DALLAS, Oct. 26, 2016
/PRNewswire/ -- Southwest Airlines Co. (NYSE:LUV) (the
"Company") today reported its third quarter 2016 results:
- Net income of $388 million, or
$.62 per diluted share, compared with
third quarter 2015 net income of $584
million, or $.88 per diluted
share.
- Excluding special items1, net income of $582 million, or $.93 per diluted share, compared with third
quarter 2015 net income of $623
million, or $.94 per diluted
share. This compared to First Call third quarter 2016 consensus
estimate of $0.88 per diluted
share.
- Operating income of $695 million,
resulting in an operating margin2 of 13.5 percent.
- Excluding special items, operating income of $972 million, resulting in an operating
margin3 of 18.9 percent.
- Operating cash flow of $856
million; free cash flow1 of $392 million; returned $312 million to Shareholders through a
combination of dividends and share repurchases.
- Return on invested capital (ROIC)1 for 12 months
ended September 30, 2016 of 32.3
percent.
Gary C. Kelly, Chairman of the
Board, President, and Chief Executive Officer, stated, "We are
pleased to report another quarter of strong cash flows and healthy
margins. We benefited from low fuel prices and record third quarter
traffic levels in a competitive fare environment. I am very
grateful for our People and their hard work. They did an
outstanding job and produced superb results, especially considering
the operational challenges caused by the technology outage in July.
Their efforts to serve our Customers were truly heroic, and I am
very appreciative.
"We are delighted to have reached tentative agreements with our
Facilities Maintenance Technicians, Pilots, Flight Attendants, and
Aircraft Appearance Technicians. These proposed agreements are
subject to a ratification vote of each respective Employee
group.
"The successful implementation of our new reservation system is
a top priority for this quarter. The first release is currently
scheduled for December, and final technology readiness is
progressing as planned.
"We are excited about the fourth quarter 2016 scheduled launch
of new service to Cuba from
Florida4, as well as
Mexico service from Los Angeles International Airport. Also, we
are on track for completion of a new five-gate international
terminal in Ft. Lauderdale with
new international routes planned for mid-2017.
"We also have exciting growth opportunities beyond those planned
for next year. We will continue to manage our growth prudently in
light of the revenue environment and increasing fuel prices. We
plan to slow our 2017 available seat mile growth rate to less than
4.0 percent, year-over-year, with approximately 2.0 points of the
increase relating to domestic growth."
Revenue Results and Outlook
The Company's total operating revenues were $5.1 billion, driven largely by third quarter
2016 passenger revenues of $4.7
billion. As compared with third quarter 2015, total
operating revenues declined 3.4 percent on a 4.2 percent increase
in available seat miles. Third quarter 2015 operating revenues
included a one-time special revenue adjustment of $172 million recorded as a result of the amended
co-branded credit card agreement with Chase Bank USA, N.A. (Chase) and a resulting required
change in accounting methodology. Excluding this special item,
third quarter 2016 total operating revenues were comparable to
third quarter 2015, despite an estimated $55
million reduction in third quarter 2016 revenues due to the
Company's July technology outage. Customer demand remained strong
during third quarter, with lower year-over-year fares resulting in
a 4.9 percent decline in passenger revenue yield, as compared with
third quarter 2015. Operating unit revenues (RASM) declined 4.1
percent, as compared with third quarter 2015 excluding the one-time
special revenue adjustment of $172
million. While current trends suggest a stabilization of
close-in fares, the overall revenue yield environment remains soft.
Based on these trends, the shift in holiday timing, and bookings
thus far, the Company expects fourth quarter 2016 RASM to decline
in the 4 to 5 percent range, compared with fourth quarter 2015
RASM.
Cost Performance and Outlook
Third quarter 2016 total operating expenses increased 8.6
percent to $4.4 billion, and
increased 4.2 percent on a unit basis, as compared with third
quarter 2015. During third quarter 2016, the Company acquired four
of its Boeing 737-300 aircraft off operating lease. As a result,
the Company recorded lease termination costs totaling $18 million as a special item and recorded the
fair value of the aircraft, as well as the associated remaining
obligations to the balance sheet as debt. During third quarter
2016, the Company also expensed $356
million (before profitsharing expense and income taxes)
related to proposed union contract signing bonuses as a special
item. Excluding special items, total operating expenses increased
1.7 percent to $4.2 billion, and
decreased 2.4 percent on a unit basis.
Third quarter 2016 economic fuel costs1 were
$2.02 per gallon, including
$0.56 per gallon in unfavorable cash
settlements from fuel derivative contracts, compared with
$2.20 per gallon in third quarter
2015, including $0.50 per gallon in
unfavorable cash settlements from fuel derivative contracts. Based
on the Company's existing fuel derivative contracts and market
prices as of October 20, 2016, fourth quarter 2016 economic
fuel costs are estimated to be approximately $2.10 per gallon5. As of
October 20, 2016, the fair market value of the Company's fuel
derivative contracts for fourth quarter 2016 was a net liability of
approximately $240 million. For 2017
and 2018, combined, the hedge portfolio was a net liability of
approximately $440 million.
Additional information regarding the Company's fuel derivative
contracts is included in the accompanying tables.
Excluding fuel and oil expense and special items in both
periods, third quarter 2016 operating expenses increased 3.9
percent compared with third quarter 2015. Third quarter 2016
profitsharing expense was $101
million, compared with $177
million in third quarter 2015. Excluding fuel and oil
expense, special items, and profitsharing expense, third quarter
2016 operating costs increased 6.8 percent, and 2.6 percent on a
unit basis, both year-over-year, and including approximately
$24 million in expenses related to
the Company's July technology outage. Based on current trends and
excluding fuel and oil expense, special items, and profitsharing
expense, the Company expects its fourth quarter 2016 unit costs to
increase in the four to five percent range6,
year-over-year, driven by the estimated impact of proposed and
amended union contracts and the additional depreciation expense
associated with the accelerated retirement of the Company's Classic
fleet (Boeing 737-300/-500 aircraft) to third quarter 2017.
Third Quarter Results
Third quarter 2016 operating income was $695 million,
compared with $1.2 billion in third
quarter 2015. Excluding special items, third quarter 2016 operating
income was $972 million, compared with $1.0 billion in third quarter 2015.
Other expenses in third quarter 2016 were $77 million, compared with $292 million in third quarter 2015. The
$215 million decrease resulted
primarily from $64 million in other
losses recognized in third quarter 2016, compared with $272 million in third quarter 2015. In both
periods, these losses included ineffectiveness and unrealized
mark-to-market amounts associated with a portion of the Company's
fuel hedge portfolio, which are special items. Excluding these
special items, other losses were $33
million in both periods, primarily attributable to the
premium costs associated with the Company's fuel derivative
contracts. Fourth quarter 2016 premium costs related to fuel
derivative contracts are currently estimated to be approximately
$36 million, compared with
$43 million in fourth quarter 2015.
Net interest expense in third quarter 2016 was $13 million, compared with $20 million in third quarter 2015.
Third quarter 2016 net income was $388 million, or $0.62 per diluted share, compared with third
quarter 2015 net income of $584
million, or $.88 per diluted
share. Excluding special items, third quarter net income was
$582 million, or $.93 per diluted share, compared with third
quarter 2015 net income of $623
million, or $.94 per diluted
share.
Liquidity and Capital Deployment
As of September 30, 2016, the Company had approximately
$3.4 billion in cash and short-term
investments, and a fully available unsecured revolving credit line
of $1 billion. During third quarter
2016, the Company entered into a new unsecured five-year revolving
credit facility, and terminated its previous $1 billion facility, which would have expired in
April 2018. Net cash provided by
operations during third quarter 2016 was $856 million, capital expenditures were
$464 million, and free cash flow was
$392 million. The Company repaid
$68 million in debt and capital lease
obligations during third quarter 2016, and expects to repay
approximately $450 million in debt
and capital lease obligations in fourth quarter 2016.
During third quarter 2016, the Company returned $312 million to its Shareholders through the
payment of $62 million in dividends
and the repurchase of 6.7 million shares in common stock for
$250 million. The common stock
repurchased was pursuant to an accelerated share repurchase program
launched during third quarter 2016 and completed this month. The
Company has $1.25 billion remaining
under its May 2016 $2.0 billion share repurchase program.
For the nine months ended September 30, 2016, net cash
provided by operations was $3.6
billion, capital expenditures were $1.4 billion, and assets constructed for others,
net of reimbursements, were $2
million, resulting in free cash flow of $2.2 billion. This enabled the Company to return
approximately $1.7 billion to
Shareholders through the payment of $222
million in dividends and the repurchase of $1.5 billion in common stock.
Fleet and Capacity
The Company ended third quarter 2016 with 714 aircraft in its
fleet. This reflects the third quarter 2016 delivery of 11 new
Boeing 737-800s, and the retirement of 16 Boeing 737 Classic
aircraft, including the last -500 aircraft in the Company's fleet.
The Company plans to end this year with 723 aircraft, with 2016
available seat mile growth in the five to six percent range,
year-over-year. Additional information regarding the Company's
aircraft delivery schedule is included in the accompanying
tables.
Awards and Recognitions
- Ranked among top Airline Rewards Programs by U.S. News &
World Report.
- Named Simpliflying's Best Airline in Customer Service, Best
Airline in Social Media, and Best Airline in North America.
- Included among top 10 of Glassdoor's Best Places to Interview
2016.
- Voted Most Trusted Brand for Airlines in Reader's Digest's 2016
Most Trusted Brands.
- Southwest Cargo received Logistics Management Magazine's 2016
Quest for Quality Award for the 20th consecutive
year.
Conference Call
The Company will discuss its third quarter 2016 results on a
conference call at 12:30 p.m. Eastern
Time today. To listen to a live broadcast of the conference
call please go to http://investors.southwest.com
1See Note Regarding Use of Non-GAAP Financial
Measures for additional information on special items, ROIC, and
free cash flow. In addition, information regarding special items,
ROIC, and economic results is included in the accompanying
reconciliation tables.
2Operating margin is calculated as operating income
divided by operating revenues.
3Operating margin, excluding special items, is
calculated as operating income, excluding special items, divided by
operating revenues. See Note Regarding Use of Non-GAAP Financial
Measures. In addition, information regarding special items is
included in the accompanying reconciliation tables.
4Pending the approvals of the Cuban government.
5Projections do not reflect the potential impact of
special items because the Company cannot reliably predict or
estimate those items or expenses or their impact to its financial
statements in future periods, especially considering the
significant volatility of the fuel and oil expense line
item. Accordingly, the Company believes a reconciliation of
non-GAAP financial measures to the equivalent GAAP financial
measures for projected results is not meaningful or available
without unreasonable effort.
6Year-over-year projections do not reflect the potential
impact of fuel and oil expense, profitsharing expense, and special
items in both years because the Company cannot reliably predict or
estimate those items or expenses or their impact to its financial
statements in future periods, especially considering the
significant volatility of the fuel and oil expense line
item. Accordingly, the Company believes a reconciliation of
non-GAAP financial measures to the equivalent GAAP financial
measures for projected results is not meaningful or available
without unreasonable effort.
Cautionary Statement Regarding Forward-Looking
Statements
This news release 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 financial
outlook, expectations, strategies, and projected results of
operations, including specific factors expected to impact the
Company's results of operations; (ii) the Company's plans and
expectations related to labor matters; (iii) 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; (iv) the Company's growth plans, strategies, and
opportunities, including its network and capacity plans,
opportunities, and expectations; (v) the Company's expectations
related to its management of risk associated with changing jet fuel
prices; (vi) the Company's expectations with respect to liquidity
(including its plans for the repayment of debt and capital lease
obligations) and capital expenditures; and (vii) the Company's
fleet plans and expectations. These forward-looking statements are
based on the Company's current intent, expectations, and
projections and are not guarantees of future
performance. 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 economic
conditions, fuel prices, actions of competitors (including without
limitation pricing, scheduling, and capacity decisions and
consolidation), and other factors beyond the Company's control, on
the Company's business decisions, plans, and strategies; (iii) the
impact of labor matters on the Company's business decisions, plans,
strategies, and costs; (iv) the Company's dependence on third
parties, in particular with respect to its fleet and technology
plans; (v) the impact of governmental regulations and other
governmental actions related to the Company's operations; (vi) 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; (vii)
changes in aircraft fuel prices, the impact of hedge accounting,
and any changes to the Company's fuel hedging strategies and
positions; and (viii) other factors, as described in the Company's
filings with the Securities and Exchange Commission, including the
detailed factors discussed under the heading "Risk Factors" in the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2015.
SW-QFS
Southwest Airlines
Co.
Condensed Consolidated Statement of Income (in millions,
except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
|
Nine months
ended
|
|
|
|
|
|
|
|
September
30,
|
|
|
|
September
30,
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Percent
Change
|
|
2016
|
|
2015
|
|
Percent
Change
|
OPERATING
REVENUES:
|
|
|
|
|
|
|
|
Passenger
|
$
|
4,669
|
|
$
|
4,716
|
|
(1.0)
|
|
$
|
13,971
|
|
$
|
13,746
|
|
1.6
|
Freight
|
42
|
|
44
|
|
(4.5)
|
|
129
|
|
134
|
|
(3.7)
|
Special revenue
adjustment
|
—
|
|
172
|
|
n.m.
|
|
—
|
|
172
|
|
n.m.
|
Other
|
428
|
|
386
|
|
10.9
|
|
1,250
|
|
791
|
|
58.0
|
Total operating
revenues
|
5,139
|
|
5,318
|
|
(3.4)
|
|
15,350
|
|
14,843
|
|
3.4
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
Salaries, wages, and
benefits
|
1,909
|
|
1,699
|
|
12.4
|
|
5,089
|
|
4,725
|
|
7.7
|
Fuel and
oil
|
941
|
|
936
|
|
0.5
|
|
2,696
|
|
2,818
|
|
(4.3)
|
Maintenance materials
and repairs
|
258
|
|
259
|
|
(0.4)
|
|
801
|
|
729
|
|
9.9
|
Aircraft
rentals
|
56
|
|
60
|
|
(6.7)
|
|
174
|
|
179
|
|
(2.8)
|
Landing fees and
other rentals
|
307
|
|
303
|
|
1.3
|
|
918
|
|
887
|
|
3.5
|
Depreciation and
amortization
|
315
|
|
258
|
|
22.1
|
|
903
|
|
751
|
|
20.2
|
Acquisition and
integration
|
—
|
|
6
|
|
n.m.
|
|
—
|
|
32
|
|
n.m.
|
Other operating
expenses
|
658
|
|
572
|
|
15.0
|
|
1,854
|
|
1,632
|
|
13.6
|
Total operating
expenses
|
4,444
|
|
4,093
|
|
8.6
|
|
12,435
|
|
11,753
|
|
5.8
|
|
|
|
|
|
|
|
|
OPERATING
INCOME
|
695
|
|
1,225
|
|
(43.3)
|
|
2,915
|
|
3,090
|
|
(5.7)
|
|
|
|
|
|
|
|
|
OTHER EXPENSES
(INCOME):
|
|
|
|
|
|
|
|
Interest
expense
|
31
|
|
31
|
|
—
|
|
93
|
|
92
|
|
1.1
|
Capitalized
interest
|
(12)
|
|
(9)
|
|
33.3
|
|
(34)
|
|
(23)
|
|
47.8
|
Interest
income
|
(6)
|
|
(2)
|
|
200.0
|
|
(17)
|
|
(5)
|
|
240.0
|
Other (gains) losses,
net
|
64
|
|
272
|
|
(76.5)
|
|
135
|
|
394
|
|
(65.7)
|
Total other expenses
(income)
|
77
|
|
292
|
|
(73.6)
|
|
177
|
|
458
|
|
(61.4)
|
|
|
|
|
|
|
|
|
INCOME BEFORE
INCOME TAXES
|
618
|
|
933
|
|
(33.8)
|
|
2,738
|
|
2,632
|
|
4.0
|
PROVISION FOR
INCOME TAXES
|
230
|
|
349
|
|
(34.1)
|
|
1,016
|
|
987
|
|
2.9
|
NET
INCOME
|
$
|
388
|
|
$
|
584
|
|
(33.6)
|
|
$
|
1,722
|
|
$
|
1,645
|
|
4.7
|
|
|
|
|
|
|
|
|
NET INCOME PER
SHARE:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.63
|
|
$
|
0.89
|
|
(29.2)
|
|
$
|
2.73
|
|
$
|
2.47
|
|
10.5
|
Diluted
|
$
|
0.62
|
|
$
|
0.88
|
|
(29.5)
|
|
$
|
2.70
|
|
$
|
2.45
|
|
10.2
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE
SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
Basic
|
618
|
|
655
|
|
(5.6)
|
|
630
|
|
665
|
|
(5.3)
|
Diluted
|
625
|
|
663
|
|
(5.7)
|
|
638
|
|
673
|
|
(5.2)
|
Southwest Airlines
Co.
Reconciliation of Reported Amounts to Non-GAAP Items
(See Note Regarding Use of Non-GAAP Financial Measures) (in
millions, except per share amounts)(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
|
Nine months
ended
|
|
|
|
|
|
|
|
September
30,
|
|
|
|
September
30,
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Percent
Change
|
|
2016
|
|
2015
|
|
Percent
Change
|
Operating
revenues, as reported
|
$
|
5,139
|
|
$
|
5,318
|
|
|
|
$
|
15,350
|
|
$
|
14,843
|
|
|
Deduct: Special
revenue adjustment
|
—
|
|
(172)
|
|
|
|
—
|
|
(172)
|
|
|
Operating
revenues, Non-GAAP
|
$
|
5,139
|
|
$
|
5,146
|
|
(0.1)
|
|
$
|
15,350
|
|
$
|
14,671
|
|
4.6
|
|
|
|
|
|
|
|
|
Fuel and oil
expense, unhedged
|
$
|
751
|
|
$
|
843
|
|
|
|
$
|
2,044
|
|
$
|
2,634
|
|
|
Add: Fuel hedge
(gains) losses included in Fuel and oil expense
|
190
|
|
93
|
|
|
|
652
|
|
184
|
|
|
Fuel and oil
expense, as reported
|
$
|
941
|
|
$
|
936
|
|
|
|
$
|
2,696
|
|
$
|
2,818
|
|
|
Add: Net impact from
fuel contracts (1)
|
97
|
|
152
|
|
|
|
120
|
|
143
|
|
|
Fuel and oil
expense, non-GAAP (economic)
|
$
|
1,038
|
|
$
|
1,088
|
|
(4.6)
|
|
$
|
2,816
|
|
$
|
2,961
|
|
(4.9)
|
|
|
|
|
|
|
|
|
Total operating
expenses, as reported
|
$
|
4,444
|
|
$
|
4,093
|
|
|
|
$
|
12,435
|
|
$
|
11,753
|
|
|
Deduct: Union
contract bonuses
|
(356)
|
|
(140)
|
|
|
|
(356)
|
|
(195)
|
|
|
Add: Net impact from
fuel contracts (1)
|
97
|
|
152
|
|
|
|
120
|
|
143
|
|
|
Deduct: Acquisition
and integration costs
|
—
|
|
(6)
|
|
|
|
—
|
|
(32)
|
|
|
Add: Litigation
settlement
|
—
|
|
—
|
|
|
|
—
|
|
37
|
|
|
Deduct: Asset
impairment
|
—
|
|
—
|
|
|
|
(21)
|
|
—
|
|
|
Deduct: Lease
termination expense
|
(18)
|
|
—
|
|
|
|
(18)
|
|
—
|
|
|
Total operating
expenses, non-GAAP
|
$
|
4,167
|
|
$
|
4,099
|
|
1.7
|
|
$
|
12,160
|
|
$
|
11,706
|
|
3.9
|
Deduct: Fuel and oil
expense, non-GAAP (economic)
|
(1,038)
|
|
(1,088)
|
|
|
|
(2,816)
|
|
(2,961)
|
|
|
Operating
expenses, non-GAAP, excluding Fuel and oil expense
|
$
|
3,129
|
|
$
|
3,011
|
|
3.9
|
|
$
|
9,344
|
|
$
|
8,745
|
|
6.8
|
Deduct: Profitsharing
expense
|
(101)
|
|
(177)
|
|
|
|
(463)
|
|
(484)
|
|
|
Operating
expenses, non-GAAP, excluding profitsharing and Fuel and oil
expense
|
$
|
3,028
|
|
$
|
2,834
|
|
6.8
|
|
$
|
8,881
|
|
$
|
8,261
|
|
7.5
|
|
|
|
|
|
|
|
|
Operating income,
as reported
|
$
|
695
|
|
$
|
1,225
|
|
|
|
$
|
2,915
|
|
$
|
3,090
|
|
|
Add: Union contract
bonuses
|
356
|
|
140
|
|
|
|
356
|
|
195
|
|
|
Deduct: Net impact
from fuel contracts (1)
|
(97)
|
|
(152)
|
|
|
|
(120)
|
|
(143)
|
|
|
Add: Acquisition and
integration costs
|
—
|
|
6
|
|
|
|
—
|
|
32
|
|
|
Deduct: Litigation
settlement
|
—
|
|
—
|
|
|
|
—
|
|
(37)
|
|
|
Deduct: Special
revenue adjustment
|
—
|
|
(172)
|
|
|
|
—
|
|
(172)
|
|
|
Add: Asset
impairment
|
—
|
|
—
|
|
|
|
21
|
|
—
|
|
|
Add: Lease
termination expense
|
18
|
|
—
|
|
|
|
18
|
|
—
|
|
|
Operating income,
non-GAAP
|
$
|
972
|
|
$
|
1,047
|
|
(7.2)
|
|
$
|
3,190
|
|
$
|
2,965
|
|
7.6
|
|
|
|
|
|
|
|
|
Other (gains)
losses, net, as reported
|
$
|
64
|
|
$
|
272
|
|
|
|
$
|
135
|
|
$
|
394
|
|
|
Deduct: Net impact
from fuel contracts (1)
|
(31)
|
|
(239)
|
|
|
|
(20)
|
|
(316)
|
|
|
Other (gains)
losses, net, non-GAAP
|
$
|
33
|
|
$
|
33
|
|
—
|
|
$
|
115
|
|
$
|
78
|
|
47.4
|
|
|
|
|
|
|
|
|
Net income, as
reported
|
$
|
388
|
|
$
|
584
|
|
|
|
$
|
1,722
|
|
$
|
1,645
|
|
|
Add: Union contract
bonuses
|
356
|
|
140
|
|
|
|
356
|
|
195
|
|
|
Add (Deduct): Net
impact from fuel contracts (1)
|
(66)
|
|
87
|
|
|
|
(100)
|
|
173
|
|
|
Add: Acquisition and
integration costs
|
—
|
|
6
|
|
|
|
—
|
|
32
|
|
|
Deduct: Litigation
settlement
|
—
|
|
—
|
|
|
|
—
|
|
(37)
|
|
|
Deduct: Special
revenue adjustment
|
—
|
|
(172)
|
|
|
|
—
|
|
(172)
|
|
|
Add: Asset
impairment
|
—
|
|
—
|
|
|
|
21
|
|
—
|
|
|
Add: Lease
termination expense
|
18
|
|
—
|
|
|
|
18
|
|
—
|
|
|
Deduct: Net income
tax impact of fuel and special items (2)
|
(114)
|
|
(22)
|
|
|
|
(110)
|
|
(72)
|
|
|
Net income,
non-GAAP
|
$
|
582
|
|
$
|
623
|
|
(6.6)
|
|
$
|
1,907
|
|
$
|
1,764
|
|
8.1
|
|
|
|
|
|
|
|
|
Net income per
share, diluted, as reported
|
$
|
0.62
|
|
$
|
0.88
|
|
|
|
$
|
2.70
|
|
$
|
2.45
|
|
|
Add (Deduct): Impact
from fuel contracts
|
(0.11)
|
|
0.13
|
|
|
|
(0.16)
|
|
0.26
|
|
|
Add: Impact of
special items
|
0.60
|
|
(0.04)
|
|
|
|
0.62
|
|
0.04
|
|
|
Deduct: Net income
tax impact of fuel and special
items (2)
|
(0.18)
|
|
(0.03)
|
|
|
|
(0.16)
|
|
(0.12)
|
|
|
Net income per
share, diluted, non-GAAP
|
$
|
0.93
|
|
$
|
0.94
|
|
(1.1)
|
|
$
|
3.00
|
|
$
|
2.63
|
|
14.1
|
|
|
(1)
|
See Reconciliation of
Impact from Fuel Contracts.
|
(2)
|
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.
|
Southwest Airlines
Co.
Reconciliation of Impact from Fuel Contracts
(See Note Regarding Use of Non-GAAP Financial Measures) (in
millions)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
Nine months
ended
|
|
September
30,
|
|
September
30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Fuel and oil
expense
|
|
|
|
|
Reclassification
between Fuel and oil and Other (gains) losses, net,
associated with current period settled
contracts
|
$
|
15
|
|
$
|
61
|
|
$
|
7
|
|
$
|
61
|
Contracts settling in
the current period, but for which losses have been recognized in a
prior period (1)
|
82
|
|
91
|
|
113
|
|
82
|
Impact from fuel
contracts to Fuel and oil expense
|
$
|
97
|
|
$
|
152
|
|
$
|
120
|
|
$
|
143
|
|
|
|
|
|
Operating
Income
|
|
|
|
|
Reclassification
between Fuel and oil and Other (gains) losses, net,
associated with current period settled
contracts
|
$
|
(15)
|
|
$
|
(61)
|
|
$
|
(7)
|
|
$
|
(61)
|
Contracts settling in
the current period, but for which losses have been recognized in a
prior period (1)
|
(82)
|
|
(91)
|
|
(113)
|
|
(82)
|
Impact from fuel
contracts to Operating Income
|
$
|
(97)
|
|
$
|
(152)
|
|
$
|
(120)
|
|
$
|
(143)
|
|
|
|
|
|
Other (gains)
losses, net
|
|
|
|
|
Mark-to-market impact
from fuel contracts settling in future periods
|
$
|
(20)
|
|
$
|
(179)
|
|
$
|
(16)
|
|
$
|
(271)
|
Ineffectiveness from
fuel hedges settling in future periods
|
4
|
|
1
|
|
3
|
|
16
|
Reclassification
between Fuel and oil and Other (gains) losses, net,
associated
with current period settled contracts
|
(15)
|
|
(61)
|
|
(7)
|
|
(61)
|
Impact from fuel
contracts to Other (gains) losses, net
|
$
|
(31)
|
|
$
|
(239)
|
|
$
|
(20)
|
|
$
|
(316)
|
|
|
|
|
|
Net
Income
|
|
|
|
|
Mark-to-market impact
from fuel contracts settling in future periods
|
$
|
20
|
|
$
|
179
|
|
$
|
16
|
|
$
|
271
|
Ineffectiveness from
fuel hedges settling in future periods
|
(4)
|
|
(1)
|
|
(3)
|
|
(16)
|
Other net impact of
fuel contracts settling in the current or a prior
period
(excluding reclassifications)
|
(82)
|
|
(91)
|
|
(113)
|
|
(82)
|
Impact from fuel
contracts to Net Income (2)
|
$
|
(66)
|
|
$
|
87
|
|
$
|
(100)
|
|
$
|
173
|
|
|
(1)
|
As a result of prior
hedge ineffectiveness and/or contracts marked-to-market through the
income statement.
|
(2)
|
Before income tax
impact of unrealized items.
|
Southwest Airlines
Co.
Comparative Consolidated Operating
Statistics (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
|
|
|
|
Nine months
ended
|
|
|
|
|
|
|
|
September
30,
|
|
|
|
September
30,
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Change
|
|
2016
|
|
2015
|
|
Change
|
Revenue passengers
carried
|
31,768,550
|
|
30,559,019
|
|
4.0%
|
|
92,712,998
|
|
87,802,757
|
|
5.6%
|
Enplaned
passengers
|
38,852,737
|
|
37,765,903
|
|
2.9%
|
|
112,960,419
|
|
107,535,145
|
|
5.0%
|
Revenue passenger
miles (RPMs) (000s) (1)
|
32,315,952
|
|
31,052,660
|
|
4.1%
|
|
93,431,810
|
|
87,771,907
|
|
6.4%
|
Available seat miles
(ASMs) (000s) (2)
|
37,881,510
|
|
36,360,340
|
|
4.2%
|
|
111,374,942
|
|
105,133,835
|
|
5.9%
|
Load factor
(3)
|
85.3%
|
|
85.4%
|
|
(0.1) pts.
|
|
83.9%
|
|
83.5%
|
|
0.4 pts.
|
Average length of
passenger haul (miles)
|
1,017
|
|
1,016
|
|
0.1%
|
|
1,008
|
|
1,000
|
|
0.8%
|
Average aircraft
stage length (miles)
|
764
|
|
754
|
|
1.3%
|
|
763
|
|
750
|
|
1.7%
|
Trips
flown
|
332,420
|
|
325,301
|
|
2.2%
|
|
981,409
|
|
948,180
|
|
3.5%
|
Seats flown
(4)
|
49,050,147
|
|
47,470,059
|
|
3.3%
|
|
144,264,317
|
|
138,326,878
|
|
4.3%
|
Seats per trip
(5)
|
147.55
|
|
145.93
|
|
1.1%
|
|
147.00
|
|
145.89
|
|
0.8%
|
Average passenger
fare
|
$
|
146.96
|
|
$
|
154.33
|
|
(4.8)%
|
|
$
|
150.69
|
|
$
|
156.55
|
|
(3.7)%
|
Passenger revenue
yield per RPM (cents) (6)
|
14.45
|
|
15.19
|
|
(4.9)%
|
|
14.95
|
|
15.66
|
|
(4.5)%
|
RASM (cents)
(7)
|
13.57
|
|
14.15
|
|
(4.1)%
|
|
13.78
|
|
13.95
|
|
(1.2)%
|
PRASM (cents)
(8)
|
12.32
|
|
12.97
|
|
(5.0)%
|
|
12.54
|
|
13.07
|
|
(4.1)%
|
CASM (cents)
(9)
|
11.73
|
|
11.26
|
|
4.2%
|
|
11.17
|
|
11.18
|
|
(0.1)%
|
CASM, excluding Fuel
and oil expense (cents)
|
9.25
|
|
8.68
|
|
6.6%
|
|
8.74
|
|
8.50
|
|
2.8%
|
CASM, excluding
special items (cents)
|
11.00
|
|
11.27
|
|
(2.4)%
|
|
10.92
|
|
11.13
|
|
(1.9)%
|
CASM, excluding Fuel
and oil expense and special items (cents)
|
8.26
|
|
8.28
|
|
(0.2)%
|
|
8.39
|
|
8.31
|
|
1.0%
|
CASM, excluding Fuel
and oil expense, special items, and profitsharing expense
(cents)
|
7.99
|
|
7.79
|
|
2.6%
|
|
7.97
|
|
7.85
|
|
1.5%
|
Fuel costs per
gallon, including fuel tax (unhedged)
|
$
|
1.46
|
|
$
|
1.70
|
|
(14.1)%
|
|
$
|
1.36
|
|
$
|
1.85
|
|
(26.5)%
|
Fuel costs per
gallon, including fuel tax
|
$
|
1.83
|
|
$
|
1.89
|
|
(3.2)%
|
|
$
|
1.79
|
|
$
|
1.98
|
|
(9.6)%
|
Fuel costs per
gallon, including fuel tax (economic)
|
$
|
2.02
|
|
$
|
2.20
|
|
(8.2)%
|
|
$
|
1.87
|
|
$
|
2.08
|
|
(10.1)%
|
Fuel consumed, in
gallons (millions)
|
513
|
|
493
|
|
4.1%
|
|
1,498
|
|
1,420
|
|
5.5%
|
Active fulltime
equivalent Employees
|
53,072
|
|
48,642
|
|
9.1%
|
|
53,072
|
|
48,642
|
|
9.1%
|
Aircraft at end of
period (10)
|
714
|
|
692
|
|
3.2%
|
|
714
|
|
692
|
|
3.2%
|
|
|
|
|
(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)
|
RASM (unit revenue) -
Operating revenue yield per ASM, calculated as operating revenue
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. Third quarter and nine months ended September 30, 2015 RASM
excludes a $172 million one-time special revenue adjustment.
Including the special revenue adjustment, RASM would have been
14.63 cents and 14.12 cents for the three and nine months ended
September 30, 2015, respectively. Additional information regarding
this special item is provided in the Note Regarding Use of Non-GAAP
Financial Measures and a reconciliation of revenue excluding
special items related to accounting changes in the accompanying
pages.
|
(8)
|
PRASM (Passenger unit
revenue) - Passenger revenue yield per ASM, 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)
|
CASM (unit costs) -
Operating expenses per ASM, 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.
|
Southwest Airlines
Co.
Return on Invested Capital (ROIC)
(See Note Regarding Use of Non-GAAP Financial Measures) (in
millions)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months
ended
|
|
Twelve months
ended
|
|
September 30,
2016
|
|
September 30,
2015
|
Operating income,
as reported
|
$
|
3,940
|
|
|
$
|
3,711
|
|
Special revenue
adjustment (1)
|
—
|
|
|
(172)
|
|
Union contract
bonuses
|
495
|
|
|
204
|
|
Net impact from fuel
contracts
|
(300)
|
|
|
(142)
|
|
Acquisition and
integration costs
|
7
|
|
|
80
|
|
Litigation
settlement
|
—
|
|
|
(37)
|
|
Asset
impairment
|
21
|
|
|
—
|
|
Lease termination
expense
|
18
|
|
|
—
|
|
Operating income,
non-GAAP
|
$
|
4,181
|
|
|
$
|
3,644
|
|
Net adjustment for
aircraft leases (2)
|
115
|
|
|
113
|
|
Adjustment for fuel
hedge accounting
|
(160)
|
|
|
(94)
|
|
Adjusted Operating
income, non-GAAP
|
$
|
4,136
|
|
|
$
|
3,663
|
|
|
|
|
|
Average invested
capital (3)
|
$
|
11,764
|
|
|
$
|
11,011
|
|
Equity adjustment for
hedge accounting
|
1,044
|
|
|
761
|
|
Adjusted average
invested capital
|
$
|
12,808
|
|
|
$
|
11,772
|
|
|
|
|
|
ROIC,
pre-tax
|
32.3%
|
|
|
31.1%
|
|
|
|
|
|
(1)
|
One-time adjustment
related to the amendment of the Company's co-branded credit card
agreement with Chase Bank USA, N.A. and a resulting change in
accounting methodology.
|
(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.
|
Southwest Airlines
Co.
Condensed Consolidated Balance Sheet (in millions)
(unaudited)
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$
|
1,966
|
|
|
$
|
1,583
|
|
Short-term
investments
|
1,480
|
|
|
1,468
|
|
Accounts and other
receivables
|
848
|
|
|
474
|
|
Inventories of parts
and supplies, at cost
|
331
|
|
|
311
|
|
Prepaid expenses and
other current assets
|
214
|
|
|
188
|
|
Total
current assets
|
4,839
|
|
|
4,024
|
|
Property and
equipment, at cost:
|
|
|
|
Flight
equipment
|
19,978
|
|
|
19,462
|
|
Ground property and
equipment
|
3,600
|
|
|
3,219
|
|
Deposits on flight
equipment purchase contracts
|
1,113
|
|
|
1,089
|
|
Assets constructed for
others
|
1,150
|
|
|
915
|
|
|
25,841
|
|
|
24,685
|
|
Less allowance for
depreciation and amortization
|
9,295
|
|
|
9,084
|
|
|
16,546
|
|
|
15,601
|
|
Goodwill
|
970
|
|
|
970
|
|
Other
assets
|
690
|
|
|
717
|
|
|
$
|
23,045
|
|
|
$
|
21,312
|
|
LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
|
1,021
|
|
|
$
|
1,188
|
|
Accrued
liabilities
|
2,146
|
|
|
2,591
|
|
Air traffic
liability
|
3,677
|
|
|
2,990
|
|
Current maturities of
long-term debt
|
972
|
|
|
637
|
|
Total
current liabilities
|
7,816
|
|
|
7,406
|
|
|
|
|
|
Long-term debt less
current maturities
|
2,323
|
|
|
2,541
|
|
Deferred income
taxes
|
3,209
|
|
|
2,490
|
|
Construction
obligation
|
989
|
|
|
757
|
|
Other noncurrent
liabilities
|
661
|
|
|
760
|
|
Stockholders'
equity:
|
|
|
|
Common stock
|
808
|
|
|
808
|
|
Capital in excess of
par value
|
1,402
|
|
|
1,374
|
|
Retained
earnings
|
10,957
|
|
|
9,409
|
|
Accumulated other
comprehensive loss
|
(499)
|
|
|
(1,051)
|
|
Treasury stock, at
cost
|
(4,621)
|
|
|
(3,182)
|
|
Total
stockholders' equity
|
8,047
|
|
|
7,358
|
|
|
$
|
23,045
|
|
|
$
|
21,312
|
|
Southwest Airlines
Co.
Condensed Consolidated Statement of Cash Flows (in
millions)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended
September 30,
|
|
Nine months
ended
September 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES:
|
|
|
|
|
Net income
|
$
|
388
|
|
$
|
584
|
|
$
|
1,722
|
|
$
|
1,645
|
|
Adjustments to
reconcile net income to cash provided by (used in) operating
activities:
|
|
|
|
|
Depreciation and
amortization
|
315
|
|
258
|
|
903
|
|
751
|
|
Loss on asset
impairment
|
—
|
|
—
|
|
21
|
|
—
|
|
Unrealized/realized
(gain) loss on fuel derivative instruments
|
(67)
|
|
87
|
|
(101)
|
|
172
|
|
Deferred income
taxes
|
315
|
|
(82)
|
|
395
|
|
(40)
|
|
Changes in certain
assets and liabilities:
|
|
|
|
|
Accounts and other
receivables
|
(320)
|
|
4
|
|
(355)
|
|
(86)
|
|
Other
assets
|
(16)
|
|
33
|
|
(61)
|
|
40
|
|
Accounts payable and
accrued liabilities
|
247
|
|
380
|
|
272
|
|
424
|
|
Air traffic
liability
|
(77)
|
|
(301)
|
|
686
|
|
617
|
|
Cash collateral
received from (provided to) derivative counterparties
|
114
|
|
181
|
|
230
|
|
(213)
|
|
Other, net
|
(43)
|
|
(308)
|
|
(128)
|
|
(396)
|
|
Net cash provided by
operating activities
|
856
|
|
836
|
|
3,584
|
|
2,914
|
|
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES:
|
|
|
|
|
Capital
expenditures
|
(464)
|
|
(230)
|
|
(1,364)
|
|
(1,231)
|
|
Assets constructed
for others
|
(33)
|
|
(32)
|
|
(70)
|
|
(76)
|
|
Purchases of
short-term investments
|
(641)
|
|
(506)
|
|
(1,670)
|
|
(1,383)
|
|
Proceeds from sales
of short-term and other investments
|
549
|
|
509
|
|
1,671
|
|
1,732
|
|
Other, net
|
5
|
|
—
|
|
—
|
|
(9)
|
|
Net cash used in
investing activities
|
(584)
|
|
(259)
|
|
(1,433)
|
|
(967)
|
|
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES:
|
|
|
|
|
Proceeds from
Employee stock plans
|
6
|
|
9
|
|
23
|
|
30
|
|
Proceeds from
termination of interest rate derivative instruments
|
—
|
|
—
|
|
—
|
|
12
|
|
Reimbursement for
assets constructed for others
|
33
|
|
9
|
|
68
|
|
14
|
|
Payments of long-term
debt and capital lease obligations
|
(68)
|
|
(79)
|
|
(171)
|
|
(170)
|
|
Payments of cash
dividends
|
(62)
|
|
(49)
|
|
(222)
|
|
(180)
|
|
Repayment of
construction obligation
|
(2)
|
|
(3)
|
|
(6)
|
|
(8)
|
|
Repurchase of common
stock
|
(250)
|
|
(500)
|
|
(1,450)
|
|
(1,180)
|
|
Other, net
|
(3)
|
|
4
|
|
(10)
|
|
(7)
|
|
Net cash used in
financing activities
|
(346)
|
|
(609)
|
|
(1,768)
|
|
(1,489)
|
|
|
|
|
|
|
NET CHANGE IN CASH
AND CASH EQUIVALENTS
|
(74)
|
|
(32)
|
|
383
|
|
458
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS AT BEGINNING OF PERIOD
|
2,040
|
|
1,772
|
|
1,583
|
|
1,282
|
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS AT END OF PERIOD
|
$
|
1,966
|
|
$
|
1,740
|
|
$
|
1,966
|
|
$
|
1,740
|
|
Southwest Airlines
Co.
Fuel Derivative Contracts
As of October 20, 2016
|
|
|
|
Estimated economic jet fuel price per gallon,
including taxes
|
Average Brent
Crude Oil price per barrel
|
4Q 2016
(2)
|
$30
|
$1.60 -
$1.65
|
$40
|
$1.80 -
$1.85
|
Current Market
(1)
|
Approximately
$2.10
|
$60
|
$2.15 -
$2.20
|
$70
|
$2.35 -
$2.40
|
|
|
|
|
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
|
2017
|
63%
|
2018
|
36%
|
|
|
|
|
(1)
|
Brent crude oil
average market price as of October 20, 2016, was approximately $52
per barrel for fourth quarter 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 October 20, 2016. The projections do not reflect the
potential impact of special items because the Company cannot
reliably predict or estimate those items or expenses or their
impact to its financial statements in future periods, especially
considering the significant volatility of the Fuel and oil expense
line item. Accordingly, the Company believes a reconciliation of
non–GAAP financial measures to the equivalent GAAP financial
measures for projected results is not meaningful or available
without unreasonable effort.
|
Southwest Airlines
Co.
737 Delivery Schedule
As of September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Boeing
Company
|
|
|
|
|
|
|
|
|
|
|
737
|
|
|
|
|
|
|
|
|
|
|
-800 Firm
Orders
|
-800
Options
|
-7
Firm
Orders
|
-8
Firm
Orders
|
|
-8
Options
|
|
Additional
-700s
|
Total
|
|
2016
|
38
|
—
|
—
|
—
|
|
—
|
|
23
|
61
|
(2)
|
2017
|
39
|
—
|
—
|
14
|
|
—
|
|
14
|
67
|
|
2018
|
16
|
14
|
—
|
13
|
|
—
|
|
4
|
47
|
|
2019
|
—
|
—
|
15
|
—
|
|
5
|
|
—
|
20
|
|
2020
|
—
|
—
|
14
|
—
|
|
8
|
|
—
|
22
|
|
2021
|
—
|
—
|
1
|
13
|
|
18
|
|
—
|
32
|
|
2022
|
—
|
—
|
—
|
15
|
|
19
|
|
—
|
34
|
|
2023
|
—
|
—
|
—
|
34
|
|
23
|
|
—
|
57
|
|
2024
|
—
|
—
|
—
|
41
|
|
23
|
|
—
|
64
|
|
2025
|
—
|
—
|
—
|
40
|
|
36
|
|
—
|
76
|
|
2026
|
—
|
—
|
—
|
—
|
|
36
|
|
—
|
36
|
|
2027
|
—
|
—
|
—
|
—
|
|
23
|
|
—
|
23
|
|
|
93
|
14
|
30
|
170
|
(1)
|
191
|
(1)
|
41
|
539
|
|
|
|
(1)
|
The Company has
flexibility to substitute 737-7 in lieu of 737-8 aircraft beginning
in 2019.
|
(2)
|
Includes 25 737-800s
and 19 737-700s delivered as of September 30, 2016.
|
NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES
The Company's unaudited 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 release 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 reflect the
Company's performance on an economic fuel cost basis include Fuel
and oil expense, non-GAAP; Total operating expenses, non-GAAP;
Operating expenses, non-GAAP, excluding fuel and oil expense;
Operating expenses, non-GAAP, excluding profitsharing and fuel and
oil expense; Operating income, non-GAAP; Operating margin,
excluding special items; Other (gains) losses, net, 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 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.
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. Financial measures identified as non-GAAP (or as excluding
special items) have been adjusted to exclude special items.
Special items include:
- A one-time $172 million Special
revenue adjustment due to the July
2015 amendment of the Company's co-branded credit card
agreement with Chase and the resulting change in accounting
methodology. This non-cash increase to revenue represented a
nonrecurring required acceleration of revenues associated with the
adoption of ASU 2009-13;
- 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 with which to compare results in future periods
now that the integration process has been completed;
- 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;
- 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;
- A $21 million noncash impairment
charge related to Newark Liberty International Airport
(Newark) slots as a result of the
FAA announcement in April 2016 that
Newark was being changed to a
Level 2 schedule-facilitated airport from its previous designation
as Level 3; and
- Lease termination costs totaling $18
million recorded during third quarter 2016 as a result of
the Company acquiring four of its Boeing 737-300 aircraft off
operating leases. The Company recorded the fair value of the
aircraft, as well as the associated remaining obligations to the
balance sheet as debt.
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 expenses, non-GAAP, excluding fuel and oil
expense; Operating expenses, non-GAAP, excluding profitsharing and
fuel and oil expense; Operating income, non-GAAP; Operating margin,
excluding special items; Other (gains) losses, net, non-GAAP; Net
income, non-GAAP; Net income per share, diluted, non-GAAP.
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 three months ended
September 30, 2016, the Company generated $392 million in free cash flow, calculated as
operating cash flows of $856 million
less capital expenditures of $464
million less assets constructed for others of $33
million plus reimbursements for assets constructed for others
of $33 million. For the nine months ended September 30,
2016, the Company generated $2,218
million in free cash flow, calculated as operating cash
flows of $3,584 million less capital
expenditures of $1,364 million less
assets constructed for others of $70 million plus
reimbursements for assets constructed for others of $68
million.
The Company has also provided ROIC, which is calculated, in
part, using non-GAAP financial measures. The Company believes ROIC
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 ROIC is commonly used as a measure
of capital efficiency, definitions of ROIC differ; therefore, the
Company is providing an explanation of its calculation for ROIC
(before taxes and excluding special items) in the accompanying
reconciliation tables (see Return on Invested Capital).
To view the original version on PR Newswire,
visit:http://www.prnewswire.com/news-releases/southwest-airlines-reports-third-quarter-profit-300351403.html
SOURCE Southwest Airlines Co.