Operating Expenses
Operating expenses were $4.6 billion for the March 2005 quarter compared to $3.9 billion for the March 2004 quarter. As discussed below, the increase in operating expenses was primarily due to (1) $531 million of charges related to pension settlements, asset writedowns, restructuring and related items and (2) significantly higher fuel prices in 2005 than in 2004. Operating capacity increased 6% to 38 billion Available Seat Miles (“ASMs”) primarily due to operational efficiencies gained through the redesign of our Atlanta hub from a banked to a continuous hub, which allowed us to increase system-wide capacity with the same number of aircraft. Operating cost per available seat mile (“CASM”) increased 11% to 12.16¢.
Salaries and related costs decreased 12% to $1.4 billion in the March 2005 quarter. This reflects a 16% decrease from salary rate reductions for our pilot and non-pilot employees and a 3% decline due to lower Mainline headcount. These decreases were partially offset by a 3% increase due mainly to higher seniority-based pay increases and a 2% rise related to higher capacity.
Aircraft fuel expense increased 54%, or $310 million, to $884 million, with approximately $290 million of the increase resulting from higher fuel prices, which were at historically high levels. The average fuel price per gallon increased 49% to $1.42 and total gallons consumed increased 3%. Our fuel cost is shown net of fuel hedge gains of $32 million in the March 2004 quarter. None of our aircraft fuel requirements were hedged during the March 2005 quarter.
Contracted services expense increased 13% to $272 million, primarily reflecting a 7% increase due to increased outsourcing of certain airport functions as a result of higher capacity, a 2% rise from new outsourcing contracts to provide airport handling and other miscellaneous services and a 1% increase due to the outsourcing of certain human resources functions.
During the March 2005 quarter, we ceased use of certain leased facilities at Dallas-Fort Worth International Airport in conjunction with our dehubbing of operations at that airport. For additional information about the related costs and the future impact on landing fees and other rents, see Note 10 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.
Expenses from our contract carrier arrangements decreased 14% to $204 million. This is primarily due to the ramp down of our arrangement with FLYi, Inc. (formerly Atlantic Coast Airlines) (“Flyi”), partially offset by higher expenses from increased fuel prices and higher capacity under certain of these arrangements. For additional information about our previous arrangement with Flyi, see Note 4 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.
Aircraft maintenance materials and outside repairs expense increased 13%. This reflects a 10% increase from higher outside repairs and a 3% increase due to higher engine materials costs. Aircraft rent expense decreased 21% to $143 million due to our lease restructuring efforts in connection with our transformation plan in the
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December 2004 quarter. The decrease in aircraft rent expense reflects an 18% decrease from the reclassification of certain leases from operating to capital in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases” (“SFAS 13”) (see Note 7 of the Notes to the Consolidated Financial Statements in our Form 10-K). This reclassification of certain leases, however, has increased our interest expense (see below for further information). We also experienced a 3% decrease in aircraft rent expense from other restructured operating leases.
Passenger commissions and other selling expenses increased 11% to $192 million. This increase is primarily due to higher booking fees related to a rise in traffic. Passenger commissions and other selling expenses were $47 million and $145 million, respectively, for the March 2005 quarter compared to $47 million and $126 million, respectively, for the March 2004 quarter.
During the March 2005 quarter, pension settlements, asset writedowns, restructuring and related items totaled $531 million. This includes:
• A $453 million charge related to certain employee initiatives under our transformation plan. This charge primarily reflects the curtailment of pension benefits related to (1) the planned reduction of 6,000-7,000 non-pilot jobs and (2) the freeze of service accruals under the defined benefit pension plan for pilots (“Pilot Plan”) effective December 31, 2004. For additional information about this charge, see Note 5 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.
• A $68 million settlement charge related to our Pilot Plan. This charge relates to lump sum distributions under the Pilot Plan for 265 pilots who retired. For additional information about this charge, see Note 5 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q. We expect to record additional settlement charges related to the Pilot Plan in the June, September and December 2005 quarters, but we cannot reasonably estimate these charges at this time because certain data used to calculate these charges is not yet final.
• A $10 million charge related to the retirement of six B-737-200 aircraft in conjunction with our transformation plan. For additional information about this charge, see Note 10 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.
Other operating expenses rose 24%, primarily due to a 27% increase from higher sales and use taxes as well as fuel taxes and a 3% rise due to increased navigation charges due to increased international capacity. These increases were partially offset by an 8% decline due to lower communications, supplies and utilities expenses.
Operating Loss and Operating Margin
We incurred an operating loss of $957 million for the March 2005 quarter, compared to an operating loss of $388 million in the March 2004 quarter. Operating margin, which is the ratio of operating loss to operating revenues, was (26%) and (11%) for the March 2005 and March 2004 quarters, respectively.
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Other Income (Expense)
Other expense, net in the March 2005 quarter was $258 million, compared to $210 million in the March 2004 quarter. This change is primarily attributable to the following:
• Interest expense increased $74 million, or 38%, in the March 2005 quarter compared to the March 2004 quarter primarily due to a 22% increase from higher levels of debt outstanding and increased interest rates as well as a 13% rise due to additional interest related to the reclassification of certain aircraft leases from operating to capital in accordance with SFAS 13 as a result of renegotiations during the December 2004 quarter (see discussion of aircraft rent expense above).
• Fair value adjustments of financial instruments accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), resulted in a charge of $2 million in the March 2005 quarter compared to a charge of $23 million in the March 2004 quarter. This decrease is primarily due to costs associated with the early settlement of our fuel hedge contracts in February 2004. For additional information about SFAS 133, see Note 2 of the Notes to the Condensed Consolidated Financial Statements in this Form 10-Q.
But Props, what you are not seeing is that SWA has ONE type of airplane, NOT 6 or 7. That is where they are saving the money that bid D cannot. It is a totally different business plan! Unless you go to a one airplane fleet, you cannot compete with SWA! JB is actually pushing the envelope by buying those 190's because this brings in more training costs with sims and whatnot! Just my .02's!
