Southwest Airlines 2002 Annual Report Download - page 24

SOUTHWEST AIRLINES CO. 2002 10-K | 5
into an arrangement with SABRE, the computer
reservation system in which Southwest has
historically participated to a limited extent,
providing for ticketing and automated booking on
Southwest in a very cost-effective manner. In
1996, Southwest began offering Ticketless Travel
through the Company’s home page on the
Internet at southwest.com. For the year ended
December 31, 2002, more than 85 percent of
Southwest’s Customers chose the Ticketless
Travel option, and approximately 49 percent of
Southwest’s passenger revenues came through
its Internet site, which has become a vital part of
the Company’s distribution strategy.
The airline industry is highly competitive as to
fares, frequent flyer benefits, routes, and service,
and some carriers competing with the Company
have larger fleets and wider name recognition.
Certain major United States airlines have
established marketing or codesharing alliances
with each other, including Northwest Airlines/
Continental Airlines, American Airlines/Alaska
Airlines, and United Airlines/USAirways.
Northwest Airlines and Continental Airlines have
announced plans to add Delta Air Lines to their
alliance in a transaction which is subject to
conditions established by the Department of
Transportation.
Since the terrorist acts of September 11, 2001,
and in the face of weak demand for air service,
most major carriers (not including Southwest)
have significantly reduced service, grounded
aircraft, and furloughed employees. UAL, the
parent of United Airlines, and USAirways have
sought relief from financial obligations in
bankruptcy and other, smaller carriers have
ceased operation entirely. America West Airlines
and others have received federal loan
guarantees (or conditional approval for guaran-
tees) authorized by federal law and additional
airlines may do so in the future.
Enhanced security measures have had, and
will continue to have, a significant impact on the
airport experience for passengers. Security
requirements are still evolving on a daily basis;
however, to date, they have not impacted
Southwest’s aircraft utilization. In response to
these measures, the Company has introduced its
new Automated Boarding Passes, as well as
RAPID CHECK-IN Kiosks in many airports and it
will continue to expand the latter service offering
throughout 2003. It is currently not possible to
assess the ultimate impact of all of these events
on airline competition.
The Company is also subject to varying degrees
of competition from surface transportation in its
shorthaul markets, particularly the private auto-
mobile. In shorthaul air services that compete
with surface transportation, price is a competi-
tive factor, but frequency and convenience of
scheduling, facilities, transportation safety and
security procedures, and Customer Service may
be of equal or greater importance to many
passengers.
Insurance
The Company carries insurance of types
customary in the airline industry and at amounts
deemed adequate to protect the Company and
its property and to comply both with federal
regulations and certain of the Company’s credit
and lease agreements. The policies principally
provide coverage for public and passenger
liability, property damage, cargo and baggage
liability, loss or damage to aircraft, engines, and
spare parts, and workers’ compensation.
Following the terrorist attacks, commercial
aviation insurers significantly increased the
premiums and reduced the amount of war-risk
coverage available to commercial carriers. At that
time, the federal government stepped in to
provide supplemental third-party war-risk
insurance coverage to commercial carriers for
renewable 60-day periods at substantially lower
premiums than prevailing commercial rates and
for levels of coverage not available in the
commercial market. In November 2002, Congress
passed the Homeland Security Act of 2002,
which mandated the federal government to
provide third-party, passenger, and hull war-risk
insurance coverage to commercial carriers
through August 31, 2003, which may be extend-
ed by the government through December 31,