Southwest Airlines 2009 Annual Report Download - page 36

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entered into these offsetting positions, the Company undesignated the majority of its original hedges and began
to mark those positions to market along with the offsetting positions. However, the Company continues to have
significant amounts “frozen” in Accumulated Other Comprehensive Income (AOCI) from the time that this
original hedge portfolio received special hedge accounting, and these amounts will be recognized in the income
statement in future periods when the underlying fuel derivative contracts settle. As discussed in Note 10 to the
Consolidated Financial Statements, the Company has deferred losses in AOCI of $580 million, net of tax, related
to fuel derivative contracts. The estimated fair market value (as of December 31, 2009) of the Company’s net
fuel derivative contracts for 2010 through 2013 reflects a net pretax liability of approximately $147 million,
including the effect of $330 million in cash collateral that had been provided to counterparties as of
December 31, 2009, which has been netted against the Company’s liabilities in the Consolidated Balance Sheet.
The following table displays the Company’s estimated fair value of remaining fuel derivative contracts (not
considering the impact of the $330 million in cash collateral provided to counterparties) as well as the amount of
deferred losses in AOCI at December 31, 2009, and the expected future periods in which these items are
expected to settle and/or be recognized in earnings (in millions):
Year
Fair value
(liability) of fuel
derivative contracts
at December 31, 2009
Amount of
(losses) deferred
in AOCI
at December 31,
2009 (net of tax)
2010 ............................... $(124) $(237)
2011 ............................... $(114) $(136)
2012 ............................... $(109) $(101)
2013 ............................... $(130) $(106)
Total ............................... $(477) $(580)
Based on forward market prices and the amounts in the above table (and excluding any other subsequent
changes to the fuel hedge portfolio), the Company’s jet fuel costs per gallon are expected to exceed market (i.e.,
unhedged) prices during each of these periods. This is based primarily on expected future cash settlements
associated with fuel derivatives, but excludes any impact associated with the ineffectiveness of fuel hedges or
fuel derivatives that are marked to market value because they do not qualify for special hedge accounting. See
Note 10 to the Consolidated Financial Statements for further information. Based on forward market prices as of
January 20, 2010, and considering only the expected net cash payments related to hedges that will settle in first
quarter 2010, the Company estimates its jet fuel price per gallon, including taxes, will be approximately $2.35 for
first quarter 2010. Assuming no changes to the Company’s current 2010 fuel derivative portfolio, and
considering only the expected net cash payments related to hedges that will settle in 2010, the Company
is providing a sensitivity table for first quarter and full year 2010 jet fuel prices at different crude oil assumptions
as of January 20, 2010, and for expected premium costs associated with settling contracts each period.
Avg crude oil
price per barrel
Estimated difference in
Southwest jet fuel price
per gallon, compared to unhedged
market prices, including taxes
First quarter 2010 Full year 2010
$ 50 ................................ $.27 above market $.32 above market
$ 60 ................................ $.24 above market $.26 above market
$ 75 ................................ $.15 above market $.15 above market
$ 81* ............................... $.09 above market $.09 above market
$ 95 ................................ ($.09) below market ($.01) below market
$110 ................................ ($.18) below market ($.10) below market
$125 ................................ ($.27) below market ($.19) below market
$150 ................................ ($.53) below market ($.38) below market
Estimated premium costs** .............. $30million $116 million
* Based on the current actual forward crude oil curve for 2010 as of January 20, 2010
** Premium costs are recognized as a component of Other (gains) losses, net
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