Southwest Airlines 2012 Annual Report Download - page 82

A hypothetical 10 percent change in market interest rates as of December 31, 2012, would not have a
material effect on the fair value of the Company’s fixed-rate debt instruments. See Note 11 to the Consolidated
Financial Statements for further information on the fair value of financial instruments. A change in market
interest rates could, however, have a corresponding effect on earnings and cash flows associated with the
Company’s floating-rate debt, invested cash (excluding cash collateral deposits held, if applicable), floating-rate
aircraft leases, and short-term investments because of the floating-rate nature of these items. Assuming floating
market rates in effect as of December 31, 2012 were held constant throughout a 12-month period, a hypothetical
10 percent change in those rates would have an immaterial impact on the Company’s net earnings and cash
flows. Utilizing these assumptions and considering the Company’s cash balance (excluding the impact of cash
collateral deposits held or provided to counterparties, if applicable), short-term investments, and floating-rate
debt outstanding at December 31, 2012, an increase in rates would have a net negative effect on the Company’s
earnings and cash flows, while a decrease in rates would have a net positive effect on the Company’s earnings
and cash flows. However, a 10 percent change in market rates would not impact the Company’s earnings or cash
flow associated with the Company’s publicly traded fixed-rate debt.
The Company is also subject to a financial covenant included in its revolving credit facility, and is subject 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. Certain covenants
include the maintenance of minimum credit ratings and/or triggers that are based on changes in these ratings. The
Company’s revolving credit facility contains a financial covenant requiring a minimum coverage ratio of adjusted
pre-tax income to fixed obligations, as defined. As of December 31, 2012, the Company was in compliance with
this covenant and there were no amounts outstanding under the revolving credit facility. However, if conditions
change and the Company fails to meet the minimum standards set forth in the revolving credit facility, there could
be a reduction in the availability of cash under the facility, or an increase in the costs to keep the facility intact as
written. Seven of the Company’s hedging counterparty agreements contain ratings triggers in which cash collateral
would be required to be posted with the counterparty if the Company’s credit rating were to fall below investment
grade by two of the three major rating agencies, and if the Company were in a net liability position with the
counterparty. See Note 10 to the Consolidated Financial Statements for further information. As of December 31,
2012, no cash collateral deposits were provided by or held by the Company under these provisions. If the
Company’s credit rating had been below investment grade as of that date, the Company would have been required
to post approximately $11 million in additional cash collateral deposits with fuel hedge counterparties.
The Company currently has agreements with organizations that process credit card transactions arising from
purchases of air travel tickets by its Customers utilizing American Express, Discover and MasterCard/VISA.
Credit card processors have financial risk associated with tickets purchased for travel because, although the
processor generally forwards the cash related to the purchase to the Company soon after the purchase is
completed, the air travel generally occurs after that time, and the processor will have liability if the Company
does not ultimately provide the air travel. Under these processing agreements, and based on specified conditions,
increasing amounts of cash reserves could be required to be posted with the counterparty.
A majority of the Company’s sales transactions are processed by Chase Paymentech. Should chargebacks
processed by Chase Paymentech reach a certain level, proceeds from advance ticket sales could be held back and
used to establish a reserve account to cover such chargebacks and any other disputed charges that might occur.
Additionally, cash reserves are required to be established if the Company’s credit rating falls to specified levels
below investment grade. Cash reserve requirements are based on the Company’s public debt rating and a
corresponding percentage of the Company’s Air traffic liability.
As of December 31, 2012, the Company was in compliance with all credit card processing agreements.
However, the inability to enter into credit card processing agreements would have a material adverse effect on
the business of the Company. The Company believes that it will be able to continue to renew its existing credit
card processing agreements or will be able to enter into new credit card processing agreements with other
processors in the future.
74