Southwest Airlines 2004 Annual Report Download - page 34

Aircraft rentals per ASM decreased 8.0 percent while increases are expected to more than oÅset a decrease in
depreciation and amortization expense per ASM in- expense from the March 2005 redemption of $100 mil-
creased 5.7 percent. Of the 47 aircraft the Company lion 8% senior unsecured notes. Capitalized interest
acquired during 2004, 46 are owned and one is on increased $6 million, or 18.2 percent, primarily as a
operating lease. This, along with the retirement of 16 result of higher 2004 progress payment balances for
owned and two leased aircraft, has increased the Com- scheduled future aircraft deliveries, compared to 2003.
pany's percentage of aircraft owned or on capital lease Interest income decreased $3 million, or 12.5 percent,
to 79 percent at December 31, 2004, from 77 percent primarily due to a decrease in average invested cash
at December 31, 2003. Based on the Company's sched- balances. Other gains in 2003 primarily resulted from
uled 2005 capacity increases and aircraft Ñnancing the government grant of $271 million received pursuant
plans, the Company expects a year-over-year decline in to the Wartime Act. See Note 3 to the Company's
aircraft rental expense per ASM in 2005. Consolidated Financial Statements for further discussion
of the grant. Other losses in 2004 primarily include
Landing fees and other rentals per ASM increased amounts recorded in accordance with SFAS 133. See
1.9 percent primarily due to the Company's expansion Note 10 to the Consolidated Financial Statements for
of gate and counter space at several airports across our more information on the Company's hedging activities.
system. During 2004, the Company recognized approximately
Other operating expenses per ASM were Öat com- $24 million of expense related to amounts excluded
pared to 2003. An increase in expense from higher fuel from the Company's measurements of hedge eÅective-
taxes as a result of the substantial increase in fuel prices ness and $13 million in expense related to the ineÅec-
was mostly oÅset by lower advertising expense. tiveness of its hedges.
Other. ""Other expenses (income)'' included in- Income Taxes. The provision for income taxes, as
terest expense, capitalized interest, interest income, and a percentage of income before taxes, decreased to
other gains and losses. Interest expense decreased by 35.94 percent in 2004 from 37.60 percent in 2003.
$3 million, or 3.3 percent, primarily due to the Com- Approximately half of the rate reduction primarily was
pany's October 2003 redemption of $100 million of due to lower eÅective state income tax rates. The
senior unsecured 8
3
/ 4 % Notes originally issued in 1991. remainder of the decrease primarily was due to a
This decrease was partially oÅset by the Company's reduction in estimated liabilities for prior year taxes as a
September 2004 issuance of $350 million 5.25% senior result of discussions with taxing authorities. The Com-
unsecured notes and the fourth quarter 2004 issuance of pany expects its 2005 eÅective tax rate to be approxi-
$112 million in Öoating-rate Ñnancing. Concurrently mately 38 percent.
with the September 2004 issuance, the Company en-
tered into an interest-rate swap agreement to convert
this Ñxed-rate debt to Öoating rate. See Note 10 to the 2003 Compared with 2002
Consolidated Financial Statements for more information
on the interest-rate swap agreement. Excluding the The Company's consolidated net income for 2003
eÅect of any new debt oÅerings the Company may was $442 million ($.54 per share, diluted), as com-
execute during 2005, the Company expects an increase pared to 2002 net income of $241 million ($.30 per
in interest expense compared to 2004, due to the full share, diluted), an increase of $201 million, or
year eÅect of the $350 million Notes, the fourth quarter 83.4 percent. Operating income for 2003 was $483 mil-
2004 issuance of $112 million in Öoating-rate Ñnanc- lion, an increase of $66 million, or 15.8 percent com-
ing, and higher expected Öoating interest rates. These pared to 2002.
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