Southwest Airlines 2009 Annual Report Download - page 39

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included in “Other (gains) losses, net,” which is below the operating income line, in both periods. Due to the fact
that the fluctuation in value of the Company’s hedge portfolio has 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 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 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.
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. “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.
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 largely 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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