Southwest Airlines 2010 Annual Report Download - page 52

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Other (gains) losses, net, primarily includes amounts recorded as a result of the Company’s fuel hedging
activities. The following table displays the components of Other (gains) losses, net, for the years ended
December 31, 2010 and 2009:
(In millions) 2010 2009
Mark-to-market impact from fuel contracts settling in future periods—included in
Other (gains) losses, net ............................................... $(21) $ (73)
Ineffectiveness from fuel hedges settling in future periods—included in Other (gains)
losses, net .......................................................... (11) (97)
Realized ineffectiveness and mark-to-market (gains) or losses—included in Other
(gains) losses, net .................................................... (1) (38)
Premium cost of fuel contracts included in Other (gains) losses, net ............... 134 148
Other ................................................................ 5 6
$106 $ (54)
See Note 10 to the Consolidated Financial Statements for further information on the Company’s hedging
activities.
Income taxes
The provision for income taxes, as a percentage of income before taxes, decreased to 38.4 percent in 2010
from 39.6 percent in 2009. The lower 2010 rate primarily was due to the Company’s higher 2010 earnings, which
dilutes the impact of permanent tax differences, thus reducing the tax rate. The Company currently expects its
2011 effective tax rate to be 38 to 39 percent.
2009 compared with 2008
The Company’s consolidated 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.
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 2008 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 newly implemented revenue
initiatives, combined with a 5.1 percent reduction in ASMs, load factor increased 4.8 points to 76.0 percent in
2009. 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.
46