Southwest Airlines 2010 Annual Report Download - page 25

As discussed above under “Business-Insurance,” the Company carries insurance of types customary in the
airline industry and is also provided supplemental, first-party, war-risk insurance coverage by the federal
government at substantially lower premiums than prevailing commercial rates. If the supplemental coverage is
not extended, the Company could incur substantially higher insurance costs. In addition, in the event of an
accident or other incident involving Company aircraft, the Company could be responsible for costs in excess of
its related insurance coverage, which costs could be substantial. Any aircraft accident or other incident, even if
fully insured, could also have a material adverse effect on the public’s perception of the Company.
The Company cannot guarantee it will be able to maintain its current level of low cost advantage. In
response to volatile fuel prices and the recent economic downturn, some of the Company’s competitors have
taken additional efficiency and cost reduction measures, such as capacity cuts and headcount reductions, which
have reduced the Company’s cost advantage. Prior to the recent economic downturn, some of the Company’s
competitors took advantage of reorganization in bankruptcy, and even the threat of bankruptcy, to decrease
operating costs through renegotiated labor, supply, and financing agreements. In addition, some airlines have
consolidated and reported resulting significant expected cost synergies.
The Company’s results of operations could be adversely impacted if it is unable to grow or to timely and
effectively implement its revenue and other 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 organic growth during 2007,
2008, 2009, and 2010 and for the indefinite future. In addition, organic growth has become increasingly difficult,
because (i) the number of domestic opportunities has declined, (ii) the Company currently does not operate
internationally, and (iii) the Company is facing an increased presence of other low cost carriers. As a result, the
Company has become increasingly reliant on the success of revenue initiatives to help offset increasing costs and
to 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. The Company cannot ensure the timing of implementation of certain of its initiatives 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. As discussed above under “Business – Operating Strategies and
Initiatives – Management Information Systems,” during 2010, the Company continued its commitment to
technology improvements to support its ongoing operations and initiatives. Among other things, the Company
completed the implementation of a new SAP Enterprise Resource Planning application, which replaced several of
the Company’s back office legacy systems such as the general ledger, accounts payable, accounts receivable,
payroll, benefits, cash management, and fixed asset systems. The Company has also invested in significant
technology changes necessary to support its new Rapid Rewards frequent flyer program, enhanced
southwest.com website, and WiFi implementation. In addition, the Company has announced its intent to replace
its reservation system. 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. The Company is also reliant upon third party performance for timely and
effective completion of many of its technology initiatives.
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