Southwest Airlines 2004 Annual Report Download - page 42

income by better matching the repricing of its assets debt. See Note 10 to the Consolidated Financial
and liabilities. Concurrently, the Company's interest Statements.
rate hedges are also intended to take advantage of The Company believes it is unlikely that materially
market conditions in which short-term rates are signiÑ- diÅerent estimates for the fair value of Ñnancial deriva-
cantly lower than the Ñxed longer term rates on the tive instruments, and forward jet fuel prices would be
Company's long-term debt. During 2003, the Company made or reported based on other reasonable assumptions
entered into interest rate swap agreements relating to its or conditions suggested by actual historical experience
$385 million 6.5% senior unsecured notes due 2012, and other data available at the time estimates were
and $375 million 5.496% Class A-2 pass-through cer- made.
tiÑcates due 2006. The Öoating rate paid under each
agreement sets in arrears. Under the Ñrst agreement, the Forward-Looking Statements
Company pays the London InterBank OÅered Rate
(LIBOR) plus a margin every six months and receives Some statements in this Form 10-K (or otherwise
6.5% every six months on a notional amount of made by the Company or on the Company's behalf from
$385 million until 2012. The average Öoating rate paid time to time in other reports, Ñlings with the Securities
under this agreement during 2004 is estimated to be and Exchange Commission, news releases, conferences,
4.490 percent based on actual and forward rates at World Wide Web postings or otherwise) which are not
December 31, 2004. Under the second agreement, the historical facts, may be ""forward-looking statements''
Company pays LIBOR plus a margin every six months within the meaning of Section 21E of the Securities
and receives 5.496% every six months on a notional Exchange Act of 1934 and the Private Securities Litiga-
amount of $375 million until 2006. Based on actual and tion Reform Act of 1995. Forward-looking statements
forward rates at December 31, 2004, the average Öoat- include statements about Southwest's estimates, expec-
ing rate paid under this agreement during 2004 is tations, beliefs, intentions or strategies for the future,
estimated to be 4.695 percent. and the assumptions underlying these forward-looking
statements. Southwest uses the words ""anticipates,''
During 2004, the Company also entered into an ""believes,'' ""estimates,'' ""expects,'' ""intends,'' ""fore-
interest rate swap agreement relating to its $350 million casts,'' ""may,'' ""will,'' ""should,'' and similar expressions
5.25% senior unsecured notes due 2014. Under this to identify these forward-looking statements. Forward-
agreement, the Company pays LIBOR plus a margin looking statements involve risks and uncertainties that
every six months and receives 5.25% every six months could cause actual results to diÅer materially from
on a notional amount of $350 million until 2014. The historical experience or the Company's present expecta-
Öoating rate is set in advance. The average Öoating rate tions. Factors that could cause these diÅerences include,
paid under this agreement during 2004 was but are not limited to:
2.814 percent.
‚ Items directly linked to the September 11, 2001
terrorist attacks, such as the adverse impact of
The Company's interest rate swap agreements
new airline and airport security directives on the
qualify as fair value hedges, as deÑned by SFAS 133. In
Company's costs and Customer demand for
addition, these interest rate swap agreements qualify for
travel, changes in the Transportation Security
the ""shortcut'' method of accounting for hedges, as
Administration's scope for managing
deÑned by SFAS 133. Under the ""shortcut'' method,
U.S. airport security, the availability and cost of
the hedges are assumed to be perfectly eÅective, and,
war-risk and other aviation insurance, including
thus, there is no ineÅectiveness to be recorded in
the federal government's provision of third party
earnings. The fair value of the interest rate swap agree-
war-risk coverage, and the possibility of addi-
ments, which are adjusted regularly, are recorded in the
tional incidents that could cause the public to
Consolidated Balance Sheet, as necessary, with a corre-
question the safety and/or eÇciency of air
sponding adjustment to the carrying value of the long-
travel.
term debt. The fair value of the interest rate swap
agreements, excluding accrued interest, at Decem- ‚ War or other military actions by the U.S. or
ber 31, 2004, was a liability of approximately $16 mil- others.
lion. This amount is recorded in ""Other deferred
liabilities'' in the Consolidated Balance Sheet. In accor- ‚ Competitive factors, such as fare sales and ca-
dance with fair value hedging, the oÅsetting entry is an pacity decisions by the Company and its com-
adjustment to decrease the carrying value of long-term petitors, changes in competitors' Öight
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