Southwest Airlines 1997 Annual Report Download - page 41

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41
SOUTHWEST AIRLINES CO. ♥ FIVE SYMBOLS OF FREEDOM
FREQUENT FLYER PROGRAM The Company accrues the estimated incremental
cost of providing free travel awards earned under its Rapid Rewards frequent flyer
program. The Company also sells flight segment credits to companies participating in
its Rapid Rewards frequent flyer program. The revenue from the sale of flight segment
credits is recognized when the credits are sold.
ADVERTISING The Company expenses the costs of advertising as incurred.
Advertising expense for the years ended December 31, 1997, 1996, and 1995 was
$112,961,000, $109,136,000, and $92,087,000, 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.
EARNINGS PER SHARE In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), Earnings per Share.
SFAS 128 replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of stock options. Diluted earnings per
share is similar to the previously reported fully diluted earnings per share. Earnings per
share amounts for all periods have been restated and presented to conform to the
SFAS 128 requirements.
DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes purchased crude oil
call options and fixed price swap agreements to hedge a portion of its exposure to fuel
price fluctuations. At December 31, 1997, 1996, and 1995, and during the years then
ended, outstanding call options and swap agreements were immaterial.
The cost of purchased crude oil call options and gains and losses on fixed price swap
agreements are deferred and expensed to fuel expense in the same month that the
underlying fuel being hedged is used. Gains and losses resulting from hedging
positions terminated or settled early are recorded to fuel expense in the month of
termination or settlement. Gains and losses on hedging transactions have not been
material.
Any such agreements expose the Company to credit loss in the event of
nonperformance by the other parties to the agreements. The Company does not
anticipate such nonperformance.
The Company does not hold or issue any financial instruments for trading purposes.