Southwest Airlines 2013 Annual Report Download - page 38

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, less than satisfactory returns on
capital caused by 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 service; 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 the recession in 2009, the Company’s credit ratings were pressured by weak industry revenue and an
extraordinarily volatile fuel price environment. 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 also have 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
Company’s competitiveness against surface transportation for shorthaul routes. Additional terrorist attacks, even
if not made directly on the airline industry, or the fear of such attacks or other hostilities (including elevated
national threat warnings or selective cancellation or redirection of flights due to terror threats) would likely have
a further significant negative impact on the Company and the airline industry.
30