Southwest Airlines 2011 Annual Report Download - page 86

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“power-by-the-hour” basis, the risk-transfer concept under this agreement is no longer met, and the Company
now records expense on a time and materials basis when an engine repair event takes place.
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.
Goodwill and intangible assets
Goodwill represents the excess of the consideration transferred over the fair value of AirTran’s assets and
liabilities on the acquisition date. See Note 2. Goodwill is not amortized, but it is evaluated for impairment at
least annually, or more frequently if events or circumstances indicate impairment may exist. A fair value-based
methodology is utilized in testing the carrying value to Goodwill, utilizing assumptions including: (1) a long-
term projection of revenues and expenses; (2) estimated discounted future cash flows; (3) observable earnings
multiples of publicly-traded airlines; (4) weighted-average cost of capital; and (5) expected tax rate. Factors used
in the valuation of goodwill include, but are not limited to, management’s plans for future operations, recent
operating results and discounted projected future cash flows. These factors are considered Level 3 inputs within
the fair value hierarchy. No goodwill impairment was noted during 2011.
Intangible assets primarily consist of acquired leasehold rights to certain airport owned gates at Chicago’s
Midway International Airport, take-off and landing slots at certain domestic slot-controlled airports, and certain
intangible assets recognized from the AirTran acquisition. See Note 2 for further information on acquired
identifiable intangible assets. The following table is a summary of the Company’s intangible assets, weighted-
average useful lives, and balance of accumulated amortization as of December 31, 2011:
Gross
carrying
amount
(in millions)
Weighted-average
useful life
(in years)
Accumulated
amortization
(in millions)
Customer relationships/marketing agreements .................. $ 39 4 $14
Trademarks/trade names ................................... 36 3 8
Domestic slots ........................................... 63 23 4
Internally developed software ............................... 2 2 1
Noncompete agreements ................................... 5 2 1
Gate leasehold rights ...................................... 60 19 22
Total .................................................. $205 14 $50
Estimated aggregate amortization expense for the five succeeding years and thereafter is as follows: 2012 –
$25 million, 2013 – $19 million, 2014 – $15 million, 2015 – $13 million, 2016 – $10 million, 2017 and thereafter
– $73 million.
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 tickets that
expire unused and recognizes such amounts in Passenger revenue once the scheduled flight date has passed.
Amounts collected from passengers for ancillary services such as baggage and other fees are generally
recognized as Other revenue when the service is provided, which is typically the flight date.
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.
80