Southwest Airlines 2011 Annual Report Download - page 116
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plans that are subject to graded vesting over a service period, the Company recognizes expense on a straight-line
basis over the requisite service period for the entire award. None of the Company’s grants include performance-
based or market-based vesting conditions, as defined.
The Black-Scholes option valuation model was developed for use in estimating the fair value of short-term
traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models
require the input of subjective assumptions including expected stock price volatility. The Company estimates
expected stock price volatility via observations of both historical volatility trends as well as implied future
volatility observations as determined by independent third parties. No stock options were issued by the Company
during 2011. For 2010 and 2009 stock option grants, the Company consistently estimated expected volatility
utilizing a ratio of two-thirds implied future volatility and one-third historical volatility as of the grant date. In
determining the expected life of the option grants, the Company observed the actual terms of prior grants with
similar characteristics and the actual vesting schedule of the grant, and also assessed the expected risk tolerance
of different optionee groups. The risk-free interest rates used were actual U.S. Treasury zero-coupon rates for
bonds matching the expected term of the option as of the option grant date.
The fair value of each option grant is estimated on the date of grant using a modified Black-Scholes option
pricing model. The following table provides the ranges of assumptions and weighted-average assumptions used
for grants made under the option plans, as well as the range of fair values and weighted-average fair value of
options granted for 2010 and 2009:
2010 2009
Wtd-average risk-free interest rate .................................... 2.9% 4.9%
Range of risk-free interest rates ....................................... 2.73% - 3.04% 0.93% - 4.97%
Wtd-average expected life of option (years) ............................. 6.0 5.9
Range of expected life of options (years) ............................... 6.0-6.0 1.0-6.0
Wtd-average expected stock volatility .................................. 33% 38%
Range of expected stock volatilities ................................... 33%-33% 36%-38%
Wtd-average expected dividend yield .................................. .11% .20%
Range of expected dividend yields .................................... .11% - .11% .18% - .28%
Wtd-average stock option fair value ................................... $ 4.44 $ 3.03
Range of stock option fair values ..................................... $4.40 - $4.46 $ 1.33 - $3.03
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