Southwest Airlines 2011 Annual Report Download - page 63

The Company’s 2010 CASM (cost per available seat mile) increased 9.7 percent compared to 2009. Over 55
percent of this year-over-year CASM increase was due to an 18.4 percent increase in the Company’s average jet
fuel cost per gallon. The Company’s 2009 operating expenses also included the impact of Freedom ‘09, the early
retirement plan offered by the Company, which resulted in a $66 million charge. Excluding the impact of this
charge, 2010 integration costs incurred in preparation for the acquisition of AirTran, and Fuel and oil expense for
each year, 2010 CASM increased compared to 2009 primarily due to higher wage rates, higher profitsharing
expense, and higher airport costs.
Salaries, wages, and benefits increased $236 million on an absolute dollar basis, including the impact of the $66
million charge recorded during third quarter 2009 as a result of Freedom ‘09, the early retirement plan offered by the
Company that was accepted by 1,404 Employees. Excluding the impact of the Freedom ‘09 charge, approximately 55
percent of the year-over-year increase was from higher salaries and wages, primarily as a result of higher average
wage rates. The remainder of the year-over-year increase primarily was attributable to a $124 million increase in
profitsharing, as a result of higher income available for profitsharing. The Company’s profitsharing expense is based
on profits that exclude the unrealized gains and/or losses the Company records for its fuel hedging program. See Note
10 to the Consolidated Financial Statements for further information on fuel hedging. Salaries, wages, and benefits
expense per ASM was 6.2 percent higher than 2009, primarily due to pay scale increases as a result of increased
seniority and contractual rate increases for the Company’s unionized workforce, who make up the majority of its
Employees, while the Company’s ASM capacity increased only slightly compared to 2009. These increases
combined with relatively flat headcount resulted in higher average rates per Employee.
Fuel and oil expense increased $576 million, or 18.9 percent, and on a per-ASM basis increased 18.3
percent versus 2009. Both the dollar and the per ASM increase were driven primarily by an 18.4 percent increase
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
guidance for derivatives and hedging, the Company recognized net losses totaling $324 million in 2010 in Fuel
and oil expense relating to fuel derivative instruments versus net losses of $467 million recognized in Fuel and
oil expense in 2009. These totals are inclusive of cash settlements realized from the expiration/settlement of fuel
derivatives, which were $153 million paid to counterparties in 2010 versus $245 million paid to counterparties
for 2009. 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.
Maintenance materials and repairs increased 4.5 percent on a dollar basis, and increased 4.1 percent on a
per-ASM basis compared to 2009. On both a dollar and a per-ASM basis, the increases were due to an increase in
the number of scheduled airframe maintenance events versus 2009.
Aircraft rentals expense per ASM decreased 5.3 percent and, on a dollar basis, decreased $6 million. Both
decreases primarily were due to the renegotiation of several aircraft leases at lower rates.
Landing fees and other rentals increased $89 million on a dollar basis and increased 12.3 percent on a
per-ASM basis, compared to 2009. 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 due to either higher operating
costs or to cover shortfalls caused by reductions in service by airlines over the past few years. When airlines
reduce their capacity, airport costs are then allocated amongst a fewer number of total flights.
Depreciation and amortization expense increased $12 million on a dollar basis compared to 2009, and was
up 1.6 percent on a per-ASM basis. These increases were both primarily due to the amortization of capitalized
software costs associated with various information technology upgrade and replacement projects the Company
completed during 2010.
Other operating expenses increased $89 million, and were up 6.6 percent on a per-ASM basis, compared to
2009. On both a dollar and a per-ASM basis, these increases primarily were due to an increase in revenue-related
costs (such as credit card interchange fees) associated with the 16.1 percent increase in Passenger revenues.
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