Gary C. Kelly, Chairman of the Board and Chief Executive Officer, stated, "Our strong fourth quarter earnings performance capped another year of extraordinary achievements, including 45 straight years of profitability. Last week, for the 24th consecutive year, Southwest was named to FORTUNE's 2018 list of World's Most Admired Companies. I want to thank our People for their exceptional results and congratulate them on this outstanding honor.
"Our strong profits, cash flow, and financial position enabled us to deploy capital wisely and sustain high returns on invested capital. We made significant progress modernizing our fleet, investing in technology and facilities, and returning value in excess of our free cash flow1 to Shareholders. We celebrated several notable milestones during 2017, including the implementation of our new reservation system; the retirement of our Boeing 737-300 Classic fleet; the launch of the new Boeing 737 MAX 8; the launch of service to Cincinnati, Grand Cayman, and Turks & Caicos; and the announcement of our commitment to serve Hawaii. Our Employees delivered another outstanding year of operational Reliability and Hospitality, including the best baggage delivery rates in our history. These achievements are significant, especially considering the backdrop of unprecedented natural disasters and the competitive industry environment. As ever, the Warrior Spirits and fortitude of our People resulted in an outstanding overall 2017 performance, which earned them $543 million in profitsharing during 2017.
Record fourth quarter net income and earnings per diluted share of $1.9 billion and $3.18, respectively
Excluding special items1, fourth quarter net income of $459 million, or $.77 per diluted share
Record annual net income and earnings per diluted share of $3.5 billion and $5.79, respectively
Excluding special items1, annual net income of $2.1 billion, or $3.50 per diluted share
Annual operating income of $3.5 billion, resulting in an operating margin2 of 16.6 percent, or 16.3 percent, excluding special items3
Annual operating cash flow of $3.9 billion, and annual free cash flow1 of $1.8 billion
Returned approximately $1.9 billion to Shareholders through a combination of $274 million in dividends and $1.6 billion in share repurchases
Annual return on invested capital (ROIC)1 of 25.9 percent
"We applaud Congress and the President for the tax reform legislation passed on December 22, 2017. We celebrated the passage of tax reform with our Employees through a $1,000 per person cash bonus paid on January 8, 2018. We also announced an incremental donation to charitable causes and an additional investment in our fleet to support future growth opportunities and fleet modernization. The tax reform is very meaningful to Southwest Airlines, reducing our 2017 deferred tax liability by $1.4 billion. Based on our current outlook, the reduction in the statutory federal rate will result in hundreds of millions in tax savings, which will significantly boost our earnings in 2018.
"As we look to realize ongoing benefits of modernizing our fleet and optimizing our route network, we are enthusiastic about our ability to leverage our strengths and scale to meet Customer demand. We are pleased with the progress made thus far to obtain authorization from the Federal Aviation Administration for Extended Operations (ETOPS) to operate between the mainland and the Hawaiian Islands later this year. In addition, as a complement to our more than forty flights a day to 15 cities nonstop from Seattle-Tacoma International Airport, today we announce our commitment to launch up to five daily flights4 at a new commercial aircraft facility at Paine Field in Everett, Washington, scheduled to be completed later this year.
"We begin 2018 focused on our goal to expand margins and profits, excluding special items1. Our balance sheet and liquidity remain strong, with manageable debt service and capital spending this year. Our 2018 growth plans effectively replace Classics retired last year and further strengthen our robust route network. Based on the current outlook and our commercial initiatives and objectives, our goal remains to achieve positive unit revenue growth in 2018, year-over-year. We continue to expect our new reservation system to produce incremental improvements in pre-tax results of approximately $200 million in 2018, primarily from enhanced revenue management capabilities. We remain focused on improving our productivity and reliability and reducing our year-over-year operating costs per available seat mile, excluding fuel and oil expense, profitsharing expense, and special items1, in 2018. Overall, our strong financial performance, solid outlook, healthy balance sheet, and significantly lower federal income taxes, provide the cash flow to continue to reward our Employees, keep our costs and fares low for our Customers, reinvest in our business, return value to our Shareholders, and support our communities."
Notable 2017 accomplishments for the Company include:Received numerous awards and recognitions, including being ranked #1 in the U.S. Department of Transportation Customer Satisfaction ranking for 2016; named Domestic Carrier of the Year by the Airforwarders Association for the 8th consecutive year; ranked the highest Low-Cost Carrier in the J.D. Power 2017 North America Airline Satisfaction Study; named one of Corporate Responsibility's 100 Best Corporate Citizens 2017; recognized by Express Delivery and Logistics Association with the 2016 Express Cargo Standard of Excellence award; received Readers' Pick for Best Frequent Flyer Program (U.S.) for its Rapid Rewards® Program by SmarterTravel; ranked among the Best Airline Rewards Programs by U.S. News & World Report; named one of Glassdoor's Best Places to Work for the 9th consecutive year; named Program of the Year for its Rapid Rewards Program and recognized for providing the Best Loyalty Credit Card, the Best Airline Redemption Ability, and for the 5th consecutive year, the Best Customer Service by the Freddie Awards; and designated as a 2017 Most Valuable Employer for military by Recruit Military, as well as a Best Employer in Forbes' 2017 list
Achieved 45th consecutive year of profitability
Employees earned $543 million in profitsharing
Strengthened its investment-grade credit rating with an upgrade to A3 with Moody's Investors Service and an upgrade to BBB+ with Standard & Poor's
Deployed the largest technology initiative in its history with the achievement of a new reservation system
Completed the early retirement of the remaining Boeing 737-300 Classic aircraft
Introduced the Boeing 737 MAX 8 into its fleet
Revised its Boeing delivery schedule to support future growth opportunities and continued fleet modernization
Opened the newly revitalized and enhanced Terminal 1 at Fort Lauderdale-Hollywood International Airport to support expanded international flying from South Florida
Consolidated its Ohio operations and launched service at Cincinnati/Northern Kentucky International Airport
Launched service to Grand Cayman and Turks & Caicos Islands, ending the year with service to 14 international destinations in 10 countries
Launched international service from Oakland International Airport, San Diego International Airport, Nashville International Airport, and St. Louis Lambert International Airport, ending the year with 16 international gateway airports from the 48 contiguous states
Announced plans to begin selling tickets in 2018 for service to Hawaii
Ratified a collective bargaining agreement with the Facilities Maintenance Technicians
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