Southwest Airlines 1997 Annual Report Download

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SOUTHWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM
TABLE OF CONTENTS
Consolidated Highlights ....................................................................................... 1
Preamble .............................................................................................................. 3
Letter to Shareholders.......................................................................................... 4
First Symbol of Freedom ...................................................................................... 6
Second Symbol of Freedom ................................................................................. 9
Third Symbol of Freedom................................................................................... 12
Fourth Symbol of Freedom................................................................................. 15
Fifth Symbol of Freedom .................................................................................... 18
Future of Freedom.............................................................................................. 21
Destinations........................................................................................................ 24
Triple Crown One ............................................................................................... 25
Financial Review ................................................................................................ 26
Management’s Discussion and Analysis ............................................................ 26
Consolidated Financial Statements.................................................................... 36
Report of Independent Auditors ......................................................................... 51
Quarterly Financial Data .................................................................................... 52
Common Stock Price Ranges and Dividends..................................................... 52
Ten-Year Summary ............................................................................................ 53
Corporate Data................................................................................................... 55
Directors and Officers......................................................................................... 56
CONSOLIDATED HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 CHANGE
Operating revenues $3,816,821 $3,406,170 12.1%
Operating expenses $3,292,585 $3,055,335 7.8%
Operating income $524,236 $350,835 49.4%
Operating margin 13.7% 10.3% 3.4 pts.
Net income $317,772 $207,337 53.3%
Net margin 8.3% 6.1% 2.2 pts.
Net income per share, basic $1.45 $.95 52.6%
Net income per share, diluted $1.40 $.92 52.2%
Stockholders’ equity $2,009,018 $1,648,312 21.9%
Return on average stockholders’ equity 17.4% 13.5% 3.9 pts.
Stockholders’ equity per common share outstanding $9.08 $7.57 19.9%
Revenue passengers carried 50,399,960 49,621,504 1.6%
Revenue passenger miles (RPMs) (000s) 28,355,169 27,083,483 4.7%
Available seat miles (ASMs) (000s) 44,487,496 40,727,495 9.2%
Passenger load factor 63.7% 66.5% (2.8) pts.
Passenger revenue yield per RPM 12.84¢12.07¢6.4%
Operating revenue yield per ASM 8.58¢8.36¢2.6%
Operating expenses per ASM 7.40¢7.50¢(1.3)%
Number of Employees at yearend 23,974 22,944 4.5%

Table of contents

  • Page 1
    ... average stockholders' equity Stockholders' equity per common share outstanding Revenue passengers carried Revenue passenger miles (RPMs) (000s) Available seat miles (ASMs) (000s) Passenger load factor Passenger revenue yield per RPM Operating revenue yield per ASM Operating expenses per ASM Number...

  • Page 2
    SOUT HWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM $318 $300 $179 $154 $183 $207 $200 $100 $0 93 94 95 96 97 NET INCOME (in millions) $1.45 $1.50 $0.84 $0.72 $0.85 $0.95 $1.00 $0.50 $0....

  • Page 3
    ... 737 aircraft serving three Texas cities - Dallas, Houston, and San Antonio. At yearend 1997, Southwest operated 261 Boeing 737 aircraft and provided service to 52 airports in 51 cities throughout the United States. Southwest has the lowest operating cost structure in the domestic airline industry...

  • Page 4
    ... new model aircraft in 1998. Because of our confidence in the 737-700 and its importance to the future competitive success of Southwest Airlines, in December 1997 we exercised options, and placed purchase orders, for 59 additional aircraft, raising our total firm orders to 129 and providing ample...

  • Page 5
    ...in our existing markets. Our People have made Southwest Airlines an enjoyable and exciting place to work, filled with an immense feeling of pride in accomplishment, by them and for our nation. Every new city that Southwest enters - from Providence to San Diego and from Seattle to Tampa - immediately...

  • Page 6
    ... AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM SOUTHWEST FLAG REPRESENTS A HIGHFLYING TRIBUTE TO OUR PEOPLE - A SKY-BLUE FIELD EMBRACING OUR FAMOUS WINGED HEART, A CONSTANT REMINDER OF OUR PROUD BEGINNINGS AT DALLAS LOVE FIELD. Southwest started 26 years ago with only three planes serving three Texas...

  • Page 7
    ... at Wichita State University and the University of Nebraska at Omaha. Southwest also ranked number one in Money magazine's first rating of the major United States carriers in 1997, which was based on safety, price, ontime performance, baggage handling, and Customer Service. And, finally, since...

  • Page 8
    SOUT HWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM 8.35 ¢ 8.07 ¢ 7.94 ¢ 8.36 ¢ 8.58 ¢ 10 ¢ 5¢ 0¢ 93 94 95 96 97 OPERATING REVENUE PER AVAILABLE SEAT MILE 10 ¢ 7.25 ¢ 7.08 ¢ 7.07 ¢ 7.50 ¢ 7.40 ¢ 5¢ 0¢ 93 94 95 96 97 OPERATING EXPENSES PER AVAILABLE SEAT MILE 8

  • Page 9
    ... operating strategy is a significant ingredient of our low cost formula. Our operating strategy is unique in the airline industry, and it has, indeed, revolutionized air travel over the last 26 years. We start with a principal focus on the shorthaul traveler, where our average flight time is about...

  • Page 10
    .... Our fare structure is simple and this means the cost of selling our product is less than industry average. Over 60 percent of our Customers buy travel on Southwest on a ticketless basis - it is easier for our Customers and less expensive for Southwest than a paper ticket. Boarding the aircraft is...

  • Page 11
    SOUT HWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM 10 ¢ 6.18 ¢ 6.09 ¢ 6.04 ¢ 6.23 ¢ 6.21 ¢ 5¢ 0¢ 93 94 95 96 97 OPERATING EXPENSES PER AVAILABLE SEAT MILE (excluding fuel and related taxes) 8.3% 6.7% 6.9% 6.4% 6.1% 10% 5% 0% 93 94 95 96 97 NET MARGIN 11

  • Page 12
    ... that enabled us to overcome adversity and prove that an airline can profitably offer low fares. That tradition of Southwest Spirit continues today. Because of our People's devoted efforts, 1997 was outstanding for Southwest Airlines. We posted our sixth consecutive yearly record profit and our...

  • Page 13
    ... In every respect, our Employees are the very best, which is the reason we are one of the most successful carriers in the domestic airline industry today. "THERE'S A CERTAIN SOUTHWEST SPIRIT THAT REFLECTS EVERYTHING WE STAND FOR, EVERYTHING WE STRIVE FOR. IT IS OUR GUIDING PRINCIPLE, OUR COMMON GOAL...

  • Page 14
    SOUT HWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM 44,487 36,180 27,511 32,124 40,727 50,000 40,000 30,000 20,000 10,000 0 93 94 95 96 97 AVAILABLE SEAT MILES (in millions) 68.4% 67.3% 64.5% 66.5% 63.7% 80% 60% 40% 20% 0% 93 94 95 96 97 PASSENGER LOAD FACTOR 14

  • Page 15
    ... Customers' time and money, we also serve many conveniently located satellite or downtown airports, such as Dallas Love Field, Houston Hobby, Chicago Midway, Oakland, Burbank, Ft. Lauderdale, Providence, and Baltimore to name a few, which further reduces total trip time and transportation expenses...

  • Page 16
    ... frequent flights with minimum ground time at efficient airports contributes to the highest productivity in the industry and, in turn, the lowest operating costs. "SOUTHWEST'S FREQUENT FLIGHTS ARE AS FUNDAMENTAL TO OUR SUCCESS AS LOW FARES. SO IF YOU MISS A FLIGHT, CHANCES ARE GOOD THERE WILL...

  • Page 17
    SOUT HWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM 15:00 10:56 11:10 11:03 11:07 11:12 10:00 5:00 0:00 93 94 95 96 97 AIRCRAFT UTILIZATION (hours and minutes per day) 261 178 199 224 243 300 200 100 0 93 94 95 96 97 FLEET SIZE (at yearend) 17

  • Page 18
    .... With an average aircraft trip length of 425 miles, ground transportation has always been our most significant competitor. Therefore, we must charge low fares, every seat, every flight, every day, regardless of what our airline competitors charge. Our pledge to our Customers has worked. We have...

  • Page 19
    ... though we serve only 52 airports in the United States, we are still the fifth largest of the U.S. airlines in terms of originating passengers. Low costs and, therefore, low fares are an enormous competitive advantage, particularly when combined with high-quality service. "FREEDOM IS SOMETHING WE...

  • Page 20
    SOUT HWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM 27,083 18,827 21,611 23,328 28,355 30,000 20,000 10,000 0 93 94 95 96 97 REVENUE PASSENGER MILES (in millions) 11.77 ¢ 11.56 ¢ 11.83 ¢ 12.07 ¢ 12.84 ¢ 15 ¢ 10 ¢ 5¢ 0¢ 93 94 95 96 97 PASSENGER REVENUE PER PASSENGER ...

  • Page 21
    ... DAY. OUR NEXT NEW CITY WILL SHARE ALL THE BENEFITS OF ALL OUR EXISTING CITIES, INCLUDING OUR LOW FARES AND TRIPLE CROWN SERVICE. Southwest is financially and strategically positioned to take advantage of short- to medium-range point-to-point opportunities. We remain the undisputed low cost leader...

  • Page 22
    ...FIVE SYMBOLS OF FREEDOM Our future commitment to Boeing's Next-Generation 737-700 will significantly contribute to our ability to remain the lowest cost producer in the airline industry, which will, in turn, allow us to continue introducing low fares to many new U.S. cities. This new aircraft model...

  • Page 23
    SOUT HWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM 737 Type -200 -300 -500 -700 Total JET FLEET December 31, 1997 Seats 122 137 122 137 133 Average Age (Yrs.) 16.9 6.5 6.7 - 8.3 Number of Aircraft 47 186 25 3 261 1998 Firm orders: Options: Total: 22 - 22 1999 25 - 25 2000 23 - 23 2001 21 ...

  • Page 24
    ... SYMBOLS OF FREEDOM Indianapolis (IND) Jackson (JAN)* Jacksonville (JAX)* Kansas City (MCI) Las Vegas (LAS) Little Rock (LIT) Los Angeles (LAX) Louisville (SDF) Lubbock (LBB) Midland/Odessa (MAF) Nashville (BNA) New Orleans (MSY) Oakland (OAK) Oklahoma City (OKC) Omaha (OMA) Ontario (ONT) Orange...

  • Page 25
    ... HWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM CROWN SERVICE IS MORE THAN A SLOGAN, IT IS A BENCHMARK. SOUTHWEST HAS WON FIVE ANNUAL TRIPLE CROWNS - NO. 1 IN ONTIME ARRIVALS, BAGGAGE HANDLING, AND CUSTOMER SATISFACTION. Southwest Airlines is the only airline that has ever won the annual Triple...

  • Page 26
    ...Southwest served 51 cities in 25 states. We added service to Jacksonville, Florida and Jackson, Mississippi in 1997 and have been very pleased with the results, thus far. We also expanded our existing service to certain cities in 1997, especially Nashville, Providence, and our Florida markets. Plans...

  • Page 27
    ... of fare increases.) On October 27, 1997, the International Air Transportation Competition Act of 1979 was amended to allow scheduled service from Dallas Love Field to Alabama, Mississippi, and Kansas. The Company now offers scheduled service from Dallas Love Field to Jackson via connecting flights...

  • Page 28
    ...for the same period primarily due to an increase in United States mail services and increased air freight volumes resulting, in part, from the United Parcel Service labor strike during third quarter 1997. Other revenues increased by 45.6 percent in 1997 to $82.9 million, compared to $56.9 million in...

  • Page 29
    ... from a 2.4 percent increase in 1997 average salary and benefits cost per Employee, partially offset by slower growth in the number of Employees. The increase in average salary and benefits cost per Employee primarily is due to increased health care costs. The Company's Flight Attendants are subject...

  • Page 30
    SOUT HWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM contract, Southwest will pay General Electric a rate per flight hour in exchange for General Electric performing substantially all engine maintenance for the CFM56-3 engines on the 737-300 and 737-500 aircraft. The Company has a similar ...

  • Page 31
    ... decrease in average salary and benefits cost per Employee. The 16.2 percent increase in average headcount primarily was 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, in line with...

  • Page 32
    ... percentage of owned aircraft. Other operating expenses per ASM increased 9.4 percent in 1996, compared to 1995. This increase was primarily due to increased advertising costs resulting from the expansion into Florida and Providence, Rhode Island, as well as a new advertising campaign; the 4.3 cent...

  • Page 33
    ... debt at fixed rates averaging 7.8 percent, which is below average rates prevailing over the last ten years. At December 31, 1997, the Company operated 119 aircraft under operating and capital leases at rates that are substantially fixed. As defined in Item 305, leases are not market risk sensitive...

  • Page 34
    ... significant exposure to changing interest rates on invested cash, which was $623 million at December 31, 1997. The Company invests available cash in certificates of deposit and investment grade commercial paper that have maturities of three months or less. As a result, the interest rate market risk...

  • Page 35
    ...AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources...availability and cost of personnel trained in this area and the ability to locate and correct all ...

  • Page 36
    SOUT HWEST AIRLINES CO. CONSOLIDATED BALANCE SHEET ♥ FIVE SYMBOLS OF FREEDOM DECEMBER 31, (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS) 1997 1996 ASSETS Current assets: Cash and cash equivalents Accounts receivable Inventories of parts and supplies, at cost Deferred income taxes (Note 9)...

  • Page 37
    ...,322 156,771 498,373 2,559,220 313,531 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 Depreciation Other...

  • Page 38
    ..., 1996 Three-for-two stock split (Note 6) 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, $.0331 per share Net income - 1997 Balance at December 31, 1997 $143,256 $151...

  • Page 39
    ... to net cash provided by operating activities: Depreciation 195,568 Deferred income taxes 81,711 Amortization of deferred gains on sale and leaseback of aircraft (15,414) Amortization of scheduled airframe overhauls 20,540 Changes in certain assets and liabilities: Accounts receivable (3,090) Other...

  • Page 40
    ...♥ FIVE SYMBOLS OF FREEDOM NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 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...

  • Page 41
    ...sale of flight segment credits is recognized when the credits are sold. ADVERTISING The Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 1997, 1996, and 1995 was $112,961,000, $109,136,000, and $92,087,000, respectively. STOCK-BASED EMPLOYEE...

  • Page 42
    ...172.8 million in 2003, and $105.5 million in 2004. 3. ACCRUED LIABILITIES (IN THOUSANDS) Aircraft rentals Employee profitsharing and savings plans (Note 8) Vacation pay Other 4. LONG-TERM DEBT (IN THOUSANDS) 1997 $123,669 92,857 50,812 159,612 $426,950 1997 $100,000 100,000 100,000 100,000 100,000...

  • Page 43
    ...on borrowings under the Credit Agreement can be, at the option of Southwest, the greater of the agent bank's prime rate or the federal funds rate plus .5 percent, .17 percent over LIBOR, or a fixed rate offered by the banks at the time of borrowing. The commitment fee is .08 percent per annum. There...

  • Page 44
    ... shareholders. At December 31, 1997, the Company had common stock reserved for issuance pursuant to Employee stock benefit plans (49,254,768 shares) ... 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 ...

  • Page 45
    ... 25 and related Interpretations in accounting for its stock-based compensation. Accordingly, no compensation expense is recognized for its fixed option plans because the exercise prices of the Company's Employee stock options equal or exceed the market prices of the underlying stock on the dates of...

  • Page 46
    SOUT HWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM Information regarding the Company's five fixed stock option plans, as adjusted for the three-for-two stock split on November 26, 1997, is summarized below: Incentive Plans Average Exercise Options Price 7,217,943 $8.05 1,474,821 12.53 (412,587) ...

  • Page 47
    ..., 1996, and 1995, respectively. Under the 1991 Employee Stock Purchase Plan (ESPP), at December 31, 1997, the Company is authorized to issue up to a balance of 871,000 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 48
    ... of the Southwest Airlines Co. Profitsharing Plan. Total profitsharing expense charged to operations in 1997, 1996, and 1995 was $91,256,000, $59,927,000, and $54,033,000, respectively. The Company sponsors Employee savings plans under Section 401(k) of the Internal Revenue Code. The plans cover...

  • Page 49
    ...580 3,567 48,147 $122,514 Southwest has received examination reports from the Internal Revenue Service (IRS) proposing certain adjustments to Southwest's income tax returns for 1989 through 1991. The adjustments relate to aircraft maintenance costs incurred by Southwest, as well as other members of...

  • Page 50
    SOUT HWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM 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 income taxes differed from the federal income tax statutory rate for the following reasons:...

  • Page 51
    ... position of Southwest Airlines Co. at December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Dallas, Texas January...

  • Page 52
    ... 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, as adjusted for the November 1997 three-for-two stock split...

  • Page 53
    ... length of passenger haul 563 Trips flown 786,288 Average passenger fare $72.21 Passenger revenue yield per RPM 12.84¢ Operating revenue yield per ASM 8.58¢ Operating expenses per ASM 7.40¢ Fuel cost per gallon (average) 62.46¢ Number of Employees at yearend 23,974 Size of fleet at yearend...

  • Page 54
    ...AIRLINES... SYMBOLS OF FREEDOM ...sale of certain financial assets, and $2.3 million from the settlement of a contingency (8) Includes $5.6 million gains on sales of aircraft and $3.6 million from the sale of certain financial assets (9) Includes certain estimates for Morris (10) Excludes merger expenses...

  • Page 55
    ... 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 Co. will be held at 10:00a.m. on May 21, 1998, at the Southwest Airlines Corporate Headquarters, 2702 Love Field Drive...

  • Page 56
    ... CROWN ONE, A SIGNATURE SALUTE TO THE EMPLOYEES OF SOUTHWEST AIRLINES FOR FIVE ANNUAL TRIPLE CROWN WINS. 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, and...

  • Page 57
    ... SYMBOLS OF FREEDOM WALTER M. MISCHER, SR. President 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...

  • Page 58
    ... Planning WILLIAM Q. MILLER Vice President-Inflight Service JOHN D. OWEN Treasurer JAMES F. PARKER* Vice President-General Counsel RON RICKS* Vice President-Governmental Affairs DAVE RIDLEY Vice President-Marketing and Sales ♥ FIVE SYMBOLS OF FREEDOM JOYCE C. ROGGE* Vice President-Advertising...