Southwest Airlines 2011 Annual Report Download - page 39

pre-ownership change NOLs of the corporation that experiences an ownership change. The limitation imposed by
Section 382 of the Code for any post-ownership change year generally would be determined by multiplying the
value of such corporation’s stock immediately before the ownership change by the applicable long-term
tax-exempt rate. Any unused annual limitation may, subject to certain limits, be carried over to later years, and
the limitation may, under certain circumstances, be increased by built-in gains or reduced by built-in losses in the
assets held by such corporation at the time of the ownership change. The combined company’s use of NOLs
arising after the date of an ownership change would not be limited unless the combined company were to
experience a subsequent ownership change.
The combined company’s ability to use the NOLs will also depend on the amount of taxable income
generated in future periods. The NOLs may expire before the combined company can generate sufficient taxable
income to utilize the NOLs.
AirTran is currently subject to pending antitrust litigation, and if judgment were to be rendered against
AirTran in the litigation, such judgment could adversely affect the Company’s operating results.
A complaint alleging violations of federal antitrust laws and seeking certification as a class action was filed
against Delta Air Lines, Inc. (“Delta”) and AirTran in the United States District Court for the Northern District of
Georgia in Atlanta on May 22, 2009. The complaint alleged, among other things, that AirTran attempted to
monopolize air travel in violation of Section 2 of the Sherman Act, and conspired with Delta in imposing
$15-per-bag fees for the first item of checked luggage in violation of Section 1 of the Sherman Act. The initial
complaint sought treble damages on behalf of a putative class of persons or entities in the United States who
directly paid Delta and/or AirTran such fees on domestic flights beginning December 5, 2008. After the filing of
the May 2009 complaint, various other nearly identical complaints also seeking certification as class actions were
filed in federal district courts in Atlanta, Georgia; Orlando, Florida; and Las Vegas, Nevada. All of the
cases were consolidated before a single federal district court judge in Atlanta. A Consolidated Amended
Complaint was filed in the consolidated action on February 1, 2010, which broadened the allegations to add
claims that Delta and AirTran conspired to reduce capacity on competitive routes and to raise prices in violation
of Section 1 of the Sherman Act. In addition to treble damages for the amount of first baggage fees paid to
AirTran and to Delta, the Consolidated Amended Complaint seeks injunctive relief against a broad range of
alleged anticompetitive activities, as well as attorneys’ fees. On August 2, 2010, the Court dismissed plaintiffs’
claims that AirTran and Delta had violated Section 2 of the Sherman Act; the Court let stand the claims of a
conspiracy with respect to the imposition of a first bag fee and the airlines’ capacity and pricing decisions. On
June 30, 2010, the plaintiffs filed a motion to certify a class, which AirTran and Delta have opposed. The Court
has not yet ruled on the class certification motion. The scheduled period for fact and expert discovery has ended,
but plaintiffs have sought to reopen discovery because Delta discovered that it had not produced certain
documents. Plaintiffs have also sought discovery sanctions against Delta but not against AirTran. The Court has
not yet ruled on the sanctions motion or plaintiffs’ request to reopen discovery. The schedule for summary
judgment motions has been suspended until the discovery issues are resolved. While AirTran has denied all
allegations of wrongdoing, including those in the Consolidated Amended Complaint, and intends to defend
vigorously any and all such allegations, results of legal proceedings such as this one cannot be predicted with
certainty. Regardless of its merit, this litigation and any potential future claims against the Company or AirTran
may be both time consuming and disruptive to the Company’s operations and cause significant expense and
diversion of management attention. Should AirTran and the Company fail to prevail in this or other matters, the
Company may be faced with significant monetary damages or injunctive relief that could materially adversely
affect its business and might materially affect its financial condition and operating results.
The application of the acquisition method of accounting resulted in the Company recording a significant
amount of goodwill, which could result in significant future impairment charges and negatively affect the
Company’s financial results.
In accordance with applicable acquisition accounting rules, the Company recorded goodwill on its
Consolidated Balance Sheet to the extent the AirTran acquisition purchase price exceeded the net fair value of
AirTran’s tangible and intangible assets and liabilities as of the acquisition date. Goodwill is not amortized, but is
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