Southwest Airlines 2009 Annual Report Download - page 32

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
YEAR IN REVIEW
For the 37th consecutive year, the Company reported a net profit, earning $99 million ($.13 per share,
diluted) in 2009, as compared to 2008 net profit of $178 million ($.24 per share, diluted). Although the
Company’s 2009 results were unfavorable compared to its 2008 results and to its historical profitability
standards, the Company believes the achievement of a profit in 2009 was a tremendous accomplishment given
the enormity of challenges faced by the airline industry during the year. The year 2009 began amidst the
backdrop of an unprecedented worldwide credit crisis and a significant economic recession. Although fuel prices
were lower on average than in 2008, prices remained much higher than long-term historical averages, which
forced all airlines to make major adjustments to their operations and business models. The Company’s response
included initiatives designed to increase unit revenues including an overall reduction in capacity and elimination
of unprofitable flights, targeted marketing campaigns to enhance the Company’s already strong Brand and
Customer Experience, improved revenue management processes, and new service offerings such as EarlyBird
Check-in and the Company’s Pets Are Welcome on Southwest (PAWS) products. The Company also introduced
initiatives to reduce costs, including right-sizing headcount.
As a result of prevailing economic conditions in the second half of 2008, which persisted throughout 2009,
most U.S. commercial air carriers significantly reduced domestic capacity in an attempt to match the level of
anticipated demand. This included the Company, which retired older aircraft, postponed deliveries of new
aircraft, and modified its operations, resulting in a 5.1 percent reduction in available seat miles flown in 2009
versus 2008. However, the Company was able to stimulate a significant amount of demand through fare sales,
through its “Bags Fly Free” advertising campaign, and through optimizing its flight schedule. These efforts
produced a significant improvement in load factors and unit revenue trends during the second half of the year. In
the first half of 2009, the Company had monthly unit revenue trends that approached year-over-year declines of
up to ten percent. By the end of 2009, however, the Company was experiencing moderate improvements in unit
revenues compared to 2008, including a fourth quarter year-over-year improvement of almost seven percent,
which outperformed the industry. The Company attributes a significant portion of this improvement to several
key initiatives, including its decision to not charge for a Customer’s first or second checked bag, as nearly all
other domestic carriers have done; a new and improved website at southwest.com; significant advancements in
the Company’s revenue management and network optimization capabilities, which include trimming
unproductive and less popular flights and reallocating capacity to fund other market growth opportunities, such
as Minneapolis-St. Paul, New York LaGuardia, Boston Logan, and Milwaukee, all of which were new
destinations for the Company in 2009; new products such as EarlyBird and PAWS; and aggressive discounting of
fares, which stimulated demand and resulted in Company-record load factors in every month from July through
December 2009.
On the cost front, lower fuel expense almost exactly offset the reduction in revenues experienced by the
Company during 2009. However, fuel prices began the year at much lower levels than they were at the end of
2009. The market price of spot crude oil hit a low of $33 per barrel during first quarter 2009, but rose throughout
the year to hit a high of $82 per barrel during fourth quarter 2009. The Company also executed Freedom ’09
during the year, which was a voluntary early retirement program that was accepted by 1,404 Employees. This
resulted in a one-time charge of $66 million (before the impact of profitsharing or taxes) during 2009. The
program was offered to decrease overstaffing created by the Company’s prior decision to reduce its capacity
during 2009, and the Company currently expects savings in subsequent years to exceed the cost of the program.
See Note 9 to the Consolidated Financial Statements for further information. The Company carefully managed its
fleet during 2009 and ended the year with 537 aircraft in active service — the same with which it started the year.
A total of 13 new Boeing 737-700s were delivered to the Company during 2009, and the Company removed
13 older 737-300s from active service.
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