Southwest Airlines 2010 Annual Report Download - page 56

transportation for Customers. The vast majority of tickets are purchased prior to the day on which travel is
provided and, in some cases, several months before the anticipated travel date. Operating cash outflows primarily
are related to the recurring expenses of operating the airline. Operating cash flows can also be significantly
impacted by the Company’s fuel hedge positions and the significant fluctuation in fair value of those positions
and the corresponding cash collateral requirements associated with those positions. In the Consolidated
Statement of Cash Flows, increases and/or decreases to these cash deposits are reflected in operating cash flows
as Cash collateral received from (provided to) fuel derivative counterparties. As of December 31, 2010, the net
amount of cash provided to fuel hedge counterparties was $65 million. Since the amount of cash collateral
deposits provided by the Company at December 31, 2009 was $330 million, the net change in cash deposits for
2010 was a net operating inflow of $265 million. Cash flows associated with entering into new fuel derivatives,
which are also classified as operating cash flows, were net outflows of $359 million in 2010, $86 million in 2009,
and $418 million in 2008. Cash flows from operating activities for 2010 were also driven by $459 million in net
income, plus noncash depreciation and amortization expense of $628 million. For further information on the
Company’s hedging program and counterparty deposits, see Note 10 to the Consolidated Financial Statements
and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk,” respectively. Operating cash
generated is used primarily to finance aircraft-related capital expenditures and to provide working capital.
Net cash flows used in investing activities in 2010 totaled $1.3 billion, versus $1.6 billion used in 2009.
Investing activities in both years included payments for new 737-700 aircraft delivered to the Company and
progress payments for future aircraft deliveries. The Company purchased 11 new 737-700 aircraft in 2010 versus
the purchase of 13 737-700s in 2009. See Note 4 to the Consolidated Financial Statements. Investing activities
for 2010 and 2009 also reflect $772 million and $986 million, respectively, related to changes in the balance of
the Company’s short-term investments. The Company increased its short-term investments in 2010 compared to
2009 due to higher overall cash balances and in order to seek higher returns on its cash holdings.
Net cash used in financing activities was $149 million in 2010. During 2010, the Company repaid $155
million in debt and capital lease obligations that came due, and also repaid $44 million from a credit line
borrowing associated with auction rate security instruments that were redeemed back to its counterparty. Net
cash provided by financing activities was $330 million in 2009. During 2009, the Company raised $381 million
from the sale and leaseback of 11 737-700 aircraft, and borrowed $332 million and $124 million under secured
term loan arrangements. Also during 2009, the Company repaid the $400 million it had borrowed during 2008
under its revolving credit agreement. See Note 7 to the Consolidated Financial Statements for more information
on the issuance and redemption of long-term debt and Note 6 for more information on the Company’s revolving
credit arrangement.
Off-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments
The Company has contractual obligations and commitments primarily with regard to future purchases of
aircraft, payment of debt, and lease arrangements. The Company received 12 Boeing 737-700 aircraft in 2010, 11
of which were new aircraft purchased from Boeing and one of which was leased from a third party. The
Company also brought back its four 737-300 aircraft that had been removed from active service and put into
storage during 2009, and retired five older leased and owned 737-300 aircraft from service during 2010. As of
January 19, 2011, the Company had firm orders with Boeing for a total of 88 737-700 aircraft and 20 737-800
aircraft for the years 2011 through 2016. The firm orders for the 20 737-800 aircraft are a result of the
Company’s decision to substitute this aircraft type for 737-700s that had been previously ordered for 2012. The
Company also had purchase options for 37 737-700 aircraft from 2013 through 2017, with an additional 98
purchase rights for 737-700 aircraft through 2021 (as further described in Note 4 to the Consolidated Financial
Statements). The Company also has the option to substitute 737-600s for the 737-700s ordered from Boeing with
at least 18 months notice prior to the contractual delivery date, and can substitute 737-800s for the 737-700s with
at least twelve months notice.
The leasing of aircraft (including the sale and leaseback of aircraft) effectively provides flexibility to the
Company as a source of financing. Although the Company is responsible for all maintenance, insurance, and
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