Southwest Airlines 2009 Annual Report Download - page 2

to affirm that Bags Fly Free only on Southwest. The results have been impressive as
Customers express their distaste for our competitors’ fees. We have experienced a
domestic market share shift worth close to a billion dollars in 2009. Our second half
2009 revenue results were impressive, especially given the recession. Starting in July
and continuing through February 2010, the most recent month reported, we reported
a record load factor every month. We reported record load factors for third quarter,
fourth quarter, and full year 2009. We reported record unit quarterly revenue in fourth
quarter 2009. We significantly outperformed the industry in 2009 revenue production
and believe the 2009 record load factors and revenues dwarf what we would
otherwise have collected in bag fees.
We prepared for record-high energy prices and recession by avoiding fleet
growth in 2009 and by aggressively trimming unpopular and unprofitable flights. All
told, this led to reduced seat miles flown in 2009 compared to 2008 of approximately
five percent, net. A significant amount of the unprofitable capacity was “harvested”
and redeployed to developing markets with high Customer demand (Denver) and
large new markets (Minneapolis/St. Paul, New York La Guardia, and Boston Logan).
Given the difficult economic environment, we did not desire to take on significant new
market risk and, consequently, scheduled a modest number of daily departures to
these large new cities in order to feed our existing network. This conservative strategy
proved out, as these new markets boosted our profits in 2009. Given our early
success with these new cities, we decided to launch Milwaukee in November, which
is a very competitive market. We want Milwaukee on our route map and judged
deferral of service not in our best long-term interests. While it carries more risk than
the other three new cities, it has exceeded our expectations, and we are pleased with
the results.
In July, we made the decision to bid for Frontier Airlines, which was for sale
pursuant to a bankruptcy court-supervised auction process. Ultimately, our bid was
not selected, primarily due to contingencies in the bid that were designed to protect
our Culture and the best interests of our Employees, Customers, and Shareholders.
As with any prospective buying opportunity, we reached our limit and chose not to
remove our contingencies. In the meantime, we boosted our presence, our
Customers, and our revenues in Denver. We have surpassed Frontier as the second
largest airline serving Denver (based on originating passengers boarded). By August
2010, we expect Denver to be the fifth largest departure point on our system. Without
a doubt, Denver is the most successful city ever added to the Southwest route
system, in terms of rapid capacity and revenue growth, in the first five years of
service. In summary, we are not disappointed with our position in Denver or the
outcome of the Frontier bankruptcy auction.
The year ahead is challenging, still. Energy prices are double year-ago levels,
and the economic recovery is halting and tepid. While 2010 earnings may improve
from last year’s meager results, they may not justify further investment in fleet growth.
Until earnings are generating sufficient returns on capital, we have no plans to
organically grow the fleet. Instead, we will focus on improving our profitability through