Southwest Airlines 2009 Annual Report Download - page 76

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
Project Early Departure was a voluntary early retirement program offered in July 2007 to eligible
Employees, in which the Company offered a cash bonus of $25,000 plus medical/dental continuation coverage
and travel privileges based on eligibility. A total of 608 out of approximately 8,500 eligible Employees elected to
participate in the program. The participants’ last day of work fell between September 30, 2007 and April 30,
2008, based on the operational needs of particular work locations and departments. Project Early Departure
resulted in a pre-tax, pre-profitsharing, charge of approximately $25 million during third quarter 2007, all of
which had been paid out to participants as of December 31, 2009.
10. DERIVATIVE AND FINANCIAL INSTRUMENTS
Fuel contracts
Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes
in jet fuel prices. Jet fuel and oil consumed during 2009, 2008, and 2007 represented approximately 30 percent,
35 percent, and 30 percent of the Company’s operating expenses, respectively. The Company’s operating
expenses have been extremely volatile in recent years due to dramatic increases and declines in energy prices.
The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating
expenses through its fuel hedging program. Because jet fuel is not widely traded on an organized futures
exchange, there are limited opportunities to hedge directly in jet fuel. However, the Company has found that
financial derivative instruments in other commodities, such as crude oil, and refined products such as heating oil
and unleaded gasoline, can be useful in decreasing its exposure to jet fuel price volatility. The Company does not
purchase or hold any derivative financial instruments for trading purposes.
The Company has used financial derivative instruments for both short-term and long-term time frames, and
typically uses a mixture of purchased call options, collar structures (which include both a purchased call option
and a sold put option), call spreads (which include a purchased call option and a sold call option), and fixed price
swap agreements in its portfolio. Generally, when the Company perceives that prices are lower than historical or
expected future levels, the Company prefers to use fixed price swap agreements and purchased call options.
However, at times when the Company perceives that purchased call options have become too expensive, it may
use more collar structures. Although the use of collar structures and swap agreements can reduce the overall cost
of hedging, these instruments carry more risk than purchased call options in that the Company could end up in a
liability position when the collar structure or swap agreement settles. With the use of purchased call options, the
Company cannot be in a liability position at settlement.
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