Southwest Airlines 2008 Annual Report Download - page 53

forfeiture experience results in an amount outside of this
range, estimates and assumptions are reviewed and
adjustments to “Air traffic liability” and to “Passenger
revenue” are recorded, as necessary. Additional factors
that may affect estimated refunds and exchanges
include, but may not be limited to, the Company’s
refund and exchange policy, the mix of refundable and
nonrefundable fares, and promotional fare activity. The
Company’s estimation techniques have been
consistently applied from year to year; however, as with
any estimates, actual refund, exchange, and forfeiture
activity may vary from estimated amounts. No material
adjustments were recorded for the years 2008, 2007, or
2006.
The Company believes it is unlikely that
materially different estimates for future refunds,
exchanges, and forfeited tickets would be reported
based on other reasonable assumptions or conditions
suggested by actual historical experience and other
data available at the time estimates were made.
Accounting For Long-lived Assets
As of December 31, 2008, the Company had
approximately $15.9 billion (at cost) of long-lived
assets, including $13.7 billion (at cost) in flight
equipment and related assets. Flight equipment
primarily relates to the 455 Boeing 737 aircraft in the
Company’s fleet at December 31, 2008, which are
either owned or on capital lease. The remaining 82
Boeing 737 aircraft in the Company’s fleet at
December 31, 2008, are on operating lease. 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 ..... 23to25years 10%-15%
Aircraft parts ........... Fleet life 4%
Ground property and
equipment ........... 5to30years 0%-10%
Leasehold
improvements ........ 5years or lease term 0%
In estimating the lives and expected residual
values of its aircraft, the Company primarily has relied
upon actual experience with the same or similar aircraft
types, current and projected future market information,
and recommendations from Boeing. Aircraft estimated
useful lives are based on the number of “cycles” flown
(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 and amortization 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, the
company has continued to operate all of its aircraft,
generate positive cash flow, and produce profits.
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.
The Company believes it unlikely that
materially different estimates for expected lives,
expected residual values, and impairment evaluations
would be made or reported based on other reasonable
assumptions or conditions suggested by actual
historical experience and other data available at the
time estimates were made.
Financial Derivative Instruments
The Company utilizes financial derivative
instruments primarily to manage its risk associated
with changing jet fuel prices, and accounts for them
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