SOUTHWEST AIRLINES REPORTS FOURTH QUARTER AND FULL YEAR 2023 RESULTS

DALLAS, Jan. 25, 2024 /PRNewswire/ -- Southwest Airlines Co. (NYSE: LUV) (the "Company") today reported its fourth quarter and full year 2023 financial results:

• Fourth quarter net loss of $219 million, or $0.37 loss per diluted share
• Fourth quarter net income, excluding special items¹, of $233 million, or $0.37 per diluted share
• Full year net income of $498 million, or $0.81 per diluted share
• Full year net income, excluding special items¹, of $986 million, or $1.57 per diluted share
• Record fourth quarter and full year operating revenues of $6.8 billion and $26.1 billion, respectively
• Liquidity² of $12.5 billion, well in excess of debt outstanding of $8.0 billion

Bob Jordan, President and Chief Executive Officer, stated, "2023 was a year of significant progress. We finished the year a much stronger Company thanks to the efforts of our incredible People. We completed a comprehensive winter action plan, restored our network, reached full utilization of our fleet, delivered significant new capabilities for our Customers, and had our best fourth quarter completion factor in more than a decade. And, importantly, we have maintained the strength of our investment grade balance sheet, despite the extraordinary challenges over the past few years. Our quarterly performance was at the better end of our expectations and included fourth quarter and full year records for operating revenues and passengers. We ratified five labor agreements in 2023, and with the successful ratification of an industry-leading contract for our Pilots, we have now ratified a total of nine agreements in just over a year, providing competitive market compensation packages to our outstanding People.

"I am very proud of our many accomplishments in 2023, but we have not yet delivered on our financial targets. As we work urgently to restore our profit margins to historical levels, we believe our 2024 plan provides a line of sight to improve our profitability year-over-year, earn our cost of capital this year, and provide significant progress towards our long-term goal to well exceed our cost of capital. Despite inflationary unit cost pressures from new labor agreements and a planned increase in aircraft maintenance, we plan to counter some of those cost pressures through strategic initiatives and already actioned network adjustments, creating operating margin³ expansion, excluding special items, in 2024. We also expect to make notable progress regaining efficiencies, with planned headcount at the end of 2024 flat to down year-over-year as we slow hiring to levels below attrition. We currently expect to grow our full year 2024 available seat miles roughly 6 percent, year-over-year, all of which is carryover from 2023 network restoration related growth. So, there is no net-new additional capacity in 2024. With the restoration of our network behind us, we plan to meter growth and continue to make adjustments, including capacity adjustments if needed, as we work vigorously to hit our financial targets.

"Our 2024 plan leverages a set of initiatives which, most importantly, includes better aligning the route network to new demand patterns. While it is early in the first quarter, these initiatives are delivering value and we expect them to contribute roughly $1.5 billion in incremental year-over-year pre-tax profits. As a result, we expect double-digit year-over-year operating revenue growth and year-over-year operating margin³ expansion. We expect our current initiatives to continue to deliver beyond 2024, and we are actively working on new initiatives. We will be relentless in executing against our plans to drive financial results while enhancing our great Hospitality and delivering a reliable and more efficient operation." 

Guidance and Outlook

The following tables introduce or update selected financial guidance for first quarter and full year 2024, as applicable:

Revenue Results and Outlook:

• Fourth quarter 2023 operating revenues were a fourth quarter record $6.8 billion, a 10.5 percent increase, year-over-year
• Full year 2023 operating revenues were a record $26.1 billion, a 9.6 percent increase, year-over-year
• Fourth quarter 2023 RASM decreased 8.9 percent, year-over-year—better than the Company's previous guidance range due to higher-than-expected close-in bookings and continued yield strength

The Company had record fourth quarter and full year 2023 revenue performance due to healthy leisure demand and continued yield strength, especially during the holiday time periods, coupled with record fourth quarter ancillary revenue, loyalty program revenue, and passengers carried. Close-in bookings, including managed business bookings, performed at the better end of expectations in November and December, driving fourth quarter unit revenues to outperform the Company's previous guidance range.

The Company expects first quarter 2024 RASM to increase in the range of 2.5 percent to 4.5 percent, year-over-year. This increase includes an approximate five point tailwind due to the negative revenue impact incurred in first quarter 2023 associated with the December 2022 operational disruption. Sequentially, the performance represents a healthy improvement driven primarily by network optimization, market share contributions from the Company's Global Distribution System ("GDS") initiative, growth in the Rapid Rewards^® loyalty program, and continued strength in overall demand. The network optimization is materially complete with the March 2024 schedule, at which point the Company expects a return to profitability.

After finalizing its 2024 plan, the Company now expects the combination of its network optimization efforts, the continued maturation of its development markets, and the incremental benefit of new and existing strategic initiatives to support 2024 operating margin³ expansion, excluding special items, driven by double-digit operating revenue growth, year-over-year, and lower market jet fuel prices, year-over-year. The Company also believes its 2024 plan provides a line of sight to earn its weighted average cost of capital ("WACC") this year, and provides significant progress towards its long-term goal to consistently achieve after-tax return on invested capital ("ROIC")⁶ well above the Company's WACC. 

Fuel Costs and Outlook:

• Fourth quarter 2023 economic fuel costs were $3.00 per gallon¹—at the lower end of the Company's previous expectations—and included $0.05 per gallon in premium expense and $0.12 per gallon in favorable cash settlements from fuel derivative contracts
• Full year 2023 economic fuel costs were $2.89 per gallon¹—in line with previous guidance—and included $0.06 per gallon in premium expense and $0.12 per gallon in favorable cash settlements from fuel derivative contracts
• Fourth quarter 2023 fuel efficiency improved 4.0 percent, year-over-year, primarily due to more Boeing 737-8 ("-8") aircraft, the Company's most fuel-efficient aircraft, as a percentage of its fleet
• As of January 17, 2024, the fair market value of the Company's fuel derivative contracts settling in 2024 through the end of 2026 was an asset of $252 million

The Company's multi-year fuel hedging program continues to provide insurance against spikes in energy prices. The Company's current fuel derivative contracts contain a combination of instruments based on West Texas Intermediate and Brent crude oil. The economic fuel price per gallon sensitivities⁴ provided in the table below assume the relationship between Brent crude oil and refined products based on market prices as of January 17, 2024.

In addition, the Company is providing its maximum percentage of estimated fuel consumption⁷ covered by fuel derivative contracts in the following table: 

Non-Fuel Costs and Outlook:

• Fourth quarter 2023 operating expenses increased 9.5 percent, year-over-year, to $7.2 billion
• Fourth quarter 2023 operating expenses, excluding fuel and oil expense, special items, and profitsharing¹, decreased 0.7 percent, year-over-year
• Fourth quarter 2023 CASM-X decreased 18.1 percent, year-over-year, and full year 2023 CASM-X decreased 1.2 percent, year-over-year—both in line with previous expectations
• Accrued $118 million of profitsharing expense for 2023 for the benefit of Employees

The Company's fourth quarter 2023 CASM-X decreased 18.1 percent, year-over-year, primarily due to the elevated operating expenses and lower capacity levels in fourth quarter 2022 as a result of the December 2022 operational disruption. This unit cost decrease was partially offset by year-over-year general inflationary cost pressures, including higher labor rates for all Employee workgroups, as well as the timing of planned maintenance expenses.

The Company's fourth quarter 2023 results included an approximate $426 million operating expense driven by an increase in the ratification bonus for Pilots as part of the new contract with the Southwest Airlines Pilots' Association ("SWAPA"). The $426 million change in estimate relates to prior periods and was, therefore, treated as a special item in the Company's fourth quarter 2023 Non-GAAP financial results. Of the $426 million change in estimate, $54 million relates to first quarter 2023, $24 million relates to second quarter 2023, $30 million relates to third quarter 2023, and the remaining $318 million relates to periods prior to 2023. As a result, only the $318 million relating to periods prior to 2023 was treated as a special item in the Company's full year 2023 Non-GAAP financial results. The change in estimate recorded in fourth quarter 2023 represents the Company's best current estimate with regards to the final ratification bonus that is due to be paid to each eligible Pilot, as determined as of the agreement ratification date of January 22, 2024. The process to determine the exact amount due to each Pilot, which must also be reconciled with and approved by SWAPA, is complex as it takes into account items that are inherently difficult to estimate. Therefore, the amount is subject to change.

Full year 2023 net interest income, which is included in Other expenses (income), increased $431 million, year-over-year, primarily due to a $366 million increase in interest income driven by higher interest rates, coupled with an $81 million decrease in interest expense driven by various debt repurchases and repayments throughout 2022.

The Company's 2023 effective tax rate was 26.3 percent, approximately three points higher than the Company's expectations primarily due to the tax impact of the settlement reached with the Department of Transportation ("DOT") regarding the December 2022 operational disruption. The Company currently estimates its 2024 effective tax rate to be in the range of 23 percent to 24 percent.

The Company currently expects its first quarter 2024 CASM-X to increase in the range of 6 percent to 7 percent, year-over-year. Approximately three to four points of the increase are driven by higher 2024 market wage rate accruals for Employee workgroups with open agreements and for overall 2024 labor cost increases, including the wage rate increases and agreed-upon work rule changes associated with the recently ratified Pilot contract. The majority of the remaining increase is driven by year-over-year pressure from maintenance expenses.

Furthermore, the Company currently expects similar cost pressures throughout the year, driving 2024 CASM-X to increase in the range of 6 percent to 7 percent, year-over-year. Specifically, the Company expects approximately four to five points of the increase to be driven by higher year-over-year labor costs, and approximately two points of the increase to be driven by higher year-over-year maintenance expenses. Progressing through the year, the Company's focus will be on regaining efficiencies to help counter inflationary cost pressures. To this end, the Company plans to end the year with headcount in the range of flat to down on a year-over-year basis.

Capacity, Fleet, and Capital Spending:
The Company's fourth quarter 2023 capacity increased 21.4 percent, and full year 2023 capacity increased 14.7 percent, both year-over-year. The Company's flight schedule is currently published for sale through October 2, 2024. In light of the Company's efforts to finalize its 2024 plans and moderate capacity growth, the Company now expects first quarter 2024 capacity to increase approximately 10 percent; second quarter 2024 capacity to increase in the range of 8 percent to 10 percent; third quarter 2024 capacity to increase in the range of 3 percent to 5 percent; and full year 2024 capacity to increase approximately 6 percent, all year-over-year. Planned ASM growth in the second half of the year is driven by an expected increase in average aircraft trip stage length with both seats and trips flown expected to be down, year-over-year, in the third and fourth quarters of 2024. The Company continues to plan for capacity growth beyond 2024 in the low- to mid-single-digits, year-over-year. However, the Company will continue to evaluate plans based on progress made against its long-term financial goals.

The Company received 17 -8 aircraft during fourth quarter 2023, including one more -8 aircraft delivery than previously planned, for a total of 86 -8 aircraft deliveries in 2023, compared with previous guidance of 85 -8 aircraft. The Company ended 2023 with 817 aircraft, which reflected 39 -700 aircraft retirements, compared with its previous guidance of 41 retirements, due to shifting two -700 retirements into 2024.

The Company is currently planning for approximately 79 MAX aircraft deliveries in 2024, which differs from its contractual order book displayed in the table below due to Boeing's continued supply chain challenges and the current status of the -7 certification. The Company plans to retire approximately 49 aircraft, including 45 -700s and four -800s, ending 2024 with roughly 847 aircraft in its fleet. The Company's current capacity plans do not assume placing the -7 in service this year and is subject to Boeing's production capability.

The Company's full year 2023 capital expenditures were $3.5 billion, in line with the Company's previous guidance. The Company estimates its 2024 capital spending to be in the range of $3.5 billion to $4.0 billion, which includes approximately $2.2 billion in aircraft capital spending and $1.6 billion in non-aircraft capital spending. Including both capital spending and operating expense budgets, the Company currently expects to spend approximately $1.7 billion in 2024 on technology investments, upgrades, and system maintenance. The Company currently estimates its average annual capital spending to be approximately $4 billion through 2027 and will continue to evaluate this level of capital spending based on the Company's performance compared with its long-term financial goals.

Since the previous financial results release on October 26, 2023, the Company exercised eight -7 options for delivery in 2025. Additionally, the Company accelerated one 2024 -8 firm order into 2023, converted and shifted three 2025 -7 firm orders to three 2024 -8 firm orders, and shifted an additional three 2025 -8 firm orders into 2024, resulting in 85 2024 contractual MAX aircraft deliveries (27 -7s and 58 -8s). The following tables provide further information regarding the Company's contractual order book and compare its contractual order book as of January 25, 2024, with its previous order book as of October 26, 2023. 

Liquidity and Capital Deployment:

• The Company ended 2023 with $11.5 billion in cash and cash equivalents and short-term investments, and a fully available revolving credit line of $1.0 billion
• The Company continues to have a large base of unencumbered assets with a net book value of approximately $17.3 billion, including $14.5 billion in aircraft value and $2.8 billion in non-aircraft assets such as spare engines, ground equipment, and real estate
• The Company had a net cash position⁸ of $3.5 billion, and adjusted debt to invested capital ("leverage")⁹ of 46 percent as of December 31, 2023
• The Company returned $428 million to its Shareholders through the payment of dividends during 2023
• The Company paid $85 million during 2023 to retire debt and finance lease obligations, including the retirement of $53 million in principal related to lease buyout transactions and $32 million related to scheduled lease payments

Awards and Recognitions:

• Named to FORTUNE's list of World's Most Admired® Companies; ranked #23 overall and #3 on the airline industry list
• Received the 2023 Freddie Awards title of Best Customer Service (Airline): Southwest Rapid Rewards™
• Recognized for providing the Best Loyalty Credit Card by the 2023 Freddie Awards for the Southwest Rapid Rewards™ Premier Credit Card
• Named the #2 domestic airline by the 2023 Elliot Readers' Choice Awards
• Ranked #2 on the Business Travel News (BTN) 2023 Airline Survey; only carrier on the survey to receive an increased total score two years in a row
• Named to Glassdoor's Best Places to Work list for the 14th consecutive year
• Recognized by Newsweek as one of America's Greatest Workplaces for Diversity 2023
• Recognized by Newsweek as one of America's Greatest Workplaces for Women
• Designated a 2023 Military Friendly Company by Viqtory
• Designated one of the 25 Best Companies for Latinos to Work 2023 by Latino Leaders Magazine
• Named a Best Place to Work for Disability Inclusion after achieving a top score on Disability:IN's 2023 Disability Equality Index
• Named a 2023 Sustainability, Environmental Achievement, and Leadership ("SEAL") Business Awards winner in the Environmental Initiative category for the Company's investment in SAFFiRE Renewables, LLC
• Recognized in D CEO Magazine 2023 Nonprofit & Corporate Citizenship Awards in the Sustainability Leadership category

Environmental, Social, and Governance (ESG):

• Published the Company's annual corporate social responsibility and environmental sustainability report—the Southwest Airlines One Report—a comprehensive, integrated report that includes information on the Company's Citizenship efforts and key topics including People, Performance, and Planet, along with reporting guided by the Global Reporting Initiatives ("GRI") Standards, Sustainability Accounting Standards Board ("SASB"), United Nations Sustainable Development Goals ("UNSDG"), and the Task Force on Climate-Related Financial Disclosures ("TCFD") frameworks
• Published the Southwest Airlines Diversity, Equity, & Inclusion ("DEI") Report, a companion piece to the One Report. This comprehensive report is focused on the Company's current DEI priorities and path forward
• Announced an updated sustainability strategy, Nonstop to Net Zero, and new environmental sustainability goals on the Company's path toward net zero carbon emissions by 2050
• Announced an offtake agreement with USA BioEnergy, LLC, for up to 680 million gallons of neat sustainable aviation fuel ("SAF")
• Launched a new tool enabling eligible corporate Customers to support the growth of SAF through Southwest Business Assist™
• Published a Supplier Code of Conduct and began integrating sustainability questions in the Company's request for proposal process with its suppliers
• Began partnering with EcoVadis, a sustainability ratings platform for global supply chains, to increase the transparency and measure the impact of the Company's supply chain
• Awarded 17 scholarships for a total commitment of $290,000 over four years to the 2023 Southwest Airlines Scholarship Program recipients
• Awarded 185 students four round trip tickets through the ¡Lánzate!/Take Off! Higher Education Travel Award Program to stay connected with their loved ones and community while pursuing higher education
• Announced collaboration with Boeing, the National Aeronautics and Space Administration ("NASA"), and other U.S. airlines to advise the Sustainable Flight Demonstrator ("SFD") project and development of the X-66A research aircraft
• Celebrated the 25th anniversary of the award-winning Adopt-A-Pilot® Program. This program has inspired thousands of fifth graders through science, technology, engineering, and mathematics ("STEM")-centered activities, connecting Southwest Pilots with classrooms to engage students in aviation-related lessons
• Announced Baylor University, Louisiana Tech, Middle Tennessee State University, and Oklahoma State University as university partners and Clay Lacy and Thrive Aviation as program partners in the airline's First Officer development and recruitment program: Destination 225º
• Visit southwest.com/citizenship for more details about the Company's ongoing ESG efforts

Conference Call
The Company will discuss its fourth quarter and full year 2023 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
www.southwestairlinesinvestorrelations.com.

Footnotes
¹See Note Regarding Use of Non-GAAP Financial Measures for additional information on special items. In addition, information regarding special items and economic results is included in the accompanying table Reconciliation of Reported Amounts to Non-GAAP Items (also referred to as "excluding special items").
²Includes $11.5 billion in cash and cash equivalents and short-term investments, and a fully available revolving credit line of $1.0 billion.
³Operating margin, excluding special items, is calculated as operating income, excluding special items, divided by operating revenues. 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. Accordingly, the Company believes reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for these projected results is not meaningful or available without unreasonable effort.
⁴Based on the Company's existing fuel derivative contracts and market prices as of January 17, 2024, first quarter and full year 2024 economic fuel costs per gallon are estimated to be in the range of $2.70 to $2.80 and $2.55 to $2.65, respectively. Economic fuel cost projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate the hedge accounting impact associated with the volatility of the energy markets, or the impact to its financial statements in future periods. 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. See Note Regarding Use of Non-GAAP Financial Measures.
⁵Projections do not reflect the potential impact of fuel and oil expense, special items, and profitsharing 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 these projected results is not meaningful or available without unreasonable effort.
⁶See Note Regarding Use of Non-GAAP Financial Measures for additional information on ROIC. In addition, information regarding ROIC and economic results is included in the accompanying table Non-GAAP Return on Invested Capital (ROIC).
⁷The Company's maximum fuel hedged percentage is calculated using the maximum number of gallons that are covered by derivative contracts divided by the Company's estimate of total fuel gallons to be consumed for each respective period. The Company's maximum number of gallons that are covered by derivative contracts may be at different strike prices and at strike prices materially higher than the current market prices. The volume of gallons covered by derivative contracts that ultimately get exercised in any given period may vary significantly from the volumes used to calculate the Company's maximum fuel hedged percentages, as market prices and the Company's fuel consumption fluctuate.
⁸Net cash position is calculated as the sum of cash and cash equivalents and short-term investments, less the sum of short-term and long-term debt.
⁹See Note Regarding Use of Non-GAAP Financial Measures for an explanation of the Company's leverage calculation. 

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 and operational outlook, expectations, goals, plans, and projected results of operations, including with respect to its network adjustment and optimization efforts and the maturation of development markets, and including factors and assumptions underlying the Company's expectations and projections; (ii) the Company's plans and expectations with respect to aircraft maintenance; (iii) the Company's ongoing strategic initiatives and planned initiatives; (iv) the Company's plans and expectations with respect to restoring efficiencies and delivering a more efficient operation; (v) the Company's 2024 hiring plans and expectations, including its plans and expectations with respect to headcount; (vi) the Company's plans and expectations with respect to capacity, capacity adjustments, and network adjustments, including with respect to stage length, aligning the route network to demand patterns, and factors and assumptions underlying the Company's expectations and projections; (vii) the Company's expectations with respect to fuel costs, hedging gains, and fuel efficiency, and the Company's related management of risks associated with changing jet fuel prices, including factors underlying the Company's expectations; (viii) the Company's plans, estimates, and assumptions related to repayment of debt obligations, interest expense, effective tax rate, and capital spending, including factors and assumptions underlying the Company's expectations and projections; (ix) the Company's plans, expectations, and goals regarding its fleet and fleet delivery schedule, including with respect to deliveries and retirements, and including factors and assumptions underlying the Company's plans and expectations; (x) the Company's expectations with respect to global distribution systems, its loyalty program, and passenger demand; and (xi) the Company's labor plans and expectations. These forward-looking statements are based on the Company's current estimates, intentions, beliefs, expectations, goals, strategies, and projections for the future and are not guarantees of future performance. 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 impact of fears or actual outbreaks of diseases, extreme or severe weather and natural disasters, actions of competitors (including, without limitation, pricing, scheduling, capacity, and network decisions, and consolidation and alliance activities), consumer perception, economic conditions, banking conditions, fears or actual acts of terrorism or war, sociodemographic trends, and other factors beyond the Company's control, on consumer behavior and the Company's results of operations and business decisions, plans, strategies, and results; (ii) 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; (iii) the emergence of additional costs or effects associated with the cancelled flights in December 2022, including litigation, government investigation and actions, and internal actions; (iv) the Company's dependence on its workforce, including its ability to employ and retain sufficient numbers of qualified Employees to effectively and efficiently maintain its operations; (v) the Company's ability to obtain and maintain adequate infrastructure and equipment to support its operations and initiatives; (vi) the impact of fuel price changes, fuel price volatility, volatility of commodities used by the Company for hedging jet fuel, and any changes to the Company's fuel hedging strategies and positions, on the Company's business plans and results of operations; (vii) the Company's dependence on Boeing and Boeing suppliers with respect to the Company's aircraft deliveries, fleet and capacity plans, operations, maintenance, strategies, and goals; (viii) the Company's dependence on Boeing and the Federal Aviation Administration with respect to the certification of the Boeing MAX 7 aircraft and Boeing production volumes; (ix) the Company's dependence on other third parties, in particular with respect to its technology plans, fuel supply, maintenance, environmental sustainability; Global Distribution Systems, and the impact on the Company's operations and results of operations of any third party delays or non-performance; (x) the Company's ability to timely and effectively prioritize its initiatives and focus areas and related expenditures; (xi) the impact of labor matters on the Company's business decisions, plans, strategies, and results; (xii) the impact of governmental regulations and other governmental actions on the Company's business plans, results, and operations; and (xiii) 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, 2022. 

NOTE REGARDING USE OF NON-GAAP FINANCIAL MEASURES

The Company's unaudited Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These GAAP financial statements may include (i) unrealized noncash 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 and benefits the Company believes are unusual and/or infrequent in nature and thus may make comparisons to its prior or future performance difficult.

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 (also referred to as "excluding special items"), 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 additional insight to investors as supplemental information to its GAAP results. The non-GAAP measures provided that relate to the Company's performance on an economic fuel cost basis include Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating expenses, non-GAAP excluding Fuel and oil expense; Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing; Operating income (loss), non-GAAP; Other (gains) losses, net, non-GAAP; Income (loss) before income taxes, non-GAAP; Provision (benefit) for income taxes, net, non-GAAP; Net income (loss), non-GAAP; Net income (loss) per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents). 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 that are designated as hedges are reflected as a component of Fuel and oil expense, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide further insight into the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, noncash 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, 2022 and subsequent filings.

The Company's GAAP results in the applicable periods may include other charges or benefits that are also deemed "special items" that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends. Financial measures identified as non-GAAP (or as excluding special items) have been adjusted to exclude special items. For the periods presented, in addition to the items discussed above, special items include:

1. Accruals associated with ongoing labor contract negotiations with TWU 556, which represents the Company's Flight Attendants. These amounts accrued in 2023 relate to additional compensation for services performed by Employees outside of this fiscal year;
2. Accruals associated with labor contract negotiations with SWAPA, which represents the Company's Pilots. These amounts accrued during the fourth quarter 2023 and/or for the fiscal year 2023, relate to additional compensation for services performed by Employees outside of those applicable fiscal periods;
3. Noncash impairment charges, primarily associated with adjustments to the salvage values for previously retired airframes;
4. A charge associated with a settlement reached with the Department of Transportation as a result of the Company's December 2022 operational disruption;
5. A charge associated with a tentative litigation settlement regarding certain California state meal-and-rest-break regulations for flight attendants;
6. Unrealized mark-to-market adjustment associated with certain available for sale securities; and
7. Losses associated with the partial extinguishment of the Company's Convertible Notes and early prepayment of debt. Such losses are incurred as a result of opportunistic decisions made by the Company to prepay portions of its debt, most of which was incurred during the pandemic in order to provide liquidity during the prolonged downturn in air travel.

Because management believes special 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 special 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 industry trends: 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 Fuel and oil expense and profitsharing; Operating income (loss), non-GAAP; Other (gains) losses, net, non-GAAP; Income (loss) before income taxes, non-GAAP; Provision (benefit) for income taxes, net, non-GAAP; Net income (loss), non-GAAP; Net income (loss) per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents).

The Company has also provided its calculation of return on invested capital, which is a measure of financial performance used by management to evaluate its investment returns on capital. Return on invested capital is not a substitute for financial results as reported in accordance with GAAP and should not be utilized in place of such GAAP results. Although return on invested capital is not a measure defined by GAAP, it is calculated by the Company, in part, using non-GAAP financial measures. Those non-GAAP financial measures are utilized for the same reasons as those noted above for Net income (loss), non-GAAP and Operating income (loss), non-GAAP. The comparable GAAP measures include charges or benefits that are deemed "special items" that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends, and the Company's profitability targets and estimates, both internally and externally, are based on non-GAAP results since "special items" cannot be reliably predicted or estimated. The Company believes non-GAAP return on invested capital is a meaningful measure because it quantifies the Company's effectiveness in generating returns relative to the capital it has invested in its business. Although return on invested capital is commonly used as a measure of capital efficiency, definitions of return on invested capital differ; therefore, the Company is providing an explanation of its calculation for non-GAAP return on invested capital in the accompanying reconciliation in order to allow investors to compare and contrast its calculation to the calculations provided by other companies.

The Company has also provided adjusted debt, invested capital, and adjusted debt to invested capital (leverage), which are non-GAAP measures of financial performance. Management believes these supplemental measures can provide a more accurate view of the Company's leverage and risk, since they consider the Company's debt and debt-like obligation profile and capital. Leverage ratios are widely used by investors, analysts, and rating agencies in the valuation, comparison, rating, and investment recommendations of companies. Although adjusted debt, invested capital, and leverage ratios are commonly-used financial measures, definitions of each differ; therefore, the Company is providing an explanation of its calculations for non-GAAP adjusted debt and adjusted equity in the accompanying reconciliation below in order to allow investors to compare and contrast its calculations to the calculations provided by other companies. Invested capital is adjusted debt plus adjusted equity. Leverage is calculated as adjusted debt divided by invested capital.

SW-QFS

SOURCE Southwest Airlines Co.