Southwest Airlines Co - Investor Booklet - April 2018 - Investor Relations
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Southwest Airlines Co. Investor Booklet – April 2018
Cautionary Statement Regarding Forward-Looking Statements
This booklet contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on, and include statements about, the
Company’s estimates, expectations, beliefs, intentions, and strategies for the future, and are not guarantees of future performance. Specific
forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include without
limitation statements related to (i) the Company’s financial position, goals, strategies, expectations, opportunities, and outlook, and its
projected results of operations, including factors expected to impact the Company’s results of operations; (ii) the Company’s operational
goals, strategies, and initiatives; (iii)the Company’s fleet plans and expectations, including with respect to its fleet modernization initiatives,
and the Company’s related financial and operational expectations; (iv) the Company’s expectations and goals with respect to returning value
to Shareholders; (v) the Company’s plans and expectations with respect to its new reservation system, and the Company’s related multi-
faceted financial and operational expectations and opportunities; and (vi) the Company’s Vision. Forward-looking statements involve risks,
uncertainties, assumptions, and other factors that are difficult to predict and that could cause actual results to vary materially from those
expressed in or indicated by them. Factors include, among others, (i) changes in demand for the Company’s services and other changes in
consumer behavior; (ii) the impact of a continually changing business environment, economic conditions, fuel prices, actions of competitors
(including, without limitation, pricing, scheduling, capacity, and network decisions and consolidation and alliance activities), governmental
actions, and other factors beyond the Company’s control, on the Company’s business decisions, plans, strategies, and results; (iii) the
Company’s dependence on third parties, in particular with respect to its fleet and technology plans; (iv) the Company’s ability to timely and
effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and
initiatives; (v) the impact of labor matters on the Company’s business decisions, plans, strategies, expectations, and costs; and (vi) other
factors, as described in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under
the heading "Risk Factors" in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
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investment purposes, and should not be relied on as investment advice.
2
Competitive differentiators
Unmatched profitability record with cost discipline and a
strong balance sheet
Outstanding Customer Service and Hospitality that drives
brand loyalty and recognition
The best People and Culture in the industry
Low fares and a point-to-point network that support
market leadership and non-stop service
Reliable, efficient operations
3
1
Unmatched profitability record
U.S. Airline Industry Bankruptcies, 2000-2011
Chapter 7
2008 2004 2003
2011 2008 2008 & 2004
2005 2005 2005
Chapter 11
2005 2004 & 2002 2003
2002 2001 2001
Southwest has remained profitable for 45 consecutive years
1In the U.S. Airline industry.
4
2017: an outstanding year!
1 1, 2 1, 2
1, 3
1These results will be recast primarily due to the retrospective application transition option selected as part of the Company’s adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers. See the Company’s
Current Report on Form 8-K furnished to the Securities and Exchange Commission on March 20, 2018 for further information.
2Excludes special items.
3ROIC is defined as annual pre-tax return on invested capital, excluding special items.
Note: See reconciliation of reported amounts to non-GAAP financial measures.
5
Significant profit expansion
$2,500 14%
Net income 1
12%
$2,000 2
Net margin
10%
$1,500 8%
Net income
Net margin
(in millions)
$1,000 6%
4%
$500
2%
$- 0%
3 3
2012 2013 2014 2015 2016 2017
Y/Y %
Change 26.4 93.0 73.5 68.6 0.6 (11.1)
Our annual profits and margins significantly improved since 2012, largely due to
the successful implementation of our strategic initiatives
1Excludes special items.
2NetMargin, excluding special items, is calculated as net income, excluding special items, divided by operating revenues, excluding special items.
3These results will be recast primarily due to the retrospective application transition option selected as part of the Company’s adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers. See the Company’s
Current Report on Form 8-K furnished to the Securities and Exchange Commission on March 20, 2018 for further information. 6
Note: See reconciliation of reported amounts to non-GAAP financial measures.
Delivering strong returns on investment
ROIC1
35%
32.7%
30.0%
30% Drivers of ROIC
25.9% • AirTran integration
25%
21.2% • All New Rapid Rewards
20%
• International
15% 13.1% • New reservation system
10% • Fleet modernization/Boeing 737-800
7.2%
• Network optimization
5%
• Low fuel prices
0%
2 2
2012 2013 2014 2015 2016 2017
Y/Y Pt.
Change 0.4 5.9 8.1 11.5 (2.7) (4.1)
1ROIC is defined as annual pre-tax return on invested capital, excluding special items. ROIC is for the 12 months ended December 31 in each year shown.
2These results will be recast primarily due to the retrospective application transition option selected as part of the Company’s adoption of Accounting Standards Update 2014-09, Revenue from
Contracts with Customers. See the Company’s Current Report on Form 8-K furnished to the Securities and Exchange Commission on March 20, 2018 for further information.
Note: See reconciliation of reported amounts to non-GAAP financial measures.
7
Low cost advantage
16.00
Domestic operating expenses per ASM, ex-fuel
14.00
12.00
10.00
(in cents)
8.00
6.00
4.00
Southwest
2.00 Network 1
LCC 2
-
1Q 2000 4Q 2017
While the gap to the industry has contracted over the past 10 years, we
are committed to preserving a meaningful competitive cost advantage
1Network airlines: Trans World, American, US Airways, Northwest, Delta, Continental, United, America West (post-American merger)
2LCC airlines: JetBlue, Alaska, Virgin America, America West (pre-AA merger), AirTran (pre-Southwest merger), Allegiant, Spirit, Frontier
Source: DOT form 41 and T100 data, through December 31, 2017. Estimated unit costs have been stage-length adjusted to Southwest’s average stage-length, represents domestic mainline
8
Fleet modernization has been a significant
contributor to our cost control efforts
Aircraft by fleet type Average seats per aircraft
Year end aircraft on property Year end average
723
694 704 706
681
665
152
149
145 146
141
136
2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017
717s Classics 700s 800s MAX 8
The increase in the seat gauge of our aircraft drives down unit costs and
allows for efficient growth opportunities 9
Reducing fuel consumption and improving efficiency
through fleet modernization and other fuel initiatives
ASMs per gallon
76 Fuel saving initiatives
75.2
75 74.4 In addition to modernizing the fleet:
73.9
74
• Split scimitar winglets
73 72.7
72 71.7 • Galley refresh
71
• Fuel and flight planning
70
69.4
69 • New seats
68
• Single engine taxi
67
66 • Electronic flight bags
2012 2013 2014 2015 2016 2017
Y/Y %
Change 1.5 3.3 1.5 1.6 0.7 1.1
10First quarter 2018 results
1Q
Record
27.1% 20.8% $4.9B
1
operating
pre-tax ROIC after-tax ROIC 1
revenues
$438M $0.75 $102M
earnings per
net income2 profitsharing
diluted share2
1Q
$648M (0.3)%
Record
returned to
81.5% nonfuel
Shareholders load factor CASM2,3, y/y
1ROIC is defined as annual return on invested capital, excluding special items, for the last twelve months.
2excluding special items.
3excluding profitsharing. 11
Note: see reconciliation of reported amounts to non-GAAP financial measures.Sustaining a strong financial position
Strong balance sheet
• $3.2 billion in unrestricted core cash and short-
Investment term investments and $1 billion line of credit fully
grade rating by undrawn and available
all three agencies • Balance Sheet leverage goal in the low-to-mid
30% range1
Balanced capital deployment
• Cash flow from operations of $1.0 billion
Returned
• Capital spending of $409 million
$648 million
to Shareholders • Free cash flow of $708 million3
2
in 1Q 2018 • Debt repayments of $82 million4
Southwest is focused on preserving a strong balance sheet and healthy cash
flows and is the only domestic carrier with a decades-long history of consistently
returning capital to Shareholders
1Includes off balance sheet aircraft leases.
2In 1Q 2018, $648 million was returned to Shareholders through a combination of $148 million in dividends and $500 million in share repurchases.
3Free cash flow is calculated as operating cash flows less capital expenditures less assets constructed for others, net. See reconciliation of reported amounts to non-GAAP financial measures.
4Includes payments of debt and capital lease obligations. 12
Note: Balance sheet information is as of March 31, 2018. All other information presented is for the three months ended March 31, 2018.Industry-leading balance sheet
Non-investment grade Investment grade
S&P/ Fitch B- B B+ BB- BB BB+ BBB- BBB BBB+ A-
Moody’s B3 B2 B1 Ba3 Ba2 Ba1 Baa3 Baa2 Baa1 A3
Source: Bloomberg as of April 20, 2018. Moody’s Senior Unsecured rating used (if unavailable, Long Term Corporate Family or Long Term rating used); S&P’s Long Term Issuer rating used; Fitch’s Senior Unsecured rating used
(if unavailable, Long-term Issuer rating used).
Note: Please see S&P disclaimer language on slide 2.
13Future delivery schedule provides significant flexibility
and continued fleet modernization opportunities
The Boeing Company
-800 MAX 7 MAX 8
MAX 8 Additional Additional
Firm Firm Firm Total
Options -700s MAX 8s
Orders Orders Orders
2018 26 — 19 — 1 — 46 (b)
2019 — 7 20 — — 3 30
2020 — — 35 — — — 35
2021 — — 44 — — — 44
2022 — — 27 14 — — 41
2023 — 12 22 23 — — 57
2024 — 11 30 23 — — 64
2025 — — 40 36 — — 76
2026 — — — 19 — — 19
26 30 237 (a) 115 1 3 412
(a) The Company has flexibility to substitute 737 MAX 7 in lieu of 737 MAX 8 firm orders beginning in 2019.
(b) Includes eleven 737-800s, one 737-700, and one 737 MAX 8 delivered as of April 25, 2018. 14
Note: Delivery schedule is as of April 25, 2018.Creating value for Shareholders
$2.5 Free cash flow
1
Share repurchases
Dividends
$2.0
$1.5
(in billions)
$1.0
$0.5
$0.0
2011 2012 2013 2014 2015 2016 2017 1Q18
From 2011 through first quarter 2018, we returned more than $8.2 billion to
Shareholders through share repurchases and dividends, and completed a $500
million ASR in first quarter 2018.
1Free cash flow is calculated as operating cash flows less capital expenditures less assets constructed for others, net. 15
Note: See reconciliation of reported amounts to non-GAAP financial measures.LUV market outperformance
$700
$600 Southwest
Total Cumulative Return
NYSE ARCA Airline
$500
S&P 500
(dollars)
$400
$300
$200
$100
$0
2012 2013 2014 2015 2016 2017
Note: This graph compares the cumulative total shareholder return on the Company’s common stock over the five-year period ended December 31, 2017, with the cumulative total return during such period of the Standard and Poor’s 500
Stock Index and the NYSE ARCA Airline Index. The comparison assumes $100 was invested on December 31, 2012, in the Company’s common stock and in each of the foregoing indices and assumes reinvestment of dividends. The stock
performance shown on this graph represents historical stock performance and is not necessarily indicative of future stock price performance.
16Customer Experience builds loyalty
“It’s a good experience. I
feel a sense of Hospitality
that other airlines do not
have.”
® Exceptional Inflight
Rapid Rewards
Offerings
Frequent Flyer Program
• Live TV
• 100% seat availability1 • $8 Wi-Fi flat rate per day
• No blackout dates • Complimentary snacks and
• Points don’t expire2 beverages
1Members are able to redeem their points for every available seat. 17
2Must have points earning activity during the most recent 24 months.Consistently loved and recognized brand
Awards in 2017
• Ranked #8 in FORTUNE’S list of the
World’s Most Admired Companies, the only
commercial airline among the Top 10
• Readers’ pick for Best Frequent Flyer
Program (U.S.) for Rapid Rewards by
No Hidden Fees1
SmarterTravel
5
• Best Loyalty Credit Card, Best Airline
Redemption Ability, and Best Customer
Service by the Freddie Awards
• Air Forwarders Association’s Domestic
Carrier of the Year
• Ranked among the Best Airline Rewards
Programs by U.S News & World Report
Low Fares2
TransfarencySM is a philosophy created by Southwest Airlines in which
Customers are treated honestly and fairly, and low fares actually stay
low—no unexpected bag fees3, change fees4, or hidden fees
1No Hidden fees determined by having bag and reservation change/cancellation fees per domestic passenger below the industry average, as determined by Bureau of Transportation Statistics for the year ending December 31, 2017.
2Low fares defined by having an average domestic fare below the industry average US domestic fare, as determined by data from the Department of Transportation O&D survey for the year ending December 31, 2017.
3Firstand second checked pieces of luggage, size and weight limits apply.
4There are never change fees, though fare differences might apply. 18
5Alaska Airlines data includes Virgin America for the year ending December 31, 2017Behind every seat is a story. Behind every story is
the reason for Transfarency.
19Culture of celebration & appreciation
Mission to our Employees
We are committed to provide our Employees
a stable work environment with equal
opportunity for learning and personal
growth. Creativity and innovation are
encouraged for improving the effectiveness
of Southwest Airlines. Above all, Employees
will be provided the same concern, respect,
and caring attitude within the organization
that they are expected to share externally
with every Southwest Customer.
20Our network in 1996
SEA GEG
PDX
BOI
DTW
MDW PVD
SLC OMA
CLE
RNO CMH
MCI IND
SMF STL
BWI
OAK
SFO SDF
SJC
AMA OKC TUL
LAS BNA
BUR
ONT ABQ LIT
LAX
SNA LBB BHM
PHX
SAN DAL
TUS ELP MAF AUS IAH
SAT MSY
HOU MCO
CRP TPA
HRL FLL
1996
21
Source: EDW DOT Traffic December 1996.By 2006…
SEA GEG
PDX
BOI BUF ALB MHT
DTW
MDW BDL
OMA
SLC PVD
CLE ISP
RNO DEN
PIT
SMF CMH PHL
IND BWI
MCI
OAK STL IAD
SDF
SJC
ORF
LAS TUL BNA
BUR RDU
AMA OKC
ABQ
ONT LIT
LAX
SNA PHX LBB BHM
SAN DAL
TUS JAN
ELP MAF
AUS JAX
SAT MSY
HOU
MCO
CRP TPA
PBI
HRL RSW
FLL
1996
2006
22
Source: EDW DOT Traffic December 1996, 2006.… and today
SEA GEG
PDX
MSP
PWM
MKE ROC
GRR BUF ALB MHT
BOS
SLC
DEN PVD
OAK
SFO
SJC
LAX
SAN
TUS
SAT
HRL
SJD PLS
HAV
CUN
PVR
MEX GCM MBJ
BZE PUJ SJU
AUA
LIR
SJO
2006
2017
23
Source: EDW DOT Traffic December 2006, Diio schedules December 2017.The evolution of our network
1996 2006 2017
Daily departures1 >2,100 >3,200 >4,000
Market share2 11% 18% 24%
Number of cities3 49 63 100
Number of states3 24 32 40
Number of countries3 1 1 11
Fleet4 243 481 706
ROIC5 12% 11% 25.9%6
The expansion of our robust network has driven meaningful results
1During peak travel seasons.
21996 market share based on enplaned passengers; 2006 and 2017 market share based on revenue passengers. 2017 market share data presented herein as measured by the Department of Transportation O&D Survey for the twelve months
ended September 30, 2017 based on domestic originating passengers boarded. O&D stands for Origin and Destination.
32006 includes 32 states and the District of Columbia; 2017 includes 40 states, the District of Columbia, and the Commonwealth of Puerto Rico.
4Fleet is as of December 31 for each year shown.
5ROIC is defined as annual pre-tax return on invested capital, excluding special items and is for the twelve months ended December 31 for each year shown.
6These results will be recast primarily due to the retrospective application transition option selected as part of the Company’s adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers. See the
Company’s Current Report on Form 8-K furnished to the Securities and Exchange Commission on March 20, 2018 for further information. 24
Note: See reconciliation of reported amounts to non-GAAP financial measures.The nation’s largest domestic airline
LA Basin Phoenix
(LAX, LGB, ONT, SNA, BUR) (PHX, AZA)
39% Market share
29% 32%
18%
14% • 24% of total domestic market share
9%
• Market leader in 26 of the top 50 U.S.
metro areas1
DC/BWI Area Denver
(BWI, DCA, IAD)
• Serve (offer itineraries for sale) 96 of
36%
32% the top 100 domestic O&D city pairs
24% 27%
18% (including co-terminal airports2)
14%
Bay Area Las Vegas Orlando
(OAK, SFO, SJC) (MCO, SFB)
LUV
37%
32% OA #1
27%
22% OA #2
16% 14% 12%
11% 10%
Southwest has a strong market presence in many of the nation’s top metro areas
Source: Data presented herein as measured by the Department of Transportation O&D Survey for the twelve months ended December 31, 2017 based on domestic originating passengers boarded. O&D stands for Origin and Destination.
1Metro Areas: A geographic area around a city that includes multiple major airports. In some cases, the airports within a metro area may serve separate competitive markets.
2Co-terminal: Airports that share a common city or region; for example Newark, LaGuardia and JFK are considered co-terminals to one another. 25Focus on Customer Service
2015 2016 2017
#2 #1 #1
#1 #3 #3
#11 #10 #10
#5 #5 #5
#7 #7 #6
#6 #6 #7
#13 #12 #12
#10 #9 #8
Southwest has earned the DOT’s best customer satisfaction ranking
for 23 of the past 27 years
26
Source: Air Travel Consumer Reports for each year shown. Rankings based on complaints filed with the Department of Transportation (DOT) per 100,000 passengers enplaned.Focus on Reliability
Ontime Performance Mishandled Baggage Rate
(OTP) (MBR)
82% 3.5
80% 3.0
78% 2.5
76% 2.0
2015 2016 2017 2015 2016 2017
With record passengers in 2017, our strong OTP and a record-low MBR
were notable operational achievements
27New reservation system
• Schedule variation
• O&D Controls • Increased days of inventory
• Improved fare flexibility • Redeyes
• Ancillary controls • Improved connection times
New
Reservation
System
• IROPS automation & optimization
• Mobile enhancements at airport
• Standby capability & policy
improvements
• Interline & codeshare
• Foreign currency
• Foreign point of sale
• Electronic Miscellaneous Documents • New distribution capabilities
(EMDs) for ancillary services
28Purpose
Connect People to what’s important in
their lives through friendly, reliable, and
low-cost air travel.
Vision
To become the world’s most loved,
most flown, and most profitable airline.
29Non-GAAP Reconciliation
in millions, except per share amounts Year ended December 31,
2011(e) 2012 2013 2014 2015 2016(f) 2017(f)
Operating revenues, as reported $ 15,658 $ 17,088 $ 17,699 $ 18,605 $ 19,820 $ 20,425 $ 21,171
Deduct: Special revenue adjustment (a) - - - - (172) - -
Operating revenues, excluding special items $ 15,658 $ 17,088 $ 17,699 $ 18,605 $ 19,648 $ 20,425 $ 21,171
Net income, as reported $ 178 $ 421 $ 754 $ 1,136 $ 2,181 $ 2,244 $ 3,488
Deduct: Special revenue adjustment (a) - - - - (172) - -
Add: Contract ratification bonuses - - - 9 334 356 -
Add (Deduct): Mark-to-market impact from fuel contracts settling in future periods 21 (221) (103) 251 373 9 69
Add (Deduct): Ineffectiveness from fuel hedges settling in future periods 33 42 11 5 (9) (11) 31
Add (Deduct): Other net impact of fuel contracts settling in the current or a prior period (excluding
35 (10) 87 24 (251) (197) (150)
reclassifications)
Add: Acquisition and integration costs (b) 132 183 86 126 39 - -
Deduct: Litigation settlement - - - - (37) - -
Add: Asset impairment 14 - - - - 21 -
Add: Lease termination expense - - - - - 22 33
Add: Aircraft grounding charge - - - - - - 63
Add (Deduct): Net income tax impact of fuel and special items, excluding Tax reform impact (c) (83) 2 (30) (154) (103) (74) (17)
Deduct: Tax reform impact (d) - - - - - - (1,410)
Net income, excluding special items $ 330 $ 417 $ 805 $ 1,397 $ 2,355 $ 2,370 $ 2,107
Net cash provided by operating activities $ 1,356 $ 2,064 $ 2,477 $ 2,902 $ 3,238 $ 4,293 $ 3,929
Deduct: Capital expenditures (968) (1,348) (1,433) (1,748) (2,041) (2,038) (2,123)
Deduct: Assets constructed for others - - (14) (80) (102) (109) (126)
Add: Reimbursement for assets constructed for others - - - 27 24 107 126
Free cash flow $ 388 $ 716 $ 1,030 $ 1,101 $ 1,119 $ 2,253 $ 1,806
Net income per share, diluted, as reported $ 5.79
Deduct: Impact from fuel contracts (0.08)
Add: Impact of special items 0.16
Deduct: Net income tax impact of fuel and special items, excluding Tax reform impact (c) (0.03)
Deduct: Tax reform impact (d) (2.34)
Net income per share, diluted, excluding special items $ 3.50
(a) One-time adjustment related to the amendment of the Company's co-branded credit card agreement with Chase Bank USA, N.A. and a resulting change in accounting methodology.
(b) Expenses associated with the Company’s acquisition and integration of AirTran Holdings, LLC, the parent company of AirTran Airways, Inc. ("AirTran"). Such expenses were primarily incurred during the acquisition and integration period of the two companies from 2011 through 2015 as a result
of the Company’s acquisition of AirTran, which closed on May 2, 2011. The exclusion of these expenses provides investors with a more applicable basis with which to compare results in future periods now that the integration process has been completed. Further, pursuant to the terms of the
Company’s ProfitSharing Plan, acquisition and integration costs were excluded from the calculation of profitsharing expense from April 1, 2011, through Dec. 31, 2013. These costs, totaling $385 million, are being amortized on a pro rata basis as a reduction
of operating profits, as defined by the ProfitSharing Plan, from 2014 through 2018, in the calculation of profitsharing. In addition, acquisition and integration costs incurred during 2014 and 2015 will reduce operating profits, as defined, in the calculation of profitsharing.
(c) Tax amounts for each individual special item are calculated at the Company's effective rate for the applicable period and totaled in this line item.
(d) Adjustment related to the Tax Cuts and Jobs Act legislation passed in December 2017, which resulted in a re-measurement of the Company's deferred tax assets and liabilities at the new corporate tax rate.
(e) Includes the impact of the AirTran acquisition as of May 2, 2011.
(f) These results will be recast primarily due to the retrospective application transition option selected as part of the Company’s adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers. See the Company’s Current Report on Form 8-K 30
furnished to the Securities and Exchange Commission on March 20, 2018 for further information.Non-GAAP Reconciliation
(continued)
Twelve months
in millions Twelve months ended December 31, ended March 31,
2018
1996 2006 2011(f) 2012 2013 2014 2015 2016(g) 2017(g)
Operating income, as reported $ 3,417
Operating income, as reported $ 351 $ 934 $ 693 $ 623 $ 1,278 $ 2,225 $ 4,116 $ 3,760 $ 3,515
Contract ratification bonuses -
Special revenue adjustment (a) - - - - - - (172) - - Net impact from fuel contracts (125)
Contract ratification bonuses - - - - - 9 334 356 - Asset impairment -
Net impact from fuel contracts - 41 - 32 84 28 (323) (202) (156) Lease termination expense 28
Acquisition and integration costs (b) - - 132 183 86 126 39 - - Aircraft grounding charge 63
Litigation settlement - - - - - - (37) - - Gain on sale of grounded aircraft (25)
Asset impairment - - 14 - - - - 21 - Operating income, non-GAAP $ 3,358
Lease termination expense - - - - - - - 22 33
Net adjustment for aircraft leases(c) 107
Aircraft grounding charge - - - - - 63
Adjusted Operating income, non-GAAP (A) $ 3,465
Operating income, non-GAAP $ 351 $ 975 $ 839 $ 838 $ 1,448 $ 2,388 $ 3,957 $ 3,957 $ 3,455
Net adjustment for aircraft leases (c) 84 72 129 117 143 133 114 111 109 Non-GAAP tax rate (B) 23.1% (h)
Adjustment for fuel hedge accounting (d) - (52) (107) (36) (60) (62) (124) (152) (135)
Adjusted Operating income, non-GAAP (A) 435 995 861 919 1,531 2,459 3,947 3,916 3,429 Net operating profit after-tax, NOPAT (A* (1-B) = C) $ 2,665
Debt, including capital leases (e) 668 1,864 3,780 3,343 2,954 2,763 2,782 3,304 3,259 Debt, including capital leases (e) 3,300
Equity (e) 1,538 6,693 6,678 6,961 7,017 7,249 7,032 7,833 8,881 Equity (e) 8,561
Net present value of aircraft operating leases (e) 1,468 1,110 1,981 2,276 1,693 1,458 1,223 1,015 785 Net present value of aircraft operating leases (e) 732
Average invested capital $ 3,674 $ 9,667 $ 12,439 $ 12,580 $ 11,664 $ 11,470 $ 11,037 $ 12,152 $ 12,925 Average invested capital $ 12,593
Equity adjustment for hedge accounting (d) - (897) 184 145 50 104 1,027 886 296 Equity adjustment for hedge accounting (d) 196
Adjusted average invested capital (B) 3,674 8,770 12,623 12,725 11,714 11,574 12,064 13,038 13,221 Adjusted average invested capital (D) $ 12,789
ROIC, pre-tax (A) / (B) 11.8% 11.3% 6.8% 7.2% 13.1% 21.2% 32.7% 30.0% 25.9% Non-GAAP ROIC, pre-tax (A/D) 27.1%
Non-GAAP ROIC, after-tax (C/D) 20.8%
(a) One-time adjustment related to the amendment of the Company's co-branded credit card agreement with Chase Bank USA, N.A. and a resulting change in accounting methodology.
(b) Expenses associated with the Company’s acquisition and integration of AirTran Holdings, LLC, the parent company of AirTran Airways, Inc. ("AirTran"). Such expenses were primarily incurred during the acquisition and integration period of the two companies from 2011 through 2015 as a result
of the Company’s acquisition of AirTran, which closed on May 2, 2011. The exclusion of these expenses provides investors with a more applicable basis with which to compare results in future periods now that the integration process has been completed. Further, pursuant to the terms of the
Company’s ProfitSharing Plan, acquisition and integration costs were excluded from the calculation of profitsharing expense from April 1, 2011, through Dec. 31, 2013. These costs, totaling $385 million, are being amortized on a pro rata basis as a reduction of operating profits, as defined by the
ProfitSharing Plan, from 2014 through 2018, in the calculation of profitsharing. In addition, acquisition and integration costs incurred during 2014 and 2015 will reduce operating profits, as defined, in the calculation of profitsharing.
(c) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of eliminating aircraft rent expense and replacing with estimated depreciation expense for those same aircraft). The Company makes this adjustment
to enhance comparability to other entities that have different capital structures by utilizing alternative financing decisions.
(d) The Adjustment for fuel hedge accounting in the numerator is due to the Company's accounting policy decision to classify fuel hedge accounting premiums below the Operating income line, and thus is adjusting Operating income to reflect such policy decision. The Equity adjustment
for hedge accounting in the denominator adjusts for the cumulative impacts, in Accumulated other comprehensive income and Retained earnings, of gains and/or losses associated with hedge accounting
related to fuel hedge derivatives that will settle in future periods. The current period impact of these gains and/or losses are reflected in the Net impact from fuel contracts in the numerator.
(e) Calculated as an average of the five most recent quarter end balances or remaining obligations. The Net present value of aircraft operating leases represents the assumption that all aircraft in the Company's fleet are owned, as it reflects the remaining contractual commitments
discounted at its estimated incremental borrowing rate as of the time each individual lease was signed.
(f) Includes the impact of the AirTran acquisition as of May 2, 2011.
(g) These results will be recast primarily due to the retrospective application transition option selected as part of the Company’s adoption of Accounting Standards Update 2014-09, Revenue from Contracts with Customers. See the Company’s Current Report on Form 8-K
furnished to the Securities and Exchange Commission on March 20, 2018 for further information.
(h) As the twelve month rolling tax rate no longer approximates an annual tax rate due to the significant impact of the Tax Cuts and Jobs Act legislation enacted in December 2017 had on corporate tax rates, the Company is utilizing the first quarter tax rate for 2018 ROIC, after-tax.
The first quarter 2018 GAAP tax rate was 23.1 percent, and the Non-GAAP tax rate for the period was also 23.1 percent. See Note Regarding Use of Non-GAAP Financial Measures for additional information. For full year 2018, the Company continues to estimate its effective tax
rate to be in the 23 to 23.5 percent range.
31Three months
ended March 31,
2018
Non-GAAP Reconciliation Fuel and oil expense, unhedged $ 1,014
Add: Premium cost of fuel contracts 34
(continued) Deduct: Fuel hedge gains included in Fuel and oil expense, net
Fuel and oil expense, as reported $
(30)
1,018
Add: Net impact from fuel contracts 7
Fuel and oil expense, excluding special items (economic) $ 1,025
Total operating expenses, as reported $ 4,328
Add: Net impact from fuel contracts 7
Add: Gain on sale of grounded aircraft 25
Three months
ended March 31, Total operating expenses, excluding special items $ 4,360
2017 Deduct: Fuel and oil expense, excluding special items
(1,025)
as recast (economic)
Operating expenses, excluding Fuel and oil expense and
$ 3,335
special items
Fuel and oil expense, unhedged $ 816
Deduct: Profitsharing expense (102)
Add: Premium cost of fuel contracts 34
Operating expenses, excluding profitsharing, Fuel and oil
Add: Fuel hedge losses included in Fuel and oil expense, net 106 $ 3,233
expense and special items
Fuel and oil expense, as recast $ 956
Add (Deduct): Net impact from fuel contracts 37 Net cash provided by operating activities $ 1,002
Fuel and oil expense, as recast, excluding special items (economic) $ 993 Capital expenditures (409)
Assets constructed for others (24)
Total operating expenses, as recast $ 4,248 Reimbursement for assets constructed for others 139
Add (Deduct): Net impact from fuel contracts 37 Free cash flow $ 708
Deduct: Lease termination expense (5)
Total operating expenses, as recast, excluding special items $ 4,280 Net income, as reported $ 463
Deduct: Fuel and oil expense, as recast, excluding special items (economic) (993) Deduct: Net impact from fuel contracts (7)
Deduct: Gain on sale of grounded aircraft (25)
Operating expenses, as recast, excluding Fuel and oil expense and special items $ 3,287 Add: Net income tax impact of fuel and special items (a) 7
Deduct: Profitsharing expense (99) Net income, excluding special items $ 438
Operating expenses, as recast, excluding profithsaring, Fuel and oil expense, and
$ 3,188
special items Net income per share, diluted, as reported $ 0.79
Deduct: Impact from fuel contracts (0.01)
Deduct: Impact of special items (0.04)
Add: Net income tax impact of fuel and special items (a) 0.01
Net income per share, diluted, excluding special items $ 0.75
(a) Tax amounts for each individual special item are calculated at the Company's effective rate for the applicable period and totaled in this line item.
32
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