Southwest Airlines 2013 Annual Report Download - page 92

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to other carriers. Among other factors, this was due to the Company’s reassessment of the current size and
importance of its operations at New York’s LaGuardia Airport and Washington’s Ronald Reagan National
Airport versus when the Company first began service to these airports in recent years. The impact of this
prospective change in accounting estimate is immaterial. Also, as part of this change, the Company evaluated its
previously owned domestic slots for impairment, but none was noted.
The aggregate amortization expense for 2013, 2012, and 2011 was $19 million, $25 million, and $50
million, respectively. Estimated aggregate amortization expense for the five succeeding years and thereafter is as
follows: 2014 – $13 million, 2015 – $11 million, 2016 – $8 million, 2017 – $5 million, 2018 – $5 million, and
thereafter – $31 million.
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. 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 refunded. 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. Prior to September 13, 2013, funds associated with
tickets in which a passenger did not show up for a flight without canceling were able to be reused on another
flight for up to twelve months. 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. Based on the Company’s revenue recognition policy, revenue is now recorded at the flight
date for a Customer who does not change his/her itinerary and loses his/her funds. This change in Company
policy did not have a significant impact on the amount of spoilage revenue recorded during 2013 or the
Company’s estimate of the amount of spoilage it expects to record in future periods. 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 related services to companies participating in
their respective frequent flyer programs. Funds received from the sale of these points 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, 2013. 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
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