Southwest Airlines 1997 Annual Report Download - page 33

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33
SOUTHWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM
As of December 31, 1997, the Company had authority from its Board of Directors to
purchase up to 2,500,000 shares of its common stock from time to time on the open
market. No shares have been purchased since 1990.
The Company has various options available to meet its capital and operating
commitments, including cash on hand at December 31, 1997, of $623.3 million,
internally generated funds, and a revolving credit line with a group of banks of up to
$475 million (none of which had been drawn at December 31, 1997). In addition, the
Company will also consider various borrowing or leasing options to maximize earnings
and supplement cash requirements.
The Company currently has outstanding shelf registrations for the issuance of $414.4
million of public debt securities, which it currently intends to utilize for aircraft financing
in 1998 and 1999.
MARKET RISK
In 1997, the Securities and Exchange Commission issued new rules (Item 305 of
Regulation S-K), which require disclosure of material risks, as defined in Item 305,
related to market risk sensitive financial instruments. As defined, Southwest currently
has market risk sensitive instruments related to jet fuel prices and interest rates.
Airline operators are inherently dependent upon energy to operate and, therefore, are
impacted by changes in jet fuel prices. Jet fuel consumed in 1997 represented
approximately 15.0 percent of Southwest’s operating expenses. Southwest endeavors
to acquire jet fuel at the lowest prevailing prices possible.
The Company hedges its exposure to jet fuel price market risk only on a conservative,
limited basis. The fair value of outstanding derivative commodity instruments (primarily
purchased crude oil call options) related to the Company’s jet fuel price market risk
during 1997 and at December 31, 1997 was immaterial. For further discussion, see
Note 1 to the Consolidated Financial Statements.
Airline operators are also inherently capital intensive, as the vast majority of the
Company’s assets are aircraft, which are long lived. The Company’s strategy is to
capitalize itself conservatively and grow capacity steadily and profitably. While
Southwest does use financial leverage, it has maintained a strong balance sheet and
“A-” or equivalent credit ratings on its senior unsecured debt with three rating agencies
(Standard & Poor’s, Moody’s, and Duff & Phelps).
As disclosed in Note 4 to the Consolidated Financial Statements, the Company has
outstanding unsecured debt of $600 million at December 31, 1997, of which only $500
million is long-term. This long-term debt represents only 14.5 percent of total
noncurrent assets at December 31, 1997. The Company has an average maturity of 11
years for the long-term debt at fixed rates averaging 7.8 percent, which is below
average rates prevailing over the last ten years.
At December 31, 1997, the Company operated 119 aircraft under operating and
capital leases at rates that are substantially fixed. As defined in Item 305, leases are
not market risk sensitive financial instruments and, therefore, are not included in the