Southwest Airlines 2009 Annual Report Download

Download and view the complete annual report

Please find the complete 2009 Southwest Airlines annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 108

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108

SOUTHWEST AIRLINES CO.
2009 ANNUAL REPORT TO SHAREHOLDERS
To our Shareholders:
The year 2009 will forever be remembered as the “Great Recession.” It was a
year where the airline industry, as a whole, lost billions of dollars. Despite the severe
economic collapse, Southwest remained profitable, producing our 37th consecutive
year of profitability, largely due to a series of aggressive adjustments leading to a
remarkable fourth quarter rally. The economy did not improve during the year to
produce that result; it was our People. I could not be more proud of them, as our
People have consistently outperformed our competition, in most every way.
Our 2009 net income was $99 million, or $.13 per diluted share, compared to
$178 million, or $.24 per diluted share for 2008. Each year includes special items
(primarily noncash, mark-to-market and other items required for a portion of the
Company’s fuel hedge portfolio). Excluding special items from both years, our year-
over-year profit declined 51 percent to $143 million, or $.19 per diluted share for
2009, compared to $294 million, or $.40 per diluted share for 2008.
Economic recession leads to a decline in travel demand, especially business
travel. Ultimately, 2009 proved to be the worst year on record for U.S. Airlines, in
terms of year-over-year revenue declines. We began to see weakness in business
travel in February. By May, we were experiencing year-over-year unit revenue
declines of close to ten percent. Revenues in some short-haul, business travel
markets were off as much as 35 percent. Accordingly, we called several “audibles”
mid-year to try and salvage what was destined, otherwise, to become our first annual
loss since Southwest’s start-up years. New technology, years in the making, was
launched in 2009 that enabled enormously successful fall fare sales, as well as a
restructuring of core fares to account for less full-coach demand. New (unplanned)
products were introduced, including Pets onboard, Unaccompanied Minor service
charges, and Early Bird Check-in. We continued optimizing our flight schedules to
allow for more published itineraries, with enhanced connecting opportunities. While
still a point-to-point schedule, with three-fourths of our passengers flying nonstop, we
were able to boost our connecting traffic by several percentage points and revenues
by tens of millions of dollars.
Perhaps most significantly, we reaffirmed our commitment to Customer
Service. Specifically, we declined to join our competitors in charging for the first and
second checked bag, and we launched an aggressive television advertising campaign

Table of contents

  • Page 1
    ... 2009 that enabled enormously successful fall fare sales, as well as a restructuring of core fares to account for less full-coach demand. New (unplanned) products were introduced, including Pets onboard, Unaccompanied Minor service charges, and Early Bird Check-in. We continued optimizing our flight...

  • Page 2
    ... conservative strategy proved out, as these new markets boosted our profits in 2009. Given our early success with these new cities, we decided to launch Milwaukee in November, which is a very competitive market. We want Milwaukee on our route map and judged deferral of service not in our best long...

  • Page 3
    ... marketing partnerships Development of the next generation Rapid Rewards frequent flyer program Continued deployment of enhancements to southwest.com Continued revenue management enhancements In addition, we will continue to focus on keeping Southwest financially strong. Currently, our total...

  • Page 4
    ...Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides greater transparency to investors as supplemental information to its GAAP results. The Company's non-GAAP financial results differ from GAAP results in that they only include the actual cash...

  • Page 5
    CORPORATE INFORMATION SOUTHWEST AIRLINES CO. GENERAL OFFICES P.O. Box 36611 2702 Love Field Drive Dallas, TX 75235 Telephone 214-792-4000 FINANCIAL INFORMATION A copy of the Company's Annual Report on Form 10-K as filed with the U.S. Securities and Exchange Commission (SEC) is included herein. Other...

  • Page 6
    ...diversified passenger airline); Audit and Safety and Compliance Oversight (Chair) Committees TRAVIS C. JOHNSON Attorney at Law; Audit, Executive (Chair), and Nominating and Corporate Governance Committees GARY C. KELLY Chairman of the Board, President, and Chief Executive Officer Southwest Airlines...

  • Page 7
    ... company (as defined in Rule 12b-2 of the Act). Yes ' No Í The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $4,984,514,100 computed by reference to the closing sale price of the common stock on the New York Stock Exchange on June 30, 2009...

  • Page 8
    ...II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities ...Item 6. Selected Financial Data ...Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ...Liquidity and Capital Resources ...Off-Balance Sheet...

  • Page 9
    ...the use of key assets, including aircraft, gates, and Employees, and also facilitates the Company's ability to provide its markets with frequent, conveniently timed flights and low fares. The Company's point-to-point service is discussed in more detail below under "Company Operations - General." The...

  • Page 10
    ... efficient point-to-point route structure, and its highly productive Employees. The Company's use of a single aircraft type, the Boeing 737, enables it to simplify scheduling, maintenance, flight operations, and training activities. The Company's point-to-point route structure includes service...

  • Page 11
    ...'s total trip cost when flying on other airlines, which can be a particularly unwelcome surprise during difficult economic times. The Company also promoted targeted fare sales, which stimulated demand and resulted in Company-record load factors in every month from July through December 2009. Revenue...

  • Page 12
    ... for additional revenue opportunities, such as an enhanced Rapid Rewards® frequent flyer program, inflight Internet connectivity, increased sales distribution channels, and Business Select product enhancements. In addition, during 2009, in connection with the Company's previously announced plans to...

  • Page 13
    ...providing current benefits such as fuel savings and reduced carbon emissions. Rapid Rewards Frequent Flyer Program The Company offers a frequent flyer program, Rapid Rewards, which allows Customers to earn credits towards free flights based on trips flown. Rapid Rewards Members can earn a credit for...

  • Page 14
    ... to three trips will be redeemed per outstanding Companion Pass. The Company currently accounts for its Rapid Rewards program obligations by recording, at the time an Award is earned, a liability for the estimated incremental cost of the use of flight Awards the Company expects to be redeemed. The...

  • Page 15
    ..., cash management, and fixed asset systems, with a goal of completion during 2010. The conversion is designed to improve the Company's key business processes by implementing an integrated tool to increase efficiency, consistency, data accuracy, and cost effectiveness. Regulation The airline industry...

  • Page 16
    ... number of gates available for commercial air service at Dallas Love Field from 32 to 20. The Company currently uses 15 gates at Dallas Love Field. Pursuant to the Wright Amendment Reform Act and local agreements with the City of Dallas with respect to gates, the Company can expand scheduled service...

  • Page 17
    ... this determination, as the TSA rejected the airlines' request for an interim reduction. The Company has made significant investments to address the effect of security regulations, including investments in facilities, equipment, and technology to process Customers efficiently and restore the airport...

  • Page 18
    ... These types of factors reduce the pricing power of the airline industry as a whole, and the increased availability of fare information on the Internet allows travelers to easily compare fares and identify competitor promotions and discounts. The Company's low cost operating structure is designed to...

  • Page 19
    ... case for 2009, fourth quarter (October 1 - December 31). Employees At December 31, 2009, the Company had 34,726 active fulltime equivalent Employees, consisting of 15,345 flight, 2,488 maintenance, 11,943 ground, Customer, and fleet service, and 4,950 management, accounting, marketing, and clerical...

  • Page 20
    ... Currently in negotiations Amendable October 2011 Amendable December 2012 Additional Information About the Company The Company was incorporated in Texas in 1967. The following documents are available free of charge through the Company's website, www.southwest.com: the Company's annual report...

  • Page 21
    ... also be limited by factors such as its low fares reputation, the portion of its Customer base that purchases travel for leisure purposes, and the competitive nature of the airline industry generally. Although fuel prices during 2009 were lower overall than in 2008, prices remained much higher than...

  • Page 22
    ... sensitive to changes in economic conditions, which affect Customer travel patterns and related revenues. For example, recent unfavorable economic conditions, such as higher unemployment rates, reduced sales revenues for many companies, and increased business operating costs, have reduced...

  • Page 23
    ... it cannot ensure the timing of their implementation or that they will be successful or profitable either over the short or long term. The Company is increasingly dependent on technology to operate its business and continues to implement substantial changes to its information systems; any failure or...

  • Page 24
    ... air travel and have also resulted in increased safety and security costs for the Company and the airline industry generally. Safety measures create delays and inconveniences and can, in particular, reduce the Company's competitiveness against surface transportation for short-haul routes. Additional...

  • Page 25
    ... be shared by the remaining operating carriers, which can therefore increase the Company's costs. The airline industry is affected by many conditions that are beyond its control, which can impact the Company's business strategies. In addition to the unpredictable economic conditions and fuel costs...

  • Page 26
    ... 31, 2009: 737 Type Seats Average Age (Yrs) Number of Aircraft Number Owned (1) Number Leased Properties -300 ...-500 ...-700 ...Totals ... 137 122 137 18.0 18.7 6.1 10.5 172 25 340 537 104 16 320 440 68 9 20 97 (1) As discussed further in Note 7 to the Consolidated Financial Statements, 128...

  • Page 27
    ... below under "Management's Discussion and Analysis of Financial Condition and Results of Operations." As of December 31, 2009, the Company operated six Customer Support and Services centers. The centers located in Chicago, Albuquerque, and Oklahoma City occupy leased space. The Company owns its...

  • Page 28
    ... National Corporation Board of Directors since November 2009. Robert E. Jordan has served as the Company's Executive Vice President Strategy & Planning since May 2008. Mr. Jordan also served as Executive Vice President Strategy & Technology from September 2006 to May 2008, Senior Vice President...

  • Page 29
    ... Purchases of Equity Securities The Company's common stock is listed on the New York Stock Exchange and is traded under the symbol "LUV." The following table shows, for the periods indicated, the high and low sales prices per share of the Company's common stock, as reported on the NYSE Composite...

  • Page 30
    ...and is not necessarily indicative of future stock price performance. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG SOUTHWEST AIRLINES CO., S&P 500 INDEX, AND AMEX AIRLINE INDEX $200 Total Cumulative Return - Dollars $150 $100 $50 Southwest Airlines Co. S&P 500 AMEX Airline $0 12/31/04 12...

  • Page 31
    ... $ 1.13 Fuel consumed, in gallons (millions) ...1,428 1,511 1,489 1,389 1,287 Fulltime equivalent Employees at period-end ...34,726 35,499 34,378 32,664 31,729 Aircraft in service at period-end (2) ...537 537 520 481 445 (1) Revenue passenger miles divided by available seat miles (2) Includes leased...

  • Page 32
    ..., improved revenue management processes, and new service offerings such as EarlyBird Check-in and the Company's Pets Are Welcome on Southwest (PAWS) products. The Company also introduced initiatives to reduce costs, including right-sizing headcount. As a result of prevailing economic conditions in...

  • Page 33
    ... in demand for air travel amid domestic economic conditions. However, as a result of the Company's fare discounting efforts and a number of recently implemented revenue initiatives, combined with a 5.1 percent reduction in ASMs, load factor increased 4.8 points to 76.0 percent in 2009, which was...

  • Page 34
    ... allows Customers to pay $10 to automatically get an assigned boarding position before general check-in begins, introduced new fees for unaccompanied minors and for pets, and continued to optimize its schedule and tout its Bags Fly Free campaign. The Company believes these and other planned programs...

  • Page 35
    ...) to hedge future jet fuel purchases, and instruments entered into to offset the majority of these original positions when market prices plummeted in the second half of 2008 and in early 2009. The decision to offset this original portfolio also benefitted the Company by reducing its exposure to cash...

  • Page 36
    ... are marked to market value because they do not qualify for special hedge accounting. See Note 10 to the Consolidated Financial Statements for further information. Based on forward market prices as of January 20, 2010, and considering only the expected net cash payments related to hedges that will...

  • Page 37
    ... future market conditions for used aircraft. This increase in expense was mostly offset by the execution of sale and leaseback agreements for 11 previously owned 737-700s during the first half of 2009. The increase on a per-ASM basis primarily was due to the fact that the Company's fleet size...

  • Page 38
    ... The lower 2008 rate included a $12 million ($.01 per share, diluted) net reduction related to the first quarter 2008 reversal of a 2007 revision in Illinois income tax laws. The 2009 rate also includes the impact of slightly higher effective state income tax rates. The Company currently expects its...

  • Page 39
    ... 2008, and returned nine 737-300s from lease, resulting in the net addition of 17 aircraft for the year. This fleet growth enabled the Company to fly 3.6 percent more ASMs in 2008 versus the prior year. However, as a result of higher fares and general economic conditions, revenue passenger miles...

  • Page 40
    ... not qualify for special hedge accounting. See Note 10 to the Consolidated Financial Statements. The 2008 increase in fuel prices was partially offset by steps the Company has taken to improve the fuel efficiency of its aircraft, its aircraft engines, and its flight plans and procedures. These steps...

  • Page 41
    ... five aircraft executed during December 2008, the Company had purchased the 26 new aircraft received during 2008 and had returned nine previously leased aircraft back to lessors, thereby increasing the percentage of the fleet owned. See Note 4 to the Consolidated Financial Statements for information...

  • Page 42
    ...income tax laws. The 2007 rate included an $11 million addition to taxes from the enactment of the Illinois tax law. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $985 million in 2009 compared to $1.5 billion used in operations in 2008. For the Company, operating cash...

  • Page 43
    ... information on the Company's hedging program and counterparty deposits, see Note 10 to the Consolidated Financial Statements, and "Item 7A. Quantitative and Qualitative Disclosures about Market Risk," respectively. Operating cash generated is used primarily to finance aircraft-related capital...

  • Page 44
    ... liquidity and supplement cash requirements as needed. Notwithstanding current economic conditions and the current liquidity environment, the Company believes it has access to financing arrangements because of its current investment grade credit ratings, unencumbered assets, modest leverage, and...

  • Page 45
    ... to a Program Development Agreement (PDA) with the City of Dallas, the Company is managing this project, and major construction is expected to commence during the first half of 2010, with completion scheduled for the second half of 2014. Although subject to change, at the current time the project...

  • Page 46
    ... shares from that date through the date of this filing. The Company does not believe it is prudent to repurchase shares at the current time considering the unstable financial markets and volatile fuel prices. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's Consolidated Financial Statements...

  • Page 47
    ... by changes to the Company's maintenance program, changes in utilization of the aircraft (actual cycles during a given period of time), governmental regulations on aging aircraft, and changing market prices of new and used aircraft of the same or similar types. The Company evaluates its estimates...

  • Page 48
    ... risk associated with changing jet fuel prices. See "Quantitative and Qualitative Disclosures about Market Risk" for more information on these risk management activities and see Note 10 to the Consolidated Financial Statements for more information on the Company's fuel hedging program, and financial...

  • Page 49
    ... fact lost hedge accounting for all unleaded gasoline derivative instruments. At such times, the Company has marked all such derivatives to market value in each quarterly period, with all changes in value reflected as a component of "Other (gains) losses, net" in the Consolidated Statement of Income...

  • Page 50
    ... the fair value of financial derivative instruments, and forward jet fuel prices, would be made or reported based on other reasonable assumptions or conditions suggested by actual historical experience and other data available at the time estimates were made. Share-Based Compensation The Company has...

  • Page 51
    ...in credit markets beginning during first quarter 2008, the auctions for most of these instruments failed, and, therefore, the Company has determined the estimated fair values of these securities utilizing a discounted cash flow analysis or other type of valuation model as of December 31, 2009, which...

  • Page 52
    ... Company's financial position at December 31, 2009, utilizing the incremental cost method of accounting for such awards. The Company also sells frequent flyer credits and related services to companies participating in its frequent flyer program. Funds received from the sale of flight segment credits...

  • Page 53
    ...2009, the Company again added to its hedging position related to future years' expected fuel purchases. The total net fair value of outstanding financial derivative instruments related to the Company's jet fuel market price risk at December 31, 2009, was a net liability of $147 million. This balance...

  • Page 54
    ...December 31, 2009, levels, except underlying futures prices. The Company's credit exposure related to fuel derivative instruments is represented by the fair value of contracts with a net positive fair value to the Company at the reporting date. At such times, these outstanding instruments expose the...

  • Page 55
    ...given the size and sophistication of its hedging program. Financial market risk The vast majority of the Company's assets are aircraft, which are long-lived. The Company's strategy is to maintain a conservative balance sheet and grow capacity steadily and profitably under the right conditions. While...

  • Page 56
    ... Financial Statements for further information. The Company invests available cash in certificates of deposit, highly rated money market instruments, investment grade commercial paper, auction rate securities, and other highly rated financial instruments, depending on market conditions and operating...

  • Page 57
    ... the Company's credit rating falls below investment grade by two of the three major rating agencies, and if the Company were in a net liability position with the counterparties. As of December 31, 2009, there was no cash posted with these counterparties. The Company was in a net fuel hedge liability...

  • Page 58
    ... Statements and Supplementary Data SOUTHWEST AIRLINES CO. CONSOLIDATED BALANCE SHEET (In millions, except share data) DECEMBER 31, 2009 2008 ASSETS Current assets: Cash and cash equivalents ...Short-term investments ...Accounts and other receivables ...Inventories of parts and supplies, at cost...

  • Page 59
    SOUTHWEST AIRLINES CO. CONSOLIDATED STATEMENT OF INCOME (In millions, except per share amounts) YEARS ENDED DECEMBER 31, 2009 2008 2007 OPERATING REVENUES: Passenger ...Freight ...Other ...Total operating revenues ...OPERATING EXPENSES: Salaries, wages, and benefits ...Fuel and oil ...Maintenance ...

  • Page 60
    SOUTHWEST AIRLINES CO. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007 Accumulated Capital in other Common excess of Retained comprehensive Treasury Stock par value earnings income (loss) stock Total (In millions, except per share amounts) Balance at ...

  • Page 61
    SOUTHWEST AIRLINES CO. CONSOLIDATED STATEMENT OF CASH FLOWS (In millions) YEARS ENDED DECEMBER 31, 2009 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES: Net income ...Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization ...Unrealized loss on ...

  • Page 62
    ... TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2009 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Southwest Airlines Co. (the Company) is a major domestic airline that provides point-to-point, low-fare service. The Consolidated Financial Statements include the accounts of...

  • Page 63
    ... 2008, and $17 million in 2007, are reflected in "Interest income" in the accompanying Consolidated Statement of Income. Noncurrent investments consist of investments with maturities of greater than twelve months. At December 31, 2009, these primarily consisted of the Company's auction rate security...

  • Page 64
    ... the Customer and relieves the liability when payments are remitted to the applicable governmental agency. Frequent flyer program The Company records a liability for the estimated incremental cost of providing free travel under its Rapid Rewards frequent flyer program at the time an award is earned...

  • Page 65
    ...award tickets. Likewise, not all award tickets will be redeemed for future travel. The Company also sells frequent flyer credits and related services to companies participating in its Rapid Rewards frequent flyer program. Funds received from the sale of flight segment credits are accounted for using...

  • Page 66
    ... liabilities." See Note 10 for further information on hedge accounting and financial derivative instruments. The Company classifies its cash collateral provided to or held from counterparties in a "net" presentation on the Consolidated Balance Sheet against the fair value of the derivative positions...

  • Page 67
    ... STATEMENTS-(Continued) December 31, 2009 To manage risk associated with financial derivative instruments held, the Company selects and will periodically review counterparties based on credit ratings, limits its exposure to a single counterparty, and monitors the market position of the program...

  • Page 68
    ... of net income per share, diluted, in 2009, 2008, and 2007, respectively, as they represent antidilutive stock options for the respective periods presented. 4. COMMITMENTS AND CONTINGENCIES Purchase commitments The Company's contractual purchase commitments primarily consist of scheduled aircraft...

  • Page 69
    ... to a Program Development Agreement (PDA) with the City of Dallas, the Company is managing this project, and major construction is expected to commence during the first half of 2010, with completion scheduled for the second half of 2014. Although subject to change, at the current time the project...

  • Page 70
    ...is callable by the counterparty at any time and was made to the Company at a cost that effectively offsets the interest earned on the auction rate security instruments. The loan is classified as a component of "Current maturities of long-term debt" in the accompanying Consolidated Balance Sheet. 62

  • Page 71
    ... provisions, but have no financial covenants. The Company used the net proceeds from the sale of the notes for general corporate purposes, including using a portion of the proceeds to provide cash collateral for some of the Company's fuel hedging arrangements. During fourth quarter 2009, the 63

  • Page 72
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 2009 Company entered into a fixed-to-floating interest rate swap to convert the interest on these secured notes to a floating rate until their maturity. See Note 10 for further information on the Company's fuel hedging arrangements ...

  • Page 73
    ... obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet. Outstanding letters of credit totaled $285 million at December 31, 2009. The net book value of the assets pledged as collateral for the Company's secured borrowings, primarily aircraft and engines, was...

  • Page 74
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 2009 8. LEASES The Company had nine aircraft classified as capital leases at December 31, 2009. The amounts applicable to these aircraft included in property and equipment were: (In millions) 2009 2008 Flight equipment ...Less ...

  • Page 75
    ... the end of the lease term at fair market value, generally limited to a stated percentage of the lessor's defined cost of the aircraft. 9. EARLY RETIREMENT OFFERS On April 16, 2009, the Company announced Freedom '09, a one-time voluntary early retirement program offered to eligible Employees, in...

  • Page 76
    ...AND FINANCIAL INSTRUMENTS Fuel contracts Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices. Jet fuel and oil consumed during 2009, 2008, and 2007 represented approximately 30 percent, 35 percent, and 30 percent of the Company...

  • Page 77
    ... FINANCIAL STATEMENTS-(Continued) December 31, 2009 The Company evaluates its hedge volumes strictly from an "economic" standpoint and thus does not consider whether the hedges qualified or will qualify for special hedge accounting. The Company defines its "economic" hedge as the net volume of fuel...

  • Page 78
    ... are classified as operating cash flows in the Consolidated Statement of Cash Flows. The following table presents the location of all assets and liabilities associated with the Company's hedging instruments within the Consolidated Balance Sheet: Asset Derivatives Fair Fair Value Value at at 12...

  • Page 79
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 2009 In addition, the Company also had the following amounts associated with fuel derivative instruments and hedging activities in its Consolidated Balance Sheet: (in millions) Balance Sheet Location December 31, 2009 2008 Cash ...

  • Page 80
    ...million of 10.5% secured notes due 2011 and its $300 million 5.75% senior unsecured Notes due 2016. The primary objective for the Company's use of these interest rate hedges was to reduce the volatility of net interest income by better matching the repricing of its assets and liabilities. Under each...

  • Page 81
    ... the carrying value of the long-term debt. The corresponding adjustment related to the net liability associated with the Company's cash flow hedge is to "Accumulated other comprehensive income (loss)." This adjustment totaled $19 million, net of tax, at December 31, 2009. See Note 7. Credit risk and...

  • Page 82
    ...guaranteed by the U.S. Government. Other available-for-sale securities primarily consist of investments associated with the Company's excess benefit plan. The Company's fuel derivative instruments consist of over-the-counter (OTC) contracts, which are not traded on a public exchange. These contracts...

  • Page 83
    ... investments" in the Consolidated Balance Sheet. In periods when an auction process successfully took place every 30-35 days, quoted market prices would be readily available, which would qualify the securities as Level 1. However, due to events in credit markets beginning during first quarter 2008...

  • Page 84
    ... 31, 2009 and 2008: Fair Value Measurements at Reporting Date Using Quoted Prices in Significant Active Markets for Significant Other Unobservable Identical Assets Observable Inputs Inputs (Level 1) (Level 2) (Level 3) (in millions) Description December 31, 2009 Assets Cash equivalents ...Short...

  • Page 85
    ... STATEMENTS-(Continued) December 31, 2009 Fair Value Measurements at Reporting Date Using Quoted Prices in Significant Active Markets for Significant Other Unobservable Identical Assets Observable Inputs Inputs (Level 1) (Level 2) (Level 3) (in millions) Description December 31, 2008 Assets Cash...

  • Page 86
    ...information on hedging. Any gains and losses (realized and unrealized) related to other investments are reported in "Other operating expenses," and were immaterial for the years ended December 31, 2009, and 2008. The carrying amounts and estimated fair values of the Company's long-term debt and fuel...

  • Page 87
    ... securities laws in the open market or in private transactions from time to time, depending on market conditions. These programs, which were completed during third quarter 2007, resulted in the repurchase of a total of approximately 53 million shares. During January 2008, the Company's Board...

  • Page 88
    ... and plans related to employment contracts with the Chairman Emeritus of the Company. The Company accounts for share-based compensation utilizing the fair value recognition provisions of "Share-Based Payment." The Consolidated Statement of Income for the years ended December 31, 2009, 2008, and 2007...

  • Page 89
    ... used for grants made under the option plans for the current and prior years, as well as the range of fair values and weighted-average fair value of options granted for 2009, 2008, and 2007: 2009 2008 2007 Wtd-average risk-free interest rate ...4.9% 4.2% 3.7% Range of risk-free interest rates...

  • Page 90
    ...shares of Common Stock to Employees of the Company. These shares may be issued at a price equal to 90 percent of the market value at the end of each monthly purchase period. Common Stock purchases are paid for through periodic payroll deductions. For the years ended December 31, 2009, 2008, and 2007...

  • Page 91
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 2009 15. EMPLOYEE RETIREMENT PLANS Defined contribution plans The Company has defined contribution plans covering substantially all its Employees. The Southwest Airlines Co. Profit Sharing Plan (Profit Sharing Plan) is a defined ...

  • Page 92
    ... service of Employees expected to receive benefits under the plan. Actuarial gains are amortized utilizing the minimum amortization method. The Company used the following actuarial assumptions to account for its postretirement benefit plans at December 31: 2009 2008 2007 Wtd-average discount rate...

  • Page 93
    ...(In millions) 2009 2008 DEFERRED TAX LIABILITIES: Accelerated depreciation ...Other ...Total deferred tax liabilities ...DEFERRED TAX ASSETS: Fuel derivative instruments ...Deferred gains from sale and leaseback of aircraft ...Capital and operating leases ...Accrued employee benefits ...Stock-based...

  • Page 94
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) December 31, 2009 No reserves for uncertain income tax positions have been recorded based on the Company's assessment of its tax positions. The Company has identified its federal tax return and its state tax returns in California and Texas as "...

  • Page 95
    ... Registered Public Accounting Firm The Board of Directors and Stockholders Southwest Airlines Co. We have audited the accompanying consolidated balance sheet of Southwest Airlines Co. as of December 31, 2009 and 2008, and the related consolidated statement of income, stockholders' equity, and cash...

  • Page 96
    ... accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Southwest Airlines Co. as of December 31, 2009 and 2008, and the related consolidated statement of income, stockholders' equity, and cash flows for the each of the three...

  • Page 97
    ... FINANCIAL DATA (unaudited) (In millions except per share amounts) THREE MONTHS ENDED March 31 June 30 Sept. 30 Dec. 31 2009 Operating revenues ...Operating income (loss) ...Income (loss) before income taxes ...Net income (loss) ...Net income (loss) per share, basic ...Net income (loss) per share...

  • Page 98
    ...on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of December 31, 2009 at the reasonable assurance level. Management's Annual Report on Internal Control over Financial Reporting...

  • Page 99
    ... hedge-related accounting transactions be pre-approved by the Company's Chief Financial Officer. Except as noted above, there were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2009...

  • Page 100
    ...to Investor Relations, Southwest Airlines Co., P.O. Box 36611, Dallas, TX 75235. The Company intends to disclose any amendments to, or waivers from, its Code of Ethics that apply to the Company's principal executive officer, principal financial officer, and principal accounting officer or controller...

  • Page 101
    ..., 2,293,180 shares remained available under the Company's 2007 Equity Incentive Plan for issuance as a result of option exercises as well as in settlement of awards of restricted stock and restricted stock units. See Note 14 to the Consolidated Financial Statements for information regarding the...

  • Page 102
    ... to Exhibit 3.1 to the Company's Current Report on Form 8-K dated November 19, 2009 (File No. 1-7259)). Specimen certificate representing common stock of the Company (incorporated by reference to Exhibit 4.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1994 (File...

  • Page 103
    ... Southwest's Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 1-7259)); Supplemental Agreements Nos. 57, 58, and 59 (incorporated by reference to Exhibits 10.1, 10.2, and 10.3, respectively, to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2008...

  • Page 104
    ...Employment Contract between the Company and Gary C. Kelly, effective as of July 15, 2007, and amended and restated November 20, 2008 (incorporated by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 1-7259)). (1) Southwest Airlines...

  • Page 105
    ... Current Report on Form 8-K dated May 16, 2007 (File No. 1-7259)). (1) Southwest Airlines Co. 2007 Equity Incentive Plan Form of Notice of Grant and Terms and Conditions for Stock Option Grant (incorporated by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended...

  • Page 106
    ... 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 1-7259)). (1) Amended and Restated Southwest Airlines Co. 2005 Excess Benefit Plan (as amended and restated effective for plan years beginning on and after January 1, 2009) (incorporated by reference to...

  • Page 107
    ... undersigned, thereunto duly authorized. SOUTHWEST AIRLINES CO. January 29, 2010 By: /s/ LAURA WRIGHT Laura Wright Senior Vice President Finance & Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons...

  • Page 108