Southwest Airlines 2004 Annual Report Download - page 30

Item 7. Management's Discussion and Analysis of 2004, consistent with virtually all other U.S. airlines.
Financial Condition and Results of This change in policy saved the Company approxi-
Operations mately $50 million in 2004.
Year in Review Demand for air travel was stronger in 2004, albeit
at depressed fare levels. Southwest had Company-record
In 2004, Southwest posted a proÑt for its load factors for every month from March to July. For
32nd consecutive year, and 55th consecutive quarter. full year 2004, Southwest's load factor was 69.5 percent,
Southwest's 2004 proÑt of $313 million exceeded our which was up 2.7 points from 2003, and represented the
2003 proÑt, excluding the impact of a 2003 federal second highest load factor in the Company's history.
government grant, by 5.0 percent. These achievements Passenger revenue yield per RPM, on the other hand,
were accomplished despite record-high energy prices, was down 1.8 percent compared to 2003. Overall, unit
and aggressive industry growth, which contributed to revenues continue to run well below pre-September 11,
the continuing weak airline revenue environment. For 2001, levels, and the percentage of Customers traveling
the fourth consecutive year, the airline industry as a on full fares remains down from historical levels. The
whole suÅered a substantial net loss. As a result, certain Company does not anticipate a complete recovery in
carriers Ñled for bankruptcy protection, and many carri- revenues until full fare business travel fully recovers or
ers underwent or continued massive eÅorts to restructure there is a rationalization of industry capacity.
their business, gain wage concessions from their em-
ployees, and slash costs. The Company believes that, despite the diÇcult
airline industry environment, it is well positioned to
To maintain its low-cost competitive advantage,
grow and remain proÑtable in 2005. The Company's
the Company continued its Company-wide eÅorts to
low-cost competitive advantage, protective fuel hedging
improve its cost structure. As a result, the Company
position, and excellent Employees have allowed South-
increased productivity at all Employee levels, and im-
west to react quickly to market opportunities. The
proved the overall eÇciency of its operations. In No-
Company added Philadelphia to its route system in May
vember 2003, the Company announced the
2004, and ramped up growth at Chicago Midway
consolidation of its Reservations centers from nine to
Airport. In fourth quarter 2004, Southwest was selected
six, eÅective February 2004. Of the 1,900 Employees
as the winning bidder at a bankruptcy-court approved
aÅected, approximately 1,000 did not elect to move to
auction for certain ATA Airlines, Inc. (ATA) assets,
one of the Company's remaining reservations locations.
which ensures the Company can continue to add low-
See Note 9 to the Consolidated Financial Statements for
fare service in Chicago. As part of the transaction,
further information. In second quarter 2004, the Com-
which closed in December 2004, Southwest agreed to
pany oÅered an early-out option to substantially all
pay $40 million for certain ATA assets, consisting of
Employees, primarily in an eÅort to alleviate overstaÇng
the leasehold rights to six ATA Chicago Midway Air-
in certain areas of the Company. The overstaÇng
port gates and the leasehold rights to an aircraft mainte-
primarily was the result of slower passenger growth;
nance hangar at Midway. Southwest and ATA have also
changes in Customer buying habits and boarding
agreed to a codeshare arrangement, which was approved
processes; and the federalization of airport security. Due
by the Department of Transportation in January 2005,
to these and other productivity eÅorts, the Company's
in which each carrier will exchange passengers on select
headcount per aircraft decreased from 85 at Decem-
routes at Midway. The Company believes this agree-
ber 31, 2003, to 74 at December 31, 2004.
ment could result in additional revenues of $25 million
As of December 31, 2004, the Company has to $50 million, annually. In addition, Southwest has
added ""blended winglets'' to approximately 92 percent provided ATA with debtor in possession Ñnancing and
of its Öeet of 737-700 aircraft. The addition of these made other Ñnancial commitments to ATA. See Note 2
wing enhancements, which are expected to be com- to the Consolidated Financial Statements for further
pleted for all 737-700 aircraft in early 2005, extend the information.
range of these aircraft, save fuel, lower potential engine
maintenance costs, and reduce takeoÅ noise. All new During 2004, the Company added 47 new
737-700 aircraft now arrive from Boeing with winglets 737-700 aircraft to its Öeet and retired 18 older
already installed. The Company expects annual fuel 737-200 aircraft, resulting in a net available seat mile
consumption savings of approximately 3 percent for (ASM) capacity increase of 7.1 percent. This brought
each aircraft outÑtted with the winglets. The Company the Company's all-737 Öeet to 417 aircraft at the end of
also phased out commissions on travel agency sales in 2004. The demand for Southwest's low fare, high-
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