Southwest Airlines 2003 Annual Report Download - page 37

a more stable aviation insurance market, the Company was able to negotiate lower 2003 aviation insurance
premiums than 2002. However, aviation insurance remains substantially higher than before September 11,
2001. The majority of the remaining decrease in other operating expenses per ASM was due to reductions in
security costs from the transition of airport security to the federal government, and decreases in advertising
and personnel-related expenses. As a result of recently concluded negotiations for 2004 commercial insurance
coverage and the additional coverage provided by the government, the Company currently expects other
operating expenses per ASM to decrease again, in 2004.
OTHER. “Other expenses (income)” included interest expense, capitalized interest, interest income,
and other gains and losses. Interest expense decreased $15 million, or 14.2 percent, compared to the prior
year, primarily due to lower effective interest rates. The Company executed two interest-rate swaps in second
quarter 2003 to convert a portion of its fixed-rate debt to a lower floating rate. The Company entered into
interest rate swap agreements relating to its $385 million 6.5% senior unsecured notes due March 1, 2012
and $375 million 5.496% Class A-2 pass-through certificates due November 1, 2006. See Note 10 to the
Consolidated Financial Statements for more information on the Company’s hedging activities. Excluding the
effect of any new debt offerings the Company may execute during 2004, the Company expects a decrease in
interest expense compared to 2003, due to the full year effect of the 2003 interest rate swaps, the October
2003 redemption of its $100 million senior unsecured 8 _% Notes, and the scheduled redemption of the
Company’s $175 million Aircraft Secured Notes on its due date in fourth quarter 2004. Capitalized interest
increased $16 million, or 94.1 percent, primarily as a result of higher 2003 progress payment balances for
scheduled future aircraft deliveries, compared to 2002. 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 2004 compared to 2003. Interest income decreased $13 million, or 35.1
percent, primarily due to a decrease in rates earned on short-term investments. Other gains in 2003 and 2002
primarily resulted from government grants of $271 million and $48 million, respectively, received pursuant to
the Wartime and the Stabilization Acts. See Note 3 to the Company's Consolidated Financial Statements for
further discussion of these Acts.
INCOME TAXES.The provision for income taxes, as a percentage of income before taxes, decreased to
37.60 percent in 2003 from 38.64 percent in 2002 due to higher Company earnings in 2003 and lower effective
state income tax rates.
2002 Compared with 2001. The Company's consolidated net income for 2002 was $241 million ($.30 per
share, diluted), as compared to 2001 net income of $511 million ($.63 per share, diluted), a decrease of $270
million or 52.8 percent. Approximately 43 percent of this decrease was due to the decrease in government
grants that the Company recognized under the Stabilization Act. In 2002 and 2001, the Company recognized
$48 million (pretax) and $235 million (pretax) in government grants under the Stabilization Act. See Note 3
to the Consolidated Financial Statements. The remainder of the decrease primarily was due to the full-year
impact of the September 11, 2001 terrorist attacks on the Company and the airline industry.
Following the September 11, 2001 terrorist attacks, all U.S. commercial flight operations were suspended for
approximately three days. However, the Company continued to incur nearly all of its normal operating
expenses (with the exception of certain direct trip-related expenditures such as fuel, landing fees, etc.). The
Company canceled approximately 9,000 flights before resuming flight operations on September 14. After
operations were fully resumed, load factors and passenger yields were severely depressed, and ticket refund
activity increased. In addition, operating expenses in areas such as aviation insurance and security-related
expenses were much higher than before. From January 2001 through the end of August 2001, the Company
had earned approximately $707 million in operating income. However, for September 2001, it incurred
operating losses of $113 million, and for fourth quarter 2001, operating income was $37 million. For the full
year 2002, operating income was $417 million, a decrease of $214 million, or 33.9 percent compared to 2001
due to the full year impact the terrorist attacks had on airline industry revenue performance.
OPERATING REVENUES. Consolidated 2002 operating revenues decreased $33 million from 2001, or .6
percent, primarily due to a $38 million, or .7 percent, decrease in passenger revenues. The decrease in passenger
revenues was primarily due to lower load factors attributable to the post-September 11, 2001 reduction in
demand for air travel. The Company's load factor for 2002 was 65.9 percent, compared to 68.1 percent for 2001,
resulting from a capacity (ASM) increase of 5.5 percent versus a traffic (RPM) increase of only 2.0 percent. The
increase in ASMs was due to the net addition of 20 aircraft during 2002 (net of three aircraft retirements).