Southwest Airlines 2010 Annual Report Download - page 54

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 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.
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.
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.
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 during 2009
(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.
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 during 2010 and 2011, 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
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