Southwest Airlines 2010 Annual Report Download - page 44

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Note Regarding Use of Non-GAAP Financial Measures
The Company’s Consolidated Financial Statements are prepared in accordance with accounting principles
generally accepted in the United States (GAAP). These GAAP financial statements include unrealized non-cash
adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections
made under accounting pronouncements relating to derivative instruments and hedging.
The Company also provides financial information in this filing that was not prepared in accordance with
GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The
Company provides supplemental non-GAAP financial information, including results that it refers to as
“economic,” which the Company’s management utilizes to evaluate its ongoing financial performance and the
Company believes provides greater transparency to investors as supplemental information to its GAAP results.
The Company’s economic financial 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 reflects the Company’s actual net cash outlays for Fuel during
the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option
contracts are reflected as a component of Other (gains) losses, net, for both GAAP and non-GAAP (including
economic) purposes. These economic results provide a better measure of the impact of the Company’s fuel
hedges on its operating performance and liquidity since they exclude the unrealized, non-cash adjustments and
reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative
instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense.
This enables the Company’s management, as well as investors, 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. Special items also include a 2010 charge of $7 million and a 2009 charge of $66 million
(each before the impact of profitsharing or taxes) related to expenses associated with the Company’s planned
acquisition of AirTran and to Freedom ’09, the Company’s early-out program, respectively. Management does
not believe these expenses are a meaningful indicator of the Company’s results for those particular periods or in
comparison to its performance in the corresponding prior or subsequent period. As a result of the anticipated
acquisition of AirTran, which is expected to close during second quarter 2011, the Company expects to incur
substantial charges associated with integration of the two companies. While the Company cannot predict the
exact timing or amounts of such charges, it does expect to treat the charges as special items in its future
presentation of non-GAAP results. See Note 2 and Note 9 to the Consolidated Financial Statements for further
information on the planned acquisition of AirTran and Freedom ’09, respectively.
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 Note 10 to the Consolidated Financial Statements.
Year In Review
The year 2010 proved to be one of significant progress for the Company in many respects. For the 38th
consecutive year, the Company was profitable, earning $459 million ($.61 per share, diluted) in 2010, compared
to the Company’s 2009 net profit of $99 million ($.13 per share, diluted). On a non-GAAP basis, the Company’s
2010 net income was $550 million, or $.74 per share, diluted, which was significantly better than the Company’s
2009 net income of $143 million, or $.19 per share, diluted, on a non-GAAP basis. See the previous note
regarding the use of non-GAAP financial measures. This considerable improvement in net income was achieved
through better revenue management techniques and strategies, improving economic conditions which led to
higher demand for air travel, capacity restraint and reallocation by both the Company and the entire airline
industry, fare increases, and targeted marketing campaigns designed to enhance the Company’s already strong
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