Southwest Airlines 2007 Annual Report Download - page 38

increase of four to five percent. For first quarter 2008, the
Company’s year-over-year capacity increase is expected
to slightly exceed six percent. Based on current plans, the
Company’s fleet is scheduled to total 527 737s by the end
of 2008.
Results of Operations
2007 Compared With 2006
Southwest’s profit of $645 million ($.84 per share,
diluted) in 2007 was an increase of $146 million, or
29.3 percent, compared to the Company’s 2006 net
income of $499 million ($.61 per share, diluted). How-
ever, the Company’s net profit results in both 2007 and
2006 include certain gains and losses, recorded in accor-
dance with SFAS 133, that relate to fuel derivatives
expiring in future periods. These adjustments, which
are related to the ineffectiveness of hedges and the loss
of hedge accounting for certain fuel derivatives, are
included in “Other (gains) losses,” which is below the
operating income line, in both periods. In 2007, these
adjustments totaled net gains of $360 million. For 2006,
these adjustments totaled net losses of $101 million.
Therefore, Southwest believes operating income provides
a better indication of the Company’s financial perfor-
mance for both 2007 and 2006 than does net income.
Southwest’s 2007 operating income was $791 million, a
decrease of $143 million, or 15.3 percent, compared to
2006. The decrease in operating income was driven
primarily by a substantial increase in fuel expense, despite
the fact that the Company once again benefited tremen-
dously from its fuel hedging program. The Company had
instruments in place to protect against over 90 percent of
its fuel consumption needs at an average crude oil equiv-
alent price of $50 per barrel. This resulted in a $686 mil-
lion reduction to Fuel and oil expense during 2007,
although, even with this protection, the Company’s aver-
age jet fuel cost per gallon increased from $1.53 in 2006
to $1.70 in 2007. Although fuel prices began 2007 at
moderately high levels, they quickly increased and stayed
at record levels throughout most of the second half of the
year. Market crude oil prices flirted with $100 per barrel
several times during 2007 and market (unhedged) jet
fuel prices reached as high as $2.87 per gallon during the
second half of the year.
Operating Revenues
Consolidated operating revenues increased
$775 million, or 8.5 percent, primarily due to a $707 mil-
lion, or 8.1 percent, increase in passenger revenues. The
increase in passenger revenues was primarily due to an
increase in capacity, as the Company added aircraft and
flights, resulting in a 7.5 percent increase in available seat
miles compared to 2006. The Company purchased a total
of 37 new Boeing 737-700 aircraft during 2007, and
added another two leased 737-700s from a previous
owner, resulting in the addition of 39 aircraft for the
year. The Company attempted to combat high fuel prices
through modest fare increases. However, general eco-
nomic conditions as well as significant low-fare compe-
tition made it difficult to raise fares as much as the
Company had done in 2006. The Company’s passenger
revenue yield per RPM (passenger revenues divided by
revenue passenger miles) increased 1.2 percent compared
to 2006. Unit revenue (total revenue divided by available
seat miles) also increased 0.9 percent compared to 2006
levels, as a result of the higher RPM yield. The Company
has been encouraged by more recent year-over-year unit
revenue trends, which improved each month during
fourth quarter 2007. The improved trends have continued
thus far in first quarter 2008. Because of the uncertainty
surrounding our nation’s overall economy, however, it is
difficult for the Company to precisely predict first quarter
2008 revenues.
Consolidated freight revenues decreased $4 million,
or 3.0 percent, versus 2006. A $10 million, or 8.5 percent,
increase in freight revenues, resulting primarily from
higher rates, was more than offset by a $14 million
decline in mail revenues. The lower mail revenues were
due to the Company’s decision to discontinue carrying
mail for the U.S. Postal Service effective as of the end of
second quarter 2006. The Company expects an increase
in consolidated freight revenues during first quarter 2008,
primarily due to an increase in capacity and higher rates
charged. “Other revenues” increased $72 million, or
35.6 percent, compared to 2006, primarily from higher
commissions earned from programs the Company spon-
sors with certain business partners, such as the Company
sponsored Chase»Visa card. The Company currently
expects another increase in first quarter 2008, also due to
higher commissions earned, and at a somewhat compa-
rable rate to the 2007 increase.
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