Southwest Airlines 2015 Annual Report Download - page 83

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provided to counterparties, if applicable), short-term investments, and floating-rate debt outstanding at
December 31, 2015, an increase in rates would have a net negative effect on the Company’s earnings
and cash flows, while a decrease in rates would have a net positive effect on the Company’s earnings
and cash flows. However, a 10 percent change in market rates would not impact the Company’s
earnings or cash flow associated with the Company’s publicly traded fixed-rate debt.
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, 2015, 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. The Company’s hedging counterparty agreements contain ratings triggers in which
additional cash collateral could 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, 2015, $835 million in cash collateral
deposits were provided by the Company under these provisions. If the Company’s credit rating had
been below investment grade as of that date, the Company would not have been required to post
additional cash collateral deposits with fuel hedge counterparties because it had additional room
available under its existing aircraft collateral facilities.
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, 2015, 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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