibank, N.A. Citibank, N.A. Citibank, N.A.
399 Park Avenue 399 Park Avenue
12th Floor, Zone 2 12th Floor, Zone 2
New York, New York 10043 New York, New York 10043
Telecopy: (212) 793-3734 Telecopy: (212) 793-3734
Attn: Thomas Boyle Telephone: (212) 559-6149
Managing Director of Attn: Thomas Boyle
Global Aviation Managing Director of
Global Aviation
</TABLE>
4. Remaining Banks. The Commitments of the Banks which are currently
parties to the Credit Agreement shall remain unchanged, and the respective pro
rata shares of such Banks shall be adjusted accordingly effective as of the date
hereof.
5. Conditions Precedent. The effectiveness of this Amendment is subject
to the satisfaction of each of the following conditions precedent:
(a) The Company shall deliver to the Administrative Agent, if
requested by Citibank, N.A., an original Committed Note and Competitive
Note payable to Citibank, N.A., which Committed Note and Competitive
Note shall be in substantially the forms of Exhibits D-1 and D-2 to the
Credit Agreement, respectively.
(b) The Administrative Agent shall have received, in
sufficient copies for each Bank, a copy of this Amendment executed by
(i) the Banks and (ii) the Company, together with an Officer's
Certificate from the Company dated the date hereof certifying true and
correct copies of resolutions adopted by the Board of Directors or
Executive Committee, as appropriate, of the Company authorizing the
Company to effect the transactions contemplated by this Amendment and
to execute and deliver this Amendment and the Committed Note and
Competitive Note in accordance with subsection (a) above.
6. Ratifications. Except as herein specifically amended and modified,
(a) the Credit Agreement is unchanged and continues in full force and effect,
and (b) the Company hereby confirms and ratifies the Credit Agreement's
existence and each and every term, condition, and covenant therein contained, to
the same extent and as though the same were set out herein in full.
7. Representations and Warranties. The Company hereby represents and
warrants to the Banks and the Agents that (a) this Amendment and the Committed
Note and Competitive Note (if applicable) have been duly executed and delivered
by the Company, (b) no action of, or filing with, any Tribunal is required to
authorize, or is otherwise required in connection with, the execution, delivery,
and performance by the Company of this Amendment and the Committed Note and
Competitive Note (if applicable) except for the routine filing of copies of this
Amendment and certain other Loan Papers with the Securities and Exchange
Commission, (c) this Amendment and the
2
<PAGE> 9
Committed Note and Competitive Note (if applicable) are valid and binding upon
the Company and are enforceable against the Company in accordance with their
terms, except as limited by the Bankruptcy Code of the United States of America
and all other similar Laws affecting the rights of creditors generally, (d) the
execution, delivery and performance by the Company of this Amendment and the
Committed Note and Competitive Note (if applicable) do not require the consent
of any other Person and do not and will not constitute a violation of any laws,
agreement, or understanding to which the Company is a party or by which the
Company is bound, (e) the representations and warranties contained in the Credit
Agreement, as amended hereby, and any other Loan Paper are true and correct in
all material respects on and as of the date of execution hereof as though made
as of the date of execution hereof, and (f) as of the date of this Amendment, no
Default or Event of Default has occurred and is continuing.
8. Additional Representations and Agreements of Citibank, N.A.. By
execution of this Amendment, Citibank, N.A. (a) confirms that it has received a
copy of the Credit Agreement, together with copies of the most recent financial
statements delivered pursuant thereto and such other documents and information
as it has deemed appropriate to make its own credit analysis and decision to
enter into this Amendment and to become a Bank under the Credit Agreement; (b)
agrees that it will, independently and without reliance upon any Agent or any
Bank and based on such documents and information as it shall deem appropriate at
the time, continue to make its own credit decisions in taking or not taking
action under the Credit Agreement; (c) appoints and authorizes the
Administrative Agent, the Auction Administration Agent and the Documentation
Agent to take such action as agent on its behalf and to exercise such powers
under the Credit Agreement and the other Loan Papers as are delegated to such
Agent by the terms thereof, together with such powers as are reasonably
incidental thereto; (d) agrees that it will perform in accordance with their
terms all the obligations which by the terms of the Credit Agreement are
required to be performed by it as a Bank; and (e) attaches hereto a completed
Administrative Questionnaire.
9. References. All references in the Loan Papers to the Credit
Agreement shall refer to the Credit Agreement as amended by this Amendment, and,
because this amendment is a "Loan Paper" referred to in the Credit Agreement,
then the provisions relating to Loan Papers set forth in the Credit Agreement
are incorporated herein by reference, the same as if set forth herein verbatim.
10. Expenses of the Agents. As provided in the Agreement, Borrower
agrees to pay (i) all reasonable costs and expenses of the Agents in connection
with (A) the preparation, execution, delivery, and administration of this
Amendment, including, without limitation, the reasonable fees and out-of-pocket
expenses of counsel for the Agents with respect thereto and with respect to
advising the Agents as to their respective Rights and responsibilities under
this Amendment and the other Loan Papers, and (B) any amendment, modification,
supplement, or waiver of any of the terms of this Amendment or the other Loan
Papers, and (ii) all reasonable costs and expenses of the Banks and the Agents
(including reasonable counsel's fees, and including reasonable allocated
in-house counsel fees for any Bank or any Agent) in connection with the
enforcement of this Amendment and the other Loan Papers. In addition, the
Company shall pay any and all Taxes payable or determined to be payable in
connection with the execution and delivery of this Amendment and the other Loan
Papers, and agrees to save the Agents and each Bank harmless from and against
any and all liabilities with respect to or resulting from any delay in paying or
omitting to pay such Taxes, if any, which may be
3
<PAGE> 10
payable or determined to be payable in connection with the execution and
delivery of this Amendment.
11. Severability. Any provision of this Amendment held by a court of
competent jurisdiction to be invalid or unenforceable shall not impair or
invalidate the remainder of this Amendment and the effect thereof shall be
confined to the provision so held to be invalid or unenforceable.
12. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN PAPERS EXECUTED
PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE PERFORMABLE IN
DALLAS, DALLAS COUNTY, TEXAS AND SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
13. Counterparts. This Amendment may be executed in a number of
identical counterparts, each of which shall be deemed an original. In making
proof of this instrument, it shall not be necessary for any party to account for
all counterparts, and it shall be sufficient for any party to produce but one
such counterpart.
14. Headings. The headings, captions, and arrangements used in this
Amendment are for convenience only and shall not affect the interpretation of
this Amendment.
15. Parties Bound. This Amendment shall be binding upon and shall inure
to the benefit of the Company, each Agent, and each Bank, and, subject to
Section 8.11 of the Credit Agreement, their respective successors and assigns.
16. ENTIRETY. THIS AMENDMENT, THE CREDIT AGREEMENT AS AMENDED HEREBY,
THE FEE LETTERS BETWEEN THE COMPANY AND THE RESPECTIVE AGENTS, AND THE OTHER
LOAN PAPERS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES FOR THE
TRANSACTIONS THEREIN, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS BY THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
[Balance of page intentionally left blank.]
4
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
SOUTHWEST AIRLINES CO.
By: /s/ LAURA WRIGHT
--------------------------------------
Name: Laura Wright
-------------------------------
Title: Treasurer
-------------------------------
CHASE BANK OF TEXAS, N.A. (formerly known
as Texas Commerce Bank National
Association), as a Bank and as
Administrative Agent
By: /s/ MIKE LISTER
--------------------------------------
Name: Mike Lister
-------------------------------
Title: Vice President
-------------------------------
THE CHASE MANHATTAN BANK,
as Auction Administration Agent
By: /s/ CHRISTOPHER CONSOMER
--------------------------------------
Name: Christopher Consomer
-------------------------------
Title: AVP
-------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as a Bank and as
Documentation Agent
By: /s/ CHAS MCDONELL
--------------------------------------
Name: Chas McDonell
-------------------------------
Title: Vice President
-------------------------------
NATIONSBANK, N.A. (successor in interest
by merger to NationsBank of Texas, N.A.),
as a Bank and as Syndication Agent
By: /s/ CHAS MCDONNELL
--------------------------------------
Name: Chas McDonell
-------------------------------
Title: Vice President
-------------------------------
<PAGE> 12
BANK OF TOKYO-MITSUBISHI
By: /s/ DOUG BARNELL
--------------------------------------
Name: Doug Barnell
--------------------------------
Title: Vice President
--------------------------------
LANDESBANK SCHESWIG-HOLSTEIN
GIROZENTRALE
By: /s/ B. CLAUSSEU S. PIEH
--------------------------------------
Name: Dr. B. Clausseu S. Pieh
-------------------------------
Title: Senior Manager Manager
-------------------------------
THE MITSUBISHI TRUST AND BANKING
CORPORATION, NEW YORK BRANCH
By: /s/ SCOTT J. PAIGE
--------------------------------------
Name: Scott J. Paige
-------------------------------
Title: Senior Vice President
-------------------------------
BANK ONE, TEXAS, N.A.
By: /s/ JERRY KANE
--------------------------------------
Name: Jerry Kane
-------------------------------
Title: Senior Managing Director Large
Corporate
-------------------------------
FIRST SECURITY BANK, N.A.
By: /s/ STEVEN M. KOHLER
--------------------------------------
Name: Steven M. Kohler
-------------------------------
Title: Vice President
-------------------------------
WACHOVIA BANK OF GEORGIA, N.A.
By: /s/ PAIGE D. MESAROS
--------------------------------------
Name: Paige D. Mesaros
-------------------------------
Title: Vice President
-------------------------------
<PAGE> 13
CITIBANK, N.A.
By: /s/ THOMAS BOYLE
-------------------------------------------
Name: Thomas Boyle
------------------------------------
Title: Managing Director
------------------------------------
<PAGE> 1
Exhibit 10.1
Supplemental Agreement No. 5
to
Purchase Agreement No. 1810
between
The Boeing Company
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737-7H4 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of MARCH 13, 1998, by
and between THE BOEING COMPANY, a Delaware corporation with its principal
offices in Seattle, Washington, (Boeing) and SOUTHWEST AIRLINES CO., a Texas
corporation with its principal offices in City of Dallas, State of Texas
(Buyer);
WHEREAS, the parties hereto entered into Purchase Agreement No.
1810 dated January 19, 1994, relating to Boeing Model 737-7H4 aircraft (the
Agreement) and;
WHEREAS, the parties wish to update the agreement to reflect the
acceleration of one (1) Block "L" Aircraft from March 2004 to November 2000;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties agree to amend the Agreement as follows:
- -------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH
THE COMMISSION.
P.A. NO. 1810 SA-5-1
K/SWA
<PAGE> 2
1. The Table of Contents of the Agreement is deleted in its entirety
and a new Table of Contents is attached hereto and incorporated into the
Agreement by this reference.
2. Article 2, entitled "Delivery, Title and Risk of Loss," paragraph
2.1, entitled "Time of Delivery," is deleted in its entirety and replaced by a
new paragraph 2.1 revised to reflect the acceleration of the Block "L" March
2004 Aircraft to November 2000. Such new pages 2-1, 2-2 and 2-3 are attached
hereto and incorporated into the Agreement by this reference.
3. Article 3, entitled "Price of Aircraft", subparagraph 3.4.1 entitled
"Advance Payment Base Price" is revised by deleting the Advance Payment Base
Price for the Block "L" March 2004 delivery position. Such new pages 3-1, 3-2,
3-3 and 3-4 are attached hereto and incorporated into the Agreement by this
reference.
4. Within three (3) business days of execution of this Supplemental
Agreement, Boeing will refund to Buyer***. Such amount reflects the difference
in advance payments due as a result of the acceleration of the March 2004 Block
"L" Aircraft to November 2000.
The Agreement will be deemed to be supplemented to the extent herein provided
and as so supplemented will continue in full force and effect.
EXECUTED IN DUPLICATE as of the day and year first above written.
THE BOEING COMPANY SOUTHWEST AIRLINES CO.
By: /S/ DAWN S. FOSTER By: /S/ GARY A. BARRON
----------------------------- ---------------------------------
Its: Attorney-In-Fact Its: Executive VP and COO
--------------------------- -------------------------------
P.A. NO. 1810 SA-5-2
K/SWA
<PAGE> 3
Exhibit 10.1
PURCHASE AGREEMENT
between
THE BOEING COMPANY
and
Southwest Airlines Co.
Relating to Boeing Model 737-7H4 Aircraft
Purchase Agreement Number 1810
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH THE
COMMISSION.
P.A. No. 1810
K/SWA
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page SA
Number Number
------ ------
ARTICLES
- --------
<S> <C> <C>
1. Subject Matter of Sale.................................1-1 SA-4
2. Delivery, Title and Risk
of Loss................................................2-1 SA-5
3. Price of Aircraft......................................3-1 SA-5
4. Taxes..................................................4-1
5. Payment................................................5-1
6. Excusable Delay........................................6-1
7. Changes to the Detail
Specification..........................................7-1 SA-1
8. Federal Aviation Requirements and
Certificates and Export License........................8-1
9. Representatives, Inspection,
Flights and Test Data..................................9-1
10. Assignment, Resale or Lease............................10-1
11. Termination for Certain Events.........................11-1
12. Product Assurance; Disclaimer and
Release; Exclusion of Liabilities;
Customer Support; Indemnification
and Insurance..........................................12-1
13. Buyer Furnished Equipment and
Spare Parts............................................13-1
14. Contractual Notices and Requests.......................14-1
15. Miscellaneous..........................................15-1
</TABLE>
P.A. No. 1810 i
K/SWA SA-5
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SA
Number
------
EXHIBITS
- --------
<S> <C>
A Aircraft Configuration SA-1
B Product Assurance Document SA-1
C Customer Support Document
D Price Adjustments Due to
Economic Fluctuations - Aircraft
E Buyer Furnished Equipment
Provisions Document
F Defined Terms Document
LETTER AGREEMENTS
1810-1 Waiver of Aircraft Demonstration Flight
</TABLE>
P.A. No. 1810 ii
K/SWA SA-5
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SA
Number
------
RESTRICTED LETTER AGREEMENTS
- ----------------------------
<S> <C>
6-1162-RLL-932 Promotional Support
6-1162-RLL-933R4 Option Aircraft SA-4
6-1162-RLL-934R1 Disclosure of Confidential SA-1
Information
6-1162-RLL-935R1 Performance Guarantees SA-1
6-1162-RLL-936R4 Certain Contractual Matters SA-4
6-1162-RLL-937 Alternate Advance Payment Schedule
6-1162-RLL-938 ***
6-1162-RLL-939R1 Certification Flight Test Aircraft SA-1
6-1162-RLL-940R1 Training Matters SA-1
6-1162-RLL-941R1 Other Matters SA-1
6-1162-RLL-942 Open Configuration Matters
6-1162-RLL-943 Substitution Rights
6-1162-RLL-944 Airframe Maintenance Material Cost
Protection Program
6-1162-RLL-945 Comparison of 737-7H4 and 737-3H4
Block Fuel Burn
6-1162-RLL-1855R3 Additional Contractual Matters SA-4
6-1162-RLL-1856 *** SA-1
6-1162-RLL-1857 Service Ready Validation Program SA-1
Field Test
6-1162-RLL-1858R1 Escalation Matters SA-4
</TABLE>
P.A. No. 1810 iii
K/SWA SA-5
<PAGE> 7
TABLE OF CONTENTS CON'T
<TABLE>
<CAPTION>
SA
Number
------
RESTRICTED LETTER AGREEMENTS
- ----------------------------
<S> <C>
6-1162-RLL-2036 Amortization of Costs for
Customer Unique Changes SA-1
6-1162-RLL-2037 Reconciliation of the Aircraft SA-1
Basic Price
6-1162-RLL-2073 Maintenance Training Matters SA-1
</TABLE>
P.A. No. 1810 iv
K/SWA SA-5
<PAGE> 8
PURCHASE AGREEMENT NO. 1810
Relating to
BOEING MODEL 737-7H4 AIRCRAFT
-------------------------
This Agreement is entered into as of January 19th 1994, by and between The
Boeing Company, a Delaware corporation, with its principal office in Seattle,
Washington (Boeing), and Southwest Airlines Co., a Texas corporation, with its
principal office in the City of Dallas, State of Texas (Buyer).
Accordingly, Boeing and Buyer agree as follows:
P.A. No. 1810 1
K/SWA
<PAGE> 9
ARTICLE 1. Subject Matter of Sale.
1.1 The Aircraft. Subject to the terms and conditions of this
Agreement, Boeing will manufacture and deliver to Buyer and Buyer will purchase
and accept delivery from Boeing of one hundred twenty-nine (129) Boeing Model
737-7H4 aircraft (the Aircraft) manufactured in accordance with Boeing Detail
Specification D6-38808-1, dated October 30, 1996, as described in Exhibit A, as
modified from time to time in accordance with this Agreement (Detail
Specification).
1.2 Additional Goods and Services. In connection with the sale of the
Aircraft, Boeing will also provide to Buyer certain other things under this
Agreement, including data, documents, training and services, all as described
in this Agreement.
1.3 Performance Guarantees. Any performance guarantees applicable to
the Aircraft will be expressly included in this Agreement. Where performance
guarantees are included in this Agreement other than within the Detail
Specification, such guarantees will be treated as being incorporated in the
Detail Specification by this reference.
1.4 Defined Terms. For ease of use, certain terms are treated as
defined terms in this Agreement. Such terms are identified with a capital
letter and set forth and/or defined in Exhibit F.
P.A. No. 1810 1-1
K/SWA SA-4
<PAGE> 10
ARTICLE 2. Delivery, Title and Risk of Loss.
2.1 Time of Delivery. The Aircraft will be delivered to Buyer by
Boeing, assembled and ready for flight and Buyer will accept delivery of the
Aircraft, in accordance with the following schedule:
<TABLE>
<CAPTION>
Month and Year
of Delivery Quantity of Aircraft
-------------- --------------------
<S> <C>
Block A Aircraft
October 1997 Two (2)
November 1997 Two (2)
Block B Aircraft
January 1998 Two (2)
February 1998 Three (3)
March 1998 Two (2)
April 1998 Two (2)
May 1998 Two (2)
June 1998 One (1)
July 1998 Two (2)
September 1998 Two (2)
Block C Aircraft
February 1999 Four (4)
May 1999 Four (4)
July 1999 Four (4)
September 1999 Four (4)
Block D Aircraft
January 2000 Four (4)
March 2000 Four (4)
July 2000 Four (4)
September 2000 Three (3)
Block E Aircraft
January 2001 Three (3)
March 2001 Three (3)
July 2001 Three (3)
September 2001 Three (3)
Block F Aircraft
October 1998 One (1)
November 1998 Two (2)
December 1998 Two (2)
</TABLE>
P.A. No. 1810 2-1
K/SWA SA-5
<PAGE> 11
<TABLE>
<CAPTION>
Month and Year
of Delivery Quantity of Aircraft
-------------- --------------------
<S> <C>
Block G Aircraft
March 1999 Two (2)
Block H Aircraft
June 1999 Two (2)
August 1999 Two (2)
September 1999 One (1)
October 1999 Two (2)
April 2000 Three (3)
October 2000 Three (3)
April 2001 Three (3)
October 2001 Three (3)
Block I Aircraft
January 2002 Four (4)
March 2002 Four (4)
April 2002 Two (2)
July 2002 Four (4)
October 2002 Four (4)
Block J Aircraft
January 2003 Four (4)
March 2003 One (1)
Block K Aircraft
April 2004 Two (2)
July 2004 Three (3)
Block L Aircraft
November 2000 Two (2)
December 2000 One (1)
July 2001 One (1)
September 2001 One (1)
October 2001 One (1)
September 2002 Three (3)
September 2003 Three (3)
</TABLE>
2.2 Notice of Target Delivery Date. Boeing will give Buyer notice of
the Target Delivery Date of the Aircraft approximately 30 days prior to the
scheduled month of delivery.
2.3 Notice of Delivery Date. If Boeing gives Buyer at least 7 days'
notice of the delivery date of the Aircraft, and an Aircraft delivery is
delayed beyond such delivery date due to the responsibility of Buyer, Buyer
will reimburse Boeing for all costs incurred by Boeing as a
P.A. No. 1810 2-2
K/SWA SA-5
<PAGE> 12
result of such delay, including amounts for storage, insurance, Taxes,
preservation or protection of the Aircraft and interest on payments due.
2.4 Place of Delivery. The Aircraft will be delivered at an airport
facility selected by Boeing in the State of Washington, unless mutually agreed
otherwise.
2.5 Title and Risk of Loss. Title to and risk of loss of an Aircraft
will pass from Boeing to Buyer upon delivery of such Aircraft, but not prior
thereto.
2.6 Bill of Sale. Upon delivery of an Aircraft Boeing will deliver to
Buyer a bill of sale conveying good title to such Aircraft, free of all liens,
claims, charges and encumbrances of every kind whatsoever, and such other
appropriate documents of title as Buyer may reasonably request.
P.A. No. 1810 2-3
K/SWA SA-5
<PAGE> 13
ARTICLE 3. Price of Aircraft.
3.1 Definitions.
3.1.1 Special Features are the features incorporated in Exhibit A
which have been selected by Buyer.
3.1.2 Base Aircraft Price is the Aircraft Basic Price excluding
the price of Special Features.
3.1.3 Aircraft Basic Price is comprised of the Base Aircraft
Price and the price of the Special Features.
3.1.4 Economic Price Adjustment is the adjustment to the Aircraft
Basic Price (Base Aircraft and Special Features) as calculated pursuant to
Exhibit D.
3.1.5 Aircraft Price is the total amount Buyer is to pay for the
Aircraft at the time of delivery.
3.2 Aircraft Basic Price.
The Aircraft Basic Price, expressed in July 1992 dollars, is set
forth below:
<TABLE>
<CAPTION>
BASE SPECIAL AIRCRAFT
AIRCRAFT PRICE FEATURES BASIC PRICE
<S> <C> <C> <C>
BLOCK A, B, C,
D & E AIRCRAFT *** *** ***
BLOCK F & G
AIRCRAFT *** *** ***
BLOCK H
AIRCRAFT *** *** ***
BLOCK I
AIRCRAFT *** *** ***
BLOCK J
AIRCRAFT *** *** ***
BLOCK K
AIRCRAFT *** *** ***
BLOCK L
AIRCRAFT *** *** ***
</TABLE>
3.3 Aircraft Price. The Aircraft Price will be established at the time
of delivery of such Aircraft to Buyer and will be the sum of:
P.A. No. 1810 3-1
K/SWA SA-5
<PAGE> 14
3.3.1 the Aircraft Basic Price, which is *** for the Block A,
B, C, D and E Aircraft, *** for the Block F and G Aircraft, *** for the Block H
Aircraft, *** for the Block I Aircraft, *** for the Block J Aircraft, *** for
the Block K Aircraft and *** for the Block L Aircraft; plus
3.3.2 the Economic Price Adjustments for the Aircraft Basic
Price, as calculated pursuant to the formulas set forth in Exhibit D (Price
Adjustments Due to Economic Fluctuations - Aircraft); plus
3.3.3 other price adjustments made pursuant to this Agreement or
other written agreements executed by Boeing and Buyer.
3.4 Advance Payment Base Price.
3.4.1 Advance Payment Base Price. For advance payment purposes,
the following estimated delivery prices of the Aircraft (Advance Payment Base
Price) have been established, using currently available forecasts of the
escalation factors used by Boeing as of the date of signing this Agreement. The
Advance Payment Base Price of each Aircraft is set forth below:
<TABLE>
<CAPTION>
Month and Year of Advance Payment Base
Scheduled Delivery Price per Aircraft
------------------ --------------------
<S> <C>
Block A Aircraft***
October 1997
November 1997
Block B Aircraft***
January 1998
February 1998
March 1998
April 1998
May 1998
June 1998
July 1998
September 1998
Block C Aircraft***
February 1999
May 1999
July 1999
September 1999
</TABLE>
P.A. No. 1810 3-2
K/SWA SA-5
<PAGE> 15
<TABLE>
<S> <C>
Block D Aircraft***
January 2000
March 2000
July 2000
September 2000
Block E Aircraft***
January 2001
March 2001
July 2001
September 2001
Block F Aircraft***
October 1998
November 1998
December 1998
Block G Aircraft***
March 1999
Block H Aircraft***
June 1999
August 1999
September 1999
October 1999
April 2000
October 2000
April 2001
October 2001
Block I Aircraft***
January 2002
March 2002
April 2002
July 2002
October 2002
Block J Aircraft***
January 2003
March 2003
</TABLE>
P.A. No. 1810 3-3
K/SWA SA-5
<PAGE> 16
<TABLE>
<S> <C>
Block K Aircraft***
April 2004
July 2004
Block L Aircraft***
November 2000
December 2000
July 2001
September 2001
October 2001
September 2002
September 2003
</TABLE>
3.4.2 Adjustment of Advance Payment Base Prices - Long-Lead
Aircraft. For Aircraft scheduled for delivery 36 months or more after the date
of this Agreement, the Advance Payment Base Prices appearing in Article 3.4.1
will be used to determine the amount of the first advance payment to be made by
Buyer on the Aircraft. No later than 25 months before the scheduled month of
delivery of each affected Aircraft, Boeing will increase or decrease the
Advance Payment Base Price of such Aircraft as required to reflect the effects
of (i) any adjustments in the Aircraft Basic Price pursuant to this Agreement
and (ii) the then-current forecasted escalation factors used by Boeing. Boeing
will provide the adjusted Advance Payment Base Prices for each affected
Aircraft to Buyer, and the advance payment schedule will be considered amended
to substitute such adjusted Advance Payment Base Prices.
P.A. No. 1810 3-4
K/SWA SA-5
<PAGE> 17
EXHIBIT 10.1
Supplemental Agreement No. 6
to
Purchase Agreement No. 1810
between
The Boeing Company
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737-7H4 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of AUGUST 24, 1998, by
and between THE BOEING COMPANY, a Delaware corporation with its principal
offices in Seattle, Washington, (Boeing) and SOUTHWEST AIRLINES CO., a Texas
corporation with its principal offices in City of Dallas, State of Texas
(Buyer);
WHEREAS, the parties hereto entered into Purchase Agreement No.
1810 dated January 19, 1994, relating to Boeing Model 737-7H4 aircraft (the
Agreement) and;
WHEREAS, the parties wish to update the agreement to reflect the
acceleration of two (2) Block "L" Aircraft from September 2003 to November 1999
(1) and December 1999 (1), to update model designators for Substitute Aircraft
and to correct price adjustment language for Option Aircraft;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties agree to amend the Agreement as follows:
- -------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH
THE COMMISSION.
P.A. NO. 1810 SA-6-1
K/SWA
<PAGE> 18
1. The Table of Contents of the Agreement is deleted in its entirety
and a new Table of Contents is attached hereto and incorporated into the
Agreement by this reference.
2. Article 2, entitled "Delivery, Title and Risk of Loss," paragraph
2.1, entitled "Time of Delivery," is deleted in its entirety and replaced by a
new paragraph 2.1 revised to reflect the acceleration of two (2) Block "L"
September 2003 Aircraft to November 1999 (1) and December 1999 (1). Such new
pages 2-1, 2-2 and 2-3 are attached hereto and incorporated into the Agreement
by this reference.
3. Article 3, entitled "Price of Aircraft", subparagraph 3.4.1 entitled
"Advance Payment Base Price" is revised by adding the Advance Payment Base Price
for the Block "L" November 1999 and December 1999 delivery positions. Such new
pages 3-1, 3-2, 3-3 and 3-4 are attached hereto and incorporated into the
Agreement by this reference.
4. Letter Agreement No. 6-1162-RLL-933R4 entitled "Option Aircraft" is
deleted in its entirety and replaced with Letter Agreement No. 6-1162-RLL-933R5
attached hereto and incorporated herein by this reference. Article 3 entitled
"Price", Paragraph 3.2 is revised in the last sentence to change the reference
to "...paragraphs 2.3 and 3.2..." to "...paragraphs 2.2 and 3.2...". Attachment
A, Paragraph 2.2 is revised to change the title from "Price Adjustments For
Option Aircraft Delivering from March 2003 through October 2006" to "Price
Adjustments For Option Aircraft Delivering from March 2003 through December
2009". Subparagraph 2.2.2 is revised to change the reference to "...paragraph
2.3.6..." to "...paragraph 2.2.6...". Subparagraph 2.2.5 is revised in the
second sentence to change "...for options delivering in 2005 and 2006..." to
"...for options delivering in 2005 through 2009...", and in the last sentence
"... (July 1992 STE) per year or portion thereof starting in March 2003" is
changed to ".. (July 1992 STE) for Aircraft delivering in 2005 and by a maximum
of*** (July 1992 STE) per year or portion thereof starting in January 2006".
5. Letter Agreement No. 6-1162-RLL-943 entitled "Substitution Rights"
is deleted in its entirety and replaced with Letter Agreement No.
6-1162-RLL-943R1 attached
P.A. NO. 1810 SA-6-2
K/SWA
<PAGE> 19
hereto and incorporated herein by this reference. Model designators for
Substitute Aircraft are changed in all instances from 737-400STRX to 737-800 and
from 737-500X to 737-600. Paragraph 1.1 is deleted and following paragraphs are
renumbered accordingly.
6. Concurrent with execution of this Supplemental Agreement, Buyer will
pay to Boeing***. Such amount reflects the difference in advance payments due as
a result of the acceleration of the two September 2003 Block "L" Aircraft to
November 1999 and December 1999.
The Agreement will be deemed to be supplemented to the extent herein provided
and as so supplemented will continue in full force and effect.
EXECUTED IN DUPLICATE as of the day and year first above written.
THE BOEING COMPANY SOUTHWEST AIRLINES CO.
By: /S/ DAWN S. FOSTER By: /S/ GARY A. BARRON
-------------------------------- -----------------------------
Its: Attorney-In-Fact Its: Executive VP and COO
------------------------------- ----------------------------
P.A. NO. 1810 SA-6-3
K/SWA
<PAGE> 20
EXHIBIT 10.1
PURCHASE AGREEMENT
between
THE BOEING COMPANY
and
Southwest Airlines Co.
Relating to Boeing Model 737-7H4 Aircraft
Purchase Agreement Number 1810
- -------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN
OMITTED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH
THE COMMISSION.
P.A. NO. 1810 SA-6
K/SWA
<PAGE> 21
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page SA
Number Number
------ ------
ARTICLES
- --------
<S> <C> <C> <C>
1. Subject Matter of Sale..........................................1-1 SA-4
2. Delivery, Title and Risk
of Loss.........................................................2-1 SA-6
3. Price of Aircraft...............................................3-1 SA-6
4. Taxes...........................................................4-1
5. Payment.........................................................5-1
6. Excusable Delay.................................................6-1
7. Changes to the Detail
Specification...................................................7-1 SA-1
8. Federal Aviation Requirements and
Certificates and Export License.................................8-1
9. Representatives, Inspection,
Flights and Test Data...........................................9-1
10. Assignment, Resale or Lease....................................10-1
11. Termination for Certain Events.................................11-1
12. Product Assurance; Disclaimer and
Release; Exclusion of Liabilities;
Customer Support; Indemnification
and Insurance..................................................12-1
13. Buyer Furnished Equipment and
Spare Parts....................................................13-1
14. Contractual Notices and Requests...............................14-1
15. Miscellaneous..................................................15-1
</TABLE>
i
P.A. NO. 1810 SA-6
K/SWA
<PAGE> 22
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SA
Number
------
EXHIBITS
- --------
<S> <C> <C>
A Aircraft Configuration SA-1
B Product Assurance Document SA-1
C Customer Support Document
D Price Adjustments Due to
Economic Fluctuations - Aircraft
E Buyer Furnished Equipment
Provisions Document
F Defined Terms Document
<CAPTION>
LETTER AGREEMENTS
- -----------------
<S> <C>
1810-1 Waiver of Aircraft Demonstration Flight
</TABLE>
P.A. NO. 1810 ii
K/SWA SA-6
<PAGE> 23
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SA
Number
------
RESTRICTED LETTER AGREEMENTS
- ----------------------------
<S> <C> <C>
6-1162-RLL-932 Promotional Support
6-1162-RLL-933R5 Option Aircraft SA-6
6-1162-RLL-934R1 Disclosure of Confidential SA-1
Information
6-1162-RLL-935R1 Performance Guarantees SA-1
6-1162-RLL-936R4 Certain Contractual Matters SA-4
6-1162-RLL-937 Alternate Advance Payment Schedule
6-1162-RLL-938 ***
6-1162-RLL-939R1 Certification Flight Test Aircraft SA-1
6-1162-RLL-940R1 Training Matters SA-1
6-1162-RLL-941R1 Other Matters SA-1
6-1162-RLL-942 Open Configuration Matters
6-1162-RLL-943R1 Substitution Rights SA-6
6-1162-RLL-944 Airframe Maintenance Material Cost
Protection Program
6-1162-RLL-945 Comparison of 737-7H4 and 737-3H4
Block Fuel Burn
6-1162-RLL-1855R3 Additional Contractual Matters SA-4
6-1162-RLL-1856 *** SA-1
6-1162-RLL-1857 Service Ready Validation Program SA-1
Field Test
6-1162-RLL-1858R1 Escalation Matters SA-4
</TABLE>
P.A. NO. 1810 iii
K/SWA SA-6
<PAGE> 24
TABLE OF CONTENTS CON'T
<TABLE>
<CAPTION>
SA
Number
------
RESTRICTED LETTER AGREEMENTS
- ----------------------------
<S> <C> <C>
6-1162-RLL-2036 Amortization of Costs for
Customer Unique Changes SA-1
6-1162-RLL-2037 Reconciliation of the Aircraft SA-1
Basic Price
6-1162-RLL-2073 Maintenance Training Matters SA-1
</TABLE>
P.A. NO. 1810 iv
K/SWA SA-6
<PAGE> 25
ARTICLE 2. Delivery, Title and Risk of Loss.
2.1 Time of Delivery. The Aircraft will be delivered to Buyer by
Boeing, assembled and ready for flight and Buyer will accept delivery of the
Aircraft, in accordance with the following schedule:
<TABLE>
<CAPTION>
Month and Year
of Delivery Quantity of Aircraft
-------------- --------------------
<S> <C> <C>
Block A Aircraft
October 1997 Two (2)
November 1997 Two (2)
Block B Aircraft
January 1998 Two (2)
February 1998 Three (3)
March 1998 Two (2)
April 1998 Two (2)
May 1998 Two (2)
June 1998 One (1)
July 1998 Two (2)
September 1998 Two (2)
Block C Aircraft
February 1999 Four (4)
May 1999 Four (4)
July 1999 Four (4)
September 1999 Four (4)
Block D Aircraft
January 2000 Four (4)
March 2000 Four (4)
July 2000 Four (4)
September 2000 Three (3)
Block E Aircraft
January 2001 Three (3)
March 2001 Three (3)
July 2001 Three (3)
September 2001 Three (3)
Block F Aircraft
October 1998 One (1)
November 1998 Two (2)
December 1998 Two (2)
</TABLE>
P.A. NO. 1810 2-1
K/SWA SA-6
<PAGE> 26
<TABLE>
<CAPTION>
<S> <C> <C>
Block G Aircraft
March 1999 Two (2)
Block H Aircraft
June 1999 Two (2)
August 1999 Two (2)
September 1999 One (1)
October 1999 Two (2)
April 2000 Three (3)
October 2000 Three (3)
April 2001 Three (3)
October 2001 Three (3)
Block I Aircraft
January 2002 Four (4)
March 2002 Four (4)
April 2002 Two (2)
July 2002 Four (4)
October 2002 Four (4)
Block J Aircraft
January 2003 Four (4)
March 2003 One (1)
Block K Aircraft
April 2004 Two (2)
July 2004 Three (3)
Block L Aircraft
November 1999 One (1)
December 1999 One (1)
November 2000 Two (2)
December 2000 One (1)
July 2001 One (1)
September 2001 One (1)
October 2001 One (1)
September 2002 Three (3)
September 2003 One (1)
</TABLE>
2.2 Notice of Target Delivery Date. Boeing will give Buyer
notice of the Target Delivery Date of the Aircraft approximately 30 days prior
to the scheduled month of delivery.
2.3 Notice of Delivery Date. If Boeing gives Buyer at least 7
days' notice of the delivery date of the Aircraft, and an Aircraft delivery is
delayed beyond such delivery date due to the responsibility of Buyer, Buyer will
reimburse Boeing for all costs
P.A. NO. 1810 2-2
K/SWA SA-6
<PAGE> 27
incurred by Boeing as a result of such delay, including amounts for storage,
insurance, Taxes, preservation or protection of the Aircraft and interest on
payments due.
2.4 Place of Delivery. The Aircraft will be delivered at an
airport facility selected by Boeing in the State of Washington, unless mutually
agreed otherwise.
2.5 Title and Risk of Loss. Title to and risk of loss of an
Aircraft will pass from Boeing to Buyer upon delivery of such Aircraft, but not
prior thereto.
2.6 Bill of Sale. Upon delivery of an Aircraft Boeing will
deliver to Buyer a bill of sale conveying good title to such Aircraft, free of
all liens, claims, charges and encumbrances of every kind whatsoever, and such
other appropriate documents of title as Buyer may reasonably request.
P.A. NO. 1810 2-3
K/SWA SA-6
<PAGE> 28
ARTICLE 3. Price of Aircraft.
3.1 Definitions.
3.1.1 Special Features are the features incorporated
in Exhibit A which have been selected by Buyer.
3.1.2 Base Aircraft Price is the Aircraft Basic Price
excluding the price of Special Features.
3.1.3 Aircraft Basic Price is comprised of the Base
Aircraft Price and the price of the Special Features.
3.1.4 Economic Price Adjustment is the adjustment to
the Aircraft Basic Price (Base Aircraft and Special Features) as calculated
pursuant to Exhibit D.
3.1.5 Aircraft Price is the total amount Buyer is to
pay for the Aircraft at the time of delivery.
3.2 Aircraft Basic Price.
The Aircraft Basic Price, expressed in July 1992 dollars, is
set forth below:
P.A. NO. 1810 15-1
K/SWA
<PAGE> 29
<TABLE>
<CAPTION>
BASE SPECIAL AIRCRAFT
AIRCRAFT PRICE FEATURES BASIC PRICE
<S> <C> <C> <C>
BLOCK A, B, C,
D & E AIRCRAFT *** *** ***
BLOCK F & G
AIRCRAFT *** *** ***
BLOCK H
AIRCRAFT *** *** ***
BLOCK I
AIRCRAFT *** *** ***
BLOCK J
AIRCRAFT *** *** ***
BLOCK K
AIRCRAFT *** *** ***
BLOCK L
AIRCRAFT *** *** ***
</TABLE>
3.3 Aircraft Price. The Aircraft Price will be established at the
time of delivery of such Aircraft to Buyer and will be the sum of:
3.3.1 the Aircraft Basic Price, which is *** for the
Block A, B, C, D and E Aircraft, *** for the Block F and G Aircraft, *** for the
Block H Aircraft, *** for the Block I Aircraft, *** for the Block J Aircraft,
*** for the Block K Aircraft and *** for the Block L Aircraft; plus
3.3.2 the Economic Price Adjustments for the Aircraft
Basic Price, as calculated pursuant to the formulas set forth in Exhibit D
(Price Adjustments Due to Economic Fluctuations Aircraft); plus
3.3.3 other price adjustments made pursuant to this
Agreement or other written agreements executed by Boeing and Buyer.
3.4 Advance Payment Base Price.
3.4.1 Advance Payment Base Price. For advance payment
purposes, the following estimated delivery prices of the Aircraft (Advance
Payment Base Price) have been established, using currently available forecasts
of the escalation factors used by Boeing as of the date of signing this
Agreement. The Advance Payment Base Price of each Aircraft is set forth below:
<TABLE>
<CAPTION>
Month and Year of Advance Payment Base
Scheduled Delivery Price per Aircraft
<S> <C> <C>
Block A Aircraft***
October 1997
November 1997
</TABLE>
P.A. NO. 1810 15-2
K/SWA
<PAGE> 30
<TABLE>
<S> <C>
Block B Aircraft***
January 1998
February 1998
March 1998
April 1998
May 1998
June 1998
July 1998
September 1998
Block C Aircraft***
February 1999
May 1999
July 1999
September 1999
Block D Aircraft***
January 2000
March 2000
July 2000
September 2000
Block E Aircraft***
January 2001
March 2001
July 2001
September 2001
Block F Aircraft***
October 1998
November 1998
December 1998
Block G Aircraft***
March 1999
Block H Aircraft***
June 1999
August 1999
September 1999
October 1999
April 2000
October 2000
April 2001
October 2001
</TABLE>
P.A. NO. 1810 15-3
K/SWA
<PAGE> 31
<TABLE>
<S> <C> <C>
Block I Aircraft***
January 2002
March 2002
April 2002
July 2002
October 2002
Block J Aircraft***
January 2003
March 2003
Block K Aircraft***
April 2004
July 2004
Block L Aircraft***
November 1999
December 1999
November 2000
December 2000
July 2001
September 2001
October 2001
September 2002
September 2003
</TABLE>
3.4.2 Adjustment of Advance Payment Base Prices -
Long-Lead Aircraft. For Aircraft scheduled for delivery 36 months or more after
the date of this Agreement, the Advance Payment Base Prices appearing in Article
3.4.1 will be used to determine the amount of the first advance payment to be
made by Buyer on the Aircraft. No later than 25 months before the scheduled
month of delivery of each affected Aircraft, Boeing will increase or decrease
the Advance Payment Base Price of such Aircraft as required to reflect the
effects of (i) any adjustments in the Aircraft Basic Price pursuant to this
Agreement and (ii) the then-current forecasted escalation factors used by
Boeing. Boeing will provide the adjusted Advance Payment Base Prices for each
affected Aircraft to Buyer, and the advance payment schedule will be considered
amended to substitute such adjusted Advance Payment Base Prices.
P.A. NO. 1810 15-4
K/SWA
<PAGE> 32
6-1162-RLL-943R1
Southwest Airlines Co.
P.O. Box 36611 - Love Field
Dallas, Texas 75235
Subject: Letter Agreement No. 6-1162-RLL-943R1 to
Purchase Agreement No. 1810 -
Substitution Rights
This Letter Agreement amends Purchase Agreement No. 1810 dated as of even date
herewith (the Agreement) between The Boeing Company (Boeing) and Southwest
Airlines Co. (Buyer) relating to Model 737-7H4 aircraft (the Aircraft) and to
Letter Agreement No. 6-1162-RLL-933R5 dated even date herewith, entitled "Option
Aircraft," relating to the sale by Boeing and purchase by Buyer of sixty-two
(62) additional Model 737-7H4 aircraft (the Option Aircraft) and fifty-nine (59)
Rollover Option Aircraft (Rollover Option Aircraft).
All terms used herein and in the Agreement, and not defined herein, will have
the same meaning as in the Agreement.
1. Right of Substitution, Model 737-800, 737-600.
Buyer shall have the right to substitute in lieu of any of the Aircraft a Boeing
Model 737-800 aircraft or Model 737-600 aircraft, as the case may be,
(hereinafter referred to as the "Substitute Aircraft"), on a one-for-one basis,
subject to the following terms and conditions:
1.1 Buyer must take delivery of a minimum of twenty-five (25) 737-7H4
aircraft before substituting either the 737-800 or the 737-600. Buyer's right to
substitute is also only applicable for Substitute Aircraft delivering after
January 1, 1999.
1.2 Buyer agrees to notify Boeing that it is considering the substitution
of Aircraft provided herein as soon as possible after such substitution comes
under consideration by Buyer and the parties shall thereupon commence technical
discussions relating to configuration of the Substitute Aircraft.
- ------------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN OMITTED
AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH THE COMMISSION.
P.A. No. 1810 SA-6
K/SWA
<PAGE> 33
Southwest Airlines Co.
6-1162-RLL-943R1 Page 2
1.3 In order to support the configuration of Buyer's initial Substitute
Aircraft, Buyer will provide Boeing with its written or telegraphic notice of
its election to substitute the first Substitute Aircraft twenty-four (24) months
prior to the then-current scheduled month of delivery of the aircraft for which
substitution is being made. Buyer and Boeing will define the initial Substitute
Aircraft configuration eighteen (18) months prior to delivery of the aircraft
for which substitution is being made.
1.4 For follow on Substitute Aircraft, Buyer shall provide Boeing with its
written or telegraphic notice of its election to substitute aircraft and the
parties shall execute a definitive agreement for the Substitute Aircraft no
later than eighteen (18) months prior to the then-current scheduled month of
delivery of the aircraft for which substitution is being made.
1.5 The delivery of the Substitute Aircraft shall occur during the same
general time period as the Aircraft for which substitution is being made, unless
otherwise agreed by the parties.
1.6 Promptly after receipt of notice from Buyer of its election to
substitute, Boeing shall prepare and submit to Buyer appropriate documents
amending the Agreement to reflect the manufacture and sale of such Substitute
Aircraft to Buyer.
1.7 If Boeing discontinues production of the Model 737-800 or 737-600
aircraft at any time which would affect Boeing's ability to manufacture and
deliver any Substitute Aircraft to Buyer, the parties will discuss the
substitution of other Boeing model aircraft being offered for delivery during
the delivery period of the affected Aircraft. Any such substitution shall be
subject to mutually agreeable terms and conditions, recognizing that the
delivery month of any substitute aircraft shall be subject to Boeing's then
current manufacturing capabilities and other delivery commitments.
2. Price of Substitute Aircraft.
Upon notification by Buyer of Buyers intent to substitute, Boeing will
provide the then-current price of such Substitute Aircraft to Buyer.
<PAGE> 34
Southwest Airlines Co.
6-1162-RLL-943R1 Page 3
3. Credit Memorandum - 737-800.
In consideration of Buyer's purchase of the model 737-800 Substitute
Aircraft, Boeing will issue to Buyer at the time of delivery of each
model 737-800 Substitute Aircraft a credit memorandum which may be used
by Buyer for the purchase of Boeing goods and services or applied to
the final delivery payment for the model 737-800 Substitute Aircraft
for which the credit was issued. The amount of this credit memorandum
applicable to each model 737-800 Substitute Aircraft will be *** of the
737-800 Substitute Aircraft Base Price (July 1992 STE $) ***.
4. Credit Memorandum - 737-600.
In consideration of Buyer's purchase of the model 737-600 Substitute
Aircraft, Boeing will issue to Buyer at the time of delivery of each
model 737-600 Substitute Aircraft a credit memorandum which may be used
by Buyer for the purchase of Boeing goods and services or applied to
the final delivery payment for the model 737-600 Substitute Aircraft
for which the credit was issued. The amount of this credit memorandum
applicable to each model 737-600 Substitute Aircraft will be *** of the
model 737-600 Substitute Aircraft Base Price (July 1992 STE $) ***.
5. Training Matters.
Specific reference is made to Letter Agreement No. 6-1162-RLL-940
"Training Matters" which does apply to the 737-600 substitute aircraft
but does not apply in any way to the 737-800 substitute aircraft.
6. Engine Thrust for Substitute Aircraft.
Reference is made to Exhibit A to the Agreement and specifically to
Change Request 7200XX3005 where Buyer has selected an increase in
thrust from 20,000 pounds to 22,000 pounds thrust. If Buyer exercises
its option to substitute in accordance with this Letter Agreement, the
additional thrust from 20,000 pounds will be provided free of charge to
Buyer. Buyer will be responsible for the price to increase the thrust
from 22,000 pounds to such higher thrust that Buyer selects for the
737-800.
P.A No. 1810
K/SWA SA-6
<PAGE> 35
Southwest Airlines Co.
6-1162-RLL-943R1 Page 4
7. Confidential Treatment.
Buyer understands that certain commercial and financial information
contained in this Letter Agreement is considered by Boeing as
confidential. Buyer agrees that it will treat this Letter Agreement and
the information contained herein as confidential and will not, without
the prior written consent of Boeing, disclose this Letter Agreement or
any information contained herein to any other person or entity, except
as provided in Letter Agreement 6-1162-RLL-934.
Very truly yours,
THE BOEING COMPANY
By /s/ DAWN S. FOSTER
----------------------------
Its
---------------------
ACCEPTED AND AGREED TO as of this
date: ______, 1998
Southwest Airlines Co.
By /S/ GARY A. BARRON
----------------------------
Its
---------------------
P.A. No. 1810 SA-6
K/SWA
<PAGE> 36
6-1162-RLL-933R5
Southwest Airlines Co.
P.O. Box 36611 - Love Field
Dallas, Texas 75235
Subject: Letter Agreement No. 6-1162-RLL-933R5 to
Purchase Agreement No. 1810 - Option Aircraft
This Letter Agreement amends Purchase Agreement No. 1810 dated as of January 19,
1994 (the Agreement) between The Boeing Company (Boeing) and Southwest Airlines
Co. (Buyer) relating to Model 737-7H4 aircraft (Aircraft).
All terms used and not defined herein will have the same meaning as in the
Agreement.
In consideration of the purchase by Buyer of the Aircraft, Boeing hereby agrees
to manufacture and sell to Buyer sixty-two (62) additional Model 737-7H4
aircraft as described in paragraph 1 of Attachment A hereto (Option Aircraft)
and fifty-nine (59) Model 737-7H4 Rollover Option Aircraft (Rollover Option
Aircraft), subject to the terms and conditions set forth below.
1. Delivery of Option Aircraft.
The Option Aircraft will be delivered to Buyer during or before the
months set forth in the following schedule:
<TABLE>
<CAPTION>
Number of Option
Month and Year Option Aircraft
of Delivery Aircraft Block
----------- -------- --------
<S> <C> <C>
March 2003 Three (3) M
April 2003 Two (2) M
July 2003 Four (4) M
October 2003 Four (4) M
January 2004 Four (4) N
March 2004 One (1) N
April 2004 One (1) N
August 2004 Two (2) N
September 2004 Three (3) N
October 2004 Two (2) N
</TABLE>
- ----------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND
HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT
TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH THE COMMISSION.
P.A. No. 1810
K/SWA SA-6
<PAGE> 37
Southwest Airlines Co.
6-1162-RLL-933R5 Page 2
<TABLE>
<CAPTION>
Number of Option
Month and Year Option Aircraft
of Delivery Aircraft Block
----------- -------- --------
<S> <C> <C>
January 2005 Four (4) O
March 2005 Four (4) O
April 2005 Two (2) O
July 2005 Four (4) O
October 2005 Four (4) O
January 2006 Four (4) P
March 2006 Four (4) P
April 2006 Two (2) P
July 2006 Four (4) P
October 2006 Four (4) P
</TABLE>
2. Delivery of Rollover Option Aircraft.
2.1 The Rollover Option Aircraft will be delivered to Buyer during or
before the years set forth in the following schedule:
<TABLE>
<CAPTION>
Option
Year of Number of Aircraft
Delivery Option Aircraft Block
-------- --------------- --------
<S> <C> <C>
2007 Twenty (20) Q
2008 Twenty (20) R
2009 Nineteen (19) S
</TABLE>
2.2 The fifty-nine (59) Rollover Option Aircraft are offered to Buyer
subject to the following conditions:
2.2.1 Buyer can exercise any fifty-nine (59) of the sixty-two
(62) Option Aircraft, and will be offered a Rollover Option Aircraft for each
option aircraft exercised up to and including fifty-nine (59).
2.2.2 Conversely to Article 2.2.1 above, if Buyer does not
exercise a minimum of fifty-nine (59) Option Aircraft, one Rollover Option
Aircraft will be deleted for each Option Aircraft not exercised by Buyer.
2.2.3 When Buyer exercises one or more Option Aircraft,
Boeing will offer the same quantity of Rollover Option Aircraft to Buyer in the
years identified in Article 2.1 above.
2.2.4 The Rollover Option Aircraft delivery month offered by
Boeing to Buyer will be at least 24 months from the Option exercise date of the
corresponding option.
2.2.5 When Boeing offers the Rollover Option Aircraft to
Buyer, Buyer will accept such Rollover Option Aircraft by wire transferring
$100,000 to Boeing. In the event Buyer exercises its option to purchase the
Rollover Option Aircraft, such application will be in accordance with Article
4.1 herein.
P.A. No. 1810
K/SWA SA-6
<PAGE> 38
Southwest Airlines Co.
6-1162-RLL-933R5 Page 3
3. Price.
3.1 The advance payment base prices of the Option Aircraft set forth
below and in paragraph 2.1 of Attachment A represent the estimated delivery
prices of the Option Aircraft. The Option Aircraft pricing elements and
associated pricing terms and conditions are given in Attachment A.
3.2 Price and escalation provisions for Model 737-7H4 aircraft
delivering after 2002, are not currently available. The estimated Advance
Payment Base Prices shown in paragraph 3.3 below and in paragraph 2.1 of
Attachment A are based on currently available price and escalation provisions.
As price and escalation provisions become available for Model 737-7H4 aircraft
delivering after 2002, such price and escalation provisions will be
appropriately applied to the applicable Option Aircraft.
For additional information relating to price and escalation provisions
applicable to Option Aircraft delivering after 2002 refer to paragraphs 2.2 and
3.2 of Attachment A.
3.3 The Advance Payment Base Prices of the Option Aircraft indicated
below do include an amount for special features in addition to those
specifically described in Attachment A but do not include any amount for items
of Buyer Furnished Equipment (BFE). An estimate for typical special features is
*** per Aircraft (expressed in 1992 STE dollars) and for BFE is *** per Aircraft
(expressed in delivery year dollars).
<TABLE>
<CAPTION>
Month and Year Advance Payment Base
of Delivery Price per Option Aircraft
----------- -------------------------
<S> <C>
Block M Aircraft***
March 2003
April 2003
July 2003
October 2003
Block N Aircraft***
January 2004
March 2004
April 2004
August 2004
September 2004
October 2004
Block O Aircraft***
January 2005
March 2005
April 2005
July 2005
October 2005
Block P Aircraft***
January 2006
March 2006
April 2006
July 2006
October 2006
</TABLE>
P.A. No. 1810
K/SWA SA-6
<PAGE> 39
Southwest Airlines Co.
6-1162-RLL-933R5 Page 4
3.4 The Option Aircraft purchase price will be the applicable basic
price thereof at the time of Option Aircraft delivery adjusted in accordance
with Boeing's Aircraft escalation provisions contained in the definitive
agreement to purchase the Option Aircraft. The purchase price will include the
price for Seller Purchased Equipment (SPE) if Buyer has elected to change Buyer
Furnished Equipment (BFE) to SPE.
4. Option Aircraft Payment.
4.1 In consideration of the granting of the option as set forth
herein, on or before the date Boeing and Buyer enter into a definitive agreement
to purchase the Aircraft, Buyer will pay a deposit to Boeing of $100,000 for
each Option Aircraft (Deposit). In the event Buyer exercises its option herein,
the amount of the Deposit will be credited against the first advance payment due
for such Option Aircraft pursuant to the advance payment schedule set forth in
paragraph 3 of Attachment A. The Deposits for the Option Aircraft will be
refunded to Buyer, without interest, if the parties do not enter into a
definitive Agreement for the Aircraft.
In the event that, after the parties enter into a definitive agreement to
purchase the Aircraft, Buyer does not exercise its option to purchase the Option
Aircraft pursuant to the terms and conditions set forth herein, Boeing will be
entitled to retain the Deposits for the Option Aircraft except as provided in
paragraphs 6 herein.
4.2 Advance payments in the amount of 30% of the advance payment base
price will be payable on the Option Aircraft in accordance with paragraph 3 of
Attachment A. The remainder of the Option Aircraft purchase price is due at the
time of delivery of the Option Aircraft.
5. Option Exercise.
5.1 To exercise its Option, Buyer will give written or telegraphic
notice thereof to Boeing on or before eighteen (18) months prior to the first
day of the delivery month of each Option Aircraft.
In such notice Buyer will select the Option Model type, and the applicable
delivery positions.
5.2 It is understood and agreed that Boeing may accelerate the option
exercise dates specified above if Boeing must make production decisions which
are dependent on Buyer's decision to buy the Option Aircraft. If Boeing elects
to accelerate the option exercise dates, Boeing will do so by giving written or
telegraphic notice thereof to Buyer. Such notice will specify the revised option
P.A. No. 1810
K/SWA SA-6
<PAGE> 40
Southwest Airlines Co.
6-1162-RLL-933R5 Page 5
exercise dates, which will not be earlier than 30 days after the date of
transmittal of such notice, and the Option Aircraft delivery positions affected
by such revision. If Buyer fails to exercise its option for any Option Aircraft
affected by such revised dates, the Deposit applicable to such Option Aircraft
will be promptly refunded, with interest, to Buyer. The interest rate for
calculation of the interest associated with such refund is the rate of two
percent (2%) below the Citibank base rate in effect from time to time during the
period the option deposit is held by Boeing.
6. Contract Terms.
It is understood that Boeing and Buyer will use their best efforts to
enter into a definitive agreement for the Option Aircraft within thirty (30)
days after Buyer exercises an option to purchase Option Aircraft pursuant to
paragraph 5 covering the detailed terms and conditions for the sale of such
Option Aircraft.
Such definitive agreement will include the terms and conditions contained herein
together with the terms and conditions, not inconsistent herewith, contained in
Boeing's then-current standard form of purchase agreement for the sale of Model
737-700 aircraft in effect as of the date of option exercise and such additional
terms and conditions as may be mutually agreed upon. In the event the parties
have not entered into such an agreement within the time period contemplated
herein, either party may, exercisable by written or telegraphic notice given to
the other within thirty (30) days after such period, terminate the purchase of
such Option Aircraft.
7. Termination of Option to Purchase.
Either Boeing or Buyer may terminate the option to purchase an Option
Aircraft if any of the following events are not accomplished by the respective
dates contemplated in this letter agreement, or in the Agreement, as the case
may be:
(i) termination of the purchase of the Aircraft under the
Agreement for any reason;
(ii) payment by Buyer of the Deposit with respect to an Option
Aircraft pursuant to paragraph 4.1 herein;
(iii) exercise of an option to purchase an Option Aircraft
pursuant to the terms hereof. Any termination of an option to purchase by Boeing
which is based on the termination of the purchase of Aircraft under the
Agreement will be on a one-for-one basis, for each Aircraft so terminated.
Any cancellation of an option to purchase which is based on failure to make the
required Deposit or to exercise the option to purchase shall only apply to the
Option Aircraft so canceled.
Termination of an option to purchase provided by this letter agreement will be
caused by either party giving written notice to the other within 10 days after
the applicable date. Upon receipt of such notice, all rights and obligations of
the parties with respect to an Option Aircraft for which the option to purchase
has been terminate will thereupon terminate.
P.A. No. 1810
K/SWA SA-6
<PAGE> 41
Southwest Airlines Co.
6-1162-RLL-933R5 Page 6
If termination is result of a revision of an option exercise date by Boeing
pursuant to paragraph 5.2, Boeing will promptly refund to Buyer, without
interest, any payments received from Buyer, including the Deposit, with respect
to the Option Aircraft for which the option is terminated. If termination is for
any other reason, Boeing will promptly refund to Buyer, without interest, any
payments received from Buyer with respect to the affected Option Aircraft,
except the Deposit, which Buyer may apply to any model Boeing aircraft purchased
by Buyer from Boeing at a future date.
8. Confidential Treatment. Buyer understands that certain commercial and
financial information contained in this Letter Agreement including any
attachments hereto is considered by Boeing as confidential. Buyer agrees that it
will treat this Letter Agreement and the
P.A. No. 1810
K/SWA SA-6
<PAGE> 42
Southwest Airlines Co.
6-1162-RLL-933R5 Page 7
information contained herein as confidential and will not, without the prior
written consent of Boeing, disclose this Letter Agreement or any information
contained herein to any other person or entity except as provided in Letter
Agreement No. 6-1162-RLL-934R1.
Very truly yours,
THE BOEING COMPANY
By /S/ DAWN S. FOSTER
----------------------------
Its ATTORNEY-IN-FACT
---------------------------
ACCEPTED AND AGREED TO this
date: AUGUST 24 , 1998
-----------
SOUTHWEST AIRLINES CO.
By /s/ GARY A. BARRON
----------------------------
Its EXECUTIVE VP & COO
---------------------------
Attachments
P.A. No. 1810
K/SWA SA-6
<PAGE> 43
Attachment A to
6-1162-RLL-933R5
Page 1
Model 737-7H4 Aircraft
1. Option Aircraft Description and Changes.
1.1 Aircraft Description. The Option Aircraft is described by Boeing
Detail Specification D6-38808-1, Dated October 30 ,1996.
1.2 Changes. The Detail Specification will be revised to include:
(1) Changes applicable to the basic Model 737-700 aircraft
which are developed by Boeing between the date of the Detail Specification and
the signing of a definitive agreement to purchase the Option Aircraft.
(2) Changes mutually agreed upon.
(3) Changes required to obtain a Standard Certificate of
Airworthiness.
(4) To provide sufficient Option Aircraft manufacturing and
procurement lead time it is necessary for Boeing and Buyer to reach final
agreement on the Option Aircraft configuration, including BFE/SPE vendor
selection fifteen (15) months prior to delivery of each Option Aircraft. If such
items are not resolved by the indicated dates, Boeing reserves the right to
amend this letter agreement:
(i) to adjust the scheduled delivery of the Option
Aircraft to a later time period and,
(ii) to make such other changes as are appropriate
and consistent with the revised Option Aircraft deliveries.
1.3 Effect of Changes. Changes to the Detail Specification
incorporated pursuant to the provisions of the clauses above will include the
effects of such changes upon Option Aircraft weight, balance, design and
performance. Performance guarantees for the Option Aircraft which are mutually
acceptable to the parties will be included in the definitive agreement for the
Option Aircraft.
P.A. No. 1810
K/SWA SA-6
<PAGE> 44
Attachment A to
6-1162-RLL-933R5
Page 2
2. Price Description
2.1 Price Elements Per Aircraft
<TABLE>
<CAPTION>
1 2 3
AIRCRAFT & ADV. PMT.
AIRCRAFT ESTIMATED SPECIAL ESTIMATED BASE PRICE
DELIVERY FEATURES PRICE ESTIMATED ESCALATION (Elements)
MO. & YR. (JULY 1992$) ESCALATION SHARING 1 + 2 + 3
- --------- ----------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BLOCK M
MARCH 2003 *** *** *** ***
APRIL 2003 *** *** *** ***
JULY 2003 *** *** *** ***
OCTOBER 2003 *** *** *** ***
BLOCK N
JANUARY 2004 *** *** *** ***
MARCH 2004 *** *** *** ***
APRIL 2004 *** *** *** ***
AUGUST 2004 *** *** *** ***
SEPTEMBER 2004 *** *** *** ***
OCTOBER 2004 *** *** *** ***
BLOCK O
JANUARY 2005 *** *** *** ***
MARCH 2005 *** *** *** ***
APRIL 2005 *** *** *** ***
JULY 2005 *** *** *** ***
OCTOBER 2005 *** *** *** ***
BLOCK P
JANUARY 2006 *** *** *** ***
MARCH 2006 *** *** *** ***
APRIL 2006 *** *** *** ***
JULY 2006 *** *** *** ***
OCTOBER 2006 *** *** *** ***
</TABLE>
Continued Next Page...
P.A. No. 1810
K/SWA SA-6
<PAGE> 45
Attachment A to
6-1162-RLL-933R5
Page 3
2. Price Description. (Continued)
2.2 Price Adjustments For Option Aircraft Delivering From March
2003 through December 2009.
2.2.1 Special Features. The price for Special Features
incorporated in the Option Aircraft Detail Specification will be adjusted to
Boeing's then-current prices for such features as of the date of execution of
the definitive agreement for the Option Aircraft.
2.2.2 Escalation Adjustments. For escalation provisions applicable
to Option Aircraft delivering after 2002, see paragraph 2.2.6 below.
2.2.3 Base Price Adjustments for FAA Changes. The Aircraft Basic
Price of the Option Aircraft will be adjusted for any FAA mandated changes
incorporated into the Aircraft.
2.2.4 Price Adjustments for Changes. Boeing may adjust the
Aircraft Basic Price and the Advance Payment Base Price for any changes mutually
agreed upon subsequent to the date that Buyer and Boeing enter into a definitive
agreement for the Option Aircraft.
2.2.5 Base Price Adjustments. The Aircraft Basic Price of the
Option Aircraft will be adjusted to Boeing's then-current prices as of the date
of execution of the definitive agreement for the Option Aircraft in accordance
with the agreement reached below. The Aircraft Basic Price starting point for
options delivering in 2003 is *** (July 1992 STE), for options delivering in
2004 is *** (July 1992 STE), for options delivering in 2005 through 2009 is ***
(July 1992 STE). Such Aircraft Basic Price may increase in accordance with
paragraphs 2.2.1, 2.2.2, 2.2.3 and 2.2.4. For any other changes to the Aircraft
Basic Price, Boeing may increase the Aircraft Basic Price by a maximum of ***
(July 1992 STE) for Aircraft delivering in 2005 and by a maximum of *** (July
1992 STE) per year or portion thereof starting in January 2006.
2.2.6 Prices for Long Lead Time Aircraft. Boeing has not
established escalation provisions for Model 737-700 aircraft for delivery 2003
and after. Such escalation provisions (i) will be incorporated into the Option
Aircraft definitive agreement when such information is available and (ii) will
be the then-current escalation provisions applicable to the same model aircraft
and engines delivering in the same time period as the Option Aircraft. The
resulting revisions to the definitive agreement will include but not be limited
to, adjustment of the Aircraft Basic Price of the Option Aircraft, the Advance
Payment Base Price, the Aircraft escalation provisions and the advance payment
amounts due on the Option Aircraft.
2.2.7 BFE to SPE. An estimate of the total price for items of
Buyer Furnished Equipment (BFE) changed to Seller Purchased Equipment (SPE)
pursuant to the Configuration Specification is included in the Option Aircraft
price build-up. The purchase price of the Option Aircraft will be adjusted by
the price charged to Boeing for such items plus 10% of such price. If all BFE
except developmental avionics is converted to SPE, Boeing will waive the 10%
fee.
P.A. No. 1810
K/SWA SA-6
<PAGE> 46
Attachment A to
6-1162-RLL-933R5
Page 4
3. Advance Payment Schedules, Prices and Adjustments.
3.1 Buyer will pay to Boeing advance payments for the Option Aircraft
on the dates and in the amounts determined below.
<TABLE>
<CAPTION>
Amount Due per Aircraft
-----------------------
(Percentage times
Due Date of Payment Advance Payment Base Price)
- -------------------
<S> <C>
Deposit $100,000 (if applicable)
18 months prior to the first 15% (less the
day of the scheduled delivery Deposit if any)
month of the Aircraft
12 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
9 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
6 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
--
Total 30%
</TABLE>
Any advance payments that would be past due as of the date of signing the
definitive purchase agreement for the Option Aircraft in accordance with the
above schedule are due and payable on such date.
3.2 Option Aircraft advance payment base prices will be increased or
decreased, as appropriate, at the time of signing of the definitive purchase
agreement for the Option Aircraft, using the then-current forecasted aircraft
escalation factors used by Boeing, to determine the amount of the advance
payments to be made by Buyer on the Option Aircraft.
P.A. No. 1810
K/SWA SA-6
<PAGE> 47
Attachment B to
6-1162-RLL-933R5
Page 1
PRICE ADJUSTMENT DUE TO
ECONOMIC FLUCTUATIONS
AIRCRAFT PRICE ADJUSTMENT
(July 1992 Base Price)
1. Formula.
The Aircraft Price Adjustment will be determined at the time of
Aircraft delivery in accordance with the following formula:
Pa = (P)(L + M - 1)
Where:
Pa = Aircraft Price Adjustment.
L = .65 x ECI
-----
116.2
M = .35 x ICI
-----
115.9
P = Aircraft Basic Price (as set forth in Article 3.2 of this
Agreement).
ECI = A value using the "Employment Cost Index for workers in aerospace
manufacturing" (aircraft manufacturing, standard industrial
classification code 3721, compensation, base month and year June 1989 =
100), as released by the Bureau of Labor Statistics, U.S. Department of
Labor on a quarterly basis for the months of March, June, September and
December, calculated as follows: A three-month arithmetic average value
(expressed as a decimal and rounded to the nearest tenth) will be
determined using the months set forth in the table below for the
applicable Aircraft, with the released Employment Cost Index value
described above for the month of March also being used for the months
of January and February; the value for June also used for April and
May; the value for September also used for July and August; and the
value for December also used for October and November.
P.A. No. 1810
K/SWA SA-6
<PAGE> 48
Attachment B to
6-1162-RLL-933R5
Page 2
ICI = The three-month arithmetic average of the released monthly values for
the Industrial Commodities Index as set forth in the "Producer Prices
and Price Index" (Base Year 1982 = 100) as released by the Bureau of
Labor Statistics, U.S. Department of Labor values (expressed as a
decimal and rounded to the nearest tenth) for the months set forth in
the table below for the applicable Aircraft.
In determining the value of L, the ratio of ECI divided by 116.2 will
be expressed as a decimal rounded to the nearest ten-thousandth and then
multiplied by .65 with the resulting value also expressed as a decimal and
rounded to the nearest ten-thousandth.
In determining the value of M, the ratio of ICI divided by 115.9 will
be expressed as a decimal rounded to the nearest ten-thousandth and then
multiplied by .35 with the resulting value also expressed as a decimal and
rounded to the nearest ten-thousandth.
<TABLE>
<CAPTION>
Months to be Utilized
Month of Scheduled in Determining the
Aircraft Delivery Value of ECI and ICI
- ------------------ ---------------------
<S> <C>
January June B, July B, Aug. B
February July B, Aug. B, Sept. B
March Aug. B, Sept. B, Oct. B
April Sept. B, Oct. B, Nov. B
May Oct. B, Nov. B, Dec. B
June Nov. B, Dec. B, Jan. D
July Dec. B, Jan. D, Feb. D
August Jan. D, Feb. D, Mar. D
September Feb. D, Mar. D, Apr. D
October Mar. D, Apr. D, May D
November Apr. D, May D, June D
December May D, June D, July D
</TABLE>
The following definitions of B and D will apply:
B = The calendar year before the year in which the scheduled month
of delivery as set forth in Paragraph 1 occurs.
D = The calendar year during which the scheduled month of delivery
as set forth in Paragraph 1 occurs.
P.A. No. 1810
K/SWA SA-6
<PAGE> 49
Attachment B to
6-1162-RLL-933R5
Page 3
2. If at the time of delivery of an Aircraft Boeing is unable to determine
the Aircraft Price Adjustment because the applicable values to be used to
determine the ECI and ICI have not been released by the Bureau of Labor
Statistics, then:
2.1 The Aircraft Price Adjustment, to be used at the time of delivery
of each of the Aircraft, will be determined by utilizing the escalation
provisions set forth above. The values released by the Bureau of Labor
Statistics and available to Boeing 30 days prior to scheduled Aircraft delivery
will be used to determine the ECI and ICI values for the applicable months
(including those noted as preliminary by the Bureau of Labor Statistics) to
calculate the Aircraft Price Adjustment. If no values have been released for an
applicable month, the provisions set forth in Paragraph 2.2 below will apply. If
prior to delivery of an Aircraft the U.S. Department of Labor changes the base
year for determination of the ECI or ICI values as defined above, such rebased
values will be incorporated in the Aircraft Price Adjustment calculation. The
payment by Buyer to Boeing of the amount of the Purchase Price for such
Aircraft, as determined at the time of Aircraft delivery, will be deemed to be
the payment for such Aircraft required at the delivery thereof.
2.2 If prior to delivery of an Aircraft the U.S. Department of Labor
substantially revises the methodology used for the determination of the values
to be used to determine the ECI and ICI values (in contrast to benchmark
adjustments or other corrections of previously released values), or for any
reason has not released values needed to determine the applicable Aircraft Price
Adjustment, the parties will, prior to delivery of any such Aircraft, select a
substitute for such values from data published by the Bureau of Labor Statistics
or other similar data reported by non-governmental United States organizations,
such substitute to lead in application to the same adjustment result, insofar as
possible, as would have been achieved by continuing the use of the original
values as they may have fluctuated during the applicable time period.
Appropriate revision of the formula will be made as required to reflect any
substitute values. However, if within 24 months from delivery of the Aircraft
the Bureau of Labor Statistics should resume releasing values for the months
needed to determine the Aircraft Price Adjustment, such values will be used to
determine any increase or decrease in the Aircraft Price Adjustment for the
Aircraft from that determined at the time of delivery of such Aircraft.
P.A. No. 1810
K/SWA SA-6
<PAGE> 50
Attachment B to
6-1162-RLL-933R5
Page 4
2.3 In the event escalation provisions are made non-enforceable or
otherwise rendered null and void by any agency of the United States Government,
the parties agree, to the extent they may lawfully do so, to equitably adjust
the Purchase Price of any affected Aircraft to reflect an allowance for
increases or decreases in labor compensation and material costs occurring since
February, 1992, which is consistent with the applicable provisions of paragraph
1 of this Exhibit D.
3. For the calculations herein, the values released by the Bureau of
Labor Statistics and available to Boeing 30 days prior to scheduled Aircraft
delivery will be used to determine the ECI and ICI values for the applicable
months (including those noted as preliminary by the Bureau of Labor Statistics)
to calculate the Aircraft Price Adjustment.
Note: Any rounding of a number, as required under this Exhibit D with respect
to escalation of the airframe price, will be accomplished as follows:
if the first digit of the portion to be dropped from the number to be
rounded is five or greater, the preceding digit will be raised to the
next higher number.
P.A. No. 1810
K/SWA SA-6
<PAGE> 51
EXHIBIT 10.1
Supplemental Agreement No. 7
to
Purchase Agreement No. 1810
between
The Boeing Company
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737-7H4 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of DECEMBER 29, 1998, by
and between THE BOEING COMPANY, a Delaware corporation with its principal
offices in Seattle, Washington, (Boeing) and SOUTHWEST AIRLINES CO., a Texas
corporation with its principal offices in City of Dallas, State of Texas
(Buyer);
WHEREAS, the parties hereto entered into Purchase Agreement No. 1810
dated January 19, 1994, relating to Boeing Model 737-7H4 aircraft (the
Agreement) and;
WHEREAS, Buyer has agreed to exercise the option to purchase one (1)
additional Option Aircraft and to accelerate delivery of that Option Aircraft
from October 2006 to December 1999 (1), and to accelerate one Block "H" Aircraft
from August 1999 to July 1999, one Block "C" Aircraft from September 1999 to
August 1999, one Block "H" Aircraft from October 1999 to September 1999, one
Block "L" Aircraft from November 1999 to October 1999, one Block "L" Aircraft
from December 1999 to November 1999, two Block "D" Aircraft from January 2000 to
November 1999, one Block "D" Aircraft from January 2000 to December 1999 and one
Block "L" Aircraft from September 2003 to November 1999;
- ------------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN OMITTED
AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH THE COMMISSION.
P.A. No.1810 SA-7-1
K/SWA
<PAGE> 52
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties agree to amend the Agreement as follows:
1. The Table of Contents of the Agreement is deleted in its entirety and a new
Table of Contents is attached hereto and incorporated into the Agreement by this
reference.
2. Article 1, entitled "Subject Matter of Sale," paragraph 1.1 entitled "The
Aircraft" is deleted in its entirety and replaced by a new paragraph 1.1 revised
to reflect one hundred thirty (130) Aircraft. Such new page 1-1 is attached
hereto and incorporated into the Agreement by this reference.
3. Article 2, entitled "Delivery, Title and Risk of Loss," paragraph 2.1,
entitled "Time of Delivery," is deleted in its entirety and replaced by a new
paragraph 2.1 revised to accelerate one (1) Block "C" Aircraft from September
1999 to August 1999, two (2) Block "D" Aircraft from January 2000 to November
1999, one (1) Block "D" Aircraft from January 2000 to December 1999, one (1)
Block "H" Aircraft from August 1999 to July 1999, one (1) Block "H" Aircraft
from October 1999 to September 1999, one (1) Block "L Aircraft from November
1999 to October 1999, one (1) Block "L" from December 1999 to November 1999, one
(1) Block "L" Aircraft from September 2003 to November 1999 and to add one (1)
Block "L" Aircraft for delivery in December 1999. Such new pages 2-1, 2-2 and
2-3 are attached hereto and incorporated into the Agreement by this reference.
4. Article 3, entitled "Price of Aircraft", paragraph 3.4 entitled "Advance
Payment Base Price," subparagraph 3.4.1 entitled "Advance Payment Base Price" is
revised by adding Advance Payment Base Prices for the Block "C" August 1999
Aircraft, for the Block "D" November 1999 and December 1999 Aircraft, for the
Block "H" July 1999 Aircraft, and for the Block "L" October 1999 Aircraft and to
delete the Advance Payment Base Price for the Block "L" September 2003 Aircraft.
Such new pages 3-1, 3-2, 3-3 and 3-4 are attached hereto and incorporated into
the Agreement by this reference.
5. Letter Agreement No. 6-1162-RLL-933R5 entitled "Option Aircraft" is deleted
in its entirety and replaced with Letter Agreement No. 6-1162-RLL-933R6 attached
hereto and incorporated herein by this reference. The third paragraph is revised
to refer to fifty-eight (58) Rollover Option Aircraft. Article 2 entitled
"Delivery of Rollover Option Aircraft," paragraph 2.1 is revised to change the
P.A. No. 1810 SA-7-2
K/SWA
<PAGE> 53
quantity of Rollover Option Aircraft from nineteen (19) to eighteen (18) in the
year 2009; paragraph 2.2 and subparagraphs 2.2.1 and 2.2.2 are revised by
changing the quantity of Rollover Option Aircraft from fifty-nine (59) to
fifty-eight (58).
6. All references in the Letter Agreements associated with Purchase Agreement
No. 1810 shall be deemed to refer to the purchase by Buyer of one hundred thirty
(130) Model 737-7H4 Aircraft, sixty-two (62) Model 737-7H4 Option Aircraft and
fifty-eight (58) Model 737-7H4 Rollover Option Aircraft, to the extent such
reference is not specifically addressed herein.
7. Concurrent with execution of this Supplemental Agreement, Buyer will pay to
Boeing***. Such amount reflects the difference in advance payments due as a
result of the acceleration of the Aircraft as described above, the exercise of
the Option to purchase one Aircraft and the deposit due for one Rollover Option
Aircraft converted to an Option Aircraft.
The Agreement will be deemed to be supplemented to the extent herein provided
and as so supplemented will continue in full force and effect.
EXECUTED IN DUPLICATE as of the day and year first above written.
THE BOEING COMPANY SOUTHWEST AIRLINES CO.
By: /S/ DAWN S. FOSTER By: /S/ GARY A. BARRON
----------------------- ------------------------
Its: Attorney-In-Fact Its: EXECUTIVE V.P. & COO
---------------------- -----------------------
P.A. No. 1810 SA-7-3
K/SWA
<PAGE> 54
Exhibit 10.1
PURCHASE AGREEMENT
between
THE BOEING COMPANY
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737-7H4 Aircraft
Purchase Agreement Number 1810
- ------------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN OMITTED AND
HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH THE COMMISSION.
P.A. No. 1810
K/SWA
<PAGE> 55
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page SA
Number Number
------ ------
ARTICLES
- --------
<S> <C> <C> <C>
1. Subject Matter of Sale..........................................1-1 SA-7
2. Delivery, Title and Risk
of Loss.........................................................2-1 SA-7
3. Price of Aircraft...............................................3-1 SA-7
4. Taxes...........................................................4-1
5. Payment.........................................................5-1
6. Excusable Delay.................................................6-1
7. Changes to the Detail
Specification...................................................7-1 SA-1
8. Federal Aviation Requirements and
Certificates and Export License.................................8-1
9. Representatives, Inspection,
Flights and Test Data...........................................9-1
10. Assignment, Resale or Lease....................................10-1
11. Termination for Certain Events.................................11-1
12. Product Assurance; Disclaimer and
Release; Exclusion of Liabilities;
Customer Support; Indemnification
and Insurance..................................................12-1
13. Buyer Furnished Equipment and
Spare Parts....................................................13-1
14. Contractual Notices and Requests...............................14-1
15. Miscellaneous..................................................15-1
</TABLE>
P.A. No. 1810
K/SWA i SA-7
<PAGE> 56
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SA
Number
------
EXHIBITS
- --------
<S> <C> <C>
A Aircraft Configuration SA-1
B Product Assurance Document SA-1
C Customer Support Document
D Price Adjustments Due to
Economic Fluctuations - Aircraft
E Buyer Furnished Equipment
Provisions Document
F Defined Terms Document
</TABLE>
<TABLE>
<CAPTION>
LETTER AGREEMENTS
- -----------------
<S> <C>
1810-1 Waiver of Aircraft Demonstration Flight
</TABLE>
P.A. No. 1810 ii
K/SWA SA-7
<PAGE> 57
<TABLE>
<CAPTION>
TABLE OF CONTENTS
SA
Number
RESTRICTED LETTER AGREEMENTS ------
- ----------------------------
<S> <C> <C>
6-1162-RLL-932 Promotional Support
6-1162-RLL-933R6 Option Aircraft SA-7
6-1162-RLL-934R1 Disclosure of Confidential SA-1
Information
6-1162-RLL-935R1 Performance Guarantees SA-1
6-1162-RLL-936R4 Certain Contractual Matters SA-4
6-1162-RLL-937 Alternate Advance Payment Schedule
6-1162-RLL-938 ***
6-1162-RLL-939R1 Certification Flight Test Aircraft SA-1
6-1162-RLL-940R1 Training Matters SA-1
6-1162-RLL-941R1 Other Matters SA-1
6-1162-RLL-942 Open Configuration Matters
6-1162-RLL-943R1 Substitution Rights SA-6
6-1162-RLL-944 Airframe Maintenance Material Cost
Protection Program
6-1162-RLL-945 Comparison of 737-7H4 and 737-3H4
Block Fuel Burn
6-1162-RLL-1855R3 Additional Contractual Matters SA-4
6-1162-RLL-1856 *** SA-1
6-1162-RLL-1857 Service Ready Validation Program SA-1
Field Test
6-1162-RLL-1858R1 Escalation Matters SA-4
</TABLE>
P.A. No. 1810 iii
K/SWA SA-7
<PAGE> 58
TABLE OF CONTENTS CON'T
<TABLE>
<CAPTION>
SA
Number
RESTRICTED LETTER AGREEMENTS ------
- ----------------------------
<S> <C> <C>
6-1162-RLL-2036 Amortization of Costs for
Customer Unique Changes SA-1
6-1162-RLL-2037 Reconciliation of the Aircraft SA-1
Basic Price
6-1162-RLL-2073 Maintenance Training Matters SA-1
</TABLE>
P.A. No. 1810 iv
K/SWA SA-7
<PAGE> 59
PURCHASE AGREEMENT NO. 1810
Relating to
BOEING MODEL 737-7H4 AIRCRAFT
----------
This Agreement is entered into as of January 19th 1994, by and between
The Boeing Company, a Delaware corporation, with its principal office in
Seattle, Washington (Boeing), and Southwest Airlines Co., a Texas corporation,
with its principal office in the City of Dallas, State of Texas (Buyer).
Accordingly, Boeing and Buyer agree as follows:
P.A. No. 1810 1
K/SWA
<PAGE> 60
ARTICLE 1. Subject Matter of Sale.
1.1 The Aircraft. Subject to the terms and conditions of this
Agreement, Boeing will manufacture and deliver to Buyer and Buyer will purchase
and accept delivery from Boeing of one hundred thirty (130) Boeing Model 737-7H4
aircraft (the Aircraft) manufactured in accordance with Boeing Detail
Specification D6-38808-1, dated October 30, 1996, as described in Exhibit A, as
modified from time to time in accordance with this Agreement (Detail
Specification).
1.2 Additional Goods and Services. In connection with the sale of the
Aircraft, Boeing will also provide to Buyer certain other things under this
Agreement, including data, documents, training and services, all as described in
this Agreement.
1.3 Performance Guarantees. Any performance guarantees applicable to
the Aircraft will be expressly included in this Agreement. Where performance
guarantees are included in this Agreement other than within the Detail
Specification, such guarantees will be treated as being incorporated in the
Detail Specification by this reference.
1.4 Defined Terms. For ease of use, certain terms are treated as
defined terms in this Agreement. Such terms are identified with a capital letter
and set forth and/or defined in Exhibit F.
P.A. No. 1810 1-1
K/SWA SA-7
<PAGE> 61
ARTICLE 2. Delivery, Title and Risk of Loss.
2.1 Time of Delivery. The Aircraft will be delivered to Buyer by
Boeing, assembled and ready for flight and Buyer will accept delivery of the
Aircraft, in accordance with the following schedule:
<TABLE>
<CAPTION>
Month and Year
of Delivery Quantity of Aircraft
-------------- --------------------
<S> <C>
Block A Aircraft
October 1997 Two (2)
November 1997 Two (2)
Block B Aircraft
January 1998 Two (2)
February 1998 Three (3)
March 1998 Two (2)
April 1998 Two (2)
May 1998 Two (2)
June 1998 One (1)
July 1998 Two (2)
September 1998 Two (2)
Block C Aircraft
February 1999 Four (4)
May 1999 Four (4)
July 1999 Four (4)
August 1999 One (1)
September 1999 Three (3)
Block D Aircraft
November 1999 Two (2)
December 1999 One (1)
January 2000 One (1)
March 2000 Four (4)
July 2000 Four (4)
September 2000 Three (3)
Block E Aircraft
January 2001 Three (3)
March 2001 Three (3)
July 2001 Three (3)
September 2001 Three (3)
Block F Aircraft
October 1998 One (1)
November 1998 Two (2)
December 1998 Two (2)
</TABLE>
P.A. No. 1810 2-1
K/SWA SA-7
<PAGE> 62
<TABLE>
<S> <C>
Block G Aircraft
March 1999 Two (2)
Block H Aircraft
June 1999 Two (2)
July 1999 One (1)
August 1999 One (1)
September 1999 Two (2)
October 1999 One (1)
April 2000 Three (3)
October 2000 Three (3)
April 2001 Three (3)
October 2001 Three (3)
Block I Aircraft
January 2002 Four (4)
March 2002 Four (4)
April 2002 Two (2)
July 2002 Four (4)
October 2002 Four (4)
Block J Aircraft
January 2003 Four (4)
March 2003 One (1)
Block K Aircraft
April 2004 Two (2)
July 2004 Three (3)
Block L Aircraft
October 1999 One (1)
November 1999 Two (2)
December 1999 One (1)
November 2000 Two (2)
December 2000 One (1)
July 2001 One (1)
September 2001 One (1)
October 2001 One (1)
September 2002 Three (3)
</TABLE>
2.2 Notice of Target Delivery Date. Boeing will give Buyer notice of the Target
Delivery Date of the Aircraft approximately 30 days prior to the scheduled month
of delivery.
P.A. No. 1810 2-2
K/SWA SA-7
<PAGE> 63
2.3 Notice of Delivery Date. If Boeing gives Buyer at least 7 days'
notice of the delivery date of the Aircraft, and an Aircraft delivery is delayed
beyond such delivery date due to the responsibility of Buyer, Buyer will
reimburse Boeing for all costs incurred by Boeing as a result of such delay,
including amounts for storage, insurance, Taxes, preservation or protection of
the Aircraft and interest on payments due.
2.4 Place of Delivery. The Aircraft will be delivered at an airport
facility selected by Boeing in the State of Washington, unless mutually agreed
otherwise.
2.5 Title and Risk of Loss. Title to and risk of loss of an Aircraft
will pass from Boeing to Buyer upon delivery of such Aircraft, but not prior
thereto.
2.6 Bill of Sale. Upon delivery of an Aircraft Boeing will deliver to
Buyer a bill of sale conveying good title to such Aircraft, free of all liens,
claims, charges and encumbrances of every kind whatsoever, and such other
appropriate documents of title as Buyer may reasonably request.
P.A. No. 1810 2-3
K/SWA SA-7
<PAGE> 64
ARTICLE 3. Price of Aircraft.
3.1 Definitions.
3.1.1 Special Features are the features incorporated in
Exhibit A which have been selected by Buyer.
3.1.2 Base Aircraft Price is the Aircraft Basic Price
excluding the price of Special Features.
3.1.3 Aircraft Basic Price is comprised of the Base Aircraft
Price and the price of the Special Features.
3.1.4 Economic Price Adjustment is the adjustment to the
Aircraft Basic Price (Base Aircraft and Special Features) as calculated pursuant
to Exhibit D.
3.1.5 Aircraft Price is the total amount Buyer is to pay for
the Aircraft at the time of delivery.
3.2 Aircraft Basic Price.
The Aircraft Basic Price, expressed in July 1992 dollars, is
set forth below:
P.A. No. 1810 3-1
K/SWA SA-7
<PAGE> 65
<TABLE>
<CAPTION>
Base Special Aircraft
Aircraft Price Features Basic Price
<S> <C> <C> <C>
Block A, B, C,
D & E Aircraft *** *** ***
Block F & G
Aircraft *** *** ***
Block H
Aircraft *** *** ***
Block I
Aircraft *** *** ***
Block J
Aircraft *** *** ***
Block K
Aircraft *** *** ***
Block L Aircraft *** *** ***
</TABLE>
3.3 Aircraft Price. The Aircraft Price will be established at the time
of delivery of such Aircraft to Buyer and will be the sum of:
3.3.1 the Aircraft Basic Price, which is *** for the Block A,
B, C, D and E Aircraft, *** for the Block F and G Aircraft, *** for the Block H
Aircraft, *** for the Block I Aircraft, *** for the Block J Aircraft, *** for
the Block K Aircraft and *** for the Block L Aircraft; plus
3.3.2 the Economic Price Adjustments for the Aircraft Basic
Price, as calculated pursuant to the formulas set forth in Exhibit D (Price
Adjustments Due to Economic Fluctuations - Aircraft); plus
3.3.3 other price adjustments made pursuant to this Agreement
or other written agreements executed by Boeing and Buyer.
3.4 Advance Payment Base Price.
3.4.1 Advance Payment Base Price. For advance payment
purposes, the following estimated delivery prices of the Aircraft (Advance
Payment Base Price) have been established, using currently available forecasts
of the escalation factors used by Boeing as of the date of signing this
Agreement. The Advance Payment Base Price of each Aircraft is set forth below:
<TABLE>
<CAPTION>
Month and Year of Advance Payment Base
Scheduled Delivery Price per Aircraft
------------------ --------------------
<S> <C>
Block A Aircraft***
October 1997
November 1997
</TABLE>
P.A. No. 1810 3-2
K/SWA SA-7
<PAGE> 66
Block B Aircraft***
January 1998
February 1998
March 1998
April 1998
May 1998
June 1998
July 1998
September 1998
Block C Aircraft***
February 1999
May 1999
July 1999
August 1999
September 1999
Block D Aircraft***
November 1999
December 1999
January 2000
March 2000
July 2000
September 2000
Block E Aircraft***
January 2001
March 2001
July 2001
September 2001
Block F Aircraft***
October 1998
November 1998
December 1998
Block G Aircraft***
March 1999
Block H Aircraft***
June 1999
July 1999
August 1999
September 1999
October 1999
April 2000
October 2000
April 2001
October 2001
P.A. No. 1810 3-3
K/SWA SA-7
<PAGE> 67
Block I Aircraft***
January 2002
March 2002
April 2002
July 2002
October 2002
Block J Aircraft***
January 2003
March 2003
Block K Aircraft***
April 2004
July 2004
Block L Aircraft***
October 1999
November 1999
December 1999
November 2000
December 2000
July 2001
September 2001
October 2001
September 2002
3.4.2 Adjustment of Advance Payment Base Prices - Long-Lead
Aircraft. For Aircraft scheduled for delivery 36 months or more after the date
of this Agreement, the Advance Payment Base Prices appearing in Article 3.4.1
will be used to determine the amount of the first advance payment to be made by
Buyer on the Aircraft. No later than 25 months before the scheduled month of
delivery of each affected Aircraft, Boeing will increase or decrease the Advance
Payment Base Price of such Aircraft as required to
P.A. No. 1810 3-4
K/SWA SA-7
<PAGE> 68
reflect the effects of (i) any adjustments in the Aircraft Basic Price pursuant
to this Agreement and (ii) the then-current forecasted escalation factors used
by Boeing. Boeing will provide the adjusted Advance Payment Base Prices for each
affected Aircraft to Buyer, and the advance payment schedule will be considered
amended to substitute such adjusted Advance Payment Base Prices.
P.A. No. 1810 3-5
K/SWA SA-7
<PAGE> 69
6-1162-RLL-933R6
Southwest Airlines Co.
P.O. Box 36611 - Love Field
Dallas, Texas 75235
Subject: Letter Agreement No. 6-1162-RLL-933R6 to
Purchase Agreement No. 1810 -
Option Aircraft
This Letter Agreement amends Purchase Agreement No. 1810 dated as of January 19,
1994 (the Agreement) between The Boeing Company (Boeing) and Southwest Airlines
Co. (Buyer) relating to Model 737-7H4 aircraft (Aircraft).
All terms used and not defined herein will have the same meaning as in the
Agreement.
In consideration of the purchase by Buyer of the Aircraft, Boeing hereby agrees
to manufacture and sell to Buyer sixty-two (62) additional Model 737-7H4
aircraft as described in paragraph 1 of Attachment A hereto (Option Aircraft)
and fifty-eight (58) Model 737-7H4 Rollover Option Aircraft (Rollover Option
Aircraft), subject to the terms and conditions set forth below.
1. Delivery of Option Aircraft.
The Option Aircraft will be delivered to Buyer during or before the
months set forth in the following schedule:
<TABLE>
<CAPTION>
Number of Option
Month and Year Option Aircraft
of Delivery Aircraft Block
-------------- ---------- ---------
<S> <C> <C>
March 2003 Three (3) M
April 2003 Two (2) M
July 2003 Four (4) M
October 2003 Four (4) M
January 2004 Four (4) N
</TABLE>
- ------------------------
*** PURSUANT TO 17 CFR, 240.246-2, CONFIDENTIAL INFORMATION HAS BEEN OMITTED
AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
PURSUANT TO A CONFIDENTIAL TREATMENT APPLICATION FILED WITH THE COMMISSION.
P.A No. 1810
K/SWA SA-7
<PAGE> 70
Southwest Airlines Co.
6-1162-RLL-933R6 Page 2
<TABLE>
<S> <C> <C>
March 2004 One (1) N
April 2004 One (1) N
August 2004 Two (2) N
September 2004 Three (3) N
October 2004 Two (2) N
</TABLE>
<TABLE>
<CAPTION>
Number of Option
Month and Year Option Aircraft
of Delivery Aircraft Block
-------------- ---------- ---------
<S> <C> <C>
January 2005 Four (4) O
March 2005 Four (4) O
April 2005 Two (2) O
July 2005 Four (4) O
October 2005 Four (4) O
January 2006 Four (4) P
March 2006 Four (4) P
April 2006 Two (2) P
July 2006 Four (4) P
October 2006 Four (4) P
</TABLE>
2. Delivery of Rollover Option Aircraft.
2.1 The Rollover Option Aircraft will be delivered to Buyer during or
before the years set forth in the following schedule:
<TABLE>
<CAPTION>
Option
Year of Number of Aircraft
Delivery Option Aircraft Block
-------- --------------- --------
<S> <C> <C>
2007 Twenty (20) Q
2008 Twenty (20) R
2009 Eighteen (18) S
</TABLE>
2.2 The fifty-eight (58) Rollover Option Aircraft are offered to Buyer
subject to the following conditions:
2.2.1 Buyer can exercise any fifty-eight (58) of the
sixty-two (62) Option Aircraft, and will be offered a Rollover Option Aircraft
for each option aircraft exercised up to and including fifty-eight (58).
2.2.2 Conversely to Article 2.2.1 above, if Buyer does not
exercise a minimum of fifty-eight (58) Option Aircraft, one Rollover Option
Aircraft will be deleted for each Option Aircraft not exercised by Buyer.
P.A No. 1810
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Southwest Airlines Co.
6-1162-RLL-933R6 Page 3
2.2.3 When Buyer exercises one or more Option Aircraft, Boeing
will offer the same quantity of Rollover Option Aircraft to Buyer in the years
identified in Article 2.1 above.
2.2.4 The Rollover Option Aircraft delivery month offered by
Boeing to Buyer will be at least 24 months from the Option exercise date of the
corresponding option.
2.2.5 When Boeing offers the Rollover Option Aircraft to
Buyer, Buyer will accept such Rollover Option Aircraft by wire transferring
$100,000 to Boeing. In the event Buyer exercises its option to purchase the
Rollover Option Aircraft, such application will be in accordance with Article
4.1 herein.
3. Price.
3.1 The advance payment base prices of the Option Aircraft set forth
below and in paragraph 2.1 of Attachment A represent the estimated delivery
prices of the Option Aircraft. The Option Aircraft pricing elements and
associated pricing terms and conditions are given in Attachment A.
3.2 Price and escalation provisions for Model 737-7H4 aircraft
delivering after 2002, are not currently available. The estimated Advance
Payment Base Prices shown in paragraph 3.3 below and in paragraph 2.1 of
Attachment A are based on currently available price and escalation provisions.
As price and escalation provisions become available for Model 737-7H4 aircraft
delivering after 2002, such price and escalation provisions will be
appropriately applied to the applicable Option Aircraft.
For additional information relating to price and escalation provisions
applicable to Option Aircraft delivering after 2002 refer to paragraphs 2.2 and
3.2 of Attachment A.
3.3 The Advance Payment Base Prices of the Option Aircraft indicated
below do include an amount for special features in addition to those
specifically described in Attachment A but do not include any amount for items
of Buyer Furnished Equipment (BFE). An estimate for typical special features is
*** per Aircraft (expressed in 1992 STE dollars) and for BFE is *** per Aircraft
(expressed in delivery year dollars).
P.A No. 1810
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<PAGE> 72
Southwest Airlines Co.
6-1162-RLL-933R6 Page 4
<TABLE>
<CAPTION>
Month and Year Advance Payment Base
of Delivery Price per Option Aircraft
--------------- -------------------------
<S> <C> <C>
Block M Aircraft***
March 2003
April 2003
July 2003
October 2003
Block N Aircraft***
January 2004
March 2004
April 2004
August 2004
September 2004
October 2004
Block O Aircraft***
January 2005
March 2005
April 2005
July 2005
October 2005
Block P Aircraft***
January 2006
March 2006
April 2006
July 2006
October 2006
</TABLE>
3.4 The Option Aircraft purchase price will be the applicable basic
price thereof at the time of Option Aircraft delivery adjusted in accordance
with Boeing's Aircraft escalation provisions contained in the definitive
agreement to purchase the Option Aircraft. The purchase price will include the
price for Seller Purchased Equipment (SPE) if Buyer has elected to change Buyer
Furnished Equipment (BFE) to SPE.
P.A No. 1810
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Southwest Airlines Co.
6-1162-RLL-933R6 Page 5
4. Option Aircraft Payment.
4.1 In consideration of the granting of the option as set forth herein,
on or before the date Boeing and Buyer enter into a definitive agreement to
purchase the Aircraft, Buyer will pay a deposit to Boeing of $100,000 for each
Option Aircraft (Deposit). In the event Buyer exercises its option herein, the
amount of the Deposit will be credited against the first advance payment due for
such Option Aircraft pursuant to the advance payment schedule set forth in
paragraph 3 of Attachment A. The Deposits for the Option Aircraft will be
refunded to Buyer, without interest, if the parties do not enter into a
definitive Agreement for the Aircraft.
In the event that, after the parties enter into a definitive agreement to
purchase the Aircraft, Buyer does not exercise its option to purchase the Option
Aircraft pursuant to the terms and conditions set forth herein, Boeing will be
entitled to retain the Deposits for the Option Aircraft except as provided in
paragraphs 6 herein.
4.2 Advance payments in the amount of 30% of the advance payment base
price will be payable on the Option Aircraft in accordance with paragraph 3 of
Attachment A. The remainder of the Option Aircraft purchase price is due at the
time of delivery of the Option Aircraft.
5. Option Exercise.
5.1 To exercise its Option, Buyer will give written or telegraphic
notice thereof to Boeing on or before eighteen (18) months prior to the first
day of the delivery month of each Option Aircraft.
In such notice Buyer will select the Option Model type, and the applicable
delivery positions.
5.2 It is understood and agreed that Boeing may accelerate the option
exercise dates specified above if Boeing must make production decisions which
are dependent on Buyer's decision to buy the Option Aircraft. If Boeing elects
to accelerate the option exercise dates, Boeing will do so by giving written or
telegraphic notice thereof to Buyer. Such notice will specify the revised option
exercise dates, which will not be earlier than 30 days after the date of
transmittal of such notice, and the Option Aircraft delivery positions affected
by such revision. If Buyer fails to exercise its option for any Option Aircraft
affected by such revised dates, the Deposit applicable
P.A No. 1810
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<PAGE> 74
Southwest Airlines Co.
6-1162-RLL-933R6 Page 6
to such Option Aircraft will be promptly refunded, with interest, to Buyer. The
interest rate for calculation of the interest associated with such refund is the
rate of two percent (2%) below the Citibank base rate in effect from time to
time during the period the option deposit is held by Boeing.
6. Contract Terms.
It is understood that Boeing and Buyer will use their best efforts to
enter into a definitive agreement for the Option Aircraft within thirty (30)
days after Buyer exercises an option to purchase Option Aircraft pursuant to
paragraph 5 covering the detailed terms and conditions for the sale of such
Option Aircraft.
Such definitive agreement will include the terms and conditions contained herein
together with the terms and conditions, not inconsistent herewith, contained in
Boeing's then-current standard form of purchase agreement for the sale of Model
737-700 aircraft in effect as of the date of option exercise and such additional
terms and conditions as may be mutually agreed upon. In the event the parties
have not entered into such an agreement within the time period contemplated
herein, either party may, exercisable by written or telegraphic notice given to
the other within thirty (30) days after such period, terminate the purchase of
such Option Aircraft.
7. Termination of Option to Purchase.
Either Boeing or Buyer may terminate the option to purchase an Option
Aircraft if any of the following events are not accomplished by the respective
dates contemplated in this letter agreement, or in the Agreement, as the case
may be:
(i) termination of the purchase of the Aircraft under the
Agreement for any reason;
(ii) payment by Buyer of the Deposit with respect to an Option
Aircraft pursuant to paragraph 4.1 herein;
(iii) exercise of an option to purchase an Option Aircraft pursuant
to the terms hereof. Any termination of an option to purchase by Boeing which is
based on the termination of the purchase of Aircraft under the Agreement will be
on a one-for-one basis, for each Aircraft so terminated.
P.A No. 1810
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<PAGE> 75
Southwest Airlines Co.
6-1162-RLL-933R6 Page 7
Any cancellation of an option to purchase which is based on failure to make the
required Deposit or to exercise the option to purchase shall only apply to the
Option Aircraft so canceled.
Termination of an option to purchase provided by this letter agreement will be
caused by either party giving written notice to the other within 10 days after
the applicable date. Upon receipt of such notice, all rights and obligations of
the parties with respect to an Option Aircraft for which the option to purchase
has been terminate will thereupon terminate.
If termination is result of a revision of an option exercise date by Boeing
pursuant to paragraph 5.2, Boeing will promptly refund to Buyer, without
interest, any payments received from Buyer, including the Deposit, with respect
to the Option Aircraft for which the option is terminated. If termination is for
any other reason, Boeing will promptly refund to Buyer, without interest, any
payments received from Buyer with respect to the affected Option Aircraft,
except the Deposit, which Buyer may apply to any model Boeing aircraft purchased
by Buyer from Boeing at a future date.
8. Confidential Treatment. Buyer understands that certain commercial and
financial information contained in this Letter Agreement including any
attachments hereto is considered by Boeing as confidential. Buyer agrees that it
will treat this Letter Agreement and the
P.A No. 1810
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<PAGE> 76
Southwest Airlines Co.
6-1162-RLL-933R6 Page 8
information contained herein as confidential and will not, without the prior
written consent of Boeing, disclose this Letter Agreement or any information
contained herein to any other person or entity except as provided in Letter
Agreement No. 6-1162-RLL-934R1.
Very truly yours,
THE BOEING COMPANY
By /s/ DAWN S. FOSTER
------------------------------------
Its ATTORNEY-IN-FACT
------------------------------------
ACCEPTED AND AGREED TO this
date: DECEMBER 29, 1998
-----------
SOUTHWEST AIRLINES CO.
By /s/ GARY A. BARRON
------------------------------------
Its EXECUTIVE V.P. & COO
------------------------------------
Attachments
P.A No. 1810
K/SWA SA-7
<PAGE> 77
Attachment A to
6-1162-RLL-933R6
Page 1
Model 737-7H4 Aircraft
1. Option Aircraft Description and Changes.
1.1 Aircraft Description. The Option Aircraft is described by Boeing
Detail Specification D6-38808-1, Dated October 30 ,1996.
1.2 Changes. The Detail Specification will be revised to include:
(1) Changes applicable to the basic Model 737-700 aircraft
which are developed by Boeing between the date of the Detail Specification and
the signing of a definitive agreement to purchase the Option Aircraft.
(2) Changes mutually agreed upon.
(3) Changes required to obtain a Standard Certificate of
Airworthiness.
(4) To provide sufficient Option Aircraft manufacturing and
procurement lead time it is necessary for Boeing and Buyer to reach final
agreement on the Option Aircraft configuration, including BFE/SPE vendor
selection fifteen (15) months prior to delivery of each Option Aircraft. If such
items are not resolved by the indicated dates, Boeing reserves the right to
amend this letter agreement:
(i) to adjust the scheduled delivery of the Option
Aircraft to a later time period and,
(ii) to make such other changes as are appropriate
and consistent with the revised Option Aircraft deliveries.
1.3 Effect of Changes. Changes to the Detail Specification incorporated
pursuant to the provisions of the clauses above will include the effects of such
changes upon Option Aircraft weight, balance, design and performance.
Performance guarantees for the Option Aircraft which are mutually acceptable to
the parties will be included in the definitive agreement for the Option
Aircraft.
P.A No. 1810
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<PAGE> 78
Attachment A to
6-1162-RLL-933
Page 2
2. Price Description
2.1 Price Elements Per Aircraft
<TABLE>
<CAPTION>
1 2 3
- - -
AIRCRAFT & ADV. PMT.
AIRCRAFT ESTIMATED SPECIAL ESTIMATED BASE PRICE
DELIVERY FEATURES PRICE ESTIMATED ESCALATION (Elements)
MO. & YR. (JULY 1992$) ESCALATION SHARING 1 + 2 + 3
- --------- -------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BLOCK M
March 2003 *** *** *** ***
April 2003 *** *** *** ***
July 2003 *** *** *** ***
October 2003 *** *** *** ***
BLOCK N
January 2004 *** *** *** ***
March 2004 *** *** *** ***
April 2004 *** *** *** ***
August 2004 *** *** *** ***
September 2004 *** *** *** ***
October 2004 *** *** *** ***
BLOCK O
January *** *** *** ***
March 2005 *** *** *** ***
April 2005 *** *** *** ***
July 2005 *** *** *** ***
October 2005 *** *** *** ***
BLOCK P
January 2006 *** *** *** ***
March 2006 *** *** *** ***
April 2006 *** *** *** ***
July 2006 *** *** *** ***
October 2006 *** *** *** ***
</TABLE>
P.A No. 1810
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<PAGE> 79
Attachment A to
6-1162-RLL-933R6
Page 3
2. Price Description. (Continued)
2.2 Price Adjustments For Option Aircraft Delivering From
March 2003 through December 2009.
2.2.1 Special Features. The price for Special Features
incorporated in the Option Aircraft Detail Specification will be adjusted to
Boeing's then-current prices for such features as of the date of execution of
the definitive agreement for the Option Aircraft.
2.2.2 Escalation Adjustments. For escalation provisions
applicable to Option Aircraft delivering after 2002, see paragraph 2.2.6 below.
2.2.3 Base Price Adjustments for FAA Changes. The Aircraft
Basic Price of the Option Aircraft will be adjusted for any FAA mandated changes
incorporated into the Aircraft.
2.2.4 Price Adjustments for Changes. Boeing may adjust the
Aircraft Basic Price and the Advance Payment Base Price for any changes mutually
agreed upon subsequent to the date that Buyer and Boeing enter into a definitive
agreement for the Option Aircraft.
2.2.5 Base Price Adjustments. The Aircraft Basic Price of the
Option Aircraft will be adjusted to Boeing's then-current prices as of the date
of execution of the definitive agreement for the Option Aircraft in accordance
with the agreement reached below. The Aircraft Basic Price starting point for
options delivering in 2003 is *** (July 1992 STE), for options delivering in
2004 is *** (July 1992 STE), for options delivering in 2005 through 2009 is ***
(July 1992 STE). Such Aircraft Basic Price may increase in accordance with
paragraphs 2.2.1, 2.2.2, 2.2.3 and 2.2.4. For any other changes to the Aircraft
Basic Price, Boeing may increase the Aircraft Basic Price by a maximum of ***
(July 1992 STE) for Aircraft delivering in 2005 and by a maximum of *** (July
1992 STE) per year or portion thereof starting in January 2006.
2.2.6 Prices for Long Lead Time Aircraft. Boeing has not
established escalation provisions for Model 737-700 aircraft for delivery 2003
and after. Such escalation provisions (i) will be incorporated into the Option
Aircraft definitive agreement when such information is available and (ii) will
be the then-current escalation provisions applicable to the same model aircraft
and engines delivering in the same time period as the Option Aircraft. The
resulting revisions to the definitive agreement will
P.A No. 1810
K/SWA SA-7
<PAGE> 80
Attachment A to
6-1162-RLL-933R6
Page 4
include but not be limited to, adjustment of the Aircraft Basic Price of the
Option Aircraft, the Advance Payment Base Price, the Aircraft escalation
provisions and the advance payment amounts due on the Option Aircraft.
2.2.7 BFE to SPE. An estimate of the total price for items of
Buyer Furnished Equipment (BFE) changed to Seller Purchased Equipment (SPE)
pursuant to the Configuration Specification is included in the Option Aircraft
price build-up. The purchase price of the Option Aircraft will be adjusted by
the price charged to Boeing for such items plus 10% of such price. If all BFE
except developmental avionics is converted to SPE, Boeing will waive the 10%
fee.
3. Advance Payment Schedules, Prices and Adjustments.
3.1 Buyer will pay to Boeing advance payments for the Option Aircraft
on the dates and in the amounts determined below.
P.A No. 1810
K/SWA SA-7
<PAGE> 81
Attachment A to
6-1162-RLL-933R6
Page 5
<TABLE>
<CAPTION>
Amount Due per Aircraft
-----------------------
(Percentage times
Due Date of Payment Advance Payment Base Price)
- -------------------
<S> <C>
Deposit $100,000 (if applicable)
18 months prior to the first 15% (less the
day of the scheduled delivery Deposit if any)
month of the Aircraft
12 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
9 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
6 months prior to the first 5%
day of the scheduled delivery
month of the Aircraft
--------
Total 30%
</TABLE>
Any advance payments that would be past due as of the date of signing the
definitive purchase agreement for the Option Aircraft in accordance with the
above schedule are due and payable on such date.
3.2 Option Aircraft advance payment base prices will be increased or
decreased, as appropriate, at the time of signing of the definitive purchase
agreement for the Option Aircraft, using the then-current forecasted aircraft
escalation factors used by Boeing, to determine the amount of the advance
payments to be made by Buyer on the Option Aircraft.
P.A No. 1810
K/SWA SA-7
<PAGE> 82
Attachment B to
6-1162-RLL-933R6
Page 1
PRICE ADJUSTMENT DUE TO
ECONOMIC FLUCTUATIONS
AIRCRAFT PRICE ADJUSTMENT
(July 1992 Base Price)
1. Formula.
The Aircraft Price Adjustment will be determined at the time of
Aircraft delivery in accordance with the following formula:
Pa = (P)(L + M - 1)
Where:
Pa = Aircraft Price Adjustment.
L = .65 x ECI
-----
116.2
M = .35 x ICI
-----
115.9
P = Aircraft Basic Price (as set forth in Article 3.2 of this
Agreement).
ECI = A value using the "Employment Cost Index for workers in
aerospace manufacturing" (aircraft manufacturing, standard
industrial classification code 3721, compensation, base month
and year June 1989 = 100), as released by the Bureau of Labor
Statistics, U.S. Department of Labor on a quarterly basis for
the months of March, June, September and December, calculated
as follows: A three-month arithmetic average value (expressed
as a decimal and rounded to the nearest tenth) will be
determined using the months set forth in the table below for
the applicable Aircraft, with the released Employment Cost
Index value described above for the month of March also being
used for the months of January and February; the value for
June also used for April and May; the value for September also
used for July and August; and the value for December also used
for October and November.
P.A No. 1810
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<PAGE> 83
Attachment B to
6-1162-RLL-933R6
Page 2
ICI = The three-month arithmetic average of the released monthly
values for the Industrial Commodities Index as set forth in
the "Producer Prices and Price Index" (Base Year 1982 = 100)
as released by the Bureau of Labor Statistics, U.S. Department
of Labor values (expressed as a decimal and rounded to the
nearest tenth) for the months set forth in the table below for
the applicable Aircraft.
In determining the value of L, the ratio of ECI divided by 116.2 will
be expressed as a decimal rounded to the nearest ten-thousandth and then
multiplied by .65 with the resulting value also expressed as a decimal and
rounded to the nearest ten-thousandth.
In determining the value of M, the ratio of ICI divided by 115.9 will
be expressed as a decimal rounded to the nearest ten-thousandth and then
multiplied by .35 with the resulting value also expressed as a decimal and
rounded to the nearest ten-thousandth.
<TABLE>
<CAPTION>
Months to be Utilized
Month of Scheduled in Determining the
Aircraft Delivery Value of ECI and ICI
- ------------------ --------------------------
<S> <C>
January June B, July B, Aug. B
February July B, Aug. B, Sept. B
March Aug. B, Sept. B, Oct. B
April Sept. B, Oct. B, Nov. B
May Oct. B, Nov. B, Dec. B
June Nov. B, Dec. B, Jan. D
July Dec. B, Jan. D, Feb. D
August Jan. D, Feb. D, Mar. D
September Feb. D, Mar. D, Apr. D
October Mar. D, Apr. D, May D
November Apr. D, May D, June D
December May D, June D, July D
</TABLE>
The following definitions of B and D will apply:
B = The calendar year before the year in which the
scheduled month of delivery as set forth in Paragraph 1
occurs.
D = The calendar year during which the scheduled month of
delivery as set forth in Paragraph 1 occurs.
P.A No. 1810
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<PAGE> 84
Attachment B to
6-1162-RLL-933R6
Page 3
2. If at the time of delivery of an Aircraft Boeing is unable to determine
the Aircraft Price Adjustment because the applicable values to be used to
determine the ECI and ICI have not been released by the Bureau of Labor
Statistics, then:
2.1 The Aircraft Price Adjustment, to be used at the time of delivery
of each of the Aircraft, will be determined by utilizing the escalation
provisions set forth above. The values released by the Bureau of Labor
Statistics and available to Boeing 30 days prior to scheduled Aircraft delivery
will be used to determine the ECI and ICI values for the applicable months
(including those noted as preliminary by the Bureau of Labor Statistics) to
calculate the Aircraft Price Adjustment. If no values have been released for an
applicable month, the provisions set forth in Paragraph 2.2 below will apply. If
prior to delivery of an Aircraft the U.S. Department of Labor changes the base
year for determination of the ECI or ICI values as defined above, such rebased
values will be incorporated in the Aircraft Price Adjustment calculation. The
payment by Buyer to Boeing of the amount of the Purchase Price for such
Aircraft, as determined at the time of Aircraft delivery, will be deemed to be
the payment for such Aircraft required at the delivery thereof.
2.2 If prior to delivery of an Aircraft the U.S. Department of Labor
substantially revises the methodology used for the determination of the values
to be used to determine the ECI and ICI values (in contrast to benchmark
adjustments or other corrections of previously released values), or for any
reason has not released values needed to determine the applicable Aircraft Price
Adjustment, the parties will, prior to delivery of any such Aircraft, select a
substitute for such values from data published by the Bureau of Labor Statistics
or other similar data reported by non-governmental United States organizations,
such substitute to lead in application to the same adjustment result, insofar as
possible, as would have been achieved by continuing the use of the original
values as they may have fluctuated during the applicable time period.
Appropriate revision of the formula will be made as required to reflect any
substitute values. However, if within 24 months from delivery of the Aircraft
the Bureau of Labor Statistics should resume releasing values for the months
needed to determine the Aircraft Price Adjustment, such values will be used to
determine any increase or decrease in the Aircraft Price Adjustment for the
Aircraft from that determined at the time of delivery of such Aircraft.
P.A No. 1810
K/SWA SA-7
<PAGE> 85
Attachment B to
6-1162-RLL-933R6
Page 4
2.3 In the event escalation provisions are made non-enforceable or
otherwise rendered null and void by any agency of the United States Government,
the parties agree, to the extent they may lawfully do so, to equitably adjust
the Purchase Price of any affected Aircraft to reflect an allowance for
increases or decreases in labor compensation and material costs occurring since
February, 1992, which is consistent with the applicable provisions of paragraph
1 of this Exhibit D.
3. For the calculations herein, the values released by the Bureau of Labor
Statistics and available to Boeing 30 days prior to scheduled Aircraft delivery
will be used to determine the ECI and ICI values for the applicable months
(including those noted as preliminary by the Bureau of Labor Statistics) to
calculate the Aircraft Price Adjustment.
Note: Any rounding of a number, as required under this Exhibit D with
respect to escalation of the airframe price, will be accomplished as
follows: if the first digit of the portion to be dropped from the
number to be rounded is five or greater, the preceding digit will be
raised to the next higher number.
P.A No. 1810
K/SWA SA-7
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333- 20275, 33-48178, 33-57327, 33-40652, and 33-40653,
333-64431, 333-67627, and 333-67631, and Form S-3 Nos. 33-29257 and 33-59113)
and in the related Prospectuses of our report dated January 21, 1999 with
respect to the consolidated financial statements of Southwest Airlines Co. for
the year ended December 31, 1998 included in this Annual Report on Form 10-K.
ERNST & YOUNG LLP
/s/ ERNST & YOUNG LLP
Dallas, Texas
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 378,511
<SECURITIES> 0
<RECEIVABLES> 88,799
<ALLOWANCES> 0
<INVENTORY> 50,035
<CURRENT-ASSETS> 574,155
<PP&E> 5,739,019
<DEPRECIATION> 1,601,409
<TOTAL-ASSETS> 4,715,996
<CURRENT-LIABILITIES> 850,653
<BONDS> 0
0
0
<COMMON> 335,904
<OTHER-SE> 2,062,014
<TOTAL-LIABILITY-AND-EQUITY> 4,715,996
<SALES> 0
<TOTAL-REVENUES> 4,163,980
<CGS> 0
<TOTAL-COSTS> 3,480,369
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 56,276
<INCOME-PRETAX> 705,112
<INCOME-TAX> 271,681
<INCOME-CONTINUING> 433,431
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 433,431
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.23
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998<F1>
<PERIOD-START> JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-01-1998
<CASH> 506,948 567,173
<SECURITIES> 0 0
<RECEIVABLES> 116,533 112,064
<ALLOWANCES> 0 0
<INVENTORY> 47,918 47,242
<CURRENT-ASSETS> 721,212 777,140
<PP&E> 5,037,877 5,271,353
<DEPRECIATION> 1,424,036 1,483,915
<TOTAL-ASSETS> 4,339,211 4,568,608
<CURRENT-LIABILITIES> 886,294 931,424
<BONDS> 0 0
0 0
0 0
<COMMON> 222,958 223,430
<OTHER-SE> 1,872,675 2,010,379
<TOTAL-LIABILITY-AND-EQUITY> 4,339,211 4,568,608
<SALES> 0 0
<TOTAL-REVENUES> 942,653 2,021,494
<CGS> 0 0
<TOTAL-COSTS> 830,960 1,701,253
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 15,711 29,272
<INCOME-PRETAX> 114,057 330,604
<INCOME-TAX> 44,049 127,203
<INCOME-CONTINUING> 70,008 203,401
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 70,008 203,401
<EPS-PRIMARY> 0.21 0.61
<EPS-DILUTED> 0.20 0.58
<FN>
<F1>On July 22, 1998, the Company's Board of Directors declared a three-for-two stock split on the Company's
Common Stock, distributed on August 20, 1998. All per share data in this exhibit have been restated to give
effect to the stock split.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997<F1>
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997
<CASH> 652,412 577,784 554,118 623,343
<SECURITIES> 0 0 0 0
<RECEIVABLES> 84,493 88,384 106,000 76,530
<ALLOWANCES> 0 0 0 0
<INVENTORY> 50,171 49,931 52,281 52,376
<CURRENT-ASSETS> 823,117 759,200 756,978 806,416
<PP&E> 4,270,302 4,537,401 4,704,002 4,811,324
<DEPRECIATION> 1,240,253 1,264,820 1,323,068 1,375,631
<TOTAL-ASSETS> 3,857,245 4,035,983 4,142,034 4,246,160
<CURRENT-LIABILITIES> 761,426 915,476 898,630 868,513
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 145,415 145,708 146,785 221,207
<OTHER-SE> 1,554,457 1,651,015 1,760,665 1,787,811
<TOTAL-LIABILITY-AND-EQUITY> 3,857,245 4,035,983 4,142,034 4,246,160
<SALES> 0 0 0 0
<TOTAL-REVENUES> 887,095 1,843,987 2,841,228 3,816,821
<CGS> 0 0 0 0
<TOTAL-COSTS> 799,892 1,600,377 2,445,848 3,292,585
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 15,225 31,444 47,872 63,454
<INCOME-PRETAX> 83,401 237,224 387,611 516,956
<INCOME-TAX> 32,527 92,518 150,394 199,184
<INCOME-CONTINUING> 50,874 144,706 237,217 317,772
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 50,874 144,706 237,217 317,772
<EPS-PRIMARY> 0.16 0.44 0.72 0.97
<EPS-DILUTED> 0.15 0.43 0.70 0.93
<FN>
<F1>On July 22, 1998, the Company's Board of Directors declared a three-for-two stock split on the Company's
Common Stock, distributed on August 20, 1998. All per share data in this exhibit have been restated to give
effect to the stock split.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996<F1>
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 581,841
<SECURITIES> 0
<RECEIVABLES> 73,440
<ALLOWANCES> 0
<INVENTORY> 51,094
<CURRENT-ASSETS> 750,990
<PP&E> 4,157,628
<DEPRECIATION> 1,188,405
<TOTAL-ASSETS> 3,723,479
<CURRENT-LIABILITIES> 765,404
<BONDS> 0
0
0
<COMMON> 145,112
<OTHER-SE> 1,503,200
<TOTAL-LIABILITY-AND-EQUITY> 3,723,479
<SALES> 0
<TOTAL-REVENUES> 3,406,170
<CGS> 0
<TOTAL-COSTS> 3,055,335
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 59,269
<INCOME-PRETAX> 341,362
<INCOME-TAX> 134,025
<INCOME-CONTINUING> 207,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207,337
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.61
<FN>
<F1>On July 22, 1998, the Company's Board of Directors declared a three-for-two stock split on the Company's
Common Stock, distributed on August 20, 1998. All per share data in this exhibit have been restated to give
effect to the stock split.
</FN>
</TABLE>
