Southwest Airlines 2011 Annual Report Download - page 64

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Other
Interest expense decreased by $19 million, or 10.2 percent, primarily due to the Company’s conversion of its
$400 million of 10.5% secured notes due 2011 and its $300 million of 5.75% senior unsecured notes due 2016 to
floating interest rates during fourth quarter 2009. Capitalized interest declined 14.3 percent, or $3 million,
compared to 2009, due to a reduction in progress payment balances for scheduled future aircraft deliveries and
lower interest rates. Interest income decreased $1 million, or 7.7 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 as a result of the Company’s fuel hedging
activities. The following table displays the components of Other (gains) losses, net, for the years ended
December 31, 2010 and 2009:
Year ended December 31,
(in millions) 2010 2009
Mark-to-market impact from fuel contracts settling in future periods ....... $(21) $ (73)
Ineffectiveness from fuel hedges settling in future periods ................ (11) (97)
Realized ineffectiveness and mark-to-market (gains) or losses ............. (1) (38)
Premium cost of fuel contracts ..................................... 134 148
Other .......................................................... 5 6
$106 $ (54)
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, decreased to 38 percent in 2010
from 40 percent in 2009. The lower 2010 rate primarily was due to the Company’s higher 2010 earnings, which
diluted the impact of permanent tax differences, thus reducing the tax rate.
LIQUIDITY AND CAPITAL RESOURCES
On a consolidated basis, net cash provided by operating activities was $1.4 billion in 2011, compared to
$1.6 billion provided by operating activities in 2010. Operating cash inflows primarily are derived from
providing air transportation to Customers. The vast majority of tickets are purchased prior to the day on which
travel is provided and, in some cases, several months before the anticipated travel date. Operating cash outflows
primarily are related to the recurring expenses of airline operations. Operating cash flows can also be
significantly impacted by the Company’s fuel hedge positions and the significant fluctuation in fair value of
those positions and the corresponding cash collateral requirements associated with those positions. In the
Consolidated Statement of Cash Flows, increases and/or decreases to these cash deposits are reflected in
operating cash flows as Cash collateral received from (provided to) fuel derivative counterparties. As of
December 31, 2011, the net amount of cash provided to fuel hedge counterparties was $226 million, and the net
change in cash deposits for 2011 was a net operating outflow of $195 million. Cash flows associated with
entering into new fuel derivatives, which are also classified as operating cash flows, were net inflows of $192
million in 2011, net outflows of $359 million in 2010, and net outflows of $86 million in 2009. Cash flows from
operating activities for 2011 were also significantly impacted by the Company’s net income (as adjusted for
non-cash depreciation and amortization expense and non-cash unrealized losses on fuel derivative instruments).
For further 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 expenditures and to
provide working capital.
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