Southwest Airlines 2005 Annual Report Download - page 46

the Company's pass-through certificates consists of its flows associated with its floating rate debt, invested
Class A certificates and Class B certificates, which cash, and short-term investments because of the float-
totaled $154 million at December 31, 2005. These ing-rate nature of these items. Assuming floating mar-
Class A and Class B certificates had fixed rates averag- ket rates in effect as of December 31, 2005, were held
ing 5.7 percent at December 31, 2005 and mature constant throughout a 12-month period, a hypothetical
during 2006. The carrying value of the Company's ten percent change in those rates would correspondingly
floating rate debt totaled $1.2 billion, and this debt had change the Company's net earnings and cash flows
a weighted-average maturity of 6.0 years at floating associated with these items by less than $2 million.
rates averaging 6.27 percent at December 31, 2005. In Utilizing these assumptions and considering the Com-
total, the Company's fixed rate debt and floating rate pany's cash balance, short-term investments, and float-
debt represented 6.2 percent and 11.6 percent, respec- ing-rate debt outstanding at December 31, 2005, an
tively, of total noncurrent assets at December 31, 2005. increase in rates would have a net positive effect on the
Company's earnings and cash flows, while a decrease in
The Company also has some risk associated with rates would have a net negative effect on the Company's
changing interest rates due to the short-term nature of earnings and cash flows. However, a ten percent change
its invested cash, which totaled $2.3 billion, and short- in market rates would not impact the Company's earn-
term investments, which totaled $251 million, at De- ings or cash flow associated with the Company's pub-
cember 31, 2005. The Company invests available cash licly traded fixed-rate debt.
in certificates of deposit, highly rated money market
instruments, investment grade commercial paper, auc- The Company is also subject to various financial
tion rate securities, and other highly rated financial covenants included in its credit card transaction process-
instruments. Because of the short-term nature of these ing agreement, the revolving credit facility, and out-
investments, the returns earned parallel closely with standing debt agreements. Covenants include the
short-term floating interest rates. The Company has not maintenance of minimum credit ratings. For the revolv-
undertaken any additional actions to cover interest rate ing credit facility, the Company shall also maintain, at
market risk and is not a party to any other material all times, a Coverage Ratio, as defined in the agreement,
market interest rate risk management activities. of not less than 1.25 to 1.0. The Company met or
exceeded the minimum standards set forth in these
A hypothetical ten percent change in market inter- agreements as of December 31, 2005. However, if
est rates as of December 31, 2005, would not have a conditions change and the Company fails to meet the
material effect on the fair value of the Company's fixed minimum standards set forth in the agreements, it could
rate debt instruments. See Note 10 to the Consolidated reduce the availability of cash under the agreements or
Financial Statements for further information on the fair increase the costs to keep these agreements intact as
value of the Company's financial instruments. A change written.
in market interest rates could, however, have a corre-
sponding effect on the Company's earnings and cash
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