Southwest Airlines 2005 Annual Report Download - page 31

Item 7. Management's Discussion and Analysis of Although the Company's fuel hedge in place for
Financial Condition and Results of 2006 is not as strong as that in 2005, absent a
Operations significant decrease from the current level of market
energy prices the Company will continue to have a
Year in Review considerable competitive advantage compared to airlines
that have not hedged fuel. The Company hopes to
In 2005, Southwest posted a profit for its overcome the impact of higher anticipated 2006 fuel
33rd consecutive year, and also extended its number of prices through improved revenue management and con-
consecutive profitable quarters to 59. Southwest's 2005 trol of non-fuel costs. As a result of cost-control efforts
profit was $548 million, representing a 75.1% increase instituted over the past 3 years, the Company was able
compared to our 2004 profit of $313 million. This to produce a reduction in non-fuel unit costs (cost per
performance was driven primarily by strong revenue ASM) of 1.5 percent in 2005 compared to 2004. The
growth, as the Company grew capacity, and effective Company's Employees again increased their productiv-
cost control measures, including a successful fuel hedge ity and improved the overall efficiency of the Company's
program. For the fifth consecutive year, the airline operations. The Company's headcount per aircraft de-
industry as a whole is expected to suffer a substantial net creased from 74 at December 31, 2004, to 71 at
loss, as additional carriers filed for bankruptcy protec- December 31, 2005. Furthermore, since the end of
tion and many underwent or continued massive efforts 2003, the Company's headcount per aircraft has de-
to restructure or merge their businesses, gain wage creased 16.5 percent.
concessions from their employees, and slash costs.
The Company moves forward into 2006 with a
The revenue environment in the airline industry
focused and measured growth plan. The Company's
strengthened considerably throughout 2005. As a result
low-cost competitive advantage, protective fuel hedging
of the extensive restructuring in the domestic airline
position, and excellent Employees will allow Southwest
industry in 2004 and 2005, several carriers reduced
to continue to react quickly to market opportunities.
domestic capacity. Industry capacity reductions and
The Company added Pittsburgh, Pennsylvania, and
strong demand resulted in high load factors for many
Fort Myers, Florida, to its route system in 2005, and
airlines. In fact, Southwest set new monthly load-factor
continued to grow its Chicago Midway service. The
records for four separate months during 2005, and
Company has increased its capacity at Chicago Midway
recorded a Company-record load factor of 70.7 percent
Airport nearly 60 percent since third quarter 2004 and
for the full year. The Company was also able to
plans to continue to add service to this market. The
modestly raise its fares over the course of the year,
Company began service to Denver, Colorado, in January
resulting in an increase in passenger revenue yield per
2006, and has already announced plans to add service
RPM (passenger revenues divided by revenue passenger
and destinations in March 2006. Denver represents the
miles) of 2.8 percent compared to 2004. Unit revenue
62nd city to which the Company flies.
(total revenue divided by ASMs) also increased a
healthy 4.7 percent compared to 2004 levels, as a result
In December 2005, we completed a transaction
of the higher load factors and higher RPM yields.
with ATA Airlines, Inc. (ATA), as a part of ATA's
The Company once again benefited from a strong bankruptcy proceedings, acquiring the leasehold rights
fuel hedge and an intense focus on controlling non-fuel to four additional gates at Chicago Midway in exchange
costs. As reflected in the Consolidated Statement of for a $20 million reduction in our outstanding
Income, the Company's fuel hedging program resulted debtor-in-possession loan. The codeshare agreement
in a reduction to ""Fuel and oil expense'' during 2005 of with ATA was recently expanded to include ATA
$892 million. The Company's hedge program also flights from DFW International Airport to Chicago
resulted in earnings variability throughout 2005, prima- Midway. The Company also recently announced an
rily due to unrealized gains and losses relating to fuel additional codeshare expansion to include connecting
contracts settling in future periods, recorded in accor- service through Houston Hobby and Oakland, begin-
dance with Statement of Financial Accounting Standard ning April 2006. Based on current codeshare markets,
133 (SFAS 133), Accounting for Derivative Instru- first quarter 2006 codeshare revenue is estimated to be
ments and Hedging Activities, as amended. For 2005, in the $10 million range. See Note 3 to the Consoli-
these amounts total a net gain of $110 million, and are dated Financial Statements for further information on
reflected in ""Other (gains) losses, net,'' in the Consoli- the Company's relationship and recent transactions with
dated Statement of Income. ATA.
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