Southwest Airlines 1996 Annual Report Download - page 36

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36
AIRCRAFT AND ENGINE MAINTENANCE The cost of engine overhauls and routine
maintenance costs for aircraft and engine maintenance are charged to maintenance expense as
incurred. Scheduled airframe overhaul costs are capitalized and amortized over the estimated
period benefited, presently eight years. Modifications that significantly enhance the operating
performance or extend the useful lives of aircraft or engines are capitalized and amortized over
the remaining life of the asset.
REVENUE RECOGNITION Passenger revenue is recognized when transportation is
provided. Tickets sold but not yet used are included in “Air traffic liability,” which includes
estimates that are evaluated and adjusted periodically. Any adjustments resulting therefrom are
included in results of operations for the periods in which the evaluations are completed.
FREQUENT FLYER AWARDS The Company accrues the estimated incremental cost of
providing free travel awards earned under its Rapid Rewards frequent flyer program.
ADVERTISING The Company expenses the production costs of advertising as incurred.
Advertising expense for the years ended December 31, 1996, 1995, and 1994 was $109,136,000,
$92,087,000, and $79,475,000, respectively.
STOCK-BASED EMPLOYEE COMPENSATION Pursuant to Statement of Financial
Accounting Standards No. 123 (SFAS 123), “ Accounting for Stock-Based Compensation,” the
Company accounts for stock-based compensation plans utilizing the provisions of Accounting
Principles Board Opinion No. 25 (APB 25), “ Accounting for Stock Issued to Employees” and
related Interpretations because, as discussed in Note 7, the alternative fair value accounting
provided for under SFAS 123 requires use of option valuation models that were not developed
for use in valuing employee stock options.
2. COMMITMENTS
The Company’s contractual purchase commitments consist primarily of scheduled aircraft
acquisitions. Timing of payments pursuant to contractual commitments was favorably affected by
third quarter 1995 amendments to certain aircraft purchase contracts, which modified future
progress payment schedules. Fifteen 737-300 and four 737-700 aircraft are scheduled for
delivery in 1997. Sixteen -700s are scheduled for delivery in 1998, 16 in 1999, 15 in 2000, and
12 in 2001. In addition, the Company has options to purchase up to 67 -700s during 1998-2004.
The Company has the option, which must be exercised two years prior to the contractual delivery