Southwest Airlines 2008 Annual Report Download - page 41

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barrel. Even with this protection, however, the
Company’s average jet fuel cost per gallon increased
from $1.80 in 2007 to $2.44 in 2008.
Operating Revenues
Consolidated operating revenues increased $1.2
billion, or 11.8 percent, primarily due to a $1.1 billion,
or 11.5 percent, increase in passenger revenues. Despite
carrying approximately the same number of passengers
as 2007, the Company was able to generate an 11.8
percent increase in average fares. The Company raised
fares several times during 2008 in an attempt to keep up
with rapidly increasing jet fuel prices. This strategy was
aided by the Company’s own slowdown in growth as
well as significant capacity reductions by competitors in
certain of the Company’s markets. The Company
purchased a total of 26 new Boeing 737-700 aircraft
during 2008, and returned nine 737-300s from lease,
resulting in the net addition of 17 aircraft for the year.
This fleet growth enabled the Company to fly 3.6
percent more ASMs in 2008 versus the prior year.
However, as a result of higher fares and general
economic conditions, revenue passenger miles (RPMs)
increased only 1.6 percent, resulting in a load factor
decrease of 1.4 points to 71.2 percent. As a result of the
Company’s management of fares, passenger revenue
yield per RPM (passenger revenues divided by RPMs)
increased 9.7 percent compared to 2007. Unit revenue
(operating revenues divided by ASMs) also increased
7.8 percent compared to 2007 levels, primarily as a
result of the higher RPM yield. Based on weak
economic conditions, which are expected to persist at
least in the short term, the Company had previously
made the decision to further reduce its future capacity.
The Company expects a four to five percent reduction in
ASMs in first quarter 2009 compared to first quarter
2008 and approximately a four percent year-over-year
decline in ASMs for full year 2009. Although recent
unit revenue trends continue to be above prior year
levels, there is no assurance this trend will continue.
Because of the uncertainty surrounding the nation’s
overall economy, it is difficult for the Company to
precisely predict first quarter 2009 revenues.
Consolidated freight revenues increased $15
million, or 11.5 percent, versus 2007. This increase
primarily was due to higher rates charged for cargo
and freight during 2008. The Company currently
expects a slight increase in consolidated freight
revenues during first quarter 2009 versus first quarter
2008, primarily due to higher rates charged. “Other
revenues” increased $55 million, or 20.1 percent,
compared to 2007. Approximately half of the
increase was due to an increase in charter revenues
versus 2007 as the Company flew charters that were
not operated by competitors due to capacity
reductions and/or bankruptcy. The majority of the
remainder of the increase was from higher
commissions earned from programs the Company
sponsors with certain business partners, such as the
Company sponsored Chase®Visa card. The
Company currently expects a slight year-over-year
decrease in first quarter 2009 “Other revenues”
compared to first quarter 2008 primarily due to lower
expected charter revenues.
Operating Expenses
Consolidated operating expenses for 2008 increased $1.5 billion, or 16.6 percent, compared to a 3.6 percent
increase in capacity. Historically, except for changes in the price of fuel, changes in operating expenses for
airlines are typically driven by changes in capacity, or ASMs. The following presents the Company’s operating
expenses per ASM for 2008 and 2007 followed by explanations of these changes on a per-ASM basis and/or on a
dollar basis (in cents, except for percentages):
2008 2007
Increase
(decrease)
Percent
change
Salaries, wages, and benefits ........................... 3.23¢ 3.22¢ .01¢ .3%
Fuel and oil ......................................... 3.60 2.70 .90 33.3
Maintenance materials and repairs ....................... .70 .62 .08 12.9
Aircraft rentals ...................................... .15 .16 (.01) (6.3)
Landing fees and other rentals .......................... .64 .56 .08 14.3
Depreciation and amortization .......................... .58 .56 .02 3.6
Other .............................................. 1.34 1.28 .06 4.7
Total ............................................ 10.24¢ 9.10¢ 1.14¢ 12.5%
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