Southwest Airlines 2007 Annual Report Download - page 62

received associated with the purchase or sale of financial
derivative instruments (i.e., premium costs of option
contracts) are classified as a component of Other (gains)
losses, net, in the Consolidated Statement of Income in
the period in which the instrument settles or expires. All
cash flows associated with purchasing and selling deriv-
atives are classified as operating cash flows in the Con-
solidated Statement of Cash Flows, either as a component
of changes in Other current assets or Other, net, depend-
ing on whether the derivative will settle within twelve
months or beyond twelve months, respectively. See
Note 10 for further information on SFAS 133 and
financial derivative instruments.
Income Taxes
The Company accounts for deferred income taxes
utilizing Statement of Financial Accounting Standards
No. 109 (SFAS 109), “Accounting for Income Taxes”,
as amended. SFAS 109 requires an asset and liability
method, whereby deferred tax assets and liabilities are
recognized based on the tax effects of temporary differ-
ences between the financial statements and the tax bases
of assets and liabilities, as measured by current enacted tax
rates. When appropriate, in accordance with SFAS 109,
the Company evaluates the need for a valuation allowance
to reduce deferred tax assets.
Concentration Risk
A significant number of the Company’s Employees
are unionized and are covered by collective bargaining
agreements. The following Employee groups are under
agreements that are currently amendable or will become
amendable during 2008: the Company’s Pilots (became
amendable in 2006, and currently in discussions on a new
agreement); the Company’s Flight Attendants (becomes
amendable in June 2008); the Company’s Ramp, Oper-
ations, Provisioning, and Freight Agents (becomes
amendable in July 2008, and began negotiations in
January 2008); the Company’s Stock Clerks and Mechan-
ics (both become amendable in August 2008); and the
Company’s Customer Service and Reservations Agents
(becomes amendable in November 2008.)
The Company attempts to minimize its concentra-
tion risk with regards to its cash, cash equivalents, and its
investment portfolio. This is accomplished by diversify-
ing and limiting amounts among different counterparties,
the type of investment, and the amount invested in any
individual security or money market fund.
To manage risk associated with financial derivative
instruments held, the Company selects and will period-
ically review counterparties based on credit ratings, limits
its exposure to a single counterparty, and monitors the
market position of the program and its relative market
position with each counterparty. At December 31, 2007,
the Company had agreements with nine counterparties
containing early termination rights and/or bilateral col-
lateral provisions whereby security is required if market
risk exposure exceeds a specified threshold amount or
credit ratings fall below certain levels. At December 31,
2007, the Company held $2.0 billion in cash collateral
deposits under these bilateral collateral provisions. These
collateral deposits serve to decrease, but not totally elim-
inate, the credit risk associated with the Company’s
hedging program.
The Company operates an all-Boeing 737 fleet of
aircraft. If the Company was unable to acquire additional
aircraft from Boeing, or Boeing was unable or unwilling to
provide adequate support for its products, the Company’s
operations could be adversely impacted. However, the
Company considers its relationship with Boeing to be
good and believes the advantages of operating a single
fleet type outweigh the risks of such a strategy.
2. Recent Accounting Developments
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. The
Company is subject to the provisions of SFAS 157 begin-
ning January 1, 2008. The Company has not yet deter-
mined whether SFAS 157 will have a material impact on
its financial condition, results of operations, or cash flow.
However, the Company believes it will likely be required
to provide additional disclosures as part of future financial
statements, beginning with first quarter 2008.
In February 2007, the FASB issued Statement
No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities” (Statement 159). Statement
159 allows entities the option to measure eligible finan-
cial instruments at fair value as of specified dates. Such
election, which may be applied on an instrument by
instrument basis, is typically irrevocable once elected.
Statement 159 is effective for fiscal years beginning after
November 15, 2007. The Company does not believe
Statement 159 will result in a material adverse effect
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)