Southwest Airlines 2006 Annual Report Download - page 27

impacted by political and economic factors. We do not
currently anticipate a significant reduction in fuel avail-
ability; however, it is difficult to predict the future avail-
ability of jet fuel due to the following, among other,
factors: dependency on foreign imports of crude oil and
the potential for hostilities or other conflicts in oil pro-
ducing areas; limited refining capacity; and the possibility
of changes in governmental policies on jet fuel produc-
tion, transportation, and marketing. Significant disrup-
tions in the supply of aircraft fuel could have a negative
impact on the Company’s operations and results of
operations.
Due to the competitive nature of the airline industry,
the Company’s ability to increase fares is limited, and it is
not certain that future fuel cost increases can be covered
by increasing fares. From time to time the Company
enters into fuel derivative contracts to protect against
rising fuel costs. Changes in the Company’s overall fuel
hedging strategy, the ability of the commodities used in
fuel hedging (principally crude oil, heating oil, and
unleaded gasoline) to qualify for special hedge account-
ing, and the effectiveness of the Company’s fuel hedges
pursuant to highly complex accounting rules, are all
significant factors impacting the Company’s results of
operations. For more information on Southwest’s fuel
hedging arrangements, see “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations,” and Note 10 to the Consolidated Financial
Statements.
Southwest’s business is labor-intensive; we could be
adversely affected if we are unable to maintain
satisfactory relations with any unionized or other
Employee work group.
The airline business is labor intensive. Wages, sal-
aries, and benefits represented approximately 37 percent
of the Company’s operating expenses for the year ended
December 31, 2006. In addition, as of December 31,
2006, approximately 82 percent of the Company’s
Employees were represented for collective bargaining
purposes by labor unions. The Company’s Ramp, Oper-
ations, Provisioning, and Freight Agents are subject to an
agreement with the Transport Workers Union of Amer-
ica, AFL-CIO (“TWU”), which becomes amendable on
June 30, 2008. However, under certain conditions, TWU
could elect to give notice to the Company by June 1,
2007, of its desire to make the agreement amendable on
June 30, 2007. During second quarter 2006, TWU
membership voted to not make the contract amendable
on June 30, 2007. The Company is unable to predict
whether future votes between now and June 2007 would
result in the same outcome. The Company’s Pilots are
subject to an agreement with the Southwest Airlines
Pilots’ Association (“SWAPA”), which became amend-
able during September 2006. The Company and SWAPA
recently began discussions on a new agreement.
Although, historically, the Company’s relationships with
its Employees have been good, the following items could
have a significant impact on the Company’s results of
operations: results of labor contract negotiations,
employee hiring and retention rates, pay rates, outsourc-
ing costs, the impact of work rules, and costs for health
care.
Southwest’s business is affected by many changing
economic and other conditions beyond its control.
Our business, and the airline industry in general, is
particularly impacted by changes in economic and other
conditions that are largely outside of our control, includ-
ing, among others:
• Actual or potential changes in international,
national, regional, and local economic, business,
and financial conditions, including recession,
inflation, interest rate increases, war, terrorist
attacks, and political instability;
• Changes in consumer preferences, perceptions,
spending patterns, or demographic trends;
• Actual or potential disruptions in the air traffic
control system;
• Increases in costs of safety, security, and envi-
ronmental measures; and
• Weather and natural disasters.
Because expenses of a flight do not vary significantly
with the number of passengers carried, a relatively small
change in the number of passengers can have a dispro-
portionate effect on an airline’s operating and financial
results. Therefore, any general reduction in airline pas-
senger traffic as a result of any of these factors could
adversely affect our business, financial condition, and
results of operations.
Southwest relies on technology to operate its business,
and any failure of these systems could harm the
Company.
Southwest is increasingly dependent on automated
systems and technology to operate its business, enhance
Customer Service and back office support systems, and
increase Employee productivity, including the Compa-
ny’s computerized airline reservation system, flight oper-
ations systems, telecommunication systems, website at
www.southwest.com, Automated Boarding Passes
8