Southwest Airlines 2010 Annual Report Download - page 87

Total rental expense for operating leases, both aircraft and other, charged to operations in 2010, 2009, and
2008 was $631 million, $596 million, and $527 million, respectively. The majority of the Company’s terminal
operations space, as well as 92 aircraft, were under operating leases at December 31, 2010. For aircraft leases and
for terminal operations leases, expense is included in Aircraft rentals and in Landing fees and other rentals,
respectively, in the Consolidated Statement of Income. As of December 31, 2010, the Company had no
remaining payments related to its aircraft on capital lease. Future minimum lease payments under noncancelable
operating leases with initial or remaining terms in excess of one year at December 31, 2010, were:
(In millions)
Operating
leases
2011 ............................................. $ 386
2012 ............................................. 414
2013 ............................................. 333
2014 ............................................. 285
2015 ............................................. 239
Thereafter ........................................ 886
Total minimum lease payments ....................... $2,543
The aircraft leases generally can be renewed for one to five years at rates based on fair market value at the
end of the lease term. Most aircraft leases have purchase options at or near the end of the lease term at fair
market value, generally limited to a stated percentage of the lessor’s defined cost of the aircraft.
9. Early Retirement Offer
On April 16, 2009, the Company announced Freedom ‘09, a one-time voluntary early retirement program
offered to eligible Employees, in which the Company offered cash bonuses, medical/dental coverage for a
specified period of time, and travel privileges based on work group and years of service. The purpose of this
voluntary initiative and other initiatives was to right-size headcount in conjunction with the Company’s decision
to reduce its capacity by approximately five percent in 2009, and to reduce costs. Virtually all of the Company’s
Employees hired before March 31, 2008, were eligible to participate in the program. Participants’ last day of
work primarily fell between July 31, 2009, and April 15, 2010, as assigned by the Company based on the
operational needs of particular work locations and departments, determined on an individual-by-individual basis.
A total of 1,404 Employees elected to participate in Freedom ’09. The Company recorded total costs of
approximately $66 million during the third quarter of 2009 upon acceptance of the retirement offer by
Employees—all of which was reflected in salaries, wages, and benefits. The Company had no material remaining
liability recorded for Freedom ’09 at December 31, 2010 versus a $24 million liability remaining at
December 31, 2009.
10. Derivative and Financial Instruments
Fuel contracts
Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes
in jet fuel prices. Furthermore, jet fuel and oil typically represents one of the largest operating expenses for
airlines. The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in
operating expenses through its fuel hedging program. Because jet fuel is not widely traded on an organized
futures exchange, there are limited opportunities to hedge directly in jet fuel. However, the Company has found
that financial derivative instruments in other commodities, such as crude oil, and refined products such as heating
oil and unleaded gasoline, can be useful in decreasing its exposure to jet fuel price volatility. The Company does
not purchase or hold any financial derivative instruments for trading purposes.
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