Southwest Airlines 2001 Annual Report Download - page 23

SOUTHWEST AIRLINES CO. 2001 ANNUAL REPORT F15
are expected to average approximately LIBOR plus 36 basis points
over the term of the Notes. Interest is payable monthly and the
Company can prepay the Notes in whole or in part prior to maturity.
Also in fourth quarter 1999, the Company entered into two identical
13-year floating rate financing arrangements, whereby it effectively
borrowed a total of $56 million from French banking partnerships. For
presentation purposes, the Company has classified these identical
borrowings as one $56 million transaction. The effective rate of interest
over the 13-year term of the loans is LIBOR plus 32 basis points.
Principal and interest are payable semi-annually on June 30 and
December 31 for each of the loans and the Company may terminate the
arrangements in any year on either of those dates, with certain
conditions. The Company has pledged two aircraft as collateral for the
entire transaction.
On February 28, 1997, the Company issued $100 million of senior
unsecured 7 3/8% Debentures due March 1, 2027. Interest is payable
semi-annually on March 1 and September 1. The Debentures may be
redeemed, at the option of the Company, in whole at any time or in part
from time to time, at a redemption price equal to the greater of the
principal amount of the Debentures plus accrued interest at the date
of redemption or the sum of the present values of the remaining
scheduled payments of principal and interest thereon, discounted to
the date of redemption at the comparable treasury rate plus 20 basis
points, plus accrued interest at the date of redemption.
During 1995, the Company issued $100 million of senior unsecured
8% Notes due March 1, 2005. Interest is payable semi-annually on
March 1 and September 1. The Notes are not redeemable prior to maturity.
During 1992, the Company issued $100 million of senior unsecured
7 7/8% Notes due September 1, 2007. Interest is payable semi-annually on
March 1 and September 1. The Notes are not redeemable prior to maturity.
During 1991, the Company issued $100 million of senior unsecured
8 3/4% Notes due October 15, 2003. Interest on the Notes is payable
semi-annually. The Notes are not redeemable prior to maturity.
The net book value of the assets pledged as collateral for the
Company’s secured borrowings, primarily aircraft and engines, was
$958.0 million at December 31, 2001.
As of December 31, 2001, aggregate annual principal maturities for
the five-year period ending December 31, 2006, were $40 million in
2002, $130 million in 2003, $232 million in 2004, $142 million in
2005, $541 million in 2006, and $291 million thereafter.
8. LEASES
Total rental expense for operating leases charged to operations
in 2001, 2000, and 1999 was $358.6 million, $330.7 million, and
$318.2 million, respectively. The majority of the Company’s terminal
operations space, as well as 92 aircraft, were under operating leases at
December 31, 2001. The amounts applicable to capital leases included
in property and equipment were:
(in thousands) 2001 2000
Flight equipment $ 165,085 $ 164,909
Less accumulated depreciation 99,80 1 92,763
$65,284 $ 72,1 46
Future minimum lease payments under capital leases and noncancelable
operating leases with initial or remaining terms in excess of one year
at December 31, 2001, were:
CAPITAL OPERATING
(in thousands) LEASES LEASES
2002 $ 1 7,562 $ 290,378
2003 1 7,75 1 275,01 3
2004 1 7,65 1 242,483
2005 23,509 21 7,1 70
2006 13,379 1 85,125
After 2006 65,395 1,589,559
Tot a l m inimum
lease payments 1 55,247 $ 2,799,728
Less amount
representing interest 45,979
Present value of minimum
lease payments 109,268
Less current portion 8,692
Long-term portion $ 1 00,576
The aircraft leases generally can be renewed at rates based on fair
market value at the end of the lease term for one to five years. Most
aircraft leases have purchase options at or near the end of the lease
term at fair market value, generally limited to a stated percentage of
the lessor’s defined cost of the aircraft.
9. DERIVATIVE AND FINANCIAL INSTRUMENTS
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 2001, 2000, and 1999 represented approximately
15.6 percent, 17.4 percent, and 12.5 percent of Southwest’s operating
expenses, respectively. The Company endeavors to acquire jet fuel at
the lowest possible prices. Because jet fuel is not traded on an
organized futures exchange, liquidity for hedging is limited. However,
the Company has found that both crude oil and heating oil contracts
are effective commodities for hedging jet fuel. The Company has
financial derivative instruments in the form of the types of hedges it
utilizes to decrease its exposure to jet fuel price increases. The
Company does not purchase or hold any derivative financial
instruments for trading purposes.
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, 2001, the
Company had a mixture of purchased call options, collar structures,
and fixed price swap agreements in place to hedge approximately
60 percent of its 2002 total anticipated jet fuel requirements,
approximately 47 percent of its 2003 total anticipated jet fuel
requirements, and a small portion of its 2004 – 2005 total anticipated
jet fuel requirements. As of December 31, 2001, the majority of the
Company’s 2002 hedges are effectively heating oil-based positions in
the form of option contracts. All remaining hedge positions are crude
oil-based positions.
During 2001, 2000, and 1999, the Company recognized gains in
“Fuel and oil” expense of $79.9 million, $113.5 million, and $14.8 million,