Southwest Airlines 2015 Annual Report Download - page 108

B717s remaining at Southwest were grounded on December 28, 2014. The Company expects the one
remaining B717 to be converted and delivered to Delta by early 2016. A total of 76 of the B717s are on
operating lease, ten are owned, and two are on capital lease.
The Company paid the majority of the costs to convert the aircraft to the Delta livery and perform
certain maintenance checks prior to the delivery of each aircraft. The agreement to pay these
conversion and maintenance costs is a “lease incentive” under applicable accounting guidance. The
sublease terms for the 76 B717s on operating lease and the two B717s on capital lease coincide with
the Company’s remaining lease terms for these aircraft from the original lessor, which range from
approximately three to eight years. The leasing of the ten B717s that are owned by the Company is
subject to certain conditions, and the lease terms are for up to seven years, after which Delta will have
the option to purchase the aircraft at the then-prevailing market value. The ten owned B717s are
accounted for as sales type leases, the two B717s classified by the Company as capital leases are
accounted for as direct financing leases, and the remaining 76 subleases are accounted for as operating
leases with Delta. With respect to the 87 B717s delivered to Delta as of December 31, 2015, the
Company had 76 operating leases, nine sales type leases, and two direct financing leases. There are no
contingent payments and no significant residual value conditions associated with the transaction.
The accounting for this transaction is based on the guidance provided for lease transactions. The
Company recorded an initial charge of approximately $137 million during third quarter 2012,
representing the remaining estimated cost, at the scheduled date of delivery of each B717 to Delta
(including the conversion, maintenance, and other contractual costs to be incurred), of the Company’s
lease of the 76 B717s that are accounted for as operating leases, net of the future sublease income from
Delta and the remaining unfavorable aircraft lease liability established as of the acquisition date.
During 2014, the Company recorded an additional $22 million in expense for its revised estimate of
conversion costs for these B717s, and an additional $9 million associated with the extension of time
between when the Company removed the aircraft from revenue service, on December 28, 2014, and
when they entered the conversion process. The charges recorded by the Company for this transaction
were included as a component of Acquisition and integration costs in the Company’s Consolidated
Statement of Income and were included as a component of Other, net in Cash flows from operating
activities in the Company’s Consolidated Statement of Cash Flows, and the corresponding liability for
this transaction is included as a component of Current liabilities and Other noncurrent liabilities in the
Company’s Consolidated Balance Sheet. A rollforward of the Company’s B717 lease/sublease liability
for 2015 and 2014 is shown below:
(in millions) B717 lease/sublease liability
Balance at December 31, 2013 $ 122
Lease/sublease accretion 5
Lease/sublease expense adjustment 22
Lease/sublease payments, net (a) (86)
Balance at December 31, 2014 $ 63
Lease/sublease accretion 1
Lease/sublease expense adjustment 2
Lease/sublease payments, net (a) (48)
Balance at December 31, 2015 $ 18
(a) Includes lease conversion cost payments
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