Southwest Airlines 2005 Annual Report Download - page 34

2005 and 2004 average jet fuel costs are net of approxi- 2006 capacity increases and current aircraft financing
mately $892 million and $455 million in gains from plans, the Company expects a year-over-year decline in
hedging activities, respectively. See Note 10 to the aircraft rental expense per ASM in first quarter 2006
Consolidated Financial Statements. The increase in fuel versus first quarter 2005.
prices was partially offset by steps the Company has Depreciation expense per ASM decreased 1.8 per-
taken to improve the fuel efficiency of its aircraft. These cent. An increase in depreciation expense per ASM
steps primarily included the addition of blended wing- from 33 new 737-700 aircraft purchased during 2005
lets to all of the Company's 737-700 aircraft, and the and the higher percentage of owned aircraft, was more
upgrade of certain engine components on many aircraft. than offset by lower expense associated with the Com-
The Company estimates that these and other efficiency pany's retirement of its 737-200 fleet and all 737-200
gains saved the Company approximately $70 million remaining spare parts by the end of January 2005. Based
during 2005, at average unhedged market jet fuel prices. on the Company's scheduled 2006 aircraft purchase
As detailed in Note 10 to the Consolidated Finan- commitments and capital expenditure plans, the Com-
cial Statements, the Company has hedges in place for pany expects first quarter 2006 depreciation expense per
over 70 percent of its anticipated fuel consumption in ASM to be slightly above the first quarter 2005 level of
2006 with a combination of derivative instruments that 55 cents per ASM.
effectively cap prices at average crude oil equivalent Other operating expenses per ASM increased
price of approximately $36 per barrel, and has hedged 2.9 percent compared to 2004. Approximately 75 per-
the refinery margins on the majority of those positions. cent of the increase relates to higher 2005 security fees
Considering current market prices, the Company is in the form of a $24 million retroactive assessment the
forecasting a significant increase compared to the Com- Company received from the Transportation Security
pany's first quarter 2005 average fuel price per gallon of Administration in January 2006. The Company intends
90.3 cents, primarily because the Company's hedge to vigorously contest this assessment; however, if it is
position is not as strong and market jet fuel prices are unsuccessful in reversing or modifying it, 2006 security
currently higher in 2006. The Company has a lower fees will be at similar levels. The remainder of the
percentage of its fuel hedged, and the hedges in place increase primarily related to higher fuel taxes as a result
are at higher average crude oil-equivalent prices. The of the substantial increase in fuel prices compared to
majority of the Company's near term hedge positions 2004. Based on current market jet fuel prices and
are in the form of option contracts, which protect the expected higher security fees in 2006, the Company
Company in the event of rising jet fuel prices and allow presently expects an increase in Other operating ex-
the Company to benefit in the event of declining prices. penses per ASM in first quarter compared to the same
Maintenance materials and repairs per ASM de- 2005 period.
creased 13.6 percent compared to 2004, primarily due Other. ""Other expenses (income)'' included in-
to a decrease in repair events for aircraft engines. terest expense, capitalized interest, interest income, and
Currently, the Company expects a decrease in mainte- other gains and losses. Interest expense increased by
nance materials and repairs expense per ASM in first $34 million, or 38.6 percent, primarily due to an
quarter 2006, versus first quarter 2005, due to a de- increase in floating interest rates. The majority of the
crease in the number of scheduled maintenance events. Company's long-term debt is at floating rates. Exclud-
Also, see Note 2 to the Consolidated Financial State- ing the effect of any new debt offerings the Company
ments for discussion of a first quarter 2006 change in may execute during 2006, the Company expects an
the Company's accounting for heavy maintenance on its increase in interest expense compared to 2005, due to
737-300 and 737-500 aircraft. higher expected floating interest rates, partially offset by
Aircraft rentals per ASM decreased 17.4 percent. the borrowings due to be repaid in 2006 on their
Of the 33 aircraft the Company acquired during 2005, redemption dates. See Note 10 to the Consolidated
all are owned. In addition, during 2005, the Company Financial Statements for more information. Capitalized
renegotiated the leases on four aircraft, and, as a result, interest was flat compared to 2004 as lower 2005
reclassified these aircraft from operating leases to capital progress payment balances for scheduled future aircraft
leases. These transactions have increased the Company's deliveries were offset by higher interest rates. Interest
percentage of aircraft owned or on capital lease to income increased $26 million, or 123.8 percent, prima-
81 percent at December 31, 2005, from 79 percent at rily due to an increase in rates earned on cash and
December 31, 2004. Based on the Company's scheduled investments. ""Other (gains) losses, net'' primarily in-
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