Southwest Airlines 1997 Annual Report Download - page 26

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26
SOUTHWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM
SOUTHWEST AIRLINES CO.
1997 ANNUAL REPORT — FINANCIAL REVIEW
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
YEAR IN REVIEW
In 1997, Southwest posted a record annual profit for the sixth consecutive year and a
profit for the 25th consecutive year. Net income for 1997 benefited from record
passenger revenue yields and continued cost control, widening our industry-leading
cost advantage.
At the end of 1997, 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 for 1998
include the addition of 14 more aircraft, net, and service to two new cities. We will
continue to add additional flights to cities we already serve. Any further expansion in
1998 will be dependent upon additional aircraft availability.
We were the launch customer for the new Boeing 737-700 aircraft, taking our first
delivery in December 1997. The -700 is expected to contribute to our low cost
advantage as it is more fuel efficient, less maintenance intensive, and has a lower
capital outlay than the -300. We added 18 new Boeing 737s to our fleet in 1997: 15 -
300s and three -700s. In 1998, we are currently scheduled to receive 22 -700s and
retire eight older -200s (three in first quarter 1998; one in second quarter 1998; and
four in fourth quarter 1998). We currently are interested in adding more 737 aircraft in
1998 if we can find aircraft at reasonable prices.
At the present time, Boeing is experiencing production delays related to the 737
production line. Thus far, these delays have not had a significant impact on our
operations as we were able to defer the retirement of some older -200s and have
earned cash penalty payments from Boeing. Boeing currently expects delays to
continue in 1998, which temporarily delays our expansion. Boeing will continue to
compensate Southwest for these production delays.
In August 1997, the Taxpayer Relief Act of 1997 was enacted, which included, among
other things, a revision of the then current ten percent federal excise tax on domestic
tickets. Effective October 1, 1997, through September 30, 1998, the tax rate was
reduced to nine percent of the amount paid for transportation beginning on or after
October 1, 1997, and a new $1.00 flight segment tax was imposed. From October 1,
1998 to September 30, 1999, the tax rate will decrease to eight percent and the