Southwest Airlines 1994 Annual Report Download - page 21

Management's Discussion and Analysis of Financial Condition and Results of Operations
Southwest Airlines – 1994 Annual Report Page 21
OPERATING EXPENSES Consolidated operating expenses increased 24.6 percent to $2,004.7 million from
$1,609.2 million in 1992. The primary factors contributing to the increase were the 28.8 percent increase
in ASMs; increased contributions to profitsharing and Employee savings plans; higher agency
commissions; higher aircraft rentals; and increased maintenance costs.
On a consolidated basis, the Company incurred $10.8 million of one-time merger expenses in connection
with the December 1993 Morris acquisition. These expenses included $1.9 million of various professional
fees; $4.7 million for disposal of duplicate or incompatible property and equipment; and $4.2 million for
Employee relocation and severance costs related to elimination of duplicate or incompatible operations. As
required for financial reporting purposes, these expenses have been reported as operating expenses.
Salaries, wages, and benefits per ASM decreased 2.3 percent in 1993. Excluding the effects of Morris,
Southwest's cost per ASM for salaries, wages, and benefits increased .9 percent from 1992 to 1993. This
increase resulted from a 2.2 percent increase in salaries and wages, offset by a 5.0 percent decrease in
health benefit and workers' compensation costs per ASM. Headcount for Southwest increased 17.0 percent
in 1993, slightly more than the 15.9 percent increase in ASMs. However, Employee productivity improved
to 2,633 passengers handled per Employee in 1993 from 2,597 in 1992.
Morris contracted out all ground handling services, which are included in “ other operating expenses.”
Consequently, salaries, wages, and benefits on a per-ASM basis are considerably lower for Morris than for
Southwest contributing to the decrease in consolidated salaries, wages, and benefits per ASM.
Profitsharing and Employee savings plan expenses per ASM increased 16.7 percent in 1993. The increase
was primarily the result of higher earnings in 1993. For additional information, see Note 10 to the
Consolidated Financial Statements.
Fuel and oil expenses per ASM decreased 2.6 percent in 1993 due to a 2.7 percent reduction in the
average cost per gallon of jet fuel from 1992. Jet fuel prices remained relatively stable throughout 1993,
continuing the trend which began in 1992, with quarterly averages ranging from $0.57 to $0.63 per
gallon.
Maintenance materials and repairs per ASM increased 5.4 percent in 1993. This increase was primarily
the result of higher airframe component repairs and higher amortization of capitalized scheduled airframe
overhauls.
Agency commissions per ASM increased 6.0 percent in 1993 primarily due to increased passenger
revenues per ASM.
Aircraft rentals per ASM increased 30.0 percent in 1993. The increase was primarily attributable to the
expansion of Morris scheduled operations, which leased 18 of its 21 aircraft, 11 of which were leased in
1993. Additionally, the increase partially resulted from the sale/leaseback financing by Southwest, since
late 1992, of seven 737-300 aircraft with long-term operating leases. Also in 1993, Southwest leased one
used 737-300 aircraft under a long-term operating lease and one used 737-200 aircraft under a short-term
operating lease.
Depreciation expense per ASM decreased 8.5 percent in 1993 due to the expansion of Morris, which, as
stated above, consisted primarily of a leased aircraft fleet.
Other operating expenses per ASM increased 13.8 percent from 1992 to 1993. This increase is primarily
the result of higher usage of contract services at Morris. As previously discussed, Morris contracted for all
ground handling service, along with various other services that are handled internally at Southwest.