Southwest Airlines 2004 Annual Report Download - page 37

many other major airlines reduced their Öight capacity Liquidity and Capital Resources
at airports served by the Company. Since Southwest did Net cash provided by operating activities was
not reduce its Öights, the Company incurred higher $1.2 billion in 2004 compared to $1.3 billion in 2003.
airport costs based on a greater relative share of total For the Company, operating cash inÖows primarily are
Öights and passengers. derived from providing air transportation for Customers.
Other operating expenses per ASM decreased The vast majority of tickets are purchased prior to the
6.8 percent. Approximately 70 percent of the decrease day on which travel is provided and, in some cases,
was due to lower aviation insurance costs. As a result of several months before the anticipated travel date. Oper-
more coverage from government insurance programs ating cash outÖows primarily are related to the recurring
and a more stable aviation insurance market, the Com- expenses of operating the airline. For 2004, the decrease
pany was able to negotiate lower 2003 aviation insur- in operating cash Öows primarily was due to lower net
ance premiums compared to 2002. However, aviation income in 2004, largely attributable to the $271 million
insurance for 2003 was substantially higher than before government grant received in 2003, and an increase in
September 11, 2001. The majority of the remaining ""Accounts and other receivables''. The increase in
decrease in other operating expenses per ASM was due ""Accounts and other receivables'' was primarily due to
to reductions in security costs from the transition of the $40 million debtor-in-possession loan made to ATA
airport security to the federal government, and decreases Airlines, Inc. (ATA), in December 2004 (see Note 2
in advertising and personnel-related expenses. to the Consolidated Financial Statements), and an
increase in receivables from fuel hedge counterparties
Other. ""Other expenses (income)'' included in- from higher hedging gains recorded in fourth quarter
terest expense, capitalized interest, interest income, and 2004 versus fourth quarter 2003. These were partially
other gains and losses. Interest expense decreased oÅset by an increase in accrued liabilities, primarily
$15 million, or 14.2 percent, compared to the prior from higher counterparty deposits associated with the
year, primarily due to lower eÅective interest rates. The Company's fuel hedging program. For further informa-
Company executed two interest-rate swaps in second tion on the Company's hedging program and
quarter 2003 to convert a portion of its Ñxed-rate debt counterparty deposits, see Note 10 to the Consolidated
to a lower Öoating rate. The Company entered into Financial Statements, and Item 7A. Qualitative and
interest rate swap agreements relating to its $385 mil- Quantitative Disclosures about Market Risk, respec-
lion 6.5% senior unsecured notes due March 1, 2012 tively. Cash generated in 2004 and in 2003 primarily
and $375 million 5.496% Class A-2 pass-through cer- was used to Ñnance aircraft-related capital expenditures
tiÑcates due November 1, 2006. See Note 10 to the and to provide working capital.
Consolidated Financial Statements for more information
on the Company's hedging activities. Capitalized inter- Cash Öows used in investing activities in 2004
est increased $16 million, or 94.1 percent, primarily as a totaled $1.9 billion compared to $1.2 billion in 2003.
result of higher 2003 progress payment balances for Investing activities in both years primarily consisted of
scheduled future aircraft deliveries, compared to 2002. payments for new 737-700 aircraft delivered to the
Interest income decreased $13 million, or 35.1 percent, Company and progress payments for future aircraft
primarily due to a decrease in rates earned on short- deliveries. The Company purchased 46 new 737-700
term investments. Other gains in 2003 and 2002 prima- aircraft in 2004 (and leased one additional 737-700)
rily resulted from government grants of $271 million versus the purchase of 17 new 737-700s in 2003.
and $48 million, respectively, received pursuant to the However, progress payments for future deliveries were
Wartime and the Stabilization Acts. See Note 3 to the substantially higher in 2003 than 2004, due to the fact
Company's Consolidated Financial Statements for fur- that, during 2003, the Company accelerated the deliv-
ther discussion of these Acts. ery for several aircraft from future years into 2004, and
exercised options for several 2004 and 2005 deliveries.
Income Taxes. The provision for income taxes, as These decisions resulted in an acceleration of progress
a percentage of income before taxes, decreased to payments to the manufacturer related to the aircraft. See
37.60 percent in 2003 from 38.64 percent in 2002 due Note 4 to the Consolidated Financial Statements. Also,
to higher Company earnings in 2003 and lower eÅective in 2004, the Company made an initial payment of
state income tax rates. $34 million for certain ATA assets, and provided ATA
with $40 million in debtor-in-possession Ñnancing. See
Note 2 to the Consolidated Financial Statements for
further information.
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