Southwest Airlines 2003 Annual Report Download - page 33

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Year in Review
In 2003, Southwest posted a profit for the 31st consecutive year. The Company also extended its streak of
consecutive quarterly profits to 51 periods in fourth quarter 2003. Both of these achievements are
unsurpassed in the airline industry. For the third consecutive year, the airline industry as a whole suffered a
net loss and many of the larger airlines underwent or continued massive efforts to restructure their business,
gain wage concessions from their employees, and slash costs in efforts to avoid bankruptcy or emerge from
bankruptcy. For the Company, although profitability levels have not returned to those achieved prior to the
September 11, 2001, terrorist attacks, profits increased considerably versus 2002, even excluding the impact
of government grants received in both years.
Although the process has been gradual, revenue trends had shown improvement prior to the Iraq war, and
have steadily improved since major hostilities in Iraq ended in May 2003. However, air traffic remains
depressed compared to pre-September 11, 2001, levels, particularly business demand. Unit revenues
continue to run below pre-September 11, 2001, levels by more than 10 percent and the percentage of
Customers traveling on full-fares remains down from historical levels. The Company does not anticipate a
complete recovery in revenues until the economy fully recovers and there is an upturn in business travel.
The Company’s business strategy did not waver in 2003. Southwest remained committed to providing
predominantly shorthaul flights, high frequency service, low fares, point-to-point flying, and high-quality
Customer Service, all while keeping costs low. The Company also continued to complement this strategy by
adding longer haul flights, including transcontinental service.
The Company continued to respond to the many security changes imposed since the terrorist attacks and find
ways to improve Customer convenience and the airport experience. The Company has automated and
significantly streamlined the ticketing and boarding process with computer generated bag tags, automated
boarding passes, self-service boarding pass kiosks, and electronic boarding pass readers at the gate. The
Company also has made technological advancements, including the addition of functionality to its website at
www.southwest.com, and has continued to enhance its fleet interiors with a new look, including comfortable
leather seats.
The Company did not open any new cities in 2003, although it continued to improve its quality of service
between cities already served. The Company recently announced that it would begin new service to
Philadelphia, Pennsylvania in May 2004, which will represent the Company’s 60th airport and 31st state to
which it flies. During 2003, the Company added 17 new 737-700 aircraft to its fleet and retired four older
737-200 aircraft, resulting in a net capacity increase of 4.2 percent. This brought the Company’s all-737
fleet to 388 aircraft at the end of 2003.
During 2003, the Company made announcements that are expected to benefit the Company’s overall cost
structure in 2004 and beyond. The Company announced it would add “blended winglets” to its fleet of 737-
700 aircraft. The addition of these wing enhancements, which began to be retrofitted on existing aircraft in
fourth quarter 2003 and are expected to take place through early 2005, will extend the range of these aircraft,
save fuel, lower engine maintenance costs, and reduce takeoff noise. New aircraft are expected to arrive with
winglets already installed beginning in August 2004. In October 2003, the Company announced it would no
longer pay commissions on travel agency sales effective December 15, 2003, consistent with virtually all
other U.S. airlines. This change in policy is expected to save the Company approximately $40 million in
2004. In November 2003, the Company also announced the consolidation of its nine Reservations Centers
into six, effective February 28, 2004. This decision was made in response to the established shift to the
internet as a preferred way of booking travel. The Company’s website, www.southwest.com, is now
accountable for more than half of passenger revenues, and, as a consequence, demand for phone contact has
dramatically decreased. The Company estimates the costs associated with this decision, approximately $20
million, will be recognized primarily in first quarter 2004. These costs are primarily related to Employee
relocation expenses and severance packages. The Company estimates that future annual operating cost
savings related to this decision will exceed the costs incurred. See Note 9 to the Consolidated Financial
Statements for further information. The Company also expects to benefit from efficiencies achieved at
airports through our effort to improve the Customer experience in ticketing and boarding.