Southwest Airlines 2013 Annual Report Download - page 82

As of December 31, 2013, excluding the notes or debentures that have been converted to a floating rate, the
Company’s fixed-rate senior unsecured notes outstanding included its $350 million 5.25% senior unsecured notes
due 2014, its $300 million 5.125% senior unsecured notes due 2017, and its $100 million 7.375% senior
unsecured notes due 2027. Each of these notes had previously been converted to floating rates, but in 2011 and
2012 the Company terminated the fixed-to-floating interest rate swap agreements related to them. See Note 10 to
the Consolidated Financial Statements for further information. The effect of these terminations was that the
interest associated with these debts prospectively reverted back to their original fixed rates. As a result of the
gains realized on these transactions, which are being amortized over the remaining term of the corresponding
notes, and based on projected interest rates at the date of termination, the Company does not believe its future
interest expense, based on projected future interest rates at the date of termination, associated with these notes
will significantly differ from the expense it would have recorded had the notes remained at floating rates. The
Company believes the fixed interest rates associated with each of these notes are comparable to average rates
prevailing for similar debt instruments over the last ten years. The following table displays the characteristics of
the Company’s secured fixed rate debt as of December 31, 2013:
Principal
amount
(in millions)
Effective
fixed rate
Final
maturity Underlying collateral
Term Loan Agreement .... $ 210 6.315% 5/6/2019 14 specified Boeing 737-700 aircraft
Term Loan Agreement .... 85 6.84% 7/1/2019 5 specified Boeing 737-700 aircraft
Term Loan Agreement .... 413 5.223% 5/9/2020 21 specified Boeing 737-700 aircraft
The carrying value of the Company’s floating rate debt totaled $430 million, and this debt had a weighted-
average maturity of 3.53 years at floating rates averaging 2.36 percent for the year ended December 31, 2013. In
total, the Company’s fixed-rate debt and floating rate debt represented 16.06 percent and 2.89 percent,
respectively, of consolidated noncurrent assets at December 31, 2013.
The Company also has some risk associated with changing interest rates due to the short-term nature of its
invested cash, which totaled $1.4 billion, and short-term investments, which totaled $1.8 billion, at December 31,
2013. See Notes 1 and 10 to the Consolidated Financial Statements for further information. The Company
currently invests available cash in certificates of deposit, highly rated money market instruments, investment
grade commercial paper, treasury securities, U.S. government agency securities, and other highly rated financial
instruments, depending on market conditions and operating cash requirements. As a result of previous turmoil in
credit markets, the Company has discontinued further investments in auction rate securities. Because of the short-
term nature of these investments, the returns earned parallel closely with short-term floating interest rates. The
Company has not undertaken any additional actions to cover interest rate market risk and is not a party to any
other material market interest rate risk management activities.
A hypothetical 10 percent change in market interest rates as of December 31, 2013, 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, 2013 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, 2013, 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.
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