Southwest Airlines 2009 Annual Report Download - page 47

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, promotional fare activity, and the impact of the economic
environment on Customer behavior. 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. The Company’s estimation process resulted in no material adjustments being recorded during
the years 2008 or 2007. During the fourth quarter of 2008 and throughout 2009, as a result of the Company’s
efforts to stimulate demand through fare sales, passenger revenues consisted of a higher percentage of discount
tickets flown and a lower percentage of fully refundable tickets flown. Consequently, the Company’s estimate of
the amount of refunded, exchanged, or forfeited tickets recorded during 2009 was in a range of approximately 30
percent to 35 percent higher than what it believes its historical averages would indicate. The Company believes
these estimates are supported by actual data and are reasonable given the underlying fact patterns.
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, 2009, 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
449 Boeing 737 aircraft in the Company’s active fleet at December 31, 2009, which are either owned or on
capital lease, plus four older 737-300 aircraft that are not in active service. The remaining 88 Boeing 737 aircraft
in the Company’s fleet at December 31, 2009, 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
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