Southwest Airlines 2009 Annual Report Download - page 38

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Other
“Other expenses (income)” included interest expense, capitalized interest, interest income, and other gains
and losses. Interest expense increased by $56 million, or 43.1 percent, primarily due to new debt issuances,
including the Company’s December 2008 issuance of $400 million of secured notes, its borrowing under its $332
million term loan in May 2009, and its July 2009 $124 million borrowing under a term loan agreement. These
issuances were partially offset by declines in floating interest rates associated with the Company’s floating rate
debt. The Company currently expects a decrease in first quarter 2010 interest expense compared to fourth quarter
2009, primarily due to lower floating interest rates. See Note 7 to the Consolidated Financial Statements for more
information on long-term debt transactions. Capitalized interest declined 16.0 percent, or $4 million, compared to
2008, due to a reduction in progress payment balances for scheduled future aircraft deliveries and lower interest
rates. Interest income decreased $13 million, or 50.0 percent, primarily due to a decrease in average rates earned
on invested cash and short-term investment balances.
“Other (gains) losses, net,” primarily includes amounts recorded in accordance with the Company’s hedging
activities. The following table displays the components of “Other (gains) losses, net,” for the years ended
December 31, 2009 and 2008:
(In millions) 2009 2008
Mark-to-market impact from fuel contracts settling in future periods — included in
Other (gains) losses, net ............................................. $(73) $ (6)
Ineffectiveness from fuel hedges settling in future periods — included in Other
(gains) losses, net .................................................. (97) 106
Realized ineffectiveness and mark-to-market (gains) or losses — included in Other
(gains) losses, net .................................................. (38) (80)
Premium cost of fuel contracts included in Other (gains) losses, net ............. 148 69
Other .............................................................. 6 3
$ (54) $ 92
See Note 10 to the Consolidated Financial Statements for further information on the Company’s hedging
activities.
Income taxes
The provision for income taxes, as a percentage of income before taxes, increased to 39.6 percent in 2009
from 35.9 percent in 2008. 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 2010
effective tax rate to be approximately 40 percent.
2008 compared with 2007
The Company’s net income of $178 million ($.24 per share, diluted) in 2008 represented a decrease of $467
million, or 72.4 percent, compared to its 2007 net income of $645 million ($.84 per share, diluted). The majority
of the decline in net income was due to the fluctuation of certain gains and losses recorded in association with
fluctuations in value of the Company’s fuel hedge portfolio. These included adjustments impacting earnings
through the recording of gains and/or losses in 2008 and 2007 associated with fuel derivatives expiring in future
periods, and settlement/expiration of fuel derivative instruments for cash in 2008 or 2007, but for which gains
and/or losses had been recorded in earnings in a prior period. See Note 10 to the Consolidated Financial
Statements for further information. Both of these types of adjustments are related to the ineffectiveness of hedges
and the loss of hedge accounting for certain fuel derivatives. Adjustments associated with fuel derivative
instruments included $19 million in net losses for 2008, and $360 million in net gains for 2007. These are
30