Southwest Airlines 2003 Annual Report Download - page 43

Accounting for Long-Lived Assets
As of December 31, 2003, the Company had approximately $10.6 billion of long-lived assets, including $8.6
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.
The following table shows a breakdown of the Company’s long-lived asset groups along with information
about estimated useful lives and residual values of these groups:
Estimated
Useful Life
Estimated
Residual value
Aircraft and engines 20 to 25 years 15%*
Aircraft parts Fleet life 4%
Ground property and equipment 5 to 30 years 0% - 10%
Leasehold improvements 5 years or lease term 0%
* The Company’s remaining 737-200’s, due to be retired by first quarter 2005, have residual value of 2%
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 aircraft. Aircraft estimated useful lives are based on the number of “cycles”
flown (a “cycle” is one take-off and landing). The Company has made a conversion of cycles into years
based on both its historical and anticipated future utilization of the aircraft. 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 cycles 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.
When appropriate, the Company evaluates its long-lived assets for impairment. Factors that would indicate
potential impairment may 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 and see Notes 2 and 10 to the
Consolidated Financial Statements for more information on SFAS 133, the Company’s fuel hedging
program, and financial derivative instruments.
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, 2003, was $251 million. The financial derivative
instruments utilized by the Company primarily were a combination of collars, purchased call options, and
fixed price swap agreements. The Company does not purchase or hold any derivative instruments for trading
purposes.