Southwest Airlines 2007 Annual Report Download - page 75

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The assumed healthcare cost trend rates have a
significant effect on the amounts reported for the Com-
pany’s plan. A one-percent change in all healthcare cost
trend rates used in measuring the APBO at December 31,
2007, would have the following effects:
1% Increase 1% Decrease
(In millions)
Increase (decrease) in total
service and interest
costs ............... $2 $(2)
Increase (decrease) in the
APBO .............. $7 $(6)
The Company’s plans are unfunded, and benefits are
paid as they become due. For 2007, both benefits paid
and Company contributions to the plans were each
$6 million. For 2006, both benefits paid and Company
contributions to the plans were each $5 million. Esti-
mated future benefit payments expected to be paid for
each of the next five years are $6 million in 2008,
$7 million in 2009, $8 million in 2010, $9 million in
2011, $10 million in 2012, and $80 million for the next
five years thereafter.
On December 31, 2006, the Company adopted the
recognition and disclosure provisions of SFAS 158.
SFAS 158 requires the Company to recognize the funded
status (i.e., the difference between the fair value of plan
assets and the projected benefit obligations) of its benefit
plans in the Consolidated Balance Sheet, with a corre-
sponding adjustment to accumulated other comprehen-
sive income, net of tax. The following table reconciles the
funded status of the plan to the Company’s accrued
postretirement benefit cost recognized in “Other deferred
liabilities” on the Company’s Consolidated Balance Sheet
at December 31, 2007 and 2006.
2007 2006
(In millions)
Funded status ................. $(88) $(111)
Unrecognized net actuarial (gain)
loss ...................... (31) 7
Unrecognized prior service cost .... 3 4
Accumulated other comprehensive
income (loss) ............... 28 (11)
Cost recognized on Consolidated
Balance Sheet ............... $(88) $(111)
During 2007, the Company recorded a $31 million
actuarial gain as a decrease to the recognized obligation with
the offset to accumulated other comprehensive income. This
actuarial gain is included above and resulted from Congress’
passage of a law to increase the mandatory retirement age for
U.S. commercial airline pilots from 60 to 65, effective
immediately. Therefore, since the Company projects that
some of its Pilots will now work past age 60, this assumption
resulted in a decrease to the Company’s projected future
postretirement obligation.
The Company’s periodic postretirement benefit
cost for the years ended December 31, 2007, 2006,
and 2005, included the following:
2007 2006 2005
(In millions)
Service cost ............... $16 $15 $12
Interest cost............... 654
Amortization of prior service
cost . . . ................ 222
Recognized actuarial loss...... — (1) —
Net periodic postretirement
benefit cost ............. $24 $21 $18
Unrecognized prior service cost is expensed using a
straight-line amortization of the cost over the average
future service of Employees expected to receive benefits
under the plan. The Company used the following actu-
arial assumptions to account for its postretirement benefit
plans at December 31:
2007 2006 2005
Wtd-average discount rate .... 5.75% 5.50% 5.25%
Assumed healthcare cost trend
rate(1) ............... 8.00% 8.50% 8.50%
(1) The assumed healthcare cost trend rate is assumed
to decline to 7.50% for 2008, then decline gradually
to 5% by 2014 and remain level thereafter.
The selection of a discount rate is made annually and
is selected by the Company based upon comparison of the
expected cash flows associated with the Company’s future
payments under its postretirement obligations to a hypo-
thetical bond portfolio created using high quality bonds
that closely match those expected cash flows. The
assumed healthcare trend rate is also reviewed at least
annually and is determined based upon both historical
experience with the Company’s healthcare benefits paid
and expectations of how those trends may or may not
change in future years.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)