Southwest Airlines 2002 Annual Report Download - page 25

6 | SOUTHWEST AIRLINES CO. 2002 10-K
2003. The Company is unable to predict whether
the government will extend this insurance
coverage past August 31, 2003, whether
alternative commercial insurance with compar-
able coverage will become available at
reasonable premiums, and what impact this will
have on the Company’s ongoing operations or
future financial performance.
Frequent Flyer Awards
Southwest’s frequent flyer program, Rapid
Rewards, is based on trips flown rather than
mileage. Rapid Rewards Customers earn a flight
segment credit for each one-way trip flown or two
credits for each roundtrip flown. Rapid Rewards
Customers can also receive flight segment credits
by using the services of non-airline partners,
which include a telephone company, car rental
agencies, hotels, and credit card partners,
including the Southwest Airlines First USA Visa
card. Rapid Rewards offers two types of travel
awards. The Rapid Rewards Award Ticket (“Award
Ticket”) offers one free roundtrip travel award to
any Southwest destination after the
accumulation of 16 flight segment credits within
a consecutive 12-month period. The Rapid
Rewards Companion Pass (“Companion Pass”) is
granted for flying 50 roundtrips (or 100 one-way
trips) on Southwest within a consecutive
12-month period. The Companion Pass offers
unlimited free roundtrip travel to any Southwest
destination for a companion of the qualifying
Rapid Rewards member. In order for the
companion to use this pass, the Rapid Rewards
member must purchase a ticket or use an Award
Ticket. Additionally, the Rapid Rewards member
and companion must travel together on the
same flight.
Trips flown are valid for flight segment credits
toward Award Tickets and Companion Passes for
12 months only; Award Tickets and Companion
Passes are automatically generated when earned
by the Customer rather than allowing the
Customer to bank credits indefinitely; and Award
Tickets and Companion Passes are valid for one
year with an automatic expiration date. Blackout
dates apply during peak holiday periods.
The Company also sells flight segment credits
to business partners including credit card
companies, phone companies, hotels, and car
rental agencies. These credits may be redeemed
for Award Tickets having the same program
characteristics as those earned by flying.
Customers redeemed approximately
2.2 million, 1.7 million, and 1.6 million Award
Tickets and flights on Companion Passes during
2002, 2001, and 2000, respectively. The amount
of free travel award usage as a percentage of
total Southwest revenue passengers carried was
6.8 percent in 2002, 5.4 percent in 2001, and
4.9 percent in 2000. The number of Award
Tickets outstanding at December 31, 2002 and
2001, was approximately 1.4 million and
1.3 million, respectively. These numbers do not
include partially earned Award Tickets. The
Company currently does not have a system to
accurately estimate partially earned Award
Tickets. However, these partially earned Award
Tickets may equal 60 percent or more of the
current outstanding Award Tickets. Since the
inception of Rapid Rewards in 1987,
approximately 14 percent of all Award Tickets
have expired without being used. The number of
Companion Passes for Southwest outstanding at
December 31, 2002 and 2001, was approxi-
mately 55,000 and 48,000, respectively. The
Company currently estimates that three to four
trips will be redeemed per outstanding
Companion Pass.
The Company accounts for its frequent flyer
program obligations by recording a liability for the
estimated incremental cost of flight awards the
Company expects to be redeemed (except for
flight segment credits sold to business partners).
This method recognizes an average incremental
cost to provide roundtrip transportation to one
additional passenger. The estimated incremental
cost includes direct passenger costs such as fuel,
food, and other operational costs, but does not
include any contribution to overhead or profit.
The incremental cost is accrued at the time an