Southwest Airlines 2004 Annual Report Download - page 23

Southwest was the Ñrst major airline to introduce a Insurance
Ticketless travel option, eliminating the need to print The Company carries insurance of types customary
and then process a paper ticket altogether, and the Ñrst in the airline industry and at amounts deemed adequate
to oÅer Ticketless travel through the Company's home to protect the Company and its property and to comply
page on the Internet, www.southwest.com. For the year both with federal regulations and certain of the Com-
ended December 31, 2004, more than 90 percent of pany's credit and lease agreements. The policies princi-
Southwest's Customers chose the Ticketless travel op- pally provide coverage for public and passenger liability,
tion and approximately 59 percent of Southwest's pas- property damage, cargo and baggage liability, loss or
senger revenues came through its Internet site, which damage to aircraft, engines, and spare parts, and work-
has become a vital part of the Company's distribution ers' compensation.
strategy. The Company has not paid commissions to
travel agents for sales since December 15, 2003. Following the terrorist attacks, commercial avia-
tion insurers signiÑcantly increased the premiums and
The airline industry is highly competitive as to reduced the amount of war-risk coverage available to
fares, frequent Öyer beneÑts, routes, and service, and commercial carriers. The federal government stepped in
some carriers competing with the Company have larger to provide supplemental third-party war-risk insurance
Öeets and wider name recognition. Certain major coverage to commercial carriers for renewable 60-day
United States airlines have established marketing or periods, at substantially lower premiums than prevailing
codesharing alliances with each other, including North- commercial rates and for levels of coverage not available
west Airlines/Continental Airlines/Delta Air Lines; in the commercial market. In November 2002, Con-
American Airlines/Alaska Airlines; and United Air- gress passed the Homeland Security Act of 2002, which
lines/US Airways. mandated the federal government to provide third party,
passenger, and hull war-risk insurance coverage to com-
Since the terrorist attacks on September 11, 2001, mercial carriers through August 31, 2003, and which
the airline industry, as a whole, has incurred substantial permitted such coverage to be extended by the govern-
losses. As a result, a number of carriers, including UAL, ment through December 31, 2003. The Emergency
the parent of United Airlines, US Airways, and Wartime Supplemental Appropriations Act (see Note 3
ATA Airlines, Inc. sought relief from Ñnancial obliga- to the Consolidated Financial Statements) extended the
tions in bankruptcy. Other, smaller carriers have ceased government's mandate to provide war-risk insurance
operation entirely. America West Airlines, US Airways, until December 31, 2004. Pursuant to the Consolidated
Aloha, ATA, and others received federal loan guaran- Appropriations Act of 2005, Congress further extended
tees authorized by federal law. Since September 11, low the government's mandate to provide war-risk insurance
cost carriers such as AirTran have accelerated their until August 31, 2005, at the discretion of the Secretary
growth and legacy carriers have added back some of the of Transportation. The Company is unable to predict
capacity they reduced immediately following September whether the government will extend this insurance
11. Faced with increasing low fare and lower cost coverage past August 31, 2005, whether alternative
competition, growing customer demand for lower fares, commercial insurance with comparable coverage will
and record high energy costs, legacy carriers have become available at reasonable premiums, and what
aggressively sought to reduce their cost structures, impact this will have on the Company's ongoing opera-
largely through downsized work forces and renegotiated tions or future Ñnancial performance.
collective bargaining and vendor agreements. Southwest
has maintained its low cost competitive advantage and Frequent Flyer Awards
continues to reduce its cost structure through increased
productivity. Southwest's frequent Öyer program, Rapid Re-
wards, is based on trips Öown rather than mileage.
The Company is also subject to varying degrees of Rapid Rewards Customers earn a credit for each one-
competition from surface transportation in its shorthaul way trip Öown or two credits for each roundtrip Öown.
markets, particularly the private automobile. In Rapid Rewards Customers can also receive credits by
shorthaul air services that compete with surface trans- using the services of non-airline partners, which include
portation, price is a competitive factor, but frequency car rental agencies, hotels, telecommunications compa-
and convenience of scheduling, facilities, transportation nies and credit card partners, including the Southwest
safety and security procedures, and Customer Service are Airlines Chase (formerly Bank One) Visa card. Rapid
also of great importance to many passengers. Rewards oÅers two types of travel awards. The Rapid
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