Southwest Airlines 2012 Annual Report Download - page 37

tampering, and theft. Although the Company maintains systems to prevent this from occurring, these systems
require ongoing monitoring and updating as technologies change, and security could be compromised,
confidential information could be misappropriated, or system disruptions could occur. The Company must also
provide certain confidential, proprietary, and personal information to third parties in the ordinary course of its
business. While the Company seeks to obtain assurances that these third parties will protect this information,
there is a risk the confidentiality of data held by third parties could be breached. A compromise of the
Company’s security systems could adversely affect the Company’s reputation and disrupt its operations and
could also result in litigation against the Company or the imposition of penalties. In addition, it could be costly to
remediate. Although the Company has not experienced cyber incidents that are individually, or in the aggregate,
material, the Company has experienced cyber attacks in the past, which have thus far been mitigated by
preventive and detective measures put in place by the Company.
The Company’s results of operations could be adversely impacted if it is unable to grow or to timely and
effectively implement its revenue and other initiatives.
Southwest has historically been regarded as a growth airline; however, the combination of a difficult
economic environment and growing jet fuel costs led to the Company’s decision to limit organic growth for the
indefinite future. In addition, organic growth has become increasingly difficult, because (i) the number of
opportunities for domestic expansion has declined; (ii) with the exception of AirTran’s near-international service,
the Company currently does not have international operations; and (iii) the Company has faced an increased
presence of other low-cost, low-fare carriers. As a result, the Company has become increasingly reliant on the
success of revenue initiatives to help offset increasing costs and to continue to improve Customer Service. The
timely and effective implementation of these initiatives has involved, and will continue to involve, significant
investments by the Company of time and money and could be negatively affected by (i) the Company’s ability to
timely and effectively implement, transition, and maintain related information technology systems and
infrastructure; (ii) the Company’s ability to effectively balance its investment of incremental operating expenses
and capital expenditures related to its initiatives against the need to effectively control costs; and (iii) the
Company’s dependence on third parties to assist with implementation of its initiatives. The Company cannot
ensure the timing of implementation of certain of its initiatives or that they will be successful or profitable either
over the short or long term.
Instability of credit, capital, and energy markets can result in pressure on the Company’s credit ratings and
can also negatively affect the Company’s ability to obtain financing on acceptable terms and the
Company’s liquidity generally.
During 2009, the Company’s credit ratings were pressured by weak industry revenue and an extraordinarily
volatile fuel price environment. During 2011, the Company’s credit ratings were pressured in connection with its
acquisition of AirTran. While the Company’s credit rating is “investment grade,” factors such as future
unfavorable economic conditions, a significant decline in demand for air travel, or instability of the credit and
capital markets could result in future pressure on credit ratings, which could negatively affect (i) the Company’s
ability to obtain financing on acceptable terms, (ii) the Company’s liquidity generally, and (iii) the availability
and cost of insurance. A credit rating downgrade would subject the Company to credit rating triggers related to
its credit card transaction processing agreements, the pricing related to any funds drawn under its revolving credit
facility, and some of its hedging counterparty agreements. The potential effect of credit rating downgrades is
discussed in more detail below under “Quantitative and Qualitative Disclosures About Market Risk.”
The airline industry has faced on-going security concerns and related cost burdens; further threatened or
actual terrorist attacks, or other hostilities, could significantly harm the airline industry and the
Company’s operations.
Terrorist attacks and threatened attacks have from time to time materially adversely affected the demand
for air travel and have also resulted in increased safety and security costs for the Company and the airline
industry generally. Safety measures create delays and inconveniences and can, in particular, reduce the
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