Southwest Airlines 2010 Annual Report Download - page 2

Our revenue results were equally as impressive, setting a number of records
every quarter of the year, while consistently outperforming the industry’s revenue
growth. For the full year, our total operating revenues grew year-over-year nearly
17 percent to $12.1 billion, which was an impressive 16.5 percent increase on an
available seat mile basis. With virtually no capacity growth for the year, our revenue
strength demonstrates that our efforts for the past several years to boost the
Company’s revenue production have been successful. In fact, compared to our 2007
revenue baseline, we increased our 2010 revenues by over $2.2 billion.
And yet, the quest for more revenue continues, as West Texas Intermediate
crude oil has surpassed $100 per barrel in March. To mitigate the damaging surge in
fuel prices, the industry has sought a number of fare increases already this year, and
many carriers have also announced capacity cuts. As I write this letter, we have
implemented a number of modest fare increases since mid-December—more than for
all of last year. Thus far, our revenue momentum remains strong, and our profits are
on plan. Representing over a third of our operating costs, fuel is the biggest threat to
our 2011 profitability. Economic fuel expense increased $626 million in 2010, and is
currently anticipated to increase another $1.3 billion this year (based on current and
forward hedged prices). That’s a significant cost mountain, but we are managing with
revenue initiatives, fuel conservation efforts, and fuel hedging.
We made significant progress on strategic Customer initiatives in 2010. We
continued to grow our Business Select Customers, and our Early Bird product
exceeded our first full-year expectations, contributing nearly $100 million in
incremental revenues. We began installing inflight internet connectivity on our
737-700s, and launched international connecting itineraries with Volaris, Mexico’s
second largest airline. We announced our decision to replace our reservations system
that, among other benefits, will allow us to serve international destinations. And,
finally, we announced the substitution of the Boeing 737-800 aircraft for our 20 -700
deliveries in 2012, and we are continuing to evaluate additional -800 substitutions for
future -700 deliveries. Producing lower unit costs on longer haul routes, the larger,
more efficient 737-800 opens up a host of exciting possibilities for growth.
On March 1, 2011, we launched our All-New Rapid Rewards frequent flyer
program. Our legacy program served us very well for 24 years. But, while our network
evolved over the years, our loyalty program essentially remained unchanged. As a
result, we were not realizing our fair share of Members in our loyalty program. Under
our new points-based program, our Members can enjoy many new attractive benefits,
including seat availability, every day, on every flight, with absolutely no blackout dates
or seat restrictions. Our goal with the new program is to drive hundreds of millions in
incremental annual revenues by winning new Customers, increasing loyalty from
current Customers, increasing usage of our co-branded VISA credit card, and
strengthening our hotel, rental car, and retail partnerships. Compared to other
programs in the industry, we believe All-New Rapid Rewards is superior.