Southwest Airlines 2011 Annual Report Download - page 33

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Any failure of the Company to maintain the security of certain Customer-related information could result
in damage to the Company’s reputation and could be costly to remediate.
The Company must receive information related to its Customers in order to run its business, and the
Company’s online operations depend upon the secure transmission of information over public networks,
including information permitting cashless payments. This information is subject to the risk of intrusion,
tampering, and theft. Although the Company maintains systems to prevent this from occurring, these systems
require ongoing monitoring and updating as technologies change, and security could be compromised,
confidential information could be misappropriated, or system disruptions could occur. The Company must also
provide certain confidential, proprietary, and personal information to third parties in the ordinary course of its
business. While the Company seeks to obtain assurances that these third parties will protect this information,
there is a risk the confidentiality of data held by third parties could be breached. A compromise of the
Company’s security systems could adversely affect the Company’s reputation and disrupt its operations and
could also result in litigation against the Company or the imposition of penalties. In addition, it could be costly to
remediate.
The Company’s results of operations could be adversely impacted if it is unable to grow or to timely and
effectively implement its revenue and other initiatives.
Southwest has historically been regarded as a growth airline; however, the combination of a difficult
economic environment and growing costs led to the Company’s decision to limit organic growth for the
indefinite future. In addition, organic growth has become increasingly difficult, because (i) the number of
opportunities for domestic expansion has declined; (ii) with the exception of AirTran’s near-international service,
the Company currently does not have international operations; and (iii) the Company has faced an increased
presence of other low-cost carriers. As a result, the Company has become increasingly reliant on the success of
revenue initiatives to help offset increasing costs and to continue to improve Customer Service. The timely and
effective implementation of these initiatives has involved, and will continue to involve, significant investments
by the Company of time and money and could be negatively affected by (i) the Company’s ability to timely and
effectively implement, transition, and maintain related information technology systems and infrastructure; (ii) the
Company’s ability to effectively balance its investment of incremental operating expenses and capital
expenditures related to its initiatives against the need to effectively control costs; and (iii) the Company’s
dependence on third parties to assist with implementation of its initiatives. The Company cannot ensure the
timing of implementation of certain of its initiatives or that they will be successful or profitable either over the
short or long term.
Instability of credit, capital, and energy markets can result in pressure on the Company’s credit ratings and
can also negatively affect the Company’s ability to obtain financing on acceptable terms and the
Company’s liquidity generally.
During 2009, the Company’s credit ratings were pressured by weak industry revenue and the volatile fuel
price environment. During 2011, the Company’s credit ratings were pressured in connection with its acquisition
of AirTran. While the Company’s credit rating is “investment grade,” factors such as future unfavorable
economic conditions, a significant decline in demand for air travel, or instability of the credit and capital markets
could result in future pressure on credit ratings, which could negatively affect (i) the Company’s ability to obtain
financing on acceptable terms, (ii) the Company’s liquidity generally, and (iii) the availability and cost of
insurance. A credit rating downgrade would subject the Company to credit rating triggers related to its credit card
transaction processing agreements, the pricing related to any funds drawn under its revolving credit facility, and
some of its hedging counterparty agreements. The potential effect of credit rating downgrades is discussed in
more detail below under “Quantitative and Qualitative Disclosures About Market Risk.”
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