Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Relevant comparative operating statistics for the
three and six months ended
June 30, 2016
and
2015
are included below. The Company provides these operating statistics because they are commonly used in the airline industry and, as such, allow readers to compare the Company’s performance against its results for the prior year period, as well as against the performance of the Company’s peers.
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Three months ended June 30,
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2016
|
|
2015
|
|
Change
|
Revenue passengers carried
|
|
32,340,969
|
|
|
30,800,742
|
|
|
5.0
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%
|
|
Enplaned passengers
|
|
39,479,241
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|
|
37,670,284
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|
|
4.8
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%
|
|
Revenue passenger miles (RPMs) (000s)
(1)
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|
32,707,694
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30,858,381
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6.0
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%
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|
Available seat miles (ASMs) (000s)
(2)
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38,225,282
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36,476,030
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4.8
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%
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|
Load factor
(3)
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85.6
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%
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84.6
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%
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1.0
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pts
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Average length of passenger haul (miles)
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1,011
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1,002
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0.9
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%
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Average aircraft stage length (miles)
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767
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756
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1.5
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%
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Trips flown
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334,452
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326,309
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2.5
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%
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Seats flown
(4)
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49,112,849
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47,612,415
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3.2
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%
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Seats per trip
(5)
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146.85
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145.91
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0.6
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%
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Average passenger fare
(11)
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$
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151.67
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$
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157.51
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(3.7
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)%
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Passenger revenue yield per RPM (cents)
(6)(11)
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15.00
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15.72
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(4.6
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)%
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Operating revenues per ASM (cents)
(7)
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14.09
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14.01
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0.6
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%
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Passenger revenue per ASM (cents)
(8)(11)
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12.83
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13.30
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(3.5
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)%
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Operating expenses per ASM (cents)
(9)
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10.75
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11.04
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(2.6
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)%
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Operating expenses per ASM, excluding fuel (cents)
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8.38
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8.29
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1.1
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%
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Operating expenses per ASM, excluding fuel and profitsharing (cents)
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7.84
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7.79
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0.6
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%
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Fuel costs per gallon, including fuel tax
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$
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1.75
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$
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2.03
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(13.8
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)%
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Fuel costs per gallon, including fuel tax, economic
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$
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1.81
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$
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2.02
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(10.4
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)%
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Fuel consumed, in gallons (millions)
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513
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493
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4.1
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%
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Active fulltime equivalent Employees
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52,301
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47,645
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9.8
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%
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Aircraft at end of period
(10)
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719
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689
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4.4
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%
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Six months ended June 30,
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2016
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2015
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Change
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Revenue passengers carried
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60,944,448
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57,243,738
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6.5
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%
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Enplaned passengers
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74,107,682
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69,769,242
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6.2
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%
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Revenue passenger miles (RPMs) (000s)
(1)
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61,115,858
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56,719,247
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7.8
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%
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Available seat miles (ASMs) (000s)
(2)
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73,493,431
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68,773,495
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6.9
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%
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Load factor
(3)
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83.2
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%
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82.5
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%
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0.7
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pts
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Average length of passenger haul (miles)
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1,003
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|
991
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1.2
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%
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Average aircraft stage length (miles)
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762
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|
748
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1.9
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%
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Trips flown
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648,989
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622,879
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4.2
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%
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Seats flown
(4)
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95,214,170
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90,856,819
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4.8
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%
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Seats per trip
(5)
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146.71
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145.87
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0.6
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%
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Average passenger fare
(11)
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$
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152.64
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$
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157.74
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(3.2
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)%
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Passenger revenue yield per RPM (cents)
(6)(11)
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15.22
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15.92
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(4.4
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)%
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Operating revenues per ASM (cents)
(7)
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|
13.89
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13.85
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0.3
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%
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Passenger revenue per ASM (cents)
(8)(11)
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12.66
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13.13
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(3.6
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)%
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Operating expenses per ASM (cents)
(9)
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10.87
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11.14
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(2.4
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)%
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Operating expenses per ASM, excluding fuel (cents)
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8.48
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8.40
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1.0
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%
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Operating expenses per ASM, excluding fuel and profitsharing (cents)
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7.99
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7.95
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0.5
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%
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Fuel costs per gallon, including fuel tax
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$
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1.78
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$
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2.02
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|
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(11.9
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)%
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Fuel costs per gallon, including fuel tax, economic
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$
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1.80
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$
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2.01
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(10.4
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)%
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Fuel consumed, in gallons (millions)
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|
985
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|
927
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6.3
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%
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Active fulltime equivalent Employees
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52,301
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47,645
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9.8
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%
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Aircraft at end of period
(10)
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|
719
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|
689
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4.4
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%
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|
(1) A revenue passenger mile is one paying passenger flown one mile. Also referred to as "traffic," which is a measure of demand for a given period.
(2) An available seat mile 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.
(3) Revenue passenger miles divided by available seat miles.
(4) Seats flown is calculated using total number of seats available by aircraft type multiplied by the total trips flown by the same aircraft type during a particular period.
(5) Seats per trip is calculated using seats flown divided by trips flown. Also referred to as “gauge.”
(6) Calculated as passenger revenue divided by revenue passenger miles. 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.
(7) Calculated as operating revenues divided by available seat miles. Also referred to as "operating unit revenues," this is a measure of operating revenue production based on the total available seat miles flown during a particular period.
(8) Calculated as passenger revenue divided by available seat miles. Also referred to as “passenger unit revenues,” this is a measure of passenger revenue production based on the total available seat miles flown during a particular period.
(9) Calculated as operating expenses divided by available seat miles. Also referred to as "unit costs" or "cost per available seat mile," this is the average cost to fly an aircraft seat (empty or full) one mile, which is a measure of cost efficiencies.
(10) Aircraft in the Company's fleet at period end.
(11) Refer to Note
2
to the unaudited Condensed Consolidated Financial Statements for additional information regarding the impact from the July 2015 amended co-branded credit card agreement ("Agreement") with Chase Bank USA, N.A. ("Chase").
Financial Overview
The Company recorded
second quarter
GAAP and non-GAAP results for
2016
and
2015
as noted in the following tables. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.
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Three months ended
|
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Six months ended
|
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(in millions, except per share amounts)
|
|
June 30,
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|
June 30,
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GAAP
|
|
2016
|
|
2015
|
|
Percent Change
|
|
2016
|
|
2015
|
|
Percent Change
|
Operating income
|
|
$
|
1,276
|
|
|
$
|
1,085
|
|
|
17.6
|
%
|
|
$
|
2,220
|
|
|
$
|
1,865
|
|
|
19.0
|
%
|
Net income
|
|
$
|
820
|
|
|
$
|
608
|
|
|
34.9
|
%
|
|
$
|
1,333
|
|
|
$
|
1,061
|
|
|
25.6
|
%
|
Net income per share, diluted
|
|
$
|
1.28
|
|
|
$
|
0.90
|
|
|
42.2
|
%
|
|
$
|
2.07
|
|
|
$
|
1.57
|
|
|
31.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
1,267
|
|
|
$
|
1,148
|
|
|
10.4
|
%
|
|
$
|
2,219
|
|
|
$
|
1,918
|
|
|
15.7
|
%
|
Net income
|
|
$
|
757
|
|
|
$
|
691
|
|
|
9.6
|
%
|
|
$
|
1,326
|
|
|
$
|
1,142
|
|
|
16.1
|
%
|
Net income per share, diluted
|
|
$
|
1.19
|
|
|
$
|
1.03
|
|
|
15.5
|
%
|
|
$
|
2.06
|
|
|
$
|
1.69
|
|
|
21.9
|
%
|
Second quarter 2016
Net income was a Company quarterly
record
of
$820 million
, a
34.9 percent
increase
year-over-year, or
$1.28
per diluted share. This increase was primarily attributable to a
5.3 percent
increase
in Operating revenues, driven by year-over-year capacity growth, strong demand for low-fare air travel, and the impact of the Agreement with Chase and the resulting change in accounting methodology. See Note
2
to the unaudited Condensed Consolidated Financial Statements for further information. Also contributing to this record Net income was a
10.1 percent
reduction in fuel expense as a result of lower market prices. Excluding special items in both years,
second quarter 2016
non-GAAP Net income was a Company quarterly
record
of
$757 million
, a
9.6 percent
increase
year-over-year, or
$1.19
per diluted share. This marked the sixth consecutive quarter during which the Company produced record net income for the applicable fiscal quarter and the
thirteenth
consecutive quarter during which the Company produced
record
non-GAAP Net income for the applicable fiscal quarter.
Second quarter 2016
Operating income was
$1.28 billion
and
second quarter 2016
non-GAAP Operating income was
$1.27 billion
. Both GAAP and non-GAAP Operating income results were also Company quarterly
records
and surpassed the prior year performance.
For the
six months ended
June 30, 2016
, Net income was
$1.33 billion
, a
25.6 percent
increase
year-over-year, or
$2.07
per diluted share, and non-GAAP Net income was
$1.33 billion
, a
16.1 percent
increase year-over-year, or
$2.06
per diluted share. These increases primarily were due to a
6.7 percent
reduction in fuel expense due to decreases in market prices, coupled with a
7.2 percent
increase
in Operating revenues, driven by strong demand for low-fare air travel, a
6.9 percent
year-over-year capacity growth, and the impact of the Agreement with Chase and the resulting change in accounting methodology. Operating expenses for the
six months ended
June 30, 2016
,
increase
d
4.3 percent
year-over-year primarily as a result of the
$153 million
increase
in Salaries, wages, and benefits, coupled with a
$94 million
increase
in Depreciation and amortization, as well as a
$74 million
increase
in Maintenance materials and repairs. These increases were partially offset by the
$127 million
decrease
in Fuel and oil expenses caused by lower jet fuel prices. Operating income for the
six months ended
June 30, 2016
, was
$2.22 billion
, and non-GAAP Operating income for the
six months ended
June 30, 2016
, was
$2.22 billion
.
For the twelve months ended
June 30, 2016
, the Company's exceptional earnings performance, combined with its actions to prudently manage invested capital, produced a
33.5 percent
pre-tax Return on invested capital, excluding special items ("ROIC"), a non-GAAP measure, exceeding the Company's pre-tax ROIC of
28.2 percent
for the twelve months ended
June 30, 2015
.
Company Overview
During
second quarter 2016
, the Company began scheduled service at Long Beach, California with four flights a day nonstop between Long Beach and Oakland. Long Beach marked the fifth airport in the Los Angeles Basin with Southwest service. Additionally, the Company recently reached some exciting international milestones with the U.S. Department of Transportation (DOT) authorizing the Company to serve two destinations in Cuba, Varadero and Santa Clara, and issuing a tentative decision granting authority for the Company to serve Havana, Cuba from Ft. Lauderdale and Tampa, Florida. The DOT is expected to issue a final decision on U.S. - Havana service in the next few weeks, and the Company intends to initiate service to Cuba later this year. The Company has also received DOT authority to provide its first ever international service from Oakland International Airport with daily flights to San Jose del Cabo and Puerto Vallarta, Mexico starting in February 2017. In addition, the Company plans to serve three Mexican beach destinations from Los Angeles International Airport consistent with the recently adopted liberalized bilateral aviation agreement between the two countries. An exchange of diplomatic notes between the United States and Mexico occurred on July 22, 2016, marking the completion of the final step in implementing the new agreement. By its own terms the liberalized agreement becomes effective 30 days after the exchange of diplomatic notes (i.e., on August 21, 2016) and provides the Company numerous additional opportunities to add low-fare service and competition in U.S.- Mexico markets.
The Company plans to continue its route network and schedule optimization efforts through the addition of new markets and itineraries, while also pruning less profitable flights from its schedule. For 2016, the Company plans to end this year with 723 aircraft, which would enable it to produce a
five to six
percent increase in ASMs year-over-year. The Company currently expects its
third quarter 2016
ASMs to
increase four to five percent
, compared with
third quarter 2015
.
During
second quarter 2016
, the Company took delivery of
seven
new Boeing 737-800 aircraft and
six
pre-owned Boeing 737-700 aircraft. The Company also retired
eight
Boeing 737 Classic (737-300 and 737-500) aircraft. Additionally, the Company currently expects to take delivery of
24
new 737-800 aircraft and
four
pre-owned 737-700 aircraft during the remainder of
2016
. See Note 7 to the unaudited Condensed Consolidated Financial Statements for further details.
The Company is in the midst of a multi-year project to completely replace its reservation system. In 2014, the Company launched the Amadeus Altéa reservations solution to support the Company’s international service. The Company has since begun implementing Amadeus' Altéa reservations solution as the Company's future single reservation system for both domestic and international reservations. The implementation consists of two foundational releases. Release 1 is expected to be completed by late 2016 and will add functionality to enable the sale of domestic tickets on the new reservation system. Release 2 is expected to be completed in the first half of 2017 and will add functionality to enable operational capabilities such as passenger check-in and boarding, and checking baggage. Subsequent releases will add functionality to enable revenue enhancements, schedule optimization, support for international growth, and additional foundational and operational capabilities.
The Company continued to return significant value to its Shareholders. During
second quarter 2016
, the Company completed its previous
$1.5 billion
share repurchase program that had been authorized in May 2015. In April 2016, the Company settled the
$500 million
accelerated share repurchase program, which was launched in January 2016 ("First Quarter 2016 ASR Program"). The purchase was recorded as a treasury share purchase for purposes of calculating earnings per share. In total, the Company received
11.9 million
shares under the First Quarter 2016 ASR Program. In addition, on
April 26, 2016
, the Company launched a
$200 million
accelerated share repurchase program with a financial institution in a privately negotiated transaction ("April 2016 ASR Program"). In total, the Company received
4.5 million
shares under the April 2016 ASR Program, which was completed in May 2016. The purchase was recorded as a treasury share purchase for purposes of calculating earnings per share.
On
May 18, 2016
, the Company's Board of Directors approved a
33 percent
increase of the Company's quarterly cash dividend per share and a new $
2.0 billion
share repurchase program. The Company began the new share repurchase program by launching a
$500 million
accelerated share repurchase program in May 2016 ("May 2016 ASR Program") with a financial institution in a privately negotiated transaction. The Company received
12.3 million
shares in total
under the May 2016 ASR Program, which was completed in June 2016. The purchase was recorded as a treasury share purchase for purposes of calculating earnings per share. On July 25, 2016, the Company launched a new accelerated share repurchase program by advancing $250 million to a financial institution in a privately negotiated transaction ("Third Quarter 2016 ASR Program"). The Company will receive an initial delivery of 5.0 million shares, representing an estimated 75 percent of the shares to be purchased by the Company under the Third Quarter 2016 ASR Program. The specific number of shares that the Company ultimately will repurchase under the Third Quarter 2016 ASR Program will be determined based generally on a discount to the volume-weighted average price per share of the Company's common stock during a calculation period to be completed no later than October 2016. The purchase will be recorded as a treasury share purchase for purposes of calculating earnings per share. Subsequent to the launch of the Third Quarter 2016 ASR Program, the Company has $1.25 billion remaining under its existing $2.0 billion share repurchase program. See Part II, Item 2 for further information on the Company's share repurchase authorizations.
Material Changes in Results of Operations
Comparison of
three months ended
June 30, 2016
and
June 30, 2015
Operating Revenues
Passenger revenues for
second quarter
2016
increase
d
$53 million
, or
1.1 percent
, year-over-year. Holding all other factors constant, the increase was primarily attributable to a
4.8 percent
increase
in capacity, as strong Customer demand for low-fare air travel enabled the Company to fill the additional seats, which was evidenced by a Company second quarter record Load factor of
85.6 percent
. On a unit basis, Passenger revenues
decrease
d
3.5 percent
, year-over-year, largely driven by a
4.6 percent
decrease
in Passenger revenue yield, year-over-year, which included the
$66 million
impact of the Agreement with Chase and the resulting change in accounting methodology. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.
Freight revenues for
second quarter
2016
were relatively flat, compared with
second quarter 2015
. Based on current trends, the Company expects
third quarter 2016
Freight revenues to increase compared with
third quarter 2015
.
Other revenues for
second quarter
2016
increase
d
$221 million
, or
103.8 percent
, year-over-year, primarily as a result of the Agreement with Chase and the resulting change in accounting methodology. The Agreement resulted in an acceleration of the timing of Operating revenues on a prospective basis beginning as of July 1, 2015. The transportation element of the consideration received is now allocated a lower relative value, resulting in a reduction in the revenues classified as Passenger on a prospective basis, and the higher relative value associated with the non-transportation elements results in an increase in the portion of revenues classified as Other within the unaudited Condensed Consolidated Statement of Comprehensive Income. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. Excluding the impact of the Agreement with Chase, Other revenues increased primarily due to higher ancillary revenues associated with EarlyBird Check-in® and A1-15 select boarding positions sold at the gate. The Company currently expects Other revenues in
third quarter 2016
to increase compared with
third quarter 2015
.
Second quarter 2016 total operating revenues included a
$137 million
benefit associated with the Agreement with Chase, which improved the year-over-year operating unit revenue performance by 2.6 points. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. While the Company expects a similar benefit to operating revenues in
third quarter 2016
, it will be comparable to the benefit realized in third quarter 2015 due to the July 2015 effective date of the Agreement and resulting change in accounting methodology, and therefore will not result in the two to three point year-over-year operating unit revenue improvement the Company has realized for the past four quarters.
Based on current bookings and yields, and excluding any potential impact from the technology outage as discussed in Note 9 to the unaudited Condensed Consolidated Financial Statements, the Company expects third quarter 2016 operating unit revenues to decline in the three to four percent range, compared with
third quarter 2015
operating unit
revenues (excluding the one-time special revenue adjustment of $172 million recorded in
third quarter 2015
as a result of the Agreement with Chase and the resulting required change in accounting methodology).
Operating Expenses
Operating expenses for
second quarter
2016
increase
d by
$82 million
, or
2.0 percent
, compared with
second quarter 2015
, while capacity
increase
d
4.8 percent
over the same period. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs. The following table presents the Company's Operating expenses per ASM for the
second quarter
of
2016
and
2015
, followed by explanations of these changes on a per ASM basis and dollar basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Per ASM
|
|
Percent
|
(in cents, except for percentages)
|
2016
|
|
2015
|
|
change
|
|
change
|
Salaries, wages, and benefits
|
|
4.29
|
¢
|
|
|
4.40
|
¢
|
|
|
(0.11
|
)¢
|
|
(2.5
|
)%
|
Fuel and oil
|
2.37
|
|
|
2.75
|
|
|
(0.38
|
)
|
|
(13.8
|
)
|
Maintenance materials and repairs
|
0.73
|
|
|
0.66
|
|
|
0.07
|
|
|
10.6
|
|
Aircraft rentals
|
0.15
|
|
|
0.16
|
|
|
(0.01
|
)
|
|
(6.3
|
)
|
Landing fees and other rentals
|
0.82
|
|
|
0.82
|
|
|
—
|
|
|
—
|
|
Depreciation and amortization
|
0.78
|
|
|
0.68
|
|
|
0.10
|
|
|
14.7
|
|
Acquisition and integration
|
—
|
|
|
0.01
|
|
|
(0.01
|
)
|
|
n.m.
|
|
Other operating expenses
|
1.61
|
|
|
1.56
|
|
|
0.05
|
|
|
3.2
|
|
Total
|
|
10.75
|
¢
|
|
|
11.04
|
¢
|
|
|
(0.29
|
)¢
|
|
(2.6
|
)%
|
Operating expenses per ASM for
second quarter 2016
decrease
d
2.6 percent
compared with
second quarter 2015
, primarily due to lower jet fuel prices. Operating expenses per ASM for
second quarter 2016
, excluding fuel and special items (a non-GAAP financial measure),
increase
d
2.5 percent
compared with
second quarter 2015
, primarily due to the accelerated depreciation expense associated with the planned early retirement of the Company's Classic 737-300 fleet. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures. Based on current cost trends, the Company expects its unit costs, excluding fuel and oil expense, profitsharing expense, and special items for
third quarter 2016
and full year 2016, to increase approximately
two percent
, and approximately one percent, respectively, as compared with the same year-ago periods and largely due to accelerated depreciation expense associated with the planned early retirement of the Company's Classic 737-300 fleet. Projected results do not reflect the potential impact of special items, fuel and oil expense, profitsharing expense, and the recent technology outage, as discussed in Note 9 to the unaudited Condensed Consolidated Financial Statements, and the tax effect of such items because the Company cannot reliably predict or estimate those items or expenses or their impact to the Company's financial statements. Accordingly, a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for projected results is not available without unreasonable effort.
Salaries, wages, and benefits expense for
second quarter 2016
increase
d by
$32 million
, or
2.0 percent
, compared with
second quarter 2015
. On a per ASM basis,
second quarter 2016
Salaries, wages, and benefits expense
decrease
d
2.5 percent
, compared with
second quarter 2015
, as the dollar increases were more than offset by the
4.8 percent
increase
in capacity. On a dollar basis, the majority of the increase was due to the
$24 million
increase in profitsharing expense as a result of increased profits in
second quarter 2016
. The Company’s profitsharing expense is based on profits that exclude the unrealized gains and/or losses the Company records for its fuel hedging program. Additionally, pursuant to the terms of the Company's ProfitSharing Plan (the "Plan"), acquisition and integration costs incurred by the Company totaling
$385 million
from April 1, 2011 through December 31, 2013, are being amortized on a pro rata basis as a reduction of operating profits, as defined by the Plan, from 2014 through 2018 in the calculation of profitsharing expense. The remainder of the increase on a dollar basis was due to increased salaries and health benefits paid as a result of the increase in full time equivalent Employees, which was partially offset by the
$55 million
accrued during
second quarter 2015
, related to the proposed ratification bonuses included in the tentative collective-bargaining agreement as part of on-going negotiations with the Company's Flight Attendants, as well as the ratification bonuses paid to Dispatchers, Meteorologists, and Flight Simulator Technicians during
second quarter 2015
. Based on current cost trends and anticipated capacity, the Company expects
third quarter 2016
Salaries, wages, and benefits expense per ASM, excluding profitsharing expense and special items, to
decrease
compared with
third quarter 2015
.
Fuel and oil expense for
second quarter 2016
decrease
d by $
102 million
, or
10.1 percent
, compared with
second quarter 2015
. On a per ASM basis,
second quarter 2016
Fuel and oil expense
decrease
d
13.8 percent
, compared with
second quarter 2015
. Excluding the impact of hedging, both the dollar and unit cost
decreases
were attributable to lower jet fuel prices. The Company's average economic jet fuel cost per gallon
decrease
d
10.4 percent
year-over-year, from $
2.02
for
second quarter 2015
to $
1.81
for
second quarter 2016
. The Company also slightly improved its fuel efficiency in
second quarter 2016
, compared with the same prior year period, when measured on the basis of ASMs generated per gallon of fuel, as a result of fleet modernization. Fuel gallons consumed
increase
d
4.1 percent
as compared with
second quarter 2015
, while year-over-year capacity
increase
d
4.8 percent
. As a result of the Company's fuel hedging program, the Company recognized net
losses
totaling
$187 million
in Fuel and oil expense for
second quarter 2016
, compared with net
losses
totaling
$43 million
for
second quarter 2015
. These totals include cash settlements realized from the settlement of fuel derivative contracts, associated with the Company's "economic" fuel hedge, totaling
$218 million
paid in losses
to counterparties for
second quarter 2016
, compared with
$38 million
paid
to counterparties for
second quarter 2015
. Additionally, these totals exclude gains and/or losses from hedge ineffectiveness and from derivatives that do not qualify for hedge accounting. Those items are recorded as a component of Other (gains) losses, net. See
Note 3
to the unaudited Condensed Consolidated Financial Statements.
As of
July 18, 2016
, on an economic basis, the Company had derivative contracts in place related to expected future fuel consumption as follows:
|
|
|
|
Period
|
Maximum percent of estimated fuel consumption covered by fuel derivative contracts at varying WTI/Brent Crude Oil, Heating Oil, and Gulf Coast Jet Fuel-equivalent price levels (1)
|
2017
|
63%
|
2018
|
37%
|
(1) The Company’s hedge position can vary significantly at different price levels, including prices at which the Company considers “catastrophic” coverage. The percentages provided are not indicative of its hedge coverage at every price, but represent the highest level of coverage at a single price. The Company believes its coverage related to 2016 is best reflected within the jet fuel forecast price sensitivity table provided below. See
Note 3
to the unaudited Condensed Consolidated Financial Statements for further information.
As a result of applying hedge accounting in prior periods, including related to hedge positions that have either been offset or settled early on a cash basis, the Company has amounts “frozen” in Accumulated other comprehensive income (loss) (“AOCI”), and these amounts will be recognized in earnings in future periods when the underlying fuel derivative contracts settle. The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties—see
Note 3
to the unaudited Condensed Consolidated Financial Statements for further information), as well as the amount of deferred gains/losses in AOCI at
June 30, 2016
, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):
|
|
|
|
|
|
|
|
|
|
Year
|
|
Fair value (liability) of fuel derivative contracts at June 30, 2016
|
|
Amount of gains (losses) deferred in AOCI at June 30, 2016 (net of tax)
|
Remainder of 2016
|
|
$
|
(507
|
)
|
|
$
|
(259
|
)
|
2017
|
|
(532
|
)
|
|
(357
|
)
|
2018
|
|
82
|
|
|
(9
|
)
|
Total
|
|
$
|
(957
|
)
|
|
$
|
(625
|
)
|
Based on forward market prices and the amounts in the above table (and excluding any other subsequent changes to the fuel hedge portfolio), the Company's jet fuel costs per gallon could exceed market (i.e., unhedged) prices during some of these future periods. This is based primarily on expected future cash settlements associated with fuel derivatives, but excludes any impact associated with the ineffectiveness of fuel hedges or fuel derivatives that are marked to market because they do not qualify for hedge accounting. See
Note 3
to the unaudited Condensed Consolidated Financial Statements for further information. Assuming no changes to the Company's current fuel derivative portfolio, but including all previous hedge activity for fuel derivatives that have not yet settled, and considering only the expected net cash payments related to hedges that will settle, the Company is providing a sensitivity table for
third quarter 2016
and full year 2016 jet fuel prices at different crude oil assumptions as of
July 18, 2016
, and for expected premium costs associated with settling contracts each period.
|
|
|
|
|
Estimated economic jet fuel price per gallon,
including taxes
|
Average Brent Crude Oil price per barrel
|
3Q 2016 (2)
|
Full Year 2016 (2)
|
$30
|
$1.65 - $1.70
|
$1.70 - $1.75
|
$40
|
$1.85 - $1.90
|
$1.80 - $1.85
|
Current Market (1)
|
$2.00 - $2.05
|
$1.90 - $1.95
|
$60
|
$2.20 - $2.25
|
$2.00 - $2.05
|
$70
|
$2.40 - $2.45
|
$2.10 - $2.15
|
Estimated Premium Costs (3)
|
$30 - $35 million
|
$150 - $160 million
|
(1)
Brent crude oil average market price as of July 18, 2016, was approximately $48 per barrel for third quarter 2016 and $45 per barrel for full year 2016.
(2)
The economic fuel price per gallon sensitivities provided assume the relationship between Brent crude oil and refined products based on market prices as of July 18, 2016.
(3) Fuel hedge premium expense is recognized as a component of Other (gains) losses, net.
Projected results do not reflect the potential impact of special items and the tax effect of such items because the Company cannot reliably predict or estimate those items or expenses or their impact to the Company's financial statements. Accordingly, a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for projected results is not available without unreasonable effort.
Maintenance materials and repairs expense for
second quarter 2016
increase
d by $
40 million
, or
16.7 percent
, compared with
second quarter 2015
. On a per ASM basis, Maintenance materials and repairs expense
increase
d
10.6 percent
, compared with
second quarter 2015
. On both a dollar and per ASM basis, the majority of the increase was attributable to a higher number of heavy airframe maintenance checks and the Company's ongoing cabin refresh project. The Company currently expects Maintenance materials and repairs expense per ASM for
third quarter 2016
to be comparable with
third quarter 2015
.
Aircraft rentals expense for
second quarter 2016
was flat, compared with
second quarter 2015
. On a per ASM basis, Aircraft rentals expense
decrease
d by
6.3 percent
, compared with
second quarter 2015
, primarily due to the return of
eight
737-300 leased aircraft and
three
737-500 leased aircraft, as well as the purchase of
two
737-300 aircraft, that were previously on operating leases, since
second quarter 2015
. The Company currently expects Aircraft rentals expense per ASM for
third quarter 2016
to be comparable with
third quarter 2015
.
Landing fees and other rentals expense for
second quarter 2016
increase
d by
$10 million
, or
3.3 percent
, compared with
second quarter 2015
. On a per ASM basis, Landing fees and other rentals expense were flat, compared with
second quarter 2015
. On a dollar basis, the majority of the
increase
was due to a
2.5
percent increase in Trips flown coupled with heavier landing weights for the Company's higher capacity 737-800 aircraft, which now make up a larger portion of the Company's fleet than a year ago. The Company currently expects Landing fees and other rentals expense per ASM for
third quarter 2016
to be comparable with
third quarter 2015
.
Depreciation and amortization expense for
second quarter 2016
increase
d by $
49 million
, or
19.6 percent
, compared with
second quarter 2015
. On a per ASM basis, Depreciation and amortization expense
increase
d
14.7 percent
, compared with
second quarter 2015
. On both a dollar and per ASM basis, the majority of the
increase
was due to the accelerated depreciation expense resulting from a change in the estimated retirement dates of many of the Company's owned 737-300 aircraft from mid-2021 to third quarter 2017. See Note
2
of the unaudited Condensed Consolidated Financial Statements for further information. The remainder of the increase was due to the purchase and capital lease of new and used aircraft since
second quarter 2015
. The Company currently expects Depreciation and amortization expense per ASM for
third quarter 2016
to increase compared with
third quarter 2015
, as a result of the changes in the estimated retirement dates of many of the Company's owned 737-300 aircraft. All of the Company's 737-500 aircraft are expected to be retired during 2016. See Note
2
to the unaudited Condensed Consolidated Financial Statements for further information.
The Company incurred
no
Acquisition and integration costs during
second quarter 2016
related to the AirTran integration, compared with
$3 million
in
second quarter 2015
. The
second quarter 2015
costs primarily consisted of Employee training, facilities integration, and certain expenses associated with the grounding and conversion costs resulting from the transition of the Company's Boeing 717-200 fleet ("B717s") to Delta Air Lines ("Delta"). The Company does not expect to incur any further Acquisition and integration costs related to the AirTran integration.
Other operating expenses for
second quarter 2016
increase
d by $
56 million
, or
9.9 percent
, compared with
second quarter 2015
. On a per ASM basis, Other operating expenses
increase
d
3.2 percent
, compared with
second quarter 2015
. On both a dollar and per ASM basis, the majority of the increase was attributable to a
$21 million
loss from impairment of Newark Liberty International Airport (Newark) slots as a result of the FAA announcement in April, that Newark was being changed to a Level 2 schedule-facilitated airport from its previous designation as Level 3. A "slot" is the right of an air carrier, pursuant to regulations of the FAA, to operate a takeoff or landing at a specific time at certain airports. The change in designation does not hinder the Company's ability to continue to serve Newark. The remainder of the increase was primarily due to higher contract programming and consulting expenses associated with large technology projects. The Company currently expects Other operating expenses per ASM for
third quarter 2016
to
increase
compared with
third quarter 2015
.
Other
Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses.
Interest expense for
second quarter 2016
increased
by
$3 million
, or
10.3 percent
, compared with
second quarter 2015
, primarily due to the issuance of the $500 million 2.65% notes in November 2015.
Capitalized interest for
second quarter 2016
increase
d by
$4 million
, or
57.1 percent
, compared with
second quarter 2015
, primarily due to an increase in average progress payment balances for scheduled future aircraft deliveries.
Interest income for
second quarter 2016
increase
d by
$4 million
, or
200.0 percent
, compared with
second quarter 2015
, primarily due to higher interest rates coupled with a greater amount of interest earned on collateral held by counterparties. See
Note 3
to the unaudited Condensed Consolidated Financial Statements for further information on the Company's derivatives.
Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities. See
Note 3
to the unaudited Condensed Consolidated Financial Statements for further information on the Company's hedging activities. The following table displays the components of Other (gains) losses, net, for the
three months ended June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
(in millions)
|
2016
|
|
2015
|
Mark-to-market impact from fuel contracts settling in future periods
|
$
|
(81
|
)
|
|
$
|
71
|
|
Ineffectiveness from fuel hedges settling in future periods
|
(3
|
)
|
|
(2
|
)
|
Realized ineffectiveness and mark-to-market (gains) or losses
|
(7
|
)
|
|
—
|
|
Premium cost of fuel contracts
|
48
|
|
|
22
|
|
Other
|
—
|
|
|
(3
|
)
|
|
$
|
(43
|
)
|
|
$
|
88
|
|
Income Taxes
The Company's effective tax rate was approximately
37.1 percent
in
second quarter 2016
, compared with
37.8 percent
in
second quarter 2015
. The lower rate in second quarter 2016 was primarily due to the Company's adoption of ASU 2016-09. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. The Company projects a full year
2016
effective tax rate of
37 to 38
percent based on currently forecasted financial results.
Comparison of
six months ended
June 30, 2016
to
six months ended
June 30, 2015
Operating Revenues
Passenger revenues for the
six months ended
June 30, 2016
,
increase
d
$273 million
, or
3.0 percent
, compared with the first
six months
of
2015
. Holding all other factors constant, the majority of the increase was attributable to a
6.9 percent
increase in capacity, as strong Customer demand for low-fare air travel enabled the Company to fill the additional seats, which was evidenced by an
83.2 percent
Load factor. On a unit basis, Passenger revenues
decrease
d
3.6 percent
, year-over-year, largely driven by a
4.4 percent
decrease
in Passenger revenue yield, year-over-year, which included the
$120 million
impact of the Agreement with Chase and the resulting change in accounting methodology. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.
Freight revenues for the
six months ended
June 30, 2016
,
decrease
d by
$3 million
, or
3.3 percent
, compared with the first
six months
of
2015
, primarily due to sluggish demand.
Other revenues for the
six months ended
June 30, 2016
,
increase
d by
$415 million
, or
102.5 percent
, compared with the first
six months
of
2015
, primarily as a result of the Agreement with Chase and the resulting change in accounting methodology. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. Excluding the impact of the Agreement with Chase, Other revenues increased primarily due to higher ancillary revenues associated with EarlyBird Check-in
®
and A1-15 select boarding positions sold at the gate.
Operating Expenses
Operating expenses for the
six months ended
June 30, 2016
,
increase
d by
$330 million
, or
4.3 percent
, compared with the first
six months
of
2015
, while capacity
increase
d
6.9 percent
over the same period. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs. The following table presents the Company's Operating expenses per ASM for the first
six months
of
2016
and
2015
, followed by explanations of these changes on a per ASM basis and dollar basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
Per ASM
|
|
Percent
|
(in cents, except for percentages)
|
2016
|
|
2015
|
|
change
|
|
change
|
Salaries, wages, and benefits
|
|
4.33
|
¢
|
|
|
4.40
|
¢
|
|
|
(0.07
|
)¢
|
|
(1.6
|
)%
|
Fuel and oil
|
2.39
|
|
|
2.74
|
|
|
(0.35
|
)
|
|
(12.8
|
)
|
Maintenance materials and repairs
|
0.74
|
|
|
0.68
|
|
|
0.06
|
|
|
8.8
|
|
Aircraft rentals
|
0.16
|
|
|
0.17
|
|
|
(0.01
|
)
|
|
(5.9
|
)
|
Landing fees and other rentals
|
0.83
|
|
|
0.85
|
|
|
(0.02
|
)
|
|
(2.4
|
)
|
Depreciation and amortization
|
0.80
|
|
|
0.72
|
|
|
0.08
|
|
|
11.1
|
|
Acquisition and integration
|
—
|
|
|
0.04
|
|
|
(0.04
|
)
|
|
n.m.
|
|
Other operating expenses
|
1.62
|
|
|
1.54
|
|
|
0.08
|
|
|
5.2
|
|
Total
|
|
10.87
|
¢
|
|
|
11.14
|
¢
|
|
|
(0.27
|
)¢
|
|
(2.4
|
)%
|
Operating expenses per ASM
decrease
d
2.4 percent
for the first
six months
of
2016
compared with the first
six months
of
2015
, primarily due to lower jet fuel prices. Operating expenses per ASM, excluding fuel and special items (a non-GAAP financial measure),
increase
d
1.4 percent
year-over-year, primarily due to the accelerated depreciation expense associated with the planned early retirement of the Classic 737-300 fleet. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.
Salaries, wages, and benefits expense for the first
six months
of
2016
increase
d by $
153 million
, or
5.1 percent
, compared with the first
six months
of
2015
. Salaries, wages, and benefits expense per ASM for the first
six months
of
2016
decrease
d
1.6 percent
, compared with the first
six months
of
2015
, as the dollar increases were more than offset by the
6.9 percent
increase
in capacity. On a dollar basis, approximately
62 percent
of the increase was due to increased salaries and health benefits paid, primarily due to the increase in trips flown, additional headcount, and contractual increases, which was partially offset by the
$55 million
accrued during second quarter 2015, related to the ratification bonuses included in the tentative collective-bargaining agreement reached with the Company's Flight Attendants, as well as the ratification bonuses paid to Dispatchers, Meteorologists, and Flight Simulator Technicians during second quarter 2015. The remainder of the increase was due to higher profitsharing expense due to increased profits eligible for profitsharing in the first
six months
of
2016
.
Fuel and oil expense for the first
six months
of
2016
decrease
d by $
127 million
, or
6.7 percent
, compared with the first
six months
of
2015
. On a per ASM basis, Fuel and oil expense for the first
six months
of
2016
decrease
d
12.8 percent
, compared with the first
six months
of
2015
. Excluding the impact of hedging, both the dollar and unit cost decreases were virtually all attributable to lower jet fuel prices. The Company's average economic jet fuel cost per gallon
decrease
d
10.4 percent
, on a year-over-year basis, from $
2.01
during the first
six months
of
2015
to $
1.80
during the first
six months
of
2016
. The Company also slightly improved its fuel efficiency during the first
six months
of
2016
compared with the same prior year period, when measured on the basis of ASMs generated per gallon of fuel. Fuel gallons consumed
increase
d
6.3 percent
, compared with the first
six months
of
2015
, while year-over-year capacity
increase
d
6.9 percent
. As a result of the Company's fuel hedging program, the Company recognized net losses totaling
$462 million
in Fuel and oil expense for the first
six months
of
2016
, compared with net losses totaling
$90 million
for the first
six months
of
2015
. These totals include cash settlements realized from the settlement of fuel derivatives totaling
$485 million
paid to counterparties for the first
six months
of
2016
, compared with
$81 million
paid to counterparties in the first
six months
of
2015
. Additionally, these totals exclude gains and/or losses recognized from hedge ineffectiveness and from derivatives that do not qualify for hedge accounting, which impacts are recorded as a component of Other (gains) losses, net. See
Note 3
to the unaudited Condensed Consolidated Financial Statements.
Maintenance materials and repairs expense for the first
six months
of
2016
increase
d by $
74 million
, or
15.8 percent
, compared with the first
six months
of
2015
. On a per ASM basis, Maintenance materials and repairs expense
increase
d
8.8 percent
, compared with the first
six months
of
2015
. On both a dollar and per ASM basis, the majority of the increase was attributable to the timing of regular maintenance checks and the Company's ongoing cabin refresh project.
Aircraft rentals expense for the first
six months
of
2016
was relatively flat, compared with the first
six months
of
2015
. On a per ASM basis, Aircraft rentals expense
decrease
d by
5.9 percent
, compared with the first
six months
of
2015
, primarily due to the return of
eight
737-300 leased aircraft and
three
737-500 leased aircraft, as well as the purchase of
two
737-300 aircraft that were previously on operating leases, since
second quarter 2015
.
Landing fees and other rentals expense for the first
six months
of
2016
increase
d by
$27 million
, or
4.6 percent
, compared with the first
six months
of
2015
. On a per ASM basis, Landing fees and other rentals expense
decrease
d
2.4 percent
, compared with the first
six months
of
2015
, as the dollar increases were more than offset by the
6.9 percent
increase
in capacity. On a dollar basis, the majority of the
increase
was due to a
4.2 percent
increase
in Trips flown coupled with heavier landing weights for 737-800 aircraft, which now make up a larger portion of the Company's fleet.
Depreciation and amortization expense for the first
six months
of
2016
increase
d by $
94 million
, or
19.0 percent
, compared with the first
six months
of
2015
. On a per ASM basis, Depreciation and amortization expense
increase
d
11.1 percent
, compared with the first
six months
of
2015
. On both a dollar and per ASM basis, the majority of the
increase
was due to the accelerated depreciation expense resulting from a change in the estimated retirement dates of many of the Company's owned 737-300 aircraft from mid-2021 to third quarter 2017. See Note
2
of the unaudited Condensed Consolidated Financial Statements for further information. The remainder of the increase was due to the purchase and capital lease of new and used aircraft since
second quarter 2015
.
The Company incurred
no
Acquisition and integration costs for the first
six months
of
2016
, compared with $
26 million
for the first
six months
of
2015
. The first six months of
2015
costs primarily consisted of Employee training, facilities integration, and certain expenses associated with the grounding and conversion costs resulting from the transition of B717s to Delta.
Other operating expenses for the first
six months
of
2016
increase
d by
$136 million
, or
12.8 percent
, compared with the first
six months
of
2015
. On a per ASM basis, Other operating expenses
increase
d
5.2 percent
, compared with the first
six months
of
2015
. On both a dollar and per ASM basis, approximately
45 percent
of the increase was the result of a
$21 million
loss from impairment of Newark slots during the first six months of 2016 as a result of the FAA announcement in April, that Newark was being changed to a Level 2 schedule-facilitated airport from its previous designation as Level 3, coupled with a
$37 million
litigation settlement received during the first
six months
of
2015
, which reduced the first six months of 2015 operating expenses. Approximately
25 percent
of the increase was
attributable to higher contract programming and consulting expenses associated with large technology projects. The remainder of the increase was due to higher personnel expenses associated with travel costs of the Company's flight crews.
Other
Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses.
Interest expense for the first
six months
of
2016
was flat, compared with the first
six months
of
2015
.
Capitalized interest for the first
six months
of
2016
increase
d by
$8 million
, or
57.1 percent
, compared with the first
six months
of
2015
, primarily due to an increase in average progress payment balances for scheduled future aircraft deliveries.
Interest income for the first
six months
of
2016
increase
d by
$8 million
, or
266.7 percent
, compared with the first
six months
of
2015
, primarily due to higher interest rates coupled with a greater amount of interest earned on collateral held by counterparties. See
Note 3
to the unaudited Condensed Consolidated Financial Statements for further information on the Company's derivatives.
Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities. See
Note 3
to the unaudited Condensed Consolidated Financial Statements for further information on the Company's hedging activities. The following table displays the components of Other (gains) losses, net, for the
six months ended
June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
(in millions)
|
2016
|
|
2015
|
Mark-to-market impact from fuel contracts settling in future periods
|
$
|
(5
|
)
|
|
$
|
91
|
|
Ineffectiveness from fuel hedges settling in future periods
|
1
|
|
|
(15
|
)
|
Realized ineffectiveness and mark-to-market (gains) or losses
|
(7
|
)
|
|
—
|
|
Premium cost of fuel contracts
|
83
|
|
|
48
|
|
Other
|
(1
|
)
|
|
(3
|
)
|
|
$
|
71
|
|
|
$
|
121
|
|
Income Taxes
The Company's effective tax rate was approximately
37.1 percent
for the first
six months
of
2016
, compared with
37.6 percent
for the first
six months
of
2015
. The lower rate in the first
six months
of
2016
was primarily due to the Company's adoption of ASU 2016-09. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.
Reconciliation of Reported Amounts to Non-GAAP Financial Measures (unaudited)
(in millions, except per share and per ASM amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Percent
|
|
Six months ended June 30,
|
|
Percent
|
|
2016
|
|
2015
|
|
Change
|
|
2016
|
|
2015
|
|
Change
|
Fuel and oil expense, unhedged
|
$
|
716
|
|
|
$
|
962
|
|
|
|
|
$
|
1,293
|
|
|
$
|
1,792
|
|
|
|
Add: Fuel hedge (gains) losses included in Fuel and oil expense
|
187
|
|
|
43
|
|
|
|
|
462
|
|
|
90
|
|
|
|
Fuel and oil expense, as reported
|
$
|
903
|
|
|
$
|
1,005
|
|
|
|
|
$
|
1,755
|
|
|
$
|
1,882
|
|
|
|
Add (Deduct): Net impact from fuel contracts
|
30
|
|
|
(5
|
)
|
|
|
|
22
|
|
|
(9
|
)
|
|
|
Fuel and oil expense, non-GAAP (economic)
|
$
|
933
|
|
|
$
|
1,000
|
|
|
(6.7)%
|
|
$
|
1,777
|
|
|
$
|
1,873
|
|
|
(5.1)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses, as reported
|
$
|
4,108
|
|
|
$
|
4,026
|
|
|
|
|
$
|
7,990
|
|
|
$
|
7,660
|
|
|
|
Deduct: Union contract bonuses
|
—
|
|
|
(55
|
)
|
|
|
|
—
|
|
|
(55
|
)
|
|
|
Deduct: Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period settled contracts
|
(7
|
)
|
|
—
|
|
|
|
|
(7
|
)
|
|
—
|
|
|
|
Add (Deduct): Contracts settling in the current period, but for which gains and/or (losses) have been recognized in a prior period*
|
37
|
|
|
(5
|
)
|
|
|
|
29
|
|
|
(9
|
)
|
|
|
Deduct: Acquisition and integration costs
|
—
|
|
|
(3
|
)
|
|
|
|
—
|
|
|
(26
|
)
|
|
|
Add: Litigation settlement
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
37
|
|
|
|
Deduct: Asset impairment
|
(21
|
)
|
|
—
|
|
|
|
|
(21
|
)
|
|
—
|
|
|
|
Total operating expenses, non-GAAP
|
$
|
4,117
|
|
|
$
|
3,963
|
|
|
3.9%
|
|
$
|
7,991
|
|
|
$
|
7,607
|
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income, as reported
|
$
|
1,276
|
|
|
$
|
1,085
|
|
|
|
|
$
|
2,220
|
|
|
$
|
1,865
|
|
|
|
Add: Union contract bonuses
|
—
|
|
|
55
|
|
|
|
|
—
|
|
|
55
|
|
|
|
Add: Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period settled contracts
|
7
|
|
|
—
|
|
|
|
|
7
|
|
|
—
|
|
|
|
Add (Deduct): Contracts settling in the current period, but for which gains and/or (losses) have been recognized in a prior period*
|
(37
|
)
|
|
5
|
|
|
|
|
(29
|
)
|
|
9
|
|
|
|
Add: Acquisition and integration costs
|
—
|
|
|
3
|
|
|
|
|
—
|
|
|
26
|
|
|
|
Deduct: Litigation settlement
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
(37
|
)
|
|
|
Add: Asset impairment
|
21
|
|
|
—
|
|
|
|
|
21
|
|
|
—
|
|
|
|
Operating income, non-GAAP
|
$
|
1,267
|
|
|
$
|
1,148
|
|
|
10.4%
|
|
$
|
2,219
|
|
|
$
|
1,918
|
|
|
15.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, as reported
|
$
|
820
|
|
|
$
|
608
|
|
|
|
|
$
|
1,333
|
|
|
$
|
1,061
|
|
|
|
Add: Union contract bonuses
|
—
|
|
|
55
|
|
|
|
|
—
|
|
|
55
|
|
|
|
Add (Deduct): Mark-to-market impact from fuel contracts settling in future periods
|
(81
|
)
|
|
71
|
|
|
|
|
(5
|
)
|
|
91
|
|
|
|
Add (Deduct): Ineffectiveness from fuel hedges settling in future periods
|
(3
|
)
|
|
(2
|
)
|
|
|
|
1
|
|
|
(15
|
)
|
|
|
Add (Deduct): Other net impact of fuel contracts settling in the current or a prior period (excluding reclassifications)
|
(37
|
)
|
|
5
|
|
|
|
|
(29
|
)
|
|
9
|
|
|
|
Add: Acquisition and integration costs
|
—
|
|
|
3
|
|
|
|
|
—
|
|
|
26
|
|
|
|
Deduct: Litigation settlement
|
—
|
|
|
—
|
|
|
|
|
—
|
|
|
(37
|
)
|
|
|
Add: Asset impairment
|
21
|
|
|
—
|
|
|
|
|
21
|
|
|
—
|
|
|
|
Add (Deduct): Net income tax impact from fuel and special items (1)
|
37
|
|
|
(49
|
)
|
|
|
|
5
|
|
|
(48
|
)
|
|
|
Net income, non-GAAP
|
$
|
757
|
|
|
$
|
691
|
|
|
9.6%
|
|
$
|
1,326
|
|
|
$
|
1,142
|
|
|
16.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, diluted, as reported
|
$
|
1.28
|
|
|
$
|
0.90
|
|
|
|
|
$
|
2.07
|
|
|
$
|
1.57
|
|
|
|
Add (Deduct): Net impact to net income above from fuel contracts divided by dilutive shares
|
(0.19
|
)
|
|
0.11
|
|
|
|
|
(0.05
|
)
|
|
0.13
|
|
|
|
Add: Impact of special items
|
0.03
|
|
|
0.09
|
|
|
|
|
0.03
|
|
|
0.07
|
|
|
|
Add (Deduct): Net income tax impact of fuel and special items (1)
|
0.07
|
|
|
(0.07
|
)
|
|
|
|
0.01
|
|
|
(0.08
|
)
|
|
|
Net income per share, diluted, non-GAAP
|
$
|
1.19
|
|
|
$
|
1.03
|
|
|
15.5%
|
|
$
|
2.06
|
|
|
$
|
1.69
|
|
|
21.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses per ASM (cents)
|
|
10.75
|
¢
|
|
|
11.04
|
¢
|
|
|
|
|
10.87
|
¢
|
|
|
11.14
|
¢
|
|
|
Deduct: Fuel and oil expense divided by ASMs
|
(2.37
|
)
|
|
(2.75
|
)
|
|
|
|
(2.39
|
)
|
|
(2.74
|
)
|
|
|
Deduct: Impact of special items
|
(0.05
|
)
|
|
(0.16
|
)
|
|
|
|
(0.02
|
)
|
|
(0.06
|
)
|
|
|
Operating expenses per ASM, non-GAAP, excluding Fuel and oil and special items (cents)
|
|
8.33
|
¢
|
|
|
8.13
|
¢
|
|
2.5%
|
|
|
8.46
|
¢
|
|
|
8.34
|
¢
|
|
1.4%
|
* As a result of prior hedge ineffectiveness and/or contracts marked to market through earnings.
(1) 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.
Return on Invested Capital (ROIC) (unaudited)
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
Twelve Months Ended
|
|
June 30, 2016
|
|
June 30, 2015
|
Operating income, as reported
|
$
|
4,471
|
|
|
$
|
3,100
|
|
Special revenue adjustment (1)
|
(172
|
)
|
|
—
|
|
Union contract bonuses
|
279
|
|
|
64
|
|
Net impact from fuel contracts
|
(354
|
)
|
|
23
|
|
Acquisition and integration costs
|
13
|
|
|
96
|
|
Litigation settlement
|
—
|
|
|
(37
|
)
|
Asset impairment
|
21
|
|
|
—
|
|
Operating income, non-GAAP
|
$
|
4,258
|
|
|
$
|
3,246
|
|
Net adjustment for aircraft leases (2)
|
117
|
|
|
117
|
|
Adjustment for fuel hedge accounting
|
(159
|
)
|
|
(76
|
)
|
Adjusted Operating income, non-GAAP
|
$
|
4,216
|
|
|
$
|
3,287
|
|
|
|
|
|
Average invested capital (3)
|
$
|
11,524
|
|
|
$
|
11,196
|
|
Equity adjustment for hedge accounting
|
1,072
|
|
|
473
|
|
Adjusted average invested capital
|
$
|
12,596
|
|
|
$
|
11,669
|
|
|
|
|
|
ROIC, pre-tax
|
33.5
|
%
|
|
28.2
|
%
|
(1) One-time adjustment related to the execution of the Agreement with Chase and the resulting change in accounting methodology. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.
(2) 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).
(3) Average invested capital is an average of the five most recent quarter end balances of debt, net present value of aircraft leases, and equity adjusted for hedge accounting.
Note Regarding Use of Non-GAAP Financial Measures
The Company's unaudited Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These GAAP financial statements include (i) unrealized non-cash 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 the Company believes are not indicative of its ongoing operational performance.
As a result, the Company also provides financial information in this filing 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, 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 greater transparency 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 financial 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 a better measure of the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, non-cash 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.
Further information on (i) the Company's fuel hedging program, (ii) the requirements of accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments is included in the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2015
, and
Note 3
to the unaudited Condensed Consolidated Financial Statements.
In addition, the Company’s GAAP results in the applicable periods include other charges or benefits that are deemed “special items” that the Company believes are not indicative of its ongoing operations and make its results difficult to compare to prior periods, anticipated future periods, or to its competitors’ results. Special items include:
|
|
1.
|
A one-time $172 million Special revenue adjustment due to the Agreement with Chase and the resulting change in accounting methodology. This non-cash increase to Other revenue represented a nonrecurring required acceleration of revenues associated with the adoption of ASU 2009-13. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information;
|
|
|
2.
|
Expenses associated with the Company’s acquisition and integration of 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 Company does not expect to incur any further acquisition and integration costs related to the AirTran acquisition and therefore, the exclusion of these expenses provides investors with a more applicable basis for which to compare results in future periods now that the integration process has been completed;
|
|
|
3.
|
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;
|
|
|
4.
|
Union contract 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; and
|
|
|
5.
|
A $21 million noncash impairment charge related to Newark slots as a result of the FAA announcement in April, that Newark was being changed to a Level 2 schedule-facilitated airport from its previous designation as Level 3.
|
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 compare results to other airlines: Operating revenues, non-GAAP; Total operating expenses, non-GAAP; Operating income, non-GAAP; Net income, non-GAAP; Net income per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding fuel and special items.
The Company has also provided return on invested capital, which is a non-GAAP financial measure. The Company believes return on invested capital is a meaningful measure because it quantifies how well the Company generates operating income 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 may differ; therefore, the Company is providing an explanation of its calculation for return on invested capital (before taxes and excluding special items) in the accompanying reconciliation.
Liquidity and Capital Resources
Net cash
provided by
operating activities was
$1.1 billion
for the
three months ended
June 30, 2016
, compared with
$627 million
provided by
operating activities in the same prior year period. For the
six months ended
June 30, 2016
, net cash
provided by
operating activities was
$2.7 billion
, compared with
$2.1 billion
provided by
operating activities in the
six months ended
June 30, 2015
. The operating cash flows for the
six months ended
June 30, 2016
, were largely impacted by the Company's net income (as adjusted for noncash items), which includes
$588 million
of depreciation and amortization,
$62 million
of which was due to the accelerated depreciation expense resulting from a change in the estimated retirement dates of many of the Company's owned 737-300 aircraft from mid-2021 to third quarter 2017. Additionally, there was a
$764 million
increase
in Air traffic liability as a result of bookings for future travel and sales of frequent flyer points to business partners, and the Company received
$116 million
in cash collateral from fuel derivative counterparties during the
six months ended
June 30, 2016
. See Note 3 to the unaudited Condensed Consolidated Financial Statements. For the
six months ended
June 30, 2015
, in addition to the Company's net income (as adjusted for noncash items), there was a
$918 million
increase in Air traffic liability as a result of bookings for future travel and sales of frequent flyer points to business partners, and
$394 million
in cash collateral was provided to fuel derivative counterparties. Net cash provided by operating activities is primarily used to finance capital expenditures, repay debt, fund stock repurchases, pay dividends, and provide working capital.
Net cash
used in
investing activities was
$674 million
during the
three months ended
June 30, 2016
, compared with $
407 million
used in
investing activities in the same prior year period. Net cash used in investing activities during the
six months ended
June 30, 2016
, totaled $
849 million
, versus $
708 million
used in
investing activities in the same prior year period. Investing activities in both years included capital expenditures, primarily related to aircraft and other equipment, payments associated with airport construction projects, denoted as Assets constructed for others, and changes in the balance of the Company's short-term and noncurrent investments. During the
six months ended
June 30, 2016
, capital expenditures were
$900 million
, consisting primarily of payments for new and previously owned aircraft delivered to the Company. This compared with
$1.0 billion
in Capital expenditures during the same prior year period. During the
six months ended
June 30, 2016
, the Company's transactions in short-term and noncurrent investments resulted in a net cash
inflow
of
$93 million
, compared with a net cash
inflow
of
$346 million
during the same prior year period.
Net cash used in financing activities was
$786 million
during the
three months ended
June 30, 2016
, compared with
$473 million
used in financing activities for the same prior year period. Net cash used in financing activities during the
six months ended
June 30, 2016
, was $
1.4 billion
, compared with $
881 million
used in
financing activities for the same prior year period. During the
six months ended
June 30, 2016
, the Company repaid
$103 million
in debt and capital lease obligations, repurchased
$1.2 billion
of its outstanding common stock through a share repurchase program, and paid
$160 million
in dividends to Shareholders. During the
six months ended
June 30, 2015
, the Company repaid
$92 million
in debt and capital lease obligations, repurchased approximately
$680 million
of its outstanding common stock through a share repurchase program, and paid
$131 million
in dividends to Shareholders.
The Company is a “well-known seasoned issuer” and has an effective shelf registration statement registering an indeterminate amount of debt and equity securities for future sales. The Company currently intends to use the proceeds from any future securities sales off this shelf registration statement for general corporate purposes.
The Company has access to a
$1 billion
unsecured revolving credit facility, which expires in
April 2018
. Interest on the facility is based on the Company's credit ratings at the time of borrowing. At the Company's current ratings, the interest cost would be
LIBOR plus a spread of 112.5 basis points
. The facility contains a financial covenant, requiring a minimum coverage ratio of adjusted pre-tax income to fixed obligations, as defined. As of
June 30, 2016
, the Company was in compliance with this covenant and there were
no
amounts outstanding under the revolving credit facility.
On May 18, 2016, the Company's Board of Directors declared an increase in the Company's quarterly cash dividend from $.075 per share to $.10 per share. Although the Company currently intends to continue paying dividends on a quarterly basis for the foreseeable future, the Company's Board of Directors may change the timing, amount, and
payment of dividends on the basis of results of operations, financial condition, cash requirements, future prospects, and other factors deemed relevant by the Board of Directors.
On
May 13, 2015
, the Company’s Board of Directors authorized the repurchase of up to
$1.5 billion
of the Company’s common stock. Under this
$1.5 billion
share repurchase program, in April 2016, the Company launched the April 2016 ASR Program and advanced
$200 million
to a financial institution in a privately negotiated transaction, and received, in total,
4.5 million
shares under the April 2016 ASR Program, which was completed in May 2016. The purchase was recorded as a treasury share purchase for purposes of calculating earnings per share. Subsequent to the completion of the April 2016 ASR Program, the Company had no amounts remaining under this
$1.5 billion
share repurchase program.
On
May 18, 2016
, the Company's Board of Directors authorized the repurchase of up to
$2.0 billion
of the Company’s common stock. Under this
$2.0 billion
share repurchase program, in May 2016, the Company launched the May 2016 ASR Program and advanced
$500 million
to a financial institution in a privately negotiated transaction. The Company received a total of 12.3 million shares under the May 2016 ASR Program, which was completed in June 2016. The purchase was recorded as a treasury share purchase for purposes of calculating earnings per share. This transaction brings total repurchases of common stock in
2016
to
$1.2 billion
. As of
June 30, 2016
, the Company has
$1.5 billion
remaining under its
$2.0 billion
share repurchase program.
The Company believes that its current liquidity position, including unrestricted cash and short-term investments of $
3.4 billion
as of
June 30, 2016
, anticipated future internally generated funds from operations, and its fully available, unsecured revolving credit facility of
$1 billion
that expires in
April 2018
, will enable it to meet its future known obligations in the ordinary course of business. However, if a liquidity need were to arise, the Company believes it has access to financing arrangements because of its investment grade credit ratings, large value of unencumbered assets, and modest leverage, which should enable it to meet its ongoing capital, operating, and other liquidity requirements. The Company will continue to consider various borrowing or leasing options to maximize liquidity and supplement cash requirements, as necessary.
The Company has contractual obligations and commitments primarily with regard to future purchases of aircraft, payment of debt, and lease arrangements. For aircraft commitments with Boeing, the Company is required to make cash deposits toward the purchase of aircraft in advance. These deposits are classified as Deposits on flight equipment purchase contracts in the unaudited Condensed Consolidated Balance Sheet until the aircraft is delivered, at which time deposits previously made are deducted from the final purchase price of the aircraft and are reclassified as Flight equipment. During second quarter 2016, the Company revised its future firm aircraft order book. Firm deliveries previously scheduled between 2019 and 2022 were deferred to 2023 through 2025 in the restructured order book. This resulted in a $1.9 billion deferral of capital spending beyond 2020. See Note 7 to the unaudited Condensed Consolidated Financial Statements for information regarding the Company's firm orders and options for Boeing 737-700, 737-800, 737-7, and 737-8 aircraft and the Company's capital commitments associated therewith in 2016, 2017, 2018, 2019, 2020, and thereafter.
The following table details information on the aircraft in the Company's fleet as of
June 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Number
|
|
Number
|
|
Number
|
Type
|
|
Seats
|
|
Age (Yrs)
|
|
of Aircraft
|
|
Owned
|
|
Leased
|
737-300
|
|
137 or 143
|
|
22
|
|
|
104
|
|
(1)
|
68
|
|
|
36
|
|
737-500
|
|
122
|
|
24
|
|
|
7
|
|
|
7
|
|
|
—
|
|
737-700
|
|
143
|
|
12
|
|
|
490
|
|
|
397
|
|
|
93
|
|
737-800
|
|
175
|
|
2
|
|
|
118
|
|
|
111
|
|
|
7
|
|
TOTALS
|
|
|
|
12
|
|
|
719
|
|
|
583
|
|
|
136
|
|
(1) Of the total,
77
737-300 aircraft have 143 seats and
27
have 137 seats.
Cautionary Statement Regarding Forward-Looking Statements
This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on, and include statements about, the Company's estimates, expectations, beliefs, intentions, and strategies for the future, and the assumptions underlying these forward-looking statements. 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 the following:
|
|
•
|
the Company's network, fleet, and capacity plans;
|
|
|
•
|
the Company’s plans and expectations with respect to the replacement of its reservations system;
|
|
|
•
|
the Company’s financial outlook and projected results of operations, including factors and assumptions underlying the Company’s projections;
|
|
|
•
|
the Company’s plans and expectations with respect to managing risk associated with changing jet fuel prices;
|
|
|
•
|
the Company's expectations with respect to liquidity, capital expenditures, and returns to shareholders, including anticipated needs for, and sources of, funds;
|
|
|
•
|
the Company's assessment of market risks; and
|
|
|
•
|
the Company's plans and expectations related to legal proceedings.
|
While management believes these forward-looking statements are reasonable as and when made, forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual results may differ materially from what is expressed in or indicated by the Company's forward-looking statements or from historical experience or the Company's present expectations. Factors that could cause these differences include, among others:
|
|
•
|
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;
|
|
|
•
|
the Company's dependence on third party vendors, in particular with respect to its fleet and technology plans;
|
|
|
•
|
the impact of governmental regulations and other governmental actions related to the Company and its operations;
|
|
|
•
|
changes in demand for the Company's services and the impact of economic conditions, fuel prices, and actions of competitors (including, without limitation, pricing, scheduling, and capacity decisions and consolidation and alliance activities) and other factors beyond the Company’s control on the Company's business decisions, plans, and strategies;
|
|
|
•
|
changes in the price of aircraft fuel, the impact of hedge accounting, and any changes to the Company's fuel hedging strategies and positions;
|
|
|
•
|
the Company's ability to maintain positive relations with employees and employee representatives and the impact of labor matters on the Company's business decisions, plans, strategies, and costs; and
|
|
|
•
|
other factors as set forth 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 year ended December 31, 2015.
|
Caution should be taken not to place undue reliance on the Company's forward-looking statements, which represent the Company's views only as of the date this report is filed. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.