Southwest Airlines 2004 Annual Report Download - page 64

SOUTHWEST AIRLINES CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Pro forma information regarding net income and net income per share, as disclosed in Note 1, has been
determined as if the Company had accounted for its Employee stock-based compensation plans and other stock options
under the fair value method of SFAS 123. The fair value of each option grant is estimated on the date of grant using a
modiÑed Black-Scholes option pricing model with the following weighted-average assumptions used for grants under
the Ñxed option plans:
2004 2003 2002
Wtd-average risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3.1% 2.6% 3.4%
Expected life of option (years)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4.0 4.2 5.0
Expected stock volatility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 34.0% 34.0% 34.0%
Expected dividend yieldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 0.11% 0.13% 0.13%
The Black-Scholes option valuation model was Company contributions to all retirement plans
developed for use in estimating the fair value of short- expensed in 2004, 2003, and 2002 were $200 million,
term traded options that have no vesting restrictions and $219 million, and $156 million, respectively.
are fully transferable. In addition, option valuation mod-
els require the input of highly subjective assumptions Postretirement BeneÑt Plans
including expected stock price volatility. Because the
The Company provides postretirement beneÑts to
Company's Employee stock options have characteristics
qualiÑed retirees in the form of medical and dental
signiÑcantly diÅerent from those of traded options and
coverage. Employees must meet minimum levels of
because changes in the subjective input assumptions can
service and age requirements as set forth by the Com-
materially aÅect the fair value estimate, in manage-
pany, or as speciÑed in collective bargaining agreements
ment's opinion the existing models do not necessarily
with speciÑc workgroups. Employees meeting these
provide a reliable single measure of the fair value of its
requirements, as deÑned, may use accrued sick time to
Employee stock options. See Note 1 for information on
pay for medical and dental premiums from the age of
the use of alternative valuation methods allowed by
retirement until age 65.
SFAS 123R.
The following table shows the change in the
The fair value of options granted under the Ñxed Company's accumulated postretirement beneÑt obliga-
option plans during 2004 ranged from $3.45 to $7.83. tion (APBO) for the years ended December 31, 2004
The fair value of options granted under the Ñxed option and 2003:
plans during 2003 ranged from $3.33 to $8.17. The fair
2004 2003
value of options granted under the Ñxed option plans (In millions)
during 2002 ranged from $3.54 to $8.52.
APBO at beginning of period ÏÏÏÏÏÏÏ $ 77 $60
Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 10 9
14. Employee Retirement Plans Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5 4
DeÑned Contribution Plans BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1) (1)
Actuarial (gain) loss ÏÏÏÏÏÏÏÏÏÏÏÏ (11) Ì
The Company has deÑned contribution plans cov- Plan amendmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì 5
ering substantially all Southwest Employees. The South-
APBO at end of period ÏÏÏÏÏÏÏÏÏÏÏÏ $ 80 $77
west Airlines Co. ProÑtsharing Plan is a money
purchase deÑned contribution plan and Employee stock
purchase plan. The Company also sponsors Employee During Ñrst quarter 2004, the Company closed its
savings plans under section 401(k) of the Internal Reservations Centers located in Dallas, Texas, Salt Lake
Revenue Code, which include Company matching con- City, Utah, and Little Rock, Arkansas. In excess of
tributions. The 401(k) plans cover substantially all 1,000 Employees at these locations did not elect to
Employees. Contributions under all deÑned contribution relocate to the Company's remaining centers, and in-
plans are primarily based on Employee compensation stead accepted severance packages oÅered by the Com-
and performance of the Company. pany. See Note 9 for further information. Also during
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