Southwest Airlines 1998 Annual Report Download - page 36

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36
SOUTHWEST AIRLINES CO. ¤ SIX STORIES OF FREEDOM
The fair values of outstanding fixed price swap agreements and purchased crude oil
call options related to the Company’s jet fuel price market risk at December 31, 1998
and 1997, and during the years then ended, were not material. A hypothetical ten
percent increase or decrease in the underlying fuel related commodity prices from the
December 31, 1998, prices would correspondingly change the fair value of these
derivative commodity instruments and their related cash flows by approximately $10
million.
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 had
outstanding unsecured debt of $500 million and $600 million at December 31, 1998
and 1997, respectively, of which only $500 million was long-term at December 31,
1997. This long-term debt represents only 12.1 percent and 14.5 percent of total
noncurrent assets at December 31, 1998 and 1997, respectively. The Company
currently has an average maturity of ten years for the long-term debt at fixed rates
averaging 8.3 percent, which is comparable to average rates prevailing over the last
ten years.
At December 31, 1998, the Company operated 112 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
interest rate sensitivity analysis below. Commitments related to leases are disclosed in
Note 5 to the Consolidated Financial Statements.