Southwest Airlines Co - Investor Booklet - February 2019 - Investor Relations
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Southwest Airlines Co. Investor Booklet – February 2019
Cautionary Statement Regarding Forward-Looking Statements
This booklet contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on, and include statements about, the
Company’s expectations, beliefs, intentions, goals, and strategies for the future, and are not guarantees of future performance. Specific
forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include without
limitation statements related to (i) the Company’s financial undertakings, goals, initiatives, and expectations; (ii) the Company’s fleet plans,
expectations, and opportunities, including with respect to fleet modernization; (iii) the Company’s plans, opportunities, and expectations with
respect to its new reservation system; and (iv) the Company’s Vision. Forward-looking statements involve risks, uncertainties, assumptions,
and other factors that are difficult to predict and that could cause actual results to vary materially from those expressed in or indicated by
them. Factors include, among others, (i) the Company's dependence on third parties, in particular with respect to its technology and fleet
plans and initiatives, and the impact on the Company’s operations and results of operations of any related third party delays or non-
performance; (ii) the impact of changes in consumer behavior, economic conditions, actions of competitors (including without limitation
pricing, scheduling, capacity, and network decisions, and consolidation and alliance activities), governmental actions, natural disasters, and
other factors beyond the Company's control, on the Company's business decisions, plans, strategies, and results; (iii) 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; (iv) the impact of changes in aircraft fuel prices and fuel price volatility on the Company’s business plans and
results of operations; (v) the Company’s ability to timely and effectively prioritize its initiatives and related expenditures; (vi) the impact of
labor matters on the Company's costs and related business decisions, plans, strategies, and projections; and (vii) 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, 2018.
Notice Regarding Third Party Content
This presentation may contain information obtained from third parties, including ratings from credit ratings agencies such as S&P Global
Ratings. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related
third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information,
including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results
obtained from the use of such content. THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES,
INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
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(INCLUDING LOST INCOME OR PROFITS AND OPPORTUNITY COSTS OR LOSSES CAUSED BY NEGLIGENCE) IN CONNECTION
WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Credit ratings are statements of opinions and are not statements of fact or
recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for
investment purposes, and should not be relied on as investment advice.
2
Competitive differentiators
Unmatched profitability record with cost discipline and a
strong balance sheet
Outstanding Customer Service and Hospitality that drives
brand loyalty and recognition
The best People and Culture in the industry
Low fares and a point-to-point network that support
market leadership and non-stop service
Reliable, efficient operations
3
1
Unmatched profitability record
U.S. Airline Industry Bankruptcies, 2000-2011
Chapter 7
2008 2004 2003
2011 2008 2008 & 2004
2005 2005 2005
Chapter 11
2005 2004 & 2002 2003
2002 2001 2001
Southwest has remained profitable for 46 consecutive years
1In
4
the U.S. Airline industry.
2018: an outstanding year
Annual
Record
23.6% 18.4% $22.0B
operating
pre-tax ROIC1 after-tax ROIC1 revenues
Annual Annual
Record
$4.24
Record
$2.4B earnings per
$544M
net income2 profitsharing
diluted share2
$2.3B 83.4% 0.7%
returned to non-fuel
Shareholders load factor CASM2,3, y/y
1ROIC is defined as annual return on invested capital, excluding special items, for the last twelve months.
2excluding special items.
3excluding profitsharing. 5
Note: see reconciliation of reported amounts to non-GAAP financial measures.
Significant profit expansion
$3,000 14%
1
Net income
$2,500 Net margin
2 12%
10%
$2,000
8%
$1,500
Net income
Net margin
(in millions)
6%
$1,000
4%
$500 2%
$- 0%
3 3 3
2014 2015 2016 2017 2018
Y/Y %
Change 73.5 68.6 (2.0) (8.4) 15.1
Our annual profits and margins have remained strong, largely due to the
successful implementation of our strategic initiatives
1Excludes special items.
2Net Margin, excluding special items, is calculated as net income, excluding special items, divided by operating revenues, excluding special items.
3The 2018 results reflect and 2017 and 2016 results were recast primarily due to the retrospective application transition option selected as part of the Company’s adoption of Accounting Standards Update 2014-09, Revenue
from Contracts with Customers. See the Company’s Current Report on Form 8-K furnished to the Securities and Exchange Commission on March 20, 2018 for further information. 6
Note: See reconciliation of reported amounts to non-GAAP financial measures.
Delivering strong returns on investment
ROIC1
35%
32.7%
30.9%
30%
27.6% Drivers of ROIC growth
25% 23.6% • AirTran integration
21.2%
• Rapid Rewards
20%
• International expansion
15% 13.1%
• New reservation system and revenue
management enhancements
10%
• Fleet modernization/Boeing 737-800
5%
• Network optimization
0%
2 2 2
2013 2014 2015 2016 2017 2018
Y/Y Pt.
Change 5.9 8.1 11.5 (1.8) (3.3) (4.0)
1ROIC is defined as annual pre-tax return on invested capital, excluding special items. ROIC is for the 12 months ended December 31 in each year shown.
2The 2018 results reflect and 2017 and 2016 results were recast primarily due to the retrospective application transition option selected as part of the Company’s adoption of Accounting Standards
Update 2014-09, Revenue from Contracts with Customers. See the Company’s Current Report on Form 8-K furnished to the Securities and Exchange Commission on March 20, 2018 for further
information. 7
Note: See reconciliation of reported amounts to non-GAAP financial measures.
Low cost position
16.00
Domestic operating expenses per ASM, ex-fuel
14.00
12.00
10.00
(in cents)
8.00
6.00
4.00
Southwest
2.00 Network 1
LCC 2
-
1Q 2009
While the gap to the industry has contracted over the past 10 years, we
are committed to preserving a meaningful competitive cost advantage
1Network airlines: Trans World, American, US Airways, Northwest, Delta, Continental, United, America West (post-American merger)
2LCC airlines: JetBlue, Alaska, Virgin America, America West (pre-AA merger), AirTran (pre-Southwest merger), Allegiant, Spirit, Frontier
Source: DOT form 41 and T100 data, through June 30, 2018. Estimated unit costs have been stage-length adjusted to Southwest’s average 2017 stage-length, represents domestic mainline
8
Fleet modernization has been a significant
contributor to our cost control efforts
Aircraft by fleet type Average seats per aircraft
Year end aircraft on property Year end average
750
723
704 706
665
153
152
149
146
145
2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
717s Classics 700s 800s MAX 8
The increase in the gauge of our aircraft drives down unit costs and
allows for efficient growth opportunities 9
Reducing fuel consumption and improving efficiency
through fleet modernization and other fuel initiatives
ASMs per gallon
77 Fuel saving initiatives
76.3
In addition to modernizing the fleet:
76
75.2 • Split scimitar winglets
75
74.4
73.9 • Galley refresh
74
• Fuel and flight planning
73 72.7
• New, lighter seats
72
71 • Single engine taxi
70 • Electronic flight bags
2014 2015 2016 2017 2018
Y/Y %
Change 1.5 1.6 0.7 1.1 1.5
10Sustaining a strong financial position
Strong balance sheet
• $3.7 billion in unrestricted core cash and short-
Investment term investments and $1 billion line of credit fully
grade rating by undrawn and available
all three agencies • Balance Sheet leverage goal in the low-to-mid
30% range1
Balanced capital deployment
• Cash flow from operations of $4.9 billion
Returned
• Capital spending, including net proceeds from
$2.3 billion ACFO, of $1.8 billion
to Shareholders
in 2018 • Free cash flow of $3.1 billion2
• Debt repayments of $342 million3
Southwest is focused on preserving a strong balance sheet and healthy cash
flows and is the only domestic carrier with a decades-long history of consistently
returning capital to Shareholders
1Includes off balance sheet aircraft leases.
2Free cash flow is calculated as operating cash flows less capital expenditures less assets constructed for others, net. See reconciliation of reported amounts to non-GAAP financial measures.
3Includes payments of debt and capital lease obligations. 11
Note: Balance sheet information is as of December 31, 2018. All other information presented is for the 12 months ended December 31, 2018.Industry-leading balance sheet
Non-investment grade Investment grade
S&P/ Fitch B- B B+ BB- BB BB+ BBB- BBB BBB+ A-
Moody’s B3 B2 B1 Ba3 Ba2 Ba1 Baa3 Baa2 Baa1 A3
Source: Bloomberg as of January 10, 2019. Moody’s Senior Unsecured rating used (if unavailable, Long Term Corporate Family or Long Term rating used); S&P’s Long Term
Issuer rating used; Fitch’s Senior Unsecured rating used (if unavailable, Long-term Issuer rating used). 12
Note: Please see S&P disclaimer language on slide 2.Future delivery schedule provides significant flexibility
and continued fleet modernization opportunities
The Boeing Company
737
MAX 7 MAX 8
Firm Firm MAX 8 Additional
Orders Orders Options MAX 8s Total
2019 7 21 — 16 44
2020 — 35 — 3 38
2021 — 44 — — 44
2022 — 27 14 — 41
2023 12 22 23 — 57
2024 11 30 23 — 64
2025 — 40 36 — 76
2026 — — 19 — 19
30 219 (a) 115 19 (b) 383
(a) The Company has flexibility to substitute 737 MAX 7 in lieu of 737 MAX 8 aircraft beginning in 2019.
(b) To be acquired in leases from various third parties. 13
Note: Delivery schedule is as of December 31, 2018.Creating value for Shareholders
$3.5 Free cash flow
1
Share repurchases
$3.0 Dividends
$2.5
$2.0
(in billions)
$1.5
$1.0
$0.5
$0.0
2014 2015 2016 2017 2018
2
On January 28, 2019, Southwest launched a $500 million ASR program and
has $850 million remaining under its current $2.0 billion share repurchase
authorization. Since 2010, we have returned nearly all of our free cash flow.
1Free cash flow is calculated as operating cash flows less capital expenditures less assets constructed for others, net..
2Accelerated share repurchase. 14
Note: See reconciliation of reported amounts to non-GAAP financial measures.Customer Experience builds loyalty
“It’s a good experience. I
feel a sense of Hospitality
that other airlines do not
have.”
®
Rapid Rewards Exceptional Inflight
Frequent Flyer Program Offerings
• 100% seat availability1 • Live TV
• No blackout dates • $8 Wi-Fi flat rate per day
• Points don’t expire2 • Complimentary snacks and
beverages
1Members
2Must
are able to redeem their points for every available seat. 15
have points earning activity during the most recent 24 months.Consistently loved and recognized brand
Awards in 2018
• Named to FORTUNE’s 2018 list of World’s
Most Admired Companies
TransfarencySM is a philosophy • Ranked No. 1 in the U.S. DOT Customer
created by Southwest Airlines Satisfaction ranking in 2017
• Ranked highest Low-Cost Carrier for
in which Customers are customer satisfaction for the 2nd year in a
treated honestly and fairly, row in the J.D. Power 2018 North America
Satisfaction StudyTM
and low fares actually stay • Named one of the Corporate Responsibility
low—no unexpected bag Magazine’s 100 Best Corporate Citizens
2018
fees1, change fees2, or hidden • Ranked among the Best Airline Rewards
fees. Programs by U.S. News & World Report
• Recognized as a Best Employer in Forbes’
2018 list
• Designated a 2019 Military Friendly
Company by Victory Media
1First
2There
and second checked pieces of luggage, size and weight limits apply. 16
are never change fees, though fare differences might apply.We continue to offer Low Fares, Hospitality, and Transfarency Note: First and second checked pieces of luggage, size and weight limits apply. 17 Note: There are never change fees, though fare differences might apply.
Culture of celebration & appreciation
Mission to our Employees
We are committed to provide our Employees
a stable work environment with equal
opportunity for learning and personal
growth. Creativity and innovation are
encouraged for improving the effectiveness
of Southwest Airlines. Above all, Employees
will be provided the same concern, respect,
and caring attitude within the organization
that they are expected to share externally
with every Southwest Customer.
18Our network in 1998
1998
19
Source: EDW DOT Traffic December 1998.By 2008…
1998
2008
20
Source: EDW DOT Traffic December 1998, 2008.… and today
2008
2018
21
Source: EDW DOT Traffic December 2008, Diio schedules July 2018.The evolution of our network
1998 2008 2018
Daily departures1 >2,300 >3,200 >4,000
Market share2 11% 20% 23%
Number of cities3 53 64 99
Number of states3 26 32 40
Number of countries3 1 1 11
Fleet4 280 537 750
ROIC5 17% 7% 23.6%
The expansion of our robust network has driven meaningful results
1During peak travel seasons.
21998 market share based on enplaned passengers; 2008 and 2018 market share based on revenue passengers. 2018 market share data presented herein as measured by the Department of Transportation O&D Survey for the twelve months
ended June 30, 2018 based on domestic originating passengers boarded. O&D stands for Origin and Destination.
32006 includes 32 states and the District of Columbia; 2018 includes 40 states, the District of Columbia, and the Commonwealth of Puerto Rico.
4Fleet is as of December 31 for each year shown.
5ROIC is defined as annual pre-tax return on invested capital, excluding special items and is for the twelve months ended December 31 for each year shown.
22
Note: See reconciliation of reported amounts to non-GAAP financial measures.The nation’s largest domestic airline
LA Basin Phoenix
(LAX, LGB, ONT, SNA, BUR) (PHX, AZA)
39% Market share
29% 32%
18% 15%
• 23% of total domestic market share
9%
• Market leader in 24 of the top 50 U.S.
metro areas1 (including co-terminal
DC/BWI Area Denver airports2)
(BWI, DCA, IAD)
36%
32% • Serve (offer itineraries for sale) 95 of
28%
23%
18% the top 100 domestic O&D city pairs
13%
(including co-terminal airports)
Bay Area Las Vegas Orlando
(OAK, SFO, SJC) (MCO, SFB)
LUV
32% 36% OA #1
22% 26% OA #2
17% 14% 12%
11% 10%
Southwest has a strong market presence in many of the nation’s top metro areas
Source: Data presented herein as measured by the Department of Transportation O&D Survey for the twelve months ended June 30, 2018 based on domestic originating passengers boarded.
O&D stands for Origin and Destination.
1Metro Areas: A geographic area around a city that includes multiple major airports. In some cases, the airports within a metro area may serve separate competitive markets. 23
2Co-terminal: Airports that share a common city or region; for example Newark, LaGuardia and JFK are considered co-terminals to one another.Focus on Reliability
Ontime Performance Mishandled Baggage Rate
(OTP) (MBR)
82% 3.5
80% 3.0
78% 2.5
76% 2.0
2016 2017 2018 2016 2017 2018
With record passengers in 2018, our strong OTP and MBR were notable
operational achievements
24New reservation system capabilities and
opportunities
• Schedule variation
• O&D Controls • Increased days of inventory
• Improved fare flexibility • Redeyes
• Ancillary controls • Improved connection times
New
Reservation
System
• IROPS automation & optimization
• Mobile enhancements at airport
• Standby capability & policy
improvements
• Interline & codeshare
• Foreign currency
• Foreign point of sale
• Electronic Miscellaneous Documents • New distribution capabilities
(EMDs) for ancillary services
25Purpose
Connect People to what’s important in
their lives through friendly, reliable, and
low-cost air travel.
Vision
To become the world’s most loved,
most flown, and most profitable airline.
26Non-GAAP Reconciliation
Twelve months ended December 31,
2012 2013 2014 2015 2016 2017 2018
(f) (f) (f) (f) as recast (g) as recast (g)
Operating income, as reported $ 623 $ 1,278 $ 2,225 $ 4,116 $ 3,522 $ 3,407 $ 3,206
Special revenue adjustment (a) - - - (172) - - -
Contract ratification bonuses - - 9 334 356 - -
Net impact from fuel contracts 32 84 28 (323) (201) (156) (14)
Acquisition and integration costs (b) 183 86 126 39 - - -
Litigation settlement - - - (37) - - -
Asset impairment - - - - 21 - -
Lease termination expense - - - - 22 33 -
Aircraft grounding charge - - - - - 63 -
Gain on sale of grounded aircraft - - - - - - (25)
Operating income, non-GAAP $ 838 $ 1,448 $ 2,388 $ 3,957 $ 3,720 $ 3,347 $ 3,167
Net adjustment for aircraft leases (c) 117 143 133 114 110 110 99
Adjustment for fuel hedge accounting (36) (60) (62) (124) - - -
Adjusted Operating income, non-GAAP (A) $ 919 $ 1,531 $ 2,459 $ 3,947 $ 3,830 $ 3,457 $ 3,266
Non-GAAP tax rate (B) 36.1% (h) 22.1% (i)
Net operating profit after-tax, NOPAT (A* (1-B) = C) $ 2,210 $ 2,545
Debt, including capital leases (d) 3,343 2,954 2,763 2,782 3,304 3,259 3,521
Equity (d) 6,961 7,017 7,249 7,032 7,195 8,194 9,853
Net present value of aircraft operating leases (d) 2,276 1,693 1,458 1,223 1,015 785 584
Average invested capital $ 12,580 $ 11,664 $ 11,470 $ 11,037 $ 11,514 $ 12,238 $ 13,958
Equity adjustment for hedge accounting (e) 145 50 104 1,027 886 296 (144)
Adjusted average invested capital (D) $ 12,725 $ 11,714 $ 11,574 $ 12,064 $ 12,400 $ 12,534 $ 13,814
Non-GAAP ROIC, pre-tax (A/D) 7.2% 13.1% 21.2% 32.7% 30.9% 27.6% 23.6%
Non-GAAP ROIC, after-tax (C/D) 17.6% 18.4%
(a) One-time adjustment related to the amendment of the Company's co-branded credit card agreement with Chase Bank USA, N.A. and a resulting change in accounting methodology.
(b) Pursuant to the terms of the Company’s ProfitSharing Plan, acquisition and integration costs were excluded from the calculation of profitsharing expense from April 1, 2011, through Dec. 31, 2013. These costs, totaling
$385 million, are being amortized on a pro rata basis as a reduction of operating profits, as defined by the ProfitSharing Plan, from 2014 through 2018, in the calculation of profitsharing. In addition, acquisition and integration
costs incurred during 2014 and 2015 will reduce operating profits, as defined, in the calculation of profitsharing.
(c) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of eliminating aircraft rent expense and replacing with estimated depreciation expense for those same aircraft). The Company
makes this adjustment to enhance comparability to other entities that have different capital structures by utilizing alternative financing decisions.
(d) Calculated as an average of the five most recent quarter end balances or remaining obligations. The Net present value of aircraft operating leases represents the assumption that all aircraft in the Company's fleet are
owned, as it reflects the remaining contractual commitments discounted at its estimated incremental borrowing rate as of the time each individual lease was signed.
(e) The Equity adjustment for hedge accounting in the denominator adjusts for the cumulative impacts, in Accumulated other comprehensive income and Retained earnings, of gains and/or losses associated with hedge
accounting related to fuel hedge derivatives that will settle in future periods. The current period impact of these gains and/or losses are reflected in the Net impact from fuel contracts in the numerator.
(f) The Company has not recast 2012, 2013, 2014, or 2015 ROIC results for ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost and ASU 2017-12, Targeted
Improvements to Accounting for Hedging Activities.
(g) The Company recast 2016 and 2017 result primarily due to the retrospective application transition option selected as part of the Company's adoption of Accounting Standards Update 2014-09, Revenue from Contracts
with Customers. See the Company's Current Report on Form 8-K furnished to the Securities and Exchange Commission on March 20, 2018 for further information.
(h) The GAAP annual tax rate as of December 31, 2017, was a 2.8 percent tax benefit due to the significant impact the Tax Cuts and jobs Act legislation enacted in December 2017 had on corporate tax rates, and the annual
Non-GAAP tax rate was 36.1 percent. 27
(i) The GAAP annual tax rate as of December 31, 2018, was 22.1 percent, and the annual Non-GAAP tax rate was also 22.1 percent.Non-GAAP Reconciliation
Year ended December 31,
(continued) 2013 2014 2015 2016 2017 2018
as recast (e) as recast (e) as recast (e) as recast (f) as recast (f)
Operating revenues, as reported $ 17,699 $ 18,605 $ 19,820 $ 20,289 $ 21,146 $ 21,965
Deduct: Special revenue adjustment (a) - - (172) - - -
Operating revenues, non-GAAP $ 17,699 $ 18,605 $ 19,648 $ 20,289 $ 21,146 $ 21,965
Net income, as reported $ 754 $ 1,136 $ 2,181 $ 2,183 $ 3,357 $ 2,465
Deduct: Special revenue adjustment (a) - - (172) - - -
Add: Contract ratification bonuses - 9 334 356 - -
Add (Deduct): Net impact from fuel contracts (5) 280 113 (198) (50) (14)
Add: Acquisition and integration costs (b) 86 126 39 - - -
Deduct: Litigation settlement - - (37) - - -
Add: Asset impairment - - - 21 - -
Add: Lease termination expense - - - 22 33 -
Add: Aircraft grounding charge - - - - 63 -
Deduct: Gain on sale of grounded aircraft - - - - - (25)
Add (Deduct): Net income tax impact of special items,
(30) (154) (103) (75) (17) 9
excluding Tax reform impact (c)
Deduct: Tax reform impact (d) - - - - (1,270) -
Net income, excluding special items $ 805 $ 1,397 $ 2,355 $ 2,309 $ 2,116 $ 2,435
Net income per share, diluted, as reported $ 1.05 $ 1.64 $ 3.27 $ 3.45 $ 5.57 $ 4.29
Add (Deduct): Impact from fuel contracts (0.01) 0.40 0.17 (0.31) (0.08) (0.02)
Add (Deduct): Impact of special items 0.12 0.19 0.24 0.63 0.16 (0.04)
Add (Deduct): Net income tax impact of special items,
(0.04) (0.23) (0.16) (0.12) (0.03) 0.01
excluding Tax reform impact (c)
Deduct: Tax reform act (d) - - - - (2.11) -
Net income per share, diluted, excluding special
$ 1.12 $ 2.01 $ 3.52 $ 3.65 $ 3.51 $ 4.24
items
(a) One-time adjustment related to the amendment of the Company's co-branded credit card agreement with Chase Bank USA, N.A. and a resulting change in accounting methodology.
(b) Pursuant to the terms of the Company’s ProfitSharing Plan, acquisition and integration costs were excluded from the calculation of profitsharing expense from April 1, 2011, through Dec. 31, 2013. These costs, totaling
$385 million, are being amortized on a pro rata basis as a reduction of operating profits, as defined by the ProfitSharing Plan, from 2014 through 2018, in the calculation of profitsharing. In addition, acquisition and integration
costs incurred during 2014 and 2015 will reduce operating profits, as defined, in the calculation of profitsharing.
(c) Tax amounts for each individual special item are calculated at the Company's effective rate for the applicable period and totaled in this line item.
(d) Adjustment related to the Tax Cuts and Jobs Act legislation enacted in December 2017, which resulted in a re-measurement of the Company's deferred tax assets and liabilities at the new federal corporate tax rate of 21
percent.
(e) The Company has chosen to not recast 2013, 2014, or 2015 results for Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, as permitted. Therefore, 2013, 2014, and 2015 only
reflect recast results for ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, and ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.
(f) The Company recast 2016 and 2017 result primarily due to the retrospective application transition option selected as part of the Company's adoption of Accounting Standards Update 2014-09, Revenue from Contracts 28
with Customers. See the Company's Current Report on Form 8-K furnished to the Securities and Exchange Commission on March 20, 2018 for further information.Non-GAAP Reconciliation
(continued)
Year ended December 31,
2014 2015 2016 2017 2018
Net cash provided by operating activities $ 2,902 $ 3,238 $ 4,293 $ 3,929 $ 4,893
Capital expenditures (1,748) (2,041) (2,038) (2,123) (1,922)
Assets constructed for others (80) (102) (109) (126) (54)
Reimbursement for assets constructed for others 27 24 107 126 170
Free cash flow $ 1,101 $ 1,119 $ 2,253 $ 1,806 $ 3,087
Year ended December 31, Twelve months ended December 31,
2017 2018 1998 2008
as recast (a) Operating income, as reported $ 646 $ 449
Fuel and oil expense, unhedged $ 3,524 $ 4,649 Net impact from fuel contracts - 187
Add: Premium cost of fuel contracts 136 135 Operating income, non-GAAP $ 646 $ 636
Add (Deduct): Fuel hedge (gains) losses included in Net adjustment for aircraft leases (b) 109 67
416 (168)
Fuel and oil expense, net Adjustment for fuel hedge accounting (c) - (69)
Fuel and oil expense, as reported $ 4,076 $ 4,616 Adjusted Operating income, non-GAAP (A) $ 755 $ 634
Add (Deduct): Net impact from fuel contracts 156 14
Fuel and oil expense, excluding special items
$ 4,232 $ 4,630
(economic) Debt, including capital leases (d) 653 2,637
Equity (d) 2,160 6,974
Total operating expenses, as reported $ 17,739 $ 18,759 Net present value of aircraft operating leases (d) 1,581 1,058
Add (Deduct): Net impact from fuel contracts 156 14 Average invested capital $ 4,394 $ 10,669
Deduct: Lease termination expense (33) -
Equity adjustment for hedge accounting (c) - (1,263)
Deduct: Aircraft grounding charge (63) -
Adjusted average invested capital (B) $ 4,394 $ 9,406
Add: Gain on sale of grounded aircraft - 25
Total operating expenses, excluding special items $ 17,799 $ 18,798 Non-GAAP ROIC, pre-tax (A/B) 17% 7%
Deduct: Fuel and oil expense, excluding special items
(4,232) (4,630)
(economic)
Operating expenses, excluding Fuel and oil (b) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of
$ 13,567 $ 14,168 eliminating aircraft rent expense and replacing with estimated depreciation expense for those same
expense and special items
aircraft). The Company makes this adjustment to enhance comparability to other entities that have
Deduct: Profitsharing expense (543) (544) different capital structures by utilizing alternative financing decisions.
Operating expenses, excluding profitsharing, Fuel (c) The Adjustment for fuel hedge accounting in the numerator is due to the Company’s accounting
$ 13,024 $ 13,624 policy decision to classify fuel hedge accounting premiums below the Operating income line, and thus
and oil expense, and special items
is adjusting Operating income to reflect such policy decision. The Equity adjustment for hedge
accounting in the denominator adjusts for the cumulative impacts, in Accumulated other
comprehensive income and Retained earnings, of gains and/or losses associated with hedge
(a) The Company recast 2016 and 2017 result primarily due to the retrospective application accounting related to fuel hedge derivatives that will settle in future periods. The current period impact
transition option selected as part of the Company's adoption of Accounting Standards Update 2014-09, of these gains and/or losses are reflected in the Net impact from fuel contracts in the numerator.
Revenue from Contracts with Customers. See the Company's Current Report on Form 8-K furnished to (d) Calculated as an average of the five most recent quarter end balances or remaining obligations.
the Securities and Exchange Commission on March 20, 2018 for further information. The Net present value of aircraft operating leases represents the assumption that all aircraft in the
Company’s fleet are owned, as it reflects the remaining contractual commitments discounted at its
estimated incremental borrowing rate as of the time each individual lease was signed.
29
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