SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
September 30, 1999 OR
____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
________ TO ________
Commission file No. 1-7259
SOUTHWEST AIRLINES CO.
(Exact name of registrant as specified in its charter)
TEXAS 74-1563240
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 36611, Dallas, Texas 75235-1611
(Address of principal executive offices) (Zip Code)
(214) 792-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of shares of Common Stock outstanding as of the close
of business on November 8, 1999:
504,435,654
SOUTHWEST AIRLINES CO.
FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Southwest Airlines Co.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
September December 31,
30,1999 1998
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $266,688 $378,511
Accounts receivable 113,039 88,799
Inventories of parts and supplies 53,628 50,035
Deferred income taxes 21,477 20,734
Prepaid expenses and other current assets 33,642 36,076
Total current assets 488,474 574,155
Property and equipment:
Flight equipment 5,492,977 4,709,059
Ground property and equipment 735,526 720,604
Deposits on flight equipment purchase contracts 374,019 309,356
6,602,522 5,739,019
Less allowance for depreciation 1,781,623 1,601,409
4,820,899 4,137,610
Other assets 8,203 4,231
$5,317,576 $4,715,996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $170,106 $157,415
Accrued liabilities 479,113 477,448
Air traffic liability 289,909 200,078
Income taxes payable 51,137 -
Current maturities of long-term debt 6,943 11,996
Other current liabilities 4,119 3,716
Total current liabilities 1,001,327 850,653
Long-term debt less current maturities 617,379 623,309
Deferred income taxes 620,038 549,207
Deferred gains from sale and leaseback of aircraft 226,495 238,412
Other deferred liabilities 51,096 56,497
Stockholders' equity:
Common stock 504,249 335,904
Capital in excess of par value 2,599 89,820
Retained earnings 2,294,818 2,044,975
Treasury stock at cost (425) (72,781)
Total stockholders' equity 2,801,241 2,397,918
$5,317,576 $4,715,996
</TABLE>
See accompanying notes.
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger $1,174,732 $1,042,813 $3,354,181 $2,967,840
Freight 25,273 23,360 75,552 72,785
Other 35,161 28,657 101,436 75,699
Total operating revenues 1,235,166 1,094,830 3,531,169 3,116,324
OPERATING EXPENSES:
Salaries, wages, and benefits 375,524 335,654 1,088,109 954,425
Fuel and oil 142,624 96,619 331,274 294,138
Maintenance materials and
repairs 100,037 77,373 274,673 224,073
Agency commissions 39,222 40,087 118,504 120,064
Aircraft rentals 49,835 51,547 149,539 152,711
Landing fees and other rentals 62,547 54,773 181,238 159,369
Depreciation 63,808 59,575 180,136 165,551
Other operating expenses 195,106 175,283 580,285 521,833
Total operating expenses 1,028,703 890,911 2,903,758 2,592,164
OPERATING INCOME 206,463 203,919 627,411 524,160
OTHER EXPENSES (INCOME):
Interest expense 13,254 13,459 39,936 42,731
Capitalized interest (8,337) (6,093) (24,430) (18,810)
Interest income (6,465) (8,533) (18,838) (24,821)
Other (gains) losses, net 62 (5,969) 10,094 (16,599)
Total other expenses (income) (1,486) (7,136) 6,762 (17,499)
INCOME BEFORE INCOME TAXES 207,949 211,055 620,649 541,659
PROVISION FOR INCOME TAXES 80,971 81,410 240,067 208,613
NET INCOME $126,978 $129,645 $380,582 $333,046
NET INCOME PER SHARE:
Basic $ .25 $ .26 $ .76 $ .67
Diluted $ .24 $ .24 $ .71 $ .63
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 504,214 500,013 502,978 500,744
Diluted 535,772 530,342 536,929 530,282
</TABLE>
See accompanying notes.
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
<S> Nine months ended September 30,
1999 1998
<C> <C>
Net cash provided by operating
activities $782,468 $692,312
Investing activities:
Net purchases of property and
equipment (902,441) (672,992)
Financing activities:
Payment of long-term debt and
capital lease obligations (11,278) (116,877)
Payment of cash dividends (10,842) (9,284)
Proceeds from Employee stock plans 30,695 35,682
Repurchase of common stock (425) (100,000)
Net cash provided by (used in)
financing activities 8,150 (190,479)
Net decrease in cash and
cash equivalents (111,823) (171,159)
Cash and cash equivalents at
beginning of period 378,511 623,343
Cash and cash equivalents at
end of period $266,688 $452,184
Cash payments for:
Interest, net of amount
capitalized $22,735 $34,450
Income taxes $103,627 $91,151
</TABLE>
See accompanying notes.
SOUTHWEST AIRLINES CO.
Notes to Condensed Consolidated Financial Statements
1. Basis of presentation - The accompanying unaudited
condensed consolidated financial statements of Southwest Airlines
Co. (Company) have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. The
condensed consolidated financial statements for the interim
periods ended September 30, 1999 and 1998 include all adjustments
(which include only normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of
the results for the interim periods. Operating results for the
three- and nine-month periods ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 1999. For further information, refer to
the consolidated financial statements and footnotes thereto
included in the Southwest Airlines Co. Annual Report on Form 10-K
for the year ended December 31, 1998.
2. Dividends - During the three-month periods ended
September 30 and June 30, 1999, dividends of $.0055 per share were
declared on the 504,079,475 and 503,581,881 shares of common stock
then outstanding, respectively. During the period ended March 31,
1999, dividends of $.005 per share were declared on the
501,949,689 shares of common stock then outstanding. During the
three-month period ended September 30, 1998, dividends of $.005
per share were declared on the 497,061,801 shares of common stock
then outstanding. During the three-month periods ended June 30,
1998 and March 31, 1998, dividends of $.0044 per share were
declared on the 502,280,503 and 501,031,778 shares of common stock
then outstanding.
3. Common stock - On May 20, 1999, the Company's Board of
Directors declared a three-for-two stock split, distributing
167,954,962 shares on July 19, 1999. All per share data presented
in the accompanying consolidated financial statements and notes
thereto have been restated for this stock split.
4. Net income per share - The following table sets forth the
computation of basic and diluted earnings per share (in thousands
except per share amounts):
[CAPTION]
<TABLE>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
NUMERATOR:
Net income available to common
stockholders - numerator for
basic and diluted earnings
per share $126,978 $129,645 $380,582 $333,046
DENOMINATOR:
Weighted-average shares
outstanding, basic 504,214 500,013 502,978 500,744
Dilutive effect of Employee
stock options 31,558 30,329 33,951 29,538
Adjusted weighted-average
shares outstanding, diluted 535,772 530,342 536,929 530,282
NET INCOME PER SHARE:
Basic $0.25 $0.26 $0.76 $0.67
Diluted $0.24 $0.24 $0.71 $0.63
</TABLE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Comparative Consolidated Operating Statistics
Relevant operating statistics for the three- and nine-month
periods ended September 30, 1999 and 1998 are as follows:
[CAPTION]
<TABLE>
Three months ended Nine months ended
September 30, September 30,
1999 1998 Change 1999 1998 Change
<S> <C> <C> <C> <C> <C> <C>
Revenue passengers
carried 14,932,022 13,680,772 9.1% 42,682,403 39,295,796 8.6%
Revenue passenger
miles (RPMs)
(000s) 9,611,325 8,463,510 13.6% 27,128,823 23,587,499 15.0%
Available seat miles
(ASMs) (000s) 13,620,008 12,279,921 10.9% 38,960,801 35,263,000 10.5%
Load factor 70.6% 68.9% 1.7pts. 69.6% 66.9% 2.7pts.
Average length of
passenger haul 644 619 4.0% 636 600 6.0%
Trips flown 216,761 206,424 5.0% 629,336 602,578 4.4%
Average passenger
fare $78.67 $76.22 3.2% $78.58 $75.53 4.0%
Passenger revenue
yield per RPM
(cents) 12.22 12.32 (0.8)% 12.36 12.58 (1.7)%
Operating revenue
yield per ASM
(cents) 9.07 8.92 1.7% 9.06 8.84 2.5%
Operating expenses
per ASM (cents) 7.55 7.26 4.0% 7.45 7.35 1.4%
Fuel costs per gallon,
excluding fuel
tax (cents) 58.36 44.18 32.1% 47.72 46.43 2.8%
Number of Employees
at period-end 27,164 25,019 8.6% 27,164 25,019 8.6%
Size of fleet at
period-end 306 276 10.9% 306 276 10.9%
</TABLE>
Material Changes in Results of Operations
Consolidated net income for the third quarter ended September
30, 1999 was $127.0 million, compared to third quarter 1998 net
income of $129.6 million, a decrease of 2.1 percent. Diluted
earnings per share for both periods was $.24 per share. Operating
income for third quarter 1999 was $206.4 million, an increase of
1.2 percent compared to third quarter 1998. For the nine months
ended September 30, 1999, net income was $380.6 million ($.71 per
share, diluted), an increase of 14.3 percent over the net income
recorded for the same 1998 period of $333.0 million ($.63 per
share, diluted). Operating income for the nine months ended
September 30, 1999 increased 19.7 percent to $627.4 million
compared to the same 1998 period. The prior year's earnings per
share amounts have been restated for the 1999 three-for-two stock
split (see Note 3 to the Condensed Consolidated Financial
Statements).
Operating revenues increased 12.8 percent for third quarter
1999 and 13.3 percent for the nine months ended September 30, 1999
compared to the corresponding periods of the prior year primarily
due to 12.7 percent and 13.0 percent increases, respectively, in
passenger revenues. The increases in passenger revenues resulted
from 9.1 percent and 8.6 percent increases in revenue passengers
carried, and 13.6 percent and 15.0 percent increases in revenue
passenger miles (RPMs) for the three- and nine-month periods ended
September 30, 1999, respectively. The passenger revenue yield per
RPM decreased 0.8 percent to $.1222 for the three months ended
September 30, 1999 and decreased 1.7 percent to $.1236 for the
nine months ended September 30, 1999. These decreases were
primarily due to an increase in average length of passenger haul
of 4.0 percent and 6.0 percent, respectively, partially offset by
a 3.2 percent and 4.0 percent increase in average passenger fare
for the three- and nine-month periods ended September 30, 1999.
The RPM increases of 13.6 percent and 15.0 percent for the
three and nine months ended September 30, 1999, respectively,
exceeded the increase in available seat miles (ASMs) of 10.9
percent and 10.5 percent for these same periods. This resulted in
a 1.7 point increase in load factor to 70.6 percent for third
quarter 1999 and a 2.7 point increase to 69.6 percent for the nine
months ended September 30, 1999. The ASM increases resulted
primarily from the net addition of 30 aircraft since third quarter
1998.
Favorable load factor and revenue trends continued in October
1999. The load factor for October 1999 was 67.6 percent, up 3.0
points from October 1998's load factor of 64.6 percent. Thus far,
bookings for November and December are also good. (The
immediately preceding sentence is a forward-looking statement that
involves uncertainties that could result in actual results
differing materially from expected results. Some significant
factors include, but may not be limited to, competitive pressure
such as fare sales and capacity changes by other carriers, general
economic conditions, and variations in advance booking trends.)
Freight revenues increased 8.2 percent in third quarter 1999
and 3.8 percent for the nine months ended September 30, 1999
compared to the same periods of the prior year. The increases
are primarily due to added capacity and modest rate increases.
The increase for the nine-month period ended September 30, 1999
was much less than capacity growth, however, due primarily to the
U.S. Postal Service shifting business away from commercial
carriers beginning in mid-1998. Other revenues increased 22.7
percent in third quarter 1999 and 34.0 percent for the nine months
ended September 30, 1999. The third quarter increase was
primarily in charter revenue due to increased and available
capacity. The increase for the nine months ended September 30,
1999 compared to the same prior year period was 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, and an increase in charter revenue.
Operating expenses per ASM increased 4.0 percent for the
three months ended September 30, 1999 and increased 1.4 percent
for the nine months ended September 30, 1999 compared to the same
prior year periods. For third quarter 1999 compared to third
quarter 1998, operating expenses per ASM increased primarily due
to a 32.1 percent increase in average jet fuel prices. Excluding
jet fuel costs, operating expenses per ASM during this period were
up 0.6 percent. Based on current trends, the Company expects, at
most, modest increases in unit costs, excluding fuel, for fourth
quarter 1999 in comparison to the same 1998 period. (The
immediately preceding sentence is a forward-looking statement that
involves uncertainties that could result in actual results
differing materially from expected results. Such uncertainties
include, but may not be limited to, general economic conditions.)
Southwest Airlines Co.
Operating Expenses per ASM
(in cents except percent change)
[CAPTION]
<TABLE>
Three months ended Nine months ended
September 30, September 30,
Inc/ Percent Inc/ Percent
1999 1998 (Dec) Change 1999 1998 (Dec) Change
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries, wages, and
benefits 2.38 2.34 .04 1.7 2.40 2.35 .05 2.1
Employee
profitsharing and
savings plans .38 .39 (.01) (2.6) .40 .36 .04 11.1
Fuel and oil 1.05 .79 .26 32.9 .85 .83 .02 2.4
Maintenance materials
and repairs .73 .63 .10 15.9 .70 .64 .06 9.4
Agency commissions .29 .33 (.04) (12.1) .30 .34 (.04) (11.8)
Aircraft rentals .37 .42 (.05) (11.9) .38 .43 (.05) (11.6)
Landing fees and
other rentals .46 .45 .01 2.2 .47 .45 .02 4.4
Depreciation .47 .49 (.02) (4.1) .46 .47 (.01) (2.1)
Other operating
expenses 1.42 1.42 - - 1.49 1.48 .01 .7
Total 7.55 7.26 .29 4.0 7.45 7.35 .10 1.4
</TABLE>
Salaries, wages, and benefits per ASM increased 1.7 percent
and 2.1 percent for the three- and nine-month periods ended
September 30, 1999, respectively. These increases were primarily
due to higher effective wage rates and increased benefits costs.
Profitsharing and Employee savings plans expense per ASM
decreased 2.6 percent for the three-month period ended September
30, 1999 and increased 11.1 percent for the nine-month period
ended September 30, 1999 compared to the corresponding periods of
the prior year. These fluctuations were both driven by
variations in earnings available for profitsharing in each
respective period compared to the same prior year period.
Fuel and oil expense per ASM increased 32.9 percent and 2.4
percent for the three- and nine-month periods ended September 30,
1999, respectively, as compared to the corresponding periods of
the prior year. The increases were primarily due to a 32.1
percent and a 2.8 percent increase in average jet fuel price per
gallon, respectively, for the three- and nine-month periods ended
September 30, 1999 compared to the same prior year periods. The
average price of jet fuel was $.5836 per gallon in third quarter
1999 compared to $.4418 per gallon in the same prior year period,
including the effects of hedging activities. For the nine months
ended September 30, 1999, the average price of jet fuel was $.4772
per gallon compared to $.4643 per gallon during the same period of
1998, including the effects of hedging activities. For the three-
and nine-month periods ended September 30, 1999, the Company's
average price of jet fuel is net of approximately $2.5 million and
$10.2 million in gains, respectively, due to hedging activities.
As of November 10, 1999, the Company has hedged its exposure to
fuel price increases with both fixed swap agreements and purchased
crude oil call options totaling approximately 46 percent of its
fourth quarter 1999 anticipated fuel requirements. However, the
Company is expecting higher jet fuel prices for fourth quarter
1999 compared to fourth quarter 1998 due to the historically low
prices experienced in fourth quarter 1998. (The immediately
preceding sentence is a forward-looking statement that 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.) The average price paid for jet fuel in October 1999
was $.6457 per gallon, including gains from hedging activities.
The average price paid for jet fuel in October 1998 was $.4670 per
gallon.
Maintenance materials and repairs per ASM increased 15.9
percent and 9.4 percent for the three- and nine-month periods
ended September 30, 1999, respectively, as compared to the
corresponding periods of 1998. Routine heavy maintenance or
airframe inspection and repairs represented approximately 57
percent and 65 percent of the increase for the three- and nine-
month periods ended September 30, 1999 compared to the same
periods in 1998, respectively, while engine overhaul costs
represented approximately 27 percent and 37 percent of the
increase, respectively. The increase in airframe inspections and
repairs was due primarily to the heavy volume of routine airframe
checks scheduled for 1999 versus 1998. Further, an increased
number of scheduled airframe checks were outsourced as the volume
of work exceeded the available internal headcount and facilities
necessary to perform such maintenance. In 1998, the Company
performed all of this type of routine heavy maintenance
internally; thus, the majority of these costs were reflected in
salaries and wages. The increases in engine overhaul costs were
primarily related to the Company's 737-200 aircraft. The
Company's 737-200 aircraft engine overhauls are performed on a
time and materials basis and are not covered by the Company's
power-by-the-hour engine maintenance contract with General
Electric Engine Services, Inc. The 737-200 engine overhauls
experienced an increase both in the number of engine overhauls and
the average cost per overhaul. The Company currently expects
fourth quarter 1999 maintenance costs to be higher on a per ASM
basis than fourth quarter 1998 for similar reasons. (The
immediately preceding sentence is a forward-looking statement that
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.) The Company plans to bring
the majority of routine heavy maintenance back in-house in 2002
when its planned hanger expansion is completed.
Agency commissions per ASM decreased 12.1 percent and 11.8
percent for the three- and nine-month periods ended September 30,
1999, respectively, compared to the same periods of 1998. The
decreases were primarily due to a decrease in the percentage of
commissionable sales resulting from an increase in direct sales to
book airline travel. Commissionable sales represented 33.4
percent and 35.3 percent of total sales in third quarter 1999 and
the first nine months of 1999, respectively, down from 38.4
percent and 40.5 percent in the same 1998 periods.
Aircraft rentals per ASM decreased 11.9 percent for third
quarter 1999 and 11.6 percent for the nine months ended September
30, 1999 as compared to the same periods of 1998, primarily due to
a lower percentage of the aircraft fleet being leased.
Approximately 32.7 percent of the Company's aircraft fleet were on
operating lease at September 30, 1999 compared to 37.7 percent on
operating lease at September 30, 1998.
Landing fees and other rentals increased 2.2 percent and 4.4
percent per ASM for the three- and nine-month periods ended
September 30, 1999, respectively, compared to the same periods of
1998. These increases were primarily due to the Company's
expansion of facilities in several airports where the Company
already had existing service as well as rental rate increases by
several airports.
Depreciation expense per ASM decreased 4.1 percent and 2.1
percent for third quarter 1999 and for the nine months ended
September 30, 1999 compared to the same periods of 1998. These
decreases were primarily due to a change in the estimated useful
lives of the Company's Boeing 737-300/500 aircraft from 20 years
to 23 years. This change in accounting estimate was made January
1, 1999 and resulted in a decrease in depreciation expense of
approximately $6.4 million for third quarter 1999 and $19.3
million for the nine months ended September 30, 1999. This
revision will also result in similar savings for fourth quarter
1999 compared to 1998. The change in accounting estimate was
partially offset for the three- and nine-month periods ended
September 30, 1999 due to an increase in depreciation from the
Company owning a higher percentage of its aircraft fleet.
Other expenses (income) for the three- and nine-month periods
ended September 30, 1999, included interest expense, capitalized
interest, interest income, and other gains and losses. For the
nine months ended September 30, 1999, interest expense decreased
approximately 6.5 percent compared to the same period of 1998, due
primarily to the February 1998 redemption of $100 million of
senior unsecured 9 1/4% Notes originally issued in February 1991.
Capitalized interest increased $2.2 million and $5.6 million for
the three- and nine-month periods ended September 30, 1999,
respectively, as a result of higher 1999 progress payment balances
for scheduled future aircraft deliveries. Interest income
decreased for the three and nine months ended September 30, 1999
due to lower invested cash balances. Other losses for the nine
months ended September 30, 1999 primarily resulted from a write-
down associated with the consolidation of certain software
development projects. Other gains for the three and nine months
ended September 30, 1998 primarily consisted of contractual
penalties received from Boeing due to delays in the delivery of
737-700 aircraft.
Liquidity and Capital Resources
Net cash provided by operating activities was $782.5 million
for the nine months ended September 30, 1999 and $976.3 million
for the 12 months then ended. Cash generated for the 12 months
ended September 30, 1999 was primarily used to finance aircraft-
related capital expenditures and provide working capital.
During the 12 months ended September 30, 1999, net capital
expenditures were $1,176.5 million, which primarily related to the
purchase of 32 new 737-700 aircraft, three used 737-300 aircraft,
five used 737-200 aircraft, and progress payments for future
aircraft deliveries. The five 737-200 aircraft were previously on
lease by Southwest prior to being purchased.
The Company's contractual commitments consist primarily
of scheduled aircraft acquisitions. During the nine months ended
September 30, 1999, the Company exercised options to purchase six
Boeing 737-700 aircraft for accelerated delivery in the year 2000,
and options for six additional Boeing 737-700 aircraft for
accelerated delivery in late 2000 and early 2001. In addition,
the Company has acquired and placed in service two used Boeing 737-
300s, thus far, in 1999 and has contracted to acquire two more in
November 1999. As of September 30, 1999, eight 737-700s are
scheduled for delivery in fourth quarter 1999, 31 in 2000, 23 in
2001, 21 in 2002, five in 2003, and five in 2004. During fourth
quarter 1999, the Company also plans to retire four 737-200
aircraft from its fleet. In addition, the Company has options to
purchase up to 62 737-700s during 2003-2006. The Company has the
option, which must be exercised two years prior to the contractual
delivery date, to substitute 737-600s or 737-800s for the 737-700s
scheduled subsequent to 1999. Aggregate funding needed for fixed
commitments at September 30, 1999 was approximately $2,134 million
at April 30, 1999 due as follows: $167 million in 1999; $689
million in 2000; $520 million in 2001; $516 million in 2002; $153
million in 2003; and $89 million in 2004.
The Company has various options available to meet its capital
and operating commitments, including cash on hand at September 30,
1999 of $266.7 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 September 30, 1999). 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 up to $318.8 million in public debt securities
which it may utilize for aircraft financing during 1999 and 2000.
On September 23, 1999, the Company announced its Board of
Directors had authorized the repurchase of up to $250 million of
the Company's common stock. Repurchases will be made in
accordance with applicable securities laws in the open market or
in private transactions, from time to time depending on market
conditions, and may be discontinued at any time. As of November
8, 1999, 28,300 shares had been repurchased at a total cost of
$425,000.
The Company began new service to Bradley International
Airport in Hartford, Connecticut on October 31, 1999 with daily
nonstop service to Baltimore/Washington, Nashville, Chicago
Midway, and Orlando.
Year 2000 Readiness Disclosure
The Year 2000 issue results from the fact that many computer
programs were previously written using two digits rather than four
to define the applicable year. Programs written in this way may
recognize a date ending in "00" as the year 1900 rather than the
year 2000. This could result in a system failure or
miscalculations causing business delays and disruptions of
operations. The Company is following an enterprise-wide Year 2000
program to take the necessary actions to become Year 2000 ready
and ensure business continuity now and into the next century.
This program encompasses information technology systems as well as
embedded technology assets and an assessment of material third-
party relationships and associated risks.
The Company's program consists of five phases:
identification of all products, services, vendors, etc. to
determine if they could potentially be affected by the Year 2000
issue; assessment includes the prioritization of each item
according to its significance to the Company's operations and the
determination of a strategy for remediation; remediation entails
the execution of plans to make an item Year 2000 ready including
replacement, modifying computer codes, retirement, or verification
of whether or not an item has date codes; testing includes the
validation of whether an item is Year 2000 ready by using date
simulation techniques; and implementation, which involves putting
an item in use in the Company's operations.
FLIGHT SAFETY SYSTEMS The Company has completed all phases of
its Year 2000 project as it relates to its aircraft fleet and
onboard support systems. The Company does not believe there are
any safety issues in regard to these systems and believes they are
Year 2000 ready. The Company also utilizes ground computer
systems and equipment essential for the maintenance of aircraft
and the management of flight operations. All phases of the
project with respect to these systems and equipment are
essentially completed and the Company believes they are Year 2000
ready.
INTERNAL SYSTEMS The Company's vital and critical internal
systems include computer hardware, software, and related equipment
for Customer reservations, ticketing, flight and crew scheduling,
revenue management, accounting functions, and payroll. Also
included are non-information systems that support airport
activities such as aircraft ground handling, baggage handling, and
security. The Company believes all of its vital and critical
systems are Year 2000 ready. Routine performance monitoring will
continue on each of these systems through the Year 2000. The
Company also believes it has or will have contingency plans in
place to ensure there will not be a material disruption in the
Company's operations. Additionally, the Company has established
procedures to review all new potential vital and critical hardware
and software purchases and development to ensure they are Year
2000 ready.
The Company's non-information systems primarily include
electrical systems, telephone systems, elevators, security
systems, etc. For non-information systems, the Company has
performed some internal testing, but has primarily relied on
positive assurances it has received from original manufacturers or
suppliers of those non-information systems where no date logic is
involved.
THIRD PARTIES As part of its Year 2000 assessment, the Company
has also considered the compliance of third parties with which the
Company has a material relationship, namely its vendors,
governmental agencies such as the Federal Aviation Administration
("FAA"), and the individual airports where the Company has
operations. 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 has contacted
all of its material third party vendors and is continuing to
monitor and evaluate their statements of Year 2000 compliance.
The Company has utilized many different methods in obtaining
assurances from third parties including questionnaires, written
statements, obtaining publicly filed documents, etc., and
continually updates information received as new data becomes
available. The Company has visited several of its vital and
critical third party vendors for the sole purpose of observing
Year 2000 testing and processes. The Company has also been very
involved with each of its individual airports efforts to ensure
their readiness for Year 2000 and to ensure they have contingency
plans in place for a wide array of possible scenarios that could
occur. 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.
The FAA has stated that all of their internal systems,
including systems that involve the operation of the nation's air
traffic control system, are now fully compliant for the Year 2000.
Systems controlled by the FAA are directly involved with air
safety, including radar screens and radio transmissions, ground
traffic control, airport weather reports, and remote radio
beacons.
In management's experience, it is not always possible to
obtain written certification of Year 2000 compliance from third
party vendors. Accordingly, in such cases, the Company is basing
its assessment on its own testing, other materials made available
by such vendors, and other publicly available information. The
Company's assessment of the readiness of third parties is based on
the most recent information that has been made available to the
Company, including oral and written assurances. The Company
currently does not expect any material impact on its operations as
a result of third party products or services; however, this
expectation is based on the timeliness and accuracy of those
assurances. The Company expects the evaluation and assessment of
third parties will be an ongoing process through the balance of
1999 and into early 2000.
YEAR 2000 COSTS The Company currently anticipates it will
spend approximately $16 million on Year 2000 compliance, of which
approximately $14.9 million has been spent through September 30,
1999. The majority of the expenditures previously incurred have
been for third party Year 2000 consultants, full-time associates,
and new hardware and software purchases. The Company also
purchased Year 2000 hardware and software testing and data aging
tools that it has utilized on internal systems. The majority of
the remaining expenditures are expected to be for full-time
associates dedicated to the Year 2000 compliance effort. All
previous as well as future expenditures on Year 2000 compliance
have or will come from operating cash flow.
RISK OF YEAR 2000 ISSUES The Company believes its project to
ensure Year 2000 readiness will be completed in a timely manner
and Year 2000 issues will not have a material adverse effect on
operations. However, it is possible the Company's or third
parties' systems and equipment could fail and result in the
reduction or suspension of the Company's operations. This could
in turn have a material adverse effect on the Company's
operations. The Company currently believes its most likely worst
case scenario could involve delays and cancellations of a small
percentage of the Company's scheduled flights on the first few
days of the Year 2000. This scenario would most likely result
from airport delays and other factors out of the Company's
control. If delays do happen, however, the Company does not
believe they would last for an extended period of time or cause a
major disruption in the Company's operations.
The Company has developed contingency plans to deal with
situations that occur from time to time in the normal course of
business, including weather emergencies, system and power outages,
etc. The Company continues to augment those plans to include
plans that deal with different Year 2000 scenarios the Company
believes could possibly occur. Contingency plans have been
established and continue to be modified within each department of
the Company to ensure there are minimal internal disruptions in
the Company's operations. The Company's senior management meets
on a regular basis to discuss the progress of its own Year 2000
effort as well as the status of the airports it serves and its
third party vendors.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
See Item 7A. Quantitative and Qualitative Disclosures About
Market Risk in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company received a statutory notice of deficiency
from the Internal Revenue Service (the "IRS") in which
the IRS proposed to disallow deductions claimed by the
Company on its federal income tax returns for the
taxable years 1989 through 1991 for the costs of certain
aircraft inspection and repair procedures. The IRS has
proposed similar adjustments to the tax returns of
numerous other members of the airline industry. In
response to the statutory notice of deficiency, the
Company filed a petition in the United States Tax court
on October 30, 1997, seeking a determination that the
IRS erred in disallowing the deductions claimed by the
Company and that there is no deficiency in the Company's
tax liability for the taxable years in issue. It is
expected that the Tax Court's decision will not be
entered for several years. Management believes that the
final resolution of this controversy will not have a
materially adverse effect upon the results of operations
of the Company.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
27.1 Financial Data Schedule
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SOUTHWEST AIRLINES CO.
November 12, 1999 /s/ Gary C. Kelly
Date Gary C. Kelly
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
INDEX TO EXHIBITS
Exhibit
Number Exhibit
27.1 Financial Data Schedule
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<ARTICLE> 5
<CIK> 0000092380
<NAME> SOUTHWEST AIRLINES CO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 266,688
<SECURITIES> 0
<RECEIVABLES> 113,039
<ALLOWANCES> 0
<INVENTORY> 53,628
<CURRENT-ASSETS> 488,474
<PP&E> 6,602,522
<DEPRECIATION> 1,781,623
<TOTAL-ASSETS> 5,317,576
<CURRENT-LIABILITIES> 1,001,327
<BONDS> 0
0
0
<COMMON> 504,249
<OTHER-SE> 2,296,992
<TOTAL-LIABILITY-AND-EQUITY> 5,317,576
<SALES> 0
<TOTAL-REVENUES> 3,531,169
<CGS> 0
<TOTAL-COSTS> 2,903,758
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 39,936
<INCOME-PRETAX> 620,649
<INCOME-TAX> 240,067
<INCOME-CONTINUING> 380,582
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 380,582
<EPS-BASIC> 0.76
<EPS-DILUTED> 0.71
</TABLE>
