Southwest Airlines 2013 Annual Report Download - page 69

purchases the majority of the aircraft it acquires, it has been able to utilize accelerated depreciation methods
(including bonus depreciation) available under the Internal Revenue Code in 2013 and in previous years, which
has enabled the Company to defer the cash tax payments associated with these depreciable assets to future years.
Based on the Company’s scheduled future aircraft deliveries from Boeing and existing tax laws in effect, the
Company will continue to defer significant cash income taxes to future years. The Company has paid in the past,
and will continue to pay in the future, significant cash taxes to the various taxing jurisdictions where it operates.
The Company expects to be able to continue to meet such obligations utilizing cash and investments on hand, as
well as cash generated from its ongoing operations.
Off-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments
The Company has contractual obligations and commitments primarily with regard to future purchases of
aircraft, payment of debt, and lease arrangements. For aircraft commitments with Boeing, the Company is
required to make cash deposits toward the purchase of aircraft in advance. These deposits are classified as
Deposits on flight equipment purchase contracts in the Consolidated Balance Sheet until the aircraft is delivered,
at which time deposits previously made are deducted from the final purchase price of the aircraft and are
reclassified as Flight equipment. See Note 4 to the Consolidated Financial Statements for a complete table of the
Company’s firm orders, options, and purchase rights with Boeing and other parties. Under the Company’s
agreement with Boeing, it has the option to substitute 737-600s for the 737-700s ordered with at least 24 months
notice prior to the contractual delivery date and can substitute 737-800s for the 737-700s with at least twelve
months notice. Additionally, during January 2014, the Company agreed to purchase five pre-owned aircraft from
a third party for delivery in 2014.
The leasing of aircraft (including the sale and leaseback of aircraft) provides flexibility to the Company as
a source of financing. Although the Company is responsible for all maintenance, insurance, and expense
associated with operating leased aircraft, and retains the risk of loss for these aircraft, it has not made guarantees
to the lessors regarding the residual value (or market value) of the aircraft at the end of the lease terms. As of
December 31, 2013, the Company operated 164 leased aircraft, of which 160 are under operating leases. Assets
and obligations under operating leases are not included in the Company’s Consolidated Balance Sheet.
Disclosure of the contractual obligations associated with the Company’s leased aircraft is included below, as well
as in Note 8 to the Consolidated Financial Statements.
The Company is required to provide standby letters of credit to support certain obligations that arise in the
ordinary course of business. Although the letters of credit are off-balance sheet, the majority of the obligations to
which they relate are reflected as liabilities in the Consolidated Balance Sheet. Outstanding letters of credit
totaled $182 million at December 31, 2013.
The Company is a “well-known seasoned issuer” and currently has an effective shelf registration statement
registering an indeterminate amount of debt and equity securities for future sales. The Company currently intends
to use the proceeds from any future securities sales off this shelf registration statement for general corporate
purposes. The Company has not issued any securities under this shelf registration statement to date.
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