Southwest Airlines 2014 Annual Report Download - page 12
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typically less congested than other airlines’ hub airports, which has contributed to Southwest’s ability
to achieve high asset utilization because aircraft can be scheduled to minimize the amount of time they
are on the ground. This, in turn, has reduced the number of aircraft and gate facilities that would
otherwise be required and allows for high Employee productivity (headcount per aircraft).
The Company believes that its fleet modernization initiatives, as well as the continued addition
of the larger Boeing 737-800 to the Southwest fleet, will have a favorable impact on the Company’s unit
costs. These strategic initiatives are discussed in more detail below under “Operating Strategies and
Initiatives - Fleet Modernization” and “Operating Strategies and Initiatives - Continued Incorporation of
the Larger Boeing 737-800 into the Southwest Fleet.”
Impact of Fuel Costs on the Company’s Low-Cost Structure
Although 2014 fuel prices were lower than levels experienced in 2013, and dropped
significantly late in 2014, Fuel and oil expense remains one of the Company’s largest operating costs.
The table below shows the Company’s average cost of jet fuel and oil over the past twelve years and
during each quarter of 2014.
Year
Cost
(Millions)
Average
Cost Per
Gallon
Percentage of
Operating
Expenses
2003 $ 920 $ 0.80 16.5%
2004 $ 1,106 $ 0.92 18.1%
2005 $ 1,470 $ 1.13 21.4%
2006 $ 2,284 $ 1.64 28.0%
2007 $ 2,690 $ 1.80 29.7%
2008 $ 3,713 $ 2.44 35.1%
2009 $ 3,044 $ 2.12 30.2%
2010 $ 3,620 $ 2.51 32.6%
2011 $ 5,644 $ 3.19 37.7%
2012 $ 6,120 $ 3.30 37.2%
2013 $ 5,763 $ 3.16 35.1%
2014 $ 5,293 $ 2.93 32.3%
First Quarter 2014 $ 1,314 $ 3.10 33.3%
Second Quarter 2014 $ 1,425 $ 3.03 33.6%
Third Quarter 2014 $ 1,386 $ 2.97 33.1%
Fourth Quarter 2014 $ 1,167 $ 2.63 29.1%
The Company enters into fuel derivative contracts to manage its risk associated with
significant increases in fuel prices; however, because energy prices can fluctuate significantly in a
relatively short amount of time, the Company must also continually monitor and adjust its fuel hedge
portfolio and strategies to address not only fuel price increases, but also fuel price volatility and hedge
collateral requirements. As evidenced by the extreme decline in jet fuel prices during the fourth quarter
of 2014, jet fuel prices are subject to significant volatility based on a variety of factors. In addition, the
cost of hedging generally increases with sustained high potential for volatility in the fuel market. The
Company’s fuel hedging activities are discussed in more detail below under “Risk Factors,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and
Note 10 to the Consolidated Financial Statements.
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