SWA Ticket Issuance and Deferral Analysis 2020

Question:

In 2020, Southwest recognized passenger revenues of $7,665m. What was the value of tickets SWA issued to paying customers in 2020? What was the percentage of tickets issued to paying customers deferred that year? Given your answer, how significant are the costs of the program?

Answer:

To determine the value of tickets Southwest Airlines (SWA) issued to paying customers in 2020 and the percentage of tickets deferred, follow these steps:

1. Value of Tickets Issued

The value of tickets issued to paying customers includes both the recognized revenue and any deferred revenue. To find the value of tickets issued, you’ll need to know the deferred revenue, which is often reported separately in financial statements. If we assume the total value of tickets issued equals the recognized revenue plus the deferred revenue, here’s the process:

Identify Recognized Revenue: $7,665 million (as provided).

Obtain Deferred Revenue: This information is typically found in the company’s financial statements or annual reports. For illustrative purposes, let’s assume deferred revenue is given or estimated.

Suppose deferred revenue was $800 million.

Total Value of Tickets Issued:

Total Value of Tickets Issued = Recognized Revenue + Deferred Revenue

Total Value of Tickets Issued = 7,665 + 800

Total Value of Tickets Issued = 8,465 million

2. Percentage of Deferred Tickets

To find the percentage of tickets deferred, use the following formula:

Percentage Deferred = (Deferred Revenue/Total Value of Tickets Issued) x 100

Given: Deferred Revenue = 800 million Total Value of Tickets Issued = 8,465 million

Percentage Deferred = (800/8,465) x 100

Percentage Deferred = 9.45%

3. Significance of the Costs

The significance of the deferred revenue (or tickets) depends on its size relative to the total revenue and the financial health of the company. In this case, deferred revenue is approximately 9.45% of the total value of tickets issued. This means that a notable portion of the revenue recognized in 2020 was from tickets sold but not yet used.

Key Points:

Value of Tickets Issued: $8,465 million (based on the example deferred revenue).

Percentage Deferred: Approximately 9.45%.

Significance: A 9.45% deferral rate indicates that a substantial portion of the revenue is deferred, impacting cash flow and potentially affecting the company’s financial planning and operations.