Southwest Airlines 2011 Annual Report Download - page 73

In March 2011, Southwest launched its All-New Rapid Rewards frequent flyer program. Under the new
program, members earn points for every dollar spent instead of credits for flight segments flown. The amount of
points earned is based on the fare and fare class purchased, with higher fare products (e.g., Business Select)
earning more points than lower fare products (e.g., Wanna Get Away). Each fare class is associated with a points
earning multiplier, and points for flights are calculated by multiplying the fare for the flight by the fare class
multiplier. Likewise, the amount of points required to be redeemed for a flight is based on the fare and fare class
purchased. However,unlike Southwest’s previous program, under the new program, (i) members are able to
redeem their points for every available seat, every day, on every flight, with no blackout dates; and (ii) points do
not expire so long as the Rapid Rewards Member has points-earning activity during a 24-month time period. In
addition, Southwest co-branded Chase Visa credit card holders are able to redeem their points for items other
than travel on Southwest Airlines, such as international flights, cruises, hotel stays, rental cars, gift cards, event
tickets, and more. In addition to earning points for revenue flights, Rapid Rewards Members also have the ability
to purchase points. As part of Southwest’s transition to the new program, Southwest did not convert members’
account balances under the previous program, but is allowing members to continue to redeem those balances for
award travel under the prior program rules for a period of time.
AirTran operates its A+ Rewards frequent flyer program, which allows Customers the opportunity to earn
free roundtrip travel awards or Business Class upgrades on AirTran flights. A+ Rewards credits are earned
through flights, purchases made with an AirTran Airways A+ Visa card, qualifying car rentals from Hertz,
purchases from other A+ Rewards partners, and in conjunction with certain marketing promotions. Under certain
circumstances, Customers may also redeem frequent flyer awards for free travel on other airlines.
Both Southwest and AirTran utilize the incremental cost method of accounting for points and/or credits
earned through flights taken in their respective frequent flyer programs. A liability is recorded for the estimated
incremental cost of providing free travel as points and/or credits are being earned. The liability recorded
represents the total number of points and/or credits expected to be redeemed by members, regardless of whether
the members may have enough to qualify for a full travel award. The incremental cost liability is primarily
composed of direct Passenger costs such as fuel, food, and other operational costs, but does not include any
contribution to overhead or profit. At December 31, 2011, Southwest and AirTran’s consolidated incremental
cost liability, including both the liability remaining from Southwest’s previous program and the liability
associated with its new frequent flyer program, was approximately $66 million.
Southwest and AirTran also sell frequent flyer points and/or credits and related services to business partners
participating in the respective frequent flyer programs. The majority of the points and/or credits sold to business
partners are through the Southwest co-branded Chase Visa credit card or the AirTran A+ Visa Card. Funds
received from the sale of points and/or credits associated with these agreements are accounted for under the
residual method. Although ASU No. 2009-13 “Revenue Agreements with Multiple Deliverables” disallows the
use of the residual method with respect to new and modified revenue arrangements after its January 1, 2011,
effective date, Southwest and AirTran are required to continue to utilize the residual method until such time as
there is a material modification to such pre-existing agreements. As a result, the adoption of ASU No. 2009-13
currently has no impact on Southwest or AirTran. See Note 3 to the Consolidated Financial Statements for
further information on ASU No. 2009-13. Under the residual method, as of December 31, 2011, Southwest
estimates that approximately 92 percent of the amount received from frequent flyer points sold associated with
Southwest’s co-branded credit card relates to free travel, and the remaining 8 percent is associated with items
such as access to its frequent flyer program population for marketing/solicitation purposes, use of the
Southwest’s logo on the co-branded credit cards, and other trademarks, designs, images, etc., of Southwest for
use in marketing materials. This apportionment of value between free travel and marketing services is estimated
based on several factors, including fares, the habits of Customers in redeeming free travel awards, and the
contractual rate received for the points sold. Prior to 2011, the amount estimated to be associated with free travel
had historically ranged from 75 percent to 82 percent. The estimated amounts associated with free travel are
deferred and recognized as Passenger revenue when the ultimate free travel awards are flown or the amounts
expire unused. For the portion of funds received that is deemed not to be associated with future travel, Southwest
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