10-K405: Annual report [Sections 13 and 15(d), S-K Item 405]
Published on March 21, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1996 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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)
Registrant's telephone number, including area code: (214) 792-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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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 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of Common Stock held by nonaffiliates as of February
28, 1997:
$3,350,000,000
Number of shares of Common Stock outstanding as of the close of business on
February 28, 1997:
145,335,143 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of
Shareholders, May 15, 1997: PART III
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PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Southwest Airlines Co. (Southwest) is a major domestic airline that
provides shorthaul, high frequency, point-to-point, low fare service. Southwest
was incorporated in Texas and commenced Customer Service on June 18, 1971 with
three Boeing 737 aircraft serving three Texas cities - Dallas, Houston, and San
Antonio.
At yearend 1996, Southwest operated 243 Boeing 737 aircraft and provided
service to 50 airports in 49 cities in 24 states throughout the United States.
Southwest commenced service to Jacksonville, Florida in January 1997, and has
recently announced that it will commence service to Jackson, Mississippi in
August 1997.
On December 31, 1993, Southwest acquired Morris Air Corporation (Morris)
in a stock-for-stock exchange, issuing approximately 3.6 million shares of
Southwest Common Stock in exchange for all of the outstanding shares of Morris.
During 1994, the operations of Morris were substantially integrated with those
of Southwest, and Morris ceased service as a certificated air carrier in March
1995. Unless the context requires otherwise, references in this annual report
to the "Company" include Southwest and Morris.
The business of the Company is somewhat seasonal. Quarterly operating
income and, to a lesser extent, revenues tend to be lower in the first quarter
(January 1 - March 31).
FUEL
The cost of fuel is an item having significant impact on the Company's
operating results. The Company's average cost of jet fuel per gallon for
scheduled carrier service over the past five years was as follows:
1992 $.61
1993 $.59
1994 $.54
1995 $.55
1996 $.65
The Company is unable to predict the extent of future fuel cost changes.
The Company has standard industry arrangements with major fuel suppliers.
Standard industry fuel contracts do not provide material protection against
price increases or for assured availability of supplies. The Company's
principal hedging program utilizes the purchase of crude oil call options at a
nominal premium and at volumes of up to 30% of its annual fuel requirements.
Although market conditions can significantly impact the price of jet fuel, at
present these conditions have not resulted in an inadequate supply of jet fuel.
For more discussion of current jet fuel costs and the impact of these costs on
the Company's operations, see Management's Discussion and Analysis of Financial
Condition and Results of Operations.
REGULATION
Economic. The Dallas Love Field section of the International Air
Transportation Competition Act of 1979 (Competition Act), as it affects
Southwest's scheduled service, provides that no common carrier may provide
scheduled passenger air transportation for compensation between Love Field and
one or more points outside Texas, except that an air carrier may transport
individuals by air on a flight between Love Field and one or more points within
the states of Arkansas, Louisiana, New Mexico, Oklahoma, and Texas if (a) "such
air carrier does not offer or provide any through service or ticketing with
another air carrier" and (b) "such air
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carrier does not offer for sale transportation to or from, and the flight or
aircraft does not serve, any point which is outside any such states." Southwest
does not interline or offer joint fares with any other air carrier at Love
Field. The Competition Act does not restrict Southwest's intrastate Texas
flights or its air service from points other than Love Field to points beyond
Texas and the four contiguous states.
The Department of Transportation (DOT) has significant regulatory
jurisdiction over passenger airlines. Unless exempted, no air carrier may
furnish air transportation over any route without a DOT certificate of
authorization, which does not confer either exclusive or proprietary rights.
The Company's certificates are unlimited in duration and permit the Company to
operate among any points within the United States, its territories and
possessions, except as limited by the Love Field section of the Competition
Act, as do the certificates of all other U.S. carriers. DOT may revoke such
certificates, in whole or in part, for intentional failure to comply with any
provisions of subchapter IV of the Federal Aviation Act of 1958, or any order,
rule or regulation issued thereunder or any term, condition or limitation of
such certificate; provided that, with respect to revocation, the certificate
holder has first been advised of the alleged violation and has been given a
reasonable time to effect compliance.
DOT prescribes uniform disclosure standards regarding terms and
conditions of carriage, and prescribes that terms incorporated into the
Contract of Carriage by reference are not binding upon passengers unless notice
is given in accordance with its regulations.
Several bills have been introduced in Congress with a goal of "reforming"
the Federal Aviation Administration ("FAA") by, among other things, modifying
the method of funding the FAA. For information regarding the impact of the
lapse and reinstatement of the 10% federal excise tax on operating results, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations. At the current time, Southwest is unable to predict how these
issues will be resolved and what impact, if any, resolution of these
uncertainties will have on future operating results or financial condition.
Safety. The Company is subject to the jurisdiction of the FAA with
respect to its aircraft maintenance and operations, including equipment, ground
facilities, dispatch, communications, flight training personnel, and other
matters affecting air safety. To ensure compliance with its regulations, the
FAA requires airlines to obtain operating, airworthiness and other certificates
which are subject to suspension or revocation for cause. The Company has
obtained such certificates. The FAA, acting through its own powers or through
the appropriate U. S. Attorney, also has the power to bring proceedings for the
imposition and collection of fines for violation of the Federal Air
Regulations.
Environmental. The Airport Noise and Capacity Act of 1990 (ANCA) requires
the phase out of Stage 2 airplanes (which meet less stringent noise emission
standards than later model Stage 3 airplanes) in the contiguous 48 states by
December 31, 1999. FAA rules establish a future interim compliance date for
ANCA of December 31, 1998. An operator may comply by either implementing a
reduction of the operator's base level, as defined in ANCA, of Stage 2 aircraft
by at least 75 percent at December 31, 1998, or by operating a fleet that is at
least 75 percent Stage 3 by December 31, 1998. Operation of Stage 2 aircraft
after December 31, 1999 is prohibited, subject, however, to an extension of the
final compliance date to December 31, 2003, if at least 85 percent of the
aircraft used by the operator in the contiguous United States will comply with
Stage 3 noise levels by July 1, 1999 and the operator successfully obtains a
waiver from the FAA of the December 31, 1999 final phaseout date. Statutory
requirements to obtain a waiver include a determination by the FAA that the
waiver is in the public interest or would enhance competition or benefit
service to small communities. There is no assurance that such a waiver is
obtainable.
The Company's fleet, as of December 31, 1996, consisted of 47 Stage 2
aircraft and 196 Stage 3 aircraft, yielding a Stage 3 percentage of over 80
percent. Accordingly, the Company exceeds the Stage 3 fleet percentage
requirement for the December 31, 1998 interim compliance date.
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As of December 31, 1996, of the 47 Stage 2 aircraft operated by the
Company, 26 are leased from third parties and 21 are owned by the Company.
Because the Company already complies with the December 31, 1998 interim
compliance requirement of a 75 percent Stage 3 fleet, the Company could operate
all 47 of its Stage 2 aircraft until December 31, 1999. Based upon the
Company's current schedule for delivery of new Stage 3 aircraft, including
options, and the Company's planned retirement schedule for Stage 2 aircraft,
assuming no hushkitting, the Company will achieve 85 percent compliance by July
1, 1999; however, the Company currently intends to hushkit at least 20
aircraft. This would qualify the Company to apply for a waiver from the final
compliance date, which, if obtained, could permit the Company to continue
operation of the then remaining Stage 2 aircraft until, at the latest, December
31, 2003.
ANCA also requires the FAA to establish parameters within which any new
Stage 2 and Stage 3 noise or access restrictions at individual airports must be
developed. The published rules generally provide that local noise restrictions
on Stage 3 aircraft first effective after October 1990 require FAA approval,
and establish a regulatory notice and review process for local restrictions on
Stage 2 aircraft first proposed after October 1990. Certain airports, including
Dallas Love Field, Los Angeles, San Diego, San Francisco, and Orange County,
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 such operations. In some instances, these
restrictions have caused curtailments in service or increases in operating
costs and such restrictions could limit the ability of Southwest to expand its
operations at the affected airports. Local authorities at other airports are
considering adopting similar noise regulations.
Operations at John Wayne Airport, Orange County, California, are governed
by the Airport's Phase 2 Commercial Airline Access Plan and Regulation (the
"Plan"). Pursuant to the Plan, each airline is allocated total annual seat
capacity to be operated at the airport, subject to renewal/reallocation on an
annual basis. Service at this airport may be adjusted annually to meet these
requirements.
The Company is subject to various other federal, state, and local laws
and regulations relating to the protection of the environment, including the
discharge of materials into the environment.
MARKETING AND COMPETITION
Southwest focuses principally on point-to-point, rather than
hub-and-spoke, service in shorthaul markets with frequent, conveniently timed
flights, and low fares. For example, Southwest's average aircraft trip length
in 1996 was 410 miles with an average duration of approximately one hour. At
yearend, Southwest served approximately 400 one-way nonstop city pairs with an
average weekday frequency of just over 5 roundtrips per city pair.
Southwest's point-to-point route system, as compared to hub-and-spoke,
provides for more direct nonstop routings for shorthaul customers and,
therefore, minimizes connections, delays, and total trip time. Southwest
focuses on nonstop, not connecting, traffic. As a result, approximately 80
percent of the Company's customers fly nonstop. In addition, Southwest serves
many conveniently-located satellite or downtown airports such as Dallas Love
Field, Houston Hobby, Chicago Midway, Baltimore, Burbank, Oakland, San Jose,
Providence and Ft. Lauderdale airports, which are typically less congested than
other airlines' hub airports and enhance the Company's ability to sustain high
employee productivity and reliable ontime performance. This operating strategy
also permits the Company to achieve high asset utilization. Aircraft are
scheduled to minimize the amount of time the aircraft is at the gate,
approximately 20 minutes, thereby reducing the number of aircraft and gate
facilities that would otherwise be required.
Southwest does not interline with other domestic jet airlines, nor have
any commuter feeder relationships. However, in late 1996 the Company entered
into a marketing relationship with Icelandair, pursuant to which Icelandair may
offer travel to Customers going between Cleveland and various foreign
Icelandair destinations,
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via Baltimore. Southwest provides the transportation between Cleveland and
Baltimore on its regularly scheduled service.
Southwest employs a very simple fare structure, featuring low,
unrestricted, unlimited everyday coach fares. The Company operates only one
aircraft type, the Boeing 737, which simplifies scheduling, maintenance, flight
operations, and training activities.
In May 1994, the computer reservations systems (CRSs) owned by United
Airlines (Apollo) and Continental Airlines (System One) disabled automated
ticketing for Southwest travel. Rather than pay the fees associated with CRS
participation in Apollo and System One, Southwest took the following actions:
Southwest introduced a Ticketless travel option, available system-wide in
January 31, 1995, eliminating the need to print a paper ticket altogether;
provided direct access to its own reservation system and ticketing for the 50
largest travel agencies (SWAT); instituted overnight delivery of
Southwest-produced tickets for approximately 300 large travel agencies; and
improved access to Ticket By Mail for direct Customers by reducing the time
limit from seven days out from the date of travel to three days. Southwest also
entered into a new arrangement with SABRE, the CRS in which Southwest has
historically participated to a limited extent, providing for ticketing and
automated booking on Southwest in a very cost-effective manner. In 1996,
Southwest began offering ticketless travel through the Company's home page on
the Internet's World Wide Web at http://www.iflyswa.com. By December 31, 1996,
approximately 50% of Southwest's customers were choosing the ticketless travel
option.
The airline industry is highly competitive as to fares, frequent flyer
benefits, routes, and service, and some carriers competing with the Company
have greater financial resources, larger fleets, and wider name recognition.
Several of the Company's larger competitors have initiated or are studying
low-cost, shorthaul service in markets served by the Company, which represents
a more direct threat in Southwest's market niche. Profit levels in the air
transport industry are highly sensitive to changes in operating and capital
costs and the extent to which competitors match an airline's fares and
services. The profitability of a carrier in the airline industry is also
impacted by general economic trends. For more discussion on the current
competitive environment for Southwest, see Management's Discussion and Analysis
of Financial Condition and Results of Operations.
The Company is also subject to varying degrees of competition from
surface transportation in its shorthaul markets, particularly the private
automobile. In shorthaul air services which compete with surface
transportation, price is a competitive factor, but frequency and convenience of
scheduling, facilities, transportation safety, and Customer Service may be of
equal or greater importance to many passengers.
INSURANCE
The Company carries insurance of types customary in the airline industry
and in amounts deemed adequate to protect the Company and its property and to
comply both with federal regulations and certain of the Company's credit and
lease agreements. The policies principally provide coverage for public and
passenger liability, property damage, cargo and baggage liability, loss or
damage to aircraft, engines, and spare parts, and workers' compensation.
FREQUENT FLYER AWARDS
Southwest's frequent flyer program, Rapid Rewards (formerly The Company
Club), is based on trips flown rather than mileage. Rapid Rewards offers one
free roundtrip travel award to any Southwest destination after flying eight
roundtrips (or 16 one-way trips) on Southwest within a consecutive twelve-month
period.
The trips flown as credit towards a free travel award certificate are
valid for twelve months only; the free travel award is automatically generated
when earned by the Customer rather than allowing the Customer to
4
bank the trip credits indefinitely; and the free travel award is valid for one
year with an automatic expiration date. Based on the issuance of free travel
awards to qualified members, coupled with the foregoing program characteristics
and the use of "black out" dates for the free travel awards during peak holiday
periods, the financial impact of free travel awards used on the Company's
consolidated financial statements has not been material. Free travel awards
redeemed were approximately 459,000, 417,000, and 279,000 during 1996, 1995,
and 1994, respectively. The amount of free travel award usage as a percentage
of total Southwest revenue passengers carried was 1.9 percent in 1996, 1.9
percent in 1995, and 1.4 percent in 1994.
The Company accounts for free travel awards using the incremental cost
method, consistent with the other major airlines. This method recognizes an
average incremental cost to provide roundtrip transportation to one additional
passenger. The incremental cost to provide free transportation is accrued at
the time an award is earned and revenue is subsequently recognized, at the
amount accrued, when the free travel award is used. The estimated incremental
costs include passenger costs such as beverage and snack supplies, baggage
claims, baggage handling, and liability insurance; operations costs such as
security services, airport rentals, fuel, oil, and into-plane charges; and
reservations costs, such as communications and system operations fees. The
liability for free travel awards earned but not used at December 31, 1996 and
1995 was not material.
The number of free travel awards for Southwest outstanding at December
31, 1996 and 1995 was approximately 404,000 and 295,000, respectively. These
numbers do not include partially earned awards. The Company currently does not
have a system to accurately estimate partially earned awards. However, these
partially earned awards may equate to approximately 60-70 percent of the
current outstanding awards. Since the inception of Rapid Rewards in 1987,
approximately 15 percent of all award certificates have expired without being
used.
EMPLOYEES
At December 31, 1996, Southwest had 22,944 active employees, consisting
of 6,228 flight, 1,049 maintenance, 13,148 ground customer service and 2,519
management, accounting, marketing, and clerical personnel.
Southwest has ten collective bargaining agreements covering approximately
84 percent of its employees. Southwest's Customer service and reservation
employees are subject to an agreement with the International Association of
Machinists and Aerospace Workers, AFL-CIO (IAM), which becomes amendable in
November 1997. Flight attendants are subject to an agreement with the
Transportation Workers Union of America, AFL-CIO (TWU), which became amendable
May 31, 1996 and is currently in negotiations. Fleet service employees are
subject to an agreement with the TWU which becomes amendable in December 1999.
The pilots are subject to an agreement with the Southwest Airlines Pilots'
Association (SWAPA), which becomes amendable in September 1999 (described
below). Flight dispatchers are represented by the Southwest Airlines Employees
Association, pursuant to an agreement which becomes amendable in November 1997.
Aircraft cleaners and stock clerks; mechanics, flight simulator technicians and
flight crew training instructors are represented by the International
Brotherhood of Teamsters pursuant to separate agreements which become amendable
in August 2000, August 2001, October 2000 and December 2000, respectively. The
flight/ground school instructors are subject to an agreement with the Southwest
Airlines Professional Instructors Association which becomes amendable in
December 2000.
In January 1995, Southwest's pilots ratified a ten-year labor contract
that calls for no wage increases in the first five years and three percent
annual wage increases in three of the last five years of the contract.
Initially, the pilots received options to purchase approximately 14.5 million
shares of Southwest common stock at $20 per share over the term of the
contract; pilots hired subsequently receive additional grants at a five percent
premium over then current fair market value, up to a total of 18,000,000 shares
that can be issued under the stock option plan. Pilots are eligible for
profitability bonuses of up to three percent of compensation in three of the
first five years and profitability-based pay increases up to three percent in
two of the second
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five years of the contract. The pilot group may choose to reopen the contract
after five years, in which event all unexercised options will terminate on
December 1, 1999.
ITEM 2. PROPERTIES
AIRCRAFT
Southwest operated a total of 243 Boeing 737 aircraft as of December 31,
1996, of which 106 and 13 were under operating and capital leases,
respectively. The remaining 124 aircraft were owned.
In January 1994, Southwest entered into an agreement with The Boeing
Company, pursuant to which Southwest is the launch customer for the Boeing
737-700 aircraft, the newest generation of the Boeing 737 aircraft type. As the
launch customer, Southwest has agreed to purchase sixty-three Boeing 737-700
aircraft from 1997 to 2001, with options for an additional sixty-seven 737-700
aircraft from 1998 to 2004. The first four 737-700 aircraft will be delivered
to the Company in late 1997.
In total, at December 31, 1996, the Company had 78 firm orders and 67
options as follows:
The average age of the Company's fleet at December 31, 1996 was 7.9
years.
For information regarding the Company's obligations under capital leases
and noncancelable operating leases see Notes 4 and 5 to the Consolidated
Financial Statements.
For information concerning Southwest's aircraft purchase commitments, see
Note 2 to the Consolidated Financial Statements.
The Company has an agreement with CFM International, Inc. (a joint
company of SNECMA (France) and General Electric Company) dated May 28, 1981, as
amended, for the supply of spare engines for its Boeing 737-300, -500, and -700
aircraft. CFM also supplies the engines to The Boeing Company for original
installation on such aircraft. CFM is the sole manufacturer of engines for use
on the Boeing 737-300, -400, -500, and -700 aircraft.
GROUND FACILITIES 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, and Phoenix Sky Harbor, its training center
near Love Field which houses three 737 simulators, and its corporate
headquarters also located near Love Field. The maintenance, training center,
and corporate headquarters buildings on these sites were built and are owned by
Southwest. At December 31, 1996, the Company operated nine reservation centers.
The reservation centers located in Little Rock, Arkansas; Chicago, Illinois;
Albuquerque, New Mexico; and Oklahoma City, Oklahoma occupy leased space. The
Company owns its Dallas, Texas; Houston, Texas; Phoenix, Arizona; Salt Lake
City, Utah; and San Antonio, Texas reservation centers.
The Company performs substantially all line maintenance on its aircraft
and provides ground support services at most of the airports it serves.
However, the Company has arrangements with certain aircraft
6
maintenance firms for major component overhauls and repairs for its airframes
and engines, which comprise the majority of the annual maintenance costs.
In recent years, many airports have increased or sought to increase the
rates charged to airlines. The extent to which such charges are limited by
statute and the ability of airlines to contest such charges has been subject to
litigation and to administrative proceedings before the Department of
Transportation. To the extent the limitations on such charges are relaxed or
the ability of airlines to challenge such charges is restricted, the rates
charged by airports to airlines may increase substantially. Management cannot
predict the magnitude of any such increase.
ITEM 3. LEGAL PROCEEDINGS
Southwest 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 differences with
the IRS involve 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to be reported.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Southwest, their positions, and their
respective ages (as of March 1, 1997) are as follows:
Executive officers are elected annually at the first meeting of
Southwest's Board of Directors following the annual meeting of shareholders or
appointed by the President pursuant to Board authorization.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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 paid on the common
stock were:
As of March 4, 1997, there were 9,457 holders of record of the
Company's common stock.
RECENT SALES OF UNREGISTERED SECURITIES
The Company re-employed Herbert D. Kelleher, effective as of January
1, 1996, as President and Chief Executive Officer under a five-year Employment
Contract. Pursuant to this Contract, Mr. Kelleher was granted nonstatutory
options to purchase, subject to his employment for four years, 144,395 shares
of the Company's Common Stock at a purchase price of $1 per share and 500,000
shares at a purchase price of $23.50 per share, representing the composite tape
closing sales price of the Common Stock on the New York Stock Exchange on
January 2, 1996. One-fifth of the options are not subject to vesting and may be
exercised at any time as to the underlying shares. Provided Mr. Kelleher
remains in the continuous, full-time employ of the Company, the balance of the
options will become exercisable in cumulative increments of one-fifth of the
underlying shares each January 1 beginning January 1, 1997; provided that in
the event of a change of control of the Company all of the options become
immediately exercisable. Each of the options will expire ten years after it
becomes exercisable. The options are not transferable by Mr. Kelleher other
than by will or the laws of descent and distribution, and are exercisable
during Mr. Kelleher's lifetime only by him. The options granted to Mr. Kelleher
in 1996 are in addition to options granted to him pursuant to earlier
employment agreements.
During 1996, Mr. Kelleher exercised unregistered options to purchase
Southwest Common Stock as follows:
9
The issuance of the above options and shares to Mr. Kelleher were
deemed exempt from the registration provisions of the Securities Act of 1933,
as amended (the "Act"), by reason of the provision of Section 4(2) of the Act
because, among other things, of the limited number of participants in such
transactions and the agreement and representation of Mr. Kelleher that he was
acquiring such securities for investment and not with a view to distribution
thereof. The certificates representing the shares issued to Mr. Kelleher
contain a legend to the effect that such shares are not registered under the
Act and may not be transferred except pursuant to a registration statement
which has become effective under the Act or to an exemption from such
registration. The issuance of such shares was not underwritten.
ITEM 6. SELECTED FINANCIAL DATA
The following financial information for the five years ended December
31, 1996 has been derived from the Company's consolidated financial statements.
This information should be read in conjunction with the Consolidated Financial
Statements and related notes thereto included elsewhere herein.
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- - ------------------
(1) Proforma prior to 1993, assuming Morris, an S-Corporation prior to 1993,
was taxed at statutory rates.
(2) Includes the net cumulative effect of adopting Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" and Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions."
(3) Includes one-time adjustment for the cumulative effect of a change in the
method of accounting for scheduled airframe overhaul costs from the direct
expense method to that of capitalizing and amortizing the costs over the
periods benefited.
(4) Includes leased aircraft.
(5) Includes certain estimates for Morris.
(6) Excludes merger expenses of $10.8 million.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR IN REVIEW
Southwest and the airline industry continued to post record profits in 1996.
Southwest's net income for the first half of 1996 benefitted from the lapse in
the ten percent federal ticket tax on December 31, 1995. Net income for the
second half of 1996 fell below year ago levels primarily due to significant
increases in jet fuel prices.
Southwest continued to maintain our advantage as the low cost leader in the
industry. Despite this advantage, we continue pursuing numerous cost reduction
efforts, which have proven to be beneficial.
We added 22 new Boeing 737-300 aircraft to our fleet in 1996 and retired three
- - -200s. Our fleet remains one of the youngest fleets in the industry with an
average age of 7.9 years. In October 1997, we will be the launch customer for
the new Boeing 737-700 aircraft. In total for 1997, we will accept delivery of
15 -300s and four -700s. We currently plan to retire four -200s in fourth
quarter 1997.
Our expansion into Florida in 1996 has been successful with strong load
factors. We added Jacksonville, Florida service beginning January 15, 1997.
Service to Providence, Rhode Island, which began October 27, 1996, also looks
promising. Our current plans for capacity growth in 1997 will be primarily
directed to cities we presently serve, either with increased frequencies or new
routes. We may begin service to one more new city later in 1997.
Proposed FAA "funding reform" continues to present uncertainty as to how or if
any changes would impact Southwest. While Congress reinstated the ten percent
ticket tax in August 1996, the tax lapsed again as of December 31, 1996. At the
current time, Southwest is unable to predict how this FAA funding issue will be
resolved and what impact, if any, resolution of this uncertainty will have on
future operating results.
RESULTS OF OPERATIONS
1996 COMPARED WITH 1995 The Company's consolidated net income for 1996 was
$207.3 million ($1.37 per share), as compared to the corresponding 1995 amount
of $182.6 million ($1.23 per share), an increase of 13.5 percent.
OPERATING REVENUES Consolidated operating revenues increased by 18.6 percent in
1996 to $3,406.2 million, compared to $2,872.8
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million for 1995. This increase in 1996 operating revenues was derived
primarily from an 18.4 percent increase in passenger revenues. Revenue
passenger miles (RPMs) increased 16.1 percent in 1996, compared to a 12.6
percent increase in available seat miles (ASMs), resulting in an increase in
load factor from 64.5 percent in 1995 to 66.5 percent in 1996. The 1996 ASM
growth resulted from the net addition of 19 aircraft during the year: 22
additions and three retirements.
In December 1995, because of the impasse in the federal budget, Congress
allowed the ten percent federal ticket tax to lapse. This benefitted
Southwest's revenues until late August when Congress reimposed the tax through
December 31, 1996. The reimposition of the ticket tax negatively impacted
revenues in third and fourth quarters 1996 as compared to revenue trends in the
first half of 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 the sale, revenues for September and October 1996 were positively
impacted with very heavy passenger volumes.
Freight revenues in 1996 were $80.0 million, compared to $65.8 million in 1995.
The 21.5 percent increase in freight revenues exceeded the 12.6 percent
increase in ASMs for the same period primarily due to increased air freight
volumes and United States mail services primarily resulting from the
development of new markets added in 1995 and early 1996.
Other revenues increased by 23.3 percent in 1996 to $56.9 million, compared to
$46.2 million in 1995. This increase is primarily due to increased charter
revenue.
OPERATING EXPENSES Consolidated operating expenses for 1996 were $3,055.3
million, compared to $2,559.2 million in 1995, an increase of 19.4 percent,
compared to the 12.6 percent increase in capacity. Operating expenses per ASM
increased 6.1 percent in 1996 compared to 1995, primarily due to significantly
higher jet fuel prices along with the 4.3 cent per gallon federal jet fuel tax
implemented October 1, 1995. Excluding jet fuel costs and related taxes,
operating expenses per ASM were up 3.1 percent in 1996 compared to 1995.
Unit costs are expected to increase in first quarter 1997 versus first quarter
1996, due to higher jet fuel prices. (The
13
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.)
Operating expenses per ASM for 1996 and 1995 were as follows:
OPERATING EXPENSES PER ASM
Salaries, wages, and benefits per ASM increased 2.3 percent in 1996. This
increase resulted primarily from a 16.2 percent increase in 1996 average
headcount, which outpaced the 1996 capacity (ASM) increase of 12.6 percent, and
offset a 0.8 percent decrease in average salary and benefits cost per Employee.
The 16.2 percent increase in average headcount was primarily the result of a
24.3 percent increase in Reservations Sales Agents in 1996. Excluding
Reservations Sales Agents, total average headcount increased 13.1 percent, in
line with capacity.
Southwest's mechanics are subject to an agreement with the International
Brotherhood of Teamsters, Chauffeurs, Warehousemen and Helpers of America (the
Teamsters), which became amendable August 16, 1995. The Company reached an
agreement with the Teamsters which was ratified by its membership in March
1996. 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.
14
Fuel and oil expenses per ASM increased 17.8 percent in 1996, primarily due to
an 18.6 percent increase in the average jet fuel cost per gallon from 1995. The
average price paid for jet fuel in 1996 was $.6547 compared to $.5522 in 1995.
During fourth quarter 1996, the average cost per gallon increased 25.0 percent
to $.7323 compared to $.5859 in fourth quarter 1995. In January 1997, fuel
prices have averaged approximately $.76 per gallon.
Maintenance materials and repairs per ASM increased 3.3 percent in 1996
compared to 1995 primarily as a result of increased scheduled airframe
inspections during 1996.
Agency commissions per ASM increased 2.9 percent in 1996 compared to 1995,
which was slightly slower than the 5.2 percent increase in passenger revenues
per ASM.
Landing fees and other rentals per ASM increased 4.5 percent in 1996 compared
to 1995, which included an airport credit of $4.9 million.
Depreciation expense per ASM increased 4.7 percent in 1996 compared to 1995 due
to an increase in the percentage of owned aircraft.
Other operating expenses per ASM increased 9.4 percent in 1996 compared to
1995. This increase was primarily due to increased advertising costs resulting
from the expansion into Florida and Providence, Rhode Island, as well as a new
advertising campaign; the 4.3 cents per gallon tax on commercial aviation jet
fuel purchased for use in domestic operations, which became effective October
1, 1995; and increased airport security costs. The additional fuel tax
increased 1996 and 1995 "other operating expenses" by $32.7 million and $7.4
million, respectively.
OTHER "Other expenses (income)" included interest expense, capitalized
interest, interest income, and nonoperating gains and losses. Capitalized
interest decreased $9.1 million in 1996 as a result of certain amendments to
aircraft purchase contracts during third quarter 1995 that affected the timing
of payments. Interest income for 1996 increased $5.7 million primarily due to
higher invested cash balances.
INCOME TAXES The provision for income taxes, as a percentage of income before
taxes decreased in 1996 to 39.3 percent from 40.2 percent in 1995. The decrease
was primarily the result of lower effective state tax rates.
1995 COMPARED WITH 1994 The Company's consolidated net income for 1995 was
$182.6 million ($1.23 per share), as compared to the
15
corresponding 1994 amount of $179.3 million ($1.22 per share), an increase of
1.8 percent.
Operating Revenues Consolidated operating revenues increased by 10.8 percent in
1995 to $2,872.8 million, compared to $2,591.9 million for 1994. This increase
in 1995 operating revenues was derived from a 10.5 percent increase in
passenger revenues. RPMs increased 7.9 percent in 1995, compared to a 12.6
percent increase in ASMs, resulting in a decrease in load factor from 67.3
percent in 1994 to 64.5 percent in 1995. The 1995 ASM growth resulted from the
addition of 25 aircraft during the year.
Freight revenues in 1995 were $65.8 million, compared to $54.4 million in 1994.
The 21.0 percent increase in freight revenues exceeded the 12.6 percent
increase in ASMs for the same period primarily due to increased air freight
volumes and United States mail services primarily resulting from the
development of new markets added throughout 1994 and 1995.
Operating Expenses Consolidated operating expenses for 1995 were $2,559.2
million, compared to $2,275.2 million in 1994, an increase of 12.5 percent,
compared to the 12.6 percent increase in ASMs. For the second consecutive year,
operating expenses on a per-ASM basis decreased year-over-year, down .1 percent
in 1995.
Salaries, wages, and benefits per ASM increased 1.9 percent in 1995. This
increase resulted primarily from a 17.8 percent increase in 1995 average
headcount, which outpaced the 1995 capacity (ASM) increase of 12.6 percent, and
offset a 2.6 percent decrease in average salary and benefits cost per Employee.
The 17.8 percent increase in average headcount was primarily the result of a
44.6 percent increase in Reservations Sales Agents in 1995. Excluding
Reservations Sales Agents, total average headcount increased only 11.4 percent.
The Reservations Sales Agent increase coincided with increased demand for
reservations capacity following 1994 enhancements to Southwest's ticket
delivery systems for direct Customers.
Employee profitsharing and savings plans expense per ASM increased 4.5 percent
in 1995. The increase is primarily the result of increased matching
contributions to Employee savings plans resulting from increased Employee
participation and higher matching rates in 1995 for non-contract Employees and
certain Employee groups covered by collective bargaining agreements.
Fuel and oil expenses per ASM increased 1.0 percent in 1995, primarily due to a
2.4 percent increase in the average jet fuel cost per gallon from 1994. Jet
fuel prices remained relatively stable throughout most of 1995, with quarterly
averages through
16
the first three quarters ranging from $.53 to $.55 per gallon. During fourth
quarter 1995, the average cost per gallon increased to $.59 and, in January
1996, averaged approximately $.62 per gallon.
Maintenance materials and repairs per ASM increased 1.7 percent in 1995
compared to 1994 primarily as a result of performing more engine overhauls
during 1995.
Agency commissions per ASM decreased 17.1 percent in 1995 compared to 1994, due
to a lower mix of travel agency sales in 1995. The lower travel agency sales
mix resulted from 1994 enhancements to Southwest's ticket delivery systems for
direct Customers, as described below.
In response to actions taken by our competitor-owned reservations systems in
1994, we reduced our operating costs and enhanced our ticket delivery systems
by developing our own Southwest Airlines Air Travel ("SWAT") system allowing
high-volume travel agents direct access to reservations; introduced overnight
ticket delivery for travel agents; reduced to three the number of advance days
reservations required for overnight delivery of tickets to consumers (Ticket By
Mail); developed our own Ticketless system, which was rolled out system-wide on
January 31, 1995; and effective March 30, 1995 subscribed to a new level of
service with SABRE that automates the booking process for SABRE travel
agencies.
Aircraft rentals per ASM increased 11.9 percent in 1995. The increase primarily
resulted from second and third quarter 1995 sale/leaseback transactions
involving ten new 737-300 aircraft and a higher percentage of the fleet
consisting of leased aircraft.
Other operating expenses per ASM decreased 2.8 percent in 1995 compared to
1994. This decrease was primarily due to operating efficiencies resulting from
the transition of Morris operating functions to Southwest commencing first
quarter 1994, and lower communications costs. Communications costs decreased
approximately 15 percent per ASM primarily due to lower negotiated rates,
increased reservations operations efficiencies, and enhancements to the
Company's ticket delivery system.
In August 1993, the Revenue Reconciliation Act of 1993 was enacted, which,
among other things, included an assessment of a 4.3 cents per gallon tax on
commercial aviation jet fuel purchased for use in domestic operations, which
became effective September 30, 1995. This additional fuel tax increased 1995
"other operating expenses" by $7.4 million.
17
Other "Other expenses (income)" included interest expense, capitalized
interest, interest income, and nonoperating gains and losses. Interest expense
increased $5.4 million in 1995 due to the March 1995 issuance of $100 million
senior unsecured 8% Notes due 2005. Capitalized interest increased $5.0 million
in 1995 as a result of higher levels of progress payments on aircraft compared
to 1994. Interest income for 1995 increased $10.9 million primarily due to
higher invested cash balances and higher short-term interest rates.
Income Taxes The provision for income taxes as a percentage of income before
taxes was relatively unchanged year over year.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided from operations was $615.2 million in 1996, compared to $456.4
million in 1995. During 1996, additional funds of $330.0 million were generated
from the sale and leaseback of ten new 737-300 aircraft subject to long-term
operating leases (increasing total commitments for operating leases by $588.8
million).
During 1996, capital expenditures of $677.4 million primarily were for the
purchase of 22 new 737-300 aircraft, one used 737-200 aircraft previously
leased by the Company, and progress payments for future aircraft deliveries. At
December 31, 1996, capital commitments of the Company consisted primarily of
scheduled aircraft acquisitions.
The Company recently announced its intention to order 20 hushkits for our
737-200 fleet, with an option for 14 more, for delivery in 1997-1999. These
hushkits, with an approximate cost of $1.0 million per aircraft, will make the
Stage 2 -200 aircraft compliant with Stage 3 noise requirements.
As of January 1997, Southwest had 78 new 737s on firm order, including 19 to be
delivered in 1997, with options to purchase another 67. Aggregate funding
required for firm commitments approximated $1,960.1 million through the year
2001 of which $515.1 million related to 1997. See Note 2 to the Consolidated
Financial Statements for further information.
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. As of February 21, 1997, no shares have been purchased
pursuant to this authority since 1990.
The Company has various options available to meet its capital and operating
commitments, including cash on hand at December 31, 1996
18
of $581.8 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
December 31, 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 of public debt securities which it currently intends to utilize
for aircraft financings in 1997.
Cash provided from operations was $456.4 million in 1995 as compared to $412.7
million in 1994. During 1995, additional funds of $321.7 million were generated
from the sale and leaseback of ten new 737-300 aircraft subject to long-term
operating leases (increasing total commitments for operating leases by $607.9
million). In addition, $98.8 million was generated from the March 1995 issuance
of $100 million in senior unsecured 8% Notes due 2005. These proceeds were
primarily used to finance aircraft-related capital expenditures and to provide
working capital.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP
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, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Southwest
Airlines Co. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
/s/ ERNST & YOUNG LLP
Dallas, Texas
January 23, 1997
20
SOUTHWEST AIRLINES CO.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
SEE ACCOMPANYING NOTES.
21
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
SEE ACCOMPANYING NOTES.
22
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
SEE ACCOMPANYING NOTES.
23
SOUTHWEST AIRLINES CO.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
SEE ACCOMPANYING NOTES.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Southwest Airlines Co. (Southwest) is a major domestic
airline that provides shorthaul, high frequency, point-to-point, low-fare
service. The consolidated financial statements include the accounts of
Southwest and its wholly owned subsidiaries (the Company). All significant
intercompany balances and transactions have been eliminated. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual
results could differ from these estimates. Certain prior year amounts have been
reclassified for comparison purposes.
CASH AND CASH EQUIVALENTS Cash equivalents consist of certificates of deposit
and investment grade commercial paper issued by major corporations and
financial institutions that are highly liquid and have original maturity dates
of three months or less. Cash and cash equivalents are carried at cost, which
approximates market value.
INVENTORIES Inventories of flight equipment expendable parts, materials, and
supplies are carried at average cost. These items are charged to expense when
issued for use.
PROPERTY AND EQUIPMENT Depreciation is provided by the straight-line method to
residual values over periods ranging from 12 to 20 years for flight equipment
and 3 to 30 years for ground property and equipment. Property under capital
leases and related obligations are recorded at an amount equal to the present
value of future minimum lease payments computed on the basis of the Company's
incremental borrowing rate or, when known, the interest rate implicit in the
lease. Amortization of property under capital leases is on a straight-line
basis over the lease term and is included in depreciation expense. In
accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of", the Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows to be generated by those assets are
less than the carrying amounts of those assets.
AIRCRAFT AND ENGINE MAINTENANCE The cost of engine overhauls and routine
maintenance costs for aircraft and engine maintenance
25
are charged to maintenance expense as incurred. Scheduled airframe overhaul
costs are capitalized and amortized over the estimated period benefited,
presently 8 years. Modifications that significantly enhance the operating
performance or extend the useful lives of aircraft or engines are capitalized
and amortized over the remaining life of the asset.
REVENUE RECOGNITION Passenger revenue is recognized when transportation is
provided. Tickets sold but not yet used are included in "Air traffic
liability", which includes estimates that are evaluated and adjusted
periodically. Any adjustments resulting therefrom are included in results of
operations for the periods in which the evaluations are completed.
FREQUENT FLYER AWARDS The Company accrues the estimated incremental cost of
providing free travel awards earned under its Rapid Rewards frequent flyer
program.
ADVERTISING The Company expenses the production costs of advertising as
incurred. Advertising expense for the years ended December 31, 1996, 1995, and
1994 was $109,136,000, $92,087,000, and $79,475,000, respectively.
STOCK-BASED EMPLOYEE COMPENSATION Pursuant to Statement of Financial Accounting
Standards No. 123 (SFAS 123) "Accounting for Stock-Based Compensation", the
Company accounts for stock-based compensation plans utilizing the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees" and related Interpretations because, as discussed in Note
7, the alternative fair value accounting provided for under SFAS 123 requires
use of option valuation models that were not developed for use in valuing
employee stock options.
2. COMMITMENTS
The Company's contractual purchase commitments consist primarily of scheduled
aircraft acquisitions. Timing of payments pursuant to contractual commitments
was affected favorably by third quarter 1995 amendments to certain aircraft
purchase contracts, which modified future progress payment schedules. Fifteen
737-300 and four 737-700 aircraft are scheduled for delivery in 1997. Sixteen
- - -700s are scheduled for delivery in 1998, 16 in 1999, 15 in 2000, and 12 in
2001. In addition, the Company has options to purchase up to sixty-seven -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 -700s delivered subsequent to 1999. Aggregate funding needed for these
commitments is approximately $1,960.1 million, subject to adjustments for
inflation, due as follows: $515.1 million in 1997,
26
$420.0 million in 1998, $502.2 million in 1999, $318.3 million in 2000, and
$204.5 million in 2001.
The Company has historically used jet fuel and heating oil fixed price swap
arrangements to hedge its exposure to price fluctuations on an insignificant
percent of its annual fuel requirements. As of December 31, 1996, the Company
had no open swap agreements, although the hedging program has not been
discontinued. As of December 31, 1995, the Company had a heating oil swap
agreement with a broker-dealer to exchange monthly payments on a notional
quantity of 1,050,000 gallons during May 1996. Under the swap agreement, the
Company paid or received the difference between the daily average heating oil
price and a fixed price of $.46 per gallon.
The Company's principal hedging program utilizes the purchase of crude oil call
options at a nominal premium and at volumes of up to 30 percent of its annual
fuel requirements.
Gains and losses on hedging transactions are recorded as adjustments to fuel
expense and have been insignificant. Any such future agreements expose the
Company to credit loss in the event of nonperformance by the other parties to
the agreements. The Company does not anticipate such nonperformance.
3. ACCRUED LIABILITIES
(in thousands)
27
4. LONG-TERM DEBT
(in thousands)
On March 7, 1995, the Company issued $100 million of senior unsecured 8% Notes
due March 1, 2005. Interest is payable semi-annually on March 1 and September
1. The Notes are not redeemable prior to maturity.
On September 9, 1992, the Company issued $100 million of senior unsecured
7 7/8% Notes due September 1, 2007. Interest is payable semi-annually on March 1
and September 1. The Notes are not redeemable prior to maturity.
During 1991, the Company issued $100 million of senior unsecured 9 1/4% Notes,
$100 million of senior unsecured 9.4% Notes, and $100 million of senior
unsecured 8 3/4% Notes due February 15, 1998, July 1, 2001, and October 15,
2003, respectively. Interest on the Notes is payable semi-annually. The Notes
are not redeemable prior to maturity.
The fair values, based on quoted market prices, of these Notes at December 31,
1996, were as follows (in thousands):
28
In addition to the credit facilities described above, Southwest has an
unsecured Bank Credit Agreement with a group of banks that permits Southwest to
borrow through December 14, 1999 on a revolving credit basis up to $460
million. Interest rates on borrowings under the Credit Agreement can be, at the
option of Southwest, the agent bank's prime rate, 0.275% over LIBOR, or 0.50%
over domestic certificate of deposit rates. The commitment fee is 0.125% per
annum. There were no outstanding borrowings under this agreement at December
31, 1996 or 1995.
29
5. LEASES
Total rental expense for operating leases charged to operations in 1996, 1995,
and 1994 was $280,389,000, $247,033,000, and $198,987,000, respectively. The
majority of the Company's terminal operations space, as well as 106 aircraft,
were under operating leases at December 31, 1996. The amounts applicable to
capital leases included in property and equipment were (in thousands):
1996 1995
- - -------------------------------------------------------------------------------
[S]
Flight equipment __________________ $226,677 $223,844
Less accumulated amortization _____ 111,815 101,641
---------------------------
$114,862 $122,203
===========================
Future minimum lease payments under capital leases and noncancelable operating
leases with initial or remaining terms in excess of one year at December 31,
1996 were (in thousands):
The aircraft leases can generally be renewed, at rates based on fair market
value at the end of the lease term, for one to five years. Most aircraft leases
have purchase options at or near the end of the lease term at fair market
value, but generally not to exceed a stated percentage of the lessor's defined
cost of the aircraft.
30
6. COMMON STOCK
At December 31, 1996, the Company had common stock reserved for issuance
pursuant to Employee stock benefit plans (35,257,962 shares) and upon exercise
of rights (180,370,052 shares) pursuant to the Common Stock Rights Agreement,
as amended (Agreement).
Effective July 18, 1996, the Company amended and restated the Agreement. The
principal purpose of the amendment and restatement was to extend the Agreement
by 10 years. Pursuant to the Agreement, each outstanding share of the Company's
common stock is accompanied by one common share purchase right (Right). Each
Right entitles its holder to purchase one share of common stock at an exercise
price of $16.67 and is exercisable only in the event of a proposed takeover, as
defined by the Agreement. The Company may redeem the Rights at $.0111 per Right
prior to the time that 15 percent of the common stock has been acquired by a
person or group. If the Company is acquired, as defined in the Agreement, each
Right will entitle its holder to purchase for $16.67 that number of the
acquiring company's or the Company's common shares, as provided in the
Agreement, having a market value of two times the exercise price of the Right.
The Rights will expire no later than July 30, 2006.
7. STOCK PLANS
At December 31, 1996, the Company had six stock-based compensation plans and
other stock options outstanding, which are described below. The Company applies
APB 25 and related Interpretations in accounting for its stock-based
compensation. Accordingly, no compensation cost is recognized for its fixed
option plans because the exercise prices of the Company's Employee stock options
equal the market prices of the underlying stock on the date of the grants.
Compensation cost charged against income for other options outstanding was
$649,778, $564,251, and $451,400 for 1996, 1995, and 1994, respectively.
The Company has five fixed option plans. Under the 1991 Incentive Stock Option
Plan, the Company may grant options to key Employees for up to 9,000,000 shares
of common stock. Under the 1991 Non-Qualified Stock Option Plan, the Company
may grant options to key Employees and non-employee directors for up to 750,000
shares of common stock. All options granted under these plans have ten-year
maximum terms and vest and become fully exercisable at the end of three, five,
or ten years of continued employment, depending upon the grant type.
Under the 1995 Southwest Airlines Pilots' Association Non-Qualified Stock
Option Plan (SWAPA Plan), the Company may grant
31
options to Pilots for up to 18,000,000 shares of common stock. An initial grant
of approximately 14,500,000 shares was made on January 12, 1995 at an option
price of $20.00 per share, which exceeded the market price of the Company's
stock on that date. Options granted under the initial grant vest in ten annual
increments of ten percent. On September 1 of each year of the agreement,
beginning September 1, 1996, additional options will be granted to Pilots that
become eligible during that year. Additional options granted on September 1,
1996 vest in eight annual increments of 12.5 percent. Options under both grants
must be exercised prior to January 31, 2007, or within a specified time upon
retirement or termination. In the event that the Southwest Airlines Pilots'
Association exercises its option to make the collective bargaining agreement
amendable on September 1, 1999, any unexercised options will be canceled on
December 1, 1999.
Under the 1996 Incentive Stock Option Plan, the Company may grant options to
key Employees for up to 6,000,000 shares of common stock. Under the 1996
Non-Qualified Stock Option Plan, the Company may grant options to key Employees
and non-employee directors for up to 575,000 shares of common stock. All
options granted under these plans have ten-year terms and vest and become fully
exercisable at the end of three, five, or ten years of continued employment,
depending upon the grant type.
Under all fixed option plans, except the SWAPA Plan, the exercise price of each
option equals the market price of the Company's stock on the date of grant.
Under the SWAPA Plan, for additional options granted each September 1, eligible
Pilots will be required to pay a purchase price equal to 105 percent of the fair
value of such stock on the date of the grant.
32
A summary of the status of the Company's five fixed option plans as of December
31, 1996, 1995, and 1994, and changes during the years ending on those dates is
presented below:
33
*Includes 1991 Incentive Stock Option Plan. No options have been
granted under the 1996 Incentive Stock Option Plan.
**Includes 1991 Non-Qualified Stock Option Plan and SWAPA Plan. No
options have been granted under the 1996 Non-Qualified Stock Option
Plan.
The following table summarizes information about fixed stock options
outstanding under the fixed option plans at December 31, 1996:
The Company has granted options to purchase the Company's common stock related
to employment contracts with the Company's president and chief executive
officer. These options have terms of ten years from the date of grant or ten
years from the date exercisable, depending upon the grant. The options vest and
become fully exercisable over three or four years. In 1996, the Company granted
144,395 options with an exercise price of $1.00 per share and 500,000 options
with an exercise price of $23.50 per share related to the 1996 employment
agreement. None of the 1996 options granted were exercised in 1996, however,
128,879 were exercisable as of December 31, 1996. At December 31, 1996, 1995,
and 1994, 1,897,898, 1,422,253, and 1,489,753 total options were outstanding.
Exercise prices range from $1.00 to $23.50 per share. Options for 168,750,
67,500, and 15,000 shares were exercised in 1996, 1995, and 1994, respectively.
Under the 1991 Employee Stock Purchase Plan (ESPP), the Company is authorized
to issue up to a balance of 1,183,236 shares of common stock to Employees of
the Company at a price equal to 90 percent of the market value at the end of
each purchase period. Common stock purchases are paid for through periodic
payroll deductions. Participants under the plan received 309,446 shares in
1996, 388,339 shares in 1995, and 290,054 shares in 1994 at average prices of
$23.05, $19.18, and $24.98, respectively.
34
Pro forma information regarding net income and net income per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock-based compensation plans and other stock options under the fair
value method of that SFAS. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants under the fixed option
plans in 1996 and 1995, respectively: dividend yield of .16% and .21%; expected
volatility of 35.4% and 36.9%; risk-free interest rate of 5.9% and 7.8%; and
expected lives of 5.0 years for both periods. Assumptions for the stock options
granted in 1996 to the Company's president and chief executive officer were the
same as for the fixed option plans except for the weighted average expected
lives of 8.0 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's Employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its Employee stock options.
For purposes of pro forma disclosures the estimated fair value of stock-based
compensation plans and other options is amortized to expense primarily over the
vesting period. The Company's pro forma net income and net income per share is
as follows (in thousands except per share amounts):
The effects of applying SFAS 123 for providing pro forma disclosures during the
initial phase-in period may not be representative of the effects on reported
net income for future years.
The weighted-average fair value of options granted under the five fixed option
plans during 1996 and 1995 was $10.17 and $8.42, respectively, for the
incentive plans, $9.24 and $7.97, respectively, for the SWAPA Plan, and $10.17
and $8.42,
35
respectively, for other non-qualified plans. The weighted average fair value of
options granted in 1996 to the Company's president and chief executive officer
(no options were granted in 1995) was $13.98. The weighted-average fair value
of each purchase right under the ESPP granted in 1996 and 1995, which is equal
to the ten percent discount from the market value of the common stock at the
end of each purchase period, was $2.56 and $2.15, respectively.
36
8. EMPLOYEE PROFITSHARING AND SAVINGS PLANS
Substantially all of Southwest's Employees are members of the Southwest
Airlines Co. Profitsharing Plan (the Plan). Total profitsharing expense charged
to operations in 1996, 1995, and 1994, was $59,927,000, $54,033,000, and
$52,782,000, respectively.
The Company sponsors Employee savings plans under Section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time Employees.
The amount of matching contributions varies by Employee group. Company
contributions generally vest over five years with credit for prior years'
service granted. Company matching contributions expensed in 1996, 1995 and
1994 were $35,125,000, $28,954,000, and $19,817,000, respectively.
9. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of
deferred tax assets and liabilities at December 31, 1996 and 1995 are as
follows (in thousands):
37
The provision for income taxes is comprised of the following (in thousands):
Southwest 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 proposed with which it does not agree. The industry's difference
with the IRS involves complex issues of law and fact that 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.
The effective tax rate on income before income taxes differed from the federal
income tax statutory rate for the following reasons (in thousands):
1996 1995 1994
- - -------------------------------------------------------------------------------
Tax at statutory
U.S. tax rates ___ $119,477 $106,799 $104,833
Nondeductible items 5,168 4,488 3,689
State income taxes,
net of federal
benefit __________ 9,072 8,784 9,177
Other, net _________ 308 2,443 2,493
________ ________ ________
Total income tax $134,025 $122,514 $120,192
provision __________ ======== ======== ========
38
10. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is computed based on the
weighted-average number of common and common equivalent shares outstanding
(151,793,477 in 1996, 148,850,512 in 1995 and 147,305,374 in 1994). Fully
diluted earnings per share have not been presented as the fully dilutive effect
of shares issuable upon the exercise of options under the Company's Stock
Option Plans is not material.
39
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None to be reported.
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See "Election of Directors" incorporated herein by reference, from pages
1-4 of the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 15, 1997. See "Executive Officers of the
Registrant" in Part I following Item 4 for information relating to executive
officers.
ITEM 11. EXECUTIVE COMPENSATION
See "Compensation of Executive Officers," incorporated herein by
reference, from pages 6-9 of the definitive Proxy Statement for Southwest's
Annual Meeting of Shareholders to be held May 15, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See "Voting Securities and Principal Shareholders," incorporated herein
by reference, from pages 4-5 of the definitive Proxy Statement for Southwest's
Annual Meeting of Shareholders to be held May 15, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Election of Directors" incorporated herein by reference, from pages
1-4 of the definitive Proxy Statement for Southwest's Annual Meeting of
Shareholders to be held May 15, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The financial statements included in Item 8 above are filed as part of
this annual report.
2. Financial Statement Schedules:
There are no financial statement schedules filed as part of 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 Articles of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Registration
Statement on Form S-3 (File No. 33-52155)); Amendment to
Restated Article of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996 (File No.
1-7259).
41
3.2 Bylaws of Southwest, as amended through February 1994
(incorporated by reference to Exhibit 3.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-7259)).
4.1 Credit Agreement dated December 15, 1990, between Southwest
and Texas Commerce Bank - Dallas, N.A., as agent for itself
and four other banks named therein, and such banks
(incorporated by reference to Exhibit 4.1 on Southwest's
Current Report on Form 8-K dated February 14, 1991 (File No.
1-7259)); First Amendment to Credit Agreement, dated April 4,
1991 and Second Amendment to Credit Agreement, dated December
14, 1991 (incorporated by reference to Exhibit 4.1 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 1-7259)); Third Amendment to
Credit Agreement, dated December 14, 1992 (incorporated by
reference in Exhibit 4.1 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1992 (File No. 1-7259));
Fourth Amendment to Credit Agreement, dated December 14, 1993
(incorporated by reference to Exhibit 4.1 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 1-7259)); Fifth and Sixth Amendments to Credit
Agreement, dated March 10, 1995 and May 18, 1995,
respectively (incorporated by reference to Exhibit 4.1 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1995 (File No. 1-7259).
4.2 Specimen certificate representing Common Stock of Southwest
(incorporated by reference to Exhibit 4.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 1-7259)).
4.3 Indenture dated as of December 1, 1985 between Southwest and
MBank Dallas, N.A., Trustee, relating to an unlimited amount
of Debt Securities (incorporated by reference to Exhibit 4.1
of Southwest's Current Report on Form 8-K dated February 26,
1986 (File No. 1-7259)) and First Supplemental Indenture dated
as of January 21, 1988, substituting MTrust Corp, National
Association, as Trustee, thereunder (incorporated by reference
to Exhibit 4.3 on Southwest's Annual Report on Form 10-K for
the year ended December 31, 1987 (File 1-7259)).
4.4 Amended and Restated Rights Agreement dated July 18, 1996
between Southwest and Continental Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to
Exhibit 1, Southwest's Registration Statement on Form 8-A/A
dated August 12, 1996 (File No. 1-7259)).
4.5 Indenture dated as of June 20, 1991 between Southwest Airlines
Co. and Bank of New York, successor to NationsBank of Texas,
N.A. (formerly NCNB Texas National Bank), Trustee
(incorporated by reference to Exhibit 4.1 to Southwest's
Current Report on Form 8-K dated June 24, 1991 (File No.
1-7259)).
4.6 Form of 9.4 percent Note due 2001 (incorporated by reference
to Exhibit 4.2 to Southwest's Current Report on Form 8-K dated
June 24, 1991 (File No. 1-7259)).
4.7 Form of 8-3/4 percent Note due 2003 (incorporated by reference
to Exhibit 4.2 to Southwest's Current Report on Form 8-K dated
October 4, 1991 (File No. 1-7259)).
4.9 Form of 9-1/4 percent Note due 1998 (incorporated by
reference to Exhibit 4.9 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1991 (File No.
1-7259)).
42
4.10 Form of 7-7/8 percent Note due 2007 (incorporated by
reference to Exhibit 4.10 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1992 (File No.
1-7259)).
4.11 Form of Global Security representing all 8% Notes due 2005
(incorporated by reference to Exhibit 4 to Southwest's
Current Report on Form 8-K dated March 6, 1995 (File No. 1-
7259)).
4.12 Indenture dated as of February 25, 1997 between the Company
and U.S. Trust Company of Texas, N.A.
4.13 Form of Global Security representing all 7 3/8% Debentures due
2027 (incorporated by reference to Exhibit 4.1 to Southwest's
Current Report on Form 8-K dated February 25, 1997 (File No.
1-7259)).
10.1 General Terms Agreement between CFM International, Inc. and
Southwest (with all amendments through March 29, 1990) dated
May 28, 1981 (incorporated by reference to Exhibit 10.2 on
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1989 (File No. 1-7259)); Amendments from
November 6, 1989 through March 29, 1993 (incorporated by
reference to Exhibit 10.2 on Southwest's Annual Report on
Form 10-K for the year ended December 31, 1992 (File No.
1-7259)); Amendments from March 29, 1993 through March 29,
1994 (incorporated by reference to Exhibit 10.2 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1993 (File No. 1-7259)); Amendment No. 7 and
Letter Agreement No. 11, each dated as of January 19, 1994
(incorporated by reference to Exhibit 10.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-7259)).
10.2 Purchase Agreement No. 1405, dated July 23, 1987 between The
Boeing Company and Southwest (with all amendments through
March 29, 1990) (incorporated by reference to Exhibit 10.3 on
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1989 (File No. 1-7259)); Amendments from April
1, 1990 through March 29, 1993 (incorporated by reference to
Exhibit 10.3 on Southwest's Annual Report on Form 10-K for
the year ended December 31, 1992 (File No. 1-7259));
Amendments from March 29, 1993 through March 29, 1994
(incorporated by reference to Exhibit 10.3 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-7259)); Amendments from March 30, 1994
through March 29, 1995 (incorporated by reference to Exhibit
10.2 to Southwest's Annual Report on Form 10-K for the year
ended December 31, 1993 (File No. 1-7259)); Amendments from
March 30, 1995 through March 29, 1996(incorporated by
reference to Exhibit 10.2 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1995 (File No.
1-7529)).
*10.3 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 on Form 10-K for the
year ended December 31, 1993 (File No. 1-7259)); Supplemental
Agreement No. 1.
The following exhibits filed under paragraph 10 of Item 601
are the Company's compensation plans and arrangements.
10.4 Form of Executive Employment Agreement between Southwest and
certain key employees pursuant to Executive Service
Recognition Plan (incorporated by reference to Exhibit 28 to
Southwest Quarterly Report on Form 10-Q for the quarter ended
June 30, 1987 (File No. 1- 7259)).
43
10.5 1992 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.8 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 1-7259)).
10.6 1987 stock option agreement between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.11 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1987 (File No. 1-7259)).
10.7 1996 employment contract between Southwest and Herbert D.
Kelleher and related stock option agreements (incorporated by
reference to Exhibit 10.8 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1996 (File No.
1-7259)).
10.8 1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
33-40652)).
10.9 1991 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 33-40652)).
10.10 1991 Employee Stock Purchase Plan as amended May 20, 1992
(incorporated by reference to Exhibit 10.13 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 1-7259)).
10.11 Southwest Airlines Co. Profit Sharing Plan (incorporated by
reference to Exhibit 10.13 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1991 (File No.
1-7259)).
10.12 Southwest Airlines Co. 401(k) Plan (incorporated by reference
to Exhibit 10.14 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 1-7259)).
10.13 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.14 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1994 (File No. 1-7259)).
10.14 1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-20275)).
10.15 1996 Non-Qualified Stock Option Plan (incorporated by
reference to Exhibit 4.2 to Registration Statement on Form S-8
(File No. 333-20275)).
11 Computation of earnings per share.
22 Subsidiaries of Southwest.
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
- - -------------------------
* Pursuant to 17 CFR 240.24b-2, confidential information has been
omitted and has been filed separately with the Securities and Exchange
Commission.
44
Southwest will furnish to the Commission supplementally upon request a
copy of each other instrument with respect to the long-term debt of the
Company.
A copy of each exhibit may be obtained at a price of 15 cents per
page, $10.00 minimum order, by writing to: Director of Investor Relations,
Southwest Airlines Co., P.O. Box 36611, Dallas, Texas 75235- 1611.
(b) There were no Form 8-K's filed during the fourth quarter of 1996.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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.
March 21, 1997
By /s/ Gary C. Kelly
-------------------------
Gary C. Kelly
Vice President-Finance,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 21, 1997 on
behalf of the registrant and in the capacities indicated.
Signature Capacity
--------- --------
/s/ Herbert D. Kelleher Chairman of the Board of Directors,
- - ---------------------------- President and Chief Executive Officer
Herbert D. Kelleher
/s/ Gary C. Kelly Vice President-Finance
- - ---------------------------- (Chief Financial and Accounting Officer)
Gary C. Kelly
/s/ Samuel E. Barshop Director
- - ----------------------------
Samuel E. Barshop
/s/ Gene H. Bishop Director
- - ----------------------------
Gene H. Bishop
/s/ C. Webb Crockett Director
- - ----------------------------
C. Webb Crockett
/s/ William P. Hobby, Jr. Director
- - ----------------------------
William P. Hobby, Jr.
/s/ Travis C. Johnson Director
- - ----------------------------
Travis C. Johnson
/s/ R.W. King Director
- - ----------------------------
R. W. King
/s/ Walter M. Mischer, Sr. Director
- - ----------------------------
Walter M. Mischer, Sr.
/s/ June M. Morris Director
- - ----------------------------
June M. Morris
E-1
INDEX TO EXHIBITS
3.1 Restated Articles of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Registration
Statement on Form S-3 (File No. 33-52155)); Amendment to
Restated Article of Incorporation of Southwest (incorporated
by reference to Exhibit 4.1 to Southwest's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996 (File No.
1-7259).
3.2 Bylaws of Southwest, as amended through February 1994
(incorporated by reference to Exhibit 3.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-7259)).
4.1 Credit Agreement dated December 15, 1990, between Southwest
and Texas Commerce Bank - Dallas, N.A., as agent for itself
and four other banks named therein, and such banks
(incorporated by reference to Exhibit 4.1 on Southwest's
Current Report on Form 8-K dated February 14, 1991 (File No.
1-7259)); First Amendment to Credit Agreement, dated April 4,
1991 and Second Amendment to Credit Agreement, dated December
14, 1991 (incorporated by reference to Exhibit 4.1 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 1-7259)); Third Amendment to
Credit Agreement, dated December 14, 1992 (incorporated by
reference in Exhibit 4.1 to Southwest's Annual Report on Form
10-K for the year ended December 31, 1992 (File No. 1-7259));
Fourth Amendment to Credit Agreement, dated December 14, 1993
(incorporated by reference to Exhibit 4.1 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 1-7259)); Fifth and Sixth Amendments to Credit
Agreement, dated March 10, 1995 and May 18, 1995,
respectively (incorporated by reference to Exhibit 4.1 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1995 (File No. 1-7259).
4.2 Specimen certificate representing Common Stock of Southwest
(incorporated by reference to Exhibit 4.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1994 (File No. 1-7259)).
4.3 Indenture dated as of December 1, 1985 between Southwest
and MBank Dallas, N.A., Trustee, relating to an unlimited
amount of Debt Securities (incorporated by reference to
Exhibit 4.1 of Southwest's Current Report on Form 8-K dated
February 26, 1986 (File No. 1-7259)) and First Supplemental
Indenture dated as of January 21, 1988, substituting MTrust
Corp, National Association, as Trustee, thereunder
(incorporated by reference to Exhibit 4.3 on Southwest's
Annual Report on Form 10-K for the year ended December 31,
1987 (File 1-7259)).
4.4 Amended and Restated Rights Agreement dated July 18, 1996
between Southwest and Continental Stock Transfer & Trust
Company, as Rights Agent (incorporated by reference to
Exhibit 1, Southwest's Registration Statement on Form 8-A/A
dated August 12, 1996 (File No. 1-7259)).
4.5 Indenture dated as of June 20, 1991 between Southwest
Airlines Co. and Bank of New York, successor to NationsBank
of Texas, N.A. (formerly NCNB Texas National Bank), Trustee
(incorporated by reference to Exhibit 4.1 to Southwest's
Current Report on Form 8-K dated June 24, 1991 (File No.
1-7259)).
E-1
4.6 Form of 9.4 percent Note due 2001 (incorporated by
reference to Exhibit 4.2 to Southwest's Current Report on
Form 8-K dated June 24, 1991 (File No. 1-7259)).
4.7 Form of 8-3/4 percent Note due 2003 (incorporated by
reference to Exhibit 4.2 to Southwest's Current Report on
Form 8-K dated October 4, 1991 (File No. 1-7259)).
4.9 Form of 9-1/4 percent Note due 1998 (incorporated by
reference to Exhibit 4.9 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1991 (File No.
1-7259)).
4.10 Form of 7-7/8 percent Note due 2007 (incorporated by
reference to Exhibit 4.10 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1992 (File No.
1-7259)).
4.11 Form of Global Security representing all 8% Notes due 2005
(incorporated by reference to Exhibit 4 to Southwest's
Current Report on Form 8-K dated March 6, 1995 (File No. 1-
7259)).
4.12 Indenture dated as of February 25, 1997 between the Company
and U.S. Trust Company of Texas, N.A.
4.13 Form of Global Security representing all 7 3/8% Debentures
due 2027 (incorporated by A reference to Exhibit 4.1 to
Southwest's Current Report on Form 8-K dated February 25,
1997 (File No. 1-7259)).
10.1 General Terms Agreement between CFM International, Inc. and
Southwest (with all amendments through March 29, 1990)
dated May 28, 1981 (incorporated by reference to Exhibit
10.2 on Southwest's Annual Report on Form 10-K for the year
ended December 31, 1989 (File No. 1-7259)); Amendments from
November 6, 1989 through March 29, 1993 (incorporated by
reference to Exhibit 10.2 on Southwest's Annual Report on
Form 10-K for the year ended December 31, 1992 (File No.
1-7259)); Amendments from March 29, 1993 through March 29,
1994 (incorporated by reference to Exhibit 10.2 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1993 (File No. 1-7259)); Amendment No. 7 and
Letter Agreement No. 11, each dated as of January 19, 1994
(incorporated by reference to Exhibit 10.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-7259)).
10.2 Purchase Agreement No. 1405, dated July 23, 1987 between
The Boeing Company and Southwest (with all amendments
through March 29, 1990) (incorporated by reference to
Exhibit 10.3 on Southwest's Annual Report on Form 10-K for
the year ended December 31, 1989 (File No. 1-7259));
Amendments from April 1, 1990 through March 29, 1993
(incorporated by reference to Exhibit 10.3 on Southwest's
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 1-7259)); Amendments from March 29, 1993
through March 29, 1994 (incorporated by reference to
Exhibit 10.3 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1993 (File No. 1-7259));
Amendments from March 30, 1994 through March 29, 1995
(incorporated by reference to Exhibit 10.2 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1993 (File No. 1-7259)); Amendments from March 30, 1995
through March 29, 1996(incorporated by reference to Exhibit
10.2 to Southwest's Annual Report on Form 10-K for the year
ended December 31, 1995 (File No. 1-7529)).
*10.3 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 on
Form
E-2
10-K for the year ended December 31, 1993 (File No. 1-7259));
Supplemental Agreement No. 1.
The following exhibits filed under paragraph 10 of Item 601 are
the Company's compensation plans and arrangements.
10.4 Form of Executive Employment Agreement between Southwest and
certain key employees pursuant to Executive Service
Recognition Plan (incorporated by reference to Exhibit 28 to
Southwest Quarterly Report on Form 10-Q for the quarter ended
June 30, 1987 (File No. 1- 7259)).
10.5 1992 stock option agreements between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.8 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 1-7259)).
10.6 1987 stock option agreement between Southwest and Herbert D.
Kelleher (incorporated by reference to Exhibit 10.11 to
Southwest's Annual Report on Form 10-K for the year ended
December 31, 1987 (File No. 1-7259)).
10.7 1996 employment contract between Southwest and Herbert D.
Kelleher and related stock option agreements (incorporated by
reference to Exhibit 10.8 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1996 (File No.
1-7259)).
10.8 1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
33-40652)).
10.9 1991 Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 4.2 to Registration Statement on Form S-8 (File No.
33-40652)).
10.10 1991 Employee Stock Purchase Plan as amended May 20, 1992
(incorporated by reference to Exhibit 10.13 to Southwest's
Annual Report on Form 10-K for the year ended December 31,
1992 (File No. 1-7259)).
10.11 Southwest Airlines Co. Profit Sharing Plan (incorporated by
reference to Exhibit 10.13 to Southwest's Annual Report on
Form 10-K for the year ended December 31, 1991 (File No.
1-7259)).
10.12 Southwest Airlines Co. 401(k) Plan (incorporated by reference
to Exhibit 10.14 to Southwest's Annual Report on Form 10-K for
the year ended December 31, 1991 (File No. 1-7259)).
10.13 Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.14 to Southwest's
Annual Report on Form 10-K for the year ended December 31, 1994
(File No. 1-7259)).
10.14 1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (File No.
333-20275)).
10.15 1996 Non-Qualified Stock Option Plan (incorporated by reference
to Exhibit 4.2 to Registration Statement on Form S-8 (File No.
333-20275)).
11 Computation of earnings per share.
22 Subsidiaries of Southwest.
E-3
23 Consent of Ernst & Young LLP, Independent Auditors.
27 Financial Data Schedule.
- - -------------------------
* Pursuant to 17 CFR 240.24b-2, confidential information has been omitted
and has been filed separately with the Securities and Exchange Commission.
E-4