Southwest Airlines 2009 Annual Report Download - page 35

of the year-over-year increase was from higher salaries and wages, primarily as a result of higher average wage
rates. This was partially offset by a $53 million decrease in profitsharing, attributable to lower income available
for profitsharing. The Company’s profitsharing expense excludes the unrealized gains and/or losses the Company
records in its fuel hedging program. See Note 10 to the Consolidated Financial Statements for further information
on fuel hedging. Salaries, wages, and benefits expense per ASM was 9.6 percent higher than 2008, primarily due
to the fact that the Company’s unionized workforce, who make up the majority of its Employees, had pay scale
increases as a result of increased seniority, while the Company’s ASM capacity declined 5.1 percent compared to
2008. Based on current cost trends and headwinds from lower capacity, the Company expects salaries, wages,
and benefits per ASM in first quarter 2010 to be higher than fourth quarter 2009’s unit cost of 3.66 cents.
The Company’s Stock Clerks are subject to an agreement between the Company and the International
Brotherhood of Teamsters, Local 19 (“IBT Local 19”). This agreement became amendable in August 2008. The
Company and IBT Local 19 reached a Tentative Agreement on behalf of the Southwest Stock Clerks in fourth
quarter 2009, which will be voted on during 2010.
The Company’s Aircraft Appearance Technicians and Dispatchers are subject to agreements between the
Company and the Aircraft Mechanics Fraternal Association (“AMFA”) and the Company and the Transportation
Workers of America, AFL-CIO, Local 550 (“TWU 550”), which became amendable in February 2009 and
November 2009, respectively. The Company is currently in discussions on new agreements with both AMFA and
TWU 550.
Fuel and oil expense decreased $669 million, or 18.0 percent, and on a per-ASM basis decreased 13.6
percent versus 2008. Both the dollar and the per-ASM decrease were driven primarily by a 13.1 percent decrease
in the average price per gallon for jet fuel, including the impact of fuel derivatives used in hedging, and including
related taxes. As a result of the Company’s fuel hedging program and inclusive of the impact of the accounting
requirements for derivatives and hedging, the Company recognized net losses totaling $467 million in 2009 in
Fuel and oil expense relating to fuel derivative instruments versus $1.1 billion of net gains recognized in Fuel
and oil expense in 2008. These totals are inclusive of cash settlements realized from the expiration/settlement of
fuel derivatives, which were $245 million paid to counterparties in 2009 versus $1.3 billion received from
counterparties for 2008. Additionally, in 2009 and 2008, there were net losses recognized in Fuel and oil
expense, of $222 million and $188 million, respectively, due to the fact that the Company had previously
recognized gains associated with settling contracts in each period that were associated with ineffective hedges or
derivatives that did not qualify for special hedge accounting. However, these totals exclude gains and/or losses
recognized from hedge ineffectiveness, which are recorded as a component of Other (gains) losses, net. See Note
10 to the Consolidated Financial Statements. In 2009, the Company also continued to make progress in
improving the fuel efficiency of its fleet. Despite the large increase in load factor from 2008 to 2009, the
Company was able to produce the same fuel gallons consumed per ASM flown for each year.
As of December 31, 2009, the Company had fuel derivative instruments in place to provide coverage on a
large portion of its 2010 estimated fuel consumption at varying price levels. The Company had derivative
contracts in place for approximately 50 percent of its estimated 2010 fuel consumption at prices up to
approximately $100 per barrel of crude oil. The Company also recently sold crude oil call options, which
decreased its protection to effectively 20 percent of estimated consumption if market prices settle in the $100 to
$120 per barrel range. The Company also added another layer of purchased crude oil call options to increase its
protection to approximately 40 percent of estimated 2010 consumption if market prices exceed $120 per barrel.
In addition to these positions, the Company also had unsettled fuel derivative instruments relating to its expected
fuel consumption in 2011 through 2013.
The Company’s fuel derivative portfolio consists of both instruments that were entered into (up until
mid-2008) to hedge future jet fuel purchases, and instruments entered into to offset the majority of these original
positions when market prices plummeted in the second half of 2008 and in early 2009. The decision to offset this
original portfolio also benefitted the Company by reducing its exposure to cash collateral requirements the
Company would be required to post with its counterparties if market prices continued to fall. When the Company
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