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.
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2
Competitive differentiators
3
Unmatched profitability record with cost discipline and a strong balance sheet
Outstanding Customer Service and Hospitality that drives brand loyalty and recognition
Low fares and a point-to-point network that support market leadership and non-stop service
The best People and Culture in the industry
Reliable, efficient operations
Unmatched profitability record1
4
Chapter 7
Chapter 11
U.S. Airline Industry Bankruptcies, 2000-2011
2005 2004 & 2002 2003
2002 2001 2001
2008 2004 2003
2011 2008 2008 & 2004
2005 2005 2005
1In the U.S. Airline industry.
Southwest has remained profitable for 46 consecutive years
2018: an outstanding year
5
23.6% pre-tax ROIC1
18.4% after-tax ROIC1
$22.0B operating revenues
Annual Record
$2.4B net income2
$4.24 earnings per diluted share2
$544M profitsharing
$2.3B returned to
Shareholders
83.4% load factor
0.7% non-fuel
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. Note: see reconciliation of reported amounts to non-GAAP financial measures.
Annual Record
Annual Record
6
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. Note: See reconciliation of reported amounts to non-GAAP financial measures.
Our annual profits and margins have remained strong, largely due to the successful implementation of our strategic initiatives
0%
2%
4%
6%
8%
10%
12%
14%
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
2014 2015 2016 2017 2018
Net incomeNet margin
Net
inco
me
(in m
illio
ns) N
et margin
Y/Y % Change 73.5 68.6 (2.0) (8.4) 15.1
1
2
Significant profit expansion
3 3 3
Delivering strong returns on investment
7
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. Note: See reconciliation of reported amounts to non-GAAP financial measures.
• AirTran integration
• Rapid Rewards
• International expansion
• New reservation system and revenue management enhancements
• Fleet modernization/Boeing 737-800
• Network optimization
Drivers of ROIC growth
Y/Y Pt. Change 5.9 8.1 11.5 (1.8) (3.3) (4.0)
ROIC1
13.1%
21.2%
32.7% 30.9%
27.6%
23.6%
0%
5%
10%
15%
20%
25%
30%
35%
2013 2014 2015 2016 2017 20182 2 2
Low cost position
While the gap to the industry has contracted over the past 10 years, we are committed to preserving a meaningful competitive cost advantage
-
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
3Q08 3Q18
SouthwestNetworkLCC
1
2
Dom
estic
ope
ratin
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es p
er A
SM, e
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(in c
ents
)
8 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 September 30, 2018. Estimated unit costs have been stage-length adjusted to Southwest’s average 2017 stage-length, represents domestic mainline
Fleet modernization has been a significant contributor to our cost control efforts
9
Aircraft by fleet type Year end aircraft on property
Average seats per aircraft Year end average
The increase in the gauge of our aircraft drives down unit costs and allows for efficient growth opportunities
665 704 723 706
750
2014 2015 2016 2017 2018
717s Classics 700s 800s MAX 8
145 146
149
152 153
2014 2015 2016 2017 2018
Reducing fuel consumption and improving efficiency through fleet modernization and other fuel initiatives
10
72.7
73.9 74.4
75.2
76.3
70
71
72
73
74
75
76
77
2014 2015 2016 2017 2018
In addition to modernizing the fleet:
• Split scimitar winglets • Galley refresh • Fuel and flight planning • New, lighter seats • Single engine taxi • Electronic flight bags
Fuel saving initiatives ASMs per gallon
Y/Y % Change 1.5 1.6 0.7 1.1 1.5
Sustaining a strong financial position
11 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. Note: Balance sheet information is as of December 31, 2018. All other information presented is for the 12 months ended December 31, 2018.
Investment grade rating by
all three agencies
• Record cash flow from operations of $4.9 billion
• Capital spending, including net proceeds from ACFO, of $1.8 billion
• Record free cash flow of $3.1 billion2
• Debt repayments of $342 million3
• $3.7 billion in unrestricted core cash and short-
term investments and $1 billion line of credit fully undrawn and available
• Balance Sheet leverage goal in the low-to-mid 30% range1
Balanced capital deployment
Strong balance sheet
Returned $2.3 billion
to Shareholders in 2018
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
12
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
Upgraded to A- in
February 2019
Source: Bloomberg as of February 14, 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). Note: Please see S&P disclaimer language on slide 2.
Future delivery schedule provides significant flexibility and continued fleet modernization opportunities
13 (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. Note: Delivery schedule is as of December 31, 2018.
The Boeing Company 737
MAX 7 Firm
Orders
MAX 8 Firm
Orders MAX 8 Options
Additional 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
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5 Free cash flowShare repurchasesDividends
Creating value for Shareholders
14 1Free cash flow is calculated as operating cash flows less capital expenditures less assets constructed for others, net.. 2Accelerated share repurchase. Note: See reconciliation of reported amounts to non-GAAP financial measures.
2014 2015 2016
On January 28, 2019, Southwest launched a $500 million ASR2 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.
(in b
illio
ns)
2017 2018
1
Customer Experience builds loyalty
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“It’s a good experience. I feel a sense of Hospitality that other airlines do not have.”
• 100% seat availability1
• No blackout dates • Points don’t expire2
Rapid Rewards®
Frequent Flyer Program • Live TV • $8 Wi-Fi flat rate per day • Complimentary snacks and beverages
Exceptional Inflight Offerings
1Members are able to redeem their points for every available seat. 2Must have points earning activity during the most recent 24 months.
Consistently loved and recognized brand
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• Named to FORTUNE’s 2018 list of World’s
Most Admired Companies • Ranked No. 1 in the U.S. DOT Customer
Satisfaction ranking in 2017 • Ranked highest Low-Cost Carrier for
customer satisfaction for the 2nd year in a row in the J.D. Power 2018 North America Satisfaction StudyTM
• Named one of the Corporate Responsibility Magazine’s 100 Best Corporate Citizens 2018
• Ranked among the Best Airline Rewards 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
Awards in 2018
TransfarencySM is a philosophy created by Southwest Airlines in which Customers are treated honestly and fairly, and low fares actually stay low—no unexpected bag fees1, change fees2, or hidden fees.
1First and second checked pieces of luggage, size and weight limits apply. 2There are never change fees, though fare differences might apply.
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We continue to offer Low Fares, Hospitality, and Transfarency
Note: First and second checked pieces of luggage, size and weight limits apply. Note: There are never change fees, though fare differences might apply.
Culture of celebration & appreciation
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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.
Our network in 1998
19 Source: EDW DOT Traffic December 1998.
1998
By 2008…
20 Source: EDW DOT Traffic December 1998, 2008.
1998 2008
… and today
21 Source: EDW DOT Traffic December 2008, Diio schedules July 2018.
2008 2018
22
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. Note: See reconciliation of reported amounts to non-GAAP financial measures.
The expansion of our robust network has driven meaningful results
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 evolution of our network
23 Source: Data presented herein as measured by the Department of Transportation O&D Survey for the twelve months ended September 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. 2Co-terminal: Airports that share a common city or region; for example Newark, LaGuardia and JFK are considered co-terminals to one another.
• 23% of total domestic market share
• Market leader in 25 of the top 50 U.S. metro areas1 (including co-terminal airports2)
• Serve (offer itineraries for sale) 96 of the top 100 domestic O&D city pairs (including co-terminal airports)
Market share
LUV OA #1 OA #2
Southwest has a strong market presence in many of the nation’s top metro areas
The nation’s largest domestic airline
29% 18% 15%
LA Basin (LAX, LGB, ONT, SNA, BUR)
26% 14% 12%
Orlando (MCO, SFB)
31% 23% 18%
DC/BWI Area (BWI, DCA, IAD)
36% 29%
14%
Denver
32% 23%
16%
Bay Area (OAK, SFO, SJC)
36%
11% 10%
Las Vegas
39% 32%
9%
Phoenix (PHX, AZA)
#1 #1 #1
Focus on Customer Service
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Southwest has set the bar high for customer satisfaction, earning the DOT’s best ranking among Marketing Carriers for 26 of the past 28 years
2016 2017 2018
Source: Air Travel Consumer Reports. Rankings based on complaints filed with the Department of Transportation (DOT) per 100,000 passengers enplaned. Note: Southwest tied for 1st Place in the DOT’s Year-to-Date (YTD) Customer Service ranking among Operating Carriers. Southwest was by far #1 among Marketing Carriers. An Operating Carrier can be an airline that only operates flights on behalf of another/larger carrier (i.e., “Branded Codeshare Partner”) or any airline that sells and flies under its own brand (a.k.a. “Marketing Carrier”).
Customer service ranking among Marketing Carriers
Southwest enplaned more than 163.6 million Customers (the most of any domestic carrier).
And, only 0.36 people per 100,000 enplaned passengers contacted the DOT with a complaint.
That’s a combination no other carrier is able to match!
In 2018…
Focus on Reliability
25
2.0
2.5
3.0
3.5
2016 2017 201876%
78%
80%
82%
2016 2017 2018
With record passengers in 2018, our strong OTP and MBR were notable operational achievements
Mishandled Baggage Rate (MBR)
Ontime Performance (OTP)
New reservation system capabilities and opportunities
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New Reservation
System
• Electronic Miscellaneous Documents (EMDs) for ancillary services
• Interline & codeshare • Foreign currency • Foreign point of sale • New distribution capabilities
• O&D Controls • Improved fare flexibility • Ancillary controls
• IROPS automation & optimization • Mobile enhancements at airport • Standby capability & policy
improvements
• Schedule variation • Increased days of inventory • Redeyes • Improved connection times
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Purpose 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.
Non-GAAP Reconciliation
28
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%
Twelve months ended December 31,
(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. (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 (continued)
29
(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 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.
2013 2014 2015 2016 2017 2018as 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, excluding Tax reform impact (c)
(30) (154) (103) (75) (17) 9
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, excluding Tax reform impact (c)
(0.04) (0.23) (0.16) (0.12) (0.03) 0.01
Deduct: Tax reform act (d) - - - - (2.11) - Net income per share, diluted, excluding special items 1.12$ 2.01$ 3.52$ 3.65$ 3.51$ 4.24$
Year ended December 31,
Non-GAAP Reconciliation (continued)
30 February 2019
2014 2015 2016 2017 2018Net 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,
2017 2018as recast (a)
Fuel and oil expense, unhedged 3,524$ 4,649$ Add: Premium cost of fuel contracts 136 135 Add (Deduct): Fuel hedge (gains) losses included in Fuel and oil expense, net
416 (168)
Fuel and oil expense, as reported 4,076$ 4,616$ Add (Deduct): Net impact from fuel contracts 156 14 Fuel and oil expense, excluding special items (economic) 4,232$ 4,630$
Total operating expenses, as reported 17,739$ 18,759$ Add (Deduct): Net impact from fuel contracts 156 14 Deduct: Lease termination expense (33) - Deduct: Aircraft grounding charge (63) - Add: Gain on sale of grounded aircraft - 25
Total operating expenses, excluding special items 17,799$ 18,798$
Deduct: Fuel and oil expense, excluding special items (economic)
(4,232) (4,630)
Operating expenses, excluding Fuel and oil expense and special items 13,567$ 14,168$
Deduct: Profitsharing expense (543) (544) Operating expenses, excluding profitsharing, Fuel and oil expense, and special items 13,024$ 13,624$
Year ended December 31,
(a) 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.
1998 2008Operating income, as reported $ 646 $ 449 Net impact from fuel contracts - 187 Operating income, non-GAAP $ 646 $ 636 Net adjustment for aircraft leases (b) 109 67 Adjustment for fuel hedge accounting (c) - (69)Adjusted Operating income, non-GAAP (A) 755$ 634$
Debt, including capital leases (d) 653 2,637 Equity (d) 2,160 6,974 Net present value of aircraft operating leases (d) 1,581 1,058 Average invested capital 4,394$ 10,669$ Equity adjustment for hedge accounting (c) - (1,263) Adjusted average invested capital (B) 4,394$ 9,406$
Non-GAAP ROIC, pre-tax (A/B) 17% 7%
Twelve months ended December 31,
(b) 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. (c) The Adjustment for fuel hedge accounting in the numerator is due to the Company’s accounting policy decision to classify fuel hedge accounting premiums below the Operating income line, and thus is adjusting Operating income to reflect such policy decision. The Equity adjustment for hedge accounting in the denominator adjusts for the cumulative impacts, in Accumulated other comprehensive income and Retained earnings, of gains and/or losses associated with hedge accounting related to fuel hedge derivatives that will settle in future periods. The current period impact of these gains and/or losses are reflected in the Net impact from fuel contracts in the numerator. (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.