Southwest Airlines 2009 Annual Report Download - page 24

Trust Certificates (“PTC” and “EETC”). The downgrade of the Company’s senior unsecured debt rating was
based on Moody’s expectation of continuing weak fundamentals of the domestic airlines sector. The downgrade
of the Company’s ratings on its PTCs and EETCs reflects the reduction in the Company’s underlying credit
quality, and, with respect to the PTCs, the elevated loan to value ratios resulting from the older vintage 737-300
aircraft that are pledged as collateral for these transactions. Factors such as further unfavorable economic
conditions, a significant decline in demand for air travel, or continued instability of the credit and capital markets
could result in future pressure on credit ratings, which could negatively impact (i) the Company’s ability to
obtain financing on acceptable terms, (b) the Company’s liquidity generally, and (c) the availability and cost of
insurance. In addition, further downgrades could trigger credit rating provisions in the Company’s credit card
transaction processing agreements and some hedging counterparty agreements. The potential effect of further
downgrades is discussed in more detail under “Quantitative and Qualitative Disclosures About Market Risk.”
The Company is dependent on single aircraft and engine suppliers; therefore, the Company would be
materially adversely affected if it were unable to obtain additional equipment or support from either of
these suppliers or in the event of a mechanical or regulatory issue associated with their equipment.
The Company is dependent on Boeing as its sole supplier for aircraft and many of its aircraft parts.
Although the Company is able to purchase some of these aircraft from parties other than Boeing, most of its
purchases are directly from Boeing. Therefore, if the Company were unable to acquire additional aircraft from
Boeing, or Boeing were unable or unwilling to provide adequate support for its products, the Company’s
operations would be materially adversely affected. In addition, the Company would be materially adversely
affected in the event of a mechanical or regulatory issue associated with the Boeing 737 aircraft type, whether as
a result of downtime for part or all of the Company’s fleet or because of a negative perception by the flying
public. The Company believes, however, that its years of experience with the Boeing 737 aircraft type, as well as
the efficiencies achieved by operating a single fleet type, outweigh the risks associated with its single aircraft
strategy. The Company is also dependent on a sole supplier for aircraft engines and would therefore also be
materially adversely affected in the event of a mechanical or regulatory issue associated with its engines.
The Company’s business is labor intensive; therefore, the Company would be adversely affected if it were
unable to maintain satisfactory relations with its Employees or its Employees’ Representatives.
The airline business is labor intensive. Salaries, wages, and benefits represented approximately 34 percent
of the Company’s operating expenses for the year ended December 31, 2009. In addition, as of December 31,
2009, approximately 82 percent of the Company’s Employees were represented for collective bargaining
purposes by labor unions, making the Company particularly exposed in the event of labor-related job actions.
Employment-related issues that may impact the Company’s results of operations, some of which are negotiated
items, include hiring/retention rates, pay rates, outsourcing costs, work rules, and health care costs. The
Company has historically maintained positive relationships with its Employees and its Employees’
Representatives, as was evidenced during 2009 when it completed five major contract negotiations; however,
new labor contracts contribute to the Company’s cost pressures. Increasing labor costs, combined with curtailed
growth, could negatively impact the Company’s competitive position.
The airline industry has faced on-going security concerns and related cost burdens; further threatened or
actual terrorist attacks, or other hostilities, could significantly harm the airline industry and the
Company’s operations.
Terrorist attacks and threatened attacks have from time to time materially impacted the demand for air travel
and have also resulted in increased safety and security costs for the Company and the airline industry generally.
Safety measures create delays and inconveniences and can, in particular, reduce the Company’s competitiveness
against surface transportation for short-haul routes. Additional terrorist attacks, even if not made directly on the
airline industry, or the fear of such attacks or other hostilities (including elevated national threat warnings or
selective cancellation or redirection of flights due to terror threats) would likely have a further significant
negative impact on the Company and the airline industry.
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