Southwest Airlines 2015 Annual Report Download - page 57

Operating Expenses
Operating expenses for 2015 decreased by $676 million, or 4.1 percent, compared with 2014, while
capacity increased 7.2 percent over the same period. Historically, except for changes in the price of
fuel, changes in most Operating expenses for airlines are driven by changes in capacity, or ASMs. The
following table presents the Company’s Operating expenses per ASM for 2015 and 2014, followed by
explanations of these changes on a per ASM basis and/or on a dollar basis:
Year ended December 31, Per ASM Percent
(in cents, except for percentages) 2015 2014 change change
Salaries, wages, and benefits 4.54¢ 4.14¢ 0.40 ¢ 9.7 %
Fuel and oil 2.57 4.04 (1.47) (36.4)
Maintenance materials and repairs 0.72 0.75 (0.03) (4.0)
Aircraft rentals 0.17 0.22 (0.05) (22.7)
Landing fees and other rentals 0.83 0.85 (0.02) (2.4)
Depreciation and amortization 0.72 0.72 — —
Acquisition and integration 0.03 0.10 (0.07) (70.0)
Other operating expenses 1.60 1.68 (0.08) (4.8)
Total 11.18¢ 12.50¢ (1.32)¢ (10.6)%
Operating expenses per ASM for 2015 decreased by 10.6 percent, compared with 2014, primarily due
to a decrease in Fuel and oil expense, partially offset by an increase in Salaries, wages, and benefits
expense. On a non-GAAP basis, Operating expenses per ASM for 2015, excluding fuel and special
items, increased 0.1 percent year-over-year primarily due to higher Salaries, wages, and benefits
expense. Based on current cost trends, the Company expects its first quarter 2016 unit costs, excluding
fuel, special items, and profitsharing to increase approximately two percent, compared with first
quarter 2015. See the previous Note Regarding Use of Non-GAAP Financial Measures.
Salaries, wages, and benefits expense for 2015 increased by $949 million, or 17.5 percent, compared
with 2014. Salaries, wages, and benefits expense per ASM for 2015 increased 9.7 percent, compared
with 2014. On both a dollar and per ASM basis, approximately half of these increases were the result
of higher salaries primarily due to the accrued $334 million of union bonuses as a result of ongoing
negotiations with various workgroups during 2015, increased training, additional headcount, and
contractual increases. The remaining increase was primarily due to higher profitsharing expense as a
result of significantly higher profits in 2015. The Company’s profitsharing expense is based on profits
that exclude the unrealized gains and/or losses the Company records for its fuel hedging program.
Additionally, pursuant to the terms of the Company’s ProfitSharing Plan (the “Plan”), acquisition and
integration costs were excluded from the calculation of profitsharing expense from April 1, 2011,
through December 31, 2013. These costs, totaling $385 million, are being amortized on a pro rata basis
as a reduction of operating profits, as defined by the Plan, from 2014 through 2018. In addition,
Acquisition and integration costs incurred during 2014 and 2015 reduced operating profits, as defined,
in the calculation of profitsharing. Based on current cost trends, the Company expects first quarter
2016 Salaries, wages, and benefits expense per ASM, excluding profitsharing and special items, to
increase, compared with first quarter 2015.
The Company conducted negotiations with various unionized Employee groups during the year
including Dispatchers, who ratified a new four-year contract, Flight Simulator Technicians, who
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