Southwest Airlines 2008 Annual Report Download - page 48

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but the number of aircraft on operating lease
increased by only two from 2006 to 2007. The
Company added 37 purchased aircraft to its fleet
during 2007, and leased two additional 737-700
aircraft.
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 primarily was due 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 primarily was 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 primarily was due to 37 new 737-700
aircraft purchased during 2007. See Note 4 to the
Consolidated Financial Statements for further
information on the Company’s future aircraft
deliveries.
Other operating expenses increased $100
million but were relatively flat on a per-ASM basis,
compared to 2006. On a dollar basis, over 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 over 20 percent 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.
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
repayment 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. See
Note 7 to the Consolidated Financial Statements for
more information on long-term debt transactions.
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
See Note 10 to the Consolidated Financial Statements for further information on the Company’s hedging
activities.
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