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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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)
Registrant's telephone number, including area code: (214) 792-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock ($1.00 par value) New York Stock Exchange, Inc.
Common Share Purchase Rights New York Stock Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Aggregate market value of Common Stock held by nonaffiliates as of
January 12, 2001:
$15,330,276,800
Number of shares of Common Stock outstanding as of the close of business on
January 12, 2001:
505,028,269 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of
Shareholders, May 16, 2001: PART III
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Southwest Airlines Co. ("Southwest") is a major domestic airline that
provides primarily shorthaul, high-frequency, point-to-point, low-fare service.
Southwest was incorporated in Texas and commenced Customer Service on June 18,
1971 with three Boeing 737 aircraft serving three Texas cities - Dallas,
Houston, and San Antonio.
At yearend 2000, Southwest operated 344 Boeing 737 aircraft and provided
service to 58 airports in 57 cities in 29 states throughout the United States.
Southwest commenced service to Albany, New York and Buffalo, New York in May and
October 2000, respectively, and to West Palm Beach, Florida in January 2001.
Southwest will discontinue service to San Francisco International Airport in
March 2001, relocating the 14 flights per day from that airport to Oakland and
San Jose, California.
Based on data for second quarter 2000 (the latest available data),
Southwest Airlines is the 4th largest carrier in the United States based on
domestic passengers boarded and the largest based on scheduled domestic
departures.
The business of the Company is somewhat seasonal. Quarterly operating
income and, to a lesser extent, revenues tend to be lower in the first quarter
(January 1 - March 31).
FUEL
The cost of fuel is an item having significant impact on the Company's
operating results. The Company's average cost of jet fuel over the past five
years was as follows:
COST AVERAGE PRICE PERCENT OF
YEAR (Millions) PER GALLON OPERATING EXPENSES
---- ---------- ------------- ------------------
1996 $484.7 $.65 15.9%
1997 $495.0 $.62 15.0%
1998 $388.3 $.46 11.2%
1999 $492.4 $.53 12.5%
2000 $804.4 $.79 17.4%
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of Southwest's fuel hedging activities.
REGULATION
Economic. The Dallas Love Field section of the International Air
Transportation Competition Act of 1979, as amended in 1997 (commonly known as
the "Wright Amendment"), as it affects Southwest's scheduled service, provides
that no common carrier may provide scheduled passenger air transportation for
compensation between Love Field and one or more points outside Texas, except
that an air carrier may transport individuals by air on a flight between Love
Field and one or more points within the states of Alabama, Arkansas, Kansas,
Louisiana, Mississippi, New Mexico, Oklahoma, and Texas if (a) "such air
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carrier does not offer or provide any through service or ticketing with another
air carrier" and (b) "such air carrier does not offer for sale transportation to
or from, and the flight or aircraft does not serve, any point which is outside
any such states." The Wright Amendment does not restrict flights operated with
aircraft having 56 or fewer passenger seats. Southwest does not interline or
offer joint fares with any other air carrier. The Wright Amendment does not
restrict Southwest's intrastate Texas flights or its air service from points
other than Love Field.
The Department of Transportation ("DOT") has significant regulatory
jurisdiction over passenger airlines. Unless exempted, no air carrier may
furnish air transportation over any route without a DOT certificate of
authorization, which does not confer either exclusive or proprietary rights. The
Company's certificates are unlimited in duration and permit the Company to
operate among any points within the United States, its territories and
possessions, except as limited by the Wright Amendment, as do the certificates
of all other U.S. carriers. DOT may revoke such certificates, in whole or in
part, for intentional failure to comply with any provisions of subchapter IV of
the Federal Aviation Act of 1958, or any order, rule or regulation issued
thereunder or any term, condition or limitation of such certificate; provided
that, with respect to revocation, the certificate holder has first been advised
of the alleged violation and has been given a reasonable time to effect
compliance.
DOT prescribes uniform disclosure standards regarding terms and conditions
of carriage, and prescribes that terms incorporated into the Contract of
Carriage by reference are not binding upon passengers unless notice is given in
accordance with its regulations.
Safety. The Company is subject to the jurisdiction of the Federal Aviation
Administration ("FAA") with respect to its aircraft maintenance and operations,
including equipment, ground facilities, dispatch, communications, flight
training personnel, and other matters affecting air safety. To ensure compliance
with its regulations, the FAA requires airlines to obtain operating,
airworthiness, and other certificates, which are subject to suspension or
revocation for cause. The Company has obtained such certificates. The FAA,
acting through its own powers or through the appropriate U. S. Attorney, also
has the power to bring proceedings for the imposition and collection of fines
for violation of the Federal Air Regulations.
The Company is subject to various other federal, state, and local laws and
regulations relating to occupational safety and health, including Occupational
Safety and Health Administration (OSHA) and Food and Drug Administration (FDA)
regulations.
Environmental. Certain airports, including San Diego, Burbank, and Orange
County, have established airport restrictions to limit noise, including
restrictions on aircraft types to be used and limits on the number of hourly or
daily operations or the time of such operations. In some instances, these
restrictions have caused curtailments in service or increases in operating
costs, and such restrictions could limit the ability of Southwest to expand its
operations at the affected airports. Local authorities at other airports may
consider adopting similar noise regulations, but such regulations are subject to
the provisions of the Airport Noise and Capacity Act of 1990 and regulations
promulgated thereunder.
Operations at John Wayne Airport, Orange County, California, are governed
by the Airport's Phase 2 Commercial Airline Access Plan and Regulation (the
"Plan"). Pursuant to the Plan, each airline is allocated total annual seat
capacity to be operated at the airport, subject to renewal/reallocation on an
annual basis. Service at this airport may be adjusted annually to meet these
requirements.
The Company is subject to various other federal, state, and local laws and
regulations relating to the protection of the environment, including the
discharge or disposal of materials such as chemicals, hazardous waste, and
aircraft deicing fluid. Potential future regulatory developments pertaining to
such things as control of engine exhaust emissions from ground support equipment
and prevention of leaks from
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underground aircraft fueling systems could increase operating costs in the
airline industry. The Company does not believe, however, that such environmental
regulatory developments will have a material impact on the Company's capital
expenditures or otherwise adversely effect its operations, operating costs, or
competitive position. Additionally, in conjunction with airport authorities,
other airlines, and state and local environmental regulatory agencies, the
Company is undertaking voluntary investigation or remediation of soil or
groundwater contamination at several airport sites. While the full extent of any
contamination at such sites and the parties responsible for such contamination
have not been determined, the Company does not believe that any environmental
liability associated with such sites will have a material adverse effect on the
Company's operations, costs, or profitability.
Customer Service Commitment. During 1999, the airline transportation
industry faced possible legislation dealing with certain customer service
practices. As a compromise with Congress, the industry, working with the Air
Transport Association, responded by adopting and filing with the DOT written
plans disclosing how it would commit to improving performance. Southwest
Airlines formalized its dedication to Customer Satisfaction by adopting its
Customer Service Commitment, a comprehensive plan which embodies the Mission
Statement of Southwest Airlines: dedication to the highest quality of Customer
Service delivered with a sense of warmth, friendliness, individual pride, and
Company Spirit. The Customer Service Commitment can be reviewed by clicking on
"About SWA" at www.southwest.com. Congress is expected to monitor the effects of
the industry's plans, and there can be no assurance that legislation will not be
proposed in the future to regulate airline practices.
MARKETING AND COMPETITION
Southwest focuses principally on point-to-point, rather than
hub-and-spoke, service in shorthaul markets with frequent, conveniently timed
flights, and low fares. For example, Southwest's average aircraft trip length in
2000 was 492 miles with an average duration of approximately 1.5 hours. At
yearend, Southwest served approximately 306 one-way nonstop city pairs.
Southwest's point-to-point route system, as compared to hub-and-spoke,
provides for more direct nonstop routings for shorthaul customers and,
therefore, minimizes connections, delays, and total trip time. Southwest focuses
on nonstop, not connecting, traffic. As a result, approximately 77 percent of
the Company's Customers fly nonstop. In addition, Southwest serves many
conveniently-located satellite or downtown airports such as Dallas Love Field,
Houston Hobby, Chicago Midway, Baltimore-Washington International, Burbank,
Manchester, Oakland, San Jose, Providence, Ft. Lauderdale/Hollywood and Long
Island airports, which are typically less congested than other airlines' hub
airports and enhance the Company's ability to sustain high Employee productivity
and reliable ontime performance. This operating strategy also permits the
Company to achieve high asset utilization. Aircraft are scheduled to minimize
the amount of time the aircraft is at the gate, currently approximately 25
minutes, thereby reducing the number of aircraft and gate facilities that would
otherwise be required. Southwest does not interline with other airlines, nor
have any commuter feeder relationships.
Southwest employs a very simple fare structure, featuring low,
unrestricted, unlimited, everyday coach fares. The Company operates only one
aircraft type, the Boeing 737, which simplifies scheduling, maintenance, flight
operations, and training activities.
In January 1995, Southwest was the first major airline to introduce a
Ticketless travel option, eliminating the need to print a paper ticket
altogether. Southwest also entered into an arrangement with SABRE, the computer
reservation system in which Southwest has historically participated to a limited
extent, providing for ticketing and automated booking on Southwest in a very
cost-effective manner. In 1996, Southwest began offering Ticketless travel
through the Company's home page on the Internet's World Wide Web at
http://www.southwest.com. At the end of 2000, approximately 80% of Southwest's
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Customers chose the Ticketless travel option. In December 2000 approximately 39%
of Southwest's passenger revenues came through its Internet site, which has
become a vital part of the Company's distribution strategy.
The airline industry is highly competitive as to fares, frequent flyer
benefits, routes, and service, and some carriers competing with the Company have
greater financial resources, larger fleets, and wider name recognition. Several
of the Company's larger competitors offer low-cost, shorthaul service in markets
served by the Company, which represents a more direct threat in Southwest's
market niche. Certain major United States airlines have established marketing
alliances with each other, including Northwest Airlines/Continental Airlines,
American Airlines/Alaska Airlines, and Continental Airlines/America West
Airlines. During 2000, two of our competitors, UAL Corporation and USAirways,
Inc., entered into a merger agreement and in January 2001, AMR Corp. announced a
plan to purchase the assets of Trans World Airlines, along with certain assets
of USAirways, Inc. If those acquisitions are concluded, competition in the
airline industry could be significantly altered. Profit levels in the air
transport industry are highly sensitive to changes in operating and capital
costs and the extent to which competitors match an airline's fares and services.
The profitability of a carrier in the airline industry is also impacted by
general economic trends.
The Company is also subject to varying degrees of competition from surface
transportation in its shorthaul markets, particularly the private automobile. In
shorthaul air services that compete with surface transportation, price is a
competitive factor, but frequency and convenience of scheduling, facilities,
transportation safety, and Customer Service may be of equal or greater
importance to many passengers.
INSURANCE
The Company carries insurance of types customary in the airline industry
and at amounts deemed adequate to protect the Company and its property and to
comply both with federal regulations and certain of the Company's credit and
lease agreements. The policies principally provide coverage for public and
passenger liability, property damage, cargo and baggage liability, loss or
damage to aircraft, engines, and spare parts, and workers' compensation.
FREQUENT FLYER AWARDS
Southwest's frequent flyer program, Rapid Rewards, is based on trips flown
rather than mileage. Rapid Rewards Customers earn a flight segment credit for
each one-way trip flown or two credits for each round trip flown. Rapid Rewards
Customers can also receive flight segment credits by using the services of
non-airline partners, which include credit card partners, a telephone company,
car rental agencies, hotels, and the Southwest Airlines First USA (R) Visa card.
Rapid Rewards offers two types of travel awards. The Rapid Rewards Award Ticket
("Award Ticket") offers one free roundtrip travel award to any Southwest
destination after the accumulation of 16 flight segment credits within a
consecutive twelve-month period. The Rapid Rewards Companion Pass ("Companion
Pass") is granted after flying 50 roundtrips (or 100 one- way trips) on
Southwest within a consecutive twelve-month period. The Companion Pass offers
unlimited free roundtrip travel to any Southwest destination for a companion of
the qualifying Rapid Rewards member. In order for the companion to use this
pass, the Rapid Rewards member must purchase a ticket or use an Award Ticket.
Additionally, the Rapid Rewards member and companion must travel together on the
same flight.
Trips flown are valid for flight segment credits toward Award Tickets and
Companion Passes for twelve months only; Award Tickets and Companion Passes are
automatically generated when earned by the Customer rather than allowing the
Customer to bank credits indefinitely and Award Tickets and Companion Passes are
valid for one year with an automatic expiration date. "Black out" dates apply
during peak holiday periods.
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The Company also sells flight segment credits to business partners
including credit card companies, phone companies, hotels, and car rental
agencies. These credits may be redeemed for Award Tickets having the same
program characteristics as those earned by flying.
Customers redeemed approximately 1,571,000, 1,248,000 and 927,000 Award
Tickets and flights on Companion Passes during 2000, 1999 and 1998 respectively.
The amount of free travel award usage as a percentage of total Southwest revenue
passengers carried was 4.9 percent in 2000, 4.3 percent in 1999 and 3.5 percent
in 1998. The number of Award Tickets outstanding at December 31, 2000 and 1999
was approximately 985,000 and 846,000, respectively. These numbers do not
include partially earned Award Tickets. The Company currently does not have a
system to accurately estimate partially earned Award Tickets. However, these
partially earned Award Tickets may equal 75 percent or more of the current
outstanding Award Tickets. Since the inception of Rapid Rewards in 1987,
approximately 14 percent of all Award Tickets have expired without being used.
The number of Companion Passes for Southwest outstanding at December 31, 2000
and 1999 was approximately 41,000 and 32,000, respectively. The Company
currently estimates that 3 to 4 trips will be redeemed per outstanding Companion
Pass. The Company's frequent flyer program has not had a material impact on its
results of operations or financial condition.
The Company accounts for its frequent flyer program obligations by
recording a liability for the estimated incremental cost of flight awards the
Company expects to be redeemed (except for flight segment credits sold to
business partners). This method recognizes an average incremental cost to
provide roundtrip transportation to one additional passenger. The estimated
incremental cost includes direct passenger costs such as fuel, food and other
operational costs, but does not include any contribution to overhead or profit.
The incremental cost is accrued at the time an award is earned and revenue is
subsequently recognized, at the amount accrued, when the free travel award is
used. For flight segment credits sold to business partners prior to January 1,
2000 revenue was recognized when the credits were sold. Beginning January 1,
2000, revenue from the sale of flight segment credits and associated with future
travel is deferred and recognized when the ultimate free travel award is flown
or the credits expire unused. Accordingly, Southwest does not accrue incremental
cost for the expected redemption of free travel awards for credits sold to
business partners. The liability for free travel awards earned but not used at
December 31, 2000 and 1999 was not material.
EMPLOYEES
At December 31, 2000, Southwest had 29,274 active employees, consisting of
9,610 flight, 1,414 maintenance, 14,560 ground customer and fleet service and
3,690 management, accounting, marketing, and clerical personnel.
Southwest has ten collective bargaining agreements covering approximately
83 percent of its employees. The following table sets forth the Company's
employee groups and collective bargaining status:
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EMPLOYEE GROUP REPRESENTED BY AGREEMENT AMENDABLE ON
-------------- -------------- ----------------------
Customer Service and International Association of November 2002
Reservations Machinists and Aerospace
Workers, AFL-CIO
Flight Attendants Transportation Workers of May 2002
America, AFL-CIO ("TWU")
Ramp, Operations and TWU December 1999
Provisioning (in negotiations)
Pilots Southwest Airlines Pilots' September 2004
Association
Flight Dispatchers Southwest Airlines Employee November 2009
Association
Aircraft Appearance International Brotherhood of February 2009
Technicians Teamsters ("Teamsters")
Stock Clerks Teamsters August 2008
Mechanics Teamsters August 2001
Flight Simulator Technicians Teamsters November 2008
Flight/Ground School Southwest Airlines Professional December 2010
Instructors and Flight Crew Instructors Association
Training Instructors
ITEM 2. PROPERTIES
AIRCRAFT
Southwest operated a total of 344 Boeing 737 aircraft as of December 31,
2000, of which 94 and seven were under operating and capital leases,
respectively. The remaining 243 aircraft were owned.
Southwest was the launch customer for the Boeing 737-700 aircraft, one of
the newest generation of the Boeing 737 aircraft type. The first 737-700
aircraft was delivered in December 1997 and entered revenue service in January
1998. At December 31, 2000, Southwest had 92 Boeing 737-700 aircraft in service.
In total, at December 31, 2000, the Company had firm orders and options to
purchase Boeing 737 Aircraft as follows:
FIRM ORDERS AND OPTIONS TO PURCHASE BOEING 737-700 AIRCRAFT
DELIVERY YEAR FIRM ORDERS OPTIONS ROLLING OPTIONS
------------- ----------- ------- ---------------
2001 25
2002 27
2003 13 13
2004 29 13
2005 5 18
2006 22 18
2007 25 20
2008-2012 25 197
TOTALS 146 87 217
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The Company currently intends to retire its fleet of 33 Boeing 737-200
aircraft over the next five years.
The average age of the Company's fleet at December 31, 2000 was 8.2 years.
GROUND FACILITIES AND SERVICES
Southwest leases terminal passenger service facilities at each of the
airports it serves to which it has added various leasehold improvements. The
Company leases land on a long-term basis for its maintenance centers located at
Dallas Love Field, Houston Hobby, and Phoenix Sky Harbor, its training center
near Love Field, which houses five 737 simulators, and its corporate
headquarters, also located near Love Field. The maintenance, training center,
and corporate headquarters buildings on these sites were built and are owned by
Southwest. At December 31, 2000, the Company operated nine reservation centers.
The reservation centers located in Little Rock, Arkansas; Chicago, Illinois;
Albuquerque, New Mexico; and Oklahoma City, Oklahoma occupy leased space. The
Company owns its Dallas, Texas; Houston, Texas; Phoenix, Arizona; Salt Lake
City, Utah; and San Antonio, Texas reservation centers.
The Company performs substantially all line maintenance on its aircraft
and provides ground support services at most of the airports it serves. However,
the Company has arrangements with certain aircraft maintenance firms for major
component inspections and repairs for its airframes and engines, which comprise
the majority of the annual maintenance costs.
ITEM 3. LEGAL PROCEEDINGS
The Company received a statutory notice of deficiency from the Internal
Revenue Service (the "IRS") in which the IRS proposed to 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 unpublished guidance confirming the
industry's practice of expensing the subject inspection and maintenance costs.
On December 21, 2000, the national office of the IRS published a revenue ruling
in which it concluded that aircraft inspection and maintenance substantially the
same as that in issue in the Company's Tax Court suit is currently deductible as
an ordinary and necessary business expense. Counsel for the company and the IRS
soon will engage in discussions in an attempt to resolve the controversy in
conformity with the IRS' revenue ruling and 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 condition or
results of operations of the Company. This forward-looking statement is based on
management's current understanding of the relevant law and facts; it is subject
to various contingencies including the views of legal counsel, changes in the
IRS' position, the potential cost and risk associated with litigation, and the
actions of the IRS, judges and juries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to be reported.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Southwest, their positions, and their respective
ages (as of January 1, 2001) are as follows:
NAME POSITION AGE
---- -------- ---
Herbert D. Kelleher Chairman of the Board, President, 69
and Chief Executive Officer
Colleen C. Barrett Executive Vice President-Customers 56
and Corporate Secretary
John G. Denison Executive Vice President- 56
Corporate Services
James C. Wimberly Executive Vice President, 48
Chief Operations Officer
Gary C. Kelly Vice President-Finance, 45
Chief Financial Officer
Ross Holman Vice President - Systems 49
James F. Parker Vice President-General Counsel 54
Ron Ricks Vice President-Governmental Affairs 51
Dave Ridley Vice President-Ground Operations 48
Joyce C. Rogge Vice President - Marketing 43
Elizabeth P. Sartain Vice President - People 46
Executive officers are elected annually at the first meeting of
Southwest's Board of Directors following the annual meeting of shareholders or
appointed by the President pursuant to Board authorization. Each of the above
individuals has worked for Southwest Airlines Co. for more than the past five
years, except Ross Holman, who joined the Company in March 1998. Prior to that
time, Mr. Holman was Chief Information Officer of PageNet since 1996.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's officers and directors to file reports of ownership and changes in
ownership in Company Common Stock with the Securities and Exchange Commission
and the New York Stock Exchange. During 2000, one report involving the sale of
2,500 shares of Southwest Common Stock was filed four days late by Joyce Rogge.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Southwest's common stock is listed on the New York Stock Exchange and is
traded under the symbol LUV. The high and low sales prices of the common stock
on the Composite Tape and the quarterly dividends per share paid on the common
stock, as adjusted for the July 1999 three-for-two stock split, were:
PERIOD DIVIDEND HIGH LOW
------ -------- ------ ------
1999
1st Quarter $.00500 $22.92 $14.92
2nd Quarter 0.00550 23.58 19.54
3rd Quarter 0.00550 22.29 14.38
4th Quarter 0.00550 18.81 15.00
2000
1st Quarter $.00550 $20.88 $15.00
2nd Quarter 0.00550 22.75 18.56
3rd Quarter 0.00550 25.00 19.13
4th Quarter 0.00550 34.99 23.63
As of December 29, 2000, there were 10,223 holders of record of the
Company's common stock.
RECENT SALES OF UNREGISTERED SECURITIES
During 2000, Herbert D. Kelleher, President and Chief Executive
Officer, exercised unregistered options to purchase Southwest Common Stock as
follows:
NUMBER OF SHARES PURCHASED EXERCISE PRICE DATE OF EXERCISE
- -------------------------- -------------- ----------------
854,295 $1.00 January 27, 2000
The issuances of the above options and shares to Mr. Kelleher were
deemed exempt from the registration provisions of the Securities Act of 1933, as
amended (the "Act"), by reason of the provision of Section 4(2) of the Act
because, among other things, of the limited number of participants in such
transactions and the agreement and representation of Mr. Kelleher that he was
acquiring such securities for investment and not with a view to distribution
thereof. The certificates representing the shares issued to Mr. Kelleher contain
a legend to the effect that such shares are not registered under the Act and may
not
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be transferred except pursuant to a registration statement which has become
effective under the Act or to an exemption from such registration. The issuance
of such shares was not underwritten.
ITEM 6. SELECTED FINANCIAL DATA
The following financial information for the five years ended December
31, 2000 has been derived from the Company's consolidated financial statements.
This information should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included elsewhere herein. The Company has
declared a 3-for-2 stock split payable February 15, 2001. Share and per share
information in this Report has not been adjusted for the effect of this 2001
stock split.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
FINANCIAL DATA:
(in thousands except per share amounts)
Operating revenues .......................... $ 5,649,560 $ 4,735,587 $ 4,163,980
Operating expenses .......................... 4,628,415 3,954,011 3,480,369
------------ ------------ ------------
Operating income ............................ 1,021,145 781,576 683,611
Other expenses(income), net ................. 3,781 7,965 (21,501)
------------ ------------ ------------
Income before income taxes .................. 1,017,364 773,611 705,112
Provision for income taxes .................. 392,140 299,233 271,681
------------ ------------ ------------
Net income .................................. $ 625,224 (3) $ 474,378 $ 433,431
============ ============ ============
Net income per share, basic ................. $ 1.25 (3) $ .94 $ .87
Net income per share, diluted ............... $ 1.18 (3) $ .89 $ .82
Cash dividends per common share ............. $ .022 $ .0215 $ .0189
Total assets at period-end .................. $ 6,669,572 $ 5,653,703 $ 4,715,996
Long-term obligations at period-end ......... $ 760,992 $ 871,717 $ 623,309
Stockholders' equity at period-end .......... $ 3,451,320 $ 2,835,788 $ 2,397,918
OPERATING DATA:
Revenue passengers carried .................. 63,678,261 57,500,213 52,586,400
Revenue passenger miles (RPMs) (000s) ....... 42,215,162 36,479,322 31,419,110
Available seat miles (ASMs) (000s) .......... 59,909,965 52,855,467 47,543,515
Load factor (1) ............................. 70.5% 69.0% 66.1%
Average length of passenger haul (miles) .... 663 634 597
Trips flown ................................. 903,754 846,823 806,822
Average passenger fare ...................... $ 85.87 $ 79.35 $ 76.26
Passenger revenue yield per RPM ............. 12.95(cent) 12.51(cent) 12.76(cent)
Operating revenue yield per ASM ............. 9.43(cent) 8.96(cent) 8.76(cent)
Operating expenses per ASM .................. 7.73(cent) 7.48(cent) 7.32(cent)
Fuel cost per gallon (average) .............. 78.69(cent) 52.71(cent) 45.67(cent)
Number of Employees at year-end ............. 29,274 27,653 25,844
Size of fleet at year-end (2) ............... 344 312 280
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1996
------------------ ------------------
FINANCIAL DATA:
(in thousands except per share amounts)
Operating revenues .......................... $ 3,816,821 $ 3,406,170
Operating expenses .......................... 3,292,585 3,055,335
------------ ------------
Operating income ............................ 524,236 350,835
Other expenses(income), net ................. 7,280 9,473
------------ ------------
Income before income taxes .................. 516,956 341,362
Provision for income taxes .................. 199,184 134,025
------------ ------------
Net income .................................. $ 317,772 $ 207,337
============ ============
Net income per share, basic ................. $ .64 $ .42
Net income per share, diluted ............... $ .62 $ .41
Cash dividends per common share ............. $ .0147 $ .0130
Total assets at period-end .................. $ 4,246,160 $ 3,723,479
Long-term obligations at period-end ......... $ 628,106 $ 650,226
Stockholders' equity at period-end .......... $ 2,009,018 $ 1,648,312
OPERATING DATA:
Revenue passengers carried .................. 50,399,960 49,621,504
Revenue passenger miles (RPMs) (000s) ....... 28,355,169 27,083,483
Available seat miles (ASMs) (000s) .......... 44,487,496 40,727,495
Load factor (1) ............................. 63.7% 66.5%
Average length of passenger haul (miles) .... 563 546
Trips flown ................................. 786,288 748,634
Average passenger fare ...................... $ 72.81 $ 66.20
Passenger revenue yield per RPM ............. 12.94(cent) 12.13(cent)
Operating revenue yield per ASM ............. 8.58(cent) 8.36(cent)
Operating expenses per ASM .................. 7.40(cent) 7.50(cent)
Fuel cost per gallon (average) .............. 62.46(cent) 65.47(cent)
Number of Employees at year-end ............. 23,974 22,944
Size of fleet at year-end (2) ............... 261 243
- ----------
(1) Revenue passenger miles divided by available seat miles.
(2) Includes leased aircraft.
(3) Excludes cumulative effect of accounting change of $22.1 million ($.04
per share).
10
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
YEAR IN REVIEW
Southwest posted a profit for the 28th consecutive year and a record annual
profit for the ninth consecutive year. This excellent financial performance was
achieved despite the highest jet fuel prices since 1990. Operating revenues and
operating income were the highest in the Company's history. Southwest's margin
performance was the best in 20 years with an operating margin of 18.1 percent
and net profit margin (before the cumulative effect of a change in accounting
principle) of 11.1 percent. The Company's revenue growth and continued strong
demand for our product were evident through our achievement of a record 2000
load factor (revenue passenger miles divided by available seat miles) of 70.5
percent and record load factors in three of the four calendar quarters of 2000.
At the end of 2000, Southwest served 57 cities in 29 states. We continued our
East Coast expansion in 2000, adding service to Albany, New York, in May 2000,
and Buffalo, New York, in October 2000 and have been very pleased with the
results in each of these new Southwest cities. The Company recently announced
plans to commence service to West Palm Beach, Florida in January 2001 and will
begin service to at least one other new city in 2001. In addition, we plan to
continue to add flights and additional frequencies between cities we already
serve.
Capacity is expected to grow approximately 11 percent in 2001 with the net
addition of 21 aircraft. The Company will acquire 25 new Boeing 737-700s
scheduled for delivery during the year and plans to retire four of the Company's
older 737-200s.
RESULTS OF OPERATIONS
2000 COMPARED WITH 1999 The Company's consolidated income for 2000 before the
cumulative effect of a change in accounting principle was $625.2 million ($1.18
per share, diluted), an increase of 31.8 percent. The cumulative change in
accounting principle, related to the adoption of SEC Staff Accounting Bulletin
No. 101, was $22.1 million, net of taxes of $14.0 million (see Note 2 to the
Consolidated Financial Statements). Net income, after the cumulative change in
accounting principle, was $603.1 million. Diluted net income per share, after
consideration of the accounting change, was $1.14 compared to $.89 in 1999.
Operating income was $1,021.1 million, an increase of 30.7 percent compared to
1999.
OPERATING REVENUES Consolidated operating revenues increased 19.3 percent
primarily due to a 19.8 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 marketing and revenue
management. The Company experienced a 10.7 percent increase in revenue
passengers carried, a 15.7 percent increase in revenue passenger miles (RPMs),
and a 3.6 percent increase in passenger revenue yield per RPM (passenger yield).
The increase in passenger yield was primarily due to an 8.2 percent increase in
average passenger fare, partially offset by a 4.6
11
13
percent increase in average length of passenger haul. The increase in average
passenger fare was primarily due to modest fare increases taken combined with a
higher mix of full-fare passengers.
The increase in RPMs exceeded a 13.3 percent increase in available seat miles
(ASMs) resulting in a load factor of 70.5 percent, or 1.5 points above the prior
year. The increase in ASMs resulted primarily from the net addition of 32
aircraft during the year. Thus far, load factors in January 2001 have exceeded
those experienced in January 2000. Bookings for February and March are also good
and we presently anticipate positive year-over-year unit revenue (operating
revenues divided by ASMs) comparisons again in first quarter 2001, although we
do not expect to match the fourth quarter 2000 year-over-year unit revenue
growth rate of 7.8 percent. (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,
operational disruptions as a result of bad weather, industry consolidation, air
traffic control related difficulties, the impact of labor issues, and variations
in advance booking trends.)
Freight revenues increased 7.5 percent primarily due to an increase in capacity.
Other revenues, which consist primarily of charter revenues, increased 1.2
percent. This increase was less than the Company's increase in capacity
primarily due to the Company's decision to utilize more of its aircraft to
satisfy the strong demand for scheduled service and, therefore, make fewer
aircraft available for charters.
OPERATING EXPENSES Consolidated operating expenses for 2000 increased 17.1
percent, compared to the 13.3 percent increase in capacity. Operating expenses
per ASM increased 3.3 percent to $.0773, compared to $.0748 in 1999, primarily
due to an increase in average jet fuel prices. The average fuel cost per gallon
in 2000 was $.7869, which was the highest annual average fuel cost per gallon
experienced by the Company since 1984. Excluding fuel expense, operating
expenses per ASM decreased 2.6 percent.
Operating expenses per ASM for 2000 and 1999 were as follows:
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14
Increase Percent
2000 1999 (Decrease) Change
---------- ---------- ---------- -------
Salaries, wages, and benefits 2.41(cent) 2.39(cent) .02(cent) .8 %
Employee retirement plans .40 .36 .04 11.1
Fuel and oil 1.34 .93 .41 44.1
Maintenance materials and repairs .63 .70 (.07) (10.0)
Agency commissions .27 .30 (.03) (10.0)
Aircraft rentals .33 .38 (.05) (13.2)
Landing fees and other rentals .44 .46 (.02) (4.3)
Depreciation .47 .47 -- --
Other 1.44 1.49 (.05) (3.4)
---- ---- --- ----
Total 7.73(cent) 7.48(cent) .25(cent) 3.3 %
==== ==== === ====
Salaries, wages, and benefits per ASM increased slightly, as increases in
productivity in several of the Company's operational areas were more than offset
by higher benefits costs, primarily workers' compensation expense, and increases
in average wage rates within certain workgroups.
The Company's Ramp, Operations, and Provisioning Agents are subject to an
agreement with the Transport Workers Union of America, (TWU), which became
amendable in December 1999. Southwest is currently in negotiations with TWU for
a new contract. The Company's Mechanics are subject to an agreement with the
International Brotherhood of Teamsters (the Teamsters), which becomes amendable
in August 2001.
Retirement plans expense per ASM increased 11.1 percent, primarily due to the
increase in Company earnings available for profitsharing.
Fuel and oil expense per ASM increased 44.1 percent, primarily due to a 49.3
percent increase in the average jet fuel cost per gallon. The average price per
gallon of jet fuel in 2000 was $.7869 compared to $.5271 in 1999, including the
effects of hedging activities. The Company's 2000 and 1999 average jet fuel
prices are net of approximately $113.5 million and $14.8 million in gains from
hedging activities, respectively. As detailed in Note 7 to the Consolidated
Financial Statements, the Company has hedges in place for the majority of its
anticipated fuel consumption in 2001 at prices below market prices as of
December 31, 2000. Including estimated hedging gains and considering current
market prices and the anticipated impact of the adoption of Statement of
Financial Accounting Standards No. 133 (SFAS 133) (see Recent Accounting
Developments in Note 1 to the Consolidated Financial Statements), we are
forecasting our first quarter 2001 average fuel price per gallon to be no higher
than first quarter 2000's average price per gallon of $.82. (The immediately
preceding sentence is a forward-looking statement which involves uncertainties
that could result in actual results differing materially from expected results.
Such uncertainties include, but may not be limited to, the largely unpredictable
levels of jet fuel prices and the effectiveness of the Company's hedges.)
13
15
Maintenance materials and repairs per ASM decreased 10.0 percent primarily
because of a decrease in engine maintenance expense for the Company's 737-200
aircraft fleet as 1999 was an unusually high period for engine maintenance on
these aircraft. The -200 engine repairs are expensed on a time and materials
basis. These engine repairs represented approximately 75 percent of the total
decrease, while a decrease in airframe inspections and repairs per ASM
represented the majority of the remaining total decrease. The decrease in
airframe inspections and repairs was primarily due to a greater amount of this
work being performed internally versus 1999, when a large portion of this type
of work was outsourced. Therefore, in 2000, a larger portion of the cost of
these repairs is reflected in salaries and wages. Currently, we do not expect a
significant increase in unit cost for maintenance materials and repairs in first
quarter 2001 versus first quarter 2000. (The immediately preceding sentence is a
forward-looking statement involving uncertainties that could result in actual
results differing materially from expected results. Such uncertainties include,
but may not be limited to, any unscheduled required aircraft airframe or engine
repairs and regulatory requirements.)
Agency commissions per ASM decreased 10.0 percent, primarily due to a decrease
in commissionable revenue. Approximately 31 percent of the Company's 2000
revenues were attributable to direct bookings through the Company's Internet
site compared to approximately 19 percent in the prior year. The increase in
Internet revenues contributed to the Company's percentage of commissionable
revenues decreasing from 34.6 percent in 1999 to 29.1 percent in 2000. The
Company recently announced a change in its commission rate policy. Beginning
January 1, 2001, the Company will decrease the commission it pays to travel
agents from ten percent to eight percent for ticketless bookings, and from ten
percent to five percent for paper ticket bookings. The Company will continue to
pay no commission on internet agency bookings. Based on the policy change, the
Company expects agency commissions to decrease on a per-ASM basis in 2001. (The
immediately preceding sentence is a forward-looking statement involving
uncertainties that could result in actual results differing materially from
expected results. Such uncertainties include, but may not be limited to, changes
in consumer ticket purchasing habits.)
Aircraft rentals decreased 13.2 percent primarily due to a lower percentage of
the aircraft fleet being leased. Approximately 27.3 percent of the Company's
aircraft were under operating lease at December 31, 2000, compared to 30.8
percent at December 31, 1999. Based on the Company's current new aircraft
delivery schedule and scheduled aircraft retirements for 2001, we expect a
decline in aircraft rental expense per ASM in 2001. (The immediately preceding
sentence is a forward-looking statement involving uncertainties that could
result in actual results differing materially from expected results. Such
uncertainties include, but may not be limited to, changes in the Company's
current schedule for purchase and/or retirement of aircraft.)
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 a 5.8 percent increase in stage length (the
average distance per aircraft trip flown).
14
16
Other operating expenses per ASM decreased 3.4 percent primarily due to
Company-wide cost reduction efforts. The Company also reduced its advertising
expense 9.5% per ASM, taking advantage of our national presence, increasing
brand awareness, and strong Customer demand.
OTHER "Other expenses (income)" included interest expense, capitalized interest,
interest income, and other gains and losses. Interest expense increased 29.1
percent due primarily to the Company's issuance of $256 million of long-term
debt in fourth quarter 1999. Capitalized interest decreased 11.9 percent
primarily as a result of lower 2000 progress payment balances for scheduled
future aircraft deliveries compared to 1999. Interest income increased 59.0
percent primarily due to higher invested cash balances and higher rates of
return. Other losses in 1999 resulted primarily from a write-down associated
with the consolidation of certain software development projects.
INCOME TAXES The provision for income taxes, as a percentage of income before
taxes, decreased slightly to 38.54 percent in 2000 from 38.68 percent in 1999.
1999 COMPARED WITH 1998 The Company's consolidated net income for 1999 was
$474.4 million ($.89 per share, diluted), as compared to the corresponding 1998
amount of $433.4 million ($.82 per share, diluted), an increase of 9.4 percent.
Operating income increased 14.3 percent to $781.6 million.
OPERATING REVENUES Consolidated operating revenues increased 13.7 percent
primarily due to a 13.8 percent increase in passenger revenues. The increase in
passenger revenues was primarily due to a 9.3 percent increase in revenue
passengers carried and a 16.1 percent increase in RPMs. The passenger yield
decreased 2.0 percent to $.1251 primarily due to an increase in average length
of passenger haul of 6.2 percent partially offset by a 4.1 percent increase in
average passenger fare.
The 16.1 percent increase in RPMs exceeded the 11.2 percent increase in ASMs,
resulting in an increase in load factor from 66.1 percent in 1998 to 69.0
percent in 1999. The 1999 ASM growth resulted from the net addition of 32
aircraft during the year.
Freight revenues increased 4.6 percent compared to 1998 primarily due to added
capacity and modest rate increases. Other revenues increased 26.2 percent
primarily due to an increase in charter revenue.
OPERATING EXPENSES Consolidated operating expenses increased 13.6 percent,
compared to the 11.2 percent increase in capacity. Operating expenses per ASM
increased 2.2 percent in 1999 primarily due to a 15.4 percent increase in
average jet fuel prices. Excluding fuel expense, operating expenses per ASM for
1999 increased .8 percent.
Salaries, wages, and benefits per ASM increased 1.7 percent in 1999. This
increase resulted primarily from increases in benefits costs, specifically
workers' compensation and health care expense.
15
17
Retirement plans expense per ASM increased slightly due to higher earnings
available for profitsharing.
Fuel and oil expenses per ASM increased 13.4 percent primarily due to a 15.4
percent increase in the average jet fuel cost per gallon. The average price paid
for jet fuel in 1999 was $.5271, including the effects of hedging activities,
compared to $.4567 in 1998. The Company's 1999 average jet fuel price is net of
approximately $14.8 million in gains from hedging activities. Hedging activities
in 1998 were not significant.
Maintenance materials and repairs expense per ASM increased 9.4 percent in 1999
compared to 1998. Routine heavy maintenance or airframe inspections and repairs
represented approximately 74 percent of the increase, while engine inspection
and repair costs represented approximately 25 percent of the increase. The
increase in airframe inspections and repairs was due primarily to a heavier
volume of routine airframe checks scheduled for 1999 versus 1998. Further, a
portion of the Company's scheduled airframe checks was outsourced in 1999 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 inspection
and repair costs were primarily related to the Company's 737-200 aircraft. The
Company's 737-200 aircraft engine inspections and repairs 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 aircraft experienced an increase both in the number of engine
inspections and repairs and the average cost per repair.
Agency commissions per ASM decreased 9.1 percent primarily due to a decrease in
the percentage of commissionable revenues to 34.8 percent of total revenues in
1999 compared to 39.8 percent in 1998. The decrease in percentage of
commissionable revenues was primarily due to the growth in tickets purchased via
the Company's website from approximately 8 percent in 1998 to approximately 19
percent in 1999.
Aircraft rentals per ASM decreased 11.6 percent primarily due to a lower
percentage of the aircraft fleet being leased. Approximately 30.8 percent of the
Company's aircraft fleet were under operating lease at December 31, 1999,
compared to 35.4 percent at December 31, 1998.
Depreciation expense per ASM was flat for 1999 compared to 1998. Although the
Company owned a higher percentage of its aircraft fleet in 1999 versus 1998,
unit cost was flat due to a change in the estimated useful lives of the
Company's Boeing 737-300/-500 aircraft from 20 years to 23 years. See Note 2 to
the Consolidated Financial Statements. This change in accounting estimate was
made January 1, 1999, and resulted in a decrease to depreciation expense of
approximately $25.7 million for 1999.
Other operating expenses per ASM increased .7 percent primarily due to increased
credit card processing costs resulting from a higher percentage of the Company's
ticket sales purchased with credit cards.
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18
OTHER "Other expenses (income)" included interest expense, capitalized interest,
interest income, and other gains and losses. Interest expense decreased 3.8
percent primarily due to the February 1998 redemption of $100 million of senior
unsecured 9 1/4% Notes originally issued in February 1991. Capitalized interest
increased 22.2 percent as a result of higher progress payment balances for
scheduled future aircraft deliveries. Interest income decreased 18.9 percent
primarily due to lower invested cash balances. Other losses in 1999 resulted
primarily from a write-down associated with the consolidation of certain
software development projects. Other gains in 1998 primarily consisted of
contractual penalties received from Boeing due to delays in the delivery of
737-700 aircraft.
INCOME TAXES The provision for income taxes, as a percentage of income before
taxes, increased slightly to 38.68 percent in 1999 from 38.53 percent in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.3 billion in 2000 compared to
$1.0 billion in 1999. The increase in operating cash flows was primarily due to
the increase in operating income. Cash generated in 2000 was primarily used to
finance aircraft-related capital expenditures, provide working capital, and
repurchase approximately 6.7 million shares of Company stock.
During 2000, net capital expenditures were $1.1 billion, which primarily related
to the purchase of 33 new and one used 737-700 aircraft, and progress payments
for future aircraft deliveries.
At December 31, 2000, capital commitments of the Company primarily consisted of
scheduled aircraft acquisitions and related flight equipment. As of December 31,
2000, Southwest had 146 new 737-700s on firm order through 2007, including 25 to
be delivered in 2001. The Company also has options to purchase another 87
737-700s during 2003-2008 and purchase rights for an additional 217 737-700s
during 2007-2012. Aggregate funding required for firm commitments approximated
$4.0 billion through the year 2007, of which $668.3 million relates to 2001. See
Note 3 to the Consolidated Financial Statements for further information on
commitments.
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 are 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 December 31, 2000, in
aggregate, 12.2 million shares had been repurchased at a total cost of $199.2
million, of which $108.7 million was completed in 2000.
The Company has various options available to meet its capital and operating
commitments, including cash on hand at December 31, 2000, of $523 million,
internally generated funds, and a revolving credit line with a group of banks of
up to $475 million (none of which had been drawn at December 31, 2000). In
addition, the Company will also consider various borrowing or leasing options to
maximize earnings and supplement cash requirements.
17
19
The Company currently has outstanding shelf registrations for the issuance of
$318.8 million of public debt securities, which it may utilize for aircraft
financings in 2001 and 2002.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Southwest has interest rate risk in that it holds floating rate debt instruments
and has commodity price risk in that it must purchase jet fuel to operate its
aircraft fleet. The Company purchases jet fuel at prevailing market prices, but
seeks to minimize its average jet fuel cost through execution of a documented
hedging strategy. Southwest has market sensitive instruments in the form of the
types of hedges it utilizes to decrease its exposure to jet fuel price increases
and with fixed rate debt instruments. The Company also operates 101 aircraft
under operating and capital leases. However, leases are not considered market
sensitive financial instruments and, therefore, are not included in the interest
rate sensitivity analysis below. Commitments related to leases are disclosed in
Note 6 to the Consolidated Financial Statements. The Company does not purchase
or hold any derivative financial instruments for trading purposes.
Airline operators are inherently dependent upon energy to operate and,
therefore, are impacted by changes in jet fuel prices. Jet fuel and oil consumed
in 2000 and 1999 represented approximately 17.4 and 12.5 percent of Southwest's
operating expenses, respectively. Southwest endeavors to acquire jet fuel at the
lowest prevailing prices possible. Because jet fuel is not traded on an
organized futures exchange, liquidity for hedging is limited. However, the
Company has found that crude oil contracts and heating oil contracts are
effective commodities for hedging jet fuel.
The Company utilizes financial derivative instruments for both short-term and
long-term time frames when it appears the Company can take advantage of market
conditions. At December 31, 2000, the Company had a mixture of purchased call
options, collar structures, and fixed price swap agreements in place to hedge
approximately 80 percent of its 2001 total anticipated jet fuel requirements,
approximately 32 percent of its 2002 total anticipated jet fuel requirements,
and a small portion of its 2005 total anticipated jet fuel requirements. As of
December 31, 2000, nearly all of the Company's 2001 hedges, and the majority of
its 2002 hedges, are effectively heating oil-based positions. All remaining
hedge positions are crude oil-based positions. The amounts related to all the
Company's fuel hedge positions contained in the Consolidated Balance Sheet at
December 31, 2000 was $22.5 million, which represents the aggregate net premium
cost paid for option and/or collar agreements. This amount is classified as
prepaid expense in current assets. The Company's fuel hedging strategy could
result in the Company not fully benefiting from certain jet fuel price declines.
See Note 7 to the Consolidated Financial Statements for further detail on the
Company's financial derivative instruments. Also see Recent Accounting
Developments in Note 1 to the Consolidated Financial Statements regarding the
new accounting requirements for financial derivative instruments effective
January 1, 2001.
The fair values of outstanding financial derivative instruments related to the
Company's jet fuel market price risk at December 31, 2000, including amounts
contained in the Consolidated Balance Sheet at December 31, 2000, was
approximately $98.3 million. A hypothetical ten
18
20
percent increase or decrease in the underlying fuel-related commodity prices
from the December 31, 2000, prices would correspondingly change the fair value
of the derivative commodity instruments in place and their related cash flows up
to approximately $2.4 million.
Airline operators are also inherently capital intensive, as the vast majority of
the Company's assets are aircraft, which are long-lived. The Company's strategy
is to capitalize conservatively and grow capacity steadily and profitably. While
the Company uses financial leverage, it has maintained a strong balance sheet
and an "A" credit rating on its senior unsecured fixed-rate debt with Standard &
Poor's and a "A-" or equivalent credit ratings with two other rating agencies
(Moody's and Fitch). The Company's Aircraft Secured Notes ($200 million) and
French Credit Agreements ($54 million) do not give rise to significant fair
value risk but do give rise to interest rate risk because these borrowings are
floating-rate debt. Although there is interest rate risk associated with these
secured borrowings, the risk is somewhat mitigated by the fact that the Company
may prepay this debt on any of the semi-annual principal and interest payment
dates. See Note 5 to the Consolidated Financial Statements for more information
on these borrowings.
As disclosed in Note 5 to the Consolidated Financial Statements, the Company had
outstanding senior unsecured notes totaling $500 million at December 31, 2000
and 1999. These long-term notes represent only 8.6 percent and 10.0 percent of
total noncurrent assets at December 31, 2000 and 1999, respectively. The
unsecured long-term debt currently has an average maturity of 8.1 years at fixed
rates averaging 8.3 percent at December 31, 2000, which is comparable to average
rates prevailing over the last ten years. The Company does not have significant
exposure to changing interest rates on its unsecured long-term debt because the
interest rates are fixed and the financial leverage is modest.
Additionally, the Company does not have significant exposure to changing
interest rates on invested cash, which was $523 million and $419 million at
December 31, 2000 and 1999, respectively. The Company invests available cash in
certificates of deposit and investment grade commercial paper that generally
have maturities of three months or less. As a result, the interest rate market
risk implicit in these investments at December 31, 2000, is low, as the
investments generally mature within three months. The Company has not undertaken
any additional actions to cover interest rate market risk and is not a party to
any other material interest rate market risk management activities.
A hypothetical ten percent change in market interest rates over the next year
would not have a material effect on the fair value of the Company's debt
instruments or its short-term cash investments. See Note 7 to the Consolidated
Financial Statements for further information on the fair value of the Company's
financial instruments. Because of the floating rate nature of the Company's
secured borrowings, a ten percent change in market interest rates as of December
31, 2000, would correspondingly change the Company's earnings and cash flows by
approximately $1.1 million in 2001. However, a ten percent change in market
rates would not impact the Company's earnings or cash flow associated with the
Company's publicly traded fixed-rate debt or its cash investments.
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21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SOUTHWEST AIRLINES CO.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts) DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 522,995 $ 418,819
Accounts and other receivables (Note 7) 138,070 75,038
Inventories of parts and supplies, at cost 80,564 65,152
Deferred income taxes (Note 11) 28,005 20,929
Prepaid expenses and other current assets 61,902 52,657
----------- -----------
Total current assets 831,536 632,595
Property and equipment, at cost (Notes 3, 5, and 6):
Flight equipment 6,831,913 5,768,506
Ground property and equipment 800,718 742,230
Deposits on flight equipment purchase contracts 335,164 338,229
----------- -----------
7,967,795 6,848,965
Less allowance for depreciation 2,148,070 1,840,799
----------- -----------
5,819,725 5,008,166
Other assets 18,311 12,942
----------- -----------
$ 6,669,572 $ 5,653,703
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 312,716 $ 266,735
Accrued liabilities (Note 4) 499,874 430,506
Air traffic liability 377,061 256,942
Current maturities of long-term debt (Note 5) 108,752 7,873
----------- -----------
Total current liabilities 1,298,403 962,056
Long-term debt less current maturities (Note 5) 760,992 871,717
Deferred income taxes (Note 11) 852,865 692,342
Deferred gains from sale and leaseback of aircraft 207,522 222,700
Other deferred liabilities 98,470 69,100
Commitments and contingencies (Notes 3, 6, and 11)
Stockholders' equity (Notes 8 and 9):
Common stock, $1.00 par value: 1,300,000 shares authorized;
507,897 and 505,005 shares issued in 2000
and 1999, respectively 507,897 505,005
Capital in excess of par value 103,780 35,436
Retained earnings 2,902,007 2,385,854
Treasury stock, at cost: 3,735 and 5,579 shares in
2000 and 1999, respectively (62,364) (90,507)
----------- -----------
Total stockholders' equity 3,451,320 2,835,788
----------- -----------
$ 6,669,572 $ 5,653,703
=========== ===========
See accompanying notes.
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SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
(In thousands, except per share amounts) 2000 1999 1998
----------- ----------- -----------
OPERATING REVENUES:
Passenger $ 5,467,965 $ 4,562,616 $ 4,010,029
Freight 110,742 102,990 98,500
Other 70,853 69,981 55,451
----------- ----------- -----------
Total operating revenues 5,649,560 4,735,587 4,163,980
OPERATING EXPENSES:
Salaries, wages, and benefits (Note 10) 1,683,689 1,455,237 1,285,942
Fuel and oil 804,426 492,415 388,348
Maintenance materials and repairs 378,470 367,606 302,431
Agency commissions 159,309 156,419 157,766
Aircraft rentals 196,328 199,740 202,160
Landing fees and other rentals 265,106 242,002 214,907
Depreciation (Note 2) 281,276 248,660 225,212
Other operating expenses 859,811 791,932 703,603
----------- ----------- -----------
Total operating expenses 4,628,415 3,954,011 3,480,369
----------- ----------- -----------
OPERATING INCOME 1,021,145 781,576 683,611
OTHER EXPENSES (INCOME):
Interest expense 69,889 54,145 56,276
Capitalized interest (27,551) (31,262) (25,588)
Interest income (40,072) (25,200) (31,083)
Other (gains) losses, net 1,515 10,282 (21,106)
----------- ----------- -----------
Total other expenses (income) 3,781 7,965 (21,501)
----------- ----------- -----------
INCOME BEFORE TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 1,017,364 773,611 705,112
PROVISION FOR INCOME TAXES (NOTE 11) 392,140 299,233 271,681
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 625,224 474,378 433,431
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF INCOME TAXES (NOTE 2) (22,131) -- --
----------- ----------- -----------
NET INCOME $ 603,093 $ 474,378 $ 433,431
=========== =========== ===========
NET INCOME PER SHARE, BASIC BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 1.25 $ .94 $ .87
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (.04) -- --
----------- ----------- -----------
NET INCOME PER SHARE, BASIC (NOTE 8, 9, AND 12) $ 1.21 $ .94 $ .87
=========== =========== ===========
NET INCOME PER SHARE, DILUTED BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ 1.18 $ .89 $ .82
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (.04) -- --
----------- ----------- -----------
NET INCOME PER SHARE, DILUTED (NOTE 8, 9, AND 12) $ 1.14 $ .89 $ .82
=========== =========== ===========
See accompanying notes.
21
23
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
-------------------------------------------------------------------------
COMMON CAPITAL IN EXCESS RETAINED TREASURY
(In thousands, except per share amounts) STOCK OF PAR VALUE EARNINGS STOCK TOTAL
----------- ----------------- ----------- ----------- -----------
Balance at December 31, 1997 $ 221,207 $ 155,696 $ 1,632,115 $ -- $ 2,009,018
Three-for-two stock split (Note 8) 111,894 (111,894) -- -- --
Purchase of shares of treasury stock (Note 8) -- -- -- (100,000) (100,000)
Issuance of common stock pursuant to
Employee stock plans (Note 9) 2,803 24,434 (10,184) 27,219 44,272
Tax benefit of options exercised -- 21,584 -- -- 21,584
Cash dividends, $.0189 per share -- -- (10,387) -- (10,387)
Net income - 1998 -- -- 433,431 -- 433,431
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 335,904 89,820 2,044,975 (72,781) 2,397,918
Three-for-two stock split (Note 8) 167,954 (89,878) (78,076) -- --
Purchase of shares of treasury stock (Note 8) -- -- -- (90,507) (90,507)
Issuance of common and treasury stock
pursuant to Employee stock
plans (Note 9) 1,147 7,811 (45,134) 72,781 36,605
Tax benefit of options exercised -- 27,683 -- -- 27,683
Cash dividends, $.0215 per share -- -- (10,289) -- (10,289)
Net income - 1999 -- -- 474,378 -- 474,378
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1999 505,005 35,436 2,385,854 (90,507) 2,835,788
Purchase of shares of treasury stock (Note 8) -- -- -- (108,674) (108,674)
Issuance of common and treasury stock
pursuant to Employee stock
plans (Note 9) 2,892 6,667 (75,952) 136,817 70,424
Tax benefit of options exercised -- 61,677 -- -- 61,677
Cash dividends, $.0220 per share -- -- (10,988) -- (10,988)
Net income - 2000 -- -- 603,093 -- 603,093
----------- ----------- ----------- ----------- -----------
Balance at December 31, 2000 $ 507,897 $ 103,780 $ 2,902,007 $ (62,364) $ 3,451,320
=========== =========== =========== =========== ===========
See accompanying notes.
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SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(In thousands) 2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 603,093 $ 474,378 $ 433,431
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 281,276 248,660 225,212
Deferred income taxes 153,447 142,940 108,335
Amortization of deferred gains on sale and leaseback of aircraft (15,178) (15,172) (15,251)
Amortization of scheduled airframe inspections & repairs 36,328 28,949 22,763
Income tax benefit from Employee stock option exercises 61,677 27,683 21,584
Changes in certain assets and liabilities:
Accounts and other receivables (63,032) 13,831 (12,269)
Other current assets (24,657) (31,698) 1,589
Accounts payable and accrued liabilities 129,438 66,081 50,903
Air traffic liability 120,119 56,864 46,737
Other 15,775 16,877 3,101
----------- ----------- -----------
Net cash provided by operating activities 1,298,286 1,029,393 886,135
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,134,644) (1,167,834) (947,096)
----------- ----------- -----------
Net cash used in investing activities (1,134,644) (1,167,834) (947,096)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt -- 255,600 --
Payments of long-term debt and
capital lease obligations (10,238) (12,107) (118,859)
Payments of cash dividends (10,978) (10,842) (9,284)
Proceeds from Employee stock plans 70,424 36,605 44,272
Repurchases of common stock (108,674) (90,507) (100,000)
----------- ----------- -----------
Net cash provided by (used in) financing activities (59,466) 178,749 (183,871)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 104,176 40,308 (244,832)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 418,819 378,511 623,343
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 522,995 $ 418,819 $ 378,511
=========== =========== ===========
CASH PAYMENTS FOR:
Interest, net of amount capitalized $ 36,946 $ 26,604 $ 33,384
Income taxes $ 150,000 $ 131,968 $ 147,447
See accompanying notes.
23
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Southwest Airlines Co. (Southwest) is a major domestic
airline that provides primarily shorthaul, high-frequency, point-to-point,
low-fare service. The consolidated financial statements include the accounts of
Southwest and its wholly owned subsidiaries (the Company). All significant
intercompany balances and transactions have been eliminated. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates. Certain prior year amounts
have been restated to conform to the current year presentation.
CASH AND CASH EQUIVALENTS Cash equivalents consist of certificates of deposit
and investment grade commercial paper issued by major corporations and financial
institutions. Cash and cash equivalents are highly liquid and generally have
original maturities of three months or less. Cash and cash equivalents are
carried at cost, which approximates market value.
INVENTORIES Inventories of flight equipment expendable parts, materials, and
supplies are carried at average cost. These items are generally charged to
expense when issued for use.
PROPERTY AND EQUIPMENT Depreciation is provided by the straight-line method to
estimated residual values over periods ranging from 20 to 25 years for flight
equipment and 3 to 30 years for ground property and equipment. See Note 2 for
further information on aircraft depreciation. Property under capital leases and
related obligations are recorded at an amount equal to the present value of
future minimum lease payments computed on the basis of the Company's incremental
borrowing rate or, when known, the interest rate implicit in the lease.
Amortization of property under capital leases is on a straight-line basis over
the lease term and is included in depreciation expense. The Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the undiscounted
cash flows to be generated by those assets are less than the carrying amounts of
those assets.
AIRCRAFT AND ENGINE MAINTENANCE The cost of scheduled engine inspections and
repairs and routine maintenance costs for aircraft and engines are charged to
maintenance expense as incurred. Scheduled airframe inspections and repairs,
known as "D" checks, are generally performed every ten years. Costs related to
"D" checks are capitalized and amortized over the estimated period benefited,
presently the least of ten years, the time until the next "D" check, or the
remaining life of the aircraft. Modifications that significantly enhance the
operating performance or extend the useful lives of aircraft or engines are
capitalized and amortized over the remaining life of the asset.
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26
REVENUE RECOGNITION Passenger revenue is recognized when transportation is
provided. Tickets sold but not yet used are included in "Air traffic liability,"
which includes estimates that are evaluated and adjusted periodically. Any
adjustments resulting therefrom are included in results of operations for the
periods in which the evaluations are completed.
FREQUENT FLYER PROGRAM The Company accrues the estimated incremental cost of
providing free travel for awards earned under its Rapid Rewards frequent flyer
program. The Company also sells flight segment credits and related services to
companies participating in its Rapid Rewards frequent flyer program. Prior to
2000, revenue from the sale of flight segment credits was recognized when the
credits were sold. However, beginning January 1, 2000, funds received from the
sale of flight segment credits and associated with future travel is deferred and
recognized as "Passenger revenue" when the ultimate free travel awards are flown
or the credits expire unused (see Note 2).
ADVERTISING The Company expenses the costs of advertising as incurred.
Advertising expense for the years ended December 31, 2000, 1999, and 1998 was
$141.3 million, $137.7 million, and $119.7 million, respectively.
STOCK-BASED EMPLOYEE COMPENSATION Pursuant to Statement of Financial Accounting
Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, the
Company accounts for stock-based compensation plans utilizing the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued
to Employees and related Interpretations. See Note 9.
FINANCIAL DERIVATIVE INSTRUMENTS The Company utilizes a variety of derivative
instruments, including both crude oil and heating oil based derivatives, to
hedge a portion of its exposure to jet fuel price increases. These instruments
consist primarily of purchased call options, collar structures, and fixed price
swap agreements. The net cost paid for option premiums and gains and losses on
fixed price swap agreements, including those terminated or settled early, are
deferred and charged or credited to fuel expense in the same month that the
underlying jet fuel being hedged is used. Hedging gains and losses are recorded
as a reduction of fuel and oil expense. Beginning January 1, 2001, the Company
will adopt Statement of Financial Accounting Standards No. 133 (SFAS 133),
Accounting for Derivative Instruments and Hedging Activities which will change
the way it accounts for financial derivative instruments. See Recent Accounting
Developments.
RECENT ACCOUNTING DEVELOPMENTS In 1998, the Financial Accounting Standards Board
(FASB) issued SFAS 133. SFAS 133, as amended, is required to be adopted in
fiscal years beginning after June 15, 2000. The Company will adopt SFAS 133
effective January 1, 2001. SFAS 133 will require the Company to record all
derivatives on its balance sheet at fair value. Derivatives that are not
designated as 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 that are considered to be effective, as
defined, will either offset the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or will be recorded in other
comprehensive income until the hedged item is recorded in earnings. Any portion
of a change in a derivative's fair value that is considered to be ineffective,
as defined, may have to be immediately recorded in
25
27
earnings. Any portion of a change in a derivative's fair value that the Company
has elected to exclude from its measurement of effectiveness, such as the change
in time value of option contracts, will be recorded in earnings.
The Company will 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 January 1, 2001, the fair value of the
Company's fuel hedge derivative instruments was approximately $98.3 million, of
which approximately $75.8 million was not recorded in the Consolidated Balance
Sheet. The $75.8 million will be recorded as an asset on the Company's balance
sheet as part of the transition adjustment related to the Company's adoption of
SFAS 133. The offset to this balance sheet adjustment will be an increase to
"Accumulated other comprehensive income", a component of stockholders' equity.
The portion of the transition adjustment in "Accumulated other comprehensive
income" that relates to 2001 hedge positions, based on fair value as of January
1, 2001, is approximately $73.9 million and will be reclassified into earnings
during 2001. The remainder of the transition amount will be reclassified to
earnings in periods subsequent to 2001. The Company believes the adoption of
SFAS 133 will result in more volatility in its financial statements than in the
past.
2. ACCOUNTING CHANGES
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 resulting from
the flight segment credits sold are earned and flown or credits expire unused.
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 impact in 2000 of adopting SAB 101 was to reduce
net income, before the cumulative effect of accounting change, by $4.6 million.
Excluding the impact of the change, basic and diluted net income per share for
2000, before the cumulative effect of accounting change, would have been $1.26
and $1.19, 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."
Adopting this new method of accounting for 1999 and 1998 would have produced the
following pro forma results (in thousands, except per share amounts):
26
28
As reported, before the cumulative
effect of accounting change 2000 1999 1998
----------- ----------- -----------
Net income $ 625,224 $ 474,378 $ 433,431
Net income per share, basic $ 1.25 $ .94 $ .87
Net income per share, diluted $ 1.18 $ .89 $ .82
Pro forma, before the cumulative
effect of accounting change 2000 1999 1998
----------- ----------- -----------
Net income $ 625,224 $ 470,439 $ 428,449
Net income per share, basic $ 1.25 $ .94 $ .86
Net income per share, diluted $ 1.18 $ .88 $ .81
Effective January 1, 1999, the Company revised the estimated useful lives of its
737-300 and -500 aircraft from 20 years to 23 years. This change was the result
of the Company's assessment of the remaining useful lives of the aircraft based
on the manufacturer's design lives, the Company's increased average aircraft
stage (trip) length, and the Company's previous experience. The effect of this
change was to reduce depreciation expense approximately $25.7 million and
increase net income $.03 per diluted share for the year ended December 31, 1999.
3. COMMITMENTS
The Company's contractual purchase commitments consist primarily of scheduled
aircraft acquisitions. Twenty-five 737-700 aircraft are scheduled for delivery
in 2001, 27 in 2002, 13 in 2003, 29 in 2004, five in 2005, and 47 thereafter. In
addition, the Company has options to purchase up to 87 737-700s during 2003-2008
and purchase rights for an additional 217 737-700s 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 firm commitments is
approximately $4.0 billion, subject to adjustments for inflation, due as
follows: $668.3 million in 2001, $766.3 million in 2002, $472.2 million in 2003,
$640.7 million in 2004, $379.4 million in 2005, and $1.0 billion thereafter.
27
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4. ACCRUED LIABILITIES
(In thousands) 2000 1999
-------- --------
Retirement plans (Note 10) $180,340 $138,566
Aircraft rentals 117,302 131,219
Vacation pay 72,115 62,937
Other 130,117 97,784
-------- --------
$499,874 $430,506
======== ========
5. LONG-TERM DEBT
(In thousands) 2000 1999
-------- --------
9.4% Notes due 2001 $100,000 $100,000
8 3/4% Notes due 2003 100,000 100,000
Aircraft Secured Notes due 2004 200,000 200,000
8% Notes due 2005 100,000 100,000
7 7/8% Notes due 2007 100,000 100,000
French Credit Agreements 54,243 55,844
7 3/8% Debentures due 2027 100,000 100,000
Capital leases (Note 6) 117,083 123,834
Other -- 1,886
-------- --------
871,326 881,564
Less current maturities 108,752 7,873
Less debt discount 1,582 1,974
-------- --------
$760,992 $871,717
======== ========
In fourth quarter 1999, the Company issued $200 million of floating rate
Aircraft Secured Notes, due 2004. The Notes are funded by a bank through a
commercial paper conduit program and are secured by eight aircraft. Interest
rates on the Notes are based on the conduit's actual commercial paper rate, plus
fees, for each period and are expected to average approximately LIBOR plus 36
basis points over the term of the Notes. Interest is payable monthly and the
Company can prepay the Notes in whole or in part prior to maturity.
Also in fourth quarter 1999, the Company entered into two identical 13-year
floating rate financing arrangements, whereby it effectively borrowed a total of
$56 million from French banking partnerships. For presentation purposes, the
Company has classified these identical borrowings as one $56 million
transaction. The effective rate of interest over the 13-year term of the loans
is LIBOR plus 32 basis points. Principal and interest are payable semi-annually
on June 30 and December 31 for each of the loans and the Company may terminate
the arrangements in any year on either of those dates, with certain conditions.
The Company has pledged two aircraft as collateral for the entire transaction.
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On February 28, 1997, the Company issued $100 million of senior unsecured 7 3/8%
Debentures due March 1, 2027. Interest is payable semi-annually on March 1 and
September 1. The Debentures may be redeemed, at the option of the Company, in
whole at any time or in part from time to time, at a redemption price equal to
the greater of the principal amount of the Debentures plus accrued interest at
the date of redemption or the sum of the present values of the remaining
scheduled payments of principal and interest thereon, discounted to the date of
redemption at the comparable treasury rate plus 20 basis points, plus accrued
interest at the date of redemption.
On March 7, 1995, the Company issued $100 million of senior unsecured 8% Notes
due March 1, 2005. Interest is payable semi-annually on March 1 and September 1.
The Notes are not redeemable prior to maturity.
On September 9, 1992, the Company issued $100 million of senior unsecured 7 7/8%
Notes due September 1, 2007. Interest is payable semi-annually on March 1 and
September 1. The Notes are not redeemable prior to maturity.
During 1991, the Company issued $100 million of senior unsecured 9.4% Notes and
$100 million of senior unsecured 8 3/4% Notes due July 1, 2001 and October 15,
2003, respectively. Interest on the Notes is payable semi-annually. The Notes
are not redeemable prior to maturity.
In addition to the credit facilities described above, Southwest has an unsecured
Bank Credit Agreement with a group of banks that permits Southwest to borrow
through May 6, 2002, on a revolving credit basis, up to $475 million. Interest
rates on borrowings under the Credit Agreement can be, at the option of
Southwest, the greater of the agent bank's prime rate or the federal funds rate
plus 50 basis points, LIBOR plus 17 basis points, or a fixed rate offered by the
banks at the time of borrowing. The commitment fee is 8 basis points per annum.
There were no outstanding borrowings under this agreement, or prior similar
agreements, at December 31, 2000 and 1999.
6. LEASES
Total rental expense for operating leases charged to operations in 2000, 1999,
and 1998 was $330.7 million, $318.2 million, and $305.2 million, respectively.
The majority of the Company's terminal operations space, as well as 94 aircraft,
were under operating leases at December 31, 2000. The amounts applicable to
capital leases included in property and equipment were:
(In thousands) 2000 1999
-------- --------
Flight equipment $164,909 $164,957
Less accumulated depreciation 92,763 85,722
-------- --------
$ 72,146 $ 79,235
======== ========
Future minimum lease payments under capital leases and noncancelable operating
leases with initial or remaining terms in excess of one year at December 31,
2000, were:
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CAPITAL OPERATING
(In thousands) LEASES LEASES
---------- ----------
2001 $ 17,391 $ 274,564
2002 17,561 262,142
2003 17,750 237,627
2004 17,650 213,782
2005 23,507 203,385
After 2005 78,891 1,701,793
---------- ----------
Total minimum lease payments 172,750 $2,893,293
==========
Less amount representing interest 55,667
----------
Present value of minimum lease payments 117,083
Less current portion 6,829
----------
Long-term portion $ 110,254
==========
The aircraft leases generally can be renewed at rates based on fair market value
at the end of the lease term for one to five years. Most aircraft leases have
purchase options at or near the end of the lease term at fair market value, but
generally not to exceed a stated percentage of the lessor's defined cost of the
aircraft.
7. FINANCIAL INSTRUMENTS
The Company utilizes a variety of financial derivative instruments to hedge a
portion of its exposure to jet fuel price increases. During 2000 and 1999, the
Company recognized gains of $113.5 million and $14.8 million, respectively, from
hedging activities. At December 31, 2000, approximately $49.9 million was due
from third parties, and accordingly, is included in "Accounts and other
receivables" in the accompanying Consolidated Balance Sheet. For further details
of the Company's fuel hedge positions at December 31, 2000, see Quantitative
and Qualitative Disclosures about Market Risk and Recent Accounting Developments
in Note 1. The fair value of the Company's financial derivative instruments at
December 31, 2000, was approximately $98.3 million.
Any outstanding financial derivative instruments expose the Company to credit
loss in the event of nonperformance by the counterparties to the agreements, but
the Company does not expect any of the counterparties to fail to meet their
obligations. The credit exposure related to these financial instruments is
represented by the fair value of contracts with a positive fair value at the
reporting date. To manage credit risks, the Company selects counterparties based
on credit ratings, limits its exposure to a single counterparty, and monitors
the market position of the program and its relative market position with each
counterparty. At December 31, 2000, the Company had an agreement with two
counterparties containing bilateral collateral provisions whereby cash deposits
are required if market risk exposure exceeds a specified threshold amount.
Neither the Company nor the
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counterparties exceeded the threshold amount at December 31, 2000. The Company
is in the process of negotiating similar agreements with other counterparties.
The Company does not hold or issue any financial instruments for trading
purposes.
The carrying amounts and estimated fair values of the Company's long-term debt
at December 31, 2000 were as follows:
(In thousands) CARRYING VALUE FAIR VALUE
-------------- ----------
8 3/4% Notes due 2003 $100,000 $104,854
Aircraft Secured Notes due 2004 200,000 200,000
8% Notes due 2005 100,000 104,143
7 7/8% Notes due 2007 100,000 102,620
French Credit Agreements 54,243 54,243
7 3/8% Debentures due 2027 100,000 92,092
The estimated fair values of the Company's long-term debt were based on quoted
market prices. The carrying values of all other financial instruments
approximate their fair value.
8. COMMON STOCK
The Company has one class of common stock. Holders of shares of common stock are
entitled to receive dividends when and if declared by the Board of Directors and
are entitled to one vote per share on all matters submitted to a vote of the
shareholders.
At December 31, 2000, the Company had common stock reserved for issuance
pursuant to Employee stock benefit plans (101.2 million shares) and upon
exercise of rights (179.4 million shares) pursuant to the Common Share Purchase
Rights Agreement, as amended (Agreement).
Pursuant to the Agreement, each outstanding share of the Company's common stock
is accompanied by one common share purchase right (Right). Each Right is
exercisable only in the event of a proposed takeover, as defined by the
Agreement. The Company may redeem the Rights at $.0033 per Right prior to the
time that 15 percent of the common stock has been acquired by a person or group.
If the Company is acquired, as defined in the Agreement, each Right will entitle
its holder to purchase for $4.94 that number of the acquiring company's or the
Company's common shares, as provided in the Agreement, having a market value of
two times the exercise price of the Right. The Rights will expire no later than
July 30, 2006.
On July 22, 1998, the Company's Board of Directors declared a three-for-two
stock split, distributing 111.9 million shares on August 20, 1998. 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. Unless
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33
otherwise stated, all share and per share data presented in the accompanying
consolidated financial statements and notes thereto have been restated to give
effect to these stock splits.
During third quarter 1998, the Company completed a $100 million common stock
repurchase program, resulting in the repurchase of 7.3 million shares at an
average cost of $13.65 per share. All of the acquired shares were subsequently
reissued under Employee stock plans.
On September 23, 1999, the Company's Board of Directors authorized the Company
to repurchase up to $250 million of its outstanding common stock. As of December
31, 2000, this program had resulted in the repurchase of 12.2 million shares at
an average cost of $16.28 per share. All of the acquired shares are held as
common stock in treasury, less shares reissued under Employee stock option and
purchase plans. When treasury shares are reissued, the Company uses a first-in,
first-out method and the excess of repurchase cost over reissuance price, if
any, is treated as a reduction of retained earnings.
On January 18, 2001, the Company's Board of Directors declared a three-for-two
stock split, payable to shareholders of record at the close of business on
January 26, 2001, and also increased the quarterly dividend. Shares will be
distributed on February 15, 2001. The dividend will be adjusted to $.0045 per
share quarterly on the increased number of shares outstanding. The share and per
share data presented in the accompanying consolidated financial statements and
notes thereto has not been restated to give effect to this pending 2001 stock
split.
9. STOCK PLANS
At December 31, 2000, the Company had twelve stock-based compensation plans and
other stock options outstanding, which are described below. The Company applies
APB 25 and related Interpretations in accounting for its stock-based
compensation. Accordingly, no compensation expense is recognized for its fixed
option plans because the exercise prices of the Company's Employee stock options
equal or exceed the market prices of the underlying stock on the dates of grant.
Compensation expense for other stock options is not material.
The Company has eleven fixed option plans that cover various Employee groups.
Under these plans, the Company may grant up to 127 million shares of common
stock, of which 24.6 million shares were available for granting in future
periods as of December 31, 2000. Under plans covered by collective bargaining
agreements, options granted to Employees generally have terms similar to the
term of, and vest in annual increments over the remaining life of, the
respective collective bargaining agreement. Options granted to Employees not
covered by collective bargaining agreements have ten-year terms and vest and
become fully exercisable over three, five, or ten years of continued employment,
depending upon the grant type.
Aggregated information regarding the Company's eleven fixed stock option plans,
as adjusted for stock splits, is summarized below:
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COLLECTIVE BARGAINING PLANS OTHER EMPLOYEE PLANS
--------------------------- ---------------------------
AVERAGE AVERAGE
EXERCISE EXERCISE
(In thousands, except exercise prices) OPTIONS PRICE OPTIONS PRICE
------- -------- ------- --------
Outstanding December 31, 1997 47,211 $ 6.08 24,000 $ 5.29
Granted 2,461 12.98 4,492 11.81
Exercised (3,462) 6.00 (3,861) 4.38
Surrendered (271) 6.17 (1,352) 7.07
------ ------
Outstanding December 31, 1998 45,939 6.45 23,279 6.60
Granted 1,536 17.55 3,367 18.28
Exercised (2,218) 6.20 (3,292) 4.67
Surrendered (408) 6.49 (1,134) 8.34
------ ------
Outstanding December 31, 1999 44,849 6.48 22,220 6.92
Granted 3,138 27.34 7,936 20.79
Exercised (5,263) 6.70 (4,944) 5.20
Surrendered (457) 7.73 (974) 13.00
------ ------
Outstanding December 31, 2000 42,267 $ 8.39 24,238 $12.99
====== ======
Exercisable December 31, 2000 21,881 7.01 5,957 9.31
Available for granting in future periods 7,974 16,658
The following table summarizes information about stock options outstanding under
the eleven fixed option plans at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------
OPTIONS WTD-AVERAGE OPTIONS
RANGE OF OUTSTANDING AT REMAINING WTD-AVERAGE EXERCISABLE AT WTD-AVERAGE
EXERCISE PRICES 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE 12/31/00 EXERCISE PRICE
- ---------------- -------------- ---------------- -------------- -------------- --------------
$ 1.78 TO $ 2.32 675 .1 yrs $ 1.90 675 $ 1.90
$ 3.35 TO $ 3.58 321 1.2 yrs 3.55 141 3.53
$ 5.00 TO $ 8.07 43,476 5.8 yrs 6.13 22,261 6.06
$ 8.75 TO $13.09 7,216 7.1 yrs 11.47 2,920 11.24
$15.15 TO $22.61 6,505 8.2 yrs 16.96 1,387 17.22
$23.18 TO $34.20 8,312 8.8 yrs 24.95 654 27.35
------- -------
$ 1.78 TO $34.20 66,505 6.4 yrs $10.07 27,838 $ 7.51
------- -------
The Company has granted options to purchase the Company's common stock related
to employment contracts with the Company's president and chief executive
officer. Depending upon the grant, these options have terms of ten years from
the date of grant or ten years from the date exercisable and vest and become
fully exercisable over three or four years. No options were granted in 2000,
1999, or 1998. At December 31, 2000, 1999, and 1998, total options of 4.1
million, 5.0 million, and 5.5 million were outstanding, respectively. At
December 31, 2000, total options of 4.1 million were exercisable at exercise
prices ranging from $1.00 to $6.96 per share. Options for 854,000, 570,000, and
342,000 shares were exercised in 2000, 1999, and 1998, respectively.
Under the 1991 Employee Stock Purchase Plan (ESPP), as amended, at December 31,
2000, the Company is authorized to issue up to a remaining balance of 5.9
million shares of common stock
33
35
to Employees of the Company at a price equal to 90 percent of the market value
at the end of each purchase period. Common stock purchases are paid for through
periodic payroll deductions. Participants under the plan received 686,000 shares
in 2000, 649,000 shares in 1999, and 677,000 shares in 1998 at average prices of
$20.01, $16.24, and $11.63, respectively.
Pro forma information regarding net income and net income per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
Employee stock-based compensation plans and other stock options under the fair
value method of SFAS 123. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants under the fixed option
plans in 2000, 1999, and 1998, respectively: dividend yield of .10 percent, .12
percent, and .16 percent; expected volatility of 34.87 percent, 35.66 percent,
and 38.20 percent; risk-free interest rate of 5.04 percent, 6.68 percent, and
4.66 percent; expected lives of 6.0 years for 2000, and 5.0 years for 1999 and
1998.
The fair value of options granted under the fixed option plans during 2000
ranged from $6.70 to $14.69. The fair value of options granted under the fixed
option plans during 1999 ranged from $6.26 to $8.81. The fair value of options
granted under the fixed option plans during 1998 ranged from $4.41 to $4.97. The
weighted-average fair value of each purchase right under the ESPP granted in
2000, 1999, and 1998, which is equal to the ten percent discount from the market
value of the common stock at the end of each purchase period, was $2.22, $1.75,
and $1.29, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including expected stock price volatility. Because the
Company's Employee stock options have characteristics significantly different
from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its Employee stock options.
For purposes of pro forma disclosures, the estimated fair value of stock-based
compensation plans and other options is amortized to expense primarily over the
vesting period. The Company's pro forma net income and net income per share are
as follows:
34
36
(In thousands except per share amounts) 2000 1999 1998
----------- ----------- -----------
NET INCOME:
As reported $ 603,093 $ 474,378 $ 433,431
Pro forma $ 583,707 $ 461,875 $ 421,097
NET INCOME PER SHARE, BASIC:
As reported $ 1.21 $ .94 $ .87
Pro forma $ 1.17 $ .92 $ .84
NET INCOME PER SHARE, DILUTED:
As reported $ 1.14 $ .89 $ .82
Pro forma $ 1.11 $ .87 $ .79
As required, the pro forma disclosures above include only options granted since
January 1, 1995. Consequently, the effects of applying SFAS 123 for providing
pro forma disclosures may not be representative of the effects on reported net
income for future years until all options outstanding are included in the pro
forma disclosures.
10. EMPLOYEE RETIREMENT PLANS
The Company has defined contribution plans covering substantially all of
Southwest's Employees. The Southwest Airlines Co. Profitsharing Plan is a money
purchase defined contribution plan and Employee stock purchase plan. The Company
also sponsors Employee savings plans under section 401(k) of the Internal
Revenue Code, which include Company matching contributions. The 401(k) plans
cover substantially all Employees. Contributions under all defined contribution
plans are based primarily on Employee compensation and performance of the
Company.
Company contributions to all retirement plans expensed in 2000, 1999, and 1998
were $241.5 million, $192.0 million, and $167.1 million, respectively.
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of
deferred tax assets and liabilities at December 31, 2000 and 1999, are as
follows:
35
37
(In thousands) 2000 1999
---------- ----------
DEFERRED TAX LIABILITIES:
Accelerated depreciation $1,049,791 $ 862,620
Scheduled airframe maintenance 71,519 52,890
Other 23,805 24,637
---------- ----------
Total deferred tax liabilities 1,145,115 940,147
DEFERRED TAX ASSETS:
Deferred gains from sale and
leaseback of aircraft 107,686 113,611
Capital and operating leases 77,151 72,554
Other 135,418 82,569
---------- ----------
Total deferred tax assets 320,255 268,734
---------- ----------
Net deferred tax liability $ 824,860 $ 671,413
========== ==========
The provision for income taxes is composed of the following:
(In thousands) 2000 1999 1998
---------- ---------- ----------
CURRENT:
Federal $ 197,875 $ 137,393 $ 143,989
State 26,671 18,900 19,357
---------- ---------- ----------
Total current 224,546 156,293 163,346
DEFERRED:
Federal 151,694 128,984 96,237
State 15,900 13,956 12,098
---------- ---------- ----------
Total deferred 167,594 142,940 108,335
---------- ---------- ----------
$ 392,140 $ 299,233 $ 271,681
========== ========== ==========
The Company received a statutory notice of deficiency from the Internal Revenue
Service (IRS) in July 1995 in which the IRS proposed to disallow deductions
claimed by the Company on its federal income tax returns for the taxable years
1989 through 1991 for the costs of certain aircraft inspection and maintenance
procedures. The IRS has proposed similar adjustments to the tax returns of
numerous other members of the airline industry. In response to the statutory
notice of deficiency, the Company filed a petition in the United States Tax
Court on October 30, 1997, seeking a determination that the IRS erred in
disallowing the deductions claimed by the Company and there is no deficiency in
the Company's tax liability for the taxable years in issue. On December 21,
2000, the national office of the IRS published a revenue ruling in which it
concluded that aircraft inspection and maintenance, substantially the same as
that in issue in the Company's Tax Court suit, is currently deductible as an
ordinary and necessary business expense. Counsel for the Company and the IRS
soon will engage in discussions in an attempt to resolve the controversy in
conformity with the IRS revenue ruling and without the necessity of further
litigation. Management believes the final
36
38
resolution of this controversy will not have a material adverse effect upon the
financial position or results of operations of the Company.
The effective tax rate on income before income taxes differed from the federal
income tax statutory rate for the following reasons:
(In thousands) 2000 1999 1998
--------- --------- ---------
Tax at statutory
U.S. tax rates $ 356,077 $ 270,764 $ 246,789
Nondeductible items 6,801 6,664 5,099
State income taxes,
net of federal benefit 27,671 21,356 20,445
Other, net 1,591 449 (652)
--------- --------- ---------
Total income
tax provision $ 392,140 $ 299,233 $ 271,681
========= ========= =========
37
39
12. 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) 2000 1999 1998
-------- -------- --------
NUMERATOR:
Net income before cumulative effect
of change in accounting principle $625,224 $474,378 $433,431
Cumulative effect of change in
accounting principle 22,131 -- --
-------- -------- --------
Net income $603,093 $474,378 $433,431
======== ======== ========
DENOMINATOR:
Weighted-average shares
outstanding, basic 499,078 503,065 500,013
Dilutive effect of Employee
stock options 31,800 32,862 29,736
-------- -------- --------
Adjusted weighted-average
shares outstanding, diluted 530,878 535,927 529,749
======== ======== ========
NET INCOME PER SHARE:
Basic before cumulative effect
of change in accounting principle $ 1.25 $ .94 $ .87
Cumulative effect of change
in accounting principle .04 -- --
-------- -------- --------
Basic earnings per share $ 1.21 $ .94 $ .87
======== ======== ========
Diluted before cumulative effect
of change in accounting principle $ 1.18 $ .89 $ .82
Cumulative effect of change
in accounting principle .04 -- --
-------- -------- --------
Diluted earnings per share $ 1.14 $ .89 $ .82
======== ======== ========
The Company has excluded 7.8 million and 4.5 million shares from its
calculations of diluted net income per share in 2000 and 1999, respectively, as
they represent antidilutive stock options for the respective periods presented.
There were no antidilutive stock options in 1998.
38
40
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND SHAREHOLDERS
SOUTHWEST AIRLINES CO.
We have audited the accompanying consolidated balance sheets of Southwest
Airlines Co. as of December 31, 2000 and 1999, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southwest Airlines
Co. at December 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 2 to the financial statements, in 2000 the Company changed
its method of accounting for the sale of flight segment credits.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Dallas, Texas
January 18, 2001
39
41
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
-------------------------------------------------
1999 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- ---------- ---------- ---------- ----------
Operating revenues $1,075,571 $1,220,432 $1,235,166 $1,204,418
Operating income 166,617 254,331 206,463 154,165
Income before income taxes 156,102 256,598 207,949 152,962
Net income 95,847 157,757 126,978 93,796
Net income per share, basic .19 .31 .25 .19
Net income per share, diluted .18 .29 .24 .18
2000 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
- ---- ---------- ---------- ---------- ----------
Operating revenues $1,242,647 $1,460,675 $1,478,834 $1,467,404
Operating income 155,408 314,558 300,109 251,070
Income before income taxes 155,973 310,865 301,073 249,453
Net income 95,643(1) 190,622 184,298 154,661
Net income per share, basic .19(1) .38 .37 .31
Net income per share, diluted .18(1) .36 .35 .29
(1) Excludes cumulative effect of accounting change of $22.1 million ($.04
per share).
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Election of Directors" incorporated herein by reference from the
definitive Proxy Statement for Southwest's Annual Meeting of Shareholders to be
held May 16, 2001. See "Executive Officers of the Registrant" in Part I
following Item 4 for information relating to executive officers.
40
42
ITEM 11. EXECUTIVE COMPENSATION
See "Compensation of Executive Officers," incorporated herein by reference
from the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 16, 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Voting Securities and Principal Shareholders," incorporated herein by
reference from the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 16, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Election of Directors" incorporated herein by reference from the
definitive Proxy Statement for Southwest's Annual Meeting of Shareholders to be
held May 16, 2001.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The financial statements included in Item 8 above are filed as part of
this annual report.
2. Financial Statement Schedules:
There are no financial statement schedules filed as part of this annual
report, since the required information is included in the consolidated
financial statements, including the notes thereto, or the circumstances
requiring inclusion of such schedules are not present.
3. Exhibits:
3.1 Restated Articles of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Registration
Statement on Form S-3 (File No. 33-52155)); Amendment to
Restated Articles of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1996 (File No.
1-7259)); Amendment to Restated Articles of Incorporation of
Southwest (incorporated by reference to Exhibit 4.1 to
Southwest's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 (File No. 1-7259)); Amendment to Restated
Articles of Incorporation of Southwest (incorporated by
reference to Exhibit 4.2 to Southwest's Registration Statement
on Form S-8 (File No. 333-82735).
3.2 Bylaws of Southwest, as amended through May 2000 (incorporated
by reference to Exhibit 1 to Southwest's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000 (File No.
1-7259).
4.1 Restated Credit Agreement dated May 6, 1997, between Southwest
and Bank of America National Trust and Savings Association,
and the other banks named therein, and such banks.
(incorporated by reference to Exhibit 4.1 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1997 (File No. 1-7259)); First Amendment to Competitive
Advance and Revolving Credit Facility Agreement dated August
7, 1998 (incorporated by reference to Exhibit 4.1 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 1-7259); Second Amendment to
Competitive Advance and Revolving Credit Facility Agreement
dated January 20, 1999 (incorporated by reference to Exhibit
4.1 to Southwest's Annual Report on Form 10-K for the year
ended December 31, 1998 (File No. 1-7259)).
41
43
4.2 Specimen certificate representing Common Stock of Southwest
(incorporated by reference to Exhibit 4.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 1-7259)).
4.3 Indenture dated as of December 1, 1985 between Southwest and
MBank Dallas, N.A., Trustee, relating to an unlimited amount
of Debt Securities (incorporated by reference to Exhibit 4.1
of Southwest's Current Report on Form 8-K dated February 26,
1986 (File No. 1-7259)) and First Supplemental Indenture dated
as of January 21, 1988, substituting MTrust Corp, National
Association, as Trustee, thereunder (incorporated by reference
to Exhibit 4.3 on Southwest's Annual Report on Form 10-K for
the year ended December 31, 1987 (File 1-7259)).
4.4 Amended and Restated Rights Agreement dated July 18, 1996
between Southwest and Continental Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to Exhibit
1, Southwest's Registration Statement on Form 8-A/A dated
August 12, 1996 (File No. 1-7259)).
4.5 Indenture dated as of June 20, 1991 between Southwest Airlines
Co. and Bank of New York, successor to NationsBank of Texas,
N.A. (formerly NCNB Texas National Bank), Trustee
(incorporated by reference to Exhibit 4.1 to Southwest's
Current Report on Form 8-K dated June 24, 1991 (File No.
1-7259)).
4.6 Indenture dated as of February 25, 1997 between the Company
and U.S. Trust Company of Texas, N.A. (incorporated by
reference to Exhibit 4.1 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1996 (File No. 1-7259)).
Southwest is not filing any other instruments evidencing any
indebtedness because the total amount of securities authorized
under any single such instrument does not exceed 10% of its
total consolidated assets. Copies of such instruments will be
furnished to the Securities and Exchange Commission upon
request.
10.1 Purchase Agreement No. 1810, dated January 19, 1994 between
The Boeing Company and Southwest (incorporated by reference to
Exhibit 10.4 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 1993 (File No. 1-7259)); Supplemental
Agreement No. 1. (incorporated by reference to Exhibit 10.3 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 1-7259)); Supplemental Agreements
No. 2, 3 and 4 (incorporated by reference to Exhibit 10.2 to
Southwest's Annual Report on form 10-K for the year ended
December 31, 1997 (File No. 1-7259)); Supplemental Agreements
Nos. 5, 6, and 7; (incorporated by reference to Exhibit 10.1
to Southwest's Annual Report on form 10-K for the year ended
December 31, 1998 (File No. 1-7259)); Supplemental Agreements
Nos. 8, 9, and 10 (incorporated by reference to Exhibit 10.1
to Southwest's Annual Report on form 10-K for the year ended
December 31, 1999 (File No. 1-7259)); Supplemental Agreements
Nos. 11, 12, 13 and 14 (incorporated by reference to Exhibit
10.1 to Southwest's Quarterly Report on form 10-Q for the
quarter ended September 30, 2000 (File No. 1-7259)).
Pursuant to 17 CFR 240.24b-2, confidential information has
been omitted and has been filed separately with the Securities
and Exchange Commission pursuant to a Confidential Treatment
Application filed with the Commission.
The following exhibits filed under paragraph 10 of Item 601
are the Company's compensation plans and arrangements.
42
44
10.2 Form of Executive Employment Agreement between Southwest and
certain key employees pursuant to Executive Service
Recognition Plan (incorporated by reference to Exhibit 28 to
Southwest Quarterly Report on Form 10-Q for the quarter ended
June 30, 1987 (File No. 1-7259)).
10.3 1992 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.8 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 1-7259)).
10.4 1996 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.8 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 1-7259)).
10.5 1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
33-40652)).
10.6 1991 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 33-40652)).
10.7 1991 Employee Stock Purchase Plan as amended September 21,
2000 (incorporated by reference to Exhibit 4 to Amendment No.
1 to Registration Statement on Form S-8 (file No. 333-40653)).
10.8 Southwest Airlines Co. Profit Sharing Plan.
10.9 Southwest Airlines Co. 401(k) Plan (incorporated by reference
to Exhibit 10.14 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 1-7259)).
10.10 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.14 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-7259)).
10.11 1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-20275)).
10.12 1996 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 333-20275)).
22 Subsidiaries of Southwest (incorporated by reference to
Exhibit 22 to Southwest's Annual Report on form 10-K for the
year ended December 31, 1997 (File No. 1-7259)).
23 Consent of Ernst & Young LLP, Independent Auditors.
A copy of each exhibit may be obtained at a price of 15 cents per page,
$10.00 minimum order, by writing to: Director of Investor Relations, Southwest
Airlines Co., P.O. Box 36611, Dallas, Texas 75235-1611.
(b) The following reports on Form 8-K were filed during the fourth quarter
of 2000.
None to be reported.
43
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
January 24, 2001
By /s/ Gary C. Kelly
-----------------------
Gary C. Kelly
Vice President-Finance,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on January 24, 2001 on
behalf of the registrant and in the capacities indicated.
Signature Capacity
--------- --------
/s/ Herbert D. Kelleher Chairman of the Board of Directors,
- ---------------------------- President and Chief Executive Officer
Herbert D. Kelleher
/s/ Gary C. Kelly Vice President-Finance
- ---------------------------- (Chief Financial and Accounting Officer)
Gary C. Kelly
/s/ Samuel E. Barshop Director
- ----------------------------
Samuel E. Barshop
Director
- ----------------------------
Gene H. Bishop
Director
- ----------------------------
C. Webb Crockett
/s/ William H. Cunningham Director
- ----------------------------
William H. Cunningham
/s/ William P. Hobby, Jr. Director
- ----------------------------
William P. Hobby, Jr.
/s/ Travis C. Johnson Director
- ----------------------------
Travis C. Johnson
Director
- ----------------------------
R. W. King
Director
- ----------------------------
June M. Morris
46
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated Articles of Incorporation of Southwest (incorporated by
reference to Exhibit 4.1 to Southwest's Registration Statement on
Form S-3 (File No. 33-52155)); Amendment to Restated Articles of
Incorporation of Southwest (incorporated by reference to Exhibit 4.1
to Southwest's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996 (File No. 1-7259); Amendment to Restated Articles of
Incorporation of Southwest (incorporated by reference to Exhibit 4.1
to Southwest's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998 (File No. 1-7259)); Amendment to Restated Articles of
Incorporation of Southwest (incorporated by reference to Exhibit 4.2
to Southwest's Registration Statement on Form S-8 (File No.
333-82735)).
3.2 Bylaws of Southwest, as amended through March, 2000 (incorporated by
reference to Exhibit 1 to Southwest's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 (File No. 1-7259)).
4.1 Restated Credit Agreement dated May 6, 1997, between Southwest and
Bank of America National Trust and Savings Association, and the other
banks named therein, and such banks. (incorporated by reference to
Exhibit 4.1 to Southwest's Annual Report on Form 10-K for the year
ended December 31, 1997 (File No. 1-7259)); First Amendment to
Competitive Advance and Revolving Credit Facility Agreement dated
August 7, 1998 (incorporated by reference to Exhibit 4.1 to
Southwest's Annual Report on Form 10-K for the year ended December
31, 1998 (File No. 1-7259)); Second Amendment to Competitive Advance
and Revolving Credit Facility Agreement dated January 20, 1999
(incorporated by reference to Exhibit 4.1 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1998 (File No.
1-7259)).
4.2 Specimen certificate representing Common Stock of Southwest
(incorporated by reference to Exhibit 4.2 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1994 (File No.
1-7259)).
4.3 Indenture dated as of December 1, 1985 between Southwest and MBank
Dallas, N.A., Trustee, relating to an unlimited amount of Debt
Securities (incorporated by reference to Exhibit 4.1 of Southwest's
Current Report on Form 8-K dated February 26, 1986 (File No. 1-7259))
and First Supplemental Indenture dated as of January 21, 1988,
substituting MTrust Corp, National Association, as Trustee,
thereunder (incorporated by reference to Exhibit 4.3 on Southwest's
Annual Report on Form 10-K for the year ended December 31, 1987 (File
1-7259)).
4.4 Amended and Restated Rights Agreement dated July 18, 1996 between
Southwest and Continental Stock Transfer & Trust Company, as Rights
Agent (incorporated by reference to Exhibit 1, Southwest's
Registration Statement on Form 8-A/A dated August 12, 1996 (File No.
1-7259)).
4.5 Indenture dated as of June 20, 1991 between Southwest Airlines Co.
and Bank of New York, successor to NationsBank of Texas, N.A.
(formerly NCNB Texas National Bank), Trustee (incorporated by
reference to Exhibit 4.1 to Southwest's Current Report on Form 8-K
dated June 24, 1991 (File No. 1-7259)).
4.6 Indenture dated as of February 25, 1997 between the Company and U.S.
Trust Company of Texas, N.A. (incorporated by reference to Exhibit
4.1 to Southwest's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 1-7259)).
E-1
47
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
Southwest is not filing any other instruments evidencing any
indebtedness because the total amount of securities authorized under
any single such instrument does not exceed 10% of its total
consolidated assets. Copies of such instruments will be furnished to
the Securities and Exchange Commission upon request.
10.1 Purchase Agreement No. 1810, dated January 19, 1994 between The
Boeing Company and Southwest (incorporated by reference to Exhibit
10.4 to Southwest's Annual Report on Form 10-K for the year ended
December 31, 1993 (File No. 1-7259)); Supplemental Agreement No. 1.
(incorporated by reference to Exhibit 10.3 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1996 (File No.
1-7259)).; Supplemental Agreements No. 2, 3 and 4 (incorporated by
reference to Exhibit 10.2 to Southwest's Annual Report on Form 10-K
for the year ended December 31, 1997 (File No. 1-7259)); Supplemental
Agreements Nos. 5, 6, and 7 (incorporated by reference to Exhibit
10.1 to Southwest's Annual Report on Form 10-K for the year ended
December 31, 1998 (File No. 1-7259)), Supplemental Agreements Nos. 8,
9, and 10 (incorporated by reference to Exhibit 10.1 to Southwest's
Annual Report on Form 10-K for the year ended December 31, 1999 (File
No. 1-7259)); Supplemental Agreements Nos. 11, 12, 13 and 14
(incorporated by reference to Exhibit 10.1 to Southwest's Quarterly
Report on form 10-Q for the quarter ended September 30, 2000 (File
No. 1-7259)).
Pursuant to 17 CFR 240.24b-2, confidential information has been
omitted and has been filed separately with the Securities and
Exchange Commission pursuant to a Confidential Treatment Application
filed with the Commission.
The following exhibits filed under paragraph 10 of Item 601 are the
Company's compensation plans and arrangements.
10.2 Form of Executive Employment Agreement between Southwest and certain
key employees pursuant to Executive Service Recognition Plan
(incorporated by reference to Exhibit 28 to Southwest Quarterly
Report on Form 10-Q for the quarter ended June 30, 1987 (File No.
1-7259)).
10.3 1992 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.8 to Southwest's
Annual Report on Form 10-K for the year ended December 31, 1991 (File
No. 1-7259)).
10.4 1996 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.8 to Southwest's
Annual Report on Form 10-K for the year ended December 31, 1996 (File
No. 1-7259)).
10.5 1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
33-40652)).
10.6 1991 Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 4.2 to Registration Statement on Form S-8 (File No.
33-40652)).
10.7 1991 Employee Stock Purchase Plan as amended September 21, 2000
(incorporated by reference to Exhibit 4 to Amendment No. 1 to
Registration Statement on Form S-8 (File No. 333-40653)).
10.8 Southwest Airlines Co. Profit Sharing Plan.
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48
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.9 Southwest Airlines Co. 401(k) Plan (incorporated by reference to
Exhibit 10.14 to Southwest's Annual Report on Form 10-K for the year
ended December 31, 1991 (File No. 1-7259)).
10.10 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option Plan
(incorporated by reference to Exhibit 10.14 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1994 (File No.
1-7259)).
10.11 1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-20275)).
10.12 1996 Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 4.2 to Registration Statement on Form S-8 (File No.
333-20275)).
22 Subsidiaries of Southwest (incorporated by reference to Exhibit 22 to
Southwest's Annual Report on form 10-K for the year ended December
31, 1997 (File No. 1-7259)).
23 Consent of Ernst & Young LLP, Independent Auditors.
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