Southwest Airlines 2012 Annual Report Download - page 64

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2011 compared with 2010
The Company’s consolidated net income of $178 million ($.23 per share, diluted) in 2011 decreased by
$281 million, or 61.2 percent, compared to its 2010 net income of $459 million ($.61 per share, diluted). The
results in each year were significantly impacted by the Company’s fuel hedge program and the accounting
requirements related to the derivative instruments used in the Company’s hedging activities. As a result of the
fuel hedges the Company had in place during 2011—including those that settled during 2011 and those that will
settle in future years—the Company recognized a net total of $259 million in losses allocated between Fuel and
oil expense and Other (gains) losses, net, in the Consolidated Statement of Income. During 2010, the Company
recognized a net total of $426 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 2011 and 2010 included 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 derivative instruments. The Company’s results for 2011 also included a charge for
asset impairment of $17 million (before the impact of profitsharing or taxes) related to the Company’s decision
not to equip its Classic (737-300/500) aircraft with RNP capabilities and AirTran acquisition and integration-
related expenses of $134 million (before the impact of profitsharing or taxes). The Company’s 2011 Operating
income of $693 million was lower than the Company’s 2010 Operating income of $988 million, as the 34.6
percent increase in Operating expenses outpaced the 29.4 percent increase in Operating revenues.
Operating revenues
Consolidated Operating revenues for 2011 increased by $3.6 billion, or 29.4 percent, compared to 2010, of
which approximately $2.0 billion was attributable to the inclusion of the results of AirTran following the May 2,
2011 acquisition. Consolidated Passenger revenues for 2011 increased by $3.2 billion, or 28.3 percent, compared
to 2010, of which approximately $1.7 billion was due to the inclusion of AirTran results following the May 2,
2011 acquisition. Excluding the results of AirTran, Operating revenues for 2011 increased 12.8 percent on a
dollar basis, compared to 2010, primarily due to a 13.1 percent increase in Passenger revenues. Holding other
factors constant, over 40 percent of the increase in Passenger revenues was attributable to the 5.5 percent
increase in Southwest’s capacity, versus 2010. The remainder of the increase primarily was due 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.
The Company’s load factor for 2011 also increased 1.6 points to 80.9 percent in 2011, which was a record
for the Company. These strong revenue results were achieved due to better revenue management techniques and
strategies, continued optimization of the Company’s flight schedule to better match demand in certain markets,
improving economic conditions, which led to higher demand for air travel versus 2010, and at times, targeted
marketing campaigns in which the Company differentiated its product and service from competitors.
Consolidated Freight revenues for 2011 increased by $14 million, or 11.2 percent, versus 2010, primarily
due to higher average rates charged as a result of fuel surcharges and better economic conditions than the prior
year.
Consolidated Other revenues for 2011 increased by $294 million, or 60.0 percent, compared to 2010, of
which approximately $261 million was due to the inclusion of AirTran results following the May 2, 2011
acquisition date. Excluding the results of AirTran, Other revenues increased 6.7 percent on a dollar basis,
compared to 2010. This increase was due to revenues from initiatives, such as the Company’s EarlyBird product,
for which Customers could pay $10 to automatically receive an assigned boarding position before general
checkin begins, and service charges for unaccompanied minors and pets. The increase in revenues from
initiatives was partially offset by a year-over-year increase in the portion of the commissions earned from
programs the Company sponsors with certain business partners that were classified as Passenger revenue. The
classification of such amounts is influenced by average fares, among other factors. See Note 1 to the
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