Southwest Airlines 2010 Annual Report Download - page 26

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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.
Instability of credit, capital, and energy markets can result in pressure on the Company’s credit ratings and
can also negatively impact the Company’s ability to obtain financing on acceptable terms and the
Company’s liquidity generally.
During 2009, the Company’s credit ratings were pressured by weak industry revenue and the volatile fuel
price environment. While the Company’s credit rating is “investment grade,” factors such as future unfavorable
economic conditions, a significant decline in demand for air travel, or 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, (ii) the Company’s liquidity generally, and (iii) the availability and cost of
insurance. A credit rating downgrade would subject the Company to credit rating triggers related to its credit card
transaction processing agreements, the pricing related to any funds drawn under its revolving credit facility, and
some of its hedging counterparty agreements. The potential effect of credit rating downgrades is discussed in
more detail under “Quantitative and Qualitative Disclosures About Market Risk.”
The Company is currently 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 it currently achieves by operating a single fleet type, currently 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 33 percent
of the Company’s operating expenses for the year ended December 31, 2010. In addition, as of December 31,
2010, 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; 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. In addition,
if the Company is successful in its efforts to acquire AirTran, Employee integration could be difficult, which
could negatively affect the Company’s historically positive Employee culture.
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