Southwest Airlines 2008 Annual Report Download - page 52

repurchase of up to a total of $1.8 billion of the
Company’s Common Stock—$300 million
authorized in January 2006, $300 million authorized
in May 2006, $400 million authorized in November
2006, $300 million authorized in March 2007, and
$500 million authorized in May 2007. Repurchases
were made in accordance with applicable securities
laws in the open market or in private transactions
from time to time, depending on market conditions.
These programs, the last of which was completed
during third quarter 2007, resulted in the repurchase
of a total of approximately 116 million shares.
During January 2008, the Company’s Board of
Directors authorized an additional program for the
repurchase of up to $500 million of the Company’s
Common Stock. Repurchases have been and will be
made in accordance with applicable securities laws in
the open market or in private transactions from time
to time, depending on market conditions. The
Company repurchased 4.4 million shares for a total
of $54 million as part of this program through
February 15, 2008; however, the Company has not
repurchased any additional shares from that date
through the date of this filing. The Company does not
believe it is prudent to repurchase shares at the
current time considering today’s unstable financial
markets and volatile fuel prices.
Critical Accounting Policies And Estimates
The Company’s Consolidated Financial
Statements have been prepared in accordance with
U.S. Generally Accepted Accounting Principles
(GAAP). The Company’s significant accounting
policies are described in Note 1 to the Consolidated
Financial Statements. The preparation of financial
statements in accordance with GAAP requires the
Company’s management to make estimates and
assumptions that affect the amounts reported in the
Consolidated Financial Statements and
accompanying footnotes. The Company’s estimates
and assumptions are based on historical experience
and changes in the business environment. However,
actual results may differ from estimates under
different conditions, sometimes materially. Critical
accounting policies and estimates are defined as
those that are both most important to the portrayal of
the Company’s financial condition and results and
require management’s most subjective judgments.
The Company’s most critical accounting policies and
estimates are described below.
Revenue Recognition
As described in Note 1 to the Consolidated
Financial Statements, tickets sold for passenger air
travel are initially deferred as “Air traffic liability.”
Passenger revenue is recognized and air traffic
liability is reduced when the service is provided (i.e.,
when the flight takes place). “Air traffic liability”
represents tickets sold for future travel dates and
estimated future refunds and exchanges of tickets
sold for past travel dates. The balance in “Air traffic
liability” fluctuates throughout the year based on
seasonal travel patterns and fare sale activity. The
Company’s “Air traffic liability” balance at
December 31, 2008 was $963 million, compared to
$931 million as of December 31, 2007.
Estimating the amount of tickets that will be
refunded, exchanged, or forfeited involves some level
of subjectivity and judgment. The majority of the
Company’s tickets sold are nonrefundable, which is
the primary source of forfeited tickets. According to
the Company’s “Contract of Carriage,” tickets
(whether refundable or nonrefundable) that are sold
but not flown on the travel date can be reused for
another flight, up to a year from the date of sale, or
can be refunded (if the ticket is refundable). A small
percentage of tickets (or partial tickets) expire
unused. Fully refundable tickets are rarely forfeited.
“Air traffic liability” includes an estimate of the
amount of future refunds and exchanges, net of
forfeitures, for all unused tickets once the flight date
has passed. These estimates are based on historical
experience over many years. The Company and
members of the airline industry have consistently
applied this accounting method to estimate revenue
from forfeited tickets at the date of travel. Estimated
future refunds and exchanges included in the air
traffic liability account are constantly evaluated
based on subsequent refund and exchange activity to
validate the accuracy of the Company’s estimates
with respect to forfeited tickets. Holding other factors
constant, a ten-percent change in the Company’s
estimate of the amount of refunded, exchanged, or
forfeited tickets for 2008 would have resulted in a
$21 million, or .2 percent, change in Passenger
revenues recognized for that period.
Events and circumstances outside of historical fare
sale activity or historical Customer travel patterns can
result in actual refunds, exchanges, or forfeited tickets
differing significantly from estimates. The Company
evaluates its estimates within a narrow range of
acceptable amounts. If actual refunds, exchanges, or
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