Southwest Airlines 2013 Annual Report Download - page 66

Fuel and oil expense for 2012 increased by $476 million, or 8.4 percent, compared to 2011. Approximately
$291 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 fuel and oil expense following the acquisition date. Excluding the results of AirTran
in both periods, Fuel and oil expense for 2012 increased 3.8 percent on a dollar basis, versus 2011. On a per
ASM basis, the Company’s 2012 Fuel and oil expense increased by 2.1 percent versus 2011. Both of these
increases were primarily due to a 3.4 percent increase in the Company’s average fuel cost per gallon. As a result
of the Company’s fuel hedging program and inclusive of accounting for derivatives and hedging, the Company
recognized net losses totaling $157 million in 2012 in Fuel and oil expense relating to fuel derivative instruments
versus net losses of $64 million recognized in Fuel and oil expense in 2011. These totals are inclusive of cash
settlements realized from the expiration/settlement of fuel derivatives, which were $125 million paid to
counterparties in 2012 versus $63 million paid to counterparties for 2011. These totals exclude gains and/or
losses recognized from hedge ineffectiveness and from derivatives that do not qualify for hedge accounting,
which impacts are recorded as a component of Other (gains) losses, net.
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.
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 liability created as part of purchase accounting adjustments based on the estimated fair value of AirTran
Boeing 717 leases, Aircraft rentals expense for 2012 decreased approximately 4.7 percent on a dollar basis
compared to 2011. See Note 2 to the Consolidated Financial Statements for further information on purchase
accounting. The majority of the decrease was due to a decrease in operating leased aircraft from 192 at December
2011 to 187 at December 2012. On a per ASM basis, the Company’s Aircraft rentals expense for 2012 increased
7.7 percent compared to 2011. This increase on a per ASM basis primarily was due to the acquisition of AirTran
during 2011 and the fact that AirTran leases the majority of its aircraft fleet.
Landing fees and other rentals expense for 2012 increased by $84 million, or 8.8 percent, compared to
2011. The majority of the dollar increase was due to an increase in rates charged by airports for both landing fees
and space rentals versus the same prior year period. In addition, approximately $29 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
Landing fees and other rentals expense following the acquisition date. On a per ASM basis, the Company’s
Landing fees and other rentals expense for 2012 increased by 1.3 percent compared to 2011 primarily due to
higher rates paid for airport space.
Depreciation and amortization expense for 2012 increased by $129 million, or 18.0 percent, compared to
2011. Approximately 49 percent of this increase was due to an acceleration of depreciation expense associated
with aircraft in the Company’s Classic (737-300/500) Fleet that were retired during 2012, coupled with the
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