Southwest Airlines 2011 Annual Report Download - page 78

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A hypothetical 10 percent change in market interest rates as of December 31, 2011, would not have a
material effect on the fair value of the Company’s, including AirTran’s, fixed-rate debt instruments. See Note 11
to the Consolidated Financial Statements for further information on the fair value of financial instruments. A
change in market interest rates could, however, have a corresponding effect on earnings and cash flows
associated with the Company’s, including AirTran’s, floating-rate debt, invested cash (excluding cash collateral
deposits held, if applicable), floating-rate aircraft leases, and short-term investments because of the floating-rate
nature of these items. Assuming floating market rates in effect as of December 31, 2011, were held constant
throughout a 12-month period, a hypothetical 10 percent change in those rates would have an immaterial impact
to the Company’s net earnings and cash flows. Utilizing these assumptions and considering the Company’s cash
balance (excluding the impact of cash collateral deposits held or provided to counterparties, if applicable), short-
term investments, and floating-rate debt outstanding at December 31, 2011, an increase in rates would have a net
negative effect on the Company’s earnings and cash flows, while a decrease in rates would have a net positive
effect on the Company’s earnings and cash flows. However, a 10 percent change in market rates would not
impact the Company’s earnings or cash flow associated with the Company’s, including AirTran’s, publicly
traded fixed-rate debt.
The Company is also subject to a financial covenant included in its revolving credit facility, and is subject 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. Certain covenants
include the maintenance of minimum credit ratings and/or triggers that are based on changes in these ratings. The
Company’s revolving credit facility contains a financial covenant requiring a minimum coverage ratio of
adjusted pre-tax income to fixed obligations, as defined. As of December 31, 2011, the Company was in
compliance with this covenant and there were no amounts outstanding under the revolving credit facility.
However, if conditions change and the Company fails to meet the minimum standards set forth in the revolving
credit facility, there could be a reduction in the availability of cash under the facility, or an increase in the costs
to keep the facility intact as written. Seven of the Company’s hedging counterparty agreements contain ratings
triggers in which cash collateral would be required to be posted with the counterparty if the Company’s credit
rating were to fall below investment grade by two of the three major rating agencies, and if the Company were in
a net liability position with the counterparty. See Note 10 to the Consolidated Financial Statements for further
information. As of December 31, 2011, the Company had posted $226 million in cash with its fuel hedge
counterparties, because the Company was in a net fuel hedge liability position with those counterparties. The
Company had the option of substituting aircraft in lieu of $27 million in cash as of December 31, 2011, but opted
to provide cash instead. If the Company’s credit rating had been below investment grade as of that date, the
Company would have been required to post approximately $53 million in additional cash collateral deposits with
fuel hedge counterparties.
The Company currently has agreements with organizations that process credit card transactions arising from
purchases of air travel tickets by its Customers utilizing American Express, Discover and MasterCard/VISA.
Credit card processors have financial risk associated with tickets purchased for travel because, although the
processor generally forwards the cash related to the purchase to the Company soon after the purchase is
completed, the air travel generally occurs after that time, and the processor will have liability if the Company
does not ultimately provide the air travel. Under these processing agreements, and based on specified conditions,
increasing amounts of cash reserves could be required to be posted with the counterparty.
A majority of the Company’s sales transactions are processed by Chase Paymentech. Should chargebacks
processed by Chase Paymentech reach a certain level, proceeds from advance ticket sales could be held back and
used to establish a reserve account to cover such chargebacks and any other disputed charges that might occur.
Additionally, cash reserves are required to be established if the Company’s credit rating falls to specified levels
below investment grade. Cash reserve requirements are based on the Company’s public debt rating and a
corresponding percentage of the Company’s Air traffic liability.
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