Southwest Airlines 2008 Annual Report Download - page 46

performance for both 2007 and 2006 than does net
income. The Company’s 2007 operating income was
$791 million, a decrease of $143 million, or 15.3
percent, compared to 2006. The decrease in operating
income primarily was driven by a substantial increase
in fuel expense, despite the fact that the Company
once again benefited tremendously from its fuel
hedging program. The Company had instruments in
place to protect against over 90 percent of its fuel
consumption needs at an average crude oil equivalent
price of $50 per barrel. This resulted in a $686
million reduction to Fuel and oil expense during
2007, although, even with this protection, the
Company’s average jet fuel cost per gallon, including
fuel-related taxes, increased from $1.64 in 2006 to
$1.80 in 2007. Although fuel prices began 2007 at
moderately high levels, they quickly increased and
stayed at record levels throughout most of the second
half of the year. Market crude oil prices flirted with
$100 per barrel several times during 2007 and market
(unhedged) jet fuel prices reached higher than $2.85
per gallon during the second half of the year.
Operating Revenues
Consolidated operating revenues increased $775
million, or 8.5 percent, primarily due to a $707
million, or 8.1 percent, increase in passenger
revenues. The increase in passenger revenues
primarily was due to an increase in capacity, as the
Company added aircraft and flights, resulting in a 7.5
percent increase in available seat miles compared to
2006. The Company purchased a total of 37 new
Boeing 737-700 aircraft during 2007, and added
another two leased 737-700s from a previous owner,
resulting in the addition of 39 aircraft for the year.
The Company attempted to combat high fuel prices
through modest fare increases. However, general
economic conditions as well as significant low-fare
competition made it difficult to raise fares as much as
the Company had done in 2006. The Company’s
passenger revenue yield per RPM (passenger
revenues divided by revenue passenger miles)
increased 1.2 percent compared to 2006. Unit
revenue (total revenue divided by available seat
miles) also increased 0.9 percent compared to 2006
levels, as a result of the higher RPM yield.
Consolidated freight revenues decreased $4
million, or 3.0 percent, versus 2006. A $10 million, or
8.5 percent, increase in freight revenues, primarily
resulting from higher rates, was more than offset by a
$14 million decline in mail revenues. The lower mail
revenues were due to the Company’s decision to
discontinue carrying mail for the U.S. Postal Service
effective as of the end of second quarter 2006. “Other
revenues” increased $72 million, or 35.6 percent,
compared to 2006, primarily from higher commissions
earned from programs the Company sponsors with
certain business partners, such as the Company
sponsored Chase®Visa card.
Operating Expenses
Consolidated operating expenses for 2007 increased $918 million, or 11.3 percent, compared to a 7.5
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 2007 and 2006 followed by explanations of these changes on a per-ASM basis
and/or on a dollar basis (in cents, except for percentages):
2007 2006
Increase
(Decrease)
Percent
Change
Salaries, wages, and benefits ............................................ 3.22¢ 3.29¢ (.07)¢ (2.1)%
Fuel and oil ......................................................... 2.70 2.47 .23 9.3
Maintenance materials and repairs ........................................ .62 .51 .11 21.6
Aircraft rentals ....................................................... .16 .17 (.01) (5.9)
Landing fees and other rentals ........................................... .56 .53 .03 5.7
Depreciation and amortization ........................................... .56 .56 — —
Other .............................................................. 1.28 1.27 .01 0.8
Total ............................................................. 9.10¢ 8.80¢ .30¢ 3.4%
The Company’s 2007 CASM (cost per available
seat mile) increased 3.4 percent compared to 2006.
Approximately 80 percent of this increase was due to
the increase in fuel expense, net of gains from the
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