Southwest Airlines 2008 Annual Report Download - page 42

The Company’s 2008 CASM (cost per available
seat mile) increased 12.5 percent compared to 2007.
Approximately 80 percent of this increase was due to
the increase in fuel expense, net of gains from the
Company’s fuel hedging program. The majority of
the remainder of the increase was due to higher
airport costs and maintenance expense. As a result of
higher fuel prices throughout much of 2008, the
Company has continued its diligent focus on
improving fuel efficiency and controlling non-fuel
costs. The Company has implemented various
technology improvements, which have improved
efficiency and enabled the Company to grow
headcount at either the same or a slower rate than
capacity. Based on current cost trends, the Company
expects first quarter 2009 unit costs to increase from
first quarter 2008’s 9.69 cents, excluding any impact
associated with the ineffectiveness of fuel hedges or
fuel derivatives that are marked to market value
because they do not qualify for special hedge
accounting, primarily due to higher salaries, wages,
and benefits and the continuation of higher
maintenance costs. Unit costs will be negatively
impacted due to the Company’s decision to decrease
its capacity versus first quarter 2008, as it will have
similar or higher fixed costs that are spread over
fewer ASMs.
Salaries, wages, and benefits increased $127
million on an absolute dollar basis. Nearly the entire
increase was from higher salaries and wages, primarily
as a result of higher average wage rates. An increase in
health and workers compensation benefits primarily
caused by inflationary increases in the cost of medical
care was mostly offset by a $46 million decrease in
profitsharing, attributable to lower income available
for profitsharing. The Company’s profitsharing
expense excludes the unrealized gains and/or losses
the Company records in its fuel hedging program as a
result of SFAS 133. See Note 10 to the Consolidated
Financial Statements for further information on SFAS
133 and fuel hedging. Salaries, wages, and benefits
expense per ASM was basically flat compared to 2007.
Salaries and wages per ASM increased primarily due
to higher wage rates, but were almost completely
offset by a decline in profitsharing expense per ASM,
as capacity grew 3.6 percent, but profitsharing expense
declined 34.7 percent versus 2007. Based on current
trends, the Company expects salaries, wages, and
benefits per ASM in first quarter 2009 to slightly
increase from fourth quarter 2008’s unit cost of 3.32
cents, but not exceed 3.40 cents per ASM.
The Company’s Pilots are subject to an
agreement between the Company and the Southwest
Airlines Pilots’ Association (“SWAPA”), which
became amendable during September 2006. The
Company and SWAPA are currently in discussions
on a new agreement.
The Company’s Flight Attendants are subject to
an agreement between the Company and the
Transport Workers Union of America, AFL-CIO
Local 556 (“TWU 556”), which became amendable
in June 2008. The Company and TWU are currently
in discussions on a new agreement.
The Company’s Ramp, Operations, Provisioning,
and Freight Agents are subject to an agreement
between the Company and the Transport Workers
Union of America, AFL-CIO Local 555 (“TWU
555”), which became amendable in July 2008. The
Company and TWU are currently in mediation.
The Company’s Stock Clerks are subject to an
agreement between the Company and the International
Brotherhood of Teamsters, Local 19 (“IBT Local 19”),
and the Company’s Mechanics are subject to an
agreement between the Company and the Aircraft
Mechanics Fraternal Association (“AMFA”). Both of
these agreements became amendable in August 2008.
The Company and AMFA reached a Tentative
Agreement on behalf of the Southwest Mechanics in
fourth quarter 2008, which was ratified by the
Mechanics during January 2009. The Company and
IBT Local 19 remain in discussions on a new
agreement for the Company’s Stock Clerks.
The Company’s Customer Service and
Reservations Agents are subject to an agreement
between the Company and the International
Association of Machinists and Aerospace Workers,
AFL-CIO (“IAM”), which became amendable in
November 2008. The Company and IAM are
currently in discussions on a new agreement.
The Company’s Aircraft Appearance
Technicians and Flight Dispatchers are subject to
agreements between the Company and AMFA and
the Company and the Transportation Workers of
America, AFL-CIO, Local 550, which will become
amendable in February 2009 and November 2009,
respectively.
Fuel and oil expense increased $1.0 billion, or
38.0 percent, and on a per-ASM basis increased 33.3
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