PDF Southwest Airlines Co. 2017 Annual Report to Shareholders
SOUTHWEST AIRLINES CO. 2017 ANNUAL REPORT TO SHAREHOLDERS
To our Shareholders:
I am very pleased to report another strong year of earnings in 2017. It marked our 45th consecutive year of profitability, unmatched by any competitor in the U.S. airline industry. Despite an unprecedented string of hurricanes, earthquakes, and wildfires, our 2017 results compared admirably to 2016's record results. Our stock price (LUV) ended the year 2017 at $65.45, an approximate 30 percent increase from the prior year and an approximate 540 percent increase over the last five years. Both periods led the industry and, in fact, placed us first against all industrials in the S&P 500 Index and ninth in the overall S&P 500 for the five years ended 2017.
Our 2017 net income was a record $3.5 billion, or $5.79 per diluted share. These results include a $1.4 billion reduction in our deferred income tax expense resulting from the Tax Cuts and Jobs Act. Excluding this and other special items1, our 2017 net income was $2.1 billion, or $3.50 per diluted share, compared with $2.4 billion, or $3.75 per diluted share in 2016.
Total operating revenues were a record $21.2 billion, up 3.7 percent versus a year ago. Available seat mile (ASM) capacity increased 3.6 percent, resulting in a slight increase in revenue per ASM (RASM), year-over-year. This reflects a more stable revenue yield environment than what we experienced the previous 24 months; however, the fare environment remains vigorous.
It was another successful year for our Commercial group, and they made significant progress in strengthening Southwest's revenue-generating capabilities and reach. First, we successfully deployed our new reservation system in May 2017. Beginning in 2018, we estimate the new system will drive incremental improvements in pre-tax results of $200 million, escalating to $500 million by 2020; however, we experienced a reduction in revenues of approximately $80 million in 2017 in connection with the transition from the old to the new system.
Second, we launched service to several new destinations including Cincinnati, Ohio; Grand Cayman; and Turks & Caicos. And, we announced our commitment to begin selling Southwest flights to Hawaii in 2018.
Finally, after three years of construction, we opened a brand new international concourse at Ft. Lauderdale-Hollywood International Airport and launched international service to Belize; Cancun, Mexico; Grand Cayman; Montego Bay, Jamaica; and San Jose, Costa Rica.
1 See Note Regarding Use of Non-GAAP Financial Measures and related reconciliations included in the accompanying Form 10-K for the fiscal year ended December 31, 2017, for additional information on special items.
Operating expenses increased 5.9 percent to $17.7 billion, or 2.3 percent per available seat mile, year-over-year. Jet fuel costs (economic) were up 4.2 percent to $2.00 per gallon from a year ago2, while fuel efficiency3 improved a welcome 1.1 percent.
We also had several notable achievements in the Operations group in 2017. We began flying Boeing's new 737 MAX 8 aircraft on October 1 of last year, which we believe is the best narrow-body airplane of comparable size in the world. We are pleased with the initial performance and are realizing over 13 percent less fuel consumed per mile along with a 40 percent reduction in noise, as compared with the prior generation 737-800. We ended 2017 with 13 of the new MAX 8 aircraft. Coincident with that historic milestone, we simplified our fleet for operational and financial purposes by completing the early retirement of our remaining 62 Boeing 737-300 (Classic) aircraft in September 2017. The effect of that was a $96 million charge in 2017, but we expect to receive economic benefits through year 2020 of an estimated $200 million stemming from lower fuel, maintenance, repairs, and out-of-service costs.
Our ontime performance was 78.7 percent for the year, a satisfactory performance given the challenging weather environment but still below our goal of over 80 percent. Our baggage handling continued to be superb (and improved). Most importantly, and for the 23rd time in the last 27 years, we were first in the U.S. Department of Transportation's category of fewest Customer complaints4. All in all, a very satisfactory performance from our Operations groups' perspective.
Our cash flow from operations was $3.9 billion, and our free cash flow5 was $1.8 billion. Our strengthened financial position earned us an upgrade in our investmentgrade credit rating to A3 with Moody's Investors Service and BBB+ with Standard & Poor's. We continue to target debt-to-total-capital (including off-balance sheet aircraft leases) in the low to mid-30 percent range. Our liquidity remained strong with $3.3 billion in year-end cash and short-term investments, plus our fully-available $1.0 billion bank line of credit. We returned $1.9 billion to Shareholders in 2017, through $274 million in dividends and $1.6 billion in share repurchases. In May 2017, in recognition of our exceptionally strong results, our Board of Directors authorized a $2.0 billion share repurchase program and increased the quarterly dividend by 25 percent to $.125 per share.
Once again, we are off to a solid start to the year. With corporate income tax reform passed through Congress and signed by the President late last year, we expect our effective income tax rate to drop to between 23 and 23.5 percent. That is expected to result in a significant boost to earnings and cash flow, compared with 2017, all else being equal. It is a welcome change 1) for our country, as it makes us more competitive around the world; 2) for our transportation sector, as it levels the federal income tax "playing field" among industries; and 3) for Southwest Airlines as the largest cash taxpayer in the
2 See Note Regarding Use of Non-GAAP Financial Measures and related reconciliations included in the accompanying Form 10-K for the fiscal year ended December 31, 2017, for additional information on economic fuel costs. 3 Calculated as available seat miles produced per fuel gallon consumed. 4 Source: Air Travel Consumer Reports. Rankings based on complaints filed with the U.S. Department of Transportation per 100,000 passengers enplaned. 5 Free cash flow is calculated as operating cash flows of $3.9 billion less capital expenditures of $2.1 billion less assets constructed for others of $126 million plus reimbursements for assets constructed for others of $126 million.
U.S. airline industry. Beyond income tax reform, we continue to hope for regulatory reform and air traffic control modernization. We were disappointed with Congress's recent decision to table air traffic control reform as this was the only viable path forward to modernization; however, we will continue our efforts to work with the Federal Aviation Administration and Members of Congress to achieve the air traffic control efficiencies we so desperately need.
U.S. domestic economic growth seems stable, and the 2017 tax reform should provide a further boost. Energy prices are stable at moderate prices, and travel demand remains strong in a competitive environment. We currently plan to grow our 2018 ASM capacity in the low five percent range, year-over-year. We ended the year 2017 with 706 aircraft in our all-Boeing 737 fleet. We are focused on restoring our fleet to its previous size prior to retiring the 737 Classic fleet, and then growing to approximately 750 aircraft at year-end 2018. Expansion to Hawaii from California is our near-term priority, along with consolidating our Central Michigan operations in Detroit by closing our Flint operation.
The year 2017 brought to a close a significant transformation of Southwest's Customer Experience, beginning with a new boarding process in 2007, to an all-new Rapid Rewards program in 2011, to an all-new reservation system in 2017, to name just a few. This year, 2018, is the first in a decade where we do not have planned a major deployment. So, in addition to readying ourselves for Hawaii service, we are focused on the basics: 1) the Reliability of our Operation; 2) the Hospitality of our Customer Service; and 3) the perpetuation of low operating costs. That is not to say we are done with innovation and change. New technologies will continue to be deployed, and improvements will continue to be enthusiastically pursued. More than anything, 2018 is a time for us to perfect the changes that have been implemented over the last decade and harvest the benefits from these significant investments.
Southwest is stronger than ever, and we are positioned better than ever, to compete in a very competitive airline environment. I am extremely grateful to all of our superb Employees, without whom, there would be no Southwest. They have built a great Company, and for the 24th consecutive year, landed us in the Top 10 of FORTUNE's list of World's Most Admired Companies: #8.
Please join me in thanking all 56,110 Employees for their hard work, Hospitality, can-do spirits, and exceptional results!
Sincerely,
Gary C. Kelly Chairman and Chief Executive Officer March 23, 2018
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
?
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2017
or
`
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission File No. 1-7259
Southwest Airlines Co.
(Exact name of registrant as specified in its charter)
TEXAS (State or other jurisdiction of incorporation or organization)
P.O. Box 36611 Dallas, Texas (Address of principal executive offices)
74-1563240 (IRS Employer Identification No.)
75235-1611 (Zip Code)
Registrant's telephone number, including area code: (214) 792-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock ($1.00 par value)
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ? No `
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ` No ?
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ? No `
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ? No `
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. `
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ? Accelerated filer ` Non-accelerated filer ` Smaller reporting company ` Emerging growth company `
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. `
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ` No ?
The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $37,211,057,645 computed by reference to the closing sale price of the common stock on the New York Stock Exchange on June 30, 2017, the last trading day of the registrant's most recently completed second fiscal quarter.
Number of shares of common stock outstanding as of the close of business on February 5, 2018: 587,950,973 shares
DOCUMENTS INCORPORATED BY REFERENCE Portions of the Definitive Proxy Statement for the Company's Annual Meeting of Shareholders to be held May 16, 2018, are incorporated into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I
Item 1. Business
1
Item 1A. Risk Factors
23
Item 1B. Unresolved Staff Comments
32
Item 2. Properties
32
Item 3. Legal Proceedings
33
Item 4. Mine Safety Disclosures
35
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities
38
Item 6. Selected Financial Data
41
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
43
Liquidity and Capital Resources
61
Off-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and
Commitments
64
Critical Accounting Policies and Estimates
67
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
75
Item 8. Financial Statements and Supplementary Data
81
Southwest Airlines Co. Consolidated Balance Sheet
81
Southwest Airlines Co. Consolidated Statement of Income
82
Southwest Airlines Co. Consolidated Statement of Comprehensive Income
83
Southwest Airlines Co. Consolidated Statement of Stockholders' Equity
84
Southwest Airlines Co. Consolidated Statement of Cash Flows
85
Notes to Consolidated Financial Statements
86
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
130
Item 9A. Controls and Procedures
130
Item 9B. Other Information
131
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
132
Item 11. Executive Compensation
132
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
132
Item 13. Certain Relationships and Related Transactions, and Director Independence
133
Item 14. Principal Accounting Fees and Services
133
PART IV
Item 15. Exhibits and Financial Statement Schedules
134
Item 16. Form 10-K Summary
141
Signatures
142
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related download
- pdf byjeff rey heer michael bostock and vadim ogievetsky aur to
- pdf rolling 10year stock market return
- pdf wizard of wall street stock market project
- pdf navigate a year old bull market elevated geopolitical risk
- pdf nasdaq 100 index options
- pdf the callan periodic table of investment returns
- pdf southwest airlines co 2017 annual report to shareholders
- pdf log log plots university of reading
- pdf how to get data an introduction into quantmod
- pdf investor profile questionnaire
Related searches
- amazon 2017 annual report analysis
- amazon annual report 2017 10k
- amazon annual report 2017 pdf
- amazon 2017 annual report pdf
- southwest airlines to pensacola fl
- apple annual report 2017 pdf
- 2017 annual report for amazon
- 2017 annual report maryland pdf
- alibaba annual report 2017 pdf
- annual report 2017 pdf
- target 2017 annual report pdf
- ford annual report 2017 pdf