Southwest Airlines 2011 Annual Report Download - page 15

promotions that AirTran may run from time to time. A+ Rewards members may purchase A+ Rewards credits,
extend the expiration of A+ credits, or give A+ credits to another member to help earn a free flight faster. A+
Rewards credits earned by holders of AirTran’s Visa card and elite A+ Rewards members have a two-year
expiration date, as opposed to a one-year expiration date for general members.
For the Company’s 2011 consolidated results, which include AirTran results from May 2, 2011 through
December 31, 2011, Customers of Southwest and AirTran redeemed approximately 3.7 million flight awards,
accounting for approximately 8.3 percent of revenue passenger miles flown. Southwest Customers redeemed
approximately 3.2 million and 3.0 million flight awards during 2010 and 2009, respectively, accounting for
approximately 7.9 percent and 7.7 percent of Southwest revenue passenger miles flown in those years. Although
under Southwest’s new frequent flyer program travel awards are no longer automatically generated, awards and
credits earned under Southwest’s previous frequent flyer program may still be redeemed until their original
expiration date. As of December 31, 2011, there were approximately 1.3 million previously issued flight awards
still outstanding under the previous program and approximately 2.6 million partially earned awards outstanding.
However, the Company believes a significant portion of these flight awards and partially earned awards will
expire without being used, as they are not transferable to the Company’s new frequent flyer program. Award
travel available to members of AirTran’s A+ program as of December 31, 2011, was not significant to the
Company. The amount of points redeemed by Southwest’s members and the number of credits redeemed by
AirTran’s members during 2011 for items other than air travel was not material.
For frequent flyer points earned by members through flight activity, the Company currently accounts for its
program obligations utilizing the incremental cost method. Under this method, the Company estimates the
incremental cost of points that are expected to be redeemed for a future flight award. The estimated incremental
cost of this liability includes direct passenger costs such as fuel, food, and other operational costs, but does not
include any contribution to overhead or profit. The majority of the revenue from the sale of points to business
partners participating in the Company’s frequent flyer program is initially deferred and is subsequently
recognized as Passenger revenue at the time of redemption. A portion of the revenue received is deemed
unrelated to future travel and is recognized as Other revenue in the period earned. The Company’s accounting
policies with respect to its frequent flyer programs are discussed in more detail in Note 1 to the Consolidated
Financial Statements. As a result of an increase in activity associated with Southwest’s All New Rapid Rewards
program in 2011 and the acquisition of AirTran, the Company’s consolidated liability associated with frequent
flyer programs, including amounts transacted with business partners, was $545 million at December 31, 2011,
versus $246 million at December 31, 2010.
Introduction of the Boeing 737-800 and Other Fleet Renewal and Modernization Strategies
The Boeing 737-800. The Company expects to introduce the Boeing 737-800 into the Southwest fleet in the
first quarter of 2012. The 737-800’s all coach seating configuration of 175 will offer significantly more Customer
seating capacity than Southwest’s existing fleet. In addition to the added seating capacity, the planned
configuration includes The Boeing Company’s Sky Interior, which features a quieter cabin, improved operational
security features, and LED reading and ceiling lighting. The Company expects the 737-800 will enable it to
(i) more economically serve longhaul routes, including extended routes over water; (ii) improve scheduling
flexibility and more economically serve high-demand, slot-controlled, and gate-restricted airports, such as New
York LaGuardia, Newark, and Washington Reagan, by adding seats to such markets without increasing the
number of flights; and (iii) boost fuel efficiency to reduce overall unit costs. Additionally, the Company expects
the 737-800 will enable Southwest to profitably expand to new destinations and potentially fly to more distant
markets such as Hawaii, Alaska, Canada, Mexico, and the Caribbean. The Company currently expects to take
delivery of 33 Boeing 737-800 aircraft during 2012. The Company’s fleet is discussed in more detail below
under “Properties – Aircraft.”
The Boeing 737 MAX. In December 2011, the Company announced that it will be the launch customer for
the new Boeing 737 MAX aircraft. The Company has placed a firm order for 150 of the Boeing 737 MAX
aircraft and expects to take delivery of the first Boeing 737 MAX aircraft in 2017. The Boeing 737 MAX is
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