Southwest Airlines 2005 Annual Report Download - page 20

PART I excluding fuel taxes, over the past five years was as
follows:
Item 1. Business Cost Average Cost Percent of
Year (Millions) Per Gallon Operating Expenses
Description of Business
2001 ÏÏÏÏÏ $ 771 $ .71 15.6%
Southwest Airlines Co. (""Southwest'' or the 2002 ÏÏÏÏÏ $ 762 $ .68 14.9%
""Company'') is a major domestic airline that provides 2003 ÏÏÏÏÏ $ 830 $ .72 15.2%
point-to-point, low-fare service. Historically, routes
2004 ÏÏÏÏÏ $1,000 $ .83 16.7%
served by Southwest had been predominantly short-haul,
2005 ÏÏÏÏÏ $1,342 $1.03 19.8%
with high frequencies. In recent years, the Company has
complemented this service with more medium to long- From October 1, 2005, through December 31,
haul routes, including transcontinental service. South- 2005, the average cost per gallon was $1.20. See
west was incorporated in Texas in 1967 and com- ""Management's Discussion and Analysis of Financial
menced Customer Service on June 18, 1971, with three Condition and Results of Operations'' for a discussion of
Boeing 737 aircraft serving three Texas cities Ì Dallas, fuel costs and more detail on Southwest's fuel hedging
Houston, and San Antonio. activities.
At year-end 2005, Southwest operated 445 Boeing
737 aircraft and provided service to 61 cities in 31 states Regulation
throughout the United States. Based on monthly data
Economic. The Dallas Love Field section of the
for October 2005 (the latest available data), Southwest
International Air Transportation Competition Act of
Airlines is the largest carrier in the United States based
1979, as amended in 1997 and 2005 (commonly
on originating domestic passengers boarded and sched-
known as the ""Wright Amendment''), as it affects
uled domestic departures. The Company began service
Southwest's scheduled service, provides that no common
to Pittsburgh, Pennsylvania in May 2005, Ft. Myers,
carrier may provide scheduled passenger air transporta-
Florida in October 2005, and Denver, Colorado in
tion for compensation between Love Field and one or
January 2006.
more points outside Texas, except that an air carrier
One of Southwest's primary competitive strengths may transport individuals by air on a flight between
is its low operating costs. Southwest has the lowest Love Field and one or more points within the states of
costs, adjusted for stage length, on a per mile basis, of Alabama, Arkansas, Kansas, Louisiana, Mississippi,
all the major airlines. Among the factors that contribute Missouri, New Mexico, Oklahoma, and Texas if
to its low cost structure are a single aircraft type, an (a) ""such air carrier does not offer or provide any
efficient, high-utilization, point-to-point route struc- through service or ticketing with another air carrier''
ture, and hardworking, innovative, and highly produc- and (b) ""such air carrier does not offer for sale
tive Employees. transportation to or from, and the flight or aircraft does
not serve, any point which is outside any such states.''
The business of the Company is somewhat sea- The Wright Amendment does not restrict flights oper-
sonal. Quarterly operating income and, to a lesser ated with aircraft having 56 or fewer passenger seats.
extent, revenues tend to be lower in the first quarter The Wright Amendment does not restrict Southwest's
(January 1 - March 31) and fourth quarter (Octo- intrastate Texas flights or its air service from points
ber 1 - December 31) of most years. other than Love Field.
Southwest's filings with the Securities and Ex- The Department of Transportation (""DOT'') has
change Commission (""SEC''), including its annual significant regulatory jurisdiction over passenger air-
report on Form 10-K, quarterly reports on Form 10-Q, lines. Unless exempted, no air carrier may furnish air
current reports on Form 8-K and amendments to those transportation over any route without a DOT certificate
reports, are accessible free of charge at of public convenience and necessity, which does not
www.southwest.com. confer either exclusive or proprietary rights. The Com-
pany's certificates are unlimited in duration and permit
Fuel the Company to operate among any points within the
The cost of fuel is an item that has significant United States, its territories and possessions, except as
impact on the Company's operating results. The Com- limited by the Wright Amendment, as do the certifi-
pany's average cost of jet fuel, net of hedging gains and cates of all other U.S. carriers. DOT may revoke such
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