Southwest Airlines 2013 Annual Report Download - page 55

continued focus on the implementation of its five strategic initiatives. 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 May 2, 2011, date of the acquisition, while results of operations and cash
flows prior to the acquisition date are only the results of Southwest.
The Company’s strategic initiatives are intended to increase revenues, reduce unit costs, and to aid the
Company with its goal of achieving an annual pre-tax return on invested capital (“ROIC”) of 15 percent. The
Company has made substantial progress towards this 15 percent ROIC goal, significantly surpassing its prior
year performance. Given the strategic initiatives that have been completed and those which remain underway, the
Company believes it is well positioned for 2014, given the current economic environment and current jet fuel
prices. The Company’s strategic initiatives include:
• The integration of AirTran. The acquisition of AirTran in 2011 increased the Company’s fleet size and
expanded the Company’s network into key U.S. markets such as Atlanta and Washington Reagan, as
well as near-international locations such as the Caribbean and Mexico. As a result of the acquisition,
the Company estimates it achieved approximately $400 million in net, pre-tax synergies during 2013
(excluding acquisition and integration expenses). Additionally, the Company reached a major
milestone during 2013 by completing the connection of the Southwest and AirTran networks.
Customers can now fly between any of the combined 96 Southwest and AirTran destinations on a
single itinerary. Significant changes have also been made to AirTran’s route network, including ending
service to several airports which proved to not be sustainable under the Southwest business model and
the re-deployment of aircraft into new markets. The Company also continued the process of converting
AirTran aircraft to the Southwest livery in 2013. As of December 31, 2013, 17 AirTran 737-700
aircraft had completed the conversion process and re-entered service as Southwest aircraft. The
Company transitioned Atlanta into a point-to-point operation, similar to other large Southwest cities,
which is expected to enable efficiencies related to the scheduling of aircraft, flight crews, and ground
staff. In addition, the Company completed its plan to bring Southwest service to all domestic AirTran
airport facilities in 2013. The Company remains on track with its plans to fully integrate AirTran into
its operations by the end of 2014.
•Fleet modernization. The Company is scheduled to be the launch customer for Boeing’s new, more fuel-
efficient 737 MAX 8 aircraft, which is expected to enter service in 2017. The 737 MAX 8 is expected to
reduce fuel burn and CO2 emissions by an additional 13 percent over today’s most fuel-efficient single-
aisle airplanes. Southwest is also scheduled to be the launch customer for the Boeing 737 MAX 7 series
aircraft, with deliveries expected to begin in 2019. Currently the Company has firm orders in place for
170 MAX 8 aircraft and 30 MAX 7 aircraft. During 2013, the Company completed its multi-year Evolve
program, which included, in total, the retrofitting of 372 Southwest 737-700 and 78 Southwest 737-300
aircraft. Evolve: The New Southwest Experience is an updated cabin interior intended to enhance the
Customer’s overall travel experience, while improving fleet efficiency with the added benefit of six
additional seats on each aircraft. In addition, during 2013, the Company transitioned 22 AirTran 717-200
aircraft out of active service, in preparation for transition, as part of lease/sublease agreements with Delta.
As of December 31, 2013, a total of 13 717-200 aircraft had been delivered to Delta. The Company also
retired 11 older 737-300s and 737-500s from its fleet during 2013. The Company intends to continue to
replace these less efficient aircraft through its current order book with Boeing and through the purchase
and lease of additional pre-owned 737-700 aircraft from third parties.
• The continued incorporation of a larger aircraft, the Boeing 737-800, into Southwest’s fleet. To further
support its fleet modernization efforts, the Company received a total of 18 Boeing 737-800s during
2013. As of December 31, 2013, the Company’s active fleet included 52 737-800s. 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, and
(iii) operates at a lower unit cost than other aircraft in the Company’s existing fleet.
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