Southwest Airlines 2008 Annual Report Download - page 34

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Ground Facilities and Services
Southwest leases terminal passenger service
facilities at each of the airports it serves, to which it
has made various leasehold improvements. The
Company leases the land and structures on a long-
term basis for its maintenance centers (located at
Dallas Love Field, Houston Hobby, Phoenix Sky
Harbor, and Chicago Midway), its flight training
center at Dallas Love Field (which houses seven 737
simulators), and its corporate headquarters, also
located at Dallas Love Field. During 2008, the City
of Dallas approved the Love Field Modernization
Program, an estimated $519 million project to
provide Dallas Love Field with modern, convenient
facilities. Southwest is managing the project, and
construction is expected to commence during the
summer of 2009, with completion scheduled for
October 2014. As of December 31, 2008, the
Company operated six reservation centers. The
reservation centers located in Chicago, Albuquerque,
and Oklahoma City occupy leased space. The
Company owns its Houston, Phoenix, and
San Antonio reservation centers.
The Company performs substantially all line
maintenance on its aircraft and provides ground
support services at most of the airports it serves.
However, the Company has arrangements with
certain aircraft maintenance firms for major
component inspections and repairs for its airframes
and engines, which comprise the majority of the
Company’s annual aircraft maintenance costs.
Item 3. Legal Proceedings
On March 6, 2008, the FAA notified Southwest
that it was seeking to fine Southwest approximately
$10 million in connection with an incident
concerning the Company’s potential non-compliance
with an airworthiness directive. The Company is
currently in settlement discussions with the FAA.
In connection with the above incident, during
the first quarter and early second quarter of 2008, the
Company was named as a defendant in two putative
class actions on behalf of persons who purchased air
travel from the Company while the Company was
allegedly in violation of FAA safety regulations.
Claims alleged by the plaintiffs in these two putative
class actions include breach of contract, breach of
warranty, fraud/misrepresentation, unjust enrichment,
and negligent and reckless operation of an
aircraft. The Company believes that the class action
lawsuits are without merit and intends to vigorously
defend itself. Also in connection with the above
incident, during the first quarter and early second
quarter of 2008, the Company received four letters
from Shareholders demanding the Company
commence an action on behalf of the Company
against members of its Board of Directors and any
other allegedly culpable parties for damages resulting
from an alleged breach of fiduciary duties owed by
them to the Company. In August 2008, Carbon
County Employees Retirement System and Mark
Cristello filed a related Shareholder derivative action
in Texas state court naming certain directors and
officers of the Company as individual defendants and
the Company as a nominal defendant. The derivative
action claims breach of fiduciary duty and seeks
recovery by the Company of alleged monetary
damages sustained as a result of the purported breach
of fiduciary duty, as well as costs of the action. A
Special Committee appointed by the Independent
Directors of the Company is currently evaluating the
Shareholder demands.
The Company is subject to various legal
proceedings and claims arising in the ordinary course
of business, including, but not limited to,
examinations by the Internal Revenue Service (IRS).
The IRS regularly examines the Company’s federal
income tax returns and, in the course of those
examinations, proposes adjustments to the
Company’s federal income tax liability reported on
such returns. It is the Company’s practice to
vigorously contest those proposed adjustments that it
deems lacking merit. The Company’s management
does not expect the outcome in any of its currently
ongoing legal proceedings or the outcome of any
proposed adjustments presented to date by the IRS,
individually or collectively, will have a material
adverse effect on the Company’s financial condition,
results of operations, or cash flows.
Item 4. Submission of Matters to a Vote of
Security Holders
None to be reported.
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