Southwest Airlines 2011 Annual Report Download - page 58

Download and view the complete annual report

Please find page 58 of the 2011 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 141

  • 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
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141

As a result of prior hedging activities, the Company continues to have significant amounts “frozen” in
Accumulated other comprehensive income (“AOCI”), and these amounts will be recognized in the Company’s
Statement of Income in future periods when the underlying fuel derivative contracts settle. The following table
displays the Company’s estimated fair value of remaining fuel derivative contracts on a consolidated basis (not
considering the impact of the cash collateral provided to or received from counterparties—See Note 10 to the
Consolidated Financial Statements for further information) as well as the amount of deferred gains/losses in
AOCI at December 31, 2011, and the expected future periods in which these items are expected to settle and/or
be recognized in earnings (in millions):
Year
Fair value
(liability) of fuel
derivative contracts
at December 31,
2011
Amount of gains
(losses) deferred
in AOCI at
December 31,
2011 (net of tax)
2012 ................................ $(189) $ (92)
2013 ................................ (14) (91)
2014 ................................ 131 23
2015 ................................ 28 (23)
Total ................................ $ (44) $(183)
Based on forward market prices and the amounts in the above table (and excluding any other subsequent
changes to the fuel hedge portfolio), the Company’s jet fuel costs per gallon are expected to exceed market (i.e.,
unhedged) prices during some of these future periods. This is based primarily on expected future cash settlements
associated with fuel derivatives, but excludes any impact associated with the ineffectiveness of fuel hedges or
fuel derivatives that are marked to market because they do not qualify for hedge accounting. See Note 10 to the
Consolidated Financial Statements for further information. Assuming no changes to the Company’s current fuel
derivative portfolio, but including all previous hedge activity for fuel derivatives that have not yet settled, and
considering only the expected net cash payments related to hedges that will settle, the Company is providing a
sensitivity table for first quarter 2012, second quarter 2012, and second half 2012 jet fuel prices at different crude
oil assumptions as of January 13, 2012, and for expected premium costs associated with settling contracts each
period.
Estimated difference in
economic jet fuel price per
gallon, above/(below) unhedged
market prices, including taxes
Average WTI Crude Oil price per barrel 1Q 2012 2Q 2012 Second Half 2012
$75 .......................................... $0.12 $0.12 $0.15
$90 .......................................... $0.12 $0.09 $0.11
$99 (1) ....................................... $0.12 $0.06 $0.06
$115 ......................................... $0.12 $0.06 ($0.11)
$130 ......................................... $0.11 $0.06 ($0.28)
Estimated premium costs (2) ...................... $6million $5 million $37 million
(1) Based on the first quarter 2012 average WTI forward curve and market prices as of January 13, 2012, and
current estimated fuel consumption covered by fuel derivative contracts, first quarter 2012 economic fuel
price per gallon, including taxes, is estimated to be approximately $3.35 per gallon, or $.12 above market
prices.
(2) Premium costs are recognized as a component of Other (gains) losses net.
Excluding the results of AirTran following the acquisition, Maintenance materials and repairs expense for
2011 increased $29 million, or 3.9 percent, on a dollar basis compared to 2010. This increase primarily was
attributable to higher airframe expense associated with routine heavy maintenance checks. On a per-ASM basis,
consolidated Maintenance materials and repairs expense increased 3.9 percent primarily as a result of higher
engine expense, as AirTran’s Boeing 717 fleet has higher engine costs, on a flight hour basis, than Southwest’s
52