Southwest Airlines 2012 Annual Report Download - page 91

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.
Amounts collected from passengers for ancillary services such as baggage and other fees are generally
recognized as Other revenue when the service is provided, which is typically the flight date.
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 programs
The Company records a liability for the estimated incremental cost of providing free travel under its
frequent flyer programs for all amounts earned from flight activity 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 fixed overhead costs or profit.
Southwest and AirTran also sell frequent flyer points and/or credits and related services to companies
participating in their respective frequent flyer programs. Funds received from the sale of these points and/or credits
are accounted for using the residual method. Under this method, the Company determined the portion of funds
received that relate to free travel were currently estimated to be 100 percent of the amount received under both
Southwest’s Rapid Reward program and under AirTran’s A+ Reward program as of December 31, 2012. These
amounts are deferred and recognized as Passenger revenue when the ultimate free travel awards are flown. In
periods in which less than 100 percent of funds received are apportioned to free travel, the remainder of the amount
received per point sold (the residual), which is not 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 executed contract with the
particular business partner, which is on a monthly or quarterly basis, upon sale, as the related marketing services are
performed or provided. For all points sold to business partners that are expected to expire unused, the Company
recognizes spoilage in accordance with the redemption method. At December 31, 2012, Southwest and AirTran’s
consolidated liability associated with the sale of frequent flyer points and/or flight credits, was approximately $814
million. This liability is included as part of Air Traffic liability in the Company’s Consolidated Balance Sheet.
In March 2011, Southwest launched its All-New Rapid Rewards frequent flyer program. Under the new
program, members earn points for every dollar spent instead of credits for flight segments flown. Unlike
Southwest’s previous program, under the new 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, Rapid Rewards Members also have the ability to purchase points.
As part of Southwest’s transition to the new program, Southwest did not convert members’ account balances
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