Southwest Airlines 2007 Annual Report Download - page 6

In the Business of Life
 Morethan 36 yearsago, SouthwestAirlinescreatedarevolutioninair travel forbusypeople.We sought to
democratizetheskiesbymakingitaffordableandeasyfortravelers——bothbusinessandleisure.Formorethan
36years,ourcausehasbeentoofferthemostproductive,efficient,andprofitablepoint-to-point,highfrequency,
ontimeairlineinAmerica.Asaresultofoursuccess,wehavebuiltoneofthemostpopularbrandsinAmericaand
nowcarrymoreCustomersthananyotherairlineintheworld.In2007,weintroducedexcitingmajorinitiativesto
furtherenhanceourBrand.
Taking Care of Business: Our Financial and Operational Performance

For2007,wepostedour35thconsecutiveyearofprofitability,afeatunmatchedintheairlineindustry.Despite
unprecedentedenergyprices,anemicdomesticairtrafficgrowth,andanincreasinglyuncertaindomesticeconomy,
Southwestgrewthefleetin2007by39aircraft.WemarkedamilestonewithTheBoeingCo.atourJunebirthday
celebrationwhenwetookdeliveryofour500thBoeing737.Wecelebratedwithaheartwarmingdedicationceremony
attheCompany’sheadquartersinDallas.TheeventwasanopportunitytocelebrateourrelationshipwithBoeing
andtopaytributetoallofourmilitaryEmployees.Onboardthenewjet’sinauguralSeattle–Dallasflightwere
36Employeeswhowereselectedfromalarge,impressivepoolofnomineeswhohadhonorablyservedinthevarious
branchesoftheU.S.military.
 Althoughweslowedourcapacitygrowthinthefourthquarter,weended2007withyear-over-yearavailableseat
milegrowthofalmosteightpercentandmorethan3,400dailydepartures.
 While the industry struggled with poor operating performance that often made front-page headlines, our
CustomerServiceperformancewasonceagainamongthebestintheairlineindustry.OurPeoplehelpedusachieve
amongthehighestmarksinbothontimeperformanceandCustomerSatisfactionin2007,accordingtostatistics
publishedbytheU.S.DepartmentofTransportation.Theywerealsoabletokeepourflightcancellationsconsistent
withlastyear’sperformanceofnomorethanonepercentofallflightsscheduled.It’snosecretthatourEmployees
takegreatprideinmakingSouthwestthemostdependable,warm,andfriendlyairlineintheindustrytoday.
 Onthefinancialside,wefelldisappointinglyshortofourearningsgoalsduetorisingenergypricesthroughout
theyearandsofterthanexpecteddemandfordomesticairtravel.Asaresultoftheweakpricingenvironment,our
year-over-yearunitrevenuegrowthwaslessthanonepercentin2007.Evenwithreducedindustryseatcapacity,
ourCustomersdemandedmorelowfares,withalmostatwo-pointdeclineinourfull-faremixfrom2006.Our2007
unitcosts,excludingspecialitems,rose3.3percentyear-over-year,drivenprimarilybyan11.3percentincreasein
oureconomicjetfuelpricepergallonfrom2006.However,ourPeoplecontinuedtheirexcellentcostcontrolefforts
throughproductivityimprovements.Whenitcomestoefficiency,Southwestisthestandard,andourPeopleare
committedtoourongoingeffortstofurtherimproveourproductivityandimproveassetutilization.OurEmployees
peraircraftdeclinedto66atyearend,amongthelowestsince1972.
 Wecontinuetoholdthebestfuelhedgeintheairlineindustry.Westarted2007withcrudeoilaround$50abarrel.
Atyear’send,itwashoveringaround$100abarrel.Fortunately,wewereapproximately90percentprotectedforall
of2007atapproximately$51abarrel.Thefuelhedgeprogramcontinuedtogiveustremendousprotectionagainstthe
volatilityofenergy prices. Since2000,wehavesavedmore than $3billionin fuelcoststhroughourfuel hedging
program.Althoughweareonceagainwell-hedgedin2008withapproximately70percentofourplannedconsumption
protected ataround $51abarrel,wecurrentlyexpect fuelheadwinds in2008of morethan$500 million.Looking
forward, wecurrently have fuelderivative contracts in placeformore than 55percentofexpected fuelneedsat
$51perbarrelin2009;nearly30percentat$63perbarrelin2010;morethan15percentat$64perbarrelin2011;and
morethan15percentat$63perbarrelin2012.
 Inadditiontotheprotectionprovidedbyourfuelhedgingprogram,weareimplementinginnovativeideastoreduce
fuelconsumptionandimproveassetutilization.Wecurrentlyplantocompletetheinstallationofblendedwingletson
asignicantportionofour737-300eetbytheendof2008,andallofour737-700sareoutttedwithfuel-saving
20072003 2004 2005 2006
Operating Expenses Per Available Seat Mile
20072003 2004 2005 2006
Operating Expenses Per Available Seat Mile
Excluding Fuel and Related Taxes
Passenger Revenues (in millions) and Distribution Method
9.10¢
7.74¢
7.97¢ 8.05¢
8.80¢
6.56¢
6.59¢
6.67¢
6.48¢ 6.49¢
9.0¢
8.6¢
8.2¢
7.8¢
7.4¢
6.7¢
6.6¢
6.5¢
6.4¢
6.3¢
$9,457$5,741
10%
59%
$6,280
74%54%
19% 18%
13% 10%16%
Passenger
Revenues
Reservations Center
Internet
Travel Agency
10%
65%
$7,279
15%
11%
9%
70%
$8,750
12%
11%
7% 7%11%
Other
2003 2004 2005 2006 2007
VO: Freedom to choose on Southwest Airlines.
SFX: Ding
VO: You are now free to move about the country.
©2008 Southwest Airlines Co.
VO: So Bill switched to Southwest Airlines.
Now Bill sits where Bill wants.
AIRLINE EMPLOYEE: You’re in 38E.
VO: And that’s when Bill decided...
BILL: Hey, I don’t want to be told where to
sit anymore.
BOSS: Bill, you’ll be sitting here.
BILL: (Sigh)
Teacher: Billy, this will be your seat.
BILL: (Sigh)
MOM: Here you go, Billy.
VO: From day one,
Bill has been told where to sit.
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The airline that
is doing it again.
. RC  L  R R RCSS
It’s a calmer, more relaxed way to board. There is no need to line up early because
your boarding pass number holds your place in line. So you are free to work,
relax, or do whatever.
. RC SS RLS SSS SLC
ou deserve Southwest irlines Business Select. For just a little extra, you can be
part of the select group that’s guaranteed to be one of the rst to board and get
a free drink and extra Rapid Rewards credit. Plus, your fare is fully refundable.
. RC R S FLS FR R S SSS
Fly long without the stops. Southwest offers over 3,00 daily nonstop ights,
which lets you y nonstop to more places you do business.
In fall 2007, Southwest launched
a print advertising campaign
detailing our new boarding
procedure, Business Select perks,
and new nonstop service to major
business destinations.
SOUTHWEST AIRLINES CO. ANNUAL REPORT 2007 5