SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
June 30, 2000 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 July 31, 2000:
498,567,401
SOUTHWEST AIRLINES CO.
FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Southwest Airlines Co.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $636,650 $418,819
Accounts receivable 117,550 73,448
Inventories of parts and supplies 70,127 65,152
Deferred income taxes 21,498 20,929
Prepaid expenses and other current assets 53,365 52,657
Total current assets 899,190 631,005
Property and equipment:
Flight equipment 6,191,771 5,768,506
Ground property and equipment 757,677 742,230
Deposits on flight equipment
purchase contracts 390,415 338,229
7,339,863 6,848,965
Less allowance for depreciation 1,992,549 1,840,799
5,347,314 5,008,166
Other assets 12,920 12,942
$6,259,424 $5,652,113
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $199,442 $156,755
Accrued liabilities 642,008 538,896
Air traffic liability 427,076 256,942
Income taxes payable 54,756 -
Current maturities of long-term debt 3,875 7,873
Total current liabilities 1,327,157 960,466
Long-term debt less current maturities 868,121 871,717
Deferred income taxes 763,345 692,342
Deferred gains from sale and leaseback
of aircraft 215,111 222,700
Other deferred liabilities 76,145 69,100
Stockholders' equity:
Common stock 507,897 505,005
Capital in excess of par value 42,103 35,436
Retained earnings 2,624,070 2,385,854
Treasury stock at cost (164,525) (90,507)
Total stockholders' equity 3,009,545 2,835,788
$6,259,424 $5,652,113
See accompanying notes.
</TABLE>
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger $1,415,958 $1,177,282 $2,615,843 $2,211,640
Freight 27,968 25,186 55,034 50,279
Other 16,749 17,964 32,445 34,084
Total operating revenues 1,460,675 1,220,432 2,703,322 2,296,003
OPERATING EXPENSES:
Salaries, wages, and benefits 422,247 368,573 803,736 712,585
Fuel and oil 197,608 102,982 394,679 188,650
Maintenance materials and
repairs 90,311 85,145 183,876 174,636
Agency commissions 41,310 40,201 78,526 79,282
Aircraft rentals 49,023 49,898 98,370 99,704
Landing fees and other rentals 64,982 60,708 130,001 118,691
Depreciation 68,523 59,542 135,221 116,328
Other operating expenses 212,113 199,052 408,947 385,179
Total operating expenses 1,146,117 966,101 2,233,356 1,875,055
OPERATING INCOME 314,558 254,331 469,966 420,948
OTHER EXPENSES (INCOME):
Interest expense 17,442 13,295 34,665 26,682
Capitalized interest (6,905) (9,109) (13,906) (16,093)
Interest income (10,511) (6,838) (17,160) (12,373)
Other (gains) losses, net 3,667 385 (471) 10,032
Total other expenses (income) 3,693 (2,267) 3,128 8,248
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 310,865 256,598 466,838 412,700
PROVISION FOR INCOME TAXES 120,243 98,841 180,573 159,096
NET INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 190,622 157,757 286,265 253,604
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (Net of
Income Taxes of $14.0 million) - - 22,131 -
NET INCOME $190,622 $157,757 $264,134 $253,604
NET INCOME PER SHARE, BASIC BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ .38 $ .31 $ .57 $ .50
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - - .04 -
NET INCOME PER SHARE, BASIC $ .38 $ .31 $ .53 $ .50
NET INCOME PER SHARE, DILUTED
BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE $ .36 $ .29 $ .54 $ .47
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - - .04 -
NET INCOME PER SHARE, DILUTED $ .36 $ .29 $ .50 $ .47
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 497,295 503,531 497,226 502,349
Diluted 528,713 539,059 527,534 537,497
See accompanying notes.
</TABLE>
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
<S> <C> <C>
NET CASH PROVIDED BY OPERATING
ACTIVITIES $811,538 $673,138
INVESTING ACTIVITIES:
Net purchases of property and
equipment (496,020) (568,790)
FINANCING ACTIVITIES:
Payments of long-term debt and
capital lease obligations (7,790) (10,572)
Payments of cash dividends (8,247) (10,542)
Proceeds from Employee stock plans 25,947 25,890
Repurchases of common stock (107,597) -
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (97,687) 4,776
NET INCREASE IN CASH AND CASH
EQUIVALENTS 217,831 109,124
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 418,819 378,511
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $636,650 $487,635
CASH PAYMENTS FOR:
Interest, net of amount capitalized $16,362 $11,408
Income taxes $21,328 $29,244
See accompanying notes.
</TABLE>
SOUTHWEST AIRLINES CO.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of presentation - The accompanying unaudited
condensed consolidated financial statements of Southwest Airlines
Co. (Company) have been prepared in accordance with accounting
principles generally accepted in the United States 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 accounting
principles generally accepted in the United States for complete
financial statements. The condensed consolidated financial
statements for the interim periods ended June 30, 2000 and 1999
include all adjustments (which include only normal recurring
adjustments) which are, in the opinion of management, necessary
for a fair presentation of the results for the interim periods.
Operating results for the three and six month periods ended June
30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. 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, 1999.
2. Dividends - During the three month periods ended June
30, 2000 and March 31, 2000, dividends of $.0055 per share were
declared on the 497.7 million and 497.1 million shares of common
stock then outstanding, respectively. During the three month
periods ended June 30, 1999 and March 31, 1999, dividends of
$.0055 per share and $.005 per share were declared, respectively,
on the 503.6 million and 501.9 million 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 168.0
million shares on July 19, 1999. All per share data presented in
the accompanying unaudited condensed consolidated financial
statements and notes thereto have been restated for the stock
split.
4. Reclassifications - Certain prior year amounts have been
reclassified to conform to the current year presentation. Most
notably, this includes the reclassification of $17.1 million of
Other Revenue to Passenger Revenue as a result of the change in
accounting principle effective January 1, 2000. See Note 6 for
further information.
5. Net income per share - The following table sets forth the
computation of basic and diluted net income per share (in
thousands except per share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
NUMERATOR:
Net income before cumulative
effect of change in accounting
principle $190,622 $157,757 $286,265 $253,604
Cumulative effect of change in
accounting principle - - 22,131 -
Net income available to common
stockholders $190,622 $157,757 $264,134 $253,604
DENOMINATOR:
Weighted-average shares
outstanding, basic 497,295 503,531 497,226 502,349
Dilutive effect of Employee
stock options 31,418 35,528 30,308 35,148
Adjusted weighted-average
shares outstanding, diluted 528,713 539,059 527,534 537,497
NET INCOME PER SHARE:
Basic, before cumulative effect of
change in accounting principle $ .38 $ .31 $ .57 $ .50
Cumulative effect of change in
accounting principle - - .04 -
Basic $ .38 $ .31 $ .53 $ .50
Diluted, before cumulative effect
of change in accounting principle $ .36 $ .29 $ .54 $ .47
Cumulative effect of change in
accounting principle - - .04 -
Diluted $ .36 $ .29 $ .50 $ .47
</TABLE>
6. Accounting Change - Effective January 1, 2000, the Company
adopted Staff Accounting Bulletin 101 (SAB 101) issued by the
Securities and Exchange Commission in December 2000. As a result
of adopting SAB 101, the Company changed the way it recognizes
revenue from the sale of flight segment credits to companies
participating in its Rapid Rewards frequent flyer program. Prior
to the issuance of SAB 101, the Company recorded revenue to "Other
revenue" when flight segment credits were sold, consistent with
most other major airlines. Beginning January 1, 2000, the Company
recognizes "Passenger revenue" when free travel awards are earned
and flown. Due to this change, the Company recorded a cumulative
adjustment in first quarter 2000 of $22.1 million (net of income
taxes of $14.0 million) or $.04 per share, basic and diluted. The
second quarter 2000 impact of adopting SAB 101 was to reduce net
income by $1.9 million. Excluding the impact of the change, basic
and diluted net income per share for second quarter 2000 would
have been $.39 and $.36, respectively. The Company also
reclassified for comparison purposes the revenue reported in prior
periods related to the sale of flight segment credits from "Other
revenue" to "Passenger revenue."
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 six months
ended June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999* Change 2000 1999* Change
<S> <C> <C> <C> <C> <C> <C>
Revenue passengers
carried 16,501,441 14,816,803 11.4% 30,890,717 27,750,381 11.3%
Revenue passenger
miles (RPMs)
(000s) 10,954,767 9,471,014 15.7% 20,407,968 17,517,498 16.5%
Available seat
miles (ASMs)
(000s) 14,744,769 12,947,815 13.9% 28,898,727 25,340,794 14.0%
Load factor 74.3% 73.1% 1.2pts. 70.6% 69.1% 1.5pts.
Average length
of passenger
haul (miles) 664 639 3.9% 661 631 4.8%
Trips flown 223,643 210,029 6.5% 442,258 412,575 7.2%
Average passenger
fare $85.81 $79.46 8.0% $84.68 $79.70 6.2%
Passenger revenue
yield per RPM
(cents) 12.93 12.43 4.0% 12.82 12.63 1.5%
Operating revenue
yield per ASM
(cents) 9.91 9.43 5.1% 9.35 9.06 3.2%
Operating expenses
per ASM (cents) 7.77 7.46 4.2% 7.73 7.40 4.5%
Operating expenses
per ASM, excluding
fuel (cents) 6.43 6.67 (3.6)% 6.36 6.65 (4.4)%
Fuel costs per gallon,
excluding fuel
tax (cents) 78.02 44.36 75.9% 79.95 41.92 90.7%
Number of Employees
at period-end 27,828 26,818 3.8% 27,828 26,818 3.8%
Size of fleet at
period-end 324 294 10.2% 324 294 10.2%
* Average passenger fare and passenger revenue yield per RPM have been
restated for comparison purposes to reflect the reclassifications related
to the change in accounting principle.
</TABLE>
Operating expenses per ASM for the three and six months ended
June 30, 2000 and 1999 are as follows (in cents except percent
change):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
Percent Percent
2000 1999 Change 2000 1999 Change
<S> <C> <C> <C> <C> <C> <C>
Salaries, wages, and
benefits 2.38 2.39 (.4) 2.39 2.41 (.8)
Employee profitsharing
and savings plans .48 .46 4.3 .38 .39 (2.6)
Fuel and oil 1.34 .80 67.5 1.37 .74 85.1
Maintenance materials
and repairs .61 .66 (7.6) .64 .69 (7.2)
Agency commissions .28 .31 (9.7) .27 .31 (12.9)
Aircraft rentals .33 .39 (15.4) .34 .39 (12.8)
Landing fees and other
rentals .44 .47 (6.4) .45 .47 (4.3)
Depreciation .46 .46 - .47 .46 2.2
Other operating
expenses 1.45 1.52 (4.6) 1.42 1.54 (7.8)
Total 7.77 7.46 4.2 7.73 7.40 4.5
</TABLE>
Material Changes in Results of Operations
Comparison of Three Months Ended June 30, 2000 to Three Months
Ended June 30, 1999
Consolidated net income for the second quarter ended June 30,
2000 was $190.6 million, an increase of 20.8 percent compared to
1999. Diluted net income per share was $.36 compared to $.29 in
1999. Operating income for second quarter 2000 was $314.6
million, an increase of 23.7 percent compared to 1999.
Second quarter 2000 consolidated operating revenues increased
19.7 percent primarily due to a 20.3 percent increase in passenger
revenues. The increase in passenger revenues primarily resulted
from the Company's capacity growth coupled with an industry-wide
strong demand for commercial air travel. The Company experienced
an 11.4 percent increase in revenue passengers carried, a 15.7
percent increase in RPMs, and a 4.0 percent increase in
passenger revenue yield per RPM (passenger yield). The increase
in passenger yield is primarily due to an 8.0 percent increase in
average passenger fare, partially offset by a 3.9 percent increase
in average length of passenger haul.
The increase in RPMs and a 13.9 percent increase in ASMs
resulted in a load factor of 74.3 percent, or 1.2 points above
second quarter 1999. The increase in ASMs resulted primarily from
the net addition of 30 aircraft since second quarter 1999, which
represents a 10.2 percent increase in the Company's fleet size.
Thus far, load factors in July appear to be consistent with
or better than those experienced in July 1999. Bookings for
August and September are also good and we presently anticipate
positive year over year unit revenue comparisons again in third
quarter 2000. (The immediately preceding two sentences are
forward-looking statements, which involve uncertainties that
could result in actual results differing materially from expected
results. Some significant factors include, but may not be limited
to, competitive pressure such as fare sales and capacity changes
by other carriers, general economic conditions, and variations in
advance booking trends.)
Consolidated freight revenues increased 11.0 percent
primarily due to an increase in capacity. Other revenues
decreased 6.8 percent primarily due to a decrease in commercial
charter revenue. The Company had less aircraft devoted to its
charter business compared to 1999 due to the strong demand for
scheduled passenger service.
Operating expenses per ASM increased 4.2 percent to $.0777,
compared to $.0746 for second quarter 1999, primarily due to a
significant increase in average jet fuel prices. The average fuel
cost per gallon was 75.9 percent higher than second quarter 1999's
average cost per gallon. Excluding fuel expense, operating
expenses per ASM decreased 3.6 percent. As detailed below, the
Company has hedged almost all of its anticipated fuel consumption
for second half 2000 at prices well below market prices as of July
26, 2000. As a result, the Company expects lower average jet fuel
cost per gallon in second half 2000 than it reported in first half
2000. Excluding fuel, the Company expects lower unit costs again
in third quarter 2000 versus 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.)
Salaries, wages, and benefits per ASM decreased slightly, as
increases in productivity were partially offset by an increase in
Employee benefit costs, primarily health care expense.
Profitsharing and Employee savings plan expenses per ASM increased
4.3 percent, primarily due to the increase in earnings available
for profitsharing.
Fuel and oil expense per ASM increased 67.5 percent due to a
75.9 percent increase in the average jet fuel cost per gallon
compared to 1999. The average price paid for jet fuel in second
quarter 2000 was $.7802 per gallon compared to $.4436 in 1999,
including the effects of hedging activities. The Company's second
quarter 2000 and 1999 average jet fuel prices are net of
approximately $3.1 million and $10.5 million in gains from hedging
activities, respectively. As of July 26, 2000, the Company had
crude oil and/or heating oil hedge positions in place for 2000 and
2001 as follows:
<TABLE>
<CAPTION>
Approximate Average price Approximate
jet fuel of hedge percentage
Type gallons instruments of expected
of hedge hedged (crude oil - requirements
Period instrument (millions) per barrel) hedged
<S> <C> <C> <C> <C>
Third Quarter 2000 swaps 131.3 $23.05 51%
options/other 112.3 $26.89 43%
Total 243.6 94%
Fourth Quarter 2000 swaps 183.8 $22.47 70%
options/other 78.7 $23.25 30%
Total 262.5 100%
First Quarter 2001 swaps 146.4 $22.27 56%
options/other 61.1 $25.00 24%
Total 207.5 80%
Second Quarter 2001 swaps 162.3 $21.73 60%
options/other 54.2 $24.44 20%
Total 216.5 80%
Third Quarter 2001 swaps 142.8 $21.64 50%
options/other 86.1 $22.15 30%
Total 228.9 80%
Fourth Quarter 2001 swaps 146.6 $21.85 51%
options/other 84.0 $20.00 29%
Total 230.6 80%
</TABLE>
As of July 26, 2000, the unrealized gains from these
hedging activities were $22.9 million and $26.0 million for
third and fourth quarter 2000, respectively. Despite these hedge
positions, the Company is expecting higher average net jet fuel
cost per gallon for third quarter 2000 compared to third quarter
1999. The Company's fuel hedging strategy could result in the
Company not fully benefiting from lower jet fuel prices related to
crude oil price declines below prices implicit in the hedge
instruments. (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.)
Maintenance materials and repairs per ASM decreased 7.6
percent primarily due to a decrease in the amount of outsourced
routine heavy maintenance. The number of airframe inspections
and repairs was unusually high in 1999. Due to the heavy volume
of work required in 1999, the Company did not have sufficient
internal resources to perform the necessary checks and repairs.
Consequently, a large portion of this type of maintenance
was outsourced. In 2000, the number of scheduled
airframe inspections and repairs has decreased enabling the
Company to perform the majority of the work internally; thus, the
majority of the labor costs related to these inspections and
repairs are reflected in salaries and wages. The Company also had
a decrease in engine maintenance related to its 737-200 aircraft
fleet as 1999 was also an unusually high period for engine
maintenance on these aircraft; however, this decrease was offset
by increases in several other miscellaneous maintenance expenses.
Agency commissions per ASM decreased 9.7 percent, primarily
due to an increase in direct sales. In second quarter 2000,
approximately 30 percent of the Company's revenues were
attributable to direct bookings through the Company's Internet
site compared to approximately 16 percent in the same prior year
period. The increase in Internet revenues contributed to the
Company's percentage of commissionable revenues decreasing from
34.1 percent in 1999 to 29.2 percent in 2000.
Aircraft rentals per ASM decreased 15.4 percent due to a
lower percentage of the aircraft fleet being leased.
Landing fees and other rentals per ASM decreased 6.4 percent
primarily as a result of a decrease in gross landing fees per
ASM of 7.6 percent (excluding landing fee adjustments from prior
periods), partially offset by a slight increase in other rentals.
Although gross landing fees declined on a per ASM basis, they were
basically flat on a per trip basis. The growth in ASMs exceeded
the trip growth primarily due to an increase in the average
distance per trip flown.
Other operating expenses per ASM decreased 4.6 percent due
primarily due to Company-wide cost reduction efforts in areas such
as supplies, optional training, communication costs, etc., which
were in response to high fuel costs.
Other expenses (income) include interest expense, capitalized
interest, interest income, and other gains and losses. Interest
expense increased approximately 31.2 percent due primarily to the
Company's issuance of $256 million of long-term debt in fourth
quarter 1999. Capitalized interest decreased 24.2 percent
primarily as a result of lower 2000 progress payment balances for
scheduled future aircraft deliveries compared to 1999 and lower
interest rates. Interest income increased 53.7 percent
primarily due to higher invested cash balances.
Comparison of Six Months Ended June 30, 2000 to Six Months Ended
June 30, 1999
Consolidated net income before the cumulative effect of
change in accounting principle for the six months ended June 30,
2000 was $286.3 million ($.54 per share, diluted), an increase of
12.9 percent compared to 1999. The cumulative effect of change in
accounting principle for 2000 was $22.1 million, net of taxes of
$14.0 million (see Note 6 to the unaudited Condensed Consolidated
Financial Statements). Net income, after the cumulative change in
accounting principle, for 2000 was $264.1 million. Diluted net
income per share, after consideration of the accounting change,
was $.50 compared to $.47 in 1999. Operating income was $470.0
million, an increase of 11.6 percent compared to 1999.
Consolidated operating revenues increased 17.7 percent
primarily due to an 18.3 percent increase in passenger revenues.
The increase in passenger revenues primarily resulted from the
Company's capacity growth coupled with an industry-wide strong
demand for commercial air travel. The Company experienced an 11.3
percent increase in revenue passengers carried, a 16.5 percent
increase in RPMs, and a 1.5 percent increase in passenger revenue
yield per RPM (passenger yield). The increase in passenger yield
is primarily due to a 6.2 percent increase in average passenger
fare, partially offset by a 4.8 percent increase in average length
of passenger haul.
The increase in RPMs exceeded a 14.0 percent increase in ASMs
resulting in a load factor of 70.6 percent, or 1.5 points above
the same prior year period. The increase in ASMs resulted
primarily from the net addition of 30 aircraft since second
quarter 1999, which represents a 10.2 percent increase in the
Company's fleet size.
Consolidated freight revenues increased 9.5 percent primarily
due to an increase in capacity. Other revenues decreased 4.8
percent primarily due to a decrease in commercial charter
revenue. The Company had less aircraft devoted to its charter
business compared to 1999 primarily due to the strong demand for
scheduled passenger service.
Operating expenses per ASM increased 4.5 percent to $.0773,
compared to $.0740 for 1999, primarily due to a significant
increase in average jet fuel prices. The average fuel cost per
gallon was almost double 1999's average cost per gallon.
Excluding fuel expense, operating expenses per ASM decreased 4.4
percent.
Salaries, wages, and benefits per ASM decreased slightly, as
increases in productivity were partially offset by an increase in
Employee benefit costs, primarily health care and workers'
compensation expenses. Profitsharing and Employee savings plan
expenses per ASM decreased slightly, primarily as a result of the
Company's capacity increasing faster than the increase in earnings
available for profitsharing.
Fuel and oil expense per ASM increased 85.1 percent due to a
90.7 percent increase in the average jet fuel cost per gallon
compared to 1999. The average price paid for jet fuel in 2000 was
$.7995 per gallon compared to $.4192 in 1999, including the
effects of hedging activities. The Company's 2000 and 1999
average jet fuel prices are net of approximately $6.3 million and
$7.7 million in gains from hedging activities, respectively. See
comparison of second quarter 2000 to second quarter 1999 for a
schedule of the Company's fuel hedging positions for the remainder
of 2000 and 2001.
Maintenance materials and repairs per ASM decreased 7.2
percent primarily because of a decrease in engine maintenance
related to the Company's 737-200 aircraft fleet. The engines on
these aircraft are not covered by the Company's maintenance
contract with General Electric Engine Services, Inc.; therefore,
repairs are expensed on a time and materials basis.
Agency commissions per ASM decreased 12.9 percent, primarily
due to an increase in direct sales. More than 28 percent of the
Company's 2000 revenues were attributable to direct bookings
through the Company's Internet site compared to less than 16
percent in the same prior year period. The increase in Internet
revenues contributed to the Company's percentage of commissionable
revenues decreasing from 35.8 percent in 1999 to 30.0 percent in
2000.
Aircraft rentals per ASM decreased 12.8 percent due to a
lower percentage of the aircraft fleet being leased.
Landing fees and other rentals per ASM decreased 4.3 percent
primarily as a result of a decrease in gross landing fees per ASM
of 6.7 percent (excluding landing fee adjustments from prior
periods), partially offset by a slight increase in other rentals.
Although gross landing fees declined on a per ASM basis, they were
basically flat on a per trip basis. The growth in ASMs exceeded
the trip growth primarily due to an increase in the average
distance per trip flown.
Depreciation expense per ASM increased 2.2 percent primarily
due to a higher percentage of owned aircraft. Of the 36 aircraft
added to the Company's fleet over the past twelve months, 35 have
been purchased. This, combined with the retirement of 6 leased
aircraft, has increased the Company's percentage of aircraft owned
or on capital lease from 66 percent at June 30, 1999 to 71 percent
at June 30, 2000.
Other operating expenses per ASM decreased 7.8 percent
primarily due to Company-wide cost reduction efforts in areas such
as supplies, advertising, optional training, communication costs,
etc., which were in response to high fuel costs.
Other expenses (income) include interest expense, capitalized
interest, interest income, and other gains and losses. Interest
expense increased 29.9 percent due primarily to the Company's
issuance of $256 million of long-term debt in fourth quarter 1999.
Capitalized interest decreased 13.6 percent primarily as a result
of lower interest rates. Interest income increased 38.7
percent primarily due to higher invested cash balances. Other
losses in the first half of 1999 resulted primarily from a
write-down associated with the consolidation of certain software
development projects.
Liquidity and Capital Resources
Net cash provided by operating activities was $811.5 million
for the six months ended June 30, 2000 and $1,140.1 million
for the 12 months then ended. Also, during fourth quarter 1999,
additional funds of $256 million were generated through the
issuance of floating rate long-term debt from two separate
financing transactions. Cash generated for the 12 months ended
June 30, 2000 was primarily used to finance aircraft-related
capital expenditures, provide working capital, and to repurchase
approximately $198.1 million of the Company's outstanding common
stock. The Company began this repurchase program during third
quarter 1999. Through June 30, 2000, the program resulted in the
repurchase of approximately 12.2 million shares at an average cost
of $16.27 per share.
During the 12 months ended June 30, 2000, net capital
expenditures were $1,095.1 million, which primarily related to the
purchase of 32 new 737-700 aircraft, one used 737-700 aircraft,
two used 737-300 aircraft, and progress payments for future
aircraft deliveries.
The Company's contractual commitments consist primarily
of scheduled aircraft acquisitions. During the second quarter
2000, the Company announced a new aircraft order with Boeing that
could result in the future purchase of up to 290 new Next-
Generation 737 aircraft for delivery between 2002 and 2012.
The order includes commitments for 94 firm deliveries, 25
options, and up to 171 purchase rights for Next-Generation 737
aircraft. This new order is in addition to the Company's existing
orders from Boeing. In total, as of June 30, 2000, 21 737-700s
are scheduled for delivery in the remainder of 2000, 21 in 2001,
31 in 2002, 13 in 2003, 29 in 2004, and 52 during the period 2005
to 2007. In addition, the Company has options to purchase up to
87 737-700s during 2003-2008 and purchase rights for up to 217
additional aircraft during 2007-2012. 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 2001. Aggregate funding needed for fixed
commitments at June 30, 2000 was approximately $4,777 million due
as follows: $555 million in 2000; $749 million in 2001; $912
million in 2002; $472 million in 2003; $641 million in 2004; and
$1,448 million thereafter.
The Company has various options available to meet its capital
and operating commitments, including cash on hand at June 30, 2000
of $636.7 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 June 30, 2000). 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 in public debt securities which it
may utilize for aircraft financing during 2000 and 2001.
The Company began new service to Albany, New York, on May 7,
2000, with daily nonstop service to Baltimore/Washington, Las
Vegas, and Orlando.
The Company recently announced new service to Buffalo, New
York, beginning October 8, 2000, with daily nonstop service to
Baltimore/Washington, Las Vegas, Phoenix, and Orlando.
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, 1999.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company received a statutory notice of deficiency
from the Internal Revenue Service (IRS) in which the IRS
proposed to defer deductions claimed by the Company on
its federal income tax returns for the taxable years
1989 through 1991 for the costs of certain aircraft
inspection and maintenance procedures. The IRS has
proposed similar adjustments to the tax returns of
numerous other members of the airline industry. In
response to the statutory notice of deficiency, the
Company filed a petition in the United States Tax court
on October 30, 1997, seeking a determination that the
IRS erred in disallowing the deductions claimed by the
Company and that there is no deficiency in the Company's
tax liability for the taxable years in issue. It is
expected that the Tax Court's decision will not be
entered for several years. Management believes that the
final resolution of this controversy will not have a
materially adverse effect upon the financial position
and 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
The Company's Annual Meeting of Shareholders was held in
Dallas, Texas on Wednesday, May 17, 2000. The following
matters were voted on at the meeting:
(i) The following nominees were elected to the Company's
Directors to hold office for a term expiring in 2003.
Herbert D. Kelleher: 432,462,325 shares voted for; and
2,796,137 shares withheld. June M. Morris: 432,796,488
shares voted for; and 3,461,974 shares withheld.
(ii) A shareholder proposal related to the Shareholder
right to vote on Poison Pills was considered.
206,291,771 shares were voted for the proposal;
129,656,202 shares were voted against the proposal;
4,500,110 shares abstained from voting.
(iii) A shareholder floor proposal related to the
corporate governance practices was defeated. 0
shares were voted for the proposal, 435,258,462 shares
were voted against the proposal; and 0 shares abstained
from voting.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(1) Bylaws of Southwest, as amended
through May 2000
(27) Financial Data Schedule
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SOUTHWEST AIRLINES CO.
August 2, 2000 /s/ Gary C. Kelly
Date Gary C. Kelly
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
