Airtran 2010 Annual Report Download - page 63

Other revenue is recognized when the service is provided. Other revenues include fees for baggage, change fees, special
services fees, and pet fees. Fees for services that have not been provided are included as a component of air traffic
liability.
Frequent Flyer Program. We accrue a liability for the estimated incremental cost of providing free travel for awards
earned under our A+ Rewards Program based on credits we expect to be redeemed on us or the contractual rate of
expected redemption on other carriers. Incremental cost includes the cost of fuel, catering, and miscellaneous direct costs,
but does not include any costs for aircraft ownership, maintenance, labor, or overhead allocation. We adjust this liability
based on credits earned and redeemed, changes in the estimated incremental costs, and changes in the A+ Rewards
Program.
We also sell credits in our A+ Rewards Program to third parties, such as credit card companies, financial institutions, and
car rental agencies. Revenue from the sale of credits is deferred and recognized as passenger revenue when transportation
is expected to be provided, based on estimates of its fair value. The remaining portion, which is the excess of the total
sales proceeds over the estimated fair value of the transportation to be provided, is recognized in other revenue at the time
of sale. A change to the time period over which the credits are used (currently one to two years), the actual redemption
activity, or our estimate of the amount of, or fair value of, expected transportation could have a significant impact on our
revenue in the year of change as well as future years.
Accounting for Derivative Financial Instruments. We enter into various commodity derivative financial instruments with
financial institutions to reduce the variability of ultimate cash flows associated with fluctuations in jet fuel prices. We
enter into both fuel swap and option arrangements. We also enter into interest rate swap agreements that effectively
convert a portion of our floating-rate debt to a fixed-rate basis thus reducing the impact of interest-rate changes on future
interest expense and cash flows. See ITEM 7A. “QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK” and ITEM 8. “FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Note 3 – Financial
Instruments” for additional information about the derivative instruments to which we are a party.
ASC 815 “Derivatives and Hedging” (Derivatives and Hedging Topic), requires a company to recognize all of its
derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for
changes in the fair value (i.e., unrealized gains or losses) of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as hedges for accounting purposes, a company must designate the
hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net
investment in a foreign operation. For derivative instruments that are designated and qualify as a cash flow hedge (i.e.,
hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective
portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods
during which the hedged transaction affects earnings (for example, in “interest expense” when the hedged transactions are
interest cash flows associated with floating-rate debt). For derivative instruments that are not designated as hedges for
accounting purposes or do not qualify as hedges for accounting purposes, changes in the unrealized fair value of the
derivatives are reflected in other (income) expense each period.
The Derivatives and Hedging Topic is a very complex accounting standard with stringent requirements which generally
require: documenting the hedging strategy, using statistical analysis to qualify certain derivative arrangements as a hedge
for accounting purposes on a historical and a prospective basis, and preparing strict contemporaneous documentation that
is required at the time each accounting hedge is designated as such. As required by the Derivatives and Hedging Topic,
we assess the effectiveness of each of our individual hedges on a quarterly basis. This analysis involves utilizing
regression and other statistical analyses intended to assess the effectiveness of each derivative designated as a hedge for
accounting purposes. Certain derivatives may not qualify for treatment as accounting hedges if there is an insufficient
correlation between the hedged item and the derivative underlying price.
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