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, 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 October 26, 2000:
501,851,494
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>
September 30, 2000 December 31, 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 580,608 $ 418,819
Accounts receivable 121,049 73,448
Inventories of parts and supplies 82,053 65,152
Deferred income taxes 21,831 20,929
Prepaid expenses and other current
assets 54,331 52,657
Total current assets 859,872 631,005
Property and equipment:
Flight equipment 6,465,137 5,768,506
Ground property and equipment 768,989 742,230
Deposits on flight equipment
purchase contracts 401,795 338,229
7,635,921 6,848,965
Less allowance for depreciation 2,067,430 1,840,799
5,568,491 5,008,166
Other assets 19,294 12,942
$ 6,447,657 $ 5,652,113
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 213,065 $ 156,755
Accrued liabilities 543,088 538,896
Air traffic liability 478,566 256,942
Income taxes payable 40,526 -
Current maturities of long-term
debt 108,655 7,873
Total current liabilities 1,383,900 960,466
Long-term debt less current
maturities 762,612 871,717
Deferred income taxes 802,213 692,342
Deferred gains from sale and
leaseback of aircraft 211,317 222,700
Other deferred liabilities 77,095 69,100
Stockholders' equity:
Common stock 507,897 505,005
Capital in excess of par value 42,103 35,436
Retained earnings 2,781,941 2,385,854
Treasury stock, at cost (121,421) (90,507)
Total stockholders' equity 3,210,520 2,835,788
$ 6,447,657 $ 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 Nine months ended
Sept. 30, Sept. 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Passenger $ 1,429,838 $ 1,189,470 $ 4,045,681 $ 3,401,111
Freight 27,925 25,273 82,959 75,552
Other 21,071 20,423 53,516 54,506
Total operating
revenues 1,478,834 1,235,166 4,182,156 3,531,169
OPERATING EXPENSES:
Salaries, wages, and
benefits 436,776 375,524 1,240,512 1,088,109
Fuel and oil 194,531 142,624 589,210 331,274
Maintenance materials
and repairs 99,442 100,037 283,318 274,673
Agency commissions 41,525 39,222 120,051 118,504
Aircraft rentals 49,609 49,835 147,979 149,539
Landing fees and other
rentals 69,421 62,547 199,422 181,238
Depreciation 71,511 63,808 206,732 180,136
Other operating expenses 215,910 195,106 624,857 580,285
Total operating
expenses 1,178,725 1,028,703 3,412,081 2,903,758
OPERATING INCOME 300,109 206,463 770,075 627,411
OTHER EXPENSES (INCOME):
Interest expense 17,464 13,254 52,129 39,936
Capitalized interest (7,030) (8,337) (20,936) (24,430)
Interest income (11,609) (6,465) (28,769) (18,838)
Other (gains) losses, net 211 62 (260) 10,094
Total other expenses
(income) (964) (1,486) 2,164 6,762
INCOME BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING
PRINCIPLE 301,073 207,949 767,911 620,649
PROVISION FOR INCOME TAXES 116,775 80,971 297,348 240,067
NET INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 184,298 126,978 470,563 380,582
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE
(net of income taxes of
$14.0 million) - - 22,131 -
NET INCOME $ 184,298 $ 126,978 $ 448,432 $ 380,582
NET INCOME PER SHARE,
BASIC BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ .37 $ .25 $ .94 $ .76
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE - - .04 -
NET INCOME PER SHARE, BASIC $ .37 $ .25 $ .90 $ .76
NET INCOME PER SHARE,
DILUTED BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ .35 $ .24 $ .89 $ .71
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE - - .04 -
NET INCOME PER SHARE, DILUTED $ .35 $ .24 $ .85 $ .71
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 499,099 504,214 497,855 502,978
Diluted 531,032 535,772 528,705 536,929
See accompanying notes.
</TABLE>
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
Sept. 30,
2000 1999
<S> <C> <C>
NET CASH PROVIDED BY OPERATING
ACTIVITIES $ 1,043,134 $ 782,468
INVESTING ACTIVITIES:
Net purchases of property and
equipment (799,507) (902,441)
FINANCING ACTIVITIES:
Payments of long-term debt and
capital lease obligations (8,618) (11,278)
Payments of cash dividends (10,978) (10,842)
Proceeds from Employee stock plans 46,431 30,695
Repurchases of common stock (108,673) (425)
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (81,838) 8,150
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 161,789 (111,823)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 418,819 378,511
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 580,608 $ 266,688
CASH PAYMENTS FOR:
Interest, net of amount
capitalized $ 32,414 $ 22,735
Income taxes $ 113,782 $ 103,627
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 September 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 nine month
periods ended September 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 September
30, 2000, June 30, 2000, and March 31, 2000, dividends of $.0055 per
share were declared on the 499.6 million, 497.7 million, and 497.1
million shares of common stock then outstanding, respectively.
During the three month periods ended September 30, 1999 and June 30,
1999, dividends of $.0055 per share were declared on the 504.1
million and 503.6 million shares of common stock then outstanding,
respectively. During the three month period ended March 31, 1999,
dividends of $.005 per share were declared on the 501.9 million
shares of common stock then outstanding.
3. Reclassifications - Certain prior year amounts have been
reclassified to conform to the current year presentation. Most
notably, this includes the reclassification of $14.7 million and
$46.9 million for the three months and nine months ended September
30, 1999, respectively, of "Other revenue" to "Passenger revenue" as
a result of the change in accounting principle effective January 1,
2000. See Note 5 for further information.
4. 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 Nine months ended
Sept 30, Sept 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
NUMERATOR:
Net income before
cumulative effect of
change in accounting
principle $ 184,298 $ 126,978 $ 470,563 $ 380,582
Cumulative effect of
change in accounting
principle - - 22,131 -
Net income available
to common
stockholders $ 184,298 $ 126,978 $ 448,432 $ 380,582
DENOMINATOR:
Weighted-average
shares outstanding,
basic 499,099 504,214 497,855 502,978
Dilutive effect of
Employee stock
options 31,933 31,558 30,850 33,951
Adjusted weighted-
average shares
outstanding, diluted 531,032 535,772 528,705 536,929
NET INCOME PER SHARE:
Basic, before cumulative
effect of change in
accounting principle $ .37 $ .25 $ .94 $ .76
Cumulative effect of
change in accounting
principle - - .04 -
Basic $ .37 $ .25 $ .90 $ .76
Diluted, before
cumulative effect of
change in accounting
principle $ .35 $ .24 $ .89 $ .71
Cumulative effect of
change in accounting
principle - - .04 -
Diluted $ .35 $ .24 $ .85 $ .71
</TABLE>
5. Accounting Change - Effective January 1, 2000, the Company
adopted Staff Accounting Bulletin 101 (SAB 101) issued by the
Securities and Exchange Commission in December 1999. 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 third quarter 2000 impact of
adopting SAB 101 was to reduce net income by $1.8 million. Excluding
the impact of the change, basic and diluted net income per share for
third quarter 2000 would have been $.37 and $.35, 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."
6. Recently issued accounting standards - In 1998, the
Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), Accounting for
Derivative Instruments and Hedging Activities. In 1999, the FASB
issued SFAS 137, which delayed the effective date of SFAS 133 by one
year. In June 2000, the FASB issued SFAS 138, which further amended
SFAS 133. SFAS 133 is required to be adopted in years beginning
after June 15, 2000. The Company expects to adopt SFAS 133 effective
January 1, 2001. SFAS 133 will require the Company to record 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 designated as a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will be either offset
against the change in fair value of the hedged assets, liabilities,
or firm commitments through earnings or recorded in other
comprehensive income until the hedged item is recorded in earnings.
The ineffective portion of a derivative's change in fair value will
be immediately recorded in earnings.
The Company currently believes it will have all appropriate
documentation in place as required by SFAS 133 and will be ready to
complete the transition to SFAS 133 on January 1, 2001. The Company
currently intends to account for its fuel hedge derivative
instruments as cash flow hedges, as defined. Although the fair value
of the Company's derivative instruments fluctuates daily, as of
September 30, 2000, the Company has estimated the fair value of its
off-balance sheet fuel hedge derivative instruments for periods
subsequent to January 1, 2001 to be approximately $140 million.
Under SFAS 133, this amount would have to be recorded as an asset on
the Company's balance sheet. The Company believes the majority of
the offset to this balance sheet adjustment would be an increase to
other comprehensive income, a component of stockholders equity. Any
difference between these amounts would be recorded as a cumulative
effect of accounting adjustment on the Company's statement of income.
The cumulative effect adjustment would represent any ineffectiveness
from the Company's hedge positions, including items such as changes
in time value that can be excluded in tests of effectiveness. The
Company believes, upon the adoption of SFAS 133, more volatility may
be incurred in its financial statements than in the past.
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 months
ended September 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept. 30, Sept. 30,
2000 1999 * Change 2000 1999 * Change
<S> <C> <C> <C> <C> <C> <C>
Revenue passengers
carried 16,500,662 14,932,022 10.5% 47,391,379 42,682,403 11.0%
Revenue passenger
miles (RPMs)
(000s) 10,968,076 9,611,325 14.1% 31,376,044 27,128,823 15.7%
Available seat
miles (ASMs)
(000s) 15,310,348 13,620,008 12.4% 44,209,075 38,960,801 13.5%
Load factor 71.6% 70.6% 1.0pts. 71.0% 69.6% 1.4pts.
Average length of
passenger haul
(miles) 665 644 3.3% 662 636 4.1%
Trips flown 229,710 216,761 6.0% 671,968 629,336 6.8%
Average passenger
fare $86.65 $79.66 8.8% $85.37 $79.68 7.1%
Passenger revenue
yield per RPM
(cents) 13.04 12.38 5.3% 12.89 12.54 2.8%
Operating revenue
yield per ASM
(cents) 9.66 9.07 6.5% 9.46 9.06 4.4%
Operating expenses
per ASM (cents) 7.70 7.55 2.0% 7.72 7.45 3.6%
Operating expenses
per ASM, excluding
fuel (cents) 6.43 6.51 (1.2)% 6.39 6.60 (3.2)%
Fuel costs per gallon,
excluding fuel taxes
(cents) 74.12 58.36 27.0% 77.93 47.72 63.3%
Number of Employees
at period-end 28,321 27,164 4.3% 28,321 27,164 4.3%
Size of fleet at
period-end 334 306 9.2% 334 306 9.2%
* 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 nine months ended
September 30, 2000 and 1999 are as follows (in cents except percent
change):
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept. 30, Sept. 30,
Percent Percent
2000 1999 Change 2000 1999 Change
<S> <C> <C> <C> <C> <C> <C>
Salaries, wages,
and benefits 2.40 2.38 .8 2.40 2.40 -
Employee profit-
sharing and
savings plans .45 .38 18.4 .41 .40 2.5
Fuel and oil 1.27 1.05 21.0 1.33 .85 56.5
Maintenance materials
and repairs .65 .73 (11.0) .64 .70 (8.6)
Agency commissions .27 .29 (6.9) .27 .30 (10.0)
Aircraft rentals .32 .37 (13.5) .33 .38 (13.2)
Landing fees and
other rentals .45 .46 (2.2) .45 .47 (4.3)
Depreciation .47 .47 - .47 .46 2.2
Other operating
expenses 1.42 1.42 - 1.42 1.49 (4.7)
Total 7.70 7.55 2.0 7.72 7.45 3.6
</TABLE>
Material Changes in Results of Operations
Comparison of Three Months Ended September 30, 2000 to Three Months
Ended September 30, 1999
Consolidated net income for the third quarter ended September
30, 2000 was $184.3 million, an increase of 45.1 percent compared to
1999. Diluted net income per share was $.35 compared to $.24 in
1999. Operating income for third quarter 2000 was $300.1 million, an
increase of 45.4 percent compared to 1999.
Third quarter 2000 consolidated operating revenues increased
19.7 percent primarily due to a 20.2 percent increase in passenger
revenues. The increase in passenger revenues primarily resulted from
the Company's increased capacity, strong demand for commercial air
travel, and excellent revenue management. The Company also benefited
due to operational difficulties experienced by several airline
competitors. Although the Company cannot precisely quantify this
benefit, we believe the basic demand for our low fare service
remained strong for third quarter 2000. The Company experienced a
10.5 percent increase in revenue passengers carried, a 14.1 percent
increase in RPMs, and a 5.3 percent increase in passenger revenue
yield per RPM (passenger yield). The increase in passenger yield is
primarily due to an 8.8 percent increase in average passenger fare,
partially offset by a 3.3 percent increase in average length of
passenger haul.
The increase in RPMs exceeded the 12.4 percent increase in
ASMs resulting in a load factor of 71.6 percent, or 1.0 points
above third quarter 1999. The increase in ASMs resulted primarily
from the net addition of 28 aircraft since third quarter 1999,
which represents a 9.2 percent increase in the Company's fleet
size. Thus far, load factors in October have exceeded those
experienced in October 1999. Bookings for November and December
are also good and we presently anticipate positive year over year
unit revenue comparisons again in fourth 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 10.5 percent primarily
due to an increase in capacity. Other revenues, which consist
primarily of charter revenues, increased 3.2 percent. This increase
was less than the Company's increase in capacity primarily due to the
Company's decision to use more of its aircraft to satisfy the strong
demand for scheduled service and, therefore, make fewer aircraft
available for charters.
Operating expenses per ASM increased 2.0 percent to $.0770,
compared to $.0755 for third quarter 1999, primarily due to an
increase in average jet fuel prices. The average fuel cost per gallon
was 27.0 percent higher than third quarter 1999's average cost per
gallon. Excluding fuel expense, operating expenses per ASM decreased
1.2 percent. As detailed below, the Company has hedges in place for
all of its anticipated fuel consumption in fourth quarter 2000 at
prices well below market prices as of October 25, 2000. Including
estimated hedging gains and taking into account current market
prices, we are forecasting our fourth quarter 2000 average fuel cost
to be in the $.80 range per gallon, which would exceed fourth quarter
1999's average cost of $.67 per gallon. Excluding fuel, the Company
expects slightly lower unit costs in fourth 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 and the Company's ability to
control its non-fuel costs.)
Salaries, wages, and benefits per ASM increased slightly as an
increase in average wage rates was partially offset by an increase in
productivity in several of the Company's operational areas.
Profitsharing and Employee savings plan expenses per ASM increased
18.4 percent, primarily due to the increase in Company earnings
available for profitsharing.
Fuel and oil expense per ASM increased 21.0 percent due to a
27.0 percent increase in the average jet fuel cost per gallon
compared to 1999. The average price paid for jet fuel in third
quarter 2000 was $.7412 per gallon compared to $.5836 in 1999,
including the effects of hedging activities. The Company's third
quarter 2000 and 1999 average jet fuel prices are net of
approximately $43.1 million and $2.5 million in gains from hedging
activities, respectively. As of October 25, 2000, the Company had
crude oil and/or heating oil hedge positions in place for 2000 and
2001 as follows:
<TABLE>
<CAPTION>
Type Average underlying Approximate percentage
of hedge price of crude oil of expected jet fuel
Period instrument hedge (per barrel) requirements hedged
<S> <C> <C> <C>
Fourth Quarter swaps $22.47 70%
2000 options/other $23.25 30%
Total 100%
First Quarter swaps $22.27 56%
2001 options/other $25.00 24%
Total 80%
Second Quarter swaps $21.73 60%
2001 options/other $24.44 20%
Total 80%
Third Quarter swaps $21.64 50%
2001 options/other $22.15 30%
Total 80%
Fourth Quarter swaps $21.85 51%
2001 options/other $20.00 29%
Total 80%
</TABLE>
As of October 25, 2000, the unrealized gains from these
hedging activities were $64.6 million for fourth quarter 2000 and
approximately $133.4 million for all of 2001. The majority of the
Company's crude oil hedge positions in the above table have been
converted to heating oil hedges. Heating oil prices have
historically correlated more closely with jet fuel prices than has
the price of crude oil. Despite these hedge positions, the Company
is expecting higher average net jet fuel cost per gallon for fourth
quarter 2000 compared to fourth quarter 1999. The Company's fuel
hedging strategy could result in the Company not fully benefiting
from lower jet fuel prices should crude oil and/or heating oil
prices decline 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 11.0
percent primarily due to a decrease in engine maintenance related to
its 737-200 aircraft fleet, as 1999 was an unusually high period for
engine maintenance on these aircraft. The engines on these aircraft
are not covered by the Company's "power-by-the-hour" maintenance
contract with General Electric Engine Services, Inc.; therefore,
repairs are expensed on a time and materials basis. These engine
repairs represented approximately 59 percent of the total decrease,
while a decrease in airframe inspections and repairs per ASM
represented approximately 16 percent of the total decrease. The
Company also expects maintenance materials and repairs expense per
ASM to be lower in fourth quarter 2000 than the comparable 1999
period due to a decrease in scheduled engine maintenance on 737-200
aircraft, although not as much of a decrease as third quarter 2000.
(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.)
Agency commissions per ASM decreased 6.9 percent, primarily due
to an increase in direct sales. In third quarter 2000, approximately
30 percent of the Company's revenues were attributable to direct
bookings through the Company's Internet site compared to
approximately 20 percent in the same prior year period. The increase
in Internet revenues contributed to the Company's percentage of
commissionable revenues decreasing from 33.0 percent in 1999 to 29.0
percent in 2000.
Aircraft rentals per ASM decreased 13.5 percent due to a lower
percentage of the aircraft fleet being leased.
Landing fees and other rentals per ASM decreased 2.2 percent
primarily as a result of a decrease in landing fees per ASM of 6.5
percent, partially offset by a slight increase in other rentals.
Although 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
aircraft trip flown.
Other expenses (income) include interest expense, capitalized
interest, interest income, and other gains and losses. Interest
expense increased approximately 31.8 percent due primarily to the
Company's issuance of $256 million of long-term debt in fourth
quarter 1999. Capitalized interest decreased 15.7 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 79.6 percent primarily due to higher
invested cash balances.
Comparison of Nine Months Ended September 30, 2000 to Nine Months
Ended September 30, 1999
Consolidated net income before the cumulative effect of change
in accounting principle for the nine months ended September 30, 2000
was $470.6 million ($.89 per share, diluted), an increase of 23.6
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 5 to the unaudited Condensed Consolidated
Financial Statements). Net income, after the cumulative change in
accounting principle, for 2000 was $448.4 million. Diluted net
income per share, after consideration of the accounting change, was
$.85 compared to $.71 in 1999. Operating income was $770.1 million,
an increase of 22.7 percent compared to 1999.
Consolidated operating revenues increased 18.4 percent
primarily due to a 19.0 percent increase in passenger revenues. The
increase in passenger revenues primarily resulted from the Company's
increased capacity, strong demand for commercial air travel, and
excellent revenue management. The Company experienced an 11.0
percent increase in revenue passengers carried, a 15.7 percent
increase in RPMs, and a 2.8 percent increase in passenger revenue
yield per RPM (passenger yield). The increase in passenger yield is
primarily due to a 7.1 percent increase in average passenger fare,
partially offset by a 4.1 percent increase in average length of
passenger haul.
The increase in RPMs exceeded a 13.5 percent increase in ASMs
resulting in a load factor of 71.0 percent, or 1.4 points above the
same prior year period. The increase in ASMs resulted primarily
from the net addition of 28 aircraft since third quarter 1999,
which represents a 9.2 percent increase in the Company's fleet
size.
Consolidated freight revenues increased 9.8 percent primarily
due to an increase in capacity. Other revenues decreased 1.8 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 3.6 percent to $.0772,
compared to $.0745 for 1999, primarily due to a significant increase
in average jet fuel prices. The average fuel cost per gallon was 63.3
percent higher than the same 1999 period. Excluding fuel expense,
operating expenses per ASM decreased 3.2 percent.
Salaries, wages, and benefits per ASM were flat, as increases
in productivity were offset by increases in average wage rates and in
Employee benefit costs, primarily health care and workers'
compensation expenses. Profitsharing and Employee savings plan
expenses per ASM increased primarily due to the increase in Company
earnings available for profitsharing.
Fuel and oil expense per ASM increased 56.5 percent due to a
63.3 percent increase in the average jet fuel cost per gallon
compared to 1999. The average price paid for jet fuel in 2000 was
$.7793 per gallon compared to $.4772 in 1999, including the effects
of hedging activities. The Company's 2000 and 1999 average jet
fuel prices are net of approximately $49.4 million and $10.2
million in gains from hedging activities, respectively. See
comparison of third quarter 2000 to third quarter 1999 for a schedule
of the Company's fuel hedging positions for the remainder of 2000 and
for 2001.
Maintenance materials and repairs per ASM decreased 8.6 percent
primarily because of a decrease in engine maintenance related to the
Company's 737-200 aircraft fleet as 1999 was an unusually high period
for engine maintenance on these aircraft. The engines on these
aircraft are not covered by the Company's "power-by-the-hour"
maintenance contract with General Electric Engine Services, Inc.;
therefore, repairs are expensed on a time and materials basis. These
engine repairs represented approximately 63 percent of the total
decrease, while a decrease in airframe inspections and repairs per
ASM represented approximately 34 percent of the total decrease.
Agency commissions per ASM decreased 10.0 percent, primarily
due to an increase in direct sales. More than 29 percent of the
Company's 2000 revenues were attributable to direct bookings through
the Company's Internet site compared to approximately 17 percent in
the same prior year period. The increase in Internet revenues
contributed to the Company's percentage of commissionable revenues
decreasing from 34.8 percent in 1999 to 29.7 percent in 2000.
Aircraft rentals per ASM decreased 13.2 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 landing fees per ASM of 6.7
percent, partially offset by a slight increase in other rentals.
Although 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
aircraft trip flown.
Depreciation expense per ASM increased 2.2 percent primarily
due to a higher percentage of owned aircraft. Of the 35 aircraft
added to the Company's fleet over the past twelve months, 34 have
been purchased. This, combined with the retirement of 7 leased
aircraft, has increased the Company's percentage of aircraft owned or
on capital lease from 67 percent at September 30, 1999 to 72 percent
at September 30, 2000.
Other operating expenses per ASM decreased 4.7 percent
primarily due to Company-wide cost reduction efforts in areas such as
supplies, advertising, optional training, communication costs, etc.
Other expenses (income) include interest expense, capitalized
interest, interest income, and other gains and losses. Interest
expense increased 30.5 percent due primarily to the Company's
issuance of $256 million of long-term debt in fourth quarter 1999.
Capitalized interest decreased 14.3 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 52.7 percent primarily due to higher invested cash
balances. Other losses in 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 $1,043.1 million
for the nine months ended September 30, 2000 and $1,262.4 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 September 30,
2000 was primarily used to finance aircraft-related capital
expenditures, provide working capital, and to repurchase
approximately $199.2 million of the Company's outstanding common
stock. The Company began this repurchase program during third
quarter 1999. Through September 30, 2000, the program resulted in
the repurchase of approximately 12.2 million shares at an average
cost of $16.28 per share.
During the 12 months ended September 30, 2000, net capital
expenditures were $1,064.9 million, which primarily related to the
purchase of 31 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. As of September 30, 2000, 10 737-
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 September
30, 2000 was approximately $4,488 million due as follows: $266
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 September 30,
2000 of $580.6 million, internally generated funds, and a revolving
credit line with a group of banks of up to $475 million (none of
which had been drawn at September 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 and general corporate purposes during
2000 and 2001.
The Company began new service to Buffalo, New York, on October
8, 2000, with daily nonstop service to Baltimore/Washington, Las
Vegas, Phoenix, and Orlando.
The Company recently announced new service to West Palm Beach,
Florida, beginning January 21, 2001, with daily nonstop service to
Baltimore/Washington, Nashville, Tampa Bay, 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 notice of deficiency from the
Internal Revenue Service (IRS) in which it 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. In defense of the 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. The notice of deficiency received by the
Company stemmed from an industry-wide challenge by the IRS
of the long standing practice of currently expensing
aircraft inspection and maintenance costs, and similar
adjustments have been proposed by the IRS to the tax
returns of numerous other members of the airline industry.
In response to this challenge, the Air Transport
Association of America, the airline industry's trade
association, since late 1996 has been in discussions with
the Treasury Department and the national office of the IRS
regarding the issuance of published guidance confirming
the industry's practice of expensing the subject
inspection and maintenance costs. Approximately one month
ago, counsel for the Company and the IRS jointly advised
the Tax Court that the IRS expects to publish guidance
favorable to the airline industry by early November 2000.
Following the publication of the guidance, counsel for
the Company and the IRS will attempt to resolve the
controversy without the necessity of further litigation.
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
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10.1) Supplemental Agreements No. 11, 12, 13 and
14 to Purchase Agreement No. 1810, dated
January 19, 1994 between the Boeing Company
and Southwest
(27) Financial Data Schedule
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SOUTHWEST AIRLINES CO.
November 2, 2000 /s/ Gary C. Kelly
Date Gary C. Kelly
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
