Southwest Airlines 2008 Annual Report Download - page 40

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Although the Company’s 2008 net income of
$178 million ($.24 per share, diluted) declined
compared to 2007 net income of $645 million ($.84
per share, diluted), much of the decline was driven by
a fluctuation in certain gains and losses, recorded in
accordance with SFAS 133, that relate to fuel
derivatives expiring in future periods. These
instruments contributed net losses totaling $19
million in 2008, but had resulted in net gains totaling
$360 million for 2007. Operating income for 2008
was $449 million, a 43.2 percent decrease compared
to 2007. The lower 2008 operating income primarily
was due to the 35.6 percent increase in the
Company’s average fuel cost per gallon, including
hedging, which counteracted an 11.8 percent increase
in operating revenues.
Looking ahead to 2009, the Company remains
cautious about demand for air travel given current
domestic economic conditions. However, the rapid
decline in fuel prices combined with the announced
cutbacks in domestic capacity by major U.S. airlines,
have thus far mitigated much of the impact of fewer
people flying. The Company expects its net available
seat mile (ASM) capacity in first quarter 2009 to be
approximately four to five percent lower than first
quarter 2008. However, at this same time, competitors
have reduced their seats by approximately 15 percent in
certain markets where they compete with the Company.
The Company has announced it will start service to
Minneapolis-St. Paul, Minnesota, beginning in March
2009, representing the 65th city and 33rd state to which
the Company flies. In addition, the Company has
received initial approval to acquire 14 take-off and
landing slots at New York’s LaGuardia airport from the
former ATA Airlines, Inc., which filed for bankruptcy
protection in April 2008. Pending final approval by the
bankruptcy court and closing of the transaction, which
is currently expected to be in March 2009, the Company
could begin flying up to seven daily roundtrips to
LaGuardia as early as summer 2009.
The Company also announced its intention to
enter into codeshare agreements with two different
airlines — Canadian carrier WestJet and Mexican
carrier Volaris. The Company and WestJet plan to
announce codeshare flight schedules and additional
features regarding the relationship by late 2009. The
Company and Volaris plan to announce codeshare
flight schedules and additional features regarding the
relationship by early 2010. Certain details of these
alliances are subject to approvals by both the U.S.
and Canadian/Mexican governments. The Company
is also continuing to consider codeshare opportunities
with other carriers, both domestic and international.
For the year 2009, the Company currently plans to
reduce its fleet by a net two aircraft. The Company
plans to add 13 new 737-700 aircraft from Boeing, and
plans to return from lease or retire a total of fifteen
aircraft. Based on current plans, the Company’s fleet is
scheduled to total 535 737s by the end of 2009.
Results of Operations
2008 compared with 2007
The Company’s net income of $178 million
($.24 per share, diluted) in 2008 represented a
decrease of $467 million, or 72.4 percent, compared
to its 2007 net income of $645 million ($.84 per
share, diluted). The majority of the decline in net
income was due to the fluctuation of certain gains
and losses, recorded in accordance with SFAS 133.
These included adjustments impacting earnings
through the recording of gains and/or losses in 2008
and 2007 associated with fuel derivatives expiring in
future periods, and settlement/expiration of fuel
derivative instruments for cash in 2008 or 2007, but
for which gains and/or losses had been recorded in
earnings in a prior period. See Note 10 to the
Consolidated Financial Statements for further
information. Both of these types of adjustments are
related to the ineffectiveness of hedges and the loss
of hedge accounting for certain fuel derivatives.
Adjustments associated with fuel derivative
instruments and SFAS 133 included $19 million in
net losses for 2008, and $360 million in net gains for
2007. These are included in “Other (gains) losses,
net,” which is below the operating income line, in
both periods. Due to the fact that items associated
with SFAS 133 have resulted in large adjustments to
“Other (gains) losses, net,” the Company believes
operating income provides a better indication of the
Company’s financial performance for both 2008 and
2007 than does net income. The Company’s 2008
operating income was $449 million, a decrease of
$342 million, or 43.2 percent, compared to 2007. The
majority of this decrease in 2008 was due to the
substantial increase in fuel expense, despite the fact
that the Company once again benefited tremendously
from its fuel hedging program. Entering 2008, the
Company had instruments in place for over 75
percent of its anticipated fuel consumption needs at
an average crude oil equivalent price of $51 per
21