Southwest Airlines 1998 Annual Report Download - page 47

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47
SOUTHWEST AIRLINES CO. ¤ SIX STORIES OF FREEDOM
DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes purchased crude oil
call options and fixed price swap agreements to hedge a portion of its exposure to fuel
price fluctuations. The cost of purchased crude oil call options and gains and losses on
fixed price swap agreements are deferred and charged or credited to fuel expense in
the same month that the underlying fuel being hedged is used. Gains and losses
resulting from hedging positions terminated or settled early are recorded to fuel
expense in the month of termination or settlement. Gains and losses on hedging
transactions have not been material.
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and
Hedging Activities, which is required to be adopted in years beginning after June 15,
1999. SFAS 133 permits early adoption as of the beginning of any fiscal quarter after
its issuance. The Company expects to adopt the new Statement effective January 1,
2000. SFAS 133 will require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative’s change in fair value will be
immediately recognized in earnings. The Company has not yet determined what the
effect of SFAS 133 will be on the earnings and financial position of the Company.
2. COMMITMENTS
The Company’s contractual purchase commitments consist primarily of scheduled
aircraft acquisitions. Thirty-two 737-700 aircraft are scheduled for delivery in 1999, 21
in 2000, 21 in 2001, 21 in 2002, five in 2003, and five in 2004. In addition, the
Company has options to purchase up to 62 -700s during 2003–2006. The Company
has the option, which must be exercised two years prior to the contractual delivery
date, to substitute 737-600s or 737-800s for the -700s scheduled subsequent to 2000.
Aggregate funding needed for firm commitments is approximately $2,492.5 million,
subject to adjustments for inflation, due as follows: $715.9 million in 1999,