Southwest Airlines 2010 Annual Report Download - page 86

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The Company is required to provide standby letters of credit to support certain obligations that arise in the
ordinary course of business. Although the letters of credit are an off-balance sheet item, the majority of the
obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet. Outstanding letters
of credit totaled $234 million at December 31, 2010.
The net book value of the assets pledged as collateral for the Company’s secured borrowings, primarily
aircraft and engines, was $2.2 billion at December 31, 2010. In addition, the Company has pledged a total of up
to 49 of its Boeing 737-700 aircraft as collateral in the case that it has obligations related to its fuel derivative
instruments with counterparties that exceed certain thresholds. See Note 10 for further information on these
collateral arrangements.
As of December 31, 2010, aggregate annual principal maturities of debt and capital leases (not including
amounts associated with interest rate swap agreements and interest on capital leases) for the five-year period
ending December 31, 2015, were $505 million in 2011, $493 million in 2012, $112 million in 2013, $461 million
in 2014, $123 million in 2015, and $1.6 billion thereafter.
8. Leases
The Company had five and nine aircraft classified as capital leases at December 31, 2010 and 2009,
respectively. The amounts applicable to these aircraft included in property and equipment were:
(In millions) 2010 2009
Flight equipment ....................................... $132 $168
Less accumulated depreciation ............................ 125 154
$7 $14
During 2008 and 2009, the Company entered into sale and leaseback transactions with a third party aircraft
lessor for the sale and leaseback of a total of 16 of the Company’s Boeing 737-700 aircraft, resulting in proceeds
received of $173 million in 2008 and $381 million in 2009. These transactions resulted in deferred gains of
approximately $21 million, which are being amortized over the terms of the respective leases, which range from
12 to 16 years. All of the leases from these sale and leaseback transactions are accounted for as operating leases.
Under the terms of the lease agreements, the Company will continue to operate and maintain the aircraft.
Payments under the lease agreements will be reset every six months based on changes in the six-month LIBO
rate. The lease agreements contain standard termination events, including termination upon a breach of the
Company’s obligations to make rental payments and upon any other material breach of the Company’s
obligations under the leases, and standard maintenance and return condition provisions. Upon a termination of
the lease due to a breach by the Company, the Company would be liable for standard contractual damages,
possibly including damages suffered by the lessor in connection with remarketing the aircraft or while the aircraft
is not leased to another party.
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