Southwest Airlines 2002 Annual Report Download - page 36

SOUTHWEST AIRLINES CO. 2002 10-K | 17
of its anticipated fuel consumption in 2003,
including all of its anticipated requirements for
first quarter 2003. Considering current market
prices and the continued effectiveness of the
Company’s fuel hedges, the Company is fore-
casting first quarter 2003 average fuel cost per
gallon to be in the $.70 to $.75 range. The
majority of the Company’s near term hedge
positions are in the form of option contracts,
which protect the Company in the event of rising
jet fuel prices. The Company should also benefit,
to a large extent, in the event of a decline in jet
fuel prices.
Maintenance materials and repairs per ASM
decreased 6.6 percent. This decrease was
primarily due to a decrease in airframe expense
resulting from fewer outsourced heavy
maintenance events versus 2001. More heavy
maintenance events were performed internally in
2002, resulting in the costs associated with
those events being reflected in salaries and
wages. Currently, the Company expects an
increase in maintenance materials and repairs
expense per ASM in first quarter and full year
2003, versus 2002, due to an increase in
contract rates from outside vendors as well as
the number of engine inspections and repairs
scheduled. The majority of the Company’s engine
maintenance work is outsourced.
Agency commissions per ASM decreased
50.0 percent, primarily due to a change in the
Company’s commission rate policy. Effective
October 15, 2001, the Company reduced the
commission paid to travel agents from eight
percent for Ticketless bookings and five percent
for paper ticket bookings, to five percent (with
no cap), regardless of the type of ticket sold.
In addition, the mix of tickets sold through
travel agents declined from 25 percent in 2001 to
20 percent in 2002, thereby reducing commis-
sionable revenues and commission expense.
Aircraft rentals per ASM decreased 6.9 percent
primarily due to a lower percentage of the aircraft
fleet being leased. Approximately 24.0 percent of
the Company’s aircraft were under operating
lease at December 31, 2002, compared to
25.9 percent at December 31, 2001. Based on
the Company’s current new aircraft delivery
schedule, scheduled aircraft retirements for
2003, and financing plans, the Company expects
a decline in aircraft rental expense per ASM i n
2003, including the first quarter.
Landing fees and other rentals per ASM
increased 4.2 percent primarily as a result of
airport rate increases throughout the Company’s
system. Moreover, following the terrorist attacks,
most other major airlines reduced their flight
schedules due to the drop in air travel. Since
Southwest did not reduce its flights, the Company
incurred higher airport costs based on a greater
relative share of total flights and passengers.
Depreciation expense per ASM increased
6.1 percent primarily due to growth in the
Company’s owned aircraft fleet. The Company
received delivery of 23 new 737-700 aircraft
during 2002, all of which were purchased.
Other operating expenses per ASM decreased
1.3 percent despite a per-ASM increase of more
than 175 percent in aviation insurance costs.
(The insurance cost increases were more than
offset through various cost control measures
implemented immediately following the prior year
terrorist attacks, including reductions in
personnel-related expenses and office expenses;
excluding insurance expense, other operating
expenses per ASM decreased 8.5 percent).
Following the terrorist attacks, commercial
aviation insurers significantly increased the
premiums and reduced the amount of war-risk
coverage available to commercial carriers. The
federal government then stepped in to provide
supplemental third-party war-risk insurance
coverage to commercial carriers, for renewable
60-day periods, at substantially lower premiums
than prevailing commercial rates during 2002
and for levels of coverage not available in the
commercial market. In November 2002, Congress
passed the Homeland Security Act of 2002,
which mandated the federal government provide
third-party, passenger, and hull war-risk insurance
coverage to commercial carriers through
August 31, 2003, and which permits such
coverage to be extended by the government
through December 31, 2003. The Company is