Southwest Airlines 2009 Annual Report Download - page 22

its net fuel hedge position in place for 2009 through 2013, leaving it with less protection against future increases.
These types of adjustments in the Company’s overall fuel hedging strategy, as well as the ability of the
commodities used in fuel hedging (principally crude oil, heating oil, and unleaded gasoline) to qualify for special
hedge accounting, have historically significantly affected, and are likely to continue to affect, the Company’s
results of operations. The Company’s fuel hedging arrangements and the impact of hedge accounting on the
Company’s results of operations are discussed in more detail under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and in Note 10 to the Consolidated Financial Statements.
The airline industry is particularly sensitive to changes in economic conditions; further unfavorable
economic conditions would likely negatively affect the Company’s results of operations.
The airline industry is particularly sensitive to changes in economic conditions, which affect Customer
travel patterns and related revenues. For example, recent unfavorable economic conditions, such as higher
unemployment rates, reduced sales revenues for many companies, and increased business operating costs, have
reduced spending for both leisure and business travel, as potential Customers cut back on travel expenses.
Leisure travel may be viewed as an expendable discretionary expense, and short-haul travelers can replace air
travel with surface travel. Businesses may be able to forego air travel by using communication alternatives such
as videoconferencing and the Internet or may be more likely to purchase less expensive tickets to reduce costs,
which results in a decrease in average revenue per seat. The Company’s operations are subject to the risk that
changes in travel patterns during recent periods of economic difficulty could remain despite any improving
economic conditions.
Unfavorable economic conditions can also impact the ability of airlines to raise fares to counteract increased
fuel, labor, and other costs. In addition, the Company’s high percentage of short-haul flights increases its
exposure to competition from surface travel alternatives during periods of unfavorable economic conditions.
The Company’s low cost structure is one of its primary competitive advantages, and many factors could
affect the Company’s ability to control its costs.
The Company’s low cost structure has historically been one of its primary competitive advantages, as it has
enabled the Company to offer low fares and drive traffic volume; however, the airline industry is capital intensive,
and the Company has limited control over increases in many of its costs, such as fuel, labor, and aircraft airframe
and engine repairs, as well as environmental, safety, security, and regulatory compliance costs. Jet fuel and oil
constituted approximately 30 percent of the Company’s operating expenses during 2009, and pricing is subject to
the external factors discussed in the first Risk Factor above. Salaries, wages, and benefits constituted
approximately 34 percent of the Company’s operating expenses during 2009. The Company’s ability to control
labor costs is limited by the terms of its collective bargaining agreements, and increased labor costs have already
impacted its low cost competitive position. In addition, health care reform currently under consideration in the
U.S. Congress could substantially change the health care and insurance industries in the United States, which
could increase the Company’s costs. The Company’s regulatory compliance costs are subject to potentially
significant increases from time to time based on actions by the regulatory agencies, as discussed above under
“Business — Regulation.” In addition, as other airlines have reduced capacity at a greater pace than has the
Company, the Company has incurred a higher percentage of total airport-related costs. The Company is also
reliant upon third party vendors and service providers, and its low cost advantage is also dependent in part on its
ability to obtain and maintain commercially reasonable terms with those parties.
As discussed above under “Business-Insurance,” the Company carries insurance of types customary in the
airline industry and is also provided supplemental, first-party, war-risk insurance coverage by the federal
government at substantially lower premiums than prevailing commercial rates. If the supplemental coverage is
not extended, the Company could incur substantially higher insurance costs. In addition, in the event of an
accident or other incident involving Company aircraft, the Company could be responsible for costs in excess of
its related insurance coverage, which costs could be substantial. Any aircraft accident or other incident, even if
fully insured, could also have a material adverse effect on the public’s perception of the Company.
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