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10 Southwest Airlines Co. 2004 Annual Report
As a result of prudent planning and
discipline throughout our 33-plus year
history, we have the strongest balance sheet
in the airline industry and are the only U.S. airline
with an investment-grade credit rating. We
have ample liquidity and access to capital.
We ended 2004 with $1.3 billion in cash
and a fully available bank revolving credit
facility of $575 million. We also had $682 million in cash
deposits at Boeing for future aircraft deliveries. Our unmortgaged
assets have a value of over $5 billion, and our debt to total
capital is under 40 percent, including aircraft leases as debt.
Due to our strong financial position, we have been able to
react quickly to growth opportunities even in the worst of
times. Although we prefer to grow at a managed growth rate
of roughly eight percent per annum, we have the financial
wherewithal and flexibility to take advantage of growth
opportunities as they arise.
Growth Opportunities
Southwest is a growth airline, and we believe we have lots
of opportunities to grow and invest in our future. Our financial
strength provides us the freedom to pursue market opportunities
as they arise, even in this weakened industry environment. We
began service to Philadelphia in May 2004 with a tremendous
reception from our Philadelphia Customers. Increasing daily
flights from an initial 14 to 41 over the course of a few months,
Philadelphia was our most aggressive startup ever, and we
plan to continue to grow this market, as facilities become
available, to meet our Customers’ demands. We are also eager to
begin service to Pittsburgh, our 60th city, which will open in
May 2005!
Growing Chicago’s Midway Airport was also a priority in
2004 and will continue to be so in 2005. By summer 2005,
we will be at 170 daily departures, making Chicago Midway our
third-largest airport in terms of daily
departures. To support future growth,
we acquired the leasehold rights to six
additional gates through the competitive
bid process in the ATA Airlines, Inc.
bankruptcy proceedings, bringing our
total gates in Chicago Midway to 25.
Southwest acquired the leasehold rights to these six gates and
a six-bay maintenance hangar in Chicago for a purchase price
of $40 million. Our bid also included a commitment to codeshare
with ATA at Chicago Midway and other points on our system,
subject to facility availability and Customer convenience; a
$40 million debtor-in-possession loan to ATA for bankruptcy
restructuring purposes; and a commitment to convert the
debtor-in-possession financing to a term loan, and purchase
$30 million of non-voting convertible preferred stock upon
ATA’s emergence from bankruptcy.
Through the ATA codeshare agreement, Southwest Airlines
Customers will be able to initially connect in Chicago Midway
for travel between select Southwest cities and the following
ATA destinations: Boston Logan Airport, Denver International
Airport, Southwest Florida International Airport (serving
Ft. Myers/Naples), Honolulu International Airport,
Minneapolis/St. Paul International Airport, New York’s
LaGuardia Airport, Newark Liberty
International Airport, San Francisco
International Airport, Sarasota-
Bradenton Airport, St. Petersburg/
Clearwater International Airport,
and Ronald Reagan Washington
National Airport. We estimate this
codeshare agreement should increase Southwest’s annual revenues
by $25 to $50 million.
At the end of 2004, Southwest operated an all-coach,
Boeing 737 fleet of 417 aircraft. All of our future orders,
options, and purchase rights with The Boeing Company for
2005 through 2012 are for 737-700s. The average age of our
young fleet is less than ten years. We are in the process of
renewing the interior and exterior of our entire fleet, which
includes comfortable leather-covered seats, before the end
of 2005.
The Boeing 737-700 remains our future. In January 2005,
we retired our last five 737-200 aircraft, bringing an end to
the tenure of these reliable aircraft in the Company’s fleet.
We plan to add 34 new -700s to our fleet in 2005, for a net
addition of 29 aircraft and a ten percent year-over-year
capacity growth. We are projecting an average annual growth
rate of roughly eight percent through 2012, based on current
orders and options placed with Boeing.