Southwest Airlines 2012 Annual Report Download - page 90

Aircraft and engine maintenance
The cost of scheduled inspections and repairs and routine maintenance costs for all aircraft and engines are
charged to Maintenance materials and repairs expense as incurred. The Company also has “power-by-the-hour”
agreements related to certain of its aircraft engines with external service providers. Under these agreements,
which the Company has determined effectively transfers the risk and creates an obligation associated with the
maintenance on such engines to the counterparty, expense is recorded commensurate with each hour flown on an
engine. The Company modified its engine maintenance contract for its Classic fleet (737-300/500s) during fourth
quarter 2011 and although payments made under this contract are made on the basis of flight hours, the risk-
transfer concept under this agreement is no longer met, and the Company now records expense on a time and
materials basis when an engine repair event takes place. The impact of this change on fourth quarter 2011 was a
reduction in Maintenance materials and repairs expense of $30 million, resulting in an increase in net income of
$16 million, and an increase in earnings per share (basic and diluted) of $.02 per share. Modifications that
significantly enhance the operating performance or extend the useful lives of aircraft or engines are capitalized
and amortized over the remaining life of the asset.
Goodwill and intangible assets
Goodwill represents the excess of the consideration transferred over the fair value of AirTran’s assets and
liabilities on the acquisition date. See Note 2. Goodwill is not amortized, but it is evaluated for impairment at
least annually, or more frequently if events or circumstances indicate impairment may exist. A fair value-based
methodology is utilized in testing the carrying value to Goodwill, utilizing assumptions including: (1) a long-
term projection of revenues and expenses; (2) estimated discounted future cash flows; (3) observable earnings
multiples of publicly-traded airlines; (4) weighted-average cost of capital; and (5) expected tax rate. Factors used
in the valuation of goodwill include, but are not limited to, management’s plans for future operations, recent
operating results and discounted projected future cash flows. These factors are considered Level 3 inputs within
the fair value hierarchy. As a result of the annual impairment test performed as of October 1, 2012, no
impairment was determined to exist for Goodwill. In the Goodwill impairment analysis performed, the excess of
fair value over carrying value was estimated to be approximately 20 percent.
Intangible assets primarily consist of acquired leasehold rights to certain airport owned gates at Chicago’s
Midway International Airport, take-off and landing slots at certain domestic slot-controlled airports, and certain
intangible assets recognized from the AirTran acquisition. See Note 2 for further information on acquired
identifiable intangible assets. The following table is a summary of the Company’s intangible assets as of
December 31, 2012:
Gross
carrying
amount
(in millions)
Weighted-average
useful life
(in years)
Accumulated
amortization
(in millions)
Customer relationships/marketing agreements . . $ 39 4 $ 19
Trademarks/trade names .................... 36 3 18
Domestic slots ........................... 71 23 7
Internally developed software ............... 2 2 2
Noncompete agreements ................... 5 2 4
Gate leasehold rights ...................... 60 19 25
Total ................................... $ 213 14 $ 75
The aggregate amortization expense for 2012 and 2011 was $25 million and $50 million, respectively. Estimated
aggregate amortization expense for the five succeeding years and thereafter is as follows: 2013 – $19 million,
2014 – $15 million, 2015 – $14 million, 2016 – $11 million, 2017 – $8 million, 2018 and thereafter – $71 million.
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