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In 2011, we achieved our 39th consecutive year of profitability, led by record operating revenues and load factors—all while staying true to our low-fare philosophy. We reached a significant milestone on May 2, 2011, as we welcomed AirTran into the Southwest Family. Our strategic initiatives, including the acquisition of AirTran, contributed to our 29.4 percent year-over-year growth in revenues. Our 2011 earnings, however, declined year-over-year due to a 34.6 percent increase in operating expenses, driven largely by high jet fuel prices. To manage costs, we are focused on improving productivity and eliminating waste. We ended the year in a strong financial position with $3.1 billion in cash and short-term investments.

In 2011, we had the following achievements:

• Earned a net income of $178 million, despite rapidly rising fuel costs
• Excluding special items, our net income was $330 millionG
• Achieved record operating revenues of $15.7 billion
• Achieved a record annual load factor1 of 80.9 percent
• Generated more than $400 million in free cash flowC
• Realized $80 million in net pre-tax synergies from the acquisition of AirTran
• Increased business partner cash sales by approximately $250 million through the All-New Rapid Rewards® frequent flyer program
• Placed first in the industry Customer Satisfaction ranking2
• Expanded domestic market share to 25 percent3 from 21 percent a year ago
• Remained the largest U.S. carrier in terms of Passengers carried3
• Realized a 7 percent return on invested capital (ROIC) before taxes and excluding special items4

RECONCILIATION OF REPORTED AMOUNTS TO NON-GAAP FINANCIAL MEASURESG

dollars in millions, except per share amounts (unaudited, see note regarding use of non-GAAP financial measures)

	2011	2010	2009	2008	2007
Net income, as reported	$178	$459	$99	$178	$645
Add/(Deduct): Net impact from fuel contracts	89	139	14	206	(319)
Add/(Deduct): Income tax impact of fuel contracts	(31)	(52)	(5)	(78)	122
Add: Charge from voluntary early-out program, net5	—	—	35	—	12
Add/(Deduct): Charge (Reversal) from change in Illinois state income tax law, net	—	—	—	(12)	11
Add: Charge for asset impairment, net5	9	—	—	—	—
Add: Charge for acquisition and integration costs, net5,6	85	4	—	—	—
Net income, non-GAAP	$330	$550	$143	$294	$471
Net income per share, diluted, as reported	$0.23	$0.61	$0.13	$0.24	$0.84
Add/(Deduct): Net impact from fuel contracts	0.07	0.12	0.02	0.17	(0.26)
Add/(Deduct): Impact of special items, net5,6	0.13	0.01	0.04	(0.01)	0.03
Net income per share, diluted, non-GAAP	$0.43	$0.74	$0.19	$0.40	$0.61
Net margin, as reported7	1.1%	3.8%	1.0%	1.6%	6.5%
Add/(Deduct): Net impact from fuel contracts	0.6	1.1	0.1	1.9	(3.1)
Add/(Deduct): Income tax impact of fuel contracts	(0.2)	(0.4)	—	(0.7)	1.2
Add: Charge from voluntary early-out program, net5	—	—	0.3	—	0.1
Add/(Deduct): Charge (Reversal) from change in Illinois state income tax law, net	—	—	—	(0.1)	0.1
Add: Charge for asset impairment, net5	0.1	—	—	—	—
Add: Charge for acquisition and integration costs, net5,6	0.5	—	—	—	—
Net margin, non-GAAP	2.1%	4.5%	1.4%	2.7%	4.8%
Return on invested capital (ROIC), pre-tax:
Operating income, as reported	$693	$988	$262	$449	$791
Add: Net impact from fuel contracts	—	172	222	187	41
Add: Charge from voluntary early-out program, net8	—	—	56	—	21
Add: Charge for asset impairment, net8	14	—	—	—	—
Add: Charge for acquisition and integration costs, net6,8	132	7	—	—	—
Operating income, non-GAAP	839	1,167	540	636	853
Net adjustment for aircraft leases9	131	84	91	67	67
Adjustment for fuel hedge accounting	(107)	(134)	(148)	(69)	(58)
Adjusted operating income, non-GAAP	$863	$1,117	$483	$634	$862
Average invested capital10	$12,372	$10,431	$9,876	$10,669	$9,335
Equity adjustment for fuel hedge accounting	203	434	763	(1,263)	(874)
Adjusted average invested capital	$12,575	$10,865	$10,639	$9,406	$8,461
ROIC, pre-tax11	7%	10%	5%	7%	10%

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 the Company believes are not indicative of its ongoing operational performance.

As a result, the Company also provides financial information in this report 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. 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 and accounting associated with accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments is included in the Company’s Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2011, as well as subsequent quarterly filings.

In addition to its “economic” financial measures, as defined above, the Company has also provided other non-GAAP financial measures as a result of items that the Company believes are not indicative of its ongoing operations. These include 1) a 2011 charge for an asset impairment related to the Company’s decision not to equip its Classic (737-300/500) aircraft with Required Navigation Performance (RNP) capabilities; 2) 2010 and 2011 charges associated with the Company’s acquisition and integration of AirTran; 3) a one-time third quarter 2009 charge associated with Freedom ’09, an early retirement option offered to Employees; 4) a first quarter 2008 adjustment to the Company’s income tax provision due to a change in Illinois state income tax laws; 5) a third quarter 2007 charge related to the Company’s voluntary early-out program; and 6) a third quarter 2007 charge from a change in the Illinois state income tax law resulting in an increase in state income taxes, which increase was subsequently reversed in first quarter 2008 due to the reversal of the August 2007 state income tax law change. 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 and expects to continue to incur substantial charges associated with integration of the two companies. While the Company cannot predict the exact timing or amounts of such charges, it does expect to treat the charges as special items in its future presentation of non-GAAP results.

1	Percentage of seats filled by fare-paying Passengers.
2	From the 2011 yearend U.S. Department of Transportation Air Travel Consumer Report issued February 2012. Top ranking is for Southwest Airlines only. AirTran ranked fifth in the same report.
3	As measured by the number of originating passengers boarded and based on data available from the U.S. Department of Transportation as of Sept. 30, 2011.
4	See reconciliation of reported amounts to non-GAAP financial measures.
5	Amounts shown net of profitsharing and taxes. See footnote 6 for explanation of profitsharing on acquisition and integration charges.
6	Amounts shown net of profitsharing on acquisition and integration charges incurred through March 31, 2011. Southwest Airlines amended the ProfitSharing Plan during second quarter 2011 to defer the profitsharing impact of acquisition and integration costs incurred from April 1, 2011, through Dec. 31, 2013. The profitsharing impact for this time period will be realized in 2014 and beyond.
7	Net income, as reported, divided by total operating revenues.
8	Amounts shown net of profitsharing impact. See footnote 6 for explanation of profitsharing impact relating to acquisition and integration charges.
9	Net adjustment related to presumption that all aircraft in fleet are owned.
10	Average invested capital represents a five quarter average of debt, net present value of aircraft leases, and equity.
11	Calculated as adjusted operating income, non-GAAP, divided by adjusted average invested capital.