Southwest Airlines 2004 Annual Report Download - page 33

70 percent of the increase per ASM was due to higher steps the Company has taken to better the fuel eÇ-
salaries expense, primarily from higher average wage ciency of its aircraft. These steps primarily included the
rates, and 25 percent was due to higher beneÑts costs, addition of blended winglets to 177 of the Company's
primarily health care and workers' compensation. For 737-700 aircraft as of December 31, 2004, and the
fourth quarter 2004 versus 2003, salaries, wages, and upgrade of certain engine components on many aircraft.
beneÑts per ASM decreased 1.0 percent, as the Com- The Company estimates that these and other eÇciency
pany beneÑted from increased labor productivity. This gains saved the Company approximately $28 million, at
increase in productivity was driven primarily by 2004 average unhedged market jet fuel prices.
headcount reductions from the Company's reservations As detailed in Note 10 to the Consolidated Finan-
center consolidation and early-out program during cial Statements, the Company has hedges in place for
2004, and slowed hiring. The Company expects to approximately 85 percent of its anticipated fuel con-
experience a decrease in salaries, wages, and beneÑts per sumption in 2005 with a combination of derivative
ASM in Ñrst quarter 2005 due, in part, to severance and instruments that eÅectively cap prices at a crude oil
other charges related to the consolidation of the Com- equivalent price of approximately $26 per barrel. Con-
pany's reservations centers in Ñrst quarter 2004, along sidering current market prices and the continued eÅec-
with increased productivity. See Note 9 to the Consoli- tiveness of the Company's fuel hedges, the Company is
dated Financial Statements. forecasting Ñrst quarter 2005 average fuel cost per
During second quarter 2004, the Company and the gallon, net of expected hedging gains, to exceed fourth
Transport Workers Union Local 556 reached a tentative quarter 2004's average price per gallon of 89.1 cents.
labor agreement (contract) for the Company's Flight The majority of the Company's near term hedge posi-
Attendants, which includes both pay increases and the tions are in the form of option contracts, which protect
issuance of stock options. During July 2004, a majority the Company in the event of rising jet fuel prices and
of the Company's Flight Attendants ratiÑed the con- allow the Company to beneÑt in the event of declining
tract, which is for the period from June 1, 2002, to prices.
May 31, 2008. Maintenance materials and repairs per ASM were
During third quarter 2004, the Company and the Öat compared to 2003. Currently, the Company expects
Aircraft Mechanics Fraternal Association, representing a decrease in maintenance materials and repairs expense
the Company's Mechanics, agreed to extend the date per ASM in Ñrst quarter 2005, versus Ñrst quarter 2004,
the current agreement becomes amendable to August due to a decrease in the number of scheduled mainte-
2008. The extension includes both pay raises and the nance events.
issuance of stock options, and was ratiÑed by a majority Agency commissions per ASM decreased to zero,
of the Company's Mechanics. due to the elimination of commissions paid to travel
During third quarter 2004, the Company and the agents, eÅective December 15, 2003. The Company
International Brotherhood of Teamsters, representing records commission expense in the period of travel, not
the Company's Flight Simulator Technicians, agreed to the period of sale. Consequently, the Company recog-
extend the date the current agreement becomes amend- nized small amounts of commission expense in 2004 as
able to November 2011. The extension includes both all pre-December 15, 2003 commissionable sales were
pay raises and the issuance of stock options, and was Öown, primarily in the Ñrst quarter of 2004. For the full
ratiÑed by a majority of the Company's Simulator year 2003, approximately 16 percent of passenger reve-
Technicians. nues were commissionable, based on the Company's
previous policy of paying a 5 percent commission to
Fuel and oil expense per ASM increased 12.1 per- travel agents. For 2004, approximately 13 percent of
cent, primarily due to a 14.5 percent increase in the revenues were derived through travel agents, 59 percent
average jet fuel cost per gallon, net of hedging gains. through the Company's web site at southwest.com, and
The average cost per gallon of jet fuel in 2004 was the remaining portion through the Company's Reserva-
82.8 cents compared to 72.3 cents in 2003, excluding tions Centers. For fourth quarter 2004, approximately
fuel-related taxes but including the eÅects of hedging 63 percent of passenger revenues were derived from
activities. The Company's 2004 and 2003 average jet southwest.com.
fuel costs are net of approximately $455 million and
$171 million in gains from hedging activities, respec- Aircraft rentals per ASM and depreciation and
tively. See Note 10 to the Consolidated Financial State- amortization expense per ASM were both impacted by a
ments. The increase in fuel prices was partially oÅset by higher percentage of the aircraft Öeet being owned.
15