Southwest Airlines 2014 Annual Report Download - page 86

Future impairment of Goodwill and owned domestic slots 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 of Goodwill, 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) significantly 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. Factors which could result in an impairment of owned domestic slots,
holding other assumptions constant, could include, but are not limited to: (i) increased competition in
the slotted airport; (ii) a change in competition in the slotted airport; (iii) significantly higher prices for
jet fuel; and (iv) increased competition at a nearby airport.
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, 2014, Southwest operated a total of 112 aircraft under operating and capital lease.
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. The
Company also has 78 aircraft under operating and capital lease that have been subleased to another
carrier, and thus had been removed from service as of December 31, 2014. Further information about
this sublease arrangement and commitments related to leases are disclosed in Note 7 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 can be significant risk in not hedging
against the possibility of such fuel price increases, especially in energy markets in which prices are
high and/or rising. The Company expects to consume approximately 1.9 billion gallons of jet fuel in
2015. 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 $19 million for 2015, excluding any
impact associated with fuel derivative instruments held.
As of December 31, 2014, 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 2015 through
2018. 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
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