Southwest Airlines 2013 Annual Report Download - page 83

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, 2013, 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. Eleven 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, 2013, 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 $7 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, 2013, 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.
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