Southwest Airlines 2011 Annual Report Download - page 87

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 programs
The Company records a liability for the estimated incremental cost of providing free travel under its (and
AirTran’s) frequent flyer program for all amounts earned from flight activity that are expected to be redeemed
for future travel. The estimated incremental cost includes direct passenger costs such as fuel, food, and other
operational costs, but does not include any contribution to overhead or profit.
Southwest and AirTran also sell frequent flyer points and/or credits and related services to companies
participating in their respective frequent flyer programs. Funds received from the sale of these points and/or
credits are accounted for using the residual method. Under this method, the Company has determined the portion
of funds received that relate to free travel, currently estimated at 92 percent of the amount received under
Southwest’s Rapid Reward program and 100 percent of amounts received under AirTran’s A+ Reward program
as of December 31, 2011. These amounts are deferred and recognized as Passenger revenue when the ultimate
free travel awards are flown or the amounts expire unused. The remainder of the amount received per points sold
(the residual), which is assumed not to be associated with future travel, includes items such as access to the
Company’s frequent flyer program population for marketing/solicitation purposes on a monthly or quarterly
basis, use of the Company’s logo on co-branded credit cards, and other trademarks, designs, images, etc. of the
Company for use in marketing materials. This residual portion is recognized in Other revenue in the period
earned, which the Company has determined 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.
Advertising
Advertising costs are charged to expense as incurred. Advertising and promotions expense for the years
ended December 31, 2011, 2010, and 2009 was $237 million, $202 million, and $204 million, respectively, and
was recorded as a component of Other operating expense in the accompanying Consolidated Statement of
Income.
Share-based Employee compensation
The Company has share-based compensation plans covering several of its Employee groups, including
plans covering the Company’s Board of Directors. The Company accounts for share-based compensation based
on its grant date fair value. See Note 15.
Financial derivative instruments
The Company accounts for financial derivative instruments at fair value and applies hedge accounting rules
where appropriate. The Company utilizes various derivative instruments, including crude oil, unleaded gasoline,
and heating oil-based derivatives, to attempt to reduce the risk of its exposure to jet fuel price increases. These
instruments consist primarily of purchased call options, collar structures, call spreads, and fixed-price swap
agreements, and upon proper qualification are accounted for as cash-flow hedges. The Company also has interest
rate swap agreements to convert a portion of its fixed-rate debt to floating rates and, including instruments
acquired from AirTran, has swap agreements that convert certain floating-rate debt to a fixed-rate. These interest
rate hedges are appropriately designated as either fair value hedges or as cash flow hedges.
Since the majority of the Company’s financial derivative instruments are not traded on a market exchange,
the Company estimates their fair values. Depending on the type of instrument, the values are determined by the
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