Southwest Airlines 1997 Annual Report Download - page 27

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27
SOUTHWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM
segment tax will increase to $2.00. Beginning October 1, 1999, the tax rate will change
to 7.5 percent of the ticket price. The segment tax will increase to $2.25 from October
1, 1999 to December 31, 1999; $2.50 during 2000; $2.75 during 2001; and $3.00 per
segment during 2002. Thereafter, the $3.00 segment tax will be indexed to changes in
the Consumer Price Index (CPI). The legislation also included a new tax on the sale of
frequent flyer miles, raised the international departure fee, and instituted a new
international arrival fee.
Management estimates these changes may increase Southwest’s tax burden by
roughly $30 million in 1998 as the effect of the new tax is to shift an increasing portion
of the excise tax burden to low fare, shorthaul carriers such as Southwest. Effective
October 1, 1997, the Company raised fares to offset the increased excise taxes. While
the fare increases mitigated the additional tax burden in fourth quarter 1997,
management cannot accurately predict the future effects of tax or fare increases. (This
paragraph contains forward-looking statements which involve uncertainties that could
result in actual results differing materially from expected results. Some significant
factors include, but may not be limited to, regulations implementing the tax,
competitors’ responses to the tax, and the ability to pass through the tax in the form of
fare increases.)
On October 27, 1997, the International Air Transportation Competition Act of 1979
was amended to allow scheduled service from Dallas Love Field to Alabama,
Mississippi, and Kansas. The Company now offers scheduled service from Dallas Love
Field to Jackson via connecting flights through Houston and service from Dallas Love
Field to Birmingham via connecting flights through New Orleans and Houston. No
additional flights have been added, thus far, from Dallas Love Field to Alabama,
Mississippi, or Kansas.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996 The Company’s consolidated net income for 1997 was
$317.8 million ($1.40 per share, diluted), as compared to the corresponding 1996
amount of $207.3 million ($.92 per share, diluted), an increase of 53.3 percent. The
prior years’ earnings per share amounts have been restated for the 1997 three-for-two
stock split (see Note 6 to the Consolidated Financial Statements).
OPERATING REVENUES Consolidated operating revenues increased by 12.1
percent in 1997 to $3,816.8 million, compared to $3,406.2 million for 1996. This
increase in 1997 operating revenues was derived primarily from an 11.3 percent
increase in passenger revenues as a result of a 4.7 percent increase in revenue
passenger miles (RPMs) and a 6.4 percent increase in passenger revenue yield per
RPM. Southwest’s passenger revenues benefited from a strong U.S. economy, strong
demand for air travel, increased fares, and a favorable mix of higher yielding fares.
The 4.7 percent increase in RPMs in 1997, coupled with a 9.2 percent increase in
available seat miles (ASMs), resulted in a decrease in load factor from 66.5 percent in
1996 to 63.7 percent in 1997. The decrease in load factor was primarily the result of
less promotional fare activity in 1997. The 1997 ASM growth resulted from the addition
of 18 aircraft during the year.