Southwest Airlines 2012 Annual Report Download - page 73

Download and view the complete annual report

Please find page 73 of the 2012 Southwest Airlines annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 140

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140

The following table shows a breakdown of the Company’s long-lived asset groups along with information
about estimated useful lives and residual values for new assets generally purchased from the manufacturer:
Estimated
Useful Life
Estimated
Residual value
Airframes and engines ............. 23to25years 2%-20%
Aircraft parts ..................... Fleet life 4%
Ground property and equipment ...... 5to30years 0%-10%
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) as well as the aircraft age. The Company has made a conversion of cycles into years based on both
historical and anticipated future utilization of the aircraft. Subsequent revisions to these estimates, which can be
significant, could be caused by changes to aircraft maintenance programs, 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. For example, during fourth
quarter 2010, and again in third quarter 2012, the Company changed the estimated residual values of its entire
remaining fleet of owned 737-300 and 737-500 aircraft. Based on current and expected future market conditions
related to these aircraft, as well as a significant change in the way the Company expects to utilize the fleet, the
Company reduced the residual values of these aircraft. This fleet originally had residual values of approximately
15 percent of original cost, but based on current estimates, now has residual values of approximately two percent of
original cost. This determination was made based on the continuous assessment of the market for these older
aircraft, as many buyers of used aircraft prefer newer, more fuel efficient models, and the increase in the number of
airlines retiring these older aircraft, which has increased the supply of older aircraft on the market. As this reduction
in residual value is considered a change in estimate, it was accounted for on a prospective basis, and thus the
Company has effectively accelerated the recording of depreciation expense over the remainder of the useful lives for
each aircraft in each instance. The Company does not believe these changes in estimates towards the end of the
useful lives for a given fleet type are unusual, especially given the rapid pace of technological advancement, volatile
fuel prices, and recent significant transactions involving the Company’s fleet. The 2012 reduction in estimated
salvage value resulted in a $34 million increase in depreciation expense during the second half of the year, and is
expected to increase 2013 expense by approximately $58 million. See Note 3 to the Consolidated Financial
Statements for further information.
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. The Company has continued to operate virtually all of its aircraft,
generate positive cash flow, and produce operating profits. Consequently, the Company has not identified any
impairment 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 is 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.
65