Southwest Airlines 2011 Annual Report Download - page 52

Download and view the complete annual report

Please find page 52 of the 2011 Southwest Airlines annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 141

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141

basis, the Company’s 2011 net income was $330 million ($.43 per share, diluted), which was below the
Company’s 2010 net income of $550 million ($.74 per share, diluted), on a non-GAAP basis. Operating income
for 2011 was $693 million, which was a 29.9 percent decrease versus 2010. On a non-GAAP basis, the
Company’s 2011 operating income was $839 million, or 28.1 percent lower than 2010. See the previous Note
Regarding the Use of Non-GAAP Financial Measures. The decline in both net income and operating income, on
both a GAAP and a non-GAAP basis, primarily was attributable to higher fuel costs. In fact, a 33.5 percent
increase in the Company’s economic jet fuel cost per gallon compared to 2010 drove the majority of an over $2
billion year-over-year increase in economic Fuel and oil expense. However, the Company was able to combat the
persistently high fuel costs by generating a 29.4 percent increase in operating revenues, thus enabling the
Company to remain profitable. As discussed in Note 2 to the Consolidated Financial Statements, for GAAP
reporting, the accompanying results of operations and cash flows contain AirTran’s results beginning as of the
date of the acquisition, while the prior year includes only the results of Southwest for all periods presented. In
certain discussions that follow, primarily those involving forward-looking information used in the projection of
future results, the Company has chosen to make comparisons to prior year “combined” results or measures in
order to provide more meaningful information since all future results for Southwest will include AirTran results.
Prior year combined results consist of the combination of Southwest and AirTran stand-alone results, without any
retrospective application of acquisition-related accounting adjustments.
The Company focused a significant amount of its efforts during 2011 on various revenue improvement
initiatives. The Company’s major strategic initiatives include:
• The acquisition and integration of AirTran in order to grow the Company’s network, gain access to key
markets, and gain synergies through optimization of the combined carriers’ operations;
• Implementation of Southwest’s All-New Rapid Rewards frequent flyer program, which took place in
first quarter 2011 and which has exceeded the Company’s expectations with respect to the number of
frequent flyer members added, the amount spent per member on airfare, the number of flights taken by
members, the number of Southwest’s co-branded Chase Visa credit card holders added, and the number
of frequent flyer points purchased by program members;
• The addition of a larger aircraft, the Boeing 737-800, to Southwest’s fleet, which is scheduled to begin
in first quarter 2012 and is expected to allow the Company to profitably expand to new destinations,
including near-international locations, generate additional revenue by replacing current aircraft on
specified routes and locations that are restricted due to space constraints or slot controls, and operate at
a lower seat mile cost;
• Acceleration of the Company’s fleet modernization efforts. The Company announced in December
2011, that it will be the first airline to accept delivery of Boeing’s new, more fuel-efficient 737-MAX,
which is expected to enter service in 2017. In connection with its fleet modernization program, the
Company placed orders for a total of 150 Boeing 737-MAX aircraft and added a total of 58 Boeing
737NG aircraft to its existing firm order book. The 737-MAX is expected to reduce CO2 emissions and
improve fuel burn by an additional 10 to 11 percent over today’s most fuel-efficient, single-aisle
airplane. In January 2012, the Company also announced plans to retrofit its 737-700 fleet with an
updated cabin interior. Evolve: The New Southwest Experience is intended to enhance Customer
comfort, personal space, and the overall travel experience, while improving fleet efficiency and being
environmentally responsible. By maximizing the space inside the plane, Evolve allows for the added
benefit of six additional seats on each 737-700 aircraft, along with more climate-friendly and cost-
effective materials. These retrofits for Southwest 737-700 aircraft are expected to begin in March 2012
and to be completed in 2013. The Company plans to retrofit the AirTran current fleet of 737-700s as
such aircraft are converted to the Southwest livery beginning in 2012.
• Evaluation of short-term and long-term options to eventually replace Southwest’s reservation system,
which is currently limited to domestic service. This will allow the Company to add international
destinations, as well as other important Customer Service automations and functionality.
46