Southwest Airlines 1996 Annual Report Download

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TABLE OF CONTENTS
Consolidated Highlights 2
Introduction 3
Letter to Shareholders 4
People and Planes 6
Southwest Spirit 8
THE Low Fare Airline 10
Productivity 12
Ontime Performance 14
Customer Satisfaction 16
Mintenance and Safety 18
What’s Next? 20
Financial Review 22
Management’s Discussion and Analysis 22
Consolidated Financial Statements 31
Report of Independent Auditors 49
Quarterly Financial Data 50
Common Stock Price Ranges and Dividends 50
Corporate Data 51
Directors and Officers 52
Ten Year Summary 55
1996 Annual Report

Table of contents

  • Page 1
    1996 Annual Report TABLE OF CONTENTS Consolidated Highlights Introduction Letter to Shareholders People and Planes Southwest Spirit THE Low Fare Airline Productivity Ontime Performance Customer Satisfaction Mintenance and Safety What' s Next? Financial Review Management' s Discussion and Analysis ...

  • Page 2
    ... (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 1995 PERCENT CHANGE Operating revenues Operating expenses Operating income Operating margin Net income Net margin Net income per common and common equivalent share Stockholders' equity Return on average stockholders' equity Debt as a percentage...

  • Page 3
    ...as well as leisure travelers. The Company, incorporated in Texas, commenced Customer Service on June 18, 1971, with three Boeing 737 aircraft serving three Texas cities - Dallas, Houston, and San Antonio. At yearend 1996, Southwest operated 243 Boeing 737 aircraft and provided service to 50 airports...

  • Page 4
    ... and two new nonstop flights beginning June 11, 1997. The introductory nonstop routings will be Nashville to Detroit, Los Angeles, Oakland, and Columbus, and current nonstop service will be enhanced from Nashville to Las Vegas and Tampa. In October 1997, Southwest will receive delivery of the first...

  • Page 5
    ...Freiberg, is the story of the People of Southwest Airlines and how the low Southwest fares and high Southwest spirits which they created have made Southwest a true "Symbol of Freedom." Seldom, if ever, has a business book been written about the People of a Company and their unique culture, and never...

  • Page 6
    ... People of Southwest in 1996 with their best-selling business book, NUTS!, a story of the unique Culture and successes of the People of Southwest Airlines and their commitment to low fares. We ended 1996 in the strongest financial position ever, with $582 million in cash and a fully available bank...

  • Page 7
    OPERATING REVENUE PER AVAILABLE SEAT MILE 8.35¢ 8.40 8.30 8.20 8.10 8.00 7.90 7.80 7.70 7.60 1992 1993 1994 1995 8.36¢ 8.07¢ 7.89¢ 7.94¢ 1996 OPERATING EXPENSE PER AVAILABLE SEAT MILE 7.50¢ 7.50 7.40 7.30 7.20 7.10 7.00 6.90 6.80 6.70 1992 1993 1994 1995 1996 7.25¢ 7.03¢ 7.08¢ 7.07...

  • Page 8
    ... increase, expanding our route system into Florida and southern New England. New Customers embraced Southwest in droves, with our revenue Customers up 10.8 percent, to 49,621,504. All that was accomplished with high marks in Customer Service, safe and reliable operations, and record profits. Our...

  • Page 9
    OPERATING EXPENSES PER AVAILABLE SEAT MILE EXCLUDING FUEL AND RELATED TAXES 6.40 6.30 6.20 6.10 6.00 5.90 5.80 6.33¢ 6.23¢ 6.18¢ 6.09¢ 6.04¢ 1992 1993 1994 1995 1996 PASSENGER REVENUE PER PASSENGER MILE 12.07¢ 12.10 12.00 11.90 11.80 11.70 11.60 11.50 11.40 11.30 1992 1993 1994 1995 ...

  • Page 10
    ...'re THE Low Fare Airline. The difference isn' t just in our prices; it' s in our philosophy. Southwest' s unique operating philosophy is to provide safe, reliable, friendly air service at the lowest fare. That' s a Customer commitment and critically important in our market niche. We' re a shorthaul...

  • Page 11
    REVENUE PASSENGERS CARRIED (in thousands) 50,000 40,000 30,000 20,000 10,000 0 1992 36,955 27,839 42,743 44,786 49,622 1993 1994 1995 1996 REVENUE PASSENGER MILES (in millions) 27,083 30000 25000 20000 15000 10000 5000 0 1992 1993 1994 1995 1996 18,827 13,787 21,611 23,328 11

  • Page 12
    ..., the lowest costs of any U.S. airline. One of the primary reasons for our productivity advantage is our dedication to the low-fare, point-to-point market niche. This market focus allows us to operate a single aircraft type, the Boeing 737, which significantly simplifies scheduling, operations, and...

  • Page 13
    AIRCRAFT UTILIZATION HOURS AND MINUTES PER DAY 11:16 11:09 11:02 10:55 10:48 10:40 10:33 10:26 10:19 1992 1993 11:10 10:56 10:39 11:03 11:07 1994 1995 1996 FLEET SIZE AT YEAREND 250 178 200 150 100 50 0 1992 1993 199 224 243 141 1994 1995 1996 13

  • Page 14
    ... our Customers both time and money, we clearly offer the best value in the airline industry. Airlines face many obstacles in their quest to depart and arrive on time. Poor scheduling, weather, air traffic congestion, mechanical problems, and attitude all can contribute to flight delays. At Southwest...

  • Page 15
    AVAILABLE SEAT MILES (in millions) 50,000 40,000 30,000 20,000 10,000 0 1992 1993 1994 1995 27,511 21,367 32,124 36,180 40,727 1996 PASSENGER LOAD FACTOR 68.4% 69.00% 68.00% 67.00% 66.00% 65.00% 64.00% 63.00% 62.00% 1992 1993 1994 1995 1996 67.3% 66.5% 64.5% 64.5% 15

  • Page 16
    ...flies, transferable, and expire one year after they have been earned. Thanks to the proud Employees of Southwest Airlines, we not only offer our Customers the lowest possible fares, we offer them the very best Customer Service in the industry. And that adds up to the best value in air transportation...

  • Page 17
    ...8 9 10 ONTIME PERFORMANCE Department of Transportation Rankings for 1996 Southwest Continental Northwest USAir United American Delta America West Alaska TWA 1 2 3 4 5 6 7 8 9 10 BAGGAGE HANDLING Department of Transportation Rankings for 1996 Southwest Continental America West USAir Delta Northwest...

  • Page 18
    ... philosophy greatly contribute to our outstanding 25year safety record. We also believe our highly skilled and trained pilots are the best in the industry. We are the only airline in the U.S. that requires first officers to be FAA captain-rated for Boeing 737 aircraft. Our new first officers...

  • Page 19
    JET FLEET December 31, 1996 737 Type -200 -300 -500 TOTAL Seats 122 137 122 133 Avg. Age (in years) 16.1 6.0 5.7 7.9 # of Aircraft 47 171 25 243 JET FLEET EXPANSION Firm -300 1997 1998 1999 2000 2001 2002 2003 2004 TOTAL 15 15 -700 4 16 16 15 12 63 Options -700 5 9 6 6 18 18 5 67 19 21 25 21 ...

  • Page 20
    ...In 1996, Southwest entered four new markets: Tampa, Ft. Lauderdale, and Orlando, Florida, and Providence, Rhode Island. Thus far, our service has been tremendously received by each of these communities. With the addition of these cities, we were able to further diversify our growing route system. At...

  • Page 21
    ...(MCI) Las Vegas (LAS) Little Rock (LIT) Los Angeles (LAX) Louisville (SDF) Lubbock (LBB) *Effective January 15, 1997 New 1996-1997 destinations Midland/Odessa (MAF) Nashville (BNA) New Orleans (MSY) Oakland (OAK) Oklahoma City (OKC) Omaha (OMA) Ontario (ONT) Orange County (SNA) Orlando (MCO) Phoenix...

  • Page 22
    SOUTHWEST AIRLINES CO. 1996 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR IN REVIEW Southwest and the airline industry continued to post record profits in 1996. Southwest' s net income for the first half of 1996 benefited from the lapse in ...

  • Page 23
    ...fourth quarters 1996 as compared to revenue trends in the first half of 1996. In celebration of the Company' s 25th Anniversary, Southwest launched a fare sale in July for travel between August 19 and October 31, 1996. The sale was extremely popular and resulted in record advance bookings, with more...

  • Page 24
    ...offset a 0.8 percent decrease in average salary and benefits cost per Employee. The 16.2 percent increase in average headcount was primarily the result of a 24.3 percent increase in Reservations Sales Agents in 1996. Excluding Reservations Sales Agents, total average headcount increased 13.1 percent...

  • Page 25
    ... May 31, 1996. Southwest is currently in negotiations with TWU to amend the contract. Fuel and oil expenses per ASM increased 17.8 percent in 1996, primarily due to an 18.6 percent increase in the average jet fuel cost per gallon from 1995. The average price paid for jet fuel in 1996 was $.6547...

  • Page 26
    ...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 throughout 1994 and 1995. OPERATING EXPENSES Consolidated operating expenses...

  • Page 27
    ...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...

  • Page 28
    ... 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 a 4.3 cents per gallon tax on commercial aviation jet...

  • Page 29
    ... purchase of 22 new 737-300 aircraft, one used 737-200 aircraft previously leased by the Company, and progress payments for future aircraft deliveries. At December 31, 1996, capital commitments of the Company consisted primarily of scheduled aircraft acquisitions. The Company recently announced its...

  • Page 30
    proceeds were primarily used to finance aircraft-related capital expenditures and to provide working capital. 30

  • Page 31
    ...(in thousands except share and per share amounts) December 31, 1996 1995 ASSETS Current assets: Cash and cash equivalents...Accounts receivable...Inventories of parts and supplies, at cost...Deferred income taxes (Note 9) ...Prepaid expenses and other current assets...Total current assets...Property...

  • Page 32
    ...,765 54,419 39,749 2,591,933 1996 Operating revenues: Passenger...Freight ...Other ...Total operating revenues ...Operating expenses: Salaries, wages, and benefits (Note 8) ...Fuel and oil...Maintenance materials and repairs...Agency commissions...Aircraft rentals...Landing fees and other rentals...

  • Page 33
    ... 31, 1995...Issuance of common stock upon exercise of executive stock ...options and pursuant to Employee stock option and purchase plans (Note 7) ...Tax benefit of options exercised...Cash dividends, $.044 per share...Net income - 1996 ...Balance at December 31, 1996...See accompanying notes. $142...

  • Page 34
    ...December 31, 1996 1995 1994 Cash flows from operating activities: Net income ...Adjustments to reconcile net income to cash provided by operating activities: Depreciation ...Deferred income taxes ...Amortization of deferred gains on sale and leaseback of aircraft...Amortization of scheduled airframe...

  • Page 35
    ... FINANCIAL STATEMENTS DECEMBER 31, 1996 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...

  • Page 36
    ... 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 Rapid Rewards frequent flyer program. ADVERTISING The Company expenses the production costs of advertising...

  • Page 37
    ... in 2000, and $204.5 million in 2001. The Company has historically used jet fuel and heating oil fixed price swap arrangements to hedge its exposure to price fluctuations on an insignificant percentage of its annual fuel requirements. As of December 31, 1996, the Company had no open swap agreements...

  • Page 38
    ...1996 9 1/4% Notes due 1998 9.4% Notes due 2001 8 3/4% Notes due 2003 7 7/8% Notes due 2007 8% Notes due 2005 Capital leases (Note 5) Other Less current maturities Less debt discount... the Company issued $100 million of senior unsecured 8% Notes due March 1, 2005. Interest is payable semi-annually on ...

  • Page 39
    ... expense for operating leases charged to operations in 1996, 1995, and 1994 was $280,389,000, $247,033,000, and $198,987,000, respectively. The majority of the Company' s terminal operations space, as well as 106 aircraft, were under operating leases at December 31, 1996. The amounts applicable...

  • Page 40
    ...the lessor' s defined cost of the aircraft. 6. COMMON STOCK At December 31, 1996, the Company had common stock reserved for issuance pursuant to Employee stock benefit plans (35,257,962 shares) and upon exercise of rights (180,370,052 shares) pursuant to the Common Stock Rights Agreement, as amended...

  • Page 41
    ... number of the acquiring company' s or the Company' s common shares, as provided in the Agreement, having a market value of two times the exercise price of the Right. The Rights will expire no later than July 30, 2006. 7. STOCK PLANS At December 31, 1996, the Company had six stock-based compensation...

  • Page 42
    ... upon the grant type. Under all fixed option plans, except the SWAPA Plan, the exercise price of each option equals the market price of the Company' s stock on the date of grant. Under the SWAPA Plan, for additional options granted each September 1, eligible Pilots will be required to pay a purchase...

  • Page 43
    ...Company' s five fixed option plans as of December 31, 1996, 1995, and 1994, and changes during the years ending on those dates is presented below: INCENTIVE PLAN* AVERAGE EXERCISE PRICE... Surrendered Outstanding December 31, 1996 Exercisable December 31, 1996 Available for granting in future periods...

  • Page 44
    ..., 1995, and 1994, respectively. Under the 1991 Employee Stock Purchase Plan (ESPP), at December 31, 1996, the Company is authorized to issue up to a balance of 1,183,236 shares of common stock to Employees of the Company at a price equal to 90 percent of the market value at the end of each purchase...

  • Page 45
    ..., in management' s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its Employee stock options. For purposes of pro forma disclosures the estimated fair value of stock-based compensation plans and other options is amortized to expense primarily...

  • Page 46
    ... members of the Southwest Airlines Co. Profitsharing Plan. Total profitsharing expense charged to operations in 1996, 1995, and 1994 was $59,927,000, $54,033,000, and $52,782,000, respectively. The Company sponsors Employee savings plans under Section 401(k) of the Internal Revenue Code. The plans...

  • Page 47
    ...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...

  • Page 48
    ...-average number of common and common equivalent shares outstanding (151,793,477 in 1996, 148,850,512 in 1995, and 147,305,374 in 1994). 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...

  • Page 49
    ... financial position of Southwest Airlines Co. at December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ending December 31, 1996, in conformity with generally accepted accounting principles. Dallas, Texas January...

  • Page 50
    ... 43,359 .29 COMMON STOCK PRICE RANGES AND DIVIDENDS 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 were: PERIOD 1996 1st quarter 2nd...

  • Page 51
    ...Trust Company 2 Broadway New York, New York 10004 (212) 509-4000 STOCK EXCHANGE LISTING New York Stock Exchange Ticker Symbol: LUV AUDITORS Ernst & Young LLP Dallas, Texas GENERAL OFFICES P. O. Box 36611 Dallas, Texas 75235-1611 ANNUAL MEETING The Annual Meeting of Shareholders of Southwest Airlines...

  • Page 52
    ..., your service, and your spirit are the stuff legends are made of. Southwest Airlines is truly your airline. DIRECTORS SAMUEL E. BARSHOP Chairman of the Board, Barshop & Oles Co., Inc., San Antonio, Texas; Audit and Compensation Committees GENE H. BISHOP Retired, Dallas, Texas; Audit, Compensation...

  • Page 53
    ... Board and Chief Executive Officer, Hallmark Residential Group, Inc., Houston, Texas (Real Estate Development); Audit and Compensation Committees JUNE M. MORRIS Founder and former Chief Executive Officer of Morris Air Corporation, Salt Lake City, Utah; Audit Committee OFFICERS HERBERT D. KELLEHER...

  • Page 54
    ... E. STERBENZ Vice President-Flight Operations KEITH L. TAYLOR Vice President-Revenue Management JAMES C. WIMBERLY* Vice President-Ground Operations *Member of Executive Planning Committee Southwest Airlines Co. P.O. Box 36611 Dallas, Texas 75235-1611 214/792-4000 1-800-I-FLY-SWA www.iflyswa.com 54

  • Page 55
    SOUTHWEST AIRLINES CO. TEN YEAR SUMMARY SELECTED CONSOLIDATED FINANCIAL DATA(1) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 1995 1994 1993 1992 1991 1990 Operating revenues: Passenger Freight Other Total operating revenues Operating expenses Operating income Other expenses (income), net ...

  • Page 56
    ... of aircraft and $3.6 million from the sale of certain financial assets (9) Includes TranStar Airlines Corporation' s (TranStar) results through June 30, 1987 (10) Includes $10.1 million net gains from the discontinuance of TranStar' s operations and $4.3 million from the sale of certain financial...