Southwest Airlines 1999 Annual Report Download - page 25

to approximately 57 percent for first quarter 2000, 85 percent for second quarter 2000, 100 percent
for third quarter 2000, 100 percent for fourth quarter 2000, 50 percent for first quarter 2001, 50
percent for second quarter 2001, and 20 percent for third quarter 2001. The Company’ s fuel hedging
strategy could result in the Company not fully benefiting from certain fuel price declines.
The fair values of outstanding fixed price swap agreements and purchased crude oil call options
related to the Company’ s jet fuel market price risk at December 31, 1999 and 1998, and during the
year ended 1998, were not material. For 1999, the Company realized approximately $14.8 million in
gains from hedging activities. A hypothetical ten percent increase or decrease in the underlying fuel-
related commodity prices from the December 31, 1999, prices would correspondingly change the fair
value of the derivative commodity instruments in place and their related cash flows by approximately $3
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 fixed-rate debt with
three rating agencies (Standard & Poor’ s, Moody’ s, and Duff & Phelps). The Company’ s Aircraft
Secured Notes ($200 million) do not give rise to significant fair value risk but do give rise to interest rate
risk because these borrowings are effectively floating-rate debt. The Company’ s $56 million in secured
borrowings completed in 1999 does not give rise to significant fair value risk because these borrowings
are also floating-rate debt. Although there is interest rate risk associated with these secured borrowings,
the risk is somewhat mitigated by the fact that the Company may prepay this debt on any of the semi-
annual principal and interest payment dates. See Note 5 to the Consolidated Financial Statements for
more information on these 1999 borrowings.
As disclosed in Note 5 to the Consolidated Financial Statements, the Company had outstanding
senior unsecured notes totaling $500 million at December 31, 1999, and at December 31, 1998. These
long-term notes represent only 10.0 percent and 12.1 percent of total noncurrent assets at December
31, 1999 and 1998, respectively. The unsecured long-term debt currently has an average maturity of
nine years at fixed rates averaging 8.3 percent at December 31, 1999, which is comparable to average
rates prevailing over the last ten years. The Company does not have significant exposure to changing
interest rates on its unsecured long-term debt because the interest rates are fixed and the financial
leverage is modest.