Southwest Airlines 2000 Annual Report Download - page 23

OPERATING EXPENSES Consolidated operating
expenses increased 13.6 percent, compared to the 11.2
percent increase in capacity. Operating expenses per ASM
increased 2.2 percent in 1999 primarily due to a 15.4 percent
increase in average jet fuel prices. Excluding fuel expense,
operating expenses per ASM for 1999 increased .8 percent.
Salaries, wages, and benefits per ASM increased 1.7
percent in 1999. This increase resulted primarily from
increases in benefits costs, specifically workers’
compensation and health care expense.
Employee retirement plans expense per ASM increased
slightly due to higher earnings available for profitsharing.
Fuel and oil expenses per ASM increased 13.4 percent
primarily due to a 15.4 percent increase in the average jet
fuel cost per gallon. The average price paid for jet fuel in
1999 was $.5271, including the effects of hedging activities,
compared to $.4567 in 1998. The Company’s 1999 average
jet fuel price is net of approximately $14.8 million in gains
from hedging activities. Hedging activities in 1998 were not
significant.
Maintenance materials and repairs expense per ASM
increased 9.4 percent in 1999 compared to 1998. Routine
heavy maintenance or airframe inspections and repairs
represented approximately 74 percent of the increase, while
engine inspection and repair costs represented
approximately 25 percent of the increase. The increase in
airframe inspections and repairs was due primarily to a
heavier volume of routine airframe checks scheduled for
1999 versus 1998. Further, a portion of the Company’s
scheduled airframe checks was outsourced in 1999 as the
volume of work exceeded the available internal headcount
and facilities necessary to perform such maintenance. In
1998, the Company performed all of this type of routine
heavy maintenance internally; thus, the majority of these
costs were reflected in salaries and wages. The increases in
engine inspection and repair costs were primarily related to
the Company’s 737-200 aircraft. The Company’s 737-200
aircraft engine inspections and repairs are performed on a
time and materials basis and are not covered by the
Company’s power-by-the-hour engine maintenance contract
with General Electric Engine Services, Inc. The 737-200
aircraft experienced an increase both in the number of
engine inspections and repairs and the average cost per
repair.
Agency commissions per ASM decreased 9.1 percent
primarily due to a decrease in the percentage of
commissionable revenues to 34.8 percent of total revenues
in 1999 compared to 39.8 percent in 1998. The decrease in
percentage of commissionable revenues was primarily due to
the growth in tickets purchased via the Company’s website
from approximately 8 percent in 1998 to approximately 19
percent in 1999.
Aircraft rentals per ASM decreased 11.6 percent primarily
due to a lower percentage of the aircraft fleet being leased.
Approximately 30.8 percent of the Company’s aircraft fleet
were under operating lease at December 31, 1999,
compared to 35.4 percent at December 31, 1998.
Depreciation expense per ASM was flat for 1999 compared
to 1998. Although the Company owned a higher percentage
of its aircraft fleet in 1999 versus 1998, unit cost was flat due
to a change in the estimated useful lives of the Company’s
Boeing 737-300/-500 aircraft from 20 years to 23 years. See
Note 2 to the Consolidated Financial Statements. This
change in accounting estimate was made January 1, 1999,
and resulted in a decrease to depreciation expense of
approximately $25.7 million for 1999.
Other operating expenses per ASM increased .7 percent
primarily due to increased credit card processing costs
resulting from a higher percentage of the Company’s ticket
sales purchased with credit cards.
OTHER “Other expenses (income)” included interest
expense, capitalized interest, interest income, and other
gains and losses. Interest expense decreased 3.8 percent
primarily due to the February 1998 redemption of $100
million of senior unsecured 9 1/4% Notes originally issued in
February 1991. Capitalized interest increased 22.2 percent
as a result of higher progress payment balances for
scheduled future aircraft deliveries. Interest income
decreased 18.9 percent primarily due to lower invested cash
balances. Other losses in 1999 resulted primarily from a
write-down associated with the consolidation of certain
software development projects. Other gains in 1998 primarily
consisted of contractual penalties received from Boeing due
to delays in the delivery of 737-700 aircraft.
INCOME TAXES The provision for income taxes, as a
percentage of income before taxes, increased slightly to
38.68 percent in 1999 from 38.53 percent in 1998.
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