Southwest Airlines 2012 Annual Report Download - page 60

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Based on forward market prices and the amounts in the above table (and excluding any other subsequent
changes to the fuel hedge portfolio), the Company’s economic jet fuel costs per gallon may exceed market (i.e.,
unhedged) prices during some of these future periods. This could occur in periods in which unfavorable cash
settlements occur associated with fuel derivatives, but would exclude any impact associated with the
ineffectiveness of fuel hedges or fuel derivatives that are marked to market because they do not qualify for hedge
accounting. See Note 10 to the Consolidated Financial Statements for further information. Assuming no changes
to the Company’s current fuel derivative portfolio, but including all previous hedge activity for fuel derivatives
that have not yet settled, and considering only the expected net cash payments related to hedges that will settle,
the Company is providing a sensitivity table for first quarter 2013, remainder of 2013, and full year 2013 jet fuel
prices at different Brent crude oil assumptions as of January 18, 2013, and expected premium costs associated
with settling contracts in each period, respectively.
Estimated difference in economic jet fuel price per gallon,
above/(below) unhedged market prices, including taxes
Average Brent Crude Oil
price per barrel 1Q 2013 Remainder of 2013 2013
$70 .............. $0.10 $0.03 $0.05
$80 .............. $0.08 $0.00 $0.02
$90 .............. $0.05 $0.00 $0.01
$100 .............. $0.05 $0.00 $0.01
Current Market (1) ....... $0.05 $0.00 $0.01
$120 .............. $0.05 $0.00 $0.01
$130 .............. $0.05 $0.00 $0.01
$140 .............. $0.03 ($0.01) $0.00
Estimated premium costs (2) . . . $5 million $55 million $60 million
(1) Brent crude oil average market prices as of January 18, 2013 were approximately $111, $107, and $108 per barrel for
first quarter 2013, the remainder of 2013, and full year 2013, respectively.
(2) Premium costs are recognized as a component of Other (gains) losses net, and are thus not reflected as part of the
Company’s fuel cost per gallon.
Maintenance materials and repairs expense for 2012 increased by $177 million, or 18.5 percent, compared
to 2011. Approximately $106 million of this increase was due to the inclusion of the full year of AirTran results
in 2012, while the 2011 results only include AirTran Maintenance materials and repairs expense following the
acquisition date. The majority of the remaining increase was attributable to higher engine expense from higher
rates associated with the Company’s 737-700 fleet. Expense for the engines on this fleet is recorded on a per-
flight hour basis and the maintenance agreement covering this fleet with GE Engine Services was modified
during fourth quarter 2011 primarily to incorporate the 52 737-700s from the AirTran acquisition and convert
them to the Southwest maintenance program, and to extend the term of that agreement to December 31, 2021.
There was minimal engine maintenance expense for the AirTran 737s prior to the contract modification due to
the fact that such engine expense was accounted for on a time and materials basis and there were no engine shop
visits incurred. On a per-ASM basis, the Company’s Maintenance materials and repairs expense for 2012
increased 11.4 percent compared to 2011. Over 40 percent of this increase was a result of the higher rates
associated with the engines on the Company’s 737-700 fleet, and the majority of the remainder was due to higher
airframe and component expense associated with ongoing Evolve modifications, which began in first quarter
2012. The Company currently expects Maintenance materials and repairs expense per ASM for first quarter 2013
to be in the 0.95 cents range, based on currently scheduled airframe maintenance events, scheduled engine shop
visits, Evolve retrofits, and projected engine hours flown.
Aircraft rentals expense for 2012 increased by $47 million, or 15.3 percent, compared to 2011. There was an
increase of approximately $54 million due to the inclusion of the full year of AirTran results in 2012, while the
2011 results only include AirTran Aircraft rentals expense following the acquisition date. Excluding the results
of AirTran in both periods, as well as the impact of amortization associated with the unfavorable aircraft lease
52