How did Southwest perform financially in 1999?

Net income was $474.4 million, or $.89 per diluted share, up from $433.4 million ($.82) in 1998. Operating revenues rose 13.7 percent to $4.74 billion and operating income rose 14.3 percent to $781.6 million. The company called it its 27th consecutive year of profitability and eighth consecutive year of record annual profit.

What were the main risks to earnings disclosed in the filing?

Jet fuel prices were the primary risk. Average jet fuel cost rose 15.4 percent in 1999, and fourth-quarter prices reached their highest levels since 1991. Management expects significantly higher fuel prices in first-quarter 2000 versus first-quarter 1999, though hedging covers part of 2000 requirements. The filing also cites a pending IRS Tax Court dispute over deductions for aircraft inspection and maintenance costs for 1989 through 1991, which management does not expect to have a materially adverse effect.

What is the company's plan for growth in 2000?

Management expects capacity to grow about 12 percent in 2000 through a net addition of at least 30 aircraft, including 31 new Boeing 737-700 deliveries and one additional 737-700 under a long-term lease. Two older 737-200s are scheduled for retirement. Southwest also plans service to Albany, New York in May 2000 and at least one other new city during the year.

How much cash does the company have, and how is it using it?

Cash and cash equivalents were $418.8 million at year-end 1999, and operating activities generated $1,001.7 million. Net capital expenditures were $1,167.8 million, mainly for 32 new 737-700s and related items. The company had no borrowings under its $475 million revolving credit line. Aggregate funding for firm aircraft commitments was about $1,965.7 million through 2004, of which $687.9 million is due in 2000. The board also authorized up to $250 million in share repurchases, and 5.6 million shares had been repurchased for $90.5 million as of December 31, 1999.

Will the Rapid Rewards accounting change affect future results?

Yes. Beginning January 1, 2000, revenue from selling flight segment credits will be deferred until the free travel awards are flown and classified as passenger revenue. The cumulative effect will reduce first-quarter 2000 net income by approximately $22.1 million, net of approximately $14.0 million in tax. Had the method been applied to 1999, 1998, and 1997, net income would have been reduced by $3.9 million, $5.0 million, and $5.5 million, respectively.

LUV 10-K FY1999 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 28, 2000. Cited figures are marked; the original filing is the authoritative source.

Southwest Airlines Co. reported record results for fiscal 1999, its 27th consecutive year of profitability and its eighth consecutive year of record annual profit.

Operating revenues rose to $4.74 billion^a, up 13.7 percent from $4.16 billion, and operating income reached $781.6 million, up 14.3 percent. Net income was $474.4 million, or $.89 per diluted share, compared with $433.4 million ($.82) in 1998, an increase of 9.4 percent. The operating margin of 16.5 percent was the highest since 1981, and the load factor hit a record 69.0 percent.

Growth was driven by a 9.3 percent increase in revenue passengers carried and a 16.1 percent increase in revenue passenger miles, with capacity (ASMs) up 11.2 percent. Cost pressures were concentrated in fuel. Fuel and oil expense rose 13.4 percent per ASM, reflecting a 15.4 percent increase in average jet fuel prices, and fourth-quarter fuel cost per gallon rose 54.5 percent.

Management said fuel prices in the fourth quarter reached their highest levels since 1991 and expects significantly higher jet fuel prices in first quarter 2000. As of February 24, 2000, the company had hedged approximately 57 percent of first-quarter 2000 fuel requirements and 85 percent of second-quarter requirements, and it expects to add 30 or more aircraft in 2000 with capacity growth of about 12 percent. Cash from operations was $1.00 billion^b, net capital expenditures were $1.17 billion, and cash and equivalents ended the year at $418.8 million with no borrowings under a $475 million revolving credit line.

The filing also notes a $22.1 million^c after-tax cumulative effect charge in first-quarter 2000 from adopting SAB 101, which changes the accounting for sales of Rapid Rewards flight segment credits. Other items include an IRS Tax Court dispute over 1989 to 1991 maintenance deductions, which management does not expect to be materially adverse, and a $250 million share repurchase authorization under which 5.6 million shares had been bought back for $90.5 million by year-end.

02—Key points

Key Highlights

Record 1999 results: operating revenues of $4.74 billion (up 13.7 percent), operating income of $781.6 million (up 14.3 percent), and net income of $474.4 million, or $.89 per diluted share, up 9.4 percent.
Operating profit margin of 16.5 percent was the highest since 1981, and the load factor reached a record 69.0 percent, up from 66.1 percent in 1998.
Fuel was the main cost headwind: fuel and oil expense per ASM rose 13.4 percent, average jet fuel cost rose 15.4 percent, and fourth-quarter 1999 fuel cost per gallon was up 54.5 percent to $.6713.
Fuel hedging was expanded in early 2000, with about 57 percent of first-quarter and 85 percent of second-quarter 2000 requirements hedged as of February 24, 2000.
Growth plans for 2000 include capacity growth of approximately 12 percent, a net addition of at least 30 aircraft, 31 new Boeing 737-700 deliveries, and new service to Albany, New York in May 2000.
Rapid Rewards accounting change under SAB 101 reduces first-quarter 2000 net income by approximately $22.1 million as a cumulative effect; the company expects to classify the related revenue as passenger revenue going forward.
Strong balance sheet: $418.8 million of cash and equivalents, $1.00 billion of operating cash flow, $1.17 billion of net capital expenditures, and an undrawn $475 million revolving credit line; $1,965.7 million of aircraft purchase commitments through 2004.

03—Questions

Frequently Asked Questions

How did Southwest perform financially in 1999?
Net income was $474.4 million, or $.89 per diluted share, up from $433.4 million ($.82) in 1998. Operating revenues rose 13.7 percent to $4.74 billion and operating income rose 14.3 percent to $781.6 million. The company called it its 27th consecutive year of profitability and eighth consecutive year of record annual profit.
What were the main risks to earnings disclosed in the filing?
Jet fuel prices were the primary risk. Average jet fuel cost rose 15.4 percent in 1999, and fourth-quarter prices reached their highest levels since 1991. Management expects significantly higher fuel prices in first-quarter 2000 versus first-quarter 1999, though hedging covers part of 2000 requirements. The filing also cites a pending IRS Tax Court dispute over deductions for aircraft inspection and maintenance costs for 1989 through 1991, which management does not expect to have a materially adverse effect.
What is the company's plan for growth in 2000?
Management expects capacity to grow about 12 percent in 2000 through a net addition of at least 30 aircraft, including 31 new Boeing 737-700 deliveries and one additional 737-700 under a long-term lease. Two older 737-200s are scheduled for retirement. Southwest also plans service to Albany, New York in May 2000 and at least one other new city during the year.
How much cash does the company have, and how is it using it?
Cash and cash equivalents were $418.8 million at year-end 1999, and operating activities generated $1,001.7 million. Net capital expenditures were $1,167.8 million, mainly for 32 new 737-700s and related items. The company had no borrowings under its $475 million revolving credit line. Aggregate funding for firm aircraft commitments was about $1,965.7 million through 2004, of which $687.9 million is due in 2000. The board also authorized up to $250 million in share repurchases, and 5.6 million shares had been repurchased for $90.5 million as of December 31, 1999.
Will the Rapid Rewards accounting change affect future results?
Yes. Beginning January 1, 2000, revenue from selling flight segment credits will be deferred until the free travel awards are flown and classified as passenger revenue. The cumulative effect will reduce first-quarter 2000 net income by approximately $22.1 million, net of approximately $14.0 million in tax. Had the method been applied to 1999, 1998, and 1997, net income would have been reduced by $3.9 million, $5.0 million, and $5.5 million, respectively.

04—Continue

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