Southwest Airlines 2007 Annual Report Download - page 29

The Company’s profitability is impacted in part by
its ability to pass fuel cost increases through to the
consumer in the form of fare increases. 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. Fare increases are even more difficult to achieve in
uncertain economic environments, as low fares are often
used to stimulate demand.
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 accounting, and the effec-
tiveness 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; Southwest
could be adversely affected if it were unable to
maintain satisfactory relations with any unionized
or other Employee work group.
The airline business is labor intensive, and the
Company’s results are subject to variations in labor-
related job actions. Salaries, wages, and benefits repre-
sented 35.4 percent of the Company’s operating expenses
for the year ended December 31, 2007. In addition, as of
December 31, 2007, approximately 82 percent of the
Company’s Employees were represented for collective
bargaining purposes by labor unions. 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. The Company
and TWU are in discussions on a new agreement. The
Company’s Pilots are subject to an agreement with the
Southwest Airlines Pilots’ Association (“SWAPA”),
which became amendable during September 2006. The
Company and SWAPA are in discussions on a new
agreement. Although, historically, the Company’s rela-
tionships with its Employees have been good, the fol-
lowing 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, outsourcing costs, the impact of work rules, and
costs for health care.
Southwest’s business is affected by many changing
economic conditions and other conditions beyond its
control.
The Company’s business, and the airline industry in
general, is particularly impacted by changes in economic
conditions. Unfavorable general economic conditions,
such as higher unemployment rates, higher interest rates,
housing-related pressures (such as recent issues in the
subprime mortgage market), and increased operating
costs can reduce consumer spending or cause shifts in
spending. A general reduction or shift in discretionary
spending can result in decreased demand for leisure and
business travel and can also impact the Company’s ability
to raise fares to counteract increased fuel and labor costs.
The Company’s business, and the airline industry in
general, is also impacted by other conditions that are
largely outside of the Company’s control, including,
among others:
• Actual or threatened 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 the Company’s business, financial con-
dition, and results of operations.
The Company relies on technology to operate its
business and continues to implement substantial
changes to its information systems; any failure or
disruption in the Company’s systems could adversely
impact the Company’s operations.
The Company has historically been dependent on
automated systems and technology to operate its business,
enhance Customer Service and back office support sys-
tems, and increase Employee productivity, including the
Company’s computerized airline reservation system,
flight operations systems, telecommunication systems,
website at www.southwest.com, Automated Boarding
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