Southwest Airlines 2015 Annual Report Download - page 77

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service was sold on a stand-alone basis. The Company determined the best estimate of selling price by
considering multiple inputs and methods including, but not limited to, the estimated selling price of
comparable travel, discounted cash flows, brand value, published selling prices, number of points
awarded, and the number of points redeemed. The Company estimated the selling prices and volumes
over the term of the Agreement in order to determine the allocation of proceeds to each of the multiple
deliverables. The Company records passenger revenue related to air transportation and certificates for
discounted companion travel when the transportation is delivered. A 1.0 percent increase or decrease in
the Company’s estimate of the allocation of proceeds to air transportation would have changed the
Company’s Operating revenues by less than $5 million for 2015.
The Company followed the transition approach of ASU 2009-13, which required that the Company’s
existing deferred revenue balance, classified within Air traffic liability, be adjusted to reflect the value,
on a relative selling price basis, of any undelivered element remaining at the date of contract
modification. The relative selling price of the undelivered element (air transportation) was lower than
the rate at which it had been deferred under the previous contract and the Company recorded a one-
time, non-cash adjustment to decrease frequent flyer deferred revenue and increase revenue through the
recording of a Special revenue adjustment of $172 million. In addition, 2015 Operating revenues
increased by an estimated net $255 million as a result of the amended Agreement with Chase and the
resulting July 1, 2015, change in accounting methodology. See Note 1 to the Consolidated Financial
Statements for further information.
Under its current program, Southwest estimates the portion of frequent flyer points that will not be
redeemed. In estimating spoilage, the Company takes into account the Member’s past behavior, as well
as several factors related to the Member’s account that are expected to be indicative of the likelihood
of future point redemption. These factors include, but are not limited to, tenure with program, points
accrued in the program, and whether or not the customer has a co-branded credit card. During fourth
quarter 2014, the Company obtained sufficient historical behavioral data to develop a predictive
statistical model to analyze the amount of spoilage expected for points sold to business partners, which
indicated an increase in the expected spoilage rate. This change in estimate, which was recorded on a
prospective basis, as of October 1, 2014, resulted in an increase in Passenger revenue of approximately
$55 million for the quarter and the year ended December 31, 2014, and an increase in Passenger
revenue of approximately $115 million for the first nine months of 2015. The Company has again
updated its analysis of projected spoilage and implemented a new rate on a prospective basis beginning
in fourth quarter 2015. The application of the new spoilage rate as of October 1, 2015, did not result in
a significant difference to Passenger revenues during fourth quarter 2015, and is likewise not expected
to have a material impact on 2016 Passenger revenues. For the year ended December 31, 2015, based
on actual redemptions of points sold to business partners, a hypothetical one percentage point change
in the estimated spoilage rate would have resulted in a change to Passenger revenue of approximately
$34 million (an increase in spoilage would have resulted in an increase in revenue and a decrease in
spoilage would have resulted in a decrease in revenue). Given that Member behavior will continue to
develop as the program matures, the Company expects the current estimates may change in future
periods. However, the Company believes its current estimates are reasonable given current facts and
circumstances.
Goodwill and Other Intangible Assets
As a result of the Company’s acquisition of AirTran on May 2, 2011, the Company has reflected
Goodwill on its Consolidated Balance Sheet in the amount of $970 million at December 31, 2015, the
excess of the consideration transferred over the fair value of AirTran’s assets and liabilities on the
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