Southwest Airlines 2011 Annual Report Download - page 38

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cost savings. These integration expenses likely will continue to result in the Company taking significant charges
against earnings in future periods, and the amount and timing of such charges are uncertain at present.
The Company’s operations may be adversely affected by its expansion into non-U.S. jurisdictions and the
related increase in laws to which it is subject.
The Company’s expansion, through AirTran, of its operations into non-U.S. jurisdictions has expanded the
scope of the laws to which the Company is subject, both domestically and internationally. In addition, operations
in non-U.S. jurisdictions are in many cases subject to the laws of those jurisdictions rather than U.S. laws. Laws
in some jurisdictions differ in significant respects from those in the United States, and these differences can
affect the Company’s ability to react to changes in its business and its rights or ability to enforce rights may be
different than would be expected under U.S. law. Further, enforcement of laws in some jurisdictions can be
inconsistent and unpredictable, which can affect both the Company’s ability to enforce its rights and to undertake
activities that it believes are beneficial to its business. As a result, the Company’s ability to generate revenue and
its expenses in non-U.S. jurisdictions may differ from what would be expected if U.S. law governed these
operations.
The Company acquired AirTran’s indebtedness upon consummation of the acquisition, which additional
indebtedness may limit the Company’s financial and operating flexibility.
Upon consummation of the acquisition, the Company acquired AirTran’s outstanding indebtedness and
became subject to the operating restrictions under the debt instruments governing such indebtedness. AirTran has
significant indebtedness and other commitments, significant debt and lease obligations related to existing
purchased and leased aircraft, and debt and lease obligations for existing and planned operating facilities. The
increased indebtedness of the Company following the acquisition may:
• require a substantial portion of cash flows from operations for debt service payments and operating
lease payments, thereby reducing the availability of the Company’s cash flow to fund working capital,
capital expenditures, acquisitions, and other general corporate purposes; and
• limit the Company’s flexibility in planning for, or reacting to, changes in its business and the airline
industry and, consequently, negatively affect the Company’s competitive position; and
The Company will need to launch certain branding or rebranding initiatives in connection with the
acquisition that may take a significant amount of time and involve substantial costs and that may not be
favorably received by Customers.
The Company may incur substantial costs in rebranding AirTran’s products and services, and it may not be
able to achieve or maintain brand name recognition or status under the Southwest brand that is comparable to the
recognition and status previously enjoyed by AirTran in any of AirTran’s markets. The failure of any such
rebranding initiative could adversely affect the Company’s ability to attract and retain Customers, which could
cause the Company not to realize some or all of the anticipated benefits contemplated to result from the
acquisition.
The Company’s ability to use AirTran’s net operating loss carryforwards to offset future taxable income
for U.S. federal income tax purposes may be limited as a result of the acquisition, or if taxable income does
not reach sufficient levels.
As of the acquisition date, AirTran had Federal net operating loss carryforwards (“NOLs”) of
approximately $542 million available to offset future taxable income, expiring between 2017 and 2029.
AirTran experienced an “ownership change” as defined in Section 382 of the Internal Revenue Code of
1986, as amended (the “Code”), as a result of its acquisition by the Company. Section 382 of the Code imposes
an annual limitation on the amount of post-ownership change taxable income generated that may be offset with
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