Southwest Airlines 2013 Annual Report Download

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SOUTHWEST AIRLINES CO.
2013 ANNUAL REPORT TO SHAREHOLDERS
To our Shareholders:
Our goals for 2013 were ambitious. We wanted to stay on track with our five Strategic
Initiatives described below. We wanted to maintain our strong Brand, unique Culture, and
award-winning Customer Service. We wanted to sustain our strong ontime performance and
baggage handling. Finally, we wanted to improve our cost performance, achieve our profit
requirement, and return value to our Shareholders. Just like in 2011 and 2012, an enormous
amount was accomplished in 2013. As a result, we produced stellar results.
Our 2013 net income was a record $754 million, or $1.05 per diluted share, including
special items (primarily noncash, mark-to-market, and other items required for a portion of the
Company’s fuel hedge portfolio, as well as costs associated with the acquisition and integration
of AirTran). Excluding special items1, our 2013 profits were also a record, increasing 93
percent year-over-year to $805 million, or $1.12 per diluted share. Our annual pre-tax return on
invested capital, excluding special items (ROIC), was 13.1 percent, nearly doubling 2012’s
performance.
Total operating revenues were a record $17.7 billion, boosted by strong yields and an 80.1
percent load factor. Through the combination of stable fuel prices and rigorous cost control
efforts, we met our goal to improve our cost performance. Despite a roller coaster economy,
we achieved record earnings; and, while just short of our 15 percent ROIC target, we produced
the best ROIC since 2000. Our stock price rose 84 percent in 2013 and reached an all-time
high, split-adjusted, closing price of $23.98 a share on March 17 of this year. I applaud the
outstanding People of Southwest and AirTran for these strong results, which earned them a
record $228 million contribution to the ProfitSharing Plan for the year 2013.
We preserved our financial strength and returned value to our Shareholders, as planned.
As of December 31, 2013, our cash and short-term investments were a strong $3.2 billion, with
a fully-available $1 billion bank line-of-credit. In May 2013, our Board of Directors authorized
an increase in our previous share repurchase authorization to $1.5 billion, and quadrupled our
quarterly dividend. These actions, coupled with the generation of a healthy $1.03 billion in free
cash flow2during 2013, enabled us to return $611 million to Shareholders through repurchases
of $540 million of common stock (38 million shares) and distribution of $71 million in dividends.
We repaid $313 million in debt and capital lease obligations during 2013. As a result, our debt-
to-total capital ratio (including aircraft leases) declined to approximately 38 percent at yearend.
All told, our invested capital base was reduced by approximately $1 billion during 2013. We
remain the only investment grade-rated U.S. airline.
1Additional information regarding non-GAAP financial measures is included in the accompanying Form 10-K for the fiscal year
ended December 31, 2013.
2Free cash flow is calculated as operating cash flows of $2.48 billion less capital expenditures of $1.45 billion.

Table of contents

  • Page 1
    ... 2013. We preserved our financial strength and returned value to our Shareholders, as planned. As of December 31, 2013, our cash and short-term investments were a strong $3.2 billion, with a fully-available $1 billion bank line-of-credit. In May 2013, our Board of Directors authorized an increase...

  • Page 2
    ... 2015. In order to manage our fleet needs as 3 From the 2013 yearend DOT Air Travel Consumer Report issued February 2014. Top ranking is for Southwest Airlines only. 4 As measured by the number of originating domestic passengers boarded and based on data available from the U.S. Department of...

  • Page 3
    ... and allow for other Customer Service, revenue management, and schedule production capabilities. Rapid Rewards® Frequent Flyer Program: To date, the program has exceeded our expectations with respect to growth in Rapid Rewards Memberships, Member flight activity, Southwest's co-branded Chase® Visa...

  • Page 4
    ... boarding positions at the gate, and a new No Show policy associated with restricted tickets that are not canceled (or changed) prior to departure. We are committed to keeping our capacity roughly flat until we reach our 15 percent ROIC goal. That is our plan for 2014, with available seat mile...

  • Page 5
    ... Dallas, Texas (Address of principal executive offices) 75235-1611 (Zip Code) Registrant's telephone number, including area code: (214) 792-4000 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Stock ($1.00 par value...

  • Page 6

  • Page 7
    ... Liabilities and Commitments ...Critical Accounting Policies and Estimates ...Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...Item 8. Financial Statements and Supplementary Data ...Southwest Airlines Co. Consolidated Balance Sheet ...Southwest Airlines Co. Consolidated...

  • Page 8

  • Page 9
    .... Southwest principally provides point-to-point, rather than hub-and-spoke, service. This has enabled it to maximize the use of key assets, including aircraft, gates, and Employees, and has also facilitated its ability to provide its markets with frequent, conveniently timed flights and low fares...

  • Page 10
    ... of seats filled by fare-paying passengers) and yields (revenue production per passenger mile). Company Operations Route Structure General Southwest principally provides point-to-point service, rather than the "hub-and-spoke" service provided by most major U.S. airlines. The hub-and-spoke system...

  • Page 11
    ... with the City of Houston ("City") to expand the City's existing William P. Hobby airport facility. Pursuant to the agreement, the Company and the City have entered into an Airport Use and Lease Agreement to control the execution of this expansion and its financial terms. This project provides for...

  • Page 12
    .... Southwest's use of a single aircraft type has allowed for simplified scheduling, maintenance, flight operations, and training activities. Southwest's point-to-point route structure includes service to and from many secondary or downtown airports such as Dallas Love Field, Houston Hobby, Chicago...

  • Page 13
    ... point multiplier under Southwest's Rapid Rewards® frequent flyer program than do Wanna Get Away fares. "Business Select" fares are refundable and changeable, and funds may be applied toward future travel on Southwest. Business Select fares also include additional perks such as priority boarding...

  • Page 14
    ... aircraft into the Southwest fleet, (iv) international capabilities and new reservation system, and (v) the continued growth of Southwest's Rapid Rewards frequent flyer program. In addition to the Company's five strategic initiatives, the Company has continued to design, implement, and manage other...

  • Page 15
    ...fleet modernization plan to provide substantial flexibility to manage its fleet needs in a variety of economic conditions. The Company's future aircraft delivery schedule is set forth in more detail under "Properties - Aircraft." The Boeing 737 MAX. The Company is scheduled to be the launch customer...

  • Page 16
    ... of 2014. Continued Growth of Southwest's Rapid Rewards Frequent Flyer Program In March 2011, Southwest launched its current Rapid Rewards frequent flyer program, under which members earn points for every dollar spent. The amount of points earned under the program is based on the fare and fare class...

  • Page 17
    ..., the number of points sold to business partners, and the number of frequent flyer points purchased by program members. AirTran's A+ Rewards frequent flyer program currently offers a number of ways to earn free travel, including bonus earnings for Business Class travel. A+ Rewards members currently...

  • Page 18
    ...its frequent flyer programs are discussed in more detail in Note 1 to the Consolidated Financial Statements. Other Initiatives Network Optimization and Revenue Management The Company uses profitability management tools to manage capacity and route expansion though optimization of its flight schedule...

  • Page 19
    ... net increase in revenues. Southwest is also the only major U.S. airline that does not impose a fee on any of its fares for a Customer change in flight plans. The Company has continued to incorporate this key point of differentiation in its marketing campaigns. The campaigns highlight the importance...

  • Page 20
    ...lanes allow Business Select Customers and Rapid Rewards A-List Members direct access to the front of the line at the ticket counter and/or security checkpoint. As of December 31, 2013, Fly By Priority Lane access was available at 68 airports. SWABIZ. SWABIZ is Southwest's business travel reservation...

  • Page 21
    ... or holding funds for future travel. Southwest expects that the No Show policy will promote Customer behavior that will enable Southwest to re-sell the open seat prior to departure. AirTran currently charges fees for checked baggage, carriage of pets, liquor sales, advance seat assignments, call...

  • Page 22
    ...between the Southwest and AirTran reservation systems, Southwest's Rapid Rewards frequent flyer program, enhanced southwest.com website, WiFi implementation, live television connectivity, and its introduction of the Boeing 737-800 aircraft into the Southwest fleet. In addition, the Company has added...

  • Page 23
    ...be allowed to cancel a paid reservation without penalty for 24 hours after the reservation is made, as long as the reservation is made at least seven days in advance of travel; (iv) fares may not increase after purchase; (v) baggage fees must be disclosed to the passenger at the time of booking; (vi...

  • Page 24
    ...did not restrict Southwest's intrastate Texas flights or its air service to or from points other than Dallas Love Field. In 2006, the Company entered into an agreement with the City of Dallas, the City of Fort Worth, American Airlines, Inc., and the DFW International Airport Board, pursuant to which...

  • Page 25
    ..., and Customer Experience. In October 2013, the FAA issued guidance that allows airlines to expand passenger use of portable electronic devices (PEDs) during all phases of flight. After conducting appropriate testing and developing necessary operational procedures, the Company received confirmation...

  • Page 26
    ... risk-based screening system that enables TSA security officers to positively verify the identity and employment status of flight-crew members. The program expedites flight crew member access to sterile areas of airports. The Company has made significant investments to address the effect of security...

  • Page 27
    ... system. Some airports have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of operations. These types of restrictions can cause curtailments in service or increases in operating...

  • Page 28
    ... Southwest from all of its major competitors by not charging additional fees for items such as first and second checked bags, flight changes, seat selection, fuel surcharges, snacks, curb-side checkin, and telephone reservations. Routes, Frequent Flyer Programs, and Schedules The Company...

  • Page 29
    ... does Southwest, including first-class, business class, and other premium seating and related amenities. Additionally, some major U.S. airlines have announced plans to add a significant number of new aircraft to their fleets. Such efforts could provide cost benefits to these airlines through fleet...

  • Page 30
    ... negotiations Southwest Flight Attendants Southwest Ramp, Operations, Provisioning, Freight Agents Southwest Customer Service Agents, Customer Representatives Currently in negotiations Currently in negotiations Southwest Material Specialists (formerly known as Stock Clerks) Southwest Mechanics...

  • Page 31
    Employee Group AirTran Pilots Representatives Status of Agreement Air Line Pilots Association ("ALPA") Amendable December 2015. Per seniority list integration agreement, transition to Southwest to be completed no later than January 2015. Association of Flight AttendantsCWA ("AFA") The parties ...

  • Page 32
    ... and AirTran workgroups. Additional Information About the Company The Company was incorporated in Texas in 1967. The following documents are available free of charge through the Company's website, www.southwest.com: the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current...

  • Page 33
    ...governmental policies on fuel production, transportation, taxes, and marketing; and (v) changes in exchange rates. The Company's ability to react to fuel price volatility can also be affected by factors outside of its control. For example, the Company's profitability is affected in part by Southwest...

  • Page 34
    ...prices. The Company's fuel hedging arrangements and the impact of hedge accounting on the Company's results of operations are discussed in more detail under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 10 to the Consolidated Financial Statements...

  • Page 35
    ... enabled Southwest to historically offer low fares, drive traffic volume, and grow market share. The Company's low-cost structure has become increasingly important as a result of the Company's decision to limit capacity growth in response to high fuel prices and uncertain economic conditions. While...

  • Page 36
    ... the Company has invested in significant technology changes to support initiatives such as the implementation of connecting capabilities between the Southwest and AirTran reservations systems, Southwest's Rapid Rewards frequent flyer program, introduction of the Boeing 737-800 to its fleet, enhanced...

  • Page 37
    ... Southwest has historically achieved by operating with a single aircraft type, currently outweigh the risks associated with its single aircraft supplier strategy. To enable Southwest to sustain the benefits associated with operating a single aircraft type, in July 2012 the Company entered...

  • Page 38
    ..., transition, and maintain related information technology systems and infrastructure; (ii) the Company's ability to effectively balance its investment of incremental operating expenses and capital expenditures related to its initiatives against the need to effectively control costs; and (iii...

  • Page 39
    ... services that can be offered by airlines in particular markets and at particular airports; restrictions on competitive practices; changes in laws that increase costs for safety, security, compliance, or other Customer Service standards, such as the new FAA regulations with respect to Pilot flight...

  • Page 40
    ... actions of other carriers with respect to pricing, routes, frequent flyer programs, scheduling, capacity, Customer Service, comfort and amenities, cost structure, aircraft fleet, and codesharing and similar activities. Risk Factors Related to the Company's Acquisition and Integration of AirTran The...

  • Page 41
    ... Southwest to modify certain processes, as the entire airport experience is dramatically different in certain international locations with respect to, among other things, common-use ticket counters and gate areas, open-air terminals, and cultural preferences. The Company's expansion, initially...

  • Page 42
    ...of Southwest and AirTran. There are a large number of processes, policies, procedures, operations, technologies, and systems that must be integrated, including reservations, frequent flyer, ticketing/distribution, maintenance, and flight operations. While the Company has assumed that a certain level...

  • Page 43
    ... with applicable acquisition accounting rules, the Company recorded goodwill on its Consolidated Balance Sheet to the extent the AirTran acquisition purchase price exceeded the net fair value of AirTran's tangible and intangible assets and liabilities as of the acquisition date. Goodwill is not...

  • Page 44
    ... or pays a usage fee for terminal passenger service facilities at each of the airports it serves, to which various leasehold improvements have been made. Southwest leases the land and structures on a longterm basis for its aircraft maintenance centers (located at Dallas Love Field, Houston Hobby...

  • Page 45
    ... Financial Statements. As of December 31, 2013, the Company operated seven Customer Support and Services call centers. The centers located in Atlanta, San Antonio, Chicago, Albuquerque, and Oklahoma City occupy leased space. The Company owns its Houston and Phoenix centers. The Company opened...

  • Page 46
    ... AirTran such fees on domestic flights beginning December 5, 2008. After the filing of the May 2009 complaint, various other nearly identical complaints also seeking certification as class actions were filed in federal district courts in Atlanta, Georgia; Orlando, Florida; and Las Vegas, Nevada. All...

  • Page 47
    ...Financial Planning & Analysis from 2000 to 2001, and Director Financial Planning & Analysis from 1997 to 2000. Mr. Van de Ven joined the Company in 1993 as its Director Internal Audit. Tammy Romo has served as the Company's Senior Vice President Finance & Chief Financial Officer since September 2012...

  • Page 48
    ... high and low prices per share of the Company's common stock, as reported on the NYSE Composite Tape, and the cash dividends per share declared on the Company's common stock. Period 2013 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 2012 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ...$ 0.00450...

  • Page 49
    ...Act of 1933 or Securities Exchange Act of 1934. The following graph compares the cumulative total shareholder return on the Company's common stock over the five-year period ended December 31, 2013, with the cumulative total return during such period of the Standard and Poor's 500 Stock Index and the...

  • Page 50
    ... November 30, 2013 ...December 1, 2013 through December 31, 2013 ...Total ... Average Total number price of shares paid per purchased share 2) (1) In January 2008, the Company's Board of Directors authorized the repurchase of up to $500 million of the Company's common stock. Through February...

  • Page 51
    ... a paying passenger to fly one mile, which is a measure of revenue production and fares. (5) Calculated as operating revenue divided by available seat miles. Also referred to as "operating unit revenues," this is a measure of operating revenue production based on the total available seat miles flown...

  • Page 52
    ... oil expense, unhedged ...Add: Fuel hedge losses included in Fuel and oil expense ...Fuel and oil expense, as reported ...Deduct: Net impact from fuel contracts ...Fuel and oil expense, non-GAAP ...Total operating expenses, as reported ...Add (Deduct): Reclassification between Fuel and oil and Other...

  • Page 53
    ... believes provides greater transparency to investors as supplemental information to its GAAP results. The Company's economic financial results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the...

  • Page 54
    ... previous Note Regarding Use of Non-GAAP Financial Measures. The Company's GAAP results for both the year ended December 31, 2013 and 2012 were impacted by the non-cash adjustments recorded as a result of the Company's portfolio of derivative contracts utilized to hedge jet fuel price volatility, as...

  • Page 55
    ... jet fuel prices. The Company's strategic initiatives include: • The integration of AirTran. The acquisition of AirTran in 2011 increased the Company's fleet size and expanded the Company's network into key U.S. markets such as Atlanta and Washington Reagan, as well as near-international locations...

  • Page 56
    ... to business partners, and the number of frequent flyer points purchased by program members. • In addition, the Company implemented other initiatives designed to increase revenues during 2013 and future periods. During first quarter 2013, Southwest began selling open premium boarding positions...

  • Page 57
    ... supplement the Company's existing service at Washington Reagan. Although the transaction is not yet final, the Company expects to fund the purchase utilizing cash on hand. Also, during 2013 the Company launched Southwest service to San Juan, Puerto Rico, Southwest's first destination outside the...

  • Page 58
    ...the Company's Operating expenses per ASM for 2013 and 2012, followed by explanations of these changes on a per ASM basis and/or on a dollar basis: (in cents, except for percentages) Salaries, wages, and benefits ...Fuel and oil ...Maintenance materials and repairs ...Aircraft rentals ...Landing fees...

  • Page 59
    ... to 2012. Excluding the impact of fuel hedge accounting, approximately 75 percent of both the dollar and per ASM decreases were attributable to reduced fuel price per gallon, with the remainder attributed to improved fuel efficiency. During 2013, the Company's average economic jet fuel price per...

  • Page 60
    ... with the ineffectiveness of fuel hedges or fuel derivatives that are marked to market because they do not qualify for hedge accounting. See Note 10 to the Consolidated Financial Statements for further information. Assuming no changes to the Company's current fuel derivative portfolio, but including...

  • Page 61
    ... by the Company in some locations and/or as a result of higher airport debt service costs passed through to the airlines in certain cities. The Company currently expects Landing fees and other rentals expense per ASM for first quarter 2014 to increase compared to first quarter 2013. Depreciation and...

  • Page 62
    ... to the Consolidated Financial Statements for further information on the Company's hedging activities. The following table displays the components of Other (gains) losses, net, for the years ended December 31, 2013, and 2012: (in millions) Mark-to-market impact from fuel contracts settling in future...

  • Page 63
    ... 9.7% 7.9% Percent Change $ $ * As a result of prior hedge ineffectiveness and/or contracts marked to market through earnings. (a) Amounts net of profitsharing impact on charges incurred through March 31, 2011. The Company amended its profitsharing plan during second quarter 2011 to defer the...

  • Page 64
    ... product, for which Customers pay a service charge to automatically receive an assigned boarding position before general checkin begins, and service charges for pets was offset by an increase in the portion of the commissions earned from programs the Company sponsors with certain business partners...

  • Page 65
    ... average fares, among other factors. See Note 1 to the Consolidated Financial Statements for further information on Southwest's frequent flyer program. Southwest's EarlyBird product and service charges for unaccompanied minors, pets, and excess bags contributed $219 million to Other revenues in 2012...

  • Page 66
    ... 2 to the Consolidated Financial Statements for further information on purchase accounting. The majority of the decrease was due to a decrease in operating leased aircraft from 192 at December 2011 to 187 at December 2012. On a per ASM basis, the Company's Aircraft rentals expense for 2012 increased...

  • Page 67
    ...associated with the Company's lease/sublease transaction for AirTran's Boeing 717-200 fleet, consulting, flight crew training, seniority integration, and facility integration expenses. See Note 2 and Note 8 to the Consolidated Financial Statements. Other operating expenses for 2012 increased by $160...

  • Page 68
    ... to Customers. The vast majority of tickets were purchased prior to the day on which travel was provided and, in some cases, several months before the anticipated travel date. Operating cash outflows are related to the recurring expenses of airline operations. The operating cash flows for 2013, 2012...

  • Page 69
    ..., the majority of the obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet. Outstanding letters of credit totaled $182 million at December 31, 2013. The Company is a "well-known seasoned issuer" and currently has an effective shelf registration statement...

  • Page 70
    ... of the Company's common stock following such authorization. On May 16, 2012, the Company's Board of Directors increased the previous share repurchase authorization by $500 million to a total of $1.0 billion. On May 15, 2013, the Company's Board of Directors further increased the previous share...

  • Page 71
    ... Financial Statements. Dallas Love Field For the rebuilding of the facilities at Dallas Love Field, the Company has guaranteed principal, premium, and interest on $456 million in bonds issued by the Love Field Airport Modernization Corporation ("LFAMC") that have been utilized to fund the majority...

  • Page 72
    ... of the existing security checkpoint, and upgrades to the Southwest ticketing counter area. The Company and the City of Houston ("City") entered into an Airport Use and Lease Agreement ("Lease") to control the execution of this expansion and the financial terms thereof. The project is estimated to...

  • Page 73
    ...13, 2013, Southwest implemented a No Show policy that applies to nonrefundable fares that are not canceled or changed by a Customer at least ten minutes prior to a flight's scheduled departure. See Note 1 to the Consolidated Financial Statements for further information. A small percentage of tickets...

  • Page 74
    ... to manage its risk associated with changing jet fuel prices. See "Quantitative and Qualitative Disclosures about Market Risk" for more information on these risk management activities, and see Note 10 to the Consolidated Financial Statements for more information on the Company's fuel hedging program...

  • Page 75
    ... fuel is purchased and consumed, all values and prices are known and are recognized in the financial statements. In some historical periods, because of increased volatility in energy markets, the Company has in fact lost hedge accounting for certain types of commodities. In the third quarter of 2013...

  • Page 76
    ...rate, and a counterparty credit spread. The Company determines the fair value of fuel derivative option contracts utilizing an option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are quoted...

  • Page 77
    ... program rules for a period of time. As of December 31, 2013, no awards or credits issued under the previous program remained. AirTran's A+ Rewards frequent flyer program currently offers a number of ways to earn free travel, including bonus earnings for Business Class travel. A+ Rewards members...

  • Page 78
    ... business partner, which is on a monthly or quarterly basis, upon sale, as the related marketing services are performed or provided. The vast majority of these marketing services consist of the access granted, either monthly or quarterly, to various lists of Southwest's frequent flyer members...

  • Page 79
    ... the Consolidated Financial Statements for information on the Company's accounting for its hedging program and for further details on the Company's financial derivative instruments. Hedging The Company purchases jet fuel at prevailing market prices, but seeks to manage market risk through execution...

  • Page 80
    ... sensitivity analysis uses industry standard valuation models and holds all inputs constant at December 31, 2013 levels, except underlying futures prices. The Company's credit exposure related to fuel derivative instruments is represented by the fair value of contracts with a net positive fair value...

  • Page 81
    ...the governance structure that it has in place is adequate given the size and sophistication of its hedging program. Financial market risk The vast majority of the Company's tangible assets are aircraft, which are long-lived. The Company's strategy is to maintain a conservative balance sheet and grow...

  • Page 82
    ... totaled $1.8 billion, at December 31, 2013. See Notes 1 and 10 to the Consolidated Financial Statements for further information. The Company currently invests available cash in certificates of deposit, highly rated money market instruments, investment grade commercial paper, treasury securities...

  • Page 83
    ... of air travel tickets by its Customers utilizing American Express, Discover and MasterCard/ VISA. Credit card processors have financial risk associated with tickets purchased for travel because, although the processor generally forwards the cash related to the purchase to the Company soon after...

  • Page 84
    Item 8. Financial Statements and Supplementary Data SOUTHWEST AIRLINES CO. CONSOLIDATED BALANCE SHEET (in millions, except share data) December 31, December 31, 2013 2012 ASSETS Current assets: Cash and cash equivalents ...Short-term investments ...Accounts and other receivables ...Inventories of ...

  • Page 85
    SOUTHWEST AIRLINES CO. CONSOLIDATED STATEMENT OF INCOME (in millions, except per share amounts) 2013 OPERATING REVENUES: Passenger ...Freight ...Other ...Total operating revenues ...OPERATING EXPENSES: Salaries, wages, and benefits ...Fuel and oil ...Maintenance materials and repairs ...Aircraft ...

  • Page 86
    SOUTHWEST AIRLINES CO. CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (in millions) Year ended December 31, 2013 2012 2011 NET INCOME ...Unrealized gain on fuel derivative instruments, net of deferred taxes of $31, $74, and $42 ...Unrealized gain (loss) on interest rate derivative instruments, net ...

  • Page 87
    SOUTHWEST AIRLINES CO. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in millions, except per share amounts) Year ended December 31, 2013, 2012, and 2011 Accumulated Capital in other Common excess of Retained comprehensive Treasury Stock par value earnings income (loss) stock Total Balance at ...

  • Page 88
    ...Proceeds from sales of short-term and other investments ...Net cash used in investing activities ...CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from Employee stock plans ...Proceeds from termination of interest rate derivative instrument ...Payments of long-term debt and capital lease obligations...

  • Page 89
    ... funds, and investment grade commercial paper issued by major corporations and financial institutions. Cash and cash equivalents are stated at cost, which approximates fair value. As of December 31, 2013, no cash collateral deposits were either held by or provided by the Company to its fuel hedge...

  • Page 90
    ... Balance Sheet. Accounts and other receivables Accounts and other receivables are carried at cost. They primarily consist of amounts due from credit card companies associated with sales of tickets for future travel, amounts due from business partners in the Company's frequent flyer programs...

  • Page 91
    ...estimate of expected future aircraft utilization. The Company modified its engine maintenance contract for its Classic fleet (737-300/500s) during fourth quarter 2011 and, although payments made under this contract are made on the basis of flight hours, the risk-transfer concept under this agreement...

  • Page 92
    ... flyer programs. Funds received from the sale of these points are accounted for using the residual method. Under this method, the Company determined the portion of funds received that relate to free travel were currently estimated to be 100 percent of the amount received under both Southwest's Rapid...

  • Page 93
    ... balances for award travel under the prior program rules for a period of time. The transition method used by the Company in moving members to the current program resulted in no material changes in the Company's estimation of its existing frequent flyer liabilities as of the launch date. Although...

  • Page 94
    ... of Cash Flows, within Changes in certain assets and liabilities. See Note 10 for further information on hedge accounting and financial derivative instruments. The Company classifies its cash collateral provided to or held from counterparties in a "net" presentation on the Consolidated Balance Sheet...

  • Page 95
    ... of costs associated with the lease and sublease of AirTran's Boeing 717-200 fleet, consulting, Employee training, seniority integration, financial advisory fees, severance, technology integration projects, and facility integration expenses. In the Consolidated Statement of Income, these costs are...

  • Page 96
    ... of this change on 2013 was not material. During third quarter 2012 the Company changed the estimated residual values of its entire fleet of owned 737-300 and 737-500 aircraft. This change was based on an agreement entered into during July 2012, pursuant to which the Company will lease or sublease...

  • Page 97
    ... one of its 737-700 aircraft, and removed 22 of its 717200 aircraft from active service. In addition, the Company also leased two 737-700 aircraft from a third party which were placed into service during third quarter 2013. As of December 31, 2013, the Company had scheduled deliveries for Boeing 737...

  • Page 98
    ... June 2012, to expand the existing Houston Hobby airport facility. As provided in the MOA, the Company and the City have entered into an Airport Use and Lease Agreement ("Lease") to control the execution of this expansion and the financial terms thereof. Per the MOA and Lease, this project provides...

  • Page 99
    ... are reflected as Repayments of airport construction obligations in the Consolidated Statement of Cash Flows. Further, future contractual airport rental payments to the City of Dallas are included in the schedule of future minimum lease payments in Note 8. The Company records interest expense on the...

  • Page 100
    ...) Profitsharing and savings plans ...Aircraft and other lease related obligations ...Vacation pay ...Health ...Derivative contracts ...Workers compensation ...Accrued taxes ...Other ...Accrued liabilities ... December 31, 2013 $ 244 173 278 73 12 161 65 223 1,229 December 31, 2012 $ 135 139 270...

  • Page 101
    ... 31, 2012 366 331 117 329 57 56 36 241 95 451 527 394 138 37 3,175 271 21 2,883 (in millions) 5.25% Notes due 2014 ...5.75% Notes due 2016 ...5.25% Convertible Senior Notes due 2016 ...5.125% Notes due 2017 ...Fixed-rate 717 Aircraft Notes payable through 2017-10.37% ...French Credit Agreements due...

  • Page 102
    ... guidance, the embedded conversion option was effectively separated and accounted for as a freestanding derivative. A fair value calculation, utilizing similar market yields and the Company's common stock price, was performed for the debt with and without the equity to measure the equity component...

  • Page 103
    ... in January 2011. See Note 10 for more information on the interest rate swap agreement and termination. In fourth quarter 2004, the Company entered into four identical 13-year floating-rate financing arrangements, whereby it borrowed a total of $112 million from French banking partnerships. Although...

  • Page 104
    ... majority of the obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet. Outstanding letters of credit totaled $182 million at December 31, 2013. The net book value of the assets pledged as collateral for the Company's secured borrowings, primarily aircraft...

  • Page 105
    ...conversions per month. A total of 78 of the B717s are on operating lease, eight are owned, and two are currently classified as capital leases. The B717s add complexity to the Company's operations, as Southwest has historically operated an allBoeing 737 fleet. From a fleet management perspective, the...

  • Page 106
    ... by changes in jet fuel prices. Furthermore, jet fuel and oil typically represent one of the largest operating expenses for airlines. The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through its fuel hedging program. Although...

  • Page 107
    ... to the types of derivatives utilized by the Company, these volumes may vary significantly as market prices fluctuate. Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. Generally, utilizing hedge accounting, all periodic changes in fair value of...

  • Page 108
    ...the Company. The Company also examines the effectiveness of each individual hedge and its entire hedging program on a quarterly basis utilizing statistical analysis. This analysis involves utilizing regression and other statistical analyses that compare changes in the price of jet fuel to changes in...

  • Page 109
    ... with purchasing and selling fuel derivatives are classified as Other operating cash flows in the Consolidated Statement of Cash Flows. The following table presents the location of all assets and liabilities associated with the Company's hedging instruments within the Consolidated Balance Sheet...

  • Page 110
    ... value position with each of the Company's counterparties in the Consolidated Balance Sheet. The Company's application of its netting policy associated with cash collateral differs depending on whether its derivative instruments are in a net asset position or a net liability position. If its fuel...

  • Page 111
    ... line item amounts presented in the Consolidated Balance Sheet in Note 5. The following tables present the impact of derivative instruments and their location within the Consolidated Statement of Income for the year ended December 31, 2013 and 2012: Derivatives in cash flow hedging relationships...

  • Page 112
    ... hedges is to the carrying value of the long-term debt. Agreements totaling a net liability of $77 million are cash flow hedges and are classified as a component of Other noncurrent liabilities. The corresponding adjustment related to the net liability associated with the Company's cash flow hedges...

  • Page 113
    ... manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. At December 31, 2013...

  • Page 114
    ... derived from information available in publicly quoted markets. Therefore, the Company has categorized these swap contracts as Level 2. The Company's Treasury Department, which reports to the Chief Financial Officer, determines the value of option contracts utilizing an option pricing model based on...

  • Page 115
    ..., are classified as available-for-sale securities and are reflected at their estimated fair value in the Consolidated Balance Sheet. The Company's Treasury Department determines the estimated fair values of these securities utilizing a discounted cash flow analysis. The Company has performed, and...

  • Page 116
    ... contracts (c) ...Swap contracts (d) ...Option contracts (d) ...Interest rate derivatives (see Note 10) ...Deferred Compensation ...Total liabilities (a) (b) (c) (d) December 31, 2012 Fair value measurements at reporting date using: Quoted prices in Significant Significant active markets other...

  • Page 117
    ... a contract with multiple derivatives is purchased as a single instrument or separate instruments. (b) Included in Other assets in the Consolidated Balance Sheet. Fair value measurements using significant unobservable inputs (Level 3) Fuel Auction rate Other derivatives securities securities Total...

  • Page 118
    ... information on hedging. Any gains and losses (realized and unrealized) related to other investments are reported in Other operating expenses, and were immaterial for 2013 and 2012. The following table presents a range of the unobservable inputs utilized in the fair value measurements of the Company...

  • Page 119
    ... the majority of its Employee groups, including plans adopted via collective bargaining, plans covering the Company's Board of Directors, and options granted pursuant to a prior employment contract with the Chairman Emeritus of the Company. The Company accounts for share-based compensation utilizing...

  • Page 120
    ... ranging from six to twelve years. There were no material grants of stock options to Employees covered by collective bargaining plans during 2011, 2012, or 2013. Neither Executive Officers nor members of the Company's Board of Directors are eligible to participate in any of the collective bargaining...

  • Page 121
    ...December 31, 2013, 2012, and 2011, was $16 million, $13 million, and $13 million, respectively. Employee Stock Purchase Plan Under the amended 1991 Employee Stock Purchase Plan (ESPP), which has been approved by Shareholders, the Company is authorized to issue up to a remaining balance of 11 million...

  • Page 122
    ... for the years ended December 31, 2013, 2012, and 2011, which is equal to the ten percent discount from the market value of the Common Stock at the end of each monthly purchase period, was $1.34, $0.89, and $1.03, respectively. Taxes A portion of the Company's granted options qualify as incentive...

  • Page 123
    ... future service of Employees expected to receive benefits under the plans. Actuarial gains are amortized utilizing the minimum amortization method. The following actuarial assumptions were used to account for the Company's postretirement benefit plans at December 31, 2013, 2012, and 2011: 115

  • Page 124
    ......Deferred gains from sale and leaseback of aircraft ...Capital and operating leases ...Construction obligation ...Accrued engine maintenance ...Accrued employee benefits ...State taxes ...Business partner income ...Net operating losses and credit carryforwards ...Other ...Total deferred tax assets...

  • Page 125
    ...in the Consolidated Balance Sheet. These NOL's will expire from 2017 to 2031 if not utilized. No valuation allowance was necessary. See Note 2 for further information on the acquisition of AirTran. The only periods subject to examination for the Company's federal tax return are the 2012 and 2013 tax...

  • Page 126
    Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders Southwest Airlines Co. We have audited the accompanying consolidated balance sheet of Southwest Airlines Co. as of December 31, 2013 and 2012, and the related consolidated statements of income, ...

  • Page 127
    ... with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Southwest Airlines Co. as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each...

  • Page 128
    QUARTERLY FINANCIAL DATA (unaudited) THREE MONTHS ENDED June 30 Sept. 30 4,643 $ 433 363 224 0.31 0.31 June 30 (in millions except per share amounts) March 31 Dec. 31 4,428 386 334 212 0.30 0.30 Dec. 31 2013 Operating revenues ...$ Operating.... 30 2012 Operating revenues ...$ Operating income ......

  • Page 129
    ... public accounting firm who audited the Company's Consolidated Financial Statements included in this Form 10-K, has issued a report on the Company's internal control over financial reporting, which is included herein. Changes in Internal Control over Financial Reporting. There were no changes...

  • Page 130
    ... executive officer, principal financial officer, and principal accounting officer or controller on the Company's website, www.southwest.com, under the "About Southwest" caption, promptly following the date of any such amendment or waiver. Item 11. Executive Compensation The information required...

  • Page 131
    ... of common stock, stock-settled phantom shares, and awards to non-Employee members of the Board. These shares are in addition to the shares reserved for issuance pursuant to outstanding awards included in column (a). See Note 14 to the Consolidated Financial Statements for information regarding the...

  • Page 132
    ... this annual report, since the required information is included in the Consolidated Financial Statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not present. 3. Exhibits: 3.1 Restated Certificate of Formation of the Company, effective May 18, 2012...

  • Page 133
    ... to Exhibits 10.1 and 10.2, respectively, to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 (File No. 1-7259)); Supplemental Agreement No. 56 (incorporated by reference to Exhibit 10.1 to Southwest's Annual Report on Form 10-K for the year ended December 31...

  • Page 134
    ... Report on Form 10-Q for the quarter ended September 30, 2013 (File No. 1-7259)). (1) 10.1(a) 10.2 Supplemental Agreement No. 85 to Purchase Agreement No. 1810, dated January 19, 1994, between The Boeing Company and the Company. (1) Form of Amended and Restated Executive Service Recognition Plan...

  • Page 135
    ...1 to the Company's 2002 Customer Service/Reservations Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 4.3 to the Company's Registration Statement on Form S-8 filed April 2, 2003 (File No. 333-104245)). Southwest Airlines Co. 2003 Non-Qualified Stock Option Plan (incorporated by...

  • Page 136
    ... Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (File No. 1-7259)). (1) Supplemental Agreement No. 3 to Purchase Agreement No. 3729, dated December 13, 2011, between The Boeing Company and the Company. (1) Southwest Airlines Co. Senior Executive Short Term Incentive Plan...

  • Page 137
    ...be deemed incorporated by reference into any filing, in accordance with Item 601 of Regulation S-K. A copy of each exhibit may be obtained at a price of 15 cents per page, $10.00 minimum order, by writing to: Investor Relations, Southwest Airlines Co., P.O. Box 36611, Dallas, Texas 75235-1611. 129

  • Page 138
    ... AIRLINES CO. February 3, 2014 By /s/ Tammy Romo Tammy Romo Senior Vice President Finance & Chief Financial Officer (On behalf of the Registrant and in her capacity as Principal Financial & Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report...

  • Page 139
    ...and Chief Executive Officer Southwest Airlines Co. Executive Committee (Chair) NANCY B. LOEFFLER Consultant for Frost Bank and member of the Frost Bank Advisory Board Long-time advocate of volunteerism Managing Director Diversified Search LLC (executive and board search firm) Compensation Committee...

  • Page 140
    .... Other financial information can be found on Southwest's web site (southwest.com) or may be obtained without charge by writing or calling: Southwest Airlines Co. Investor Relations, HDQ-6IR P.O. Box 36611 2702 Love Field Drive Dallas, Texas 75235 Telephone: 214-792-4908 STOCK EXCHANGE LISTING New...