Southwest Airlines 2013 Annual Report Download - page 91

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. In situations where the payments to the counterparty do not sufficiently match the level of services
received during the period, expense is recorded on a straight-line basis over the term of the agreement based on
our best estimate of expected future aircraft utilization. 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. 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: (i) a long-term projection of
revenues and expenses; (ii) estimated discounted future cash flows; (iii) observable earnings multiples of
publicly- traded airlines; (iv) weighted-average cost of capital; and (v) 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, 2013, no impairment was
determined to exist for Goodwill. In the Goodwill impairment analysis performed, the excess fair value of the
enterprise over carrying value was estimated to be in excess of 50 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, 2013:
Gross
carrying
amount
(in millions)
Weighted-average
useful life
(in years)
Accumulated
amortization
(in millions)
Customer relationships/marketing agreements . . $ 39 9 $ 23
Trademarks/trade names .................... 36 6 25
Owned domestic slots ...................... 93 Indefinite n/a
Leased domestic slots (1) ................... 19 39 4
Noncompete agreements ................... 5 2 5
Gate leasehold rights ...................... 60 19 29
Total ................................. $ 252 15 $ 86
(1) Useful life of leased slots is based on the stated lease term.
During fourth quarter 2013, following the Company’s acquisition of additional slots at New York’s
LaGuardia Airport, the Company made the determination that all of its owned domestic slots should be assigned
an indefinite life and would thus not be subject to further amortization, including those that are owned but leased
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