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SOUTHWEST AIRLINES CO. 2002 10-K | 25
Since the majority of the Company’s financial
derivative instruments are not traded on a
market exchange, the Company estimates their
fair values. Depending on the type of instrument,
the values are determined by the use of present
value methods or standard option value models
with assumptions about commodity prices based
on those observed in underlying markets. Also
since there is not a reliable forward market for jet
fuel, the Company must estimate the future
prices of jet fuel in order to measure the
effectiveness of the hedging instruments in
offsetting changes to those prices, as required by
SFAS 133. Forward jet fuel prices are estimated
through the observation of similar commodity
futures prices (such as crude oil and heating oil)
and adjusted based on historical variations to
those like commodities.
Fair values for financial derivative instruments
and forward jet fuel prices are both estimated
prior to the time that the financial derivative
instruments settle and the time that jet fuel is
purchased and consumed, respectively. How-
ever, once settlement of the financial derivative
instruments occur and the hedged jet fuel is
purchased and consumed, all values and prices
are known and are realized in the financial
statements. Based on these actual results once
all values and prices become known, the
Company’s estimates have proved to be
materially accurate. Furthermore, since the
majority of the Company’s hedges settle within
12 to 24 months from the time the Company
enters into the contract for the derivative
financial instrument, the estimates being made
are relatively short-term.
Estimating the fair value of these fuel hedging
derivatives and forward prices for jet fuel will also
result in changes in their values from period to
period and thus determine how they are
accounted for under SFAS 133. To the extent that
the period to period change in the estimated fair
value of a fuel hedging instrument differs from a
period to period change in the estimated price of
the associated jet fuel to be purchased,
ineffectiveness of the fuel hedge will result, as
defined by SFAS 133. This could result in the
immediate recording of charges or income, even
though the derivative instrument may not expire
until a future period. Historically, the Company
has not experienced significant ineffectiveness
in its fuel hedges accounted for under SFAS 133.
See Note 2 and Note 9 to the Consolidated
Financial Statements for more information on
SFAS 133 and the Company’s fuel hedging
activities.
Forward-Looking Statements
Some statements in this Form 10-K (or
otherwise made by the Company or on the
Company’s behalf from time to time in other
reports, filings with the Securities and Exchange
Commission, news releases, conferences, World
Wide Web postings, or otherwise) which are not
historical facts may be “forward-looking state-
ments” within the meaning of Section 21E of the
Securities Exchange Act of 1934 and the Private
Securities Litigation Reform Act of 1995. Forward-
looking statements include statements about
Southwest’s estimates, expectations, beliefs,
intentions, or strategies for the future and the
assumptions underlying these forward-looking
statements. Southwest uses the words
“anticipates,” “believes,” “estimates,” “may,”
“expects,” “intends,” “forecasts,” “should,”
“will,” and similar expressions to identify these
forward-looking statements. Forward-looking state-
ments involve risks and uncertainties that could
cause actual results to differ materially from
historical experience or the Company’s present
expectations. Factors that could cause these
differences include, but are not limited to:
• Items directly linked to the September 11,
2001, terrorist attacks, such as the adverse
impact of new airline and airport security
directives on the Company’s costs and
Customer demand for travel, changes in
the Transportation Security Administration’s
scope for managing U.S. airport security,
the availability and cost of war-risk and
other aviation insurance, including the
federal government’s provision of third-