2011

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

 

Financial Highlights - 2011 Compared to 2010  

 

Our net income for 2011 was $854 million , or $1.01 per diluted share. This is $261 million higher than 2010 despite significantly higher fuel costs. Total operating revenue increased $3.4 billion , on an 11% increase in passenger mile yield, primarily due to higher passenger revenues as we were able to adjust ticket prices in response to higher fuel prices. Total operating expense was up $3.6 billion , or 12% , driven primarily by a $2.9 billion increase in fuel expense (including our contract carriers under capacity purchase agreements).  

Fuel price volatility continues to represent a significant risk to our business and the airline industry as a whole. Our fuel cost per gallon increased 31% from 2010 to 2011 . During 2011 , fuel expense, including amounts under contract carrier agreements, increased by $2.9 billion and now represents 36% of total operating expense. During 2011 , gains from our hedging program reduced fuel expense by $420 million . Including fuel hedge activity, our average price per fuel gallon in 2011 was $3.06 as compared to $2.33 in 2010 .  

Our consolidated operating cost per available seat mile ("CASM") for 2011 increased to 14.12 cents compared to 12.69 cents in 2010 , primarily reflecting higher fuel prices. For 2011 , CASM-Ex (a non-GAAP financial measure as defined in "Supplemental Information" below) was 8.53 cents, or 3% higher than 2010 , primarily reflecting higher revenue-related expenses and salaries and related costs.  

During 2011 , we reduced our total debt and capital leases by $1.5 billion and ended the year with $5.4 billion in unrestricted liquidity, consisting of cash and cash equivalents, short-term investments and availability under credit facilities.  

Fleet Strategy  

 

During 2011, we entered into an agreement with The Boeing Company ("Boeing") to purchase 100 B-737-900ER aircraft with deliveries beginning in 2013 and continuing through 2018. We have obtained committed long-term financing for a substantial portion of the purchase price of these aircraft. The Boeing agreement and our plans to bring into service 30 to 40 previously owned MD-90 aircraft over the next two to three years will enable us to replace on a capacity-neutral basis older, less efficient aircraft scheduled to be retired. The majority of the MD-90 aircraft scheduled to come into service over the next two to three years were purchased or leased in 2010 and 2011. These B-737-900ER and MD-90 aircraft will have lower unit costs than the aircraft they are replacing as a result of lower maintenance costs and fuel efficiencies.  

 

In addition to lowering unit costs, we are also investing in our fleet to enhance the customer experience. The state-of-the-art B-737-900ER will offer an industry leading customer experience, including expanded carry-on baggage space and a roomier cabin. By the end of 2013, our entire widebody international fleet will be updated with full flat-bed seats in BusinessElite. We completed the installation of full flat-bed seats in the BusinessElite cabin