Southwest Airlines 2011 Annual Report Download - page 29

DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are
based on, and include statements about, the Company’s estimates, expectations, beliefs, intentions, and strategies
for the future, and the assumptions underlying these forward-looking statements. Specific forward-looking
statements can be identified by the fact that they do not relate strictly to historical or current facts and include,
without limitation, words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “will,”
“should,” and similar expressions. Although management believes these forward-looking statements are
reasonable as and when made, forward-looking statements are not guarantees of future performance and involve
risks and uncertainties that are difficult to predict. Therefore, actual results may differ materially from what is
expressed in or indicated by the Company’s forward-looking statements or from historical experience or the
Company’s present expectations. Known material risk factors that could cause these differences are set forth
below under “Risk Factors.” Additional risks or uncertainties (i) that are not currently known to the Company,
(ii) that the Company currently deems to be immaterial, or (iii) that could apply to any company, could also
materially adversely affect the Company’s business, financial condition, or future results.
Caution should be taken not to place undue reliance on the Company’s forward-looking statements, which
represent the Company’s views only as of the date this report is filed. The Company undertakes no obligation to
update publicly or revise any forward-looking statement, whether as a result of new information, future events, or
otherwise.
Item 1A. Risk Factors
The Company’s business has been significantly impacted by high and/or volatile fuel prices; therefore, the
Company’s strategic plans and future profitability are likely to be impacted by the Company’s ability to
effectively address fuel prices.
Fuel prices continue to present one of the Company’s most significant challenges, as (i) the cost of fuel has
been at historically high levels over the last few years and has been unpredictable, and (ii) airlines are inherently
dependent upon energy to operate; therefore, even a small change in market fuel prices can significantly affect
profitability. Fuel prices are unpredictable, in part, because of many external factors that are beyond the
Company’s control. For example, fuel prices can be impacted by political and economic factors, such as
(i) dependency on foreign imports of crude oil and the potential for hostilities or other conflicts in oil producing
areas; (ii) limited refining capacity; (iii) worldwide demand for fuel, particularly in developing countries, which
has resulted in inflated energy prices; (iv) changes in governmental policies on fuel production, transportation,
taxes, and marketing; and (v) changes in exchange rates. The Company’s ability to react to fuel price volatility
can also be affected by factors outside of its control. For example, the Company’s profitability is affected in part
by Southwest’s and AirTran’s ability to increase fares in reaction to fuel price increases; however, fare increases
are difficult to implement in difficult economic environments when low fares are often used to stimulate traffic.
The ability to increase fares can also be limited by factors such as the low-fare reputation of both Southwest and
AirTran, the portion of their Customer base that purchases travel for leisure purposes, the competitive nature of
the airline industry generally, and the risk that higher fares will drive a decrease in demand.
Jet fuel and oil consumed for 2011 and 2010 represented approximately 38 percent and 33 percent of the
Company’s operating expenses, respectively, and constituted the largest expense incurred by the Company in
2011 and the second largest expense in 2010. As a result, the price of fuel has impacted, and could continue to
impact, the timing and nature of the Company’s growth plans and strategic initiatives.
The Company purchases jet fuel at prevailing market prices, but seeks to protect against significant
increases in fuel costs by entering into over-the-counter fuel derivative contracts. In addition, the Company
enters into fuel derivative contracts in an effort to reduce volatility in its operating expenses. As discussed in
detail in Note 10 to the Consolidated Financial Statements, derivatives that are designated as hedges and deemed
“effective” (i.e., that meet certain requirements under applicable accounting standards) are granted hedge
accounting treatment, which can reduce volatility in the Company’s operating expenses. Nevertheless, because
23