Southwest Airlines 2010 Annual Report Download - page 76

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their expected useful lives, which are approximately 20 years for the rights to gates, and ranges from 12 to 18
years for the take-off and landing slots. The accumulated amortization related to these intangible assets at
December 31, 2010, and 2009, was $19 million and $15 million, respectively. The Company periodically
assesses its intangible assets for impairment; however, no impairments have been noted.
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 (whether refundable or nonrefundable)
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 tickets that
expire unused and recognizes such amounts in Passenger revenue once the scheduled flight date has passed.
The Company is also required to collect certain taxes and fees from Customers on behalf of government
agencies and remit these back to the applicable governmental entity on a periodic basis. These taxes and fees
include U.S. federal transportation taxes, federal security charges, and airport passenger facility charges. These
items are collected from Customers at the time they purchase their tickets, but are not included in Passenger
revenue. The Company records a liability upon collection from the Customer and relieves the liability when
payments are remitted to the applicable governmental agency.
Frequent flyer program
The Company records a liability for the estimated incremental cost of providing free travel under its Rapid
Rewards frequent flyer program for both fully earned and partially earned awards that are expected to be
redeemed for future travel. The estimated incremental cost includes direct passenger costs such as fuel, food, and
other operational costs, but does not include any contribution to overhead or profit. See Note 3 for further
discussion.
The Company also sells frequent flyer credits and related services to companies participating in its Rapid
Rewards frequent flyer program. Funds received from the sale of flight segment credits are accounted for using
the residual method. Under this method, the Company has determined the portion of funds received for sale of
flight segment credits that relate to free travel, currently estimated at 83 percent of the amount received per flight
segment credit sold as of December 31, 2010. These amounts are deferred and recognized as Passenger revenue
when the ultimate free travel awards are flown or the credits expire unused. The remainder of the amount
received per flight segment credit sold (the residual), which is assumed not to be associated with future travel,
includes items such as access to the Company’s frequent flyer program population for marketing/solicitation
purposes on a monthly or quarterly basis, use of the Company’s logo on co-branded credit cards, and other
trademarks, designs, images, etc. of the Company for use in marketing materials. This residual portion is
recognized in Other revenue in the period earned, which the Company has determined is the period in which it
has fulfilled its obligation under the contract signed with the particular business partner, which is on a monthly or
quarterly basis, upon sale, as the related marketing services are performed or provided.
Advertising
Advertising costs are charged to expense as incurred. Advertising and promotions expense for the years
ended December 31, 2010, 2009, and 2008 was $202 million, $204 million, and $199 million, respectively, and
was recorded as a component of Other operating expense in the accompanying Consolidated Statement of
Income.
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