Southwest Airlines 2012 Annual Report Download - page 77

In March 2011, Southwest launched its All-New Rapid Rewards frequent flyer program. Under the current
program, members earn points for every dollar spent, whereas, under the prior program members earned credits
for flight segments flown. The amount of points earned under the current program is based on the fare and fare
class purchased, with higher fare products (e.g., Business Select) earning more points than lower fare products
(e.g., Wanna Get Away). Each fare class is associated with a points earning multiplier, and points for flights are
calculated by multiplying the fare for the flight by the fare class multiplier. Likewise, the amount of points
required to be redeemed for a flight is based on the fare and fare class purchased. However,unlike Southwest’s
previous program, under the current program, (i) members are able to redeem their points for every available
seat, every day, on every flight, with no blackout dates; and (ii) points do not expire so long as the Rapid
Rewards Member has points-earning activity during a 24-month time period. In addition, Southwest co-branded
Chase Visa credit card holders are able to redeem their points for items other than travel on Southwest Airlines,
such as international flights, cruises, hotel stays, rental cars, gift cards, event tickets, and more. In addition to
earning points for revenue flights and qualifying purchases with Rapid Rewards Partners, Rapid Rewards
Members also have the ability to purchase points. As part of Southwest’s transition to the current program,
Southwest did not convert members’ account balances under the previous program, but is allowing members to
continue to redeem those balances for award travel under the prior program rules for a period of time. At
December 31, 2012, the amount of awards and credits issued under the previous program that are expected to be
redeemed was not material.
AirTran operates its A+ Rewards frequent flyer program, which allows Customers the opportunity to earn
free roundtrip travel awards or Business Class upgrades on AirTran flights. A+ Rewards credits are earned
through flights, purchases made with an AirTran Airways A+ Visa card or an AirTran A+ Rewards Chase Visa
credit card (collectively, the “AirTran A+ cards”), qualifying car rentals from Hertz, purchases from other A+
Rewards partners, and in conjunction with certain marketing promotions. Under certain circumstances,
Customers may also redeem frequent flyer awards for free travel on other airlines.
Both Southwest and AirTran utilize the incremental cost method of accounting for points and/or credits
earned through flights taken in their respective frequent flyer programs. A liability is recorded for the estimated
incremental cost of providing free travel as points and/or credits are being earned. The liability recorded
represents the total number of points and/or credits expected to be redeemed by members, regardless of whether
the members may have enough to qualify for a full travel award. The incremental cost liability is primarily
composed of direct Passenger costs such as fuel, food, and other operational costs, but does not include any
contribution to fixed overhead costs or profit. At December 31, 2012, Southwest and AirTran’s consolidated
incremental cost liability, including both the liability remaining from Southwest’s previous program and the
liability associated with its new frequent flyer program, was approximately $74 million.
Southwest and AirTran also sell frequent flyer points and/or credits and related services to business partners
participating in the respective frequent flyer programs. The majority of the points and/or credits sold to business
partners are through the Southwest co-branded Chase Visa credit card or the AirTran A+ cards. Funds received
from the sale of points and/or credits associated with these agreements are accounted for under the residual
method. Under the residual method, as of December 31, 2012, Southwest estimates that 100 percent of the
amount received from frequent flyer points sold associated with Southwest’s co-branded Chase Visa credit card
relates to free travel. This is due to the significant increase in Southwest’s average fare in recent years, while the
average value received from business partners for the purchase of points has remained relatively flat. Therefore,
for accounting purposes the Company currently assigns no value associated with items such as business partner
access to Southwest’s frequent flyer program population for marketing/solicitation purposes, use of the
Southwest’s logo on the co-branded Chase Visa credit cards, and other trademarks, designs, images, etc., of
Southwest for use in marketing materials. Prior to 2012, the apportioned amount estimated to be associated with
free travel as opposed to marketing services had historically ranged from 75 percent to 92 percent. The estimated
amounts associated with free travel are deferred and recognized as Passenger revenue when the ultimate free
travel awards are flown. For all points sold to business partners that are expected to expire unused, the Company
recognizes spoilage in accordance with the redemption method. For any portion of funds received that is deemed
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