Southwest Airlines 2007 Annual Report Download - page 41

purchased aircraft to its fleet during 2007, and leased two
additional 737-700 aircraft. The Company currently
expects similar year-over-year rental expense compari-
sons for first quarter 2008.
Landing fees and other rentals increased $65 million
on a dollar basis and 5.7 percent on a per-ASM basis,
compared to 2006. The dollar increase was due primarily
to an increase in airport gate space to support the increase
in capacity and trips flown versus 2006. On a per-ASM
basis, the increase was due primarily to higher rates paid
for airport space. The Company currently expects a year-
over-year increase in landing fees and other rentals per
ASM for first quarter 2008, primarily due to higher rates
paid for airport space.
Depreciation and amortization expense increased
$40 million on a dollar basis compared to 2006, but
was flat on a per-ASM basis. The dollar increase was due
primarily to 37 new 737-700 aircraft purchased during
2007. Based on current fleet and growth plans, the
Company expects a similar year-over-year comparison
for first quarter 2008 on a per-ASM basis. See Note 4 to
the Consolidated Financial Statements for further infor-
mation on the Company’s future aircraft deliveries.
Other operating expenses increased $108 million
but were flat on a per-ASM basis, compared to 2006. On
a dollar basis, approximately 20 percent of the increase
was due to an increase in revenue-related costs associated
with the 8.1 percent increase in passenger revenues (such
as credit card processing fees) and approximately 20 per-
cent was due to higher personnel expenses (which
includes items associated with flight crew travel, such
as hotel and per diem costs) caused by the increase in
capacity and trips flown. Excluding anticipated gains
from the sale of aircraft, the Company currently expects
an increase in other operating expenses on a per-ASM
basis for first quarter 2008 compared to first quarter
2007, assuming increased revenues.
Other
“Other expenses (income)” included interest
expense, capitalized interest, interest income, and other
gains and losses. Interest expense decreased by $9 million,
or 7.0 percent, primarily due to the Company’s repay-
ment of $729 million in debt during 2006 and 2007. This
was partially offset by the issuance of $800 million in new
debt instruments in 2006 and 2007; however, the timing
of the new debt issued compared to the debt repaid
resulted in lower expense for 2007. The Company cur-
rently expects an increase in interest expense compared to
2007, primarily due to a higher average debt balance
associated with recent borrowings in late 2006 and in
2007. See Note 7 to the Consolidated Financial State-
ments for more information on long-term debt transac-
tions. Capitalized interest declined slightly compared to
2006 due to a reduction in progress payment balances for
scheduled future aircraft deliveries. Interest income
decreased $40 million, or 47.6 percent, primarily due
to a decrease in average cash and short-term investment
balances on which the Company earns interest. See Note 1
to the Consolidated Financial Statements for more
information.
Other (gains) losses, net, primarily includes amounts recorded in accordance with the Company’s hedging activities
and SFAS 133. During 2007, the Company recorded significant gains related to the ineffectiveness of its hedges as well as
to the increase in market value of fuel derivative contracts that were marked to market because they didn’t qualify for
SFAS 133 hedge accounting. The gains resulted from the dramatic increase in the fair value of the Company’s portfolio of
fuel derivative instruments as commodity prices reached record levels. During 2006, the Company recorded losses related
to the ineffectiveness of its hedges, as well as the increase in market value of fuel derivative contracts that were marked to
market because they didn’t qualify for SFAS 133 hedge accounting, as commodity prices declined during that year. The
following table displays the components of Other (gains) losses, net, for the years ended December 31, 2007 and 2006:
2007 2006
(In millions)
Mark-to-market impact from fuel contracts settling in future periods — included in
Other (gains) losses, net ........................................... $(219) $42
Ineffectiveness from fuel hedges settling in future periods — included in Other (gains)
losses, net ...................................................... (51) 39
Realized ineffectiveness and mark-to-market (gains) or losses — included in Other
(gains) losses, net ................................................ (90) 20
Premium cost of fuel contracts included in Other (gains) losses, net .............. 58 52
Other ........................................................... 10 (2)
$(292) $151
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