Southwest Airlines 2003 Annual Report Download - page 39

ASM increased 6.1 percent. The Company owns all 23 of the aircraft it put into service during 2002. This,
along with the retirement of one owned and two leased aircraft in 2002, increased the Company’s percentage of
aircraft owned or on capital lease to 76 percent at December 31, 2002, from 74 percent at December 31, 2001.
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.
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
airlines, for renewable 60-days periods, at substantially lower premiums than prevailing commercial rates
during 2002 and for levels of coverage not available at that time in the commercial market.
OTHER. “Other expenses (income)” included interest expense, capitalized interest, interest income,
and other gains and losses. Interest expense increased $36 million, or 51.4 percent, compared to the prior
year, due to higher debt levels. In fourth quarter 2001, the Company issued $614 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 $4 million, or 19.0 percent, primarily as a result of lower 2002 progress
payment balances for scheduled future aircraft deliveries, compared to 2001. Interest income decreased $6
million, or 14.0 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 grants under the Stabilization Act. See Note 3 to the Company's Consolidated
Financial Statements for further discussion of the Stabilization Act.
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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.3 billion in 2003 compared to $520 million in 2002. For the
Company, operating cash inflows are primarily derived from providing air transportation for Customers. The
vast majority of tickets are purchased prior to the day in which travel is provided and, in some cases, several
months before the anticipated travel date. Operating cash outflows are primarily related to the recurring expenses
of operating the airline. For 2003, the increase in operating cash flows primarily was due to higher net income,
largely attributable to the $271 million government grant from the Wartime Act. Also contributing to the
increase in operating cash flows was an increase in accrued liabilities and a decrease in accounts and other
receivables. The increase in accrued liabilities primarily was due to an increase in accrued profitsharing from
higher 2003 earnings available for profitsharing. The decrease in accounts and other receivables was primarily
due to the 2003 collection of a $51 million tax refund related to the 2002 tax year. Cash generated in 2003 and
in 2002 was primarily used to finance aircraft-related capital expenditures and provide working capital.
Cash flows used in investing activities in 2003 totaled $1.2 billion compared to $603 million in 2002. Investing
activities in both years primarily consisted of payments for new 737-700 aircraft delivered to the Company and
progress payments for future aircraft deliveries. Although the Company received fewer new aircraft in 2003 (17
new 737-700s) versus 2002 (23 new 737-700s), there was a substantial increase in progress payments for future
deliveries compared to the prior year. The increase in progress payments primarily was related to aircraft to be
delivered in 2004 and 2005. During 2003, the Company accelerated the delivery for several aircraft from future
years into 2004, and exercised options for several 2004 and 2005 deliveries. These decisions resulted in an
acceleration of progress payments to the manufacturer related to the aircraft. See Note 4 to the Consolidated
Financial Statements.