Southwest Airlines 1999 Annual Report Download

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THE FREEDOM TO FLY
FROM VISION
TO REALITY
TO AFFORDABILITY
SOUTHWEST AIRLINES CO. ANNUAL REPORT 1999
T A B L E O F C O N T E N T S
Consolidated Highlights
The Freedom to Fly
Letter to Shareholders
Vision
Reality
Affordability
Our Second Decade
Our Third Decade
The 21st Century
System Map
IFC
1
2
4
6
8
10
12
14
16
Financial Review
Management’s Discussion and Analysis
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Report of Independent Auditors
Quarterly Financial Data
Common Stock Price Ranges and Dividends
Ten-Year Summary
Corporate Data
Directors and Officers
F1
F2
F8
F12
F20
F21
F21
F22
F24
IBC
C O N S O L I D A T E D H I G H L I G H T S
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1999 1998 CHANGE
Operating revenues $4,735,587 $4,163,980 13.7%
Operating expenses $3,954,011 $3,480,369 13.6%
Operating income $781,576 $683,611 14.3%
Operating margin 16.5% 16.4% 0.1 pts.
Net income $474,378 $433,431 9.4%
Net margin 10.0% 10.4% (0.4) pts.
Net income per share – basic $.94 $.87 8.1%
Net income per share – diluted $.89 $.82 8.5%
Stockholders’ equity $2,835,788 $2,397,918 18.3%
Return on average stockholders’ equity 18.1% 19.7% (1.6) pts.
Stockholders’ equity per common share outstanding $5.62 $4.76 18.1%
Revenue passengers carried 57,500,213 52,586,400 9.3%
Revenue passenger miles (RPMs) (000s) 36,479,322 31,419,110 16.1%
Available seat miles (ASMs) (000s) 52,855,467 47,543,515 11.2%
Passenger load factor 69.0% 66.1% 2.9 pts.
Passenger revenue yield per RPM 12.33¢ 12.62¢ (2.3)%
Operating revenue yield per ASM 8.96¢ 8.76¢ 2.3%
Operating expenses per ASM 7.48¢ 7.32¢ 2.2%
Number of Employees at yearend 27,653 25,844 7.0%

Table of contents

  • Page 1
    ... Stock Price Ranges and Dividends Ten-Year Summary Corporate Data Directors and Officers F1 F2 F8 F12 F20 F21 F21 F22 F24 IBC C O N S O L I D A T ED H IGHLIGHTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1999 1998 CHANGE Operating revenues Operating expenses Operating income Operating margin...

  • Page 2
    ... 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 1999, Southwest operated 312 Boeing 737 aircraft and provided service to 56 airports in 29...

  • Page 3
    ... has one of the best overall Customer Service records. LUV is our stock exchange symbol, selected to represent our home at Dallas Love Field, as well as the theme of our Employee and Customer relationships. TO OUR SHAREHOLDERS : In 1999, our magnificent People brought the Freedom to Fly to 57,500...

  • Page 4
    ... in terms of available seat miles and that we will open at least one other city, in addition to Albany, New York, where service begins to Baltimore/Washington, Orlando, and Las Vegas on May 7, 2000. Our 1999 new city additions of Islip, Long Island; Raleigh-Durham, North Carolina; and Hartford...

  • Page 5
    ...to-point, shorthaul Customers since no other airline was doing a good job of meeting those needs. Herb and Rollin knew they must have low costs to offer low fares. After all, a business needs to make a profit. So they envisioned an operation that was far superior in terms of efficiency, productivity...

  • Page 6
    ... Customers. Business travelers especially want convenience. So we offer frequent flights on our shorthaul routes, on the order of eight or more times a day. For example, Dallas-Houston has 40 roundtrips a day. At the end of 1999, we operated 2,550 daily departures to 56 airports, or 46 departures...

  • Page 7
    ... contact us directly, either by calling toll-free to one of our nine reservation centers (located in Salt Lake City, Phoenix, Albuquerque, Oklahoma City, Dallas, San Antonio, Houston, Chicago, and Little Rock) or logging onto our web site at www.southwest.com, one of the most successful travel sites...

  • Page 8
    ... Best Bonus Promotion among all frequent flyer programs. Customers can also earn flight credits through purchases with our travel partners (Alamo, American Express, Budget, Diners Club, Dollar, Hertz, Hilton, Marriott, MCI WorldCom) as well as through the use of the Southwest Airlines Rapid Rewards...

  • Page 9
    ... are sold directly by Southwest versus an industry average of 10 to 15 percent. Almost 80 percent of our seats are sold Ticketless, which eliminates significant paper and back-office processing. Ticketless Travel is also the foundation of sales through our web site at www.southwest.com, which has...

  • Page 10
    ... airlines. Rounding out our Customer Service strategy, we offer quick, simple ticketing and boarding with fast, friendly inflight beverage service. Our all-Boeing 737 fleet is one of the youngest in the world and is clean, safe, quiet, and comfortable. In an all coach configuration with open seating...

  • Page 11
    ... encourages our Employees to be creative and have fun. As a result, our People tend to go out of their way to ensure our Customers have an enjoyable flight and are treated like guests. For the past three years, Southwest has been named by Fortune magazine as one of the best companies to work for in...

  • Page 12
    ... ten cities' daily departures are currently: Phoenix, 177; Houston Hobby, 149; Las Vegas, 149; Dallas Love Field, 139; Los Angeles International, 122; Chicago Midway, 118; Oakland, 112; Baltimore, 95; St. Louis, 88; and San Diego, 78. This is very different from our hub-andspoke competitors, which...

  • Page 13
    Boeing 737-700 Firm Orders And Options Type Firm Orders Options Total 2000 31 - 31 2001 23 - 23 2002 21 - 21 2003 5 13 18 2004 5 13 18 2005 - 18 18 2006 - 18 18 Total 85 62 147 Southwest's Capacity By Region Southwest's Market Share Southwest's Top 100 City-pair Markets

  • Page 14
    ...2 Markets Dallas, Houston (Hobby), San Antonio Harlingen Corpus Christi, Midland, Lubbock, El Paso, Austin Amarillo New Orleans Oklahoma City, Tulsa, Albuquerque, Houston Intercontinental Las Vegas, Phoenix, San Diego, Kansas City, LAX, San Francisco Little Rock Chicago (Midway), St. Louis, Ontario...

  • Page 15
    ... Providence Jacksonville, Jackson Manchester Islip, Raleigh-Durham, Hartford Albany (new service starts May 7, 2000) Southwest's Top Airports 1999 Daily Departures BALTIMORE LAS VEGAS OAKLAND DALLAS LOVE LOS ANGELES CHICAGO MIDWAY SAN DIEGO HOUSTON HOBBY ST. LOUIS PHOENIX 175 150 125 100...

  • Page 16
    ... to Islip, New York, on Long Island in March 1999, Raleigh-Durham, North Carolina, in June 1999, and Hartford, Connecticut, in October 1999 and have been very pleased with the results in each of these new Southwest cities. The Company recently announced plans to commence service to Albany, New York...

  • Page 17
    ... increase in charter revenue. Beginning January 1, 2000, the Company will change its method of accounting for the sale of flight segment credits. See Recent Accounting Developments in Note 1 to the Consolidated Financial Statements. OPERATING EXPENSES Consolidated operating expenses for 1999 were...

  • Page 18
    ... - .01 .16¢ Percent Change 1.7% 2.9 13.4 9.4 (9.1) (11.6) 2.2 - 0.7 2.2% 1999 Salaries, wages, and benefits Employee profitsharing and savings plans Fuel and oil Maintenance materials and repairs Agency commissions Aircraft rentals Landing fees and other rentals Depreciation Other Total 2.39¢ .36...

  • Page 19
    ... salaries and wages. The increases in engine inspection and repair costs were primarily related to the Company' s 737-200 aircraft. The Company' s 737-200 aircraft engine inspections and repairs are performed on a time and materials basis and are not covered by the Company' s power-bythe-hour engine...

  • Page 20
    ... to, a change in the Company' s aircraft financing strategy.) Other operating expenses per ASM increased 0.7 percent in 1999 compared to 1998. This increase was primarily due to increased credit card processing costs resulting from a higher percentage of the Company' s ticket sales purchased with...

  • Page 21
    ... decrease in average jet fuel cost per gallon. The decrease in average jet fuel prices was offset by a $36.1 million increase in Employee profitsharing and savings plan contributions and an increase in maintenance costs primarily due to unusually low aircraft engine inspection and repair costs in...

  • Page 22
    ... Employee. The increase in average salary and benefits cost per Employee primarily is due to higher effective wage rates, lower productivity in 1998 caused by Boeing aircraft delivery delays, and increased health care and workers' compensation costs. Employee profitsharing and savings plans expense...

  • Page 23
    ... being purchased. At December 31, 1999, capital commitments of the Company primarily consisted of scheduled aircraft acquisitions and related flight equipment. As of December 31, 1999, Southwest had 85 new 737-700s on firm order, including 31 to be delivered in 2000, with options to purchase another...

  • Page 24
    ...jet fuel to operate its aircraft fleet. To the extent the Company does not have hedges in place, jet fuel will be purchased at prevailing market prices. Southwest also has market sensitive instruments in the form of the types of hedges it utilizes to decrease its exposure to jet fuel price increases...

  • Page 25
    ...and purchased crude oil call options related to the Company' s jet fuel market price risk at December 31, 1999 and 1998, and during the year ended 1998, were not material. For 1999, the Company realized approximately $14.8 million in gains from hedging activities. A hypothetical ten percent increase...

  • Page 26
    ... not have significant exposure to changing interest rates on invested cash, which was $419 million and $379 million at December 31, 1999 and 1998, respectively. The Company invests available cash in certificates of deposit and investment grade commercial paper that have maturities of three months or...

  • Page 27
    F8 SOUTHWEST AIRLINES CO. CONSOLIDATED BALANCE SHEET DECEMBER 31, 1999 1998 (In thousands except per share amounts) ASSETS Current assets: Cash and cash equivalents Accounts receivable Inventories of parts and supplies, at cost Deferred income taxes (Note 11) Prepaid expenses and other current ...

  • Page 28
    ... except per share amounts ) OPERATING REVENUES: Passenger Freight Other Total operating revenues OPERATING EXPENSES: Salaries, wages, and benefits (Note 10) Fuel and oil Maintenance materials and repairs Agency commissions Aircraft rentals Landing fees and other rentals Depreciation (Note 2) Other...

  • Page 29
    ...-two stock split (Note 8) Purchase of shares of treasury stock (Note 8) Issuance of common and treasury stock upon exercise of executive stock options and pursuant to Employee stock option and purchase plans (Note 9) Tax benefit of options exercised Cash dividends, $.0215 per share Net income - 1999...

  • Page 30
    ... FROM INVESTING ACTIVITIES: Purchases of property and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of long-term debt Payment of long-term debt and capital lease obligations Payment of cash dividends Proceeds from Employee stock plans Repurchase of...

  • Page 31
    ...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...

  • Page 32
    ...of operations for the periods in which the evaluations are completed. FREQUENT FLYER PROGRAM The Company accrues the estimated incremental cost of providing free travel awards earned under its Rapid Rewards frequent flyer program. The Company also sells flight segment credits and related services...

  • Page 33
    ... fiscal quarter of the fiscal year beginning after December 15, 1999. The Company will adopt SAB 101 effective January 1, 2000, and change its method of accounting used to recognize revenue for the sale of flight segment credits to companies participating in its Rapid Rewards frequent flyer program.

  • Page 34
    ...average aircraft stage (trip) length, and the Company's previous experience. The effect of this change was to reduce depreciation expense approximately $25.7 million and increase net income $.03 per diluted share for the year ended December 31, 1999. 3. COMMITMENTS The Company's contractual purchase...

  • Page 35
    ... in 2004. 4. ACCRUED LIABILITIES (In thousands) Employee profitsharing and savings plans (Note 10) Aircraft rentals Vacation pay Other 1999 $138,566 131,219 62,937 202,302 $535,024 1998 $123,195 121,868 54,781 177,604 $477,448 5. LONG-TERM DEBT (In thousands) 9.4% Notes due 2001 8 3/4% Notes...

  • Page 36
    ...1997, the Company issued $100 million of senior unsecured 7 3/8% Debentures due March 1, 2027. Interest is payable semi-annually on March 1 and September 1. The Debentures may be redeemed, at the option of the Company, in whole at any time or in part from time to time, at a redemption price equal to...

  • Page 37
    ... cost of the aircraft. 7. FINANCIAL INSTRUMENTS The Company has historically utilized purchased crude oil call options and fixed price swap agreements to hedge a portion of its exposure to fuel price increases. During 1999, the Company recognized gains of $14.8 million from hedging activities. At

  • Page 38
    ... amount at December 31, 1999. The Company is in the process of negotiating similar agreements with other counterparties. The Company does not hold or issue any financial instruments for trading purposes. The carrying amounts and estimated fair values of the Company's long-term debt at December 31...

  • Page 39
    ... to receive dividends when and if declared by the Board of Directors and are entitled to one vote per share on all matters submitted to a vote of the shareholders. At December 31, 1999, the Company had common stock reserved for issuance pursuant to Employee stock benefit plans (97.9 million shares...

  • Page 40
    ... under the Employee stock option and purchase plans. When treasury shares are reissued, the Company uses a first-in, first-out method and the excess of repurchase cost over reissuance price, if any, is treated as a reduction of retained earnings. 9. STOCK PLANS At December 31, 1999, the Company had...

  • Page 41
    ... Southwest Airlines Professional Instructors' Association NonQualified Stock Option Plan (SWAPIA Plan), the Company may grant options to Professional Instructors for up to 525,000 shares of common stock. An initial grant of approximately 229,500 shares was made on May 20, 1999, at an option price...

  • Page 42
    ...percent of the fair value of such stock on the date of the grant. Information regarding the Company's seven fixed stock option plans, as adjusted for stock splits, is summarized below: (In thousands except exercise prices) INCENTIVE PLANS AVERAGE EXERCISE OPTIONS PRICE 21,046 $4.90 5,524 6.45 (2,592...

  • Page 43
    ... the 1991 Employee Stock Purchase Plan (ESPP), at December 31, 1999, the Company is authorized to issue up to a balance of 1.3 million 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 period. Common stock purchases are...

  • Page 44
    ... weighted-average fair value of each purchase right under the ESPP granted in 1999, 1998, and 1997, which is equal to the ten percent discount from the market value of the common stock at the end of each purchase period, was $1.75, $1.29, and $0.79, respectively. The Black-Scholes option valuation...

  • Page 45
    ... at December 31, 1999 and 1998, are as follows: (In thousands) DEFERRED TAX LIABILITIES: Accelerated depreciation Scheduled airframe maintenance Other Total deferred tax liabilities DEFERRED TAX ASSETS: Deferred gains from sale and leaseback of aircraft Capital and operating leases Other Total...

  • Page 46
    ...and diluted earnings per share: (In thousands except per share amounts) NUMERATOR: Net income, available to common stockholders DENOMINATOR: Weighted-average shares outstanding, basic Dilutive effect of Employee stock options Adjusted weighted-average shares outstanding, diluted 1999 1998 1997 $474...

  • Page 47
    ... earnings per share in 1999 and 1997, respectively, as they represent antidilutive stock options for the respective periods presented. There were no antidilutive stock options in 1998. F20 REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS SOUTHWEST AIRLINES CO...

  • Page 48
    ... 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 August 1998 and July 1999 three-for-two stock splits...

  • Page 49
    ... length of passenger haul Trips flown Average passenger fare Passenger revenue yield per RPM Operating revenue yield per ASM Operating expenses per ASM Fuel cost per gallon (average) Number of Employees at yearend Size of fleet at yearend (9) 1999 $4,499,360 102,990 133,237 4,735,587 3,954,011...

  • Page 50
    CHART ...operated as a charter carrier; therefore, no Morris statistics are included for these years (3) Pro forma for 1992 through 1990 assuming Morris, an S-Corporation prior to 1993, was taxed at statutory rates (4) Excludes cumulative effect of accounting changes of $15.3 million ($.03 per share...

  • Page 51
    ..., dividend payments, or account consolidation should be directed to: Continental Stock Transfer & Trust Company 2 Broadway New York, New York 10004 (212) 509-4000 STOCK EXCHANGE LISTING New York Stock Exchange Ticker Symbol: LUV INDEPENDENT AUDITORS Ernst & Young LLP Dallas, Texas GENERAL OFFICES...

  • Page 52
    ...or calling: Southwest Airlines Co. Investor Relations P.O. Box 36611 Dallas, Texas 75235-1611 Telephone (214) 792-4908 Company documents filed electronically with the SEC can also be found on the SEC's web site (http://www.sec.gov). A copy of this Annual Report and other financial information can be...

  • Page 53
    ..., Johnson & Bowen, Attorneys at Law, El Paso, Texas; Chairman, Audit Committee DONNA D. CONOVER Vice President - Inflight Service and Provisioning JAMES A. RUPPEL Vice President - Customer HERBERT D. KELLEHER Chairman of the Board, President, and Chief Executive Officer of Southwest Airlines Co...

  • Page 54
    ... Company. SeaWorld photos and Shamu plush toy are ©2000 SeaWorld, Inc. All rights reserved. Reproduced by permission. Shamu is a registered trademark of SeaWorld, Inc. SOUTHWEST AIRLINES A SYMBOL OF FREEDOM P.O. Box 36611 Dallas, Texas 75235-1611 (214) 792-4000 1-800-I-FLY-SWA www.southwest...