Southwest Airlines 2013 Annual Report Download - page 79

carriers. Among other factors, this was due to the Company’s reassessment of the current size and importance of
its operations at New York’s LaGuardia Airport and Washington’s Ronald Reagan National Airport versus when
the Company first began service to these airports in recent years. The impact of this prospective change in
accounting estimate had an insignificant impact on amortization expense for 2013.
Future impairment of Goodwill may result from changes in assumptions, estimates, or circumstances, some
of which are beyond the Company’s control. Factors which could result in an impairment, holding other
assumptions constant, could include, but are not limited to: (i) reduced passenger demand as a result of domestic
or global economic conditions; (ii) higher prices for jet fuel; (iii) lower fares or passenger yields as a result of
increased competition or lower demand; (iv) a significant increase in future capital expenditure commitments;
and (v) significant disruptions to the Company’s operations as a result of both internal and external events such
as terrorist activities, actual or threatened war, labor actions by Employees, or further industry regulation.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company has interest rate risk in its floating-rate debt obligations and interest rate swaps, commodity
price risk in jet fuel required to operate its aircraft fleet, and market risk in the derivatives used to manage its fuel
hedging program and in the form of fixed-rate debt instruments. As of December 31, 2013, Southwest and
AirTran operated a total of 164 aircraft in service under operating and capital leases. However, except for a small
number of aircraft that have lease payments that fluctuate based in part on changes in market interest rates, the
remainder of the leases are not considered market sensitive financial instruments and, therefore, are not included
in the interest rate sensitivity analysis below. Commitments related to leases are disclosed in Note 8 to the
Consolidated Financial Statements. The Company does not purchase or hold any derivative financial instruments
for trading purposes. See Note 10 to the Consolidated Financial Statements for information on the Company’s
accounting for its hedging program and for further details on the Company’s financial derivative instruments.
Hedging
The Company purchases jet fuel at prevailing market prices, but seeks to manage market risk through
execution of a documented hedging strategy. The Company utilizes financial derivative instruments, on both a
short term and a long term basis, as a form of insurance against the potential for significant increases in fuel
prices. The Company believes there is significant risk in not hedging against the possibility of such fuel price
increases. The Company expects to consume approximately 1.8 billion gallons of jet fuel in 2014. Based on this
anticipated usage, a change in jet fuel prices of just one cent per gallon would impact the Company’s Fuel and oil
expense by approximately $18 million for 2014, excluding any impact associated with fuel derivative
instruments held.
As of December 31, 2013, the Company held a net position of fuel derivative instruments that represented
a hedge for a portion of its anticipated jet fuel purchases for each year from 2014 through 2017. See Note 10 to
the Consolidated Financial Statements for further information. The Company may increase or decrease the size
of its fuel hedge based on its expectation of future market prices, as well as its perceived exposure to cash
collateral requirements contained in the agreements it has signed with various counterparties, while considering
the significant cost that can be associated with different types of hedging strategies. The gross fair value of
outstanding financial derivative instruments related to the Company’s jet fuel market price risk at December 31,
2013, was a net asset of $180 million. In addition, no cash collateral deposits were provided by or held by the
Company in connection with these instruments based on their fair value as of December 31, 2013. The fair values
of the derivative instruments, depending on the type of instrument, were determined by use of present value
methods or standard option value models with assumptions about commodity prices based on those observed in
underlying markets. An immediate 10 percent increase or decrease in underlying fuel-related commodity prices
from the December 31, 2013 (for all years from 2014 through 2017) prices would correspondingly change the
fair value of the commodity derivative instruments in place by approximately $500 million. Fluctuations in the
related commodity derivative instrument cash flows may change by more or less than this amount based upon
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