Reaching New Heights through Exceptional Performance

Southwest had an outstanding year in 2017. We once again led the industry in Customer Satisfaction22) Source: Air Travel Consumer Reports. Rankings based on complaints filed with the Department of Transportation (DOT) per 100,000 passengers enplaned. from the U.S. Department of Transportation (DOT) and had the best baggage delivery rates in our history while carrying a record number of Customers. We saw record profits delivered at strong margins. We further diversified and strengthened our route network, preserved our strong financial position, and returned significant value to our Shareholders. Read on for a look at our financial and operational performance.

Key Accomplishments

45 years

2017 was our 45th consecutive year of profitability.

Introduced
the Boeing 737
MAX 8 aircraft into our fleet
Ranked #1

in Customer Satisfaction by the U.S. DOT.22) Source: Air Travel Consumer Reports. Rankings based on complaints filed with the Department of Transportation (DOT) per 100,000 passengers enplaned.

Key Topic

Financial Results

2017 was a year of great achievements and also great challenges. We implemented a new reservation system, retired our remaining Boeing 737-300 Classic aircraft, and introduced a new aircraft to our fleet—the 737 MAX 8. At the same time, our Employees had their Warrior Spirits on full display as they courageously worked hard and persevered through unprecedented tragic events and the competitive industry environment. Our Employees worked together as One Team to deliver their world-renowned Customer Service and Hospitality that, once again, brought a record number of Passengers to Southwest, generating record revenues.

Southwest continues to be a Low-Fare Leader in the airline industry, maintaining low-cost discipline and prudently managing growth opportunities and investments in technology and facilities. Our stock price (LUV) ended the year at $65.45, an approximate 30 percent increase from prior year and an approximate 540 percent increase over the last five years. Both periods led the domestic airline industry and, in fact, placed us first against all industrials in the S&P 500 Index and ninth in the overall S&P 500 for the five years ended 2017.

Sustained Returns
Sustained Returns
We delivered another year of strong annual pretax return on invested capital (ROIC)33) The Company's Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These GAAP financial statements include (i) unrealized noncash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges and benefits the Company believes are unusual and/or infrequent in nature and thus may make comparisons to its prior or future performance difficult.

As a result, the Company also provides financial information in this report that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information (also referred to as "excluding special items"), including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides additional insight to investors as supplemental information to its GAAP results. The non-GAAP measures provided that relate to the Company’s performance on an economic fuel cost basis include Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating income, non-GAAP; Net income, non-GAAP; and Net income per share, diluted, non-GAAP. The Company's economic Fuel and oil expense results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis has historically been utilized by the Company, as well as some of the other airlines that utilize fuel hedging, as it reflects the Company’s actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts are reflected as a component of Other (gains) losses, net, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide further insight on the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, noncash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company's management, as well as investors and analysts, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations, and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.

The Company’s GAAP results in the applicable periods include other charges or benefits that are also deemed “special items" that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends. Financial measures identified as non-GAAP (or as excluding special items) have been adjusted to exclude special items. Special items include:

1) A one-time $172 million Special revenue adjustment in July 2015 as a result of the Agreement with Chase and the resulting required change in accounting methodology. This increase to revenue represented a nonrecurring required acceleration of revenues associated with the adoption of Accounting Standards Update 2009-13;
2) Contract ratification bonuses recorded for certain workgroups. As the bonuses would only be paid at ratification of the associated tentative agreement and would not represent an ongoing expense to the Company, management believes its results for the associated periods are more usefully compared if the impacts of ratification bonus amounts are excluded from results. Generally, union contract agreements cover a specified three- to five- year period, although such contracts officially never expire, and the agreed upon terms remain in place until a revised agreement is reached, which can be several years following the amendable date;
3) Expenses associated with the Company’s acquisition and integration of AirTran Holdings, Inc. and its subsidiaries, including AirTran Airways, Inc. (collectively, “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;
4) A gain resulting from a litigation settlement received in January 2015. This cash settlement meaningfully lowered Other operating expenses during the applicable period and the Company does not expect a similar impact on its cost structure in the future;
5) A noncash impairment charge related to leased slots 33 at Newark Liberty International Airport as a result of the Federal Aviation Administration announcement in April 2016 that this airport was being changed to a Level 2 schedule-facilitated airport from its previous designation as Level 3;
6) Lease termination costs recorded as a result of the Company acquiring 13 of its Boeing 737-300 aircraft off operating leases as part of the Company’s strategic effort to remove its Classic aircraft from operations on or before Sept. 29, 2017, in the most economically advantageous manner possible. The Company had not budgeted for these early lease termination costs, as they were subject to negotiations being concluded with the third party lessors. The Company recorded the fair value of the aircraft acquired off operating leases, as well as any associated remaining obligations to the balance sheet as debt;
7) An Aircraft grounding charge recorded in third quarter 2017, as a result of the Company grounding its remaining Boeing 737-300 aircraft on Sept. 29, 2017. The loss was a result of the remaining net lease payments due and certain lease return requirements that could have to be performed on these leased aircraft prior to their return to the lessors as of the cease-use date. The Company had not budgeted for the lease return requirements, as they are subject to negotiation with third party lessors; and
8) An adjustment to Provision for income taxes related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a re-measurement of the Company's deferred tax assets and liabilities at the new federal corporate tax rate of 21 percent. This adjustment is a non-cash item and is being treated as a special item.

Because management believes each of these items can distort the trends associated with the Company’s ongoing performance as an airline, the Company believes that evaluation of its financial performance can be enhanced by a supplemental presentation of results that exclude the impact of these items in order to enhance consistency and comparativeness with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods. The following measures are often provided, excluding special items, and utilized by the Company’s management, analysts, and investors to enhance comparability of year-over-year results, as well as to industry trends: Total operating expenses, non-GAAP; Operating income, non-GAAP; Provision for income taxes, non-GAAP; Net income, non-GAAP; Net income per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding profitsharing expense, Fuel and oil expense, and special items.

The Company has also provided free cash flow, which is a non-GAAP financial measure. The Company believes free cash flow is a meaningful measure because it demonstrates the Company’s ability to service its debt, pay dividends, and make investments to enhance Shareholder value. Although free cash flow is commonly used as a measure of liquidity, definitions of free cash flow may differ; therefore, the Company is providing an explanation of its calculation for free cash flow. For the year ended Dec. 31, 2017, the Company generated $1.8 billion in free cash flow, calculated as operating cash flows of $3.9 billion less capital expenditures of $2.1 billion less assets constructed for others of $126 million plus reimbursements for assets constructed for others of $126 million.

The Company has also provided its calculation of return on invested capital, which is a measure of financial performance used by management to evaluate its investment returns on capital. Return on invested capital is not a substitute for financial results as reported in accordance with GAAP, and should not be utilized in place of such GAAP results. Although return on invested capital is not a measure defined by GAAP, it is calculated by the Company, in part, using non-GAAP financial measures. Those non-GAAP financial measures are utilized for the same reasons as those noted above for Net income, non-GAAP and Operating income, non-GAAP - the comparable GAAP measures include charges or benefits that are deemed "special items" that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends, and the Company’s profitability targets and estimates, both internally and externally, are based on non-GAAP results since in the vast majority of cases the "special items" cannot be reliably predicted or estimated. The Company believes non-GAAP return on invested capital is a meaningful measure because it quantifies the Company's effectiveness in generating returns relative to the capital it has invested in its business. Although return on invested capital is commonly used as a measure of capital efficiency, definitions of return on invested capital differ; therefore, the Company is providing an explanation of its calculation for non-GAAP return on invested capital in the accompanying reconciliation, in order to allow investors to compare and contrast its calculation to those provided by other companies.

Information regarding special items and reconciliation of reported amounts to amounts excluding special items are included in the accompanying reconciliation tables in the Performance section.
performance in 2017.
Strong Demand
Strong Demand
Demand for our low fares remained strong in 2017, and our annual load factor44) Load factor is RPMs 12 divided by ASMs. 10 remained high.
Key Topic

Strong Financial Position

Our balance sheet and liquidity remained strong in 2017. Our record profits and manageable capital spending produced solid free cash flow,33) The Company's Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These GAAP financial statements include (i) unrealized noncash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges and benefits the Company believes are unusual and/or infrequent in nature and thus may make comparisons to its prior or future performance difficult.

As a result, the Company also provides financial information in this report that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information (also referred to as "excluding special items"), including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides additional insight to investors as supplemental information to its GAAP results. The non-GAAP measures provided that relate to the Company’s performance on an economic fuel cost basis include Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating income, non-GAAP; Net income, non-GAAP; and Net income per share, diluted, non-GAAP. The Company's economic Fuel and oil expense results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis has historically been utilized by the Company, as well as some of the other airlines that utilize fuel hedging, as it reflects the Company’s actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts are reflected as a component of Other (gains) losses, net, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide further insight on the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, noncash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company's management, as well as investors and analysts, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations, and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.

The Company’s GAAP results in the applicable periods include other charges or benefits that are also deemed “special items" that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends. Financial measures identified as non-GAAP (or as excluding special items) have been adjusted to exclude special items. Special items include:

1) A one-time $172 million Special revenue adjustment in July 2015 as a result of the Agreement with Chase and the resulting required change in accounting methodology. This increase to revenue represented a nonrecurring required acceleration of revenues associated with the adoption of Accounting Standards Update 2009-13;
2) Contract ratification bonuses recorded for certain workgroups. As the bonuses would only be paid at ratification of the associated tentative agreement and would not represent an ongoing expense to the Company, management believes its results for the associated periods are more usefully compared if the impacts of ratification bonus amounts are excluded from results. Generally, union contract agreements cover a specified three- to five- year period, although such contracts officially never expire, and the agreed upon terms remain in place until a revised agreement is reached, which can be several years following the amendable date;
3) Expenses associated with the Company’s acquisition and integration of AirTran Holdings, Inc. and its subsidiaries, including AirTran Airways, Inc. (collectively, “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;
4) A gain resulting from a litigation settlement received in January 2015. This cash settlement meaningfully lowered Other operating expenses during the applicable period and the Company does not expect a similar impact on its cost structure in the future;
5) A noncash impairment charge related to leased slots 33 at Newark Liberty International Airport as a result of the Federal Aviation Administration announcement in April 2016 that this airport was being changed to a Level 2 schedule-facilitated airport from its previous designation as Level 3;
6) Lease termination costs recorded as a result of the Company acquiring 13 of its Boeing 737-300 aircraft off operating leases as part of the Company’s strategic effort to remove its Classic aircraft from operations on or before Sept. 29, 2017, in the most economically advantageous manner possible. The Company had not budgeted for these early lease termination costs, as they were subject to negotiations being concluded with the third party lessors. The Company recorded the fair value of the aircraft acquired off operating leases, as well as any associated remaining obligations to the balance sheet as debt;
7) An Aircraft grounding charge recorded in third quarter 2017, as a result of the Company grounding its remaining Boeing 737-300 aircraft on Sept. 29, 2017. The loss was a result of the remaining net lease payments due and certain lease return requirements that could have to be performed on these leased aircraft prior to their return to the lessors as of the cease-use date. The Company had not budgeted for the lease return requirements, as they are subject to negotiation with third party lessors; and
8) An adjustment to Provision for income taxes related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a re-measurement of the Company's deferred tax assets and liabilities at the new federal corporate tax rate of 21 percent. This adjustment is a non-cash item and is being treated as a special item.

Because management believes each of these items can distort the trends associated with the Company’s ongoing performance as an airline, the Company believes that evaluation of its financial performance can be enhanced by a supplemental presentation of results that exclude the impact of these items in order to enhance consistency and comparativeness with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods. The following measures are often provided, excluding special items, and utilized by the Company’s management, analysts, and investors to enhance comparability of year-over-year results, as well as to industry trends: Total operating expenses, non-GAAP; Operating income, non-GAAP; Provision for income taxes, non-GAAP; Net income, non-GAAP; Net income per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding profitsharing expense, Fuel and oil expense, and special items.

The Company has also provided free cash flow, which is a non-GAAP financial measure. The Company believes free cash flow is a meaningful measure because it demonstrates the Company’s ability to service its debt, pay dividends, and make investments to enhance Shareholder value. Although free cash flow is commonly used as a measure of liquidity, definitions of free cash flow may differ; therefore, the Company is providing an explanation of its calculation for free cash flow. For the year ended Dec. 31, 2017, the Company generated $1.8 billion in free cash flow, calculated as operating cash flows of $3.9 billion less capital expenditures of $2.1 billion less assets constructed for others of $126 million plus reimbursements for assets constructed for others of $126 million.

The Company has also provided its calculation of return on invested capital, which is a measure of financial performance used by management to evaluate its investment returns on capital. Return on invested capital is not a substitute for financial results as reported in accordance with GAAP, and should not be utilized in place of such GAAP results. Although return on invested capital is not a measure defined by GAAP, it is calculated by the Company, in part, using non-GAAP financial measures. Those non-GAAP financial measures are utilized for the same reasons as those noted above for Net income, non-GAAP and Operating income, non-GAAP - the comparable GAAP measures include charges or benefits that are deemed "special items" that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends, and the Company’s profitability targets and estimates, both internally and externally, are based on non-GAAP results since in the vast majority of cases the "special items" cannot be reliably predicted or estimated. The Company believes non-GAAP return on invested capital is a meaningful measure because it quantifies the Company's effectiveness in generating returns relative to the capital it has invested in its business. Although return on invested capital is commonly used as a measure of capital efficiency, definitions of return on invested capital differ; therefore, the Company is providing an explanation of its calculation for non-GAAP return on invested capital in the accompanying reconciliation, in order to allow investors to compare and contrast its calculation to those provided by other companies.

Information regarding special items and reconciliation of reported amounts to amounts excluding special items are included in the accompanying reconciliation tables in the Performance section.
enabling us to continue to return significant value to our Shareholders.

$3.9 billion
Annual operating cash flow
Southwest’s investment grade balance sheet received credit rating upgrades to ‘A3’ by Moody’s and ‘BBB+’ by Standard & Poor’s1616) The 2017 Southwest Airlines One Report may contain information obtained from third parties, including ratings from credit ratings agencies such as S&P Global Ratings. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENT PROVIDERS SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FEES, OR LOSSES (INCLUDING LOST INCOME OR PROFITS AND OPPORTUNITY COSTS OR LOSSES CAUSED BY NEGLIGENCE) IN CONNECTION WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice.
$1.9 billion
Returned to Shareholders through share repurchases and dividends
Key Topic

Growing Our Robust Network

Our friendly, reliable, and low-cost air travel helped Southwest remain the largest domestic air carrier in the United States.55) As measured by the U.S. DOT’s O&D Survey for the 12 months ended Dec. 31, 2017 based on domestic originating passengers. O&D stands for Origin and Destination. We were the leader in 25 of the top 50 U.S. metro areas,55) As measured by the U.S. DOT’s O&D Survey for the 12 months ended Dec. 31, 2017 based on domestic originating passengers. O&D stands for Origin and Destination.,1717) Metro areas are areas around cities that may include multiple major airports. In some cases, the airports within a metro area may serve separate competitive markets. and we served 96 of the top 100 domestic origin and destination city pairs, including co-terminal airports.55) As measured by the U.S. DOT’s O&D Survey for the 12 months ended Dec. 31, 2017 based on domestic originating passengers. O&D stands for Origin and Destination.,1818) Co-terminal: Airports that share a common city or region; for example, Newark, LaGuardia, and JFK are considered co-terminals to one another.

With a point-to-point network allowing for more direct routing, approximately 76 percent of our Customers flew nonstop during 2017, and as of Dec. 31, 2017, we served 675 nonstop city pairs. Our available seat miles1010) An available seat mile (ASM) is one seat (empty or full) flown one mile. Also referred to as “capacity,” which is a measure of the space available to carry Passengers in a given period. (capacity) grew 3.6 percent in 2017, year-over-year. As we look to the exciting growth opportunities ahead, we seek to expand our network prudently and profitably.11) The 2017 Southwest Airlines One Report 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. Specific forward-looking statements include, without limitation, statements related to (i) the Company’s Vision; (ii) the Company’s network and growth plans, strategies, opportunities, and expectations; (iii) the Company’s financial position, outlook, goals, targets, strategies, plans, expectations, and projected results of operations, including specific factors expected to impact the Company’s results of operations; (iv) the Company’s plans and expectations with respect to its new reservation system and other technology initiatives, and the Company’s related multi-faceted financial and operational expectations and opportunities; (v) the Company’s capacity plans and expectations; (vi) the Company’s fleet plans, strategies, and expectations, including its fleet modernization initiatives, and the Company’s related financial and operational expectations; (vii) the Company’s operational initiatives and related plans and expectations, including with respect to its technology initiatives; (viii) the Company’s expectations related to its management of risk associated with changing jet fuel prices; (ix) the Company’s expectations and goals with respect to returning value to Shareholders; and (x) the Company’s other initiatives, including construction, safety, and environmental initiatives, and related plans and expectations. These 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, product, scheduling, capacity, and network decisions, and consolidation and alliance activities), and other factors beyond the Company’s control, on the Company's business decisions, plans, strategies, and results; (iii) the impact of governmental regulations and other governmental actions related to the Company's operations; (iv) the Company’s dependence on third parties, in particular with respect to its fleet and technology plans; (v) 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; (vi) the Company’s ability to timely and effectively prioritize its initiatives and related expenditures; (vii) the impact of labor matters on the Company’s business decisions, plans, strategies, and costs; (viii) changes in aircraft fuel prices, the impact of hedge accounting, and any changes to the Company’s fuel hedging strategies and positions; and (ix) 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 Dec. 31, 2017.

Largest Domestic Carrier
Largest Domestic Carrier
Southwest has 24% of the total domestic market share.
Domestic & International
Domestic & International
We serve 100 destinations
in 11 countries.

Looking Forward11) The 2017 Southwest Airlines One Report 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. Specific forward-looking statements include, without limitation, statements related to (i) the Company’s Vision; (ii) the Company’s network and growth plans, strategies, opportunities, and expectations; (iii) the Company’s financial position, outlook, goals, targets, strategies, plans, expectations, and projected results of operations, including specific factors expected to impact the Company’s results of operations; (iv) the Company’s plans and expectations with respect to its new reservation system and other technology initiatives, and the Company’s related multi-faceted financial and operational expectations and opportunities; (v) the Company’s capacity plans and expectations; (vi) the Company’s fleet plans, strategies, and expectations, including its fleet modernization initiatives, and the Company’s related financial and operational expectations; (vii) the Company’s operational initiatives and related plans and expectations, including with respect to its technology initiatives; (viii) the Company’s expectations related to its management of risk associated with changing jet fuel prices; (ix) the Company’s expectations and goals with respect to returning value to Shareholders; and (x) the Company’s other initiatives, including construction, safety, and environmental initiatives, and related plans and expectations. These 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, product, scheduling, capacity, and network decisions, and consolidation and alliance activities), and other factors beyond the Company’s control, on the Company's business decisions, plans, strategies, and results; (iii) the impact of governmental regulations and other governmental actions related to the Company's operations; (iv) the Company’s dependence on third parties, in particular with respect to its fleet and technology plans; (v) 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; (vi) the Company’s ability to timely and effectively prioritize its initiatives and related expenditures; (vii) the impact of labor matters on the Company’s business decisions, plans, strategies, and costs; (viii) changes in aircraft fuel prices, the impact of hedge accounting, and any changes to the Company’s fuel hedging strategies and positions; and (ix) 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 Dec. 31, 2017.

  • Hawaii Service
    We have announced our plans for service to Hawaii, subject to requisite governmental approvals.
  • Reservation System Benefits
    Our new reservation system is expected to generate an improvement in EBIT2424) Earnings before interest and taxes. of approximately $500 million by 2020 through added revenue management functionality and operational capabilities.
  • Expanded Destinations
    We’re planning to launch up to five daily flights2525) Pending requisite approvals of governmental and regulatory agencies. at a new commercial aircraft facility at Paine Field in Everett, Washington.

Performance Data Table1111) These results do not reflect the impact of accounting standards adopted by the Company subsequent to Dec. 31, 2017. See the Company’s Current Report on Form 8-K furnished to the Securities and Exchange Commission on March 20, 2018, as well as in subsequent quarterly filings, for further information on these accounting standards.

(Dollars in millions except per share amounts, unaudited)
Consolidated Highlights
Year ended Dec. 31,20172016CHANGE
Operating revenues$ 21,171$ 20,4253.7 %
Operating expenses$ 17,656$ 16,6655.9 %
Operating income$ 3,515$ 3,760(6.5) %
Operating margin16.6 %18.4 %(1.8) pts.
Net income$ 3,488$ 2,24455.4 %
Net margin16.5 %11.0 %5.5 pts.
Net income per share - basic$ 5.80$ 3.5862.0 %
Net income per share - diluted$ 5.79$ 3.5563.1 %
Stockholders' equity$ 10,430$ 8,44123.6 %
Return on average stockholders' equity 37.0 %28.4 %8.6 pts.
Stockholders' equity per common share outstanding$ 17.72$ 13.7229.2 %
Revenue passengers carried130,256,190124,719,7654.4 %
Revenue passenger miles (RPMs) (000s)1212) A revenue passenger mile (RPM) is one paying Passenger flown one mile. Also referred to as “traffic,” which is a measure of demand for a given period.129,041,420124,797,9863.4 %
Available seat miles (ASMs) (000s)1010) An available seat mile (ASM) is one seat (empty or full) flown one mile. Also referred to as “capacity,” which is a measure of the space available to carry Passengers in a given period.153,811,072148,522,0513.6 %
Passenger load factor44) Load factor is RPMs 12 divided by ASMs. 10 83.9 %84.0 %(0.1) pts.
Passenger revenue yield per RPM (cents)77) Calculated as passenger revenue divided by RPMs. 12 Also referred to as “yield,” this is the average cost paid by a paying Passenger to fly one mile, which is a measure of revenue production and fares.14.8314.90(0.5) %
Operating revenue yield per ASM (cents) 88) Calculated as operating revenues divided by available seat miles. 10 Also referred to as “operating unit revenues” or “RASM,” this is a measure of operating revenue production based on the total available seat miles flown during a particular period. Year ended 2015 RASM excludes a $172 million one-time special revenue adjustment. Including the special revenue adjustment, RASM would have been 14.11 cents for the year ended 2015.13.7613.750.1 %
Operating expenses per ASM (cents)99) Calculated as operating expenses divided by available seat miles. 10 Also referred to as “unit costs” or "CASM,” this is the average cost to fly an aircraft seat (empty or full) one mile, which is a measure of cost efficiencies.11.4811.222.3 %
Aircraft at yearend706723(2.4) %
Active, full-time equivalent Employees at yearend1414) Active, full-time equivalent Employees as of Dec. 31 for specified calendar year.56,11053,5364.8 %
Reconciliation of Reported Amounts to Non-GAAP Items33) The Company's Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These GAAP financial statements include (i) unrealized noncash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges and benefits the Company believes are unusual and/or infrequent in nature and thus may make comparisons to its prior or future performance difficult.

As a result, the Company also provides financial information in this report that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information (also referred to as "excluding special items"), including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides additional insight to investors as supplemental information to its GAAP results. The non-GAAP measures provided that relate to the Company’s performance on an economic fuel cost basis include Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating income, non-GAAP; Net income, non-GAAP; and Net income per share, diluted, non-GAAP. The Company's economic Fuel and oil expense results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis has historically been utilized by the Company, as well as some of the other airlines that utilize fuel hedging, as it reflects the Company’s actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts are reflected as a component of Other (gains) losses, net, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide further insight on the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, noncash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company's management, as well as investors and analysts, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations, and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.

The Company’s GAAP results in the applicable periods include other charges or benefits that are also deemed “special items" that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends. Financial measures identified as non-GAAP (or as excluding special items) have been adjusted to exclude special items. Special items include:

1) A one-time $172 million Special revenue adjustment in July 2015 as a result of the Agreement with Chase and the resulting required change in accounting methodology. This increase to revenue represented a nonrecurring required acceleration of revenues associated with the adoption of Accounting Standards Update 2009-13;
2) Contract ratification bonuses recorded for certain workgroups. As the bonuses would only be paid at ratification of the associated tentative agreement and would not represent an ongoing expense to the Company, management believes its results for the associated periods are more usefully compared if the impacts of ratification bonus amounts are excluded from results. Generally, union contract agreements cover a specified three- to five- year period, although such contracts officially never expire, and the agreed upon terms remain in place until a revised agreement is reached, which can be several years following the amendable date;
3) Expenses associated with the Company’s acquisition and integration of AirTran Holdings, Inc. and its subsidiaries, including AirTran Airways, Inc. (collectively, “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;
4) A gain resulting from a litigation settlement received in January 2015. This cash settlement meaningfully lowered Other operating expenses during the applicable period and the Company does not expect a similar impact on its cost structure in the future;
5) A noncash impairment charge related to leased slots 33 at Newark Liberty International Airport as a result of the Federal Aviation Administration announcement in April 2016 that this airport was being changed to a Level 2 schedule-facilitated airport from its previous designation as Level 3;
6) Lease termination costs recorded as a result of the Company acquiring 13 of its Boeing 737-300 aircraft off operating leases as part of the Company’s strategic effort to remove its Classic aircraft from operations on or before Sept. 29, 2017, in the most economically advantageous manner possible. The Company had not budgeted for these early lease termination costs, as they were subject to negotiations being concluded with the third party lessors. The Company recorded the fair value of the aircraft acquired off operating leases, as well as any associated remaining obligations to the balance sheet as debt;
7) An Aircraft grounding charge recorded in third quarter 2017, as a result of the Company grounding its remaining Boeing 737-300 aircraft on Sept. 29, 2017. The loss was a result of the remaining net lease payments due and certain lease return requirements that could have to be performed on these leased aircraft prior to their return to the lessors as of the cease-use date. The Company had not budgeted for the lease return requirements, as they are subject to negotiation with third party lessors; and
8) An adjustment to Provision for income taxes related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a re-measurement of the Company's deferred tax assets and liabilities at the new federal corporate tax rate of 21 percent. This adjustment is a non-cash item and is being treated as a special item.

Because management believes each of these items can distort the trends associated with the Company’s ongoing performance as an airline, the Company believes that evaluation of its financial performance can be enhanced by a supplemental presentation of results that exclude the impact of these items in order to enhance consistency and comparativeness with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods. The following measures are often provided, excluding special items, and utilized by the Company’s management, analysts, and investors to enhance comparability of year-over-year results, as well as to industry trends: Total operating expenses, non-GAAP; Operating income, non-GAAP; Provision for income taxes, non-GAAP; Net income, non-GAAP; Net income per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding profitsharing expense, Fuel and oil expense, and special items.

The Company has also provided free cash flow, which is a non-GAAP financial measure. The Company believes free cash flow is a meaningful measure because it demonstrates the Company’s ability to service its debt, pay dividends, and make investments to enhance Shareholder value. Although free cash flow is commonly used as a measure of liquidity, definitions of free cash flow may differ; therefore, the Company is providing an explanation of its calculation for free cash flow. For the year ended Dec. 31, 2017, the Company generated $1.8 billion in free cash flow, calculated as operating cash flows of $3.9 billion less capital expenditures of $2.1 billion less assets constructed for others of $126 million plus reimbursements for assets constructed for others of $126 million.

The Company has also provided its calculation of return on invested capital, which is a measure of financial performance used by management to evaluate its investment returns on capital. Return on invested capital is not a substitute for financial results as reported in accordance with GAAP, and should not be utilized in place of such GAAP results. Although return on invested capital is not a measure defined by GAAP, it is calculated by the Company, in part, using non-GAAP financial measures. Those non-GAAP financial measures are utilized for the same reasons as those noted above for Net income, non-GAAP and Operating income, non-GAAP - the comparable GAAP measures include charges or benefits that are deemed "special items" that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends, and the Company’s profitability targets and estimates, both internally and externally, are based on non-GAAP results since in the vast majority of cases the "special items" cannot be reliably predicted or estimated. The Company believes non-GAAP return on invested capital is a meaningful measure because it quantifies the Company's effectiveness in generating returns relative to the capital it has invested in its business. Although return on invested capital is commonly used as a measure of capital efficiency, definitions of return on invested capital differ; therefore, the Company is providing an explanation of its calculation for non-GAAP return on invested capital in the accompanying reconciliation, in order to allow investors to compare and contrast its calculation to those provided by other companies.

Information regarding special items and reconciliation of reported amounts to amounts excluding special items are included in the accompanying reconciliation tables in the Performance section.
Year ended December 31,20172016201520142013
Fuel and oil expense, unhedged$ 3,524$ 2,827
Add: Fuel hedge (gains) losses included in Fuel and oil expense, net416820
Fuel and oil expense, as reported$ 3,940$ 3,647
Add: Net impact from fuel contracts156202
Fuel and oil expense, excluding special items (economic)$ 4,096$ 3,849
Total operating expenses, as reported$ 17,656$ 16,665
Deduct: Contract ratification bonuses-(356)
Add: Net impact from fuel contracts156202
Deduct: Asset impairment-(21)
Deduct: Lease termination expense(33)(22)
Deduct: Aircraft grounding charge(63)-
Total operating expenses, excluding special items$ 17,716$ 16,468
Deduct: Fuel and oil expense, excluding special items (economic)(4,096)(3,849)
Operating expenses, excluding Fuel and oil expense and special items$ 13,620$ 12,619
Deduct: Profitsharing expense(543)(586)
Operating expenses, excluding profitsharing expense, Fuel and oil expense, and special items$ 13,077$ 12,033
Net income, as reported$ 3,488$ 2,244$ 2,181$ 1,136$ 754
Deduct: Special revenue adjustment--(172)--
Add: Contract ratification bonuses-3563349-
Add (Deduct): Mark-to-market impact from fuel contracts settling in future periods699373251(103)
Add (Deduct): Ineffectiveness from fuel hedges settling in future periods31(11)(9)511
Add (Deduct): Other net impact of fuel contracts settling in the current or a prior period (excluding reclassifications)(150)(197)(251)2487
Add: Acquisition and integration costs--3912686
Deduct: Litigation settlement--(37)--
Add: Asset impairment-21---
Add: Lease termination expense3322---
Add: Aircraft grounding charge63----
Deduct: Income tax impact of fuel and special items, excluding Tax reform impact2626) 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.(17)(74)(103)(154)(30)
Deduct: Tax reform impact2727) Adjustment related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a re-measurement of the Company's deferred tax assets and liabilities at the new corporate tax rate.(1,410)----
Net income, excluding special items$ 2,107$ 2,370$ 2,355$ 1,397$ 805
Net income per share, diluted, as reported$ 5.79
Deduct: Impact from fuel contracts(0.08)
Add: Impact of special items0.16
Deduct: Income tax impact of fuel and special items, excluding Tax reform impact2626) 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.(0.03)
Deduct: Tax reform impact2727) Adjustment related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a re-measurement of the Company's deferred tax assets and liabilities at the new corporate tax rate.(2.34)
Net income per share, diluted, excluding special items$ 3.50
Non-GAAP Return on Invested Capital (ROIC)
Year ended Dec. 31,2017
Operating income, as reported$ 3,515
Net impact from fuel contracts(156)
Lease termination expense33
Aircraft grounding charge63
Operating income, non-GAAP$ 3,455
Net adjustment for aircraft leases2828) 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.109
Adjustment for fuel hedge accounting2929) 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.(135)
Adjusted Operating income, non-GAAP (A)$ 3,429
Debt, including capital leases3030) 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 the Company's estimated incremental borrowing rate as of the time each individual lease was signed.3,259
Equity3030) 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 the Company's estimated incremental borrowing rate as of the time each individual lease was signed.8,881
Net present value of aircraft operating leases3030) 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 the Company's estimated incremental borrowing rate as of the time each individual lease was signed.785
Average invested capital$ 12,925
Equity adjustment for hedge accounting2929) 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.296
Adjusted average invested capital (B)$ 13,221
Non-GAAP ROIC, pre-tax (A/B)25.9 %

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