Southwest Airlines 2012 Annual Report Download - page 41

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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 also expands 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. Although the Company has policies and procedures in place that are designed to promote compliance
with the laws of the jurisdictions in which it operates, a violation by the Company’s Employees, contractors, or
agents or other intermediaries, could nonetheless occur. Any violation (or alleged or perceived violation), even if
prohibited by the Company’s policies, could have an adverse effect on the Company’s reputation and/or its
results of operations.
The Company will need to continue certain branding or rebranding initiatives in connection with the
acquisition that may take a significant amount of time and involve substantial additional costs and that
may not be favorably received by Customers.
The Company may incur substantial additional 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.
Following the filing of AirTran’s May 2, 2011 short period Federal tax return in first quarter 2012, AirTran
had Federal net operating loss carryforwards (“NOLs”) of approximately $560 million available to offset future
taxable income, expiring between 2017 and 2031. Although the Company is limited in the amount of NOLs that
can be used in each year, it was able to utilize a portion of such benefits in its 2011 Federal tax return and expects
to be able to utilize an additional portion when it files its 2012 Federal tax return.
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
pre-ownership change NOLs of the corporation that experiences an ownership change. The limitation imposed by
Section 382 of the Code for any post-ownership change year generally would be determined by multiplying the
value of such corporation’s stock immediately before the ownership change by the applicable longterm tax-
exempt rate. Any unused annual limitation may, subject to certain limits, be carried over to later years, and the
limitation may, under certain circumstances, be increased by built-in gains or reduced by built-in losses in the
assets held by such corporation at the time of the ownership change. The combined company’s use of NOLs
arising after the date of an ownership change would not be limited unless the combined company were to
experience a subsequent ownership change.
While the Company expects to be able to utilize the entire amount of such NOLs prior to their respective
expirations, the Company’s ability to use the NOLs will also depend on the amount of taxable income generated in
future periods. The NOLs may expire before the Company can generate sufficient taxable income to utilize the NOLs.
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