Southwest Airlines 2005 Annual Report Download - page 33

Operating Expenses. Consolidated operating expenses for 2005 increased $788 million, or 13.2 percent,
compared to the 10.8 percent increase in capacity. To a large extent, changes in operating expenses for airlines are
driven by changes in capacity, or ASMs. The following presents Southwest's operating expenses per ASM for 2005 and
2004 followed by explanations of these changes on a per-ASM basis:
Increase Percent
2005 2004 (Decrease) Change
Salaries, wages, and benefits ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.17„ 3.18„ (.01)„ (.3)%
Fuel and oil ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.57 1.30 .27 20.8
Maintenance materials and repairsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .51 .59 (.08) (13.6)
Aircraft rentalsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .19 .23 (.04) (17.4)
Landing fees and other rentals ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .53 .53 Ì Ì
Depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ .55 .56 (.01) (1.8)
Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.42 1.38 .04 2.9
Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.94„ 7.77„ .17„ 2.2%
Operating expenses per ASM increased 2.2 percent quarter 2006 salaries, wages, and benefits to experience
to 7.94 cents, primarily due to an increase in jet fuel an increase in expense of approximately $20 million that
prices, net of hedging gains. The Company was able to was not present in first quarter 2005, due to the Com-
hold flat or reduce unit costs in every cost category, pany's previous method of accounting under SFAS 123.
except fuel expense and other operating expense, Based on stock options issued to Employees prior to
through a variety of cost reduction and productivity January 1, 2006, for the full year 2006, the Company
efforts. These efforts, however, were entirely offset by expects salaries, wages, and benefits to experience an
the significant increase in the cost of fuel. Excluding expense increase of approximately $65 million due to the
fuel, CASM was 1.5 percent lower than 2004, at 6.37 adoption of SFAS 123R. See Note 2 to the Consolidated
cents. For first quarter 2006, the Company currently Financial Statements for more information on the 2006
expects operating expenses per ASM, excluding fuel, to adoption of SFAS 123R.
exceed the first quarter 2005 level of 6.32 cents, but The Company's Pilots are subject to an agreement
improve from fourth quarter 2005's 6.57 cents. A with the Southwest Airlines Pilots' Association, which
portion of the expected year-over-year increase com- becomes amendable during September 2006. The Com-
pared to first quarter 2005 will be attributable to the pany's Customer Service and Reservations Agents are
Company's January 1, 2006, adoption of SFAS 123R, subject to an agreement with the International Associa-
Share-Based Payment (SFAS 123R). tion of Machinists and Aerospace Workers (""IAM''),
Salaries, wages, and benefits expense per ASM which becomes amendable during November 2008, but
decreased .3 percent compared to 2004, primarily due which may become amendable during 2006 at the
to productivity efforts that have enabled the Company IAM's option, under certain conditions. The Com-
to grow overall headcount at a rate that is less than the pany's Ramp, Operations, and Provisioning and Freight
growth in ASMs. This decrease was partially offset by Agents are subject to an agreement with the Transpor-
higher average wage rates, and higher profitsharing tation Workers of America, AFL-CIO (""TWU''),
expense associated with the Company's higher earnings. which becomes amendable during November 2008, but
which may become amendable during 2006 at the
On January 1, 2006, the Company will be required TWU's option, under certain conditions. The Company
to adopt SFAS 123R, which, among other things, will is currently unable to predict whether its contracts with
require the recording in the financial statements of non- the IAM and TWU will become amendable during
cash compensation expense related to stock options. Prior 2006.
to 2006, the Company had only shown, as permitted by
SFAS 123, pro forma financial results including the Fuel and oil expense per ASM increased 20.8 per-
effects of share-based compensation expense in the foot- cent, primarily due to a 24.8 percent increase in the
notes to the financial statements. See Note 1 to the average jet fuel cost per gallon, net of hedging gains.
Consolidated Financial Statements for these pro forma The average cost per gallon of jet fuel in 2005 was
results related to years 2005, 2004, and 2003. As a result $1.03 compared to 82.8 cents in 2004, excluding fuel-
of this accounting change, the Company expects its first related taxes and net of hedging gains. The Company's
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