Southwest Airlines 2011 Annual Report Download - page 69

The Company believes it is unlikely that materially different estimates for future refunds, exchanges, and
forfeited tickets would be reported based on other reasonable assumptions or conditions suggested by actual
historical experience and other data available at the time estimates were made.
Accounting for long-lived assets
Flight equipment and related assets make up the majority of the Company’s long-lived assets. Flight
equipment primarily relates to the 496 Boeing 737 aircraft and 10 Boeing 717 aircraft in the Company’s
(including AirTran’s) fleet at December 31, 2011, which are either owned or on capital lease. The remaining 114
Boeing 737 aircraft and 78 Boeing 717 aircraft in the Company’s (including AirTran’s) fleet at December 31,
2011, are operated under operating leases. In accounting for long-lived assets, the Company must make estimates
about the expected useful lives of the assets, the expected residual values of the assets, and the potential for
impairment based on the fair value of the assets and their future expected cash flows.
The following table shows a breakdown of the Company’s long-lived asset groups along with information
about estimated useful lives and residual values for new assets generally purchased from the manufacturer:
Estimated
Useful Life
Estimated
Residual value
Airframes and engines ..................... 23to30years 5%-15%
Aircraft parts ............................. Fleet life 4%
Ground property and equipment .............. 5to30years 0%-10%
In estimating the lives and expected residual values of its aircraft, the Company primarily has relied upon
actual experience with the same or similar aircraft types, current and projected future market information, and
recommendations from Boeing. Aircraft estimated useful lives are based on the number of “cycles” flown (one
take-off and landing) as well as the aircraft age. The Company has made a conversion of cycles into years based
on both historical and anticipated future utilization of the aircraft. Subsequent revisions to these estimates, which
can be significant, could be caused by changes to aircraft maintenance programs, changes in utilization of the
aircraft (actual cycles during a given period of time), governmental regulations on aging aircraft, and changing
market prices of new and used aircraft of the same or similar types. The Company evaluates its estimates and
assumptions each reporting period and, when warranted, adjusts these estimates and assumptions. Generally,
these adjustments are accounted for on a prospective basis through depreciation and amortization expense. For
example, during fourth quarter 2010, the Company changed the estimated residual values of its entire remaining
fleet of owned 737-300 and 737-500 aircraft. Based on current and expected future market conditions related to
these aircraft, the Company reduced the residual values of these aircraft from approximately 15 percent of
original cost to approximately 10 percent of original cost. This determination was made due to the lack of buyers
for these older aircraft, as many buyers of used aircraft prefer newer, more fuel efficient models, and the increase
in the number of airlines retiring these older aircraft, which has increased the supply of older aircraft on the
market. As this reduction in residual value is considered a change in estimate, it was accounted for on a
prospective basis, and thus the Company has effectively accelerated the recording of depreciation expense over
the remainder of the useful lives for each aircraft. The impact of this change was not material.
The Company evaluates its long-lived assets for impairment. Factors that would indicate potential impairment
may 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. The Company has continued to operate virtually all of its aircraft, generate positive cash flow, and
produce operating profits. Consequently, the Company has not identified any impairment related to its existing
aircraft fleet. The Company will continue to monitor its long-lived assets and the airline operating environment.
The Company believes it is unlikely that materially different estimates for expected lives, expected residual
values, and impairment evaluations would be made or reported based on other reasonable assumptions or
conditions suggested by actual historical experience and other data available at the time estimates were made.
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