Southwest Airlines 2009 Annual Report Download - page 40

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The Company’s 2008 CASM (cost per available seat mile) increased 12.5 percent compared to 2007.
Approximately 80 percent of this increase was due to the increase in fuel expense, net of gains from the
Company’s fuel hedging program. The majority of the remainder of the increase was due to higher airport costs
and maintenance expense. As a result of higher fuel prices throughout much of 2008, the Company continued its
diligent focus on improving fuel efficiency and controlling non-fuel costs. The Company implemented various
technology improvements, which have improved efficiency and enabled the Company to grow headcount at
either the same or a slower rate than capacity.
Salaries, wages, and benefits increased $127 million on an absolute dollar basis. Nearly the entire increase
was from higher salaries and wages, primarily as a result of higher average wage rates. An increase in health and
workers compensation benefits primarily caused by inflationary increases in the cost of medical care was mostly
offset by a $46 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
and the related accounting requirements. Salaries, wages, and benefits expense per ASM was basically flat
compared to 2007. Salaries and wages per ASM increased primarily due to higher wage rates, but were almost
completely offset by a decline in profitsharing expense per ASM, as capacity grew 3.6 percent, but profitsharing
expense declined 34.7 percent versus 2007.
Fuel and oil expense increased $1.0 billion, or 38.0 percent, and on a per-ASM basis increased 33.3 percent
versus 2007. Both the dollar and the per-ASM increase were driven primarily by a 35.6 percent increase 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 related accounting requirements, the
Company recognized net gains totaling $1.1 billion in 2008 relating to fuel derivative instruments versus $686
million of net gains recognized in 2007. Cash settlements realized from the expiration/settlement of fuel
derivatives were $1.3 billion in 2008 versus $727 million for 2007. The primary reason that gains recognized in
Fuel and oil expense during 2008 were less than the cash settlement of fuel derivatives was due to the fact that a
portion of the gains associated with these settlements had already been recognized in earnings in prior periods, as
they were associated with ineffective hedges or derivatives that did not qualify for special hedge accounting. See
Note 10 to the Consolidated Financial Statements. The 2008 increase in fuel prices was partially offset by steps
the Company has taken to improve the fuel efficiency of its aircraft, its aircraft engines, and its flight plans and
procedures. These steps resulted in a 2.1 percent reduction in fuel gallons consumed per ASM flown for 2008
versus 2007.
Maintenance materials and repairs per ASM increased 12.9 percent compared to 2007, while increasing
$105 million on a dollar basis. On both a dollar basis and a per ASM basis, engine expense accounted for almost
60 percent of the increase and airframe expense accounted for approximately 40 percent of the increase. The
majority of the increase in engine costs related to the Company’s 737-700 aircraft. For all of 2007 and the first
half of 2008, these aircraft engines were accounted for on a time and materials basis. During the first half of
2008, there were significantly more repair events for these engines than in the first half of 2007. This was due to
the fact that the 737-700 is the newest aircraft type in the Company’s fleet, and, as this fleet has matured, the
number of engines on these aircraft undergoing their first major overhaul has increased. In June 2008, the
Company transitioned to a new engine repair agreement for these aircraft and expense is now based on flight
hours associated with 737-700 engines. The expense for 737-700 engines recognized in the second half of 2008
associated with the new agreement also exceeded the expense recognized in the second half of 2007, when
repairs were still being accounted for on a time and materials basis. The increase in airframe expense primarily
was due to more planned airframe inspection and repair events than in the prior year. These events, which are
required based on the number of flight hours each individual aircraft has flown, were higher in number as well as
cost per event.
Aircraft rentals expense per ASM decreased 6.3 percent and, on a dollar basis, decreased slightly. Both
decreases primarily were due to the fact that the Company returned nine operating lease aircraft to lessors during
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