Southwest Airlines 2003 Annual Report Download
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1999 2000 2001 2002 2003
Net Margin
12%
10%
8%
6%
4%
2%
10.0%
11.1%
9.2%
4.4%
7.4%
6.8%
15.8%
0.5
pts.
83.4%
3.0
pts.
80.6%
80.0%
14.2%
3.6
pts.
12.5%
4.2%
5.6%
4.2%
0.9
pts.
1.7%
3.1%
2.6%
3.5%
Operating expenses
Operating income
Operating margin
Net income
Net margin
Net income per share – basic
Net income per share – diluted
Stockholders’ equity
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
Size of fleet at yearend
(2.5)%
Number of Employees at yearend
Stockholders’ equity per common share outstanding
Return on average stockholders’ equity
CONSOLIDATED HIGHLIGHTS
Operating revenues
7.5%
CHANGE
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
$5,454
$483
8.1%
$442
7.4%
$.56
$.54
$5,052
9.3%
$6.40
65,673,945
47,943,066
71,790,425
66.8%
11.97¢
8.27¢
7.60¢
388
32,847
$5,937
2003
$5,105
$417
7.6%
$241
4.4%
$.31
$.30
$4,422
5.7%
$5.69
63,045,988
45,391,903
68,886,546
65.9%
11.77¢
8.0 2 ¢
7.41¢
375
33,705
$5,522
2002
Southwest Airlines Co. is the nation’s low-fare, high Customer Satisfaction airline. We primarily serve short- and medium-haul
city pairs, providing single-class air transportation which targets business and 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 2003, Southwest operated 388 Boeing 737 aircraft and provided service to 59 airports in
30 states throughout the United States. Southwest has one of the lowest operating cost structures in the domestic airline
industry and consistently offers the lowest and simplest fares. Southwest also 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.
1999 2000 2001 2002
$.80
$.70
$.60
$.50
$.40
$.30
$.59
$.79*
$.63
$.30
2003
$.54
Net Income Per Share, Diluted
Excludes cumulative effect of change
in accounting principle of $.03.
*
1999 2000 2001 2002
Return On Stockholders’ Equity
20%
15%
10%
5%
18.1%
19.9%
13.7%
5.7%
2003
9.3%
Table of contents
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Page 1
...(2.5)% Southwest Airlines Co. is the nation's low-fare, high Customer Satisfaction airline. We primarily serve short- and medium-haul city pairs, providing single-class air transportation which targets business and leisure travelers. The Company, incorporated in Texas, commenced Customer Service on... -
Page 2
... and future f leet of Boeing 737-700s will be outfitted with fuel-saving, performance-enhancing Blended Winglets. In August, the Bureau of Transportation Statistics announced that Southwest carried more domestic originating passengers in May than any other airline, marking the first time a low-fare... -
Page 3
... Saddle Tan; new design seats affording superb personal comfort; and aesthetic Blended Winglets, which improve aircraft performance by extending range, saving fuel, and reducing engine maintenance costs and takeoff noise. 5. Southwest retained its leadership in Customer Satisfaction, again receiving... -
Page 4
Southwest Airlines Co. 2003 Annual Report 3 Herbert D. Kelleher, Chairman of the Board Herb was named to Secretary of Homeland Security Tom Ridge's advisory panel in 2003. James F. Parker, Vice Chairman & CEO Jim was named one of two "Business People of the Year" by Dallas Business Journal; the ... -
Page 5
... Report SPREADING OUR WINGS In June 2003, Southwest Airlines announced that our current and future f leet of Boeing 737-700s will be outfitted with fuel-saving, performance-enhancing Blended Winglets. We unveiled the f leet's first jet with winglets in ceremonies in Austin, Dallas, and Houston... -
Page 6
.... The government also waived the requirement that security fees be collected on airline tickets issued from June 1 to September 30, 2003. Despite these diff icult challenges, we reported our 31st consecutive annual profit in 2003 because of our low operating costs and superb People. Southwest's long... -
Page 7
6 Southwest Airlines Co. 2003 Annual Report CHICAGO M I D WAY B A LT I M O R E / WA S H I N G T O N I N T E R N AT I O N A L HOUSTON HOBBY Recent renovations to our Chicago Midway, Baltimore/Washington International, and Houston Hobby airports have resulted in stunning new environments for our ... -
Page 8
... low fares to Americans is not just our business, it's our passion. Frequent Flights Legendary Customer Service Southwest offers lots of f lights to the cities we serve and continued to increase f lights in 2003. We have approximately 2,800 daily frequencies to 59 airports. Our high frequencies... -
Page 9
8 Southwest Airlines Co. 2003 Annual Report P H I L AD E L P H IA FREEDOM In October 2003, Southwest announced service to Philadelphia, the city that freedom built, beginning in May 2004. Philadelphia was once the home of local legend and Southwest Chairman Herb Kelleher (center left), whose ... -
Page 10
... program with its Freddie Awards for Best Customer Service, Best Award Redemption, and Best Bonus Promotion among all frequent f lyer programs. Rapid Rewards Members can also receive Rapid Rewards credits when doing business with our Preferred Partners (Alamo, American Express, Budget, Diners Club... -
Page 11
10 Southwest Airlines Co. 2003 Annual Report FREEDOM FIGHTERS The People of Southwest Airlines are our most valuable asset. It is their friendliness, Customer caring, and relentless resourcefulness that have helped make Southwest one of the world's most successful airlines. We are not a Company ... -
Page 12
... largest city in terms of daily departures with 134. In addition to recently expanding airpor t facilities at Baltimore/Washington and Chicago Midway, we have major expansion projects at Fort Lauderdale, Houston Hobby, Las Vegas, Long Island/Islip, Oakland, Orange County, Orlando, Phoenix, and Tampa... -
Page 13
... based on passengers carried) Southwest's Capacity By Region 183 161 134 143 185 200 175 150 125 100 130 122 114 83 86 75 50 San Diego Nashville Los Angeles Oakland Dallas Love Chicago Midway Houston Hobby Baltimore/ Washington Phoenix Las Vegas Southwest's Top Ten Airports - Daily Departures -
Page 14
... 42 .05 .05 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 2003 1st Quarter 2nd... -
Page 15
... income per share, diluted Total assets Cash dividends per common share Long-term debt less current maturities Stockholders' equity CONSOLIDATED FINANCIAL RATIOS Return on average total assets Return on average stockholders' equity CONSOLIDATED OPERATING STATISTICS Revenue passengers carried RPMs... -
Page 16
Southwest Airlines Co. 2003 Annual Report 15 1999 $ 4,563 103 70 4, 736 3,954 782 8 774 299 $ 475 $.63 $.59 $.0143 $ $ $ 5, 654 872 2, 836 9.2% 18.1 % $ $ $ $ $ 1998 4 ,010 99 55 4 ,164 3,480 684 (... -
Page 17
... Southwest Airlines Co. 2003 Annual Report CORPORATE DATA TRANSFER AGENT AND REGISTRAR Registered shareholder inquiries regarding stock transfers, address changes, lost stock certificates, dividend payments, or account consolidation should be directed to: Continental Stock Transfer & Trust Company... -
Page 18
... low-cost airline has set the pace and provided the model for the latest crop of low-fare carriers...Southwest's financial superlatives in these days of airline bankruptcies are of chest-pounding stuff." - Airline Financial News, December 4, 2003 SOUTHWEST AIRLINES CO. P.O. Box 36611 Dallas, Texas... -
Page 19
... of Each Class on Which Registered 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... -
Page 20
...a major domestic airline that provides predominantly shorthaul, high-frequency, point-to-point, low-fare service. Southwest was incorporated in Texas in 1967 and commenced Customer Service on June 18, 1971 with three Boeing 737 aircraft serving three Texas cities Dallas, Houston, and San Antonio. At... -
Page 21
... with aircraft having 56 or fewer passenger seats. The Wright Amendment does not restrict Southwest's intrastate Texas flights or its air service from points other than Love Field. The Department of Transportation ("DOT") has significant regulatory jurisdiction over passenger airlines. Unless... -
Page 22
.... During 2003, the Company also installed gate readers at all of its airports to improve the boarding reconciliation process. In 2004, Customers will be able to check baggage using RAPID CHECK-IN kiosks. Southwest also plans to introduce internet checkin and transfer boarding passes at the time of... -
Page 23
... offering frequent daily flights are: Dallas to Houston, 35 weekday roundtrips; Phoenix to Las Vegas, 19 weekday roundtrips; and Los Angeles International to Oakland, 22 weekday roundtrips. Southwest complements these high-frequency shorthaul routes with longhaul nonstop service between markets such... -
Page 24
... card. Rapid Rewards offers two types of travel awards. The Rapid Rewards Award Ticket ("Award Ticket") offers one free roundtrip travel award to any Southwest destination after the accumulation of 16 flight segment credits within a consecutive twelve-month period. The Rapid Rewards Companion Pass... -
Page 25
... number of seats available to holders of Award Tickets and Companion Passes. The Company also sells flight segment credits to business partners including credit card companies, phone companies, hotels, and car rental agencies. These credits may be redeemed for Award Tickets having the same program... -
Page 26
... 31, 2003, Southwest had 146 Boeing 737-700 aircraft in service. The following table details information on the 388 aircraft in the Company's fleet as of December 31, 2003: 737 Type -200 -300 -500 -700 Totals Seats 122 137 122 137 Average Age (Yrs) 21.2 12.6 12.7 3.3 9.6 Number of Aircraft 23 194 25... -
Page 27
... 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, Phoenix Sky Harbor, and... -
Page 28
Item 4. Submission of Matters to a Vote of Security Holders None to be reported. -
Page 29
... the Board Vice Chairman of the Board and Chief Executive Officer Director, President and Chief Operating Officer Executive Vice President- Customer Service Executive Vice President and Chief Financial Officer Executive Vice President- Chief Operations Officer Senior Vice President - Marketing Vice... -
Page 30
PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 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 ... -
Page 31
... not Approved by Security Holders Total (b) (c) Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (in thousands) Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights* 29,821 $10.77... -
Page 32
... per share, diluted Cash dividends per common share Total assets at period-end Long-term obligations at period-end Stockholders' equity at period-end Operating Data: Revenue passengers carried Revenue passenger miles (RPMs) (000s) Available seat miles (ASMs) (000s) Load factor (1) Average length... -
Page 33
... the economy fully recovers and there is an upturn in business travel. The Company's business strategy did not waver in 2003. Southwest remained committed to providing predominantly shorthaul flights, high frequency service, low fares, point-to-point flying, and high-quality Customer Service, all... -
Page 34
Available seat mile (ASM) capacity currently is expected to grow in the 7 to 8 percent range in 2004 with the planned net addition of 29 aircraft. The Company currently has 47 new Boeing 737-700s scheduled for delivery during the year and plans to retire 18 of the Company's older 737-200s. Results ... -
Page 35
... during the first half of 2003, demand improved following the war. The increase in revenue passenger miles primarily was due to a 4.2 percent increase in added capacity, as measured by available seat miles or ASMs. This was achieved through the Company's net addition of 13 aircraft during 2003 (net... -
Page 36
... lower premiums than then-prevailing commercial rates and for levels of coverage not available in the commercial market. In November 2002, Congress passed the Homeland Security Act of 2002, which mandated the federal government provide third party, passenger, and hull war-risk insurance coverage... -
Page 37
... in security costs from the transition of airport security to the federal government, and decreases in advertising and personnel-related expenses. As a result of recently concluded negotiations for 2004 commercial insurance coverage and the additional coverage provided by the government, the Company... -
Page 38
... part to additional security requirements at airports. The remaining portion of the increase in salaries and wages per ASM primarily was due to higher average wage rates. The increase in benefits expense per ASM primarily was due to higher health care costs. Employee retirement plans expense per ASM... -
Page 39
...stepped in to provide supplemental third-party war-risk insurance coverage to commercial airlines, for renewable 60-days periods, at substantially lower premiums than prevailing commercial rates during 2002 and for levels of coverage not available at that time in the commercial market. OTHER. "Other... -
Page 40
... and accelerated the delivery dates for several aircraft into 2004 from future years. The Company also entered into an agreement to lease a new Boeing 737-700 from a third party beginning in 2004. The following table details the Company's current firm orders, options, and purchase rights for 737-700... -
Page 41
... new aircraft. Although the Company is responsible for all maintenance, insurance, and expense associated with operating the aircraft, and retains the risk of loss for leased aircraft, it has not made any guarantees to the lessors regarding the residual value (or market value) of the aircraft... -
Page 42
..., including new airport security measures, concerns about further terrorist attacks, and an uncertain economy. Consequently, the Company recorded $36 million in additional passenger revenue in second quarter 2002 as Customers required fewer refunds and exchanges, resulting in more forfeited tickets... -
Page 43
... related to its existing aircraft fleet. The Company will continue to monitor its long-lived assets and the airline operating environment. Financial Derivative Instruments The Company utilizes financial derivative instruments to manage its risk associated with changing jet fuel prices, and accounts... -
Page 44
... by the use of present value methods or standard option value models with assumptions about commodity prices based on those observed in underlying markets. Also, since there is not a reliable forward market for jet fuel, the Company must estimate the future prices of jet fuel in order to measure the... -
Page 45
...of new airline and airport security directives on the Company's costs and Customer demand for travel, changes in the Transportation Security Administration's scope for managing U.S. airport security, the availability and cost of war-risk and other aviation insurance, including the federal government... -
Page 46
... constant at December 31, 2003, levels, except underlying futures prices. Financial market risk. Airline operators are inherently capital intensive as the vast majority of the Company's assets are expensive aircraft, which are long-lived. The Company's strategy is to capitalize conservatively and... -
Page 47
... percent change in market rates would not impact the Company's earnings or cash flow associated with the Company's publicly traded fixed-rate debt. The Company is also subject to various financial covenants included in its credit card transaction processing agreement, the revolving credit facility... -
Page 48
... 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA SOUTHWEST AIRLINES CO. CONSOLIDATED BALANCE SHEET (In millions, except share data) DECEMBER 31, 2003 2002 ASSETS Current assets: Cash and cash equivalents Accounts and other receivables Inventories of parts and supplies, at cost Fuel hedge contracts... -
Page 49
... DECEMBER 31, (In millions, except per share amounts) OPERATING REVENUES: Passenger Freight Other Total operating revenues OPERATING EXPENSES: Salaries, wages, and benefits Fuel and oil Maintenance materials and repairs Agency commissions Aircraft rentals Landing fees and other rentals Depreciation... -
Page 50
...STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001 Accumulated Capital in Common (In millions, except per share amounts) Balance at December 31, 2000 Three-for-two stock split Issuance of common and treasury stock pursuant to Employee stock plans Tax benefit of options exercised Cash... -
Page 51
...net cash provided by operating activities: Depreciation and amortization Deferred income taxes Amortization of deferred gains on sale and leaseback of aircraft Amortization of scheduled airframe inspections and repairs Income tax benefit from Employee stock option exercises Changes in certain assets... -
Page 52
... OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Southwest Airlines Co. (Southwest) is a major domestic airline that provides predominantly shorthaul, high-frequency, point-to-point, low-fare service. The Consolidated Financial Statements include the accounts of Southwest and its wholly... -
Page 53
... cost of providing free travel for awards earned under its Rapid Rewards frequent flyer program. The Company also sells frequent flyer credits and related services to companies participating in its Rapid Rewards frequent flyer program. Funds received from the sale of flight segment credits... -
Page 54
... by the use of present value methods or standard option value models with assumptions about commodity prices based on those observed in underlying markets. Also, since there is not a reliable forward market for jet fuel, the Company must estimate the future prices of jet fuel in order to measure the... -
Page 55
... are in the areas of planned major maintenance activities (D checks) and component accounting. As discussed in "Aircraft and Engine Maintenance", the Company currently capitalizes costs related to D checks and amortizes those costs over the estimated period benefited, presently the least of ten... -
Page 56
... "Passenger revenue." Following the terrorist events of September 11, 2001, and the subsequent temporary shutdown of U.S. air space, Southwest temporarily suspended its normal refund policy in order to provide the highest Service to the Company's Customers, including refunding nonrefundable tickets... -
Page 57
..., and $95 million in 2008. In November 2001, in response to decreased demand for air travel following the terrorist attacks, the Company modified its schedule for future aircraft deliveries to defer the acquisition of 19 new 737-700 aircraft that were either already in production at Boeing or were... -
Page 58
... scheduled for payment on November 1, 2006. During 2003, the Company entered into an interest rate swap agreement relating to the $375 million 5.5% Class A-2 certificates. See Note 10 for further information. In fourth quarter 1999, the Company issued $200 million of floating rate Aircraft Secured... -
Page 59
...to maturity. The net book value of the assets pledged as collateral for the Company's secured borrowings, primarily aircraft and engines, was $893 million at December 31, 2003. As of December 31, 2003, aggregate annual principal maturities (not including interest on capital leases) for the five-year... -
Page 60
... way of booking travel. The Company's website, www.southwest.com, is now responsible for more than half of ticket bookings and, as a consequence, demand for phone contact has dramatically decreased. The Company will close its Reservations Centers located in Dallas, Texas, Salt Lake City, Utah, and... -
Page 61
... financial instruments is represented by the fair value of contracts with a positive fair value at the reporting date. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure to a single counterparty, and monitors the market... -
Page 62
... agreement. Neither Executive Officers nor members of the Company's Board of Directors are eligible to participate in any of these collective bargaining plans. Options granted to Employees through other Employee plans are granted at the fair market value of the Company's common stock on the date... -
Page 63
... shareholders except the plan covering non-management, non-contract Employees, which had 7.6 million options outstanding to purchase the Company's common stock as of December 31, 2003, and an additional plan which is not available to Officers or Board members, reserving 15 million shares for future... -
Page 64
... fair value of each option grant is estimated on the date of grant using a modified Black-Scholes option pricing model with the following weighted-average assumptions used for grants under the fixed option plans: 2003 Wtd-average risk-free interest rate Expected life of option (years) Expected stock... -
Page 65
...: Accelerated depreciation Scheduled airframe maintenance Fuel hedges Other Total deferred tax liabilities DEFERRED TAX ASSETS: Deferred gains from sale and leaseback of aircraft Capital and operating leases Accrued employee benefits State taxes Other Total deferred tax assets Net deferred tax... -
Page 66
.... The Company's management does not expect that the outcome of any proposed adjustments presented to date by the IRS, individually or collectively, will have a material adverse effect on the Company's financial condition, results of operations, or cash flows. 16. NET INCOME PER SHARE The following... -
Page 67
REPORT OF 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, 2003 and 2002, and the related consolidated statements of income, stockholders' equity, and cash ... -
Page 68
Quarterly Financial Data (Unaudited) (in millions except per share amounts) Three months ended 2003 Operating revenues Operating income Income before income taxes Net income Net income per share, basic Net income per share, diluted 2002 Operating revenues Operating income Income before income taxes... -
Page 69
... issued multiple new regulations, requiring the implementation of policies and procedures in the corporate governance area. Since beginning business in 1971, Southwest has thrived on a culture, which encourages an entrepreneurial spirit in its Employees, and has emphasized personal responsibility... -
Page 70
.... Principal Accountant Fees and Services See "Relationship with Independent Auditors" incorporated herein by reference from the definitive Proxy Statement for Southwest's Annual Meeting of Shareholders to be held May 19, 2004. PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on... -
Page 71
...assets. Copies of such instruments will be furnished to the Securities and Exchange Commission upon request. 4.2 4.3 4.4 4.5 10.1 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... -
Page 72
...1991 Employee Stock Purchase Plan as amended September 21, 2000 (incorporated by reference to Exhibit 4 to Amendment No. 1 to Registration Statement on Form S-8 (file No. 33-40653)). Southwest Airlines Co. Profit Sharing Plan (incorporated by reference to Exhibit 10.8 to Southwest's Annual Report on... -
Page 73
... Employment Agreement dated as of June 19, 2002 between Southwest and Colleen C. Barrett (incorporated by reference to Exhibit 10.17 to Southwest's Annual Report on Form 10-K for the year ended December 31, 2000 (File No. 1-7259)). Southwest Airlines Co. Outside Director Incentive Plan (incorporated... -
Page 74
...2000 Aircraft Appearance Technicians Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.4 to Southwest's Quarterly Report ...7259)). 2002 Customer Service/Reservations Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.28 to Southwest's Annual Report on Form ... -
Page 75
...obtained at a price of 15 cents per page, $10.00 minimum order, by writing to: Sr. Director of Investor Relations, Southwest Airlines Co., P.O. Box 36611, Dallas, Texas 75235-1611. (b) On October 20, 2003, Southwest filed a current report on Form 8-K to furnish the Company's public announcement of... -
Page 76
... behalf by the undersigned, thereunto duly authorized. SOUTHWEST AIRLINES CO. January 28, 2004 By /s/ Gary C. Kelly Gary C. Kelly Executive Vice President, Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following...