Southwest Airlines 2013 Annual Report Download - page 73

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exchanges of tickets sold for past travel dates. The balance in Air traffic liability, which includes a portion of the
Company’s liability associated with its frequent flyer programs, fluctuates throughout the year based on seasonal
travel patterns, fare sale activity, and activity associated with the Company’s frequent flyer programs.
For air travel on Southwest, the amount of tickets that will expire unused are estimated and recognized in
Passenger revenue once the scheduled flight date has passed. Estimating the amount of tickets that will expire
unused, be refunded, or exchanged involves some level of subjectivity and judgment. The majority of
Southwest’s tickets sold are nonrefundable, which is the primary source of unused tickets. According to
Southwest’s current “Contract of Carriage,” all refundable tickets that are sold but not flown on the travel date
can be reused for another flight, up to a year from the date of sale, or can be refunded. This policy also applies to
unused Customer funds that may be left over from exchanging a less expensive ticket for a previously purchased
ticket that was more expensive. On September 13, 2013, Southwest implemented a No Show policy that applies
to nonrefundable fares that are not canceled or changed by a Customer at least ten minutes prior to a flight’s
scheduled departure. See Note 1 to the Consolidated Financial Statements for further information. A small
percentage of tickets (or partial tickets) expire unused. Fully refundable tickets are rarely forfeited. Estimates of
tickets that will expire unused are based on historical experience over many years. Southwest and other airlines
have consistently applied this accounting method to estimate revenue from unused tickets at the date of
scheduled travel.
Events and circumstances outside of historical fare sale activity or historical Customer travel patterns can
result in actual refunds, exchanges, or forfeited tickets differing significantly from estimates. The Company
evaluates its estimates within a narrow range of acceptable amounts. If actual refunds, exchanges, or forfeiture
experience results in an amount outside of this range, estimates and assumptions are reviewed and adjustments to
Air traffic liability and to Passenger revenue are recorded, as necessary. Additional factors that may affect
estimated refunds and exchanges include, but may not be limited to, changes to the Company’s ticketing policies,
the Company’s refund, exchange, and unused funds policies, the mix of refundable and nonrefundable fares,
promotional fare activity, and the impact of the economic environment on Customer behavior. The Company’s
estimation techniques have been consistently applied from year to year; however, as with any estimates, actual
refund, exchange, and forfeiture activity may vary from estimated amounts.
The Company believes it is unlikely that materially different estimates for future refunds, exchanges, and
forfeited tickets would be reported based on other reasonable assumptions or conditions suggested by actual
historical experience and other data available at the time estimates were made.
Accounting for long-lived assets
Flight equipment and related assets make up the majority of the Company’s long-lived assets. Flight
equipment primarily relates to the 510 Boeing 737 aircraft and 10 Boeing 717 aircraft in the Company’s in-
service fleet at December 31, 2013, which are either owned or on capital lease. The remaining 104 Boeing 737
aircraft and 56 Boeing 717 aircraft in the Company’s in-service fleet at December 31, 2013, are operated under
operating leases. In accounting for long-lived assets, the Company must make estimates about the expected
useful lives of the assets, the expected residual values of the assets, and the potential for impairment based on the
fair value of the assets and their future expected cash flows.
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%
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