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, 2002 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)
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 duringthe 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 24, 2002:
772,915,619
SOUTHWEST AIRLINES CO.
FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
Southwest Airlines Co.
Condensed Consolidated Balance Sheet
(in thousands)
(unaudited)
June 30, 2002 December 31, 2001
ASSETS
Current assets:
Cash and cash equivalents $2,117,835 $2,279,861
Accounts and other receivables 129,840 71,283
Inventories of parts and supplies,
at cost 69,875 70,561
Deferred income taxes 46,440 46,400
Prepaid expenses and other
current assets 109,019 52,114
Total current assets 2,473,009 2,520,219
Property and equipment, at cost:
Flight equipment 7,848,552 7,534,119
Ground property and equipment 977,268 899,421
Deposits on flight equipment
purchase contracts 297,769 468,154
9,123,589 8,901,694
Less allowance for depreciation 2,618,074 2,456,207
6,505,515 6,445,487
Other assets 69,497 31,435
$9,048,021 $8,997,141
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $383,754 $504,831
Accrued liabilities 637,238 547,540
Air traffic liability 531,552 450,407
Aircraft purchase obligations 104,678 221,840
Short-term borrowings - 475,000
Current maturities of long-term debt 29,917 39,567
Total current liabilities 1,687,139 2,239,185
Long-term debt less current maturities 1,661,449 1,327,158
Deferred income taxes 1,174,223 1,058,143
Deferred gains from sale and leaseback
of aircraft 184,752 192,342
Other deferred liabilities 116,880 166,260
Stockholders' equity:
Common stock 772,556 766,774
Capital in excess of par value 75,396 50,409
Retained earnings 3,345,137 3,228,408
Accumulated other comprehensive
income (loss) 30,489 (31,538)
Total stockholders' equity 4,223,578 4,014,053
$9,048,021 $8,997,141
See accompanying notes.
Southwest Airlines Co.
Condensed Consolidated Statement of Income
(in thousands, except per share amounts)
(unaudited)
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
OPERATING REVENUES:
Passenger $1,425,365 $1,505,329 $2,640,150 $2,886,605
Freight 22,113 24,869 42,902 50,650
Other 25,320 23,587 46,989 45,147
Total operating
Revenues 1,472,798 1,553,785 2,730,041 2,982,402
OPERATING EXPENSES:
Salaries, wages,
and benefits 501,252 473,042 962,902 920,473
Fuel and oil 188,330 208,029 358,699 417,613
Maintenance materials
and repairs 101,468 102,910 198,062 201,434
Agency commissions 15,126 30,084 29,259 60,578
Aircraft rentals 46,387 47,879 93,822 95,924
Landing fees and
other rentals 87,974 77,156 171,154 147,174
Depreciation 86,551 78,213 171,146 155,905
Other operating expenses 256,711 245,610 506,633 482,282
Total operating
Expenses 1,283,799 1,262,923 2,491,677 2,481,383
OPERATING INCOME 188,999 290,862 238,364 501,019
OTHER EXPENSES (INCOME):
Interest expense 26,262 16,460 52,741 33,471
Capitalized interest (4,092) (5,640) (8,479) (11,839)
Interest income (9,521) (10,236) (19,112) (19,118)
Other (gains) losses, net 7,112 2,827 8,780 14,552
Total other expenses
(income) 19,761 3,411 33,930 17,066
INCOME BEFORE INCOME TAXES 169,238 287,451 204,434 483,953
PROVISION FOR INCOME TAXES 66,940 111,818 80,751 187,275
NET INCOME $102,298 $175,633 $123,683 $296,678
NET INCOME PER SHARE,
BASIC $ .13 $ .23 $ .16 $ .39
NET INCOME PER SHARE,
DILUTED $ .13 $ .22 $ .15 $ .37
WEIGHTED AVERAGE SHARES
OUTSTANDING:
Basic 772,012 762,139 770,698 761,188
Diluted 809,401 806,524 810,090 807,140
See accompanying notes.
Southwest Airlines Co.
Condensed Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
Six months ended June 30,
2002 2001
NET CASH PROVIDED BY OPERATING
ACTIVITIES $386,049 $904,820
INVESTING ACTIVITIES:
Net purchases of property and
Equipment (253,206) (460,761)
FINANCING ACTIVITIES:
Proceeds from long-term debt
Obligations 385,000 -
Payments of long-term debt
and capital lease
obligations (55,011) (6,834)
Payment of short term debt (475,000) -
Payment of trust arrangement (284,030) -
Payments of cash dividends (10,391) (10,002)
Proceeds from Employee
stock plans 30,769 18,129
Proceeds from trust
Arrangement 119,142 -
Other, net (5,348) -
NET CASH USED IN
FINANCING ACTIVITIES (294,869) 1,293
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (162,026) 445,352
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 2,279,861 522,995
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $2,117,835 $968,347
CASH PAYMENTS FOR:
Interest, net of amount
capitalized $21,349 $22,530
Income taxes $1,823 $10,601
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
unaudited condensed consolidated financial statements for the interim periods
ended June 30, 2002 and 2001 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. The Condensed
Consolidated Balance Sheet as of December 31, 2001 has been derived from the
Company's audited financial statements as of that date but does not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. Operating results for the three
and six months ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002. 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, 2001.
2. Dividends - During the three months ended June 30, 2002 and March
31, 2002, dividends of $.0045 per share were declared on the 772.3 million and
770.7 million shares of common stock then outstanding, respectively. During
the three months ended June 30, 2001 and March 31, 2001, dividends of $.0045
per share were declared on the 762.7 million and 760.7 million shares of common
stock then outstanding, respectively.
3. 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 June 30, Six months ended June 30,
2002 2001 2002 2001
NUMERATOR:
Net income
available to
common
stockholders $102,298 $175,633 $123,683 $296,678
DENOMINATOR:
Weighted-average
shares
outstanding,
basic 772,012 762,139 770,698 761,188
Dilutive effect
of Employee
stock options 37,389 44,385 39,392 45,952
Adjusted weighted-
average shares
outstanding,
diluted 809,401 806,524 810,090 807,140
NET INCOME PER SHARE:
Basic $.13 $.23 $.16 $.39
Diluted $.13 $.22 $.15 $.37
4. Accounting changes - Effective January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended (SFAS 133). SFAS 133 requires
the Company to record all financial derivative instruments on its balance sheet
at fair value. Derivatives that are not designated as hedges must be adjusted
to fair value through income. If a derivative is designated as a hedge,
depending on the nature of the hedge, changes in its fair value that are
considered to be effective, as defined, either offset the change in fair value
of the hedged assets, liabilities, or firm commitments through earnings or are
recorded in "Accumulated other comprehensive income (loss)" until the hedged
item is recorded in earnings. Any portion of a change in a derivative's fair
value that is considered to be ineffective, as defined, is recorded immediately
in "Other (gains) losses, net" in the Condensed Consolidated Statement of
Income. Any portion of a change in a derivative's fair value that the Company
elects to exclude from its measurement of effectiveness is required to be
recorded immediately in earnings.
Upon adoption of SFAS 133, the Company recorded the fair value of its fuel
derivative instruments in the Condensed Consolidated Balance Sheet and a
deferred gain of $46.1 million, net of tax, in "Accumulated other comprehensive
income (loss)", of which $45.5 million was recognized in earnings in 2001. See
Note 6 for further information on Comprehensive income. The 2001 adoption of
SFAS 133 has resulted in more volatility in the Company's financial statements
than in the past due to the changes in market values of its derivative
instruments and some ineffectiveness that has been experienced in its fuel
hedges. See Note 5 for further information on the Company's derivative
instruments.
5. Financial derivative instruments - Airline operators are inherently
dependent upon energy to operate and, therefore, are impacted by changes in jet
fuel prices. Jet fuel and oil consumed in the three months ended June 30, 2002
and 2001 represented approximately 14.7 percent and 16.5 percent of Southwest's
operating expenses, respectively. The Company endeavors to acquire jet fuel at
the lowest possible prices. Because jet fuel is not traded on an organized
futures exchange, liquidity for hedging is limited. However, the Company has
found that both crude oil and heating oil contracts are effective commodities
for hedging jet fuel. The Company has financial derivative instruments in the
form of the types of hedges it utilizes to decrease its exposure to jet fuel
price increases. The Company does not purchase or hold any derivative
financial instruments for trading purposes.
The Company utilizes financial derivative instruments for both short-term and
long-term time frames when it appears the Company can take advantage of market
conditions. As of July 18, 2002, the Company had a mixture of purchased call
options, collar structures, and fixed price swap agreements in place to hedge
approximately 80 percent of its third quarter and fourth quarter 2002 total
anticipated jet fuel requirements. The Company also has agreements in place to
hedge approximately 65 percent of its 2003 total anticipated jet fuel
requirements, and small portions of its 2004-2008 total anticipated jet fuel
requirements. As of July 18, 2002, the majority of the Company's remaining
2002 hedges and first quarter 2003 hedges are effectively heating oil-based
positions in the form of option contracts. The majority of the remaining hedge
positions are crude oil-based.
The Company accounts for its fuel hedge derivative instruments as cash flow
hedges, as defined in SFAS 133. Therefore, all changes in fair value that are
considered to be effective are recorded in "Accumulated other comprehensive
income (loss)" until the underlying jet fuel is consumed. The fair value of the
Company's financial derivative instruments at June 30, 2002, was a net asset of
approximately $96.2 million. The current portion of this net asset is
classified in "Prepaid expenses and other current assets" and the noncurrent
portion is classified in "Other assets" in the Condensed Consolidated Balance
Sheet. The fair value of the derivative instruments, depending on the type of
instrument, was determined by the use of present value methods or standard
option value models with assumptions about commodity prices based on those
observed in underlying markets.
During the three months ended June 30, 2002 and 2001, the Company recognized
$6.8 million and $20.4 million in gains in "Fuel and oil" expense, respectively,
from hedging activities. The Company recognized approximately $6.1 million and
$4.7 million of net expense, related to amounts excluded from the Company's
measurements of hedge effectiveness, in "Other (gains) losses, net" during the
three months ended June 30, 2002 and 2001, respectively. The Company
recognized approximately $2.5 million in expense and $1.8 million as additional
income in "Other (gains) losses, net," related to the ineffectiveness of its
hedges during the three months ended June 30, 2002 and 2001, respectively.
As of June 30, 2002, the Company had approximately $31.7 million in unrealized
gains, net of tax, in "Accumulated other comprehensive income (loss)" related
to fuel hedges. Included in this total are approximately $21.7 million in net
unrealized gains that are expected to be realized in earnings during the twelve
months following June 30, 2002.
6. Comprehensive income - Comprehensive income 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 $105.8 million and $185.7 million for the three
and six months ended June 30, 2002, respectively. Comprehensive income totaled
$171.8 million and $328.6 million for the three and six months ended June 30,
2001, respectively. The differences between Net income and Comprehensive income
for each of these periods was as follows (in thousands):
Three months ended June 30,
2002 2001
Net income $102,298 $175,633
Unrealized gain (loss) on
derivative instruments,
net of deferred taxes of
$2,566 and ($2,556) 3,930 (3,956)
Other, net of deferred
taxes of ($269) and $50 (417) 77
Total other comprehensive income 3,513 (3,879)
Comprehensive income $105,811 $171,754
Six months ended June 30,
2002 2001
Net income $123,683 $296,678
Unrealized gain (loss) on
derivative instruments,
net of deferred taxes of
$40,587 and $21,020 62,788 32,538
Other, net of deferred taxes
of ($491) and ($402) (761) (622)
Total other comprehensive income 62,027 31,916
Comprehensive income $185,710 $328,594
A rollforward of the amounts included in "Accumulated other comprehensive
Income (loss)," net of taxes, is shown below (in thousands):
Accumulated
Fuel other
hedge comprehensive
derivatives Other income (loss)
Balance at December 31, 2001 ($31,063) ($475) ($31,538)
2002 changes in value 62,143 (761) 61,382
Reclassification to earnings 645 - 645
Balance at June 30, 2002 $ 31,725 ($1,236) $ 30,489
7. September 11, 2001 Terrorist Attacks - On September 11, 2001,
terrorists hijacked and used two American Airlines, Inc. aircraft and two United
Air Lines, Inc. aircraft in terrorist attacks on the United States (terrorist
attacks). As a result of these terrorist attacks, the Federal Aviation
Administration (FAA) immediately suspended all commercial airline flights. The
Company resumed flight activity on September 14 and was operating its normal
pre-September 11 flight schedule by September 18, 2001. From September 11
until the Company resumed flight operations on September 14, Southwest
cancelled approximately 9,000 flights.
Once the Company resumed operations, load factors (percentage of seats filled)
and yields (revenue per mile flown) were severely impacted, along with
increased ticket refund activity. Load factors returned to somewhat normal
levels during fourth quarter 2001. Yields, however, have continued to be
significantly below prior year levels.
On September 22, 2001, President Bush signed into law the Air Transportation
Safety and System Stabilization Act (the Act). The Act provides for up to $5
billion in cash grants to qualifying U.S. airlines and freight carriers to
compensate for direct and incremental losses, as defined in the Act, from
September 11, 2001 through December 31, 2001, associated with the terrorist
attacks. Each airline's total eligible grant is determined based on that
airline's percentage of available seat miles (ASMs) during August 2001 to total
eligible carriers' ASMs for August 2001, less an amount set aside for eligible
carriers for whom the use of ASM formula would result in an insufficient
representation of their share of direct and incremental losses. The Department
of Transportation (DOT) will make the final determination of the amount of
eligible direct and incremental losses incurred by each airline. Direct and
incremental losses, while defined generally in the Act, are subject to
interpretation by the DOT. The DOT issued its final rules with respect to the
Act on April 16, 2002. The Company filed its final application for grant
proceeds on May 16, 2002, which was accompanied by an Agreed Upon Procedures
report from the Company's independent auditors. The DOT, Congress, or other
governmental agencies may perform additional audit and/or review(s) of the
Company's application.
During second half 2001, the Company recognized approximately $235 million in
"Other gains" from grants under the Act. Based on the Company's application,
which was filed during second quarter 2002, the Company believes its actual
direct and incremental losses related to the September 11 terrorist attacks
exceed the Company's estimated maximum eligible grant of approximately $278
million. Accordingly, the Company expects to recognize approximately $43
million as "Other gains", including $29 million in proceeds received during
second quarter 2002, upon completion of subsequent audits and/or reviews of the
Company's final application by various governmental agencies.
The Company recorded total special charges of $48 million during the third and
fourth quarters of 2001 arising from the terrorist attacks. Total special
charges included a $30 million reduction in "Passenger revenue" resulting from
refunds of nonrefundable fares, $13 million in charges to "Other operating
expenses" for write-downs of various assets due to impairment, and other
charges that are included in "Other (gains) losses, net."
8. Credit facility - In September 2001, the Company borrowed the full
$475 million available under its unsecured revolving credit line with a group of
banks. Borrowings under the credit line bore interest at six-month LIBOR plus
15.5 basis points. The Company repaid this unsecured revolving credit line in
full, plus accrued interest, in March 2002.
On April 23, 2002, the Company entered into new unsecured revolving credit
facility agreements totaling $575 million with a group of banks. Half of the
total amount of these agreements is available to the Company for three
renewable one-year terms from April 23, 2002. The other half is available
to the Company for a full three-year term. The Company's previous $475 million
revolving credit facility was simultaneously cancelled on April 23, 2002.
9. Issuance of debt - During first quarter 2002, the Company issued
$385 million senior unsecured Notes (Notes) due 2012. The Notes bear interest
at 6.5 percent, payable semi-annually in arrears, with the first payment due on
September 1, 2002. Southwest used the net proceeds from the issuance of the
Notes, approximately $380.2 million, for general corporate purposes.
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 six
months ended June 30, 2002 and 2001 are as follows:
Three months ended June 30, Six months ended June 30,
2002 2001 Change 2002 2001 Change
Revenue
passengers
carried 16,772,419 17,526,753 (4.3)% 31,235,701 33,242,773 (6.0)%
Revenue
passenger
miles
(RPMs)
(000s) 11,998,867 11,788,386 1.8% 22,391,457 22,450,777 (0.3)%
Available
seat
miles
(ASMs)
(000s) 17,172,875 16,443,810 4.4% 33,692,832 32,296,808 4.3%
Load factor 69.9% 71.7% (1.8) pts. 66.5% 69.5% (3.0) pts.
Average length
of passenger
haul 715 673 6.2% 717 675 6.2%
Trips flown 236,830 238,397 (0.7)% 468,025 470,190 (0.5)%
Average
passenger
fare $82.84* $85.89 (3.6)% $83.37* $86.83 (4.0)%
Passenger
revenue
yield
per RPM
(cents) 11.58* 12.77 (9.3)% 11.63* 12.86 (9.6)%
Operating
revenue
yield
per ASM
(cents) 8.37* 9.45 (11.4)% 8.00* 9.23 (13.3)%
Operating
expenses
per ASM
(cents) 7.48 7.68 (2.6)% 7.40 7.68 (3.6)%
Operating
expenses
per ASM,
excluding
fuel (cents) 6.38 6.42 (0.6)% 6.33 6.39 (0.9)%
Fuel costs
per gallon,
excluding
fuel tax
(cents) 67.42 74.96 (10.1)% 65.39 76.71 (14.8)%
Number of
Employees
at period-end 33,149 30,369 9.2% 33,149 30,369 9.2%
Size of fleet
at period-end 366 356 2.8% 366 356 2.8%
* Amounts exclude $36 million in revenue related to a reduction in "Air traffic
liability"
Southwest operating expenses per ASM for the three and six months ended
June 30, 2002 and 2001 are as follows (in cents except percent change):
Three months ended June 30, Six months ended June 30,
Percent Percent
2002 2001 Change 2002 2001 Change
Salaries, wages,
and benefits 2.63 2.46 6.9 2.63 2.48 6.0
Employee
retirement
plans .29 .42 (31.0) .23 .37 (37.8)
Fuel and oil 1.10 1.27 (13.4) 1.06 1.29 (17.8)
Maintenance
materials
and repairs .59 .63 (6.3) .59 .62 (4.8)
Agency
commissions .09 .18 (50.0) .09 .19 (52.6)
Aircraft
rentals .27 .29 (6.9) .28 .30 (6.7)
Landing fees
and other
rentals .51 .47 8.5 .51 .46 10.9
Depreciation .50 .48 4.2 .51 .48 6.3
Other operating
expenses 1.50 1.48 1.4 1.50 1.49 0.7
Total 7.48 7.68 (2.6) 7.40 7.68 (3.6)
Material Changes in Results of Operations
Summary
The airline industry continues to suffer from a persistently weak revenue
and economic environment. While the Company's profitability levels have been
modest relative to pre-September 11, 2001 levels, Southwest's profits and
overall financial performance have exceeded the significant losses posted by
the majority of the Company's airline competitors.
Although the airline industry has experienced challenging operating conditions
resulting from increased airport security measures and substantial increases in
aviation insurance following the terrorist attacks, the Company has benefited
from lower jet fuel costs, reduced distribution costs, and decreases within
"other operating expenses." The reduction in various other operating expenses
resulted from various cost reduction measures implemented post-September 11.
Consolidated net income for second quarter 2002 was $102.3 million ($.13
per share, diluted), 41.8 percent below the second quarter 2001 net income of
$175.6 million ($.22 per share, diluted). During second quarter 2002, the
Company recognized $36 million in additional passenger revenue from a reduction
in estimated refunds and exchanges included in "Air traffic liability."
Excluding the effect of this change in air traffic liability, net income for
second quarter 2002 was $84.5 million, or $.10 per share, diluted.
Second quarter 2002 operating income was $189.0 million compared to
operating income of $290.9 million in 2001. For the six months ended June 30,
2002, net income was $123.7 million ($.15 per share, diluted), as compared to
net income of $296.7 million ($.37 per share, diluted) in the same prior year
period. For the six months ended June 30, 2002, operating income decreased
52.4 percent to $238.4 million compared to operating income of $501.0 million
in 2001. For both the three and six months ended June 30, 2002 compared to the
prior year, the decreases in net income and operating income were due to
decreases in revenues. Substantial discounting of airfares by the Company and
the entire industry has stimulated demand but also resulted in a lower
passenger revenue yield per RPM (passenger yield) versus the prior year. Total
operating expenses have been comparable to 2001, as lower jet fuel prices,
agency commissions, profitsharing expense, and other cost control measures
offset increases in salaries, wages, and benefits, airport security, and
aviation insurance costs.
As the Company continues to carry a higher percentage of Customers
traveling on lower-yielding discounted fares and assuming normal seasonal
travel patterns, third quarter unit revenue (operating revenue divided by ASMs)
is expected to be below second quarter's unit revenue of $.0837. Additionally,
third and fourth quarter 2002 financial and operating comparisons with the
prior year will be difficult because of the September 11, 2001 terrorist
attacks (terrorist attacks). (The immediately preceding two sentences are
forward-looking statements that involve uncertainties that could result in
actual results differing materially from expected results. Some significant
factors include, but may not be limited to, additional incidents that could
cause the public to question the safety and/or efficiency of air travel,
competitive pressure such as fare sales and capacity changes by other carriers,
general economic conditions, and variations in advance booking trends.)
Security. The Company has had to respond and react swiftly to numerous
new and changing Federal Security Directives, which have dramatically changed
the manner in which Customers, luggage, and airplanes are protected and cleared
for flight. This has created various challenges at each of the 59 airports we
currently serve. These enhanced security measures, however, were implemented
in such a way so as to not diminish our aircraft productivity or impair
Southwest's reliable ontime performance record. The Company has implemented
significant changes across our network, which have generally reduced wait times
to acceptable levels. Among other airport improvements, Southwest recently
implemented its new Automated Boarding Pass and has begun introducing self-
service RAPID CHECK-IN during third quarter 2002. Although significant
progress has been made since the weeks following September 11, 2001, improving
the overall airport experience remains one of our primary operational goals.
Insurance. Following the terrorist attacks, commercial aviation insurers
significantly increased the premiums for coverage related to acts of terrorism
(war-risk coverage) and reduced the amount of coverage available to commercial
carriers. At that time, the federal government, through passage of the Act,
supplemented the amount of coverage available to commercial carriers for
renewable 60-days periods. Thus far, this supplemental coverage has been
extended through August 17, 2002. If the supplemental coverage from the federal
government is not extended beyond this date, the Company's insurance costs would
most likely increase substantially.
Aircraft and Engine Maintenance. The cost of scheduled engine inspections
and repairs and routine maintenance costs for aircraft and engines are charged
to maintenance expense as incurred. Scheduled airframe inspections and repairs,
known as "D" checks, are generally performed every ten years. Costs related to
"D" checks are capitalized and amortized over the estimated period benefited,
presently the least of ten years, the time until the next "D" check, or the
remaining life of the aircraft. Modifications that significantly enhance the
operating performance or extend the useful lives of aircraft or engines are
capitalized and amortized over the remaining life of the asset.
In 2001, the American Institute of Certified Public Accountants (AICPA)
issued a Proposed Statement of Position entitled "Accounting for Certain Costs
and Activities Related to Property, Plant, and Equipment" (Proposed SOP).
Although the AICPA continues to deliberate the Proposed SOP, if it is issued,
the Proposed SOP could change the way in which the Company accounts for its
property and equipment and certain aircraft maintenance, including "D" checks.
Comparison of Three Months Ended June 30, 2002 to Three Months Ended June 30,
2001
Consolidated operating revenues decreased 5.2 percent primarily due to a
5.3 percent decrease in passenger revenues. During second quarter 2002, the
Company recognized $36 million in additional passenger revenue from a reduction
in estimated refunds and exchanges included in "Air traffic liability." As the
demand for full fare unrestricted air transportation has weakened, Southwest's
mix of discounted nonrefundable fares has increased. This change in Customer
travel patterns, along with effects from September 11, led to a second quarter
2002 reduction in estimated liabilities for refunds and exchanges as of June 30,
2002 and a corresponding increase in "Passenger revenue." Excluding this
additional revenue, passenger revenues decreased 7.7 percent. As a result of
heavy promotional activities and weak business Customer travel, the Company is
carrying a greater proportion of Customers traveling on lower yielding
discounted fares than in the prior year. Excluding the reduction in air
traffic liability, passenger yield was $.1158 for second quarter 2002, a
decrease of 9.3 percent compared to 2001. Second quarter 2002 capacity, as
measured by available seat miles (ASMs), increased 4.4 percent. The increase
in ASMs primarily resulted from the net addition of 10 aircraft (net of six
retirements) from July 2001 through June 2002. The second quarter 2002 load
factor was 69.9 percent, a decrease of 1.8 points compared to 2001. The Company
experienced a 4.3 percent decrease in revenue passengers carried, and a 1.8
percent increase in RPMs.
Consolidated freight revenues decreased 11.1 percent primarily due to a
decrease in U.S. mail shipments. The U.S. Postal Service has diverted more of
its mail shipments to freight carriers and away from commercial airlines,
particularly following the terrorist attacks. Due to this recent trend,
the Company also expects a year-over-year decline in consolidated freight
revenues for third quarter 2002. (The immediately preceding sentence is a
forward-looking statement that involves uncertainties that could result in
actual results differing materially from expected results. Some significant
factors include, but may not be limited to, decisions by major freight
customers on how they allocate freight deliveries among different types of
carriers, general economic conditions, etc.) Other revenues increased 7.3
percent primarily due to an increase in commissions earned from programs the
Company sponsors with certain business partners, such as the Company sponsored
First USA Visa card. That increase was partially offset by a decline in
charter revenues.
Operating expenses per ASM were $.0748, a 2.6 percent decrease compared
to $.0768 for 2001. Excluding fuel expense, operating expenses per ASM
declined .6 percent to $.0638. The Company does not currently anticipate any
significant changes in its cost structure for third quarter 2002. (The
immediately preceding sentence is a forward-looking statement that involves
uncertainties that could result in actual results differing materially from
expected results. Some significant factors include, but may not be limited to,
capacity changes by the Company and its competitors, changing security
requirements, labor issues, etc.)
Salaries, wages, and benefits per ASM increased 6.9 percent.
Approximately 75 percent of the increase was in salaries and wages, as the
Company's headcount growth exceeded the increase in ASMs. The Company has
increased headcount in certain operational areas in order to alleviate
excessive overtime, to comply with enhanced federal security regulations, and
for projects designed to improve the overall airport experience of its
Customers. Approximately 25 percent of the increase was in benefits, primarily
due to increasing health care costs. Based on the Company's recent hiring and
the overall rise in health care costs, we are expecting an increase in
salaries, wages, and benefits per ASM in third quarter 2002 compared to second
quarter 2002. (The immediately preceding sentence is a forward-looking
statement that involves uncertainties that could result in actual results
differing materially from expected results. Some significant factors include,
but may not be limited to, Employee hiring and retention rates, the results of
Employee labor contract negotiations, costs for health care, capacity decisions
made by the Company, etc.)
Employee retirement plans expense per ASM decreased 31.0 percent,
primarily due to the decrease in Company earnings available for profitsharing.
Fuel and oil expense per ASM decreased 13.4 percent primarily due to a
10.1 percent decrease in the average jet fuel cost per gallon compared to 2001.
The average jet fuel cost per gallon in second quarter 2002 was $.6742 compared
to $.7496 in second quarter 2001, including the effects of hedging activities.
See Note 5 to the unaudited condensed consolidated financial statements. As
of July 18, 2002, the Company had fuel derivatives in place to hedge
approximately 80 percent of its third quarter and fourth quarter 2002 total
anticipated jet fuel requirements. The majority of the Company's near term
hedge positions are in the form of option contracts, which should enable the
Company to benefit to a large extent from a decline in jet fuel prices. (The
immediately preceding sentence is a forward-looking statement, which involves
uncertainties that could result in actual results differing materially from
expected results. Such uncertainties include, but may not be limited to, the
largely unpredictable prices of jet fuel, crude oil, and heating oil prices,
the continued effectiveness of the Company's fuel hedges, and changes in the
Company's overall fuel hedging strategy.)
Maintenance materials and repairs per ASM decreased 6.3 percent primarily
due to a decrease in engine repair expense per ASM. This decrease was
primarily due to a decrease in scheduled engine repairs for the Company's 737
-200 aircraft. The Company expects third quarter 2002 maintenance materials
and repairs per ASM to be modestly higher than second quarter 2002 expense
due to currently scheduled maintenance. (The immediately preceding sentence is
a forward-looking statement involving uncertainties that could result in actual
results differing materially from expected results. Such uncertainties
include, but may not be limited to, any unscheduled required aircraft airframe
or engine repairs and regulatory requirements.)
Agency commissions per ASM decreased 50.0 percent. Approximately 60
percent of the decrease was due to a change in the Company's commission rate
policy, and approximately 40 percent was due to the overall decline in revenues
and the mix of commissionable revenues. Effective October 15, 2001, the
Company reduced the commission paid to travel agents to five percent (with no
cap), regardless of the type of ticket sold. Previously, the Company paid an
eight percent commission rate on ticketless bookings by travel agents. The
percentage of commissionable revenues decreased from approximately 26 percent
in second quarter 2001 to approximately 20 percent in second quarter 2002. Due
to the commission policy change in October 2001, the Company expects agency
commissions to show a year-over-year decrease on a per-ASM basis and expects
commissionable revenues to remain in the 20 percent range in third quarter
2002. (The immediately preceding sentence is a forward-looking statement
involving uncertainties that could result in actual results differing
materially from expected results. Such uncertainties include, but may not be
limited to, changes in consumer ticket purchasing habits and further commission
policy changes.)
Aircraft rentals per ASM decreased 6.9 percent compared to second quarter
2001 due to a lower percentage of the aircraft fleet being leased. The Company
retired two leased aircraft in fourth quarter 2001 and one leased aircraft in
each of the first and second quarter 2002. Approximately 24.6 percent of the
Company's aircraft fleet was under operating lease at June 30, 2002, compared
to 26.4 percent at June 30, 2001.
Landing fees and other rentals per ASM increased 8.5 percent.
Approximately 70 percent of the increase was due to an increase in other
rentals primarily as a result of the Company's expansion of facilities in
several airports, most notably Chicago Midway Airport and Baltimore/Washington
International Airport. Approximately 30 percent of the increase was due to an
increase in landing fee rates at certain airports as a result of capacity
reductions by other airlines. As a result of the terrorist attacks, most major
airlines reduced their flight schedules and/or have retired aircraft early due
to the decrease in demand for air travel. Since Southwest did not reduce the
number of flights it offers, the Company expects that the airport costs it
shares with other airlines on the basis of flights offered or passengers
carried, such as landing fees, will also show an increase on a per ASM basis in
third quarter 2002 compared to the prior year. However, due to the recent
reinstatement of certain routes by other carriers, the Company expects the
third quarter 2002 cost per ASM to be modestly lower than the second quarter
2002 cost per ASM. (The immediately preceding two sentences are forward-
looking statements involving uncertainties that could result in actual results
differing materially from expected results. Such uncertainties include, but may
not be limited to, changes in competitors' flight schedules, demand for air
travel, etc.)
Depreciation expense per ASM increased 4.2 percent primarily due to a
higher percentage of owned aircraft. All 16 of the aircraft put in service by
the Company over the past twelve months have been purchased. This, along with
the retirement of six aircraft, four of which were leased, has increased the
Company's percentage of aircraft owned or on capital lease to 75.4 percent at
June 30, 2002 from 73.6 percent at June 30, 2001.
Other operating expenses per ASM increased 1.4 percent. Substantial
increases in aviation insurance costs were mostly offset through various cost
control measures implemented immediately following the terrorist attacks. The
increases in aviation insurance costs are from increased rates imposed on
airlines after the terrorist attacks. The Company expects the heightened costs
of aviation insurance to continue for the foreseeable future. This increase is
expected to total in excess of $85 million for the full year 2002 compared to
2001. There is no assurance the Company will continue to offset such increases
with cost reductions in other areas in future periods. (The immediately
preceding three sentences are forward-looking statements involving
uncertainties that could result in actual results differing materially from
expected results. Such uncertainties include, but may not be limited to,
results of the Company's cost control efforts, changes in the Transportation
Security Administration's schedule or scope for taking over U.S. airport
security, costs of insurance including the federal government's coverage of
third party war-risk coverage, etc.)
Interest expense increased 59.6 percent primarily due to two separate
borrowings executed by the Company over the past nine months. During the
fourth quarter 2001, the Company issued $614.3 million in long-term debt in the
form of Pass-Through Certificates and in first quarter 2002 issued $385 million
in unsecured notes (see Note 9 to the unaudited condensed consolidated
financial statements). The increase in expense caused by these borrowings was
partially offset by a decrease in interest rates on the Company's floating rate
debt and the July 2001 redemption of $100 million of unsecured notes. Based on
the Company's recent borrowings, we also expect interest expense to be higher on
a year-over-year basis throughout the remainder of 2002. (The immediately
preceding sentence is a forward-looking statement involving uncertainties that
could result in actual results differing materially from expected results.
Such uncertainties include, but may not be limited to, subsequent financing
decisions made by the Company.)
Capitalized interest decreased 27.4 percent primarily due to a reduction
in progress payment balances for future aircraft deliveries.
Interest income decreased 7.0 percent as higher invested cash balances
were more than offset by a decrease in rates earned on investments.
In second quarter 2002 and 2001, Other losses primarily reflects net
charges recorded in accordance with FAS 133, which the Company adopted January
1, 2001. The Company recognized approximately $6.1 million and $4.7 million of
net expense, related to amounts excluded from the Company's measurements of
hedge effectiveness, in "Other (gains) losses, net" during the second quarters
of 2002 and 2001, respectively. The Company recognized approximately $2.5
million as net expense and $1.8 million as additional income in "Other (gains)
losses, net," related to the ineffectiveness of its hedges during the second
quarters of 2002 and 2001, respectively. See Note 5 to the unaudited condensed
consolidated financial statements. As detailed in Note 7 to the unaudited
condensed consolidated financial statements, the Company may recognize gains
from additional grants from the Air Transportation Safety and System
Stabilization Act (the Act) of up to approximately $43 million during the
second half of 2002. (The immediately preceding sentence is a forward-looking
statement involving uncertainties that could result in actual results differing
materially from expected results. Such uncertainties include, but may not be
limited to, subsequent modifications or amendments to the Act, changes in the
expected requirements for or schedule of distributing grant funds, etc.)
Comparison of Six Months Ended June 30, 2002 to Six Months Ended June 30, 2001
Consolidated operating revenues decreased 8.5 percent primarily due to an
8.5 percent decrease in passenger revenues. The decrease in passenger revenues
was primarily due to the weak domestic airline revenue environment compared to
the same period in 2001. Excluding the effect of the $36 million increase in
revenue as previously described, passenger yield was $.1163, a decrease of 9.6
percent compared to the same period of 2001. Capacity increased 4.3 percent,
primarily as a result of the net addition of 10 aircraft (net of six
retirements) from July 2001 through June 2002. The Company's load factor for
the six months ended June 30, 2002, was 66.5 percent, a decrease of 3.0 points
compared to the same period in 2001. The Company also experienced a 6.0
percent decrease in revenue passengers carried and a .3 percent decrease in
RPMs.
Consolidated freight revenues decreased 15.3 percent primarily due to a
decrease in U.S. mail shipments. Other revenues increased slightly primarily
due to an increase in commissions earned from programs the Company sponsors with
certain business partners, such as the Company sponsored First USA Visa card.
That increase was partially offset by a decline in charter revenues.
Operating expenses per ASM were $.0740, a 3.6 percent decrease compared to
$.0768 for 2001. Excluding fuel expense, operating expenses per ASM declined .9
percent to $.0633.
Salaries, wages, and benefits per ASM increased 6.0 percent.
Approximately 70 percent of the increase was in salaries and wages, as the
Company's headcount growth exceeded the increase in ASMs. The Company has
increased headcount in certain operational areas in order to alleviate
excessive overtime, to comply with enhanced federal security regulations, and
for projects designed to improve the overall airport experience of its
Customers. Approximately 30 percent of the increase was in benefits, primarily
due to increasing health care costs.
Employee retirement plans expense per ASM decreased 37.8 percent,
primarily due to the decrease in Company earnings available for profitsharing.
Fuel and oil expense per ASM decreased 17.8 percent due to a 14.8 percent
decrease in the average jet fuel cost per gallon compared to 2001. The average
jet fuel cost per gallon in 2002 was $.6539 compared to $.7671 in 2001,
including the effects of hedging activities. See Note 5 to the unaudited
condensed consolidated financial statements.
Maintenance materials and repairs per ASM decreased 4.8 percent primarily
due to a decrease in engine repair expense per ASM. This decrease was
primarily due to a decrease in scheduled engine repairs for the Company's 737
-200 aircraft.
Agency commissions per ASM decreased 52.6 percent. Approximately 60
percent of the decrease was due to a change in the Company's commission rate
policy, and approximately 40 percent was due to the overall decline in revenues
and the mix of commissionable revenues. Effective October 15, 2001, the
Company reduced the commission paid to travel agents to five percent (with no
cap), regardless of the type of ticket sold. Previously, the Company paid an
eight percent commission rate on ticketless bookings by travel agents. The
percentage of commissionable revenues decreased from approximately 27 percent in
2001 to approximately 21 percent in 2002.
Aircraft rentals per ASM decreased 6.7 percent compared to second quarter
2001 due to a lower percentage of the aircraft fleet being leased. The Company
retired two leased aircraft in fourth quarter 2001 and one leased aircraft in
each of the first and second quarter 2002. Approximately 24.6 percent of the
Company's aircraft fleet was under operating lease at June 30, 2002, compared to
26.4 percent at June 30, 2001.
Landing fees and other rentals per ASM increased 10.9 percent.
Approximately 65 percent of the increase was due to an increase in other
rentals primarily as a result of the Company's expansion of facilities in
several airports, most notably Chicago Midway Airport and Baltimore/Washington
International Airport. Approximately 35 percent of the increase was due to an
increase in landing fee rates at certain airports as a result of capacity
reductions by other airlines. As a result of the terrorist attacks, most major
airlines reduced their flight schedules and/or have retired aircraft early due
to the decrease in demand for air travel.
Depreciation expense per ASM increased 6.3 percent primarily due to a
higher percentage of owned aircraft. All 16 of the aircraft put in service by
the Company over the past twelve months have been purchased. This, along with
the retirement of six aircraft, four of which were leased, has increased the
Company's percentage of aircraft owned or on capital lease to 75.4 percent at
June 30, 2002 from 73.6 percent at June 30, 2001.
Other operating expenses per ASM was up .7 percent compared to the same
period of the prior year. Substantial increases in aviation insurance costs
were mostly offset through Company-wide cost control measures implemented
immediately following the terrorist attacks.
Interest expense increased 57.6 percent primarily due to three separate
borrowings executed by the Company since the terrorist attacks. In September
2001, the Company borrowed the full $475 million available under its revolving
credit facility. This borrowing was fully repaid in March 2002. During the
fourth quarter 2001, the Company issued $614.3 million in long-term debt in the
form of Pass-Through Certificates and in first quarter 2002 issued $385 million
in unsecured notes (see Note 9 to the unaudited condensed consolidated
financial statements). The increase in expense caused by these borrowings was
partially offset by a decrease in interest rates on the Company's floating rate
debt and the July 2001 redemption of $100 million of unsecured notes.
Capitalized interest decreased 28.4 percent primarily due to a reduction
in progress payment balances for future aircraft deliveries.
Interest income was flat compared to the same period of 2001 as
substantially higher invested cash balances were offset by a decrease in rates
earned on investments.
In 2002 and 2001, Other losses primarily reflects net charges recorded in
accordance with FAS 133, which the Company adopted January 1, 2001. The Company
recognized approximately $12.0 million and $13.1 million of net expense, related
to amounts excluded from the Company's measurements of hedge effectiveness, in
"Other (gains) losses, net" during the first half of 2002 and 2001,
respectively. The Company recognized approximately $2.1 million as additional
income and $.8 million as net expense in "Other (gains) losses, net," related
to the ineffectiveness of its hedges during the first half of 2002 and 2001,
respectively. See Note 5 to the unaudited condensed consolidated financial
statements.
Liquidity and Capital Resources
Net cash provided by operating activities was $386.0 million for the six
months ended June 30, 2002 and $965.8 million for the 12 months then ended. In
addition, the Company issued $385 million in unsecured notes and repaid its
$475 million revolving credit facility during the six months ended June 30,
2002. See Notes 8 and 9 to the unaudited condensed consolidated financial
statements. Cash generated for the 12 months ended June 30, 2002 was primarily
used to finance aircraft-related capital expenditures and to provide working
capital.
During the 12 months ended June 30, 2002, net capital expenditures were
$790.3 million, which primarily related to the purchase of new 737-700 aircraft
and progress payments for future aircraft deliveries.
The Company's contractual purchase commitments consist primarily of
scheduled aircraft acquisitions. As a result of the terrorist attacks, the
Company modified its future delivery dates to defer the acquisition of 19 new
737-700 aircraft that were either already in production at Boeing or were
scheduled to be built through April 2002 through an arrangement with a special
purpose trust (the Trust). Through the Trust, the Company has accepted 14 of
these 19 aircraft thus far in 2002 and has announced its intention to accept
delivery of four more aircraft in the second half of 2002. The one remaining
aircraft is scheduled for delivery in the first half of 2003, although the
Company has the ability to accelerate the delivery of this aircraft at any time
before its scheduled delivery date. For these 19 aircraft, the Company recorded
the associated assets ("Flight equipment" or "Deposits on flight equipment
purchase contracts") and liabilities ("Aircraft purchase obligations") in its
financial statements as the aircraft were completed by Boeing and delivered to
the Trust. All 19 aircraft were reflected in the Company's financial statements
as of June 30, 2002.
As of June 30, 2002, in addition to the aircraft that are part of the
Trust, the Company has contractual purchase commitments, aircraft purchase
options, and aircraft purchase rights with Boeing for a total of 417 aircraft
through 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. Including the amounts associated with the Trust that are
included as liabilities in the Company's Condensed Consolidated Balance Sheet,
aggregate (cash basis) funding needed for firm commitments, as of June 30, 2002,
is approximately $3.4 billion, subject to adjustments for inflation, due as
follows: $277 million in 2002, $521 million in 2003, $643 million in 2004, $719
million in 2005, $631 million in 2006, and $613 million thereafter.
The Company has various options available to meet its capital and
operating commitments, including cash on hand at June 30, 2002 of $2.1 billion
and internally generated funds. On April 23, 2002, the Company entered into
new unsecured revolving credit facility agreements totaling $575 million with a
group of banks. Half of the total amount of these agreements is available to
the Company for three renewable one-year terms from April 23, 2002. The other
half is available to the Company for a full three-year term. The Company's
previous $475 million revolving credit facility, which was fully repaid in
March 2002 (See Note 8 to the financial statements) was simultaneously
cancelled on April 23, 2002. The Company will also consider various borrowing
or leasing options to maximize earnings and supplement cash requirements.
The Company has outstanding shelf registrations for the issuance of an
additional $319 million in public debt securities and pass through
certificates, which the Company could utilize to finance aircraft during 2002
and 2003.
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, 2001
and Note 5 to the unaudited condensed consolidated financial statements.
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 of which, 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 that 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.
Item 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
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 15, 2002. The following matters were voted on at the meeting:
(i) The following nominees were elected to the Company's Board of Directors to
hold office for a term expiring in 2005: Colleen C. Barrett: 601,533,131
shares voted for and 14,246,599 shares withheld; Rollin W. King: 529,654,941
shares voted for and 86,124,789 shares withheld; John T. Montford: 607,002,340
shares voted for and 8,777,390 shares withheld; James F. Parker: 603,174,164
shares voted for and 12,605,566 shares withheld. There were no broker
non-votes on this matter.
Additionally, the following current directors of the Company continued to serve
as directors as of the Annual Meeting: C. Webb Crockett, William H. Cunningham,
William P. Hobby, Travis C. Johnson, Herbert D. Kelleher, and June M. Morris.
(ii) A shareholder proposal related to shareholder right to vote on the
Company's shareholder rights plan was considered. A total of 277,253,544 shares
were voted for the proposal, 207,027,334 shares were voted against the proposal
and 5,802,103 shares abstained from voting. There were 125,696,749 broker non-
votes on this matter.
(iii) A shareholder proposal related to annual election of directors was
considered. A total of 286,680,016 shares were voted for the proposal,
197,831,512 shares were voted against the proposal and 5,571,453 shares
abstained from voting. There were 125,696,749 broker non-votes on this matter.
(iv) A shareholder proposal related to confidential shareholder voting was
considered. A total of 299,933,350 shares were voted for the proposal,
184,393,867 shares were voted against the proposal and 5,755,764 shares
abstained from voting. There were 125,696,749 broker non-votes on this matter.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
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.
July 26, 2002 By /s/ Gary C. Kelly
Gary C. Kelly
Executive Vice President -
Chief Financial Officer
(Principal Financial and
Accounting Officer)