Southwest Airlines 2009 Annual Report Download - page 64

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
December 31, 2009
When appropriate, the Company evaluates its long-lived assets used in operations for impairment.
Impairment losses would be recorded when events and circumstances indicate that an asset might be impaired
and the undiscounted cash flows to be generated by that asset are less than the carrying amounts of the asset.
Factors that would indicate potential impairment include, but are not limited to, significant decreases in the
market value of the long-lived asset(s), a significant change in the long-lived asset’s physical condition, and
operating or cash flow losses associated with the use of the long-lived asset. Excluding the impact of cash
collateral deposits with counterparties, the Company continues to experience positive cash flow associated with
its aircraft fleet, and there have been no impairments of long-lived assets recorded during 2009, 2008, or 2007.
Aircraft and engine maintenance
The cost of scheduled inspections and repairs and routine maintenance costs for all aircraft and engines are
charged to maintenance expense as incurred. The Company has “power-by-the-hour” agreements related to
virtually all of its aircraft engines with an external service provider. Under these agreements, which the Company
has determined effectively transfer the risks associated with the maintenance on such engines to the counterparty,
expense is recorded commensurate with each hour flown on an engine. Modifications that significantly enhance
the operating performance or extend the useful lives of aircraft or engines are capitalized and amortized over the
remaining life of the asset.
Intangible assets
Intangible assets primarily consist of acquired leasehold rights to certain airport owned gates at Chicago’s
Midway International Airport and take-off and landing slots at New York’s LaGuardia International Airport. The
rights to gates, which have a cost basis of approximately $60 million, are amortized on a straight-line basis over
the expected useful life of the lease, approximately 20 years. The take-off and landing slots, which have a cost
basis of approximately $7 million, are being amortized over the expected useful life of approximately 12 years.
The accumulated amortization related to both the rights to gates and take-off and landing slots at December 31,
2009, and 2008, was $15 million and $12 million, respectively. The Company periodically assesses its intangible
assets for impairment; however, no impairments have been noted.
Revenue recognition
Tickets sold are initially deferred as “Air traffic liability”. Passenger revenue is recognized when
transportation is provided. “Air traffic liability” primarily represents tickets sold for future travel dates and
estimated refunds and exchanges of tickets sold for past travel dates. The majority of the Company’s tickets sold
are nonrefundable. Tickets that are sold but not flown on the travel date (whether refundable or nonrefundable)
can be reused for another flight, up to a year from the date of sale, or refunded (if the ticket is refundable). A
small percentage of tickets (or partial tickets) expire unused. The Company estimates the amount of future
refunds and exchanges, net of forfeitures, for all unused tickets once the flight date has passed.
The Company is also required to collect certain taxes and fees from Customers on behalf of government
agencies and remit these back to the applicable governmental entity on a periodic basis. These taxes and fees
include U.S. federal transportation taxes, federal security charges, and airport passenger facility charges. These
items are collected from Customers at the time they purchase their tickets, but are not included in Passenger
revenue. The Company records a liability upon collection from the Customer and relieves the liability when
payments are remitted to the applicable governmental agency.
Frequent flyer program
The Company records a liability for the estimated incremental cost of providing free travel under its Rapid
Rewards frequent flyer program at the time an award is earned. The estimated incremental cost includes direct
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