Southwest Airlines 2000 Annual Report Download - page 24

LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.3 billion in
2000 compared to $1.0 billion in 1999. The increase in
operating cash flows was primarily due to the increase in
operating income. Cash generated in 2000 was primarily
used to finance aircraft-related capital expenditures, provide
working capital, and repurchase approximately 6.7 million
shares of Company stock.
During 2000, net capital expenditures were $1.1 billion,
which primarily related to the purchase of 33 new and one
used 737-700 aircraft, and progress payments for future
aircraft deliveries.
At December 31, 2000, capital commitments of the
Company primarily consisted of scheduled aircraft
acquisitions and related flight equipment. As of December
31, 2000, Southwest had 146 new 737-700s on firm order
through 2007, including 25 to be delivered in 2001. The
Company also has options to purchase another 87 737-700s
during 2003–2008 and purchase rights for an additional 217
737-700s during 2007–2012. Aggregate funding required for
firm commitments approximated $4.0 billion through the year
2007, of which $668.3 million relates to 2001. See Note 3 to
the Consolidated Financial Statements for further information
on commitments.
On September 23, 1999, the Company announced its
Board of Directors had authorized the repurchase of up to
$250 million of the Company’s common stock. Repurchases
are made in accordance with applicable securities laws in the
open market or in private transactions from time to time,
depending on market conditions, and may be discontinued at
any time. As of December 31, 2000, in aggregate, 12.2
million shares had been repurchased at a total cost of $199.2
million, of which $108.7 million was completed in 2000.
The Company has various options available to meet its
capital and operating commitments, including cash on hand
at December 31, 2000, of $523 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, 2000). 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 may utilize for aircraft financings in 2001 and 2002.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Southwest has interest rate risk in that it holds floating rate
debt instruments and has commodity price risk in that it must
purchase jet fuel to operate its aircraft fleet. The Company
purchases jet fuel at prevailing market prices, but seeks to
minimize its average jet fuel cost through execution of a
documented hedging strategy. Southwest has market
sensitive instruments in the form of the types of hedges it
utilizes to decrease its exposure to jet fuel price increases
and with fixed rate debt instruments. The Company also
operates 101 aircraft under operating and capital leases.
However, leases are not considered market sensitive
financial instruments and, therefore, are not included in the
interest rate sensitivity analysis below. Commitments related
to leases are disclosed in Note 6 to the Consolidated
Financial Statements. The Company does not purchase or
hold any financial derivative instruments for trading purposes.
Airline operators are inherently dependent upon energy to
operate and, therefore, are impacted by changes in jet fuel
prices. Jet fuel and oil consumed in 2000 and 1999
represented approximately 17.4 and 12.5 percent of
Southwest’s operating expenses, respectively. Southwest
endeavors to acquire jet fuel at the lowest prevailing prices
possible. Because jet fuel is not traded on an organized
futures exchange, liquidity for hedging is limited. However,
the Company has found that crude oil contracts and heating
oil contracts are effective commodities for hedging jet fuel.
The Company utilizes financial derivative instruments for
both short-term and long-term time frames when it appears
the Company can take advantage of market conditions. At
December 31, 2000, the Company had a mixture of
purchased call options, collar structures, and fixed price
swap agreements in place to hedge approximately 80
percent of its 2001 total anticipated jet fuel requirements,
approximately 32 percent of its 2002 total anticipated jet fuel
requirements, and a small portion of its 2005 total anticipated
jet fuel requirements. As of December 31, 2000, nearly all of
the Company’s 2001 hedges, and the majority of its 2002
hedges, are effectively heating oil-based positions. All
remaining hedge positions are crude oil-based positions. The
amount related to all the Company’s fuel hedge positions
contained in the Consolidated Balance Sheet at December
31, 2000, was $22.5 million, which represents the aggregate
net premium cost paid for option and/or collar agreements.
This amount is classified as prepaid expense in current
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