Southwest Airlines 2002 Annual Report Download - page 37

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18 | SOUTHWEST AIRLINES CO. 2002 10-K
unable to predict whether the government will
extend this insurance coverage past August 31,
2003; whether alternative commercial insurance
with comparable coverage will become available
at reasonable premiums; and what impact the
outcome will have on the Company’s ongoing
operations or future financial performance. As a
result of recently concluded negotiations for 2003
commercial insurance coverage and the addi-
tional coverage provided by the government, the
Company currently expects per-ASM insurance
costs to decrease compared to 2002 for at least
the near term, including first quarter 2003.
Other. “Other expenses (income)” included
interest expense, capitalized interest, interest
income, and other gains and losses. Interest
expense increased $36.2 million, or 51.8 percent
compared to the prior year, due to higher debt
levels. In fourth quarter 2001, the Company
issued $614.3 million in long-term debt in the
form of Pass-Through Certificates. In first quarter
2002, the Company issued $385 million in
unsecured notes. See Note 7 to the Consolidated
Financial Statements for more information on
these two borrowings. The increase in expense
caused by these borrowings was partially offset by
a decrease in interest rates on the Company’s
floating rate debt and the July 2001 redemption
of $100 million of unsecured notes. Capitalized
interest decreased $3.9 million, or 18.7 percent,
primarily as a result of lower 2002 progress
payment balances for scheduled future aircraft
deliveries, compared to 2001. Based on the
Company’s current schedule of progress
payments and aircraft deliveries, the Company
expects progress payment balances, and
corresponding capitalized interest, to increase in
2003 compared to 2002. Interest income
decreased $5.6 million, or 13.2 percent, as
higher invested cash balances for the year were
more than offset by lower rates. Other gains in
2002 and 2001 primarily resulted from
$48 million and $235 million, respectively,
received as the Company’s share of government
grant funds under the Air Stabilization Act. See
Note 3 to the Company’s Consolidated Financial
Statements for further discussion of the Air
Stabilization Act and grants from the government.
Income Taxes. The provision for income taxes,
as a percentage of income before taxes,
increased to 38.64 percent in 2002 from
38.24 percent in 2001 primarily due to the
Company’s lower earnings in 2002.
2001 Compared With 2000. Consolidated net
income for 2001 was $511.1 million ($.63 per
share, diluted), as compared to 2000 net
income, before the cumulative effect of change
in accounting principle, of $625.2 million
($.79 per share, diluted), a decrease of
$114.1 million, or 18.2 percent. Consolidated
results for 2001 included $235 million in gains
that the Company recognized from grants under
the Air Stabilization Act and special pre-tax
charges of approximately $48 million arising from
the terrorist attacks (see Note 3 to the Consoli-
dated Financial Statements). Excluding the grant
and special charges related to the terrorist
attacks, net income for 2001 was $412.9 million
($.51 per share, diluted). The cumulative effect of
change in accounting principle for 2000 was
$22.1 million, net of taxes of $14.0 million (see
Note 2 to the Consolidated Financial State-
ments). Net income and net income per share,
diluted, for 2000, after the cumulative change in
accounting principle, were $603.1 million and
$.76, respectively. Operating income for 2001
was $631.1 million, a decrease of
$390.0 million, or 38.2 percent, compared to
2000.
Operating Revenues. Consolidated operating
revenues decreased $94.4 million, or 1.7 per-
cent, primarily due to a 1.6 percent decrease in
passenger revenues. The decrease in passenger
revenues was a direct result of the terrorist
attacks. From January through August 2001, pas-
senger revenues were higher by $314.9 million,
or 8.7 percent, than the same period in 2000
primarily due to an increase in capacity, as
measured by ASMs, of 11.6 percent. This
capacity increase was due to the addition of