Southwest Airlines 2010 Annual Report Download - page 94

Download and view the complete annual report

Please find page 94 of the 2010 Southwest Airlines annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 120

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120

categorized these option contracts as Level 3. The Company also considers counterparty credit risk and its own
credit risk in its determination of all estimated fair values. The Company has consistently applied these valuation
techniques in all periods presented and believes it has obtained the most accurate information available for the
types of derivative contracts it holds.
The Company’s investments associated with its excess benefit plan consist of mutual funds that are publicly
traded and for which market prices are readily available. This plan is a deferred compensation plan designed to
hold Employee contributions in excess of limits established by Section 415 of the Internal Revenue Code. This
plan is funded through qualifying Employee contributions and it impacts the Company’s earnings through
changes in the fair value of plan assets.
All of the Company’s auction rate security instruments, totaling $93 million at December 31, 2010, are
classified as available for sale securities and are reflected at fair value as a component of Other assets in the
Consolidated Balance Sheet. At December 31, 2009, approximately $99 million of the Company’s auction rate
security instruments were classified as available for sale securities and $75 million were classified as trading
securities. In periods when an auction process successfully took place every 30-35 days, quoted market prices
would be readily available, which would qualify the securities as Level 1. However, due to events in credit
markets beginning during first quarter 2008, the auction events for most of these instruments continue to fail,
and, therefore, the Company determines the fair values of these securities utilizing a discounted cash flow
analysis or other type of valuation model. The Company has performed, and routinely updates, a valuation for
each of its auction rate security instruments, considering, among other items, the collateralization underlying the
security investments, the expected future cash flows, including the final maturity, associated with the securities,
and estimates of the next time the security is expected to have a successful auction or return to full par value.
In association with its estimate of fair value related to auction rate security instruments, as of December 31,
2010 and 2009, the Company had recorded a temporary unrealized decline in fair value as of each date of $17
million, with an offsetting entry to AOCI. The Company continues to believe that this decline in fair value is due
entirely to market liquidity issues, because the underlying assets for the majority of these auction rate securities
held by the Company are almost entirely backed by the U.S. Government. In addition, these auction rate
securities represented an immaterial portion of the Company’s total cash, cash equivalent, and investment
balance at December 31, 2010. The range of maturities for the Company’s auction rate securities are from 8 years
to 37 years. Considering the relative insignificance of these securities in comparison to the Company’s liquid
assets and other sources of liquidity, the Company has no current intention of selling these securities, nor does it
expect to be required to sell these securities before a recovery in their cost basis. At the time of the first failed
auctions during first quarter 2008, the Company held a total of $463 million in auction rate securities and, since
that time, has been able to sell $353 million of these instruments at par value.
The Company remains in discussions with its remaining counterparties to determine whether mutually
agreeable decisions can be reached regarding the effective repurchase of its remaining auction rate securities. The
Company has continued to earn interest on virtually all of its outstanding auction rate security instruments. Any
future fluctuation in fair value related to these instruments that the Company deems to be temporary, including
any recoveries of previous temporary write-downs, would be recorded to AOCI. If the Company determines that
any future valuation adjustment was other than temporary, it would record a charge to earnings as appropriate.
88