Southwest Airlines 2015 Annual Report Download - page 30

the ability of the commodities used in fuel hedging to qualify for special hedge accounting, are likely
to continue to affect the Company’s results of operations. In addition, there can be no assurance that
the Company will be able to cost-effectively hedge against increases in fuel prices.
The Company’s fuel hedging arrangements and the various potential impacts of hedge accounting on
the Company’s financial position, cash flows, and results of operations are discussed in more detail
under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
“Quantitative and Qualitative Disclosures About Market Risk,” and in Note 1 and Note 10 to the
Consolidated Financial Statements.
The Company is also reliant upon the readily available supply and timely delivery of jet fuel to the
airports that it serves. A disruption in that supply could present significant challenges to the
Company’s operations and could ultimately cause the cancellation of flights and/or the inability of the
Company to provide service to a particular airport.
The Company’s low-cost structure has historically been one of its primary competitive
advantages, and many factors have affected and could continue to affect the Company’s ability
to control its costs.
The Company’s low-cost structure has historically been one of its primary competitive advantages, as
it has enabled it to offer low fares, drive traffic volume, and grow market share. The Company has
limited control over fuel and labor costs, as well as other costs such as regulatory compliance costs. Jet
fuel and oil constituted approximately 23 percent of the Company’s operating expenses during 2015,
and the cost of fuel is subject to the external factors discussed in the second Risk Factor above.
Salaries, wages, and benefits constituted approximately 41 percent of the Company’s operating
expenses during 2015. The Company’s ability to control labor costs is limited by the terms of its
collective-bargaining agreements, and increased labor costs have negatively impacted the Company’s
low-cost competitive position. As discussed further under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” the Company’s unionized workforce, which makes up
the majority of its Employees, has had pay scale increases as a result of contractual rate increases.
Furthermore, as indicated above under “Business - Employees,” the majority of Southwest’s unionized
Employees, including its Pilots; Mechanics; Ramp, Operations, Provisioning, and Freight Agents;
Flight Attendants; Material Specialists; Facilities Maintenance Technicians; Flight Crew Training
Instructors; and Source of Support Representatives, are in unions currently in negotiations for labor
agreements, which could continue to put pressure on the Company’s labor costs. As discussed above
under “Business - Regulation,” the airline industry is heavily regulated, and the Company’s regulatory
compliance costs are subject to potentially significant increases from time to time based on actions by
the regulatory agencies. Additionally, when other airlines reduce their capacity, airport costs are then
allocated among a fewer number of total flights, which can result in increased landing fees and other
costs for the Company. The Company is also reliant upon third party vendors and service providers,
and its low-cost advantage is also dependent in part on its ability to obtain and maintain commercially
reasonable terms with those parties.
As discussed above under “Business - Insurance,” the Company carries insurance of types customary
in the airline industry and, in the past, has also been provided supplemental, first-party, war-risk
insurance coverage by the federal government. Since the government-provided supplemental coverage
from the Wartime Act was set to expire on September 30, 2014, the Company proactively canceled its
government provided war-risk insurance coverage prior to that date and purchased comparable
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