Southwest Airlines 2006 Annual Report Download - page 59

condition at December 31, 2006 has been included in the
accompanying consolidated financial statements. State-
ment 158 did not have an effect on the Company’s
consolidated financial condition at December 31, 2005
or 2004. See Note 14 for further discussion.
Recent Accounting Developments
In July 2006, the Financial Accounting Standards
Board (FASB) issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109” (FIN 48),
which clarifies the accounting and disclosure for uncer-
tainty in tax positions, as defined. FIN 48 seeks to reduce
the diversity in practice associated with certain aspects of
the recognition and measurement related to accounting
for income taxes. This interpretation is effective for fiscal
years beginning after December 15, 2006. The Company
does not expect the interpretation will have a material
impact on its results from operations or financial position.
In September 2006, the FASB issued statement
No. 157, “Fair Value Measurements”,(SFAS 157).
SFAS 157 defines fair value, establishes a framework
for measuring fair value in accordance with accounting
principles generally accepted in the United States, and
expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after
November 15, 2007, with earlier application encouraged.
Any amounts recognized upon adoption as a cumulative
effect adjustment will be recorded to the opening balance
of retained earnings in the year of adoption. The Com-
pany has not yet determined the impact of this Statement
on its financial condition and results of operations.
3. Acquisition of Certain Assets
In fourth quarter 2004, Southwest was selected as
the winning bidder at a bankruptcy-court approved auc-
tion for certain ATA Airlines, Inc. (ATA) assets. As
part of the transaction, which was approved in December
2004, Southwest agreed to pay $40 million for certain
ATA assets, consisting of the leasehold rights to six of
ATA’s leased Chicago Midway Airport gates and the
rights to a leased aircraft maintenance hangar at Chicago
Midway Airport. In addition, Southwest provided ATA
with $40 million in debtor-in-possession financing while
ATA remained in bankruptcy, and also guaranteed the
repayment of an ATA construction loan to the City of
Chicago for $7 million. As part of this original transac-
tion, Southwest committed, upon ATA’s emergence
from bankruptcy, to convert the debtor-in-possession
financing to a term loan, payable over five years, and
to invest $30 million cash in ATA convertible preferred
stock.
During fourth quarter 2005, ATA entered into an
agreement in which an investor, MatlinPatterson Global
Opportunities Partners II, would provide financing to
enable ATA to emerge from bankruptcy. As part of this
transaction, Southwest entered into an agreement with
ATA to acquire the leasehold rights to four additional
leased gates at Chicago Midway Airport in exchange for a
$20 million reduction in the Company’s debtor-in-pos-
session loan. Upon ATA’s emergence from bankruptcy,
which took place on February 28, 2006, ATA repaid the
remaining $20 million balance of the debtor-in-posses-
sion financing to the Company, and provided a letter of
credit to support Southwest’s obligation under the con-
struction loan to the City of Chicago. In addition, South-
west was relieved of its commitment to purchase ATA
convertible preferred stock.
Southwest and ATA agreed on a code share arrange-
ment, which was approved by the Department of Trans-
portation in January 2005. Under the agreement, which
has since been expanded, each carrier can exchange
passengers on certain designated flights. Sales of the code
share flights began in January 2005, with travel dates
beginning in February 2005. As part of the December
2005 agreement with ATA, Southwest has enhanced its
codeshare arrangement with ATA to include additional
flights and destinations, among other items. In addition,
the Company and ATA have instituted enhancements to
Southwest’s Rapid Rewards frequent flyer program to
provide new award destinations via ATA.
4. Commitments
The Company’s contractual purchase commitments
primarily consist of scheduled aircraft acquisitions from
Boeing. As of December 31, 2006, the Company had
contractual purchase commitments with Boeing for 37
737-700 aircraft deliveries in 2007, 30 scheduled for
delivery in 2008, 18 in 2009, and ten each in 2010-2012.
In addition, the Company has options and purchase
rights for an additional 168 737-700s that it may acquire
during 2008-2014. The Company has the option, which
must be exercised 18 months prior to the contractual
delivery date, to substitute 737-600s or 737-800s for the
737-700s. As of December 31, 2006, aggregate funding
needed for firm commitments is approximately $3.1 bil-
lion, subject to adjustments for inflation, due as follows:
$1.0 billion in 2007, $758 million in 2008, $467 million
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)