Southwest Airlines 2014 Annual Report Download - page 80

entire remaining fleet of owned 737-300 and 737-500 aircraft. Based on current and expected future
market conditions related to these aircraft, as well as a significant change in the way the Company
expected to utilize the fleet, the Company reduced the residual values of these aircraft. This
determination was made based on the continuous assessment of the market for these older aircraft, as
many buyers of used aircraft prefer newer, more fuel efficient models, and the increase in the number
of airlines retiring these older aircraft, which has increased the supply of older aircraft on the market.
As this reduction in residual value is considered a change in estimate, it was accounted for on a
prospective basis, and thus the Company has effectively accelerated the recording of depreciation
expense over the remainder of the useful lives for each aircraft. The Company does not believe these
changes in estimates towards the end of the useful lives for a given fleet type are unusual, especially
given the rapid pace of technological advancement, volatile fuel prices, and recent significant
transactions involving the Company’s fleet. See Note 1 to the Consolidated Financial Statements for
further information. The impact of this change for the year ended December 31, 2012 was an increase
to Depreciation expense of $34 million.
The Company evaluates its long-lived assets for impairment. Factors that would indicate
potential impairment may include, but are not limited to, significant decreases in the market value of
the long-lived asset(s), a significant change in the long-lived asset’s physical condition, and operating
or cash flow losses associated with the use of the long-lived asset. The Company has continued to
operate virtually all of its aircraft, generate positive cash flow, and produce operating profits.
Consequently, the Company has not identified any impairment related to its existing aircraft fleet. The
Company will continue to monitor its long-lived assets and the airline operating environment.
The Company believes it is unlikely that materially different estimates for expected lives,
expected residual values, and impairment evaluations would be made or reported based on other
reasonable assumptions or conditions suggested by actual historical experience and other data available
at the time estimates were made.
Financial derivative instruments
The Company utilizes financial derivative instruments primarily to manage its risk associated
with changing jet fuel prices. See “Quantitative and Qualitative Disclosures about Market Risk” for
more information on these risk management activities, and see Note 10 to the Consolidated Financial
Statements for more information on the Company’s fuel hedging program and financial derivative
instruments.
All derivatives are required to be reflected at fair value and recorded on the Consolidated
Balance Sheet. At December 31, 2014, the Company was a party to over 1,100 separate financial
derivative instruments related to its fuel hedging program for the years 2015 through 2018. Changes in
the fair values of these instruments can vary dramatically based on changes in the underlying
commodity prices, as has been evident in recent years and in the second half of 2014. For example,
during 2014, market “spot” prices for Brent crude oil peaked at a high of approximately $115 per
barrel and hit a low price of approximately $57 per barrel. During 2013, market spot prices ranged
from a high of $119 per barrel to a low of $98 per barrel. Market price changes can be driven by
factors such as supply and demand, inventory levels, weather events, refinery capacity, political
agendas, the value of the U.S. dollar, geopolitical events, and general economic conditions, among
other items. The financial derivative instruments utilized by the Company primarily are a combination
of collars, purchased call options, call spreads, put spreads, and fixed price swap agreements.
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