Southwest Airlines 2009 Annual Report Download - page 37

Maintenance materials and repairs were flat on a dollar basis, but increased 4.3 percent on a per ASM basis
compared to 2008. On a dollar basis, an increase in engine expense was mostly offset by a decrease in airframe
expense. The majority of the increase in engine costs related to the Company’s 737-700 aircraft, which for the
second half of 2008 and all of 2009 were accounted for under an agreement with GE Engines Services, Inc. (GE
Engines) that provides for engine repairs to be done on a rate per flight hour basis. For the first half of 2008,
these aircraft engines were accounted for on a time and materials basis and there were very few repair events.
The expense for 737-700 engines recognized in 2009 associated with the current agreement exceeded the expense
recognized in 2008. Under this engine agreement, which is similar to the “power-by-the-hour” agreement with
GE Engines the Company has in place for its 737-300 and 737-500 fleet, payments are primarily based on a rate
per flight hour basis. Since the Company has effectively transferred the risk for specified future repairs and
maintenance on these engines to the service provider, expense is recorded commensurate with each hour flown
on an engine. The decrease in airframe expense primarily was due to a decline in the number of scheduled
airframe maintenance events versus 2008. On a per ASM basis, the increase in maintenance materials and repairs
compared to 2008 primarily was due to the increase in 737-700 engine costs combined with the Company’s 5.1
percent decline in ASMs. The Company expects Maintenance materials and repairs per ASM for first quarter
2010 to exceed the .76 cents per ASM experienced in first quarter 2009, based on currently scheduled airframe
maintenance events and projected engine hours flown.
Aircraft rentals expense per ASM increased 26.7 percent and, on a dollar basis, increased $32 million. Both
increases primarily were due to the fact that the Company executed sale and leaseback transactions for a total of
16 of its 737-700 aircraft during December 2008 and the first half of 2009, combined with the impact of the
Company’s 5.1 percent ASM reduction for 2009 compared to 2008. All of the lease agreements executed as part
of the sale and leaseback transactions were classified as operating leases. As a result of these transactions, the
Company currently expects rental expense per ASM for first quarter 2010 to be similar to the .20 cents per ASM
experienced in fourth quarter 2009.
Landing fees and other rentals increased $56 million on a dollar basis and increased 14.1 percent on a
per-ASM basis, compared to 2008. The majority of both the dollar increase and per ASM increase was due to higher
space rentals in airports as a result of higher rates charged by those airports for gate and terminal space. The
majority of these higher rates charged by airports was due to other airlines’ reduced capacity (which in most cases
exceeded the Company’s capacity reductions at those airports), as airport costs are then allocated among a fewer
number of total flights. As a consequence of continued rate inflation at various airports, the Company currently
expects Landing fees and other rentals per ASM in first quarter 2010 to be in the mid .80 cents per ASM range.
Depreciation and amortization expense increased $17 million on a dollar basis compared to 2008, and was
up 8.6 percent on a per-ASM basis. The increase on a dollar basis primarily was due to higher owned aircraft
depreciation expense, primarily due to a reduction in the estimated salvage values of owned aircraft that were
recently retired or are expected to be retired over the next two years, based on current and expected future market
conditions for used aircraft. This increase in expense was mostly offset by the execution of sale and leaseback
agreements for 11 previously owned 737-700s during the first half of 2009. The increase on a per-ASM basis
primarily was due to the fact that the Company’s fleet size remained constant, while it reduced the number of
ASMs flown as a result of economic conditions. For first quarter 2010, the Company expects Depreciation
expense per ASM to increase slightly from fourth quarter 2009’s .66 cents.
Other operating expenses decreased $48 million, but were up 1.5 percent on a per-ASM basis, compared to
2008. Approximately 29 percent of the decrease on a dollar basis was due to lower bad debt expense related to
revenues from credit card sales, and another 28 percent of the decrease was due to lower personnel expenses,
primarily due to the reduction in headcount, the Company’s decline in capacity versus 2008, and other cost-
reduction efforts. On a per-ASM basis, the increase in operating expenses per ASM primarily was due to an
increase in advertising expense compared to 2008 combined with the reduction in ASMs. The Company
currently expects other operating expenses on a per-ASM basis for first quarter 2010 to be slightly higher than
the 1.47 cents experienced in fourth quarter 2009.
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