Southwest Airlines 2011 Annual Report Download - page 59

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all-Boeing 737 fleet. In October 2011, the Company amended its engine maintenance contracts with GE Engine
Services. Previously, the engines on both its Classic fleet (737-300/500s) and its 737-700s were subject to
“power-by-the-hour” agreements under which the cost was based on the number of engine hours flown. The
amended agreement for the Classic fleet no longer meets the risk-transfer criteria of a “power-by-the-hour”
agreement, and thus expense will prospectively be recorded on a time and materials basis when an engine repair
event takes place. The maintenance contract for the engines on the Company’s 737-700 fleet was amended
primarily to incorporate the 52 Boeing 737-700s from the AirTran acquisition and to extend the term of that
agreement until December 31, 2021. The amendments to both maintenance contracts were effective October 1,
2011. The Company currently expects consolidated Maintenance materials and repairs expense per ASM for first
quarter 2012 to be comparable to combined first quarter 2011 results, based on currently scheduled airframe
maintenance events, scheduled engine shop visits, Evolve retrofits, and projected engine hours flown.
Excluding the results of AirTran following the acquisition, Aircraft rentals expense for 2011 decreased $31
million, or 17.2 percent, on a dollar basis compared to 2010 as a result of amortization associated with the
unfavorable aircraft lease liability created as part of purchase accounting adjustments based on the estimated fair
value of AirTran’s Boeing 717 leases. See Note 2 to the Consolidated Financial Statements. Excluding the
impact of this amortization, year-over-year expense decreased slightly on a dollar basis. Consolidated Aircraft
rentals expense per ASM for 2011 increased 44.4 percent compared to 2010. This increase on a per-ASM basis
primarily was due to the fact that AirTran leases the majority of its aircraft fleet. Of the 140 aircraft in AirTran’s
fleet, over 70 percent are on operating leases, versus approximately 16 percent for Southwest’s fleet at
December 31, 2011. The Company currently expects consolidated Aircraft rentals expense per ASM for first
quarter 2012 to be comparable to fourth quarter 2011’s consolidated results, based on expected amortization
associated with the aforementioned unfavorable aircraft lease liability and lease rate reductions negotiated for the
Boeing 717 leases.
Excluding the results of AirTran following the acquisition, Landing fees and other rentals expense for 2011
increased by $35 million, or 4.3 percent, on a dollar basis compared to 2010. The majority of the dollar increase
was due to the increase in number of trips flown versus the same prior year period. On a per-ASM basis
compared to 2010, consolidated Landing fees and other rentals expense decreased by 2.4 percent. The decline on
a per-ASM basis primarily was due to higher than anticipated credits (refunds) received in 2011 as a result of
airports’ audits of prior period payments. The Company currently expects consolidated Landing fees and other
rentals expense for first quarter 2012 to be higher than the combined first quarter 2011 results on a per-ASM
basis.
Excluding the results of AirTran following the acquisition, Depreciation and amortization expense for 2011
increased $46 million, or 7.3 percent, on a dollar basis compared to 2010. Approximately 66 percent of this
increase was due to the amortization associated with the intangible assets recognized upon the acquisition of
AirTran, such as customer relationships, trademarks, slots, domain name, and non-compete agreements, and
approximately 23 percent was due to large projects that have been placed into service, such as the Company’s
implementation of its All-New Rapid Rewards frequent flyer program. On a per-ASM basis, consolidated
Depreciation and amortization expense decreased by 7.8 percent compared to 2010, primarily due to the majority
of AirTran’s fleet being on operating leases. For first quarter 2012, the Company currently expects consolidated
Depreciation and amortization expense per ASM to increase compared to first quarter 2011’s combined results,
primarily due to the amortization of intangible assets and the Company’s plans to accelerate the retirement of its
Classic fleet.
On a consolidated basis for 2011, the Company incurred $134 million of acquisition and integration costs
related to the acquisition of AirTran. These costs primarily consisted of financial advisory fees and consulting,
severance, technology, and facility integration expenses. See Note 2 to the Consolidated Financial Statements.
Excluding the results of AirTran following the acquisition, Other operating expenses for 2011 increased
$211 million on a dollar basis compared to 2010. Approximately 20 percent of this increase was a result of
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