Southwest Airlines 2004 Annual Report Download - page 24

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Rewards Award Ticket (""Award Ticket'') oÅers one partially earned awards. However, due to the expected
free roundtrip award valid to any destination available expiration of a portion of credits making up these
on Southwest after the accumulation of 16 credits partial awards, not all of them will eventually turn into
within a consecutive twelve-month period. The Rapid useable Award Tickets. Also, not all Award Tickets will
Rewards Companion Pass (""Companion Pass'') is be redeemed for future travel. Since the inception of
granted for Öying 50 roundtrips (or 100 one-way trips) Rapid Rewards in 1987, approximately 14 percent of all
on Southwest or earning 100 credits within a consecu- fully earned Award Tickets have expired without being
tive twelve-month period. The Companion Pass oÅers used. The number of Companion Passes for Southwest
unlimited free roundtrip travel to any destination availa- outstanding at December 31, 2004 and 2003 was
ble on Southwest for a designated companion of the approximately 60,000 and 53,000, respectively. The
qualifying Rapid Rewards member. In order for the Company currently estimates that an average of 3 to
designated companion to use this pass, the Rapid Re- 4 trips will be redeemed per outstanding Companion
wards member must purchase a ticket or use an Award Pass.
Ticket. Additionally, the Rapid Rewards member and The Company accounts for its frequent Öyer pro-
designated companion must travel together on the same gram obligations by recording a liability for the esti-
Öight. mated incremental cost of Öight awards the Company
expects to be redeemed (except for credits sold to
Trips Öown are valid for credits toward Award business partners). This method recognizes an average
Tickets and Companion Passes for twelve months only; incremental cost to provide roundtrip transportation to
Award Tickets and Companion Passes are automatically one additional passenger. The estimated incremental
generated when earned by the Customer rather than cost includes direct passenger costs such as fuel, food,
allowing the Customer to bank credits indeÑnitely; and and other operational costs, but does not include any
Award Tickets and Companion Passes are valid for one contribution to overhead or proÑt. The incremental cost
year with an automatic expiration date. ""Black out'' is accrued at the time an award is earned and revenue is
dates apply during peak holiday periods. Unlike most of subsequently recognized, at the amount accrued, when
its competitors, the Company does not limit the number the free travel award is used. Revenue from the sale of
of seats available to holders of Award Tickets and credits and associated with future travel is deferred and
Companion Passes. recognized when the ultimate free travel award is Öown
or the credits expire unused. Accordingly, Southwest
The Company also sells credits to business partners does not accrue incremental cost for the expected
including credit card companies, hotels, telecommunica- redemption of free travel awards for credits sold to
tions companies and car rental agencies. These credits business partners. The liability for free travel awards
may be redeemed for Award Tickets having the same earned but not used at December 31, 2004 and 2003
program characteristics as those earned by Öying. was not material.
Customers redeemed approximately 2.5 million, Employees
2.5 million, and 2.2 million Award Tickets and Öights
on Companion Passes during 2004, 2003, and 2002, At December 31, 2004, Southwest had 31,011 ac-
respectively. The amount of free travel award usage as a tive Employees, consisting of 11,442 Öight,
percentage of total Southwest revenue passengers carried 1,972 maintenance, 13,414 ground, Customer, and Öeet
was 7.1 percent in 2004, 7.5 percent in 2003, and service and 4,183 management, accounting, marketing,
6.8 percent in 2002. The number of fully earned Award and clerical personnel.
Tickets and partially earned awards outstanding at
December 31, 2004 and 2003 was approximately
7.0 million, approximately 80 percent of which were
6