Southwest Airlines 2014 Annual Report Download - page 136
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Please find page 136 of the 2014 Southwest Airlines annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.-
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The significant unobservable input used in the fair value measurement of the Company’s
derivative option contracts is implied volatility. Holding other inputs constant, a significant increase
(decrease) in implied volatility would result in a significantly higher (lower) fair value measurement,
respectively, for the Company’s derivative option contracts. The significant unobservable inputs used
in the fair value measurement of the Company’s auction rate securities are time to principal recovery,
an illiquidity premium, and counterparty credit spread. Holding other inputs constant, a significant
increase (decrease) in such unobservable inputs would result in a significantly lower (higher) fair value
measurement, respectively.
The following table presents a range of the unobservable inputs utilized in the fair value
measurements of the Company’s assets and liabilities classified as Level 3 at December 31, 2014:
Quantitative information about Level 3 fair value measurements
Valuation technique Unobservable input Period (by year) Range
Fuel derivatives Option model Implied volatility 2015 23-47%
2016 24-36%
2017 19-30%
2018 25-27%
Auction rate securities Discounted cash flow Time to principal recovery 8 years
Illiquidity premium 3%
Counterparty credit spread 1-2%
The carrying amounts and estimated fair values of the Company’s long-term debt (including
current maturities), as well as the applicable fair value hierarchy tier, at December 31, 2014, are
presented in the table below. The fair values of the Company’s publicly held long-term debt are
determined based on inputs that are readily available in public markets or can be derived from
information available in publicly quoted markets; therefore, the Company has categorized these
agreements as Level 2. Six of the Company’s debt agreements are not publicly held. The Company has
determined the estimated fair value of this debt to be Level 3, as certain inputs used to determine the
fair value of these agreements are unobservable. The Company utilizes indicative pricing from
counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items.
(in millions) Carrying value
Estimated fair
value
Fair value level
hierarchy
5.75% Notes due 2016 313 335 Level 2
5.25% Convertible Senior Notes due 2016 113 318 Level 2
5.125% Notes due 2017 316 338 Level 2
French Credit Agreements due 2018 - 1.06% 36 36 Level 3
Fixed-rate 737 Aircraft Notes payable through 2018 -
7.02% 24 25 Level 3
2.75% Notes due 2019 300 304 Level 2
Term Loan Agreement due 2019 - 6.315% 178 178 Level 3
Term Loan Agreement due 2019 - 6.84% 73 79 Level 3
Term Loan Agreement due 2020 - 5.223% 372 367 Level 3
Floating-rate 737 Aircraft Notes payable through 2020 300 293 Level 3
Pass Through Certificates due 2022 - 6.24% 355 410 Level 2
7.375% Debentures due 2027 134 160 Level 2
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