Southwest Airlines 2013 Annual Report Download - page 77

instruments it holds, and such experience is continually evaluated against its counterparties each period when
such instruments expire and are settled for cash, the Company believes it is unlikely that an independent third
party would value the Company’s derivative contracts at a significantly different amount than what is reflected in
the Company’s financial statements. In addition, the Company also has bilateral credit provisions in some of its
counterparty agreements, which provide for parties (or the Company) to provide cash collateral when the fair
value of fuel derivatives with a single party exceeds certain threshold levels. Since this cash collateral is based on
the estimated fair value of the Company’s outstanding fuel derivative contracts, this provides further validation to
the Company’s estimate of fair values.
Frequent flyer accounting
Southwest and AirTran utilize estimates in the recognition of liabilities associated with their respective
frequent flyer programs. These estimates primarily include the liability associated with frequent flyer member
account balances that are expected to be redeemed for travel or other products at a future date, and frequent flyer
awards or certificates that have been issued, are outstanding, and are expected to be redeemed at a future date.
Frequent flyer account balances include points/credits earned through flights taken, points sold to Customers, or
points/credits earned through business partners participating in the frequent flyer programs.
In March 2011, Southwest launched its current Rapid Rewards frequent flyer program, under which
members earn points for every dollar spent. The amount of points earned under the 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. Under the 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, and allowed members to continue to redeem those balances for award travel under the prior
program rules for a period of time. As of December 31, 2013, no awards or credits issued under the previous
program remained.
AirTran’s A+ Rewards frequent flyer program currently offers a number of ways to earn free travel,
including bonus earnings for Business Class travel. A+ Rewards members currently can earn a credit for each
one-way trip flown or 1.5 credits for one-way Business Class travel. A+ Rewards credits currently can also be
earned for purchases made with an AirTran Airways A+ Visa card or an AirTran A+ Rewards Chase Visa credit
card, qualifying car rentals from Hertz, for purchases from other A+ Rewards partners, and in conjunction with
marketing promotions that AirTran may run from time to time. A+ Rewards members currently may purchase
A+ Rewards credits, extend the expiration of A+ credits, or give A+ credits to another member to help earn a free
flight faster.
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, 2013, Southwest and AirTran’s consolidated
incremental cost liability was approximately $79 million.
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