UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the quarterly period ended September 30, 2007
or
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
|
For
the transition period from ________ to
________
|
Commission
File No. 1-7259
Southwest
Airlines Co.
(Exact
name of registrant as specified in its charter)
TEXAS
|
74-1563240
|
(State
or other jurisdiction of
|
(IRS
Employer
|
incorporation
or organization)
|
Identification
No.)
|
|
|
P.O.
Box 36611, Dallas, Texas
|
75235-1611
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (214)
792-4000
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 ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer þ Accelerated
filer ¨ Non-accelerated
filer ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes ¨No þ
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
|
Number
of shares of Common Stock outstanding as of the close of business
on
October 17, 2007:
|
734,037,983
SOUTHWEST
AIRLINES CO.
FORM
10-Q
SOUTHWEST
AIRLINES CO.
FORM
10-Q
Part
I - FINANCIAL INFORMATION
Southwest
Airlines Co.
Condensed
Consolidated Balance Sheet
(in
millions)
(unaudited)
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
|
December
31, 2006
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
1,050
|
|
|
$ |
1,390
|
|
Short-term
investments
|
|
|
507
|
|
|
|
369
|
|
Accounts
and other receivables
|
|
|
326
|
|
|
|
241
|
|
Inventories
of parts and supplies, at cost
|
|
|
204
|
|
|
|
181
|
|
Fuel
derivative contracts
|
|
|
697
|
|
|
|
369
|
|
Prepaid
expenses and other current assets
|
|
|
86
|
|
|
|
51
|
|
Total
current assets
|
|
|
2,870
|
|
|
|
2,601
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, at cost:
|
|
|
|
|
|
|
|
|
Flight
equipment
|
|
|
12,698
|
|
|
|
11,769
|
|
Ground
property and equipment
|
|
|
1,458
|
|
|
|
1,356
|
|
Deposits
on flight equipment purchase contracts
|
|
|
655
|
|
|
|
734
|
|
|
|
|
14,811
|
|
|
|
13,859
|
|
Less
allowance for depreciation and amortization
|
|
|
4,144
|
|
|
|
3,765
|
|
|
|
|
10,667
|
|
|
|
10,094
|
|
Other
assets
|
|
|
987
|
|
|
|
765
|
|
|
|
$ |
14,524
|
|
|
$ |
13,460
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
735
|
|
|
$ |
643
|
|
Accrued
liabilities
|
|
|
1,972
|
|
|
|
1,323
|
|
Air
traffic liability
|
|
|
1,095
|
|
|
|
799
|
|
Current
maturities of long-term debt
|
|
|
24
|
|
|
|
122
|
|
Total
current liabilities
|
|
|
3,826
|
|
|
|
2,887
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt less current maturities
|
|
|
1,555
|
|
|
|
1,567
|
|
Deferred
income taxes
|
|
|
2,404
|
|
|
|
2,104
|
|
Deferred
gains from sale and leaseback of aircraft
|
|
|
110
|
|
|
|
120
|
|
Other
deferred liabilities
|
|
|
360
|
|
|
|
333
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
808
|
|
|
|
808
|
|
Capital
in excess of par value
|
|
|
1,171
|
|
|
|
1,142
|
|
Retained
earnings
|
|
|
4,685
|
|
|
|
4,307
|
|
Accumulated
other comprehensive income
|
|
|
723
|
|
|
|
582
|
|
Treasury
stock, at cost
|
|
|
(1,118 |
) |
|
|
(390 |
) |
Total
stockholders' equity
|
|
|
6,269
|
|
|
|
6,449
|
|
|
|
$ |
14,524
|
|
|
$ |
13,460
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
Southwest
Airlines Co.
Condensed
Consolidated Statement of Income
(in
millions, except per share amounts)
(unaudited)
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger
|
|
$ |
2,482
|
|
|
$ |
2,258
|
|
|
$ |
7,069
|
|
|
$ |
6,558
|
|
Freight
|
|
|
32
|
|
|
|
30
|
|
|
|
95
|
|
|
|
103
|
|
Other
|
|
|
74
|
|
|
|
54
|
|
|
|
205
|
|
|
|
149
|
|
Total
operating revenues
|
|
|
2,588
|
|
|
|
2,342
|
|
|
|
7,369
|
|
|
|
6,810
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and benefits
|
|
|
832
|
|
|
|
771
|
|
|
|
2,413
|
|
|
|
2,273
|
|
Fuel
and oil
|
|
|
660
|
|
|
|
563
|
|
|
|
1,831
|
|
|
|
1,581
|
|
Maintenance
materials and repairs
|
|
|
160
|
|
|
|
117
|
|
|
|
450
|
|
|
|
341
|
|
Aircraft
rentals
|
|
|
38
|
|
|
|
39
|
|
|
|
116
|
|
|
|
119
|
|
Landing
fees and other rentals
|
|
|
145
|
|
|
|
128
|
|
|
|
422
|
|
|
|
374
|
|
Depreciation
and amortization
|
|
|
140
|
|
|
|
131
|
|
|
|
411
|
|
|
|
381
|
|
Other
operating expenses
|
|
|
362
|
|
|
|
332
|
|
|
|
1,062
|
|
|
|
981
|
|
Total
operating expenses
|
|
|
2,337
|
|
|
|
2,081
|
|
|
|
6,705
|
|
|
|
6,050
|
|
OPERATING
INCOME
|
|
|
251
|
|
|
|
261
|
|
|
|
664
|
|
|
|
760
|
|
OTHER
EXPENSES (INCOME):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
28
|
|
|
|
32
|
|
|
|
86
|
|
|
|
100
|
|
Capitalized
interest
|
|
|
(13 |
) |
|
|
(12 |
) |
|
|
(39 |
) |
|
|
(38 |
) |
Interest
income
|
|
|
(9 |
) |
|
|
(23 |
) |
|
|
(36 |
) |
|
|
(62 |
) |
Other
(gains) losses, net
|
|
|
(32 |
) |
|
|
186
|
|
|
|
(221 |
) |
|
|
71
|
|
Total
other expenses (income)
|
|
|
(26 |
) |
|
|
183
|
|
|
|
(210 |
) |
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
277
|
|
|
|
78
|
|
|
|
874
|
|
|
|
689
|
|
PROVISION
FOR INCOME TAXES
|
|
|
115
|
|
|
|
30
|
|
|
|
341
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$ |
162
|
|
|
$ |
48
|
|
|
$ |
533
|
|
|
$ |
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE, BASIC
|
|
|
$.22
|
|
|
|
$.06
|
|
|
|
$.70
|
|
|
|
$.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE, DILUTED
|
|
|
$.22
|
|
|
|
$.06
|
|
|
|
$.69
|
|
|
|
$.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
739
|
|
|
|
789
|
|
|
|
765
|
|
|
|
796
|
|
Diluted
|
|
|
752
|
|
|
|
821
|
|
|
|
777
|
|
|
|
827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southwest
Airlines Co.
Condensed
Consolidated Statement of Cash Flows
(in
millions)
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2007
|
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
162
|
|
|
|
$ |
48
|
|
|
$ |
533
|
|
|
$ |
442
|
|
Adjustments
to reconcile net income to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
cash
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
140
|
|
|
|
|
131
|
|
|
|
411
|
|
|
|
381
|
|
Deferred
income taxes
|
|
|
105
|
|
|
|
|
24
|
|
|
|
272
|
|
|
|
238
|
|
Amortization
of deferred gains on sale and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
leaseback
of aircraft
|
|
|
(4 |
) |
|
|
|
(4 |
) |
|
|
(11 |
) |
|
|
(12 |
) |
Share-based
compensation expense
|
|
|
4
|
|
|
|
|
20
|
|
|
|
30
|
|
|
|
66
|
|
Excess
tax benefits from share-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
arrangements
|
|
|
(2 |
) |
|
|
|
(25 |
) |
|
|
(30 |
) |
|
|
(55 |
) |
Changes
in certain assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
and other receivables
|
|
|
(5 |
) |
|
|
|
3
|
|
|
|
(85 |
) |
|
|
(29 |
) |
Other
current assets
|
|
|
(69 |
) |
|
|
|
121
|
|
|
|
(218 |
) |
|
|
47
|
|
Accounts
payable and accrued liabilities
|
|
|
(144 |
) |
|
|
|
(744 |
) |
|
|
686
|
|
|
|
(173 |
) |
Air
traffic liability
|
|
|
(27 |
) |
|
|
|
10
|
|
|
|
296
|
|
|
|
319
|
|
Other,
net
|
|
|
(6 |
) |
|
|
|
97
|
|
|
|
(133 |
) |
|
|
39
|
|
Net
cash provided by (used in) operating activities
|
|
|
154
|
|
|
|
|
(319 |
) |
|
|
1,751
|
|
|
|
1,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment, net
|
|
|
(319 |
) |
|
|
|
(381 |
) |
|
|
(981 |
) |
|
|
(1,046 |
) |
Purchases
of short-term investments
|
|
|
(1,535 |
) |
|
|
|
(1,277 |
) |
|
|
(3,607 |
) |
|
|
(3,348 |
) |
Proceeds
from sales of short-term investments
|
|
|
1,538
|
|
|
|
|
1,319
|
|
|
|
3,469
|
|
|
|
3,245
|
|
Proceeds
from ATA Airlines, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
debtor
in possession loan
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
Other,
net
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
Net
cash used in investing activities
|
|
|
(316 |
) |
|
|
|
(339 |
) |
|
|
(1,119 |
) |
|
|
(1,128 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from Employee stock plans
|
|
|
36
|
|
|
|
|
90
|
|
|
|
128
|
|
|
|
226
|
|
Payments
of long-term debt and capital lease obligations
|
|
|
(101 |
) |
|
|
|
(1 |
) |
|
|
(116 |
) |
|
|
(137 |
) |
Payments
of cash dividends
|
|
|
(3 |
) |
|
|
|
(4 |
) |
|
|
(14 |
) |
|
|
(14 |
) |
Repurchase
of common stock
|
|
|
(327 |
) |
|
|
|
(98 |
) |
|
|
(1,001 |
) |
|
|
(600 |
) |
Excess
tax benefits from share-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
arrangements
|
|
|
2
|
|
|
|
|
25
|
|
|
|
30
|
|
|
|
55
|
|
Other,
net
|
|
|
-
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Net
cash provided by (used in) financing activities
|
|
|
(393 |
) |
|
|
|
13
|
|
|
|
(972 |
) |
|
|
(468 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
EQUIVALENTS
|
|
|
(555 |
) |
|
|
|
(645 |
) |
|
|
(340 |
) |
|
|
(333 |
) |
CASH
AND CASH EQUIVALENTS AT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BEGINNING
OF PERIOD
|
|
|
1,605
|
|
|
|
|
2,592
|
|
|
|
1,390
|
|
|
|
2,280
|
|
CASH
AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AT
END OF PERIOD
|
|
$ |
1,050
|
|
|
|
$ |
1,947
|
|
|
$ |
1,050
|
|
|
$ |
1,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
PAYMENTS FOR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest,
net of amount capitalized
|
|
$ |
21
|
|
|
|
$ |
20
|
|
|
$ |
50
|
|
|
$ |
58
|
|
Income
taxes
|
|
$ |
68
|
|
|
|
$ |
7
|
|
|
$ |
72
|
|
|
$ |
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southwest
Airlines Co.
Notes
to Condensed Consolidated Financial Statements
(unaudited)
1. BASIS
OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements of Southwest
Airlines Co. (Company or Southwest) have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article
10 of
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. The unaudited
condensed consolidated financial statements for the interim periods ended
September 30, 2007 and 2006, include all adjustments which are, in the opinion
of management, necessary for a fair presentation of the results for the interim
periods. This includes all normal and recurring adjustments, but does
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. Financial
results for the Company, and airlines in general, are seasonal in
nature. Historically, the Company’s second and third fiscal quarters
have been more profitable than its first and fourth fiscal
quarters. However, as a result of the extensive nature of the
Company’s fuel hedging program, the volatility of commodities used by the
Company for hedging jet fuel, and the unique accounting requirements of SFAS
133, as amended, the Company has experienced significant volatility in its
results in all fiscal periods. See Note 5 for further
information. Operating results for the three and nine months ended
September 30, 2007, are not necessarily indicative of the results that may
be
expected for the year ended December 31, 2007. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Southwest Airlines Co. Annual Report on Form 10-K
for
the year ended December 31, 2006.
Certain
prior period amounts have been reclassified to conform to the current
presentation. In the unaudited Condensed Consolidated Statement of
Cash Flows for the three and nine months ended September 30, 2006, “Purchases of
short-term investments” and “Proceeds from sales of short-term investments” are
shown as gross amounts instead of being netted into a single line item within
investing activities.
2. SHARE-BASED
COMPENSATION
The
Company accounts for share-based compensation in accordance with SFAS No.
123R,
“Share-Based Payment,” which was adopted January 1, 2006, utilizing the modified
retrospective transition method.
Stock
Option Plans
The
Company has stock option 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 non-qualified, granted at or above the fair
market value of the Company’s Common Stock on the date of grant, and generally
have terms ranging from six to twelve years. Neither
Executive Officers nor members of the Company’s Board of Directors are eligible
to participate in any of these collective bargaining plans. Options
granted to Employees through other Employee plans are both qualified as
incentive stock options under the Internal Revenue Code of 1986 and
non-qualified stock options, granted at or above the fair market value of
the
Company’s Common Stock on the date of grant, and have ten-year
terms. All of the options included in the Company’s definition of
other Employee plans have been approved by Shareholders, except the plan
covering non-management, non-contract Employees, which had options outstanding
to purchase 5.2 million shares of the Company’s Common Stock as of
September 30, 2007. Although the Company does not have a formal policy per
se,
upon option exercise, the Company will typically issue Treasury stock, to
the
extent such shares are available.
Vesting
terms for both collective bargaining plans and other Employee plans differ
based
on the grant made, and have ranged in length from immediate vesting to vesting
over ten years, and have also included vesting periods in accordance with
the
period covered by collective bargaining agreement. For grants in any of the
Company’s plans that are subject to graded vesting over a service period, we
recognize expense on a straight-line basis over the requisite service period
for
the entire award. None of the Company’s past grants have included
performance-based or market-based vesting conditions, as defined.
The
fair
value of each option grant is estimated on the date of grant using a modified
Black-Scholes option pricing model. 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 somewhat subjective assumptions including expected stock price
volatility. During the three months ended September 30, 2007 and
2006, there were .1 million and .2 million stock options granted under the
Company’s plans related to collective bargaining agreements,
respectively. The fair value of options granted under these plans
during the three months ended September 30, 2007, ranged from $1.57 to $4.11,
with a weighted-average fair value of $3.31. The fair value of
options granted under these plans during the three months ended September
30,
2006, ranged from $2.48 to $5.74, with a weighted-average fair value of
$4.22. During the three months ended September 30, 2007, there were
.3 million stock options granted from the 2007 Equity Incentive
Plan. The fair value of options granted under this plan during the
three months ended September 30, 2007, was $6.26. Stock options
granted from other Employee plans during the three months ended September
30,
2006, were immaterial.
The
unaudited Condensed Consolidated Statement of Income for the three months
ended
September 30, 2007 and 2006 reflects share-based compensation cost of $4
million
and $20 million, respectively. The total tax benefit recognized from
share-based compensation arrangements for the three months ended September
30,
2007 and 2006, was $2 million and $6 million, respectively. The
Company currently estimates that share-based compensation expense will be
approximately $37 million for the full year 2007, before income taxes and
profitsharing.
As
of
September 30, 2007, there was $43 million of total unrecognized compensation
cost related to share-based compensation arrangements, which is expected
to be
recognized over a weighted-average period of 2.2 years. The total
recognition period for the remaining unrecognized compensation cost is
approximately eight years; however, the majority of this cost will be recognized
over the next two years, in accordance with vesting provisions.
Employee
Stock Purchase Plan
Under
the
amended 1991 Employee Stock Purchase Plan (ESPP), which has been approved
by
Shareholders, the Company is authorized to issue up to a remaining balance
of
6.8 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 monthly purchase period. Common Stock purchases are paid
for through periodic payroll deductions. For the three months ended
September 30, 2007 and 2006, participants under the ESPP purchased .3 million
shares and .3 million shares at average prices of $13.74 and $15.55,
respectively. The weighted-average fair value of each purchase right
under the ESPP granted for the three months ended September 30, 2007 and
2006,
which is equal to the ten percent discount from the market value of the Common
Stock at the end of each monthly purchase period, was $1.53 and $1.73,
respectively.
3. DIVIDENDS
During
the three month periods ended March 31, June 30, and September 30, 2007,
dividends of $.0045 per share were declared on the 787 million shares, 764
million shares, and 738 million shares of Common Stock then outstanding,
respectively. During the three month periods ended March 31, June 30,
and September 30, 2006, dividends of $.0045 per share were declared on the
803
million shares, 798 million shares, and 791 million shares of Common Stock
then
outstanding, respectively.
4. NET
INCOME PER SHARE
The
following table sets forth the computation of basic and diluted net income
per
share (in millions except per share amounts):
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NUMERATOR:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders
|
|
$ |
162
|
|
|
$ |
48
|
|
|
$ |
533
|
|
|
$ |
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DENOMINATOR:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding,
basic
|
|
|
739
|
|
|
|
789
|
|
|
|
765
|
|
|
|
796
|
|
Dilutive
effect of Employee stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options
|
|
|
13
|
|
|
|
32
|
|
|
|
12
|
|
|
|
31
|
|
Adjusted
weighted-average shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding,
diluted
|
|
|
752
|
|
|
|
821
|
|
|
|
777
|
|
|
|
827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME PER SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$.22
|
|
|
|
$.06
|
|
|
|
$.70
|
|
|
|
$.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
$.22
|
|
|
|
$.06
|
|
|
|
$.69
|
|
|
|
$.53
|
|
5. FINANCIAL
DERIVATIVE INSTRUMENTS
Fuel
Contracts
Airline
operators are inherently dependent upon energy to operate and, therefore,
are
significantly impacted by changes in jet fuel prices. Jet fuel and
oil consumed for the three months ended September 30, 2007 and 2006 represented
approximately 28.2 percent and 27.1 percent of Southwest’s operating expenses,
respectively. In both years, jet fuel costs were the second largest
expense incurred by the Company, following only salaries, wages, and
benefits. The Company utilizes financial derivative instruments to
decrease its exposure to jet fuel price increases in its attempt 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 commodities for hedging of jet fuel costs, primarily crude
oil, and refined products such as heating oil. The Company does not
purchase or hold any derivative financial instruments for trading
purposes.
The
Company has utilized financial derivative instruments for both short-term
and
long-term time frames. In addition to the significant protective fuel derivative
positions the Company had in place during the first nine months of 2007,
the
Company also has significant future positions. The Company currently
has a mixture of purchased call options, collar structures, and fixed price
swap
agreements in place to provide protection for approximately 90 percent of
its
remaining 2007 total anticipated jet fuel requirements at average crude oil
equivalent prices of approximately $51 per barrel, and has also added refinery
margin contracts on most of those positions. Based on current growth
plans, the Company is also approximately 70 percent protected for 2008 at
approximately $51 per barrel, approximately 55 percent protected for 2009
at
approximately $51 per barrel, over 25 percent protected for 2010 at
approximately $63 per barrel, and has modest positions in 2011 and
2012.
Upon
proper qualification, the Company accounts for its fuel derivative instruments
as cash flow hedges, as defined in Statement of Financial Accounting Standards
No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as
amended (SFAS 133). Under SFAS 133, all derivatives are reflected at fair
value
in the Company’s unaudited Condensed Consolidated Balance Sheet, and all
derivatives designated as hedges that meet certain requirements are granted
special hedge accounting treatment. Generally, utilizing the special
hedge accounting, all periodic changes in fair value of the derivatives
designated as hedges that are considered to be effective, as defined, are
recorded in "Accumulated other comprehensive income" until the underlying
jet
fuel is consumed. See Note 6 for further information on Accumulated
other comprehensive income. The Company is exposed to the risk that
periodic changes will not be perfectly effective, as defined, or that the
derivatives will no longer qualify for special hedge
accounting. Ineffectiveness, as defined, results when the change in
the fair value of the derivative instrument exceeds the change in the value
of
the Company’s expected future cash outlay to purchase and consume jet
fuel. To the extent that the periodic changes in the fair value of
the derivatives exceed the change in the value of the Company’s expected future
cash outlay to purchase and consume jet fuel, that ineffectiveness is recorded
immediately to “Other (gains) and losses, net” in the income
statement. Likewise, if a hedge ceases to qualify for hedge
accounting, any change in the fair value of derivative instruments since
the
last period is recorded to “Other (gains) and losses, net” in the income
statement in the period of the change.
The
Company has utilized historical data, which is updated every quarterly reporting
period to ascertain whether SFAS 133 hedge accounting is allowed for every
commodity the Company uses in its hedging program. However,
ineffectiveness is inherent in hedging jet fuel with derivative positions
based
in other crude oil related commodities, especially given the magnitude of
the
current fair market value of the Company’s fuel derivatives and the recent
volatility in the prices of refined products. In addition, 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 the prices, as required by SFAS
133. Due to these reasons, the Company is unable to predict the
amount of ineffectiveness each period, including the loss of hedge accounting,
which could be determined on a derivative by derivative basis or in the
aggregate for an entire commodity. This may result, and has resulted,
in increased volatility in the Company’s results. The significant
increase in the amount of hedge ineffectiveness and unrealized gains and
losses
on derivative contracts settling in future periods recorded in recent years
has
been due to a number of factors. These factors included: the
significant fluctuation in energy prices, the number of derivative positions
the
Company holds, significant weather events that have affected refinery capacity
and the production of refined products, and the volatility of the different
types of products the Company uses for protection. The number of
instances in which the Company has discontinued hedge accounting for specific
hedges has increased recently, primarily due to these reasons. In
these cases, the Company has determined that the hedges will not regain
effectiveness in the time period remaining until settlement and therefore
must
discontinue special hedge accounting, as defined by SFAS 133. In
addition, the Company can no longer show that any unleaded gasoline-based
derivative will be highly effective in offsetting future cash flows associated
with the purchase of jet fuel, so the Company cannot utilize special hedge
accounting for any unleaded gasoline-based derivatives. When the
Company cannot utilize special hedge accounting, any changes in fair value
of
the derivative instruments are marked to market through earnings in the period
of change. However, any amounts that have been recorded in
"Accumulated other comprehensive income" at the time special hedge accounting
is
discontinued, are required to remain in "Accumulated other comprehensive
income"
until the time that the original forecasted transaction affects earnings
(i.e.,
the consumption of jet fuel occurs). All cash flows associated with
the purchase of derivative instruments (such as call options and collar
structures) are classified as operating cash flows.
Even
though derivatives may not meet the strict requirements to qualify for SFAS
133
special hedge accounting, the Company may continue to hold the instruments
because it believes they continue to represent good “economic hedges” in its
goal to minimize jet fuel costs. As previously mentioned, there is
not a reliable forward derivatives market for jet fuel, so the Company is
subject to the inherent ineffectiveness of using other commodities in hedging,
which the Company believes is a better alternative than not hedging at
all. As the fair value of the Company’s hedge positions increases in
amount, there is a higher degree of probability that there will be continued
variability recorded in the income statement and that the amount of hedge
ineffectiveness and unrealized gains or losses for changes in value of the
derivatives recorded in future periods will be material. This is
primarily due to the fact that small differences in the correlation of crude
oil
related products are leveraged over large dollar volumes.
Net
gains
and/or losses on derivatives that are effective, as defined in SFAS 133,
are
reflected as a component of Fuel and oil expense in the unaudited Condensed
Consolidated Statement of Income. Ineffectiveness, as defined, gains
and losses from derivative instruments that do not qualify for hedge accounting,
and all premium costs associated with purchased option and collar contracts,
are
reflected in “Other (gains) losses, net.” The following table
presents the location of gains and/or losses on derivative instruments for
the
three and nine months ended September 30, 2006 and 2007.
|
|
Three
months ended September 30,
|
|
(In
millions)
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Fuel
hedge (gains) included in Fuel and oil expense
|
|
$ |
(188 |
) |
|
|
$ |
(201 |
) |
Mark-to-market
impact from fuel contracts settling in future
|
|
|
|
|
|
|
|
|
|
periods
- included in Other (gains) losses, net
|
|
|
(44 |
) |
|
|
|
123
|
|
Ineffectiveness
from fuel hedges settling in future periods -
|
|
|
|
|
|
|
|
|
|
included
in Other (gains) losses, net
|
|
|
(11 |
) |
|
|
|
18
|
|
Realized
ineffectiveness and mark-to-market (gains) or
|
|
|
|
|
|
|
|
|
|
losses
- included in Other (gains) losses, net
|
|
|
7
|
|
|
|
|
32
|
|
Premium
cost of fuel contracts included in Other (gains) losses,
net
|
|
|
14
|
|
|
|
|
13
|
|
|
|
Nine
months ended September 30,
|
|
(In
millions)
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Fuel
hedge (gains) included in Fuel and oil expense
|
|
$ |
(439 |
) |
|
|
$ |
(515 |
) |
Mark-to-market
impact from fuel contracts settling in future
|
|
|
|
|
|
|
|
|
|
periods
- included in Other (gains) losses, net
|
|
|
(216 |
) |
|
|
|
18
|
|
Ineffectiveness
from fuel hedges settling in future periods -
|
|
|
|
|
|
|
|
|
|
included
in Other (gains) losses, net
|
|
|
(4 |
) |
|
|
|
22
|
|
Realized
ineffectiveness and mark-to-market (gains) or
|
|
|
|
|
|
|
|
|
|
losses
- included in Other (gains) losses, net
|
|
|
(45 |
) |
|
|
|
(3 |
) |
Premium
cost of fuel contracts included in Other (gains) losses,
net
|
|
|
43
|
|
|
|
|
37
|
|
Also,
the
following table presents the fair values of the Company’s remaining derivative
instruments, receivable amounts from settled/expired derivative contracts,
and
the amounts of unrealized gains, net of tax, in Accumulated other comprehensive
income related to fuel hedges.
|
|
September
30,
|
|
|
December
31,
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Fair
value of current fuel contracts (Fuel derivative
contracts)
|
|
$ |
697
|
|
|
$ |
369
|
|
Fair
value of noncurrent fuel contracts (Other assets)
|
|
|
848
|
|
|
|
630
|
|
Due
from third parties for settled fuel contracts (Accounts
|
|
|
|
|
|
|
|
|
and
other receivables)
|
|
|
71
|
|
|
|
42
|
|
Net
unrealized gains from fuel hedges, net of tax (Accumulated
|
|
|
|
|
|
|
|
|
other
comprehensive income)
|
|
|
725
|
|
|
|
584
|
|
The
fair
value of derivative instruments, depending on the type of instrument, was
determined by the use of present value methods or standard option valuation
models with assumptions about commodity prices based on those observed in
underlying markets. Included in the above $725 million net unrealized
gains from fuel hedges are approximately $339 million in net unrealized gains
that are expected to be realized in earnings during the twelve months following
September 30, 2007.
Interest
Rate Swaps
Prior
to
2007, the Company had entered into interest rate swap agreements relating
to its
$350 million 5.25% senior unsecured notes due 2014 and its $385 million 6.5%
senior unsecured notes due 2012. During first quarter 2007, the Company executed
interest rate swap agreements relating to its $300 million 5.125% senior
unsecured notes due 2017 and its $100 million 7.375% senior unsecured notes
due
2027. Under each of these interest rate swap agreements, the Company
pays the London InterBank Offered Rate (LIBOR) plus a margin every six months
on
the notional amount of the debt, and receives the fixed stated rate of the
notes
every six months until the date the notes become due.
The
Company’s 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 Company’s balance sheet as an
asset or liability, 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 September 30, 2007,
was a
liability of approximately $26 million. This entire amount is
recorded in Other deferred liabilities in the unaudited Condensed Consolidated
Balance Sheet. In accordance with fair value hedging, the offsetting
entry is an adjustment to decrease the carrying value of long-term
debt.
During
2007, the Company also entered into swap agreements to hedge the variability
in
interest rates on the anticipated issuance of $500 million in Pass Through
Certificates. These Pass Through Certificates were subsequently
issued on October 3, 2007. The swap agreements were accounted for as
cash flow hedges, and were settled, resulting in a payment by the Company
of $20
million. The effective portion of the hedge is being amortized to
interest expense concurrent with the amortization of the debt. The
ineffectiveness of the hedge transaction was immaterial. See Note 10
for further information on the Pass Through Certificates.
6. COMPREHENSIVE
INCOME (LOSS)
Comprehensive
income (loss) included 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 $133 million for
the three months ended September 30, 2007 and comprehensive (loss) totaled
$337
million for the three months ended September 30, 2006. For the nine months
ended
September 30, 2007 and 2006, comprehensive income totaled $674 million and
$269
million, respectively. The differences between net income and
comprehensive income (loss) for each of these periods were as
follows:
|
|
Three
months ended September 30,
|
|
(In
millions)
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
162
|
|
|
|
$ |
48
|
|
Unrealized
gain (loss) on derivative instruments,
|
|
|
|
|
|
|
|
|
|
net
of deferred taxes of ($18) and ($240)
|
|
|
(29 |
) |
|
|
|
(386 |
) |
Other,
net of deferred taxes of $0 and $1
|
|
|
-
|
|
|
|
|
1
|
|
Total
other comprehensive income (loss)
|
|
|
(29 |
) |
|
|
|
(385 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$ |
133
|
|
|
|
$ |
(337 |
) |
|
|
Nine
months ended September 30,
|
|
(In
millions)
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
533
|
|
|
|
$ |
442
|
|
Unrealized
gain (loss) on derivative instruments,
|
|
|
|
|
|
|
|
|
|
net
of deferred taxes of $87 and ($118)
|
|
|
141
|
|
|
|
|
(175 |
) |
Other,
net of deferred taxes of $0 and $1
|
|
|
-
|
|
|
|
|
2
|
|
Total
other comprehensive income (loss)
|
|
|
141
|
|
|
|
|
(173 |
) |
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$ |
674
|
|
|
|
$ |
269
|
|
A
rollforward of the amounts included in Accumulated other comprehensive income,
net of taxes, is shown below:
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Fuel
|
|
|
|
|
|
other
|
|
|
|
hedge
|
|
|
|
|
|
comprehensive
|
|
(In
millions)
|
|
derivatives
|
|
|
Other
|
|
|
income
(loss)
|
|
Balance
at June 30, 2007
|
|
$ |
754
|
|
|
$ |
(2 |
) |
|
$ |
752
|
|
Third
quarter 2007 changes in value
|
|
|
78
|
|
|
|
-
|
|
|
|
78
|
|
Reclassification
to earnings
|
|
|
(107 |
) |
|
|
-
|
|
|
|
(107 |
) |
Balance
at September 30, 2007
|
|
$ |
725
|
|
|
$ |
(2 |
) |
|
$ |
723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Fuel
|
|
|
|
|
|
|
other
|
|
|
|
hedge
|
|
|
|
|
|
|
comprehensive
|
|
(In
millions)
|
|
derivatives
|
|
|
Other
|
|
|
income
(loss)
|
|
Balance
at December 31, 2006
|
|
$ |
584
|
|
|
$ |
(2 |
) |
|
$ |
582
|
|
2007
changes in value
|
|
|
383
|
|
|
|
-
|
|
|
|
383
|
|
Reclassification
to earnings
|
|
|
(242 |
) |
|
|
-
|
|
|
|
(242 |
) |
Balance
at September 30, 2007
|
|
$ |
725
|
|
|
$ |
(2 |
) |
|
$ |
723
|
|
7. OTHER
ASSETS AND ACCRUED LIABILITIES
|
|
September
30,
|
|
|
December
31,
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Noncurrent
fuel hedge contracts, at fair value
|
|
$ |
848
|
|
|
$ |
630
|
|
Other
|
|
|
139
|
|
|
|
135
|
|
Other
assets
|
|
$ |
987
|
|
|
$ |
765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
(In
millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Retirement
Plans
|
|
$ |
106
|
|
|
$ |
165
|
|
Aircraft
Rentals
|
|
|
118
|
|
|
|
128
|
|
Vacation
Pay
|
|
|
164
|
|
|
|
151
|
|
Advances
and deposits
|
|
|
1,159
|
|
|
|
546
|
|
Deferred
income taxes
|
|
|
137
|
|
|
|
78
|
|
Other
accrued benefits
|
|
|
148
|
|
|
|
101
|
|
Other
|
|
|
140
|
|
|
|
154
|
|
Accrued
liabilities
|
|
$ |
1,972
|
|
|
$ |
1,323
|
|
8. POSTRETIREMENT
BENEFITS
The
following table sets forth the Company’s periodic postretirement benefit cost
for each of the interim periods identified:
|
|
Three
months ended September 30,
|
|
(In
millions)
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
4
|
|
|
|
$ |
4
|
|
Interest
cost
|
|
|
1
|
|
|
|
|
1
|
|
Amortization
of prior service cost
|
|
|
1
|
|
|
|
|
-
|
|
Recognized
actuarial loss
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic postretirement benefit cost
|
|
$ |
6
|
|
|
|
$ |
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, |
|
(In
millions)
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$ |
11
|
|
|
|
$ |
11
|
|
Interest
cost
|
|
|
4
|
|
|
|
|
4
|
|
Amortization
of prior service cost
|
|
|
2
|
|
|
|
|
1
|
|
Recognized
actuarial loss
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Net
periodic postretirement benefit cost
|
|
$ |
17
|
|
|
|
$ |
16
|
|
9. PROJECT
EARLY DEPARTURE
Project
Early Departure was a voluntary early retirement program offered in July
to
eligible Employees, in which the Company offered a cash bonus of $25,000
plus
medical/dental continuation coverage and travel privileges based on
eligibility.
A
total
of 608 out of approximately 8,500 eligible Employees elected to participate
in
the program. The number of Employees from each group that accepted the package
is as follows: 395 from Reservations, 165 from Ground Operations, 41 from
Inflight and seven from Provisioning. The participants’ last day of
work falls between September 30, 2007 and April 30, 2008, based on the
operational needs of particular work locations and departments. The
Company did not have a target or expectation for the number of Employees
expected to accept the package.
Project
Early Departure resulted in a pre-tax, pre-profitsharing, one-time charge
of
approximately $25 million during third quarter 2007, all of which is reflected
in Salaries, wages and benefits in the accompanying unaudited Condensed
Consolidated Statement of Income. Approximately $18 million remained
and was classified as an accrued liability in the accompanying unaudited
Condensed Consolidated Balance Sheet as of September 30, 2007. The
Company anticipates that future cost savings will be approximately $20 million
annually through 2012. The Company will continue to address future
staffing needs, but currently anticipates that the majority of the positions
will be filled with entry-level Employees at lower wage rates to meet
operational demands. The purpose of this voluntary initiative and
other initiatives is to help the Company curb cost pressures, such as higher
wage rates and the increase in fuel prices.
10. LONG-TERM
DEBT
On
September 1, 2007, the Company redeemed its $100 million senior unsecured
7 7/8%
notes on their scheduled maturity date.
On
October 3, 2007, the Company issued $500 million Pass Through Certificates
consisting of $412 million 6.15% Series A certificates and $88 million 6.65%
Series 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 16 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 semi-annually, beginning February 1, 2008. Also beginning
February 1, 2008, principal payments on the equipment notes held for both
series
of certificates are due semi-annually until the balance of the certificates
mature on August 1, 2022. The Company plans to use the proceeds from
the issuance of the Pass Through Certificates for general corporate
purposes.
11. CONTINGENCIES
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
Company’s federal income tax returns and, in the course thereof, proposes
adjustments to the Company’s federal income tax liability reported on such
returns. It is the Company’s practice to vigorously contest those
proposed adjustments it deems lacking of merit.
The
Company's 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 result in a material
adverse effect on the Company's financial condition, results of operations
or
cash flow.
12. RECENT
ACCOUNTING PRONOUNCEMENTS
In
July
2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB
Statement No. 109” (FIN 48), which clarifies the accounting and disclosure
for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the
diversity in practice associated with certain aspects of the recognition
and
measurement related to accounting for income taxes. The Company is
subject to the provisions of FIN 48 as of January 1, 2007, and
has analyzed filing positions in all of the federal and state jurisdictions
where it is required to file income tax returns, as well as all open tax
years
in these jurisdictions. The Company has identified its federal tax
return and its state tax returns in California and Texas as “major” tax
jurisdictions, as defined. The only periods subject to examination
for the Company’s federal tax return are the 2005 and 2006 tax
years. The periods subject to examination for the Company’s state tax
returns in California and Texas are years 2002 through 2006. The
Company believes that its income tax filing positions and deductions will
be
sustained on audit and does not anticipate any adjustments that will result
in a
material adverse effect on the Company’s financial condition, results of
operations, or cash flow. Therefore, no reserves for
uncertain income tax positions have been recorded pursuant to FIN
48. In addition, the Company did not record a cumulative effect
adjustment related to the adoption of FIN 48.
The
Company’s policy for recording interest and penalties associated with audits is
to record such items as a component of income before taxes. Penalties
are recorded in “Other (gains) losses, net,” and interest paid or received is
recorded in interest expense or interest income, respectively, in the statement
of income. For the nine months ended September 30, 2007, the Company
recorded approximately $1 million in interest income related to the settlement
of audits for certain prior periods.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (Statement
159). Statement 159 allows entities the option to measure eligible
financial instruments at fair value as of specified dates. Such
election, which may be applied on an instrument by instrument basis, is
typically irrevocable once elected. Statement 159 is effective for
fiscal years beginning after November 15, 2007, and early application is
allowed
under certain circumstances. The Company has not yet determined the
impact this interpretation will have on our financial position.
Item
2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Comparative
Consolidated Operating Statistics
Relevant
Southwest comparative
operating statistics for the three and nine months ended September 30, 2007
and
2006 are as follows:
|
|
Three
months ended September 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
passengers carried
|
|
|
23,553,366
|
|
|
|
21,558,982
|
|
|
|
9.3 |
% |
Enplaned
passengers
|
|
|
27,242,613
|
|
|
|
24,880,646
|
|
|
|
9.5 |
% |
Revenue
passenger miles (RPMs) (000s)
|
|
|
19,685,690
|
|
|
|
17,767,128
|
|
|
|
10.8 |
% |
Available
seat miles (ASMs) (000s)
|
|
|
25,715,957
|
|
|
|
23,784,615
|
|
|
|
8.1 |
% |
Load
factor
|
|
|
76.6 |
% |
|
|
74.7 |
% |
|
1.9
|
pts. |
Average
length of passenger haul (miles)
|
|
|
836
|
|
|
|
824
|
|
|
|
1.5 |
% |
Average
aircraft stage length (miles)
|
|
|
633
|
|
|
|
625
|
|
|
|
1.3 |
% |
Trips
flown
|
|
|
297,782
|
|
|
|
279,032
|
|
|
|
6.7 |
% |
Average
passenger fare
|
|
|
$105.37
|
|
|
|
$104.75
|
|
|
|
0.6 |
% |
Passenger
revenue yield per RPM (cents)
|
|
|
12.61
|
|
|
|
12.71
|
|
|
|
(0.8 |
)% |
Operating
revenue yield per ASM (cents)
|
|
|
10.06
|
|
|
|
9.85
|
|
|
|
2.1 |
% |
Operating
expenses per ASM (cents)
|
|
|
9.09
|
|
|
|
8.75
|
|
|
|
3.9 |
% |
Operating
expenses per ASM, excluding fuel (cents)
|
|
|
6.52
|
|
|
|
6.38
|
|
|
|
2.2 |
% |
Fuel
costs per gallon, excluding fuel tax
|
|
|
$1.69
|
|
|
|
$1.56
|
|
|
|
8.3 |
% |
Fuel
consumed, in gallons (millions)
|
|
|
388
|
|
|
|
359
|
|
|
|
8.1 |
% |
Full-time
equivalent Employees at period-end
|
|
|
33,787
|
|
|
|
32,144
|
|
|
|
5.1 |
% |
Size
of fleet at period-end
|
|
|
511
|
|
|
|
475
|
|
|
|
7.6 |
% |
|
|
Nine
months ended September 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
passengers carried
|
|
|
66,956,318
|
|
|
|
62,757,726
|
|
|
|
6.7 |
% |
Enplaned
passengers
|
|
|
77,035,110
|
|
|
|
72,202,988
|
|
|
|
6.7 |
% |
Revenue
passenger miles (RPMs) (000s)
|
|
|
54,813,530
|
|
|
|
50,891,473
|
|
|
|
7.7 |
% |
Available
seat miles (ASMs) (000s)
|
|
|
74,377,009
|
|
|
|
68,748,057
|
|
|
|
8.2 |
% |
Load
factor
|
|
|
73.7 |
% |
|
|
74.0 |
% |
|
(.3)
|
pts. |
Average
length of passenger haul (miles)
|
|
|
819
|
|
|
|
811
|
|
|
|
1.0 |
% |
Average
aircraft stage length (miles)
|
|
|
630
|
|
|
|
620
|
|
|
|
1.6 |
% |
Trips
flown
|
|
|
865,329
|
|
|
|
812,428
|
|
|
|
6.5 |
% |
Average
passenger fare
|
|
|
$105.57
|
|
|
|
$104.50
|
|
|
|
1.0 |
% |
Passenger
revenue yield per RPM (cents)
|
|
|
12.90
|
|
|
|
12.89
|
|
|
|
0.1 |
% |
Operating
revenue yield per ASM (cents)
|
|
|
9.91
|
|
|
|
9.91
|
|
|
|
0.0 |
% |
Operating
expenses per ASM (cents)
|
|
|
9.01
|
|
|
|
8.80
|
|
|
|
2.4 |
% |
Operating
expenses per ASM, excluding fuel (cents)
|
|
|
6.55
|
|
|
|
6.50
|
|
|
|
0.8 |
% |
Fuel
costs per gallon, excluding fuel tax
|
|
|
$1.64
|
|
|
|
$1.53
|
|
|
|
7.2 |
% |
Fuel
consumed, in gallons (millions)
|
|
|
1,114
|
|
|
|
1,032
|
|
|
|
7.9 |
% |
Full-time
equivalent Employees at period-end
|
|
|
33,787
|
|
|
|
32,144
|
|
|
|
5.1 |
% |
Size
of fleet at period-end
|
|
|
511
|
|
|
|
475
|
|
|
|
7.6 |
% |
Material
Changes in Results of Operations
Summary
The
Company’s third quarter 2007 net income of $162 million ($.22 per share,
diluted), represented the Company’s 66th consecutive
quarterly profit and compared favorably to the Company’s third quarter 2006
profit of $48 million ($.06 per share, diluted). Both third quarter
2007 and third quarter 2006 had significant adjustments related to derivative
contracts the Company utilizes in attempting to hedge against jet fuel price
increases. In third quarter 2007, forward prices for the derivatives
Southwest uses for hedging purposes increased, resulting in unrealized gains
related to the higher fair values of these contracts, and in third quarter
2006,
forward prices had decreased, resulting in the recording of significant
unrealized losses related to the lower fair values of these
contracts. Primarily as a result of the third quarter 2007 rise in
prices for fuel derivatives that will settle in future periods or that were
ineffective, as defined, or that did not qualify for special hedge accounting,
the Company recorded $48 million in net gains, which are included in “Other
(gains) losses, net.” In third quarter 2006, the Company recorded a
total of $173 million in losses associated with fuel derivatives that were
ineffective, as defined, or did not qualify for special hedge
accounting. See Note 5 to the unaudited condensed consolidated
financial statements for further information on the Company’s hedging
activities.
Third
quarter 2007 operating income decreased $10 million, or 3.8 percent, compared
to
third quarter 2006, as an increase in operating expenses outpaced an increase
in
operating revenues. Due to the significant unrealized adjustments
recorded to “Other (gains) losses, net,” which is below the operating income
line, the Company believes operating income provides a better indication
of the
Company’s financial performance in both years than does net
income. Although the Company’s fuel hedging program has resulted in
significant unrealized gains and losses being recorded to “Other (gains) losses,
net” for several years, it also continues to provide excellent economic benefits
to the Company. Even with a less favorable fuel hedge position in
2007 versus 2006, our hedging program resulted in the realization of
approximately $189 million in cash settlements for third quarter 2007 compared
to $200 million in cash settlements for third quarter 2006. The
majority of the $189 million in third quarter 2007 cash settlements were
reflected as a reduction to Fuel and oil expense. Even including this
third quarter 2007 hedge position, fuel cost per gallon increased 8.3 percent
versus third quarter 2006.
The
decrease in operating income was primarily due to the fact that operating
expenses grew 12.3 percent, while operating revenues grew only 10.5
percent. The increase in operating expenses included a $25 million
charge associated with an early retirement program taken by over 600 Employees
during third quarter 2007, higher fuel costs, and higher maintenance expenses.
Excluding the $25 million early retirement charge, net of profitsharing,
third
quarter 2007 operating income would have moderately exceeded the prior
year. Although the Company achieved a higher passenger load factor in
third quarter 2007 versus 2006, RPM yields (passenger revenues divided by
revenue passenger miles) declined .8 percent as passengers paid less to fly
on a
per mile basis. This was primarily due to the fact that the higher
load factors resulted from strong demand for low fares.
For
the
nine months ended September 30, 2007, net income increased 20.6 percent to
$533
million ($.69 per share, diluted), compared to net income of $442 million
($.53
per share, diluted) for the same 2006 period. Results in both years
were significantly impacted by gains associated with fuel derivatives that
did
not qualify for special hedge accounting, as well as ineffectiveness associated
with hedges, as defined. For the nine months ended September 30,
2007, these gains and hedge ineffectiveness totaled $265 million compared
to
losses of $37 million for the first nine months of 2006. Operating
income, which excludes these items, was $664 million for the nine months
ended
September 30, 2007, a decrease of 12.6 percent compared to the prior
year. Operating expenses grew 10.8 percent, led by a 32.0 percent
increase in maintenance expense and a 15.8 percent increase in fuel expense,
while operating revenues grew 8.2 percent compared to the first nine months
of
2006.
The
early
retirement program that was offered by the Company and accepted by more than
600
Employees during third quarter 2007 is one of many efforts underway in an
attempt to improve the Company’s future profitability. Although the
program resulted in a one-time $25 million charge to salaries, wages and
benefits in third quarter 2007, the Company expects savings in excess of
$20
million per year over the next several years, as those Employees will be
replaced by workers with lower initial wage rates. See Note 9 to the
unaudited condensed consolidated financial statements for further information
on
this program. The Company has also outlined several initiatives that
are designed to improve future revenues and enhance Customer Service, some
of
which have been recently announced. For example, the Company’s new
Customer boarding method for flights is designed to significantly reduce
the
average time a Customer spends waiting in line at the gate, while retaining
the
Company’s famous open seating policy once aboard the aircraft. The
new boarding method is scheduled to be implemented systemwide November 8,
2007,
and allows for future enhancements such as product customization and additional
incentives for the business and leisure traveler. In October 2007,
the Company also announced an updated gate design to enhance the airport
experience for Customers, to be installed at all 64 airports served by the
Company. This “gate makeover” is scheduled for completion during
mid-year 2008. Other items the Company intends to roll out in the
near future include: introduction of an enhanced fare structure and Rapid
Rewards frequent flyer program in fourth quarter 2007; launch of a new
advertising campaign; and the expansion of our GDS (Global Distribution System)
and corporate travel account efforts through agreements with Travelport’s
Galileo and Worldspan. In connection with and in support of these
initiatives, the Company also intends to implement significant technology
enhancements.
Based
on
our current forecast, the Company expects fourth quarter 2007 capacity to
grow
approximately five to six percent versus fourth quarter 2006. The
Company will receive nine new Boeing 737-700 aircraft deliveries in fourth
quarter 2007. The Company also anticipates a six percent available
seat mile growth for 2008, based upon the planned delivery of 29 Boeing 737-700
aircraft, less the retirement and/or sale of at least ten existing aircraft,
bringing 2008 planned additions to no more than 19 net aircraft. The
Company’s unit revenue trends improved throughout third quarter 2007 and we
currently expect those trends to continue into fourth quarter
2007. Current bookings for fourth quarter 2007 are solid and
Passenger revenue per ASM is currently expected to be up approximately 3
percent
versus fourth quarter 2006. In addition, based on these revenue
trends, bookings, and planned revenue initiatives and barring a slowdown
in the
domestic economy, we expect fourth quarter 2007 operating unit revenues to
exceed year ago levels.
Comparison
of three months ended September 30, 2007, to three months ended September
30,
2006
Revenues
Consolidated
operating revenues
increased by $246 million, or 10.5 percent, primarily due to a $224 million,
or
9.9 percent, increase in Passenger revenues. The increase in
Passenger revenues was primarily attributable to the 8.1 percent increase
in
capacity, as the Company added 36 aircraft since the end of third quarter
2006
(and had no aircraft retirements). The increase in Passenger revenues
compared to capacity was primarily due to a higher load factor, as average
fares
were comparable to the same prior year period. The Company’s third
quarter 2007 load factor increased 1.9 points versus third quarter 2006 and
represented a Company record for the quarter at 76.6 percent. As a
result of this higher load factor, Passenger revenues per available seat
mile
also increased 1.7 percent compared to third quarter 2006. However,
RPM yields (Passenger revenues divided by revenue passenger miles) declined
.8
percent due to a higher mix of discounted fares in third quarter
2007.
Consolidated
freight revenues increased
by $2 million, or 6.7 percent, primarily as a result of higher rates
charged. The Company expects a comparable increase in consolidated
freight revenues for fourth quarter 2007 compared to fourth quarter
2006. Other revenues increased by $20 million, or 37.0 percent,
compared to third quarter 2006, primarily due to higher commissions earned
from
programs the Company sponsors with certain business partners, such as the
Company sponsored co-branded Visa card. This included a new long term
agreement signed with a business partner during second quarter 2007, which
resulted in higher rates and certain incentives that the Company had not
received in previous agreements for our co-branded Visa card. The
Company expects a year-over-year increase in Other revenues for fourth quarter
2007, although at a lower rate than experienced in third quarter
2007.
Operating
expenses
To
a large extent, changes in operating
expenses for airlines are driven by changes in capacity, or ASMs. The
following presents Southwest’s operating expenses per ASM for the three months
ended September 30, 2007 and 2006, followed by explanations of changes on
a
per-ASM basis and/or on a dollar basis, when appropriate (in cents, except
for
percentages):
|
|
Three
months ended September 30,
|
|
|
Per
ASM
|
|
|
Percent
|
|
|
|
2007
|
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and benefits
|
|
|
3.23
|
|
|
|
|
3.24
|
|
|
|
(.01 |
) |
|
|
(.3 |
) |
Fuel
and oil
|
|
|
2.57
|
|
|
|
|
2.37
|
|
|
|
.20
|
|
|
|
8.4
|
|
Maintenance
materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
repairs
|
|
|
.62
|
|
|
|
|
.49
|
|
|
|
.13
|
|
|
|
26.5
|
|
Aircraft
rentals
|
|
|
.15
|
|
|
|
|
.16
|
|
|
|
(.01 |
) |
|
|
(6.3 |
) |
Landing
fees and other rentals
|
|
|
.57
|
|
|
|
|
.54
|
|
|
|
.03
|
|
|
|
5.6
|
|
Depreciation
|
|
|
.54
|
|
|
|
|
.55
|
|
|
|
(.01 |
) |
|
|
(1.8 |
) |
Other
operating expenses
|
|
|
1.41
|
|
|
|
|
1.40
|
|
|
|
.01
|
|
|
|
.7
|
|
Total
|
|
|
9.09
|
|
|
|
|
8.75
|
|
|
|
.34
|
|
|
|
3.9
|
|
Operating expenses per ASM were 9.09 cents, a 3.9 percent increase compared
to
8.75 cents for third quarter 2006. Over 55 percent of the increase
per ASM was due to higher fuel costs, as the Company’s average cost per gallon
of fuel increased 8.3 percent versus the prior year, net of
hedging. Approximately 35 percent of the increase per ASM was due to
higher maintenance materials and repairs expense, as a result of an increase
in
the cost and number of both engine and airframe repair events. The
remainder of the increase was primarily due to the $25 million charge related
to
the Company’s early retirement program during third quarter 2007; however, this
was mostly offset in Salaries, wages and benefits by lower share-based
compensation and lower profitsharing expense. Excluding fuel,
year-over-year CASM increased 2.2 percent to 6.52 cents, primarily due to
the
increase in maintenance costs. Based on current unit operating cost
trends and various cost pressures, the Company expects fourth quarter 2007
unit
costs, excluding fuel, to be higher than third quarter 2007’s 6.52 cents per
ASM, primarily due to higher expected advertising costs, higher airport costs,
higher fuel taxes, and expense associated with the Company’s aforementioned
“gate makeover.” The Company currently expects to spend a total of
approximately $30 million to $40 million on its “gate makeover” project, the
majority of which is expected to be capitalized; however, portions of the
project are not expected to be eligible for capitalization and will be
immediately expensed during the period they are incurred. For fourth
quarter 2007, the Company expects this expense to be approximately $5
million. The Company’s decision to slow its growth in fourth quarter
2007 is negatively impacting unit cost trends. Our fourth quarter 2007 flight
schedule, which had been set before the decision to reduce capacity growth,
is
not optimized and the Company is incurring costs related to excess capacity
that
cannot be eliminated until January 2008.
Salaries,
wages, and benefits expense
per ASM declined slightly compared to third quarter 2006, but on a dollar
basis
increased $61 million. Both figures included the impact of the
one-time $25 million charge in third quarter 2007 associated with the early
retirement program offered by the Company. Excluding this charge, on
a per-ASM basis, the Company would have experienced a larger decrease in
Salaries, wages and benefits, as a result of lower share-based compensation
expense and lower profitsharing expense versus third quarter
2006. The Company’s profitsharing contributions are based on income
before taxes excluding primarily unrealized gains and losses from fuel
derivative contracts. See Note 2 to the unaudited condensed
consolidated financial statements for further information on share-based
compensation. On a dollar basis, excluding the one-time $25 million
third quarter 2007 charge (net of related profitsharing savings of $4 million),
the remaining $40 million increase in Salaries, wages and benefits was primarily
due to higher wages from a 5.1 percent increase in headcount, partially offset
by lower share-based compensation expense. The Company
currently expects Salaries, wages, and benefits per ASM in fourth quarter
2007
to be lower than the 3.26 cents reported in fourth quarter 2006, primarily
due
to lower share-based compensation expense.
Fuel
and
oil expense increased $97 million, and on a per ASM basis increased 8.4 percent,
primarily due to a weaker hedge position held by the Company in third quarter
2007 versus third quarter 2006 as well as higher average prices, excluding
hedging. In third quarter 2007, the Company held fuel derivative
instruments that were at higher average crude oil-equivalent prices than
in
third quarter 2006. The Company’s average fuel cost per gallon in
third quarter 2007 was $1.69, which is 8.3 percent higher than third quarter
2006, including the effects of hedging activities. Excluding hedging,
the Company’s average fuel cost per gallon in third quarter 2007 was $2.18
versus $2.12 in third quarter 2006. For third quarter 2007, the
Company had protected over 90 percent of its anticipated fuel needs at a
crude
oil-equivalent price of approximately $51 per barrel, resulting in gains
recorded in Fuel and oil expense of $188 million. Third quarter 2006
hedging gains recorded in Fuel and oil expense were $201 million.
For
fourth quarter 2007, the Company has fuel derivatives in place for approximately
90 percent of its expected fuel consumption with a combination of derivative
instruments that effectively cap prices at approximately $51 per barrel of
crude
oil and has added refinery margins on the majority of those
positions. Based on this protection and current market prices, we are
currently estimating our fourth quarter 2007 jet fuel cost per gallon to
be in
the $1.80 range. The majority of the Company's near term fuel
derivatives are in the form of option contracts. At September 30,
2007, the estimated net fair value of the Company’s fuel derivative contracts
was $1.5 billion. See Note 5 to the unaudited condensed consolidated
financial statements for further discussion of the Company’s hedging activities.
The Company has also continued its efforts to conserve fuel, and in 2007
began
installing Aviation Partners Boeing Blended Winglets on a significant number
of
its 737-300 aircraft (substantially all 737-700 aircraft are already equipped
with winglets). Installations have begun on these 737-300 aircraft
and are expected to be completed in late 2008 or early 2009.
Maintenance
materials and repairs per
ASM increased 26.5 percent, and on a dollar basis increased $43 million compared
to third quarter 2006. Approximately half of the increase per ASM was
a result of higher engine expense related to the Company’s 737-700 aircraft, as
the number of scheduled overhaul events for these aircraft engines was
significantly higher than the same prior year period. This is
primarily due to the maturing of these aircraft, which make up the majority
of
the Company’s fleet. The majority of the remainder of the increase
per ASM was in airframe expense as the Company also completed significantly
more
planned airframe inspection and repair events than in the prior
year. These airframe inspection events, which are required based on
the number of flight hours each individual aircraft has flown, were higher
in
number as well as cost per event. This increase in airframe
maintenance is due to the maturing of the Company’s fleet as well as the ongoing
transition to a new airframe maintenance program for 737-300 and 737-500
aircraft, which began in 2006. This transition is expected to have an
impact on maintenance expense for the next two to three years; however, the
Company does not expect these higher airframe costs to be a long-term
trend. The Company currently expects Maintenance materials and
repairs per ASM for fourth quarter 2007 to be comparable to third quarter
2007’s
.62 cents.
Aircraft
rentals per ASM decreased 6.3 percent compared to third quarter 2006, and
on a
dollar basis, expense decreased $1 million. The decrease per ASM was
primarily due to the 8.1 percent increase in ASMs, combined with the slight
reduction in expense on a dollar basis. The Company currently expects
Aircraft rentals per ASM for fourth quarter 2007 to be at approximately the
same
level as fourth quarter 2006.
Landing
fees and other rentals increased $17 million on a dollar basis, and on a
per ASM
basis increased 5.6 percent compared to third quarter 2006. The
majority of the increases on both a dollar basis and a per ASM basis were
due to
higher space rentals in airports. These higher rentals were a result
of both space increases by the Company to accommodate new flight activity
and
higher rates charged by those airports for gate and terminal
space. The Company currently expects Landing fees and other rentals
per ASM in fourth quarter 2007 to be higher than the .57 cents per ASM in
third
quarter 2007, primarily due to the same reasons noted above for third quarter
2007, combined with credits received as a result of airports’ audits of prior
periods during third quarter 2007 that are not currently expected to be repeated
during fourth quarter 2007.
Depreciation expenses per ASM declined slightly compared to third quarter
2006
but increased by $9 million on a dollar basis. The increase on a
dollar basis was primarily due to the Company’s addition of 36 Boeing 737-700’s
to its fleet over the past twelve months, of which 34 were
purchased. For fourth quarter 2007, the Company expects Depreciation
expenses per ASM to be comparable to fourth quarter 2006’s .56
cents.
Other
operating expenses per ASM
increased slightly compared to third quarter 2006’s performance of 1.40
cents. On a dollar basis, other operating expenses increased $30
million. The largest single items contributing to this dollar
increase were identical $6 million increases in personnel expenses and credit
card transaction fees associated with the increase in revenues. For
fourth quarter 2007, the Company currently expects Other operating expenses
per
ASM to be in the 1.50 cent range.
Through
the 2003 Emergency Wartime
Supplemental Appropriations Act, the federal government has continued to
provide
renewable, supplemental, first-party war-risk insurance coverage to commercial
carriers, at substantially lower premiums than prevailing commercial rates
and
for levels of coverage not available in the commercial
market. The government-provided supplemental coverage from the
Wartime Act is currently set to expire on December 31, 2007. Although
another extension beyond this date is expected, if such coverage is not extended
by the government, the Company could incur substantially higher insurance
costs
or unavailability of adequate coverage in future periods.
Other
Interest
expense decreased $4 million,
or 12.5 percent, compared to third quarter 2006. An increase in
market interest rates was more than offset by a lower debt balance
outstanding. The majority of the Company’s long-term debt is at
floating rates. See Notes 5 and 10 to the unaudited condensed
consolidated financial statements for more information.
Capitalized
interest increased $1
million compared to the prior year primarily due to a slight increase in
progress payment balances for scheduled future aircraft deliveries.
Interest
income decreased by $14
million, or 60.9 percent, primarily due to a decrease in the average balance
of
invested cash and short-term investments.
Other
(gains) losses, net, primarily
includes amounts recorded in accordance with the Company’s hedging activities
and SFAS 133. The following table displays the components of Other
(gains) losses, net, for the three months ended September 30, 2007 and
2006:
|
|
Three
months ended September 30,
|
|
(In
millions)
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Mark-to-market
impact from fuel contracts settling in future
|
|
|
|
|
|
|
|
periods
- included in Other (gains) losses, net
|
|
$ |
(44 |
) |
|
|
$ |
123
|
|
Ineffectiveness
from fuel hedges settling in future periods -
|
|
|
|
|
|
|
|
|
|
included
in Other (gains) losses, net
|
|
|
(11 |
) |
|
|
|
18
|
|
Realized
ineffectiveness and mark-to-market (gains) or
|
|
|
|
|
|
|
|
|
|
losses
- included in Other (gains) losses, net
|
|
|
7
|
|
|
|
|
32
|
|
Premium
cost of fuel contracts included in Other (gains) losses,
net
|
|
|
14
|
|
|
|
|
13
|
|
Other
|
|
|
2
|
|
|
|
|
-
|
|
|
|
$ |
(32 |
) |
|
|
$ |
186
|
|
For
the
expense related to amounts excluded from the Company's measurements of hedge
effectiveness (i.e., the premium cost of option and collar derivative contracts
that settled during third quarter 2007), the Company expects a similar expense
relating to these items in fourth quarter 2007.
The
Company’s effective tax rate was
41.5 percent in third quarter 2007 compared to 38.9 percent in third quarter
2006. The higher rate in third quarter 2007 was primarily due to a
state of Illinois tax law change during third quarter 2007 that resulted
in a
net $11 million ($.01 per share, diluted) increase to state deferred tax
liabilities that is recorded in third quarter 2007 tax expense. As a
result of this law change, the Company currently expects its full year 2007
effective rate to be approximately 39 percent.
Comparison
of nine months ended September 30, 2007, to nine months ended September 30,
2006
Revenues
Consolidated
operating revenues
increased by $559 million, or 8.2 percent, primarily due to a $511 million,
or
7.8 percent, increase in Passenger revenues. The increase in
Passenger revenues was primarily attributable to the 8.2 percent increase
in
capacity, as the Company added 36 aircraft since September 30, 2006 (and
had no
aircraft retirements). The increase in capacity was partially offset,
however, by a slightly lower load factor compared to the nine months ended
September 30, 2006. The 2007 load factor was 73.7 percent, compared
to 74.0 percent for the nine months ended September 30,
2006. Passenger yield per RPM was basically flat versus the nine
months ended September 30, 2006, as modest fare increases taken were mostly
offset by a higher mix of discounted tickets flown during the first nine
months
of 2007. Passenger revenue per ASM was also flat compared to the same
prior year period.
Consolidated
freight revenues decreased
by $8 million, or 7.8 percent, primarily as a result of the Company’s decision
to discontinue the carrying of mail for the U.S. Postal Service effective
as of
June 30, 2006. Therefore, the Company had a $14 million shortfall in
mail revenues versus the nine months ended September 30, 2006. This
decrease was partially offset by higher freight and cargo revenues, primarily
as
a result of higher rates charged. Other revenues increased by $56
million, or 37.6 percent, compared to 2006. The increase was
primarily due to higher commissions and incentives earned from programs the
Company sponsors with certain business partners, such as the Company sponsored
co-branded Visa card.
Operating
expenses
To
a large extent, changes in operating
expenses for airlines are driven by changes in capacity, or ASMs. The
following presents Southwest’s operating expenses per ASM for the nine months
ended September 30, 2007 and 2006, followed by explanations of changes on
a
per-ASM basis and/or on a dollar basis, when appropriate (in cents, except
for
percentages):
|
|
Nine
months ended September 30,
|
|
Per
ASM
|
|
|
Percent
|
|
|
|
2007
|
|
|
|
2006
|
|
|
Change
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries,
wages, and benefits
|
|
|
3.24
|
|
|
|
|
3.31
|
|
|
|
(.07 |
) |
|
|
(2.1 |
) |
Fuel
and oil
|
|
|
2.46
|
|
|
|
|
2.30
|
|
|
|
.16
|
|
|
|
7.0
|
|
Maintenance
materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
repairs
|
|
|
.60
|
|
|
|
|
.50
|
|
|
|
.10
|
|
|
|
20.0
|
|
Aircraft
rentals
|
|
|
.16
|
|
|
|
|
.17
|
|
|
|
(.01 |
) |
|
|
(5.9 |
) |
Landing
fees and other rentals
|
|
|
.57
|
|
|
|
|
.54
|
|
|
|
.03
|
|
|
|
5.6
|
|
Depreciation
|
|
|
.55
|
|
|
|
|
.55
|
|
|
|
-
|
|
|
|
-
|
|
Other
operating expenses
|
|
|
1.43
|
|
|
|
|
1.43
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
9.01
|
|
|
|
|
8.80
|
|
|
|
.21
|
|
|
|
2.4
|
|
Operating expenses per ASM were 9.01 cents, a 2.4 percent increase compared
to
8.80 cents for the nine months ended September 30, 2006. Higher fuel
expense per ASM from a higher price per gallon of jet fuel, net of hedging,
and
higher maintenance expense per ASM were partially offset by a decline in
salaries, wages and benefits per ASM. Excluding fuel, year-over-year
CASM increased .8 percent.
Salaries,
wages, and benefits expense
per ASM decreased 2.1 percent compared to the nine months ended September
30,
2006, including the impact of the one-time $25 million charge in third quarter
2007 associated with the early retirement program offered by the
Company. Excluding the impact of this charge, the decrease was larger
primarily due to lower profitsharing expense and lower share-based compensation
expense, partially offset by an increase in wage rates. The Company’s
profitsharing contributions are based on income before taxes excluding primarily
unrealized gains and losses from fuel derivative contracts. Excluding
these items from both years resulted in a 21.8 percent decrease in profitsharing
contributions for the first nine months of 2007. On a dollar basis,
salaries, wages, and benefits expense increased $140
million. Excluding the one-time charge of $25 million in 2007, the
remainder of the change included a $159 million salary increase, primarily
due
to higher wages from a 5.1 percent increase in headcount, and a $22 million
benefits increase (excluding profitsharing and share-based
compensation). These increases were partially offset by a $30 million
decrease in profitsharing expense, due to less income available for
profitsharing, and a $36 million decrease in share-based compensation expense,
primarily due to a greater number of Employee stock options becoming vested
in
2006 versus 2007. See Note 2 to the unaudited condensed consolidated
financial statements for further information on share-based
compensation.
Fuel
and
oil expense increased $250 million, and on a per ASM basis increased 7.0
percent, primarily due to a weaker hedge position held by the Company in
2007
versus 2006. In the first nine months of 2007, the Company held fuel
derivative instruments that were at higher average crude oil-equivalent prices
than in 2006. The Company’s average fuel cost per gallon for the nine
months ended September 30, 2007, was $1.64, which was 7.2 percent higher
than
the same 2006 period, including the effects of hedging
activities. Excluding hedging gains in both years, the Company’s
average jet fuel cost per gallon for the nine months ended September 30,
2007,
and for the nine months ended September 30, 2006, was $2.03 for each
period. For the first nine months of 2007, the Company had protected
against over 90 percent of its anticipated fuel needs at a crude oil-equivalent
price of approximately $50 per barrel, resulting in gains recorded in Fuel
and
oil expense of $439 million. During the first nine months of 2006,
hedging gains recorded in Fuel and oil expense were $515 million.
Maintenance
materials and repairs per
ASM increased 20.0 percent compared to the first nine months of 2006, and
increased $109 million on a dollar basis. The majority of the
increase on both a dollar basis and per ASM, was a result of higher airframe
expense as the Company completed significantly more planned airframe inspection
and repair events than in the prior year. These airframe inspection
events, which are required based on the number of flight hours each individual
aircraft has flown, were higher in number as well as cost per event, and
were
partially due to the ongoing transition to a new airframe maintenance program
for 737-300 and 737-500 aircraft which began in 2006.
Landing
fees and other rentals increased $48 million on a dollar basis, and increased
5.6 percent on a per ASM basis compared to the first nine months of 2006,
primarily from an increase in other rentals per ASM. This increase
per ASM was primarily due to higher rates at certain airports and an increase
in
airport space in locations in which the Company has increased the number
of
flights offered.
Other
operating expenses increased $81
million, but was flat per ASM compared to the nine months ended September
30,
2006. On a dollar basis, approximately 20 percent of the increase was
due to higher credit card fees associated with the increase in revenues,
and
another 20 percent was related to higher personnel expenses associated with
flight crews, such as hotel and meal costs.
Other
Interest
expense decreased $14 million,
or 14.0 percent, compared to the first nine months of 2006. An
increase in interest rates was more than offset by a lower debt balance
outstanding. The majority of the Company’s long-term debt is at
floating rates. See Notes 5 and 10 to the unaudited condensed
consolidated financial statements for more information.
Capitalized
interest increased $1
million, or 2.6 percent, compared to the prior year, primarily due to a slight
increase in the balances that qualify for interest capitalization—primarily
progress payments made for future aircraft deliveries.
Interest
income decreased by $26
million, or 41.9 percent, primarily due to a decrease in invested cash and
short-term investments.
Other
(gains) losses, net, primarily
includes amounts recorded in accordance with the Company’s hedging activities
and SFAS 133. The following table displays the components of Other
(gains) losses, net for the nine months ended September 30, 2007 and
2006:
|
|
Nine
months ended September 30,
|
|
(In
millions)
|
|
2007
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Mark-to-market
impact from fuel contracts settling in future
|
|
|
|
|
|
|
|
periods
- included in Other (gains) losses, net
|
|
$ |
(216 |
) |
|
|
$ |
18
|
|
Ineffectiveness
from fuel hedges settling in future periods -
|
|
|
|
|
|
|
|
|
|
included
in Other (gains) losses, net
|
|
|
(4 |
) |
|
|
|
22
|
|
Realized
ineffectiveness and mark-to-market (gains) or
|
|
|
|
|
|
|
|
|
|
losses
- included in Other (gains) losses, net
|
|
|
(45 |
) |
|
|
|
(3 |
) |
Premium
cost of fuel contracts included in Other (gains) losses,
net
|
|
|
43
|
|
|
|
|
37
|
|
Other
|
|
|
1
|
|
|
|
|
(3 |
) |
|
|
$ |
(221 |
) |
|
|
$ |
71
|
|
The
Company’s effective tax rate was
39.0 percent in the first nine months of 2007 compared to 35.9 percent in
the
same 2006 period. The lower rate in 2006 was primarily due to a $13
million net reduction related to a revision in the State of Texas franchise
tax
law enacted during 2006. The 2007 rate also included an $11 million
($.01 per share, diluted) net addition related to a revision in the Illinois
income tax laws enacted in 2007.
Liquidity
and Capital Resources
Net
cash provided by operating
activities was $154 million for the three months ended September 30, 2007,
compared to $319 million used in operating activities in the same prior year
period. For the nine months ended September 30, 2007, net cash
provided by operating activities was $1.8 billion, compared to $1.3 billion
provided by operating activities in the prior year. The operating
cash flows through September 30 in both years were largely impacted by
fluctuations in counterparty deposits associated with the Company’s fuel hedging
program. There was an increase in counterparty deposits of $600
million for the nine months ended September 30, 2007, versus a decrease of
$270
million during the nine months ended September 30, 2006 (counterparty deposits
are classified in Accrued liabilities in the unaudited Condensed Consolidated
Balance Sheet). The fluctuations in these deposits in both years has
been due to large changes in the fair value of the Company’s fuel derivatives
portfolio. The fair value of the Company’s fuel derivatives increased
from $1.0 billion at December 31, 2006, to $1.5 billion at September 30,
2007,
but decreased from $1.7 billion at December 31, 2005, to $1.3 billion at
September 30, 2006. See Item 3, and Notes 5 and 7 to the unaudited
condensed consolidated financial statements. The 2007 increase in
counterparty deposits was partially offset by smaller decreases in cash flows
within several items, such as Other current assets, Other noncurrent assets
and
liabilities (classified as “Other” in the unaudited Condensed Consolidated
Statement of Cash Flows), and Accounts receivable. Cash flows from
operating activities for both years were also impacted by changes in Air
traffic
liability as well as net income. For the nine months ended September
30, 2007, there was a $296 million increase in Air traffic liability, as
a
result of seasonal bookings for future travel, and the Company achieved net
income of $533 million. These amounts were comparable to the prior
year $319 million increase in Air traffic liability and net income of $442
million. Net cash provided by operating activities is primarily used
to finance capital expenditures.
Net
cash
flows used in investing activities during the three months ended September
30,
2007, totaled $316 million compared to $339 million in 2006. For the
nine months ended September 30, 2007, net cash flows used in investing
activities was $1.1 billion, the same as the comparable 2006
period. Investing activities in both years consisted primarily of
payments for new 737-700 aircraft delivered to the Company and progress payments
for future aircraft deliveries. In addition, investing activities for
both periods were impacted by changes in the balance of the Company’s short-term
investments, namely auction rate securities. During the nine months
ended September 30, 2007, the Company’s short-term investments increased by a
net $138 million, versus a net increase of $103 million during the same prior
year period.
Net
cash
used in financing activities during the three months ended September 30,
2007,
was $393 million compared to $13 million provided by financing activities
for
the same period in 2006. For the nine months ended September 30,
2007, net cash used in financing activities was $972 million, compared to
$468
million for the same 2006 period. During the nine months ended
September 30, 2007, the Company repurchased $1.0 billion of its Common Stock,
representing a total of 66.4 million shares, and repaid a total of $116 million
in long-term debt and capital lease obligations, including the Company’s $100
million senior unsecured 7 7/8% notes in September 2007. These
outflows were partially offset by $128 million received from Employees’ exercise
of stock options. For the nine months ended September 30, 2006, the
Company repurchased $600 million of its Common Stock and repaid $137 million
in
debt and capital lease obligations, which were partially offset by $226 million
received from Employees’ exercise of stock options.
Contractual
Obligations and Contingent Liabilities and Commitments
Southwest
has contractual obligations
and commitments primarily for future purchases of aircraft, payment of debt,
and
lease arrangements. Through the first nine months of 2007, the
Company purchased 28 new 737-700 aircraft from Boeing and leased an additional
two previously owned 737-700 aircraft from a third party. In
addition, the Company will receive nine more 737-700 aircraft from Boeing
during
fourth quarter 2007. The Company also currently expects its fleet to
grow by no more than 19 net aircraft during 2008. Southwest’s firm
orders and options to purchase Boeing 737-700 aircraft are reflected in the
following table:
|
|
The
Boeing Company
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
|
|
|
Previously
|
|
|
|
|
|
|
Firm
|
|
|
Options
|
|
|
Rights
|
|
|
Owned
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
37
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
39 |
* |
2008
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29 |
** |
2009
|
|
|
18
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
28
|
|
2010
|
|
|
10
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
34
|
|
2011
|
|
|
10
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
32
|
|
2012
|
|
|
10
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
40
|
|
2013
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
2014
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
Through
2014
|
|
|
-
|
|
|
|
-
|
|
|
|
54
|
|
|
|
|
|
|
|
54
|
|
Total
|
|
|
143
|
|
|
|
86
|
|
|
|
54
|
|
|
|
2
|
|
|
|
285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* 2007
delivery dates: eight in first quarter, eleven in second quarter,
eleven
|
|
in
third quarter and nine in fourth quarter.
|
|
|
|
|
|
|
|
|
|
**
The Company currently plans to reduce its fleet in 2008 by at least
10
aircraft,
|
|
bringing
2008 planned net additions to no more than 19 aircraft.
|
|
|
|
|
|
The following table details information on the 511 aircraft in the Company’s
fleet as of September 30, 2007:
|
|
|
|
|
|
Average
|
|
|
Number
|
|
|
Number
|
|
|
Number
|
|
737
Type
|
|
|
Seats
|
|
|
Age
(Yrs)
|
|
|
of
Aircraft
|
|
|
Owned
|
|
|
Leased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-300
|
|
|
|
137
|
|
|
|
16.4
|
|
|
|
194
|
|
|
|
112
|
|
|
|
82
|
|
|
-500
|
|
|
|
122
|
|
|
|
16.4
|
|
|
|
25
|
|
|
|
16
|
|
|
|
9
|
|
|
-700
|
|
|
|
137
|
|
|
|
4.1
|
|
|
|
292
|
|
|
|
288
|
|
|
|
4
|
|
TOTALS
|
|
|
|
|
|
|
|
9.4
|
|
|
|
511
|
|
|
|
416
|
|
|
|
95
|
|
The
Company has the option, which must
be exercised two years prior to the contractual delivery date, to substitute
-600s or -800s for the -700s. Based on the above delivery schedule,
aggregate funding needed for firm aircraft commitments was approximately
$3.4
billion, subject to adjustments for inflation, due as follows: $232 million
remaining in 2007, $735 million in 2008, $467 million in 2009, $341 million
in
2010, $444 million in 2011, $458 million in 2012, $487 million in 2013 and
$197
million thereafter.
The
Company has various options
available to meet its capital and operating commitments, including cash on
hand
and short term investments at September 30, 2007, of $1.6 billion, internally
generated funds, and the Company’s fully available $600 million revolving credit
facility. As discussed in Note 10 to the unaudited condensed
consolidated financial statements, on October 3, 2007, the Company issued
$500
million Pass Through Certificates consisting of $412 million 6.15% Series
A
certificates and $88 million 6.65% Series B certificates. The Company
will also consider various borrowing or leasing options to maximize earnings
and
supplement cash requirements.
In
May 2007, the Company’s Board of
Directors authorized the repurchase of up to $500 million of the Company’s
Common Stock. This program was completed during third quarter 2007,
resulting in the repurchase of 32.9 million shares. See Item 2 of
Part II of this filing for further information on this repurchase
program.
The
Company currently has outstanding
shelf registrations for the issuance of up to $540 million in public debt
securities and pass-through certificates, which it may utilize for aircraft
financings or other purposes in the future.
Forward
looking statements
Some
statements in this Form 10-Q (or otherwise made by the Company or on the
Company’s 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 27A of the Securities Act of 1933, as amended,
Section 21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are
based
on, and include statements about, Southwest’s estimates, expectations, beliefs,
intentions, or strategies for the future, and the assumptions underlying
these
forward-looking statements. Specific forward-looking statements can
be identified by the fact that they do not relate strictly to historical
or
current facts and include, without limitation, statements related to the
following: our expectations with respect to revenues and operating expenses;
our
growth expectations; our liquidity, including our anticipated needs for,
and
sources of, funds; our initiatives and strategies to improve revenues and
control costs, including, without limitation, the anticipated impact of Project
Early Departure; our plans and expectations for managing exposure to material
increases in jet fuel prices; and our expectations and intentions relating
to
outstanding litigation. Forward-looking statements are not guarantees
of future performance and involve risks and uncertainties that are difficult
to
predict. Therefore, actual results may differ materially from what is
expressed in or indicated by Southwest’s forward-looking statements or from
historical experience or the Company’s present expectations. These factors
include, among others:
(i) the
price and availability of aircraft fuel;
|
(ii)
|
our
ability to timely and effectively prioritize our revenue and cost
reduction initiatives and our related ability to timely and effectively
implement and maintain the necessary information technology systems
and
infrastructure to support these
initiatives;
|
|
(iii)
|
the
extent and timing of our investment of incremental operating expenses
and
capital expenditures to develop and implement our initiatives and
our
corresponding ability to effectively control our operating
expenses;
|
|
(iv)
|
our
dependence on third party arrangements to assist with implementation
of
certain of our initiatives;
|
(v)
|
the
impact of governmental regulations on our operating costs, as well
as our
operations generally;
|
(vi)
|
the
impact of certain pending technological initiatives in the Company’s
technology infrastructure, including its point of sale, ticketing,
revenue
accounting, payroll and financial reporting
areas;
|
(vii)
competitor capacity and load factors; and
(viii)
|
other
factors as set forth in our filings with the Securities and Exchange
Commission, including the detailed factors discussed under the
heading
“Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2006.
|
Caution
should be taken not to place undue reliance on the Company’s forward-looking
statements, which represent the Company’s views only as of the date this report
is filed. The Company undertakes no obligation to update publicly or revise
any
forward-looking statement, whether as a result of new information, future
events
or otherwise.
Item
3.
Quantitative
and Qualitative
Disclosures About Market Risk
As
discussed in Note 5 to the unaudited condensed consolidated financial
statements, the Company utilizes financial derivative instruments to hedge
its
exposure to material increases in jet fuel prices. During the first
nine months of 2007, the fair values of the Company’s fuel derivative contracts
increased significantly. At September 30, 2007, the estimated gross
fair value of outstanding contracts was $1.5 billion, compared to $1.0 billion
at December 31, 2006.
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 September
30, 2007, the Company had agreements with eight 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 September 30, 2007, the Company
held $1.1 billion in fuel derivative related cash collateral deposits under
these bilateral collateral provisions. These collateral deposits
serve to decrease, but not totally eliminate, the credit risk associated
with
the Company’s hedging program. The cash deposits, which can have a significant
impact on the Company’s cash balance, are included in Accrued liabilities on the
unaudited Condensed Consolidated Balance Sheet. Cash flows as of and
for a particular operating period are included as Operating cash flows in
the
unaudited Condensed Consolidated Statement of Cash Flows. See also
Note 7 to the unaudited condensed consolidated financial
statements.
See
Item 7A “Quantitative and
Qualitative Disclosures About Market Risk” in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2006, and Note 5 to the unaudited
condensed consolidated financial statements for further information about
Market
Risk.
Item
4. Controls and Procedures
Disclosure
Controls and Procedures
The
Company maintains disclosure 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 Securities and Exchange Commission (SEC), and to record, process,
summarize, and disclose this information within the time periods specified
in
the rules of the SEC, including controls and procedures designed to ensure
that
this information is accumulated and communicated to the Company’s management,
including its Chief Executive and Chief Financial Officers, as appropriate
to
allow timely decisions regarding required disclosure. Based on an
evaluation of the Company’s disclosure controls and procedures as of the end of
the period covered by this report conducted by the Company’s 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.
Internal
Control over Financial Reporting
There
were no changes in the Company’s internal control over financial reporting (as
defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act) during
the
fiscal quarter ended September 30, 2007, that have materially affected, or
are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II.
OTHER INFORMATION
Item
1. 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
Company’s federal income tax returns and, in the course thereof, proposes
adjustments to the Company’s federal income tax liability reported on such
returns. It is the Company’s practice to vigorously contest those
proposed adjustments it deems lacking of merit.
The
Company's 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 Company's financial condition, results of operations, or cash
flow.
There have been no material changes to the factors disclosed in Item 1A.
Risk
Factors in our Annual Report on Form 10-K for the year ended December 31,
2006.
Item
2.
Unregistered
Sales of Equity
Securities and Use of Proceeds
(c)
Issuer
Purchases of Equity Securities (1)
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
(d)
|
|
|
|
|
|
|
|
|
|
Total
number of
|
|
|
Maximum
dollar
|
|
|
|
|
|
|
|
|
|
shares
purchased
|
|
|
value
that may
|
|
|
|
Total
number
|
|
|
Average
|
|
|
as
part of publicly
|
|
|
yet
be purchased
|
|
|
|
of
shares
|
|
|
price
paid
|
|
|
announced
plans
|
|
|
under
the plans
|
|
Period
|
|
purchased
|
|
|
per
share
|
|
|
or
programs
|
|
|
or
programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
1, 2007 through July 31, 2007
|
|
|
12,750,000
|
|
|
$ |
15.42
|
|
|
|
12,750,000
|
|
|
$ |
129,940,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August
1, 2007 through August 31, 2007
|
|
|
8,100,000
|
|
|
$ |
15.65
|
|
|
|
8,100,000
|
|
|
$ |
3,146,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
1, 2007 through September 30, 2007
|
|
|
208,000
|
|
|
$ |
15.13
|
|
|
|
208,000
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,058,000
|
|
|
|
|
|
|
|
21,058,000
|
|
|
|
|
|
(1) On
May 16, 2007, the Company publicly announced a program for the repurchase
of up
to $500 million of the Company’s Common Stock. This program was
completed during September 2007, resulting in the purchase of 32.9 million
shares. Repurchases for this program were made in accordance with
applicable securities laws in the open market or in private transactions
from
time to time, depending on market conditions.
Item
3. Defaults
upon Senior
Securities
None
Item
4.
Submission
of Matters to a Vote of
Security Holders
None
Item
5.
Other
Information
None
|
3.1
|
Restated
Articles of Incorporation of Southwest (incorporated by reference
to
|
|
|
Exhibit 4.1
to Southwest’s Registration Statement on
Form S-3 (File
|
|
|
No. 33-52155));
Amendment to Restated Articles of Incorporation of
Southwest
|
|
|
(incorporated
by reference to Exhibit 3.1 to Southwest’s 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 Southwest’s 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
Southwest’s
|
|
|
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 Southwest’s Quarterly Report on Form 10-Q for
the
|
|
|
quarter
ended June 30, 2001 (File No. 1-7259)); Articles of Amendment
to
|
|
|
Articles
of Incorporation of Southwest Airlines Co. (incorporated
by
|
|
|
reference
to Exhibit 3.1 to Southwest’s Quarterly Report on Form 10-Q for
the
|
|
|
quarter
ended June 30, 2007 (File No. 1-7259)).
|
|
3.2
|
Amended
and Restated Bylaws of Southwest, effective September 20,
2007
|
|
|
(incorporated
by reference to Exhibit 3.1 to Southwest’s Current
Report
|
|
|
on
Form 8-K dated September 20, 2007 (File
No. 1-7259)).
|
|
10.1
|
Supplemental
Agreement No. 54 to Purchase Agreement No. 1810,
|
|
|
dated
January 19, 1994, between The Boeing Company and
Southwest.(1)
|
|
10.2
|
Supplemental
Agreement No. 55 to Purchase Agreement No. 1810,
|
|
|
dated
January 19, 1994, between The Boeing Company and
Southwest.(1)
|
|
10.3
|
Employment
Contract, dated as of July 15, 2007, between Southwest
and
|
|
|
Herbert
D. Kelleher.
|
|
10.4
|
Employment
Contract, dated as of July 15, 2007, between Southwest
and
|
|
|
Gary
C. Kelly.
|
|
10.5
|
Employment
Contract, dated as of July 15, 2007, between Southwest
and
|
|
|
Colleen
C. Barrett.
|
|
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 Certifications of Chief Executive Officer and Chief
Financial
|
|
|
Officer
|
(1) Pursuant
to 17 CRF 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.
Pursuant
to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to
be signed on its behalf by the undersigned thereunto duly
authorized.
|
SOUTHWEST
AIRLINES CO.
|
|
|
|
October
19, 2007
|
By
|
/s/ Laura
Wright
|
|
|
|
|
|
Laura
Wright
|
|
|
Chief
Financial Officer
|
|
|
(On
behalf of the Registrant and in
|
|
|
her
capacity as Principal Financial
|
|
|
and
Accounting Officer)
|
|
|
|
|
3.1
|
Restated
Articles of Incorporation of Southwest (incorporated by reference
to
|
|
|
Exhibit 4.1
to Southwest’s Registration Statement on
Form S-3 (File
|
|
|
No. 33-52155));
Amendment to Restated Articles of Incorporation of
Southwest
|
|
|
(incorporated
by reference to Exhibit 3.1 to Southwest’s 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 Southwest’s 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
Southwest’s
|
|
|
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 Southwest’s Quarterly Report on Form 10-Q for
the
|
|
|
quarter
ended June 30, 2001 (File No. 1-7259)); Articles of Amendment
to
|
|
|
Articles
of Incorporation of Southwest Airlines Co. (incorporated
by
|
|
|
reference
to Exhibit 3.1 to Southwest’s Quarterly Report on Form 10-Q for
the
|
|
|
quarter
ended June 30, 2007 (File No. 1-7259)).
|
|
3.2
|
Amended
and Restated Bylaws of Southwest, effective September 20,
2007
|
|
|
(incorporated
by reference to Exhibit 3.1 to Southwest’s Current
Report
|
|
|
on
Form 8-K dated September 20, 2007 (File
No. 1-7259)).
|
|
10.1
|
Supplemental
Agreement No. 54 to Purchase Agreement No. 1810,
|
|
|
dated
January 19, 1994, between The Boeing Company and
Southwest.(1)
|
|
10.2
|
Supplemental
Agreement No. 55 to Purchase Agreement No. 1810,
|
|
|
dated
January 19, 1994, between The Boeing Company and
Southwest.(1)
|
|
10.3
|
Employment
Contract, dated as of July 15, 2007, between Southwest
and
|
|
|
Herbert
D. Kelleher.
|
|
10.4
|
Employment
Contract, dated as of July 15, 2007, between Southwest
and
|
|
|
Gary
C. Kelly.
|
|
10.5
|
Employment
Contract, dated as of July 15, 2007, between Southwest
and
|
|
|
Colleen
C. Barrett.
|
|
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 Certifications of Chief Executive Officer and Chief
Financial
|
|
|
Officer
|
(1) Pursuant
to 17 CRF 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.