Southwest Airlines 2008 Annual Report Download - page 62

Download and view the complete annual report

Please find page 62 of the 2008 Southwest Airlines annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 103

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103

the availability of cash under the agreement, or an
increase in the costs to keep the agreement intact as
written. Two of the Company’s hedging counterparty
agreements contain ratings triggers in which cash
collateral would be required to be posted with the
counterparty if the Company’s credit rating falls
below investment grade by two of the three major
rating agencies. As of December 31, 2008, there was
no cash posted with these counterparties. Given the
Company’s net fuel hedge liability with these
counterparties at December 31, 2008, and assuming
its credit rating were below investment grade as of
that date, the Company would have been required to
post approximately $700 million in cash collateral
deposits with the counterparties. However, these cash
collateral deposit requirements would be
correspondingly reduced as the underlying fuel
derivative instruments settle—including by
approximately $244 million in 2009.
The Company currently has processing
agreements with organizations that process credit
card transactions arising from purchases of air travel
tickets by its Customers utilizing American Express,
Discover and MasterCard/VISA. Credit card
processors have financial risk associated with tickets
purchased for travel because, although the processor
generally forwards the cash related to the purchase to
the Company soon after the purchase is completed,
the air travel generally occurs after that time, and the
processor would have liability if the Company does
not ultimately provide the air travel. Under these
processing agreements, and based on specified
conditions, increasing amounts of cash reserves could
be required to be posted with the counterparty.
A majority of the Company’s sales transactions
are processed by Chase Paymentech. Should
chargebacks processed by Chase Paymentech reach a
certain level, proceeds from advance ticket sales
could be held back and used to establish a reserve
account to cover such chargebacks and any other
disputed charges that might occur. Additionally, cash
reserves are required to be established if the
Company’s credit rating falls to specified levels
below investment grade. Cash reserve requirements
are based on the Company’s public debt rating and a
corresponding percentage of the Company’s “Air
traffic liability.”
As of December 31, 2008 the Company was in
compliance with all credit card processing
agreements. However, the inability to enter into
credit card processing agreements would have a
material adverse effect on the business of the
Company. The Company believes that it will be able
to continue to renew its existing credit card
processing agreements or will be able to enter into
new credit card processing agreements with other
processors in the future.
43