Southwest Airlines 2011 Annual Report Download - page 77

Financial market risk
The vast majority of the Company’s tangible assets are aircraft, which are long-lived. The Company’s
strategy is to maintain a conservative balance sheet and grow capacity steadily and profitably under the right
conditions. While the Company uses financial leverage, it strives to maintain a strong balance sheet and has a
“BBB” rating with Fitch, a “BBB-” rating with Standard & Poor’s, and a “Baa3” credit rating with Moody’s as of
December 31, 2011, which are considered “investment grade.” The Company’s 1999 and 2004 French Credit
Agreements do not give rise to significant fair value risk but do give rise to interest rate risk because these
borrowings were originally issued as floating-rate debt. In addition, as disclosed in Note 10 to the Consolidated
Financial Statements, the Company and AirTran have converted certain of their long-term debt to floating rate
debt by entering into interest rate swap agreements. Although there is interest rate risk associated with these
floating rate borrowings, the risk for the 1999 and 2004 French Credit Agreements is somewhat mitigated by the
fact that the Company may prepay this debt under certain conditions. See Notes 6 and 7 to the Consolidated
Financial Statements for more information on the material terms of the Company’s, including AirTran’s, short-
term and long-term debt.
As of December 31, 2011, excluding the notes or debentures that have been converted to a floating rate, the
Company’s fixed-rate senior unsecured notes outstanding included its $350 million 5.25% senior unsecured notes
due 2014 and its $300 million 5.125% senior unsecured notes due 2017. Both of these notes had previously been
converted to floating rates, but in January 2011, the Company terminated the fixed-to-floating interest rate swap
agreements related to them. The effect of these terminations was that the interest associated with these debts
prospectively reverted back to their original fixed rates. As a result of the gains realized on these transactions,
which will be amortized over the remaining term of the corresponding notes, and based on projected interest rates
at the date of termination, the Company does not believe its future interest expense, based on projected future
interest rates at the date of termination, associated with these notes will significantly differ from the expense it
would have recorded had the notes remained at floating rates. Although there is no longer interest rate risk
associated with these notes, the Company is now exposed to fair value risk over their remaining terms. The
Company believes the fixed interest rates associated with its $350 million 5.25% senior unsecured notes due
2014 and its $300 million 5.125% senior unsecured notes due 2017 are comparable to average rates prevailing
for similar debt instruments over the last ten years. The following table displays the characteristics of the
Company’s (including AirTran’s) secured fixed rate debt as of December 31, 2011:
Principal
amount
(in millions)
Effective
fixed rate
Final
maturity Underlying collateral
Term Loan Agreement ............. $269 6.315% 5/6/2019 14 specified Boeing 737-700 aircraft
Term Loan Agreement ............. 106 6.84% 7/1/2019 5 specified Boeing 737-700 aircraft
Term Loan Agreement ............. 487 5.223% 5/9/2020 21 specified Boeing 737-700 aircraft
The carrying value of the Company’s, including AirTran’s, floating rate debt totaled $1.1 billion, and this debt
had a weighted-average maturity of 4.99 years at floating rates averaging 4.46 percent for the year ended
December 31, 2011. In total, the Company’s, including AirTran’s, fixed-rate debt and floating rate debt represented
19.52 percent and 7.82 percent, respectively, of consolidated noncurrent assets at December 31, 2011.
The Company also has some risk associated with changing interest rates due to the short-term nature of its
invested cash, which totaled $829 million, and short-term investments, which totaled $2.3 billion, at
December 31, 2011. See Notes 1 and 10 to the Consolidated Financial Statements for further information. The
Company currently invests available cash in certificates of deposit, highly rated money market instruments,
investment grade commercial paper, treasury securities, US government agency securities, and other highly rated
financial instruments, depending on market conditions and operating cash requirements. As a result of turmoil in
credit markets, the Company has discontinued further investments in auction rate securities. Because of the short-
term nature of these investments, the returns earned parallel closely with short-term floating interest rates. The
Company has not undertaken any additional actions to cover interest rate market risk and is not a party to any
other material market interest rate risk management activities.
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