Southwest Airlines 2002 Annual Report Download - page 53

34 | SOUTHWEST AIRLINES CO. 2002 10-K
indicators, Southwest has continued to
operate all of its aircraft and continues to
experience positive cash flow.
Aircraft and Engine Maintenance. The cost
of scheduled engine inspections and repairs
and routine maintenance costs for aircraft
and engines are charged to maintenance
expense as incurred. Scheduled airframe
inspections and repairs, known as “D”
checks, are generally performed every ten
years. Costs related to “D” checks are capital-
ized and amortized over the estimated period
benefited, presently the least of ten years, the
time until the next “D” check, or the
remaining life of the aircraft. Modifications
that significantly enhance the operating perfor-
mance or extend the useful lives of aircraft or
engines are capitalized and amortized over
the remaining life of the asset.
In 2001, the American Institute of Certified
Public Accountants (AICPA) issued a Proposed
Statement of Position entitled “Accounting for
Certain Costs and Activities Related to
Property, Plant, and Equipment” (Proposed
SOP). The Proposed SOP, as originally written,
would require that all “D” checks be expensed
as incurred. In fourth quarter 2002, the AICPA
announced it would be transitioning this
project to the Financial Accounting Standards
Board (FASB), although the AICPA may retain
and address certain components of the
Proposed SOP. The FASB and the AICPA have
not determined which components, if any, will
be retained by the AICPA for potential
issuance in a future SOP. In addition, the
FASB has not set a timetable for addressing
the issues raised by the proposed SOP.
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 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 future refunds, exchanges, and
forfeitures for all unused tickets once the flight
date has passed. These estimates are based
on historical experience over many years. The
Company and members of the airline industry
have consistently applied this accounting
method to estimate revenue from forfeited
tickets at the date travel is provided.
Estimated future refunds and exchanges
included in the air traffic liability account are
constantly evaluated based on subsequent
refund and exchange activity to validate the
accuracy of the Company’s revenue
recognition method with respect to forfeited
tickets.
Events and circumstances outside of
historical fare sale activity or historical
Customer travel patterns can result in actual
refunds, exchanges, or forfeited tickets
differing significantly from estimates; however,
these differences have historically not been
material. Additional factors that may affect
estimated refunds include, but may not b e
limited to, the Company’s refund and
exchange policy, the mix of refundable and
nonrefundable fares, and fare sale activity.
The Company’s estimation techniques have
been consistently applied from year to year;
however, as with any estimates, actual refund
and exchange activity may vary from
estimated amounts.
Subsequent to third quarter 2001 and
through second quarter 2002, the Company
experienced a higher than usual mix of low-
fare, nonrefundable 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. Consequently, the
Company recorded $36 million in additional