Southwest Airlines 2007 Annual Report Download - page 39

Operating Expenses
Consolidated operating expenses for 2007 increased $918 million, or 11.3 percent, compared to a 7.5 percent
increase in capacity. Historically, changes in operating expenses for airlines are typically driven by changes in capacity, or
ASMs. The following presents Southwest’s operating expenses per ASM for 2007 and 2006 followed by explanations of
these changes on a per-ASM basis and/or on a dollar basis (in cents, except for percentages):
2007 2006
Increase
(Decrease)
Percent
Change
Salaries, wages, and benefits ............................ 3.22¢ 3.29¢ (.07)¢ (2.1)%
Fuel and oil........................................ 2.55 2.31 .24 10.4
Maintenance materials and repairs ........................ .62 .51 .11 21.6
Aircraft rentals ..................................... .16 .17 (.01) (5.9)
Landing fees and other rentals .......................... .56 .53 .03 5.7
Depreciation and amortization .......................... .56 .56 — —
Other ............................................ 1.43 1.43 — —
Total .......................................... 9.10¢ 8.80¢ .30¢ 3.4%
The Company’s 2007 CASM (cost per available
seat mile) increased 3.4 percent compared to 2006.
Approximately 80 percent of this increase was solely
due to the increase in fuel expense, net of gains from
the Company’s fuel hedging program. The remainder of
the increase was due to higher maintenance expense. All
other operating expense categories combined to be
approximately flat compared to 2006. Due to higher fuel
prices, the Company has intensified its focus on control-
ling non-fuel costs and continues to mitigate wage rate
and benefit cost pressures through productivity and effi-
ciency improvements. The Company’s headcount per
aircraft at December 31, 2007, was 66, versus a year-
ago level of 68. From the end of 2003 to the end of 2007,
Southwest’s headcount per aircraft decreased 22 percent,
as the Company implemented various technology
improvements, which improved efficiency and enabled
the Company to grow capacity without a commensurate
increase in headcount. Based on current cost trends, the
Company expects first quarter 2008 unit costs to increase
from first quarter 2007’s 8.93 cents, due primarily to a
significant increase in fuel costs and the continuation of
higher maintenance costs. The higher expected fuel costs
are due to the fact that the Company’s protective position
as to fuel derivative instruments is not as favorable as first
quarter 2007, and current physical (unhedged) jet fuel
prices are significantly higher than the prior year.
On an absolute dollar basis, Salaries, wages, and
benefits increased $161 million, primarily from a
$204 million increase in salaries and wages, partially
offset by a $43 million decrease in benefits. The dollar
increase in salaries and wages was due primarily to a
5.2 percent headcount increase, and the dollar decrease in
benefits was due primarily to a $33 million decrease in
profitsharing, attributable to lower income available for
profitsharing, and a $43 million decrease in share-based
compensation, due to fewer Employee stock options
becoming vested during 2007 versus 2006. These ben-
efits decreases were partially offset by higher healthcare
costs. Although the Company’s net income was higher
than 2006, income available for profitsharing was lower,
since the Company’s profitsharing plan does not consider
the unrealized gains and/or losses the Company records
in its fuel hedging program as a result of SFAS 133.
Salaries, wages, and benefits expense per ASM decreased
2.1 percent compared to 2006, primarily due to lower
profitsharing expense and lower share-based compensa-
tion expense, despite the increase in ASMs. See Note 10
to the Consolidated Financial Statements for further
information on SFAS 133 and fuel hedging, and Note 13
for further information on share-based compensation.
Based on current trends, the Company expects salaries,
wages, and benefits per ASM in first quarter 2008 to be in
line with first quarter 2007’s unit cost.
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 are currently in
discussions on a new agreement.
The Company’s Flight Attendants are subject to an
agreement with the Transport Workers Union of Amer-
ica, AFL-CIO (“TWU”), which becomes amendable in
June 2008.
The Company’s Ramp, Operations, Provisioning,
and Freight Agents are subject to an agreement with the
TWU, which becomes amendable in July 2008. However,
20