Southwest Airlines 2009 Annual Report Download - page 23

The Company cannot guarantee it will be able to maintain its current level of low cost advantage.
Reorganization in bankruptcy, and even the threat of bankruptcy, has allowed other carriers to decrease operating
costs through renegotiated labor, supply, and financing agreements. In addition, as discussed above, increases in
the cost of fuel over historical levels have exacerbated cost challenges for the industry as a whole.
The Company’s results of operations could be adversely impacted if it is unable to timely and effectively
implement its revenue initiatives.
The Company has historically been regarded as a growth airline; however, the combination of a difficult
economic environment and growing costs led to the Company’s decision to curtail growth during 2009 and for
the indefinite future. In addition, growth has become increasingly difficult, as the number of opportunities has
declined and the Company faces an increased presence of other low cost carriers. As a result, the Company has
become increasingly reliant on the successful implementation of new revenue initiatives to help offset increasing
costs and continue to improve Customer Service. The timely and effective implementation of these initiatives has
involved, and will continue to involve, significant investments by the Company of time and money and could be
impacted by (i) the Company’s ability to timely and effectively implement, transition, and maintain related
information technology systems and infrastructure; (ii) the Company’s ability to effectively balance its
investment of incremental operating expenses and capital expenditures related to its initiatives against the need to
effectively control costs; and (iii) the Company’s dependence on third parties to assist with implementation of its
initiatives. Because the Company has limited experience with some of its strategic initiatives, it cannot ensure the
timing of their implementation or that they will be successful or profitable either over the short or long term.
The Company is increasingly dependent on technology to operate its business and continues to implement
substantial changes to its information systems; any failure or disruption in the Company’s information
systems could materially adversely affect the Company’s operations.
The Company is increasingly dependent on the use of complex technology and systems to run its ongoing
operations, as well as to support its initiatives. During 2009, the Company replaced or enhanced several key
technology systems and is scheduled to convert several more. These systems are discussed in more detail above
under “Business — Management Information Systems.” Integration of complex systems and technology presents
significant challenges in terms of costs, human resources, and development of effective internal controls.
Integration also presents the risk of operational or security inadequacy or interruption, which could materially
affect the Company’s ability to effectively operate its business. In particular, the Company could encounter
systems and operational complications in connection with its conversion to a new SAP Enterprise Resource
Planning application, which could have a material adverse effect on the Company’s business, financial condition,
or results of operations. The Company is also reliant upon third party performance for timely and effective
completion of many of its technology initiatives.
In the ordinary course of business, the Company’s systems will continue to require modification and
refinements to address growth and changing business requirements. The Company’s operations could be
adversely affected if it is unable to timely or effectively modify its systems as necessary.
Unstable credit, capital, and energy markets could result in future pressure on the Company’s credit
ratings and could also negatively impact the Company’s ability to obtain financing on acceptable terms
and the Company’s liquidity generally.
The Company’s credit ratings have been pressured by weak industry revenue and the volatile fuel price
environment. Standard & Poor’s and Fitch both recently downgraded the Company’s credit rating from “BBB+”
to “BBB” based on lower demand, especially among business travelers, and continued volatility in fuel prices.
While the Company’s credit rating remains “investment grade,” the lower ratings will likely result in a slight
increase in the Company’s borrowing costs on a prospective basis. Moody’s also downgraded the Company’s
rating from “Baa1” to Baa3” and lowered the ratings of the Company’s Pass-through and Enhanced Equipment
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