Southwest Airlines 2011 Annual Report Download - page 74

Download and view the complete annual report

Please find page 74 of the 2011 Southwest Airlines annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 141

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141

has determined that the period revenue is recognized is the period in which it has fulfilled its obligation under the
contract signed with the particular business partner, which is on a monthly or quarterly basis, upon sale, as the
related marketing services are performed or provided. The vast majority of these marketing services consist of
the access granted, either monthly or quarterly, to various lists of Southwest’s frequent flyer members. The
estimated amount that is not associated with free travel is recognized in Other revenue in the period earned. For
AirTran, 100 percent of amounts received for credits sold is estimated to relate to free travel and is deferred until
the travel award is flown.
Under its new program, Southwest continues to estimate the portion of frequent flyer points that will not be
redeemed. These estimates are based on experience in its previous program and expectations of customer
behavior given the rules of the new program. However, since the program is new, these estimates may result in
significant adjustments based on actual experience.
Goodwill and other intangible assets
As a result of the Company’s acquisition of AirTran on May 2, 2011, the Company has reflected Goodwill
on its Consolidated Balance Sheet in the amount of $970 million at December 31, 2011, representing the excess
of the fair value of AirTran’s assets and liabilities over its book value on the acquisition date. In addition, the
Company carries other intangible assets totaling approximately $125 million at December 31, 2011, primarily
consisting of leasehold rights to airport gates, take-off and landing slots at certain domestic slot-controlled
airports, and certain intangible assets recognized as part of the valuation of AirTran’s assets and liabilities as of
the acquisition date. All of the Company’s intangible assets are finite-lived and are being amortized over their
estimated economic useful lives. Goodwill is not amortized, but will be tested for impairment at least annually, or
more frequently if events or circumstances indicate that an impairment may exist. The Company has selected
October 1 as its annual testing date and performed its initial annual Goodwill impairment test as of October 1,
2011.
The Company applies a fair value based methodology in testing the carrying value of Goodwill for its one
reporting unit. Key assumptions and/or estimates made in the Company’s 2011 Goodwill impairment test
included the following: 1) a long-term projection of revenues, expenses, and cash flows; 2) an estimated
weighted average cost of capital of 9.5 percent; and 3) a tax rate of 38.5 percent. The Company believes these
assumptions are consistent with those a hypothetical market participant would use given circumstances that were
present at the time the estimates were made. However, actual results and amounts may be significantly different
from the Company’s estimates.
Future impairment of Goodwill may result from changes in assumptions, estimates, or circumstances, some
of which are beyond the Company’s control. Factors which could result in an impairment, holding other
assumptions constant, could include, but are not limited to: 1) reduced passenger demand as a result of domestic
or global economic conditions; 2) higher prices for jet fuel; 3) lower fares or passenger yields as a result of
increased competition or lower demand; 4) a significant increase in future capital expenditure commitments; and
5) significant disruptions to the Company’s operations as a result of both internal and external events such as
terrorist activities, actual or threatened war, labor actions by Employees, or further industry regulation.
As a result of the tests performed during fourth quarter 2011, no impairment was determined to exist for
Goodwill or any of the Company’s finite-lived intangible assets. In the Goodwill impairment analysis performed,
the excess of fair value versus carrying value was estimated to be between 15 - 20 percent.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company has interest rate risk in its floating-rate debt obligations and interest rate swaps, commodity
price risk in jet fuel required to operate its aircraft fleet, and market risk in the derivatives used to manage its fuel
hedging program and in the form of fixed-rate debt instruments. As of December 31, 2011, Southwest and
68