Southwest Airlines 2010 Annual Report Download - page 32

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• limit the Company’s flexibility in planning for, or reacting to, changes in its business and the airline
industry and, consequently, negatively affect the Company’s competitive position; and
• negatively impact the Company’s existing credit ratings, including resulting in a downgrade or negative
outlook.
In addition, covenants in the debt instruments governing this indebtedness may limit how the Company
conducts its business following the merger.
The combined company’s ability to use AirTran’s net operating loss carryforwards to offset future taxable
income for U.S. federal income tax purposes may be limited as a result of the merger, or if taxable income
does not reach sufficient levels.
As of December 31, 2010, AirTran had federal net operating loss carryforwards (“NOLs”) of approximately
$477 million available to offset future taxable income, which are not currently subject to an annual limitation
under Section 382 of the Internal Revenue Code (the “Code”). The NOLs expire between 2017 and 2030.
The combined company’s ability to utilize the AirTran NOLs may be limited if AirTran undergoes an
“ownership change,” as defined in Section 382 of the Code. An ownership change could be triggered by
substantial changes in the ownership of the outstanding stock of AirTran. An ownership change would occur if
certain stockholders increase their aggregate percentage ownership of AirTran stock by more than 50 percentage
points over their lowest percentage ownership at any time during the testing period, which is generally the three-
year period preceding any potential ownership change. The merger is currently expected to result in an ownership
change of AirTran for purposes of Section 382 of the Code.
Section 382 of the Code imposes an annual limitation on the amount of post-ownership change taxable
income that may be offset with pre-ownership change NOLs of the corporation that experiences an ownership
change. The limitation imposed by Section 382 of the Code for any post-ownership change year generally would
be determined by multiplying the value of such corporation’s stock immediately before the ownership change by
the applicable long-term tax-exempt rate. Any unused annual limitation may, subject to certain limits, be carried
over to later years, and the limitation may under certain circumstances be increased by built-in gains or reduced
by built-in losses in the assets held by such corporation at the time of the ownership change. The combined
company’s use of NOLs arising after the date of an ownership change would not be limited unless the combined
company were to experience a subsequent ownership change.
The combined company’s ability to use the NOLs will also depend on the amount of taxable income
generated in future periods. The NOLs may expire before the combined company can generate sufficient taxable
income to utilize the NOLs.
The Company’s future results will suffer if it does not effectively manage its expanded operations following
the merger.
Following the merger, the size of the business of the Company will increase significantly beyond the current
size of either the Company’s or AirTran’s businesses. The Company’s future success depends, in part, upon its
ability to manage this expanded business, which may pose substantial challenges for management, including
challenges related to the management and monitoring of new operations, including new international operations,
and associated increased costs and complexity. There can be no assurances that the Company will be successful
or that it will realize the expected operating efficiencies, cost savings, revenue enhancements and other benefits
currently anticipated from the merger.
26