Southwest Airlines 2002 Annual Report Download - page 43

24 | SOUTHWEST AIRLINES CO. 2002 10-K
In evaluating passenger revenue through third
quarter 2001, based on these unusually high
refund levels, the Company estimated that
approximately $30 million of these refunds
related to revenue previously recognized for
estimated forfeited tickets. As a result, the
Company reduced third quarter 2001 “Passenger
revenue” by $30 million and restored “Air traffic
liability,” accordingly.
Subsequent to third quarter 2001 and through
second quarter 2002, the Company experienced
a higher than usual mix of low-fare, nonrefund-
able ticket sales. The Company also experienced
changes in Customer travel patterns resulting
from various factors including new airport security
measures, concerns about further terrorist
attacks, and an uncertain economy. Conse-
quently, the Company recorded $36 million in
additional passenger revenue in second quarter
2002 as Customers required fewer refunds and
exchanges, resulting in more forfeited tickets.
While the Company believes the current
estimates included in “Air traffic liability” and
“Passenger revenue” are reasonable, these esti-
mates may continue to change based on refund,
exchange, and forfeiture activity varying from pre-
September 2001 patterns.
Accounting for Long-lived Assets
As of December 31, 2002, the Company had
approximately $9.46 billion of long-lived assets,
including $8.02 billion in flight equipment and
related assets. In accounting for long-lived
assets, the Company must make estimates
about the expected useful lives of the assets, the
expected residual values of the assets, and the
potential for impairment based on the fair value
of the assets and the cash flows they generate.
In estimating the lives and expected residual
values of its aircraft, the Company has primarily
relied upon actual experience with the same or
similar aircraft types and recommendations from
Boeing, the manufacturer of the Company’s air-
craft. Subsequent revisions to these estimates,
which can be significant, could be caused by
changes to the Company’s maintenance
program, changes in utilization of the aircraft
(actual flight hours during a given period of time),
governmental regulations on aging aircraft, and
changing market prices of new and used aircraft
of the same or similar types. The Company
evaluates its estimates and assumptions each
reporting period and, when warranted, adjusts
these estimates and assumptions. Generally,
these adjustments are accounted for on a
prospective basis through depreciation expense,
as required by GAAP.
The Company periodically evaluates its long-
lived assets for impairment. Factors that would
indicate potential impairment include, but are
not limited to, significant decreases in the
market value of the long-lived asset(s), a
significant change in the long-lived asset’s
physical condition, and operating or cash flow
losses associated with the use of the long-lived
asset. While the airline industry as a whole has
experienced many of these indicators, Southwest
has continued to operate all of its aircraft and
continues to experience positive cash flow.
Consequently, the Company has not identified
any impairments related to its existing aircraft
fleet. The Company will continue to monitor its
long-lived assets and the airline operating
environment.
Financial Derivative Instruments
The Company utilizes financial derivative
instruments to manage its risk associated with
changing jet fuel prices and accounts for them
under Statement of Financial Accounting
Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (SFAS 133).
See “Qualitative and Quantitative Disclosures
about Market Risk” for more information on
these risk management activities. SFAS 133
requires that all derivatives be marked to market
(fair value) and recorded on the Consolidated
Balance Sheet. The fair value of the Company’s
financial derivative instruments recorded on the
Company’s Consolidated Balance Sheet as of
December 31, 2002, was $157.2 million.