Southwest Airlines 2003 Annual Report Download - page 35

Company saw a disruption in revenue and bookings due to the threat of war and from the subsequent conflict
between the United States and Iraq during the first half of 2003, demand improved following the war.
The increase in revenue passenger miles primarily was due to a 4.2 percent increase in added capacity, as
measured by available seat miles or ASMs. This was achieved through the Company’s net addition of 13 aircraft
during 2003 (net of four aircraft retirements). The Company's improved load factor for 2003 (RPMs divided by
ASMs) was 66.8 percent, compared to 65.9 percent for 2002. The improved 2003 load factor is still well below
pre-September 11, 2001, annual levels. Passenger yields for 2003 (passenger revenue divided by RPMs) were
$.1197 compared to $.1177 in 2002, an increase of 1.7 percent, due to less heavy fare discounting in 2003 by the
Company and the airline industry in general.
As the economy recovers and demand for business travel increases, the Company’s operating revenue yields
per ASM (unit revenues) gradually continue to improve. Although the first half of January 2004 showed
modest unit revenue growth, bookings suggest that January’s load factor could fall below January 2003’s
load factor of 58.0 percent.
Consolidated freight revenues increased $9 million, or 10.6 percent, primarily due to an increase in freight and
cargo units shipped. Other revenues increased $6 million, or 6.3 percent, primarily due to an increase in
commissions earned from programs the Company sponsors with certain business partners, such as the Company-
sponsored Bank One® (formerly First USA) Visa card.
OPERATING EXPENSES. Consolidated operating expenses for 2003 increased $349 million, or 6.8
percent, compared to the 4.2 percent increase in capacity. To a large extent, changes in operating expenses
for airlines are driven by changes in capacity, or ASMs. The following presents Southwest’s operating
expenses per ASM for 2003 and 2002 followed by explanations of these changes on a per-ASM basis:
Increase Percent
2003 2002 (decrease) change
Salaries, wages, and benefits 3.10 ¢2.89 ¢ .21 ¢ 7.3 %
Fuel and oil 1.16 1.11 .05 4.5
Maintenance materials and repai
r
.60 .57 .03 5.3
Agency commissions .07 .08 (.01) (12.5)
Aircraft rentals .25 .27 (.02) (7.4)
Landing fees and other rentals .52 .50 .02 4.0
Depreciation .53 .52 .01 1.9
Other 1.37 1.47 (.10) (6.8)
Total 7.60 ¢7.41 ¢ .19 ¢ 2.6 %
Operating expenses per ASM increased 2.6 percent to $.0760, primarily due to increases in salaries,
profitsharing, and jet fuel prices, after hedging gains. For first quarter 2004, excluding costs associated with the
Company’s reservations center consolidation, the Company currently expects an increase in operating expenses
per ASM compared to first quarter 2003 primarily due to higher salaries, jet fuel prices, and airport costs. Based
on the Company’s aggressive efforts to mitigate these cost pressures, unit costs should begin to decline in the
second half of 2004. For the year 2004, the Company’s goal is to, at least, keep unit costs flat with 2003.
Salaries, wages, and benefits expense per ASM increased 7.3 percent. Approximately 60 percent of the increase
was due to an increase in salaries and wages per ASM, primarily from increases in average wage rates. The
majority of the remainder of the increase was due to an increase in Employee retirement plans expense per ASM,
primarily from the increase in 2003 earnings and resulting profitsharing. The Company also expects to
experience an increase in salaries, wages, and benefits per ASM in 2004 due, in part, to restructuring charges
related to the consolidation of the Company’s reservations centers. See Note 9 to the Consolidated Financial
Statements.