Southwest Airlines 2006 Annual Report Download - page 25

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travel to any destination available on Southwest for a
designated companion of the qualifying Rapid Rewards
member. For the designated companion to use this pass,
the Rapid Rewards member must purchase a ticket or use
an Award Ticket. Additionally, the Rapid Rewards mem-
ber and designated companion must travel together on
the same flight.
Award Tickets and Companion Passes are automat-
ically generated when earned by the Customer rather than
allowing the Customer to bank credits indefinitely.
Award Tickets are valid for 12 months after issuance.
Award Tickets issued before February 10, 2006 have no
seat restrictions, but are subject to published “Black out”
dates. Effective February 10, 2006, systemwide “Black
out” dates for Award Tickets were eliminated, but Award
Tickets are subject to seat restrictions. Companion travel
has no seat restrictions or “Black out” dates.
The Company also sells credits to business partners
including credit card companies, hotels, telecommunica-
tion companies, and car rental agencies. These credits
may be redeemed for Award Tickets having the same
program characteristics as those earned by flying. South-
west’s codeshare agreement with ATA Airlines offers
Customers of each airline the opportunity to earn and
redeem frequent flier award credits on the other.
Customers redeemed approximately 2.7 million,
2.6 million, and 2.5 million Award Tickets and flights
on Companion Passes during 2006, 2005, and 2004,
respectively. The amount of free travel award usage as a
percentage of total Southwest revenue passengers carried
was 6.4 percent in 2006, 6.6 percent in 2005, and
7.1 percent in 2004. The number of fully earned Award
Tickets and partially earned awards outstanding at
December 31, 2006 was approximately 10.1 million,
of which approximately 81 percent were partially earned
awards. The number of fully earned Award Tickets and
partially earned awards outstanding at December 31,
2005 was approximately 6.8 million, of which approxi-
mately 78 percent were partially earned awards. However,
due to the expected expiration of a portion of credits
making up partial awards, not all of them will eventually
turn into useable Award Tickets. Also, not all Award
Tickets will be redeemed for future travel. Since the
inception of Rapid Rewards in 1987, approximately
14 percent of all fully earned Award Tickets have expired
without being used. The number of Companion Passes
for Southwest outstanding at December 31, 2006 and
2005 was approximately 58,000 and 60,000, respec-
tively. The Company currently estimates that an average
of 3 to 4 trips will be redeemed per outstanding Com-
panion Pass.
The Company accounts for its frequent flyer pro-
gram obligations by recording a liability for the estimated
incremental cost of flight awards the Company expects to
be redeemed. The estimated incremental cost includes
direct passenger costs such as fuel, food, and other
operational costs, but does not include any contribution
to overhead or profit. Revenue from the sale of credits to
business partners and associated with future travel is
deferred and recognized when the ultimate free travel
award is flown or the credits expire unused. The liability
for free travel awards earned but not used at December 31,
2006 and 2005 was not material.
Employees
At December 31, 2006, Southwest had 32,664
active Employees, consisting of 12,954 flight, 2,056
maintenance, 13,446 ground, Customer, and fleet service
and 4,208 management, accounting, marketing, and
clerical personnel.
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