Southwest Airlines 1998 Annual Report Download - page 35

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35
SOUTHWEST AIRLINES CO. ¤ SIX STORIES OF FREEDOM
The Company has various options available to meet its capital and operating
commitments, including cash on hand at December 31, 1998, of $378.5 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, 1998). 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 $318.8
million of public debt securities, which it currently intends to utilize for aircraft
financings in 1999 and 2000.
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 1998 and 1997
represented approximately 11.2 and 15.0 percent of Southwest’s operating expenses,
respectively. Southwest endeavors to acquire jet fuel at the lowest prevailing prices
possible.
The Company has historically hedged its exposure to jet fuel price market risk only on
a conservative, limited basis. In December 1998, in order to take advantage of
historically low jet fuel prices, Southwest increased its fuel hedging activity by entering
into fixed price swap agreements hedging approximately 77 percent and 56 percent of
its jet fuel needs in first and second quarter 1999, respectively. In January 1999, the
Company increased its hedging position for second quarter 1999 to 74 percent. During
1999, the Company may continue its fuel hedging activities at these higher levels to
take advantage of the historically low jet fuel prices.