SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001 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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of shares of Common Stock outstanding as of the close of
business on April 27, 2001:
761,643,359
SOUTHWEST AIRLINES CO.
FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Southwest Airlines Co.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
March 31, 2001 December 31, 2000
ASSETS
Current assets:
Cash and cash equivalents $684,678 $522,995
Accounts and other receivables 144,467 138,070
Inventories of parts and supplies,
at cost 78,817 80,564
Deferred income taxes 28,132 28,005
Fuel hedge contracts 63,773 22,515
Prepaid expenses and other
current assets 44,547 39,387
Total current assets 1,044,414 831,536
Property and equipment:
Flight equipment 7,108,197 6,831,913
Ground property and equipment 823,835 800,718
Deposits on flight equipment
purchase contracts 286,969 335,164
8,219,001 7,967,795
Less allowance for depreciation 2,232,500 2,148,070
5,986,501 5,819,725
Other assets 34,938 18,311
$7,065,853 $6,669,572
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $316,112 $312,716
Accrued liabilities 537,755 499,874
Air traffic liability 504,846 377,061
Income taxes payable 19,572 -
Current maturities of long-term debt 110,136 108,752
Total current liabilities 1,488,421 1,298,403
Long-term debt less current maturities 754,686 760,992
Deferred income taxes 891,186 852,865
Deferred gains from sale and leaseback
of aircraft 203,728 207,522
Other deferred liabilities 85,726 98,470
Stockholders' equity:
Common stock 761,826 507,897
Capital in excess of par value - 103,780
Retained earnings 2,858,932 2,902,007
Accumulated other comprehensive
income 35,795 -
Treasury stock at cost (14,447) (62,364)
Total stockholders' equity 3,642,106 3,451,320
$7,065,853 $6,669,572
See accompanying notes.
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
Three months ended March 31,
2001 2000
OPERATING REVENUES:
Passenger $1,381,276 $1,199,885
Freight 25,781 27,066
Other 21,560 15,696
Total operating revenues 1,428,617 1,242,647
OPERATING EXPENSES:
Salaries, wages, and benefits 447,431 381,489
Fuel and oil 209,584 197,071
Maintenance materials and repairs 98,524 93,565
Agency commissions 30,494 37,216
Aircraft rentals 48,045 49,347
Landing fees and other rentals 70,018 65,019
Depreciation 77,692 66,698
Other operating expenses 236,672 196,834
Total operating expenses 1,218,460 1,087,239
OPERATING INCOME 210,157 155,408
OTHER EXPENSES (INCOME):
Interest expense 17,012 17,223
Capitalized interest (6,199) (7,001)
Interest income (8,882) (6,649)
Other (gains) losses, net 11,724 (4,138)
Total other expenses (income) 13,655 (565)
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 196,502 155,973
PROVISION FOR INCOME TAXES 75,457 60,330
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 121,045 95,643
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (Net of Income Taxes of
$14.0 million) - (22,131)
NET INCOME $121,045 $73,512
NET INCOME PER SHARE, BASIC BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE $ .16 $ .13
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - (.03)
NET INCOME PER SHARE, BASIC $ .16 $ .10
NET INCOME PER SHARE, DILUTED BEFORE
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE $ .15 $ .12
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE - (.03)
NET INCOME PER SHARE, DILUTED $ .15 $ .09
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 760,225 745,736
Diluted 807,744 789,534
See accompanying notes.
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three months ended March 31,
2001 2000
NET CASH PROVIDED BY OPERATING
ACTIVITIES $420,598 $415,565
INVESTING ACTIVITIES:
Net purchases of property and
equipment (254,328) (191,810)
FINANCING ACTIVITIES:
Payments of long-term debt and
capital lease obligations (5,019) (4,411)
Payments of cash dividends (6,570) (5,510)
Proceeds from Employee stock plans 7,002 11,271
Repurchases of common stock - (101,363)
NET CASH (USED IN)
FINANCING ACTIVITIES (4,587) (100,013)
NET INCREASE IN CASH AND CASH
EQUIVALENTS 161,683 123,742
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 522,995 418,819
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $684,678 $542,561
CASH PAYMENTS FOR:
Interest, net of amount capitalized $18,086 $12,453
Income taxes $3,109 $621
See accompanying notes.
SOUTHWEST AIRLINES CO.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of presentation - The accompanying unaudited condensed
consolidated financial statements of Southwest Airlines Co. (Company)
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
for complete financial statements. The condensed consolidated financial
statements for the interim periods ended March 31, 2001 and 2000 include
all adjustments (which include only normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of
the results for the interim periods. The Condensed Consolidated Balance
Sheet as of December 31, 2000 has been derived from the Company's audited
financial statements as of that date but does not include all of the
information and footnotes required by Generally Accepted Accounting
Principles for complete financial statements. Operating results for the
three months ended March 31, 2001 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2001. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Southwest Airlines Co. Annual Report
on Form 10-K for the year ended December 31, 2000.
2. Dividends - During the three month period ended March 31, 2001,
dividends of $.0045 per share were declared on the 760.7 million shares
of common stock then outstanding. During the three month period ended
March 31, 2000, dividends of $.0037 per share were declared on the 745.7
million shares of common stock then outstanding.
3. Common stock - On January 18, 2001, the Company's Board of
Directors declared a three-for-two stock split, distributing 253.9
million shares on February 15, 2001. All share and per share data
presented in the accompanying unaudited condensed consolidated
financial statements and notes thereto have been restated for the stock
split.
4. Reclassifications - Certain prior year amounts have been
reclassified to conform to the current year presentation.
5. Net income per share - The following table sets forth the
computation of basic and diluted net income per share (in thousands except
per share amounts)(unaudited):
Three months ended March 31,
2001 2000
NUMERATOR:
Net income before cumulative effect
of change in accounting principle $121,045 $95,643
Cumulative effect of change in
accounting principle - (22,131)
Net income available to common
stockholders $121,045 $73,512
DENOMINATOR:
Weighted-average shares
outstanding, basic 760,225 745,736
Dilutive effect of Employee stock
options 47,519 43,798
Adjusted weighted-average shares
outstanding, diluted 807,744 789,534
NET INCOME PER SHARE:
Basic, before cumulative effect of
change in accounting principle $.16 $.13
Cumulative effect of change in
accounting principle - (.03)
Basic $.16 $.10
Diluted, before cumulative effect of
change in accounting principle $.15 $.12
Cumulative effect of change in
accounting principle - (.03)
Diluted $.15 $.09
6. Accounting changes - Effective January 1, 2001, the Company
adopted Statement of Financial Accounting Standards No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended (SFAS 133).
SFAS 133 requires the Company to record all financial derivative
instruments 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, either offset the change in fair value of the
hedged assets, liabilities, or firm commitments through earnings or are
recorded in accumulated 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, is recorded
immediately in Other (gains)/losses in the Condensed Consolidated Statement
of Income. 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, is recorded immediately
in Other (gains)/losses in the Condensed Consolidated Statement of Income.
Airline operators are inherently dependent upon energy to operate and,
therefore, are impacted by changes in jet fuel prices. The Company
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 has financial derivative instruments in the form of
the types of hedges it utilizes to decrease its exposure to jet fuel price
increases. The Company does not purchase or hold any derivative financial
instruments for trading purposes.
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 March 31, 2001, 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 remaining 2001 total
anticipated jet fuel requirements, approximately 27 percent of its 2002
total anticipated jet fuel requirements, and a small portion of its 2005
total anticipated jet fuel requirements. As of March 31, 2001, nearly all
of the Company's remaining 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 Company accounts for its fuel hedge derivative instruments as cash flow
hedges, as defined. Upon adoption of SFAS 133, the Company recorded the
fair value of its fuel derivative instruments in the Condensed Consolidated
Balance Sheet and a deferred gain of $46.1 million, net of tax, in
accumulated other comprehensive income. The portion of the transition
adjustment in "Accumulated other comprehensive income" that was recognized
in earnings during first quarter 2001 was a gain of $16.8 million, net of
tax. During first quarter 2001, the Company recognized approximately $2.5
million of net expense, related to the ineffectiveness of its hedges, in
Other losses on the Condensed Consolidated Statement of Income. During
first quarter 2001, the Company recognized approximately $8.4 million of
net expense, related to the change in time value of hedge instruments, in
Other (gains)/losses on the Condensed Consolidated Statement of Income.
The Company believes the adoption of SFAS 133 will result in more
volatility in its financial statements than in the past.
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 $.03 per share,
basic and diluted.
7. Comprehensive income - Comprehensive income includes changes in
the fair value of certain financial derivative instruments, which qualify
for hedge accounting and unrealized gains and losses on certain
investments. For the three months ended March 31, 2001, comprehensive
income totaled $156.8 million. The difference between net income and
comprehensive income for the three months ended March 31, 2001 is as
follows (in thousands):
Three months ended
March 31, 2001
Net income $121,045
Unrealized gain (loss) on
Derivative instruments, net of
deferred taxes of $23,575 36,494
Other, net of deferred taxes of ($452) (699)
Total other comprehensive income 35,795
Comprehensive income $156,840
As of March 31, 2001, the Company had approximately $36.5 million in
unrealized gains, net of tax, in accumulated other comprehensive income
related to fuel hedges, of which approximately $32.9 million is
expected to be realized in earnings over the next twelve months
following March 31, 2001. Upon the adoption of SFAS 133 on January 1,
2001, the Company recorded unrealized fuel hedge gains of $46.1
million, net of tax, of which approximately $45.1 million is expected
to be realized in earnings over the twelve months following January 1,
2001. A rollforward of the amounts included in Accumulated other
comprehensive income, net of taxes, is shown below (in thousands):
Accumulated
Fuel other
hedge comprehensive
derivatives Other income
Balance at December 31, 2000 - - -
January 1, 2001 transition
adjustment $ 46,089 - $ 46,089
Current-period changes in
value 4,279 ($699) 3,580
Reclassification to
earnings (13,874) - (13,874)
Balance at March 31, 2001 $ 36,494 ($699) $ 35,795
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
Comparative Consolidated Operating Statistics
Relevant operating statistics for the three months ended March 31,
2001 and 2000 are as follows:
SOUTHWEST AIRLINES CO.
COMPARATIVE CONSOLIDATED OPERATING STATISTICS
Three months ended March 31,
2001 2000 Change
Revenue passengers carried 15,716,020 14,389,276 9.2%
Revenue passenger miles
(RPMs) (000s) 10,662,391 9,453,201 12.8%
Available seat miles
(ASMs) (000s) 15,852,999 14,153,959 12.0%
Load factor 67.3% 66.8% .5 pts.
Average length of passenger
haul 678 657 3.2%
Trips flown 231,793 218,615 6.0%
Average passenger fare $87.89 $83.39 5.4%
Passenger revenue yield per
RPM (cents) 12.95 12.69 2.0%
Operating revenue yield per
ASM (cents) 9.01 8.78 2.6%
Operating expenses per ASM
(cents) 7.69 7.68 0.1%
Operating expenses per ASM,
excluding fuel (cents) 6.36 6.29 1.1%
Fuel costs per gallon, excluding
fuel tax (cents) 78.53 81.98 (4.2)%
Number of Employees at
period-end 29,563 27,911 5.9%
Size of fleet at period-end 352 315 11.7%
Material Changes in Results of Operations
Consolidated net income for first quarter 2001 was $121.0 million
($.15 per share, diluted), as compared to first quarter 2000 net income,
before the cumulative effect of change in accounting principle, of $95.6
million ($.12 per share, diluted), an increase of 26.6 percent. The prior
year's net income per share amounts have been restated for the 2001 three-
for-two stock split (see Note 3 to the unaudited Condensed Consolidated
Financial Statements). The cumulative effect of change in accounting
principle for first quarter 2000 was $22.1 million, net of taxes of $14.0
million (see Note 6 to the unaudited Condensed Consolidated Financial
Statements). Net income and diluted net income per share, after the
cumulative change in accounting principle, for first quarter 2000 were
$73.5 million and $.09, respectively. Operating income for first quarter
2001 was $210.2 million, an increase of 35.2 percent compared to 2000.
Consolidated operating revenues increased 15.0 percent primarily due
to a 15.1 percent increase in passenger revenues. The increase in
passenger revenues primarily resulted from the Company's increased
capacity. The Company experienced a 9.2 percent increase in revenue
passengers carried, a 12.8 percent increase in RPMs, and a 2.0 percent
increase in passenger revenue yield per RPM (passenger yield). The
increase in RPMs exceeded a 12.0 percent increase in ASMs resulting in a
load factor of 67.3 percent, or .5 points above the same prior year
period. The increase in ASMs resulted primarily from the net addition
of 37 aircraft since first quarter 2000, which represents an 11.7 percent
increase in the Company's fleet size. The increase in passenger yield is
primarily due to a 5.4 percent increase in average passenger fare,
partially offset by a 3.2 percent increase in average length of passenger
haul.
Based on current traffic and booking trends thus far in April and
considering an estimated increase in available seat miles of 11.6 percent
for second quarter 2001, the Company's second quarter 2001 load factor
is forecasted to be lower than second quarter 2000's load factor of 74.3
percent. The April 2001 load factor is expected to fall below April
2000's load factor by approximately 2.0 points. RPM yields for April 2001
are expected to be in line with year ago levels. As a result of the
weakening economy and industry environment, RPM yields may continue to
soften. (The immediately preceding sentences are forward-looking
statements that involve uncertainties that could result in actual
results differing materially from expected results. Some significant
factors include, but may not be limited to, competitive pressure such as
fare sales and capacity changes by other carriers, general economic
conditions, and variations in advance booking trends.)
Consolidated freight revenues decreased 4.7 percent primarily due to
the recent U.S. economic decline experienced throughout first quarter 2001.
Other revenues increased 37.4 percent. Approximately 51.1 percent of the
increase in other revenues was from an increase in commissions earned from
programs the Company sponsors with certain business partners, such as the
Company sponsored First USA Visa card, while 27.5 percent of the increase
was due to an increase in charter revenues.
Operating expenses per ASM were $.0769, compared to $.0768 for 2000.
Excluding fuel expense, operating expenses per ASM increased 1.1 percent
to $.0636. As in first quarter 2001, the Company currently expects that,
excluding fuel, operating expenses per ASM in second quarter 2001 will
continue to experience a moderate year-over-year increase compared to
second quarter 2000. (The immediately preceding sentence is a forward-
looking statement which involves uncertainties that could result in
actual results differing materially from expected results. Some
significant factors include, but may not be limited to, wage and
productivity pressures from within the Company's work force and general
economic conditions)
Southwest Airlines Co.
Operating Expenses per ASM
(in cents except percent change)
Three months ended March 31,
Inc/ Percent
2001 2000 (Dec) Change
Salaries, wages, and
benefits 2.49 2.40 .09 3.8
Employee retirement
plans .33 .29 .04 13.8
Fuel and oil 1.32 1.39 (.07) (5.0)
Maintenance materials
and repairs .62 .66 (.04) (6.1)
Agency commissions .19 .26 (.07) (26.9)
Aircraft rentals .30 .35 (.05) (14.3)
Landing fees and other
rentals .44 .46 (.02) (4.3)
Depreciation .49 .47 .02 4.3
Other operating expenses 1.51 1.40 .11 7.9
Total 7.69 7.68 .01 .1
Salaries, wages, and benefits per ASM increased 3.8 percent.
Approximately 63.3 percent of the increase was due to an increase in
salaries, and approximately 28.9 percent of the increase was due to an
increase in health benefits expense.
Employee retirement plans expense per ASM increased 13.8 percent,
primarily due to the increase in Company earnings available for
profitsharing.
Fuel and oil expense per ASM decreased 5.0 percent due to a 4.2
percent decrease in the average jet fuel cost per gallon compared to
2000. The average jet fuel cost per gallon in first quarter 2001 was
$.7853 compared to $.8198 in first quarter 2000, including the effects
of hedging activities. The Company's first quarter 2001 average jet fuel
cost is net of approximately $24.4 million in "effective" hedging gains,
as defined. See Note 6 to the Condensed Consolidated Financial
Statements. The Company's first quarter 2000 average jet fuel cost is
net of approximately $3.2 million in gains from hedging activities. As
of March 31, 2001, the Company had hedges in place for approximately 80
percent of its anticipated jet fuel requirements for the remainder of
2001 at prices below market prices as of March 31, 2001. Including
estimated hedging gains and considering current market prices and the
continued effectiveness of the Company's fuel hedges, we are forecasting
our second quarter 2001 average fuel price per gallon to be at or below
second quarter 2000's average fuel cost per gallon of $.78. The
Company's fuel hedging strategy could result in the Company not fully
benefiting from certain jet fuel price declines. (The immediately
preceding two sentences are forward-looking statements, which involve
uncertainties that could result in actual results differing materially
from expected results. Such uncertainties include, but may not be
limited to, the largely unpredictable levels of jet fuel prices.)
Maintenance materials and repairs per ASM decreased 6.1 percent
primarily due to a decrease in engine repair expense.
Agency commissions per ASM decreased 26.9 percent, primarily due
to a change in the Company's commission rate policy effective January 1,
2001. The Company reduced the commission rate paid to travel agents
from ten percent to eight percent for Ticketless bookings, and from ten
percent to five percent for paper ticket bookings. The percentage of
commissionable revenues decreased from approximately 31 percent in first
quarter 2000 to approximately 28 percent in first quarter 2001. Due
to the Company's commission policy change in 2001, we expect agency
commissions to continue to show year-over-year decreases throughout 2001
on a per-ASM basis. (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 per ASM decreased 14.3 percent compared to first
quarter 2000 due to a lower percentage of the aircraft fleet being
leased. Approximately 26.7 percent of the Company's aircraft fleet
was under operating lease at March 31, 2001, compared to 30.5 percent
at March 31, 2000. Based on the Company's current new aircraft delivery
schedule and scheduled aircraft retirements for 2001, we expect to
continue to have year-over-year decreases throughout 2001 on a per-ASM
basis. (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 5.6
percent. Although landing fees declined on a per ASM basis, they were
basically flat on a per trip basis. The growth in ASMs exceeded the trip
growth primarily due to an increase in the average distance per aircraft
trip flown.
Depreciation expense per ASM increased 4.3 percent primarily due to
a higher percentage of owned aircraft. All of the 39 aircraft added to
the Company's fleet over the past twelve months have been purchased.
This, combined with the retirement of two leased aircraft, has increased
the Company's percentage of aircraft owned or on capital lease from 69.5
percent at March 31, 2000 to 73.3 percent at March 31, 2001.
Other operating expenses per ASM increased 7.9 percent primarily due
to an increase in advertising costs.
Other expenses (income) include interest expense, capitalized
interest, interest income, and other gains and losses. Interest
expense decreased 1.2 percent primarily due to a reduction in interest
rates on the Company's floating rate debt. Capitalized interest
decreased 11.5 percent primarily due to a reduction in progress payment
balances for future aircraft deliveries. Interest income increased 33.6
percent primarily due to higher invested cash balances. Other losses in
first quarter 2001 resulted primarily from the reduction in the time
value portion of financial derivative instruments, such as premiums paid
for option contracts, used in the Company's fuel hedging program. The
Company excludes this change in time value from its tests of
effectiveness, as defined by SFAS 133, and thus records the changes in
other gains and losses. See Note 6 to the Condensed Consolidated
Financial Statements. Other gains in first quarter 2000 were primarily
due to proceeds received from the favorable conclusion of a lawsuit.
Liquidity and Capital Resources
Net cash provided by operating activities was $420.6 million for the
three months ended March 31, 2001 and $1,303.3 million for the 12 months
then ended. Cash generated for the 12 months ended March 31, 2001 was
primarily used to finance aircraft-related capital expenditures and
provide working capital.
During the 12 months ended March 31, 2001, net capital expenditures
were $1,197.2 million, which primarily related to the purchase of 39 new
737-700 aircraft, and progress payments for future aircraft deliveries.
The Company's contractual commitments consist primarily of
scheduled aircraft acquisitions. As of March 31, 2001, 17 737-700s are
scheduled for delivery in the remainder of 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 2002. Aggregate funding needed for fixed
commitments at March 31, 2001 was approximately $3,800 million due as
follows: $473 million in 2001; $766 million in 2002; $472 million in 2003;
$641 million in 2004; $379 million in 2005; and $1,069 million thereafter.
The Company has various options available to meet its capital and
operating commitments, including cash on hand at March 31, 2001 of $684.7
million, internally generated funds, and a revolving credit line with a
group of banks of up to $475 million (none of which had been drawn at
March 31, 2001). In addition, the Company will also consider various
borrowing or leasing options to maximize earnings and supplement cash
requirements.
The Company currently has outstanding shelf registrations for the
issuance of $318.8 million in public debt securities which it may utilize
for aircraft financing during 2001 and 2002.
In January 2001, the Company began new service to Palm Beach
International Airport in West Palm Beach, Florida, with daily nonstop
service to Tampa Bay, Orlando, Nashville, and Baltimore/Washington.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Item 7A. Quantitative and Qualitative Disclosures About Market
Risk in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 are 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 resolution of this controversy will
not have a material adverse effect upon the financial position or
results of operations of the Company.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
During the first quarter of 2001, Herbert D. Kelleher exercised
unregistered options to purchase Southwest Airlines Co. Common
Stock as follows:
Number of Shares Option Price Date of Exercise
Purchased
893,427 $1.00 1/2/2001
The number of shares shown has not been adjusted for the February
15, 2001 3-for-2 stock split. The issuance of the above shares to
Mr. Kelleher were exempt from the registration provisions of the
Securities Act of 1933, as amended (the "Act"), by reason of the
provision of Section 4(2) of the Act because, among other things,
of the limited number of participants in such transactions and the
agreement and representation of Mr. Kelleher that he was acquiring
such securities for investment and not with a view to distribution
thereof. The certificates representing the shares issued to Mr.
Kelleher contain a legend to the effect that such shares are not
registered under the Act and may not be transferred except pursuant
to a registration statement which has become effective under the Act
or to an exemption from such registration. The issuance of such
shares was not underwritten.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(10) 2001 Employment Contract between Southwest and Herbert D.
Kelleher dated as of January 1, 2001
b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
SOUTHWEST AIRLINES CO.
May 1, 2001 By /s/ Gary C. Kelly
Gary C. Kelly
Vice President - Finance and
Chief Financial Officer
(Principal Financial and
Accounting Officer)