Southwest Airlines 2010 Annual Report Download - page 69

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drawn under its revolving credit facility, and some of its hedging counterparty agreements. Certain covenants
include the maintenance of minimum credit ratings and/or triggers that are based on changes in these ratings. The
Company’s revolving credit facility contains a financial covenant requiring a minimum coverage ratio of
adjusted pre-tax income to fixed obligations, as defined. As of December 31, 2010, the Company was in
compliance with this covenant and there were no amounts outstanding under the revolving credit facility.
However, if conditions change and the Company fails to meet the minimum standards set forth in the revolving
credit facility, there could be a reduction in the availability of cash under the facility, or an increase in the costs
to keep the facility intact as written. Five of the Company’s hedging counterparty agreements contain ratings
triggers in which cash collateral would be required to be posted with the counterparty if the Company’s credit
rating falls below investment grade by two of the three major rating agencies, and if the Company were in a net
liability position with the counterparties including one counterparty in which the Company had posted $125M as
if December 31 2010. See note 10 to the Consolidated Financial Statements for further information. As of
December 31, 2010, there was no cash posted with any other counterparties. The Company was in a net fuel
hedge liability position with one counterparty at December 31, 2010 in which no cash was posted. Assuming its
credit rating were below investment grade as of that date, the Company would have been required to post
approximately $3 million in cash collateral deposits with that counterparty.
The Company currently has agreements with organizations that process credit card transactions arising from
purchases of air travel tickets by its Customers utilizing American Express, Discover and MasterCard/VISA.
Credit card processors have financial risk associated with tickets purchased for travel because, although the
processor generally forwards the cash related to the purchase to the Company soon after the purchase is
completed, the air travel generally occurs after that time, and the processor would have liability if the Company
does not ultimately provide the air travel. Under these processing agreements, and based on specified conditions,
increasing amounts of cash reserves could be required to be posted with the counterparty.
A majority of the Company’s sales transactions are processed by Chase Paymentech. Should chargebacks
processed by Chase Paymentech reach a certain level, proceeds from advance ticket sales could be held back and
used to establish a reserve account to cover such chargebacks and any other disputed charges that might occur.
Additionally, cash reserves are required to be established if the Company’s credit rating falls to specified levels
below investment grade. Cash reserve requirements are based on the Company’s public debt rating and a
corresponding percentage of the Company’s Air traffic liability.
As of December 31, 2010, the Company was in compliance with all credit card processing agreements.
However, the inability to enter into credit card processing agreements would have a material adverse effect on
the business of the Company. The Company believes that it will be able to continue to renew its existing credit
card processing agreements or will be able to enter into new credit card processing agreements with other
processors in the future.
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