10-Q 1 0001.txt 2QTR00 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2000 OR ____TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ Commission file No. 1-7259 SOUTHWEST AIRLINES CO. (Exact name of registrant as specified in its charter) TEXAS 74-1563240 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 36611, Dallas, Texas 75235-1611 (Address of principal executive offices) (Zip Code) (214) 792-4000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Number of shares of Common Stock outstanding as of the close of business on July 31, 2000: 498,567,401 SOUTHWEST AIRLINES CO. FORM 10-Q Part I - FINANCIAL INFORMATION Item 1. Financial Statements Southwest Airlines Co. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) (unaudited)
June 30, December 31, 2000 1999 ASSETS Current assets: Cash and cash equivalents $636,650 $418,819 Accounts receivable 117,550 73,448 Inventories of parts and supplies 70,127 65,152 Deferred income taxes 21,498 20,929 Prepaid expenses and other current assets 53,365 52,657 Total current assets 899,190 631,005 Property and equipment: Flight equipment 6,191,771 5,768,506 Ground property and equipment 757,677 742,230 Deposits on flight equipment purchase contracts 390,415 338,229 7,339,863 6,848,965 Less allowance for depreciation 1,992,549 1,840,799 5,347,314 5,008,166 Other assets 12,920 12,942 $6,259,424 $5,652,113 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $199,442 $156,755 Accrued liabilities 642,008 538,896 Air traffic liability 427,076 256,942 Income taxes payable 54,756 - Current maturities of long-term debt 3,875 7,873 Total current liabilities 1,327,157 960,466 Long-term debt less current maturities 868,121 871,717 Deferred income taxes 763,345 692,342 Deferred gains from sale and leaseback of aircraft 215,111 222,700 Other deferred liabilities 76,145 69,100 Stockholders' equity: Common stock 507,897 505,005 Capital in excess of par value 42,103 35,436 Retained earnings 2,624,070 2,385,854 Treasury stock at cost (164,525) (90,507) Total stockholders' equity 3,009,545 2,835,788 $6,259,424 $5,652,113 See accompanying notes.
Southwest Airlines Co. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) (unaudited)
Three months ended Six months ended June 30, June 30, 2000 1999 2000 1999 OPERATING REVENUES: Passenger $1,415,958 $1,177,282 $2,615,843 $2,211,640 Freight 27,968 25,186 55,034 50,279 Other 16,749 17,964 32,445 34,084 Total operating revenues 1,460,675 1,220,432 2,703,322 2,296,003 OPERATING EXPENSES: Salaries, wages, and benefits 422,247 368,573 803,736 712,585 Fuel and oil 197,608 102,982 394,679 188,650 Maintenance materials and repairs 90,311 85,145 183,876 174,636 Agency commissions 41,310 40,201 78,526 79,282 Aircraft rentals 49,023 49,898 98,370 99,704 Landing fees and other rentals 64,982 60,708 130,001 118,691 Depreciation 68,523 59,542 135,221 116,328 Other operating expenses 212,113 199,052 408,947 385,179 Total operating expenses 1,146,117 966,101 2,233,356 1,875,055 OPERATING INCOME 314,558 254,331 469,966 420,948 OTHER EXPENSES (INCOME): Interest expense 17,442 13,295 34,665 26,682 Capitalized interest (6,905) (9,109) (13,906) (16,093) Interest income (10,511) (6,838) (17,160) (12,373) Other (gains) losses, net 3,667 385 (471) 10,032 Total other expenses (income) 3,693 (2,267) 3,128 8,248 INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 310,865 256,598 466,838 412,700 PROVISION FOR INCOME TAXES 120,243 98,841 180,573 159,096 NET INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 190,622 157,757 286,265 253,604 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Net of Income Taxes of $14.0 million) - - 22,131 - NET INCOME $190,622 $157,757 $264,134 $253,604 NET INCOME PER SHARE, BASIC BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ .38 $ .31 $ .57 $ .50 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - - .04 - NET INCOME PER SHARE, BASIC $ .38 $ .31 $ .53 $ .50 NET INCOME PER SHARE, DILUTED BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE $ .36 $ .29 $ .54 $ .47 CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - - .04 - NET INCOME PER SHARE, DILUTED $ .36 $ .29 $ .50 $ .47 WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 497,295 503,531 497,226 502,349 Diluted 528,713 539,059 527,534 537,497 See accompanying notes.
Southwest Airlines Co. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Six months ended June 30, 2000 1999 NET CASH PROVIDED BY OPERATING ACTIVITIES $811,538 $673,138 INVESTING ACTIVITIES: Net purchases of property and equipment (496,020) (568,790) FINANCING ACTIVITIES: Payments of long-term debt and capital lease obligations (7,790) (10,572) Payments of cash dividends (8,247) (10,542) Proceeds from Employee stock plans 25,947 25,890 Repurchases of common stock (107,597) - NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (97,687) 4,776 NET INCREASE IN CASH AND CASH EQUIVALENTS 217,831 109,124 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 418,819 378,511 CASH AND CASH EQUIVALENTS AT END OF PERIOD $636,650 $487,635 CASH PAYMENTS FOR: Interest, net of amount capitalized $16,362 $11,408 Income taxes $21,328 $29,244 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) 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 condensed consolidated financial statements for the interim periods ended June 30, 2000 and 1999 include all adjustments (which include only normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. Operating results for the three and six month periods ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. 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, 1999. 2. Dividends - During the three month periods ended June 30, 2000 and March 31, 2000, dividends of $.0055 per share were declared on the 497.7 million and 497.1 million shares of common stock then outstanding, respectively. During the three month periods ended June 30, 1999 and March 31, 1999, dividends of $.0055 per share and $.005 per share were declared, respectively, on the 503.6 million and 501.9 million shares of common stock then outstanding. 3. Common stock - On May 20, 1999, the Company's Board of Directors declared a three-for-two stock split, distributing 168.0 million shares on July 19, 1999. All per share data presented in the accompanying unaudited condensed consolidated financial statements and notes thereto have been restated for the stock split. 4. Reclassifications - Certain prior year amounts have been reclassified to conform to the current year presentation. Most notably, this includes the reclassification of $17.1 million of Other Revenue to Passenger Revenue as a result of the change in accounting principle effective January 1, 2000. See Note 6 for further information. 5. Net income per share - The following table sets forth the computation of basic and diluted net income per share (in thousands except per share amounts):
Three months ended Six months ended June 30, June 30, 2000 1999 2000 1999 NUMERATOR: Net income before cumulative effect of change in accounting principle $190,622 $157,757 $286,265 $253,604 Cumulative effect of change in accounting principle - - 22,131 - Net income available to common stockholders $190,622 $157,757 $264,134 $253,604 DENOMINATOR: Weighted-average shares outstanding, basic 497,295 503,531 497,226 502,349 Dilutive effect of Employee stock options 31,418 35,528 30,308 35,148 Adjusted weighted-average shares outstanding, diluted 528,713 539,059 527,534 537,497 NET INCOME PER SHARE: Basic, before cumulative effect of change in accounting principle $ .38 $ .31 $ .57 $ .50 Cumulative effect of change in accounting principle - - .04 - Basic $ .38 $ .31 $ .53 $ .50 Diluted, before cumulative effect of change in accounting principle $ .36 $ .29 $ .54 $ .47 Cumulative effect of change in accounting principle - - .04 - Diluted $ .36 $ .29 $ .50 $ .47
6. Accounting Change - Effective January 1, 2000, the Company adopted Staff Accounting Bulletin 101 (SAB 101) issued by the Securities and Exchange Commission in December 2000. As a result of adopting SAB 101, the Company changed the way it recognizes revenue from the sale of flight segment credits to companies participating in its Rapid Rewards frequent flyer program. Prior to the issuance of SAB 101, the Company recorded revenue to "Other revenue" when flight segment credits were sold, consistent with most other major airlines. Beginning January 1, 2000, the Company recognizes "Passenger revenue" when free travel awards are earned and flown. Due to this change, the Company recorded a cumulative adjustment in first quarter 2000 of $22.1 million (net of income taxes of $14.0 million) or $.04 per share, basic and diluted. The second quarter 2000 impact of adopting SAB 101 was to reduce net income by $1.9 million. Excluding the impact of the change, basic and diluted net income per share for second quarter 2000 would have been $.39 and $.36, respectively. The Company also reclassified for comparison purposes the revenue reported in prior periods related to the sale of flight segment credits from "Other revenue" to "Passenger revenue." Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Comparative Consolidated Operating Statistics Relevant operating statistics for the three and six months ended June 30, 2000 and 1999 are as follows:
Three months ended June 30, Six months ended June 30, 2000 1999* Change 2000 1999* Change Revenue passengers carried 16,501,441 14,816,803 11.4% 30,890,717 27,750,381 11.3% Revenue passenger miles (RPMs) (000s) 10,954,767 9,471,014 15.7% 20,407,968 17,517,498 16.5% Available seat miles (ASMs) (000s) 14,744,769 12,947,815 13.9% 28,898,727 25,340,794 14.0% Load factor 74.3% 73.1% 1.2pts. 70.6% 69.1% 1.5pts. Average length of passenger haul (miles) 664 639 3.9% 661 631 4.8% Trips flown 223,643 210,029 6.5% 442,258 412,575 7.2% Average passenger fare $85.81 $79.46 8.0% $84.68 $79.70 6.2% Passenger revenue yield per RPM (cents) 12.93 12.43 4.0% 12.82 12.63 1.5% Operating revenue yield per ASM (cents) 9.91 9.43 5.1% 9.35 9.06 3.2% Operating expenses per ASM (cents) 7.77 7.46 4.2% 7.73 7.40 4.5% Operating expenses per ASM, excluding fuel (cents) 6.43 6.67 (3.6)% 6.36 6.65 (4.4)% Fuel costs per gallon, excluding fuel tax (cents) 78.02 44.36 75.9% 79.95 41.92 90.7% Number of Employees at period-end 27,828 26,818 3.8% 27,828 26,818 3.8% Size of fleet at period-end 324 294 10.2% 324 294 10.2% * Average passenger fare and passenger revenue yield per RPM have been restated for comparison purposes to reflect the reclassifications related to the change in accounting principle.
Operating expenses per ASM for the three and six months ended June 30, 2000 and 1999 are as follows (in cents except percent change):
Three months ended Six months ended June 30, June 30, Percent Percent 2000 1999 Change 2000 1999 Change Salaries, wages, and benefits 2.38 2.39 (.4) 2.39 2.41 (.8) Employee profitsharing and savings plans .48 .46 4.3 .38 .39 (2.6) Fuel and oil 1.34 .80 67.5 1.37 .74 85.1 Maintenance materials and repairs .61 .66 (7.6) .64 .69 (7.2) Agency commissions .28 .31 (9.7) .27 .31 (12.9) Aircraft rentals .33 .39 (15.4) .34 .39 (12.8) Landing fees and other rentals .44 .47 (6.4) .45 .47 (4.3) Depreciation .46 .46 - .47 .46 2.2 Other operating expenses 1.45 1.52 (4.6) 1.42 1.54 (7.8) Total 7.77 7.46 4.2 7.73 7.40 4.5
Material Changes in Results of Operations Comparison of Three Months Ended June 30, 2000 to Three Months Ended June 30, 1999 Consolidated net income for the second quarter ended June 30, 2000 was $190.6 million, an increase of 20.8 percent compared to 1999. Diluted net income per share was $.36 compared to $.29 in 1999. Operating income for second quarter 2000 was $314.6 million, an increase of 23.7 percent compared to 1999. Second quarter 2000 consolidated operating revenues increased 19.7 percent primarily due to a 20.3 percent increase in passenger revenues. The increase in passenger revenues primarily resulted from the Company's capacity growth coupled with an industry-wide strong demand for commercial air travel. The Company experienced an 11.4 percent increase in revenue passengers carried, a 15.7 percent increase in RPMs, and a 4.0 percent increase in passenger revenue yield per RPM (passenger yield). The increase in passenger yield is primarily due to an 8.0 percent increase in average passenger fare, partially offset by a 3.9 percent increase in average length of passenger haul. The increase in RPMs and a 13.9 percent increase in ASMs resulted in a load factor of 74.3 percent, or 1.2 points above second quarter 1999. The increase in ASMs resulted primarily from the net addition of 30 aircraft since second quarter 1999, which represents a 10.2 percent increase in the Company's fleet size. Thus far, load factors in July appear to be consistent with or better than those experienced in July 1999. Bookings for August and September are also good and we presently anticipate positive year over year unit revenue comparisons again in third quarter 2000. (The immediately preceding two sentences are forward-looking statements, which involve uncertainties that could result in actual results differing materially from expected results. Some significant factors include, but may not be limited to, competitive pressure such as fare sales and capacity changes by other carriers, general economic conditions, and variations in advance booking trends.) Consolidated freight revenues increased 11.0 percent primarily due to an increase in capacity. Other revenues decreased 6.8 percent primarily due to a decrease in commercial charter revenue. The Company had less aircraft devoted to its charter business compared to 1999 due to the strong demand for scheduled passenger service. Operating expenses per ASM increased 4.2 percent to $.0777, compared to $.0746 for second quarter 1999, primarily due to a significant increase in average jet fuel prices. The average fuel cost per gallon was 75.9 percent higher than second quarter 1999's average cost per gallon. Excluding fuel expense, operating expenses per ASM decreased 3.6 percent. As detailed below, the Company has hedged almost all of its anticipated fuel consumption for second half 2000 at prices well below market prices as of July 26, 2000. As a result, the Company expects lower average jet fuel cost per gallon in second half 2000 than it reported in first half 2000. Excluding fuel, the Company expects lower unit costs again in third quarter 2000 versus 1999. (The immediately preceding two sentences are forward-looking statements which involve uncertainties that could result in actual results differing materially from expected results. Such uncertainties include, but may not be limited to, the largely unpredictable levels of jet fuel prices.) Salaries, wages, and benefits per ASM decreased slightly, as increases in productivity were partially offset by an increase in Employee benefit costs, primarily health care expense. Profitsharing and Employee savings plan expenses per ASM increased 4.3 percent, primarily due to the increase in earnings available for profitsharing. Fuel and oil expense per ASM increased 67.5 percent due to a 75.9 percent increase in the average jet fuel cost per gallon compared to 1999. The average price paid for jet fuel in second quarter 2000 was $.7802 per gallon compared to $.4436 in 1999, including the effects of hedging activities. The Company's second quarter 2000 and 1999 average jet fuel prices are net of approximately $3.1 million and $10.5 million in gains from hedging activities, respectively. As of July 26, 2000, the Company had crude oil and/or heating oil hedge positions in place for 2000 and 2001 as follows:
Approximate Average price Approximate jet fuel of hedge percentage Type gallons instruments of expected of hedge hedged (crude oil - requirements Period instrument (millions) per barrel) hedged Third Quarter 2000 swaps 131.3 $23.05 51% options/other 112.3 $26.89 43% Total 243.6 94% Fourth Quarter 2000 swaps 183.8 $22.47 70% options/other 78.7 $23.25 30% Total 262.5 100% First Quarter 2001 swaps 146.4 $22.27 56% options/other 61.1 $25.00 24% Total 207.5 80% Second Quarter 2001 swaps 162.3 $21.73 60% options/other 54.2 $24.44 20% Total 216.5 80% Third Quarter 2001 swaps 142.8 $21.64 50% options/other 86.1 $22.15 30% Total 228.9 80% Fourth Quarter 2001 swaps 146.6 $21.85 51% options/other 84.0 $20.00 29% Total 230.6 80%
As of July 26, 2000, the unrealized gains from these hedging activities were $22.9 million and $26.0 million for third and fourth quarter 2000, respectively. Despite these hedge positions, the Company is expecting higher average net jet fuel cost per gallon for third quarter 2000 compared to third quarter 1999. The Company's fuel hedging strategy could result in the Company not fully benefiting from lower jet fuel prices related to crude oil price declines below prices implicit in the hedge instruments. (The immediately preceding two sentences are forward- looking statements, which involve uncertainties that could result in actual results differing materially from expected results. Such uncertainties include, but may not be limited to, the largely unpredictable levels of jet fuel prices.) Maintenance materials and repairs per ASM decreased 7.6 percent primarily due to a decrease in the amount of outsourced routine heavy maintenance. The number of airframe inspections and repairs was unusually high in 1999. Due to the heavy volume of work required in 1999, the Company did not have sufficient internal resources to perform the necessary checks and repairs. Consequently, a large portion of this type of maintenance was outsourced. In 2000, the number of scheduled airframe inspections and repairs has decreased enabling the Company to perform the majority of the work internally; thus, the majority of the labor costs related to these inspections and repairs are reflected in salaries and wages. The Company also had a decrease in engine maintenance related to its 737-200 aircraft fleet as 1999 was also an unusually high period for engine maintenance on these aircraft; however, this decrease was offset by increases in several other miscellaneous maintenance expenses. Agency commissions per ASM decreased 9.7 percent, primarily due to an increase in direct sales. In second quarter 2000, approximately 30 percent of the Company's revenues were attributable to direct bookings through the Company's Internet site compared to approximately 16 percent in the same prior year period. The increase in Internet revenues contributed to the Company's percentage of commissionable revenues decreasing from 34.1 percent in 1999 to 29.2 percent in 2000. Aircraft rentals per ASM decreased 15.4 percent due to a lower percentage of the aircraft fleet being leased. Landing fees and other rentals per ASM decreased 6.4 percent primarily as a result of a decrease in gross landing fees per ASM of 7.6 percent (excluding landing fee adjustments from prior periods), partially offset by a slight increase in other rentals. Although gross landing fees declined on a per ASM basis, they were basically flat on a per trip basis. The growth in ASMs exceeded the trip growth primarily due to an increase in the average distance per trip flown. Other operating expenses per ASM decreased 4.6 percent due primarily due to Company-wide cost reduction efforts in areas such as supplies, optional training, communication costs, etc., which were in response to high fuel costs. Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses. Interest expense increased approximately 31.2 percent due primarily to the Company's issuance of $256 million of long-term debt in fourth quarter 1999. Capitalized interest decreased 24.2 percent primarily as a result of lower 2000 progress payment balances for scheduled future aircraft deliveries compared to 1999 and lower interest rates. Interest income increased 53.7 percent primarily due to higher invested cash balances. Comparison of Six Months Ended June 30, 2000 to Six Months Ended June 30, 1999 Consolidated net income before the cumulative effect of change in accounting principle for the six months ended June 30, 2000 was $286.3 million ($.54 per share, diluted), an increase of 12.9 percent compared to 1999. The cumulative effect of change in accounting principle for 2000 was $22.1 million, net of taxes of $14.0 million (see Note 6 to the unaudited Condensed Consolidated Financial Statements). Net income, after the cumulative change in accounting principle, for 2000 was $264.1 million. Diluted net income per share, after consideration of the accounting change, was $.50 compared to $.47 in 1999. Operating income was $470.0 million, an increase of 11.6 percent compared to 1999. Consolidated operating revenues increased 17.7 percent primarily due to an 18.3 percent increase in passenger revenues. The increase in passenger revenues primarily resulted from the Company's capacity growth coupled with an industry-wide strong demand for commercial air travel. The Company experienced an 11.3 percent increase in revenue passengers carried, a 16.5 percent increase in RPMs, and a 1.5 percent increase in passenger revenue yield per RPM (passenger yield). The increase in passenger yield is primarily due to a 6.2 percent increase in average passenger fare, partially offset by a 4.8 percent increase in average length of passenger haul. The increase in RPMs exceeded a 14.0 percent increase in ASMs resulting in a load factor of 70.6 percent, or 1.5 points above the same prior year period. The increase in ASMs resulted primarily from the net addition of 30 aircraft since second quarter 1999, which represents a 10.2 percent increase in the Company's fleet size. Consolidated freight revenues increased 9.5 percent primarily due to an increase in capacity. Other revenues decreased 4.8 percent primarily due to a decrease in commercial charter revenue. The Company had less aircraft devoted to its charter business compared to 1999 primarily due to the strong demand for scheduled passenger service. Operating expenses per ASM increased 4.5 percent to $.0773, compared to $.0740 for 1999, primarily due to a significant increase in average jet fuel prices. The average fuel cost per gallon was almost double 1999's average cost per gallon. Excluding fuel expense, operating expenses per ASM decreased 4.4 percent. Salaries, wages, and benefits per ASM decreased slightly, as increases in productivity were partially offset by an increase in Employee benefit costs, primarily health care and workers' compensation expenses. Profitsharing and Employee savings plan expenses per ASM decreased slightly, primarily as a result of the Company's capacity increasing faster than the increase in earnings available for profitsharing. Fuel and oil expense per ASM increased 85.1 percent due to a 90.7 percent increase in the average jet fuel cost per gallon compared to 1999. The average price paid for jet fuel in 2000 was $.7995 per gallon compared to $.4192 in 1999, including the effects of hedging activities. The Company's 2000 and 1999 average jet fuel prices are net of approximately $6.3 million and $7.7 million in gains from hedging activities, respectively. See comparison of second quarter 2000 to second quarter 1999 for a schedule of the Company's fuel hedging positions for the remainder of 2000 and 2001. Maintenance materials and repairs per ASM decreased 7.2 percent primarily because of a decrease in engine maintenance related to the Company's 737-200 aircraft fleet. The engines on these aircraft are not covered by the Company's maintenance contract with General Electric Engine Services, Inc.; therefore, repairs are expensed on a time and materials basis. Agency commissions per ASM decreased 12.9 percent, primarily due to an increase in direct sales. More than 28 percent of the Company's 2000 revenues were attributable to direct bookings through the Company's Internet site compared to less than 16 percent in the same prior year period. The increase in Internet revenues contributed to the Company's percentage of commissionable revenues decreasing from 35.8 percent in 1999 to 30.0 percent in 2000. Aircraft rentals per ASM decreased 12.8 percent due to a lower percentage of the aircraft fleet being leased. Landing fees and other rentals per ASM decreased 4.3 percent primarily as a result of a decrease in gross landing fees per ASM of 6.7 percent (excluding landing fee adjustments from prior periods), partially offset by a slight increase in other rentals. Although gross landing fees declined on a per ASM basis, they were basically flat on a per trip basis. The growth in ASMs exceeded the trip growth primarily due to an increase in the average distance per trip flown. Depreciation expense per ASM increased 2.2 percent primarily due to a higher percentage of owned aircraft. Of the 36 aircraft added to the Company's fleet over the past twelve months, 35 have been purchased. This, combined with the retirement of 6 leased aircraft, has increased the Company's percentage of aircraft owned or on capital lease from 66 percent at June 30, 1999 to 71 percent at June 30, 2000. Other operating expenses per ASM decreased 7.8 percent primarily due to Company-wide cost reduction efforts in areas such as supplies, advertising, optional training, communication costs, etc., which were in response to high fuel costs. Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses. Interest expense increased 29.9 percent due primarily to the Company's issuance of $256 million of long-term debt in fourth quarter 1999. Capitalized interest decreased 13.6 percent primarily as a result of lower interest rates. Interest income increased 38.7 percent primarily due to higher invested cash balances. Other losses in the first half of 1999 resulted primarily from a write-down associated with the consolidation of certain software development projects. Liquidity and Capital Resources Net cash provided by operating activities was $811.5 million for the six months ended June 30, 2000 and $1,140.1 million for the 12 months then ended. Also, during fourth quarter 1999, additional funds of $256 million were generated through the issuance of floating rate long-term debt from two separate financing transactions. Cash generated for the 12 months ended June 30, 2000 was primarily used to finance aircraft-related capital expenditures, provide working capital, and to repurchase approximately $198.1 million of the Company's outstanding common stock. The Company began this repurchase program during third quarter 1999. Through June 30, 2000, the program resulted in the repurchase of approximately 12.2 million shares at an average cost of $16.27 per share. During the 12 months ended June 30, 2000, net capital expenditures were $1,095.1 million, which primarily related to the purchase of 32 new 737-700 aircraft, one used 737-700 aircraft, two used 737-300 aircraft, and progress payments for future aircraft deliveries. The Company's contractual commitments consist primarily of scheduled aircraft acquisitions. During the second quarter 2000, the Company announced a new aircraft order with Boeing that could result in the future purchase of up to 290 new Next- Generation 737 aircraft for delivery between 2002 and 2012. The order includes commitments for 94 firm deliveries, 25 options, and up to 171 purchase rights for Next-Generation 737 aircraft. This new order is in addition to the Company's existing orders from Boeing. In total, as of June 30, 2000, 21 737-700s are scheduled for delivery in the remainder of 2000, 21 in 2001, 31 in 2002, 13 in 2003, 29 in 2004, and 52 during the period 2005 to 2007. In addition, the Company has options to purchase up to 87 737-700s during 2003-2008 and purchase rights for up to 217 additional aircraft during 2007-2012. The Company has the option, which must be exercised two years prior to the contractual delivery date, to substitute 737-600s or 737-800s for the 737-700s scheduled subsequent to 2001. Aggregate funding needed for fixed commitments at June 30, 2000 was approximately $4,777 million due as follows: $555 million in 2000; $749 million in 2001; $912 million in 2002; $472 million in 2003; $641 million in 2004; and $1,448 million thereafter. The Company has various options available to meet its capital and operating commitments, including cash on hand at June 30, 2000 of $636.7 million, internally generated funds, and a revolving credit line with a group of banks of up to $475 million (none of which had been drawn at June 30, 2000). In addition, the Company will also consider various borrowing or leasing options to maximize earnings and supplement cash requirements. The Company currently has outstanding shelf registrations for the issuance of $318.8 million in public debt securities which it may utilize for aircraft financing during 2000 and 2001. The Company began new service to Albany, New York, on May 7, 2000, with daily nonstop service to Baltimore/Washington, Las Vegas, and Orlando. The Company recently announced new service to Buffalo, New York, beginning October 8, 2000, with daily nonstop service to Baltimore/Washington, Las Vegas, Phoenix, and Orlando. Item 3. Quantitative and Qualitative Disclosures About Market Risk 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, 1999. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company received a statutory notice of deficiency from the Internal Revenue Service (IRS) in which the IRS proposed to defer deductions claimed by the Company on its federal income tax returns for the taxable years 1989 through 1991 for the costs of certain aircraft inspection and maintenance procedures. The IRS has proposed similar adjustments to the tax returns of numerous other members of the airline industry. In response to the statutory notice of deficiency, the Company filed a petition in the United States Tax court on October 30, 1997, seeking a determination that the IRS erred in disallowing the deductions claimed by the Company and that there is no deficiency in the Company's tax liability for the taxable years in issue. It is expected that the Tax Court's decision will not be entered for several years. Management believes that the final resolution of this controversy will not have a materially adverse effect upon the financial position and results of operations of the Company. Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Company's Annual Meeting of Shareholders was held in Dallas, Texas on Wednesday, May 17, 2000. The following matters were voted on at the meeting: (i) The following nominees were elected to the Company's Directors to hold office for a term expiring in 2003. Herbert D. Kelleher: 432,462,325 shares voted for; and 2,796,137 shares withheld. June M. Morris: 432,796,488 shares voted for; and 3,461,974 shares withheld. (ii) A shareholder proposal related to the Shareholder right to vote on Poison Pills was considered. 206,291,771 shares were voted for the proposal; 129,656,202 shares were voted against the proposal; 4,500,110 shares abstained from voting. (iii) A shareholder floor proposal related to the corporate governance practices was defeated. 0 shares were voted for the proposal, 435,258,462 shares were voted against the proposal; and 0 shares abstained from voting. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K a) Exhibits (1) Bylaws of Southwest, as amended through May 2000 (27) Financial Data Schedule b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHWEST AIRLINES CO. August 2, 2000 /s/ Gary C. Kelly Date Gary C. Kelly Vice President - Finance and Chief Financial Officer (Principal Financial and Accounting Officer)