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, 2005 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 (IRS 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.) 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 13, 2005:
784,751,947
<Page>
SOUTHWEST AIRLINES CO.
FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
<Table>
<Caption>
Southwest Airlines Co.
Condensed Consolidated Balance Sheet
(in millions)
(unaudited)
March 31, December 31,
2005 2004
ASSETS
Current assets:
Cash and cash equivalents $1,908 $1,048
Short-term investments - 257
Accounts and other receivables 334 248
Inventories of parts and supplies, at cost 128 137
Fuel hedge contracts 790 428
Prepaid expenses and other current assets 75 54
Total current assets 3,235 2,172
Property and equipment, at cost:
Flight equipment 10,354 10,037
Ground property and equipment 1,220 1,202
Deposits on flight equipment
purchase contracts 646 682
12,220 11,921
Less allowance for depreciation
and amortization 3,210 3,198
9,010 8,723
Other assets 1,009 442
$13,254 $11,337
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $471 $420
Accrued liabilities 1,611 1,047
Air traffic liability 724 529
Current maturities of long-term debt 74 146
Total current liabilities 2,880 2,142
Long-term debt less current maturities 1,926 1,700
Deferred income taxes 1,975 1,610
Deferred gains from sale and leaseback of aircraft 148 152
Other deferred liabilities 210 209
Stockholders' equity:
Common stock 790 790
Capital in excess of par value 299 299
Retained earnings 4,138 4,089
Accumulated other comprehensive income 972 417
Treasury stock, at cost (84) (71)
Total stockholders' equity 6,115 5,524
$13,254 $11,337
See accompanying notes.
</Table>
<Page>
<Table>
<Caption>
Southwest Airlines Co.
Condensed Consolidated Statement of Income
(in millions, except per share amounts)
(unaudited)
Three months ended
March 31,
2005 2004
OPERATING REVENUES:
Passenger $1,592 $1,428
Freight 34 25
Other 37 31
Total operating revenues 1,663 1,484
OPERATING EXPENSES:
Salaries, wages, and benefits 640 589
Fuel and oil 279 230
Maintenance materials and repairs 101 114
Aircraft rentals 43 45
Landing fees and other rentals 113 103
Depreciation and amortization 112 103
Other operating expenses 269 254
Total operating expenses 1,557 1,438
OPERATING INCOME 106 46
OTHER EXPENSES (INCOME):
Interest expense 27 19
Capitalized interest (9) (10)
Interest income (7) (4)
Other (gains) losses, net (19) -
Total other expenses (income) (8) 5
INCOME BEFORE INCOME TAXES 114 41
PROVISION FOR INCOME TAXES 38 15
NET INCOME $76 $26
NET INCOME PER SHARE, BASIC $ .10 $ .03
NET INCOME PER SHARE, DILUTED $ .09 $ .03
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 784 785
Diluted 812 817
See accompanying notes.
</Table>
<Page>
<Table>
<Caption>
Southwest Airlines Co.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
Three months ended
March 31,
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $76 $26
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 112 103
Deferred income taxes 38 16
Amortization of deferred gains on sale and
leaseback of aircraft (4) (4)
Amortization of scheduled airframe
inspections & repairs 11 14
Changes in certain assets and liabilities:
Accounts and other receivables (86) (47)
Other current assets (12) (15)
Accounts payable and accrued liabilities 593 123
Air traffic liability 195 238
Other (37) (37)
Net cash provided by
operating activities 886 417
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (423) (360)
Change in short-term investments 257 39
Acquisition of assets from ATA Airlines, Inc. (6) -
Net cash used in investing activities (172) (321)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 300 29
Proceeds from Employee stock plans 19 13
Payments of long-term debt and
capital lease obligations (108) (7)
Payments of cash dividends (7) (7)
Repurchase of common stock (55) (125)
Other, net (3) (1)
Net cash provided by (used in)
financing activities 146 (98)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 860 (2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,048 1,484
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,908 $1,482
CASH PAYMENTS FOR:
Interest, net of amount capitalized $16 $13
Income taxes $- $-
See accompanying notes.
</Table>
<Page>
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 or Southwest) 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
unaudited condensed consolidated financial statements for the interim
periods ended March 31, 2005 and 2004, include all adjustments, which are, in
the opinion of management, necessary for a fair presentation of the results
for the interim periods. This includes all normal and recurring adjustments,
and other accounting entries as described herein. The Condensed Consolidated
Balance Sheet as of December 31, 2004, 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. Financial results for the
Company, and airlines in general, are seasonal in nature. Historically, the
Company's second and third fiscal quarters have been more profitable than its
first and fourth fiscal quarters. Operating results for the three months
ended March 31, 2005, are not necessarily indicative of the results that
may be expected for the year ended December 31, 2005. 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, 2004.
Certain prior period amounts have been reclassified to conform to the current
presentation. In the Condensed Consolidated Balance Sheet as of December 31,
2004, the Company has reclassified certain amounts as "Short-term
investments", that were previously classified as "Cash and cash equivalents."
In the Condensed Consolidated Statement of Cash Flows for the period ended
March 31, 2004, changes in the amounts of "Short-term investments" are
classified as cash flows from investing activities. In the Condensed
Consolidated Statement of Income for the period ended March 31, 2004, amounts
previously classified as "Agency commissions" are now classified in
"Other operating expenses."
2. STOCK-BASED EMPLOYEE COMPENSATION
The Company has stock-based compensation plans covering the majority of its
Employee groups, including plans adopted via collective bargaining, a plan
covering the Company's Board of Directors, and plans related to employment
contracts with certain Executive Officers of the Company. The Company
accounts for stock-based compensation utilizing the intrinsic value method
in accordance with the provisions of Accounting Principles Board Opinion No.
25 (APB 25), "Accounting for Stock Issued to Employees" and related
Interpretations. Accordingly, no compensation expense is recognized for
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fixed option plans because the exercise prices of Employee stock options
equal or exceed the market prices of the underlying stock on the dates of
grant. See Note 11 for additional information.
The following table represents the effect on net income and earnings per
share if the Company had applied the fair value based method and recognition
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," to stock-based Employee
compensation (in millions, except per share amounts):
<Table>
<Caption>
Three months ended March 31,
2004 2003
Net income, as reported $76 $26
Add: Stock-based Employee compensation
expense included in reported income,
net of related tax effects - -
Deduct: Total stock-based Employee
compensation expense determined under
fair value based methods for all awards,
net of related tax effects (12) (12)
Pro forma net income $64 $14
Net income per share
Basic, as reported $.10 $.03
Basic, pro forma $.08 $.02
Diluted, as reported $.09 $.03
Diluted, pro forma $.08 $.02
</Table>
3. DIVIDENDS
During the three month period ended March 31, 2005, dividends of $.0045 per
share were declared on the 783 million shares of common stock then
outstanding. During the three month period ended March 31, 2004, dividends
of $.0045 per share were declared on the 784 million shares of common
stock then outstanding.
4. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share (in millions except per share amounts):
<Table>
<Caption>
Three months ended March 31,
2004 2003
NUMERATOR:
Net income available to
common stockholders $76 $26
<Page>
DENOMINATOR:
Weighted-average shares
outstanding, basic 784 785
Dilutive effect of Employee stock
Options 28 32
Adjusted weighted-average shares
outstanding, diluted 812 817
NET INCOME PER SHARE:
Basic $.10 $.03
Diluted $.09 $.03
</Table>
5. FINANCIAL DERIVATIVE INSTRUMENTS
Fuel Contracts - 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 the three month periods ended March 31, 2005 and 2004,
represented approximately 17.9 percent and 16.0 percent, respectively, of
Southwest's operating expenses for those periods. The Company endeavors to
acquire jet fuel at the lowest possible prices. Because jet fuel is not
traded on an organized futures exchange, liquidity for jet fuel hedging is
limited. However, the Company has found commodities for effective hedging of
jet fuel costs, primarily crude oil, heating oil, and unleaded gasoline. The
Company utilizes financial derivative instruments as hedges 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. In addition to the significant hedging positions the
Company had in place for the first three months of 2005, the Company also has
significant future hedging positions. The Company currently has a mixture of
purchased call options, collar structures, and fixed price swap agreements in
place to hedge approximately 85 percent of its remaining 2005 total
anticipated jet fuel requirements that effectively cap crude oil-equivalent
prices at $26 per barrel. As of March 31, 2005, the "spot" market price for
a barrel of crude oil was over $55. The Company is also 65 percent hedged
for 2006 at approximately $32 per barrel, over 45 percent hedged for 2007 at
approximately $31 per barrel, 30 percent hedged for 2008 at approximately $33
per barrel, and 25 percent hedged for 2009 at approximately $35 per barrel.
As of March 31, 2005, the majority of the Company's remaining 2005 hedges are
effectively in the form of unleaded gasoline-based and heating oil-based
option contracts. The majority of the remaining hedge positions are crude
oil-based positions.
The Company accounts for its fuel hedge derivative instruments as cash flow
hedges, as defined in Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended
(SFAS 133). All changes in fair value that are considered to be effective,
as defined, are recorded in "Accumulated other comprehensive income" until
the underlying jet fuel is consumed. The fair value of the Company's
financial derivative instruments at March 31, 2005, was a net asset of
approximately $1.7 billion. The current portion of this net asset,
approximately $790 million, is classified as "Fuel hedge contracts" and the
noncurrent portion, approximately $929 million, is classified in "Other
<Page>
assets" in the Condensed Consolidated Balance Sheet. The fair value of the
derivative instruments, depending on the type of instrument, was
determined by the use of present value methods or standard option value
models with assumptions about commodity prices based on those observed in
underlying markets.
During the three months ended March 31, 2005 and 2004, the Company recognized
$155 million and $63 million in gains in "Fuel and oil" expense,
respectively, from hedging activities. During the three months ended March
31, 2005 and 2004, the Company also recognized approximately $27 million
and $6 million, respectively, of additional income in "Other (gains) losses,
net," related to the ineffectiveness of its hedges. Ineffectiveness is
inherent in hedging jet fuel with derivative positions based in other crude
oil related commodities, especially given the magnitude of the current fair
market value of the Company's fuel hedge derivatives. Due to the volatility
in markets for crude oil and crude oil related products, the Company is
unable to predict the amount of ineffectiveness each period, which may result
in increased volatility in the Company's results. The significant increase
in the amount of noncash ineffectiveness recorded during first quarter 2005
was primarily due to the significant increase in energy prices compared to
prior periods, the number of derivative positions the Company holds, as well
as volatility between the different types of products the Company uses in
hedging-specifically between crude oil and heating oil. As the fair value of
the Company's hedge positions gets larger in amount, there is a higher degree
of probability that there will be more variability in noncash ineffectiveness
recorded in the income statement as small differences in the correlation of
crude oil related products is leveraged over large dollar volumes. The
Company also recognized approximately $9 million and $6 million of net
expense, respectively, related to amounts excluded from the Company's
measurements of hedge effectiveness, in "Other (gains) losses, net" during
first quarter 2005, and first quarter 2004.
As of March 31, 2005, the Company had approximately $971 million in
unrealized gains, net of tax, in "Accumulated other comprehensive income"
related to fuel hedges. Included in this total are approximately $456
million in net unrealized gains that are expected to be realized in earnings
during the twelve months following March 31, 2005.
Interest Rate Swaps - In previous periods, the Company has entered into
interest rate swap agreements relating to its $350 million 5.25% senior
unsecured notes due October 1, 2014, its $385 million 6.5% senior unsecured
notes due March 1, 2012 and its $375 million 5.496% Class A-2 pass-through
certificates due November 1, 2006. Under these interest rate swap
agreements, the Company pays the London InterBank Offered Rate (LIBOR) plus a
margin every six months on the notional amount of the debt, and receives the
fixed stated rate of the notes every six months until the date the notes
become due.
The Company's interest rate swap agreements qualify as fair value hedges, as
defined by SFAS 133. The fair value of the interest rate swap agreements,
which are adjusted regularly, are recorded in the Company's balance sheet as
an asset or liability, as necessary, with a corresponding adjustment to the
carrying value of the long-term debt. The fair value of the interest rate
swap agreements, excluding accrued interest, at March 31, 2005 was a
liability of approximately $37 million. This amount is recorded in "Other
<Page>
deferred liabilities" in the unaudited Condensed Consolidated Balance Sheet.
In accordance with fair value hedging, the offsetting entry is an adjustment
to decrease the carrying value of long-term debt.
6. COMPREHENSIVE INCOME
Comprehensive income included changes in the fair value of certain financial
derivative instruments, which qualify for hedge accounting, and unrealized
gains and losses on certain investments. For first quarter 2005, the
Company's comprehensive income increased significantly, due to the
substantial change in the fair value of the Company's hedges. Since
comprehensive income is reported net of tax, there was also a significant
increase in the Company's deferred tax liability compared to December 31,
2004. See Note 5 for further information. Comprehensive income totaled $631
million and $88 million, respectively, for the three months ended March 31,
2005 and 2004, respectively. The differences between net income and
comprehensive income for each of these periods was as follows (in millions):
<Table>
<Caption>
Three months ended March 31,
2004 2003
Net income $76 $26
Unrealized gain (loss) on
derivative instruments,
net of deferred taxes of $352 and $40 555 61
Other, net of deferred taxes of $0 and $1 - 1
Total other comprehensive income 555 62
Comprehensive income $631 $88
</Table>
A rollforward of the amounts included in "Accumulated other comprehensive
income," net of taxes, is shown below (in millions):
<Table>
<Caption>
Accumulated
Fuel other
hedge comprehensive
derivatives Other income (loss)
Balance at December 31, 2004 $ 416 $ 1 $ 417
2005 changes in value 644 - 644
Reclassification to earnings (89) - (89)
Balance at March 31, 2005 $ 971 $ 1 $ 972
</Table>
7. CONSOLIDATION OF RESERVATIONS CENTERS
In November 2003, the Company announced the consolidation of its nine
Reservations Centers into six, effective February 28, 2004. This decision was
made in response to the established shift by Customers to the internet as
a preferred way of booking travel. The Company's website, southwest.com, now
accounts for more than half of ticket bookings and, as a consequence,
demand for phone contact has dramatically decreased. During first quarter
<Page>
2004, the Company closed its Reservations Centers located in Dallas, Texas,
Salt Lake City, Utah, and Little Rock, Arkansas. The Company provided the
1,900 affected Employees at these locations the opportunity to relocate to
another of the Company's remaining six centers. Those Employees choosing not
to relocate, approximately 55% of the total affected, were offered support
packages, which included severance pay, flight benefits, medical coverage,
and job-search assistance, depending on length of service with the Company.
The total cost associated with the Reservations Centers consolidation,
recognized in first quarter 2004, was approximately $18 million. Employee
severance and benefit costs of $13 million were recorded in "Salaries, wages,
and benefits," and the majority of other costs were reflected in "Other
operating expenses" in the Condensed Consolidated Statement of Income. Of
the total amount expensed, approximately $2 million remained accrued (not yet
paid) as of March 31, 2005.
8. LONG-TERM DEBT
During February 2005, the Company issued $300 million senior unsecured Notes
(Notes) due 2017. The Notes bear interest at 5.125 percent, payable semi-
annually in arrears, with the first payment due on September 1, 2005.
Southwest used the net proceeds from the issuance of the Notes, approximately
$296 million, for general corporate purposes.
During first quarter 2005, the Company redeemed its $100 million senior
unsecured 8% Notes on their maturity date of March 1, 2005.
9. OTHER ASSETS AND ACCRUED LIABILITIES
<Table>
<Caption>
March 31, December 31,
2005 2004
Noncurrent fuel hedge contracts,
at fair value $929 $368
Other 80 74
Other assets $1,009 $442
</Table>
<Table>
<Caption>
March 31, December 31,
2005 2004
Counterparty fuel hedge deposits $820 $330
Accrued vacation pay 123 120
Accrued aircraft rent 114 127
Accrued profitsharing 109 89
Deferred income taxes 243 218
Other 202 163
Accrued liabilities $1,611 $1,047
</Table>
10. POSTRETIREMENT BENEFITS
The following table sets forth the Company's periodic postretirement benefit
cost for each of the interim periods identified:
<Page>
<Table>
<Caption>
Three months ended March 31,
(In millions) 2005 2004
Service cost $3 $3
Interest cost 1 1
Amortization of prior service cost - 1
Recognized actuarial loss - -
Net periodic postretirement benefit cost $4 $5
</Table>
11. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment". SFAS
No. 123R is a revision of SFAS No. 123, "Accounting for Stock Based
Compensation", and supersedes APB 25. Among other items, SFAS 123R
eliminates the use of APB 25 and the intrinsic value method of accounting,
and requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments, based on the grant date fair value
of those awards, in the financial statements. The effective date of SFAS
123R is the first reporting period beginning after June 15, 2005, which is
third quarter 2005 for calendar year companies, although early adoption is
allowed. However, on April 14, 2005, the Securities and Exchange Commission
(SEC) announced that the effective date of SFAS 123R will be suspended until
January 1, 2006, for calendar year companies.
SFAS 123R permits companies to adopt its requirements using either a
"modified prospective" method, or a "modified retrospective" method. Under
the "modified prospective" method, compensation cost is recognized in the
financial statements beginning with the effective date, based on the
requirements of SFAS 123R for all share-based payments granted after that
date, and based on the requirements of SFAS 123 for all unvested awards
granted prior to the effective date of SFAS 123R. Under the "modified
retrospective" method, the requirements are the same as under the "modified
prospective" method, but also permits entities to restate financial
statements of previous periods based on proforma disclosures made in
accordance with SFAS 123.
The Company currently utilizes a standard option pricing model (i.e., Black-
Scholes) to measure the fair value of stock options granted to Employees.
While SFAS 123R permits entities to continue to use such a model, the
standard also permits the use of a "lattice" model. The Company has not yet
determined which model it will use to measure the fair value of employee
stock options upon the adoption of SFAS 123R.
SFAS 123R also requires that the benefits associated with the tax deductions
in excess of recognized compensation cost be reported as a financing cash
flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after the effective date. These
future amounts cannot be estimated because they depend on, among other
things, when employees exercise stock options.
<Page>
The Company currently expects to adopt SFAS 123R effective January 1, 2006,
based on the new effective date announced by the SEC; however, the Company
has not yet determined which of the aforementioned adoption methods it will
use. In addition, the Company has not yet determined the financial statement
impact of adopting SFAS 123R for periods beyond 2005.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Comparative Consolidated Operating Statistics
Relevant Southwest comparative operating statistics for the three
months ended March 31, 2005 and 2004 are as follows:
<Table>
<Caption>
Three months ended March 31,
2005 2004 Change
Revenue passengers carried 17,474,490 15,995,061 9.2 %
Enplaned passengers 19,780,746 18,190,404 8.7 %
Revenue passenger miles (RPMs) (000s) 13,238,009 11,792,423 12.3 %
Available seat miles (ASMs) (000s) 20,231,599 18,381,592 10.1 %
Load factor 65.4% 64.2% 1.2 pts.
Average length of passenger haul (miles) 758 737 2.8 %
Average aircraft stage length (miles) 596 568 4.9 %
Trips flown 249,119 238,469 4.5 %
Average passenger fare $91.15 $89.28 2.1 %
Passenger revenue yield per RPM (cents) 12.03 12.11 (0.7)%
Operating revenue yield per ASM (cents) 8.22 8.07 1.9 %
Operating expenses per ASM (cents) 7.70 7.82 (1.5)%
Operating expenses per ASM,
excluding fuel (cents) 6.32 6.57 (3.8)%
Fuel costs per gallon,
excluding fuel tax (cents) 90.3 79.6 13.4 %
Fuel consumed, in gallons (millions) 307 287 7.0 %
Number of Employees at period-end 30,974 31,522 (1.7)%
Size of fleet at period-end 424 393 7.9 %
</Table>
Material Changes in Results of Operations
Summary
The operating environment for airlines continued to present significant
challenges for the industry during first quarter 2005. The price of fuel, an
airline's second largest expense after labor, reached record-high levels, and
stubbornly remained at historically elevated levels, with crude oil prices
exceeding $45 per barrel for nearly the entire first quarter 2005. What
makes this especially significant is not the fact that prices have spiked
upwards-brief ascents are common occurrences for volatile commodities such as
energy-but the fact that prices have remained at historically high
<Page>
levels for a significant period of time. This has not happened in past
periods. Fortunately, the Company's hedging program greatly mitigated these
record-high market fuel prices during first quarter 2005, as hedging gains
reduced fuel and oil expense by $155 million. In addition, the Company
recorded $27 million in "Other gains" in accordance with SFAS 133. See Note
5 to the unaudited condensed consolidated financial statements. However,
even with the Company's strong hedging position, fuel cost per gallon
increased 13.4 percent versus the same prior year period.
Despite this cost pressure and the weak airline industry revenue
environment, first quarter 2005 was the Company's 56th consecutive quarterly
profit and represented a significant increase in profits compared to first
quarter 2004.. The Company's first quarter 2005 net income was $76
million ($.09 per share, diluted), an increase of $50 million, or 192.3
percent, compared to first quarter 2004 net income of $26 million ($.03 per
share, diluted). Operating income increased $60 million, or 130.4 percent
compared to first quarter 2004. This significant increase in operating
income was due to a 1.9 percent increase in RASM (revenue per available seat
mile) and to the Company's ongoing cost reduction efforts, which resulted in
a 1.5 percent decrease in CASM (cost per available seat mile.)
A portion of the CASM decrease was due to first quarter 2004 costs
associated with the Company's Reservations Centers consolidation. Excluding
these costs, however, year-over-year unit costs also decreased slightly. See
Note 7 to the unaudited condensed consolidated financial statements for more
information on the Reservations Centers consolidation. The decrease was in
part due to an increase in the productivity of the Company's workforce. As a
result, the Company has been able to expand flights while simultaneously
decreasing overall headcount. At March 31, 2005, the Company's headcount per
aircraft was 73 versus a year-ago level of 80. Items contributing to the
reduction in headcount include: shifting ticket distribution to the internet,
allowing the Company to decrease its investment in "brick and mortar"
reservations centers (see Note 7 to the unaudited condensed consolidated
financial statements); the use of RAPID CHECK-IN kiosks at the airport; the
ability to obtain boarding passes via the internet at www.southwest.com;
initiatives to re-allocate headcount by offering transfer opportunities to
Employees in departments that may be overstaffed to areas where the Company
is continuing to grow; and during 2004 offering a voluntary early out option
to all of its Employees, except officers. These and other initiatives helped
the Company to absorb cost pressures, such as higher wage rates and the
increase in fuel prices.
Based on recent trends, the Company does not expect second quarter 2005
unit costs, excluding fuel, to significantly exceed first quarter 2005's 6.32
cents per ASM. The Company also expects our 2005 annual CASM, excluding
fuel, to be in line with, or below, 2004 levels. The Company will also begin
service to Pittsburgh, Pennsylvania, in May 2005.
Comparison of three months ended March 31, 2005, to three months ended March
31, 2004
Revenues
Consolidated operating revenues increased by $179 million, or 12.1
percent, primarily due to a $164 million, or 11.5 percent, increase in
<Page>
passenger revenues. The increase in passenger revenues was primarily due to
a 12.3 percent increase in revenue passenger miles (RPMs) flown.
First quarter 2005 capacity, as measured by available seat miles
(ASMs), increased 10.1 percent compared to first quarter 2004. The capacity
increase resulted from the net addition of 31 aircraft (net of 21
retirements) since the end of first quarter 2004. The first quarter 2005
load factor was 65.4 percent, an increase of 1.2 points compared to 2004.
The Company also experienced a 9.2 percent increase in revenue passengers
carried compared to first quarter 2004.
The first quarter 2005 passenger yield per RPM decreased .7 percent to
12.03 cents from 12.11 cents in first quarter 2004. The lower RPM yield was
primarily due to heavy fare discounting arising as a result of the glut in
industry seats available, but was partially offset by modest fare increases
since first quarter 2004. Unit revenue (operating revenue per ASM) increased
1.9 percent to 8.22 cents compared to first quarter 2004, however, as higher
load factors and stronger freight and other revenues slightly offset the
decline in RPM yield. The Company's March and first quarter 2005 passenger
traffic benefited from the inclusion of the Easter Holiday, compared to 2004,
when Easter fell in April. Revenue trends were also favorably impacted by
the Company's recent codeshare agreement with ATA Airlines Inc., and by
competitive capacity reductions in certain markets. At the current juncture,
it appears likely that, due to the timing of the Easter holiday, second
quarter 2005 load factors will decline relative to last year's record levels.
Therefore, it is difficult to predict whether or not the Company will have
favorable year-over-year passenger unit revenue comparisons in second quarter
2005. However, since April 2005 unit revenue could be down as much as 5
percent on a year-over-year basis, it will be a challenge to match second
quarter 2004's unit revenue of 9.14 cents.
Consolidated freight revenues increased by $9 million, or 36.0 percent.
Approximately 75 percent of the increase was due to an increase in mail
revenues, as the U.S. Postal Service shifted more business to commercial
carriers. The Company epxects year-over-year freight revenue growth in second
quarter 2005; however, at a lower rate than in first quarter 2005. Other
revenues increased by $6 million, or 19.4 percent, compared to first quarter
2004 primarily due to a 21.8 percent increase in commissions earned from
programs the Company sponsors with certain business partners, such as the
Company sponsored Chase Visa card. The Company expects second quarter 2005
revenues to be similar to first quarter 2005's Other revenues of $37 million.
Operating expenses
To a large extent, changes in operating expenses for airlines are
driven by changes in capacity, or ASMs. The following presents Southwest's
operating expenses per ASM for the three months ended March 31, 2005 and
2004, followed by explanations of changes on a per-ASM basis:
<Table>
<Caption>
Three months ended March 31, Per ASM Percent
2005 2004 Change Change
Salaries, wages, and benefits 3.16 3.21 (.05) (1.6)
Fuel and oil 1.38 1.25 .13 10.4
Maintenance materials
and repairs .50 .62 (.12) (19.4)
Aircraft rentals .21 .24 (.03) (12.5)
Landing fees and other rentals .56 .56 - -
Depreciation .55 .56 (.01) (1.8)
Other operating expenses 1.34 1.38 (.04) (2.9)
Total 7.70 7.82 (.12) (1.5)
</Table>
<Page>
Operating expenses per ASM were 7.70 cents, a 1.5 percent decrease
compared to 7.82 cents for first quarter 2004. The CASM decrease was driven
primarily by lower maintenance costs and lower salaries, wages, and benefits,
partially offset by higher fuel and oil expense. Excluding fuel, CASM was
3.8 percent lower than first quarter 2004, at 6.32 cents per ASM.
Salaries, wages, and benefits expense per ASM decreased 1.6 percent.
In first quarter 2004, salaries, wages, and benefits included approximately
$13 million of costs related to severance and relocation packages and a
reduction of approximately $3 million in profitsharing expense associated
with the consolidation of the Company's reservations operations. See Note 7
to the condensed consolidated financial statements for further information on
the Company's Reservations Centers consolidation. Excluding these costs,
salaries, wages, and benefits were basically flat on a per ASM basis compared
to first quarter 2004. Higher average wage rates and higher profitsharing
expense per ASM from the increase in earnings were offset by continued
productivity efforts that have enabled the Company to reduce headcount while
continuing to grow its aircraft fleet. The Company expects these trends to
continue and to experience lower year-over-year unit cost in Salaries, wages,
and benefits in second quarter 2005, excluding the second quarter 2004 costs
incurred associated with the Company's voluntary early-out plan offered to all
Employees except officers, and charges associated with the Company's labor
agreement with its Flight Attendants.
Fuel and oil expense per ASM increased 10.4 percent primarily due to an
increase in the average jet fuel price per gallon. The average fuel cost per
gallon in first quarter 2005 was 90.3 cents, 13.4 percent higher than first
quarter 2004, including the effects of hedging activities. For first quarter
2005, the Company was hedged for 86 percent of its fuel needs, resulting in
gains recorded in fuel and oil expense of $155 million. In other efforts to
control fuel expense, the Company has added Blended Winglets to all of its
Boeing 737-700 aircraft. These enhancements extend the range of these
aircraft, enable the aircraft to burn less fuel, lower potential engine
maintenance costs, and reduce takeoff noise. All new 737-700 aircraft now
arrive from Boeing with winglets already installed. The Company expects
annual fuel consumption savings of approximately three percent for each
aircraft outfitted with the winglets. For second quarter 2005, the Company
has fuel hedges in place for approximately 83 percent of its expected fuel
consumption with a combination of derivative instruments that effectively cap
prices at approximately $26 per barrel of crude oil. The majority of the
Company's near term hedge positions are in the form of option contracts. During
the first three months of 2005, because of the continued rise in energy prices,
the fair values of the Company's fuel hedge contracts have increased
significantly. At March 31, 2005, the estimated gross fair value of these
contracts was $1.7 billion. See Note 5 to the unaudited condensed
consolidated financial statements for further discussion of the Company's
hedging activities.
<Page>
Maintenance materials and repairs per ASM decreased 19.4 percent
primarily due to a decrease in repair events for aircraft engines. The
Company currently expects a similar year-over-year decline in maintenance
materials and repairs per ASM for second quarter 2005, primarily due to
less scheduled maintenance activity.
Aircraft rentals per ASM decreased 12.5 percent compared to first
quarter 2004. The majority of the decrease per ASM was due to the Company's
growth occurring with purchased aircraft. All of the aircraft acquired in
2004, except for one, and all of the aircraft acquired in 2005, are owned by
the Company. The Company currently expects a similar year-over-year decline
in aircraft rentals per ASM for second quarter 2005.
Landing fees and other rentals per ASM were flat compared to first
quarter 2004, as higher landing fees per ASM were offset by a decline in
other rentals per ASM. The Company experienced an 8.0 percent increase in
landing fees per ASM, primarily due to higher rates paid. There was a 6.5
percent decrease in other rentals expense per ASM, primarily due to first
quarter 2005 credits from airports' audits of prior periods. The Company
currently expects second quarter 2005 landing fees and other rentals per ASM
to be flat or slightly up from second quarter 2004.
Depreciation expense per ASM decreased 1.8 percent primarily due to the
retirement of equipment associated with the Company's 737-200 aircraft, the
remainder of which were phased out of the Company's fleet in January 2005.
The Company currently expects depreciation per ASM to be comparable to first
quarter 2005.
Other operating expenses per ASM decreased 2.9 percent compared to
first quarter 2004. Approximately half of the decrease was due to certain
first quarter 2004 asset write-offs, including assets written off in
connection with the Reservations Centers consolidation. See Note 7 to the
condensed consolidated financial statements. The remainder of the decrease
was primarily due to lower personnel costs, principally moving costs incurred
in first quarter 2004, also associated with the Reservations Centers
consolidation. These and other smaller decreases were partially offset by
higher fuel sales taxes due to the substantial increase in fuel prices. The
Company currently expects Other operating expenses per ASM for second quarter
2005 to approximate the 1.34 cents per ASM experienced in first quarter 2005.
Through the 2003 Emergency Wartime Supplemental Appropriations Act, the
federal government has continued to provide supplemental third-party war-risk
insurance coverage to commercial carriers for renewable 60-days periods, at
substantially lower premiums than prevailing commercial rates and for levels
of coverage not available in the commercial market. The government-provided
supplemental coverage from the Wartime Act is currently set to expire
on August 31, 2005, but is currently expected to be extended to December 31,
2005. If such coverage is not extended by the government beyond either of
these dates, the Company could incur substantially higher insurance costs.
Other
Interest expense increased 42.1 percent compared to first quarter 2004.
The majority of the increase was due to the issuance of new debt, including
the Company's September 2004 issuance of $350 million senior unsecured Notes,
<Page>
fourth quarter 2004 issuance of $112 million of French credit agreements, and
the February 2005 issuance of $300 million senior unsecured Notes. These new
issuances were partially offset by the November 2004 redemption of $175
million aircraft secured Notes, and the March 2005 redemption of $100 million
senior unsecured Notes. See Note 8 to the unaudited condensed consolidated
financial statements for more information.
Capitalized interest decreased by $1 million, or 10.0 percent,
primarily due to a decrease in progress payment balances for future aircraft
deliveries.
Interest income increased by $3 million, or 75.0 percent, primarily due
to an increase in rates earned on cash and investment balances.
"Other (gains) losses, net" primarily includes amounts recorded in
accordance with SFAS 133. See Note 5 to the unaudited condensed consolidated
financial statements for more information on the Company's hedging
activities. During first quarter 2005, the Company recognized approximately
$9 million of expense related to amounts excluded from the Company's
measurements of hedge effectiveness and $27 million in income related to the
ineffectiveness of its hedges. In first quarter 2004, the Company recognized
approximately $6 million of expense related to amounts excluded from the
Company's measurements of hedge effectiveness and $6 million in income
related to the ineffectiveness of its hedges.
The Company's effective tax rate decreased to 33.1 percent in first
quarter 2005 from 37.9 percent in first quarter 2004. The lower rate in 2005
reflected a $6 million ($.01 per share, diluted) reduction in income tax
expense, attributable to the favorable resolution of an industry-wide issue
regarding the tax treatment of certain aircraft engine maintenance costs.
The Company currently expects its second quarter 2005 effective rate to
approximate 38 percent and its full year 2005 effective rate to be in the 37 to
38 percent range.
Liquidity and Capital Resources
Net cash provided by operating activities was $886 million for the
three months ended March 31, 2005, compared to $417 million in the same prior
year period. The increase was primarily due to an increase in Accounts
payable and accrued liabilities, primarily from $490 million more in
counterparty deposits associated with the Company's fuel hedging program.
See Item 3, and Notes 5 and 9 to the unaudited condensed consolidated
financial statements. Net cash provided by operating activities was $1.6
billion for the 12 months ended March 31, 2005. Cash generated from
operating activities for the 12 months ended March 31, 2005, was primarily
used to finance capital expenditures.
Cash flows used in investing activities during the three months ended
March 31, 2005, totaled $172 million compared to $321 million in 2004.
Investing activities in both years consisted primarily of payments for new
737-700 aircraft delivered to the Company and progress payments for future
aircraft deliveries. In addition, investing activities now includes changes
in the Company's balance of short-term investments, namely auction rate
securities, which represents a change in classification from prior periods.
<Page>
See Note 1 to the condensed consolidated financial statements. Cash flows
used in investing activities for the 12 months ended March 31, 2005 totaled
$1.6 billion.
Net cash generated from financing activities during the three months
ended March 31, 2005, was $146 million compared to $98 million used in
financing activities in 2004. The Company generated $300 million from the
February 2005 issuance of senior unsecured Notes due 2017. This was
partially offset by cash used to redeem the $100 million senior unsecured 8%
Notes due March 1, 2005, and to repurchase $55 million of the Company's
common stock.
Contractual Obligations and Contingent Liabilities and Commitments
Southwest has contractual obligations and commitments primarily for
future purchases of aircraft, payment of debt, and lease arrangements.
Following the receipt of 12 new 737-700 aircraft from Boeing in the first
three months of 2005, the Company has 22 737-700 aircraft deliveries for the
remainder of 2005. Following the first quarter exercise of options to
purchase an additional seven aircraft in 2006, the Company has firm
commitments for the purchase of 33 new 737-700 aircraft to be delivered in
2006, along with an option for one additional aircraft. The following table
details the Company's current (as of March 31, 2005) firm orders, options,
and purchase rights through 2012.
<Table>
<Caption>
Current Schedule
Firm Options*
2005** 34 -
2006 33 1
2007 25 29
2008 6 45
2009-2012 - 177
Total 98 252
* Includes purchase rights
** Includes 12 aircraft delivered through March 31, 2005
</Table>
The following table details information on the 424 aircraft in the
Company's fleet as of March 31, 2005:
<Table>
<Caption>
Average Number Number Number
737 Type Seats Age (Yrs) of Aircraft Owned Leased
- -300 137 13.9 194 110 84
- -500 122 13.9 25 16 9
- -700 137 3.4 205 203 2
TOTALS 8.8 424 297 95
</Table>
<Page>
The Company has the option, which must be exercised two years prior to
the contractual delivery date, to substitute -600s or -800s for the -700s.
Aggregate funding needed for firm aircraft commitments, as of March 31, 2005,
was approximately $1.8 billion, subject to adjustments for inflation, due as
follows: $600 million remaining in 2005, $699 million in 2006, $420 million
in 2007, and $80 million thereafter.
In January 2004, the Company's Board of Directors authorized the
repurchase of up to $300 million of the Company's common stock, utilizing
proceeds from the exercise of Employee stock options. Repurchases have been
made in accordance with applicable securities laws in the open market or in
private transactions from time to time, depending on market conditions.
During first quarter 2005, the Company completed this program by repurchasing
3.9 million shares. See Item 2 of Part II of this filing for further
information.
The Company has various options available to meet its capital and
operating commitments, including cash on hand at March 31, 2005, of $1.9
billion, internally generated funds, and the Company's fully available $575
million revolving credit facility. The Company will also consider
various borrowing or leasing options to maximize earnings and supplement cash
requirements.
During first quarter 2005, the Company issued $300 million senior
unsecured Notes (Notes) due 2017. The Notes bear interest at 5.125 percent,
payable semi-annually in arrears, with the first payment due on September 1,
2005. Also during first quarter 2005, the Company redeemed its $100 million
8% senior unsecured notes on the maturity date of March 1, 2005. See Note 8
to the condensed consolidated financial statements.
The Company currently has outstanding shelf registrations for the
issuance of up to $350 million in public debt securities and pass through
certificates, which it may utilize for aircraft financings or other purposes
in the future.
Forward looking statements
Some statements in this Form 10-Q (or otherwise made by the Company or on the
Company's behalf from time to time in other reports, filings with the
Securities and Exchange Commission, news releases, conferences, World Wide
Web postings or otherwise) which are not historical facts may be "forward-
looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of
1995. Forward-looking statements include statements about Southwest's
estimates, expectations, beliefs, intentions, or strategies for the future,
and the assumptions underlying these forward-looking statements. Southwest
uses the words "anticipates," "believes," "estimates," "expects," "intends,"
"forecasts," "may," "will," "should," and similar expressions to identify
these forward-looking statements. Forward-looking statements involve risks
and uncertainties that could cause actual results to differ materially from
historical experience or the Company's present expectations. Factors that
could cause these differences include, but are not limited to:
- - Items directly linked to the September 11, 2001, terrorist attacks, such as
the adverse impact of new airline and airport security directives on the
<Page>
Company's costs and Customer demand for travel, changes in the
Transportation Security Administration's scope for managing U.S. airport
security, and the possibility of further terrorist attacks or additional
incidents that could cause the public to question the safety and/or
efficiency of air travel.
- - The availability and cost of war-risk and other aviation insurance,
including the federal government's provision of third party war-risk
coverage to airlines. The government's coverage currently extends to
August 31, 2005, and the Company expects it will be extended further to
December 31, 2005, by the Department of Transportation. However, there
are no assurances that such coverage will be extended beyond August 31,
2005 or December 31, 2005.
- - War or other military actions by the U.S. or others.
- - Competitive factors, such as fare sales and capacity decisions by the
Company and its competitors, changes in competitors' flight schedules,
mergers and acquisitions, codesharing programs, and airline bankruptcies.
- - General economic conditions, which could adversely affect the demand for
travel in general and consumer ticket purchasing habits, as well as
decisions by major freight Customers on how they allocate freight
deliveries among different types of carriers.
- - Factors that could affect the Company's ability to control its costs, such
as the results of Employee labor contract negotiations, Employee hiring and
retention rates, costs for health care, capacity decisions by the Company
and its competitors, unscheduled required aircraft airframe or engine
repairs and regulatory requirements, changes in commission policy,
availability of capital markets, and future financing decisions made by the
Company.
- - Factors affecting the Company's fuel expense, including, but not limited
to, the largely unpredictable prices of jet fuel, crude oil, heating oil,
and unleaded gasoline, the continued effectiveness of the Company's fuel
hedges, changes in the Company's overall fuel hedging strategy, and the
Company's interpretation and application of the complex requirements of
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as
amended.
- - Disruptions to operations due to adverse weather conditions and air traffic
control-related constraints.
- - Internal failures of technology or large-scale external interruptions in
technology infrastructure, such as power, telecommunications, or the
internet.
- - Risks involved with the Company's acquisition of certain assets from ATA
Airlines, Inc. (ATA), including the collectibility of loans made to ATA,
and the continued success of the Company's codeshare agreement with ATA.
Caution should be taken not to place undue reliance on the Company's forward-
looking statements, which represent the Company's views only as of the date
<Page>
this report is filed. The Company undertakes no obligation to update publicly
or revise any forward-looking statement, whether as a result of new
information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As discussed in Note 5 to the unaudited condensed consolidated financial
statements, the Company utilizes financial derivative instruments to hedge
its exposure to material increases in jet fuel prices. During the first
three months of 2005, because of the continued upward trend in energy
prices, the fair values of the Company's fuel hedge contracts have increased
significantly. At March 31, 2005, the estimated gross fair value of
outstanding contracts was $1.7 billion, compared to $796 million at December
31, 2004.
Outstanding financial derivative instruments expose the Company to credit
loss in the event of nonperformance by the counterparties to the agreements.
However, 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 risk, the Company selects
and periodically reviews 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 March 31,
2005, the Company had agreements with seven counterparties containing early
termination rights and/or bilateral collateral provisions whereby security is
required if market risk exposure exceeds a specified threshold amount or
credit ratings fall below certain levels. At March 31, 2005, the Company
held $820 million in fuel hedge related cash collateral deposits and $150
million in U.S. Treasury Bills, under these bilateral collateral provisions.
These collateral deposits serve to decrease, but not totally eliminate, the
credit risk associated with the Company's hedging program. The cash deposits,
which can have a significant impact on the Company's cash balance and cash
flows as of and for a particular operating period, are included in "Accrued
liabilities" on the Consolidated Balance Sheet and are included as "Operating
cash flows" in the Consolidated Statement of Cash Flows. In accordance with
SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", the U.S. Treasury Bills, supplied as non-
cash collateral by counterparties, are not reflected on the Company's
Consolidated Balance Sheet. See also Note 9 to the unaudited condensed
consolidated financial statements.
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, 2004
and Note 5 to the unaudited condensed consolidated financial statements for
further information about Market Risk.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure
that it is able to collect the information it is required to disclose in the
reports it files with the Securities and Exchange Commission (SEC), and to
process, summarize and disclose this information within the time periods
<Page>
specified in the rules of the SEC. Based on an evaluation of the Company's
disclosure controls and procedures as of the end of the period covered by
this report conducted by the Company's management, with the participation of
the Chief Executive and Chief Financial Officers, the Chief Executive and
Chief Financial Officers believe that these controls and procedures are
effective to ensure that the Company is able to collect, process, and
disclose the information it is required to disclose in the reports it files
with the SEC within the required time periods.
Internal Control over Financial Reporting. During first quarter 2005, the
Company implemented a new fuel inventory management application that improved
the efficiency of the Company 's fuel purchasing, inventory, and payment
processes. As with any new information technology application the Company
implements, this application, along with the internal controls over financial
reporting included in this process, were appropriately tested for
effectiveness prior to implementation. The Company expects this new
application to improve its internal controls over financial reporting for its
fuel management process.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is subject to various legal proceedings and claims arising in the
ordinary course of business, including, but not limited to, examinations by
the Internal Revenue Service (IRS). The IRS regularly examines the Company's
federal income tax returns and, in the course thereof, proposes adjustments
to the Company's federal income tax liability reported on such returns. It
is the Company's practice to vigorously contest those proposed adjustments it
deems lacking of merit.
The Company's management does not expect that the outcome in any of its
currently ongoing legal proceedings or the outcome of any proposed
adjustments presented to date by the IRS, individually or collectively, will
have a material adverse effect on the Company's financial condition, results
of operations or cash flow.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c)
Issuer Purchases of Equity Securities (1)
<Table>
<Caption>
(a) (b) (c) (d)
Total number of Maximum dollar
shares purchased value that may
Total number Average as part of publicly yet be purchased
of shares price paid announced plans under the plans
Period purchased per share or programs or programs
January 1,
2005 through
January 31,
2005 2,400,000 $14.16 2,400,000 $20,370,022
<Page>
February 1,
2005 through
February 28,
2005 1,458,500 $14.38 1,458,500 $ -
March 1,
2005 through
March 31,
2005 - $ - - $ -
Total (2) 3,858,500 3,858,500
</Table>
(1) On January 22, 2004, the Company announced a program for the repurchase
of up to $300 million of the Company's common stock, utilizing present
and anticipated proceeds from the exercise of Employee stock options.
Repurchases were made in accordance with applicable securities laws in
the open market or in private transactions from time to time, depending
on market conditions. The program was completed during first quarter
2005.
(2) All shares were purchased pursuant to the publicly announced program.
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
a) Exhibits
10.1 Supplemental Agreements Nos. 42, 43, and 44 to Purchase Agreement
No. 1810, dated January 19, 1994 between The Boeing Company and
Southwest. 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.
31.1 Rule 13a-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a) Certification of Chief Financial Officer
32.1 Section 1350 Certifications of Chief Executive Officer and Chief
Financial Officer
<Page>
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.
April 15, 2005 By /s/ Laura Wright
Laura Wright
Chief Financial Officer
(Principal Financial and
Accounting Officer)
<Page>
EXHIBIT INDEX
Exhibit No. Description
Exhibit 10.1 - Supplemental Agreements Nos. 42, 43, and 44 to
Purchase Agreement No. 1810, dated January 19, 1994
between The Boeing Company and Southwest. 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.
Exhibit 31.1 - Rule 13a-14(a) Certification of Chief Executive
Officer
Exhibit 31.2 - Rule 13a-14(a) Certification of Chief Financial
Officer
Exhibit 32.1 - Section 1350 Certifications of Chief Executive
Officer and Chief Financial Officer
<Page>