Southwest Airlines 2012 Annual Report Download - page 105

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9. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share (in millions except
per share amounts):
2012 2011 2010
NUMERATOR:
Net income ......................................... $ 421 $ 178 $ 459
Incremental income effect of interest on 5.25% convertible
notes ............................................ 3 — —
Net income after assumed conversion .................... $ 424 $ 178 $ 459
DENOMINATOR:
Weighted-average shares outstanding, basic ............... 750 774 746
Dilutive effect of Employee stock options and restricted stock
units ............................................ 1 1 1
Dilutive effect of 5.25% convertible notes ................ 6 — —
Adjusted weighted-average shares outstanding, diluted ...... 757 775 747
NET INCOME PER SHARE:
Basic .............................................. $ .56 $ .23 $ .62
Diluted ............................................ $ .56 $ .23 $ .61
Potentially dilutive amounts excluded from calculations
Stock options and restricted stock units ................... 35 48 62
5.25% Convertible notes .............................. — 6 —
10. FINANCIAL DERIVATIVE 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 represent 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 West Texas Intermediate (“WTI”) crude oil,
Brent 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.
The Company has used financial derivative instruments for both short-term and long-term time frames, and
primarily uses a mixture of purchased call options, collar structures (which include both a purchased call option
and a sold put option), call spreads (which include a purchased call option and a sold call option), and fixed price
swap agreements in its portfolio. Although the use of collar structures and swap agreements can reduce the
overall cost of hedging, these instruments carry more risk than purchased call options in that the Company could
end up in a liability position when the collar structure or swap agreement settles. With the use of purchased call
options and call spreads, the Company cannot be in a liability position at settlement, but may be exposed to price
changes beyond a certain market price.
The Company evaluates its hedge volumes strictly from an “economic” standpoint and thus does not
consider whether the hedges have qualified or will qualify for hedge accounting. The Company defines its
“economic” hedge as the net volume of fuel derivative contracts held, including the impact of positions that have
been offset through sold positions, regardless of whether those contracts qualify for hedge accounting. The level
at which the Company is hedged for a particular period is also dependent on current market prices for that period
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