Southwest Airlines 2012 Annual Report Download - page 56

with little route overlap. Strategically, both carriers place an emphasis on outstanding Customer Service, high
quality low-cost operations, solid low-fare brands, and strong Employee cultures.
At the current time, the Company plans to continue its route network and schedule optimization efforts, but
does not intend to grow its overall fleet size for 2013. The Company currently expects to receive 20 737-800
aircraft deliveries during 2013, all of which will be new aircraft from Boeing. The Company also expects to retire
some of its older 737-300s and 737-500s, as well as transition a number of 717-200s out of service as part of the
Company’s lease/sublease agreement with Delta. See Note 8 to the Consolidated Financial Statements. In total,
the Company expects to keep its fleet relatively flat with 2012 and expects 2013 ASMs to increase approximately
two percent compared to ASMs flown during 2012.
2012 compared with 2011
The Company’s net income of $421 million ($.56 per share, diluted) in 2012 increased by $243 million, or
136.5 percent, compared to its 2011 net income of $178 million ($.23 per share, diluted). The Company’s GAAP
results for both years ended December 31, 2012 and 2011 were significantly impacted by the non-cash
adjustments recorded as a result of the Company’s portfolio of derivative contracts utilized to hedge against jet
fuel price volatility, as well as acquisition and integration costs associated with the Company’s 2011 acquisition
of AirTran. As a result of the fuel hedges the Company had in place during 2012 — including those that settled
during 2012 and those that will settle in future years—the Company recognized a net total of $28 million in gains
allocated between Fuel and oil expense and Other (gains) losses, net, in the Consolidated Statement of Income.
During 2011, the Company recognized a net total of $259 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 2012 and
2011 include 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 hedging and Note 2 for further information on
the acquisition of AirTran. In addition, the Company’s GAAP results for the year ended December 31, 2012
included a $137 million third quarter 2012 charge associated with the Company’s agreement with Delta and
Boeing Capital Corp. to lease or sublease all 88 of AirTran’s Boeing 717s to Delta. See Note 8 to the
Consolidated Financial Statements for further information on this transaction. The Company’s GAAP results for
the year ended December 31, 2011 included an asset impairment related to the Company’s decision not to equip
its Classic (737-300/500) aircraft with Required Navigation Performance (RNP) capabilities. Excluding the
impact of these items, the Company’s net income on a non-GAAP basis increased 26.4 percent for the year ended
2012 compared to 2011. This increase primarily was a result of better 2012 revenue production, which more than
offset higher operating costs.
Operating revenues
Operating revenues for 2012 increased by $1.4 billion, or 9.1 percent, compared to 2011. The majority of
the increase was due to the fact that 2012 results include the full year of AirTran Operating revenues, while 2011
results only include AirTran Operating revenues following the May 2, 2011 acquisition date. For the full year
2012, other than due to the inclusion of 12 months of activity versus only eight months in 2011, AirTran’s
standalone operating revenues did not otherwise have a significant impact on the Company’s consolidated
results. Excluding the results of AirTran in both periods, Operating revenues for 2012 increased 5.5 percent on a
dollar basis, compared to 2011, primarily due to a 5.6 percent increase in Passenger revenues. Holding other
factors constant, over 60 percent of the increase in Passenger revenues was attributable to higher Passenger
yields (Passenger revenues per RPM flown), as the Company implemented fare increases in an attempt to buffer
a portion of the impact of higher fuel costs. In addition to the fare increases the Company has been able to
implement and other revenue management techniques, the year-over-year increase in Passenger revenues
benefitted from continued optimization of the Company’s flight schedule to better match demand in certain
markets and, at certain times, targeted marketing campaigns in which the Company differentiates its products and
services from competitors. These increases were partially offset by a slight decrease in Southwest’s load factor,
partially due to the impact of higher airfares on Customer demand. Based on bookings and revenue trends, thus
far, the Company expects a solid year-over-year increase in its first quarter 2013 passenger unit revenues.
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