Southwest Airlines 2015 Annual Report Download - page 24

opportunities. For example, the bilateral air transport agreement currently in force between the United
States and Mexico imposes limitations on the number of U.S. air carriers that may operate on city-pair
routes between points in the United States and points in Mexico. These restrictions currently prevent
the Company from entering certain U.S.-Mexico routes on which it would like to provide service.
Although the United States and Mexican governments signed a new bilateral agreement on
December 18, 2015, that would remove such restrictions and thereby provide greater market access by
U.S. carriers to Mexico, that agreement does not take effect until ratification by the Mexican legislature
occurs and other diplomatic procedures are completed. The Company is not able to predict if or when
the new U.S.-Mexico bilateral aviation agreement will officially enter into force.
The CBP is the federal agency of the U.S. Department of Homeland Security charged with facilitating
international trade, collecting import duties, and enforcing U.S. regulations with respect to trade,
customs, and immigration. As the Company expands its international flight offerings, CBP and its
requirements and resources will also become increasingly important considerations to the Company.
For instance, with the exception of flights from a small number of foreign “preclearance” locations,
arriving international flights may only land at CBP-designated airports, and CBP officers must be
present and in sufficient quantities at those airports to effectively process and inspect arriving
international passengers and cargo. Thus, CBP personnel and CBP-mandated procedures can affect the
Company’s operations, costs, and Customer experience. The Company has made and expects to
continue to make significant investments in facilities, equipment, and technologies at certain airports in
order to improve the Customer experience and to assist CBP with its inspection and processing duties;
however, the Company is not able to predict the impact, if any, that various CBP measures or the lack
of CBP resources will have on Company revenues and costs, either in the short-term or the long-term.
Insurance
The Company carries insurance of types customary in the airline industry and in amounts deemed
adequate to protect the Company and its property and to comply both with federal regulations and
certain of the Company’s credit and lease agreements. The policies principally provide coverage for
public and passenger liability, property damage, cargo and baggage liability, loss or damage to aircraft,
engines, and spare parts, and workers’ compensation. In addition, the Company carries a cyber-security
insurance policy with regards to data protection and business interruption associated with both security
breaches from malicious parties and from certain system failures.
Through the 2003 Emergency Wartime Supplemental Appropriations Act (the “Wartime Act”), the
federal government has in the past provided war-risk insurance coverage to commercial carriers,
including for losses from terrorism, for passengers, third parties (ground damage), and the aircraft hull.
However, since the government-provided supplemental coverage from the Wartime Act was set to
expire on September 30, 2014, the Company proactively canceled its government provided war-risk
insurance coverage prior to that date and purchased comparable coverage via the commercial insurance
marketplace. Although the Company was able to purchase comparable coverage via the commercial
insurance marketplace, available commercial insurance in the future could be more expensive and/or
have material differences in coverage than is currently provided and may not be adequate to protect the
Company’s risk of loss from future acts of terrorism.
Competition
Competition within the airline industry is intense and highly unpredictable, and Southwest currently
competes with other airlines on virtually all of its scheduled routes. As a result of moderately improved
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