Southwest Airlines 1999 Annual Report Download - page 34

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Prior to the issuance of SAB 101, the Company recorded revenue to Other Revenue when
flight segment credits were sold, which is a commonly used method of accounting within
the airline industry. However, in accordance with SAB 101, revenue received from the sale
of flight segment credits and associated with future travel will be deferred and recognized
as the ultimate free travel awards are flown. Also as part of this change, this revenue will be
classified as Passenger Revenue in the Company’s Consolidated Statement of Income.
As of January 1, 2000, the cumulative effect of this accounting change will reduce
first quarter 2000 net income by approximately $22.1 million (net of provision for income
taxes of approximately $14.0 million). Adopting this new method of accounting for 1999,
1998, and 1997, would have produced the following pro forma results: Net income would
have been reduced by $3.9 million, $5.0 million, and $5.5 million, respectively (net of
provision for income taxes and profitsharing of approximately $2.5 million, $3.1 million, and
$3.5 million, respectively). Earnings per share, basic and diluted, would have been
reduced by $.01 per share for each year, except 1999 basic earnings per share would not
change. However, while pro forma amounts will be presented in future financial statements,
these years will not be restated.
2. CHANGE IN ACCOUNTING ESTIMATE
Effective January 1, 1999, the Company revised the estimated useful lives of its
737-300 and -500 aircraft from 20 years to 23 years. This change was the result of the
Company’s assessment of the remaining useful lives of the aircraft based on the
manufacturer’s design lives, the Company’s increased average aircraft stage (trip) length,
and the Company’s previous experience. The effect of this change was to reduce
depreciation expense approximately $25.7 million and increase net income $.03 per
diluted share for the year ended December 31, 1999.
3. COMMITMENTS
The Company’s contractual purchase commitments consist primarily of scheduled
aircraft acquisitions. Thirty-one 737-700 aircraft are scheduled for delivery in 2000, 23 in
2001, 21 in 2002, five in 2003, and five in 2004. In addition, the Company has options to
purchase up to 62 737-700s during 2003–2006. The Company has the option, which must
be exercised two years prior to the contractual delivery date, to substitute 737-600s or
737-800s for the 737-700s scheduled subsequent to 2001. Aggregate funding needed for
fixed commitments is approximately $1,965.7 million, subject to adjustments for inflation,