Southwest Airlines 2007 Annual Report Download - page 54

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rates. The Company has not undertaken any additional
actions to cover interest rate market risk and is not a party
to any other material market interest rate risk manage-
ment activities.
A hypothetical ten percent change in market inter-
est rates as of December 31, 2007, would not have a
material affect on the fair value of the Company’s fixed
rate debt instruments. See Note 10 to the Consolidated
Financial Statements for further information on the fair
value of the Company’s financial instruments. A change
in market interest rates could, however, have a corre-
sponding effect on the Company’s earnings and cash
flows associated with its floating rate debt, invested cash
(excluding cash collateral deposits), and short-term
investments because of the floating-rate nature of these
items. Assuming floating market rates in effect as of
December 31, 2007, were held constant throughout a
12-month period, a hypothetical ten percent change in
those rates would correspondingly change the Company’s
net earnings and cash flows associated with these items by
less than $3 million. Utilizing these assumptions and
considering the Company’s cash balance (excluding cash
collateral deposits), short-term investments, and
floating-rate debt outstanding at December 31, 2007,
an increase in rates would have a net positive effect on the
Company’s earnings and cash flows, while a decrease in
rates would have a net negative effect on the Company’s
earnings and cash flows. However, a ten percent change
in market rates would not impact the Company’s earnings
or cash flow associated with the Company’s publicly
traded fixed-rate debt.
The Company is also subject to various financial
covenants included in its credit card transaction process-
ing agreement, the revolving credit facility, and outstand-
ing debt agreements. Covenants include the maintenance
of minimum credit ratings. For the revolving credit
facility, the Company must also maintain, at all times,
a Coverage Ratio, as defined in the agreement, of not less
than 1.00 to 1.25. The Company met or exceeded the
minimum standards set forth in these agreements as of
December 31, 2007. However, if conditions change and
the Company fails to meet the minimum standards set
forth in the agreements, it could reduce the availability of
cash under the agreements or increase the costs to keep
these agreements intact as written.
35