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26 | SOUTHWEST AIRLINES CO. 2002 10-K
party war-risk coverage, and the possibility
of additional incidents that could cause
the public to question the safety and/or
efficiency of air travel.
• War or other military actions by the U.S. or
others.
• Competitive factors, such as fare sales and
capacity decisions by the Company and its
competitors, changes in competitors’ flight
schedules, mergers and acquisitions,
codesharing programs, and airline bank--
ruptcies.
• General economic conditions, which could
adversely affect the demand for travel i n
general and consumer ticket purchasing
habits, as well as decisions by major freight
Customers on how they allocate freight
deliveries among different types of carriers.
• Factors that could affect the Company’s
ability to control its costs, such as the
results of Employee labor contract
negotiations, Employee hiring and reten-
tion rates, costs for health care, the largely
unpredictable prices of jet fuel, crude oil,
and heating oil, the continued effective-
ness of the Company’s fuel hedges,
changes in the Company’s overall fuel
hedging strategy, capacity decisions by the
Company and its competitors, unscheduled
required aircraft airframe or engine repairs
and regulatory requirements, changes in
commission policy, availability of capital
markets, and future financing decisions
made by the Company.
• Disruptions to operations due to adverse
weather conditions and air traffic control-
related constraints.
Caution should be taken not to place undue
reliance on the Company’s forward-looking
statements, which represent the Company’s
views only as of the date this report is filed. The
Company undertakes no obligation to update
publicly or revise any forward-looking statement,
whether as a result of new information, future
events, or otherwise.
Item 7A. Qualitative and Quantitative
Disclosures About Market Risk
Southwest has interest rate risk in that it holds
floating rate debt instruments and has com-
modity 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 instru-
ments in the form of fixed-rate debt instruments
and derivative instruments used to hedge its
exposure to jet fuel price increases. The
Company also operates 97 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 8 to the Consolidated Financial Statements.
The Company does not purchase or hold any
derivative financial instruments for trading pur-
poses. See Note 2 to the Consolidated Financial
Statements for information on the Company’s
accounting for its hedging program and Note 9 to
the Consolidated Financial Statements for further
details on the Company’s financial derivative
instruments.
Fuel hedging
The fair values of outstanding financial
derivative instruments related to the Company’s
jet fuel market price risk at December 31, 2002,
were a net asset of $157.2 million. The current
portion of these financial derivative instruments,
or $112.8 million, is classified as “Fuel hedge
contracts” in the Consolidated Balance Sheet.
The long-term portion of these financial
derivative instruments, or $44.4 million, is
included in “Other assets.” The fair values of the