Southwest Airlines 2015 Annual Report Download - page 52

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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 (i) 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 and (ii) other charges and benefits the Company believes are not
indicative of its ongoing operational performance.
As a result, 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 in the period of contract settlement. The Company believes 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.
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.
In addition to its “economic” financial measures, as defined above, the Company has also provided
other non-GAAP financial measures, including results that it refers to as “excluding special items,” as
a result of items that the Company believes are not indicative of its ongoing operations. These include
a one-time Special revenue adjustment due to the July 2015 amended co-branded credit card agreement
(the “Agreement”) with Chase Bank USA, N.A. (“Chase”) and the resulting change in accounting
methodology, expenses associated with the Company’s acquisition and integration of AirTran, a gain
resulting from a litigation settlement received in January 2015, and union contract bonuses recorded
for certain workgroups. The Company believes that evaluation of its financial performance can be
enhanced by a presentation of results that exclude the impact of these items in order to evaluate the
results on a comparative basis with results in prior periods that do not include such items and as a basis
for evaluating operating results in future periods. As a result of the Company’s acquisition of AirTran,
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