Southwest Airlines 2007 Annual Report Download - page 43

ASMs. The following presents Southwest’s operating expenses per ASM for 2006 and 2005 followed by explanations of
these changes on a per-ASM and/or an absolute dollar basis:
2006 2005
Increase
(Decrease)
Percent
Change
Salaries, wages, and benefits ............................ 3.29¢ 3.27¢ .02¢ .6%
Fuel and oil........................................ 2.31 1.58 .73 46.2
Maintenance materials and repairs ........................ .51 .52 (.01) (1.9)
Aircraft rentals ..................................... .17 .19 (.02) (10.5)
Landing fees and other rentals .......................... .53 .53 — —
Depreciation and amortization .......................... .56 .55 .01 1.8
Other ............................................ 1.43 1.41 .02 1.4
Total .......................................... 8.80¢ 8.05¢ .75¢ 9.3%
Operating expenses per ASM increased 9.3 percent
to 8.80 cents, primarily due to an increase in jet fuel
prices, net of gains from the Company’s fuel hedging
program. The Company’s average cost per gallon of fuel
increased 48.5 percent versus the prior year.
Salaries, wages, and benefits expense per ASM
increased .6 percent compared to 2005, primarily due
to an increase in average wage rates, largely offset by
productivity efforts that enabled the Company to grow
overall headcount at a rate less than the growth in ASMs.
The Company’s headcount at December 31, 2006, was
2.9 percent higher than at December 31, 2005, despite
the 8.8 percent growth in available seat miles. On a dollar
basis, Salaries, wages and benefits increased $270 million,
of which $197 million was solely wages. The $197 million
increase in wages represented a 10.1 percent increase
compared to 2005, on an 8.8 percent increase in ASMs.
Of the $197 million increase in wages, the majority was
related to the increase in average wage rates.
Fuel and oil expense increased $797 million, and on
a per-ASM basis increased 46.2 percent, net of hedging
gains, primarily due to a significant increase in the
average cost per gallon of jet fuel. Although the Compa-
ny’s fuel hedge position was not as strong as the position
the Company held in 2005, the Company’s hedging
program still resulted in the realization of $675 million
in cash settlements during 2006. These settlements
resulted in a 2006 reduction to Fuel and oil expense of
$634 million. However, even with this hedge position,
the Company’s jet fuel cost per gallon increased 48.5 per-
cent versus 2005. The average cost per gallon of jet fuel in
2006 was $1.53 compared to $1.03 in 2005, excluding
fuel-related taxes and net of hedging gains. See Note 10
to the Consolidated Financial Statements. The increase
in fuel prices was partially offset by steps the Company
has taken to improve the fuel efficiency of its aircraft,
including the addition of blended winglets to all of the
Company’s 737-700 aircraft.
On an absolute dollar basis, maintenance materials
and repairs expense increased $22 million, primarily due
to an increase in the number of aircraft engine repairs.
However, on a per-ASM basis, maintenance materials
and repairs decreased 1.9 percent compared to 2005, as
the dollar increase was only 4.9 percent versus the
capacity (ASM) increase of 8.8 percent.
Aircraft rentals per ASM decreased 10.5 percent.
The Company’s 8.8 percent increase in ASMs was gen-
erated by the 36 aircraft the Company acquired during
2006, all of which were purchased. The number of
aircraft on operating lease remained the same, thereby
reducing the percentage of these aircraft in the total fleet.
On an absolute dollar basis, expense decreased $5 million
due to the renegotiation of some aircraft leases at lower
rates.
Landing fees and other rentals per ASM was flat
compared to 2005. On a dollar basis, expense increased
$41 million, primarily due to the Company’s increase in
airport space to support additional flight activity.
Depreciation and amortization expense per ASM
increased 1.8 percent, and on a dollar basis increased
$46 million. These increases were primarily due to an
increase in depreciation expense per ASM from 36 new
737-700 aircraft purchased during 2006 and the result-
ing higher percentage of owned aircraft.
In absolute dollars, Other operating expenses increased
$122 million, of which $39 million related to credit card
processing fees. The $39 million increase in credit card
processing fees represented a 22.2 percent increase from
2005 compared to the Company’s 20.2 percent increase in
Passenger revenues. In excess of 97 percent of Passenger
revenues are booked via customer credit cards, resulting in a
close correlation between these two measures. The second
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