2014

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

 

Financial Highlights - 2014 Compared to 2013  

 

Our pre-tax income for 2014 was $ 1.1 billion , representing a $ 1.5 billion decrease compared to prior year as a result of $3.5 billion of special items. Excluding special items, pre-tax income increased $1.9 billion, or 70%, to $4.5 billion primarily driven by higher passenger revenue, lower fuel prices and flat non-fuel unit cost growth.  

 

Revenue. Our passenger revenue increased $ 2.0 billion , or 6%, compared to prior year due to a 2% increase in passenger mile yield on 4% higher traffic. Passenger revenue per available seat mile ("PRASM") increased 3% on 3% higher capacity. Our ability to maintain revenue momentum was driven by a strong domestic demand environment, higher corporate sales and merchandising initiatives.  

 

Operating Expense. Total operating expense increased $3.8 billion from 2013 driven by the special items noted above and discussed below. Our consolidated operating cost per available seat mile ("CASM") for 2014 increased 8% to 15.92 cent s from 14.77 cent s in 2013 , on a 3% increase in capacity. Non-fuel unit costs ("CASM-Ex," a non-GAAP financial measure) increased 0.2% to 9.16 cent s in 2014 compared to 2013 .  

 

The increase in total operating expense is primarily due to special items recorded during the year, including $2.3 billion related to unfavorable MTM adjustments on fuel hedges and $716 million of restructuring and other, primarily associated with our fleet restructuring initiatives. The MTM adjustments are based on market prices at the end of the reporting period for contracts settling in future periods and were driven by the significant decrease in crude oil prices during the year (from a high of $115 per barrel in June to a low of $57 per barrel at December 31, 2014 ). Such market prices are not necessarily indicative of the actual future value of the underlying hedge in the contract settlement period. The fleet restructuring initiatives relate to (1) the early retirement of B-747-400 aircraft associated with our ongoing optimization of the Pacific network and (2) the restructuring of our domestic fleet by replacing a significant portion of our 50-seat regional flying with more efficient and customer preferred CRJ-900 and B-717-200 aircraft and replacing older, less cost effective B-757-200 aircraft with B-737-900ER aircraft.  

 

The increase in our total operating expense also reflects higher profit sharing, higher salaries and related costs and volume-based cost increases driven by the increase in capacity. These increases were partially offset by a reduction in regional carrier expense, primarily related to lower fuel costs. Salaries and related costs are higher primarily due to employee investments.  

 

The non-GAAP financial measures for pre-tax income, adjusted for special items, and CASM-Ex used in this section are defined and reconciled in "Supplemental Information" below.  

 

Company Initiatives  

 

Network Strategy  

 

We are implementing several strategies that are designed to strengthen and expand our global