Southwest Airlines 2003 Annual Report Download - page 56

income (loss)". See Note 11 for further information on Accumulated other comprehensive income (loss).
During 2003, 2002, and 2001, the Company recognized $16 million in additional income, $5 million in
additional income, and $8 million in expense, respectively, in "Other (gains) losses, net", related to the
ineffectiveness of its hedges. During 2003, 2002, and 2001, the Company recognized approximately $29
million, $26 million, and $18 million, respectively, of net expense, related to amounts excluded from the
Company's measurements of hedge effectiveness, in "Other (gains) losses, net". The 2001 adoption of SFAS
133 has resulted in more volatility in the Company's financial statements than in the past due to the changes in
market values of its derivative instruments and some ineffectiveness that has been experienced in its fuel hedges.
See Note 10 for further information on the Company's derivative instruments.
3. FEDERAL GRANTS AND SPECIAL CHARGES RELATED TO TERRORIST ATTACKS
On September 11, 2001, terrorists hijacked and used two American Airlines, Inc. aircraft and two United Air
Lines, Inc. aircraft in terrorist attacks on the United States (terrorist attacks). As a result of these terrorist
attacks, the Federal Aviation Administration (FAA) immediately suspended all commercial airline flights.
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 (Stabilization Act). The 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
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 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
Stabilization Act during the second half of 2001 and recognized an additional $48 million as "Other gains"
from grants under the Stabilization Act in third quarter 2002 coincident with the receipt of its final payment.
Representatives of the DOT or other governmental agencies may perform additional audit and/or review(s)
of the Company's previously submitted final application. While the Stabilization Act is subject to significant
interpretation as to what constitutes 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 shutdown 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 approximately $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 approximately $5 million were also included
in "Other (gains) losses, net."
On April 16, 2003, as a result of the United States war with Iraq, the Emergency Wartime Supplemental
Appropriations Act (Wartime Act) was signed into law. Among other items, the legislation included a $2.3
billion government grant for airlines. Southwest received $271 million as its proportional share of the grant
during second quarter 2003. This amount is included in “Other (gains) losses” in the accompanying
Consolidated Income Statement for 2003. Also as part of the Wartime Act, the Company received
approximately $5 million as a reimbursement for the direct cost of reinforcing cockpit doors on all of the
Company’s aircraft. The Company accounted for this reimbursement as a reduction of capitalized property
and equipment.