Southwest Airlines 2013 Annual Report Download - page 64

2012 compared with 2011
The Company’s net income of $421 million ($0.56 per share, diluted) in 2012 increased by $243 million,
or 136.5 percent, compared to its 2011 net income of $178 million ($0.23 per share, diluted). The Company’s
GAAP results for both years 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 December 31, 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 was able to implement
and other revenue management techniques, the year-over-year increase in Passenger revenues benefited 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.
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.
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
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