Southwest Airlines 2012 Annual Report Download - page 57

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Freight revenues for 2012 increased by $21 million, or 15.1 percent, compared to 2011, primarily due to an
increase in shipments as a result of better domestic economic conditions than the prior year. The Company
currently expects freight revenues for first quarter 2013 to be in line with fourth quarter 2012 freight revenues.
Other revenues for 2012 increased by $70 million, or 9.2 percent, compared to 2011, of which
approximately $69 million was due to the inclusion of the full year of AirTran results in 2012, while 2011 results
only include AirTran Other revenues following the acquisition date. Excluding the results of AirTran in both
periods, Other revenues were relatively stable compared to 2011, as an increase in revenues from initiatives, such
as the Company’s EarlyBird product, for which Customers pay a service charge to automatically receive an
assigned boarding position before general checkin begins, and service charges for pets was offset by an increase
in the portion of the commissions earned from programs the Company sponsors with certain business partners
that were classified as Passenger revenues as opposed to Other revenues. The classification of such amounts is
influenced by average fares, among other factors. See Note 1 to the Consolidated Financial Statements for further
information on Southwest’s frequent flyer program. Southwest’s EarlyBird product and service charges for
unaccompanied minors, pets, and excess bags contributed $219 million to Other revenues in 2012 versus
$198 million generated from these products during 2011. Other revenues for 2012 included approximately
$146 million in baggage fees collected from AirTran Customers, versus approximately $110 million for 2011.
The Company currently expects Other revenues in first quarter 2013 to be in line with first quarter 2012 Other
revenues.
Operating expenses
Operating expenses for 2012 increased by $1.5 billion, or 10.0 percent, compared to 2011, while capacity
increased 6.3 percent compared to 2011. The increase in Operating expenses was primarily due to the inclusion
of AirTran results for the full year 2012, while 2011 results only include AirTran Operating expenses following
the acquisition date. 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 table presents the Company’s
Operating expenses per ASM for 2012 and 2011, followed by explanations of these changes on a per-ASM basis
and/or on a dollar basis:
Year ended December 31, Per-ASM
change
Percent
change(in cents, except for percentages) 2012 2011
Salaries, wages, and benefits ........... 3.69¢ 3.62¢ .07¢ 1.9%
Fuel and oil ......................... 4.78 4.68 .10 2.1
Maintenance materials and repairs ....... .88 .79 .09 11.4
Aircraft rentals ...................... .28 .26 .02 7.7
Landing fees and other rentals .......... .81 .80 .01 1.3
Depreciation and amortization .......... .66 .59 .07 11.9
Acquisition and integration ............. .14 .11 .03 27.3
Other operating expenses .............. 1.61 1.56 .05 3.2
Total .............................. 12.85¢ 12.41¢ .44¢ 3.5%
On a per-ASM basis, the Company’s Operating expenses (unit costs) for 2012 increased 3.5 percent
compared to 2011. Approximately 23 percent of this year-over-year cost per available seat mile increase was due
to higher fuel costs, as the Company’s average jet fuel cost per gallon increased 3.4 percent to $3.30, including
the impact of hedging activity, and approximately 20 percent was due to higher maintenance materials and
repairs costs. An increase in acquisition and integration expenses (incurred by Southwest) of $77 million also
contributed to the year-over-year increase in costs on both a dollar and a per-ASM basis during 2012. On a dollar
basis, excluding the results for AirTran in both periods, Operating expenses increased 6.4 percent for 2012
compared to 2011, which was attributable to higher expenses in nearly every operating cost category, except for
Aircraft rentals. On a non-GAAP basis, the Company’s Operating expenses per ASM for 2012, excluding fuel,
increased 4.2 percent compared to 2011. Based on current cost trends, the Company expects first quarter 2013
49