Southwest Airlines 2014 Annual Report Download - page 101

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 to other carriers. In addition, during first quarter 2014, the
Company acquired additional slots at Washington’s Ronald Reagan National Airport which were also
assigned an indefinite life. Among other factors, the determination that all of the Company’s owned
domestic slots should be assigned an indefinite life 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.
The aggregate amortization expense for 2014, 2013, and 2012 was $13 million, $19 million, and
$25 million, respectively. Estimated aggregate amortization expense for the five succeeding years and
thereafter is as follows: 2015 – $11 million, 2016 – $8 million, 2017 – $5 million, 2018 – $5 million,
2019 – $4 million, and thereafter – $27 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 using the redemption method
based on scheduled flight date. 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.
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’s policy is to record revenue for the estimated spoilage of tickets (including
partial tickets) once the flight date has passed, under the redemption method. Initial spoilage estimates
are routinely adjusted and ultimately finalized once the tickets expire, which is typically twelve months
after the original purchase date. Spoilage estimates are based on the Customers’ historical travel
behavior as well as assumptions about the Customers’ future travel behavior. Assumptions used to
generate spoilage estimates can be impacted by several factors including, but not limited to: fare
increases, fare sales, changes to the Company’s ticketing policies, changes to the Company’s refund,
exchange and unused funds policies, or economic factors.
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
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