Southwest Airlines 2002 Annual Report Download - page 54

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SOUTHWEST AIRLINES CO. 2002 10-K | 35
passenger revenue in second quarter 2002 as
Customers required fewer refunds and
exchanges, resulting in more forfeited tickets.
While actual results may vary from these
estimates, the Company believes it is unlikely
that materially different estimates for future
refunds, exchanges, and forfeited tickets
would be reported based on other reasonable
assumptions or conditions suggested by
actual historical experience and other data
available at the time estimates were made.
Frequent Flyer Program. The Company
accrues the estimated incremental cost of
providing free travel for awards earned under
its Rapid Rewards frequent flyer program. The
Company also sells frequent flyer credits and
related services to companies participating in
its Rapid Rewards frequent flyer program.
Funds received from the sale of flight segment
credits and associated with future travel are
deferred and recognized as Passenger
revenue when the ultimate free travel awards
are flown or the credits expire unused. See
Note 2 for additional information on frequent
flyer program accounting.
Advertising. The Company expenses the
costs of advertising as incurred. Advertising
expense for the years ended December 31,
2002, 2001, and 2000 was $156.4 million,
$147.6 million, and $141.3 million,
respectively.
Stock-Based Employee Com pensation. The
Company has stock-based compensation
plans covering the majority of its Employee
groups, including a plan covering the
Company’s Board of Directors and plans
related to employment contracts with certain
Executive Officers of the Company. The
Company accounts for stock-based compen-
sation utilizing the intrinsic value method in
accordance with the provisions of Accounting
Principles Board Opinion No. 25 (APB 25),
“Accounting for Stock Issued to Employees”
and related Interpretations. Accordingly, n o
compensation expense is recognized for fixed
option plans because the exercise prices of
Employee stock options equal or exceed the
market prices of the underlying stock on the
dates of grant. Compensation expense for
other stock options is not material.