Transportation

Three components of the transportation industry will be discussed: air carriers,

railroads, and the motor carrier industry. The Civil Aeronautics Board, which
requires the use of a uniform system of accounts and reporting, regulates
interstate commercial aviation. The Interstate Commerce Commission, which also
has control over a uniform system of accounts and reporting, regulates interstate
railroads. The Interstate Commerce Commission also regulates interstate motor
carriers whose principal business is transportation services.

FINANCIAL STATEMENTS
The balance sheet format for air carriers, railroads, and motor carriers resembles
that for manufacturing or retailing firms. As in a heavy manufacturing firm,
property and equipment make up a large portion of assets. Also, supplies and
parts comprise the basic inventory items. The income statement format
resembles that of a utility. The system of accounts provides for the grouping of all
revenues and expenses in terms of both major natural objectives and functional
activities. There is no cost of goods sold calculation; rather, there is operating
income: revenue (categorized) minus operating expenses. In essence, the
statements are a prescribed, categorized form of single-step income statement.
They cannot be converted to multiple-step format.

Ratio
Most of the traditional ratios also apply in the transportation field. Exceptions are
inventory turnovers (because there is no cost of goods sold) and gross profit
margin. The ratios discussed in the subsections that follow are especially suited to
transportation. They are derived from the 2006 statement of income and balance
sheet for Southwest Airlines Co., presented in Exhibit 12-15.
 Exhibit 12-15 SOUTHWEST AIRLINES CO. 
Selected Financial Data
SOUTHWEST AIRLINES CO.
CONSOLIDATED BALANCE SHEET
December 31,
2006 2005
(In millions, except share data)
ASSETS
Current assets:
Cash and cash equivalents $ 1,390 $ 2,280
Short-term investments 369 251
Accounts and other receivables 241 258
Inventories of parts and supplies, at cost 181 150
Fuel derivative contracts 369 641
Prepaid expenses and other current assets 51 40
Total current assets 2,601 3,620
Property and equipment, at cost:
Flight equipment 11,769 10,592
Ground property and equipment 1,356 1,256
Deposits on flight equipment purchase contracts 734 660
13,859 12,508
Less allowance for depreciation and amortization 3,765 3,296
10,094 9,212
Other assets 765 1,171
$13,460 $14,003

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current assets:
Accounts payable $ 643 $ 524
Accrued liabilities 1,323 2,074
Air traffic liability 799 649
Current maturities of long-term debt 122 601
Total current liabilities 2,887 3,848
Long-term debt less current maturities 1,567 1,394
Deferred income taxes 2,104 1,681
Deferred gains from sale and leaseback of aircraft 120 136
Other deferred liabilities 333 269
Commitments and contingencies
Stockholders’ equity:
Common stock, $1.00 par value: 2,000,000,000
shares authorized; 807,611,634 and 801,641,645
shares issued in 2006 and 2005, respectively 808 802
Capital in excess of par value 1,142 963
Retained earnings 4,307 4,018
Accumulated other comprehensive income 582 892
Treasury stock, at cost: 24,302,215 shares in 2006 (390) —
Total stockholders’ equity 6,449 6,675
$13,460 $14,003

“Southwest Airlines Co. is a major passenger airline that provides scheduled air transportation in the United States.” 10-K
 Exhibit 12-15 SOUTHWEST AIRLINES CO. (Continued)

SOUTHWEST AIRLINES CO.

CONSOLIDATED STATEMENT OF INCOME
Years Ended December 31,
2006 2005 2004
(In millions, except per share amounts)
OPERATING REVENUES:
Passenger $8,750 $7,279 $6,280
Freight 134 133 117
Other 202 172 133
Total operating revenues 9,086 7,584 6,530
OPERATING EXPENSES:
Salaries, wages, and benefits 3,052 2,782 2,578
Fuel and oil 2,138 1,341 1,000
Maintenance materials and repairs 468 446 472
Aircraft rentals 158 163 179
Landing fees and other rentals 495 454 408
Depreciation and amortization 515 469 431
Other operating expenses 1,326 1,204 1,058
Total operating expenses 8,152 6,859 6,126
OPERATING INCOME: 934 725 404
OTHER EXPENSES (INCOME):
Interest expense 128 122 88
Capitalized interest (51) (39) (39)
Interest income (84) (47) (21)
Other (gains) losses, net 151 (90) 37
Total other expenses (income) 144 (54) 65
INCOME BEFORE INCOME TAXES 790 779 339
PROVISION FOR INCOME TAXES 291 295 124
NET INCOME $ 499 $ 484 $ 215
NET INCOME PER SHARE, BASIC $ .63 $ .61 $ .27
NET INCOME PER SHARE, DILUTED $ .61 $ .60 $ .27

The traditional sources of industry averages cover transportation. The federal

government accumulates numerous statistics for regulated industries, including
transportation. An example is the Interstate Commerce Commission’s Annual
Report on transport statistics in the United States. For the motor carrier industry,
a particularly good source of industry data is the annual pub- lication Financial
Analysis of the Motor Carrier Industry, published by the American Trucking
Association, Inc., 1616 P Street, NW, Washington, DC 20036. This publication
includes an economic and industry overview, distribution of revenue by carrier
type, and industry issues. It
also includes definitions of terminology that relate to the motor carrier industry.
There are hundreds of motor carrier firms, most of which are relatively small. The
American Trucking Association compiles data by composite carrier groups. For
example, Group A includes composite data for several hundred general freight
carriers with annual reve- nues of less than $5 million. One of the groups includes
composite data for the publicly held carriers of general freight.
The very extensive composite data in the American Trucking Association
publication include industry total dollars for the income statement and balance
sheet. It also includes ver- tical common-size analyses for the income statement
and the balance sheet. This publication also includes approximately 36 ratios and
other analytical data, such as total tons.

Operating Ratio
The operating ratio is computed by comparing operating expenses to operating
revenues. It measures cost and should be kept low, but external conditions, such
as the level of business activity, may affect this ratio. Operating revenues vary
from year to year because of differ- ences in rates, classification of traffic,
volume of traffic carried, and the distance traffic is transported. Operating
expenses change because of variations in the price level, traffic car- ried, the
type of service performed, and the effectiveness of operating and maintaining
the properties. Common-size analysis of revenues and expenses is needed to
explain changes in the operating ratio.
Exhibit 12-16 presents the operating ratio for Southwest Airlines Co. The
operating ratio for Southwest Airlines decreased from 90.44% in 2005 to
89.72% in 2006. The operating ratio can dramatically affect the profitability of
a carrier. This trend in the operating ratio is favorable for Southwest Airlines.

Exhibit 12-16 SOUTHWEST AIRLINES CO.

Operating Ratio
For the Years Ended December 31, 2006 and 2005

(In millions) 2006 2005

Operating expenses [A] $8,152 $6,859
Operating revenues [B] $9,086 $7,584

Operating ratio [A ÷ B] 89.72% 90.44%

Long-Term Debt to Operating Property

Because of the transportation companies’ heavy investment in operating assets,

such as equipment, the long-term ratios increase in importance. Long-term
borrowing capacity is also a key consideration. The ratio of long-term debt to
operating property ratio gives a measure of the sources of funds with which
property is obtained. It also measures borrowing capacity. Operating property is
defined as long-term property and equipment. Exhibit 12-17 presents this ratio
for Southwest Airlines. For Southwest Airlines, the long-term debt to operating
property ratio increased in 2006 to 15.52% from 15.13%. This represents a slight
negative trend.

Exhibit 12-17 SOUTHWEST AIRLINES CO.

Long-Term Debt to Operating Property
For the Years Ended December 31, 2006 and 2005

(In millions) 2006 2005

Long-term debt less current maturities [A] $1,567 $ 1,394
Operating property [B] $10,094 $ 9,212

Long-term debt to operating property [A ÷ B] 15.52% 15.13%

Operating Revenue to Operating Property

This ratio measures the turnover of operating assets. The objective is to generate
as many dollars in revenue per dollar of property as possible. Exhibit 12-18
presents this ratio for Southwest Airlines. The operating revenue to operating
property increased materially between 2005 and 2006.

Per-Mile, Per-Person, and Per-Ton Passenger Load Factors

For transportation companies, additional insight can be gained by looking at
revenues and expenses on a per-unit-of-usage basis. Examples would be per mile
of line or per 10 miles for
 Exhibit 12-18 SOUTHWEST AIRLINES CO.
Operating Revenue to Operating Property
For the Years Ended December 31, 2006 and 2005

(In millions) 2006 2005

Operating revenue [A] $9,086 $7,584
Operating property [B] $10,094 $9,212

Operating revenue to operating property [A ÷ B] 90.01% 82.33%

railroads, or a per passenger mile for air carriers. Although this type of disclosure
is not required, it is often presented in highlights.
This type of disclosure is illustrated in Exhibit 12-19, which shows statistics
for Southwest Airlines Co. Statistics in Exhibit 12-19 include revenue passengers
carried, enplaned passengers, revenue passenger miles (RPMs), available seat
miles (ASMs), load factor, average length of passenger haul, average stage length,
trips flown, average passenger fare, passenger revenue yield per RPM, operating
revenue yield per ASM, operating expenses per ASM, fuel cost per gallon, number
of employees at year-end, and size of fleet at year-end.
 Exhibit 12-19 SOUTHWEST AIRLINES CO.
Other Financial and Statistical Data
For the Years Ended December 31, 2002–2006

Item 6. Selected Financial Data (in Part)

The following financial information for the five years ended December 31, 2006, has
been derived from the Company’s Consolidated Financial Statements. This informa-
tion should be read in conjunction with the Consolidated Financial Statements and
related notes thereto included elsewhere herein.

Years Ended December 31,

2006 2005 2004 2003 2002

Operating Data:
Revenue passengers carried 83,814,823 77,693,875 70,902,773 65,673,945 63,045,988
Enplaned passengers 96,276,907 88,379,900 81,066,038 74,719,340 72,462,123
Revenue passenger miles (RPMs) (000s) 67,691,289 60,223,100 53,418,353 47,943,066 45,391,903
Available seat miles (ASMs) (000s) 92,663,023 85,172,795 76,861,296 71,790,425 68,886,546
Load factor(1) 73.1% 70.7% 69.5% 66.8% 65.9%
Average length of passenger haul (miles) 808 775 753 730 720
Average stage length (miles) 622 607 576 558 537
Trips flown 1,092,331 1,028,639 981,591 949,882 947,331
Average passenger fare $104.40 $93.68 $88.57 $87.42 $84.72
Passenger revenue yield per RPM 12.93¢ 12.09¢ 11.76¢ 11.97¢ 11.77¢
Operating revenue yield per ASM 9.81¢ 8.90¢ 8.50¢ 8.27¢ 8.02¢
Operating expenses per ASM 8.80¢ 8.05¢ 7.97¢ 7.74¢ 7.52¢
Operating expenses per ASM, excluding 6.67¢ 6.41¢
fuel 6.49¢ 6.48¢ 6.59¢
Fuel cost per gallon (average) $1.53 $1.03 $0.83 $0.72 $0.68
Number of employees at year-end 32,664 31,729 31,011 32,847 33,705
Size of fleet at year-end(2) 481 445 417 388 375

(1)
Revenue passenger miles divided by available seat miles.
(2)
Includes leased aircraft.