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Published on October 9, 2009
October
9, 2009
Via
Edgar
Mr. Lyn
Shenk
Branch
Chief
Division
of Corporation Finance
U.S.
Securities and Exchange Commission
100 F
Street, N.E.
Mail Stop
3561
Washington,
D.C. 20549-3561
RE: Southwest
Airlines Co.
File No. 001-07259
Form 10-K: For the fiscal year ended
December 31, 2008
Form 10-Q: For the quarterly period
ended June 30, 2009
Dear Mr.
Shenk:
Form 10-K: For
the fiscal year ended December 31, 2008
Item 8. Financial
Statements and Supplementary Data
Note 1. Summary
of Significant Accounting Policies
Frequent flyer program, page
50
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1.
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Per
your response to our prior comment number 4, you believe that your
accounting policy for frequent flyer credits is consistent with the
guidance outlined in the AICPA Audit and Accounting Guide for Airlines
(the “Airline Guide”). However, we do not concur with your
conclusion. In this regard, we note that paragraph 3.108 of the
Airline Guide states that under the incremental cost method, a liability
is recorded for the incremental cost associated with rewarding those
frequent flyer program (“FFP”) members expected to redeem mileage
credits. In addition, paragraph 3.109 of the Airline Guide
states that a key factor in estimating an FFP obligation under the
incremental cost method is the estimate of mileage credits that are
expected to be redeemed. While we acknowledge from your
response that a significant amount of your FFP members’ flight credits
expire unused, we believe that the exclusion of all partially earned
awards from your liability implies that it is not probable that any of the
excluded flight credits will ultimately be redeemed by your program’s
members. Furthermore, per your disclosure regarding your “Rapid
Rewards Frequent Flyer Program” on page 6, it appears that the liability
that you recognize is based upon the incremental costs attributable to
earned awards that you expect to be redeemed. In this regard,
we believe that taking into consideration the probability of partially
earned awards being fully earned and redeemed would be consistent with
your practice of taking into consideration the probability of fully earned
awards not being redeemed. Based upon the observations noted
above, we believe that your liability for frequent flyer awards should
also include an accrual for partially earned awards that you expect will
be fully earned and redeemed. Please revise your accounting
policy accordingly, or advise.
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Response:
While the
Company acknowledges that the Airline Guide could be interpreted in the manner
suggested by the Staff’s comment, the Company continues to believe that its
current accounting for partial frequent flyer awards is an acceptable method,
based on the following factors. First, the Company notes that this
practice, which has longstanding use within the airline industry, is based, at
least in part, on discussions between industry participants and the Staff in the
early 1990’s and acknowledged by the Staff in our previous review in
2007. Additionally, as discussed in the Company’s prior response, our
understanding is that the issuance of the revised Airline Guide was not meant to
cause a change in the existing accounting practices for frequent flyer
programs. Further, the Company notes that the revised Airline Guide
is considered “non-authoritative” and is not included in the recently released
FASB Accounting Standards Codification. The Company will continue to
evaluate its accounting policy related to its frequent flyer program as new
authoritative guidance is issued.
1
Form 10-Q: For
the quarterly period ended June 30, 2009
Item1. Financial
Statements
Notes to Condensed
Consolidated Financial Statements
Note 13. Early
Retirement Offer
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2.
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We
have reviewed your response to our prior comment number
10. However, it is not clear to us why you believe that the
termination benefits attributable to your one-time voluntary early out
program are excluded from the scope of SFAS No. 88. Per your
response, you have concluded that the mandatory service period required
for a significant number of your employees does not qualify as a short
period of time; therefore, you believe all costs of the program should be
spread over that service period. While we acknowledge that
paragraph 15 of SFAS No. 88 suggests that special termination benefits
would only be expected to be offered for a
short period of time, the guidance does not appear to address whether or
not a mandatory service period can be required for the recipients of such
benefits. In this regard, we note that all of your employees
were only provided (i) approximately two months to elect to participate in
your program and (ii) one additional month to rescind their
election. Based upon the fact that your one-time voluntary
early out program was only offered for a short period of time, it appears
to be covered by the guidance outlined in paragraph 15 of SFAS No.
88. As such, your program also appears to be excluded from the
scope of SFAS No. 112 pursuant to paragraph 5(c). Furthermore,
the termination benefits awarded by your program do not appear to be
analogous to the bonus compensation contemplated by EITF
05-5. Therefore, we believe you should revise your intended
accounting treatment for the costs attributable to your one-time voluntary
early out program. Alternatively, explain to us in further
detail why you do not believe that a revision is
necessary.
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Response:
The
Company will comply with the Staff’s request and utilize the provisions of SFAS
No. 88 in recording the expense associated with its voluntary early retirement
program.
****
In
connection with our above responses to the Staff’s comments, the Company
acknowledges that:
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·
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The
Company is responsible for the adequacy and accuracy of the disclosure in
its filings;
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·
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Staff
comments or changes to disclosure in response to Staff comments do not
foreclose the Commission from taking any action with respect to the
filings; and
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The
Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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Thank you
for your assistance. If you have any questions, please do not
hesitate to contact me at (214) 792-4459.
| Sincerely, | |||
| /s/ Laura Wright | |||
| Laura Wright | |||
| Chief Financial Officer |
| Copy to: | John T. Montford (Chairman, Audit Committee) |
| Gary C. Kelly | |
| Leah Koontz | |
| Madeleine Johnson | |
| David Heselton (Ernst & Young LLP) | |