Southwest Airlines 2009 Annual Report Download - page 33

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Looking ahead to 2010, the Company remains cautious about demand for domestic air travel given current
domestic economic conditions. Although unit revenue trends have improved recently, this improvement
primarily has been through capacity reductions and other revenue initiatives, and the Company has not
experienced a significant increase in the demand for full-fare tickets. In addition, fuel prices continue to be
volatile and remain much higher than long-term historical averages. In October 2009, the Company announced
its decision to begin service from Northwest Florida Beaches International Airport near Panama City, Florida in
May 2010. This will represent the Company’s 69th destination, and it believes it will continue to have
opportunities to add more new cities in the future. The Company also plans to continue efforts to implement its
previously announced codeshare agreements with two different airlines — Canadian carrier WestJet and Mexican
carrier Volaris. Flight schedules and additional features regarding these relationships are expected to be
announced in 2010. However, certain details of these alliances are subject to approvals by both the U.S. and
Canadian/Mexican governments. The Company currently anticipates another year of little or no change in its
overall fleet size for 2010. The Company anticipates it will receive ten new 737-700 deliveries from Boeing
during 2010 and currently plans to retire a similar number of older 737-300s, resulting in approximately flat
ASMs compared to 2009. However, if there is a significant improvement in demand which includes the return of
full-fare traffic, the Company believes it has the flexibility to alter its current plans and to resume growth.
RESULTS OF OPERATIONS
2009 compared with 2008
The Company’s net income of $99 million ($.13 per share, diluted) in 2009 represented a decrease of $79
million, or 44.4 percent, compared to its 2008 net income of $178 million ($.24 per share, diluted). The results in
each year were significantly impacted by the Company’s fuel hedge program and the accounting requirements
related to the derivative instruments used in the Company’s hedging activities. As a result of the fuel hedges the
Company had in place during 2009 — including those that settled during 2009 and those that will settle in future
years — the Company recognized a net total of $408 million in losses allocated between Fuel and oil expense
and Other (gains) losses, net, in the Consolidated Statement of Income. During 2008, the Company had
recognized a total of $1.0 billion in net gains as a result of its fuel hedging activities, allocated between Fuel and
oil expense and Other (gains) losses, net. Each of these totals for 2009 and 2008 includes the net premium costs
the Company paid to enter into a portion of its fuel derivative instruments such as option contracts which is
classified as a component of Other (gains) losses, net. See Note 10 to the Consolidated Financial Statements for
further information on fuel derivative instruments.
Due to the fact that the Company’s fuel hedging activities have resulted in large noncash adjustments to
“Other (gains) losses, net,” the Company believes operating income provides a better indication of the
Company’s financial performance for both 2009 and 2008 than does net income. The Company’s 2009 operating
income was $262 million, a decrease of $187 million, or 41.6 percent, compared to 2008. Although the
fluctuations in Passenger revenue and Fuel and oil expense in 2009 versus 2008 were the largest individual
components impacting operating income, the year-over-year decline in Passenger revenues almost exactly offset
the year-over-year decline in Fuel and oil expense. Excluding these two components, the majority of the $187
million decline in operating income for 2009 versus 2008 was due to an increase in Salaries, wages, and benefits.
Operating revenues
Consolidated operating revenues decreased $673 million, or 6.1 percent, primarily due to a $657 million, or 6.2
percent, decrease in passenger revenues. The majority of the decline in passenger revenues was attributable to a 7.4
percent decrease in passenger revenue yields (passenger revenues divided by revenue passenger miles or RPMs), as
the percentage of full fare bookings was down versus the prior year and the Company offered more fare sales and
discounted seats in response to the decline in demand for air travel amid domestic economic conditions. However,
as a result of the Company’s fare discounting efforts and a number of recently implemented revenue initiatives,
combined with a 5.1 percent reduction in ASMs, load factor increased 4.8 points to 76.0 percent in 2009, which was
a record for the Company. The higher load factor mostly offset the decline in passenger yield, resulting in only a net
1.0 percent decline in operating revenue yield per ASM (unit revenue) versus 2008.
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