Southwest Airlines 2012 Annual Report Download - page 54

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diluted). Operating income for 2012 was $623 million, which was a 10.1 percent decrease versus 2011. On a
non-GAAP basis, the Company’s 2012 operating income was $838 million, which was relatively flat compared
to 2011. See the previous Note Regarding Use of Non-GAAP Financial Measures. As discussed in Note 2 to the
Consolidated Financial Statements, for GAAP reporting, the accompanying results of operations and cash flows
contain AirTran’s results beginning as of the date of the acquisition, while results of operations and cash flows
prior to the acquisition date are only the results of Southwest.
The Company has implemented, and/or is in the midst of, several strategic initiatives that are intended to
increase its revenues and reduce its unit costs, and to aid the Company with its goal of achieving pre-tax return
on invested capital of 15 percent. The Company’s five major strategic initiatives include:
• The integration of AirTran. The 2011 acquisition of AirTan increased the Company’s fleet size by
140 aircraft and expanded the Company’s network into key U.S. markets such as Atlanta and
Washington Reagan, and near-international locations such as the Caribbean and Mexico. The Company
has been able to produce significant synergies to date and continues to expect net pre-tax annual
synergies of $400 million in 2013 (excluding acquisition and integration expenses). Significant changes
have been made and are underway to AirTran’s route network, including the closure of several airports
that proved unsustainable, and the re-deployment of aircraft in new markets. In addition, during the
first quarter of 2012, the Company obtained a single operating certificate from the FAA. The Company
has also continued the process of transferring AirTran aircraft to Southwest to be converted to the
Southwest livery. As of January 24, 2013, 11 AirTran 737-700 aircraft had completed the conversion
process and re-entered service as Southwest aircraft. In addition, the Company converted several
AirTran airport facilities to Southwest in 2012 and plans to continue converting the remainder of
AirTran’s airport facilities to Southwest.
• Southwest’s All-New Rapid Rewards®frequent flyer program. The results of the program have
exceeded the Company’s expectations with respect to the number of new frequent flyer members, the
amount spent per member on airfare, the number of flights taken by members, the number of
Southwest’s co-branded Chase®Visa credit card holders added, the number of points sold to business
partners, and the number of frequent flyer points purchased by program members.
• Fleet modernization. The Company entered into an agreement in 2011 to be the launch customer for
Boeing’s new, more fuel-efficient 737 MAX aircraft, which is expected to enter service in 2017. The
Company placed firm orders for 150 Boeing 737 MAX aircraft and also added Boeing 737NG aircraft
to its existing firm order book at that time. The 737 MAX is expected to reduce CO2 emissions and
improve fuel burn by an additional 10 to 11 percent over today’s most fuel-efficient, single-aisle
airplane. In January 2012, the Company also announced its plans to retrofit its 737-700 fleet with an
updated cabin interior. Evolve: The New Southwest Experience is intended to enhance Customer
comfort, personal space, and the overall travel experience, while improving fleet efficiency and being
environmentally responsible. By maximizing the space inside the plane, Evolve allows for the added
benefit of six additional seats on each 737-700 aircraft, along with more climate-friendly and cost-
effective materials. These retrofits for Southwest 737-700 aircraft began in March 2012 and are
expected to be completed in 2013. AirTran aircraft that are transitioned to the Southwest fleet are also
expected to receive the new Evolve interior. As of January 24, 2013, 270 of the Company’s 737-700
aircraft had been converted to the Evolve interior, including 11 transitioned AirTran aircraft. The
Company has also made the decision to retrofit 78 of its 737-300 fleet with Evolve, which it also
expects to complete in 2013.
• The addition of a larger aircraft, the Boeing 737-800, to Southwest’s fleet. To further support its fleet
modernization efforts, the Company received a total of 34 Boeing 737-800s during 2012. The Boeing
737-800 (i) is better suited for potential new destinations, including near-international locations,
(ii) provides the Company with the opportunity to generate additional revenue by replacing current
aircraft on specified routes and locations that are restricted due to space constraints or slot controls (a
“slot” is the right of an air carrier, pursuant to regulations of the FAA, to operate a takeoff or landing at
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