10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 13, 1996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
September 30, 1996 OR
____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
________ TO ________
Commission file No. 1-7259
SOUTHWEST AIRLINES CO.
(Exact name of registrant as specified in its charter)
TEXAS 74-1563240
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 36611, Dallas, Texas 75235-1611
(Address of principal executive offices) (Zip Code)
(214) 792-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Number of shares of Common Stock outstanding as of the close
of business on November 6, 1996:
145,031,619
SOUTHWEST AIRLINES CO.
FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Southwest Airlines Co.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
(unaudited)
See accompanying notes.
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands except per share amounts)
(unaudited)
See accompanying notes.
Southwest Airlines Co.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
See accompanying notes.
SOUTHWEST AIRLINES CO.
Notes to Condensed Consolidated Financial Statements
1. Basis of presentation - The accompanying unaudited
condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. The condensed consolidated financial statements
for the interim periods ended September 30, 1996 and 1995 include
all adjustments (which include only normal recurring adjustments)
which are, in the opinion of management, necessary for a fair
presentation of the results for the interim periods. Operating
results for the three and nine month periods ended September 30,
1996 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1996. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Southwest Airlines Co. annual
report on Form 10-K for the year ended December 31, 1995.
2. Dividends - During the three month periods ended
September 30, 1996, June 30, 1996, and March 31, 1996, dividends
of $.011 per share were declared on the 144,956,331, 144,715,343,
and 144,452,894 shares of common stock then outstanding,
respectively. During the three month periods ended September 30,
1995, June 30, 1995, and March 31, 1995, dividends of $.01 per
share were declared on the 143,840,928, 143,648,993, and
143,411,223 shares of common stock then outstanding,
respectively.
3. Leases - During third quarter 1996, the Company
completed transactions for the sale and leaseback of six new
Boeing 737 aircraft. The lease terms, which require periodic
lease payments through May 2021, increased the Company's
commitments for operating leases by $355.7 million.
4. Common stock - Effective July 18, 1996, the Company
amended and restated its Common Stock Rights Agreement dated July
14, 1986 (the Agreement). The principal purpose of the amendment
and restatement was to extend the Agreement by 10 years. For
further information regarding the Agreement, refer to footnote 8
to the consolidated financial statements included in the
Southwest Airlines Co. annual report on Form 10-K for the year
ended December 31, 1995.
5. Reclassifications - Certain prior year amounts have
been reclassified for comparison purposes.
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Comparative Consolidated Operating Statistics
Relevant operating statistics for the three and nine month
periods ended September 30, 1996 and 1995 are as follows:
Material Changes in Results of Operations
Consolidated net income for the three months ended
September 30, 1996 was $60.9 million ($.40 per share) compared
with $67.7 million ($.45 per share) earned in third quarter 1995.
Consolidated operating revenues increased 16.5 percent for
the third quarter of 1996 and 21.2 percent for the nine months
ended September 30, 1996, as compared to the corresponding
periods of the prior year, primarily as a result of a 16.4
percent and 21.1 percent increase, respectively, in consolidated
passenger revenues. The increase in passenger revenues resulted
from a 17.3 percent and 14.5 percent increase in revenue
passenger miles (RPMs) for the three and nine month periods ended
September 30, 1996, respectively, coupled with a 5.8 percent and
9.5 percent increase in average passenger fare over these same
periods.
Available seat miles (ASMs) increased 13.7 percent and 13.6
percent in third quarter 1996 and the nine month period ended
September 30, 1996, respectively, resulting in load factors of
70.0 percent and 66.0 percent for these same periods. The
increase in ASMs resulted primarily from the addition of 22
aircraft since third quarter 1995.
The reimposition of the ten percent federal excise tax
negatively impacted revenues in third quarter 1996. The ticket
tax was reinstated on August 27, 1996 and is currently expected
to expire again on December 31, 1996.
In celebration of the Company's 25th Anniversary, Southwest
launched a fare sale in July for travel between August 19 and
October 31, 1996. The sale was extremely popular and resulted in
record advance bookings, with more than four and a half million
seats sold. Although July and early August load factors and
revenues were negatively impacted by the telephone line
congestion experienced during our sale, the load factor for the
month of September 1996 was positively impacted, up 9.5 points
over September 1995's performance. The October load factor of
72.2 percent also compared favorably to last year's load factor
of 60.0 percent. Although passenger revenue yield per RPM for
the month of October was down due to the fare sale, passenger
revenue per ASM increased compared to October 1995. Thus far,
November and December traffic and bookings also look strong. (The
immediately preceding sentence is a forward-looking statement
which involves uncertainties that could result in actual results
differing materially from expected results. Some significant
factors include, but may not be limited to, competitive pressure
such as fare sales and capacity changes by other carriers,
general economic conditions, and variations in advanced booking
trends.)
Consolidated freight revenues increased 21.8 percent in the
third quarter of 1996 and 24.4 percent for the nine months ended
September 30, 1996 as compared to the same periods of the prior
year, primarily due to increased capacity, as well as an increase
in United States mail services. Other revenues increased 18.9
percent in the third quarter 1996 and 22.8 percent for the nine
months ended September 30, 1996, primarily due to increased
charter revenue.
Operating expenses per ASM increased 6.5 percent and 6.2
percent for the three months and nine months ended September 30,
1996, respectively, primarily due to significantly higher jet
fuel prices; the 4.3 cent per gallon federal jet fuel tax
implemented October 1, 1995; and higher aircraft maintenance
costs. Excluding jet fuel costs and related taxes, operating
expenses per ASM for the three and nine month periods ended
September 30, 1996, were up 3.0 percent and 3.5 percent,
respectively.
Unit costs are expected to increase in fourth quarter 1996
versus fourth quarter 1995 primarily due to higher jet fuel
prices and higher advertising costs from our recent expansion
into Providence, Rhode Island, the upcoming expansion into
Jacksonville, Florida, and our launch of the "Freedom"
advertising campaign. (The immediately preceding sentence is a
forward-looking statement which involves uncertainties that could
result in actual results differing materially from expected
results. Such uncertainties include, but may not be limited to,
the largely unpredictable levels of fuel prices.)
Southwest Airlines Co.
Consolidated Operating Expenses per ASM
(in cents except percent change)
Salaries, wages, and benefits per ASM increased 2.4 percent
and 1.8 percent for the three and nine month periods ended
September 30, 1996, respectively, as compared to the same periods
of the prior year, primarily due to an increase in Reservation
Sales Agent wages.
The Company's flight attendants are subject to an agreement
with the Transport Workers Union of America, AFL-CIO (TWU), which
became amendable May 31, 1996. Southwest is currently in
negotiations with TWU to amend the contract.
Profitsharing and Employee savings plans expense per ASM
decreased 13.3 percent for the three months ended September
30,1996 and increased 8.3 percent for the nine months ended
September 30, 1996, respectively, as compared to the same periods
of the prior year based on the profitability of the corresponding
period.
Fuel and oil expense per ASM increased 20.0 percent and 15.2
percent in third quarter 1996 and the nine month period then
ended due to higher jet fuel prices. The average price paid for
jet fuel in the three and nine month periods ended September 30,
1996 was $.6615 and $.6279 per gallon, respectively, compared to
$.5460 and $.5404 for the corresponding periods in 1995. Since
the end of third quarter 1996, fuel prices have averaged
approximately $.73 per gallon.
Maintenance materials and repairs per ASM increased 11.5
percent and 10.0 percent for the three and nine month periods
ended September 30, 1996, respectively, as compared to the
corresponding periods of 1995, primarily as a result of higher
engine overhaul costs and increased scheduled airframe
inspections during 1996.
Agency commissions per ASM increased by 2.9 percent for the
third quarter 1996 and remained unchanged for the nine months
ended September 30, 1996. Management believes that the third
quarter 1996 increase is due to an increase in the use of travel
agents in July as a result of telephone line congestion during
the fare sale.
Aircraft rentals per ASM decreased 4.2 percent and 2.1
percent for the three and nine month periods ended September 30,
1996, compared to the corresponding periods of 1995. The
decrease was primarily due to a lower percentage of the aircraft
fleet being leased.
Landing fees and other rentals per ASM increased 4.4 percent
and 2.2 percent for the three and nine month periods ended
September 30, 1996, respectively, compared to the corresponding
periods of 1995 primarily due to increases in landing fee rates.
Management expects fourth quarter 1996 increases to appear high
due to a $4.9 million airport credit received in fourth quarter
1995.
Depreciation expense per ASM increased 4.8 percent for third
quarter 1996 and 4.7 percent for the nine months ended September
30, 1996 as compared to the same periods of 1995 due to owned
aircraft representing a higher percentage of the total fleet.
Other operating expenses per ASM increased 11.2 percent and
11.1 percent for the three and nine month periods ended September
30, 1996, respectively. These increases were primarily due to
the 4.3 cent per gallon jet fuel tax as well as increased
advertising costs resulting from the October 1996 expansion into
Providence, Rhode Island.
Other expenses (income) for the three months and nine months
ended September 30, 1996 included interest expense, capitalized
interest, interest income, and nonoperating gains and losses.
Interest expense increased in the first nine months of 1996 as
compared to the first nine months of 1995 due to the March 1995
issuance of $100 million of 8 percent senior unsecured Notes due
March 2005. Capitalized interest decreased for the nine month
period ended September 30, 1996 as a result of certain amendments
to aircraft purchase contracts during third quarter 1995 that
affected the timing of payments. Interest income increased for
the three and nine months ended September 30, 1996 due to higher
invested cash balances.
Material Changes in Financial Condition
Net cash provided by operating activities was $82.0 million
for the three months ended September 30, 1996. During third
quarter 1996, the Company generated $198.0 million from the
sale/leaseback of six Boeing 737 aircraft. During the twelve
months ended September 30, 1996, cash of $554.4 million was
provided from operations. This cash was primarily used to
finance aircraft-related expenditures and provide working
capital.
For the twelve months ended September 30, 1996, net capital
expenditures were $651.8 million, which were primarily for the
purchase of 22 new 737-300 aircraft and progress payments for
future aircraft deliveries.
The Company opened service to Providence, Rhode Island on
October 27, 1996 and recently announced expansion to
Jacksonville, Florida beginning January 1997.
In September 1996, the Company's Board of Directors
reaffirmed a 1990 authorization for the Company to purchase
shares of its common stock from time-to-time on the open market.
The authorization reaffirmed the purchase of up to 2,500,000
shares. No shares have been purchased pursuant to this authority
since 1990.
The Company's contractual commitments at September 30, 1996
consist primarily of scheduled aircraft acquisitions. Five 737-
300s are scheduled for delivery in fourth quarter 1996 and 15 in
1997. Four 737-700s are scheduled for delivery in 1997, 16 in
1998, 16 in 1999, 15 in 2000, and 12 in 2001. In addition, the
Company has options to purchase up to sixty-seven 737-700s during
1998-2004. The Company has the option, which must be exercised
two years prior to the contractual delivery date, to substitute
737-600s or 737-800s for the 737-700s delivered subsequent to
1999. Aggregate funding needed for these commitments is
approximately $2,220.7 million at September 30, 1996 due as
follows: $89.8 million in 1996; $564.1 million in 1997; $444.5
million in 1998; $548.9 million in 1999; $348.7 million in 2000;
and $224.7 million in 2001.
The Company has various options available to meet its
capital and operating commitments, including cash on hand at
September 30, 1996 of $594.0 million, internally generated funds,
and a revolving credit line with a group of banks of up to $460
million (none of which had been drawn at September 30, 1996). In
addition, the Company will also consider various borrowing or
leasing options to maximize earnings and supplement cash
requirements.
The Company currently has outstanding shelf registrations
for the issuance of $114.4 million public debt securities which
it currently intends to utilize for aircraft financings in 1997.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company has received examination reports from
the Internal Revenue Service proposing certain
adjustments to Southwest's income tax returns for 1987
through 1991. The adjustments relate to certain types
of aircraft financings consummated by Southwest, as
well as other members of the aviation industry, during
that time period. Southwest intends to vigorously
protest the adjustments made with which it does not
agree. The industry's difference with the IRS involves
complex issues of law and fact which are likely to take
a substantial period of time to resolve. Management
believes that final resolution of such protest will not
have a materially adverse effect upon the results of
operations of Southwest. This forward-looking
statement is based on management's current
understanding of the relevant law and facts; it is
subject to various contingencies including the views of
legal counsel, changes in the IRS' position, the
potential cost and risk associated with litigation and
the actions of the IRS, judges and juries.
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
(11.1) Computation of Earnings Per Share
(27) Financial Data Schedule
b) Reports on Form 8-K
The following report on Form 8-K was
filed during the quarter:
Form 8-K dated September 17, 1996 was filed
for the purpose of filing certain exhibits in
connection with, and incorporated by references
into Southwest Airlines Co. Registration Statement
on Form S-3 (File No. 33-59113), as declared
effective on May 9, 1995, relating to Pass Through
Certificates, Series 1996-A.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SOUTHWEST AIRLINES CO.
INDEX TO EXHIBITS
Exhibit
Number Exhibit
(11.1) Computation of Earnings Per Share
(27) Financial Data Schedule