Southwest Airlines 2006 Annual Report Download - page 39

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additional income related to the ineffectiveness of its
hedges and unrealized mark-to-market changes in the
fair value of certain derivative contracts.
Income Taxes
The provision for income taxes, as a percentage of
income before taxes, decreased to 36.8 percent in 2006
from 37.9 percent in 2005. The decrease in the 2006 rate
was primarily due to a $9 million reduction related to a
revision in the State of Texas franchise tax law enacted
during 2006. The Company currently expects its 2007
effective rate to be approximately 38 percent.
2005 Compared With 2004
The Company’s consolidated net income for 2005
was $484 million ($.60 per share, diluted), as compared
to 2004 net income of $215 million ($.27 per share,
diluted), an increase of $269 million, or 125.1 percent.
Operating income for 2005 was $725 million, an increase
of $321 million, or 79.5 percent, compared to 2004. The
increase in operating income was primarily due to higher
revenues from the Company’s fleet growth, improved
load factors, and higher fares, which more than offset
a significant increase in the cost of jet fuel. The larger
percentage increase in net income compared to operating
income primarily was due to variability in “Other (gains)
losses,” due to unrealized 2005 gains resulting from the
Company’s fuel hedging activities, in accordance with
SFAS 133.
Operating Revenues
Consolidated operating revenues increased $1.1 bil-
lion, or 16.1 percent, primarily due to a $1.0 billion, or
15.9 percent, increase in passenger revenues. The
increase in passenger revenues primarily was due to an
increase in capacity, an increase in RPM yield, and an
increase in load factor. Holding other factors constant
(such as yields and load factor), almost 70 percent of the
increase in passenger revenue was due to the Company’s
10.8 percent increase in available seat miles compared to
2004. The Company increased available seat miles as a
result of the net addition of 28 aircraft (33 new 737-700
aircraft net of five 737-200 aircraft retirements).
Approximately 18 percent of the increase in passenger
revenue was due to the 2.8 percent increase in passenger
yields. Average passenger fares increased 5.8 percent
compared to 2004, primarily due to less fare discounting
because of the strong demand for air travel coupled with
the availability of fewer seats from industrywide domestic
capacity reductions. The remainder of the passenger
revenue increase primarily was due to the 1.2 point
increase in the Company’s load factor compared to 2004.
Consolidated freight revenues increased $16 million,
or 13.7 percent. Approximately 65 percent of the
increase was due to an increase in freight and cargo
revenues, primarily due to higher rates charged on ship-
ments. The remaining 35 percent of the increase was due
to higher mail revenues. The U.S. Postal Service period-
ically reallocates the amount of mail business given to
commercial and freight air carriers and, during 2005,
shifted more business to commercial carriers. Other rev-
enues increased $39 million, or 29.3 percent, compared
to 2004. Approximately 35 percent of the increase was
from commissions earned from programs the Company
sponsors with certain business partners, such as the
Company sponsored Chase»Visa card. An additional
35 percent of the increase was due to an increase in excess
baggage charges, as the Company modified its fee policy
related to the weight of checked baggage during second
quarter 2005. Among other changes, the limit at which
baggage charges apply was reduced to 50 pounds per
checked bag.
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