Southwest Airlines 2011 Annual Report Download - page 62

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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 2010—including those that settled during 2010 and
those that will settle in future years—the Company recognized a net total of $426 million in losses allocated
between Fuel and oil expense and Other (gains) losses, net, in the Consolidated Statement of Income. During
2009, the Company recognized a total of $408 million in losses as a result of its fuel hedging activities, allocated
between Fuel and oil expense and Other (gains) losses, net. Each of these totals for 2010 and 2009 includes the
net premium costs the Company paid to enter into a portion of its fuel derivative instruments such as option
contracts which are classified as a component of Other (gains) losses, net. See Note 10 to the Consolidated
Financial Statements for further information on fuel derivative instruments. The Company’s results for 2009 also
included a one-time charge of $66 million (before the impact of profitsharing or taxes) related to Freedom ‘09, a
voluntary early retirement program that was accepted by 1,404 Employees. See Note 9 to the Consolidated
Financial Statements for further information on this program. The Company’s 2010 operating income was $988
million, which was significantly better than the Company’s 2009 operating income of $262 million, as the 16.9
percent increase in operating revenues outpaced the 10.2 percent increase in operating expenses.
Operating revenues
Consolidated operating revenues increased $1.8 billion, or 16.9 percent, primarily due to a $1.6 billion, or 16.1
percent, increase in Passenger revenues. The majority of the increase in Passenger revenues was attributable to the
10.8 percent increase in Passenger yield (Passenger revenues per RPM flown), primarily due to higher average
fares. The Company’s load factor also increased 3.3 points to 79.3 percent in 2010. These strong revenue results
were achieved due to better revenue management techniques and strategies, improving economic conditions which
led to higher demand for air travel versus 2009, including a new and improved website at www.southwest.com,
capacity restraint and reallocation by both the Company and the entire airline industry, fare increases, and targeted
marketing campaigns designed to enhance the Company’s already strong Brand and Customer Experience.
Consolidated Freight revenues increased $7 million, or 5.9 percent, versus 2009, primarily due to higher
average rates charged as a result of better economic conditions. Other revenues increased $150 million, or 44.1
percent, compared to 2009. Approximately 63 percent of the increase was due to revenues from initiatives, such
as the Company’s EarlyBird product, for which Customers can pay $10 to automatically receive an assigned
boarding position before general checkin begins, and service charges for unaccompanied minors and for pets.
The remainder of the increase primarily was due to higher commissions earned from programs the Company
sponsors with certain business partners, such as Southwest’s co-branded Chase Visa credit card.
Operating expenses
Consolidated operating expenses for 2010 increased $1.0 billion, or 10.2 percent, compared to a slight
increase in capacity. Historically, except for changes in the price of fuel, changes in operating expenses for
airlines are largely driven by changes in capacity, or ASMs. The following presents the Company’s operating
expenses per ASM for 2010 and 2009 followed by explanations of these changes on a per ASM basis and/or on a
dollar basis (in cents, except for percentages):
Year ended December 31, Per ASM
change
Percent
change(in cents, except for percentages) 2010 2009
Salaries, wages, and benefits ................................ 3.76¢ 3.54¢ .22¢ 6.2%
Fuel and oil .............................................. 3.68 3.11 .57 18.3
Maintenance materials and repairs ............................ .76 .73 .03 4.1
Aircraft rentals ........................................... .18 .19 (.01) (5.3)
Landing fees and other rentals ............................... .82 .73 .09 12.3
Depreciation and amortization ............................... .64 .63 .01 1.6
Other operating expenses ................................... 1.45 1.36 .09 6.6
Total ................................................... 11.29¢ 10.29¢ 1.00¢ 9.7%
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