REVENUE

9 Months Ended

Sep. 30, 2020

Revenue Recognition and Deferred Revenue [Abstract]

REVENUE

REVENUE

Passenger Revenues

Revenue is categorized by revenue source as the Company believes it best depicts the nature, amount, timing, and uncertainty of revenue and cash flow. The following table provides the components of Passenger revenue recognized for the three and nine months ended September 30, 2020 and 2019:

	Three months ended September 30,				Nine months ended September 30,
(in millions)	2020		2019		2020		2019
Passenger non-loyalty	$	1,183	$	4,400	$	4,966	$	13,126
Passenger loyalty - air transportation	205		657		747		1,814
Passenger ancillary sold separately	66		173		290		522
Total passenger revenues	$	1,454	$	5,230	$	6,003	$	15,462

As of September 30, 2020, and December 31, 2019, the components of Air traffic liability and Air traffic liability - noncurrent, including contract liabilities based on tickets sold, unused funds available to the Customer, and loyalty points available for redemption, net of expected spoilage, within the unaudited Condensed Consolidated Balance Sheet were as follows:

	Balance as of
(in millions)	September 30, 2020		December 31, 2019
Air traffic liability - passenger travel and ancillary passenger services	$	2,907	$	2,125
Air traffic liability - loyalty program	4,187		3,385
Total Air traffic liability	$	7,094	$	5,510

Rollforwards of the Company's Air traffic liability - loyalty program for the three and nine months ended September 30, 2020 and 2019 were as follows (in millions):

	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Air traffic liability - loyalty program - beginning balance	$	3,856	$	3,289	$	3,385	$	3,011
Amounts deferred associated with points awarded	447		727		1,488		2,195
Revenue recognized from points redeemed - Passenger	(205)		(657)		(747)		(1,814)
Revenue recognized from points redeemed - Other	(16)		(20)		(44)		(53)
Unused funds converted to loyalty points	105		—		105		—
Air traffic liability - loyalty program - ending balance	$	4,187	$	3,339	$	4,187	$	3,339

Air traffic liability includes consideration received for ticket and loyalty related performance obligations which have not been satisfied as of a given date. Rollforwards of the amounts included in Air traffic liability as of September 30, 2020 and 2019 were as follows (in millions):

	Air traffic liability
Balance at December 31, 2019	$	5,510
Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)	7,631
Revenue from amounts included in contract liability opening balances	(2,126)
Revenue from current period sales	(3,921)
Balance at September 30, 2020	$	7,094

	Air traffic liability
Balance at December 31, 2018	$	5,070
Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)	16,410
Revenue from amounts included in contract liability opening balances	(3,160)
Revenue from current period sales	(12,354)
Balance at September 30, 2019	$	5,966

During the first and second quarters 2020, the Company experienced a significantly higher number of Customer-driven flight cancellations as a result of the COVID-19 pandemic. See Note 2 for further information. As a result, the amount of Customer travel funds held by the Company, net of spoilage, that can be redeemed for future travel as of September 30, 2020, far exceeds previous periods and represents approximately 27 percent of the total Air traffic liability balance at September 30, 2020, as compared to approximately 1 percent of the total Air traffic liability balance at December 31, 2019. In order to provide additional flexibility to Customers who hold these funds, the Company has significantly relaxed its previous policies with regards to the time period within which these funds can be redeemed, which is typically twelve months from the original date of purchase. For all Customer travel funds created or expired between March 1 and September 7, 2020 associated with flight cancellations, the Company has extended the expiration date to September 7, 2022. Further, as presented in the above tables, the Company announced in August 2020 that it will allow qualified travel funds to be converted to Rapid Rewards points through

December 15, 2020. Despite the possibility that some of these travel funds may be redeemed beyond the following twelve-month period, the Company has continued to classify them as "current" in the accompanying unaudited Condensed Consolidated Balance Sheet as they remain a demand liability and the Company does not have sufficient data to enable it to accurately estimate the portion that will not be redeemed for travel in the subsequent twelve months.

Spoilage estimates are based on the Company's 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, seat availability, and economic factors. Given the unprecedented amount of 2020 Customer flight cancellations and the amount of travel funds provided, the Company expects additional variability in the amount of spoilage revenue recorded in future periods, as the estimates of the portion of sold tickets that will expire unused may differ from historical experience.

The Company has a co-branded credit card agreement (the “Agreement”) with Chase Bank USA, N.A. (“Chase”), through which the Company sells loyalty points and certain marketing components, which consist of the use of the brand and access to Rapid Rewards Member lists, licensing and advertising elements, and the use of the Company’s resource team. In 2018, Chase and Southwest executed a multi-year extension of the Agreement, extending the decades-long relationship between the parties. The Company recognized revenue related to the marketing, advertising, and other travel-related benefits of the revenue associated with various loyalty partner agreements including, but not limited to, the Agreement with Chase, within Other operating revenues. For the three months ended September 30, 2020 and 2019, the Company recognized $282 million and $329 million, respectively. For the nine months ended September 30, 2020 and 2019, the Company recognized $859 million and $984 million, respectively.