Southwest Airlines 2009 Annual Report Download - page 46

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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
53 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 the 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. 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, 2009, was $1.04 billion, compared to $963 million as
of December 31, 2008.
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 other airlines 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 during 2009 would have resulted in a $26 million, or .3 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 forfeiture
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