Southwest Airlines 2005 Annual Report Download - page 38

tion of blended winglets to 177 of the Company's 737- to the Wartime Act. See Note 17 to the Consolidated
700 aircraft as of December 31, 2004, and the upgrade Financial Statements for further discussion of the grant.
of certain engine components on many aircraft. The Other losses in 2004 primarily include amounts re-
Company estimates that these and other efficiency gains corded in accordance with SFAS 133. See Note 10 to
saved the Company approximately $28 million in 2004, the Consolidated Financial Statements for more infor-
at average unhedged market jet fuel prices. mation on the Company's hedging activities. During
2004, the Company recognized approximately $24 mil-
Aircraft rentals per ASM and depreciation and lion of expense related to amounts excluded from the
amortization expense per ASM were both impacted by a Company's measurements of hedge effectiveness and
higher percentage of the aircraft fleet being owned. $13 million in expense related to the ineffectiveness of
Aircraft rentals per ASM decreased 8.0 percent while its hedges and unrealized mark-to-market changes in
depreciation and amortization expense per ASM in- the fair value of certain derivative contracts.
creased 5.7 percent. Of the 47 aircraft the Company
acquired during 2004, 46 are owned and one is on Income Taxes. The provision for income taxes, as
operating lease. This, along with the retirement of 16 a percentage of income before taxes, decreased to
owned and two leased aircraft, increased the Company's 35.94 percent in 2004 from 37.60 percent in 2003.
percentage of aircraft owned or on capital lease to Approximately half of the rate reduction was due to
79 percent at December 31, 2004, from 77 percent at lower effective state income tax rates. The remainder of
December 31, 2003. the decrease primarily was due to a favorable adjustment
related to the ultimate resolution of an industry-wide
Landing fees and other rentals per ASM increased issue regarding the tax treatment of certain aircraft
1.9 percent primarily due to the Company's expansion engine maintenance costs.
of gate and counter space at several airports across our
system. Liquidity and Capital Resources
Other operating expenses per ASM decreased
Net cash provided by operating activities was
4.2 percent compared to 2003 primarily due to the
$2.2 billion in 2005 compared to $1.2 billion in 2004.
elimination of commissions paid to travel agents, effec-
For the Company, operating cash inflows primarily are
tive December 15, 2003. In addition to this change, an
derived from providing air transportation for Customers.
increase in expense from higher fuel taxes as a result of
The vast majority of tickets are purchased prior to the
the substantial increase in fuel prices was mostly offset
day on which travel is provided and, in some cases,
by lower advertising expense.
several months before the anticipated travel date. Oper-
Other. ""Other expenses (income)'' included in- ating cash outflows primarily are related to the recurring
terest expense, capitalized interest, interest income, and expenses of operating the airline. For 2005, the increase
other gains and losses. Interest expense decreased by in operating cash flows primarily was due to an increase
$3 million, or 3.3 percent, primarily due to the Com- in ""Accounts payable and accrued liabilities'' and
pany's October 2003 redemption of $100 million of higher net income in 2005 versus 2004. There was a
senior unsecured 8
3
/ 4 % Notes originally issued in 1991. $1.0 billion increase in accrued liabilities, primarily
This decrease was partially offset by the Company's related to a $620 million increase in counterparty
September 2004 issuance of $350 million 5.25% senior deposits associated with the Company's fuel hedging
unsecured notes and the fourth quarter 2004 issuance of program. For further information on the Company's
$112 million in floating-rate financing. Concurrently hedging program and counterparty deposits, see
with the September 2004 issuance, the Company en- Note 10 to the Consolidated Financial Statements, and
tered into an interest-rate swap agreement to convert Item 7A. Qualitative and Quantitative Disclosures about
this fixed-rate debt to floating rate. See Note 10 to the Market Risk, respectively. Cash generated in 2005 and
Consolidated Financial Statements for more information in 2004 primarily was used to finance aircraft-related
on the interest-rate swap agreement. Capitalized inter- capital expenditures and to provide working capital.
est increased $6 million, or 18.2 percent, primarily as a
result of higher 2004 progress payment balances for Cash flows used in investing activities in 2005
scheduled future aircraft deliveries, compared to 2003. totaled $1.2 billion compared to $1.7 billion in 2004.
Interest income decreased $3 million, or 12.5 percent, Investing activities in both years primarily consisted of
primarily due to a decrease in average invested cash payments for new 737-700 aircraft delivered to the
balances. Other gains in 2003 primarily resulted from Company and progress payments for future aircraft
the government grant of $271 million received pursuant deliveries. The Company purchased 33 new 737-700
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