Southwest Airlines 2005 Annual Report Download - page 41

Estimating the amount of tickets that will be tual historical experience and other data available at the
refunded, exchanged, or forfeited involves some level of time estimates were made.
subjectivity and judgment. The majority of the Com-
pany's tickets sold are nonrefundable, which is the Accounting for Long-Lived Assets
primary source of forfeited tickets. According to the As of December 31, 2005, the Company had
Company's ""Contract of Carriage'', tickets that are sold approximately $12.9 billion (at cost) of long-lived
but not flown on the travel date can be reused for assets, including $11.0 billion (at cost) in flight equip-
another flight, up to a year from the date of sale, or can ment and related assets. Flight equipment primarily
be refunded (if the ticket is refundable). A small relates to the 361 Boeing 737 aircraft in the Company's
percentage of tickets (or partial tickets) expire unused. fleet at December 31, 2005, which are either owned or
Fully refundable tickets are rarely forfeited. ""Air traffic on capital lease. The remaining 84 Boeing 737 aircraft
liability'' includes an estimate of the amount of future in the Company's fleet at December 31, 2005, are on
refunds and exchanges, net of forfeitures, for all unused operating lease. In accounting for long-lived assets, the
tickets once the flight date has passed. These estimates Company must make estimates about the expected
are based on historical experience over many years. The useful lives of the assets, the expected residual values of
Company and members of the airline industry have the assets, and the potential for impairment based on
consistently applied this accounting method to estimate the fair value of the assets and the cash flows they
revenue from forfeited tickets at the date travel is generate.
provided. Estimated future refunds and exchanges in-
cluded in the air traffic liability account are constantly The following table shows a breakdown of the
evaluated based on subsequent refund and exchange Company's long-lived asset groups along with informa-
activity to validate the accuracy of the Company's tion about estimated useful lives and residual values of
estimates with respect to forfeited tickets. Holding other these groups:
factors constant, a ten-percent change in the Company's Estimated
estimate of the amount of refunded, exchanged, or Residual
Estimated Useful Life Value
forfeited tickets for 2005 would have resulted in a
$13 million change in Passenger revenues recognized Aircraft and engines 23 to 25 years 15%
for that period. Aircraft parts ÏÏÏÏÏÏ Fleet life 4%
Ground property and
Events and circumstances outside of historical fare equipmentÏÏÏÏÏÏÏ 5 to 30 years 0%-10%
sale activity or historical Customer travel patterns, as Leasehold
noted, can result in actual refunds, exchanges, or for- improvements ÏÏÏÏ 5 years or lease term 0%
feited tickets differing significantly from estimates. The
Company evaluates its estimates within a narrow range In estimating the lives and expected residual values
of acceptable amounts. If actual refunds, exchanges, or of its aircraft, the Company primarily has relied upon
forfeiture experience results in an amount outside of this actual experience with the same or similar aircraft types
range, estimates and assumptions are reviewed and and recommendations from Boeing, the manufacturer of
adjustments to ""Air traffic liability'' and to ""Passenger the Company's aircraft. Aircraft estimated useful lives
revenue'' are recorded, as necessary. Additional factors are based on the number of ""cycles'' flown (one take-
that may affect estimated refunds and exchanges in- off and landing). The Company has made a conversion
clude, but may not be limited to, the Company's refund of cycles into years based on both its historical and
and exchange policy, the mix of refundable and anticipated future utilization of the aircraft. Subsequent
nonrefundable fares, and promotional fare activity. The revisions to these estimates, which can be significant,
Company's estimation techniques have been consistently could be caused by changes to the Company's mainte-
applied from year to year; however, as with any esti- nance program, changes in utilization of the aircraft
mates, actual refund, exchange, and forfeiture activity (actual cycles during a given period of time), govern-
may vary from estimated amounts. No material adjust- mental regulations on aging aircraft, and changing
ments were recorded for years 2003, 2004, or 2005. market prices of new and used aircraft of the same or
similar types. The Company evaluates its estimates and
The Company believes it is unlikely that materially assumptions each reporting period and, when war-
different estimates for future refunds, exchanges, and ranted, adjusts these estimates and assumptions. Gener-
forfeited tickets would be reported based on other ally, these adjustments are accounted for on a
reasonable assumptions or conditions suggested by ac- prospective basis through depreciation and amortization
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