Southwest Airlines 2002 Annual Report Download - page 58

SOUTHWEST AIRLINES CO. 2002 10-K | 39
September 14, 2001, and was operating its
normal pre-September 11 flight schedule by
September 18, 2001. From September 11
until the Company resumed flight operations
on September 14, Southwest cancelled
approximately 9,000 flights.
On September 22, 2001, President Bush
signed into law the Air Transportation Safety
and System Stabilization Act (Air Stabilization
Act). The Air Stabilization Act provided for up
to $5 billion in cash grants to qualifying U.S.
airlines and freight carriers to compensate for
direct and incremental losses, as defined in
the Air Stabilization Act, from September 11,
2001 through December 31, 2001, associated
with the terrorist attacks. Each airline’s total
eligible grant was determined based on that
airline’s percentage of available seat miles
(ASMs) during August 2001 to total eligible
carriers’ ASMs for August 2001, less an
amount set aside for eligible carriers for whom
the use of an ASM formula would result in an
insufficient representation of their share of
direct and incremental losses.
In 2001, the Department of Transportation
(DOT) made a final determination of the
amount of eligible direct and incremental
losses incurred by Southwest, and the
Company was allotted 100 percent of its
eligible grants, totaling $283 million. The
Company recognized $235 million in “Other
gains” from grants under the Air Stabilization
Act during the second half of 2001 and
recognized an additional $48 million as
“Other gains” from grants under the Air
Stabilization Act in third quarter 2002
coincident with the receipt of its final
payment. Representatives of the DOT or other
govern-mental agencies may perform addi-
tional audit and/or review(s) of the Company’s
previously submitted final application. While
the Air Stabilization Act is subject to
significant interpretation as to what consti-
tutes direct and incremental losses,
management believes the Company’s eligible
direct and incremental losses are sufficient to
retain 100 percent of its eligible grant
following additional audits or reviews, should
they occur.
The Company recorded total special
charges of $48 million in 2001 arising from
the terrorist attacks, which included a
$30 million reduction in “Passenger revenue.”
Following the terrorist events of September 11,
2001, and the subsequent temporary shut-
down of U.S. air space, Southwest temporarily
suspended its normal refund policy in order to
provide the highest Service to the Company’s
Customers, including refunding nonrefundable
tickets upon Customer request. As a result,
the Company’s refunds during September
2001 and through December 2001 were far
above historical refund levels and in excess of
the Company’s contractual obligations.
Refunds are recorded as a reduction in “Air
traffic liability.” Based on these unusually high
refunds, the Company estimated that approxi-
mately $30 million of these refunds related to
revenue previously recognized for estimated
forfeited tickets. As a result, the Company
reduced third quarter 2001 “Passenger
revenue” by $30 million and restored “Air
traffic liability” accordingly. Total special
charges also included $13 million in “Other
operating expenses,” primarily related to write-
downs of various assets due to impairment.
Other miscellaneous charges totaling approxi-
mately $5 million were also included in “Other
(gains) losses, net.”
4. Commitments
The Company’s contractual purchase
commitments consist primarily of scheduled
aircraft acquisitions from Boeing. The
Company has contractual purchase commit-
ments with Boeing for 17 737-700 aircraft
deliveries in 2003, 23 scheduled for delivery
in 2004, 24 in 2005, 22 in 2006, 25 in 2007,
and six in 2008. In addition, the Company
has options to purchase up to 79 737-700s
during 2004–2008 and purchase rights for an
additional 217 737-700s during 2007–2012.
The Company has the option, which must be