Southwest Airlines 2011 Annual Report Download - page 60

Download and view the complete annual report

Please find page 60 of the 2011 Southwest Airlines annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 141

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141

revenue-related costs (such as credit card processing fees) associated with the 13.1 percent increase in Passenger
revenues, approximately 17 percent was due to technology and consulting costs associated with completed and
ongoing projects, and approximately 8 percent was a result of a $17 million asset impairment related to the
Company’s decision not to equip its Classic aircraft with RNP capabilities. On a consolidated basis, Other
operating expenses per ASM for 2011 increased 7.6 percent compared to 2010. Approximately 31 percent of the
increase per ASM was a result of revenue-related costs and 16 percent was due to technology and consulting
costs associated with projects. On a consolidated basis for first quarter 2012, the Company currently expects
Other operating expenses per ASM to increase from first quarter 2011’s combined results.
Through the 2003 Emergency Wartime Supplemental Appropriations Act, the federal government has
continued to provide renewable, supplemental, first-party war-risk insurance coverage to commercial carriers at
substantially lower premiums than prevailing commercial rates and for levels of coverage not available in the
commercial market. The government-provided supplemental coverage from the Wartime Act is currently set to
expire on September 30, 2012. Although another extension beyond this date is expected, if such coverage is not
extended by the government, the Company could incur substantially higher insurance costs or experience
unavailability of adequate coverage in future periods.
Other
Consolidated Other expenses (income) include interest expense, capitalized interest, interest income, and
other gains and losses. Consolidated Interest expense for 2011 increased by $27 million, or 16.2 percent,
compared to 2010. The additional debt held by the Company in connection with the AirTran acquisition resulted
in $26 million additional interest expense for 2011. For first quarter 2012, the Company expects interest expense
to decline from fourth quarter 2011’s $51 million, primarily as a result of the redemption of the Company’s $400
million 10.5% notes on December 15, 2011. See Note 2 to the Consolidated Financial Statements.
Consolidated Capitalized interest for 2011 decreased by $6 million, or 33.3 percent, compared to 2010,
primarily due to a decrease in average progress payment balances for scheduled future aircraft deliveries.
Consolidated Interest income for 2011 decreased by $2 million, or 16.7 percent, compared to 2010,
primarily due to lower rates earned on invested cash and short-term investments.
Consolidated Other (gains) losses, net, primarily includes amounts recorded as a result of the Company’s
hedging activities. See Note 10 to the Consolidated Financial Statements for further information on the
Company’s hedging activities. The following table displays the components of Other (gains) losses, net, for the
years ended December 31, 2011 and 2010:
Year ended December 31,
(in millions) 2011 2010
Mark-to-market impact from fuel contracts settling in future periods ......... $ 21 $(21)
Ineffectiveness from fuel hedges settling in future periods ................. 33 (11)
Realized ineffectiveness and mark-to-market (gains) or losses .............. 35 (1)
Premium cost of fuel contracts ....................................... 107 134
Other ........................................................... 2 5
$198 $106
Income taxes
The Company’s consolidated effective tax rate was approximately 45 percent for 2011, compared to 38
percent for 2010. The higher rate for 2011 primarily was driven by the Company’s lower 2011 income before
taxes (thus enhancing the impact of permanent tax differences), a portion of acquisition-related costs being
non-deductible, additional income tax expense of $5 million as a result of an IRS settlement agreed to in first
quarter 2011 related to tax years 2007 through 2009, and a first quarter 2011 $2 million charge as a result of a
54