SECURITIES AND EXCHANGE COMMISSION
Form 10-K
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þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
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For the fiscal year ended December 31, 2004 | |||
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or | |||
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
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For the transition period from to |
Commission File No. 1-7259
Southwest Airlines Co.
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) |
Registrants telephone number, including area code:
(214) 792-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock ($1.00 par value) | 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 þ No o
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 registrants 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. þ
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o
The aggregate market value of the Common Stock held by non-affiliates of the registrant was approximately $13,162,000,000, computed by reference to the closing sale price of the stock on the New York Stock Exchange on June 30, 2004, the last trading day of the registrants most recently completed second fiscal quarter.
Number of shares of Common Stock outstanding as of the close of business on January 31, 2005: 783,771,923 shares
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of
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Shareholders, May 18, 2005:
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PART III |
PART I
Item 1. Business
Description of Business
Southwest Airlines Co. (Southwest or the Company) is a major domestic airline that provides point-to-point, low-fare service. Historically, routes served by Southwest had been predominantly short-haul, with high frequencies. In recent years, the Company has complemented this service with more medium to long-haul routes, including transcontinental service. Southwest was incorporated in Texas in 1967 and commenced Customer Service on June 18, 1971, with three Boeing 737 aircraft serving three Texas cities Dallas, Houston, and San Antonio.
At year-end 2004, Southwest operated 417 Boeing 737 aircraft and provided service to 60 airports in 59 cities in 31 states throughout the United States. Southwest Airlines topped the monthly domestic passenger traffic rankings published by the Department of Transportation (DOT) for the first time in May 2003. Based on monthly data for October 2004 (the latest available data), Southwest Airlines is the largest carrier in the United States based on originating domestic passengers boarded and scheduled domestic departures. The Company began service to Philadelphia in May 2004, and recently announced it will begin service to Pittsburgh in May 2005.
One of Southwests primary competitive strengths is its low operating costs. Southwest has the lowest costs, adjusted for stage length, on a per mile basis, of all the major airlines. Among the factors that contribute to its low cost structure are a single aircraft type, an efficient, high-utilization, point-to-point route structure, and hardworking, innovative, and highly productive Employees.
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) and fourth quarter (October 1 - December 31) of most years.
Southwests filings with the Securities and Exchange Commission (SEC), including its annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to
those reports, are accessible free of charge at www.southwest.com.
Fuel
The cost of fuel is an item that has significant impact on the Companys operating results.
The Companys average cost of jet fuel, net of hedging gains, over the past five years was as
follows:
Cost
Average Cost
Percent of
Year
(Millions)
Per
Gallon
Operating
Expenses
$
804
$
.79
17.4
%
$
771
$
.71
15.6
%
$
762
$
.68
14.9
%
$
830
$
.72
15.2
%
$
1,000
$
.83
16.7
%
From October 1, 2004, through December 31, 2004, the average cost per gallon was $.89. See Managements Discussion and Analysis of Financial Condition and Results of Operations for a discussion of Southwests fuel hedging activities.
1
Regulation
Economic. The Dallas Love Field section of the International Air Transportation Competition Act of 1979, as amended in 1997 (commonly known as the Wright Amendment), as it affects Southwests 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 Alabama, Arkansas, Kansas, Louisiana, Mississippi, 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 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. The Wright Amendment does not restrict flights operated with aircraft having 56 or fewer passenger seats. The Wright Amendment does not restrict Southwests intrastate Texas flights or its air service from points other than Love Field .
The Department of Transportation (DOT) has significant regulatory jurisdiction over passenger airlines. Unless exempted, no air carrier may furnish air transportation over any route without a DOT certificate of public convenience and necessity, which does not confer either exclusive or proprietary rights. The Companys 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 Wright Amendment, 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 certain provisions of the U.S. Transportation Code, or any order or regulation issued thereunder or any term of such certificate; provided that, with respect to revocation, the certificate holder has first been advised of the alleged violation and fails to comply after being given a reasonable time to do so.
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.
Safety. The Company and its third-party maintenance providers are subject to the jurisdiction of the Federal Aviation Administration (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.
The Company is subject to various other federal, state, and local laws and regulations relating to occupational safety and health, including Occupational Safety and Health Administration (OSHA) and Food and Drug Administration (FDA) regulations.
Security. The Aviation and Transportation Security Act (Security Act) generally provides for enhanced aviation security measures. The Security Act established a new Transportation Security Administration (TSA), which is part of the Department of Homeland Security. The TSA assumed the aviation security functions previously residing in the FAA and assumed passenger screening contracts at U.S. airports in February 2002. The TSA provides for the screening of all passengers and property, which is performed by federal employees. Beginning February 1, 2002, a $2.50 per enplanement security fee is imposed on passengers (maximum of $5.00 per one-way trip). This fee was suspended by Congress from June 1 through September 30, 2003. Pursuant to authority granted to the TSA to impose additional fees on air carriers if necessary to cover additional federal aviation security costs, the TSA has imposed an annual
2
Security Infrastructure Fee, which approximated $18 million for Southwest in 2003 and $26 million in 2004. This fee was also suspended by Congress from June 1 through September 30, 2003. Like the FAA, the TSA may impose and collect fines for violations of its regulations.
Enhanced security measures have had, and will continue to have, a significant impact on the airport experience for passengers. While these security requirements have not impacted aircraft utilization, they have impacted our business. The Company has invested significantly in facilities, equipment, and technology to process Customers efficiently and restore the airport experience. The Company has implemented its Automated Boarding Passes and RAPID CHECK-IN self service kiosks in all airports it serves to reduce the number of lines in which a Customer must wait. During 2003 and 2004, the Company also installed gate readers at all of its airports to improve the boarding reconciliation process. In 2004, Southwest introduced baggage checkin through RAPID CHECK-IN kiosks at certain airport locations and also introduced Internet checkin and transfer boarding passes at the time of checkin.
Environmental. Certain airports, including San Diego 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 may consider adopting similar noise regulations, but such regulations are subject to the provisions of the Airport Noise and Capacity Act of 1990 and regulations promulgated thereunder.
Operations at John Wayne Airport, Orange County, California, are governed by the Airports 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 or disposal of materials such as chemicals, hazardous waste, and aircraft deicing fluid. Regulatory developments pertaining to such things as control of engine exhaust emissions from ground support equipment and prevention of leaks from underground aircraft fueling systems could increase operating costs in the airline industry. The Company does not believe, however, that such environmental regulatory developments will have a material impact on the Companys capital expenditures or otherwise adversely effect its operations, operating costs, or competitive position. Additionally, in conjunction with airport authorities, other airlines, and state and local environmental regulatory agencies, the Company is undertaking voluntary investigation or remediation of soil or groundwater contamination at several airport sites. The Company does not believe that any environmental liability associated with such sites will have a material adverse effect on the Companys operations, costs, or profitability.
Customer Service Commitment. From time to time, the airline transportation industry has been faced with possible legislation dealing with certain Customer service practices. As a compromise with Congress, the industry, working with the Air Transport Association, has responded by adopting and filing with the DOT written plans disclosing how it would commit to improving performance. Southwest Airlines formalized its dedication to Customer Satisfaction by adopting its Customer Service Commitment, a comprehensive plan which embodies the Mission Statement of Southwest Airlines: dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. The Customer Service Commitment can be reviewed by clicking on About SWA at www.southwest.com. The DOT and Congress are expected to monitor the effects of the industrys plans, and there can be no assurance that legislation or regulations will not be proposed in the future to regulate airline Customer service practices.
3
Marketing and Competition
Southwest focuses principally on point-to-point, rather than hub-and-spoke, service in markets with frequent, conveniently timed flights and low fares. At year-end, Southwest served 359 nonstop city pairs. Southwests average aircraft trip stage length in 2004 was 576 miles with an average duration of approximately 1.5 hours. Examples of markets offering frequent daily flights are: Dallas to Houston Hobby, 29 weekday roundtrips; Phoenix to Las Vegas, 19 weekday roundtrips; and Los Angeles International to Oakland, 22 weekday roundtrips. Southwest complements these high-frequency shorthaul routes with longhaul nonstop service between markets such as Baltimore and Los Angeles, Phoenix and Tampa Bay, Las Vegas and Nashville, and Houston and Oakland.
Southwests point-to-point route system, as compared to hub-and-spoke, provides for more direct nonstop routings for Customers and, therefore, minimizes connections, delays, and total trip time. Southwest focuses on nonstop, not connecting, traffic. As a result, approximately 78 percent of the Companys Customers fly nonstop. In addition, Southwest serves many conveniently located secondary or downtown airports such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore-Washington International, Burbank, Manchester, Oakland, San Jose, Providence, Ft. Lauderdale/Hollywood, and Long Island Islip airports, which are typically less congested than other airlines hub airports and enhance the Companys 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 are at the gate, currently approximately 25 minutes, thereby reducing the number of aircraft and gate facilities than would otherwise be required. The Company operates only one aircraft type, the Boeing 737, which simplifies scheduling, maintenance, flight operations, and training activities.
In first quarter 2005, Southwest began its first codeshare arrangement, with ATA Airlines. Under this codeshare arrangement, Southwest and ATA will exchange Customers at Chicago Midway Airport, initially, with a limited number of other connect points to be subsequently added as our respective ground facilities permit. Under this codeshare arrangement, Southwest may market and sell tickets for certain flights on ATA that are identified by Southwests designator code, e.g., WN Flight 123. Conversely, ATA may market and sell tickets under its code designator (TZ) for certain flights on Southwest Airlines. All codeshare itineraries marketed by either airline will involve connecting service between a Southwest flight and a flight operated by ATA. Any flight bearing a Southwest code designator that is operated by ATA will be disclosed in Southwests reservations systems and on the Customers flight itinerary, boarding pass, and ticket, if a paper ticket is issued. Other than the ATA agreement, Southwest does not interline or offer joint fares with other airlines, nor does Southwest have any commuter feeder relationships.
Southwest employs a relatively simple fare structure, featuring low, unrestricted, unlimited, everyday coach fares, as well as even lower fares available on a restricted basis. The Companys highest non-codeshare, oneway unrestricted walkup fare offered is $299 for any flight. Even lower walkup fares are available on Southwests short and medium haul flights.
Southwest was the first major airline to introduce a Ticketless travel option, eliminating the need to print and then process a paper ticket altogether, and the first to offer Ticketless travel through the Companys home page on the Internet, www.southwest.com. For the year ended December 31, 2004, more than 90 percent of Southwests Customers chose the Ticketless travel option and approximately 59 percent of Southwests passenger revenues came through its Internet site, which has become a vital part of the Companys distribution strategy. The Company has not paid commissions to travel agents for sales since December 15, 2003.
4
The airline industry is highly competitive as to fares, frequent flyer benefits, routes, and service, and some carriers competing with the Company have larger fleets and wider name recognition. Certain major United States airlines have established marketing or codesharing alliances with each other, including Northwest Airlines/Continental Airlines/Delta Air Lines; American Airlines/Alaska Airlines; and United Airlines/US Airways.
Since the terrorist attacks on September 11, 2001, the airline industry, as a whole, has incurred substantial losses. As a result, a number of carriers, including UAL, the parent of United Airlines, US Airways, and ATA Airlines, Inc. sought relief from financial obligations in bankruptcy. Other, smaller carriers have ceased operation entirely. America West Airlines, US Airways, Aloha, ATA, and others received federal loan guarantees authorized by federal law. Since September 11, low cost carriers such as AirTran have accelerated their growth and legacy carriers have added back some of the capacity they reduced immediately following September 11. Faced with increasing low fare and lower cost competition, growing customer demand for lower fares, and record high energy costs, legacy carriers have aggressively sought to reduce their cost structures, largely through downsized work forces and renegotiated collective bargaining and vendor agreements. Southwest has maintained its low cost competitive advantage and continues to reduce its cost structure through increased productivity.
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 that compete with surface transportation, price is a competitive factor, but frequency and convenience of scheduling, facilities, transportation safety and security procedures, and Customer Service are also of great importance to many passengers.
Insurance
The Company carries insurance of types customary in the airline industry and at amounts deemed adequate to protect the Company and its property and to comply both with federal regulations and certain of the Companys 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.
Following the terrorist attacks, commercial aviation insurers significantly increased the premiums and reduced the amount of war-risk coverage available to commercial carriers. The federal government stepped in to provide supplemental third-party war-risk insurance coverage to commercial carriers for renewable 60-day periods, at substantially lower premiums than prevailing commercial rates and for levels of coverage not available in the commercial market. In November 2002, Congress passed the Homeland Security Act of 2002, which mandated the federal government to provide third party, passenger, and hull war-risk insurance coverage to commercial carriers through August 31, 2003, and which permitted such coverage to be extended by the government through December 31, 2003. The Emergency Wartime Supplemental Appropriations Act (see Note 3 to the Consolidated Financial Statements) extended the governments mandate to provide war-risk insurance until December 31, 2004. Pursuant to the Consolidated Appropriations Act of 2005, Congress further extended the governments mandate to provide war-risk insurance until August 31, 2005, at the discretion of the Secretary of Transportation. The Company is unable to predict whether the government will extend this insurance coverage past August 31, 2005, whether alternative commercial insurance with comparable coverage will become available at reasonable premiums, and what impact this will have on the Companys ongoing operations or future financial performance.
5
Frequent Flyer Awards
Southwests frequent flyer program, Rapid Rewards, is based on trips flown rather than mileage. Rapid Rewards Customers earn a credit for each one-way trip flown or two credits for each roundtrip flown. Rapid Rewards Customers can also receive credits by using the services of non-airline partners, which include car rental agencies, hotels, telecommunications companies and credit card partners, including the Southwest Airlines Chase (formerly Bank One) Visa card. Rapid Rewards offers two types of travel awards. The Rapid Rewards Award Ticket (Award Ticket) offers one free roundtrip award valid to any destination available on Southwest after the accumulation of 16 credits within a consecutive twelve-month period. The Rapid Rewards Companion Pass (Companion Pass) is granted for flying 50 roundtrips (or 100 one-way trips) on Southwest or earning 100 credits within a consecutive twelve-month period. The Companion Pass offers unlimited free roundtrip travel to any destination available on Southwest for a designated companion of the qualifying Rapid Rewards member. In order for the designated companion to use this pass, the Rapid Rewards member must purchase a ticket or use an Award Ticket. Additionally, the Rapid Rewards member and designated companion must travel together on the same flight.
Trips flown are valid for credits toward Award Tickets and Companion Passes for twelve months only; Award Tickets and Companion Passes are automatically generated when earned by the Customer rather than allowing the Customer to bank credits indefinitely; and Award Tickets and Companion Passes are valid for one year with an automatic expiration date. Black out dates apply during peak holiday periods. Unlike most of its competitors, the Company does not limit the number of seats available to holders of Award Tickets and Companion Passes.
The Company also sells credits to business partners including credit card companies, hotels, telecommunications companies and car rental agencies. These credits may be redeemed for Award Tickets having the same program characteristics as those earned by flying.
Customers redeemed approximately 2.5 million, 2.5 million, and 2.2 million Award Tickets and flights on Companion Passes during 2004, 2003, and 2002, respectively. The amount of free travel award usage as a percentage of total Southwest revenue passengers carried was 7.1 percent in 2004, 7.5 percent in 2003, and 6.8 percent in 2002. The number of fully earned Award Tickets and partially earned awards outstanding at December 31, 2004 and 2003 was approximately 7.0 million, approximately 80 percent of which were partially earned awards. However, due to the expected expiration of a portion of credits making up these partial awards, not all of them will eventually turn into useable Award Tickets. Also, not all Award Tickets will be redeemed for future travel. Since the inception of Rapid Rewards in 1987, approximately 14 percent of all fully earned Award Tickets have expired without being used. The number of Companion Passes for Southwest outstanding at December 31, 2004 and 2003 was approximately 60,000 and 53,000, respectively. The Company currently estimates that an average of 3 to 4 trips will be redeemed per outstanding Companion Pass.
The Company accounts for its frequent flyer program obligations by recording a liability for the estimated incremental cost of flight awards the Company expects to be redeemed (except for credits sold to business partners). This method recognizes an average incremental cost to provide roundtrip transportation to one additional passenger. The estimated incremental cost includes direct passenger costs such as fuel, food, and other operational costs, but does not include any contribution to overhead or profit. The incremental cost 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. Revenue from the sale of credits and associated with future travel is deferred and recognized when the ultimate free travel award is flown or the credits expire unused. Accordingly, Southwest does not accrue incremental cost for the expected redemption of free travel awards for credits sold to business partners. The liability for free travel awards earned but not used at December 31, 2004 and 2003 was not material.
6
Employees
At December 31, 2004, Southwest had 31,011 active Employees, consisting of 11,442 flight, 1,972 maintenance, 13,414 ground, Customer, and fleet service and 4,183 management, accounting, marketing, and clerical personnel.
Southwest has ten collective bargaining agreements covering approximately 81.2 percent of its
Employees. The following table sets forth the Companys Employee groups and collective bargaining
status:
Employee
Group
Represented by
Agreement Amendable on
International
Association of
Machinists and
Aerospace Workers,
AFL-CIO
November 2008 (or
2006 at the Unions
option under certain
conditions)
Transportation
Workers of America,
AFL-CIO (TWU)
June 2008
TWU
June 2008 (or 2006 at
the Unions option
under certain
conditions)
Southwest Airlines
Pilots Association
September 2006
Southwest Airlines
Employee
Association
December 2009
Aircraft Mechanics
Fraternal
Association
(AMFA)
February 2009
International
Brotherhood of
Teamsters
(Teamsters)
August 2008
AMFA
August 2008
Teamsters
November 2011
Southwest Airlines
Professional
Instructors
Association
December 2012
Item 2. Properties
Aircraft
Southwest operated a total of 417 Boeing 737 aircraft as of December 31, 2004, of which 88 and 7 were under operating and capital leases, respectively. The remaining 322 aircraft were owned.
Southwest was the launch Customer for the Boeing 737-700 aircraft, the newest generation of the Boeing 737 aircraft type. The first 737-700 aircraft was delivered in December 1997 and entered revenue service in January 1998. At December 31, 2004, Southwest had 193 Boeing 737-700 aircraft in service.
7
The following table details information on the 417 aircraft in the Companys fleet as of
December 31, 2004:
Average Age
Number of
Number
Number
737
Type
Seats
(Yrs)
Aircraft
Owned
Leased
122
22.0
5
5
137
13.7
194
110
84
122
13.7
25
16
9
137
3.4
193
191
2
9.0
417
322
95
The Company retired its five remaining Boeing 737-200 aircraft during January 2005.
In total, at December 31, 2004, the Company had firm orders and options to purchase Boeing 737
aircraft as follows:
Firm Orders and Options to Purchase Boeing 737-700 Aircraft
Delivery
Year
Firm
Orders
Options
Purchase
Rights
2005
34
2006
26
8
2007
25
9
20
2008
6
25
20
2009-2012
177
Totals
91
42
217
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, Phoenix Sky Harbor, and Chicago Midway, its training center near Love Field, which houses six 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. During first quarter 2004, the Company closed its Dallas, Salt Lake City, and Little Rock reservations centers. At December 31, 2004, the Company operated six reservation centers. The reservation centers located in Chicago, Albuquerque, and Oklahoma City occupy leased space. The Company owns its Houston, Phoenix, and San Antonio reservation centers.
Southwest has entered into a concession agreement with the Town of Islip, New York which gives the Company the right to construct, furnish, occupy, and maintain a new concourse at the airport. Once all phases of the project are completed, the concourse could have up to eight gates. Phase I of this project, which began operations in August 2004, includes four gates. The Company has announced plans to construct Phase II of the project, which includes an additional 4 gates. When all phases of construction are complete, the entire new concourse will become the property of the Town of Islip. In return for constructing the new concourse, Southwest will receive fixed-rent abatements for a total of 25 years; however, the Company will still be required to pay variable rents for common use areas and manage the new concourse.
8
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 maintenance firms for major component inspections and repairs for its airframes and engines, which comprise the majority of the annual aircraft maintenance costs.
Item 3. Legal Proceedings
The Company is subject to various legal proceedings and claims arising in the ordinary course of business, including, but not limited to, examinations by the Internal Revenue Service (IRS). The IRS regularly examines the Companys federal income tax returns and, in the course of those examinations, proposes adjustments to the Companys federal income tax liability reported on such returns. It is the Companys practice to vigorously contest those proposed adjustments that it deems lacking of merit. The Companys management does not expect that the outcome in any of its currently ongoing legal proceedings or the outcome of any proposed adjustments presented to date by the IRS, individually or collectively, will have a material adverse effect on the Companys financial condition, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
None to be reported.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Southwest, their positions, and their respective ages (as of January
1, 2005) are as follows:
Name
Position
Age
Chairman of the Board
73
Vice Chairman of the Board and Chief Executive Officer
49
Director, President and Secretary
60
Executive Vice President Customer Operations
51
Executive Vice President Aircraft Operations
51
Senior Vice President Finance and Chief Financial Officer
44
Senior Vice President Marketing
47
Executive officers are elected annually at the first meeting of Southwests Board of Directors following the annual meeting of shareholders or appointed by the Chief Executive Officer pursuant to Board authorization. Each of the above individuals has worked for Southwest Airlines Co. for more than the past five years.
9
PART II
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities
Southwests 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 December 31, 2004, there were 11,896 holders of record of the Companys common stock.
Recent Sales of Unregistered Securities
During 2004, Herbert D. Kelleher, Chairman of the Board, exercised unregistered options to
purchase Southwest Common Stock as follows:
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 Securities Act), by reason
of the provision of Section 4(2) of the Securities 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 Securities Act and may not be transferred except pursuant
to a registration statement which has become effective under the Securities Act or to an exemption
from such registration. The issuance of such shares was not underwritten.
10
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2004, regarding compensation plans
(including individual compensation arrangements) under which equity securities of Southwest are
authorized for issuance.
Equity Compensation Plan Information
See Note 13 to the Consolidated Financial Statements for information regarding the material
features of the above plans. Each of the above plans provides that the number of shares with
respect to which options may be granted, and the number of shares of Common Stock subject to an
outstanding option, shall be proportionately adjusted in the event of a subdivision or
consolidation of shares or the payment of a stock dividend on Common Stock, and the purchase price
per share of outstanding options shall be proportionately revised.
11
Item 6.
Selected Financial Data
The following financial information for the five years ended December 31, 2004, has been
derived from the Companys Consolidated Financial Statements. This information should be read in
conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere
herein.
________________
12
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR IN REVIEW
In 2004, Southwest posted a profit for its 32
nd
consecutive year, and 55
th
consecutive quarter. Southwests 2004 profit of $313 million exceeded our 2003 profit, excluding
the impact of a 2003 federal government grant, by 5.0 percent. These achievements were
accomplished despite record-high energy prices, and aggressive industry growth, which contributed
to the continuing weak airline revenue environment. For the fourth consecutive year, the airline
industry as a whole suffered a substantial net loss. As a result, certain carriers filed for
bankruptcy protection, and many carriers underwent or continued massive efforts to restructure
their business, gain wage concessions from their employees, and slash costs.
To maintain its low-cost competitive advantage, the Company continued its Company-wide efforts to
improve its cost structure. As a result, the Company increased productivity at all Employee
levels, and improved the overall efficiency of its operations. In November 2003, the Company
announced the consolidation of its Reservations centers from nine to six, effective February 2004.
Of the 1,900 Employees affected, approximately 1,000 did not elect to move to one of the Companys
remaining reservations locations. See Note 9 to the Consolidated Financial Statements for further
information. In second quarter 2004, the Company offered an early-out option to substantially all
Employees, primarily in an effort to alleviate overstaffing in certain areas of the Company. The
overstaffing primarily was the result of slower passenger growth; changes in Customer buying habits
and boarding processes; and the federalization of airport security. Due to these and other
productivity efforts, the Companys headcount per aircraft decreased from 85 at December 31, 2003,
to 74 at December 31, 2004.
As of December 31, 2004, the Company has added blended winglets to approximately 92 percent of
its fleet of 737-700 aircraft. The addition of these wing enhancements, which are expected to be
completed for all 737-700 aircraft in early 2005, extend the range of these aircraft, save fuel,
lower potential engine maintenance costs, and reduce takeoff noise. All new 737-700 aircraft now
arrive from Boeing with winglets already installed. The Company expects annual fuel consumption
savings of approximately 3 percent for each aircraft outfitted with the winglets. The Company also
phased out commissions on travel agency sales in 2004, consistent with virtually all other U.S.
airlines. This change in policy saved the Company approximately $50 million in 2004.
Demand for air travel was stronger in 2004, albeit at depressed fare levels. Southwest had
Company-record load factors for every month from March to July. For full year 2004, Southwests
load factor was 69.5 percent, which was up 2.7 points from 2003, and represented the second highest
load factor in the Companys history. Passenger revenue yield per RPM, on the other hand, was down
1.8 percent compared to 2003. Overall, unit revenues continue to run well below pre-September 11,
2001, levels, and the percentage of Customers traveling on full fares remains down from historical
levels. The Company does not anticipate a complete recovery in revenues until full fare business
travel fully recovers or there is a rationalization of industry capacity.
The Company believes that, despite the difficult airline industry environment, it is well
positioned to grow and remain profitable in 2005. The Companys low-cost competitive advantage,
protective fuel hedging position, and excellent Employees have allowed Southwest to react quickly
to market opportunities. The Company added Philadelphia to its route system in May 2004, and
ramped up growth at Chicago Midway Airport. In fourth quarter 2004, Southwest was selected as the
winning bidder at a bankruptcy-court approved auction for certain ATA Airlines, Inc. (ATA) assets,
which ensures the Company can continue to add low-fare service in Chicago. As part of the
transaction, which closed in December 2004, Southwest agreed to pay $40 million for certain ATA
assets, consisting of the leasehold rights to six ATA Chicago Midway Airport gates
13
and the
leasehold rights to an aircraft maintenance hangar at Midway. Southwest and ATA have also agreed
to a codeshare arrangement, which was approved by the Department of Transportation in January 2005,
in which
each carrier will exchange passengers on select routes at Midway. The Company believes this
agreement could result in additional revenues of $25 million to $50 million, annually. In
addition, Southwest has provided ATA with debtor in possession financing and made other financial
commitments to ATA. See Note 2 to the Consolidated Financial Statements for further information.
During 2004, the Company added 47 new 737-700 aircraft to its fleet and retired 18 older 737-200
aircraft, resulting in a net available seat mile (ASM) capacity increase of 7.1 percent. This
brought the Companys all-737 fleet to 417 aircraft at the end of 2004. The demand for Southwests
low fare, high-quality Customer Service flights in Philadelphia has made this city the Companys
most aggressive new city start ever. Also, in January 2005, the Company announced that Pittsburgh
would become the 60
th
city the Company flies to, with daily service beginning May 2005.
ASM capacity currently is expected to grow approximately 10 percent in 2005 with the planned net
addition of 29 aircraft. The Company currently has 34 new Boeing 737700s scheduled for delivery
during the year and will retire all five of its remaining 737-200s in January 2005.
14
Results of Operation
2004 Compared With 2003
The Companys consolidated net income for 2004 was $313 million ($.38 per
share, diluted), as compared to 2003 net income of $442 million ($.54 per share, diluted), a
decrease of $129 million or 29.2 percent. Operating income for 2004 was $554 million, an increase
of $71 million, or 14.7 percent compared to 2003.
As disclosed in Note 3 to the Consolidated Financial Statements, results for 2003 included $271
million as Other gains from the Emergency Wartime Supplemental Appropriations Act (Wartime Act).
The Company believes that excluding the impact of this special item will enhance comparative
analysis of results. The grant was made to stabilize and support the airline industry as a result
of the 2003 war with Iraq. Financial results including the grant were not indicative of the
Companys operating performance for 2003, nor should they be considered in developing trend
analysis for future periods. There were no special items in 2004. The following table reconciles
and compares results reported in accordance with Generally Accepted Accounting Principles (GAAP)
for 2004 and 2003 with results excluding the impact of the government grant received in 2003:
Excluding the government grant received, consolidated net income for 2004 increased $15
million, or 5.0 percent, compared to 2003 net income of $298 million. The increase primarily was
due to higher revenues from the Companys fleet growth and addition of capacity, which slightly
exceeded higher costs. Excluding the impact of the 2003 government grant, operating income
increased $31 million, or 5.9 percent, compared to 2003.
OPERATING REVENUES Consolidated operating revenues increased $593 million, or 10.0 percent,
primarily due to a $539 million, or 9.4 percent, increase in passenger revenues. The increase in
passenger revenues primarily was due to an 11.4 percent increase in revenue passenger miles (RPMs)
flown, driven by the Companys growth and a 2.7 point increase in the Companys load factor
compared to 2003.
The Company increased available seat miles (ASMs) by 7.1 percent compared to 2003, primarily as a
result of the net addition of 29 aircraft during 2004 (47 new aircraft, net of 18 aircraft
retirements). The Companys load factor for 2004 (RPMs divided by ASMs) was 69.5 percent, compared
to 66.8 percent for 2003. Although this represented a strong load factor performance for the
Company, passenger yields for 2004 (passenger revenue
15
divided by RPMs) remained under considerable
pressure due to significant capacity increases by a large majority of carriers. Passenger yields
for 2004 declined to $.1176, compared to $.1197 in 2003, a decrease of 1.8 percent, because of
heavy fare discounting arising as a result of the glut in industry seats available.
The Company believes the pressure on passenger yields will continue into the foreseeable future,
barring a dramatic decrease in industry capacity or a strong upturn in full fare travel. However,
continued industry discounting will most likely keep load factors at elevated levels compared to
historical averages. The Companys January 2005 load factor was 58.8 percent, which was 2.6 points
higher than January 2004s load factor of 56.2 percent. However, we expect January 2005s
passenger unit revenues to fall below the year ago performance.
Consolidated freight revenues increased $23 million, or 24.5 percent. Approximately 70 percent of
the increase was due to an increase in freight and cargo revenues, primarily due to more units
shipped. The remaining 30 percent of the increase was due to higher mail revenues, as the U.S.
Postal Service shifted more business to commercial carriers. Other revenues increased $31 million,
or 30.4 percent, primarily due to an increase in commissions earned from programs the Company
sponsors with certain business partners, such as the Company-sponsored Chase® (formerly Bank One)
Visa card. The Company expects continued year-over-year increases in both freight and other
revenues in first quarter 2005, in comparison to first quarter 2004; however, not at the rate
experienced in 2004.
OPERATING EXPENSES Consolidated operating expenses for 2004 increased $522 million, or 9.6
percent, compared to the 7.1 percent increase in capacity. To a large extent, changes in operating
expenses for airlines are driven by changes in capacity, or ASMs. The following presents
Southwests operating expenses per ASM for 2004 and 2003 followed by explanations of these changes
on a per-ASM basis:
Operating expenses per ASM increased 2.2 percent to $.0777, primarily due to an increase in
jet fuel prices, net of hedging gains, and an increase in salaries, wages, and benefits. These
increases were partially offset by the Companys elimination of commissions paid to travel agents,
which was effective December 15, 2003. For first quarter 2005, the Company currently expects
operating expenses per ASM, excluding fuel, to decline from first quarter 2004s unit costs,
excluding fuel, of 6.57 cents, primarily due to year-over-year decreases in salaries, wages, and
benefits and maintenance costs per ASM. The expected decrease in salaries, wages, and benefits per
ASM will primarily be due to $13 million in severance and relocation costs associated with the
Companys reservations center consolidation in first quarter 2004. For the year 2005, the Company
expects unit costs, excluding fuel, to be lower than 2004.
Salaries, wages, and benefits expense per ASM increased 2.6 percent, inclusive of $40 million in
additional expense from the profitsharing impact of the 2003 government grant. Excluding the
profitsharing impact of
16
the 2003 government grant, approximately 70 percent of the increase per ASM
was due to higher salaries expense, primarily from higher average wage rates, and 25 percent was
due to higher benefits costs, primarily health care and workers compensation. For fourth quarter
2004 versus 2003, salaries, wages, and benefits per ASM decreased 1.0 percent, as the Company
benefited from increased labor productivity. This increase in productivity was driven primarily by
headcount reductions from the Companys reservations center consolidation and early-out program
during 2004, and slowed hiring. The Company expects to experience a decrease in salaries, wages,
and benefits per ASM in first quarter 2005 due, in part, to severance and other charges related to
the consolidation of the Companys reservations centers in first quarter 2004, along with increased
productivity. See Note 9 to the Consolidated Financial Statements.
During second quarter 2004, the Company and the Transport Workers Union Local 556 reached a
tentative labor agreement (contract) for the Companys Flight Attendants, which includes both pay
increases and the issuance of stock options. During July 2004, a majority of the Companys Flight
Attendants ratified the contract, which is for the period from June 1, 2002, to May 31, 2008.
During third quarter 2004, the Company and the Aircraft Mechanics Fraternal Association,
representing the Companys Mechanics, agreed to extend the date the current agreement becomes
amendable to August 2008. The extension includes both pay raises and the issuance of stock
options, and was ratified by a majority of the Companys Mechanics.
During third quarter 2004, the Company and the International Brotherhood of Teamsters, representing
the Companys Flight Simulator Technicians, agreed to extend the date the current agreement becomes
amendable to November 2011. The extension includes both pay raises and the issuance of stock
options, and was ratified by a majority of the Companys Simulator Technicians.
Fuel and oil expense per ASM increased 12.1 percent, primarily due to a 14.5 percent increase in
the average jet fuel cost per gallon, net of hedging gains. The average cost per gallon of jet
fuel in 2004 was 82.8 cents compared to 72.3 cents in 2003, excluding fuel-related taxes but
including the effects of hedging activities. The Companys 2004 and 2003 average jet fuel costs
are net of approximately $455 million and $171 million in gains from hedging activities,
respectively. See Note 10 to the Consolidated Financial Statements. The increase in fuel prices
was partially offset by steps the Company has taken to better the fuel efficiency of its aircraft.
These steps primarily included the addition of blended winglets to 177 of the Companys 737-700
aircraft as of December 31, 2004, and the upgrade of certain engine components on many aircraft.
The Company estimates that these and other efficiency gains saved the Company approximately $28
million, at 2004 average unhedged market jet fuel prices.
As detailed in Note 10 to the Consolidated Financial Statements, the Company has hedges in place
for approximately 85 percent of its anticipated fuel consumption in 2005 with a combination of
derivative instruments that effectively cap prices at a crude oil equivalent price of approximately
$26 per barrel. Considering current market prices and the continued effectiveness of the Companys
fuel hedges, the Company is forecasting first quarter 2005 average fuel cost per gallon, net of
expected hedging gains, to exceed fourth quarter 2004s average price per gallon of 89.1 cents.
The majority of the Companys near term hedge positions are in the form of option contracts, which
protect the Company in the event of rising jet fuel prices and allow the Company to benefit in the
event of declining prices.
Maintenance materials and repairs per ASM were flat compared to 2003. Currently, the Company
expects a decrease in maintenance materials and repairs expense per ASM in first quarter 2005,
versus first quarter 2004, due to a decrease in the number of scheduled maintenance events.
Agency commissions per ASM decreased to zero, due to the elimination of commissions paid to travel
agents, effective December 15, 2003. The Company records commission expense in the period of
travel, not the period of sale. Consequently, the Company recognized small amounts of commission
expense in 2004 as all pre-
17
December 15, 2003 commissionable sales were flown, primarily in the
first quarter of 2004. For the full year 2003, approximately 16 percent of passenger revenues were
commissionable, based on the Companys previous policy of paying a 5 percent commission to travel
agents. For 2004, approximately 13 percent of revenues were derived through travel agents, 59
percent through the Companys web site at
southwest.com
, and the remaining portion through the
Companys Reservations Centers. For fourth quarter 2004, approximately 63 percent of passenger
revenues were derived from southwest.com.
Aircraft rentals per ASM and depreciation and amortization expense per ASM were both impacted by a
higher percentage of the aircraft fleet being owned. Aircraft rentals per ASM decreased 8.0
percent while depreciation and amortization expense per ASM increased 5.7 percent. Of the 47
aircraft the Company acquired during 2004, 46 are owned and one is on operating lease. This, along
with the retirement of 16 owned and two leased aircraft, has increased the Companys percentage of
aircraft owned or on capital lease to 79 percent at December 31, 2004, from 77 percent at December
31, 2003. Based on the Companys scheduled 2005 capacity increases and aircraft financing plans,
the Company expects a year-over-year decline in aircraft rental expense per ASM in 2005.
Landing fees and other rentals per ASM increased 1.9 percent primarily due to the Companys
expansion of gate and counter space at several airports across our system.
Other operating expenses per ASM were flat compared to 2003. An increase in expense from higher
fuel taxes as a result of the substantial increase in fuel prices was mostly offset by lower
advertising expense.
OTHER Other expenses (income) included interest expense, capitalized interest, interest income,
and other gains and losses. Interest expense decreased by $3 million, or 3.3 percent, primarily
due to the Companys October 2003 redemption of $100 million of senior unsecured 8 3/4% Notes
originally issued in 1991. This decrease was partially offset by the Companys September 2004
issuance of $350 million 5.25% senior unsecured notes and the fourth quarter 2004 issuance of $112
million in floating-rate financing. Concurrently with the September 2004 issuance, the Company
entered into an interest-rate swap agreement to convert this fixed-rate debt to floating rate. See
Note 10 to the Consolidated Financial Statements for more information on the interest-rate swap
agreement. Excluding the effect of any new debt offerings the Company may execute during 2005, the
Company expects an increase in interest expense compared to 2004, due to the full year effect of
the $350 million Notes, the fourth quarter 2004 issuance of $112 million in floating-rate
financing, and higher expected floating interest rates. These increases are expected to more than
offset a decrease in expense from the March 2005 redemption of $100 million 8% senior unsecured
notes. Capitalized interest increased $6 million, or 18.2 percent, primarily as a result of higher
2004 progress payment balances for scheduled future aircraft deliveries, compared to 2003.
Interest income decreased $3 million, or 12.5 percent, primarily due to a decrease in average
invested cash balances. Other gains in 2003 primarily resulted from the government grant of $271
million received pursuant to the Wartime Act. See Note 3 to the Companys Consolidated Financial
Statements for further discussion of the grant. Other losses in 2004 primarily include amounts
recorded in accordance with SFAS 133. See Note 10 to the Consolidated Financial Statements for
more information on the Companys hedging activities. During 2004, the Company recognized
approximately $24 million of expense related to amounts excluded from the Companys measurements of
hedge effectiveness and $13 million in expense related to the ineffectiveness of its hedges.
INCOME TAXES The provision for income taxes, as a percentage of income before taxes, decreased to
35.94 percent in 2004 from 37.60 percent in 2003. Approximately half of the rate reduction
primarily was
due to lower effective state income tax rates. The remainder of the decrease primarily was due to
a reduction in estimated liabilities for prior year taxes as a result of discussions with taxing
authorities. The Company expects its 2005 effective tax rate to be approximately 38 percent.
2003 COMPARED WITH 2002
The Companys consolidated net income for 2003 was $442 million ($.54 per
share, diluted), as compared to 2002 net income of $241 million ($.30 per share, diluted), an
increase of
18
$201 million, or 83.4 percent. Operating income for 2003 was $483 million, an increase
of $66 million, or 15.8 percent compared to 2002.
As disclosed in Note 3 to the Consolidated Financial Statements, results for 2003 included $271
million as Other gains from the Emergency Wartime Supplemental Appropriations Act (Wartime Act)
and results for 2002 included $48 million as Other gains from grants under the Air Transportation
Safety and System Stabilization Act (Stabilization Act). The Company believes that excluding the
impact of these special items will enhance comparative analysis of results. The grants were made
to stabilize and support the airline industry as a result of the devastating effects of the
September 11, 2001 terrorist attacks and the 2003 war with Iraq. Neither of these grants were
indicative of the Companys operating performance for these respective periods, nor should they be
considered in developing trend analysis for future periods. The following table reconciles results
reported in accordance with Generally Accepted Accounting Principles (GAAP) for 2003 with results
excluding the impact of the government grant received in that period:
Excluding the governments grants received in both years, consolidated net income for 2003 was
$298 million ($.36 per share, diluted), as compared to 2002 net income of $216 million ($.27 per
share, diluted), an increase of $82 million, or 38.0 percent. The increase primarily was due to
overall higher demand for air travel in 2003, especially vacation travel. Operating income for
2003 was $523 million, an increase of $99 million, or 23.3 percent, compared to 2002.
OPERATING REVENUES Consolidated operating revenues increased $415 million, or 7.5 percent,
primarily due to a $400 million, or 7.5 percent, increase in passenger revenues. The increase in
passenger
revenues primarily was due to a 5.6 percent increase in revenue passenger miles (RPMs) flown.
Although the Company saw a disruption in revenue and bookings due to the threat of war and from the
subsequent conflict between the United States and Iraq during first half 2003, demand improved
following the war.
The increase in revenue passenger miles primarily was due to a 4.2 percent increase in added
capacity, as measured by available seat miles or ASMs. This was achieved through the Companys net
addition of 13 aircraft during 2003 (net of four aircraft retirements). The Companys improved
load factor for 2003 was 66.8 percent, compared to 65.9 percent for 2002. Passenger yields for
2003 were $.1197 compared to $.1177 in
19
2002, an increase of 1.7 percent, due to less fare
discounting in 2003 by the Company and the airline industry, in general.
Consolidated freight revenues increased $9 million, or 10.6 percent, primarily due to an increase
in freight and cargo units shipped. Other revenues increased $6 million, or 6.3 percent, primarily
due to an increase in commissions earned from programs the Company sponsors with certain business
partners, such as the Company-sponsored Chase® (formerly Bank One) Visa card.
OPERATING EXPENSES Consolidated operating expenses for 2003 increased $349 million, or 6.8
percent, compared to the 4.2 percent increase in capacity. To a large extent, changes in operating
expenses for airlines are driven by changes in capacity, or ASMs. The following presents
Southwests operating expenses per ASM for 2003 and 2002 followed by explanations of these changes
on a per-ASM basis:
Operating expenses per ASM increased 2.6 percent to $.0760, primarily due to increases in
salaries, profitsharing, and jet fuel prices, after hedging gains.
Salaries, wages, and benefits expense per ASM increased 7.3 percent. Approximately 60 percent of
the increase was due to an increase in salaries and wages per ASM, primarily from increases in
average wage rates. The majority of the remainder of the increase was due to an increase in
Employee retirement plans expense per ASM, primarily from the increase in 2003 earnings and
resulting profitsharing.
Fuel and oil expense per ASM increased 4.5 percent, primarily due to a 6.3 percent increase in the
average jet fuel cost per gallon. The average cost per gallon of jet fuel in 2003 was 72.3 cents
compared to 68.0 cents in 2002, excluding fuel-related taxes but including the effects of hedging
activities. The Companys 2003 and 2002 average jet fuel costs are net of approximately $171
million and $45 million in gains from hedging activities, respectively. See Note 10 to the
Consolidated Financial Statements.
Maintenance materials and repairs per ASM increased 5.3 percent primarily due to an increase in
engine maintenance. The Company outsources all of its heavy engine maintenance work.
Approximately half of the increase in engine maintenance expense was for 737-300 and 737-500
aircraft subject to a long-term maintenance contract, which is based on a contract rate charged per
hour flown. The majority of the increase in engine expense for these aircraft in 2003 was due to
an increase in the contract rate per hour flown, predicated on increased engine maintenance events.
The other half of the increase in engine maintenance expense was for 737-700 aircraft, which is
based on a time and materials basis. Expense for these aircraft engines increased due to the
growing number of this type of aircraft in the Companys fleet.
Agency commissions per ASM decreased 12.5 percent, primarily due to a decline in commissionable
revenues. The percentage of commissionable revenues decreased from approximately 20 percent in
2002 to
20
approximately 16 percent in 2003. Approximately 54 percent of passenger revenues in 2003
were derived through the Companys web site at
southwest.com
versus 49 percent in 2002. In October
2003, the Company announced it would no longer pay commissions on travel agency sales effective
December 15, 2003.
Aircraft rentals per ASM and depreciation and amortization expense per ASM were both impacted by a
higher percentage of the aircraft fleet being owned. Aircraft rentals per ASM decreased 7.4
percent while depreciation and amortization expense per ASM increased 1.9 percent. The Company
owns all 17 of the aircraft it put into service during 2003. This, along with the retirement of
three owned and one leased aircraft, increased the Companys percentage of aircraft owned or on
capital lease to 77 percent at December 31, 2003, from 76 percent at December 31, 2002.
Landing fees and other rentals per ASM increased 4.0 percent primarily as a result of higher space
rental rates throughout the Companys system. During 2003, many other major airlines reduced their
flight capacity at airports served by the Company. Since Southwest did not reduce its flights, the
Company incurred higher airport costs based on a greater relative share of total flights and
passengers.
Other operating expenses per ASM decreased 6.8 percent. Approximately 70 percent of the decrease
was due to lower aviation insurance costs. As a result of more coverage from government insurance
programs and a more stable aviation insurance market, the Company was able to negotiate lower 2003
aviation insurance premiums compared to 2002. However, aviation insurance for 2003 was
substantially higher than before September 11, 2001. The majority of the remaining decrease in
other operating expenses per ASM was due to reductions in security costs from the transition of
airport security to the federal government, and decreases in advertising and personnel-related
expenses.
OTHER Other expenses (income) included interest expense, capitalized interest, interest income,
and other gains and losses. Interest expense decreased $15 million, or 14.2 percent, compared to
the prior year, primarily due to lower effective interest rates. The Company executed two
interest-rate swaps in second quarter 2003 to convert a portion of its fixed-rate debt to a lower
floating rate. The Company entered into interest rate swap agreements relating to its $385 million
6.5% senior unsecured notes due March 1, 2012 and $375 million 5.496% Class A-2 pass-through
certificates due November 1, 2006. See Note 10 to the Consolidated Financial Statements for more
information on the Companys hedging activities. Capitalized interest increased $16 million, or
94.1 percent, primarily as a result of higher 2003 progress payment balances for scheduled future
aircraft deliveries, compared to 2002. Interest income decreased $13 million, or 35.1 percent,
primarily due to a decrease in rates earned on short-term investments. Other gains in 2003 and
2002 primarily resulted from government grants of $271 million and $48 million, respectively,
received pursuant to the Wartime and the Stabilization Acts. See Note 3 to the Companys
Consolidated Financial Statements for further discussion of these Acts.
INCOME TAXES The provision for income taxes, as a percentage of income before taxes, decreased to
37.60 percent in 2003 from 38.64 percent in 2002 due to higher Company earnings in 2003 and lower
effective state income tax rates.
21
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.2 billion in 2004 compared to $1.3 billion in
2003. For the Company, operating cash inflows primarily are derived from providing air
transportation for Customers. The vast majority of tickets are purchased prior to the day on which
travel is provided and, in some cases, several months before the anticipated travel date. Operating
cash outflows primarily are related to the recurring expenses of operating the airline. For 2004,
the decrease in operating cash flows primarily was due to lower net income in 2004, largely
attributable to the $271 million government grant received in 2003, and an increase in Accounts
and other receivables. The increase in Accounts and other receivables was primarily due to the
$40 million debtor-in-possession loan made to ATA Airlines, Inc. (ATA), in December 2004 (see Note
2 to the Consolidated Financial Statements), and an increase in receivables from fuel hedge
counterparties from higher hedging gains recorded in fourth quarter 2004 versus fourth quarter
2003. These were partially offset by an increase in accrued liabilities, primarily from higher
counterparty deposits associated with the Companys fuel hedging program. For further information
on the Companys hedging program and counterparty deposits, see Note 10 to the Consolidated
Financial Statements, and Item 7A. Qualitative and Quantitative Disclosures about Market Risk,
respectively. Cash generated in 2004 and in 2003 primarily was used to finance aircraft-related
capital expenditures and to provide working capital.
Cash flows used in investing activities in 2004 totaled $1.9 billion compared to $1.2 billion in
2003. Investing activities in both years primarily consisted of payments for new 737-700 aircraft
delivered to the Company and progress payments for future aircraft deliveries. The Company
purchased 46 new 737-700 aircraft in 2004 (and leased one additional 737-700) versus the purchase
of 17 new 737-700s in 2003. However, progress payments for future deliveries were substantially
higher in 2003 than 2004, due to the fact that, during 2003, the Company accelerated the delivery
for several aircraft from future years into 2004, and exercised options for several 2004 and 2005
deliveries. These decisions resulted in an acceleration of progress payments to the manufacturer
related to the aircraft. See Note 4 to the Consolidated Financial Statements. Also, in 2004, the
Company made an initial payment of $34 million for certain ATA assets, and provided ATA with $40
million in debtor-in-possession financing. See Note 2 to the Consolidated Financial Statements for
further information.
Net cash provided by financing activities was $133 million in 2004, primarily from the issuance of
$520 million in long-term debt. The majority of the debt issuance was the $350 million senior
unsecured notes issued in September 2004, and the fourth quarter 2004 issuance of $112 million in
floating-rate financing. The largest cash outflows in financing activities were from the Companys
repurchase of $246 million of its common stock during 2004, and the redemption of long-term debt,
primarily the $175 million Aircraft Secured Notes that came due in November 2004. For 2003, net
cash used in financing activities was $48 million. Cash used primarily was for the redemption of
its $100 million senior unsecured 8 3/4% Notes originally issued in 1991. This was mostly offset by
proceeds of $93 million from the exercise of Employee stock options. See Note 7 to the
Consolidated Financial Statements for more information on the issuance and redemption of long-term
debt.
The Company has various options available to meet its 2005 capital and operating commitments,
including cash on hand at December 31, 2004, of $1.3 billion, internally generated funds, and a
$575 million bank revolving line of credit. In addition, the Company will also consider various
borrowing or leasing options to maximize earnings and supplement cash requirements. The Company
believes it has access to a wide variety of financing arrangements because of its excellent credit
ratings, unencumbered assets, modest leverage, and consistent profitability.
The Company currently has outstanding shelf registrations for the issuance of up to $650 million in
public debt securities and pass through certificates, which it may utilize for aircraft financings
or other purposes in the future. The Company currently expects that a portion of these securities
will be issued in 2005, primarily to replace debt that is coming due and to fund current fleet
growth plans.
22
OFF-BALANCE SHEET ARRANGEMENTS, CONTRACTUAL OBLIGATIONS, AND CONTINGENT LIABILITIES AND COMMITMENTS
Southwest has contractual obligations and commitments primarily with regard to future purchases of
aircraft, payment of debt, and lease arrangements. Along with the receipt of 47 new 737-700
aircraft in 2004 (one of which is leased), the Company exercised its remaining options for aircraft
to be delivered in 2005, and several more options for aircraft to be delivered in 2006. The
following table details the Companys current firm orders, options, and purchase rights for 737-700
aircraft:
The Company has the option to substitute 737-600s or -800s for the -700s. This option is
applicable to aircraft ordered from the manufacturer and must be exercised two years prior to the
contractual delivery date.
The Company has engaged in off-balance sheet arrangements in the leasing of aircraft. The leasing
of aircraft provides flexibility to the Company effectively as a source of financing. Although the
Company is responsible for all maintenance, insurance, and expense associated with operating the
aircraft, and retains the risk of loss for leased aircraft, it has not made any guarantees to the
lessors regarding the residual value (or market value) of the aircraft at the end of the lease
terms.
As shown above and as disclosed in Note 8 to the Consolidated Financial Statements, the Company
operates 95 aircraft that it has leased from third parties, of which 88 are operating leases. As
prescribed by GAAP, assets and obligations under operating lease are not included in the Companys
Consolidated Balance Sheet. Disclosure of the contractual obligations associated with the Companys
leased aircraft are shown below as well as in Note 8 to the Consolidated Financial Statements.
The following table aggregates the Companys material expected contractual obligations and
commitments as of December 31, 2004:
23
The Company currently expects that it will issue a portion of its $650 million in outstanding
shelf registrations for public debt securities during 2005.
There were no outstanding borrowings under the revolving credit facility at December 31, 2004. See
Note 6 to the Consolidated Financial Statements for more information.
In January 2004, the Companys Board of Directors authorized the repurchase of up to $300 million
of the Companys common stock, utilizing present and anticipated proceeds from the exercise of
Employee stock options. Repurchases are made in accordance with applicable securities laws in the
open market or in private transactions from time to time, depending on market conditions. During
2004, the Company repurchased approximately 17.0 million of its common shares for a total of
approximately $246 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Companys Consolidated Financial Statements have been prepared in accordance with United States
GAAP. The Companys significant accounting policies are described in Note 1 to the Consolidated
Financial Statements. The preparation of financial statements in accordance with GAAP requires the
Companys management to make estimates and assumptions that affect the amounts reported in the
Consolidated Financial Statements and accompanying footnotes. The Companys estimates and
assumptions are based on historical experiences and changes in the business environment. However,
actual results may differ from estimates under different conditions, sometimes materially. Critical
accounting policies and estimates are defined as those that are both most important to the
portrayal of the Companys financial condition and results and require managements most subjective
judgments. The Companys most critical accounting policies and estimates are described below.
Revenue Recognition
As described in Note 1 to the Consolidated Financial Statements, tickets sold for passenger air
travel are initially deferred as Air traffic liability. Passenger revenue is recognized and air
traffic liability is reduced when the service is provided (i.e., when the flight takes place).
Air traffic liability represents tickets sold for future travel dates and estimated future
refunds and exchanges of tickets sold for past travel dates. The balance in Air traffic
liability fluctuates throughout the year based on seasonal travel patterns and fare sale activity.
The Companys Air traffic liability balance at December 31, 2004 was $529 million, compared to
$462 million as of December 31, 2003.
Estimating the amount of tickets that will be refunded, exchanged, or forfeited involves some level
of subjectivity and judgment. The majority of the Companys tickets sold are nonrefundable, which
is the primary source of forfeited tickets. According to the Companys Contract of Carriage,
tickets that are sold but not flown on the travel date can be reused for another flight, up to a
year from the date of sale, or can be refunded (if the ticket is refundable). A small percentage
of tickets (or partial tickets) expire unused. Fully refundable tickets are rarely forfeited.
Air traffic liability includes an estimate of the amount of future refunds and exchanges, net of
forfeitures, for all unused tickets once the flight date has passed. These estimates are based on historical experience over many years. The Company and
members of the airline industry have consistently applied this accounting method to estimate
revenue from forfeited tickets at the date travel is provided. Estimated future refunds and
exchanges included in the air traffic liability account are constantly evaluated based on
subsequent refund and exchange activity to validate the accuracy of the Companys estimates with
respect to forfeited tickets.
Events and circumstances outside of historical fare sale activity or historical Customer travel
patterns, as noted, can result in actual refunds, exchanges, or forfeited tickets differing
significantly from estimates. The
24
Company evaluates its estimates within a narrow range of
acceptable amounts. If actual refunds, exchanges, or forfeiture experience results in an amount
outside of this range, estimates and assumptions are reviewed and adjustments to Air traffic
liability and to Passenger revenue are recorded, as necessary. Additional factors that may
affect estimated refunds and exchanges include, but may not be limited to, the Companys refund and
exchange policy, the mix of refundable and nonrefundable fares, and promotional fare activity. The
Companys estimation techniques have been consistently applied from year to year; however, as with
any estimates, actual refund, exchange, and forfeiture activity may vary from estimated amounts.
Furthermore, the Company believes it is unlikely that materially different estimates for future
refunds, exchanges, and forfeited tickets would be reported based on other reasonable assumptions
or conditions suggested by actual historical experience and other data available at the time
estimates were made.
Accounting for Long-Lived Assets
As of December 31, 2004, the Company had approximately $11.9 billion (at cost) of long-lived
assets, including $10.0 billion (at cost) in flight equipment and related assets. Flight equipment
primarily relates to the 329 Boeing 737 aircraft in the Companys fleet at December 31, 2004, which
are either owned or on capital lease. The remaining 88 Boeing 737 aircraft in the Companys fleet
at December 31, 2004, are on operating lease. In accounting for long-lived assets, the Company
must make estimates about the expected useful lives of the assets, the expected residual values of
the assets, and the potential for impairment based on the fair value of the assets and the cash
flows they generate.
The following table shows a breakdown of the Companys long-lived asset groups along with
information about estimated useful lives and residual values of these groups:
In estimating the lives and expected residual values of its aircraft, the Company primarily has
relied upon actual experience with the same or similar aircraft types and recommendations from
Boeing, the manufacturer of the Companys aircraft. Aircraft estimated useful lives are based on
the number of cycles flown (one take-off and landing). The Company has made a conversion of
cycles into years based on both its historical and anticipated future utilization of the aircraft.
Subsequent revisions to these estimates, which can be significant, could be caused by changes to the Companys maintenance
program, changes in utilization of the aircraft (actual cycles during a given period of time),
governmental regulations on aging aircraft, and changing market prices of new and used aircraft of
the same or similar types. The Company evaluates its estimates and assumptions each reporting
period and, when warranted, adjusts these estimates and assumptions. Generally, these adjustments
are accounted for on a prospective basis through depreciation and amortization expense, as required
by GAAP.
When appropriate, the Company evaluates its long-lived assets for impairment. Factors that would
indicate potential impairment may include, but are not limited to, significant decreases in the
market value of the long-lived asset(s), a significant change in the long-lived assets physical
condition, and operating or cash flow losses associated with the use of the long-lived asset.
While the airline industry as a whole has experienced many of these indicators, Southwest has
continued to operate all of its aircraft, generate positive cash flow, and produce profits.
Consequently, the Company has not identified any impairments related to its
25
existing aircraft
fleet. The Company will continue to monitor its long-lived assets and the airline operating
environment.
The Company believes it unlikely that materially different estimates for expected lives, expected
residual values, and impairment evaluations would be made or reported based on other reasonable
assumptions or conditions suggested by actual historical experience and other data available at the
time estimates were made.
Financial Derivative Instruments
The Company utilizes financial derivative instruments primarily to manage its risk associated with
changing jet fuel prices, and accounts for them under Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). See
Qualitative and Quantitative Disclosures about Market Risk for more information on these risk
management activities and see Note 10 to the Consolidated Financial Statements for more information
on SFAS 133, the Companys fuel hedging program, and financial derivative instruments.
SFAS 133 requires that all derivatives be marked to market (fair value) and recorded on the
Consolidated Balance Sheet. At December 31, 2004, the Company was a party to over 300 financial
derivative instruments, related to fuel hedging, for the years 2005 through 2009. The fair value
of the Companys fuel hedging financial derivative instruments recorded on the Companys
Consolidated Balance Sheet as of December 31, 2004, was $796 million, compared to $251 million at
December 31, 2003. The large increase in fair value primarily was due to the dramatic increase in
energy prices throughout 2004, and the Companys addition of derivative instruments to increase its
hedge positions in future years. Changes in the fair values of these instruments can vary
dramatically, as was evident during 2004, based on changes in the underlying commodity prices. The
financial derivative instruments utilized by the Company primarily are a combination of collars,
purchased call options, and fixed price swap agreements. The Company does not purchase or hold any
derivative instruments for trading purposes.
The Company enters into financial derivative instruments with third party institutions in
over-the-counter markets. Since the majority of the Companys financial derivative instruments
are not traded on a market exchange, the Company estimates their fair values. Depending on the
type of instrument, the values are determined by the use of present value methods or standard
option value models with assumptions about commodity prices based on those observed in underlying
markets. Also, since there is not a reliable forward market for jet fuel, the Company must
estimate the future prices of jet fuel in order to measure the effectiveness of the hedging
instruments in offsetting changes to those prices, as required by SFAS 133. Forward jet fuel
prices are estimated through the observation of similar commodity futures prices (such as
crude oil, heating oil, and unleaded gasoline) and adjusted based on historical variations to those
like commodities.
Fair values for financial derivative instruments and forward jet fuel prices are both estimated
prior to the time that the financial derivative instruments settle, and the time that jet fuel is
purchased and consumed, respectively. However, once settlement of the financial derivative
instruments occurs and the hedged jet fuel is purchased and consumed, all values and prices are
known and are recognized in the financial statements. Based on these actual results once all
values and prices become known, the Companys estimates have proved to be materially accurate.
Estimating the fair value of these fuel hedging derivatives and forward prices for jet fuel will
also result in changes in their values from period to period and thus determine how they are
accounted for under SFAS 133. To the extent that the change in the estimated fair value of a fuel
hedging instrument differs from the change in the estimated price of the associated jet fuel to be
purchased, both on a cumulative and a period-to-period basis, ineffectiveness of the fuel hedge can
result, as defined by SFAS 133. This could result in the immediate recording of charges or income,
even though the derivative instrument may not expire until a
26
future period. Historically, the
Company has not experienced significant ineffectiveness in its fuel hedges accounted for under SFAS
133, in relation to the fair value of the underlying financial derivative instruments.
SFAS 133 is a complex accounting standard with stringent requirements including the documentation
of a Company hedging strategy, statistical analysis to qualify a commodity for hedge accounting
both on a historical and a prospective basis, and strict contemporaneous documentation that is
required at the time each hedge is executed by the Company. As required by SFAS 133, the Company
assesses the effectiveness of each of its individual hedges on a quarterly basis. The Company also
examines the effectiveness of its entire hedging program on a quarterly basis utilizing statistical
analysis. This analysis involves utilizing regression and other statistical analyses that compare
changes in the price of jet fuel to changes in the prices of the commodities used for hedging
purposes (crude oil, heating oil, and unleaded gasoline).
The Company also utilizes financial derivative instruments in the form of interest rate swap
agreements. The primary objective for the Companys use of interest rate hedges is to reduce the
volatility of net interest income by better matching the repricing of its assets and liabilities.
Concurrently, the Companys interest rate hedges are also intended to take advantage of market
conditions in which short-term rates are significantly lower than the fixed longer term rates on
the Companys long-term debt. During 2003, the Company entered into interest rate swap agreements
relating to its $385 million 6.5% senior unsecured notes due 2012, and $375 million 5.496% Class
A-2 pass-through certificates due 2006. The floating rate paid under each agreement sets in
arrears. Under the first agreement, the Company pays the London InterBank Offered Rate (LIBOR)
plus a margin every six months and receives 6.5% every six months on a notional amount of $385
million until 2012. The average floating rate paid under this agreement during 2004 is estimated to
be 4.490 percent based on actual and forward rates at December 31, 2004. Under the second
agreement, the Company pays LIBOR plus a margin every six months and receives 5.496% every six
months on a notional amount of $375 million until 2006. Based on actual and forward rates at
December 31, 2004, the average floating rate paid under this agreement during 2004 is estimated to
be 4.695 percent.
During 2004, the Company also entered into an interest rate swap agreement relating to its $350
million 5.25% senior unsecured notes due 2014. Under this agreement, the Company pays LIBOR plus a
margin every six months and receives 5.25% every six months on a notional amount of $350 million
until 2014. The floating rate is set in advance. The average floating rate paid under this
agreement during 2004 was 2.814 percent.
The Companys interest rate swap agreements qualify as fair value hedges, as defined by SFAS 133.
In addition, these interest rate swap agreements qualify for the shortcut method of accounting
for hedges, as defined by SFAS 133. Under the shortcut method, the hedges are assumed to be
perfectly effective, and, thus, there is no ineffectiveness to be recorded in earnings. The fair
value of the interest rate swap agreements, which are adjusted regularly, are recorded in the
Consolidated Balance Sheet, as necessary, with a corresponding adjustment to the carrying value of
the long-term debt. The fair value of the interest rate swap agreements, excluding accrued
interest, at December 31, 2004, was a liability of approximately $16 million. This amount is
recorded in Other deferred liabilities in the Consolidated Balance Sheet. In accordance with
fair value hedging, the offsetting entry is an adjustment to decrease the carrying value of
long-term debt. See Note 10 to the Consolidated Financial Statements.
The Company believes it is unlikely that materially different estimates for the fair value of
financial derivative instruments, and forward jet fuel prices would be made or reported based on
other reasonable assumptions or conditions suggested by actual historical experience and other data
available at the time estimates were made.
27
FORWARD-LOOKING STATEMENTS
Some statements in this Form 10-K (or otherwise made by the Company or on the Companys behalf from
time to time in other reports, filings with the Securities and Exchange Commission, news releases,
conferences, World Wide Web postings or otherwise) which are not historical facts, may be
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934 and the Private Securities Litigation Reform Act of 1995. Forward-looking statements include
statements about Southwests estimates, expectations, beliefs, intentions or strategies for the
future, and the assumptions underlying these forward-looking statements. Southwest uses the words
anticipates, believes, estimates, expects, intends, forecasts, may, will, should,
and similar expressions to identify these forward-looking statements. Forward-looking statements
involve risks and uncertainties that could cause actual results to differ materially from
historical experience or the Companys present expectations. Factors that could cause these
differences include, but are not limited to:
Caution should be taken not to place undue reliance on the Companys forward-looking statements,
which represent the Companys views only as of the date this report is filed. The Company
undertakes no
28
obligation to update publicly or revise any forward-looking statement, whether as a
result of new information, future events, or otherwise.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Southwest has interest rate risk in its floating rate debt obligations and interest rate swaps, and
has commodity price risk in jet fuel required to operate its aircraft fleet. The Company purchases
jet fuel at prevailing market prices, but seeks to manage market risk through execution of a
documented hedging strategy. Southwest has market sensitive instruments in the form of fixed rate
debt instruments and financial derivative instruments used to hedge its exposure to jet fuel price
increases. The Company also operates 95 aircraft under operating and capital leases. However,
leases are not considered market sensitive financial instruments and, therefore, are not included
in the interest rate sensitivity analysis below. Commitments related to leases are disclosed in
Note 8 to the Consolidated Financial Statements. The Company does not purchase or hold any
derivative financial instruments for trading purposes. See Note 10 to the Consolidated Financial
Statements for information on the Companys accounting for its hedging program and for further
details on the Companys financial derivative instruments.
Fuel hedging.
The Company utilizes its fuel hedges, on both a short-term and a long-term
basis, as a form of insurance against significant increases in fuel prices. The Company believes
there is significant risk in not hedging against the possibility of such fuel price increases. The
Company expects to consume 1.3 billion gallons of jet fuel in 2005. Based on this usage, a change
in jet fuel prices of just one cent per gallon would impact the Companys Fuel and oil expense by
approximately $13 million per year.
The fair values of outstanding financial derivative instruments related to the Companys jet fuel
market price risk at December 31, 2004, were net assets of $796 million. The current portion of
these financial derivative instruments, or $428 million, is classified as Fuel hedge contracts in
the Consolidated Balance Sheet. The long-term portion of these financial derivative instruments,
or $368 million, is included in Other assets. The fair values of the derivative instruments,
depending on the type of instrument, were determined by use of present value methods or standard
option value models with assumptions about commodity prices based on those observed in underlying
markets. An immediate ten- percent increase or decrease in underlying fuel-related commodity
prices from the December 31, 2004, prices would correspondingly change the fair value of the
commodity derivative instruments in place by
approximately $300 million. Changes in the related commodity derivative instrument cash flows may
change by more or less than this amount based upon further fluctuations in futures prices as well
as related income tax effects. This sensitivity analysis uses industry standard valuation models
and holds all inputs constant at December 31, 2004, levels, except underlying futures prices.
Outstanding financial derivative instruments expose the Company to credit loss in the event of
nonperformance by the counterparties to the agreements. However, the Company does not expect any
of the counterparties to fail to meet their obligations. The credit exposure related to these
financial instruments is represented by the fair value of contracts with a positive fair value at
the reporting date. To manage credit risk, the Company selects and will periodically review
counterparties based on credit ratings, limits its exposure to a single counterparty, and monitors
the market position of the program and its relative market position with each counterparty. At
December 31, 2004, the Company had agreements with seven counterparties containing early
termination rights and/or bilateral collateral provisions whereby security is required if market
risk exposure exceeds a specified threshold amount or credit ratings fall below certain levels. At
December 31, 2004, the Company held $330 million in cash collateral deposits, and another $150
million in U.S. Treasury Bills, under these bilateral collateral provisions. These collateral
deposits serve to decrease, but not totally eliminate, the credit risk associated with the
Companys hedging program. The cash deposits are included in Accrued liabilities on the
Consolidated Balance Sheet. See also Note 10 to the Consolidated Financial Statements. In
accordance with SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments
29
of Liabilities, the U.S. Treasury Bills, supplied as non-cash collateral by
counterparties, are not reflected on the Companys Consolidated Balance Sheet.
Financial market risk.
The vast majority of the Companys assets are expensive aircraft,
which are long-lived. The Companys strategy is to capitalize conservatively and grow capacity
steadily and profitably. While the Company uses financial leverage, it has maintained a strong
balance sheet and an A credit rating on its senior unsecured fixed-rate debt with Standard &
Poors and Fitch ratings agencies, and a Baa1 credit rating with Moodys rating agency. The
Companys 1999 and 2004 French Credit Agreements do not give rise to significant fair value risk
but do give rise to interest rate risk because these borrowings are floating-rate debt. In
addition, as disclosed in Note 10 to the Consolidated Financial Statements, the Company has
converted certain of its long-term debt to floating rate debt by entering into interest rate swap
agreements. This includes the Companys $385 million 6.5% senior unsecured notes due 2012, the
$375 million 5.496% Class A-2 pass-through certificates due 2006, and the $350 million 5.25% senior
unsecured notes due 2014. Although there is interest rate risk associated with these floating rate
borrowings, the risk for the 1999 and 2004 French Credit Agreements is somewhat mitigated by the
fact that the Company may prepay this debt under certain conditions. See Notes 6 and 7 to the
Consolidated Financial Statements for more information on the material terms of the Companys
short-term and long-term debt.
Excluding the $385 million 6.5% senior unsecured notes, and the $350 million 5.25% senior unsecured
notes that were converted to a floating rate as previously noted, the Company had outstanding
senior unsecured notes totaling $300 million at December 31, 2004. These senior unsecured notes
currently have a weighted-average maturity of 8.3 years at fixed rates averaging 7.75 percent at
December 31, 2004, which is comparable to average rates prevailing for similar debt instruments
over the last ten years. The fixed-rate portion of the Companys pass-through certificates
consists of its Class A certificates and Class B certificates, which totaled $174 million at
December 31, 2004. These Class A and Class B certificates had a weighted-average maturity of 1.5
years at fixed rates averaging 5.63 percent at December 31, 2004. The carrying value of the
Companys floating rate debt totaled $1.2 billion, and this debt had a weighted-average maturity of
7.1 years at floating rates averaging 4.42 percent at December 31, 2004. In total, the Companys
fixed rate debt and floating rate debt represented 5.2 percent and 13.6 percent, respectively, of
total noncurrent assets at December 31, 2004.
The Company also has some risk associated with changing interest rates due to the short-term nature
of its invested cash, which totaled $1.3 billion at December 31, 2004. The Company invests
available cash in certificates of deposit, highly rated money markets, investment grade commercial
paper, and other highly rated financial instruments. Because of the short-term nature of these
investments, the returns earned parallel closely with short-term floating interest rates. The
Company has not undertaken any additional actions to cover interest rate market risk and is not a
party to any other material market interest rate risk management activities.
A hypothetical ten percent change in market interest rates as of December 31, 2004, would not have
a material effect on the fair value of the Companys fixed rate debt instruments. See Note 10 to
the Consolidated Financial Statements for further information on the fair value of the Companys
financial instruments. A change in market interest rates could, however, have a corresponding
effect on the Companys earnings and cash flows associated with its floating rate debt, invested
cash, and short-term investments because of the floating-rate nature of these items. Assuming
floating market rates in effect as of December 31, 2004, were held constant throughout a 12-month
period, a hypothetical ten percent change in those rates would correspondingly change the Companys
net earnings and cash flows associated with these items by less than $2 million. Utilizing these
assumptions and considering the Companys cash balance, short-term investments, and floating-rate
debt outstanding at December 31, 2004, an increase in rates would have a net positive effect on the
Companys earnings and cash flows, while a decrease in rates would have a net negative effect on
the Companys earnings and cash flows. However, a ten percent change in market rates would not
impact the Companys earnings or cash flow associated with the Companys publicly traded fixed-rate
debt.
30
The Company is also subject to various financial covenants included in its credit card transaction
processing agreement, the revolving credit facility, and outstanding debt agreements. Covenants
include the maintenance of minimum credit ratings. For the revolving credit facility, the Company
shall also maintain, at all times, a Coverage Ratio, as defined in the agreement, of not less than
1.25 to 1.0. The Company met or exceeded the minimum standards set forth in these agreements as of
December 31, 2004. However, if conditions change and the Company fails to meet the minimum
standards set forth in the agreements, it could reduce the availability of cash under the
agreements or increase the costs to keep these agreements intact as written.
31
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
See accompanying notes
32
SOUTHWEST AIRLINES CO.
See accompanying notes.
33
SOUTHWEST AIRLINES CO.
See accompanying notes.
34
SOUTHWEST AIRLINES CO.
See accompanying notes.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION Southwest Airlines Co. (Southwest) is a major domestic airline that provides
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
accounting principles generally accepted in the United States (GAAP) 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.
CASH AND CASH EQUIVALENTS Cash in excess of that necessary for operating requirements is invested
in short-term, highly liquid, income-producing investments. Investments with maturities of three
months or less are classified as cash and cash equivalents, which primarily consist of certificates
of deposit, money market funds, and investment grade commercial paper issued by major corporations
and financial institutions. Cash and cash equivalents are stated at cost, which approximates
market value.
INVENTORIES Inventories of flight equipment expendable parts, materials, and supplies are carried
at average cost. These items are generally charged to expense when issued for use.
PROPERTY AND EQUIPMENT Depreciation is provided by the straight-line method to estimated residual
values over periods generally ranging from 20 to 25 years for flight equipment and 5 to 30 years
for ground property and equipment once the asset is placed in service. Residual values estimated
for aircraft are 15 percent, except for 737-200 aircraft, which were retired from the Companys
fleet in January 2005. The estimated residual value for these aircraft is two percent, based on
current market values. Residual value percentages for ground property and equipment range from zero
to 10 percent. 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 Companys
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 estimating the lives and expected residual values of its aircraft, the Company primarily has
relied upon actual experience with the same or similar aircraft types and recommendations from
Boeing, the manufacturer of the Companys aircraft. Subsequent revisions to these estimates, which
can be significant, could be caused by changes to the Companys maintenance program, changes in
utilization of the aircraft (actual flight hours or cycles during a given period of time),
governmental regulations on aging aircraft, changing market prices of new and used aircraft of the
same or similar types, etc. The Company evaluates its estimates and assumptions each reporting
period and, when warranted, adjusts these estimates and assumptions. Generally, these adjustments
are accounted for on a prospective basis through depreciation and amortization expense, as required
by GAAP.
When appropriate, the Company evaluates its long-lived assets used in operations for impairment.
Impairment losses would be recorded when events and circumstances indicate that an asset might be
impaired and the undiscounted cash flows to be generated by that asset are less than the carrying
amounts of the asset. Factors that would indicate potential impairment include, but are not
limited to, significant decreases in the market value of the long-lived asset(s), a significant
change in the long-lived assets physical condition, operating or cash flow losses associated with
the use of the long-lived asset, etc.
While the airline industry as a whole has experienced many of these indicators, Southwest has
continued to operate all of its aircraft and continues to experience positive cash flow.
36
AIRCRAFT AND ENGINE MAINTENANCE The cost of scheduled engine inspections and repairs and routine
maintenance costs for all aircraft and engines are charged to maintenance expense as incurred. For
the Companys 737-200, 737-300, and 737-500 aircraft fleet types, scheduled airframe inspections
and repairs, known as D checks, are generally performed every ten years. Costs related to D checks
are capitalized and amortized over the estimated period benefited, presently the least of ten
years, the time until the next D check, or the remaining life of the aircraft. 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.
The Companys newest aircraft fleet type, the 737-700, is maintained under a different, more
efficient next-generation maintenance program. This program bundles tasks based on data gathered
relative to fleet performance. Scheduled maintenance is still performed at recommended intervals;
however, this program does not contain a D check. The costs of scheduled airframe inspections and
repairs under this maintenance program are expensed as incurred, as those expenses more readily
approximate the underlying scheduled maintenance tasks.
INTANGIBLE ASSETS Intangible assets primarily consist of rights to airport owned gates acquired by
the Company. These assets are amortized on a straight-line basis over the expected useful life of
the lease.
REVENUE RECOGNITION Tickets sold are initially deferred as Air traffic liability. Passenger
revenue is recognized when transportation is provided. Air traffic liability primarily
represents tickets sold for future travel dates and estimated refunds and exchanges of tickets sold
for past travel dates. The majority of the Companys tickets sold are nonrefundable. Tickets that
are sold but not flown on the travel date can be reused for another flight, up to a year from the
date of sale, or refunded (if the ticket is refundable). A small percentage of tickets (or partial
tickets) expire unused. The Company estimates the amount of future refunds and exchanges, net of
forfeitures, for all unused tickets once the flight date has passed. These estimates are based on
historical experience over many years. The Company and members of the airline industry have
consistently applied this accounting method to estimate revenue from forfeited tickets at the date
travel is provided. Estimated future refunds and exchanges included in the air traffic liability
account are constantly evaluated based on subsequent refund and exchange activity to validate the
accuracy of the Companys revenue recognition method with respect to forfeited tickets.
Events and circumstances outside of historical fare sale activity or historical Customer travel
patterns can result in actual refunds, exchanges or forfeited tickets differing significantly from
estimates; however, these differences have historically not been material. Additional factors that
may affect estimated refunds, exchanges, and forfeitures include, but may not be limited to, the
Companys refund and exchange policy, the mix of refundable and nonrefundable fares, and fare sale
activity. The Companys estimation techniques have been consistently applied from year to year;
however, as with any estimates, actual refund and exchange activity may vary from estimated
amounts.
Subsequent to third quarter 2001 and through second quarter 2002, the Company experienced a higher
than historical mix of discount, nonrefundable ticket sales. The Company also experienced changes
in Customer travel patterns resulting from various factors, including new airport security
measures, concerns about further terrorist attacks, and an uncertain economy. Consequently, the
Company recorded $36 million in additional passenger revenue in second quarter 2002 as Customers
required fewer refunds and exchanges, resulting in more forfeited tickets. During 2003 and 2004,
refund, exchange, and forfeiture activity returned to more historic, pre-September 11, 2001,
patterns.
FREQUENT FLYER PROGRAM The Company accrues the estimated incremental cost of providing free
travel for awards earned under its Rapid Rewards frequent flyer program. The Company also sells
frequent flyer credits and related services to companies participating in its Rapid Rewards
frequent flyer program. Funds
37
received from the sale of flight segment credits and associated with
future travel are deferred and recognized as Passenger revenue when the ultimate free travel
awards are flown or the credits expire unused.
ADVERTISING The Company expenses the costs of advertising as incurred. Advertising expense for
the years ended December 31, 2004, 2003, and 2002 was $158 million, $155 million, and $156 million,
respectively.
STOCK-BASED EMPLOYEE COMPENSATION The Company has stock-based compensation plans covering the
majority of its Employee groups, including a plan covering the Companys Board of Directors and
plans related to employment contracts with certain Executive Officers of the Company. The Company
accounts for stock-based compensation utilizing the intrinsic value method in accordance with the
provisions of Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees and related Interpretations. Accordingly, no compensation expense is recognized for
fixed option plans because the exercise prices of Employee stock options equal or exceed the market
prices of the underlying stock on the dates of grant. Compensation expense for other stock options
is not material.
The following table represents the effect on net income and earnings per share if the Company had
applied the fair value based method and recognition provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based Employee
compensation:
As required, the pro forma disclosures above include options granted since January 1, 1995. 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. See Note 13 for further
discussion of the Companys stock-based Employee compensation.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment. SFAS No. 123R is a
revision of SFAS No. 123, Accounting for Stock Based Compensation, and supersedes APB 25. Among
other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting,
and requires companies to recognize the cost of employee services received in exchange for awards
of equity
38
instruments, based on the grant date fair value of those awards, in the financial
statements. The effective date of SFAS 123R is the first reporting period beginning after June 15,
2005, which is third quarter 2005 for calendar year companies, although early adoption is allowed.
SFAS 123R permits companies to adopt its requirements using either a modified prospective method,
or a modified retrospective method. Under the modified prospective method, compensation cost
is recognized in the financial statements beginning with the effective date, based on the
requirements of SFAS 123R for all share-based payments granted after that date, and based on the
requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R.
Under the modified retrospective method, the requirements are the same as under the modified
prospective method, but also permits entities to restate financial statements of previous periods
based on proforma disclosures made in accordance with SFAS 123.
The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to measure the
fair value of stock options granted to Employees. While SFAS 123R permits entities to continue to
use such a model, the standard also permits the use of a lattice model. The Company has not yet
determined which model it will use to measure the fair value of employee stock options upon the
adoption of SFAS 123R. See Note 13 for further information.
SFAS 123R also requires that the benefits associated with the tax deductions in excess of
recognized compensation cost be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature. This requirement will reduce net operating cash flows
and increase net financing cash flows in periods after the effective date. These future amounts
cannot be estimated, because they depend on, among other things, when employees exercise stock
options. However, the amount of operating cash flows recognized in prior periods for such excess
tax deductions, as shown in the Companys Consolidated Statement of Cash Flows, were $35 million,
$41 million, and $38 million, respectively, for 2004, 2003, and 2002.
The Company currently expects to adopt SFAS 123R effective July 1, 2005; however, the Company has
not yet determined which of the aforementioned adoption methods it
will use. Subject to a complete review of the requirements of SFAS
123R, based on stock
options granted to Employees through December 31, 2004, and stock options expected to be granted
during 2005, the Company expects that the adoption of SFAS 123R on July 1, 2005, would reduce both
third quarter 2005 and fourth quarter 2005 net earnings by approximately $10 million ($.01 per
share, diluted) each. See Note 13 for further information on the Companys stock-based
compensation plans.
FINANCIAL DERIVATIVE INSTRUMENTS The Company accounts for financial derivative instruments
utilizing Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for
Derivative Instruments and Hedging Activities, as amended. The Company utilizes various
derivative instruments, including both crude oil and heating oil-based derivatives, to hedge a
portion of its exposure to jet fuel price increases. These instruments primarily consist of
purchased call options, collar structures, and fixed-price swap agreements, and are accounted for
as cash-flow hedges, as defined by SFAS 133. The Company has also entered into interest rate swap
agreements to convert a portion of its fixed-rate debt to floating rates. These interest rate
hedges are accounted for as fair value hedges, as defined by SFAS 133.
Since the majority of the Companys financial derivative instruments are not traded on a market
exchange, the Company estimates their fair values. Depending on the type of instrument, the values
are determined by the use of present value methods or standard option value models with assumptions
about commodity prices based on those observed in underlying markets. Also, since there is not a
reliable forward market for jet fuel,
the Company must estimate the future prices of jet fuel in order to measure the effectiveness of
the hedging instruments in offsetting changes to those prices, as required by SFAS 133. Forward
jet fuel prices are estimated through the observation of similar commodity futures prices (such as
crude oil, heating oil, and unleaded gasoline) and adjusted based on historical variations to those
like commodities. See Note 10 for further information on SFAS 133 and financial derivative
instruments.
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INCOME TAXES The Company accounts for deferred income taxes utilizing Statement of Financial
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes, as amended. SFAS 109
requires an asset and liability method, whereby deferred tax assets and liabilities are recognized
based on the tax effects of temporary differences between the financial statements and the tax
bases of assets and liabilities, as measured by current enacted tax rates. When appropriate, in
accordance with SFAS 109, the Company evaluates the need for a valuation allowance to reduce
deferred tax assets.
2. ACQUISITION OF CERTAIN ASSETS
In fourth quarter 2004, Southwest was selected as the winning bidder at a bankruptcy-court approved
auction for certain ATA Airlines, Inc. (ATA) assets. As part of the transaction, which was
approved in December 2004, Southwest agreed to pay $40 million for certain ATA assets, consisting
of the rights to six of ATAs leased Chicago Midway Airport gates and the rights to a leased
aircraft maintenance hangar at Chicago Midway Airport. An initial payment of $34 million in
December 2004 is classified as an intangible asset and is included in Other assets in the
Consolidated Balance Sheet. In addition, Southwest provided ATA with $40 million in
debtor-in-possession financing while ATA remains in bankruptcy, and has also guaranteed the
repayment of an ATA construction loan to the City of Chicago for $7 million. The $40 million
debtor-in-possession financing, which will mature no later than September 30, 2005, is classified
as Accounts and other receivables in the Consolidated Balance Sheet, and the estimated fair value
of the Companys guarantee of the ATA construction loan, which is not material, is classified as
part of Other deferred liabilities. The debtor-in-possession financing bears interest at a rate
equal to the higher of 8 percent or LIBOR plus 5 percent, and interest is payable to Southwest
monthly.
Southwest and ATA also agreed on a code share arrangement, which was approved by the Department of
Transportation in January 2005. Under the agreement, each carrier can exchange passengers on
certain designated flights at Chicagos Midway Airport. Sales of the code share flights began
January 16, 2005, with travel dates beginning February 4, 2005.
Upon ATAs emergence from bankruptcy, Southwest has committed to convert the debtor-in-possession
financing to a term loan, payable over five years. Additionally, Southwest has committed to invest
$30 million in cash into ATA convertible preferred stock, which would represent 27.5 percent of the
new ATA. The stock will be nonvoting, and it is the Companys intent to liquidate those shares in
an orderly manner over time.
3. FEDERAL GRANTS
As a result of the September 11, 2001 terrorist attacks, President Bush signed into law the Air
Transportation Safety and System Stabilization Act (Stabilization Act). The Stabilization Act
provided for up to $5 billion in cash grants to qualifying U.S. airlines and freight carriers to
compensate for direct and incremental losses, as defined in the Stabilization Act, from September
11, 2001, through December 31, 2001, associated with the terrorist attacks. Each airlines total
eligible grant was determined based on that airlines percentage of available seat miles (ASMs)
during August 2001 to total eligible carriers ASMs for August 2001, less an amount set aside for
eligible carriers for whom the use of an ASM formula would result in an insufficient representation
of their share of direct and incremental losses.
In 2001, the Department of Transportation (DOT) made a determination of the amount of eligible
direct and incremental losses incurred by Southwest, and the Company was allotted 100 percent of
its eligible grants, totaling $283 million. The Company recognized $235 million in Other gains
from grants under the Stabilization Act during the second half of 2001 and recognized an additional
$48 million as Other gains from grants under the Stabilization Act in third quarter 2002
coincident with the receipt of its final payment. Representatives of the DOT or other governmental
agencies may perform additional audit and/or review(s) of the Companys previously submitted final
application, although no reviews had been performed as of December 31, 2004. While the
Stabilization Act is subject to significant interpretation as to what constitutes
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direct and
incremental losses, management believes the Companys eligible direct and incremental losses are
sufficient to retain 100 percent of its eligible grant following additional audits or reviews,
should they occur.
On April 16, 2003, as a result of the United States war with Iraq, the Emergency Wartime
Supplemental Appropriations Act (Wartime Act) was signed into law. Among other items, the
legislation included a $2.3 billion government grant for airlines. Southwest received $271 million
as its proportional share of the grant during second quarter 2003. This amount is included in
Other (gains) losses in the accompanying Consolidated Income Statement for 2003. Also as part
of the Wartime Act, the Company received approximately $5 million as a reimbursement for the direct
cost of reinforcing cockpit doors on all of the Companys aircraft. The Company accounted for this
reimbursement as a reduction of capitalized property and equipment.
4. COMMITMENTS
The Companys contractual purchase commitments primarily consist of scheduled aircraft acquisitions
from Boeing. The Company has contractual purchase commitments with Boeing for 34 737-700 aircraft
deliveries in 2005, 26 scheduled for delivery in 2006, 25 in 2007, and 6 in 2008. In addition, the
Company has options and purchase rights for an additional 259 737-700s that it may acquire during
2006-2012. The Company has the option, which must be exercised two years prior to the contractual
delivery date, to substitute 737-600s or 737-800s for the 737-700s. As of December 31, 2004,
aggregate funding needed for firm commitments is approximately $2.3 billion, subject to adjustments
for inflation, due as follows: $920 million in 2005, $709 million in 2006, $523 million in 2007,
and $105 million in 2008.
In November 2001, in response to decreased demand for air travel following the terrorist attacks,
the Company modified its schedule for future aircraft deliveries to defer the acquisition of 19 new
737-700 aircraft that were either already in production at Boeing or were scheduled to be built
through April 2002. The Company accomplished this by entering into a trust arrangement with a
special purpose entity (the Trust) and assigned its purchase agreement with Boeing to the Trust
with respect to the 19 aircraft originally scheduled for delivery between September 2001 and April
2002. Southwest subsequently entered into a purchase agreement with the Trust to purchase the
aircraft at new delivery dates from January 2002 to April 2003. The Trust was formed to facilitate
the financing of the Companys near-term aircraft purchase obligations with Boeing. The Trust
purchased 11 of the aircraft in 2001 and eight aircraft in 2002. For these 19 Trust aircraft, the
Company recorded the associated assets (Flight equipment) and liabilities (Aircraft purchase
obligations) in its financial statements as the aircraft were completed by Boeing and delivered to
the Trust. In the Consolidated Statement of Cash Flows, the Trusts receipt of these aircraft was
recorded as Purchases of property and equipment and Proceeds from trust arrangement. During
2002, the Company accelerated the deliveries from the Trust and accepted delivery of all 19
aircraft, thereby terminating the Trust. The receipt of the aircraft from the Trust was reflected
in the Consolidated Statement of Cash Flows as Payments of trust arrangement. The cost of
financing these aircraft obligations, approximately $5 million, was expensed.
5. ACCRUED LIABILITIES
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6. SHORT-TERM BORROWINGS
Following the terrorist attacks in September 2001, the Company borrowed the full $475 million
available under its unsecured revolving credit line with a group of banks. Borrowings under the
credit line bore interest at six-month LIBOR plus 15.5 basis points. The Company repaid this
unsecured revolving credit line in full, plus accrued interest, in March 2002. This credit
facility was replaced in April 2002.
During second quarter 2004, the Company replaced its former revolving credit facilities with a new
facility. Under the new facility, the Company can borrow up to $575 million from a group of banks.
The facility expires in April 2007 and is unsecured. At the Companys option, interest on the
facility can be calculated on one of several different bases. For most borrowings, Southwest would
anticipate choosing a floating rate based upon LIBOR. If fully drawn, the spread over LIBOR would
be 75 basis points given Southwests credit rating at December 31, 2004. The facility also
contains a financial covenant requiring a minimum coverage ratio of adjusted pretax income to fixed
obligations, as defined. As of December 31, 2004, the Company is in compliance with this covenant,
and there are no outstanding amounts borrowed under this facility.
7. LONG-TERM DEBT
In November 2004, the Company redeemed its remaining $175 million of floating rate Aircraft Secured
Notes originally issued in 1999.
In fourth quarter 2004, the Company entered into four identical 13-year floating-rate financing
arrangements, whereby it borrowed a total of $112 million from French banking partnerships.
Although the interest on the borrowings are at floating rates, the Company estimates that,
considering the full effect of the net present value benefits included in the transactions, the
effective economic yield over the 13-year term of the loans will be approximately LIBOR minus 45
basis points. Principal and interest are payable semi-annually on June 30 and December 31 for each
of the loans, and the Company may terminate the arrangements in any year on either of those dates,
with certain conditions. The Company has pledged four aircraft as collateral for the transactions.
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In September 2004, the Company issued $350 million senior unsecured Notes (Notes) due 2014. The
Notes bear interest at 5.25 percent, payable semi-annually in arrears, with the first payment due
on April 1, 2005. Concurrently, the Company entered into an interest-rate swap agreement to convert
this fixed-rate debt to a floating rate. See Note 10 for more information on the interest-rate
swap agreement. Southwest used the net proceeds from the issuance of the Notes, approximately $346
million, for general corporate purposes.
In February 2004 and April 2004, the Company issued two separate $29 million two-year notes, each
secured by one new 737-700 aircraft. Both of the notes are non-interest bearing and accrete to
face value at maturity at annual rates of 2.9 percent and 3.4 percent, respectively. The proceeds
of these borrowings were used to fund the individual aircraft purchases.
On March 1, 2002, the Company issued $385 million senior unsecured Notes (Notes) due March 1, 2012.
The Notes bear interest at 6.5 percent, payable semi-annually beginning on September 1, 2002.
Southwest used the net proceeds from the issuance of the Notes, approximately $380 million, for
general corporate purposes, including the repayment of the Companys credit facility in March 2002.
See Note 6. During 2003, the Company entered into an interest rate swap agreement relating to
these Notes. See Note 10 for further information.
On October 30, 2001, the Company issued $614 million Pass Through Certificates consisting of $150
million 5.1% Class A-1 certificates, $375 million 5.5% Class A-2 certificates, and $89 million 6.1%
Class B certificates. A separate trust was established for each class of certificates. The trusts
used the proceeds from the sale of certificates to acquire equipment notes, which were issued by
Southwest on a full recourse basis. Payments on the equipment notes held in each trust will be
passed through to the holders of certificates of such trust. The equipment notes were issued for
each of 29 Boeing 737-700 aircraft owned by Southwest and are secured by a mortgage on such
aircraft. Interest on the equipment notes held for the certificates is payable semiannually,
beginning May 1, 2002. Beginning May 1, 2002, principal payments on the equipment notes held for
the Class A-1 certificates are due semiannually until the balance of the certificates mature on May
1, 2006. The entire principal of the equipment notes for the Class A-2 and Class B certificates
are scheduled for payment on November 1, 2006. During 2003, the Company entered into an interest
rate swap agreement relating to the $375 million 5.5% Class A-2 certificates. See Note 10 for
further information.
In fourth quarter 1999, the Company entered into two identical 13-year floating rate financing
arrangements, whereby it borrowed a total of $56 million from French banking partnerships. Although
the interest on the borrowings are at floating rates, the Company estimates that, considering the
full effect of the net present value benefits included in the transactions, the effective
economic yield over the 13-year term of the loans will be approximately LIBOR minus 67 basis
points. Principal and interest are payable semi-annually on June 30 and December 31 for each of
the loans and the Company may terminate the arrangements in any year on either of those dates, with
certain conditions. The Company pledged two aircraft as collateral for the transactions.
On February 28, 1997, the Company issued $100 million of senior unsecured 7 3/8% Debentures due
March 1, 2027. Interest is payable semi-annually on March 1 and September 1. The Debentures may
be redeemed, at the option of the Company, in whole at any time or in part from time to time, at a
redemption price equal to the greater of the principal amount of the Debentures plus accrued
interest at the date of redemption or the sum of the present values of the remaining scheduled
payments of principal and interest thereon, discounted to the date of redemption at the comparable
treasury rate plus 20 basis points, plus accrued interest at the date of redemption.
During 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.
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During 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.
The net book value of the assets pledged as collateral for the Companys secured borrowings,
primarily aircraft and engines, was $889 million at December 31, 2004.
As of December 31, 2004, aggregate annual principal maturities (not including amounts associated
with interest rate swap agreements, and interest on capital leases) for the five-year period ending
December 31, 2009, were $146 million in 2005, $604 million in 2006, $120 million in 2007, $22
million in 2008, $24 million in 2009, and $960 million thereafter.
8. LEASES
The Company had seven aircraft classified as capital leases at December 31, 2004. The amounts
applicable to these aircraft included in property and equipment were:
Total rental expense for operating leases, both aircraft and other, charged to operations in 2004,
2003, and 2002 was $403 million, $386 million, and $371 million, respectively. The majority of the
Companys terminal operations space, as well as 88 aircraft, were under operating leases at
December 31, 2004. Future minimum lease payments under capital leases and noncancelable operating
leases with initial or remaining terms in excess of one year at December 31, 2004, were:
The aircraft leases generally can 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, generally limited to a stated percentage of the
lessors defined cost of the aircraft.
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9. CONSOLIDATION OF RESERVATIONS CENTERS
In November 2003, the Company announced the consolidation of its nine Reservations Centers into
six, effective February 28, 2004. This decision was made in response to the established shift by
Customers to the internet as a preferred way of booking travel. The Companys website,
southwest.com
, now accounts for more than half of ticket bookings and, as a consequence, demand for
phone contact has dramatically decreased. During first quarter 2004, the Company closed its
Reservations Centers located in Dallas, Texas, Salt Lake City, Utah, and Little Rock, Arkansas.
The Company provided the 1,900 affected Employees at these locations the opportunity to relocate to
another of the Companys remaining six centers. Those Employees choosing not to relocate,
approximately 55% of the total affected, were offered support packages, which included severance
pay, flight benefits, medical coverage, and job-search assistance, depending on length of service
with the Company. The total cost associated with the Reservations Center consolidation, recognized
in first quarter 2004, was approximately $18 million. Employee severance and benefit costs were
reflected in Salaries, wages, and benefits, and the majority of other costs in Other operating
expenses in the Consolidated Statement of Income. The breakdown of the costs incurred and a
rollforward of the amounts accrued is as follows (in millions):
10. DERIVATIVE AND FINANCIAL INSTRUMENTS
Fuel contracts
- Airline operators are inherently dependent upon energy to operate and,
therefore, are impacted by changes in jet fuel prices. Jet fuel and oil consumed in 2004, 2003,
and 2002 represented approximately 16.7 percent, 15.2 percent, and 14.9 percent of Southwests
operating expenses, respectively. The Company endeavors to acquire jet fuel at the lowest possible
cost. Because jet fuel is not traded on an organized futures exchange, liquidity for hedging is
limited. However, the Company has found that crude oil, heating oil, and unleaded gasoline
contracts are effective commodities for hedging jet fuel. The Company has financial derivative
instruments in the form of the types of hedges it utilizes to decrease its exposure to jet fuel
price increases. The Company does not purchase or hold any derivative financial instruments for
trading purposes.
The Company utilizes financial derivative instruments for both short-term and long-term time frames
when it appears the Company can take advantage of market conditions. As of December 31, 2004, the
Company had a mixture of purchased call options, collar structures, and fixed price swap agreements
in place to hedge its total anticipated jet fuel requirements, at crude oil equivalent prices, for
the following periods: 85 percent for 2005 at approximately $26 per barrel, 65 percent for 2006 at
approximately $32 per barrel, over 45 percent for 2007 at approximately $31 per barrel, 30 percent
in 2008 at approximately $33 per barrel, and over 25 percent for 2009 at approximately $35 per
barrel. As of December 31, 2004, the majority of the Companys first quarter 2005 hedges are
effectively heating oil-based positions in the form of option contracts. For the remainder of
2005, the majority of the Companys hedge positions are effectively in the form of unleaded
gasoline-based and heating oil-based option contracts. The majority of the remaining hedge
positions are crude oil-based positions.
Under the rules established by SFAS 133, the Company is required to record all financial derivative instruments on its balance sheet
at fair value; however, not all instruments necessarily qualify for hedge accounting. Derivatives that are not designated as hedges must be adjusted to fair value
through income. If a derivative is
45
designated as a hedge, depending on the nature of the hedge,
changes in its fair value that are considered to be effective, as defined, either offset the change
in fair value of the hedged assets, liabilities, or firm commitments through earnings or are
recorded in Accumulated other comprehensive income (loss) until the hedged item is recorded in
earnings. Any portion of a change in a derivatives fair value that is considered to be
ineffective, as defined, is recorded immediately in Other (gains) losses, net in the Consolidated
Statement of Income. See Note 11 for further information on Accumulated other comprehensive income
(loss). Any portion of a change in a derivatives fair value that the Company elects to exclude
from its measurement of effectiveness is required to be recorded immediately in earnings.
The Company primarily uses financial derivative instruments to
hedge its exposure to jet fuel price increases and accounts for these derivatives as cash flow
hedges, as defined. In accordance with SFAS 133, the Company must comply with detailed rules and
strict documentation requirements prior to beginning hedge accounting. As required by SFAS 133,
the Company assesses the effectiveness of each of its individual hedges on a quarterly basis. The
Company also examines the effectiveness of its entire hedging program on a quarterly basis
utilizing statistical analysis. This analysis involves utilizing regression and other statistical
analyses that compare changes in the price of jet fuel to changes in the prices of the commodities
used for hedging purposes (crude oil, heating oil, and unleaded gasoline). If a derivative
instrument does not qualify for hedge accounting, as defined by SFAS 133, any change in fair value
of that derivative instrument is recorded immediately in earnings.
During 2004, the Company recognized $13 million in additional expense in Other (gains) losses,
net, related to the ineffectiveness of its hedges. During 2003 and 2002, the Company recognized
$16 million and $5 million, in additional income, respectively, in Other (gains) losses, net,
related to the ineffectiveness of its hedges. During 2004, 2003, and 2002, the Company recognized
approximately $24 million, $29 million, and $26 million, respectively, of net expense, related to
amounts excluded from the Companys measurements of hedge effectiveness, in Other (gains) losses,
net. Hedge accounting, as administered
according to SFAS 133, generally results in more volatility in the Companys financial statements
than prior to its adoption, due to the changes in market values of derivative instruments and some
ineffectiveness that has been experienced in fuel hedges.
During 2004, 2003, and 2002, the Company recognized gains in Fuel and oil expense of $455
million, $171 million, and $45 million, respectively, from hedging activities. At December 31,
2004 and 2003, approximately $51 million and $19 million, respectively, due from third parties from
expired derivative contracts, is included in Accounts and other receivables in the accompanying
Consolidated Balance Sheet. The fair value of the Companys financial derivative instruments at
December 31, 2004, was a net asset of approximately $796 million. The current portion of these
financial derivative instruments is classified as Fuel hedge contracts and the long-term portion
is classified as Other assets in the Consolidated Balance Sheet. The fair value of the derivative
instruments, depending on the type of instrument, was determined by the use of present value
methods or standard option value models with assumptions about commodity prices based on those
observed in underlying markets.
As of December 31, 2004, the Company had approximately $416 million in unrealized gains, net of
tax, in Accumulated other comprehensive income (loss) related to fuel hedges. Included in this
total are approximately $246 million in net unrealized gains that are expected to be realized in
earnings during 2005.
Interest Rate Swaps
- During 2003, the Company entered into interest rate swap agreements
relating to its $385 million 6.5% senior unsecured notes due 2012 and $375 million 5.496% Class A-2
pass-through certificates due 2006. The floating rate paid under each agreement is set in arrears.
Under the first agreement, the Company pays the London InterBank Offered Rate (LIBOR) plus a
margin every six months and receives 6.5% every six months on a notional amount of $385 million
until 2012. The average floating rate paid under this agreement during 2004 is estimated to be
4.490 percent based on actual and forward rates at December 31,
46
2004. Under the second agreement,
the Company pays LIBOR plus a margin every six months and receives 5.496% every six months on a
notional amount of $375 million until 2006. Based on actual and forward rates at December 31,
2004, the average floating rate paid under this agreement during 2004 is estimated to be 4.695
percent.
During 2004, the Company entered into an interest rate swap agreement relating to its $350 million
5.25% senior unsecured notes due 2014. Under this agreement, the Company pays LIBOR plus a margin
every six months and receives 5.25% every six months on a notional amount of $350 million until
2014. The floating rate is set in advance. The average floating rate paid under this agreement
during 2004 was 2.814 percent.
The primary objective for the Companys use of interest rate hedges is to reduce the volatility of
net interest income by better matching the repricing of its assets and liabilities. Concurrently,
the Companys interest rate hedges are also intended to take advantage of market conditions in
which short-term rates are significantly lower than the fixed longer term rates on the Companys
long-term debt. The Companys interest rate swap agreements qualify as fair value hedges, as
defined by SFAS 133. The fair value of the interest rate swap agreements, which are adjusted
regularly, are recorded in the Consolidated Balance Sheet, as necessary, with a corresponding
adjustment to the carrying value of the long-term debt. The fair value of the interest rate swap
agreements, excluding accrued interest, at December 31, 2004, was a liability of approximately $16
million. This amount is recorded in Other deferred liabilities in the Consolidated Balance
Sheet. In accordance with fair value hedging, the offsetting entry is an adjustment to decrease
the carrying value of long-term debt. See Note 7.
Outstanding financial derivative instruments expose the Company to credit loss in the event of
nonperformance by the counterparties to the agreements. However, the Company does not expect any
of the counterparties to fail to meet their obligations. The credit exposure related to these
financial instruments is represented by the fair value of contracts with a positive fair value at
the reporting date. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits
its exposure to a single counterparty, and monitors the market position of the program and its
relative market position with each counterparty. At December 31, 2004, the Company had agreements
with seven counterparties containing early termination rights and/or bilateral collateral
provisions whereby security is required if market risk exposure exceeds a specified threshold
amount or credit ratings fall below certain levels. At December 31, 2004, the Company held $330
million in cash collateral deposits and $150 million in U.S. Treasury Bills, under these bilateral
collateral provisions. These collateral deposits serve to decrease, but not totally eliminate, the
credit risk associated with the Companys hedging program. The cash deposits are included in
Accrued liabilities on the Consolidated Balance Sheet and are included as Operating cash flows
in the Consolidated Statement of Cash Flows. In accordance with SFAS 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, the U.S. Treasury
Bills, supplied as non-cash collateral by counterparties, are not reflected on the Companys
Consolidated Balance Sheet.
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The carrying amounts and estimated fair values of the Companys long-term debt at December 31, 2004
were as follows:
The estimated fair values of the Companys publicly held long-term debt were based on quoted
market prices. The carrying values of all other financial instruments approximate their fair
value.
11. COMPREHENSIVE INCOME
Comprehensive income includes changes in the fair value of certain financial derivative
instruments, which qualify for hedge accounting, and unrealized gains and losses on certain
investments. Comprehensive income totaled $608 million, $510 million, and $327 million for 2004,
2003, and 2002, respectively. The differences between Net income and Comprehensive income for
these years are as follows:
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A rollforward of the amounts included in Accumulated other comprehensive income (loss), net
of taxes for 2004, 2003, and 2002, is shown below:
12. COMMON STOCK
The Company has one class of common stock. Holders of shares of common stock are entitled to
receive dividends when and if declared by the Board of Directors and are entitled to one vote per
share on all matters submitted to a vote of the shareholders. At December 31, 2004, the Company
had 241 million shares of common stock reserved for issuance pursuant to Employee stock benefit
plans (of which 43 million shares have not yet been granted.)
In January 2004, the Companys Board of Directors authorized the repurchase of up to $300 million
of the Companys common stock, utilizing present and anticipated proceeds from the exercise of
Employee stock options. Repurchases will be made in accordance with applicable securities laws in
the open market or in private transactions from time to time, depending on market conditions.
During 2004, the Company repurchased approximately 17.0 million of its common shares for a total of
approximately $246 million.
13. STOCK PLANS
The Company has stock plans covering Employees subject to collective bargaining agreements
(collective bargaining plans) and stock plans covering Employees not subject to collective
bargaining agreements (other Employee plans). None of the collective bargaining plans were
required to be approved by shareholders. Options granted to Employees under collective bargaining
plans are granted at or above the fair market value of the Companys common stock on the date of
grant, and generally have terms ranging from six to twelve years. Vesting terms differ based on
the grant made, and have ranged in length from immediate vesting to vesting periods in accordance
with the period covered by the respective collective bargaining agreement. Neither Executive
Officers nor members of the Companys Board of Directors are eligible to participate in any of
these collective bargaining plans. Options granted to Employees through other Employee plans are
granted at the fair market value of the Companys common stock on the date of grant, have ten-year
terms, and vest and become fully exercisable over three, five, or ten years of continued
employment, depending upon the grant type. All of the options included under the heading of Other
Employee Plans have been approved by shareholders, except the plan covering non-management,
non-contract Employees, which had 6.8 million options outstanding to purchase the Companys common
stock as of December 31, 2004.
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Aggregated information regarding the Companys fixed stock option plans is summarized below:
The following table summarizes information about stock options outstanding under the fixed
option plans at December 31, 2004:
Under the amended 1991 Employee Stock Purchase Plan (ESPP), which has been approved by
shareholders, as of December 31, 2004, the Company is authorized to issue up to a remaining balance
of 3.5 million shares of common stock to Employees of the Company. These shares may be issued 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
1.5 million shares in 2004, 1.4 million shares in 2003, and 1.4 million shares in 2002, at average
prices of $13.47, $14.04, and $14.70, respectively. The weighted-average fair value of each
purchase right under the ESPP granted in 2004, 2003, and 2002, which is equal to the ten percent
discount from the market value of the common stock at the end of each purchase period, was $1.50,
$1.56, and $1.63, respectively.
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Pro forma information regarding net income and net income per share, as disclosed in Note 1, 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 SFAS 123. The fair value of each option grant
is estimated on the date of grant using a modified Black-Scholes option pricing model with the
following weighted-average assumptions used for grants under the fixed option plans:
The Black-Scholes option valuation model was developed for use in estimating the fair value of
short-term traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective assumptions including
expected stock price volatility. Because the Companys 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 managements opinion the existing
models do not necessarily provide a reliable single measure of the fair value of its Employee stock
options. See Note 1 for information on the use of alternative valuation methods allowed by SFAS
123R.
The fair value of options granted under the fixed option plans during 2004 ranged from $3.45 to
$7.83. The fair value of options granted under the fixed option plans during 2003 ranged from $3.33
to $8.17. The fair value of options granted under the fixed option plans during 2002 ranged from
$3.54 to $8.52.
14. EMPLOYEE RETIREMENT PLANS
Defined contribution plans
The Company has defined contribution plans covering substantially all Southwest Employees. The
Southwest Airlines Co. Profitsharing Plan is a money purchase defined contribution plan and
Employee stock purchase plan. The Company also sponsors Employee savings plans under section
401(k) of the Internal Revenue Code, which include Company matching contributions. The 401(k)
plans cover substantially all Employees. Contributions under all defined contribution plans are
primarily based on Employee compensation and performance of the Company.
Company contributions to all retirement plans expensed in 2004, 2003, and 2002 were $200 million,
$219 million, and $156 million, respectively.
Postretirement benefit plans
The Company provides postretirement benefits to qualified retirees in the form of medical and
dental coverage. Employees must meet minimum levels of service and age requirements as set forth
by the Company, or as specified in collective bargaining agreements with specific workgroups.
Employees meeting these requirements, as defined, may use accrued sick time to pay for medical and
dental premiums from the age of retirement until age 65.
51
The following table shows the change in the Companys accumulated postretirement benefit obligation
(APBO) for the years ended December 31, 2004 and 2003:
During first quarter 2004, the Company closed its Reservations Centers located in Dallas, Texas,
Salt Lake City, Utah, and Little Rock, Arkansas. In excess of 1,000 Employees at these locations
did not elect to relocate to the Companys remaining centers, and instead accepted severance
packages offered by the Company. See Note 9 for further information. Also during 2004, the
Company offered an early-out option to substantially all Employees, primarily in an effort to
alleviate overstaffing in certain areas of the Company. As a result of the reduction in headcount
associated with these events, the Company remeasured its benefit obligation, resulting in the 2004
gain.
The assumed healthcare cost trend rates have a significant effect on the amounts reported for the
Companys plan. A one-percent change in all healthcare cost trend rates used in measuring the APBO
at December 31, 2004, would have the following effects:
The Companys plans are unfunded, and benefits are paid as they become due. For the years ended
December 31, 2004 and 2003, both benefits paid and Company contributions to the plans were $1
million in each year. Estimated future benefit payments expected to be paid for each of the next
five years are $2 million in 2005, $3 million in 2006, $5 million in 2007, $7 million in 2008, $9
million in 2009, and $78 million for the next five years thereafter.
The following table shows the calculation of the accrued postretirement benefit cost recognized in
Other deferred liabilities on the Companys Consolidated Balance Sheet at December 31, 2004 and
2003:
52
The Companys periodic postretirement benefit cost for the years ended December 31, 2004, 2003, and
2002, included the following:
Unrecognized prior service cost is expensed using a straight-line amortization of the cost over the
average future service of Employees expected to receive benefits under the plan. The Company used
the following actuarial assumptions to account for its postretirement benefit plans at December 31:
15. 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, 2004 and 2003,
are as follows:
53
The provision for income taxes is composed of the following:
For the year 2004, Southwest Airlines Co. had a tax net operating loss of $612 million for
federal income tax purposes. The Company estimates that a federal tax refund will be realized as a
result of utilizing a portion of this net operating loss as a carryback to prior taxable years.
This refund, estimated at $35 million at December 31, 2004, is included in Accounts and other
receivables in the Consolidated Balance Sheet. The remainder of the tax benefit related to the
year 2004 federal net operating loss is carried forward to future years, and expires in 2024.
The effective tax rate on income before income taxes differed from the federal income tax statutory
rate for the following reasons:
The Internal Revenue Service (IRS) regularly examines the Companys federal income tax returns
and, in the course of which, may propose adjustments to the Companys federal income tax liability
reported on such returns. It is the Companys practice to vigorously contest those proposed
adjustments that it deems lacking of merit. The Companys management does not expect that the
outcome of any proposed adjustments presented to date by the IRS, individually or collectively,
will have a material adverse effect on the Companys financial condition, results of operations, or
cash flows.
54
16. NET INCOME PER SHARE
The following table sets forth the computation of net income per share, basic and diluted:
The Company has excluded 31 million, 10 million, and 11 million shares from its calculations of net
income per share, diluted in 2004, 2003 and 2002 respectively, as they represent antidilutive
stock options for the respective periods presented.
55
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS
We have audited the accompanying consolidated balance sheets of Southwest Airlines Co. as of
December 31, 2004 and 2003, and the related consolidated statements of income, stockholders
equity, and cash flows for each of the three years in the period ended December 31, 2004. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the auditing standards of the Public Company Accounting
Oversight Board (United States). 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, 2004 and
2003, and the consolidated results of its operations and its cash flows for each of the three years
in the period ended December 31, 2004, in conformity with United States generally accepted
accounting principles.
We have also audited, in
accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Southwest
Airlines Co.'s internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control
- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
February 2, 2005 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Dallas, Texas
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
THE BOARD OF DIRECTORS AND SHAREHOLDERS
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reporting, that Southwest Airlines Co. maintained effective
internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Southwest Airlines management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that Southwest Airlines Co. maintained effective internal
control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, Southwest Airlines Co. maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria
.
57
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Southwest Airlines Co. as of December 31,
2004 and 2003, and the related consolidated statements of income, stockholders equity, and cash
flows for each of the three years in the period ended December 31, 2004 of Southwest Airlines Co.
and our report dated February 2, 2005 expressed an unqualified opinion thereon.
ERNST & YOUNG LLP
Dallas, TX
58
QUARTERLY FINANCIAL DATA (Unaudited)
Item 9.
Changes In
and Disagreements With Accountants on Accounting and Financial
Disclosure
None.
Item 9A.
Controls
and Procedures
Disclosure Controls and Procedures.
The Company maintains controls and procedures designed to
ensure that it is able to collect the information it is required to disclose in the reports it
files with the SEC, and to process, summarize and disclose this information within the time periods
specified in the rules of the SEC. Based on an evaluation of the Companys disclosure controls and
procedures as of the end of the period covered by this report conducted by the Companys
management, with the participation of the Chief Executive and Chief Financial Officers, the Chief
Executive and Chief Financial Officers believe that these controls and procedures are effective to
ensure that the Company is able to collect, process and disclose the information it is required to
disclose in the reports it files with the SEC within the required time periods.
Managements Report on Internal Control over Financial Reporting.
Management of the Company is
responsible for establishing and maintaining effective internal control over financial reporting as
defined in
59
Rules 13a-15(f) under the Securities Exchange Act of 1934. The Companys internal
control over financial reporting is designed to provide reasonable assurance to the Companys
management and board of directors regarding the preparation and fair presentation of published
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation.
Management assessed the effectiveness of the Companys internal control over financial
reporting as of December 31, 2004. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal
Control
Integrated Framework.
Based on our assessment, we believe that, as of December 31, 2004,
the Companys internal control over financial reporting is effective based on those criteria.
Managements assessment of the effectiveness of internal control over financial reporting as
of December 31, 2004, has been audited by Ernst & Young,
LLP, the independent registered public
accounting firm who also audited the Companys consolidated
financial statements. Ernst & Youngs attestation report on
managements assessment of the Companys internal control over
financial reporting appears on page 57 hereof.
Item 9B.
Other
Information
None.
PART III
Item 10.
Directors
and Executive Officers of the Registrant
The information required by Item 401 of Regulation S-K regarding directors is included under
Election of Directors in the definitive Proxy Statement for Southwests Annual Meeting of
Shareholders to be held May 18, 2005, and is incorporated herein by reference. The information
required by Item 401 of Regulation S-K regarding executive officers is included under Executive
Officers of the Registrant in Part I following Item 4 of this Report. The information required by
Item 405 of Regulation S-K is included under Section 16(a) Beneficial Ownership Reporting
Compliance in the definitive Proxy Statement for Southwests Annual Meeting of Shareholders to be
held May 18, 2005, and is incorporated herein by reference.
In the wake of well-publicized corporate scandals, the Securities and Exchange Commission and
the New York Stock Exchange have issued multiple new regulations, requiring the implementation of
policies and procedures in the corporate governance area. Since beginning business in 1971,
Southwest has thrived on a culture that encourages an entrepreneurial spirit in its Employees, and
has emphasized personal responsibility, initiative, and the use of independent, good judgment. The
Golden Rule is one of the core values, and there is a top-down insistence on the highest ethical
standards at all times.
In complying with new regulations requiring the institution of policies and procedures, it has
been the goal of Southwests Board of Directors and senior leadership to do so in a way which does
not inhibit or constrain Southwests unique culture, and which does not unduly impose a bureaucracy
of forms and checklists. Accordingly, formal, written policies and procedures have been adopted in
the simplest possible way, consistent with legal requirements. The Companys Corporate Governance
Guidelines, its
charters for each of its Audit, Compensation and Nominating and Corporate Governance
Committees and its Code of Ethics covering all Employees are available on the Companys website,
www.southwest.com, and a copy will be mailed upon request to Manager Investor Relations,
Southwest Airlines Co., P.O. Box 36611, Dallas, TX 75235. The Company intends to disclose any
amendments to or waivers of the Code of Ethics on
60
behalf of the Companys Chief Executive Officer,
Chief Financial Officer, Controller, and persons performing similar functions on the Companys
website, at southwest.com, under the About SWA caption, promptly following the date of such
amendment or waiver.
Item 11.
Executive
Compensation
See Compensation of Executive Officers, incorporated herein by reference from the definitive
Proxy Statement for Southwests Annual Meeting of Shareholders to be held May 18, 2005.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
See Voting Securities and Principal Shareholders, incorporated herein by reference from the
definitive Proxy Statement for Southwests Annual Meeting of Shareholders to be held May 18, 2005.
Item 13.
Certain
Relationships and Related Transactions
See Election of Directors incorporated herein by reference from the definitive Proxy
Statement for Southwests Annual Meeting of Shareholders to be held May 18, 2005.
Item 14.
Principal
Accountant Fees and Services
See Relationship with Independent Auditors incorporated herein by reference from the
definitive Proxy Statement for Southwests Annual Meeting of Shareholders to be held May 18, 2005.
PART IV
Item 15.
Exhibits
and Financial Statement Schedules
61
62
63
64
65
A copy of each exhibit may be obtained at a price of 15 cents per page, $10.00 minimum order,
by writing to: Manager Investor Relations, Southwest Airlines Co., P.O. Box 36611, Dallas, Texas
75235-1611.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on February 4, 2005 on behalf of the registrant and in the
capacities indicated.
67
68
INDEX TO THE EXHIBITS
Period
Dividend
High
Low
$
0.00450
$
16.60
$
12.88
0.00450
17.06
13.56
0.00450
16.85
13.18
0.00450
16.74
13.45
$
0.00450
$
15.33
$
11.72
0.00450
17.70
14.09
0.00450
18.99
15.86
0.00450
19.69
15.30
Number of Shares
Exercise
Date of
Date of
Purchased
Price
Exercise
Option Grant
$4.64
10/14/04
01/01/96
$1.00
10/14/04
01/01/96
$4.64
12/14/04
01/01/96
Table of Contents
Number of
Number of Securities
Securities to
Remaining Available for
be Issued upon
Future Issuance Under
Exercise
Equity Compensation
of Outstanding
Weighted-Average
Plans (Excluding
Options,
Exercise Price of
Securities Reflected in
Warrants, and Rights
Outstanding Options,
Column (a))
Plan Category
(in thousands)
Warrants, and Rights*
(in thousands)
(a)
(b)
(c)
28,887
$12.11
13,241
127,542
$11.22
29,288
156,429
$11.38
42,529
Table of Contents
Years Ended December 31,
2004
2003
2002
2001
2000
$
6,530
$
5,937
$
5,522
$
5,555
$
5,650
5,976
5,454
5,105
4,924
4,628
554
483
417
631
1,022
65
(225
)
24
(197
)
4
489
708
393
828
1,018
176
266
152
317
392
$
313
$
442
$
241
$
511
$
626
$
.40
$
.56
$
.31
$
.67
$
.84
$
.38
$
.54
$
.30
$
.63
$
.79
$
.0180
$
.0180
$
.0180
$
.0180
$
.0148
$
11,337
$
9,878
$
8,954
$
8,997
$
6,670
$
1,700
$
1,332
$
1,553
$
1,327
$
761
$
5,524
$
5,052
$
4,422
$
4,014
$
3,451
70,902,773
65,673,945
63,045,988
64,446,773
63,678,261
81,066,038
74,719,340
72,462,123
73,628,723
72,566,817
53,418,353
47,943,066
45,391,903
44,493,916
42,215,162
76,861,296
71,790,425
68,886,546
65,295,290
59,909,965
69.5
%
66.8
%
65.9
%
68.1
%
70.5
%
753
730
720
690
663
576
558
537
514
492
981,591
949,882
947,331
940,426
903,754
$
88.57
$
87.42
$
84.72
$
83.46
$
85.87
11.76
¢
11.97
¢
11.77
¢
12.09
¢
12.95
¢
8.50
¢
8.27
¢
8.02
¢
8.51
¢
9.43
¢
7.77
¢
7.60
¢
7.41
¢
7.54
¢
7.73
¢
6.47
¢
6.44
¢
6.30
¢
6.36
¢
6.38
¢
82.8
¢
72.3
¢
68.0
¢
70.9
¢
78.7
¢
31,011
32,847
33,705
31,580
29,274
417
388
375
355
344
(1)
Revenue passenger miles divided by available seat miles.
(2)
Includes leased aircraft.
(3)
Before cumulative effect of change in accounting principle.
Table of Contents
Table of Contents
Table of Contents
(in millions, except per share and per ASM amounts)
2004
2003
$
5,976
$
5,454
(40
)
$
5,976
$
5,414
$
.0777
$
.0760
(.0006
)
$
.0777
$
.0754
$
554
$
483
40
$
554
$
523
$
313
$
442
(144
)
$
313
$
298
$
.38
$
.54
(.18
)
$
.38
$
.36
Table of Contents
Increase
Percent
2004
2003
(decrease)
change
3.18
¢
3.10
¢
.08
¢
2.6
%
1.30
1.16
.14
12.1
.60
.60
.07
(.07
)
(100.0
)
.23
.25
(.02
)
(8.0
)
.53
.52
.01
1.9
.56
.53
.03
5.7
1.37
1.37
7.77
¢
7.60
¢
.17
¢
2.2
%
Table of Contents
Table of Contents
Table of Contents
(in millions, except per share amounts)
2003
2002
$
5,454
$
5,105
(7
)
(40
)
$
5,414
$
5,098
$
483
$
417
7
40
$
523
$
424
$
442
$
241
(25
)
(144
)
$
298
$
216
$
.54
$
.30
(.03
)
(.18
)
$
.36
$
.27
Table of Contents
Increase
Percent
2003
2002
(decrease)
change
3.10
¢
2.89
¢
.21
¢
7.3
%
1.16
1.11
.05
4.5
.60
.57
.03
5.3
.07
.08
(.01
)
(12.5
)
.25
.27
(.02
)
(7.4
)
.52
.50
.02
4.0
.53
.52
.01
1.9
1.37
1.47
(.10
)
(6.8
)
7.60
¢
7.41
¢
.19
¢
2.6
%
Table of Contents
Table of Contents
Table of Contents
Current Schedule
Firm
Options*
34
26
8
25
29
6
45
177
91
259
*
Includes purchase rights
Obligations by period (in millions)
2006
2008
Beyond
Contractual obligations
2005
- 2007
- 2009
2009
Total
$
129
$
707
$
25
$
936
$
1,797
24
26
26
26
102
343
535
430
1,369
2,677
920
1,232
105
2,257
120
78
15
127
340
$
1,536
$
2,578
$
601
$
2,458
$
7,173
(1)
Includes current maturities, but excludes amounts associated with interest rate swap agreements
(2)
Includes amounts classified as interest
(3)
Firm orders from the manufacturer
Table of Contents
Table of Contents
Estimated
Estimated
Useful Life
Residual value
20 to 25 years
2%-15
%
Fleet life
4
%
5 to 30 years
0%-10
%
5 years or lease term
0
%
Table of Contents
Table of Contents
Table of Contents
Items directly linked to the September 11, 2001 terrorist attacks,
such as the adverse impact of new airline and airport security
directives on the Companys costs and Customer demand for travel,
changes in the Transportation Security Administrations scope for
managing U.S. airport security, the availability and cost of
war-risk and other aviation insurance, including the federal
governments provision of third party war-risk coverage, and the
possibility of additional incidents that could cause the public to
question the safety and/or efficiency of air travel.
War or other military actions by the U.S. or others.
Competitive factors, such as fare sales and capacity decisions by
the Company and its competitors, changes in competitors flight
schedules, mergers and acquisitions, codesharing programs, and
airline bankruptcies.
General economic conditions, which could adversely affect the
demand for travel in general and consumer ticket purchasing
habits, as well as decisions by major freight Customers on how
they allocate freight deliveries among different types of
carriers.
Factors that could affect the Companys ability to control its
costs, such as the results of Employee labor contract
negotiations, Employee hiring and retention rates, costs for
health care, the largely unpredictable prices of jet fuel, crude
oil, and heating oil, the continued effectiveness of the
Companys fuel hedges, changes in the Companys overall fuel hedging strategy, capacity
decisions by the Company and its competitors, unscheduled required aircraft airframe or engine
repairs and regulatory requirements, changes in commission policy, availability of capital
markets, future financing decisions made by the Company, and reliance on single suppliers for
both the Companys aircraft and its aircraft engines.
Disruptions to operations due to adverse weather conditions and
air traffic control-related constraints.
Internal failures of technology or large-scale external
interruptions in technology infrastructure, such as power,
telecommunications, or the internet.
Risks involved with the Companys acquisition of certain assets
from ATA Airlines, Inc. (ATA), including the ability to
efficiently utilize the rights to the leases acquired, and the
collectibility of loans made to ATA.
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CONSOLIDATED BALANCE SHEET
(In millions, except share data)
DECEMBER 31,
2004
2003
$
1,305
$
1,865
248
132
137
93
428
164
54
59
2,172
2,313
10,037
8,646
1,202
1,117
682
787
11,921
10,550
3,198
3,107
8,723
7,443
442
122
$
11,337
$
9,878
$
420
$
405
1,047
650
529
462
146
206
2,142
1,723
1,700
1,332
1,610
1,420
152
168
209
183
790
789
299
258
4,089
3,883
417
122
(71
)
5,524
5,052
$
11,337
$
9,878
Table of Contents
CONSOLIDATED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31,
(In millions, except per share amounts)
2004
2003
2002
$
6,280
$
5,741
$
5,341
117
94
85
133
102
96
6,530
5,937
5,522
2,443
2,224
1,993
1,000
830
762
458
430
390
2
48
55
179
183
187
408
372
345
431
384
356
1,055
983
1,017
5,976
5,454
5,105
554
483
417
88
91
106
(39
)
(33
)
(17
)
(21
)
(24
)
(37
)
37
(259
)
(28
)
65
(225
)
24
489
708
393
176
266
152
$
313
$
442
$
241
$
.40
$
.56
$
.31
$
.38
$
.54
$
.30
Table of Contents
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
Accumulated
Capital in
other
Common
excess of
Retained
comprehensive
Treasury
(In millions, except per share amounts)
Stock
par value
earnings
income (loss)
stock
Total
$
767
$
51
$
3,228
$
(32
)
$
$
4,014
10
47
57
38
38
(14
)
(14
)
241
241
88
88
(2
)
(2
)
327
777
136
3,455
54
4,422
12
81
93
41
41
(14
)
(14
)
442
442
66
66
2
2
510
789
258
3,883
122
5,052
(246
)
(246
)
1
6
(93
)
175
89
35
35
(14
)
(14
)
313
313
293
293
2
2
608
$
790
$
299
$
4,089
$
417
$
(71
)
$
5,524
Table of Contents
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31,
(In millions)
2004
2003
2002
$
313
$
442
$
241
431
384
356
184
183
170
(16
)
(16
)
(15
)
52
49
46
35
41
38
(75
)
43
(103
)
(44
)
(19
)
(10
)
231
129
(149
)
68
50
(38
)
(22
)
50
(16
)
1,157
1,336
520
(1,775
)
(1,238
)
(603
)
(34
)
(40
)
(1
)
(1,850
)
(1,238
)
(603
)
520
385
119
88
93
57
(207
)
(130
)
(65
)
(385
)
(475
)
(14
)
(14
)
(14
)
(246
)
(8
)
3
(4
)
133
(48
)
(382
)
(560
)
50
(465
)
1,865
1,815
2,280
$
1,305
$
1,865
$
1,815
$
38
$
62
$
80
$
2
$
51
$
3
Table of Contents
Table of Contents
Table of Contents
(In millions, except per share amounts)
2004
2003
2002
$
313
$
442
$
241
(74
)
(57
)
(53
)
$
239
$
385
$
188
$
.40
$
.56
$
.31
$
.31
$
.49
$
.24
$
.38
$
.54
$
.30
$
.30
$
.48
$
.23
Table of Contents
Table of Contents
Table of Contents
(In millions)
2004
2003
$
89
$
126
127
114
120
109
334
121
218
38
159
142
$
1,047
$
650
Table of Contents
(In millions)
2004
2003
$
$
175
100
100
58
544
564
100
100
44
47
377
371
348
111
100
100
80
91
1,862
1,548
146
206
16
10
$
1,700
$
1,332
Table of Contents
Table of Contents
(In millions)
2004
2003
$
173
$
171
126
114
$
47
$
57
(In millions)
Capital leases
Operating leases
$
24
$
343
13
279
13
256
13
226
13
204
26
1,369
$
102
$
2,677
22
80
17
$
63
Table of Contents
Consolidation
Employee
of facilities
bonus pay
and other
and benefits
charges
Total
$
13
$
5
$
18
(12
)
(4
)
(16
)
$
1
$
1
$
2
Table of Contents
Table of Contents
Table of Contents
Estimated fair
(In millions)
Carrying value
value
$
100
$
101
58
58
544
560
100
110
44
44
377
412
348
349
111
111
100
114
(In millions)
2004
2003
2002
$
313
$
442
$
241
293
66
88
2
2
(2
)
295
68
86
$
608
$
510
$
327
Table of Contents
Fuel
Accumulated other
hedge
comprehensive
(In millions)
derivatives
Other
income (loss)
$
57
$
(3
)
$
54
157
2
159
(91
)
(91
)
123
(1
)
122
558
2
560
(265
)
(265
)
$
416
$
1
$
417
Table of Contents
COLLECTIVE BARGAINING PLANS
OTHER EMPLOYEE PLANS
Average exercise
Average exercise
(In thousands, except exercise prices)
Options
price
Options
price
60,550
$
6.05
34,851
$
10.20
48,414
13.37
4,423
16.90
(4,211
)
4.48
(3,805
)
5.75
(733
)
8.69
(1,317
)
12.48
104,020
9.51
34,152
11.47
26,674
13.53
4,770
14.63
(7,422
)
6.78
(3,318
)
7.95
(3,214
)
12.69
(1,052
)
13.57
120,058
10.47
34,552
12.21
14,131
14.41
4,255
15.05
(7,222
)
6.59
(3,133
)
6.79
(6,264
)
13.62
(1,453
)
14.54
120,703
$
10.98
34,221
$
12.94
74,493
$
9.28
18,677
$
13.00
28,077
10,952
OPTIONS OUTSTANDING
OPTIONS EXERCISABLE
Options
Wtd-average
Options
outstanding
remaining
Wtd-average
exercisable at
Wtd-average
Range of exercise prices
at 12/31/04 (000s)
contractual life
exercise price
12/31/04 (000s)
exercise price
37,763
2.0 yrs
$
4.05
35,900
$
4.02
6,995
3.3 yrs
7.63
5,154
7.49
80,843
6.7 yrs
13.17
37,929
13.33
29,136
6.3 yrs
16.90
14,030
17.24
187
6.3 yrs
23.11
157
22.95
154,924
5.3 yrs
$
11.41
93,170
$
10.03
Table of Contents
2004
2003
2002
3.1
%
2.6
%
3.4
%
4.0
4.2
5.0
34.0
%
34.0
%
34.0
%
0.11
%
0.13
%
0.13
%
Table of Contents
(In millions)
2004
2003
$
77
$
60
10
9
5
4
(1
)
(1
)
(11
)
5
$
80
$
77
(In millions)
1% increase
1% decrease
$
1
$
(1
)
$
6
$
(6
)
(In millions)
2004
2003
$
(80
)
$
(77
)
4
16
8
10
$
(68
)
$
(51
)
Table of Contents
(In millions)
2004
2003
2002
$
10
$
9
$
6
5
4
2
2
2
1
1
1
$
18
$
16
$
9
2004
2003
2002
6.25
%
6.75
%
7.25
%
10.00
%
10.00
%
9.00
%
(In millions)
2004
2003
$
2,027
$
1,640
83
77
264
79
11
19
2,385
1,815
83
89
73
73
110
108
52
47
186
53
40
557
357
$
1,828
$
1,458
Table of Contents
(In millions)
2004
2003
2002
$
(8
)
$
73
$
(19
)
10
1
(8
)
83
(18
)
178
170
157
6
13
13
184
183
170
$
176
$
266
$
152
(In millions)
2004
2003
2002
$
171
$
247
$
138
7
7
6
4
15
9
(6
)
(3
)
(1
)
$
176
$
266
$
152
Table of Contents
(In millions, except per share amounts)
2004
2003
2002
$
313
$
442
$
241
783
783
773
32
39
36
815
822
809
$
.40
$
.56
$
.31
$
.38
$
.54
$
.30
Table of Contents
SOUTHWEST AIRLINES CO.
February 2, 2005
Table of Contents
SOUTHWEST AIRLINES CO.
Table of Contents
February 2, 2005
Table of Contents
(in millions except per share amounts)
Three Months Ended
2004
March 31
June 30
Sept. 30
Dec. 31
$
1,484
$
1,716
$
1,674
$
1,655
46
197
191
120
41
179
181
89
26
113
119
56
.03
.14
.15
.07
.03
.14
.15
.07
2003
March 31
June 30
Sept. 30
Dec. 31
$
1,351
$
1,515
$
1,553
$
1,517
46
140
185
111
39
397
171
101
24
246
106
66
.03
.32
.14
.08
.03
.30
.13
.08
Table of Contents
Table of Contents
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 Southwests Registration Statement on Form S-3 (File No.
33-52155)); Amendment to Restated Articles of Incorporation of Southwest
(incorporated by reference to
Exhibit 3.1
to Southwests Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996 (File No. 1-7259));
Amendment to Restated Articles of Incorporation of Southwest (incorporated
by reference to
Exhibit 3.1
to Southwests Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 (File No. 1-7259)); Amendment to
Restated Articles of Incorporation of Southwest (incorporated by reference
to
Exhibit 4.2
to Southwests Registration Statement on Form S-8 (File No.
333-82735); Amendment to Restated Articles of Incorporation of Southwest
(incorporated by reference to
Exhibit 3.1
to Southwests Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001 (File No. 1-7259).
Table of Contents
3.2
Bylaws of Southwest, as amended through January 2005 (incorporated by
reference to
Exhibit 3.2
to Southwests Current Report on Form 8-K dated
January 25, 2005 (File No. 1-7259).
4.1
$575,000,000 Competitive Advance and Credit Facility Agreement
dated as of April 20, 2004 (incorporated by reference to
Exhibit 10.1
to
Southwests Quarterly Report on Form 10-Q for the quarter ended June 30,
2004 (File No. 1-7259)).
4.2
Specimen certificate representing Common Stock of Southwest (incorporated
by reference to
Exhibit 4.2
to Southwests Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-7259)).
4.3
Indenture dated as of September 17, 2004 between Southwest Airlines Co. and
Wells Fargo Bank, N.A., Trustee (incorporated by reference to
Exhibit 4.1
to Southwests Registration Statement on Form S-3 dated October 30, 2002
(File No. 1-7259)).
4.4
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
Southwests Current Report on Form 8-K dated June 24, 1991 (File No.
1-7259)).
4.5
Indenture dated as of February 25, 1997, between the Company and U.S. Trust
Company of Texas, N.A. (incorporated by reference to
Exhibit 4.2
to
Southwests Annual Report on Form 10-K for the year ended December 31, 1996
(File No. 1-7259)).
Southwest is not filing any other instruments evidencing any indebtedness
because the total amount of securities authorized under any single such
instrument does not exceed 10% of its total consolidated assets. Copies of
such instruments will be furnished to the Securities and Exchange
Commission upon request.
10.1
Purchase Agreement No. 1810, dated January 19, 1994, between The Boeing
Company and Southwest (incorporated by reference to
Exhibit 10.4
to
Southwests Annual Report on Form 10-K for the year ended December 31, 1993
(File No. 1-7259)); Supplemental Agreement No. 1. (incorporated by
reference to Exhibit 10.3 to Southwests Annual Report on Form 10-K for the
year ended December 31, 1996 (File No. 1-7259)); Supplemental Agreements
No. 2, 3 and 4 (incorporated by reference to Exhibit 10.2 to Southwests
Annual Report on Form 10-K for the year ended December 31, 1997 (File No.
1-7259)); Supplemental Agreements Nos. 5, 6, and 7; (incorporated by
reference to
Exhibit 10.1
to Southwests Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 1-7259)); Supplemental Agreements
Nos. 8, 9, and 10 (incorporated by reference to
Exhibit 10.1
to Southwests
Annual Report on Form 10-K for the year ended December 31, 1999 (File No.
1-7259)); Supplemental Agreements Nos. 11, 12, 13 and 14 (incorporated by
reference to
Exhibit 10.1
to Southwests Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000 (File No. 1-7259)); Supplemental
Agreements Nos. 15, 16, 17, 18 and 19 (incorporated by reference to
Exhibit
10.1
to Southwests Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 (File No. 1-7259)); Supplemental Agreements Nos. 20, 21,
22, 23 and 24 (incorporated by reference to
Exhibit 10.3
to Southwests
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002
(File No. 1-7259)); Supplemental Agreements Nos. 25, 26, 27, 28 and 29 to
Purchase Agreement No. 1810, dated January 19, 1994, between The Boeing
Company and Southwest (incorporated by reference to
Exhibit 10.8
to
Southwests Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 (File No. 1-7259)); Supplemental Agreements Nos. 30, 31, 32, and 33 to
Purchase Agreement No. 1810, dated January 19, 1993 between The Boeing
Company and Southwest; (incorporated by reference to
Exhibit 10.1
to
Southwests Annual Report on Form 10-K for the year ended
Table of Contents
December 31, 2003
(File No. 1-7259)); Supplemental Agreements Nos. 34, 35, 36, 37, and 38
(incorporated by reference to Exhibit 10.3 to Southwests Quarterly Report
on Form 10-Q for the quarter ended June 30, 2004 (File No. 1-7259));
Supplemental Agreements Nos. 39 and 40 (incorporated by reference to
Exhibit 10.6 to Southwests Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004 (File No. 1-7259)); Supplemental Agreement No. 41.
Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and
has been filed separately with the Securities and Exchange Commission
pursuant to a Confidential Treatment Application filed with the Commission.
The following exhibits filed under paragraph 10 of Item 601 are the
Companys compensation plans and arrangements.
10.2
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)).
10.3
1996 stock option agreements between Southwest and Herbert D. Kelleher
(incorporated by reference to
Exhibit 10.8
to Southwests Annual Report on
Form 10-K for the year ended December 31, 1996 (File No. 1-7259)).
10.4
2001 stock option agreements between Southwest and Herbert D. Kelleher
(incorporated by reference to
Exhibit 10
to Southwests Quarterly Report on
Form 10-Q for the quarter ended March 31, 2001 (File No. 1-7259)).
10.5
1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.6
to Southwests Annual Report on Form 10-K for the year ended December 31,
2002 (File No. 1-7259)).
10.6
1991 Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit
10.7
to Southwests Annual Report on Form 10-K for the year ended December
31, 2002 (File No. 1-7259)).
10.7
1991 Employee Stock Purchase Plan as amended September 21, 2000
(incorporated by reference to
Exhibit 4
to Amendment No. 1 to Registration
Statement on Form S-8 (file No. 33-40653)).
10.8
Southwest Airlines Co. Profit Sharing Plan (incorporated by reference to
Exhibit 10.8
to Southwests Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 1-729)); Amendment No. 1 to Southwest Airlines
Co. Profit Sharing Plan (incorporated by reference to
Exhibit 10.11
to
Southwests Annual Report on Form 10-K for the year ended December 31, 2001
(File No. 1-7259)); Amendment No. 2 to Southwest Airlines Co. Profit
Sharing Plan (incorporated by reference to
Exhibit 10.9
to Southwests
Annual Report on Form 10-K for the year ended December 31, 2002 (File No.
1-7259)); Amendment No. 3 to Southwest Airlines Co. Profit Sharing Plan
(incorporated by reference to
Exhibit 10.1
to Southwests Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-7259));
Amendment No. 4 to Southwest Airlines Co. Profit Sharing Plan (incorporated
by reference to
Exhibit 10.8
to Southwests Annual Report on Form 10-K for
the year ended December 31, 2003 (File No. 1-7259)); Amendment No. 5 to
Southwest Airlines Co. Profit Sharing Plan (incorporated by reference to
Exhibit 10.2
to Southwests Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004 (File No. 1-7259)); Amendment No. 6 to Southwest
Airlines Co. Profit Sharing Plan.
Table of Contents
10.9
Southwest Airlines Co. 401(k) Plan (incorporated by reference to
Exhibit
10.12
to Southwests Annual Report on Form 10-K for the year ended December
31, 2001 (File No. 1-7259)); Amendment No. 1 to Southwest Airlines Co.
401(k) Plan (incorporated by reference to
Exhibit 10.10
to Southwests
Annual Report on Form 10-K for the year ended December 31, 2002 (File No.
1-7259)); Amendment No. 2 to Southwest Airlines Co. 401(k) Plan
(incorporated by reference to
Exhibit 10.10
to Southwests Annual Report on
Form 10-K for the year ended December 31, 2002 (File No. 1-7259));
Amendment No. 3 to Southwest Airlines Co. 401(k) Plan (incorporated by
reference to
Exhibit 10.2
to Southwests Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003 (File No. 1-7259)); Amendment No. 4 to
Southwest Airlines Co. 401(k) Plan (incorporated by reference to
Exhibit
10.9
to Southwests Annual Report on Form 10-K for the year ended December
31, 2003 (File No. 1-7259)); Amendment No. 5 to Southwest Airlines Co.
401(k) Plan.
10.10
Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option Plan
(incorporated by reference to
Exhibit 10.14
to Southwests Annual Report on
Form 10-K for the year ended December 31, 1994 (File No. 1-7259)).
10.11
1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit
10.12
to Southwests Annual Report on Form 10-K for the year ended December
31, 2002 (File No. 1-7259)).
10.12
1996 Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit
10.13
to Southwests Annual Report on Form 10-K for the year ended December
31, 2002 (File No. 1-7259)).
10.13
Employment Contract dated as of July 15, 2004, between Southwest and
Herbert D. Kelleher (incorporated by reference to
Exhibit 10.3
to
Southwests Quarterly Report on Form 10-Q the quarter ended September 30,
2004 (File No. 1-7259)).
10.14
Employment Contract dated as of July 15, 2004, between Southwest and Gary
C. Kelly (incorporated by reference to
Exhibit 10.4
to Southwests
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004
(File No. 1-7259)).
10.15
Employment Contract dated as of July 15, 2004, between Southwest and
Colleen C. Barrett (incorporated by reference to
Exhibit 10.5
to
Southwests Quarterly Report on Form 10-Q for the quarter ended September
30, 2004 (File No. 1-7259)).
10.16
Severance Contract dated as of July 15, 2004, between Southwest and James
F. Parker (incorporated by reference to
Exhibit 10.2
to Southwests
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004
(File No. 1-7259)).
10.17
Southwest Airlines Co. Outside Director Incentive Plan (incorporated by
reference to
Exhibit 10.1
to Southwests Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002 (File No. 1-7259)).
10.18
1998 SAEA Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 10.17
to Southwests Annual Report on Form 10-K for the year ended
December 31, 2002 (File No. 1-7259)).
10.19
1999 SWAPIA Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 10.18
to Southwests Annual Report on Form 10-K for the year ended
December 31, 2002 (File No. 1-7259)).
Table of Contents
10.20
LUV 2000 Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 4.1
to Registration Statement on Form S-8 (File No. 333-53610)).
10.21
2000 Aircraft Appearance Technicians Non-Qualified Stock Option Plan
(incorporated by reference to
Exhibit 4.1
to Registration Statement on Form
S-8 (File No. 333-52388)); Amendment No. 1 to 2000 Aircraft Appearance
Technicians Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 10.4
to Southwests Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003 (File No. 1-7259)).
10.22
2000 Stock Clerks Non-Qualified Stock Option Plan (incorporated by
reference to
Exhibit 4.1
to Registration Statement on Form S-8 (File No.
333-52390)); Amendment No. 1 to 2000 Stock Clerks Non-Qualified Stock
Option Plan (incorporated by reference to
Exhibit 10.5
to Southwests
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No.
1-7259)).
10.23
2000 Flight Simulator Technicians Non-Qualified Stock Option Plan
(incorporated by reference to
Exhibit 4.1
to Registration Statement on Form
S-8 (File No. 333-53616)); Amendment No. 1 to 2000 Flight Simulator
Technicians Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 10.6
to Southwests Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003 (File No. 1-7259)).
10.24
2002 SWAPA Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 4.1
to Registration Statement on Form S-8 (File No. 333-98761)).
10.25
2002 Bonus SWAPA Non-Qualified Stock Option Plan (incorporated by reference
to
Exhibit 4.1
to Registration Statement on Form S-8 (File No. 333-98761)).
10.26
2002 SWAPIA Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 4.2
to Registration Statement on Form S-8 (File No. 333-100862)).
10.27
2002 Mechanics Non-Qualified Stock Option Plan (incorporated by reference
to
Exhibit 4.2
to Registration Statement on Form S-8 (File No.
333-100862)).
10.28
2002 Ramp, Operations, Provisioning and Freight Non-Qualified Stock Option
Plan (incorporated by reference to
Exhibit 10.27
to Southwests Annual
Report on Form 10-K for the year ended December 31, 2002 (File No.
1-7259)).
10.29
2002 Customer Service/Reservations Non-Qualified Stock Option Plan
(incorporated by reference to
Exhibit 10.28
to Southwests Annual Report on
Form 10-K for the year ended December 31, 2002 (File No. 1-7259)));
Amendment No. 1 to 2002 Customer Service/Reservations Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-8 (File No. 333-104245)).
10.30
2003 Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit
10.3
to Southwests Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003 (File No. 1-7259)).
14
Code of Ethics (incorporated by reference to
Exhibit 14
to Southwests
Annual Report on Form 10-K for the year ended December 31, 2003 (File No.
1-7259)).
22
Subsidiaries of Southwest (incorporated by reference to
Exhibit 22
to
Southwests Annual Report on Form 10-K for the year ended December 31, 1997
(File No. 1-7259)).
23
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
Table of Contents
31.1
Rule 13a-14(a) Certification of Chief Executive Officer.
31.2
Rule 13a-14(a) Certification of Chief Financial Officer.
32.1
Section 1350 Certification of Chief Executive Officer.
32.2
Section 1350 Certification of Chief Financial Officer.
Table of Contents
SOUTHWEST AIRLINES CO.
February 4, 2005
By
/s/ LAURA WRIGHT
Laura Wright
Senior Vice President - Finance,
Chief Financial Officer
Signature
Capacity
Chairman of the Board of Directors
Chief Executive Officer and Director
President and Director
Sr. Vice President-Finance and Chief Financial
Officer (Chief Financial and Accounting Officer)
Director
Director
Director
Director
R.W. King
Director
Table of Contents
Signature
Capacity
Director
Director
Director
Director
Table of Contents
NUMBER
DESCRIPTION
3.1
Restated Articles of Incorporation of Southwest (incorporated by reference
to
Exhibit 4.1
to Southwests Registration Statement on Form S-3 (File No.
33-52155)); Amendment to Restated Articles of Incorporation of Southwest
(incorporated by reference to
Exhibit 3.1
to Southwests Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996 (File No. 1-7259));
Amendment to Restated Articles of Incorporation of Southwest (incorporated
by reference to
Exhibit 3.1
to Southwests Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998 (File No. 1-7259)); Amendment to
Restated Articles of Incorporation of Southwest (incorporated by reference
to
Exhibit 4.2
to Southwests Registration Statement on Form S-8 (File No.
333-82735); Amendment to Restated Articles of Incorporation of Southwest
(incorporated by reference to
Exhibit 3.1
to Southwests Quarterly Report
on Form 10-Q for the quarter ended June 30, 2001 (File No. 1-7259).
3.2
Bylaws of Southwest, as amended through January 2005 (incorporated by
reference to
Exhibit 3.2
to Southwests Current Report on Form 8-K dated
January 25, 2005 (File No. 1-7259).
4.1
$575,000,000 Competitive Advance and Credit Facility Agreement
dated as of April 20, 2004 (incorporated by reference to
Exhibit 10.1
to
Southwests Quarterly Report on Form 10-Q for the quarter ended June 30,
2004 (File No. 1-7259)).
4.2
Specimen certificate representing Common Stock of Southwest (incorporated
by reference to
Exhibit 4.2
to Southwests Annual Report on Form 10-K for
the year ended December 31, 1994 (File No. 1-7259)).
4.3
Indenture dated as of September 17, 2004 between Southwest Airlines Co. and
Wells Fargo Bank, N.A., Trustee (incorporated by reference to
Exhibit 4.1
to Southwests Registration Statement on Form S-3 dated October 30, 2002
(File No. 1-7259)).
4.4
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
Southwests Current Report on Form 8-K dated June 24, 1991 (File No.
1-7259)).
4.5
Indenture dated as of February 25, 1997, between the Company and U.S. Trust
Company of Texas, N.A. (incorporated by reference to
Exhibit 4.2
to
Southwests Annual Report on Form 10-K for the year ended December 31, 1996
(File No. 1-7259)).
Southwest is not filing any other instruments evidencing any indebtedness
because the total amount of securities authorized under any single such
instrument does not exceed 10% of its total consolidated assets. Copies of
such instruments will be furnished to the Securities and Exchange
Commission upon request.
10.1
Purchase Agreement No. 1810, dated January 19, 1994, between The Boeing
Company and Southwest (incorporated by reference to
Exhibit 10.4
to
Southwests Annual Report on Form 10-K for the year ended December 31, 1993
(File No. 1-7259)); Supplemental Agreement No. 1. (incorporated by
reference to Exhibit 10.3 to Southwests Annual Report on Form 10-K for the
year ended December 31, 1996 (File No. 1-7259)); Supplemental Agreements
No. 2, 3 and 4 (incorporated by reference to Exhibit 10.2 to Southwests
Annual Report on Form 10-K for the year ended December 31, 1997 (File No.
1-7259)); Supplemental Agreements Nos. 5, 6, and 7; (incorporated by
reference to
Exhibit 10.1
to Southwests Annual Report on Form 10-K for the
year ended December 31, 1998 (File No. 1-7259)); Supplemental Agreements
Nos. 8, 9, and 10 (incorporated by reference to
Exhibit 10.1
to Southwests
Annual Report on Form 10-K for the year ended December 31, 1999 (File No.
1-7259)); Supplemental Agreements Nos. 11, 12, 13 and 14 (incorporated by
reference to
Exhibit 10.1
to Southwests Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000 (File No. 1-7259)); Supplemental
Agreements Nos. 15, 16, 17, 18 and 19 (incorporated by reference to
Exhibit
10.1
to Southwests Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001 (File No. 1-7259)); Supplemental Agreements Nos. 20, 21,
22, 23 and 24 (incorporated by reference to
Exhibit 10.3
to Southwests
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002
(File No. 1-7259)); Supplemental Agreements Nos. 25, 26, 27, 28 and 29 to
Purchase Agreement No. 1810, dated January 19, 1994, between The Boeing
Company and Southwest (incorporated by reference to
Exhibit 10.8
to
Southwests Quarterly Report on Form 10-Q for the quarter ended June 30,
2003 (File No. 1-7259)); Supplemental Agreements Nos. 30, 31, 32, and 33 to
Purchase Agreement No. 1810, dated January 19, 1993 between The Boeing
Company and Southwest; (incorporated by reference to
Exhibit 10.1
to
Southwests Annual Report on Form 10-K for the year ended
Table of Contents
December 31, 2003
(File No. 1-7259)); Supplemental Agreements Nos. 34, 35, 36, 37, and 38
(incorporated by reference to Exhibit 10.3 to Southwests Quarterly Report
on Form 10-Q for the quarter ended June 30, 2004 (File No. 1-7259));
Supplemental Agreements Nos. 39 and 40 (incorporated by reference to
Exhibit 10.6 to Southwests Quarterly Report on Form 10-Q for the quarter
ended September 30, 2004 (File No. 1-7259)); Supplemental Agreement No. 41.
Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and
has been filed separately with the Securities and Exchange Commission
pursuant to a Confidential Treatment Application filed with the
Commission.
The following exhibits filed under paragraph 10 of Item 601 are the
Companys compensation plans and arrangements.
10.2
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)).
10.3
1996 stock option agreements between Southwest and Herbert D. Kelleher
(incorporated by reference to
Exhibit 10.8
to Southwests Annual Report on
Form 10-K for the year ended December 31, 1996 (File No. 1-7259)).
10.4
2001 stock option agreements between Southwest and Herbert D. Kelleher
(incorporated by reference to
Exhibit 10
to Southwests Quarterly Report on
Form 10-Q for the quarter ended March 31, 2001 (File No. 1-7259)).
10.5
1991 Incentive Stock Option Plan (incorporated by reference to
Exhibit 10.6
to Southwests Annual Report on Form 10-K for the year ended December 31,
2002 (File No. 1-7259)).
10.6
1991 Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit
10.7
to Southwests Annual Report on Form 10-K for the year ended December
31, 2002 (File No. 1-7259)).
10.7
1991 Employee Stock Purchase Plan as amended September 21, 2000
(incorporated by reference to
Exhibit 4
to Amendment No. 1 to Registration
Statement on Form S-8 (file No. 33-40653)).
10.8
Southwest Airlines Co. Profit Sharing Plan (incorporated by reference to
Exhibit 10.8
to Southwests Annual Report on Form 10-K for the year ended
December 31, 2000 (File No. 1-729)); Amendment No. 1 to Southwest Airlines
Co. Profit Sharing Plan (incorporated by reference to
Exhibit 10.11
to
Southwests Annual Report on Form 10-K for the year ended December 31, 2001
(File No. 1-7259)); Amendment No. 2 to Southwest Airlines Co. Profit
Sharing Plan (incorporated by reference to
Exhibit 10.9
to Southwests
Annual Report on Form 10-K for the year ended December 31, 2002 (File No.
1-7259)); Amendment No. 3 to Southwest Airlines Co. Profit Sharing Plan
(incorporated by reference to
Exhibit 10.1
to Southwests Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003 (File No. 1-7259));
Amendment No. 4 to Southwest Airlines Co. Profit Sharing Plan (incorporated
by reference to
Exhibit 10.8
to Southwests Annual Report on Form 10-K for
the year ended December 31, 2003 (File No. 1-7259)); Amendment No. 5 to
Southwest Airlines Co. Profit Sharing Plan (incorporated by reference to
Exhibit 10.2
to Southwests Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004 (File No. 1-7259)); Amendment No. 6 to Southwest
Airlines Co. Profit Sharing Plan.
Table of Contents
10.9
Southwest Airlines Co. 401(k) Plan (incorporated by reference to
Exhibit
10.12
to Southwests Annual Report on Form 10-K for the year ended December
31, 2001 (File No. 1-7259)); Amendment No. 1 to Southwest Airlines Co.
401(k) Plan (incorporated by reference to
Exhibit 10.10
to Southwests
Annual Report on Form 10-K for the year ended December 31, 2002 (File No.
1-7259)); Amendment No. 2 to Southwest Airlines Co. 401(k) Plan
(incorporated by reference to
Exhibit 10.10
to Southwests Annual Report on
Form 10-K for the year ended December 31, 2002 (File No. 1-7259));
Amendment No. 3 to Southwest Airlines Co. 401(k) Plan (incorporated by
reference to
Exhibit 10.2
to Southwests Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003 (File No. 1-7259)); Amendment No. 4 to
Southwest Airlines Co. 401(k) Plan (incorporated by reference to
Exhibit
10.9
to Southwests Annual Report on Form 10-K for the year ended December
31, 2003 (File No. 1-7259)); Amendment No. 5 to Southwest Airlines Co.
401(k) Plan.
10.10
Southwest Airlines Co. 1995 SWAPA Non-Qualified Stock Option Plan
(incorporated by reference to
Exhibit 10.14
to Southwests Annual Report on
Form 10-K for the year ended December 31, 1994 (File No. 1-7259)).
10.11
1996 Incentive Stock Option Plan (incorporated by reference to
Exhibit
10.12
to Southwests Annual Report on Form 10-K for the year ended December
31, 2002 (File No. 1-7259)).
10.12
1996 Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit
10.13
to Southwests Annual Report on Form 10-K for the year ended December
31, 2002 (File No. 1-7259)).
10.13
Employment Contract dated as of July 15, 2004, between Southwest and
Herbert D. Kelleher (incorporated by reference to
Exhibit 10.3
to
Southwests Quarterly Report on Form 10-Q the quarter ended September 30,
2004 (File No. 1-7259)).
10.14
Employment Contract dated as of July 15, 2004, between Southwest and Gary
C. Kelly (incorporated by reference to
Exhibit 10.4
to Southwests
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004
(File No. 1-7259)).
10.15
Employment Contract dated as of July 15, 2004, between Southwest and
Colleen C. Barrett (incorporated by reference to
Exhibit 10.5
to
Southwests Quarterly Report on Form 10-Q for the quarter ended September
30, 2004 (File No. 1-7259)).
10.16
Severance Contract dated as of July 15, 2004, between Southwest and James
F. Parker (incorporated by reference to
Exhibit 10.2
to Southwests
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004
(File No. 1-7259)).
10.17
Southwest Airlines Co. Outside Director Incentive Plan (incorporated by
reference to
Exhibit 10.1
to Southwests Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002 (File No. 1-7259)).
10.18
1998 SAEA Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 10.17
to Southwests Annual Report on Form 10-K for the year ended
December 31, 2002 (File No. 1-7259)).
10.19
1999 SWAPIA Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 10.18
to Southwests Annual Report on Form 10-K for the year ended
December 31, 2002 (File No. 1-7259)).
Table of Contents
10.20
LUV 2000 Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 4.1
to Registration Statement on Form S-8 (File No. 333-53610)).
10.21
2000 Aircraft Appearance Technicians Non-Qualified Stock Option Plan
(incorporated by reference to
Exhibit 4.1
to Registration Statement on Form
S-8 (File No. 333-52388)); Amendment No. 1 to 2000 Aircraft Appearance
Technicians Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 10.4
to Southwests Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003 (File No. 1-7259)).
10.22
2000 Stock Clerks Non-Qualified Stock Option Plan (incorporated by
reference to
Exhibit 4.1
to Registration Statement on Form S-8 (File No.
333-52390)); Amendment No. 1 to 2000 Stock Clerks Non-Qualified Stock
Option Plan (incorporated by reference to
Exhibit 10.5
to Southwests
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (File No.
1-7259)).
10.23
2000 Flight Simulator Technicians Non-Qualified Stock Option Plan
(incorporated by reference to
Exhibit 4.1
to Registration Statement on Form
S-8 (File No. 333-53616)); Amendment No. 1 to 2000 Flight Simulator
Technicians Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 10.6
to Southwests Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003 (File No. 1-7259)).
10.24
2002 SWAPA Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 4.1
to Registration Statement on Form S-8 (File No. 333-98761)).
10.25
2002 Bonus SWAPA Non-Qualified Stock Option Plan (incorporated by reference
to
Exhibit 4.1
to Registration Statement on Form S-8 (File No. 333-98761)).
10.26
2002 SWAPIA Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit 4.2
to Registration Statement on Form S-8 (File No. 333-100862)).
10.27
2002 Mechanics Non-Qualified Stock Option Plan (incorporated by reference
to
Exhibit 4.2
to Registration Statement on Form S-8 (File No.
333-100862)).
10.28
2002 Ramp, Operations, Provisioning and Freight Non-Qualified Stock Option
Plan (incorporated by reference to
Exhibit 10.27
to Southwests Annual
Report on Form 10-K for the year ended December 31, 2002 (File No.
1-7259)).
10.29
2002 Customer Service/Reservations Non-Qualified Stock Option Plan
(incorporated by reference to
Exhibit 10.28
to Southwests Annual Report on
Form 10-K for the year ended December 31, 2002 (File No. 1-7259)));
Amendment No. 1 to 2002 Customer Service/Reservations Non-Qualified Stock
Option Plan (incorporated by reference to Exhibit 4.3 to Registration
Statement on Form S-8 (File No. 333-104245)).
10.30
2003 Non-Qualified Stock Option Plan (incorporated by reference to
Exhibit
10.3
to Southwests Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003 (File No. 1-7259)).
14
Code of Ethics (incorporated by reference to
Exhibit 14
to Southwests
Annual Report on Form 10-K for the year ended December 31, 2003 (File No.
1-7259)).
22
Subsidiaries of Southwest (incorporated by reference to
Exhibit 22
to
Southwests Annual Report on Form 10-K for the year ended December 31, 1997
(File No. 1-7259)).
23
Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
Table of Contents
31.1
Rule 13a-14(a) Certification of Chief Executive Officer.
31.2
Rule 13a-14(a) Certification of Chief Financial Officer.
32.1
Section 1350 Certification of Chief Executive Officer.
32.2
Section 1350 Certification of Chief Financial Officer.
Exhibit 10.1
Supplemental Agreement No. 41
to
Purchase Agreement No. 1810
between
THE BOEING COMPANY
and
SOUTHWEST AIRLINES CO.
Relating to Boeing Model 737-7H4 Aircraft
THIS SUPPLEMENTAL AGREEMENT, entered into as of November 17, 2004, by and between THE BOEING COMPANY, a Delaware corporation with principal offices in Seattle, Washington, (Boeing) and SOUTHWEST AIRLINES CO., a Texas corporation with principal offices in Dallas, Texas (Buyer);
WHEREAS, the parties hereto entered into Purchase Agreement No. 1810 dated January 19, 1994, relating to Boeing Model 737-7H4 aircraft (the Agreement) and;
WHEREAS, Buyer has agreed to exercise three (3) March 2006 Block U Option Aircraft (as Block T-W Aircraft) and;
NOW THEREFORE, in consideration of the mutual covenants herein contained, the parties agree to amend the Agreement as follows:
1. The Table of Contents of the Agreement is deleted in its entirety and a new Table of Contents is attached hereto and incorporated into the Agreement by this reference.
2. Table 1 is deleted in its entirety and replaced by a new Table 1 which is attached hereto and is incorporated into the Agreement by this reference.
***Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission.
P.A. No. 1810
K/SWA |
SA-41-1 |
Exhibit 10.1
3. Table 2 is deleted in its entirety and replaced by a new Table 2 which is attached hereto and is incorporated into the Agreement by this reference.
NOTE Buyer now has forty-five (45) banked Rollover Option Aircraft as a result of the option exercises covered by Supplemental Agreement No. 21, 23, 24, 26, 27, 28, 29, 30, 31, 32, 33, 34, 35, 36, 37, 38, 39, 40 and 41 that may be converted to Option Aircraft at a future date subject to the terms of Letter Agreement No. 6-1162-RLL-933R19.
4. Attachment A to Letter Agreement No. 6-1162-JMG-669R2 is replaced by updated Attachment A attached hereto.
5. All references in the Letter Agreements associated with Purchase Agreement No. 1810 shall be deemed to refer to the purchase by Buyer of two hundred eighty-one (281) Model 737-7H4 Aircraft, Forty-two (42) Model 737-7H4 Option Aircraft and two hundred seventeen (217) Model 737-7H4 Rollover Option Aircraft, to the extent such reference is not specifically addressed herein.
8. The Advance Payments due upon signing assuming execution of this Supplemental Agreement on or before November 30, 2004 are:
*** for three (3) March 2006 aircraft
Buyer will pay the *** directly to Boeing on or before Tuesday, November 30, 2004.
P.A. No. 1810
K/SWA |
SA-41-2 |
Exhibit 10.1
The Agreement will be deemed to be supplemented to the extent herein provided and as so supplemented will continue in full force and effect.
EXECUTED IN DUPLICATE as of the day and year first above written.
THE BOEING COMPANY | SOUTHWEST AIRLINES CO. | |||||||||
|
||||||||||
By:
|
/s/ Nobuko Wiles | By: | /s/ Laura Wright | |||||||
|
||||||||||
Its:
|
Attorney-In-Fact | Its: | SVP Finance & CFO | |||||||
|
P.A. No. 1810
K/SWA |
SA-41-3 |
TABLE OF CONTENTS
Page | SA | |||||
Number | Number | |||||
ARTICLES | ||||||
1.
|
Subject Matter of Sale | 1-1 | SA-13 | |||
|
||||||
2.
|
Delivery, Title and Risk of Loss | 2-1 | SA-28 | |||
|
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3.
|
Price of Aircraft | 3-1 | SA-28 | |||
|
||||||
4.
|
Taxes | 4-1 | ||||
|
||||||
5.
|
Payment | 5-1 | ||||
|
||||||
6.
|
Excusable Delay | 6-1 | ||||
|
||||||
7.
|
Changes to the Detail Specification | 7-1 | SA-1 | |||
|
||||||
8.
|
Federal Aviation Requirements and Certificates and Export License | 8-1 | ||||
|
||||||
9.
|
Representatives, Inspection, Flights and Test Data | 9-1 | ||||
|
||||||
10.
|
Assignment, Resale or Lease | 10-1 | ||||
|
||||||
11.
|
Termination for Certain Events | 11-1 | ||||
|
||||||
12.
|
Product Assurance; Disclaimer and Release; Exclusion of Liabilities; Customer Support; Indemnification and Insurance | 12-1 | ||||
|
||||||
13.
|
Buyer Furnished Equipment and Spare Parts | 13-1 | ||||
|
||||||
14.
|
Contractual Notices and Requests | 14-1 | ||||
|
||||||
15.
|
Miscellaneous | 15-1 |
P.A. No. 1810
K/SWA |
i | SA-41 |
TABLE OF CONTENTS CONT
P.A. No. 1810
K/SWA |
ii | SA-41 |
TABLE OF CONTENTS CONT
SA | ||||
Number | ||||
RESTRICTED LETTER AGREEMENTS | ||||
|
||||
6-1162-RLL-932R2
|
Promotional Support | SA-13 | ||
|
||||
6-1162-RLL-933R19
|
Option Aircraft | SA-28 | ||
|
||||
6-1162-RLL-934R3
|
Disclosure of Confidential Information | SA-14 | ||
|
||||
6-1162-RLL-935R1
|
Performance Guarantees | SA-1 | ||
|
||||
6-1162-NIW-890
|
*** | SA-39 | ||
|
||||
6-1162-RLL-936R4
|
Certain Contractual Matters | SA-4 | ||
|
||||
6-1162-RLL-937
|
Alternate Advance Payment Schedule | |||
|
||||
6-1162-RLL-938
***
|
||||
|
||||
6-1162-RLL-939R1
|
Certification Flight Test Aircraft | SA-1 | ||
|
||||
6-1162-RLL-940R1
|
Training Matters | SA-1 | ||
|
||||
6-1162-RLL-941R2
|
Other Matters | SA-13 | ||
|
||||
6-1162-RLL-942
|
Open Configuration Matters | |||
|
||||
6-1162-RLL-943R1
|
Substitution Rights | SA-6 | ||
|
||||
6-1162-RLL-944
|
Airframe Maintenance Material Cost Protection Program | |||
|
||||
6-1162-RLL-945
|
Comparison of 737-7H4 and 737-3H4 Block Fuel Burn | |||
|
||||
6-1162-RLL-1855R3
|
Additional Contractual Matters | SA-4 | ||
|
||||
6-1162-RLL-1856
|
*** | SA-1 | ||
|
||||
6-1162-RLL-1857
|
Service Ready Validation Program Field Test | SA-1 | ||
|
||||
6-1162-RLL-1858R1
|
Escalation Matters | SA-4 |
P.A. No. 1810
K/SWA |
iii | SA-41 |
TABLE OF CONTENTS CONT
SA | ||||
Number | ||||
RESTRICTED LETTER AGREEMENTS | ||||
|
||||
6-1162-RLL-2036
|
Amortization of Costs for Customer Unique Changes | SA-1 | ||
|
||||
6-1162-RLL-2037
|
Reconciliation of the Aircraft Basic Price | SA-1 | ||
|
||||
6-1162-RLL-2073
|
Maintenance Training Matters | SA-1 | ||
|
||||
6-1162-KJJ-054
|
Business Matters | SA-13 | ||
|
||||
6-1162-KJJ-055R1
|
Structural Matters | SA-25 | ||
|
||||
6-1162-KJJ-056
|
Noise and Emission Matters | SA-13 | ||
|
||||
6-1162-KJJ-057
|
Product Development Matters | SA-13 | ||
|
||||
6-1162-KJJ-058
|
Additional Substitution Rights | SA-13 | ||
|
||||
6-1162-KJJ-150
|
Flight Control Computer & Mode Control Panel Spares Matter | SA-14 | ||
|
||||
6-1162-MSA-185R3
|
Delivery Change Contractual Matters | SA-21 | ||
|
||||
6-1162-JMG-669R2
|
Special Matters | SA-36 | ||
|
||||
6-1162-JMG-747R1
|
*** | SA-36 | ||
|
||||
6-1162-CHL-217
|
Rescheduled Flight Test Aircraft | SA-32 | ||
|
||||
6-1162-NIW-606R1
|
*** | SA-36 | ||
|
||||
6-1162-NIW-640
|
*** | SA-35 | ||
|
||||
6-1162-NIW-889
|
Warranty Exterior Color Schemes and Markings for YA143 and on | SA-39 |
P.A. No. 1810
K/SWA |
iv | SA-41 |
Table 1 to
Purchase Agreement No. 1810
Aircraft Information Table
Base Aircraft | Special | Aircraft Basic | Base Year | |||||||||||
Price | Features | Price | Dollars | |||||||||||
Block A, B, C, D & E Aircraft
|
*** | *** | *** | July 1992 | ||||||||||
Block F & G Aircraft
|
*** | *** | *** | July 1992 | ||||||||||
Block H Aircraft
|
*** | *** | *** | July 1992 | ||||||||||
Block I Aircraft
|
*** | *** | *** | July 1992 | ||||||||||
Block J Aircraft
|
*** | *** | *** | July 1992 | ||||||||||
Block K Aircraft
|
*** | *** | *** | July 1992 | ||||||||||
Block K-W Aircraft
|
*** | *** | *** | July 1992 | ||||||||||
Block L Aircraft
|
*** | *** | *** | July 1992 | ||||||||||
Block T Aircraft
|
*** | *** | *** | July 1999 | ||||||||||
Block T-W Aircraft
|
*** | *** | *** | July 1999 |
Block K-W Aircraft: Block K airplanes with production winglets installation
Block T-W Aircraft: Block T airplanes with production winglets installation
Escalation Estimate
Adv Payment
Delivery
Number of
Aircraft
Base
Date
Aircraft
Block
Price Per A/P
2
E
***
1
E
***
1
E
***
2
E
***
3
E
***
3
E
***
1
F
***
2
F
***
2
F
***
2
G
***
2
H
***
1
H
***
1
H
***
2
H
***
1
H
***
1
H
***
2
H
***
1
H
***
2
H
***
2
H
***
Table 1 to
Purchase Agreement No. 1810
Aircraft Information Table
Escalation Estimate
Adv Payment
Delivery
Number of
Aircraft
Base
Date
Aircraft
Block
Price Per A/P
1
H
***
3
H
***
2
I
***
1
I
***
1
I
***
4
I
***
2
I
***
2
I
***
1
I
***
2
I
***
1
I
***
1
I
***
3
I
***
1
J
***
1
J
***
2
J
***
2
J
***
1
J
***
1
K
***
3
K
***
1
K
***
2
K
***
2
K
***
1
K-W
***
4
K-W
***
1
L
***
2
L
***
1
L
***
3
L
***
3
L
***
1
L
***
1
L
***
4
L
***
1
L
***
1
L
***
1
L
***
1
L
***
1
L
***
1
L
***
2
L
***
1
L
***
2
L
***
1
T
***
1
T
***
2
T
***
1
T
***
3
T
***
1
T
***
6
T
***
2
T
***
6
T-W
***
Table 1 to
Purchase Agreement No. 1810
Aircraft Information Table
Escalation Estimate
Adv Payment
Delivery
Number of
Aircraft
Base
Date
Aircraft
Block
Price Per A/P
4
T-W
***
0
T-W
***
3
T-W
***
3
T-W
***
5
T-W
***
3
T-W
***
4
T-W
***
4
T-W
***
2
T-W
***
4
T-W
***
2
T-W
***
2
T-W
***
3
T-W
***
2
T-W
***
2
T-W
***
1
T-W
***
1
T-W
***
4
T-W
***
3
T-W
***
3
T-W
***
4
T-W
***
1
T-W
***
3
T-W
***
3
T-W
***
2
T-W
***
2
T-W
***
2
T-W
***
3
T-W
***
2
T-W
***
2
T-W
***
2
T-W
***
2
T-W
***
2
T-W
***
2
T-W
***
2
T-W
***
2
T-W
***
2
T-W
***
2
T-W
***
1
T-W
***
1
T-W
***
1
T-W
***
1
T-W
***
1
T-W
***
1
T-W
***
Table 2 to Purchase Agreement No. 1810
(Letter Agreement No. 6-1162-RLL-933R19)
Option Aircraft Information Table
Base Aircraft | Special | Aircraft | |||||||
Price | Features | Basic Price | Base Year Dollars | ||||||
***
|
*** | *** | July 1999 | ||||||
***
|
*** | *** | July 1999 |
Option Aircraft Block |
Q
|
R
|
S
|
V
|
42 |
Adv Payment | ||||||||
Option | Base | |||||||
Aircraft | Price Per | |||||||
Block | Option Aircraft | Option Exercise | ||||||
U-W
|
*** | December 1, 2004 | ||||||
U-W
|
*** | January 1, 2005 | ||||||
U-W
|
*** | February 1, 2005 | ||||||
U-W
|
*** | March 1, 2005 | ||||||
U-W
|
*** | June 1, 2005 | ||||||
U-W
|
*** | December 1, 2005 | ||||||
U-W
|
*** | January 1, 2006 | ||||||
U-W
|
*** | February 1, 2006 | ||||||
U-W
|
*** | March 1, 2006 | ||||||
U-W
|
*** | April 1, 2006 | ||||||
U-W
|
*** | May 1, 2006 | ||||||
U-W
|
*** | June 1, 2006 | ||||||
U-W
|
*** | July 1, 2006 | ||||||
U-W
|
*** | August 1, 2006 | ||||||
U-W
|
*** | September 1, 2006 | ||||||
U-W
|
*** | October 1, 2006 | ||||||
U-W
|
*** | November 1, 2006 | ||||||
U-W
|
*** | December 1, 2006 | ||||||
U-W
|
*** | January 1, 2007 | ||||||
U-W
|
*** | February 1, 2007 | ||||||
U-W
|
*** | March 1, 2007 | ||||||
U-W
|
*** | April 1, 2007 | ||||||
U-W
|
*** | May 1, 2007 | ||||||
U-W
|
*** | June 1, 2007 | ||||||
U-W
|
*** | July 1, 2007 | ||||||
U-W
|
*** | August 1, 2007 | ||||||
Southwest Airlines Co.
Attachment A to 6-1162-JMG-669R2
***
|
|
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|
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|
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|
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|
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|
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|
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SA-41
EXHIBIT 10.8
AMENDMENT NO. 6
TO SOUTHWEST AIRLINES CO. PROFIT SHARING PLAN
Pursuant to the authority of the Board of Directors of Southwest Airlines Co., and the provisions of Section 17.1 thereof, the Southwest Airlines Co. Profit Sharing Plan is hereby amended, effective as of January 1, 2005, in the following respects only:
(1) Article XI, Section 11.1(b), is hereby amended in its entirety, to read as follows:
(b) Employer Savings Account . Subject to the requirements of Section 18.11 hereof, a Member who has attained Normal Retirement Age may elect in writing, within the time period established by the Committee for such elections, to withdraw all or any portion of his vested interest (determined pursuant to Section 10.1 hereof) in his Employer Savings Account. No more than one such withdrawal may be made by the Member during any Plan Year. The amount available for withdrawal shall be determined as of the Valuation Date next following the date on which the Committee receives the Members withdrawal election, and the withdrawal amount shall be distributed to the Member as soon as practicable thereafter.
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the foregoing instrument comprising Amendment No. 6 to the Southwest Airlines Co. Profit Sharing Plan, the Company has caused these presents to be duly executed in its name and behalf by its proper officers thereunto duly authorized this 7th day of December, 2004.
SOUTHWEST AIRLINES CO. | ||||||
|
||||||
|
By: | /s/ Gary C. Kelly | ||||
|
||||||
|
Gary C. Kelly, Chief Executive Officer | |||||
|
||||||
ATTEST:
|
||||||
|
||||||
/s/ Deborah Ackerman
Deborah Ackerman, Assistant Secretary |
- 1 -
STATE OF TEXAS
|
§ | |
|
§ | |
COUNTY OF DALLAS
|
§ |
BEFORE ME, the undersigned, a Notary Public in and for said County and State, on this 7 day of December, 2004, personally appeared GARY C. KELLY, to me known to be the identical person who subscribed the name of SOUTHWEST AIRLINES CO., as its CHIEF EXECUTIVE OFFICER to the foregoing instrument and acknowledged to me that he executed the same as his free and voluntary act and deed and as the free and voluntary act and deed of such organization for the uses and purposes therein set forth.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, the day and year last above written
|
/s/ Teri Lee Lambert | |
|
||
|
Notary Public in and for the State of Texas | |
My Commission Expires:
June 4, 2006
|
- 2 -
EXHIBIT 10.9
AMENDMENT NO. 5
TO SOUTHWEST AIRLINES CO. 401(k) PLAN
Pursuant to the authority of the Board of Directors of Southwest Airlines Co., and the provisions of Section 17.1 thereof, the Southwest Airlines Co. 401(k) Plan (the Plan) is hereby amended in the following respects only, effective as specifically provided herein.
(1) Article II, the second paragraph of Section 2.1(c), is hereby amended effective January 1, 2002 to read as follows:
Effective January 1, 1999, the Annual Compensation of each Member or former Member taken into account under the Plan for any Plan Year shall not exceed $150,000, as adjusted by the Secretary of the Treasury for increases in the cost of living at the time and in the manner set forth in Section 401(a)(17)(B) of the Code. If a Plan Year consists of fewer than twelve (12) months, then the $150,000 limitation will be multiplied by a fraction, the numerator of which is the number of months in the Plan Year, and the denominator of which is twelve (12). Except as otherwise provided herein, for purposes of an allocation under the Plan based on Annual Compensation, Annual Compensation shall only include amounts actually paid to an Employee during the period he is a Member of the Plan. Notwithstanding the limitation in the preceding sentence, for purposes of an allocation of a Company Matching Contribution, Annual Compensation shall include amounts actually paid to an Employee during the applicable Plan Year.
(2) Article II, Section 2.1(o), is hereby amended effective January 1, 2005 to read as follows:
(o) Entry Date : The first day of each calendar month.
(3) Article III, Section 3.1, is hereby amended effective January 1, 2005 to read as follows:
3.1 Eligibility Requirements : Every Employee on the Effective Date, who was a Member in the Prior Plan on the day before the Effective Date, shall continue to be a Member in the Plan. Except as otherwise provided herein, every other Employee shall be eligible to become a Member in the Plan as of the first Entry Date next following such Employees completion of one full calendar month of Service, beginning on or after his employment commencement date. The employment commencement date is the first day for which an Employee is entitled to be credited hereunder with an Hour of Service. Non-resident aliens who receive no earned income from the Company that constitutes income from sources within the United States shall not be eligible to participate in the Plan.
- 1 -
Furthermore, leased employees (as such term is defined in Section 2.1(n) hereof) and Employees classified by the Company as interns shall not be eligible to participate in the Plan. A person who is not treated as an Employee on the Companys books and records (such as a person who as a matter of practice is treated by the Company as an independent contractor, but who is later determined to be an Employee as a matter of fact) shall not be an eligible Employee during any part of a Plan Year in which such person was not treated as an Employee, despite any retroactive recharacterization.
(4) Article XI, the third paragraph of Section 11.2(a), is hereby amended in its entirety, effective January 1, 2005, to read as follows:
Upon a Members receipt of a withdrawal for financial hardship on or after January 1, 2005, such Member shall be prohibited from making Salary Reduction Contributions and Catch-Up Contributions, if applicable, for a period of at least six (6) months, beginning on the date on which the hardship withdrawal is made. Any such Member may elect to resume Salary Reduction Contributions and Catch-Up Contributions, if applicable, as of the first day of any payroll period following the last day of such six (6) month period by filing a new salary deferral election within the time period prior to the first day of such payroll period established by the Committee. Any withdrawal for financial hardship received before January 1, 2005 will be governed by the terms of the Plan in effect on the date of such withdrawal.
IN WITNESS WHEREOF, and as conclusive evidence of the adoption of the foregoing instrument comprising Amendment No. 5 to the Southwest Airlines Co. 401(k) Plan, the Company has caused these presents to be duly executed in its name and behalf by its proper officers thereunto duly authorized this 7th day of December, 2004.
SOUTHWEST AIRLINES CO. | ||||||
|
||||||
|
By: |
/s/ Gary C. Kelly
|
||||
|
Gary C. Kelly, Chief Executive Officer | |||||
|
||||||
ATTEST:
|
||||||
|
||||||
/s/ Deborah Ackerman
Deborah Ackerman, Assistant Secretary |
- 2 -
STATE OF TEXAS
|
§ | |
|
§ | |
COUNTY OF DALLAS
|
§ |
BEFORE ME, the undersigned, a Notary Public in and for said County and State, on this 7 day of December, 2004, personally appeared GARY C. KELLY, to me known to be the identical person who subscribed the name of SOUTHWEST AIRLINES CO., as its CHIEF EXECUTIVE OFFICER to the foregoing instrument and acknowledged to me that he executed the same as his free and voluntary act and deed and as the free and voluntary act and deed of such organization for the uses and purposes therein set forth.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, the day and year last above written
|
/s/ Teri Lee Lambert
|
|
|
Notary Public in and for the State of Texas | |
My Commission Expires:
June 4, 2006
|
- 3 -
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements (Forms S-8 Nos.
33-20275, 33-48178, 33-57327, 33-40652, 33-40653, 333-64431, 333-67627, 333-67631, 333-82735,
333-89303, 333-46560, 333-52388, 333-52390, 333-53610, 333-53616, 333-57478, 333-98761, 333-100862,
333-104245, 333-117802 and Forms S-3 Nos. 333-29257, 333-71392, and 333-100861) of Southwest
Airlines Co. and in the related Prospectuses of our reports dated February 2, 2005, and with
respect to the consolidated financial statements of Southwest Airlines Co., Southwest Airlines Co.
managements assessment of the effectiveness of internal control over financial reporting, and the
effectiveness of internal control over financial reporting of Southwest Airlines Co., included in
this Annual Report (Form 10-K) for the year ended December 31, 2004.
Dallas, Texas
February 2, 2005
Exhibit 31.1
CERTIFICATION
I, Gary C. Kelly, Chief Executive Officer and Vice Chairman of the Board of Directors of
Southwest Airlines Co., certify that:
1. I have reviewed this annual report on Form 10-K of Southwest Airlines Co.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(c) disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions):
(a) all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
Date: February 4, 2005
By:
/s/ Gary C. Kelly
Gary C. Kelly
Chief Executive Officer and
Vice Chairman of the Board
of Directors
Exhibit 31.2
CERTIFICATION
I, Laura H. Wright, Chief Financial Officer of Southwest Airlines Co., certify that:
1. I have reviewed this annual report on Form 10-K of Southwest Airlines Co.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrants disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation ; and
(d) disclosed in this report any change in the registrants internal control over financial
reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth
fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the audit
committee of the registrants board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrants internal control over financial reporting.
Date: February 4, 2005
By:
/s/ Laura H. Wright
Laura H. Wright
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
In connection with the Annual Report on Form 10-K of Southwest Airlines Co. (the Company)
for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the
date hereof (the Report), I, Gary C. Kelly, Chief Executive Officer and Vice Chairman of the
Board of Directors of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Date: February 4, 2005
By
/s/ Gary C. Kelly
Gary C. Kelly
Chief Executive Officer and
Vice Chairman of the Board
of Directors
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
In connection with the Annual Report on Form 10-K of Southwest Airlines Co. (the Company)
for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the
date hereof (the Report), I, Laura H. Wright, Chief Financial Officer of the Company, certify
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Date: February 4, 2005
By:
/s/ Laura H. Wright
Laura H. Wright
Chief Financial Officer