10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2015
 
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
74-1563240
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
P.O. Box 36611
 
Dallas, Texas
75235-1611
(Address of principal executive offices)
(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  þ    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  þ
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  þ    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  þ    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.    þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
þ
 
Accelerated filer
 
¨
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ
The aggregate market value of the common stock held by non-affiliates of the registrant was approximately $21,774,060,585 computed by reference to the closing sale price of the common stock on the New York Stock Exchange on June 30, 2015, 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 January 29, 2016: 638,070,032 shares

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held May 18, 2016, are incorporated into Part III of this Annual Report on Form 10-K.
 





TABLE OF CONTENTS

 
 
 
 
PART I
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II
 
Item 5.
Item 6.
Item 7.
 
 
 
Item 7A.
Item 8.
 
 
 
 
 
 
Item 9.
Item 9A.
Item 9B.
 
 
 
 
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
PART IV
 
Item 15.


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PART I 
Item 1.
Business
Company Overview
Southwest Airlines Co. (the “Company” or “Southwest”) operates Southwest Airlines, a major passenger airline that provides scheduled air transportation in the United States and near-international markets. For the 43rd consecutive year, the Company was profitable, earning $2.2 billion in net income.
Southwest commenced service on June 18, 1971, with three Boeing 737 aircraft serving three Texas cities: Dallas, Houston, and San Antonio. The Company ended 2015 serving 97 destinations in 40 states, the District of Columbia, the Commonwealth of Puerto Rico, and seven near-international countries including Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, and Belize. During 2015, the Company added its first three destinations in Central America (San Jose, Costa Rica, Belize City, Belize, and Liberia, Costa Rica) and also commenced Southwest service to a fourth destination in Mexico (Puerto Vallarta). At December 31, 2015, Southwest operated a total of 704 Boeing 737 aircraft.
During 2015, the Company also added 20 domestic nonstop destinations from Dallas Love Field. These routes were made possible by the repeal of certain federal flight restrictions at Dallas Love Field in October 2014. At year-end 2015, Southwest offered a total of 180 weekday departures to 50 nonstop destinations from Dallas Love Field. In addition, the Company added eight international nonstop destinations from a newly constructed five-gate international terminal at Houston’s William P. Hobby Airport. Based on the most recent data available from the U.S. Department of Transportation, as of June 30, 2015, Southwest was the largest domestic air carrier in the United States, as measured by the number of domestic originating passengers boarded.
Industry
The airline industry has historically been an extremely volatile industry subject to numerous challenges. Among other things, it has been cyclical, energy intensive, labor intensive, capital intensive, technology intensive, highly regulated, heavily taxed, and extremely competitive. The airline industry has also been particularly susceptible to detrimental events such as acts of terrorism, poor weather, and natural disasters.
The U.S. airline industry benefited from moderate economic growth during 2015 and was further aided by a significant drop in fuel prices. The U.S. airline industry, including Southwest, has increased available seat miles (also referred to as “capacity,” an available seat mile is one seat, empty or full, flown one mile and is a measure of space available to carry passengers in a given period), and has increased the number of seats per trip (or “gauge”) through slimline seat retrofits and the use of larger aircraft.
 
Company Operations
Route Structure
General
Southwest principally provides point-to-point service, rather than the “hub-and-spoke” service provided by most major U.S. airlines. The hub-and-spoke system concentrates most of an airline’s operations at a limited number of central hub cities and serves most other destinations in the system by providing one-stop or connecting service through a hub. By not concentrating operations through one or more central transfer points, Southwest’s point-to-point route structure has allowed for more direct nonstop routing than hub-and-spoke service. Approximately 74 percent of the Company's Customers flew nonstop during 2015, and, as of December 31, 2015, Southwest served 637 nonstop city pairs.
Southwest’s point-to-point service has also enabled it to provide its markets with frequent, conveniently timed flights and low fares. For example, Southwest currently offers 20 weekday roundtrips from Dallas Love Field to Houston Hobby, 14 weekday roundtrips from Los Angeles International to Oakland, 12 weekday roundtrips from Burbank to Oakland, 11 weekday roundtrips from Phoenix to Las Vegas, and ten weekday roundtrips from San Diego to San Jose.
Southwest complements its high-frequency short-haul routes with long-haul nonstop service between markets such as Los Angeles and Nashville, Las Vegas and Orlando, San Diego and Baltimore, and Houston and New York LaGuardia.

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During 2015, the Company continued to incorporate the Boeing 737-800 into its fleet, which offers significantly more Customer seating capacity than Southwest’s other aircraft. This has enabled the Company to more economically serve long-haul routes, as well as high-demand, slot-controlled and gate-restricted airports, by adding seats for such routes without increasing the number of flights (a “slot” is the right of an air carrier, pursuant to regulations of the Federal Aviation Administration (“FAA”), to operate a takeoff or landing at a specific time at certain airports). For 2015, the Company’s average aircraft trip stage length was 750 miles, with an average duration of approximately 2.0 hours, as compared with an average aircraft trip stage length of 721 miles and an average duration of approximately 2.0 hours in 2014. During 2014, the Company also operated AirTran Airways (“AirTran”). AirTran’s final passenger service occurred on December 28, 2014, and it has been integrated into Southwest.
International Service
Southwest Airlines launched international service in 2014, and ended 2015 with service to 11 international destinations. The Company’s international expansion in 2015 was facilitated by the completion of construction of a new five-gate international terminal at Houston’s William P. Hobby Airport. The new terminal includes an expanded security checkpoint and an upgraded Southwest ticketing area. The Company controlled this expansion and the related financial terms pursuant to an Airport Use and Lease Agreement with the City of Houston. Additional information regarding this project is provided below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 4 to the Consolidated Financial Statements.
Approximately $287 million of the Company’s 2015 operating revenues were attributable to foreign operations. The remainder of the Company’s 2015 operating revenues, approximately $19.5 billion, was attributable to domestic operations. Approximately $226 million of the Company’s 2014 operating revenues were attributable to foreign operations (including those attributable to both Southwest and AirTran). The remainder of the Company’s 2014 operating revenues, approximately $18.4 billion, was attributable to domestic operations. The Company's assets are not allocated to a geographic area because the Company’s tangible assets primarily consist of flight equipment, the majority of which are interchangeable and are deployed systemwide, with no individual aircraft dedicated to any specific route or region.
Cost Structure
General
A key component of the Company’s business strategy has historically been its low-cost structure, which was designed to allow it to profitably charge low fares. Adjusted for stage length, the Company has lower unit costs, on average, than the majority of major domestic carriers. The Company’s low-cost structure has historically been facilitated by Southwest’s use of a single aircraft type, the Boeing 737, its operationally efficient point-to-point route structure, and its highly productive Employees. Southwest’s use of a single aircraft type has allowed for simplified scheduling, maintenance, flight operations, and training activities. Southwest’s point-to-point route structure includes service to and from many secondary or downtown airports such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore-Washington International, Burbank, Manchester, Oakland, San Jose, Providence, and Ft. Lauderdale-Hollywood. These conveniently located airports are typically less congested than other airlines’ hub airports, which has contributed to Southwest's ability to achieve high asset utilization because aircraft can be scheduled to minimize the amount of time they are on the ground. This, in turn, has reduced the number of aircraft and gate facilities that would otherwise be required and allows for high Employee productivity (headcount per aircraft).
Impact of Fuel Costs on the Company’s Low-Cost Structure; Fuel Initiatives
Although 2015 fuel prices were lower than 2014 fuel prices, Fuel and oil expense remained one of the Company's largest operating costs. The table below shows the Company’s average cost of jet fuel for each year beginning in 2003 and during each quarter of 2015.


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Year
 
Cost
(Millions)
 
Average
Cost Per
Gallon
 
Percentage of    
Operating
Expenses
2003
 
$
920

 
$
0.80

 
16.5
%
2004
 
$
1,106

 
$
0.92

 
18.1
%
2005
 
$
1,470

 
$
1.13

 
21.4
%
2006
 
$
2,284

 
$
1.64

 
28.0
%
2007
 
$
2,690

 
$
1.80

 
29.7
%
2008
 
$
3,713

 
$
2.44

 
35.1
%
2009
 
$
3,044

 
$
2.12

 
30.2
%
2010
 
$
3,620

 
$
2.51

 
32.6
%
2011
 
$
5,644

 
$
3.19

 
37.7
%
2012
 
$
6,120

 
$
3.30

 
37.2
%
2013
 
$
5,763

 
$
3.16

 
35.1
%
2014
 
$
5,293

 
$
2.93

 
32.3
%
2015
 
$
3,616

 
$
1.90

 
23.0
%
First Quarter 2015
 
$
877

 
$
2.01

 
24.1
%
Second Quarter 2015
 
$
1,005

 
$
2.03

 
25.0
%
Third Quarter 2015
 
$
936

 
$
1.98

 
22.9
%
Fourth Quarter 2015
 
$
798

 
$
1.65

 
20.2
%
The Company enters into fuel derivative contracts to manage its risk associated with significant increases in fuel prices; however, as is evidenced by the table above, energy prices can fluctuate significantly in a relatively short amount of time, and the cost of hedging generally increases with sustained high potential for volatility in the fuel market. Therefore, the Company continually monitors and adjusts its fuel hedge portfolio and strategies to address not only fuel price increases, but also fuel price volatility, hedge costs, and hedge collateral requirements. The Company’s fuel hedging activities are discussed in more detail below under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 10 to the Consolidated Financial Statements.
During 2015, the Company continued to focus on reducing fuel consumption and improving efficiency through fleet modernization and other fuel initiatives. The Company continued to replace its older aircraft with newer aircraft that are less maintenance intensive and more fuel efficient. For example, during 2015, the Company took delivery of 19 Boeing 737-800 aircraft and 24 Boeing 737-700 aircraft. In 2016, the Company currently expects to take delivery of an additional 36 Boeing 737-800 aircraft and 17 Boeing 737-700 aircraft. As further discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in Note 1 to the Consolidated Financial Statements, the Company recently announced its intent to accelerate the retirement of its 737-300 and 737-500 aircraft. The Company's fleet composition and delivery schedule is discussed in more detail below under "Properties - Aircraft." The Company also continued to participate in Required Navigation Performance (“RNP”) operations as part of the FAA’s Performance Based Navigation program. RNP combines the capabilities of advanced aircraft avionics, Global Positioning System satellite navigation (instead of less precise ground-based navigation), and new flight procedures to produce more efficient flight patterns and conserve fuel. The Company’s RNP activities are discussed further under “Regulation - Environmental Regulation."
The table below illustrates the Company's available seat miles produced per fuel gallon consumed over the last five years:
  
 
Year ended December 31,
 
 
2015
 
2014
 
2013
 
2012
 
2011
Available seat miles per fuel gallon consumed
 
73.9
 
72.8
 
71.7
 
69.4
 
68.3


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Fare Structure
General
Southwest offers a relatively simple fare structure that features competitive, unrestricted, unlimited, everyday coach fares, as well as lower fares available on a restricted basis. Southwest bundles fares into three major categories: “Wanna Get Away®,” “AnytimeSM,” and “Business Select®,” with the goal of making it easier for Customers to choose the fare they prefer. All fare products include the privilege of two free checked bags (weight and size limits apply). In addition, regardless of the fare product, Southwest does not charge fees for changes to flight reservations.
“Wanna Get Away” fares are generally the lowest fares and are typically subject to advance purchase requirements. They are nonrefundable but, subject to compliance with Southwest’s No Show policy, funds may be applied to future travel on Southwest without a change fee. Southwest’s No Show policy applies if a Customer has booked a nonrefundable fare anywhere in his/her itinerary and that portion of the flight is not used and not canceled or changed by the Customer at least ten minutes prior to scheduled departure. In such event, subject to certain exceptions, all unused funds on the full itinerary will be forfeited, and the remaining reservation will be canceled. The intent of the No Show policy is to promote Customer behavior that will enable Southwest to re-sell the open seat prior to departure.
“Anytime” fares are refundable and changeable, and funds may also be applied toward future travel on Southwest. Anytime fares also include a higher frequent flyer point multiplier under Southwest’s Rapid Rewards® frequent flyer program than do Wanna Get Away fares. The Company's frequent flyer program is discussed below under "Rapid Rewards Frequent Flyer Program."
“Business Select” fares are refundable and changeable, and funds may be applied toward future travel on Southwest. Business Select fares also include additional perks, when available, such as priority boarding in the first 15 boarding positions within boarding group “A,” a higher frequent flyer point multiplier than other Southwest fares (including twice as many points per dollar spent as compared with Wanna Get Away fares), “Fly By®” priority security and/or ticket counter access in participating airports, and one complimentary adult beverage coupon for the day of travel (for Customers of legal drinking age).
Ancillary Services
The Company offers ancillary service offerings such as Southwest’s EarlyBird Check-In® and transportation of pets and unaccompanied minors, in accordance with Southwest's respective policies. EarlyBird Check-In provides Customers with automatic check-in before general boarding positions become available, improving Customers' seat selection options (priority boarding privileges are already a benefit of being an "A-List" tier member under the Company's Rapid Rewards Frequent Flyer Program). Southwest’s Pet Policy provides Customers an opportunity to bring a small cat or dog into the aircraft cabin. Southwest also has an unaccompanied minor travel policy to address the administrative costs and the extra care necessary to safely transport these Customers.
When available, Southwest also sells, at the gate, open priority boarding positions in the first 15 positions in its "A" boarding group.
Southwest offers inflight satellite-based WiFi service on all of its 737-700 and 737-800 aircraft, representing over 80 percent of Southwest’s fleet. Southwest’s Customers with small portable electronic devices are able to utilize the airline’s onboard WiFi from gate-to-gate when travelling on a Southwest WiFi-enabled airplane. Southwest was the first carrier to offer gate-to-gate connectivity. Southwest’s onboard entertainment options on WiFi-enabled aircraft for viewing on Customers’ personal wireless devices include free access to Southwest’s live and on-demand television product. The television product currently consists of 19 live channels and up to 75 on-demand recorded episodes from popular television series. Due to licensing restrictions, free live TV may not be available onboard WiFi-enabled international flights. Southwest also provides movies-on-demand, and also offers a Messaging-only option, including all WiFi-enabled stops and connections. The Messaging service allows access to iMessage and pre-downloaded apps for Viber and WhatsApp. Customers do not have to purchase WiFi to access television offerings, movies-on-demand, or the Messaging-only service.

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Rapid Rewards Frequent Flyer Program
Southwest’s Rapid Rewards frequent flyer program enables program members (“Members”) to earn points for every dollar spent on Southwest fares. The amount of points earned under the program is based on the fare and fare class purchased, with higher fare products (e.g., Business Select) earning more points than lower fare products (e.g., Wanna Get Away). Each fare class is associated with a points earning multiplier, and points for flights are calculated by multiplying the fare for the flight by the fare class multiplier. Likewise, the amount of points required to be redeemed for a flight is based on the fare and fare class purchased. Under the program (i) Members are able to redeem their points for every available seat, every day, on every flight, with no blackout dates; and (ii) points do not expire so long as the Member has points-earning activity during the most recent 24 months.
Under the program, Members continue to accumulate points until the time they decide to redeem them. As a result, the program provides Members significant flexibility and options for earning and redeeming rewards. For example, Members can earn more points (and/or achieve tiered status such as A-List and Companion Pass faster) by purchasing higher fare tickets. Members also have significant flexibility in redeeming points, such as the opportunity to book in advance to take advantage of a lower fare (including many fare sales) ticket by redeeming fewer points or by being able to redeem more points and book at the last minute if seats are still available for sale. Members can also earn points through qualifying purchases with Rapid Rewards Partners (which include, for example, car rental agencies, hotels, restaurants, and retailers), as well as by using Southwest’s co-branded Chase® Visa credit card. In addition, holders of Southwest’s co-branded Chase Visa credit card are able to redeem their points for items other than travel on Southwest, such as international flights on other airlines, cruises, hotel stays, rental cars, gift cards, event tickets, and more. In addition to earning points for revenue flights and qualifying purchases with Rapid Rewards Partners, Members also have the ability to purchase, gift, and transfer points, as well as the ability to donate points to selected charities.
Southwest’s Rapid Rewards frequent flyer program features tier and Companion Pass programs for the most active Members, including “A-List” and “A-List Preferred” status. Both A-List and A-List Preferred Members enjoy benefits such as “Fly By®” priority check-in and security lane access, where available, as well as dedicated phone lines, standby priority, and an earnings bonus on eligible revenue flights (25 percent for A-List and 100 percent for A-List Preferred). In addition, A-List Preferred Members enjoy free inflight WiFi on equipped flights. Members who attain A-List or A-List Preferred status receive priority boarding privileges for an entire year. When these Customers purchase travel at least 36 hours prior to flight time, they receive the best boarding pass number available (generally, an “A” boarding pass). Members who fly 100 qualifying one-way flights or earn 110,000 qualifying points in a calendar year automatically receive a Companion Pass, which provides for unlimited free travel for one year to any destination available on Southwest for a designated companion of the qualifying Member. The Member and designated companion must travel together on the same flight.
Southwest’s Rapid Rewards frequent flyer program has been designed to drive more revenue by (i) bringing in new Customers, including new Members, as well as new holders of Southwest’s co-branded Chase Visa credit card; (ii) increasing business from existing Customers; and (iii) strengthening the Company’s Rapid Rewards hotel, rental car, credit card, and retail partnerships. The program continues to exceed the Company’s expectations with respect to the number of Members added, the amount spent per Member on airfare, the number of flights taken by Members, the number of Southwest’s co-branded Chase Visa credit card holders added, the number of points sold to business partners, and the number of frequent flyer points purchased by Members. During 2015, the Company entered into an amended co-branded credit card agreement with Chase Bank USA, N.A. Additional information regarding this amended co-branded credit card agreement, including the effect of the resulting change in accounting methodology, is provided below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 1 to the Consolidated Financial Statements.
For the Company’s 2015 consolidated results, Customers of Southwest redeemed approximately 7.3 million flight awards, accounting for approximately 12.0 percent of revenue passenger miles flown. For the Company’s 2014 consolidated results, Customers of Southwest and AirTran redeemed approximately 6.2 million flight awards, accounting for approximately 11.0 percent of revenue passenger miles flown. For the Company’s 2013 consolidated results, Customers of Southwest and AirTran redeemed approximately 5.4 million flight awards, accounting for approximately 9.5 percent of revenue passenger miles flown. The Company’s accounting policies with respect to its frequent flyer programs are discussed in more detail in Note 1 to the Consolidated Financial Statements.

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Southwest.com
The Company’s Internet website, Southwest.com®, is the only avenue for Southwest Customers to purchase and manage travel online. Customers’ trips can be planned and managed directly from the southwest.com home page. Southwest.com is designed to help make the Customer's experience personal and intuitive with features such as recognizing the Customer's location to provide relevant deals, remembering recent searches to make it easy to get to trips of interest, and shopping cart functionality allowing Customers to purchase air, hotel, and car rental in one visit. The newly redesigned “My Accounts” section of the website provides a detailed view into a Customer’s travel and loyalty activity. Southwest.com highlights points of differentiation between Southwest and other air carriers, as well as the fact that southwest.com is the only place where Customers can purchase Southwest fares online. In addition, southwest.com and swabiz.com (the Company’s business travel reservation web page) are available in a translated Spanish version, which provides Customers who prefer to transact in Spanish the same level of Customer Service provided by the English versions of the websites. Additionally, Southwest offers Customers a mobile website and app to provide Customers the ability to transact with Southwest anytime they have access to their mobile device. For the year ended December 31, 2015, approximately 79.4 percent of the Company’s Passenger revenues came through its website (including revenues from SWABIZ®).
Marketing
During 2015, the Company continued to benefit from, and aggressively market, Southwest’s points of differentiation from its competitors. In October 2015, the Company premiered a new advertising campaign called TransfarencySM.. The campaign emphasizes Southwest's approach to treating Customers fairly, honestly, and respectfully, with its low fares and no unexpected bag fees, change fees, or hidden fees.
Southwest continues to be the only major U.S. airline that offers to all ticketed Customers up to two checked bags that fly free (weight and size limits apply). Through both its national and local marketing campaigns, Southwest has continued to aggressively promote this point of differentiation from its competitors with its “Bags Fly Free®” message. The Company believes its decision not to charge for first and second checked bags on Southwest, as reinforced by the Company’s related marketing campaign, has driven an increase in Southwest’s market share and a resulting net increase in revenues.
Southwest is also the only major U.S. airline that does not charge a fee on any of its fares for a Customer change in flight reservations. The Company has continued to incorporate this key point of differentiation in its marketing campaigns. The campaigns highlight the importance to Southwest of Customer Service by showing that Southwest understands plans can change and therefore does not charge a change fee. While a Customer may pay a difference in airfare, the Customer will not be charged a change fee on top of any difference in airfare.
Also unlike most of its competitors, Southwest does not impose additional fees for items such as seat selection, snacks, curb-side check-in, and telephone reservations. In addition, Southwest allows each ticketed Customer to check one stroller and one car seat free of charge, in addition to the two free checked bags.
The Company also continues to promote all of the many other reasons to fly Southwest such as its low fares, network size, Customer Service, free live television offerings, and its Rapid Rewards frequent flyer program.
In 2014, the Company launched a new visual expression of its brand by introducing a new Heart aircraft livery, airport experience, and logo. Aircraft already in the Company's fleet are scheduled to receive the newly painted livery within the aircraft's existing repainting schedule, while new aircraft will be delivered in the Heart livery. In addition, many of the future airport conversions will be integrated into existing and upcoming airport improvement projects.
Technology Initiatives
During 2015, the Company continued its commitment to technology improvements to support its ongoing operations and initiatives.
The Company is in the midst of a multi-year project to completely replace its reservation system. In 2014, the Company launched the Amadeus Altéa reservations solution to support the Company’s international service. The Company has since begun implementing Amadeus' Altéa reservations solution as the Company's future single reservation system for both domestic and international reservations. This single reservation system is expected to be implemented in 2017 and is expected to (i) provide significant incremental revenue opportunities beyond implementation; (ii) allow the

9



Company to offer product enhancements that will benefit Customers; (iii) give the Company a flexible and reliable foundation that will allow it to adapt more quickly and efficiently, and better respond to industry demands; and (iv) reduce the complexities associated with maintaining and operating multiple reservation systems. In August 2015, the Company achieved one of the first milestones of the single reservation system when its Customer Support & Services group (“CS&S”) began using Amadeus Group Manager for international group reservations. This enhanced functionality allows CS&S to book larger numbers of Passengers on a single reservation via streamlined booking processes.
During 2015, the Company also activated a new recovery optimization tool designed to help the Company effectively manage its increasingly complex network. The optimizing tool assists with irregular operations such as out of service events, station reduction, and station shutdown, by considering many factors including passenger and crew connections, airport curfews, equipment mismatches, and mission and maintenance requirements.
The Company intends to continue to devote significant technology resources towards, among other things, (i) the continued development of systems to improve both revenue management and network optimization capabilities, (ii) the aforementioned replacement of Southwest's existing domestic reservation system with the comprehensive Amadeus' Altéa reservations solution, and (iii) tools to improve operational management.
Regulation
The airline industry is heavily regulated, especially by the federal government, and there are a significant number of governmental agencies and legislative bodies that have the ability to directly or indirectly affect the Company and/or the airline industry financially and/or operationally. Examples of regulations affecting the Company and/or the airline industry, imposed by several of these governmental agencies and legislative bodies, are discussed below.
Economic and Operational Regulation
Consumer Protection Regulation by the U.S. Department of Transportation
The U.S. Department of Transportation (the “DOT”) regulates economic operating authority for air carriers and consumer protection for airline passengers. The Federal Aviation Authority (“FAA”), a sub-agency of the DOT, regulates aviation safety. The DOT may impose civil penalties on air carriers for violating its regulations.
To provide passenger transportation in the United States, a domestic airline is required to hold both a Certificate of Public Convenience & Necessity from the DOT and an Air Carrier Operating Certificate from the FAA. A Certificate of Public Convenience & Necessity is unlimited in duration, and the Company’s certificate generally permits it to operate among any points within the United States and its territories and possessions. Additional DOT authority, in the form of a certificate or exemption from certificate requirements, is required for a U.S. airline to serve foreign destinations either with its own aircraft or via code-sharing with another airline. Exemptions granted by the DOT to serve international markets are generally limited in duration and are subject to periodic renewal requirements. The DOT also has jurisdiction over international tariffs and pricing in certain markets. The DOT may revoke a certificate or exemption, in whole or in part, for intentional failure to comply with federal aviation statutes, regulations, orders, or the terms of the certificate itself.
The DOT’s consumer protection and enforcement activities relate to areas such as unfair and deceptive practices and unfair competition by air carriers, deceptive airline advertising (concerning, e.g., fares, ontime performance, schedules, and code-sharing), and violations of rules concerning denied boarding compensation, ticket refunds, and baggage liability requirements. The DOT is also charged with prohibiting discrimination by airlines against consumers on the basis of race, religion, national origin, or sex.
Under the above-described authority, the DOT has adopted so-called “Passenger Protection Rules,” which address a wide variety of matters including flight delays on the tarmac, chronically delayed flights, denied boarding compensation, and advertising of airfares, among others. Under the Passenger Protection Rules, U.S. passenger airlines are required to adopt contingency plans that include the following: (i) assurances that no domestic flight will remain on the airport tarmac for more than three hours and that no international flight will remain on the tarmac at a U.S. airport for more than four hours, unless the pilot-in-command determines there is a safety-related or security-related impediment to deplaning passengers, or air traffic control advises the pilot-in-command that returning to the gate or permitting passengers to disembark elsewhere would significantly disrupt airport operations; (ii) an assurance that air carriers

10



will provide adequate food and potable drinking water no later than two hours after the aircraft leaves the gate (in the case of departure) or touches down (in the case of arrival) if the aircraft remains on the tarmac, unless the pilot-in-command determines that safety or security considerations preclude such service; and (iii) an assurance of operable lavatories, as well as adequate medical attention, if needed. Air carriers are required to publish their contingency plans on their websites.
The Passenger Protection Rules also subject airlines to potential DOT enforcement action for unfair and deceptive practices in the event of chronically delayed domestic flights (i.e., domestic flights that operate at least ten times a month and arrive more than 30 minutes late more than 50 percent of the time during that month). In addition, airlines are required to (i) display ontime performance on their websites; (ii) adopt customer service plans, publish those plans on their website, and audit their own compliance with their plans; (iii) designate an employee to monitor the performance of their flights; (iv) provide information to passengers on how to file complaints; and (v) respond in a timely and substantive fashion to consumer complaints.
The Passenger Protection Rules also require airlines to (i) pay up to $1,350 in denied boarding compensation to each passenger involuntarily bumped from a flight; (ii) refund any checked bag fee for permanently lost luggage; (iii) prominently disclose all potential fees for optional ancillary services on their websites; and (iv) refund passenger fees paid for ancillary services if a flight cancels or oversells and a passenger is unable to take advantage of such services.
The Passenger Protection Rules also require that (i) advertised airfares include all government-mandated taxes and fees; (ii) passengers be allowed to hold a reservation for up to 24 hours without making a payment; (iii) passengers be allowed to cancel a paid reservation without penalty for 24 hours after the reservation is made, as long as the reservation is made at least seven days in advance of travel; (iv) fares may not increase after purchase; (v) baggage fees must be disclosed to the passenger at the time of booking; (vi) the same baggage allowances and fees must apply throughout a passenger’s trip; (vii) baggage fees must be disclosed on e-ticket confirmations; and (viii) passengers must be promptly notified in the event of delays of more than 30 minutes or if there is a cancellation or diversion of their flight.
The DOT has issued a proposed rule that would further expand the Passenger Protection Rules. First, the proposed rule would require airlines to share with ticket agents fee information for “basic ancillary services,” including fees for a first checked bag, second checked bag, carry-on items, and advance seat selection. Second, the proposed rule would require enhanced reporting of information to the DOT by mainline carriers for their domestic code-share partner operations. Third, the proposed rule would require ticket agencies to disclose which carriers' tickets they sell to avoid leading consumers to mistakenly believe they are searching all possible flight options when in fact other options may be available. Fourth, the proposed rule would impose a variety of additional requirements on ticket agents and air carriers, such as public disclosures of information. The Company is not able to predict the impact of any new consumer protection rules on its services, although the Company is likely to be affected to a lesser degree than most other airlines, which generally offer more ancillary products and services, and sell their services largely via ticket agencies. The DOT is expected to issue a final rule in this proceeding in 2016.

The DOT has expressed its intent to aggressively investigate alleged violations of its consumer protection rules. Airlines that violate any DOT regulation are subject to potential fines of up to $27,500 per occurrence.

The Company is also monitoring other potential rulemakings that could impact its business such as (i) an FAA proposed rule designed to tighten the utilization requirements for takeoff and landing slots operated by air carriers at the three New York City airports; (ii) a DOT proposed rule to change the metric by which the DOT computes an air carrier’s mishandled baggage performance; (iii) a DOT proposed rule to require air carriers to publicly disclose the revenues received from the sale of ancillary services to passengers; (iv) a potential DOT proposed rule to enhance accessibility for disabled passengers with respect to aircraft lavatories and in-flight entertainment; and (v) a potential DOT proposed rule to restrict passenger cell phone voice calls on aircraft.
Aviation Taxes and Fees
The statutory authority for the federal government to collect most types of aviation taxes, which are used, in part, to finance programs administered by the FAA, must be periodically reauthorized by the U.S. Congress. In 2012, Congress adopted the FAA Modernization and Reform Act of 2012, which extended most commercial aviation taxes through

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September 30, 2015. In September 2015, Congress extended the expiration date for an additional six months. Congress is expected to try to enact a new FAA reauthorization bill in 2016, which may make substantive changes with respect to aviation taxes (including, possibly, airport-assessed passenger facility charges) and/or FAA offices and programs that are financed through aviation tax revenue. Congress must either adopt a new FAA reauthorization bill or pass a “status quo” extension by April 1, 2016; otherwise, a lapse in the statutory authority could affect the airlines’ and passengers’ respective tax burdens, as well as impact the FAA’s ability to fund airport grants and regulate the airline industry.
In addition to FAA-related taxes, there are additional federal taxes related to the Department of Homeland Security. These taxes do not need to be reauthorized periodically. Congress has set the Transportation Security Fee paid by passengers at $5.60 per one-way passenger trip. In December 2015, Congress enacted another statute that indexes immigration and customs fees to inflation, beginning in 2016. These two fees are paid by inbound international passengers and are used to support the operations of U.S. Customs and Border Protection (“CBP”). Finally, the U.S. Department of Agriculture’s Animal and Plant Health Inspection Service published a final regulation in October 2015 that modifies international agriculture inspection fees. Under this new rule, effective December 28, 2015, the per-passenger agriculture inspection fee is $5.00 and the per-commercial aircraft fee is $225.00.
In 2016, in addition to FAA reauthorization legislation, Congress may consider comprehensive tax reform legislation, which could result in a lower corporate tax rate and the elimination of certain tax deductions and preferences. Grants to airports and/or airport bond financing may also be affected through future legislation, which could result in higher fees, rates, and charges at many of the airports the Company serves.
Operational, Safety, and Health Regulation
The FAA has the authority to regulate safety aspects of civil aviation operations. Specifically, the Company and its third-party service providers are subject to the jurisdiction of the FAA with respect to aircraft maintenance and operations, including equipment, ground facilities, dispatch, communications, flight training personnel, and other matters affecting air safety. The FAA, acting through its own powers or through the appropriate U.S. Attorney, has the power to bring proceedings for the imposition and collection of fines for violation of the FAA regulations.
To address compliance with its regulations, the FAA requires airlines to obtain the Air Carrier Operating Certificate and other certificates, approvals, and authorities. These certificates, approvals, and authorities are subject to suspension or revocation for cause.
The FAA has rules in effect with respect to flight, duty, and rest regulations. Among other things, the rules require a ten hour minimum rest period prior to a pilot’s flight duty period; mandate that a pilot must have an opportunity for eight hours of uninterrupted sleep within the rest period; and impose pilot “flight time” and “duty time” limitations based upon report times, the number of scheduled flight segments, and other operational factors. The rules affect the Company’s staffing flexibility, which could impact the Company’s operational performance, costs, and Customer Experience.
In addition to its role as safety regulator, the FAA also operates the nation’s air traffic control system and is in the midst of implementing a multi-faceted “next generation” air traffic control system (“NextGen”). The Air Traffic Organization (“ATO”) is the operational arm of the FAA. The ATO is responsible for providing safe and efficient air navigation services to all of the United States and large portions of the Atlantic and Pacific Oceans and the Gulf of Mexico. The Company is subject to any operational changes imposed by the FAA/ATO as they relate to the “NextGen” program, as well as the day-to-day management of the air traffic control system. The FAA reauthorization discussed above under “Aviation Taxes and Fees,” as well as the annual appropriation legislation that will fund the DOT and the FAA in federal fiscal year 2017, could include provisions impacting future FAA safety-related activities and ATO operations in 2016 and beyond.
The Company is subject to various other federal, state, and local laws and regulations relating to occupational safety and health, including Occupational Safety and Health Administration and Food and Drug Administration regulations.
Security Regulation
Pursuant to the Aviation and Transportation Security Act (“ATSA”), the Transportation Security Administration (the “TSA”), a division of the U.S. Department of Homeland Security, is responsible for certain civil aviation security

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matters. ATSA and subsequent TSA regulations and procedures implementing ATSA address, among other things, (i) flight deck security; (ii) the use of federal air marshals onboard flights; (iii) airport perimeter access security; (iv) airline crew security training; (v) security screening of passengers, baggage, cargo, mail, employees, and vendors; (vi) training and qualifications of security screening personnel; (vii) provision of passenger data to CBP; and (viii) background checks. Under ATSA, substantially all security officers at airports are federal employees, and significant other elements of airline and airport security are overseen and performed by federal employees, including federal security managers, federal law enforcement officers, and federal air marshals. TSA personnel and TSA-mandated security procedures can affect the Company’s operations, costs, and Customer experience. For example, as part of its security measures, the TSA regulates the types of liquid items that can be carried onboard aircraft. In addition, as part of its Secure Flight program, the TSA requires airlines to collect a passenger’s full name (as it appears on a government-issued ID), date of birth, gender, and Redress Number (if applicable). Airlines must transmit this information to Secure Flight, which uses the information to perform matching against terrorist watch lists. After matching passenger information against the watch lists, Secure Flight transmits the matching results back to airlines. This serves to identify individuals for enhanced security screening and to prevent individuals on watch lists from boarding an aircraft. It also helps prevent the misidentification of passengers who have names similar to individuals on watch lists. The TSA has also implemented enhanced security procedures as part of its enhanced, multi-layer approach to airport security, including physical pat down procedures, at security checkpoints. Such enhanced security procedures have raised privacy concerns by some air travelers.
The Company, in conjunction with the TSA and CBP, participates in TSA PreCheck™, a pre-screening initiative that allows a select group of low risk passengers to move through security checkpoints with greater efficiency and ease when traveling. Eligible passengers may use dedicated screening lanes at certain airports the Company serves for screening benefits, which include leaving on shoes, light outerwear, and belts, as well as leaving laptops and permitted liquids in carryon bags.
The Company also participates in the TSA Known Crewmember® program, which is a risk-based screening system that enables TSA security officers to positively verify the identity and employment status of flight-crew members. The program expedites flight crew member access to sterile areas of airports.
The Company works collaboratively with foreign national governments and airports to provide risk-based security measures at international departure locations.
The Company has also made significant investments to address the effect of security regulations, including investments in facilities, equipment, and technology to process Customers, checked baggage, and cargo efficiently; however, the Company is not able to predict the impact, if any, that various security measures or the lack of TSA resources at certain airports will have on Passenger revenues and the Company’s costs, either in the short-term or the long-term.
Environmental Regulation
The Company is subject to various federal laws and regulations relating to the protection of the environment, including the Clean Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Safe Drinking Water Act, and the Comprehensive Environmental Response, Compensation and Liability Act, as well as state and local laws and regulations. These laws and regulations govern aircraft drinking water, emissions, and storm water discharges from operations, and the disposal of materials such as jet fuel, chemicals, hazardous waste, and aircraft deicing fluid. Additionally, in conjunction with airport authorities, other airlines, and state and local environmental regulatory agencies, the Company, as a normal course of business, undertakes voluntary investigation or remediation of soil or groundwater contamination at several airport sites. The Company does not believe that any environmental liability associated with these airport sites will have a material adverse effect on the Company’s operations, costs, or profitability, nor has it experienced any such liability in the past that has had a material adverse effect on its operations, costs, or profitability. Further regulatory developments pertaining to the control of engine exhaust emissions from ground support equipment could increase operating costs in the airline industry. The Company does not believe, however, that pending environmental regulatory developments in this area will have a material effect on the Company’s capital expenditures or otherwise materially adversely affect its operations, operating costs, or competitive position.
The federal government, as well as several state and local governments, the governments of other countries, and the United Nations’ International Civil Aviation Organization (“ICAO”) are considering legislative and regulatory proposals and voluntary measures to address climate change by reducing green-house gas emissions. At the federal

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level, on July 1, 2015, the Environmental Protection Agency (the “EPA”) issued a proposed endangerment finding for greenhouse gas emissions from aircraft. That proposal is expected to be finalized sometime in 2016. The EPA would be required under the Clean Air Act to regulate greenhouse gases from aircraft if it determines the emissions endanger public health or the environment. In addition, along with its proposed endangerment finding, the EPA published an advance notice of proposed rulemaking summarizing international efforts to regulate aircraft emissions. ICAO could adopt a carbon dioxide standard for aircraft in 2016 and possibly a larger international framework for aviation emissions. Regardless of the method of regulation, policy changes with regards to climate change are possible, which could significantly increase operating costs in the airline industry and, as a result, adversely affect operations.
In addition to climate change, aircraft noise continues to be an environmental focus, especially as the FAA implements new flight procedures as part of its “NextGen” airspace modernization program discussed below. The Airport Noise and Capacity Act of 1990 gives airport operators the right, under certain circumstances, to implement local noise abatement programs, so long as they do not unreasonably interfere with interstate or foreign commerce or the national air transportation system. Some airports have established airport restrictions to limit noise, including restrictions on aircraft types to be used and limits on the number of hourly or daily operations or the time of operations. These types of restrictions can cause curtailments in service or increases in operating costs and can limit the ability of air carriers to expand operations at the affected airports. At the federal level, the FAA is considering changes in 2016 to enhance community engagement when developing new flight procedures, and there is a possibility that Congress may enact legislation in 2016 to address local noise concerns at one or more commercial airports in the United States.
The Company has undertaken a number of fuel conservation and carbon emission reduction initiatives such as the following:
installation of blended winglets, which reduce drag and increase fuel efficiency, on all Boeing 737-700 and 737-800 aircraft in Southwest’s fleet and on a majority of Southwest’s 737-300 aircraft;
upgrading of the Company’s 737-800 fleet with newly designed, split scimitar winglets;
periodic engine washes;
use of electric ground power for aircraft air and power at the gate and for ground support equipment at select locations;
deployment of auto-throttle and vertical navigation to maintain optimum cruising speeds;
implementation of engine start procedures to support the Company's single engine taxi procedures;
adjustment of the timing of auxiliary power unit starts on originating flights to reduce auxiliary power unit usage;
implementation of fuel planning initiatives to safely reduce loading of excess fuel;
Evolve aircraft cabin interior retrofitting featuring lighter seats;
reduction of aircraft engine idle speed while on the ground, which also increases engine life;
galley refreshes with dry goods weight reduction;
Company optimized routes (flying the best wind routes to take advantage of tailwinds or to minimize headwinds);
improvements in flight planning algorithms to better match the Company's aircraft flight management system (and thereby enabling the Company to fly at the most efficient altitudes);
substitution of Pilot flight bags with lighter Electronic Flight Bag tablets; and
implementation of Real Time Descent Winds (automatic uplinking of up-to-date wind data to the aircraft allowing crews to time the descent to minimize thrust inputs).
The Company has also participated in Required Navigation Performance (“RNP”) operations as part of the FAA’s Performance Based Navigation program, which is intended to modernize the U.S. Air Traffic Control System by addressing limitations on air transportation capacity and making more efficient use of airspace. RNP combines the

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capabilities of advanced aircraft avionics, Global Positioning System ("GPS") satellite navigation (instead of less precise ground-based navigation), and new flight procedures to (i) enable aircraft to carry navigation capabilities rather than relying on airports; (ii) improve operational capabilities by opening up many new and more direct airport approach paths to produce more efficient flight patterns; and (iii) conserve fuel, improve safety, and reduce carbon emissions. By the end of 2015, Southwest had conducted over 23,000 RNP approaches, including approximately 5,000 in 2015. Southwest must rely on RNP approaches published by the FAA, and the rate of introduction of RNP approaches continues to be slower than expected, with fuel efficient RNP approaches currently available at only 46 of Southwest’s airports. In addition, even at airports with approved RNP approaches, the clearance required from air traffic controllers to perform RNP approaches is sometimes not granted. Southwest continues to work with the FAA to develop more RNP approaches and to modify air traffic control rules to support greater utilization of RNP.
As part of its commitment to corporate sustainability, the Company has published the Southwest One ReportTM describing the Company’s sustainability strategies, which include these and other efforts to reduce greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling.
International Regulation
All international air service is subject to certain U.S. federal requirements and approvals, as well as the regulatory requirements of the appropriate authorities of the foreign countries involved. The Company has obtained the necessary economic authority from the DOT, as well as approvals required by the FAA and applicable foreign government entities, to conduct operations, under certain circumstances, to points outside of the continental United States currently served by the Company. Certain international authorities and approvals held by the Company are subject to periodic renewal requirements. The Company requests extensions of such authorities and approvals when and as appropriate. To the extent the Company seeks to serve additional foreign destinations in the future, or to renew its authority to serve certain routes, it may be required to obtain necessary authority from the DOT and/or approvals from the FAA, as well as any applicable foreign government entity.
Certain international route authorities are governed by bilateral air transportation agreements between the United States and foreign countries. Changes in U.S. or foreign government aviation policies could result in the alteration or termination of such agreements, diminish the value of the Company’s existing international authorities, present barriers to renewing existing or securing new authorities, or otherwise affect the Company’s international operations. Bilateral agreements between the United States and foreign countries the Company currently serves, or may serve in the future, may be subject to renegotiation from time to time. While the U.S. government has negotiated “open skies” agreements with many countries, which allow for unrestricted access between the United States and respective foreign destinations, agreements with other countries may restrict the Company’s entry and/or growth opportunities. For example, the bilateral air transport agreement currently in force between the United States and Mexico imposes limitations on the number of U.S. air carriers that may operate on city-pair routes between points in the United States and points in Mexico. These restrictions currently prevent the Company from entering certain U.S.-Mexico routes on which it would like to provide service. Although the United States and Mexican governments signed a new bilateral agreement on December 18, 2015, that would remove such restrictions and thereby provide greater market access by U.S. carriers to Mexico, that agreement does not take effect until ratification by the Mexican legislature occurs and other diplomatic procedures are completed. The Company is not able to predict if or when the new U.S.-Mexico bilateral aviation agreement will officially enter into force.
The CBP is the federal agency of the U.S. Department of Homeland Security charged with facilitating international trade, collecting import duties, and enforcing U.S. regulations with respect to trade, customs, and immigration. As the Company expands its international flight offerings, CBP and its requirements and resources will also become increasingly important considerations to the Company. For instance, with the exception of flights from a small number of foreign “preclearance” locations, arriving international flights may only land at CBP-designated airports, and CBP officers must be present and in sufficient quantities at those airports to effectively process and inspect arriving international passengers and cargo. Thus, CBP personnel and CBP-mandated procedures can affect the Company’s operations, costs, and Customer experience. The Company has made and expects to continue to make significant investments in facilities, equipment, and technologies at certain airports in order to improve the Customer experience and to assist CBP with its inspection and processing duties; however, the Company is not able to predict the impact,

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if any, that various CBP measures or the lack of CBP resources will have on Company revenues and costs, either in the short-term or the long-term.
Insurance
The Company carries insurance of types customary in the airline industry and in amounts deemed adequate to protect the Company and its property and to comply both with federal regulations and certain of the Company’s credit and lease agreements. The policies principally provide coverage for public and passenger liability, property damage, cargo and baggage liability, loss or damage to aircraft, engines, and spare parts, and workers’ compensation. In addition, the Company carries a cyber-security insurance policy with regards to data protection and business interruption associated with both security breaches from malicious parties and from certain system failures.
Through the 2003 Emergency Wartime Supplemental Appropriations Act (the “Wartime Act”), the federal government has in the past provided war-risk insurance coverage to commercial carriers, including for losses from terrorism, for passengers, third parties (ground damage), and the aircraft hull. However, since the government-provided supplemental coverage from the Wartime Act was set to expire on September 30, 2014, the Company proactively canceled its government provided war-risk insurance coverage prior to that date and purchased comparable coverage via the commercial insurance marketplace. Although the Company was able to purchase comparable coverage via the commercial insurance marketplace, available commercial insurance in the future could be more expensive and/or have material differences in coverage than is currently provided and may not be adequate to protect the Company's risk of loss from future acts of terrorism.
Competition
Competition within the airline industry is intense and highly unpredictable, and Southwest currently competes with other airlines on virtually all of its scheduled routes. As a result of moderately improved economic conditions and an increased focus by airlines on costs, the airline industry has become increasingly competitive in recent years with healthier financial condition and improved profitability.
Key competitive factors within the airline industry include (i) pricing and cost structure; (ii) routes, frequent flyer programs, and schedules; and (iii) customer service, comfort, and amenities. Southwest also competes for customers with other forms of transportation, as well as alternatives to travel. In recent years, the majority of domestic airline service has been provided by Southwest and the other largest major U.S. airlines, including American Airlines, Delta Air Lines, and United Airlines. The DOT defines major U.S. airlines as those airlines with annual revenues of at least $1 billion; there are currently 13 passenger airlines offering scheduled service, including Southwest, that meet this standard.
Pricing and Cost Structure
Pricing is a significant competitive factor in the airline industry, and the availability of fare information on the Internet allows travelers to easily compare fares and identify competitor promotions and discounts. Pricing can be driven by a variety of factors. For example, airlines often discount fares to drive traffic in new markets or to stimulate traffic when necessary to improve load factors and/or cash flow. In addition, multiple airlines have been able to reduce fares because they have been able to lower their operating costs as a result of reorganization within and outside of bankruptcy. Further, some of the Company’s competitors have continued to grow and modernize their fleets and expand their networks, potentially enabling them to better control costs per available seat mile (the average cost to fly an aircraft seat (empty or full) one mile), which in turn may enable them to lower their fares.
The Company believes its low-cost operating structure continues to provide it with an advantage over many of its airline competitors by enabling it to continue to charge low fares. The Company also believes it has gained a competitive advantage by differentiating Southwest from all of its major competitors by not charging additional fees for items such as first and second checked bags, flight changes, seat selection, snacks, curb-side check-in, and telephone reservations.
Routes, Frequent Flyer Programs, and Schedules
The Company also competes with other airlines based on markets served, frequent flyer opportunities, and flight schedules. Some major airlines have more extensive route structures than Southwest, including more extensive international networks. In addition, many competitors have entered into significant commercial relationships with other airlines, such as global alliances, code-sharing, and capacity purchase agreements, which increase the airlines’

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opportunities to expand their route offerings. For example, an alliance or code-sharing agreement enables an airline to offer flights that are operated by another airline and also allows the airline’s customers to book travel that includes segments on different airlines through a single reservation or ticket. As a result, depending on the nature of the specific alliance or code-sharing arrangement, a participating airline may be able to (i) offer its customers access to more destinations than it would be able to serve on its own, (ii) gain exposure in markets it does not otherwise serve, or (iii) increase the perceived frequency of its flights on certain routes. Alliance and code-sharing arrangements not only provide additional route flexibility for participating airlines, they can also allow these airlines to offer their customers more opportunities to earn and redeem frequent flyer miles or points. A capacity purchase agreement enables an airline to expand its route structure by paying another airline (e.g., a regional airline with smaller aircraft) to operate flights on its behalf in markets that it does not, or cannot, serve itself. The Company continues to evaluate and implement initiatives to better enable itself to offer additional itineraries.
Customer Service, Comfort, and Amenities
Southwest also competes with other airlines in areas of Customer Service such as ontime performance, passenger amenities, flight equipment type, and comfort. According to statistics published by the DOT, Southwest consistently ranks at or near the top among domestic carriers in Customer Satisfaction for having the lowest Customer complaint ratio. Some airlines have more seating options and associated passenger amenities than does Southwest, including first-class, business class, and other premium seating and related amenities. Additionally, some major U.S. airlines, including Southwest, are adding a significant number of new aircraft to their fleets. Such efforts could provide cost benefits to these airlines through fleet simplification, improved fuel efficiencies, and lower maintenance costs. Additionally, such new aircraft could have newer and different passenger amenities than those contained in the Company’s existing fleet.
Other Forms of Competition
The airline industry is subject to varying degrees of competition from surface transportation by automobiles, buses, and trains. Inconveniences and delays associated with air travel security measures can increase surface competition. In addition, surface competition can be significant during economic downturns when consumers cut back on discretionary spending and fewer choose to fly, or when gasoline prices are lower, making surface transportation a less expensive option. Because of the relatively high percentage of short-haul travel provided by Southwest, it is particularly exposed to competition from surface transportation in these instances. The airline industry is also subject to competition from alternatives to travel such as videoconferencing and the Internet, which can increase in the event of travel inconveniences and economic downturns. The Company is subject to the risk that air travel inconveniences and economic downturns may, in some cases, result in permanent changes to consumer behavior in favor of surface transportation and electronic communications.
Seasonality
The Company’s business is seasonal. Generally, in most markets the Company serves, demand for air travel is greater during the summer months, and therefore, revenues in the airline industry tend to be stronger in the second (April 1 - June 30) and third (July 1 - September 30) quarters of the year than in the first (January 1 - March 31) and fourth (October 1 - December 31) quarters of the year. As a result, in many cases, the Company’s results of operations reflect this seasonality. Factors that could alter this seasonality include, among others, the price of fuel, general economic conditions, extreme or severe weather, fears of terrorism or war, or changes in the competitive environment. Therefore, the Company’s quarterly operating results are not necessarily indicative of operating results for the entire year, and historical operating results in a quarterly or annual period are not necessarily indicative of future operating results.
Employees
At December 31, 2015, the Company had approximately 49,600 active fulltime equivalent Employees, consisting of 21,100 flight, 2,800 maintenance, 17,300 ground, Customer, and fleet service, and 8,400 management, technology, finance, marketing, and clerical personnel (associated with non-operational departments). Approximately 83 percent of these Employees were represented by labor unions. The Railway Labor Act establishes the right of airline employees to organize and bargain collectively. Under the Railway Labor Act, collective-bargaining agreements between an airline and a labor union generally do not expire, but instead become amendable as of an agreed date. By the amendable date, if either party wishes to modify the terms of the agreement, it must notify the other party in the manner required by

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the Railway Labor Act and/or described in the agreement. After receipt of the notice, the parties must meet for direct negotiations. If no agreement is reached, either party may request the National Mediation Board to appoint a federal mediator. If no agreement is reached in mediation, the National Mediation Board may determine an impasse exists and offer binding arbitration to the parties. If either party rejects binding arbitration, a 30-day “cooling off” period begins. At the end of this 30-day period, the parties may engage in “self-help,” unless a Presidential Emergency Board is established to investigate and report on the dispute. The appointment of a Presidential Emergency Board maintains the “status quo” for an additional 60 days. If the parties do not reach agreement during this period, the parties may then engage in “self-help.” “Self-help” includes, among other things, a strike by the union or the airline’s imposition of any or all of its proposed amendments and the hiring of new employees to replace any striking workers. The following table sets forth the Company’s Employee groups and the status of the respective collective-bargaining agreements as of December 31, 2015:


Employee Group
Approximate Number of Employees
Representatives
Status of Agreement
Southwest Pilots
7,600
Southwest Airlines Pilots’ Association (“SWAPA”)
In negotiations
Southwest Flight Attendants
13,100
Transportation Workers of America, AFL-CIO, Local 556 (“TWU 556”)
In negotiations
Southwest Ramp, Operations, Provisioning, Freight Agents
11,000
Transportation Workers of America, AFL-CIO, Local 555 (“TWU 555”)
The Company reached a tentative agreement with TWU 555 in December 2015. TWU 555 has presented the contract to its members for ratification. If ratified, the contract will become amendable in 2021.
Southwest Customer Service Agents, Customer Representatives
6,300
International Association of Machinists and Aerospace Workers, AFL-CIO (“IAM 142”)
Amendable December 2018
Southwest Material Specialists (formerly known as Stock Clerks)
300
International Brotherhood of Teamsters, Local 19 (“IBT 19”)
In negotiations
Southwest Mechanics
2,300
Aircraft Mechanics Fraternal Association (“AMFA”)
In negotiations
Southwest Aircraft Appearance Technicians
200
AMFA
Amendable February 2017
Southwest Facilities Maintenance Technicians
40
AMFA
In negotiations
Southwest Dispatchers
300
Transportation Workers of America, AFL-CIO, Local 550 (“TWU 550”)
Amendable November 2019
Southwest Flight Simulator Technicians
30
International Brotherhood of Teamsters (“IBT”)
Amendable April 2019
Southwest Flight Crew Training Instructors
80
Transportation Workers of America, AFL-CIO, Local 557 (“TWU 557”)
In negotiations
Southwest Meteorologists
7
TWU 550
Amendable June 2019
Southwest Source of Support Representatives
90
IAM 142
In negotiations

Additional Information About the Company
The Company was incorporated in Texas in 1967. The following documents are available free of charge through the Company’s website, www.southwest.com: the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports that are filed with or furnished to the Securities and Exchange Commission (“SEC”) pursuant to Sections 13(a) or 15(d) of the Securities Exchange Act of 1934. These materials are made available through the Company’s website as soon as reasonably practicable

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after they are electronically filed with, or furnished to, the SEC. In addition to its reports filed or furnished with the SEC, the Company publicly discloses material information from time to time in its press releases, at annual meetings of Shareholders, in publicly accessible conferences and Investor presentations, and through its website (principally in its Press Room and Investor Relations pages).

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DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on, and include statements about, the Company’s estimates, expectations, beliefs, intentions, and strategies for the future, and the assumptions underlying these forward-looking statements. 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, words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “will,” “should,” and similar expressions. Although management believes these forward-looking statements are reasonable as and when made, forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual results may differ materially from what is expressed in or indicated by the Company’s forward-looking statements or from historical experience or the Company’s present expectations. Known material risk factors that could cause these differences are set forth below under “Risk Factors.” Additional risks or uncertainties (i) that are not currently known to the Company, (ii) that the Company currently deems to be immaterial, or (iii) that could apply to any company, could also materially adversely affect the Company’s business, financial condition, or future results.
Caution should be taken not to place undue reliance on the Company’s forward-looking statements, which represent the Company’s views only as of the date this report is filed. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.
Item 1A.    Risk Factors
The airline industry is particularly sensitive to changes in economic conditions; in the event of unfavorable economic conditions or economic uncertainty, the Company’s results of operations could be negatively affected, which could require the Company to adjust its business strategies.
The airline industry, which is subject to relatively high fixed costs and highly variable and unpredictable demand, is particularly sensitive to changes in economic conditions. Historically, unfavorable U.S. economic conditions have driven changes in travel patterns and have resulted in reduced spending for both leisure and business travel. For some consumers, leisure travel is a discretionary expense, and short-haul travelers, in particular, have the option to replace air travel with surface travel. Businesses are able to forego air travel by using communication alternatives such as videoconferencing and the Internet or may be more likely to purchase less expensive tickets to reduce costs, which can result in a decrease in average revenue per seat. Unfavorable economic conditions have also historically hampered the ability of airlines to raise fares to counteract any increases in fuel, labor, and other costs. Although the U.S. economy has experienced moderate economic growth over the course of the past three years, any continuing or future U.S. or global economic uncertainty could negatively affect the Company’s results of operations and could cause the Company to adjust its business strategies.
The Company’s business can be significantly impacted by high and/or volatile fuel prices, and the Company’s operations are subject to disruption in the event of any delayed supply of fuel; therefore, the Company’s strategic plans and future profitability are likely to be impacted by the Company’s ability to effectively address fuel price increases and fuel price volatility and availability.
Airlines are inherently dependent upon energy to operate, and jet fuel and oil represented approximately 23 percent of the Company’s operating expenses for 2015. Although 2015 fuel prices were lower than in 2014, and dropped significantly beginning in the second half of 2014, the cost of fuel continues to be volatile and unpredictable, and even a small change in market fuel prices can significantly affect profitability. Furthermore, volatility in fuel prices can be due to many external factors that are beyond the Company’s control. For example, fuel prices can be impacted by political and economic factors, such as (i) dependency on foreign imports of crude oil and the potential for hostilities or other conflicts in oil producing areas; (ii) limited domestic refining or pipeline capacity; (iii) worldwide demand for fuel, particularly in developing countries, which can result in inflated energy prices; (iv) changes in U.S. governmental policies on fuel production, transportation, taxes, and marketing; and (v) changes in currency exchange rates.

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If higher fuel prices were to return, the Company’s ability to effectively address fuel price increases could be limited by its ability to increase fares, which can be difficult in challenging economic environments when low fares are often used to stimulate traffic. The Company's ability to increase fares can also be limited by factors such as its historical low-fare reputation, the portion of its Customer base that purchases travel for leisure purposes, the competitive nature of the airline industry generally, and the risk that higher fares will drive a decrease in demand.
The Company attempts to manage its risk associated with volatile jet fuel prices by utilizing over-the-counter fuel derivative instruments to hedge a portion of its future jet fuel purchases. However, as evidenced by the extreme decline in jet fuel prices during the fourth quarter of 2014 and early 2015, and again in late 2015, energy prices can fluctuate significantly in a relatively short amount of time. Because the Company uses a variety of different derivative instruments at different price points, the Company is subject to the risk that the fuel derivatives it uses will not provide adequate protection against significant increases in fuel prices and could in fact result in additional volatility in the Company’s earnings. The Company is also subject to the risk that additional cash collateral may be required to be posted to fuel hedge counterparties, which could have a significant impact on the Company’s financial position and liquidity.
In addition, the Company is subject to the risk that its fuel derivatives will not be effective or that they will no longer qualify for hedge accounting under applicable accounting standards, which can create additional earnings volatility. Adjustments in the Company’s overall fuel hedging strategy, as well as the ability of the commodities used in fuel hedging to qualify for special hedge accounting, are likely to continue to affect the Company’s results of operations. In addition, there can be no assurance that the Company will be able to cost-effectively hedge against increases in fuel prices.
The Company’s fuel hedging arrangements and the various potential impacts of hedge accounting on the Company’s financial position, cash flows, and results of operations are discussed in more detail under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Quantitative and Qualitative Disclosures About Market Risk,” and in Note 1 and Note 10 to the Consolidated Financial Statements.
The Company is also reliant upon the readily available supply and timely delivery of jet fuel to the airports that it serves. A disruption in that supply could present significant challenges to the Company’s operations and could ultimately cause the cancellation of flights and/or the inability of the Company to provide service to a particular airport.
The Company’s low-cost structure has historically been one of its primary competitive advantages, and many factors have affected and could continue to affect the Company’s ability to control its costs.
The Company’s low-cost structure has historically been one of its primary competitive advantages, as it has enabled it to offer low fares, drive traffic volume, and grow market share. The Company has limited control over fuel and labor costs, as well as other costs such as regulatory compliance costs. Jet fuel and oil constituted approximately 23 percent of the Company’s operating expenses during 2015, and the cost of fuel is subject to the external factors discussed in the second Risk Factor above. Salaries, wages, and benefits constituted approximately 41 percent of the Company’s operating expenses during 2015. The Company’s ability to control labor costs is limited by the terms of its collective-bargaining agreements, and increased labor costs have negatively impacted the Company’s low-cost competitive position. As discussed further under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Company’s unionized workforce, which makes up the majority of its Employees, has had pay scale increases as a result of contractual rate increases. Furthermore, as indicated above under “Business - Employees,” the majority of Southwest’s unionized Employees, including its Pilots; Mechanics; Ramp, Operations, Provisioning, and Freight Agents; Flight Attendants; Material Specialists; Facilities Maintenance Technicians; Flight Crew Training Instructors; and Source of Support Representatives, are in unions currently in negotiations for labor agreements, which could continue to put pressure on the Company’s labor costs. As discussed above under “Business - Regulation,” the airline industry is heavily regulated, and the Company’s regulatory compliance costs are subject to potentially significant increases from time to time based on actions by the regulatory agencies. Additionally, when other airlines reduce their capacity, airport costs are then allocated among a fewer number of total flights, which can result in increased landing fees and other costs for the Company. The Company is also reliant upon third party vendors and service providers, and its low-cost advantage is also dependent in part on its ability to obtain and maintain commercially reasonable terms with those parties.
As discussed above under “Business - Insurance,” the Company carries insurance of types customary in the airline industry and, in the past, has also been provided supplemental, first-party, war-risk insurance coverage by the federal

21



government. Since the government-provided supplemental coverage from the Wartime Act was set to expire on September 30, 2014, the Company proactively canceled its government provided war-risk insurance coverage prior to that date and purchased comparable coverage via the commercial insurance marketplace. Although the Company was able to purchase comparable coverage via the commercial insurance marketplace, available commercial insurance in the future could be more expensive and/or have material differences in coverage than is currently provided and may not be adequate to protect against the Company's risk of loss from future acts of terrorism. In addition, an accident or other incident involving Southwest aircraft could result in costs in excess of its related insurance coverage, which costs could be substantial. Any aircraft accident or other incident, even if fully insured, could also have a material adverse effect on the public’s perception of the Company.
The Company cannot guarantee it will be able to maintain or improve upon its current level of low-cost advantage over many of its airline competitors. Some of the Company’s competitors have achieved lower employee pay scales through bankruptcy. Further, some competitors have continued to grow their fleets and expand their networks, potentially enabling them to better control costs per available seat mile. In addition, like Southwest, some competitors have plans to add a significant number of new aircraft to their fleets, which could potentially decrease their operating costs through better fuel efficiencies, and lower maintenance costs. Some of the Company’s competitors have taken advantage of reorganization in bankruptcy, and even the threat of bankruptcy, not only to lower employee pay scales, but also to decrease operating costs through renegotiated supply and financing agreements. In addition, some airlines have consolidated and reported significant cost synergies.
The Company is increasingly dependent on technology to operate its business and continues to implement substantial changes to its information systems; any failure, disruption, or breach in the Company’s information systems could materially adversely affect its operations.
The Company is increasingly dependent on the use of complex technology and systems to run its ongoing operations. In recent years the Company has been committed to technology improvements to support its ongoing operations and initiatives and, as discussed above under “Business - Technology Initiatives,” the Company has invested in significant technology changes. The Company is in the midst of a multi-year project to completely replace its reservation system. In 2014, the Company launched the Amadeus Altéa reservations solution to support the Company’s international service. The Company has since begun implementing Amadeus' Altéa reservations solution as the Company's future single reservation system for both domestic and international reservations. This single reservation system is expected to be implemented in 2017. The Company intends to continue to devote significant technology resources towards, among other things, (i) the continued development of systems to improve both revenue management and network optimization capabilities, (ii) the aforementioned replacement of Southwest's existing domestic reservation system with the comprehensive Amadeus' Altéa reservations solution, and (iii) tools to improve operational management.
Integration of complex systems and technology presents significant challenges in terms of costs, human resources, and development of effective internal controls. Integration also presents the risk of operational or security inadequacy or interruption, which could materially affect the Company’s ability to effectively operate its business. The Company is also reliant upon third party performance for timely and effective completion of many of its technology initiatives.
In the ordinary course of business, the Company’s systems will continue to require modification and refinements to address growth and changing business requirements, including requirements related to international operations. In addition, the Company’s systems may require modification to enable the Company to comply with changing regulatory requirements. Modifications and refinements to the Company’s systems have been and are expected to continue to be expensive to implement and may divert management’s attention from other matters. In addition, the Company’s operations could be adversely affected, or it could face imposition of regulatory penalties, if it were unable to timely or effectively modify its systems as necessary.
The Company may occasionally experience system interruptions and delays that make its websites and services unavailable or slow to respond, which could prevent the Company from efficiently processing Customer transactions or providing services. This in turn could reduce the Company’s operating revenues and the attractiveness of its services. The Company’s computer and communications systems and operations could be damaged or interrupted by catastrophic events such as fires, floods, earthquakes, tornadoes and hurricanes, power loss, computer and telecommunications failures, acts of war or terrorism, computer viruses, security breaches, and similar events or disruptions. Any of these events could cause system interruptions, delays, and loss of critical data, and could prevent the Company from

22



processing Customer transactions or providing services, which could make the Company’s business and services less attractive and subject the Company to liability. Any of these events could damage the Company’s reputation and be expensive to remedy.
The Company’s business is labor intensive; therefore, the Company would be adversely affected if it were unable to maintain satisfactory relations with its Employees or its Employees’ Representatives or if the Company were unable to employ sufficient numbers of qualified Employees to maintain its operations.
The airline business is labor intensive. Salaries, wages, and benefits represented approximately 41 percent of the Company’s operating expenses for the year ended December 31, 2015. In addition, as of December 31, 2015, approximately 83 percent of the Company’s Employees were represented for collective bargaining purposes by labor unions, making the Company particularly exposed in the event of labor-related job actions. Employment-related issues that may impact the Company’s results of operations, some of which are negotiated items, include hiring/retention rates, pay rates, outsourcing costs, work rules, and health care costs. The Company has historically maintained positive relationships with its Employees and its Employees’ Representatives. However, as indicated above under “Business - Employees,” the majority of Southwest’s unionized Employees, including its Pilots; Mechanics; Ramp, Operations, Provisioning, and Freight Agents; Flight Attendants; Material Specialists; Facilities Maintenance Technicians; Flight Crew Training Instructors; and Source of Support Representatives, are in unions currently in negotiations for labor agreements, which could continue to put pressure on the Company’s labor costs. Increasing labor costs could negatively impact the Company’s competitive position.
The Company’s success also depends on its ability to attract and retain skilled personnel. Competition for skilled personnel may intensify if overall industry capacity increases and/or if high levels of current personnel reach retirement age. The Company may be required to increase existing levels of compensation to retain or supplement its skilled workforce. The inability to recruit and retain skilled personnel or the unexpected loss of key skilled personnel could adversely affect the Company’s operations.
The Company is currently dependent on single aircraft and engine suppliers, as well as single suppliers of certain other parts; therefore, the Company would be materially adversely affected if it were unable to obtain additional equipment or support from any of these suppliers or in the event of a mechanical or regulatory issue associated with their equipment.
The Company is dependent on Boeing as its sole supplier for aircraft and many of its aircraft parts and is dependent on other suppliers for certain other aircraft parts. Although the Company is able to purchase some aircraft from parties other than Boeing, most of its purchases are directly from Boeing. Therefore, if the Company were unable to acquire additional aircraft from Boeing, or if Boeing were unable or unwilling to make timely deliveries of aircraft or to provide adequate support for its products, the Company’s operations would be materially adversely affected. In addition, the Company would be materially adversely affected in the event of a mechanical or regulatory issue associated with the Boeing 737 aircraft type, whether as a result of downtime for part or all of the Company’s fleet, increased maintenance costs, or because of a negative perception by the flying public. The Company believes, however, that its years of experience with the Boeing 737 aircraft type, as well as the efficiencies Southwest has historically achieved by operating with a single aircraft type, outweigh the risks associated with its single aircraft supplier strategy. The Company is also dependent on sole suppliers for aircraft engines and certain other aircraft parts and would therefore also be materially adversely affected in the event of the unavailability of, or a mechanical or regulatory issue associated with, engines and other parts.
Any failure of the Company to maintain the security of certain Customer-related information could result in damage to the Company’s reputation and could be costly to remediate.
The Company must receive information related to its Customers in order to run its business, and the Company’s online operations depend upon the secure transmission of information over public networks, including information permitting cashless payments. This information is subject to the risk of intrusion, tampering, and theft. Although the Company maintains systems to defend against this from occurring, these systems require ongoing monitoring and updating as technologies change, and security could be compromised, confidential information could be misappropriated, or system disruptions could occur. In the ordinary course of its business, the Company provides certain confidential, proprietary, and personal information to third parties. While the Company seeks to obtain assurances that these third parties will protect this information, there is a risk the confidentiality of data held by third parties could be breached. A compromise

23



of the Company’s security systems could adversely affect the Company’s reputation and disrupt its operations and could also result in litigation against the Company or the imposition of penalties. In addition, it could be costly to remediate. Although the Company has not experienced cyber incidents that are individually, or in the aggregate, material, the Company has experienced cyber attacks in the past, which have thus far been mitigated by preventative, detective, and responsive measures put in place by the Company.
The Company’s results of operations could be adversely impacted if it is unable to grow or to effectively execute its strategic plans.
Southwest has historically been regarded as a growth airline. However, organic growth remains challenging because (i) the opportunities for domestic expansion could be limited; (ii) the Company's international network is small and not yet developed; and (iii) the Company has faced an increased presence of other low-cost, low-fare carriers. As a result, the Company is reliant on the success of its revenue strategies to help offset certain increasing costs and to continue to improve Customer Service. The timely and effective execution of the Company's strategic plans could be negatively affected by (i) the Company’s ability to timely and effectively implement, transition, and maintain related information technology systems and infrastructure; (ii) the Company’s ability to effectively balance its investment of incremental operating expenses and capital expenditures related to its strategies against the need to effectively control costs; and (iii) the Company’s dependence on third parties with respect to its strategic plans.
Instability of credit, capital, and energy markets can result in pressure on the Company’s credit ratings and can also negatively affect the Company’s ability to obtain financing on acceptable terms and the Company’s liquidity generally.
While the Company’s credit rating is “investment grade,” factors such as future unfavorable economic conditions, a significant decline in demand for air travel, or instability of the credit, capital, and energy markets could result in future pressure on credit ratings, which could negatively affect (i) the Company’s ability to obtain financing on acceptable terms, (ii) the Company’s liquidity generally, and (iii) the availability and cost of insurance. A credit rating downgrade could subject the Company to credit rating triggers related to its credit card transaction processing agreements, the pricing related to any funds drawn under its revolving credit facility, and some of its hedging counterparty agreements. The potential effect of credit rating downgrades is discussed in more detail below under “Quantitative and Qualitative Disclosures About Market Risk.”
The airline industry has faced on-going security concerns and related cost burdens; further threatened or actual terrorist attacks, or other hostilities, could significantly harm the airline industry and the Company’s operations.
Terrorist attacks, actual and threatened, have from time to time materially adversely affected the demand for air travel and also have resulted in increased safety and security costs for the Company and the airline industry generally. Safety measures create delays and inconveniences and can, in particular, reduce the Company’s competitiveness against surface transportation for short-haul routes. Additional terrorist attacks, even if not made directly on the airline industry, or the fear of such attacks or other hostilities (including elevated national threat warnings or selective cancellation or redirection of flights due to terror threats) would likely have a further significant negative impact on the Company and the airline industry.
Airport capacity constraints and air traffic control inefficiencies could limit the Company’s growth; changes in or additional governmental regulation could increase the Company’s operating costs or otherwise limit the Company’s ability to conduct business.
Almost all commercial service airports are owned and/or operated by units of local or state governments. Airlines are largely dependent on these governmental entities to provide adequate airport facilities and capacity at an affordable cost. Similarly, the federal government singularly controls all U.S. airspace, and airlines are completely dependent on the FAA operating that airspace in a safe and efficient manner. The air traffic control system, which is operated by the FAA, could continue to face airspace and/or airport congestion challenges in the future, which could limit the Company’s opportunities for growth. As discussed above under “Business - Regulation,” airlines are also subject to other extensive regulatory requirements. These requirements often impose substantial costs on airlines. The Company’s strategic plans and results of operations could be negatively affected by changes in law and future actions taken by domestic and foreign governmental agencies having jurisdiction over its operations, including, but not limited to:
increases in airport rates and charges;

24



limitations on airport gate capacity or use of other airport facilities;
limitations on route authorities;
actions and decisions that create difficulties in obtaining access at slot-controlled airports;
actions and decisions that create difficulties in obtaining operating permits and approvals;
changes to environmental regulations;
new or increased taxes or fees;
changes to laws that affect the services that can be offered by airlines in particular markets and at particular airports;
restrictions on competitive practices;
changes in laws that increase costs for safety, security, compliance, or other Customer Service standards;
changes in laws that may limit the Company's ability to enter into fuel derivative contracts to hedge against increases in fuel prices;
changes in laws that may limit or regulate the Company’s ability to promote the Company’s business or fares; and
the adoption of more restrictive locally-imposed noise regulations.
Because expenses of a flight do not vary significantly with the number of passengers carried, a relatively small change in the number of passengers can have a disproportionate effect on an airline’s operating and financial results. Therefore, any general reduction in airline passenger traffic as a result of any of the factors listed above could adversely affect the Company’s results of operations. In addition, in instances where the airline industry shrinks, many airport operating costs are essentially unchanged and must be shared by the remaining operating carriers, which can therefore increase the Company’s costs.
The airline industry is affected by many conditions that are beyond its control, which can impact the Company’s business strategies and results of operations.
In addition to the unpredictable economic conditions and fuel costs discussed above, the Company, like the airline industry in general, is affected by conditions that are largely unforeseeable and outside of its control, including, among others:
adverse weather and natural disasters;
outbreaks of disease;
changes in consumer preferences, perceptions, spending patterns, or demographic trends (including, without limitation, changes in government travel patterns due to government shutdowns or sequestration);
actual or potential disruptions in the air traffic control system (including, without limitation, as a result of potential FAA budget cuts due to government shutdowns or sequestration);
changes in the competitive environment due to industry consolidation, industry bankruptcies, and other factors;
air traffic congestion and other air traffic control issues; and
actual or threatened war, terrorist attacks, and political instability.
The airline industry is intensely competitive.
As discussed in more detail above under “Business - Competition,” the airline industry is intensely competitive. The Company’s primary competitors include other major domestic airlines, as well as regional and new entrant airlines, surface transportation, and alternatives to transportation such as videoconferencing and the Internet. The Company’s revenues are sensitive to the actions of other carriers with respect to pricing, routes, frequent flyer programs, scheduling, capacity, Customer Service, comfort and amenities, cost structure, aircraft fleet, and code-sharing and similar activities.

25



The Company’s future results will suffer if it does not effectively manage its expanded operations, including its international operations.
As the Company expands its international flight offerings, the U.S. Customs and Border Protection (“CBP”) will become an increasingly important federal agency. CBP personnel and CBP-mandated procedures can affect the Company’s operations, costs, and Customer experience. The Company has made, and is continuing to make, significant investments in facilities, equipment, and technologies at certain airports in order to improve the Customer experience and to assist CBP with its inspection and processing duties; however, the Company is not able to predict the impact, if any, that various CBP measures or the lack of CBP resources will have on Company revenues and costs, either in the short-term or the long-term.
International flying requires the Company to modify certain processes, as the airport environment is dramatically different in certain international locations with respect to, among other things, common-use ticket counters and gate areas, local operating requirements, and cultural preferences. In addition, international flying exposes the Company to certain foreign currency risks to the extent the Company chooses to, or is required to, transact in currencies other than the U.S. dollar. To the extent the Company seeks to serve additional foreign destinations in the future, or to renew its authority to serve certain routes, it may be required to obtain necessary authority from the DOT and/or approvals from the FAA, as well as any applicable foreign government entity.
The Company’s expansion of its operations into non-U.S. jurisdictions also expands the scope of the laws to which the Company is subject, both domestically and internationally. In addition, operations in non-U.S. jurisdictions are in many cases subject to the laws of those jurisdictions rather than U.S. laws. Laws in some jurisdictions differ in significant respects from those in the United States, and these differences can affect the Company’s ability to react to changes in its business, and its rights or ability to enforce rights may be different than would be expected under U.S. laws. Furthermore, enforcement of laws in some jurisdictions can be inconsistent and unpredictable, which can affect both the Company’s ability to enforce its rights and to undertake activities that it believes are beneficial to its business. As a result, the Company’s ability to generate revenue and its expenses in non-U.S. jurisdictions may differ from what would be expected if U.S. laws governed these operations. Although the Company has policies and procedures in place that are designed to promote compliance with the laws of the jurisdictions in which it operates, a violation by the Company’s Employees, contractors, or agents or other intermediaries, could nonetheless occur. Any violation (or alleged or perceived violation), even if prohibited by the Company’s policies, could have an adverse effect on the Company’s reputation and/or its results of operations.
The Company is currently subject to pending litigation, and if judgment were to be rendered against the Company in the litigation, such judgment could adversely affect the Company’s operating results.
 A complaint alleging violations of federal antitrust laws and seeking certification as a class action was filed against Delta Air Lines, Inc. and AirTran in the United States District Court for the Northern District of Georgia in Atlanta on May 22, 2009. The complaint alleged, among other things, that AirTran attempted to monopolize air travel in violation of Section 2 of the Sherman Act, and conspired with Delta in imposing $15-per-bag fees for the first item of checked luggage in violation of Section 1 of the Sherman Act. The initial complaint sought treble damages on behalf of a putative class of persons or entities in the United States who directly paid Delta and/or AirTran such fees on domestic flights beginning December 5, 2008. After the filing of the May 2009 complaint, various other nearly identical complaints also seeking certification as class actions were filed in federal district courts in Atlanta, Georgia; Orlando, Florida; and Las Vegas, Nevada. All of the cases were consolidated before a single federal district court judge in Atlanta. A Consolidated Amended Complaint was filed in the consolidated action on February 1, 2010, which broadened the allegations to add claims that Delta and AirTran conspired to reduce capacity on competitive routes and to raise prices in violation of Section 1 of the Sherman Act. In addition to treble damages for the amount of first baggage fees paid to AirTran and to Delta, the Consolidated Amended Complaint seeks injunctive relief against a broad range of alleged anticompetitive activities, as well as attorneys' fees. On August 2, 2010, the Court dismissed plaintiffs' claims that AirTran and Delta had violated Section 2 of the Sherman Act; the Court let stand the claims of a conspiracy with respect to the imposition of a first bag fee and the airlines' capacity and pricing decisions. On June 30, 2010, the plaintiffs filed a motion to certify a class, which AirTran and Delta have opposed. The parties have submitted briefs on class certification, and the parties have filed motions to exclude the class certification opinions of each other’s expert. The parties engaged in extensive discovery, and discovery has now closed. On June 18, 2012, the parties filed a Stipulation and Order that plaintiffs have abandoned their claim that AirTran and Delta conspired to reduce capacity.

26



On August 31, 2012, AirTran and Delta moved for summary judgment on all of plaintiffs' remaining claims, but discovery disputes between plaintiffs and Delta delayed further briefing on summary judgment. On August 5, 2015, the Court entered an order granting class certification, which was vacated on August 17, 2015, to permit further briefing on class certification and AirTran’s motion to exclude plaintiffs’ expert. Thereafter, the parties filed motions to exclude the opinions of the other parties’ experts. On January 8, 2016, the parties completed briefing on defendants’ motions for summary judgment, plaintiffs’ motion for class certification, and the motions to exclude the opinions of experts, and those motions have been submitted to the Court for decision. While AirTran has denied all allegations of wrongdoing, including those in the Consolidated Amended Complaint, and intends to defend vigorously any and all such allegations, results of legal proceedings such as this one cannot be predicted with certainty.
Also, on June 30, 2015, the U.S. Department of Justice (“DOJ”) issued a Civil Investigative Demand (“CID”) to the Company. The CID seeks information and documents about the Company’s capacity from January 2010 to the present including public statements and communications with third parties about capacity. In June 2015, the Company also received a letter from the Connecticut Attorney General requesting information about capacity; and on August 21, 2015, the Attorney General of the State of Ohio issued an investigative demand seeking information and documents about the Company’s capacity from December 2013 to the present. The Company is cooperating fully with the DOJ CID and these two state inquiries.
Further, on July 1, 2015, a complaint was filed in the United States District Court for the Southern District of New York on behalf of putative classes of consumers alleging collusion among the Company, American Airlines, Delta Air Lines, and United Airlines to limit capacity and maintain higher fares in violation of Section 1 of the Sherman Act. Since then, a number of similar class action complaints have been filed in the United States District Courts for the Central District of California, the Northern District of California, the District of Columbia, the Middle District of Florida, the Southern District of Florida, the Northern District of Georgia, the Northern District of Illinois, the Southern District of Indiana, the Eastern District of Louisiana, the District of Minnesota, the District of New Jersey, the Eastern District of New York, the Southern District of New York, the Middle District of North Carolina, the District of Oklahoma, the Eastern District of Pennsylvania, the Northern District of Texas, the District of Vermont, and the Eastern District of Wisconsin. The complaints seek treble damages for periods that vary among the complaints, costs, attorneys’ fees, and injunctive relief. On October 13, 2015, the Judicial Panel on Multi-District Litigation centralized the cases to the United States District Court in the District of Columbia. The Court has not yet entered a scheduling order establishing a date for defendants to respond to the complaints. While the Company intends to vigorously defend these civil cases, results of legal proceedings such as this one cannot be predicted with certainty.
In addition, on July 8, 2015, the Company was named as a defendant in putative class action filed in British Columbia, Canada alleging that the Company, Air Canada, American Airlines, Delta Air Lines and United Airlines colluded to restrict capacity and maintain higher fares for Canadian citizens traveling in the United States and for travel between the United States and Canada. Similar lawsuits were filed in Ontario, Quebec and Saskatchewan. The time for the Company to respond to the complaints has not yet expired. While the Company intends to vigorously defend these civil cases, results of legal proceedings such as this one cannot be predicted with certainty.
Regardless of merit, these litigation matters and any potential future claims against the Company or AirTran may be both time consuming and disruptive to the Company’s operations and cause significant expense and diversion of management attention. Should AirTran and the Company fail to prevail in these or other matters, the Company may be faced with significant monetary damages or injunctive relief that could materially adversely affect its business and might materially affect its financial condition and operating results.
The application of the acquisition method of accounting resulted in the Company recording a significant amount of goodwill in connection with the acquisition of AirTran, which could result in significant future impairment charges and negatively affect the Company’s financial results.
The Company recorded goodwill on its Consolidated Balance Sheet as a result of its acquisition of AirTran. Goodwill is not amortized, but is tested for impairment at least annually. Future impairment of Goodwill could be recorded in the Company's results of operations as a result of changes in assumptions, estimates, or circumstances, some of which are beyond the Company’s control. Factors which could result in an impairment, holding other assumptions constant, could include, but are not limited to: (i) reduced passenger demand as a result of domestic or global economic conditions; (ii) significantly higher prices for jet fuel; (iii) lower fares or passenger yields as a result of increased competition or

27



lower demand; (iv) a significant increase in future capital expenditure commitments; and (v) significant disruptions to the Company’s operations as a result of both internal and external events such as terrorist activities, actual or threatened war, labor actions by Employees, or further industry regulation. The Company can provide no assurance that a significant impairment charge will not occur in one or more future periods. Any such charges may materially negatively affect the Company’s financial results. See Note 1 to the Consolidated Financial Statements for further information.

Item 1B.        Unresolved Staff Comments
None.

Item 2.        Properties
Aircraft
Southwest operated a total of 704 Boeing 737 aircraft as of December 31, 2015, of which 95 and 28 were under operating and capital leases, respectively. The following table details information on the 704 aircraft as of December 31, 2015:
Type
 
Seats
 
Average
Age
(Yrs)
 
Number of
Aircraft
 
Number
Owned (a)
 
Number
Leased
737-300 (b)
 
137 or 143
 
22

 
118

 
78

 
40

737-500
 
122
 
24

 
11

 
9

 
2

737-700
 
143
 
11

 
471

 
397

 
74

737-800
 
175
 
2

 
104

 
97

 
7

Totals
 
 
 
12

 
704

 
581

 
123

 
(a)
As discussed further in Note 6 to the Consolidated Financial Statements, 181 of the Company's aircraft were pledged as collateral as of December 31, 2015, for secured borrowings and/or in the case that the Company has obligations related to its fuel derivative instruments with counterparties that exceed certain thresholds.
(b)
Of the total, 78 737-300 aircraft had 143 seats and 40 have 137 seats.

As of December 31, 2015, the Company had firm deliveries and options for Boeing 737-700, 737-800, 737 MAX 7, and 737 MAX 8 aircraft as follows:

 
The Boeing Company
737 NG

 
 
The Boeing Company
737 MAX
 
 
 
-800
Firm
Orders
Options
Additional -700 A/C
 
-7
Firm
Orders
-8
Firm
Orders
 
Options
 
Total

2016
36


17

 


 

 
53

2017
35


14

 

14

 

 
63

2018
18

18

4

 

13

 

 
53

2019



 
15

10

 

 
25

2020



 
14

22

 

 
36

2021



 
1

33

 
18

 
52

2022



 

30

 
19

 
49

2023



 

24

 
23

 
47

2024



 

24

 
23

 
47

2025



 


 
36

 
36

2026



 


 
36

 
36

2027



 


 
36

 
36

Total
89

18

35

(b)
30

170

(a)
191

 
533


28




(a) The Company has flexibility to substitute MAX 7 in lieu of MAX 8 firm orders beginning in 2019.
(b) To be acquired in leases from various third parties.
Ground Facilities and Services
Southwest either leases or pays a usage fee for terminal passenger service facilities at each of the airports it serves, to which various leasehold improvements have been made. The Company leases the land and/or structures on a long-term basis for its aircraft maintenance centers (located at Dallas Love Field, Houston Hobby, Phoenix Sky Harbor, Chicago Midway, Hartsfield-Jackson Atlanta International Airport and Orlando International Airport), its flight training center at Dallas Love Field (which houses ten 737 simulators), and its main corporate headquarters building, also located at Dallas Love Field. The Company also leases a warehouse and engine repair facility in Atlanta. The Company owns an energy-efficient, modern building designed to house certain operational and training functions, including its 24-hour operations. This additional headquarters building is located across the street from the Company’s current headquarters building on land owned by the Company.
The Company’s international expansion in 2015 was facilitated by the completion of construction of a new five-gate international terminal at Houston’s William P. Hobby Airport with international passenger processing facilities, an expanded security checkpoint, and an upgraded Southwest ticketing area. The Company controlled this expansion and related financial terms pursuant to an Airport Use and Lease Agreement with the City of Houston. Additional information regarding this project is provided below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 4 to the Consolidated Financial Statements.
Pursuant to an agreement with Broward County, Florida, which owns and operates Fort Lauderdale-Hollywood International Airport, the Company is also overseeing and managing the design and construction of the airport’s Terminal 1 Modernization Project. In addition to significant improvements to the existing Terminal 1, the project includes the design and construction of a new five-gate Concourse A with an international processing facility. Major construction on the project began during third quarter 2015 and is estimated to be completed during 2017. Additional information regarding this project is provided below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 4 to the Consolidated Financial Statements.
Pursuant to a lease agreement with Los Angeles World Airports, which owns and operates Los Angeles International Airport, the Company is also overseeing and managing the design, development, financing, construction, and commissioning of the airport's Terminal 1 Modernization Project. Construction on the project began during fourth quarter 2014 and is estimated to be completed during 2018. Additional information regarding this project is provided below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 4 to the Consolidated Financial Statements.
The Company also managed the reconstruction of Dallas Love Field with modern, convenient air travel facilities (“Love Field Modernization Program”). The project consisted of the complete replacement of gate facilities with a new 20-gate facility, including infrastructure, systems and equipment, aircraft parking apron, fueling system, roadways and terminal curbside, baggage handling systems, passenger loading bridges and support systems, and other supporting infrastructure. The Love Field Modernization Program is discussed in more detail below under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in Note 4 to the Consolidated Financial Statements.
As of December 31, 2015, the Company operated seven Customer Support and Services call centers. The centers located in Atlanta, San Antonio, Chicago, Albuquerque, and Oklahoma City occupy leased space. The Company owns its Houston and Phoenix centers.
The Company performs substantially all line maintenance on its aircraft and provides ground support services at most of the airports it serves. However, the Company has arrangements with certain aircraft maintenance firms for major component inspections and repairs for its airframes and engines, which comprise the majority of the Company’s annual aircraft maintenance costs.

29



Item 3. Legal Proceedings
A complaint alleging violations of federal antitrust laws and seeking certification as a class action was filed against Delta Air Lines, Inc. and AirTran in the United States District Court for the Northern District of Georgia in Atlanta on May 22, 2009. The complaint alleged, among other things, that AirTran attempted to monopolize air travel in violation of Section 2 of the Sherman Act, and conspired with Delta in imposing $15-per-bag fees for the first item of checked luggage in violation of Section 1 of the Sherman Act. The initial complaint sought treble damages on behalf of a putative class of persons or entities in the United States who directly paid Delta and/or AirTran such fees on domestic flights beginning December 5, 2008. After the filing of the May 2009 complaint, various other nearly identical complaints also seeking certification as class actions were filed in federal district courts in Atlanta, Georgia; Orlando, Florida; and Las Vegas, Nevada. All of the cases were consolidated before a single federal district court judge in Atlanta. A Consolidated Amended Complaint was filed in the consolidated action on February 1, 2010, which broadened the allegations to add claims that Delta and AirTran conspired to reduce capacity on competitive routes and to raise prices in violation of Section 1 of the Sherman Act. In addition to treble damages for the amount of first baggage fees paid to AirTran and to Delta, the Consolidated Amended Complaint seeks injunctive relief against a broad range of alleged anticompetitive activities, as well as attorneys' fees. On August 2, 2010, the Court dismissed plaintiffs' claims that AirTran and Delta had violated Section 2 of the Sherman Act; the Court let stand the claims of a conspiracy with respect to the imposition of a first bag fee and the airlines' capacity and pricing decisions. On June 30, 2010, the plaintiffs filed a motion to certify a class, which AirTran and Delta have opposed. The parties have submitted briefs on class certification, and the parties have filed motions to exclude the class certification opinions of each other’s expert. The parties engaged in extensive discovery, and discovery has now closed. On June 18, 2012, the parties filed a Stipulation and Order that plaintiffs have abandoned their claim that AirTran and Delta conspired to reduce capacity. On August 31, 2012, AirTran and Delta moved for summary judgment on all of plaintiffs' remaining claims, but discovery disputes between plaintiffs and Delta delayed further briefing on summary judgment. On August 5, 2015, the Court entered an order granting class certification, which was vacated on August 17, 2015, to permit further briefing on class certification and AirTran’s motion to exclude plaintiffs’ expert. Thereafter, the parties filed motions to exclude the opinions of the other parties’ experts. On January 8, 2016, the parties completed briefing on defendants’ motions for summary judgment, plaintiffs’ motion for class certification, and the motions to exclude the opinions of experts, and those motions have been submitted to the Court for decision. AirTran denies all allegations of wrongdoing, including those in the Consolidated Amended Complaint, and intends to defend vigorously any and all such allegations.
Also, on June 30, 2015, the U.S. Department of Justice (“DOJ”) issued a Civil Investigative Demand (“CID”) to the Company. The CID seeks information and documents about the Company’s capacity from January 2010 to the present including public statements and communications with third parties about capacity. In June 2015, the Company also received a letter from the Connecticut Attorney General requesting information about capacity; and on August 21, 2015, the Attorney General of the State of Ohio issued an investigative demand seeking information and documents about the Company’s capacity from December 2013 to the present. The Company is cooperating fully with the DOJ CID and these two state inquiries.
Further, on July 1, 2015, a complaint was filed in the United States District Court for the Southern District of New York on behalf of putative classes of consumers alleging collusion among the Company, American Airlines, Delta Air Lines, and United Airlines to limit capacity and maintain higher fares in violation of Section 1 of the Sherman Act. Since then, a number of similar class action complaints have been filed in the United States District Courts for the Central District of California, the Northern District of California, the District of Columbia, the Middle District of Florida, the Southern District of Florida, the Northern District of Georgia, the Northern District of Illinois, the Southern District of Indiana, the Eastern District of Louisiana, the District of Minnesota, the District of New Jersey, the Eastern District of New York, the Southern District of New York, the Middle District of North Carolina, the District of Oklahoma, the Eastern District of Pennsylvania, the Northern District of Texas, the District of Vermont, and the Eastern District of Wisconsin. The complaints seek treble damages for periods that vary among the complaints, costs, attorneys’ fees, and injunctive relief. On October 13, 2015, the Judicial Panel on Multi-District Litigation centralized the cases to the United States District Court in the District of Columbia. The Court has not yet entered a scheduling order establishing a date for defendants to respond to the complaints. The Company intends to vigorously defend these civil cases.
In addition, on July 8, 2015, the Company was named as a defendant in putative class action filed in British Columbia, Canada alleging that the Company, Air Canada, American Airlines, Delta Air Lines and United Airlines colluded to

30



restrict capacity and maintain higher fares for Canadian citizens traveling in the United States and for travel between the United States and Canada. Similar lawsuits were filed in Ontario, Quebec and Saskatchewan. The time for the Company to respond to the complaints has not yet expired. The Company intends to vigorously defend these civil cases in Canada.
The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business, including, but not limited to, examinations by the Internal Revenue Service.
The Company’s management does not expect that the outcome in any of its currently ongoing legal proceedings or the outcome of any proposed adjustments presented to date by the Internal Revenue Service, individually or collectively, will have a material adverse effect on the Company’s financial condition, results of operations, or cash flow.
Item 4. Mine Safety Disclosures
  
Not applicable.

EXECUTIVE OFFICERS OF THE REGISTRANT
The following information regarding the Company’s executive officers is as of February 1, 2016.
 
Name
Position
Age  
Gary C. Kelly
Chairman of the Board, President, & Chief Executive Officer
60
Robert E. Jordan
Executive Vice President & Chief Commercial Officer
55
Jeff Lamb
Executive Vice President Corporate Services
53
Thomas M. Nealon
Executive Vice President Strategy & Innovation
54
Tammy Romo
Executive Vice President & Chief Financial Officer
53
Michael G. Van de Ven
Executive Vice President & Chief Operating Officer
54
Mark R. Shaw
Senior Vice President, General Counsel, & Corporate Secretary

53
Set forth below is a description of the background of each of the Company’s executive officers.
Gary C. Kelly has served as the Company’s Chairman of the Board since May 2008, as its President since July 2008, and as its Chief Executive Officer since July 2004. Mr. Kelly also served as Executive Vice President & Chief Financial Officer from June 2001 to July 2004 and Vice President Finance & Chief Financial Officer from 1989 to 2001. Mr. Kelly joined the Company in 1986 as its Controller.
Robert E. Jordan has served as the Company’s Executive Vice President & Chief Commercial Officer since September 2011 and as President of AirTran Airways, Inc. since May 2011. Mr. Jordan also served as Executive Vice President Strategy & Planning from May 2008 to September 2011, Executive Vice President Strategy & Technology from September 2006 to May 2008, Senior Vice President Enterprise Spend Management from August 2004 to September 2006, Vice President Technology from 2002 to 2004, Vice President Purchasing from 2001 to 2002, Controller from 1997 to 2001, Director Revenue Accounting from 1994 to 1997, and Manager Sales Accounting from 1990 to 1994. Mr. Jordan joined the Company in 1988 as a programmer.
Jeff Lamb has served as the Company’s Executive Vice President Corporate Services since July 2015. Mr. Lamb also served as Executive Vice President & Chief People & Administrative Officer from September 2011 to July 2015, Senior Vice President Administration & Chief People Officer from October 2007 to September 2011, Vice President People & Leadership Development from February 2006 to October 2007, and as Senior Director People Development from December 2004 until February 2006.
Thomas M. Nealon has served as the Company’s Executive Vice President Strategy & Innovation since January 2016. Prior to becoming an executive officer of the Company, Mr. Nealon served on the Company’s Board of Directors from December 2010 until November 2015. Mr. Nealon has also served as Group Executive Vice President of J.C. Penney Company, Inc., a retail company, from August 2010 until December 2011. In this role Mr. Nealon was responsible for Strategy, jcp.com, Information Technology, Customer Insights, and Digital Ventures. Mr. Nealon also served as J.C. Penney’s Executive Vice President & Chief Information Officer from September 2006 until August 2010. Prior to

31



joining J.C. Penney, Mr. Nealon was a partner with The Feld Group, a provider of information technology consulting services, where he served in a consultant capacity as Senior Vice President & Chief Information Officer for the Company from 2002 to 2006. Mr. Nealon also served as Chief Information Officer for Frito-Lay, a division of PepsiCo, Inc., from 1996 to 2000, and in various software engineering, systems engineering, and management positions for Frito-Lay from 1983 to 1996.
Tammy Romo has served as the Company’s Executive Vice President & Chief Financial Officer since July 2015. Ms. Romo also served as Senior Vice President Finance & Chief Financial Officer from September 2012 to July 2015, Senior Vice President of Planning from February 2010 to September 2012, Vice President of Financial Planning from September 2008 to February 2010, Vice President Controller from February 2006 to August 2008, Vice President Treasurer from September 2004 to February 2006, Senior Director of Investor Relations from March 2002 to September 2004, Director of Investor Relations from December 1994 to March 2002, Manager of Investor Relations from September 1994 to December 1994, and Manager of Financial Reporting from September 1991 to September 1994.
Michael G. Van de Ven has served as the Company’s Executive Vice President & Chief Operating Officer since May 2008. Mr. Van de Ven also served as Chief of Operations from September 2006 to May 2008, Executive Vice President Aircraft Operations from November 2005 through August 2006, Senior Vice President Planning from August 2004 to November 2005, Vice President Financial Planning & Analysis from 2001 to 2004, Senior Director Financial Planning & Analysis from 2000 to 2001, and Director Financial Planning & Analysis from 1997 to 2000. Mr. Van de Ven joined the Company in 1993 as its Director Internal Audit.
Mark R. Shaw has served as the Company’s Senior Vice President, General Counsel, & Corporate Secretary since July 2015. Mr. Shaw also served as Vice President, General Counsel, & Corporate Secretary from February 2013 to July 2015 and as Associate General Counsel - Corporate and Transactions from February 2008 to February 2013. Mr. Shaw joined the Company in 2000 as an Attorney in the General Counsel Department.

32



PART II

Item 5.        Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

The Company’s common stock is listed on the New York Stock Exchange ("NYSE") and is traded under the symbol “LUV.” The following table shows the high and low prices per share of the Company’s common stock, as reported on the NYSE Composite Tape, and the cash dividends per share declared on the Company’s common stock.
 
Period
 
Dividend  
 
High  
 
Low    
2015
 
 
 
 
 
 
1st Quarter
 
$
0.06000

 
$
47.17

 
$
38.26

2nd Quarter
 
0.07500

 
44.19

 
33.02

3rd Quarter
 
0.07500

 
40.87

 
31.36

4th Quarter
 
0.07500

 
51.34

 
37.00

2014
 
 
 
 
 
 
1st Quarter
 
$
0.04000

 
$
24.17

 
$
18.78

2nd Quarter
 
0.06000

 
27.70

 
22.35

3rd Quarter
 
0.06000

 
35.49

 
25.86

4th Quarter
 
0.06000

 
43.19

 
28.40


The Company currently intends to continue declaring dividends on a quarterly basis for the foreseeable future; however, the Company’s Board of Directors may elect to alter the timing, amount, and payment of dividends on the basis of operational results, financial condition, cash requirements, future prospects, and other factors deemed relevant by the Board. As of January 29, 2016, there were approximately 13,518 holders of record of the Company’s common stock.


33



Stock Performance Graph

The following Performance Graph and related information shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934.

The following graph compares the cumulative total shareholder return on the Company’s common stock over the five-year period ended December 31, 2015, with the cumulative total return during such period of the Standard and Poor’s 500 Stock Index and the NYSE ARCA Airline Index. The comparison assumes $100 was invested on December 31, 2010, in the Company’s common stock and in each of the foregoing indices and assumes reinvestment of dividends. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance.

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG SOUTHWEST AIRLINES CO., S&P 500 INDEX, AND NYSE ARCA AIRLINE INDEX
 
 
12/31/2010
 
12/31/2011
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
Southwest Airlines Co.
 
$
100

 
$
66

 
$
79

 
$
147

 
$
332

 
$
340

S&P 500
 
$
100

 
$
102

 
$
119

 
$
156

 
$
177

 
$
180

NYSE ARCA Airline
 
$
100

 
$
70

 
$
96

 
$
152

 
$
227

 
$
193




34



Issuer Repurchases
 
Issuer Purchases of Equity Securities (1)
 
 
 
(a)
 
(b)
 
(c)
 
(d)
 
 
 
 
 
 
 
Total number of
 
Maximum dollar
 
 
 
 
 
 
 
shares purchased
 
value of shares that
 
 
 
Total number
 
Average
 
as part of publicly
 
may yet be purchased
 
 
 
of shares
 
price paid
 
announced plans
 
under the plans
 
Period
 
purchased
 
per share
 
or programs
 
or programs
 
October 1, 2015 through
  October 31, 2015
 

 
$

 

 
$
700,000,000

 
November 1, 2015 through
  November 30, 2015
 
3,213,009

 
$

(2
)
3,213,009

 
$
700,000,000

 
December 1, 2015 through
  December 31, 2015
 

 
$

 

 
$
700,000,000

 
Total
 
3,213,009

 
 
 
3,213,009

 
 
 

(1)
In May 2015, the Company’s Board of Directors authorized the repurchase of up to $1.5 billion of the Company’s common stock. Repurchases are made in accordance with applicable securities laws in open market, private, or in accelerated repurchase transactions from time to time, depending on market conditions, and may be discontinued at any time.
(2)
Under an accelerated share repurchase program entered into by the Company with a third party financial institution in third quarter 2015 ("Third Quarter ASR Program"), the Company paid $500 million and received an initial delivery of 9,679,195 shares during third quarter 2015, representing an estimated 75 percent of the shares to be purchased by the Company under the Third Quarter ASR Program based on a volume-weighted average price of $38.74 per share of the Company’s common stock on the New York Stock Exchange during a calculation period between August 3, 2015 and August 20, 2015. Final settlement of this Third Quarter ASR Program occurred in November 2015 and was determined based generally on a discount to the volume-weighted average price per share of the Company's common stock during a calculation period completed in October 2015. Upon settlement, the third party financial institution delivered 3,213,009 additional shares of the Company’s common stock to the Company. In total, the average purchase price per share for the 12,892,204 shares repurchased under the Third Quarter ASR Program, upon completion of the Third Quarter ASR Program in November 2015, was $38.78.


Item 6.         Selected Financial Data

The following financial information, for the five years ended December 31, 2015, has been derived from the Company’s Consolidated Financial Statements. This information should be viewed in conjunction with the Consolidated Financial Statements and related notes thereto included elsewhere herein. This financial information includes the operations of AirTran from the May 2, 2011 acquisition date through the end of AirTran service on December 28, 2014. Any financial information presented prior to May 2, 2011, or after December 28, 2014, includes only the operations of Southwest unless otherwise indicated. The Company provides the operating data below because these statistics are commonly used in the airline industry and, therefore, allow readers to compare the Company’s performance against its results for prior periods, as well as against the performance of the Company’s peers.
 

35



  
 
Year ended December 31,
 
 
2015
 
2014
 
2013
 
2012
 
2011
Financial Data (in millions, except per share amounts):
 
 
 
 
 
 
 
 
 
 
Operating revenues
 
$
19,820

 
$
18,605

 
$
17,699

 
$
17,088

 
$
15,658

Operating expenses
 
15,704

 
16,380

 
16,421

 
16,465

 
14,965

Operating income
 
4,116

 
2,225

 
1,278

 
623

 
693

Other expenses (income) net
 
637

 
409

 
69

 
(62
)
 
370

Income before taxes
 
3,479

 
1,816

 
1,209

 
685

 
323

Provision for income taxes
 
1,298

 
680

 
455

 
264

 
145

Net income
 
$
2,181

 
$
1,136

 
$
754

 
$
421

 
$
178

Net income per share, basic
 
$
3.30

 
$
1.65

 
$
1.06

 
$
0.56

 
$
0.23

Net income per share, diluted
 
$
3.27

 
$
1.64

 
$
1.05

 
$
0.56

 
$
0.23

Cash dividends per common share
 
$
0.2850

 
$
0.2200

 
$
0.1300

 
$
0.0345

 
$
0.0180

Total assets at period-end (1)
 
$
21,312

 
$
19,723

 
$
19,177

 
$
18,350

 
$
17,805

Long-term obligations at period-end
 
$
2,541

 
$
2,434

 
$
2,191

 
$
2,883

 
$
3,107

Stockholders’ equity at period-end
 
$
7,358

 
$
6,775

 
$
7,336

 
$
6,992

 
$
6,877

Operating Data:
 
 
 
 
 
 
 
 
 
 
Revenue passengers carried
 
118,171,211

 
110,496,912

 
108,075,976

 
109,346,509

 
103,973,759

Enplaned passengers
 
144,574,882

 
135,767,188

 
133,155,030

 
133,978,100

 
127,551,012

Revenue passenger miles (RPMs) (000s) (2)
 
117,499,879

 
108,035,133

 
104,348,216

 
102,874,979

 
97,582,530

Available seat miles (ASMs) (000s) (3)
 
140,501,409

 
131,003,957

 
130,344,072

 
128,137,110

 
120,578,736

Load factor (4)
 
83.6
%
 
82.5
%
 
80.1
%
 
80.3
%
 
80.9
%
Average length of passenger haul (miles)
 
994

 
978

 
966

 
941

 
939

Average aircraft stage length (miles)
 
750

 
721

 
703

 
693

 
679

Trips flown
 
1,267,358

 
1,255,502

 
1,312,785

 
1,361,558

 
1,317,977

Seats flown (5)
 
184,955,094

 
179,733,055

 
183,563,527

 
184,208,891

 
177,469,069

Seats per trip (6)
 
145.94

 
143.16

 
139.83

 
135.92

 
134.65

Average passenger fare (12)
 
$
154.85

 
$
159.80

 
$
154.72

 
$
147.17

 
$
141.90

Passenger revenue yield per RPM (cents) (7)(12)
 
15.57

 
16.34

 
16.02

 
15.64

 
15.12

Operating revenue per ASM (cents) (8)
 
13.98

 
14.20

 
13.58

 
13.34

 
12.99

Passenger revenue per ASM (cents) (9)(12)
 
13.02

 
13.48

 
12.83

 
12.56

 
12.24

Operating expenses per ASM (cents) (10)
 
11.18

 
12.50

 
12.60

 
12.85

 
12.41

Operating expenses per ASM, excluding fuel (cents)
 
8.61

 
8.46

 
8.18

 
8.07

 
7.73

Operating expenses per ASM, excluding fuel and profitsharing (cents)
 
8.17

 
8.19

 
8.01

 
7.98

 
7.65

Fuel costs per gallon, including fuel tax
 
$
1.90

 
$
2.93

 
$
3.16

 
$
3.30

 
$
3.19

Fuel costs per gallon, including fuel tax, economic
 
$
2.07

 
$
2.92

 
$
3.12

 
$
3.28

 
$
3.19

Fuel consumed, in gallons (millions)
 
1,901

 
1,801

 
1,818

 
1,847

 
1,764

Active fulltime equivalent Employees
 
49,583

 
46,278

 
44,381

 
45,861

 
45,392

Aircraft at end of period (11)
 
704

 
665

 
681

 
694

 
698

 
(1)
Historical amounts have been restated to align with current presentation. See Note 1 to the Consolidated Financial Statements for further information.
(2)
A revenue passenger mile is one paying passenger flown one mile. Also referred to as “traffic,” which is a measure of demand for a given period.
(3)
An available seat mile is one seat (empty or full) flown one mile. Also referred to as “capacity,” which is a measure of the space available to carry passengers in a given period.
(4)
Revenue passenger miles divided by available seat miles.
(5)
Seats flown is calculated using total number of seats available by aircraft type multiplied by the total trips flown by the same aircraft type during a particular period.
(6)
Seats per trip is calculated using seats flown divided by trips flown. Also referred to as “gauge.”
(7)
Calculated as passenger revenue divided by revenue passenger miles. Also referred to as “yield,” this is the average cost paid by a paying passenger to fly one mile, which is a measure of revenue production and fares.
(8)
Calculated as operating revenues, excluding special items, divided by available seat miles. Also referred to as "RASM" or "operating unit revenues," this is a measure of operating revenue production based on the total available seat miles flown during a particular period. Year ended 2015 RASM excludes a $172 million one-time non-cash special revenue adjustment. Additional information regarding this special item is provided in the Note Regarding Use of Non-GAAP Financial Measures and a reconciliation of revenue excluding special items related to accounting changes in the accompanying pages.
(9)
Calculated as passenger revenue divided by available seat miles. Also referred to as “passenger unit revenues,” this is a measure of passenger revenue production based on the total available seat miles flown during a particular period.
(10)
Calculated as operating expenses divided by available seat miles. Also referred to as “unit costs” or “cost per available seat mile,” this is the average cost to fly an aircraft seat (empty or full) one mile, which is a measure of cost efficiencies.
(11)
Aircraft in the Company's fleet at end of period, less Boeing 717-200s removed from service in preparation for transition out of the fleet.
(12)
Refer to Note 1 to the Consolidated Financial Statements for additional information regarding the impact from the July 2015 amended co-branded credit card agreement with Chase Bank USA, N.A.

36



Item 7.        Management's Discussion and Analysis of Financial Condition and Results of Operations

Reconciliation of Reported Amounts to Non-GAAP Financial Measures (unaudited) (in millions, except per share and per ASM amounts)
 
Year ended December 31,
 
Percent
 
2015
 
2014
 
Change
Total operating revenues, as reported
$
19,820

 
$
18,605

 
 
Deduct: Special revenue adjustment
(172
)
 

 
 
Operating revenues, Non-GAAP
$
19,648

 
$
18,605

 
5.6
 %
 
 
 
 
 
 
Fuel and oil expense, unhedged
$
3,362

 
$
5,321

 
 
Add (Deduct): Fuel hedge losses (gains) included in Fuel and oil expense
254

 
(28
)
 
 
Fuel and oil expense, as reported
$
3,616

 
$
5,293

 
 
Add (Deduct): Net impact from fuel contracts
323

 
(28
)
 
 
Fuel and oil expense, non-GAAP
$
3,939

 
$
5,265

 
(25.2
)%
 
 
 
 
 
 
Total operating expenses, as reported
$
15,704

 
$
16,380

 
 
Deduct: Union contract bonuses
(334
)
 
(9
)
 
 
Add (Deduct): Reclassification between Fuel and oil and Other (gains) losses, net,
  associated with current period settled contracts
72

 
(4
)
 
 
Add (Deduct): Contracts settling in the current period, but for which gains and/or (losses)
  have been recognized in a prior period*
251

 
(24
)
 
 
Deduct: Acquisition and integration costs
(39
)
 
(126
)
 
 
Add: Litigation settlement
37

 

 
 
Total operating expenses, non-GAAP
$
15,691

 
$
16,217

 
(3.2
)%
 
 
 
 
 
 
Operating income, as reported
$
4,116

 
$
2,225

 
 
Deduct: Special revenue adjustment
(172
)
 
$

 
 
Add: Union contract bonuses
334

 
9

 
 
Add (Deduct): Reclassification between Fuel and oil and Other (gains) losses, net,
  associated with current period settled contracts
(72
)
 
4

 
 
Add (Deduct): Contracts settling in the current period, but for which gains and/or (losses)
  have been recognized in a prior period*
(251
)
 
24

 
 
Add: Acquisition and integration costs
39

 
126

 
 
Deduct: Litigation settlement
(37
)
 

 
 
Operating income, non-GAAP
$
3,957

 
$
2,388

 
65.7
 %
 
 
 
 
 
 
Net income, as reported
$
2,181

 
$
1,136

 
 
Deduct: Special revenue adjustment (a)
(108
)
 

 
 
Add: Union contract bonuses (a)
210

 
6

 
 
Add: Mark-to-market impact from fuel contracts settling in future periods
373

 
251

 
 
Add (Deduct): Ineffectiveness from fuel hedges settling in future periods
(9
)
 
5

 
 
Add (Deduct): Other net impact of fuel contracts settling in the current or a prior period
  (excluding reclassifications)
(251
)
 
24

 
 
Deduct: Income tax impact of fuel contracts
(42
)
 
(104
)
 
 
Add: Acquisition and integration costs (a)
24

 
79

 
 
Deduct: Litigation settlement (a)
(23
)
 

 
 
Net income, non-GAAP
$
2,355

 
$
1,397

 
68.6
 %


37



 
Year ended December 31,
 
Percent
 
2015
 
2014
 
Change
Net income per share, diluted, as reported
$
3.27

 
$
1.64

 
 
Add: Net impact to net income above from fuel contracts divided by dilutive shares (a)
0.06

 
0.25

 
 
Add: Impact of special items (a)
0.19

 
0.12

 
 
Net income per share, diluted, non-GAAP
$
3.52

 
$
2.01

 
75.1
%
 
 
 
 
 
 
Operating expenses per ASM (cents)

11.18
¢
 

12.50
¢
 
 
Deduct: Fuel expense divided by ASMs
(2.57
)
 
(4.04
)
 
 
Deduct: Impact of special items
(0.24
)
 
(0.10
)
 
 
Operating expenses per ASM, non-GAAP, excluding fuel and special items (cents)

8.37
¢
 

8.36
¢
 
0.1
%
* As a result of prior hedge ineffectiveness and/or contracts marked to market through earnings.
(a) Amounts net of tax.

38




Return on Invested Capital (ROIC) (in millions) (unaudited)

 
Year Ended
 
Year Ended
 
Year Ended
 
December 31, 2015
 
December 31, 2014
 
December 31, 2013
Operating Income, as reported
$
4,116

 
$
2,225

 
$
1,278

Deduct: Special revenue adjustment
(172
)
 

 

Add: Union contract bonuses
334

 
9

 

Add (Deduct): Net impact from fuel contracts
(323
)
 
28

 
84

Add: Acquisition and integration costs
39

 
126

 
86

Deduct: Litigation settlement
(37
)
 

 

Operating Income, non-GAAP
3,957

 
2,388

 
1,448

Net adjustment for aircraft leases (1)
114

 
133

 
143

Adjustment for fuel hedge accounting
(124
)
 
(62
)
 
(60
)
Adjusted Operating Income, non-GAAP
$
3,947

 
$
2,459

 
$
1,531

 
 
 
 
 
 
Average invested capital (2)
$
11,037

 
$
11,470

 
$
11,664

Equity adjustment for hedge accounting
1,027

 
104

 
50

Adjusted average invested capital
$
12,064

 
$
11,574

 
$
11,714

 
 
 
 
 
 
ROIC, pre-tax
32.7
%
 
21.2
%
 
13.1
%

(1) 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).
(2) Average invested capital is an average of the five most recent quarter end balances of debt, net present value of aircraft leases, and equity adjusted for hedge accounting.

39




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, which closed on May 2, 2011, the Company has incurred substantial charges associated with the integration of the two companies. The Company does not expect to incur any further Acquisition and integration costs beyond 2015.
 
The Company has also provided return on invested capital, which is a non-GAAP financial measure. The Company believes return on invested capital is a meaningful measure because it quantifies how well the Company generates operating income 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 may differ; therefore, the Company is providing an explanation of its calculation for return on invested capital (before taxes and excluding special items) in the accompanying reconciliation.


40



YEAR IN REVIEW

For the 43rd consecutive year, the Company was profitable, recording GAAP and non-GAAP results for 2015 and 2014 as follows:
 
 
Year ended
 
 
(in millions, except per share amounts)
 
December 31,
 
 
GAAP
 
2015
 
2014
 
Percent Change
Operating income
 
$
4,116

 
$
2,225

 
85.0
Net income
 
$
2,181

 
$
1,136

 
92.0
Net income per share, diluted
 
$
3.27

 
$
1.64

 
99.4
 
 
 

 
 

 
 
Non-GAAP
 
 
 
 
 
 
Operating income
 
$
3,957

 
$
2,388

 
65.7
Net income
 
$
2,355

 
$
1,397

 
68.6
Net income per share, diluted
 
$
3.52

 
$
2.01

 
75.1
See the previous Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Net income for the year ended December 31, 2015, was a Company record $2.2 billion, or $3.27 per diluted share, a 92.0 percent increase in Net income year-over-year. This increase primarily was due to a 6.5 percent increase in Operating revenues, driven by strong demand for low-fare air travel and a 7.2 percent year-over-year capacity growth, and the impact of the July 2015 amended Agreement with Chase and the resulting change in accounting methodology. See Note 1 to the Consolidated Financial Statements for further information. Also, Operating expenses decreased 4.1 percent, primarily as a result of lower fuel prices, which more than offset increases in certain cost categories discussed below, including Salaries, Wages, and Benefits expense, which included the Company's record Employee Profitsharing expense of $620 million. Excluding special items in both years, non-GAAP Net income was a record $2.4 billion, or $3.52 per diluted share, a 68.6 percent increase in non-GAAP Net income year-over-year. Year ended December 31, 2015 Operating income was $4.1 billion and non-GAAP Operating income was $4.0 billion. Both GAAP and non-GAAP annual Operating income results for 2015 were Company records and significantly surpassed the prior year performance.

For the twelve months ended December 31, 2015, the Company's exceptional earnings performance, combined with its actions to prudently manage invested capital, produced a 32.7 percent pre-tax Return on invested capital, excluding special items ("ROIC"). This represented a significant increase compared with the Company's ROIC of 21.2 percent for the twelve months ended December 31, 2014. The increase in ROIC was achieved primarily through successful integration of AirTran, operational and network enhancements, and declining fuel prices.

During 2015, the Company continued to return significant value to its Shareholders. The Company returned a record $1.4 billion to Shareholders through a combined $180 million in dividend payments and $1.2 billion through three separate accelerated share repurchase programs and the buyback of its common shares on the open market. On January 25, 2016, the Company launched a new accelerated share repurchase program by advancing $500 million to a financial institution in a privately negotiated transaction ("First Quarter 2016 ASR Program"). The Company received an initial delivery of shares, representing an estimated 75 percent of the shares to be purchased by the Company under the First Quarter 2016 ASR Program. The specific number of shares that the Company ultimately will repurchase under the First Quarter 2016 ASR Program will be determined based generally on a discount to the volume-weighted average price per share of the Company's common stock during a calculation period to be completed no later than April 2016. The purchase will be recorded as a treasury share purchase for purposes of calculating earnings per share. Subsequent to the launch of the First Quarter 2016 ASR Program, the Company has $200 million remaining under its existing $1.5 billion share repurchase program. See Part II, Item 5 for further information on the Company's share repurchase authorizations.

41




Company Overview

Following the Company’s effective completion of the AirTran integration at the end of 2014, one of the Company’s primary areas of focus was on allowing its expanded network to develop, while also improving the reliability of its operations. Throughout most of 2015, the Company had a significantly higher than normal portion of its network considered under development, due to new service implemented upon converting both international and domestic destinations over from AirTran to Southwest, as well as growth in existing Southwest markets including Dallas, Houston, Washington D.C, and New York. In 2016, the portion of those markets under development will return to a more long-term historical figure based on capacity. Following the integration of AirTran, the Company also made investments in its 2015 flight schedule to improve its overall on-time performance. The Company’s on-time performance during 2015 as reported through November 2015 was approximately 80 percent, which increased approximately 7 points compared to full year 2014.

During 2015, the Company took several steps designed to enhance its existing service in cities across the network or to connect existing cities with new service not previously offered by Southwest, most notably:
The Company began offering daily nonstop flights to 20 new cities from Dallas Love Field, marking the Company's most robust schedule ever offered at Dallas Love Field, with 180 daily departures to 50 nonstop destinations.
The Company connected Central America to the Company's network with the addition of Liberia, Costa Rica; San Jose, Costa Rica; and Belize City, Belize in 2015.
The Company began service to Puerto Vallarta, Mexico in June 2015.
During October 2015, the all-new international terminal at Houston Hobby opened and the Company commenced service from Houston Hobby to Mexico (Cancun, Mexico City, Puerto Vallarta, Cabo San Lucas/Los Cabos), Belize City, Belize; San Jose, Costa Rica; Liberia, Costa Rica; and Montego Bay, Jamaica.
During 2015, the Company took delivery of 19 737-800 aircraft from Boeing and 24 pre-owned Boeing 737-700 aircraft from third parties, and retired four Boeing 737 Classic (737-300 and 737-500) aircraft during the year. Following AirTran's final passenger service on December 28, 2014, the Company removed all remaining Boeing 717-200 aircraft ("B717s") from service. As of December 31, 201587 of AirTran's 88 B717 aircraft had been delivered to Delta pursuant to a lease/sublease agreement, and one B717 aircraft was undergoing conversion in preparation for delivery to Delta. See Note 7 to the Consolidated Financial Statements for further information.
The Company is scheduled to be the launch customer for Boeing’s new, more fuel-efficient 737 MAX 8 aircraft, which is expected to enter service in 2017. The 737 MAX 8 is expected to reduce fuel burn and CO2 emissions approximately 20 percent, compared with the original Next-Generation 737s (737-300 and 737-500) when they first entered service. Southwest is also scheduled to be the launch customer for the Boeing 737 MAX 7 series aircraft, with deliveries expected to begin in 2019. Currently, the Company has firm orders in place for 170 MAX 8 aircraft and 30 MAX 7 aircraft. 
At the end of December 2015, the Company revised its future firm delivery schedule to reflect 33 additional -800s, and the conversion of its remaining 25 -700 firm orders to -800s. In addition, two pre-owned -700s were added to its delivery schedule. The incremental seat gauge and aircraft will be used to replace the capacity associated with the Company's year-end decision to further accelerate the retirement of its Classic fleet to no later than mid-2018, as compared to the previous plan of 2021. The Company continues to plan for modest year-over-year fleet growth through 2018 of no more than two percent, on average. The Company also expects an approximate five to six percent increase year-over-year in 2016 ASMs. The revised delivery schedule is currently estimated to increase the Company's firm aircraft capital commitments by $400 million beyond 2015. Replacing the Boeing 737-300s and Boeing 737-500s with more efficient and cost-effective aircraft is expected to provide significant cost savings, along with improving the Customer experience with better ontime performance and WiFi-equipped aircraft. Additional information regarding the Company's aircraft delivery schedule is included in Note 4 to the Consolidated Financial Statements.

42



During 2015, the following events took place regarding the Company's unionized Employee groups in contract negotiations:
Dispatchers, represented by the Transport Workers Union, Local 550 ("TWU 550"), ratified a new four-year contract which becomes amendable on November 30, 2019.
Flight Simulator Technicians, represented by the International Brotherhood of Teamsters, ratified a new four-year contract which becomes amendable on April 30, 2019.
Meteorologists, represented by TWU 550, approved their first-ever collective-bargaining agreement following certification by the National Mediation Board late last year. This new, four-year contract becomes amendable on June 1, 2019.
Flight Attendants, represented by the Transport Workers Union, Local 556, reached a tentative collective-bargaining agreement with the Company, which was announced in July 2015. The Flight Attendants failed to ratify this agreement, as announced by the Company on July 24, 2015, and the parties will continue negotiations.
Pilots, represented by the Southwest Airlines Pilots' Association, reached a tentative collective bargaining agreement with the Company, which was announced September 17, 2015. The Pilots failed to ratify this agreement, as announced by the Company on November 4, 2015, and the parties will continue negotiations.
Ramp, Operations, Provisioning, and Freight Agents, represented by the Transport Workers Union Local 555, reached a tentative collective bargaining agreement with the Company, which was announced on December 29, 2015. The agreement has been presented to members for ratification and the vote will be closed in first quarter 2016.
2015 Compared with 2014

Operating Revenues

Passenger revenues for 2015 increased by $641 million, or 3.6 percent, compared with 2014. Holding load factor and yield constant, the increase was primarily attributable to a 7.2 percent increase in capacity as strong Customer demand for low-fare air travel enabled the Company to fill the additional seats, as evidenced by a Company record annual load factor of 83.6 percent. On a unit basis, Passenger revenue decreased 3.4 percent, year-over-year, largely driven by a 4.7 percent decrease in passenger revenue yield, year-over-year.

Freight revenues for 2015 increased by $4 million, or 2.3 percent, compared with 2014, primarily due to increased pounds shipped. Based on current trends, the Company currently expects Freight revenues in first quarter 2016 to be comparable to fourth quarter 2015.

The Company recorded a Special revenue adjustment during 2015 of $172 million. This adjustment represented a one-time non-cash reduction to the deferred revenue liability as a result of the July 2015 amended Agreement with Chase and the resulting change in accounting methodology. The adjustment is classified as a special item and thus excluded from the Company's non-GAAP financial results. See Note 1 to the Consolidated Financial Statements and the Note Regarding Use of Non-GAAP Financial Measures for further information.

Other revenues for 2015 increased by $398 million, or 51.6 percent, compared with 2014, primarily as a result of the July 2015 amended Agreement with Chase and the resulting change in accounting methodology. The Agreement resulted in an acceleration of the timing of revenue recognition on a prospective basis beginning July 1, 2015, as well as a change in classification. The transportation element of the consideration received is now allocated a lower relative value, resulting in a reduction in the revenues classified as Passenger on a prospective basis, and the higher relative value associated with the non-transportation elements results in an increase in the portion of revenues classified as Other within the Consolidated Statement of Income; however, the precise revenue impact for future periods is not determinable until the volume of future transactions for the period is known. Ancillary revenues increased slightly year-over-year, primarily due to an increase in EarlyBird Check-in® and A1-15 select boarding positions sold at the

43



gate, which was partially offset by the decrease in revenues from the termination of AirTran passenger service and related ancillary fees.

While some yield softness has continued into January, demand for low-fare air travel, thus far, remains strong. Based on favorable booking and revenue trends, and including the estimated $110 million first quarter 2016 effect of the amended Agreement with Chase, the Company is currently expecting first quarter 2016 operating unit revenues to be flat with first quarter 2015. See Note 1 to the Consolidated Financial Statements for further information.

Operating Expenses

Operating expenses for 2015 decreased by $676 million, or 4.1 percent, compared with 2014, while capacity increased 7.2 percent over the same period. Historically, except for changes in the price of fuel, changes in most Operating expenses for airlines are driven by changes in capacity, or ASMs. The following table presents the Company's Operating expenses per ASM for 2015 and 2014, followed by explanations of these changes on a per ASM basis and/or on a dollar basis:

 
Year ended December 31,
 
Per ASM
 
Percent
(in cents, except for percentages)
2015
 
2014
 
change
 
change
Salaries, wages, and benefits

4.54
¢
 

4.14
¢
 

0.40
 ¢
 
9.7
 %
Fuel and oil
2.57

 
4.04

 
(1.47
)
 
(36.4
)
Maintenance materials and repairs
0.72

 
0.75

 
(0.03
)
 
(4.0
)
Aircraft rentals
0.17

 
0.22

 
(0.05
)
 
(22.7
)
Landing fees and other rentals
0.83

 
0.85

 
(0.02
)
 
(2.4
)
Depreciation and amortization
0.72

 
0.72

 

 

Acquisition and integration
0.03

 
0.10

 
(0.07
)
 
(70.0
)
Other operating expenses
1.60

 
1.68

 
(0.08
)
 
(4.8
)
Total

11.18
¢
 

12.50
¢
 

(1.32
 
(10.6
)%

Operating expenses per ASM for 2015 decreased by 10.6 percent, compared with 2014, primarily due to a decrease in Fuel and oil expense, partially offset by an increase in Salaries, wages, and benefits expense. On a non-GAAP basis, Operating expenses per ASM for 2015, excluding fuel and special items, increased 0.1 percent year-over-year primarily due to higher Salaries, wages, and benefits expense. Based on current cost trends, the Company expects its first quarter 2016 unit costs, excluding fuel, special items, and profitsharing to increase approximately two percent, compared with first quarter 2015. See the previous Note Regarding Use of Non-GAAP Financial Measures.
      
Salaries, wages, and benefits expense for 2015 increased by $949 million, or 17.5 percent, compared with 2014. Salaries, wages, and benefits expense per ASM for 2015 increased 9.7 percent, compared with 2014. On both a dollar and per ASM basis, approximately half of these increases were the result of higher salaries primarily due to the accrued $334 million of union bonuses as a result of ongoing negotiations with various workgroups during 2015, increased training, additional headcount, and contractual increases. The remaining increase was primarily due to higher profitsharing expense as a result of significantly higher profits in 2015. The Company’s profitsharing expense is based on profits that exclude the unrealized gains and/or losses the Company records for its fuel hedging program. Additionally, pursuant to the terms of the Company's ProfitSharing Plan (the "Plan"), acquisition and integration costs were excluded from the calculation of profitsharing expense from April 1, 2011, through December 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 Plan, from 2014 through 2018. In addition, Acquisition and integration costs incurred during 2014 and 2015 reduced operating profits, as defined, in the calculation of profitsharing. Based on current cost trends, the Company expects first quarter 2016 Salaries, wages, and benefits expense per ASM, excluding profitsharing and special items, to increase, compared with first quarter 2015.


44



The Company conducted negotiations with various unionized Employee groups during the year including Dispatchers, who ratified a new four-year contract, Flight Simulator Technicians, who ratified a new four-year contract, Meteorologists, who approved their first-ever collective bargaining agreement, Flight Attendants, Pilots, and Ramp, Operations, Provisioning, and Freight Agents. The following table sets forth the Company’s unionized Employee groups that are currently in negotiations on collective-bargaining agreements:
 
Employee Group
Approximate Number of Employees
Representatives
Amendable Date
Southwest Pilots
7,600
Southwest Airlines Pilots’ Association (“SWAPA”)
August 2012
Southwest Flight Attendants
13,100
Transportation Workers of America, AFL-CIO, Local 556 (“TWU 556”)
May 2013
Southwest Ramp, Operations, Provisioning, Freight Agents
11,000
Transportation Workers of America, AFL-CIO, Local 555 (“TWU 555”)
June 2011
Southwest Material Specialists (formerly known as Stock Clerks)
300
International Brotherhood of Teamsters, Local 19 (“IBT 19”)
August 2013
Southwest Mechanics
2,300
Aircraft Mechanics Fraternal Association (“AMFA”)
August 2012
Southwest Facilities Maintenance Technicians
40
AMFA
N/A
Southwest Flight Crew Training Instructors
80
Transportation Workers of America, AFL-CIO, Local 557 (“TWU 557”)
December 2015
Southwest Source of Support Representatives
90
IAM 142
N/A


Fuel and oil expense for 2015 decreased by $1.7 billion, or 31.7 percent, compared with 2014. On a per ASM basis, Fuel and oil expense for 2015 decreased 36.4 percent, compared with 2014. Excluding the impact of fuel hedge accounting, both the dollar and per ASM decreases were attributable to lower jet fuel prices. The Company's average economic jet fuel price per gallon decreased 29.1 percent year-over-year, from $2.92 for 2014 to $2.07 for 2015. The Company also slightly improved fuel efficiency, when measured on the basis of ASMs generated per gallon of fuel, primarily as a result of modernization of the Company's fleet and a 4.0 percent increase in stage length. Fuel gallons consumed increased 5.6 percent, compared with 2014, while year-over-year capacity increased 7.2 percent.

As a result of the Company's fuel hedging program, the Company recognized losses totaling $254 million in Fuel and oil expense for 2015, compared with net gains totaling $28 million for 2014. These totals include cash settlements realized from the settlement of fuel derivative contracts totaling $577 million paid to counterparties for 2015, compared to $56 million received from counterparties for 2014, although such totals exclude gains and/or losses recognized from hedge ineffectiveness and from derivatives that do not qualify for hedge accounting. These impacts are recorded as a component of Other (gains) losses, net. See Note 10 to the Consolidated Financial Statements.

As of January 15, 2016, on an economic basis, the Company had derivative contracts in place related to expected future fuel consumption as follows:


45



 
 
Average percent of estimated fuel consumption covered by
 
 
fuel derivative contracts at varying WTI/Brent Crude Oil,
Period
 
Heating Oil, and Gulf Coast Jet Fuel-equivalent price levels
First quarter 2016 (1)
 
Full year 2016 (2)
 
Approx. 20%
2017 (2)
 
Approx. 65%
2018 (2)
 
Approx. 35%

(1) The Company is effectively unhedged for the first quarter 2016 at current price levels. A majority of the financial impact of the derivative contracts currently held for the quarter is locked-in and is included in the economic jet fuel price simulations below.
(2) Given the Company has entered into different derivative contracts at various prices, these percentages are an average based on the assumption that Brent crude oil prices settle above current market prices. See Note 10 to the Consolidated Financial Statements for further information.

As a result of applying hedge accounting in prior periods, a portion of the amounts in Accumulated other comprehensive income (loss) (“AOCI”) are considered "frozen," and these amounts will be recognized in earnings in future periods when the underlying fuel derivative contracts settle. The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties (See Note 10 to the Consolidated Financial Statements for further information), as well as the amount of deferred gains/losses in AOCI at December 31, 2015, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

Year
 
Fair value (liability) of fuel
derivative contracts
at December 31, 2015
 
Amount of gains (losses) deferred
in AOCI at December 31,
2015 (net of tax)
2016
 
$
(863
)
 
$
(618
)
2017
 
(630
)
 
(409
)
2018
 
12

 
(21
)
Total
 
$
(1,481
)
 
$
(1,048
)

Based on forward market prices and the amounts in the above table (and excluding any other subsequent changes to the fuel hedge portfolio), the Company's jet fuel costs per gallon could exceed market (i.e., unhedged) prices during some of these future periods. This is based primarily on expected future cash settlements associated with fuel derivatives, but excludes any impact associated with the ineffectiveness of fuel hedges or fuel derivatives that are marked to market because they do not qualify for hedge accounting. See Note 10 to the Consolidated Financial Statements for further information. Assuming no changes to the Company's current fuel derivative portfolio, but including all previous hedge activity for fuel derivatives that have not yet settled, and considering only the expected net cash payments related to hedges that will settle, the Company is providing a sensitivity table for first quarter 2016, and full year 2016, jet fuel prices at different crude oil assumptions as of January 15, 2016, and for expected premium costs associated with settling contracts each period, respectively.

 
Estimated economic jet fuel price per gallon,
including taxes
Average Brent Crude Oil
price per barrel
1Q 2016 (2)
Full Year 2016 (2)
$15
$1.20 - $1.25
$1.30 - $1.35
$25
$1.45 - $1.50
$1.50 - $1.55
Current Market (1)
$1.65 - $1.70
$1.70 - $1.75
$45
$2.00 - $2.05
$1.95 - $2.00
$55
$2.30 - $2.35
$2.15 - $2.20
Estimated Premium Costs (3)
$35 - $40 million
$150 - $160 million

46




(1) Brent crude oil average market prices as of January 15, 2016, were approximately $30 and $33 per barrel for first quarter 2016 and full year 2016, respectively.
(2) The economic fuel price per gallon sensitivities provided assume the relationship between Brent crude oil and refined products based on market prices as of January 15, 2016.
(3) Fuel hedge premium expense is recognized as a component of Other (gains) losses, net.

Maintenance materials and repairs expense for 2015 increased by $27 million, or 2.8 percent, compared with 2014. On a per ASM basis, Maintenance materials and repairs expense for 2015 decreased 4.0 percent, compared with 2014, as the dollar increases were more than offset by the 7.2 percent increase in capacity. On a dollar basis, the majority of the increase was attributable to the timing of regular airframe maintenance checks, partially offset by reduced engine and avionic repair expense as a result of the B717 aircraft transitioning out of the Company's fleet. The Company currently expects Maintenance materials and repairs expense per ASM for first quarter 2016 to increase, compared with first quarter 2015.

Aircraft rentals expense for 2015 decreased by $57 million, or 19.3 percent, compared with 2014. On a per ASM basis, Aircraft rentals expense decreased 22.7 percent, compared with 2014. On both a dollar and per ASM basis, the decrease was primarily due to the transition of leased B717 aircraft out of the Company's fleet for conversion and delivery to Delta. The Company currently expects Aircraft rentals expense per ASM for first quarter 2016 to be comparable to fourth quarter 2015.

Landing fees and other rentals expense for 2015 increased by $55 million, or 5.0 percent, compared with 2014. On a per ASM basis, Landing fees and other rentals expense for 2015 decreased 2.4 percent, compared with 2014, as the dollar increases were more than offset by the 7.2 percent increase in capacity. On a dollar basis, the majority of the increase was due was due to higher space rental rates at various airports. The remaining increase was due to heavier landing weights for the Company's higher capacity 737-800 aircraft, which now make up a larger portion of the Company's fleet. The Company currently expects Landing fees and other rentals expense per ASM for first quarter 2016 to decrease, compared with first quarter 2015.

Depreciation and amortization expense for 2015 increased by $77 million, or 8.2 percent, compared with 2014. On a per ASM basis, Depreciation and amortization expense remained flat, compared with 2014. On a dollar basis, the majority of the increase was due to the purchase and capital lease of new and used aircraft since 2014, the majority of which replaced B717s removed from service in late 2014. The Company currently expects Depreciation and amortization expense per ASM for first quarter 2016 to increase, compared with first quarter 2015, due to the accelerated retirement of the owned 737-300 and 737-500 fleet and the acquisition of new 737-800 and 737-700 aircraft. See Note 1 to the Consolidated Financial Statements for further information.

The Company incurred $39 million in Acquisition and integration costs in 2015, related to the AirTran integration, compared with $126 million in 2014. This expense primarily consisted of Employee training, facilities integration, and certain expenses associated with the grounding and conversion costs resulting from the transition of B717s to Delta. The Company does not expect to incur any further Acquisition and integration costs beyond 2015. See Note 7 to the Consolidated Financial Statements for further information.

Other operating expenses for 2015 increased by $37 million, or 1.7 percent, compared with 2014. On a per ASM basis, Other operating expenses for 2015 decreased 4.8 percent, compared with 2014, as the dollar increases were more than offset by the 7.2 percent increase in capacity. On a dollar basis, the increase was equally attributable to higher personnel expenses associated with travel costs of the Company's flight crew and credit card fees paid to third parties associated with the increase in Passenger revenues. These and other smaller increases were partially offset by a decrease in security expenses as a result of the repeal of the TSA Aviation Security Infrastructure Fee in October 2014 and a litigation settlement received by the Company in the first quarter of 2015. The Company currently expects Other operating expenses per ASM for first quarter 2016 to be comparable with fourth quarter 2015.

Other

47




Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities. See Note 10 to the Consolidated Financial Statements for further information on the Company's hedging activities. The following table displays the components of Other (gains) losses, net, for the years ended December 31, 2015, and 2014:
 
Year ended December 31,
(in millions)
2015
 
2014
Mark-to-market impact from fuel contracts settling in future periods
$
373

 
$
251

Ineffectiveness from fuel hedges settling in future periods
(9
)
 
5

Realized ineffectiveness and mark-to-market (gains) or losses
72

 
(4
)
Premium cost of fuel contracts
124

 
62

Other
(4
)
 
(5
)
 
$
556

 
$
309


Income Taxes

The Company's effective tax rate was approximately 37.3 percent for 2015, compared with 37.4 percent for 2014. On a non-GAAP basis, the Company currently projects a full year 2016 effective tax rate of approximately 37 to 38 percent based on forecasted financial results. However, the Company’s effective tax rate during interim periods of 2016 may differ significantly from this full-year estimate.

48




Reconciliation of Reported Amounts to Non-GAAP Financial Measures (unaudited) (in millions, except per share and per ASM amounts)
 
 
Year ended
December 31,
 
Percent
Change    
 
 
2014
 
2013
 
Fuel and oil expense, unhedged
 
$
5,321

 
$
5,645

 
 
Add (Deduct): Fuel hedge (gains) losses included in Fuel and oil expense
 
(28
)
 
118

 
 
Fuel and oil expense, as reported
 
$
5,293


$
5,763

 
 
Deduct: Net impact from fuel contracts
 
(28
)
 
(84
)
 
 
Fuel and oil expense, non-GAAP
 
$
5,265


$
5,679

 
(7.3
)%
 
 
 
 
 
 
 
Total operating expenses, as reported
 
$
16,380

 
$
16,421

 
 
Add (Deduct): Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period
  settled contracts
 
(4
)
 
3

 
 
Deduct: Contracts settling in the current period, but for which gains and/or (losses) have been recognized in a prior
  period*
 
(24
)
 
(87
)
 
 
Deduct: Acquisition and integration costs
 
(126
)
 
(86
)
 
 
Deduct: Union contract bonuses
 
(9
)
 

 
 
Total operating expenses, non-GAAP
 
$
16,217


$
16,251

 
(0.2
)%
 
 
 
 
 
 
 
Operating income, as reported
 
$
2,225

 
$
1,278

 
 
Add (Deduct): Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period
  settled contracts
 
4

 
(3
)
 
 
Add: Contracts settling in the current period, but for which gains and/or (losses) have been recognized in a prior
  period*
 
24

 
87

 
 
Add: Acquisition and integration costs
 
126

 
86

 
 
Add: Union contract bonuses
 
9

 

 
 
Operating income, non-GAAP
 
$
2,388


$
1,448

 
64.9
 %
 
 
 
 
 
 
 
Net income, as reported
 
$
1,136

 
$
754

 
 
Add (Deduct): Mark-to-market impact from fuel contracts settling in future periods
 
251

 
(103
)
 
 
Add: Ineffectiveness from fuel hedges settling in future periods
 
5

 
11

 
 
Add: Other net impact of fuel contracts settling in the current or a prior period (excluding reclassifications)
 
24

 
87

 
 
Add (Deduct): Income tax impact of fuel contracts
 
(104
)
 
2

 
 
Add: Acquisition and integration costs (a)
 
79

 
54

 
 
Add: Union contract bonuses (a)
 
6

 

 
 
Net income, non-GAAP
 
$
1,397


$
805

 
73.5
 %
 
 
 
 
 
 
 
Net income per share, diluted, as reported
 
$