Southwest Airlines 2006 Annual Report Download - page 37

Download and view the complete annual report

Please find page 37 of the 2006 Southwest Airlines annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 83

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83

card. The Company expects a similar increase in first
quarter 2007, also due to higher commissions earned.
Operating Expenses
Consolidated operating expenses for 2006 increased $1.3 billion, or 18.9 percent, compared to the 8.8 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 2006 and 2005 followed by explanations of
these changes on a per-ASM basis:
2006 2005
Increase
(Decrease)
Percent
Change
Salaries, wages, and benefits ............................ 3.29¢ 3.27¢ .02¢ .6%
Fuel and oil........................................ 2.31 1.58 .73 46.2
Maintenance materials and repairs ........................ .51 .52 (.01) (1.9)
Aircraft rentals ..................................... .17 .19 (.02) (10.5)
Landing fees and other rentals .......................... .53 .53 — —
Depreciation and amortization .......................... .56 .55 .01 1.8
Other ............................................ 1.43 1.41 .02 1.4
Total .......................................... 8.80¢ 8.05¢ .75¢ 9.3%
Operating expenses per ASM increased 9.3 percent
to 8.80 cents, primarily due to an increase in jet fuel
prices, net of gains from the Company’s fuel hedging
program. The Company’s average cost per gallon of fuel
increased 48.5 percent versus the prior year. Excluding
fuel, year-over-year CASM was basically flat with 2005.
Based on current cost trends, the Company expects first
quarter 2007 unit costs, excluding fuel, to increase from
2006’s full year figure of 6.49 cents.
Salaries, wages, and benefits expense per ASM
increased .6 percent compared to 2005, primarily due
to an increase in average wage rates, mostly offset by
productivity efforts that have enabled the Company to
grow overall headcount at a rate that is less than the
growth in ASMs. The Company’s headcount at Decem-
ber 31, 2006, was 2.9 percent higher than at Decem-
ber 31, 2005, despite the 8.8 growth in available seat
miles. The Company expects a similar performance for
salaries, wages, and benefits per ASM in first quarter
2007 versus first quarter 2006, due to higher wage rates
partially offset by a reduction in share-based compensa-
tion expense.
The Company’s Ramp, Operations, Provisioning,
and Freight Agents are subject to an agreement with the
Transport Workers Union of America, 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 amendable during Septem-
ber, 2006. The Company and SWAPA recently began
discussions on a new agreement.
Fuel and oil expense per ASM increased 46.2 per-
cent, net of hedging gains, primarily due to a significant
increase in the average jet fuel cost per gallon. Although
the Company’s fuel hedge position was not as strong as
the position the Company held in 2005, the Company’s
hedging program still resulted in the realization of
$675 million in cash settlements during 2006. These
settlements resulted in a 2006 reduction to Fuel and oil
expense of $634 million. However, even with this hedge
position, the Company’s jet fuel cost per gallon increased
48.5 percent versus 2005. The average cost per gallon of
jet fuel in 2006 was $1.53 compared to $1.03 in 2005,
excluding fuel-related taxes and net of hedging gains. See
Note 10 to the Consolidated Financial Statements. The
increase in fuel prices was partially offset by steps the
Company has taken to improve the fuel efficiency of its
aircraft, including the addition of blended winglets to all
of the Company’s 737-700 aircraft. The Company has
also announced it will install blended winglets on a
significant number of its 737-300 aircraft, beginning
in first quarter 2007.
18