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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 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1995 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of 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) 904-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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 [ ]
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. [ ]
Aggregate market value of Common Stock held by nonaffiliates as of February 29,
1996:
$4,352,674,000
Number of shares of Common Stock outstanding as of the close of business on
February 29, 1996:
144,399,522 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of
Shareholders, May 16, 1996: PART III
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PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Southwest Airlines Co. (Southwest) is a major domestic airline that
provides 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 1995, Southwest operated 224 Boeing 737 aircraft and
provided service to 46 airports in 45 cities primarily in the midwestern,
southwestern, and western regions of the United States. Southwest commenced
service to Tampa and Ft. Lauderdale, Florida in January 1996 and will begin
service to Orlando, Florida in April 1996.
On December 31, 1993, Southwest acquired Morris Air Corporation
(Morris) in a stock-for-stock exchange, issuing approximately 3.6 million
shares of Southwest Common Stock in exchange for all of the outstanding shares
of Morris. During 1994, the operations of Morris were substantially integrated
with those of Southwest, and Morris ceased service as a certificated air
carrier in March 1995. Unless the context requires otherwise, references in
this annual report to the "Company" include Southwest and Morris.
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 per gallon for
scheduled carrier service over the past five years was as follows:
1991 $.66
1992 $.61
1993 $.59
1994 $.54
1995 $.55
The Company is unable to predict the extent of future fuel cost
changes. The Company has standard industry arrangements with major fuel
suppliers. Standard industry fuel contracts do not provide material protection
against price increases or for assured availability of supplies. The Company
uses various price-risk management techniques, including derivative products
such as fixed-price swaps, caps, and collars, to help protect against price
increases. To date, not more than two percent of then-current usage was hedged
in this manner. Although market conditions can significantly impact the price
of jet fuel, at present, these conditions have not resulted in an inadequate
supply of jet fuel. For more discussion of current jet fuel costs and the
impact of these costs on the Company's operations, see Management's Discussion
and Analysis of Financial Condition and Results of Operations.
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REGULATION
Economic. The Dallas Love Field section of the International Air
Transportation Competition Act of 1979 (Competition Act), 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 Arkansas, Louisiana, New Mexico, Oklahoma, and Texas if (a) "such
air 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." Southwest does not interline or offer
joint fares with any other air carrier. The Competition Act does not restrict
Southwest's intrastate Texas flights or its air service from points other than
Love Field to points beyond Texas and the four contiguous states.
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 Love Field section of the Competition
Act, 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.
The national budget impasse, lapse of the 10 percent ticket tax and
its presumed reinstatement and proposed deferral of the jet fuel tax present
uncertainty for 1996 and future periods. Further, several bills have been
introduced in Congress with a goal of "reforming" the Federal Aviation
Administration ("FAA") by, among other things, modifying the method of funding
the FAA. At the current time, Southwest is unable to predict how these issues
will be resolved and what impact, if any, resolution of these uncertainties
will have on future operating results or financial condition.
Safety. The Company is subject to the jurisdiction of the 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.
Environmental. The Airport Noise and Capacity Act of 1990 (ANCA)
requires the phase out of Stage 2 airplanes (which meet less stringent noise
emission standards than later model Stage 3 airplanes) in the contiguous 48
states by December 31, 1999. FAA rules establish future interim compliance
dates for ANCA of December 31, 1996 and December 31, 1998. An operator may
comply by either implementing a reduction of the operator's base level, as
defined in ANCA, of Stage 2 aircraft by at least 50 percent at December 31,
1996 and 75 percent at December 31, 1998, or by operating a fleet that is at
least 65 percent Stage 3 by December 31, 1996 and 75 percent by December 31,
1998. Selection of
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one of the two alternative compliance techniques is not irrevocable and
operators are free to opt for one method at one compliance date and another at
the next. Operation of Stage 2 aircraft after December 31, 1999 is prohibited,
subject, however, to an extension of the final compliance date to December 31,
2003, if at least 85 percent of the aircraft used by the operator in the
contiguous United States will comply with Stage 3 noise levels by July 1, 1999
and the operator successfully obtains a waiver from the FAA of the December 31,
1999 final phaseout date. Statutory requirements to obtain a waiver include a
determination by the FAA that the waiver is in the public interest or would
enhance competition or benefit service to small communities. There is no
assurance that such a waiver is obtainable.
The Company's fleet, as of December 31, 1995, consisted of 50 Stage 2
aircraft and 174 Stage 3 aircraft, yielding a Stage 3 percentage of 78 percent.
Accordingly, the Company exceeds the Stage 3 fleet percentage requirement for
the December 31, 1996 and December 31, 1998 interim compliance dates.
As of December 31, 1995, of the 50 Stage 2 aircraft operated by the
Company, 30 are leased from third parties and 20 are owned by the Company. The
Company can comply with the rules by acquiring additional Stage 3 aircraft,
returning Stage 2 aircraft to the lessors as the leases terminate according to
their terms, retiring owned Stage 2 aircraft, or hushkitting Stage 2 aircraft.
Because the Company already complies with the December 31, 1998 interim
compliance requirement of a 75 percent Stage 3 fleet, the Company could operate
all 50 of its Stage 2 aircraft until December 31, 1999. Based upon the
Company's current schedule for delivery of new Stage 3 aircraft, including
options, and the Company's planned retirement schedule for Stage 2 aircraft,
assuming no hushkitting, the Company will achieve 85 percent compliance by July
1, 1999. This would qualify the Company to apply for a waiver from the final
compliance date, which, if obtained, could permit the Company to continue
operation of the then remaining 43 Stage 2 aircraft until, at the latest,
December 31, 2003.
ANCA also requires the FAA to establish parameters within which any
new Stage 2 and Stage 3 noise or access restrictions at individual airports
must be developed. The published rules generally provide that local noise
restrictions on Stage 3 aircraft first effective after October 1990 require FAA
approval, and establish a regulatory notice and review process for local
restrictions on Stage 2 aircraft first proposed after October 1990. Certain
airports, including Dallas Love Field, Los Angeles, San Diego, San Francisco,
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 are considering adopting similar noise regulations.
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 of materials into the environment.
MARKETING AND COMPETITION
Southwest focuses 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 1995 was 400
miles with an average duration of approximately one hour. At yearend,
Southwest served 350 nonstop city pairs with an average weekday frequency of
six roundtrips per city pair.
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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 local, not connecting, traffic. As a result, approximately 80
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, Burbank, Oakland, San Jose and
Ft. Lauderdale 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,
approximately 20 minutes, thereby reducing the number of aircraft and gate
facilities that would otherwise be required. Southwest does not interline with
other jet 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 May 1994, the computer reservations systems (CRSs) owned by United
Airlines (Apollo) and Continental Airlines (System One) disabled automated
ticketing for Southwest travel. Rather than pay the fees associated with CRS
participation in Apollo and System One, Southwest took the following actions:
Southwest introduced a Ticketless travel option, available system-wide in
January 31, 1995, eliminating the need to print a paper ticket altogether;
provided direct access to its own reservation system and ticketing for the 50
largest travel agencies (SWAT); instituted overnight delivery of
Southwest-produced tickets for approximately 300 large travel agencies; and
improved access to Ticket By Mail for direct Customers by reducing the time
limit from seven days out from the date of travel to three days. Southwest
also entered into a new arrangement with SABRE, the CRS in which Southwest has
histori- cally participated to a limited extent, providing for ticketing and
automated booking on Southwest in a very cost- effective manner. By December
31, 1995, approximately 35% of Southwest's customers were choosing the
ticketless travel option.
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 have initiated or are studying
low-cost, shorthaul service in markets served by the Company, which represents
a more direct threat in Southwest's market niche. 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. For more discussion on the current
competitive environment for Southwest, see Management's Discussion and Analysis
of Financial Condition and Results of Operations.
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 which 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 in 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.
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FREQUENT FLYER AWARDS
Southwest's frequent flyer program, The Company Club, is based on
trips flown rather than mileage. The Company Club offers one free roundtrip
travel award to any Southwest destination after flying eight roundtrips (or 16
one-way trips) on Southwest within a consecutive twelve-month period.
The trips flown as credit towards a free travel award certificate are
valid for twelve months only; the free travel award is automatically generated
when earned by the Customer rather than allowing the Customer to bank the trip
credits indefinitely; and the free travel award is valid for one year with an
automatic expiration date. Based on the issuance of free travel awards to
qualified members, coupled with the foregoing program characteristics and the
use of "black out" dates for the free travel awards during peak holiday
periods, the financial impact of free travel awards used on the Company's
consolidated financial statements has not been material. Free travel awards
redeemed were approximately 417,000, 279,000, and 256,000 during 1995, 1994,
and 1993, respectively. The amount of free travel award usage as a percentage
of total Southwest revenue passengers carried was 1.9 percent in 1995, 1.4
percent in 1994 and 1.5 percent in 1993.
The Company accounts for free travel awards using the incremental cost
method, consistent with the other major airlines. This method recognizes an
average incremental cost to provide roundtrip transportation to one additional
passenger. The incremental cost to provide free transportation 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. The estimated incremental
costs include passenger costs such as beverage and snack supplies, baggage
claims, baggage handling, and liability insurance; operations costs such as
security services, airport rentals, fuel, oil, and into-plane charges; and
reservations costs, such as communications and system operations fees. The
liability for free travel awards earned but not used at December 31, 1995 and
1994 was not material.
The number of free travel awards for Southwest outstanding at December
31, 1995 and 1994 was approximately 295,000 and 248,000, respectively. These
numbers do not include partially earned awards. The Company currently does not
have a system to accurately estimate partially earned awards. However, these
partially earned awards may equate to approximately 60-70 percent of the
current outstanding awards. Since the inception of The Company Club in 1987,
approximately 15 percent of all award certificates have expired without being
used.
EMPLOYEES
At December 31, 1995, Southwest had 19,933 employees, consisting of
5,499 flight, 872 maintenance, 11,368 ground customer service and 2,194
management, accounting, marketing, and clerical personnel.
Southwest has nine collective bargaining agreements covering
approximately 83 percent of its employees. Southwest's fleet service employees
are subject to an agreement with the Ramp, Operations and Provisioning
Association, which becomes amendable in December 1999. Customer service and
reservation employees are subject to an agreement with the International
Association of Machinists and Aerospace Workers, AFL-CIO (IAM), which becomes
amendable in November 1997. Flight attendants are subject to an agreement with
the Transportation Workers Union of America, AFL-CIO, which becomes amendable
May 31, 1996. The pilots are subject to an agreement with the Southwest
Airlines Pilots' Association (SWAPA), which becomes amendable in September 1999
(described below). Flight dispatchers are represented by the Southwest
Airlines Employees Association, pursuant to an agreement which becomes
amendable in November 1997. Aircraft cleaners and stock clerks are subject to
agreements with the International Brotherhood of Teamsters, which become
amendable in August 2000. Mechanics and flight simulator technicians are
represented by the International Brotherhood of Teamsters
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pursuant to separate agreements. The mechanics' agreement becomes amendable in
August 2001 and the flight simulator technicians are in negotiations. The
flight/ground school instructors are subject to an agreement with the Southwest
Airlines Professional Instructors Association which becomes amendable in
December 2000.
In January 1995, Southwest's pilots ratified a ten-year labor contract
that calls for no wage increases in the first five years and three percent
annual wage increases in three of the last five years of the contract.
Initially, the pilots received options to purchase approximately 14.5 million
shares of Southwest common stock at $20 per share over the term of the
contract; pilots hired subsequently will receive additional grants at a five
percent premium over then current fair market value, up to a total of
18,000,000 shares that can be issued under the stock option plan. Pilots will
be eligible for profitability bonuses of up to three percent of compensation in
three of the first five years and profitability-based pay increases up to three
percent in two of the second five years of the contract. The pilot group may
choose to reopen the contract in five years, in which event all unexercised
options will terminate on December 1, 1999.
ITEM 2. PROPERTIES
AIRCRAFT
Southwest operated a total of 224 Boeing 737 aircraft as of December
31, 1995, of which 100 and 13 were under operating and capital leases,
respectively. The remaining 111 aircraft are owned.
In January 1994, Southwest entered into an agreement with The Boeing
Company, pursuant to which Southwest is the launch customer for the Boeing
737-700 aircraft, the newest generation of the Boeing 737 aircraft type. As
the launch customer, Southwest has agreed to purchase sixty-three Boeing
737-700 aircraft from 1997 to 2001, with options for an additional 63 737-700
aircraft from 1998 to 2004.
In total, at December 31, 1995, the Company had 100 firm orders and 67
options as follows:
Type Seats 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
---- ----- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
737-200 122 50 --- --- --- --- --- --- --- --- ---
737-300 137 149 20 21 --- --- --- --- --- --- ---
737-500 122 25 --- --- --- --- --- --- --- --- ---
737-700 137 --- --- 4 21 21 21 18 18 18 5
Subsequent to yearend, four 1997-300 options were converted to four
1999-700 options. The average age of the Company's fleet at December 31, 1995
was 7.8 years.
For information regarding the Company's obligations under capital leases
and noncancelable operating leases see Notes 6 and 7 to the Consolidated
Financial Statements.
For information concerning Southwest's aircraft purchase commitments, see
Note 4 to the Consolidated Financial Statements.
The Company has an agreement with CFM International, Inc. (a joint company
of SNECMA (France) and General Electric Company) dated May 28, 1981, as
amended, for the supply of spare engines for its Boeing 737-300, -500, and -700
aircraft. CFM also supplies the engines to The Boeing Company for original
installation on such aircraft. CFM is the sole manufacturer of engines for use
on the Boeing 737-300, -400, -500, and -700 aircraft.
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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 three 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, 1995, the Company operated nine reservation
centers. The reservation centers located in Little Rock, Arkansas; Chicago,
Illinois; Albuquerque, New Mexico; Oklahoma City, Oklahoma and Salt Lake City,
Utah occupy leased space. The Company owns its Dallas, Texas; Houston, Texas;
Phoenix, Arizona; 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 overhauls and repairs for its airframes and engines, which
comprise the majority of the annual maintenance costs.
In recent years, many airports have increased or sought to increase the
rates charged to airlines. The extent to which such charges are limited by
statute and the ability of airlines to contest such charges has been subject to
litigation, including a case recently decided against certain carriers by the
United States Supreme Court. To the extent the limitations on such charges are
relaxed or the ability of airlines to challenge such charges is restricted, the
rates charged by airports to airlines may increase substantially. Management
cannot predict the magnitude of any such increase.
ITEM 3. LEGAL PROCEEDINGS
Southwest has received examination reports from the Internal Revenue
Service proposing certain adjustments to Southwest's income tax returns for
1987 through 1991. The adjustments relate to certain types of aircraft
financings consummated by Southwest, as well as other members of the aviation
industry, during that time period. Southwest intends to vigorously protest the
adjustments made with which it does not agree. The industry's differences with
the IRS involve complex issues of law and fact which are likely to take a
substantial period of time to resolve. Management believes that final
resolution of such protest will not have a materially adverse effect upon the
results of operations of Southwest.
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 March 1, 1996) are as follows:
OFFICER
CONTINUOUSLY
NAME POSITION AGE SINCE
---- -------- --- ------------
Herbert D. Kelleher Chairman of the Board, President, 64 1967
and Chief Executive Officer
Colleen C. Barrett Executive Vice President-Customers 51 1978
and Corporate Secretary
Gary A. Barron Executive Vice President, 51 1978
Chief Operations Officer
John G. Denison Executive Vice President- 51 1986
Corporate Services
Gary C. Kelly Vice President-Finance, 40 1986
Chief Financial Officer
James F. Parker Vice President-General Counsel 49 1986
Ron Ricks Vice President-Governmental Affairs 46 1986
James C. Wimberly Vice President-Ground Operations 43 1985
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. All of the
executive officers have held their current positions with Southwest for more
than five years.
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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 were:
PERIOD DIVIDEND HIGH LOW
------ -------- ---- ---
1995
1st Quarter $.01 $20.00 $16 .38
2nd Quarter .01 25.75 17.63
3rd Quarter .01 29.88 23.63
4th Quarter .01 26.13 19.75
1994
1st Quarter $.01 $39.00 $31 .25
2nd Quarter .01 34.38 24.13
3rd Quarter .01 29.63 21.63
4th Quarter .01 23.63 15.50
As of February 29, 1996, there were 9,461 holders of record of the
Company's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following financial information for the five years ended December
31, 1995 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.
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YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
FINANCIAL DATA:
(in thousands except per share amounts)
Operating revenues . . . . . . . . . . . . . $2,872,751 $2,591,933 $2,296,673 $1,802,979 $1,379,286
Operating expenses . . . . . . . . . . . . . 2,559,220 2,275,224 2,004,700 1,609,175 1,306,675
---------- ---------- ---------- ---------- ----------
Operating income . . . . . . . . . . . . . . 313,531 316,709 291,973 193,804 72,611
Other expenses, net . . . . . . . . . . . . 8,391 17,186 32,336 36,361 18,725
---------- ---------- ---------- ---------- ----------
Income before income taxes and cumula-
tive effect of accounting changes . . . . 305,140 299,523 259,637 157,443 53,886
Provision for income taxes (1) . . . . . . . 122,514 120,192 105,353 60,058 20,738
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
accounting changes (1) . . . . . . 182,626 179,331 154,284 97,385 33,148
Cumulative effect of accounting changes . . - - 15,259(2) 12,538(3) ---
---------- ---------- ---------- ---------- ----------
Net income (1) . . . . . . . . . . . . . . . $182,626 $179,331 $ 169,543 $ 109,923 $ 33,148
========== ========== ========== ========== ==========
Net income per common and common
equivalent share before cumulative
effect of accounting changes (1) . . . . $1.23 $1.22 $1.05 $0.68 $0.25
Cash dividends per common share . . . . . . $.04000 $.04000 $.03867 $.03533 $.03333
Total assets at period-end . . . . . . . . . $3,256,122 $2,823,071 $2,576,037 $2,368,856 $1,854,331
Long-term obligations at period-end . . . . $661,010 $583,071 $639,136 $735,754 $617,434
Stockholders' equity at period-end . . . . . $1,427,318 $1,238,706 $1,054,019 $879,536 $635,793
OPERATING DATA:
Revenue passengers carried . . . . . . . . . 44,785,573 42,742,602(5) 36,955,221(5) 27,839,284 22,669,942
Revenue passenger miles (RPMs) (000s) . . . 23,327,804 21,611,266 18,827,228 13,787,005 11,296,183
Available seat miles (ASMs) (000s) . . . . . 36,180,001 32,123,974 27,511,000 21,366,642 18,491,003
Load factor . . . . . . . . . . . . . . . . 64.5% 67.3% 68.4% 64.5% 61.1%
Average length of passenger haul (miles) . . 521 506 509 495 498
Trips flown . . . . . . . . . . . . . . . . 685,524 624,476 546,297 438,184 382,752
Average passenger fare . . . . . . . . . . . $61.64 $58.44 $59.97 $58.33 $55.93
Passenger revenue yield per RPM . . . . . . 11.83c. 11.56c. 11.77c. 11.78c. 11.22c.
Operating revenue yield per ASM . . . . . . 7.94c. 8.07c. 8.35c. 7.89c. 7.10c.
Operating expenses per ASM . . . . . . . . . 7.07c. 7.08c. 7.25c.(6) 7.03c. 6.76c.
Fuel cost per gallon (average) . . . . . . . 55.22c. 53.92c. 59.15c. 60.82c. 65.69c.
Number of employees at period-end . . . . . 19,933 16,818 15,175 11,397 9,778
Size of fleet at period-end (4) . . . . . . 224 199 178 141 124
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(1) Proforma prior to 1993, assuming Morris, an S-Corporation prior to
1993, was taxed at statutory rates.
(2) Includes the net cumulative effect of adopting Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" and
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions."
(3) Includes one-time adjustment for the cumulative effect of a change in
the method of accounting for scheduled airframe overhaul costs from
the direct expense method to that of capitalizing and amortizing the
costs over the periods benefited.
(4) Includes leased aircraft.
(5) Includes certain estimates for Morris.
(6) Excludes merger expenses of $10.8 million.
10
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis listed in the accompanying Index
to Consolidated Financial Statements on Page F-1 is filed as part of this
annual report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Notes to Consolidated Financial
Statements, and Report of Ernst & Young LLP, Independent Auditors, listed in
the accompanying Index to Consolidated Financial Statements on page F-1 are
filed as part of this annual report.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
----------------------------------------------------
1995 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---- -------- ------- -------- -------
Operating revenues $620,999 $738,205 $764,975 $748,572
Operating income 23,409 103,425 114,098 72,599
Income before income taxes 20,034 100,801 114,215 70,090
Net income 11,826 59,724 67,717 43,359
Net income per common and .08 .41 .45 .29
common equivalent share
THREE MONTHS ENDED
----------------------------------------------------
1994 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---- -------- ------- -------- -------
Operating revenues $619,412 $661,056 $685,289 $626,176
Operating income 76,046 101,834 101,710 37,119
Income before income taxes 69,538 97,156 97,128 35,701
Net income 41,847 58,522 58,619 20,343
Net income per common and .28 .40 .40 .14
common equivalent share
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None to be reported.
11
13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Election of Directors" and "Other Matters - Certain Transactions,"
incorporated herein by reference, from pages 1-4 and 19, respectively, of the
definitive Proxy Statement for Southwest's Annual Meeting of Shareholders to be
held May 16, 1996. See "Executive Officers of the Registrant" in Part I
following Item 4 for information relating to executive officers.
ITEM 11. EXECUTIVE COMPENSATION
See "Compensation of Executive Officers," incorporated herein by
reference, from pages 6-9 of the definitive Proxy Statement for Southwest's
Annual Meeting of Shareholders to be held May 16, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Voting Securities and Principal Shareholders," incorporated herein by
reference, from pages 4-5 of the definitive Proxy Statement for Southwest's
Annual Meeting of Shareholders to be held May 16, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Election of Directors" incorporated herein by reference, from pages
1-4 of the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 16, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The financial statements listed in the accompanying Index to
Consolidated Financial Statements on page F-1 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)).
12
14
3.2 Bylaws of Southwest, as amended through February 1994
(incorporated by reference to Exhibit 3.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-7259)).
4.1 Credit Agreement dated December 15, 1990, between Southwest
and Texas Commerce Bank - Dallas, N.A., as agent for itself
and four other banks named therein, and such banks
(incorporated by reference to Exhibit 4.1 on Southwest's
Current Report on Form 8-K dated February 14, 1991 (File No.
1-7259)); First Amendment to Credit Agreement, dated April 4,
1991 and Second Amendment to Credit Agreement, dated December
14, 1991 (incorporated by reference to Exhibit 4.1 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 1-7259)); Third Amendment to
Credit Agreement, dated December 14, 1992 (incorporated by
reference in Exhibit 4.1 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1992 (File No. 1-7259));
Fourth Amendment to Credit Agreement, dated December 14, 1993
(incorporated by reference to Exhibit 4.1 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 1-7259)); Fifth and Sixth Amendments to Credit
Agreement, dated March 10, 1995 and May 18, 1995,
respectively.
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 Rights Agreement dated July 14, 1986 between Southwest and
MBank Dallas, N.A., as Rights Agent (incorporated by reference
to Exhibit 1, Southwest's Registration Statement on Form 8-A
dated July 15, 1986 (File No. 1-7259)) and Amendment No. 1 to
Rights Agreement, dated as of December 1, 1990 between
Southwest and Ameritrust Texas N.A. (incorporated by reference
to Exhibit 4.2 on Southwest's Current Report on Form 8-K dated
February 14, 1991 (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 Form of 9.4 percent Note due 2001 (incorporated by reference
to Exhibit 4.2 to Southwest's Current Report on Form 8-K dated
June 24, 1991 (File No. 1-7259)).
4.7 Form of 8-3/4 percent Note due 2003 (incorporated by reference
to Exhibit 4.2 to Southwest's Current Report on Form 8-K dated
October 4, 1991 (File No. 1-7259)).
4.9 Form of 9-1/4 percent Note due 1998 (incorporated by reference
to Exhibit 4.9 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 1-7259)).
13
15
4.10 Form of 7-7/8 percent Note due 2007 (incorporated by reference
to Exhibit 4.10 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1992 (File No. 1-7259)).
4.11 Form of Global Security representing all 8 percent Notes due
2005 (incorporated by reference to Exhibit 4 to Southwest's
current Report on Form 8-K dated March 6, 1995 (File No.
1-7259)).
10.1 General Terms Agreement between CFM International, Inc. and
Southwest (with all amendments through March 29, 1990) dated
May 28, 1981 (incorporated by reference to Exhibit 10.2 on
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1989 (File No. 1-7259)); Amendments from November
6, 1989 through March 29, 1993 (incorporated by reference to
Exhibit 10.2 on Southwest's Annual Report on Form 10-K for the
year ended December 31, 1992 (File No. 1-7259)); Amendments
from March 29, 1993 through March 29, 1994 (incorporated by
reference to Exhibit 10.2 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1993 (File No. 1-7259));
Amendment No. 7 and Letter Agreement No. 11, each dated as of
January 19, 1994 (incorporated by reference to Exhibit 10.2 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1993 (File No. 1-7259)).
10.2 Purchase Agreement No. 1405, dated July 23, 1987 between The
Boeing Company and Southwest (with all amendments through
March 29, 1990) (incorporated by reference to Exhibit 10.3 on
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1989 (File No. 1-7259)); Amendments from April 1,
1990 through March 29, 1993 (incorporated by reference to
Exhibit 10.3 on Southwest's Annual Report on Form 10-K for the
year ended December 31, 1992 (File No. 1-7259)); Amendments
from March 29, 1993 through March 29, 1994 (incorporated by
reference to Exhibit 10.3 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1993 (File No. 1-7259));
Amendments from March 30, 1994 through March 29, 1995
(incorporated by reference to Exhibit 10.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-7259)); Amendments from March 30, 1995
through March 29, 1996.
10.3 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)).
The following exhibits filed under paragraph 10 of Item 601
are the Company's compensation plans and arrangements.
10.4 1985 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.1 to
Southwest's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1985 (File No. 1-7259)).
10.5 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)).
14
16
10.6 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)).
10.7 1987 stock option agreement between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.11 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1987 (File No. 1-7259)).
10.8 1996 employment contract between Southwest and Herbert D.
Kelleher and related stock option agreements.
10.9 1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
33-40652)).
10.10 1991 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration State- ment on Form
S-8 (File No. 33-40652)).
10.11 1991 Employee Stock Purchase Plan as amended May 20, 1992
(incorporated by reference to Exhibit 10.13 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 1-7259)).
10.12 Southwest Airlines Co. Profit Sharing Plan (incorporated by
reference to Exhibit 10.13 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1991 (File No.
1-7259)).
10.13 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)).
10.14 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)).
11 Computation of earnings per share.
22 Subsidiaries of Southwest.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
15
17
Southwest will furnish to the Commission supplementally upon request a
copy of each other instrument with respect to the long-term debt of the
Company.
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 1995:
Form 8-K dated October 2, 1995, including exhibits relative to Pass
Through Certificates, Series 1995-A.
16
18
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Management's Discussion and Analysis F-2
Consolidated Financial Statements F-11
Report of Independent Auditors F-17
F-1
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR IN REVIEW
Southwest and the airline industry posted their highest profits ever in 1995.
Southwest began 1995 with first quarter earnings substantially below first
quarter 1994. This beginning of 1995 followed a 47 percent decline in fourth
quarter 1994 earnings compared to fourth quarter 1993. In early 1995, we
addressed many of the challenges that surfaced during fourth quarter 1994, and
we finished the year strong, reporting record earnings for 1995.
Competitive pressures eased in 1995 with most carriers pulling back to their
hubs and routes where they dominate. Continental Lite ceased to exist,
American substantially decreased its presence in Nashville, and the United
Shuttle reduced head-to-head competition with Southwest by approximately 50
percent. Southwest, however, continued to expand, adding service to Omaha,
Nebraska, and increasing service in many under-served markets, particularly
those experiencing reductions in service by other carriers.
In 1995, capacity and traffic for the domestic airline industry grew
approximatly three percent and four percent, respectively, and load factor
increased versus 1994 due to modest capacity growth and a steady economy.
Southwest, however, grew capacity aggressively at 12.6 percent. For most of
1995 and in January 1996, Southwest's monthly load factors were below year-ago
levels. While it is too early to determine if this trend will continue in 1996,
thus far these lower load factors have been offset by strong passenger revenue
yield performances. Our passenger revenue yield for January 1996 exceeded
January 1995 by more than 10 percent aided, in large measure, by the lapse of
the 10 percent federal ticket tax on January 1, 1996.
The early results of our 1996 expansion into Florida look promising as our load
factors for our initial two markets, Tampa and Ft. Lauderdale, have exceeded
our systemwide averages. We will begin service to Orlando in April 1996.
After years of horrendous losses, most carriers reduced costs in 1995 by
closing hubs, reducing their work force, contracting high-cost work, and
obtaining concessions from union workers. For the second consecutive year, our
operating expenses per ASM also declined year-over-year, down .1 percent in
1995 primarily due to the significant reduction in the Company's distribution
costs. While our goal is to continue this overall cost trend, recent increases
in jet fuel prices, and the October 1, 1995 implementation of a 4.3 cents per
gallon transportation fuel tax
F-2
20
for commercial aviation, make near-term reductions in total operating expenses
on a per-ASM basis much more difficult.
The national budget impasse, lapse of the 10 percent ticket tax and its
presumed reinstatement, proposed deferral of the jet fuel tax, and looming
prospect of FAA reform present uncertainty for 1996 and future periods. At the
current time, Southwest is unable to predict how these issues will be resolved
and what impact, if any, resolution of these uncertainties will have on future
operating results or financial condition.
During 1996, we plan to add a net of seventeen aircraft to our fleet, which
will be used primarily in our Florida expansion and to strengthen our existing
route system.
RESULTS OF OPERATIONS
1995 COMPARED WITH 1994 The Company's consolidated net income for 1995 was
$182.6 million ($1.23 per share), as compared to the corresponding 1994 amount
of $179.3 million ($1.22 per share), an increase of 1.8 percent.
Operating Revenues Consolidated operating revenues increased by 10.8 percent
in 1995 to $2,872.8 million, compared to $2,591.9 million for 1994. This
increase in 1995 operating revenues was derived from a 10.5 percent increase in
passenger revenues. Revenue passenger miles (RPMs) increased 7.9 percent in
1995, compared to a 12.6 percent increase in available seat miles (ASMs),
resulting in a decrease in load factor from 67.3 percent in 1994 to 64.5
percent in 1995. The 1995 ASM growth resulted from the addition of 25 aircraft
during the year.
Freight revenues in 1995 were $65.8 million, compared to $54.4 million in 1994.
The 21.0 percent increase in freight revenues exceeded the 12.6 percent
increase in ASMs for the same period primarily due to increased air freight
volumes and United States mail services primarily resulting from the
development of new markets added in 1994.
Operating Expenses Consolidated operating expenses for 1995 were $2,559.2
million, compared to $2,275.2 million in 1994, an increase of 12.5 percent,
compared to the 12.6 percent increase in ASMs. For the second consecutive
year, operating expenses on a per-ASM basis decreased year-over-year, down .1
percent in 1995.
F-3
21
Operating expenses per ASM for 1995 and 1994 were as follows:
OPERATING EXPENSES PER ASM
- -------------------------------------------------------------------------------------------
INCREASE PERCENT
1995 1994 (DECREASE) CHANGE
- ------------------------------------------------------------------------------------------
Salaries, wages,
and benefits________________ 2.17c. 2.13c. .04c. 1.9%
Employee profitsharing
and savings plans___________ .23 .22 .01 4.5
Fuel and oil_____________________ 1.01 1.00 .01 1.0
Maintenance materials and
repairs_____________________ .60 .59 .01 1.7
Agency commissions_______________ .34 .41 (.07) (17.1)
Aircraft rentals_________________ .47 .42 .05 11.9
Landing fees and
other rentals_______________ .44 .46 (.02) (4.3)
Depreciation_____________________ .43 .43 - -
Other 1.38 1.42 (.04) (2.8)
- -------------------------------------------------------------------------------------------
TOTAL 7.07c. 7.08c. (.01)c. (0.1)%
- -------------------------------------------------------------------------------------------
Salaries, wages, and benefits per ASM increased 1.9 percent in 1995. This
increase resulted primarily from a 17.8 percent increase in 1995 average
headcount, which outpaced the 1995 capacity (ASM) increase of 12.6 percent, and
offset a 2.6 percent decrease in average salary and benefits cost per Employee.
The 17.8 percent increase in average headcount was primarily the result of a
44.6 percent increase in Reservations Sales Agents in 1995. Excluding
Reservations Sales Agents, total average headcount increased only 11.4 percent.
The Reservations Sales Agent increase coincided with increased demand for
reservations capacity following 1994 enhancements to Southwest's ticket
delivery systems for direct Customers.
Fleet Service Employees are subject to an agreement with the Ramp, Operations
and Provisioning Association (ROPA), which became amendable in December 1994.
The Company reached an agreement with ROPA which was ratified by its membership
in November 1995. Southwest's mechanics are subject to an agreement with the
International Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of
America (the Teamsters), which became amendable August 16, 1995. Southwest is
currently in negotiations with the Teamsters for a new contract.
Employee profitsharing and savings plans expense per ASM increased 4.5 percent
in 1995. The increase is primarily the
F-4
22
result of increased matching contributions to Employee savings plans resulting
from increased Employee participation and higher matching rates in 1995 for
non-contract Employees and certain Employee groups covered by collective
bargaining agreements.
Fuel and oil expenses per ASM increased 1.0 percent in 1995, primarily due to a
2.4 percent increase in the average jet fuel cost per gallon from 1994. Jet
fuel prices remained relatively stable throughout most of 1995, with quarterly
averages through the first three quarters ranging from $.53 to $.55 per gallon.
During fourth quarter 1995, the average cost per gallon increased to $.59 and,
in January 1996, has averaged approximately $.62 per gallon.
Maintenance materials and repairs per ASM increased 1.7 percent in 1995
compared to 1994 primarily as a result of performing more engine overhauls
during 1995.
Agency commissions per ASM decreased 17.1 percent in 1995 compared to 1994, due
to a lower mix of travel agency sales in 1995. The lower travel agency sales
mix resulted from 1994 enhancements to Southwest's ticket delivery systems for
direct Customers, as described below.
In response to actions taken by our competitor-owned reservations systems in
1994, we reduced our operating costs and enhanced our ticket delivery systems
by developing our own Southwest Airlines Air Travel ("SWAT") system allowing
high-volume travel agents direct access to reservations; introduced overnight
ticket delivery for travel agents; reduced to three the number of advance days
reservations required for overnight delivery of tickets to consumers (Ticket By
Mail); developed our own Ticketless system, which was rolled out system-wide on
January 31, 1995; and effective March 30, 1995 subscribed to a new level of
service with SABRE that automates the booking process for SABRE travel
agencies. We also continue to actively pursue other cost-effective solutions
for automating non-SABRE travel agency bookings.
Aircraft rentals per ASM increased 11.9 percent in 1995. The increase
primarily resulted from second and third quarter 1995 sale/leaseback
transactions involving ten new 737-300 aircraft and a higher percentage of the
fleet consisting of leased aircraft.
Other operating expenses per ASM decreased 2.8 percent in 1995 compared to
1994. This decrease was primarily due to operating efficiencies resulting from
the transition of Morris operational functions to Southwest commencing first
quarter 1994, and lower communications costs. Communications costs decreased
approximately
F-5
23
15 percent per ASM primarily due to lower negotiated rates, increased
reservations operations efficiencies, and enhancements to the Company's ticket
delivery system.
In August 1993, the Revenue Reconciliation Act of 1993 was enacted, which,
among other things, included an assessment of 4.3 cents per gallon in federal
jet fuel tax, which became effective September 30, 1995, for aviation. This
additional fuel tax increased 1995 "other operating expenses" by $7.4 million.
Other "Other expenses (income)" included interest expense, interest income, and
nonoperating gains and losses. Interest expense increased $5.4 million in 1995
due to the March 1995 issuance of $100 million senior unsecured 8% Notes due
2005. Capitalized interest increased $5.0 million in 1995 as a result of higher
levels of progress payments on aircraft compared to 1994. Interest income for
1995 increased $10.9 million primarily due to higher invested cash balances and
higher short-term interest rates.
Income Taxes The provision for income taxes as a percentage of income before
taxes was relatively unchanged year over year.
1994 COMPARED WITH 1993 The Company's consolidated net income for 1994 was
$179.3 million ($1.22 per share), as compared to the corresponding 1993 amount
(before the cumulative effect of accounting changes) of $154.3 million ($1.05
per share), an increase of 16.2 percent. The increase in earnings was
primarily attributable to an increase in operating income of 8.5 percent and a
decrease in other expenses (nonoperating) of 46.9 percent.
Operating Revenues Consolidated operating revenues increased by 12.9 percent
in 1994 to $2,591.9 million, compared to $2,296.7 million for 1993. This
increase in 1994 operating revenues was derived from a 12.7 percent increase in
passenger revenues. RPMs increased 14.8 percent in 1994, compared to a 16.8
percent increase in ASMs, resulting in a decrease in load factor from 68.4
percent in 1993 to 67.3 percent in 1994. The 1994 ASM growth resulted from the
addition of 21 aircraft during 1994.
Freight revenues in 1994 were $54.4 million, compared to $42.9 million in 1993.
The 26.9 percent increase in freight revenues exceeded the 16.8 percent
increase in ASMs for the same period primarily due to increased air freight
volumes and United States mail services.
Operating Expenses Consolidated operating expenses for 1994 were $2,275.2
million, compared to $2,004.7 million in 1993, an increase of 13.5 percent,
compared to the 16.8 percent increase in ASMs. On a per-ASM basis, operating
expenses (excluding 1993
F-6
24
merger expenses) decreased 2.3 percent in 1994. The primary factors
contributing to this decrease were an 8.8 percent decrease in average jet fuel
cost per gallon and lower agency commission costs, offset by increased aircraft
rentals.
Salaries, wages, and benefits per ASM increased only .5 percent in 1994. This
increase resulted from a 3.0 percent increase in average salary and benefits
cost per Employee, partially offset by slower average headcount growth, which
increased only 13.8 percent in 1994 versus the 1994 capacity (ASM) increase of
16.8 percent. The majority of the increase in average salary and benefits cost
related to increased health benefits and workers' compensation costs. Employee
productivity improved from 2,633 passengers handled per Employee in 1993 to
2,676 in 1994.
Employee profitsharing and savings plans expense per ASM increased 4.8 percent
in 1994. The increase is primarily the result of increased matching
contributions to Employee savings plans resulting from increased Employee
participation and higher matching rates in 1994 for Flight Attendants and
Customer Service Employees under their respective collective bargaining
agreements.
Fuel and oil expenses per ASM decreased 9.9 percent in 1994, primarily due to
an 8.8 percent reduction in the average jet fuel cost per gallon from 1993. Jet
fuel prices remained relatively stable throughout 1994, with quarterly averages
ranging from $.51 to $.56 per gallon.
Maintenance materials and repairs per ASM was unchanged in 1994 compared to
1993.
Agency commissions per ASM decreased 12.8 percent due to a lower mix of travel
agency sales and lower 1994 passenger revenue per ASM. The lower travel agency
sales mix resulted from 1994 enhancements to Southwest's ticket delivery
systems for direct Customers.
Aircraft rentals per ASM increased 7.7 percent in 1994. The increase primarily
resulted from a third quarter 1994 sale/leaseback transaction involving ten new
737-300 aircraft and a lease of three used aircraft under long-term operating
leases. At December 31, 1994, 44.7 percent of the Company's fleet was subject
to operating leases, compared to 43.3 percent at December 31, 1993.
Other operating expenses per ASM decreased 1.4 percent in 1994 compared to
1993. The overall decrease is primarily attributable to operating efficiencies
resulting from the transition of Morris operational functions to Southwest,
primarily contract services
F-7
25
which decreased $8.8 million (24.4 percent per ASM), offset by an increase in
advertising costs of $24.1 million (22.9 percent per ASM) primarily associated
with the start-up of seven new cities and new competitive pressures in 1994.
Other "Other expenses (income)" included interest expense, interest income, and
nonoperating gains and losses. Interest expense decreased $5.1 million in 1994
due to the March 1, 1993 redemption of $100 million senior unsecured 9% Notes
due 1996 and the repayment of approximately $54.0 million of Morris long-term
debt during first quarter 1994. Capitalized interest increased $8.6 million in
1994 as a result of higher levels of advance payments on aircraft compared to
1993. Interest income for 1994 decreased $1.9 million primarily due to lower
cash balances available for short-term investment.
Income Taxes The provision for income taxes decreased in 1994 as a
percentage of income before taxes, including cumulative effect of accounting
changes, to 40.1 percent from 40.6 percent in 1993. The 1993 rate was higher
due to deferred tax adjustments in 1993 related to the 1993 increase in the
federal corporate income tax rate from 34 percent to 35 percent (see Note 11 to
the Consolidated Financial Statements). This was offset by increased 1994
effective state income tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations was $456.4 million in 1995, compared to $412.7
million in 1994. During 1995, additional funds of $321.7 million were
generated from the sale and leaseback of ten new 737-300 aircraft subject to
long-term operating leases (increasing total commitments for operating leases
by $607.9 million). In addition, $98.8 million was generated from the March
1995 issuance of $100 million in Senior Unsecured 8% Notes due in 2005.
During 1995, capital expenditures of $728.6 million primarily were for the
purchase of 23 new 737-300 aircraft, one used 737-300 aircraft previously
leased by Morris, and progress payments for future aircraft deliveries. At
December 31, 1995, capital commitments of the Company consisted primarily of
scheduled aircraft acquisitions.
As of January 1996, Southwest had one hundred 737s on firm order, including
twenty to be delivered in 1996, with options to purchase another sixty-seven.
Aggregate funding required for firm commitments approximated $2,614.0 million
through the year 2001 of which $461.5 million related to 1996. See Note 4 to
the Consolidated Financial Statements for further information.
F-8
26
As of December 31, 1995 and since 1990, the Company had authority from its
Board of Directors to purchase 3,750,000 shares of its common stock from
time-to-time on the open market. No shares have been purchased since 1990.
The Company has various options available to meet its capital and operating
commitments, including cash on hand at December 31, 1995 of $317.4 million,
internally generated funds, and a revolving credit line with a group of banks
of up to $460 million (none of which had been drawn at December 31, 1995). 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
$260.6 million public debt securities.
Cash provided from operations was $412.7 million in 1994 as compared to $392.7
million in 1993. During 1994, additional funds of $315.0 million were generated
from the sale and leaseback of ten new 737-300 aircraft subject to long-term
operating leases (increasing total commitments for operating leases by $619.0
million). These proceeds were primarily used to finance aircraft-related
capital expenditures and to provide working capital.
F-9
27
SOUTHWEST AIRLINES CO.
CONSOLIDATED BALANCE SHEET
(in thousands except share and per share amounts)
December 31,
1995 1994
- ---------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents_____________ $ 317,363 $ 174,538
Accounts receivable___________________ 79,781 75,692
Inventories of parts and supplies,
at cost_____________________________ 41,032 37,565
Deferred income taxes (Note 11)_______ 10,476 9,822
Prepaid expenses and other current
assets______________________________ 24,484 17,281
---------- ---------
Total current assets______________ 473,136 314,898
Property and equipment, at cost
(Notes 4 and 7):
Flight equipment______________________ 3,024,702 2,564,551
Ground property and equipment_________ 435,822 384,501
Deposits on flight equipment
purchase contracts__________________ 323,864 393,749
---------- ---------
3,784,388 3,342,801
Less allowance for depreciation_______ 1,005,081 837,838
---------- ---------
2,779,307 2,504,963
Other assets____________________________ 3,679 3,210
---------- ----------
$3,256,122 $2,823,071
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable______________________ $ 117,473 $ 117,599
Accrued liabilities (Note 5)__________ 348,476 288,979
Air traffic liability_________________ 131,156 106,139
Current maturities of long-term
debt________________________________ 13,516 9,553
---------- ----------
Total current liabilities_________ 610,621 522,270
Long-term debt less current
maturities (Note 6)___________________ 661,010 583,071
Deferred income taxes (Note 11)_________ 281,650 232,850
Deferred gains from sale and
leaseback of aircraft_________________ 245,154 217,677
Other deferred liabilities______________ 30,369 28,497
Commitments and contingencies
(Notes 4, 7, and 11)
Stockholders' equity (Notes 8 and 9):
Common stock, $1.00 par value:
500,000,000 shares authorized;
144,033,273 shares issued and
outstanding in 1995 and
143,255,795 shares in 1994__________ 144,033 143,256
Capital in excess of par value________ 162,704 151,746
Retained earnings_____________________ 1,120,581 943,704
---------- ----------
Total stockholders' equity_________ 1,427,318 1,238,706
---------- ---------
$3,256,122 $2,823,071
========== ==========
SEE ACCOMPANYING NOTES.
F-10
28
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
Years ended December 31,
1995 1994 1993
- --------------------------------------------------------------------------------
OPERATING REVENUES:
Passenger____________________ $ 2,760,756 $ 2,497,765 $ 2,216,342
Freight______________________ 65,825 54,419 42,897
Other________________________ 46,170 39,749 37,434
----------- ----------- -----------
Total operating revenues___ 2,872,751 2,591,933 2,296,673
OPERATING EXPENSES:
Salaries, wages, and
benefits (Note 10)_________ 867,984 756,023 641,747
Fuel and oil_________________ 365,670 319,552 304,424
Maintenance materials and
repairs____________________ 217,259 190,308 163,395
Agency commissions___________ 123,380 133,081 130,445
Aircraft rentals_____________ 169,461 132,992 107,885
Landing fees and other
rentals___________________ 160,322 148,107 129,222
Depreciation_________________ 156,771 139,045 119,338
Other operating expenses_____ 498,373 456,116 397,441
Merger expenses (Note 2)_____ -- -- 10,803
----------- ----------- -----------
Total operating expenses__ 2,559,220 2,275,224 2,004,700
----------- ----------- -----------
OPERATING INCOME_______________ 313,531 316,709 291,973
OTHER EXPENSES (INCOME):
Interest expense_____________ 58,810 53,368 58,460
Capitalized interest_________ (31,371) (26,323) (17,770)
Interest income______________ (20,095) (9,166) (11,093)
Nonoperating (gains) losses,
net_________________________ 1,047 (693) 2,739
----------- ----------- -----------
Total other expenses______ 8,391 17,186 32,336
----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES___________ 305,140 299,523 259,637
PROVISION FOR INCOME TAXES
(NOTE 11)____________________ 122,514 120,192 105,353
----------- ----------- -----------
INCOME BEFORE CUMULATIVE
EFFECT OF ACCOUNTING
CHANGES______________________ 182,626 179,331 154,284
CUMULATIVE EFFECT OF
ACCOUNTING CHANGES
(NOTE 3)_____________________ -- -- 15,259
----------- ----------- -----------
NET INCOME_____________________ $ 182,626 $ 179,331 $ 169,543
=========== =========== ===========
PER SHARE AMOUNTS (NOTES 3, 8,
AND 12):
Income before cumulative
effect of accounting
changes____________________ $ 1.23 $ 1.22 $ 1.05
Cumulative effect of
accounting changes_________ -- -- .10
----------- ----------- -----------
Net income___________________ $ 1.23 $ 1.22 $ 1.15
=========== =========== ===========
SEE ACCOMPANYING NOTES.
F-11
29
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
(in thousands except per share amounts)
Capital
in excess
Common of Retained
stock par value earnings Total
- ----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992___________ 96,047 177,561 605,928 879,536
Three-for-two stock split
(Note 8)___________________________ 46,325 (46,325) - -
Issuance of common stock upon
exercise of executive stock
options and pursuant to Employee
stock option and purchase plans
and related tax benefit
(Note 9)___________________________ 384 9,932 - 10,316
Cash dividends, $.03867 per share - - (5,376) (5,376)
Net income - 1993____________________ - - 169,543 169,543
--------- --------- ----------- -------------
Balance at December 31, 1993____________ 142,756 141,168 770,095 1,054,019
Issuance of common stock upon
exercise of executive stock
options and pursuant to Employee
stock option and purchase plans
and related tax benefit
(Note 9)____________________________ 500 10,578 - 11,078
Cash dividends, $.04 per share________ - - (5,722) (5,722)
Net income - 1994_____________________ - - 179,331 179,331
--------- --------- ----------- -------------
Balance at December 31, 1994____________ 143,256 151,746 943,704 1,238,706
Issuance of common stock upon
exercise of executive stock
options and pursuant to Employee
stock option and purchase plans
and related tax benefit
(Note 9)____________________________ 777 10,958 - 11,735
Cash dividends, $.04 per share _______ - - (5,749) (5,749)
Net income - 1995_____________________ - - 182,626 182,626
--------- --------- ----------- -------------
Balance at December 31, 1995____________ $ 144,033 $ 162,704 $ 1,120,581 $ 1,427,318
========= ========= =========== ===========
F-12
30
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Years ended December 31,
1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income_____________________________________________________ $182,626 $179,331 $169,543
Cumulative effect of accounting changes (Note 3)___________ - - (15,259)
-------- -------- ---------
Income before cumulative effect of accounting
changes_________________________________________________ 182,626 179,331 154,284
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation_________________________________________ 156,771 139,045 119,338
Deferred income taxes________________________________ 48,147 49,887 53,200
Amortization of deferred gains on sale and
leaseback of aircraft______________________________ (24,286) (30,341) (32,509)
Amortization of scheduled airframe overhauls_________ 17,337 14,216 11,630
Changes in certain assets and liabilities:
Increase in accounts receivable____________________ (4,089) (5,208) (14,253)
(Increase) decrease in other current assets________ (11,857) 648 (9,641)
Increase in accounts payable and accrued
liabilities______________________________________ 61,937 52,679 67,585
Increase in air traffic liability__________________ 25,017 9,993 30,212
Increase (decrease) in other current liabilities 1,050 (4,690) 2,393
Other_________________________________________________ 3,789 7,106 10,440
-------- -------- ---------
Net cash provided by operating activities_________ 456,442 412,666 392,679
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment_________________________ (728,643) (788,649) (524,169)
--------- --------- ---------
Net cash used in investing activities____________ (728,643) (788,649) (524,169)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt__________________________________ 98,811 - 17,810
Proceeds from aircraft sale and leaseback
transactions_____________________________________________ 321,650 315,000 90,000
Payment of long-term debt and capital lease
obligations______________________________________________ (10,379) (63,071) (120,098)
Payment of cash dividends___________________________________ (5,749) (5,722) (5,376)
Proceeds from Employee stock plans__________________________ 10,693 8,743 6,743
Other_______________________________________________________ - - (7)
-------- --------- ---------
Net cash provided by (used in) financing activities_________ 415,026 254,950 (10,928)
-------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS_________________ 142,825 (121,033) (142,418)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD_____________________ 174,538 295,571 437,989
-------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD___________________________ $317,363 $174,538 $295,571
========= ======== ========
CASH PAYMENTS FOR:
Interest, net of amount capitalized_________________________ $ 25,277 $ 26,598 $ 43,161
Income taxes________________________________________________ 73,928 80,461 45,292
SEE ACCOMPANYING NOTES.
F-13
31
SOUTHWEST AIRLINES CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation Southwest Airlines Co. (Southwest) is a major domestic
airline that provides 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 generally accepted accounting
priniciples 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 reclassified for comparison purposes.
Cash and cash equivalents Cash equivalents consist of certificates of
deposit and investment grade commercial paper issued by major corporations and
financial institutions that are highly liquid and have original maturity dates
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 charged to expense
when issued for use.
Property and equipment Depreciation is provided by the straight-line method
to residual values over periods ranging from 15 to 20 years for flight
equipment and 3 to 30 years for ground property and equipment. 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.
Aircraft and engine maintenance The cost of engine overhauls and routine
maintenance costs for aircraft and engine maintenance are charged to
maintenance expense as incurred. Scheduled airframe overhaul costs are
capitalized at amounts not to exceed the fair market value of the related
aircraft and amortized over the estimated periods benefited, presently 8 years.
Modifications that
F-14
32
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.
Revenue recognition Passenger revenue is recognized when the 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 awards The Company accrues the estimated incremental cost of
providing free travel awards earned under its Company Club frequent flyer
program.
Advertising The Company expenses the production costs of advertising as
incurred. Advertising expense for the years ended December 31, 1995, 1994, and
1993 was $92,087,000, $79,475,000, and $55,344,000, respectively.
Stock-Based Employee Compensation The Company accounts for stock-based
compensation plans utilizing the provisions of Accounting Principles Board
Opinion No. 25 (APB25), "Accounting for Stock Issued to Employees." In October
of 1995, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation." The Company is not required to adopt the provisions of SFAS 123
until 1996. Under SFAS 123, companies are allowed to continue to apply the
provisions of APB 25 to their stock-based employee compensation arrangements.
As such, the Company will only be required to supplement its financial
statements with additional disclosures beginning in 1996.
2. ACQUISITION
On December 31, 1993, Southwest exchanged 3,574,656 newly issued shares of its
common stock for all of the outstanding stock of Morris Air Corporation
(Morris), a low-fare commercial/charter air carrier based in Salt Lake City.
The acquisition was accounted for as a pooling of interests and, accordingly,
the Company's consolidated financial statements were restated to include the
accounts and operations of Morris for all periods prior to the acquisition.
Merger expenses of $10,803,000 relating to the merger of Southwest and Morris
have been included in 1993 operating expenses as required for financial
reporting purposes; however, these expenses have been separately reported as
"merger expenses" to reflect the impact of these nonrecurring expenses on
operating results.
F-15
33
3. ACCOUNTING CHANGES
Income Taxes Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes". As a result of adopting SFAS 109, the Company recorded deferred tax
assets of $6,977,000 and reduced deferred tax liabilities by $9,048,000 at
January 1, 1993, which resulted in an increase to the Company's 1993 net income
of $16,025,000 ($.11 per share) for the cumulative effect of the accounting
change.
Postretirement Benefits Effective January 1, 1993, the Company adopted
Statement of Financial Accounting Standards No. 106 (SFAS 106), "Employers'
Accounting for Postretirement Benefits Other Than Pensions". The cumulative
effect of this change in accounting method at January 1, 1993 reduced 1993 net
income by $766,000 (net of benefit from income taxes of $469,000) or $.01 per
share. The effect of adopting SFAS 106 on 1993 income before cumulative effect
of accounting changes was not material.
4. COMMITMENTS
The Company's contractual purchase commitments consist primarily of scheduled
aircraft acquisitions. Timing of payments pursuant to contractual commitments
was affected by third quarter 1995 amendments to certain aircraft purchase
contracts, which modified future progress payment schedules. Twenty 737-300
aircraft are scheduled for delivery in 1996, and 17 in 1997. Four 737-700s are
scheduled for delivery in 1997, 16 in 1998, 16 in 1999, 15 in 2000, and 12 in
2001. In addition, the Company has options to purchase up to sixty-seven
737-700s during 1998-2004. 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 delivered subsequent to 1999. Aggregate funding
needed for these commitments is approximately $2,614.0 million, subject to
adjustments for inflation, due as follows: $461.5 million in 1996, $576.9
million in 1997, $446.9 million in 1998, $551.2 million in 1999, $351.0 million
in 2000, and $226.5 million in 2001.
The Company uses jet fuel and heating oil fixed price swap arrangements to
hedge its exposure to price fluctuations on approximately two percent of its
annual fuel requirements. As of December 31, 1995, the Company had a heating
oil swap agreement with a broker-dealer to exchange monthly payments on a
notional quantity of 1,050,000 gallons during May 1996. Under the swap
agreement, the Company pays or receives the difference between the daily
average heating oil price and a fixed price of $.46 per gallon. Gains and
losses on such transactions are recorded as adjustments to fuel expense and
have been insignificant. Although
F-16
34
such agreements expose the Company to credit loss in the event of
nonperformance by the other parties to the agreements, the Company does not
anticipate such nonperformance.
5. ACCRUED LIABILITIES
(in thousands)
1995 1994
- --------------------------------------------------------------------------------
Aircraft rentals_____________ $ 105,534 $ 67,407
Employee profitsharing and
savings plans (Note 10)___ 55,253 53,512
Vacation pay_________________ 38,777 31,801
Aircraft maintenance costs___ 31,463 37,330
Taxes, other than income_____ 22,478 25,001
Interest_____________________ 22,326 20,270
Other________________________ 72,645 53,658
-----------------------------------------
$ 348,476 $ 288,979
=========================================
6. LONG-TERM DEBT
(in thousands)
1995 1994
- --------------------------------------------------------------------------------
9 1/4% Notes due 1998_________ $100,000 $100,000
9.4% Notes due 2001___________ 100,000 100,000
8 3/4% Notes due 2003_________ 100,000 100,000
7 7/8% Notes due 2007_________ 100,000 100,000
8% Notes due 2005_____________ 100,000 -
Capital leases (Note 7)_______ 177,696 195,756
Other_________________________ 430 435
-----------------------------------------
678,126 596,191
Less current maturities_______ 13,516 9,553
Less debt discount____________ 3,600 3,567
-----------------------------------------
$661,010 $583,071
=========================================
F-17
35
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 1/4% Notes,
$100 million of senior unsecured 9.4% Notes, and $100 million of senior
unsecured 8 3/4% Notes due February 15, 1998, July 1, 2001, and October 15,
2003, respectively. Interest on the Notes is payable semi-annually. The Notes
are not redeemable by the Company prior to maturity.
The fair values, based on quoted market prices, of these Notes at December 31,
1995, were as follows (in thousands):
9 1/4% Notes due 1998_______________ $106,720
9.4% Notes due 2001_________________ 114,610
8 3/4% Notes due 2003_______________ 114,350
7 7/8% Notes due 2007_______________ 110,530
8% Notes due 2005___________________ 110,310
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 December 14, 1999 on a revolving credit basis up to $460
million. Interest rates on borrowings under the Credit Agreement can be, at
the option of Southwest, the agent bank's prime rate, 0.275% over LIBOR, or
0.50% over domestic certificate of deposit rates. The commitment fee is 0.125%
per annum. There were no outstanding borrowings under this agreement at
December 31, 1995 or 1994.
F-18
36
7. LEASES
Total rental expense for operating leases charged to operations in 1995, 1994,
and 1993 was $247,033,000, $198,987,000, and $167,303,000, respectively. The
majority of the Company's terminal operations space, as well as 100 aircraft,
were under operating leases at December 31, 1995. The amounts applicable to
capital leases included in property and equipment were (in thousands):
1995 1994
- -------------------------------------------------------------------------------
Flight equipment________________ $223,844 $233,324
Less accumulated amortization___ 101,641 88,656
-------------------------------------
$122,203 $144,668
=====================================
Future minimum lease payments under capital leases and noncancelable operating
leases, with initial or remaining terms in excess of one year, at December 31,
1995, were (in thousands):
CAPITAL OPERATING
LEASES LEASES
- ---------------------------------------------------------------------------------
1996______________________ $27,796 $223,279
1997______________________ 25,858 207,875
1998______________________ 32,026 187,662
1999______________________ 20,245 173,846
2000______________________ 16,871 165,692
After 2000______________________ 172,751 1,935,372
--------------------------------------
Total minimum lease payments____ 295,547 $2,893,726
===============
Less amount representing
interest_____________________ 117,851
Present value of minimum -----------
lease payments_______________ 177,696
Less current portion____________ 13,505
-----------
Long-term portion_______________ $164,191
===========
The aircraft leases can generally 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.
F-19
37
8. COMMON STOCK
At December 31, 1995, the Company had common stock reserved for issuance
pursuant to Employee stock benefit plans (29,202,885 shares) and upon exercise
of rights pursuant to the Common Stock Rights Agreement (Agreement), as amended
(173,236,158 shares).
Pursuant to the Agreement, each outstanding share of the Company's common stock
is accompanied by one common share purchase right (Right). Each Right entitles
its holder to purchase one share of common stock at an exercise price of $16.67
and is exercisable only in the event of a proposed takeover, as defined by the
Agreement. The Company may redeem the Rights at $.0111 per Right prior to the
time that 20 percent of the common stock has been acquired by a person or
group. If the Company is acquired or if certain self-dealing transactions
occur, as defined in the Agreement, each Right will entitle its holder to
purchase for $16.67 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,
1996.
On May 19, 1993, the Company's Board of Directors declared a three-for-two
stock split, distributing 46,325,147 shares on July 15, 1993.
9. STOCK PLANS
In May 1991, the Company's stockholders approved the Incentive Stock Option
Plan and the Non-Qualified Stock Option Plan. Under the Incentive Stock Option
Plan, options to purchase a maximum of 9,000,000 shares of Southwest common
stock may be granted to key Employees. Under the Non-Qualified Stock Option
Plan, options to purchase up to 750,000 shares of Southwest common stock may be
granted to key Employees and non-employee directors. Under each plan, the
option price per share may not be less than the fair market value of a share on
the date the option is granted and the maximum term of an option may not exceed
ten years.
Effective January 12, 1995, the Company adopted, pursuant to a collective
bargaining agreement between the Company and the Southwest Airlines Pilots'
Association (SWAPA), the 1995 SWAPA Non-Qualified Stock Option Plan (SWAPA
Plan). Under the terms of the SWAPA Plan, 18,000,000 common shares have been
reserved for issuance. An initial grant of approximately 14.5 million shares
was made on the effective date at an option price of $20.00 per share. On
September 1 of each year of the agreement, commencing September 1, 1996,
additional options will be granted to Pilots that became eligible during that
year at an option price equal to the fair market value of the common stock of
the Company on the
F-20
38
date of grant plus 5 percent. Options vest in ten annual increments of ten per
cent and must be exercised prior to January 31, 2007, or within a specified
time upon retirement or termination. In the event that SWAPA exercises its
option to make the collective bargaining agreement amendable on September 1,
1999, any unexercised options will be canceled on December 1, 1999.
Information regarding the stock option plans is summarized below:
INCENTIVE NON-QUALIFIED
PLAN PLANS *
------------- --------------
Outstanding December 31, 1992__ 4,016,904 374,625
Granted________________________ 724,646 22,512
Exercised______________________ **(198,285) ***(94,810)
Surrendered____________________ (230,978) (1,050)
-------------- --------------
Outstanding December 31, 1993___ 4,312,287 301,277
Granted_________________________ 794,714 63,918
Exercised_______________________ (190,159) (9,940)
Surrendered_____________________ (104,880) -
-------------- --------------
Outstanding December 31, 1994___ 4,811,962 355,255
Granted_________________________ 983,214 14,620,365
Exercised_____________________ (275,058) (60,510)
Surrendered___________________ (308,239) (61,041)
--------- --------
Outstanding December 31, 1995___ 5,211,879 14,854,069
========= ==========
Exercisable_____________________ 889,499 2,892,969
Available for granting in
future periods______________ 2,772,719 3,719,841
Average price of exercised
options:
1995_____________________ $8.50 $15.12
1994_____________________ $8.23 $7.85
1993_____________________ $7.14 $7.37
F-21
39
*Includes 1991 Non-Qualified Plan and SWAPA Plan.
**Includes 108,113 pre-split shares and 36,115 post-split
shares, of which 5,476 pre-split shares and 72 post-split
shares were issued from treasury.
***Includes 12,740 pre-split shares and 75,700 post-split
shares.
The exercise price of outstanding options ranged from $6.02 to $37.44 in 1995
and 1994, and $6.02 to $19.71 in 1993.
In 1991, the Company's stockholders also approved the Employee Stock Purchase
Plan that provides for the sale of common stock to Employees of the Company at
a price equal to 90% 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 388,339 shares in 1995, 290,054 shares in
1994, and 182,459 shares (59,442 pre-split shares and 93,296 post-split shares)
in 1993 at average prices of $19.18, $24.98, and $25.25, respectively.
At December 31, 1995, 1994, and 1993, 1,422,253, 1,489,753, and 1,504,753,
options to purchase the Company's common stock were also outstanding related to
employment contracts with the Company's president and chief executive officer.
Exercise prices range from $1.00 to $11.33 per share. Options for 67,500
shares, 15,000 shares, and 7,500 shares (5,000 pre-split shares, of which 968
shares were issued from treasury), were exercised in 1995, 1994, and 1993,
respectively.
10. EMPLOYEE PROFITSHARING AND SAVINGS PLANS
Substantially all of Southwest's Employees are members of the Southwest
Airlines Co. Profitsharing Plan (the Plan). Total profitsharing expense
charged to operations in 1995, 1994, and 1993, was $54,033,000, $52,782,000,
and $44,959,000, respectively. The Company sponsors Employee savings plans
under Section 401(k) of the Internal Revenue Code. The plans cover
substantially all full-time Employees. The amount of matching contributions
varies by Employee group. Company contributions generally vest over five years
with credit for prior years' service granted. Company matching contributions
expensed in 1995, 1994, and 1993 were $28,954,000, $19,817,000, and
$13,986,000, respectively.
11. INCOME TAXES
Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method as required by
SFAS 109 (see Note 3).
F-22
40
Under SFAS 109, 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, 1995 and
1994 are as follows (in thousands):
1995 1994
------- -------
Deferred tax liabilities:
Accelerated depreciation_____________ $400,321 $343,585
Scheduled airframe overhauls_________ 27,129 23,966
Other________________________________ 68,458 55,953
-------- --------
Total deferred tax liabilities____ 495,908 423,504
Deferred tax assets:
Deferred gains from sale and
leaseback of aircraft_____________ 106,119 95,602
Capital and operating leases_________ 54,472 38,240
Alternative minimum tax credit
carryforward_____________________ 11,333 22,778
Other________________________________ 52,810 43,856
-------- --------
Total deferred tax assets_________ 224,734 200,476
-------- --------
Net deferred tax liability________ $271,174 $223,028
======== ========
In August 1993, the Revenue Reconciliation Act of 1993 was enacted, which
contains numerous provision changes including an increase in the federal
corporate income tax rate from 34 percent to 35 percent effective January 1,
1993. As a result, the Company recognized approximately $4.0 million of
additional expense in 1993 related to deferred tax liabilities existing on
January 1, 1993.
The provision for income taxes before the cumulative effect of accounting
changes is comprised of the following (in thousands):
1995 1994 1993
- -------------------------------------------------------------------
Current:
Federal__________ $64,420 $59,603 $46,744
State____________ 9,947 10,702 5,409
-------- -------- --------
Total current___ 74,367 70,305 52,153
Deferred:
Federal__________ 44,580 46,470 48,524
State____________ 3,567 3,417 4,676
-------- -------- --------
Total deferred__ 48,147 49,887 53,200
-------- -------- --------
$122,514 $120,192 $105,353
======== ======== ========
F-23
41
Southwest has received examination reports from the Internal Revenue Service
proposing certain adjustments to Southwest's income tax returns for 1987
through 1991. The adjustments relate to certain types of aircraft financings
consummated by Southwest, as well as other members of the aviation industry
during that time period. Southwest intends to vigorously protest the
adjustments proposed with which it does not agree. The industry's difference
with the IRS involves complex issues of law and fact that are likely to take a
substantial period of time to resolve. Management believes that final
resolution of such protest will not have a materially adverse effect upon the
results of operations of Southwest.
The effective tax rate on income before cumulative effect of accounting changes
differed from the federal income tax statutory rate for the following reasons
(in thousands):
1995 1994 1993
- ---------------------------------------------------------------------------
Tax at statutory
U.S. tax rates______ $106,799 $104,833 $90,873
Nondeductible items___ 4,488 3,689 1,361
State income taxes,
net of federal
benefit_____________ 8,784 9,177 6,632
Effect of increase
in U.S. statutory
rate_____________ - - 3,957
Other, net____________ 2,443 2,493 2,530
-------- -------- --------
Total income tax
provision___________ $122,514 $120,192 $105,353
======== ======== ========
12. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is computed based on the
weighted average number of common and common equivalent shares outstanding
(148,850,512 in 1995, 147,305,374 in 1994, and 147,144,568 in 1993). Fully
diluted earnings per share have not been presented as the fully dilutive effect
of shares issuable upon the exercise of options under the Company's Stock
Option Plans is not material.
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42
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, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1995. 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 generally accepted auditing
standards. 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, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 3, during 1993, the Company changed its method of
accounting for income taxes and postretirement benefits.
ERNST & YOUNG LLP
Dallas, Texas
January 25, 1996
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43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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.
March 21, 1996
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 March 21, 1996 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
/s/ Gene H. Bishop Director
- ----------------------------------
Gene H. Bishop
/s/ C. Webb Crockett Director
- ----------------------------------
C. Webb Crockett
/s/ William P. Hobby, Jr. Director
- ----------------------------------
William P. Hobby, Jr.
/s/ Travis C. Johnson Director
- ----------------------------------
Travis C. Johnson
/s/ R.W. King Director
- ----------------------------------
R. W. King
/s/ Walter M. Mischer, Sr. Director
- ----------------------------------
Walter M. Mischer, Sr.
/s/ June M. Morris Director
- ----------------------------------
June M. Morris
44
INDEX TO 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)).
3.2 Bylaws of Southwest, as amended through February 1994 (incorporated by
reference to Exhibit 3.2 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1993 (File No. 1-7259)).
4.1 Credit Agreement dated December 15, 1990, between Southwest and Texas
Commerce Bank - Dallas, N.A., as agent for itself and four other banks
named therein, and such banks (incorporated by reference to Exhibit
4.1 on Southwest's Current Report on Form 8-K dated February 14, 1991
(File No. 1-7259)); First Amendment to Credit Agreement, dated April
4, 1991 and Second Amendment to Credit Agreement, dated December 14,
1991 (incorporated by reference to Exhibit 4.1 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1991 (File No.
1-7259)); Third Amendment to Credit Agreement, dated December 14, 1992
(incorporated by reference in Exhibit 4.1 to Southwest's Annual Report
on Form 10-K for the year ended December 31, 1992 (File No. 1-7259));
Fourth Amendment to Credit Agreement, dated December 14, 1993
(incorporated by reference to Exhibit 4.1 to Southwest's Annual Report
on Form 10-K for the year ended December 31, 1994 (File No. 1-7259)).
Fifth and Sixth Amendments to Credit Agreement dated March 10, 1995
and May 18, 1995, respectively.
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 Rights Agreement dated July 14, 1986 between Southwest and MBank
Dallas, N.A., as Rights Agent (incorporated by reference to Exhibit
1, Southwest's Registration Statement on Form 8-A dated July 15, 1986
(File No. 1-7259)) and Amendment No. 1 to Rights Agreement, dated as
of December 1, 1990 between Southwest and Ameritrust Texas N.A.
(incorporated by reference to Exhibit 4.2 on Southwest's Current
Report on Form 8-K dated February 14, 1991 (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)).
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45
4.6 Form of 9.4 percent Note due 2001 (incorporated by reference to
Exhibit 4.2 to Southwest's Current Report on Form 8-K dated June 24,
1991 (File No. 1-7259)).
4.7 Form of 8-3/4 percent Note due 2003 (incorporated by reference to
Exhibit 4.2 to Southwest's Current Report on Form 8-K dated October 4,
1991 (File No. 1-7259)).
4.9 Form of 9-1/4 percent Note due 1998 (incorporated by reference to
Exhibit 4.9 to Southwest's Annual Report on Form 10-K for the year
ended December 31, 1991 (File No. 1-7259)).
4.10 Form of 7-7/8 percent Note due 2007 (incorporated by reference to
Exhibit 4.10 to Southwest's Annual Report on Form 10-K for the year
ended December 31, 1992 (File No. 1-7259)).
4.11 Form of Global Security representing all 8 percent Notes due 2005
(incorporated by reference to Exhibit 4 to Southwest's current
Report on Form 8-K dated March 6, 1995 (File No. 1-7259)).
10.1 General Terms Agreement between CFM International, Inc. and Southwest
(with all amendments through March 29, 1990) dated May 28, 1981
(incorporated by reference to Exhibit 10.2 on Southwest's Annual
Report on Form 10-K for the year ended December 31, 1989 (File No.
1-7259)); Amendments from November 6, 1989 through March 29, 1993
(incorporated by reference to Exhibit 10.2 on Southwest's Annual
Report on Form 10-K for the year ended December 31, 1992 (File No.
1-7259)); Amendments from March 29, 1993 through March 29, 1994
(incorporated by reference to Exhibit 10.2 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1993 (File No.
1-7259)); Amendment No. 7 and Letter Agreement No. 11, each dated as
of January 19, 1994 (incorporated by reference to Exhibit 10.2 to
Southwest's Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-7259)).
10.2 Purchase Agreement No. 1405, dated July 23, 1987 between The Boeing
Company and Southwest (with all amendments through March 29, 1990)
(incorporated by reference to Exhibit 10.3 on Southwest's Annual
Report on Form 10-K for the year ended December 31, 1989 (File No.
1-7259)); Amendments from April 1, 1990 through March 29, 1993
(incorporated by reference to Exhibit 10.3 on Southwest's Annual
Report on Form 10-K for the year ended December 31, 1992 (File No.
1-7259)); Amendments from March 29, 1993 through March 29, 1994
(incorporated by reference to Exhibit 10.3 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1993 (File No.
1-7259)); Amendments from March 30, 1994 through March 29, 1995
(incorporated by reference to Exhibit 10.2 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1993 (File No.
1-7259)); Amendments from March 30, 1995 through March 29, 1996.
10.3 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)).
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46
The following exhibits filed under paragraph 10 of Item 601 are the Company's
compensation plans and arrangements.
10.4 1985 stock option agreements between Southwest and Herbert D. Kelleher
(incorporated by reference to Exhibit 10.1 to Southwest's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1985 (File No.
1-7259)).
10.5 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)).
10.6 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)).
10.7 1987 stock option agreement between Southwest and Herbert D. Kelleher
(incorporated by reference to Exhibit 10.11 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1987 (File No.
1-7259)).
10.8 1996 employment contract between Southwest and Herbert D. Kelleher and
related stock option agreements.
10.9 1991 Incentive Stock Option Plan (incorporated by reference to Exhibit
4.1 to Registration Statement on Form S-8 (File No. 33-40652)).
10.10 1991 Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 4.2 to Registration Statement on Form S-8 (File No.
33-40652)).
10.11 1991 Employee Stock Purchase Plan as amended May 20, 1992
(incorporated by reference to Exhibit 10.13 to Southwest's Annual
Report on Form 10-K for the year ended December 31, 1992 (File No.
1-7259)).
10.12 Southwest Airlines Co. Profit Sharing Plan (incorporated by reference
to Exhibit 10.13 to Southwest's Annual Report on Form 10-K for the
year ended December 31, 1991 (File No. 1-7259)).
10.13 Southwest Airlines Co. 401(k) Plan (incorporrated 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)).
10.14 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)).
11 Computation of earnings per share.
22 Subsidiaries of Southwest.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
E-3