Southwest Airlines 2002 Annual Report Download - page 32

SOUTHWEST AIRLINES CO. 2002 10-K | 13
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of
Operations
Year in Review
In 2002, Southwest posted a profit for the 30th
consecutive year. While the Company’s 2002
profitability fell short of our historical standards,
this performance was remarkable given that the
major airlines collectively reported losses in the
billions of dollars. From a financial perspective,
2002 was the worst year, ever, in the history of
commercial aviation. It was a year that included
dramatic increases in aviation insurance costs,
increased passenger security costs resulting from
continually evolving security laws and directives,
airline industry downsizing, rising energy prices,
and a recessionary airline revenue environment.
However, the Company’s business strategy —
predominantly shorthaul, high frequency, low-fare,
point-to-point, high-quality Customer Service, low
costs — continued to serve Southwest well
throughout the year. The Company has been able
to combat many of these higher exogenous costs
by lowering distribution costs and implementing
other cost reduction measures. Throughout the
difficult period beginning with the September 11,
2001, terrorist attacks the Company has been
profitable every quarter.
During 2002, Southwest successfully met the
challenge of dramatic changes in airport security.
Initially, these security changes dramatically
altered airport checkin procedures resulting in
longer checkin times for Customers. The
Company invested in additional airport facilities
and new technology, changed processes, and
added Employees. These actions, at most
airports, restored checkin times to normal
durations. Specific changes to the way Custom-
ers and baggage are processed included the
implementation of computer-generated baggage
tags to electronically track bags checked by
Customers, computer-generated boarding passes
from multiple points in the airport, and the
installation of self-service RAPID CHECK-IN Kiosks
at airports. Although the Transportation Security
Administration has successfully assumed
responsibility for passenger and baggage
screening and has complied with all federal
security mandates as required by the Aviation
and Transportation Security Act, the Company is
currently unable to predict what impact future
mandates, if any, will have on the Company’s
ongoing operations and future financial
performance.
Although the Company did not open any new
cities in 2002, it did improve its quality of service
between cities already served and added 23 new
737-700 aircraft to facilitate this growth. These
additions, along with the retirement of three
older 737-200 aircraft, resulted in a net capacity
increase of 5.5 percent and brought the
Company’s all-737 fleet to 375 aircraft at the end
of 2002. The Company ended 2002 serving
59 airports in 30 states.
Available seat mile (ASM) capacity is expected
to grow approximately four percent in 2003 with
the planned net addition of 11 aircraft. The
Company currently has 17 new Boeing 737-700s
scheduled for delivery during the year and plans
to retire six of the Company’s older 737-200s.
Results of Operations
2002 Compared with 2001. The Company’s
consolidated net income for 2002 was
$241.0 million ($.30 per share, diluted), as
compared to 2001 net income of $511.1 million
($.63 per share, diluted), a decrease of
$270.1 million or 52.9 percent. Operating income
for 2002 was $417.3 million, a decrease of
$213.8 million, or 33.9 percent compared to
2001.
Consolidated results for 2002 and 2001
included $48 million and $235 million, respec-
tively, in gains that the Company recognized from
grants under the Air Transportation Safety and
System Stabilization Act (Air Stabilization Act).
Consolidated results for 2002 also included
$36 million in additional passenger revenue from
a reduction in estimated refunds and exchanges,
contributing to an increase in forfeited tickets
included in “Air traffic liability.” Consolidated