Southwest Airlines 2008 Annual Report Download - page 47

Company’s fuel hedging program. The remainder of the
increase was due to higher maintenance expense. All
other operating expense categories combined to be
approximately flat compared to 2006. Due to higher fuel
prices, the Company intensified its focus on controlling
non-fuel costs and continued to mitigate wage rate and
benefit cost pressures through productivity and
efficiency improvements. The Company’s headcount
per aircraft at December 31, 2007, was 66, versus a
December 31, 2006 level of 68. From the end of 2003 to
the end of 2007, the Company’s headcount per aircraft
decreased 22 percent, as it implemented various
technology improvements, which improved efficiency
and enabled the Company to grow capacity without a
commensurate increase in headcount.
On an absolute dollar basis, Salaries, wages, and
benefits increased $161 million, primarily from a
$204 million increase in salaries and wages, partially
offset by a $43 million decrease in benefits. The
dollar increase in salaries and wages primarily was
due to a 5.2 percent headcount increase, and the
dollar decrease in benefits primarily was due to a $33
million decrease in profitsharing, attributable to
lower income available for profitsharing, and a $43
million decrease in share-based compensation, due to
fewer Employee stock options becoming vested
during 2007 versus 2006. These benefits decreases
were partially offset by higher healthcare costs.
Although the Company’s net income was higher than
2006, income available for profitsharing was lower,
since the Company’s profitsharing plan does not
consider the unrealized gains and/or losses the
Company records in its fuel hedging program as a
result of SFAS 133. Salaries, wages, and benefits
expense per ASM decreased 2.1 percent compared to
2006, primarily due to lower profitsharing expense
and lower share-based compensation expense, despite
the increase in ASMs. See Note 10 to the
Consolidated Financial Statements for further
information on SFAS 133 and fuel hedging, and Note
14 for further information on share-based
compensation.
Fuel and oil expense increased $406 million,
and on a per-ASM basis increased 9.3 percent versus
2006. Approximately 55 percent of the dollar
increase was due to an increase in fuel prices, and the
remainder was from an increase in gallons consumed
to support the 7.5 percent capacity increase versus
2006. On a per-ASM basis, nearly the entire increase
was due to higher fuel prices. The fuel derivative
instruments the Company held for 2007 were not as
favorable as those held in the prior year, as they were
at higher average crude-oil equivalent prices than the
instruments that settled/expired in 2006. Despite this,
the Company’s hedging program resulted in the
realization of $727 million in cash settlements during
2007. These settlements generated a 2007 reduction
to Fuel and oil expense of $686 million, compared to
the prior year when the Company’s fuel derivative
instruments resulted in a $634 million reduction to
Fuel and oil expense. Even with these significant
hedge positions in both years, the Company’s jet fuel
cost per gallon increased 9.8 percent versus 2006.
The average cost per gallon of jet fuel in 2007 was
$1.80 compared to $1.64 in 2006, including fuel-
related taxes and net of hedging gains. See Note 10 to
the Consolidated Financial Statements. The 2007
increase in fuel prices was partially offset by steps
the Company has taken to improve the fuel efficiency
of its aircraft, including the addition of blended
winglets to all of the Company’s 737-700 aircraft and
a significant number of its 737-300 aircraft.
Maintenance materials and repairs per ASM
increased 21.6 percent compared to 2006, while
increasing $148 million on a dollar basis. On a dollar
basis, engine expense accounted for over 45 percent
of the increase and airframe expense accounted for
over 43 percent of the increase. With respect to
airframe expense, the Company completed
significantly more planned airframe inspection and
repair events than in 2006. These events, which are
required based on the number of flight hours each
individual aircraft has flown, were higher in number
as well as cost per event, and were also due to the
ongoing transition to a new airframe maintenance
program for 737-300 and 737-500 aircraft which
began in 2006. In engine expense, there was a
significant increase in repairs for the Company’s
737-700 aircraft engines primarily due to the
maturation of this fleet, which was introduced in
1997, and more repair events than expected. On a
per-ASM basis, approximately 48 percent of the
increase in maintenance materials and repairs was a
result of the higher airframe expense, and
approximately 43 percent of the increase was due to
the higher engine expense.
Aircraft rentals expense per ASM decreased 5.9
percent and, on a dollar basis, decreased slightly. The
decrease per ASM primarily was due to the fact that
the Company increased overall ASMs by 7.5 percent,
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