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


FORM 10-Q

(Mark One)
þ☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
For the quarterly period ended September 30, 2017or
☐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

southwestheartimage.jpg


Southwest Airlines Co.SOUTHWEST AIRLINES CO.
(Exact name of registrant as specified in its charter)
TEXASTexas74-1563240
(State or other jurisdiction of(IRS Employer
incorporation or organization)Identification No.)
P.O. Box 36611
Dallas, TexasTexas75235-1611
(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 classTrading SymbolName of each exchange on which registered
Common Stock ($1.00 par value)LUVNew York Stock Exchange
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 þx  No ¨


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þx  No ¨


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerxAccelerated filer☐
Non-accelerated filer☐Smaller reporting company☐
Large accelerated filer þ
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
Emerging growth company¨
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes ¨☐ No þx

Number of shares of Common Stock outstanding as of the close of business on October 30, 2017: 593,387,660

April 27, 2023: 595,073,046



TABLE OF CONTENTS TO FORM 10-Q


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2017March 31, 2023 and December 31, 20162022
Condensed Consolidated Statement of Comprehensive Income (Loss)for the three and nine months ended September 30, 2017March 31, 2023 and 20162022
Condensed Consolidated Statement of Stockholders' Equity as of March 31, 2023 and 2022
Condensed Consolidated Statement of Cash Flows for the three and nine months ended September 30, 2017March 31, 2023 and 20162022
Notes to Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
SIGNATURES

2


Table of Contents


SOUTHWEST AIRLINES CO.
FORM 10-Q
PART I – FINANCIAL INFORMATION


Item 1. 1. Financial Statements
Southwest Airlines Co.
Condensed Consolidated Balance Sheet
(in millions)
(unaudited)
 September 30, 2017 December 31, 2016
ASSETS   
Current assets:   
Cash and cash equivalents$1,460
 $1,680
Short-term investments1,580
 1,625
Accounts and other receivables579
 546
Inventories of parts and supplies, at cost438
 337
Prepaid expenses and other current assets223
 310
Total current assets4,280
 4,498
    
Property and equipment, at cost: 
  
Flight equipment21,004
 20,275
Ground property and equipment4,219
 3,779
Deposits on flight equipment purchase contracts1,118
 1,190
Assets constructed for others1,460
 1,220
 27,801
 26,464
Less allowance for depreciation and amortization9,645
 9,420
 18,156
 17,044
Goodwill970
 970
Other assets843
 774
 $24,249
 $23,286
    
LIABILITIES AND STOCKHOLDERS' EQUITY 
  
Current liabilities: 
  
Accounts payable$1,124
 $1,178
Accrued liabilities1,593
 1,985
Air traffic liability3,932
 3,115
Current maturities of long-term debt316
 566
Total current liabilities6,965
 6,844
    
Long-term debt less current maturities2,763
 2,821
Deferred income taxes3,697
 3,374
Construction obligation1,311
 1,078
Other noncurrent liabilities713
 728
Stockholders' equity: 
  
Common stock808
 808
Capital in excess of par value1,436
 1,410
Retained earnings12,806
 11,418
Accumulated other comprehensive loss(136) (323)
Treasury stock, at cost(6,114) (4,872)
Total stockholders' equity8,800
 8,441
 $24,249
 $23,286

March 31, 2023December 31, 2022
ASSETS  
Current assets: 
Cash and cash equivalents$8,359 $9,492 
Short-term investments3,315 2,800 
Accounts and other receivables1,250 1,040 
Inventories of parts and supplies, at cost736 790 
Prepaid expenses and other current assets614 686 
Total current assets14,274 14,808 
Property and equipment, at cost:
Flight equipment24,577 23,725 
Ground property and equipment7,008 6,855 
Deposits on flight equipment purchase contracts283 376 
Assets constructed for others34 28 
31,902 30,984 
Less allowance for depreciation and amortization13,878 13,642 
 18,024 17,342 
Goodwill970 970 
Operating lease right-of-use assets1,380 1,394 
Other assets898 855 
 $35,546 $35,369 
LIABILITIES AND STOCKHOLDERS' EQUITY  
Current liabilities:  
Accounts payable$1,729 $2,004 
Accrued liabilities2,118 2,043 
Current operating lease liabilities233 225 
Air traffic liability7,217 6,064 
Current maturities of long-term debt32 42 
Total current liabilities11,329 10,378 
Long-term debt less current maturities7,999 8,046 
Air traffic liability - noncurrent1,980 2,186 
Deferred income taxes1,888 1,985 
Noncurrent operating lease liabilities1,112 1,118 
Other noncurrent liabilities936 969 
Stockholders' equity:  
Common stock888 888 
Capital in excess of par value4,058 4,037 
Retained earnings15,995 16,261 
Accumulated other comprehensive income197 344 
Treasury stock, at cost(10,836)(10,843)
Total stockholders' equity10,302 10,687 
 $35,546 $35,369 
See accompanying notes.

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Table of Contents
Southwest Airlines Co.
Condensed Consolidated Statement of Comprehensive Income (Loss)
(in millions, except per share amounts)
(unaudited)


Three months ended September 30, Nine months ended September 30, Three months ended March 31,
2017 2016 2017 2016 20232022
OPERATING REVENUES:       OPERATING REVENUES:  
Passenger$4,745
 $4,669
 $14,403
 $13,971
Passenger$5,105 $4,135 
Freight42
 42
 128
 129
Freight41 42 
Other484
 428
 1,366
 1,250
Other560 517 
Total operating revenues5,271
 5,139
 15,897
 15,350
Total operating revenues5,706 4,694 
       
OPERATING EXPENSES: 
  
  
  
OPERATING EXPENSES, NET:OPERATING EXPENSES, NET:  
Salaries, wages, and benefits1,795
 1,909
 5,395
 5,089
Salaries, wages, and benefits2,478 2,229 
Fuel and oil1,003
 941
 2,915
 2,696
Fuel and oil1,547 1,004 
Maintenance materials and repairs263
 258
 758
 801
Maintenance materials and repairs240 211 
Aircraft rentals51
 56
 158
 174
Landing fees and other rentals324
 307
 969
 918
Landing fees and airport rentalsLanding fees and airport rentals408 346 
Depreciation and amortization302
 315
 939
 903
Depreciation and amortization365 324 
Other operating expenses699
 658
 2,021
 1,854
Other operating expenses952 731 
Total operating expenses4,437
 4,444
 13,155
 12,435
Total operating expenses, netTotal operating expenses, net5,990 4,845 
       
OPERATING INCOME834
 695
 2,742
 2,915
OPERATING LOSSOPERATING LOSS(284)(151)
       
OTHER EXPENSES (INCOME): 
  
  
  
OTHER EXPENSES (INCOME):
Interest expense28
 31
 84
 93
Interest expense66 93 
Capitalized interest(15) (12) (38) (34)Capitalized interest(6)(9)
Interest income(9) (6) (24) (17)Interest income(125)(3)
Loss on extinguishment of debtLoss on extinguishment of debt— 72 
Other (gains) losses, net39
 64
 207
 135
Other (gains) losses, net(14)72 
Total other expenses (income)43
 77
 229
 177
Total other expenses (income)(79)225 
       
INCOME BEFORE INCOME TAXES791
 618
 2,513
 2,738
PROVISION FOR INCOME TAXES288
 230
 913
 1,016
LOSS BEFORE INCOME TAXESLOSS BEFORE INCOME TAXES(205)(376)
BENEFIT FOR INCOME TAXESBENEFIT FOR INCOME TAXES(46)(98)
       
NET INCOME$503
 $388
 $1,600
 $1,722
NET LOSSNET LOSS$(159)$(278)
       
NET INCOME PER SHARE, BASIC$0.84
 $0.63
 $2.65
 $2.73
NET LOSS PER SHARE, BASICNET LOSS PER SHARE, BASIC$(0.27)$(0.47)
       
NET INCOME PER SHARE, DILUTED$0.84
 $0.62
 $2.64
 $2.70
NET LOSS PER SHARE, DILUTEDNET LOSS PER SHARE, DILUTED$(0.27)$(0.47)
       
COMPREHENSIVE INCOME$630
 $517
 $1,787
 $2,274
COMPREHENSIVE INCOME (LOSS)COMPREHENSIVE INCOME (LOSS)$(306)$225 
       
WEIGHTED AVERAGE SHARES OUTSTANDING   
  
  
WEIGHTED AVERAGE SHARES OUTSTANDING 
Basic597
 618
 605
 630
Basic594 592 
Diluted598
 625
 606
 638
Diluted594 592 
       
Cash dividends declared per common share$.125
 $.100
 $.350
 $.275
See accompanying notes.

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Table of Contents
Southwest Airlines Co.
Condensed Consolidated Statement of Stockholders' Equity
(in millions, except per share amounts)
(unaudited)
  
Common StockCapital in excess of par valueRetained earningsAccumulated other comprehensive incomeTreasury stockTotal
Balance at December 31, 2022$888 $4,037 $16,261 $344 $(10,843)$10,687 
Issuance of common and treasury stock pursuant to Employee stock plans— 1 — — 7 8 
Share-based compensation— 20 — — — 20 
Cash dividends, $0.18 per share— — (107)— — (107)
Comprehensive income (loss)— — (159)(147)— (306)
Balance at March 31, 2023$888 $4,058 $15,995 $197 $(10,836)$10,302 

  
Common StockCapital in excess of par valueRetained earningsAccumulated other comprehensive incomeTreasury stockTotal
Balance at December 31, 2021$888 $4,224 $15,774 $388 $(10,860)$10,414 
Cumulative effect of adopting Accounting Standards Update No. 2020-06, Debt— (300)55 — — (245)
Issuance of common and treasury stock pursuant to Employee stock plans— — — — 7 7 
Share-based compensation— 16 — — — 16 
Comprehensive income (loss)— — (278)503 — 225 
Balance at March 31, 2022$888 $3,940 $15,551 $891 $(10,853)$10,417 
    See accompanying notes.
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Table of Contents
Southwest Airlines Co.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
Three months ended
March 31,
20232022
CASH FLOWS FROM OPERATING ACTIVITIES:CASH FLOWS FROM OPERATING ACTIVITIES:  
Net lossNet loss$(159)$(278)
Adjustments to reconcile net loss to cash provided by operating activities:Adjustments to reconcile net loss to cash provided by operating activities: 
Depreciation and amortizationDepreciation and amortization365 324 
Impairment of long-lived assetsImpairment of long-lived assets— 16 
Unrealized mark-to-market adjustment on available for sale securitiesUnrealized mark-to-market adjustment on available for sale securities(4)5 
Unrealized/realized (gain) loss on fuel derivative instrumentsUnrealized/realized (gain) loss on fuel derivative instruments— 34 
Deferred income taxesDeferred income taxes(52)(97)
Loss on extinguishment of debtLoss on extinguishment of debt— 72 
Changes in certain assets and liabilities:Changes in certain assets and liabilities: 
Accounts and other receivablesAccounts and other receivables(232)(334)
Other assetsOther assets50 (44)
Accounts payable and accrued liabilitiesAccounts payable and accrued liabilities(72)177 
Air traffic liabilityAir traffic liability947 885 
Other liabilitiesOther liabilities(47)(105)
Cash collateral received from (provided to) derivative counterpartiesCash collateral received from (provided to) derivative counterparties(30)385 
Other, netOther, net(60)31 
Net cash provided by operating activitiesNet cash provided by operating activities706 1,071 
CASH FLOWS FROM INVESTING ACTIVITIES:CASH FLOWS FROM INVESTING ACTIVITIES:  
Capital expendituresCapital expenditures(1,046)(510)
Assets constructed for othersAssets constructed for others(6)(4)
Purchases of short-term investmentsPurchases of short-term investments(2,204)(925)
Proceeds from sales of short-term and other investmentsProceeds from sales of short-term and other investments1,679 1,300 
Net cash used in investing activitiesNet cash used in investing activities(1,577)(139)
CASH FLOWS FROM FINANCING ACTIVITIES:CASH FLOWS FROM FINANCING ACTIVITIES:  
Three months ended Nine months ended
September 30, September 30,
2017 2016 2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:       
Net income$503
 $388
 $1,600
 $1,722
Adjustments to reconcile net income to cash provided by (used in) operating activities: 
  
  
  
Depreciation and amortization302
 315
 939
 903
Loss on asset impairment
—
 —
 —
 21
Aircraft grounding charge63
 —
 63
 —
Unrealized/realized (gain) loss on fuel derivative instruments(42) (67) (20) (101)
Deferred income taxes82
 315
 213
 395
Changes in certain assets and liabilities: 
  
  
  
Accounts and other receivables—
 (320) (23) (355)
Other assets(64) (16) (264) (61)
Accounts payable and accrued liabilities89
 247
 (156) 272
Air traffic liability(80) (77) 817
 686
Cash collateral received from derivative counterparties151
 114
 286
 230
Other, net(8) (43) (89) (128)
Net cash provided by operating activities996
 856
 3,366
 3,584
       
CASH FLOWS FROM INVESTING ACTIVITIES: 
  
  
  
Capital expenditures(638) (464) (1,603) (1,364)
Assets constructed for others(17) (33) (113) (70)
Purchases of short-term investments(531) (641) (1,653) (1,670)
Proceeds from sales of short-term and other investments566
 549
 1,696
 1,671
Other, net—
 5
 —
 —
Net cash used in investing activities(620) (584) (1,673) (1,433)
       
CASH FLOWS FROM FINANCING ACTIVITIES: 
  
  
  
Proceeds from Employee stock plans7
 6
 22
 23
Proceeds from Employee stock plans9 6 
Reimbursement for assets constructed for others17
 33
 113
 68
Payments of long-term debt and capital lease obligations(106) (68) (534) (171)
Payments of long-term debt and finance lease obligationsPayments of long-term debt and finance lease obligations(59)(93)
Payments of cash dividends(75) (62) (274) (222)Payments of cash dividends(214)— 
Repayment of construction obligation(2) (2) (7) (6)
Repurchase of common stock(300) (250) (1,250) (1,450)
Payments for repurchases and conversions of convertible debtPayments for repurchases and conversions of convertible debt— (230)
Other, net6
 (3) 17
 (10)Other, net2 3 
Net cash used in financing activities(453) (346) (1,913) (1,768)Net cash used in financing activities(262)(314)
       
NET CHANGE IN CASH AND CASH EQUIVALENTS(77) (74) (220) 383
NET CHANGE IN CASH AND CASH EQUIVALENTS(1,133)618 
       
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD1,537
 2,040
 1,680
 1,583
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD9,492 12,480 
       
CASH AND CASH EQUIVALENTS AT END OF PERIOD$1,460
 $1,966
 $1,460
 $1,966
CASH AND CASH EQUIVALENTS AT END OF PERIOD$8,359 $13,098 
       
CASH PAYMENTS FOR:       CASH PAYMENTS FOR:
Interest, net of amount capitalized$16
 $27
 $61
 $77
Interest, net of amount capitalized$19 $20 
Income taxes$229
 $264
 $611
 $902
Income taxes$2 $4 
       
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS       
Flight equipment acquired through the assumption of debt$—
 $20
 $—
 $20
Flight equipment under capital leases$77
 $—
 $180
 $251
Assets constructed for others$39
 $50
 $127
 $165
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Adoption of Accounting Standards Update 2020-06, DebtAdoption of Accounting Standards Update 2020-06, Debt$— $245 
Right-of-use assets acquired under operating leasesRight-of-use assets acquired under operating leases$47 $24 
See accompanying notes.

6

Table of Contents
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


1. Basis of Presentation
2. New Accounting Pronouncements
3. Financial Derivative Instruments
4. Comprehensive Income (Loss)
5. Revenue
6. Net Loss Per Share
7. Fair Value Measurements
8. Supplemental Financial Information
9. Commitments and Contingencies
10. Financing Activities
7
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


1.    BASIS OF PRESENTATION


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. The unaudited Condensed Consolidated Financial Statements include accounts of the Company and its wholly owned subsidiaries.


In late December 2022, the Company experienced a wide-scale operational disruption as historically extreme winter weather across a significant portion of the United States impacted its operational plan and flight schedules. Subsequent to Winter Storm Elliott, the Company was challenged to realign flight crews, flight schedules, and aircraft for a period of several days during this peak demand travel period. The Company returned to a normal operating schedule on December 30, 2022. This disruption and subsequent recovery efforts resulted in the cancellation of more than 16,700 flights during the period from December 21 through December 31, 2022. For first quarter 2023, these events also created a deceleration in bookings, primarily isolated to January and February 2023, as well as increased expenses of approximately $55 million, which are included in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2023. These expenses included reimbursements to Customers impacted by the cancellations for costs they incurred in excess of the amounts accrued as of December 31, 2022, adjustments to the estimated value of Rapid Rewards points offered as a gesture of goodwill to Customers as a result of changes in the estimates of the points expected to be redeemed, and additional premium pay and additional compensation for Employees directly or indirectly impacted by the cancellations and recovery efforts. The financial impacts of the event to the Company also included the elimination of profitsharing expenses for the quarter. The continuing effects of this event significantly contributed to the Company recording a net loss for first quarter 2023 in the amount of $159 million.

The accompanying unaudited Condensed Consolidated Financial Statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States ("GAAP") for complete financial statements. The unaudited Condensed Consolidated Financial Statements for the interim periods ended September 30, 2017March 31, 2023 and 20162022 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. This includes all normal and recurring adjustments and elimination of significant intercompany transactions. Financial results for the Company and airlines in general can be seasonal in nature. In many years, the Company's revenues, as well as its Operating income and Net income, have been better in its second and third fiscal quarters than in its first and fourth fiscal quarters. Air travel is also significantly impacted by general economic conditions, the amount of disposable income available to consumers and changes in consumer behavior, unemployment levels, corporate travel budgets, global pandemics such as COVID-19, extreme or severe weather and natural disasters, fears of terrorism or war, governmental actions, and other factors beyond the Company's control. These and other factors, such as the price of jet fuel in some periods, the nature of the Company's fuel hedging program, and the periodic volatility of commodities used by the Company for hedging jet fuel, and the requirements related to hedge accounting, have created, and may continue to create, significant volatility in the Company's financial results. SeeNote 3 for further information on fuel and the Company's hedging program. Operating results for the three and nine months endedSeptember 30, 2017, March 31, 2023, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2017.2023. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Southwest Airlines Co.Company's Annual Report on Form 10-K for the year ended December 31, 2016.2022.

2.    NEW ACCOUNTING PRONOUNCEMENTS

On August 28, 2017,Certain prior period amounts have been reclassified to conform to the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The standard amendscurrent presentation. In the hedge accounting model to enable entities to better portray the economicsunaudited Condensed Consolidated Statement of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The amendments also simplify the application of hedge accounting in certain situations. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted in any interim or annual period. The most significant impacts of this ASU on the Company's accounting will be the elimination of ineffectiveness for all cash flow hedges in a hedging relationship, as well as a change in classification of premium expense associated with option contracts. Currently, such premium expenseComprehensive Income for the Company's fuel hedges is reflected as a component ofthree months ended March 31, 2022, the Company has reclassified $72 million from Other (gains) losses, net in the Condensed Consolidated Statementto Loss on extinguishment of Income, but under the new ASU will be reflected as a component of the line item to which the hedge relates, which is Fuel and oil expense. The Company is currently considering early adoption of the ASU as of January 1, 2018.debt.


2.    NEW ACCOUNTING PRONOUNCEMENTS

8
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


On March 10, 2017,January 7, 2021, the FASB issued ASU No. 2017-07, Improving2021-01, Reference Rate Reform (Topic 848). This new standard provides optional temporary guidance for entities transitioning away from London Interbank Offered Rate ("LIBOR") to new reference interest rates so that derivatives affected by the Presentationdiscounting transition are explicitly eligible for certain optional expedients and exceptions with Topic 848. These amendments do not apply to any contract modifications made after December 31, 2024, any new hedging relationships entered into after December 31, 2024, or to existing hedging relationships evaluated for effectiveness existing as of Net Periodic Pension CostDecember 31, 2024, that apply certain optional practical expedients. This standard was effective immediately and Net Periodic Postretirement Benefit Cost. The standard requires employersmay be applied (i) on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to presentMarch 12, 2020, or (ii) on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the service cost componentdate of the net periodic benefit cost inissuance of a final update, up to the same income statement line item as other employee compensation costs arising from services rendereddate that financial statements are available to be issued. The Company had no material LIBOR-related contract modifications during the period. The other components of net benefit cost, including amortization of prior service cost/credit, and settlement and curtailment effects, are to be included in nonoperating expenses. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company does not expect this to have a material impact on Operating income and expects this to have no impact on Net income. The Company will adopt this guidance as of January 1, 2018.three months ended March 31, 2023.
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)



On January 26, 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The standard simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test (as defined by the FASB), which requires a hypothetical purchase price allocation (implied fair value of goodwill) to measure impairment loss. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company does not expect this ASU to have a significant impact on its financial statement presentation or results.

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases. The standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. The guidance requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases (with the exception of short-term leases) at the lease commencement date and recognize expenses on the income statement in a similar manner to the current guidance in Accounting Standards Codification 840, Leases. The lease liability will be measured at the present value of the unpaid lease payments and the right-of-use asset will be derived from the calculation of the lease liability. Lease payments will include fixed and in-substance fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, fees paid by the lessee to the owners of a special-purpose entity for restructuring the transaction, and probable amounts the lessee will owe under a residual value guarantee. Lease payments will not include variable lease payments other than those that depend on an index or rate, any guarantee by the lessee of the lessor’s debt, or any amount allocated to non-lease components.

The Company has formed a project team to evaluate and implement the standard, and currently believes the most significant impact of this ASU on its accounting will be the balance sheet impact of its aircraft operating leases, which will significantly increase assets and liabilities. As of September 30, 2017, the Company had 53 leased aircraft under operating leases and also had another 76 aircraft under operating leases that are being subleased to another airline. As of September 30, 2017, the net present value of future rents for those aircraft was approximately $1.0 billion. This amount only includes contractual payments due to lessors, and does not consider certain items that the standard requires to be assessed in determining the final asset and liability to be reflected on the Company's balance sheet, such as lease renewal options and potential impairments, nor does it consider the sublease income that is due from third parties. The Company also has operating leases related to terminal operations space and other real estate leases. Although the real estate leases will also have a substantial impact to the balance sheet, the Company does not expect the leases related to terminal operations space to have a significant impact since variable lease payments, other than those based on an index or rate, are excluded from the measurement of the lease liability. The Company also does not expect the adoption of this ASU to impact any of its existing debt covenants.

In addition, the standard eliminates the current build-to-suit lease accounting guidance and could result in derecognition of build-to-suit assets and liabilities that remained on the balance sheet after the end of the construction period. The underlying leases for these facilities will be subject to evaluation under the new standard. See Note 7 for further information on the Company’s build-to-suit projects.

The Company anticipates utilizing the modified retrospective transition approach to adopt the standard, which requires application of the new guidance for all periods presented with an option to use certain practical expedients. The Company currently plans to adopt the standard as of January 1, 2018, pending successful implementation of a third-party lease accounting software and completion of remaining administrative tasks. The Company is continuing to evaluate the new guidance and plans to provide additional information in its 2017 10-K.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. Following the FASB's finalization of a one year deferral of this standard, the ASU is now effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company has formed a project team to evaluate and work to implement the standard, and currently believes the most significant impact of this ASU on its accounting will be the elimination of the incremental cost method for frequent flyer accounting, which will require the Company to re-value its liabilities associated with Customer flight points with a relative fair value approach, resulting in a significant increase in the liabilities. The Company's liabilities associated with these flight points were $64 million at September 30, 2017,
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


and the Company currently estimates that applying a relative fair value approach would increase the liabilities by approximately 20 to 25 times that value, depending on various assumptions made at the time of measurement. The adoption of the new standard is also expected to result in different income statement classification for certain types of revenues which are currently classified as Other revenues, but under the new ASU would be included in Passenger revenues. Based on the Company's full year 2016 results, the amount to be reclassified would have been approximately $600 million. However, the estimated impact of this ASU would not have had a material impact on Operating revenues and would not have impacted any of its existing debt covenants. The Company currently anticipates utilizing the full retrospective method of adoption allowed by the standard, in order to provide for comparative results in all periods presented, and will adopt the standard as of January 1, 2018. The Company is continuing to evaluate the new guidance both internally and through its participation in an industry working group, and plans to continue to provide relevant and material information prior to adoption. The Company is in the process of completing its analysis of information necessary to recast prior period results, however it does not believe there are any remaining significant implementation topics associated with the adoption of this ASU that have not yet been addressed.

3.    FINANCIAL DERIVATIVE INSTRUMENTS


Fuel contractsContracts
Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices. Furthermore, jet fuel and oil typically represents one of the largest operating expenses for airlines. The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through its fuel hedging program. Although the Company may periodically enter into jet fuel derivatives for short-term timeframes, because jet fuel is not widely traded on an organized futures exchange, there are limited opportunities to hedge directly in jet fuel for time horizons longer than approximately 24 months into the future. However, the Company has found that financial derivative instruments in other commodities, such as West Texas Intermediate ("WTI") crude oil, Brent crude oil, and refined products, such as heating oil and unleaded gasoline, can be useful in decreasing its exposure to jet fuel price volatility. The Company does not purchase or hold any financial derivative instruments for trading or speculative purposes.


The Company has used financial derivative instruments for both short-term and long-term timeframes, and primarily uses a mixture of purchased call options, collar structures (which include both a purchased call option and a sold put option), call spreads (which include a purchased call option and a sold call option), put spreads (which include a purchased put option and a sold put option), and fixed price swap agreements in its portfolio. Although the use of collar structures and swap agreements can reduce the overall cost of hedging, these instruments carry more risk than purchased call options in that theThe Company could end up in a liability position when the collar structure or swap agreement settles. With the use of purchased call options and call spreads, the Company cannot be in a liability position at settlement, but does not have coverage once market prices fall below the strike price of the purchased call option.purchase or hold any financial derivative instruments for trading or speculative purposes.


For the purpose of evaluating its net cash spend for jet fuel and for forecasting its future estimated jet fuel expense, the Company evaluates its hedge volumes strictly from an "economic" standpoint and thus does not consider whether the hedges have qualified or will qualify for hedge accounting. The Company defines its "economic" hedge as the net volume of fuel derivative contracts held, including the impact of positions that have been offset through sold positions, regardless of whether those contracts qualify for hedge accounting. The level at which the Company is economically hedged for a particular period is also dependent on current market prices for that period, as well as the types of derivative instruments held and the strike prices of those instruments. For example, the Company may enter into "out-of-the-money" option contracts (including "catastrophic" protection), which may not generate intrinsic gains at settlement if market prices do not rise above the option strike price. Therefore, even though the Company may have an economic hedge in place for a particular period, that hedge may not produce any hedging gains at settlement and may even produce hedging losses depending on market prices, the types of instruments held, and the strike prices of those instruments.

9
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Notes to Condensed Consolidated Financial Statements
(unaudited)




For the three and nine months endedSeptember 30, 2017, the Company had fuel derivative instruments in place for up to 61 percent and 62 percent, respectively, of its fuel consumption. As of September 30, 2017,March 31, 2023, the Company also had fuel derivative instruments in place to provide coverage at varying price levels, but up to a maximum of approximately 64 percent of its remaining 2017 estimated fuel consumption, depending on where market prices settle.levels. The following table provides information about the Company’s volume of fuel hedging on an economic basis considering current market prices:basis:


  Maximum fuel hedged as of  
  September 30, 2017 Derivative underlying commodity type as of
Period (by year) (gallons in millions) (a) September 30, 2017
Remainder of 2017 320
 WTI crude and Brent crude oil
2018 1,647
 WTI crude and Brent crude oil
2019 1,377
 WTI crude and Brent crude oil
Beyond 2019 358
 WTI crude oil
Maximum fuel hedged as of
March 31, 2023Derivative underlying commodity type as of
Period (by year)(gallons in millions) (a)March 31, 2023
Remainder of 2023813 West Texas Intermediate ("WTI") crude oil and Brent crude oil
20241,265 WTI crude oil and Brent crude oil
2025227 Brent crude oil
(a) Due to the types of derivatives utilized by the Company and different price levels of those contracts, these volumes represent the maximum economic hedge in place and may vary significantly as market prices and the Company's flight schedule fluctuate.


Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. Generally, utilizing hedge accounting,Qualification is re-evaluated quarterly, and all periodic changes in fair value of the derivatives designated as hedges that are considered to be effective are recorded in Accumulated other comprehensive income (loss) ("AOCI") until the underlying jet fuel is consumed. See Note 4. The Company’s results are subject to the possibility that periodic changes will not be effective, as defined, or that the derivatives will no longer qualify for hedge accounting. Ineffectiveness results when the change in the fair value of the derivative instrument exceeds the change in the value of the Company’s expected future cash outlay to purchase and consume jet fuel. To the extent that the periodic changes in the fair value of the derivatives are ineffective, the ineffective portion is recorded to Other (gains) losses, net, in the unaudited Condensed Consolidated Statement of Comprehensive Income in the period of the change. Likewise, if a hedge ceases to qualify for hedge accounting, any change in the fair value of derivative instruments since the last reporting period is recorded to Other (gains) losses, net, in the unaudited Condensed Consolidated Statement of Comprehensive Income in the period of the change; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense. 4.

When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent changes in fair value of those positions are marked to market through earnings. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de-designated as hedges are concurrently marked to market through earnings. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs. In a situation where it becomes probable that a fuel hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings. The Company did not have any such situations occurwhere a derivative ceased to qualify for hedge accounting during 2016,2022, or during the ninethree months ended September 30, 2017.March 31, 2023.

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)



All cash flows associated with purchasing and selling fuel derivatives are classified as Other operating cash flows in the unaudited Condensed Consolidated Statement of Cash Flows. The following table presents the location of all assets and liabilities associated with the Company’s derivative instruments within the unaudited Condensed Consolidated Balance Sheet:



   Asset derivatives Liability derivatives  Asset derivatives
 Balance Sheet Fair value at Fair value at Fair value at Fair value at Balance SheetFair value atFair value at
(in millions) location 9/30/2017 12/31/2016 9/30/2017 12/31/2016(in millions)location3/31/202312/31/2022
Derivatives designated as hedges (a)          Derivatives designated as hedges (a)   
Fuel derivative contracts (gross) Prepaid expenses and other current assets $23
 $7
 $36
 $44
Fuel derivative contracts (gross)Prepaid expenses and other current assets$228 $352 
Fuel derivative contracts (gross) Other assets 85
 126
 —
 —
Fuel derivative contracts (gross)Other assets167 160 
Fuel derivative contracts (gross) Accrued liabilities 16
 4
 84
 412
Interest rate derivative contracts Other noncurrent liabilities —
 —
 18
 35
Interest rate derivative contractsOther assets13 14 
Total derivatives designated as hedgesTotal derivatives designated as hedges $124
 $137
 $138
 $491
Total derivatives designated as hedges$408 $526 
Derivatives not designated as hedges (a)          
Fuel derivative contracts (gross) Prepaid expenses and other current assets $41
 $54
 $25
 $—
Fuel derivative contracts (gross) Other assets 14
 52
 14
 52
Fuel derivative contracts (gross) Accrued liabilities 55
 201
 85
 262
Interest rate derivative contracts Other noncurrent liabilities —
 —
 3
 —
Total derivatives not designated as hedges   $110
 $307
 $127
 $314
Total derivatives   $234
 $444
 $265
 $805
(a) Represents the position of each trade before consideration of offsetting positions with each counterparty and does not include the impact of cash collateral deposits provided to or received from counterparties. See discussion of credit risk and collateral following in this Note.


10
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


In addition, the Company had the following amounts associated with fuel derivative instruments and hedging activities in its unaudited Condensed Consolidated Balance Sheet:


  Balance Sheet September 30, December 31,
(in millions) location 2017 2016
Cash collateral deposits held from counterparties for fuel
  contracts - current
 Offset against Prepaid expenses and other current assets $3
 $4
Cash collateral deposits held from counterparties for fuel
  contracts - noncurrent
 Offset against Other assets 1
 6
Cash collateral deposits provided to counterparties for fuel
  contracts - current
 Offset against Accrued liabilities 18
 311
Due to third parties for fuel contracts Accounts payable 50
 75
 Balance SheetMarch 31,December 31,
(in millions)location20232022
Cash collateral deposits held from counterparties for fuel contracts - currentOffset against Prepaid expenses and other current assets$65 $106 
Cash collateral deposits held from counterparties for fuel contracts - noncurrentOffset against Other assets11 — 
Receivable from third parties for fuel contractsAccounts and other receivables15 34 
 
All of the Company's fuel derivative instruments and interest rate swaps are subject to agreements that follow the netting guidance in the applicable accounting standards for derivatives and hedging. The types of derivative instruments the Company has determined are subject to netting requirements in the accompanying unaudited Condensed Consolidated Balance Sheet are those in which the Company pays or receives cash for transactions with the same counterparty and in the same currency via one net payment or receipt. For cash collateral held by the Company or provided to counterparties, the Company nets such amounts against the fair value of the Company's derivative portfolio
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


by each counterparty. The Company has elected to utilize netting for both its fuel derivative instruments and interest rate swap agreements and also classifies such amounts as either current or noncurrent, based on the net fair value position with each of the Company's counterparties in the unaudited Condensed Consolidated Balance Sheet.

The Company's application of its netting policy associated with cash collateral differs depending on whether its derivative instruments are in a net asset position or a net liability position. If its fuel derivative instruments are in a net asset position with a counterparty, cash collateral amounts held are first netted against current outstanding derivative asset amounts associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of noncurrent outstanding derivative instruments. If the Company's fuel derivative instruments are in a net liability position with the counterparty,As of March 31, 2023, no cash collateral amountsdeposits were provided are first netted against noncurrentby or held by the Company based on its outstanding derivative liability amounts associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of current outstanding derivative instruments.interest rate swap agreements.


The Company has the following recognized financial assets and financial liabilities resulting from those transactions that meet the scope of the disclosure requirements as necessitated by applicable accounting guidance for balance sheet offsetting:


Offsetting of derivative assetsOffsetting of derivative assets Offsetting of derivative assets
(in millions)(in millions) (in millions)
 (i) (ii) (iii) = (i) + (ii) (i) (ii) (iii) = (i) + (ii) (i)(ii)(iii) = (i) + (ii)(i)(ii)(iii) = (i) + (ii)
 September 30, 2017 December 31, 2016 March 31, 2023December 31, 2022
Description Balance Sheet location Gross amounts of recognized assets Gross amounts offset in the Balance Sheet Net amounts of assets presented in the Balance Sheet Gross amounts of recognized assets Gross amounts offset in the Balance Sheet Net amounts of assets presented in the Balance Sheet DescriptionBalance Sheet locationGross amounts of recognized assetsGross amounts offset in the Balance SheetNet amounts of assets presented in the Balance SheetGross amounts of recognized assetsGross amounts offset in the Balance SheetNet amounts of assets presented in the Balance Sheet
Fuel derivative contracts Prepaid expenses and other current assets $64
 $(64) $—
 $61
 $(48) $13
 Fuel derivative contractsPrepaid expenses and other current assets$228 $(65)$163 $352 $(106)$246 
Fuel derivative contracts Other assets $99
 $(15) $84
(a)$178
 $(58) $120
(a)Fuel derivative contractsOther assets$167 $(11)$156 (a)$160 $— $160 (a)
Fuel derivative contracts Accrued liabilities $89
 $(89) $—
(a)$516
 $(516) $—
(a)
Interest rate derivative contractsInterest rate derivative contractsOther assets$13 $— $13 (a)$14 $— $14 (a)
(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 5.8.



11
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Offsetting of derivative liabilitiesOffsetting of derivative liabilities Offsetting of derivative liabilities
(in millions)(in millions) (in millions)
 (i) (ii) (iii) = (i) + (ii) (i) (ii) (iii) = (i) + (ii) (i)(ii)(iii) = (i) + (ii)(i)(ii)(iii) = (i) + (ii)
 September 30, 2017 December 31, 2016 March 31, 2023December 31, 2022
Description Balance Sheet location Gross amounts of recognized liabilities Gross amounts offset in the Balance Sheet Net amounts of liabilities presented in the Balance Sheet Gross amounts of recognized liabilities Gross amounts offset in the Balance Sheet Net amounts of liabilities presented in the Balance Sheet DescriptionBalance Sheet locationGross amounts of recognized liabilitiesGross amounts offset in the Balance SheetNet amounts of liabilities presented in the Balance SheetGross amounts of recognized liabilitiesGross amounts offset in the Balance SheetNet amounts of liabilities presented in the Balance Sheet
Fuel derivative contracts Prepaid expenses and other current assets $64
 $(64) $—
 $48
 $(48) $—
 Fuel derivative contractsPrepaid expenses and other current assets$65 $(65)$— $106 $(106)$— 
Fuel derivative contracts Other assets $15
 $(15) $—
(a)$58
 $(58) $—
(a)Fuel derivative contractsOther assets$11 $(11)$— $— $— $— 
Fuel derivative contracts Accrued liabilities $169
 $(89) $80
(a)$674
 $(516) $158
(a)
Interest rate derivative contracts Other noncurrent liabilities $21
 $—
 $21
(a)$35
 $—
 $35
(a)
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 5.

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and nine months ended September 30, 2017March 31, 2023 and 2016:2022:


Location and amount recognized in income on cash flow and fair value hedging relationships
Three months ended March 31, 2023Three months ended March 31, 2022
(in millions)Fuel and oilOther operating expensesFuel and oilOther operating expenses
Total$(28)$2 $(203)$2 
(Gain) loss on cash flow hedging relationships:
Commodity contracts:
Amount of (gain) reclassified from AOCI into income(28)— (203)— 
Interest contracts:
Amount of loss reclassified from AOCI into income— 2 — 2 

Derivatives designated and qualified in cash flow hedging relationships
 (Gain) loss recognized in AOCI on derivatives, net of tax
 Three months ended
 March 31,
(in millions)20232022
Fuel derivative contracts$125 $(654)
Interest rate derivatives2 (4)
Total$127 $(658)

12
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Derivatives in cash flow hedging relationships
 
(Gain) loss recognized in AOCI on derivatives (effective
 portion)
 
(Gain) loss reclassified from AOCI into income (effective
portion) (a)
 
(Gain) loss recognized in income on derivatives
(ineffective portion) (b)
 Three months ended Three months ended Three months ended
 September 30, September 30, September 30,
(in millions)2017 2016 2017 2016 2017 2016
Fuel derivative contracts$(29)*$19
*$94
*$141
*$8
 $(4)
Interest rate derivatives—
*(2)*2
*2
*—
 (2)
Total$(29) $17
 $96
 $143
 $8
 $(6)
Derivatives not designated as hedges
 (Gain) loss recognized in income on derivatives 
  
 Three months endedLocation of (gain) loss recognized in income on derivatives
 March 31,
(in millions)20232022
Fuel derivative contracts$— $34 Other (gains) losses, net
*Net of tax
(a) Amounts related to fuel derivative contracts and interest rate derivatives, which are included in Fuel and oil and Interest expense, respectively.
(b) Amounts are included in Other (gains) losses, net.

Derivatives in cash flow hedging relationships
 (Gain) loss recognized in AOCI on derivatives (effective portion) (Gain) loss reclassified from AOCI into income (effective portion)(a) (Gain) loss recognized in income on derivatives (ineffective portion)(b)
 Nine months ended Nine months ended Nine months ended
 September 30, September 30, September 30,
(in millions)2017 2016 2017 2016 2017 2016
Fuel derivative contracts$104
*$(62)*$282
*$484
*$29
 $(3)
Interest rate derivatives1
*4
*6
*7
*—
 (3)
Total$105
 $(58) $288
 $491
 $29
 $(6)
*Net of tax
(a) Amounts related to fuel derivative contracts and interest rate derivatives, which are included in Fuel and oil and Interest expense, respectively.
(b) Amounts are included in Other (gains) losses, net.

Derivatives not in cash flow hedging relationships
    
 
(Gain) loss
recognized in income on
derivatives
  
   
 Three months ended 
Location of (gain) loss
 recognized in income
on derivatives
 September 30, 
(in millions)2017 2016 
Fuel derivative contracts$(4) $35
 Other (gains) losses, net
Interest rate derivatives(1) —
 Interest expense
 $(5) $35
  
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)



Derivatives not in cash flow hedging relationships
 (Gain) loss  
 recognized in income on  
 derivatives  
 Nine months ended Location of (gain) loss
 September 30, recognized in income
(in millions)2017 2016 on derivatives
Fuel derivative contracts$80
 $23
 Other (gains) losses, net
Interest rate derivatives

(3) —
 Interest expense
 $77
 $23
  


The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three months ended September 30, 2017March 31, 2023 and 2016 of $34 million2022. Gains and/or losses associated with fuel derivatives that qualify for hedge accounting are ultimately recorded to Fuel and $34 million, respectively, and the nine months ended September 30, 2017 and 2016 of $102 million and $117 million, respectively. These amountsoil expense. Gains and/or losses associated with fuel derivatives that do not qualify for hedge accounting are excluded from the Company’s measurement of effectiveness for related hedges and are included as a component ofrecorded to Other (gains) and losses, net, innet. The following table presents the impact of premiums paid for fuel derivative contracts and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income.Income (Loss) during the period the contract settles:


 Premium expense recognized in income on derivatives 
  
 Three months endedLocation of premium expense recognized in income on derivatives
 March 31,
(in millions)20232022
Fuel derivative contracts designated as hedges$30 $26 Fuel and oil

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets or provided by third parties. Included in the Company’s cumulative net unrealized lossesgains from fuel hedges as of September 30, 2017,March 31, 2023, recorded in AOCI, were approximately $118$75 million in unrealized losses,gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to September 30, 2017.March 31, 2023.


Interest rate swapsRate Swaps
The Company is party to certain interest rate swap agreements that are accounted for as eithercash flow hedges. The Company did not have any interest rate swap agreements designated as fair value hedges, or cash flow hedges, as defined, induring the applicable accounting guidance for derivative instruments and hedging. Severalperiods presented. All of the Company's interest rate swap agreements qualify for the "shortcut" methodor "critical terms match" methods of accounting for hedges, which dictatesdictate that the hedges arewere assumed to be perfectly effective at origination, and, thus, there iswas no ineffectiveness to be recorded in earnings. For the Company’s interest rate swap agreements that do not qualify for the "shortcut" method of accounting, ineffectiveness is required to be measured at each reporting period. The ineffectiveness associated with all of the Company’s interest rate swap agreements for all periods presented was not material.


Credit riskRisk and collateralCollateral
Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company at the reporting date. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. At September 30, 2017,March 31, 2023, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterpartycounterparty's credit rating. The Company also had agreements with counterparties in which cash deposits and letters of credit and/or pledged aircraft arewere required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds. In certain cases, the Company has the ability to substitute among these different forms of collateral at its discretion.


13
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of September 30, 2017,March 31, 2023, at which such postings are triggered:


Counterparty (CP)   Counterparty (CP) 
(in millions)A B C D E F 
Other (a)
 Total(in millions)ABCDEFGOther (a)Total
Fair value of fuel derivatives$(42) $(3) $16
 $10
 $4
 $3
 $2
 $(10)Fair value of fuel derivatives$96 $51 $78 $23 $55 $29 $48 $15 $395 
Cash collateral held from (by) CP(18) —
 —
 —
 4
 —
 —
 (14)
Aircraft collateral pledged to CP—
 —
 —
 —
 —
 —
 —
 —
Letters of credit (LC)—
 —
 —
 —
 —
 —
 —
 —
Option to substitute LC for aircraft(200) to (600)(b) (100) to (500)(c) (150) to (550)(c) (150) to (550)(c) N/A N/A    
Cash collateral held from CPCash collateral held from CP76 — — — — — — — 76 
Option to substitute LC for cashN/A >(500)(c) (75) to (150) or >(550)(c) 
(125) to (150) or >(550)(d)

 (d) N/A    Option to substitute LC for cashN/AN/A (b)
 (b)

 (b)N/A (b)  
If credit rating is investment
grade, fair value of fuel
derivative level at which:
               If credit rating is investment
grade, fair value of fuel
derivative level at which:		     
Cash is provided to CP(50) to (200) or >(600) (50) to (100) or >(500) (75) to (150) or >(550) 
(125) to (150) or >(550)

 >(100) >(65)    Cash is provided to CP>(100)>(50)>(75)
>(125)

>(40)>(65)>(100)  
Cash is received from CP>50(e) >150(e) >250(e) >75(e) >0(e) >30(e)    Cash is received from CP>0(c)>150(c)>250(c)>125(c)>100(c)>70(c)>100(c)  
Aircraft or cash can be pledged to
CP as collateral
(200) to (600)(f) (100) to (500)(c) (150) to (550)(c) 
(150) to (550)(c)

 N/A N/A    
If credit rating is non-investment
grade, fair value of fuel derivative level at which:
               If credit rating is non-investment
grade, fair value of fuel derivative level at which:		     
Cash is provided to CP(0) to (200) or >(600) (0) to (100) or >(500) (0) to (150) or >(550) 
(0) to (150) or >(550)

 (g) (g)    
Cash is received from CP(g) (g) (g) (g) (g) (g)    Cash is received from CP (d) (d) (d) (d) (d) (d) (d)  
Aircraft or cash can be pledged to
CP as collateral
(200) to (600) (100) to (500) (150) to (550) (150) to (550) N/A N/A    
(a) Individual counterparties with fair value of fuel derivatives <$2 $16 million.
(b) The Company has the option of providing letters of credit in addition to aircraft collateral if the appraised value of the aircraft does not meet the collateral requirements.
(c) The Company has the option of providing cash, letters of credit, or pledging aircraft as collateral.
(d) The Company has the option to substitute letters of credit for 100 percent of cash collateral requirement.
(e)(c) Thresholds may vary based on changes in credit ratings within investment grade.
(f) The Company has the option of providing cash or pledging aircraft as collateral.
(g)(d) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)



4.    COMPREHENSIVE INCOME (LOSS)


Comprehensive income (loss) includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting unrealized gains and losses on certain investments, and actuarial gains/losses arising from the Company’s postretirement benefit obligation. The differences between Net incomeloss and Comprehensive income (loss) for the three and nine months ended September 30,2017March 31, 2023 and 20162022 were as follows:

 Three months ended March 31,
(in millions)20232022
NET LOSS$(159)$(278)
Unrealized gain (loss) on fuel derivative instruments, net of
  deferred taxes of ($44) and $151
(147)498 
Unrealized gain on interest rate derivative instruments, net of
  deferred taxes of $0 and $2
— 5 
Total other comprehensive income (loss)$(147)$503 
COMPREHENSIVE INCOME (LOSS)$(306)$225 


14
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


 Three months ended September 30,
(in millions)2017 2016
NET INCOME$503
 $388
Unrealized gain on fuel derivative instruments, net of
  deferred taxes of $73 and $72
123
 122
Unrealized gain on interest rate derivative instruments, net of
  deferred taxes of $- and $2
2
 4
Other, net of deferred taxes of $2 and $22
 3
Total other comprehensive income$127
 $129
COMPREHENSIVE INCOME$630
 $517

 Nine months ended September 30,
(in millions)2017 2016
NET INCOME$1,600
 $1,722
Unrealized gain on fuel derivative instruments, net of
  deferred taxes of $105 and $321
178
 546
Unrealized gain on interest rate derivative instruments, net of
  deferred taxes of $2 and $1
5
 3
Other, net of deferred taxes of $2 and $24
 3
Total other comprehensive income$187
 $552
COMPREHENSIVE INCOME$1,787
 $2,274

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three and nine months ended September 30, 2017:March 31, 2023:
(in millions)Fuel derivativesInterest rate derivativesDefined benefit plan itemsDeferred tax impactAccumulated other comprehensive income
Balance at December 31, 2022$305 $(32)$170 $(99)$344 
Changes in fair value(163)(2)— 38 (127)
Reclassification to earnings(28)2 — (a)6 (20)
Balance at March 31, 2023$114 $(32)$170 $(55)$197 
(in millions)Fuel derivatives Interest rate derivatives Defined benefit plan items Other Deferred tax 
Accumulated other
comprehensive income (loss)
Balance at June 30, 2017$(412) $(13) $(14) $22
 $154
 $(263)
Changes in fair value45
 —
 —
 4
 (18) 31
Reclassification to earnings151
 2
 —
 —
 (57) 96
Balance at September 30, 2017$(216) $(11) $(14) $26
 $79
 $(136)



(in millions)Fuel derivatives Interest rate derivatives Defined benefit plan items Other Deferred tax 
Accumulated other
comprehensive income (loss)
Balance at December 31, 2016$(499) $(18) $(14) $20
 $188
 $(323)
Changes in fair value(165) (1) —
 6
 59
 (101)
Reclassification to earnings448
 8
 —
 —
 (168) 288
Balance at September 30, 2017$(216) $(11) $(14) $26
 $79
 $(136)

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following tables illustratetable illustrates the significant amounts reclassified out of each component of AOCI for the three and nine months ended September 30, 2017:March 31, 2023:

Three months ended March 31, 2023
(in millions)Amounts reclassified from AOCIAffected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)
AOCI components
Unrealized (gain) on fuel derivative instruments$(28)Fuel and oil expense
(6)Less: Tax expense
$(22)Net of tax
Unrealized loss on interest rate derivative instruments$2 Other operating expenses
— Less: Tax expense
$2 Net of tax
Total reclassifications for the period$(20)Net of tax


5.    REVENUE

Passenger Revenues

The Company’s contracts with its Customers primarily consist of its tickets sold, which are initially deferred as Air traffic liability. Passenger revenue associated with tickets is recognized when the performance obligation to the Customer is satisfied, which is primarily when travel is provided.

Revenue is categorized by revenue source as the Company believes it best depicts the nature, amount, timing, and uncertainty of revenue and cash flow. The following table provides the components of Passenger revenue recognized for the three months ended March 31, 2023 and 2022:
 Three months ended March 31,
(in millions)20232022
Passenger non-loyalty$4,082 $3,364 
Passenger loyalty - air transportation825 624 
Passenger ancillary sold separately198 147 
Total passenger revenues$5,105 $4,135 

15
Three months ended September 30, 2017
(in millions) Amounts reclassified from AOCI 
Affected line item in the unaudited Condensed Consolidated Statement of
Comprehensive Income
AOCI components  
Unrealized loss on fuel derivative instruments $151
 Fuel and oil expense
  57
 Less: Tax expense
  $94
 Net of tax
Unrealized loss on interest rate derivative instruments $2
 Interest expense
  —
 Less: Tax expense
  $2
 Net of tax
     
Total reclassifications for the period $96
 Net of tax

Nine months ended September 30, 2017
(in millions) Amounts reclassified from AOCI 
Affected line item in the unaudited Condensed Consolidated Statement of
Comprehensive Income
AOCI components  
Unrealized loss on fuel derivative instruments $448
 Fuel and oil expense
  166
 Less: Tax Expense
  $282
 Net of tax
Unrealized loss on interest rate derivative instruments $8
 Interest expense
  2
 Less: Tax Expense
  $6
 Net of tax
     
Total reclassifications for the period $288
 Net of tax


Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


As of March 31, 2023, and December 31, 2022, the components of Air traffic liability, including contract liabilities based on tickets sold and unused flight credits available to the Customer, both of which are net of recorded breakage, and loyalty points available for redemption, within the unaudited Condensed Consolidated Financial StatementsBalance Sheet were as follows:
(unaudited)
 Balance as of
(in millions)March 31, 2023December 31, 2022
Air traffic liability - passenger travel and ancillary passenger services$4,007 $3,061 
Air traffic liability - loyalty program5,190 5,189 
Total Air traffic liability$9,197 $8,250 



5. SUPPLEMENTAL FINANCIAL INFORMATION
(in millions)September 30, 2017 December 31, 2016
Derivative contracts$84
 $120
Intangible assets, net416
 426
Capital lease receivable79
 90
Non-current prepaid maintenance113
 6
Other151
 132
Other assets$843
 $774

(in millions)September 30, 2017 December 31, 2016
Accounts payable trade$165
 $138
Salaries payable175
 200
Taxes payable180
 184
Aircraft maintenance payable33
 26
Fuel payable139
 95
Other payables432
 535
Accounts payable$1,124
 $1,178

(in millions)September 30, 2017 December 31, 2016
ProfitSharing and savings plans$450
 $645
Aircraft and other lease related obligations41
 55
Permanently grounded aircraft liability31
(a)—
Vacation pay348
 355
Contract ratification bonuses69
 188
Health93
 96
Derivative contracts80
 158
Workers compensation174
 183
Property and income taxes79
 68
Other228
 237
Accrued liabilities$1,593
 $1,985

(in millions)September 30, 2017 December 31, 2016
Postretirement obligation$274
 $256
Non-current lease-related obligations94
 125
Permanently grounded aircraft liability18
(a)—
Other deferred compensation225
 204
Derivative contracts21
 35
Other81
 108
Other noncurrent liabilities$713
 $728

(a)The balance in Air traffic liability - passenger travel and ancillary passenger services also includes flight credits not currently associated with a ticket that can be applied by Customers towards the purchase of future travel. These amounts represent the current and noncurrent portion of the Company's cease-use liability recorded during third quarter 2017,flight credits are typically created as a result of a prior ticket cancellation or exchange, and are reflected net of associated breakage. Rollforwards of the Company's Air traffic liability - loyalty program for the three months ended March 31, 2023 and 2022 were as follows (in millions):

Three months ended March 31,
20232022
Air traffic liability - loyalty program - beginning balance$5,189 $4,789 
Amounts deferred associated with points awarded846 736 
Revenue recognized from points redeemed - Passenger(825)(624)
Revenue recognized from points redeemed - Other(20)(17)
Air traffic liability - loyalty program - ending balance$5,190 $4,884 

Air traffic liability includes consideration received for ticket and loyalty related performance obligations which have not been satisfied as of a given date. Rollforwards of the amounts included in Air traffic liability as of March 31, 2023 and 2022 were as follows (in millions):

Air traffic liability
Balance at December 31, 2022$8,250 
Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)6,072 
Revenue from amounts included in contract liability opening balances(2,568)
Revenue from current period sales(2,557)
Balance at March 31, 2023$9,197 

Air traffic liability
Balance at December 31, 2021$7,725 
Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)5,038 
Revenue from amounts included in contract liability opening balances(1,881)
Revenue from current period sales(2,272)
Balance at March 31, 2022$8,610 

On July 28, 2022, the Company grounding its remaining leased Boeing 737-300 aircraft on September 29, 2017. The liability reflectsannounced that all existing Customer flight credits as of that date, as well as any future flight credits issued, will no longer expire and will thus remain redeemable by Customers. Flight credits for non-refundable fares will be issued as long as the remaining net lease payments due and certain lease return requirements that may have to be performed on these leased aircraftflight is cancelled more than 10 minutes prior to their returnthe scheduled departure. As the Company continues to the lessors asbelieve that a portion of Customer flight credits issued after July 28, 2022, will not be redeemed, it continues to estimate and record breakage associated with such amounts. The amount of
16
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Customer flight credits represents approximately 7 percent and 9 percent of the cease-use date, but does not include the write–off of approximately $15 million in net prepaid rents associated with the aircrafttotal Air traffic liability balance at the groundingMarch 31, 2023, and December 31, 2022, respectively.
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


date, which were included in the $63 million charge recorded. This lossThe Company recognized revenue related to the groundingmarketing, advertising, and other travel-related benefits of the Classic fleet was recordedrevenue associated with various loyalty partner agreements including, but not limited to, the Agreement with Chase, within Other operating expenses inrevenues. For the unaudited Condensed Consolidated Statement of Comprehensive Income during third quarter 2017.three months ended March 31, 2023 and 2022, the Company recognized $521 million and $486 million, respectively.

For further details on fuel derivative and interest rate derivative contracts, see Note 3.

Other Operating Expenses
Other operating expenses consist of distribution costs, advertising expenses, personnel expenses, professional fees, and other operating costs, none of which individually exceeded 10 percent of Operating expenses.

6.    NET INCOMELOSS PER SHARE

The following table sets forth the computation of basic and diluted net income (loss) per share (in millions except per share amounts):
 Three months ended September 30, Nine months ended September 30,
 2017 2016 2017 2016
NUMERATOR:       
Net income$503
 $388
 $1,600
 $1,722
Incremental income effect of interest on 5.25% convertible notes—
 1
 —
 2
Net income after assumed conversion$503
 $389
 $1,600
 $1,724
        
DENOMINATOR: 
  
  
  
Weighted-average shares outstanding, basic597
 618
 605
 630
Dilutive effect of Employee stock options and restricted stock units1
 1
 1
 2
Dilutive effect of 5.25% convertible notes—
 6
 —
 6
Adjusted weighted-average shares outstanding, diluted598
 625
 606
 638
        
NET INCOME PER SHARE: 
  
  
  
Basic$0.84
 $0.63
 $2.65
 $2.73
Diluted$0.84
 $0.62
 $2.64
 $2.70

7.    COMMITMENTS AND CONTINGENCIES

Fort Lauderdale-Hollywood International Airport
In December 2013, the Company entered into an agreement with Broward County, Florida, which owns and operates Fort Lauderdale-Hollywood International Airport ("FLL"), to oversee and manage the design and construction of the airport's Terminal 1 Modernization Project. Pursuant to an addendum entered into during 2016, the cost of the project. Basic net income (loss) per share is not to exceed $333 million. 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. Funding for the project comes directly from Broward County aviation sources, but flows through the Company in its capacity as manager of the project. Major construction on the project began during third quarter 2015. Construction of Concourse A was completed during second quarter 2017, and construction on Terminal 1 is expected to be completed later this year. The Company has determined that due to its agreed upon role in overseeing and managing the project, it is considered the owner of the project for accounting purposes. As such, during construction the Company records expenditures as Assets constructed for others ("ACFO") in the unaudited Condensed Consolidated Balance Sheet, along with a corresponding outflow within Assets constructed for others in the unaudited Condensed Consolidated Statement of Cash Flows, and an increase to Construction obligation (with a corresponding cash inflow from Financing activities in the unaudited Condensed Consolidated Statement of Cash Flows) as reimbursements are received from Broward County.
Los Angeles International Airport
In March 2013, the Company executed a lease agreement (the "T1 Lease") with Los Angeles World Airports ("LAWA"), which owns and operates Los Angeles International Airport ("LAX"). Under the T1 Lease, which was amended in June 2014 and September 2017, the Company is overseeing and managing the design, development, financing, construction, and commissioning of the airport's Terminal 1 Modernization Project at a cost not to exceed $526 million (including proprietary renovations, or $510 million excluding proprietary renovations). In October 2017, the Company executed a separate lease agreement with LAWA (the "T1.5 Lease"). The Company intends to oversee and manage the design, development, financing, construction, and commissioning of a passenger processing facility between Terminal 1 and
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


2 ("Terminal 1.5"), but there is a scenario under the T1.5 Lease where the Company could be responsible for constructing just the site improvements for Terminal 1.5. Terminal 1.5 will house ticketing, baggage claim, passenger screening and a bus gate at a cost not to exceed $479 million for site improvements and non-proprietary improvements.
These projects are being funded primarily using the Regional Airports Improvement Corporation (the "RAIC"), which is a quasi-governmental special purpose entity that acts as a conduit borrower under syndicated credit facilities providedcalculated by groups of lenders. Loans made under the separate credit facilities for the Terminal 1 project and the Terminal 1.5 project are being used to fund the development of each of these projects, and the outstanding loans will be repaid with the proceeds of LAWA’s payments to purchase completed construction phases. The Company has guaranteed the obligations of the RAIC under each of the credit facilities of the respective lease agreements. As of September 30, 2017, there was no guarantee outstanding for the Terminal 1.5 project, and the Company's outstanding remaining guaranteed obligation under the credit facility for the Terminal 1 project was $299 million.
Construction on the Terminal 1 project began during 2014 and is estimated to be completed during 2018. Construction on the Terminal 1.5 project began during third quarter 2017 and is estimated to be completed during 2020. The Company has determined that due to its agreed upon role in overseeing and managing these projects, it is considered the owner of these projects for accounting purposes. LAWA is reimbursing the Company (through the RAIC credit facilities) for the site improvements and non-proprietary improvements, while proprietary improvements will not be reimbursed. As a result, the costs incurred to fund these projects are included within ACFO and all amounts that have been or will be reimbursed will be included within Construction obligation on the accompanying unaudited Condensed Consolidated Balance Sheet.
Dallas Love Field
During 2008, the City of Dallas approved the Love Field Modernization Program ("LFMP"), a project to reconstruct Dallas Love Field with modern, convenient air travel facilities. Pursuant to a Program Development Agreement with the City of Dallas and the Love Field Airport Modernization Corporation (or "LFAMC," a Texas non-profit "local government corporation" establisheddividing net income (loss) by the Cityweighted average of Dallasshares outstanding during the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to act on the City of Dallas' behalf to facilitate the development of the LFMP), the Company managed this project.issue common stock were exercised or converted into common stock.


Although the City of Dallas received commitments from various sources that helped to fund portions of this LFMP project, including the Federal Aviation Administration ("FAA"), the Transportation Security Administration, and the City of Dallas' Aviation Fund, the majority of the funds used were from the issuance of bonds. The Company guaranteed principal and interest payments on $456 million of such bonds issued by the LFAMC. As of September 30, 2017, $432 million of principal remained outstanding. The Company utilized the accounting guidance provided for lessees involved in asset construction. Upon completion of different phases of the LFMP project, the Company has placed the associated assets in service and has begun depreciating the assets over their estimated useful lives. The corresponding LFMP liabilities are being reduced primarily through the Company's airport rental payments to the City of Dallas as the construction costs of this project are passed through to the Company via recurring airport rates and charges. Major construction was effectively completed by December 31, 2014. During second quarter 2017, the City of Dallas approved using the remaining bond funds for additional terminal construction projects which began during second quarter and are expected to be completed in 2018.
Three months ended March 31,
 20232022
NUMERATOR:
Net loss$(159)$(278)
Add: Interest expense— — 
Net loss attributable to common stockholders(159)(278)
DENOMINATOR:
Weighted-average shares outstanding, basic and diluted594 592 
NET LOSS PER SHARE:
Basic$(0.27)$(0.47)
Diluted$(0.27)$(0.47)
Antidilutive amounts excluded from calculations:  
Convertible debt42 47 
Restricted stock units3 — 
Stock warrants1 — 


During 2015, the City of Dallas issued additional bonds for the construction of a new parking garage at Dallas Love Field. The Company has not guaranteed the principal or interest payments on these bonds, but remains the accounting owner of this project due to its incorporation into the LFMP agreements.


Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Construction costs recorded in ACFO for the Company's various projects as of September 30, 2017, and December 31, 2016, were as follows:

  September 30, 2017 December 31, 2016
(in millions) ACFO
ACFO,
Net (b)
Construction Obligation ACFO
ACFO,
Net (b)
Construction Obligation
FLL Terminal(a)$245
$244
$245
 $132
$132
$132
LAX Terminal 1(a)417
404
417
 344
336
344
LFMP - Terminal 540
474
517
 538
486
522
LFMP - Parking Garage(a)132
132
132
 80
80
80
HOU International Terminal(c)126
119
—
 126
122
—
  $1,460
$1,373
$1,311
 $1,220
$1,156
$1,078
(a) Projects still in progress.
(b) Net of accumulated depreciation.
(c) Project completed in 2015 at Houston William P. Hobby Airport ("HOU").

Contingencies
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 ("IRS"). The Company's management does not expect that the outcome of any of its currently ongoing legal proceedings or the outcome of any adjustments presented by the IRS, individually or collectively, will have a material adverse effect on the Company's financial condition, results of operations, or cash flow.

8.7.    FAIR VALUE MEASUREMENTS


Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.


As of September 30, 2017,March 31, 2023, the Company held certain items that are required to be measured at fair value on a recurring basis. These included cash equivalents, short-term investments (primarily treasury bills and certificates of deposit)bills), interest rate derivative
17
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


contracts, fuel derivative contracts, and available-for-sale securities. The majority of the Company’s cash equivalents and short-term investments consist of instruments classified as Level 1. However, the Company has certificates of deposit, commercial paper, and Eurodollartime deposits that are classified as Level 2, due to the fact that the fair value for these instruments is determined utilizing observable inputs in non-active markets. Other available-for-saleEquity securities primarily consist of investments with readily determinable market values associated with the Company’s excess benefit plan.


The Company’s fuel and interest rate derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange. Fuel derivative instruments include swaps, as well as different typescurrently consist solely of option contracts, whereas interest rate derivatives consist solely of swap agreements. See Note 3 for further information on the Company’s derivative instruments and hedging activities. The fair values of swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these swap contracts as Level 2. The Company’s Treasury Department, which reports to the Chief Financial Officer, determines the value of option contracts utilizing an option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are provided by financial institutions that trade these contracts. The option pricing model used by the Company is an industry standard model for valuing options and is the samea similar model used by the broker/dealer community (i.e., the Company’s counterparties). The inputs to this option pricing model are the option strike price, underlying price, risk free rate of interest, time to expiration, and volatility. Because certain inputs used to determine
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


the fair value of option contracts are unobservable (principally implied volatility), the Company has categorized these option contracts as Level 3. Volatility information is obtained from external sources, but is analyzed by the Company for reasonableness and compared to similar information received from other external sources. The fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives that have not yet settled. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. To validate the reasonableness of the Company’s option pricing model, on a monthly basis, the Company compares its option valuations to third party valuations. If any significant differences were to be noted, they would be researched in order to determine the reason. However, historically, no significant differences have been noted. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds.


Included in Other available-for-sale securities are the Company’s investments associated with its deferred compensation plans, which consist of mutual funds that are publicly traded and for which market prices are readily available. These plans are non-qualified deferred compensation plans designed to hold contributions in excess of limits established by the Internal Revenue Code of 1986, as amended. The distribution timing and payment amounts under these plans are made based on the participant’s distribution election and plan balance. Assets related to the funded portions of the deferred compensation plans are held in a rabbi trust, and the Company remains liable to these participants for the unfunded portion of the plans. The Company records changes in the fair value of plan obligations and plan assets, which net to zero, within the assets inSalaries, wages, and benefits line and Other (gains) losses line, respectively, of the Company’s earnings.

Southwest Airlines Co.
Notes tounaudited Condensed Consolidated Financial StatementsStatement of Comprehensive Income (Loss).
(unaudited)

18
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)



The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2017,March 31, 2023, and December 31, 2016:2022:

   Fair value measurements at reporting date using:  Fair value measurements at reporting date using:
   
Quoted prices in
active markets
for identical assets
 
Significant
other observable
inputs
 
Significant
unobservable
inputs
Quoted prices in active markets for identical assetsSignificant other observable inputsSignificant unobservable inputs
Description September 30, 2017 (Level 1) (Level 2) (Level 3)DescriptionMarch 31, 2023(Level 1)(Level 2)(Level 3)
Assets (in millions)Assets(in millions)
Cash equivalents(a)        
Cash equivalents:Cash equivalents:    
Cash equivalents (a) $1,025
 $1,025
 $—
 $—
$7,497 $7,497 $— $— 
Commercial paper 420
 —
 420
 —
Commercial paper224 — 224 — 
Certificates of deposit 15
 —
 15
 —
Certificates of deposit13 — 13 — 
Time depositsTime deposits625 — 625 — 
Short-term investments:        Short-term investments: 
Treasury bills 1,344
 1,344
 —
 —
Treasury bills3,116 3,116 — — 
Certificates of deposit 236
 —
 236
 —
Certificates of deposit150 — 150 — 
Time depositsTime deposits49 — 49 — 
Fuel derivatives:        Fuel derivatives: 
Swap contracts (c) 12
 —
 12
 —
Option contracts (b) 164
 —
 —
 164
Option contracts (b)395 — — 395 
Option contracts (c) 58
 —
 —
 58
Other available-for-sale securities 101
 101
 —
 —
Interest rate derivatives (see Note 3)Interest rate derivatives (see Note 3)13 — 13 — 
Equity SecuritiesEquity Securities236 236 — — 
Total assets $3,375
 $2,470
 $683
 $222
Total assets$12,318 $10,849 $1,074 $395 
Liabilities        
Fuel derivatives:        
Swap contracts (c) $(27) $—
 $(27) $—
Option contracts (b) (76) —
 —
 (76)
Option contracts (c) (141) —
 —
 (141)
Interest rate derivatives (see Note 3) (21) —
 (21) —
Total liabilities $(265) $—
 $(48) $(217)
(a) Cash equivalents are primarily composed of money market investments.
(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as a net asset. See Note 3.
(c) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as a net liability. See Note 3.

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


   Fair value measurements at reporting date using:  Fair value measurements at reporting date using:
   
Quoted prices in
active markets
for identical assets
 
Significant
other observable
inputs
 
Significant
unobservable
inputs
Quoted prices in active markets for identical assetsSignificant other observable inputsSignificant unobservable inputs
Description December 31, 2016 (Level 1) (Level 2) (Level 3)DescriptionDecember 31, 2022(Level 1)(Level 2)(Level 3)
Assets (in millions)Assets(in millions)
Cash equivalents(a)        
Cash equivalents:Cash equivalents:   
Cash equivalents (a) $1,344
 $1,344
 $—
 $—
$9,040 $9,040 $— $— 
Commercial paper 325
 —
 325
 —
Commercial paper179 — 179 — 
Certificates of deposit 11
 —
 11
 —
Certificates of deposit23 — 23 — 
Time depositsTime deposits250 — 250 — 
Short-term investments:        Short-term investments:    
Treasury bills 1,345
 1,345
 —
 —
Treasury bills2,226 2,226 — — 
Certificates of deposit 280
 —
 280
 —
Certificates of deposit124 — 124 — 
Time depositsTime deposits450 — 450 — 
Fuel derivatives:        Fuel derivatives:    
Swap contracts (c) 42
 —
 42
 —
Option contracts (b) 239
 —
 —
 239
Option contracts (b)512 — — 512 
Option contracts (c) 163
 —
 —
 163
Other available-for-sale securities 83
 83
 —
 —
Interest rate derivatives (see Note 3)Interest rate derivatives (see Note 3)14 — 14 — 
Equity SecuritiesEquity Securities235 235 — — 
Total assets $3,832
 $2,772
 $658
 $402
Total assets$13,053 $11,501 $1,040 $512 
Liabilities        
Fuel derivatives:        
Swap contracts (c) $(110) $—
 $(110) $—
Option contracts (b) (96) —
 —
 (96)
Option contracts (c) (564) —
 —
 (564)
Interest rate derivatives (see Note 3) (35) —
 (35) —
Total liabilities $(805) $—
 $(145) $(660)
(a) Cash equivalents are primarily composed of money market investments.
(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as a netan asset. See Note 3.
(c) In the unaudited Consolidated Balance Sheet amounts are presented as a net liability. See Note 3.


19
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)
Notes to Condensed Consolidated Financial Statements
(unaudited)



The Company had no transfers of assets or liabilities between any of the above levels during the nine months ended September 30, 2017, or the year ended December 31, 2016. The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis as ofduring the ninethree months ended September 30, 2017,March 31, 2023, or the year ended December 31, 2016.2022. The following tables presenttable presents the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2017:March 31, 2023:

Fair value measurements using significant unobservable inputs (Level 3)
(in millions)Fuel derivatives 
Balance at June 30, 2017$(233) 
Total gains (realized or unrealized) 
 
Included in earnings10
 
Included in other comprehensive income45
 
Purchases25
(a)
Sales—
(a)
Settlements158
 
Balance at September 30, 2017$5
 
The amount of total gains for the period
  included in earnings attributable to the
  change in unrealized gains or losses relating
  to option contracts still held at September 30, 2017
$4
 
Fair value measurements using significant unobservable inputs (Level 3)
(in millions)Fuel derivatives
Balance at December 31, 2022$512 
Total gains (losses) for the period
Included in other comprehensive income(163)
Purchases104 (a)
Settlements(58)
Balance at March 31, 2023$395 
The amount of total losses for the period
  included in other comprehensive income attributable to the
  change in unrealized gains or losses relating
  to assets still held at March 31, 2023
$(145)
(a) The purchase and sale of fuel derivatives areis recorded gross based on the structure of the derivative instrument and whether a contract with multiple derivatives iswas purchased as a single instrument or separate instruments.
Fair value measurements using significant unobservable inputs (Level 3)
(in millions)Fuel derivatives 
Balance at December 31, 2016$(258) 
Total losses (realized or unrealized) 
 
Included in earnings(136) 
Included in other comprehensive income(164) 
Purchases104
(a)
Sales—
(a)
Settlements459
 
Balance at September 30, 2017$5
 
The amount of total losses for the period
  included in earnings attributable to the
  change in unrealized gains or losses relating
  to option contracts still held at September 30, 2017
$(57) 
(a) The purchase and sale of fuel derivatives are recorded gross based on the structure of the derivative instrument and
whether a contract with multiple derivatives is purchased as a single instrument or separate instruments.


The significant unobservable input used in the fair value measurement of the Company’s derivative option contracts is implied volatility. Holding other inputs constant, a significantan increase (decrease) in implied volatility would resulthave resulted in a significantly higher (lower) fair value measurement, respectively, for the Company’s derivative option contracts.


Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following table presents a range and weighted average of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 at September 30, 2017:March 31, 2023:

Quantitative information about Level 3 fair value measurements
 Valuation techniqueUnobservable inputPeriod (by year)RangeWeighted Average (a)
Fuel derivativesOption modelImplied volatilitySecond quarter 202326-42%35 %
Third quarter 202332-43%38 %
Fourth quarter 202334-42%38 %
202431-42%33 %
202530-31%30 %
(a) Implied volatility weighted by the notional amount (barrels of fuel) that will settle in respective period.
Quantitative information about Level 3 fair value measurements
Valuation techniqueUnobservable inputPeriod (by year)Range
Fuel derivativesOption modelImplied volatility
Fourth quarter 2017

14-30%
201819-28%
201918-23%
Beyond 201917-21%

The carrying amounts and estimated fair values of the Company’s short-term and long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, at September 30, 2017,March 31, 2023, are presented in the table below. The fair values of the Company’s publicly held long-term debt are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company has categorized these agreements as Level 2. Debt under seven of the Company’sAll privately held debt agreements is not publicly held.are categorized as Level 3. The Company has determined the estimated fair value of this debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes indicative pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items.

20
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


(in millions) Carrying value Estimated fair value Fair value level hierarchy
French Credit Agreements due 2018 - 2.15%$7
 $7
 Level 3
Fixed-rate 737 Aircraft Notes payable through 2018 - 7.03%3
 3
 Level 3
2.75% Notes due 2019301
 305
 Level 2
Term Loan Agreement payable through 2019 - 6.315%76
 77
 Level 3
Term Loan Agreement payable through 2019 - 4.84%19
 20
 Level 3
2.65% Notes due 2020495
 503
 Level 2
Term Loan Agreement payable through 2020 - 5.223%249
 252
 Level 3
737 Aircraft Notes payable through 2020166
 165
 Level 3
Pass Through Certificates due 2022 - 6.24%294
 322
 Level 2
Term Loan Agreement payable through 2026 - 2.53%215
 215
 Level 3
3.00% Notes due 2026300
 296
 Level 2
7.375% Debentures due 2027128
 157
 Level 2
(in millions)Carrying valueEstimated fair valueFair value level hierarchy
1.25% Convertible Notes due 20251,611 1,831 Level 2
5.25% Notes due 20251,302 1,308 Level 2
3.00% Notes due 2026300 281 Level 2
3.45% Notes due 2027300 281 Level 2
5.125% Notes due 20271,727 1,727 Level 2
7.375% Debentures due 2027113 121 Level 2
2.625% Notes due 2030500 427 Level 2
1.000% PSP1 Loan due 2030976 866 Level 3
1.000% PSP2 Loan due 2031566 487 Level 3
1.000% PSP3 Loan due 2031526 448 Level 3





8. SUPPLEMENTAL FINANCIAL INFORMATION
(in millions)March 31, 2023December 31, 2022
Trade receivables$64 $117 
Credit card receivables185 85 
Business partners and other suppliers545 478 
Taxes receivable129 133 
Fuel hedging and receivables15 34 
Other312 193 
Accounts and other receivables$1,250 $1,040 
(in millions)March 31, 2023December 31, 2022
Derivative contracts$169 $174 
Intangible assets, net295 296 
Equity securities236 261 
Other198 124 
Other assets$898 $855 
(in millions)March 31, 2023December 31, 2022
Accounts payable trade$272 $277 
Salaries, withholdings and payroll taxes368 456 
Ticket taxes and fees434 242 
Aircraft maintenance payable91 65 
Fuel payable113 188 
Dividends payable— 107 
Customer reimbursements and refunds (a)17 311 
Accrued third party services240 196 
Other payable194 162 
Accounts payable$1,729 $2,004 
21
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


(in millions)March 31, 2023December 31, 2022
Voluntary Separation Program$69 $72 
Profitsharing and savings plans32 167 
Vacation pay495 484 
Health289 261 
Workers compensation166 164 
Property and income taxes53 37 
Interest164 45 
Bonus and incentive pay (b)626 563 
Other224 250 
Accrued liabilities$2,118 $2,043 
(in millions)March 31, 2023December 31, 2022
Voluntary Separation Program$125 $147 
Postretirement obligation242 241 
Other deferred compensation326 331 
Other243 250 
Other noncurrent liabilities$936 $969 

(a) This amount includes customer reimbursement expenses due to the Company's December 2022 operational disruption and refund submissions that had yet to be processed.
(b) Primarily consists of anticipated contract labor ratification bonuses and/or accruals. Also includes non-contract incentive pay.

For further information on fuel derivative and interest rate derivative contracts, see Note 3.

Other Operating Expenses
Other operating expenses consist of aircraft rentals, distribution costs, advertising expenses, personnel expenses, professional fees, and other operating costs, none of which individually exceeded 10 percent of Total operating expenses, net.

9.    COMMITMENTS AND CONTINGENCIES

William P. Hobby Airport

In March 2022, the Company executed a Memorandum of Agreement ("MOA") with the City of Houston, Texas (the "City") which owns William P. Hobby Airport ("Hobby") that is managed and operated by the City's Houston Airport System. Under the MOA, the Company will manage the development, design, and construction of seven new gates in Hobby's West Concourse.

The project is currently estimated to be completed in 2025 or 2026 at a cost of at least $250 million, based on initial projections. The Company will provide initial funding for the majority of the project, but is expected to be reimbursed for such funding from the City on a monthly basis and therefore should not significantly impact the Company’s liquidity. The City plans to fund these reimbursements utilizing rates and charges collected from current and future Hobby occupants, including the Company.

Based on the MOA, as well as a terminal lease amendment expected to be finalized prior to the beginning of significant construction, the Company has determined that it does not control the assets during the construction
22
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


period for accounting purposes, and thus will record the amounts funded for the project as a receivable until reimbursed by the City, and the balance is derecognized.

Contractual Obligations and Contingent Liabilities and Commitments

During 2022, the Company entered into supplemental agreements with The Boeing Company ("Boeing") to replace the majority of its 2023 Boeing 737 MAX 7 ("-7") firm orders with Boeing 737 MAX 8 ("-8") firm orders, among other adjustments to its near-term order book. During first quarter 2023, the Company exercised 15 -7 options for delivery in 2024 and converted 11 2024 -7 firm orders to -8 firm orders.

The delivery schedule below reflects commitments, although the timing of future deliveries is uncertain. For purposes of the delivery schedule below, the Company has included the remaining 46 of its 2022 contractual undelivered aircraft within its 2023 commitments, and has not made any further adjustments to this schedule based on current estimations. The Company now expects it will receive approximately 70 -8 aircraft deliveries in 2023. The Company retains significant flexibility to manage its fleet size, including opportunities to accelerate fleet modernization efforts if growth opportunities do not materialize. Given the current supply chain and aircraft delivery delays, the Company will continue working with Boeing to solidify future delivery dates.

Additional information regarding the Company's order book is included in the following table as of March 31, 2023:

The Boeing Company
-7 Firm Orders-8 Firm Orders-7 or -8 OptionsTotal
202331 105 — 136 (c)
202445 11 30 86 
202530 — 56 86 
202630 15 40 85 
202715 15 6 36 
202815 15 — 30 
202920 30 — 50 
2030— 55 — 55 
2031— — — — 
186(a)246(b)132564

(a) The delivery timing for the -7 is dependent on the Federal Aviation Administration ("FAA") issuing required certifications and approvals to Boeing and the Company. The FAA will ultimately determine the timing of the -7 certification and entry into service, and the Company therefore offers no assurances that current estimations and timelines are correct.
(b) The Company has flexibility to designate firm orders or options as -7s or -8s, upon written advance notification as stated in the contract.
(c) Includes 30 -8 deliveries received through March 31, 2023. In addition, the Company has included the remaining 46 of its 2022 contractual undelivered aircraft (14 -7s and 32 -8s) within its 2023 commitments. Due to Boeing's supply chain challenges and the current status of the -7 certification, the Company currently estimates approximately 70 -8 aircraft deliveries in 2023. The 2023 detail is as follows:
The Boeing Company
-7
Firm Orders		-8
Firm Orders		Total
2022 Contractual Deliveries Remaining14 32 46 
2023 Contractual Deliveries17 73 90 
2023 Total31 105 136 

Boeing continues to experience delays in fulfilling its commitments with regards to delivery of MAX aircraft to the Company, as a result of both supply chain constraints as well as awaiting achievement of the FAA's certification of the -7, for which Southwest expects to be the launch customer. Therefore, for purposes of the Company’s aircraft
23
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


order commitments with Boeing, the Company has assumed that any aircraft that were contractually due but remain undelivered as of December 31, 2022, have been rolled into the Company’s 2023 commitments, until such time as the Company and Boeing revise the aircraft order book. Based on the Company's existing agreement with Boeing, capital commitments associated with its firm orders as of March 31, 2023, were: $1.6 billion in 2023 (of which approximately $956 million relates to 46 MAX aircraft that were contractually committed for 2022 but were not received), $1.5 billion in 2024, $993 million in 2025, $1.4 billion in 2026, $1.1 billion in 2027, $1.3 billion in 2028, and $4.5 billion thereafter.

Subsequent to March 31, 2023 and through April 27, 2023, the Company has exercised 11 -7 options for delivery in 2024, and converted eight 2024 -7 firm orders to -8 firm orders, resulting in the Company's 2024 capital commitments increasing to $1.7 billion.

Contingencies
The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business and records a liability for such claims when it is probable that a loss will be incurred and the amount is reasonably estimable.

Based on the wide-scale operational disruption for the Company, which led to the cancelation of a significant number of flights between December 21 and December 29, 2022, the Company could be subject to fines and/or penalties resulting from investigations by the Department of Transportation or other government agencies. The Company could also face monetary damages or other costs resulting from litigation initiated by Customers and/or Shareholders. The Company is currently not able to estimate a range of possible loss for such items.

The Company is a defendant in class action litigation asserting it has not provided paid short-term military leave to certain employees, in violation of the federal Uniformed Services Employment and Reemployment Rights Act (“USERRA”). The United States District Court for the Northern District of California previously issued an order to effectively stay the action, pending an appeal from an order by the United States District Court for the Eastern District of Washington granting summary judgment in favor of an airline in a separate case involving substantially the same claims at issue in this action. On February 1, 2023, the Ninth Circuit reversed the district court’s grant of summary judgment and remanded the separate airline case to the District Court. The Ninth Circuit’s decision may adversely affect the Company’s defenses in the USERRA proceeding and may give rise to additional litigation in this or other areas. The Company is currently not able to estimate a range of possible loss with regards to the litigation to which it is a defendant.

10. FINANCING ACTIVITIES

On May 1, 2020, the Company completed the public offering of $2.3 billion aggregate principal amount of Convertible Senior Notes (the "Convertible Notes"). The Convertible Notes bear interest at a rate of 1.25% and will mature on May 1, 2025. Interest on the notes is payable semi-annually in arrears.

Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2025, in the event certain conditions are met, as stated in the offering documents. The Convertible Notes did not meet the criteria to be converted as of the date of the financial statements, and thus are classified as Long-term debt in the accompanying unaudited Condensed Consolidated Balance Sheet as of March 31, 2023. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election. The Company intends to settle conversions by paying cash up to the principal amount of the Convertible Notes, with any excess conversion value settled in cash or shares of common stock. The initial conversion rate was 25.9909 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $38.48 per share of common stock). However, based on the Company's cash dividends paid in January 2023 and March 2023, the bond conversion rate changed to 26.1250 on January 9, 2023,
24
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


and changed to 26.2650 on March 7, 2023. The net carrying amount and principal amount of the Convertible Notes was $1.6 billion as of March 31, 2023 and December 31, 2022.

The Company recognized interest expense associated with the Convertible Notes as follows:
Three months ended March 31,
(in millions)20232022
Non-cash amortization of debt issuance costs3 3 
Contractual coupon interest5 6 
Total interest expense$8 $9 

The unamortized debt issuance costs are being recognized as non-cash interest expense based on the 5-year term of the notes, through May 1, 2025, less amounts that were or will be required to be accelerated immediately upon conversion or repurchases. The Company had no changes to contingencies during the three months ended March 31, 2023. The effective interest rate associated with the Convertible Notes was approximately 1.9 percent for the three months ended March 31, 2023.

The following table presents the impact of the partial extinguishment of the Company's Convertible Notes and early prepayment of debt (excluding payments on finance leases) for the three months ended March 31, 2022. No such instances of partial extinguishment or early prepayment of debt occurred for the three months ended March 31, 2023.

Three months ended March 31, 2022
(in millions)Cash paid for debt and interestPrincipal repaymentLoss on extinguishmentNon-cash amortization of debt discount and (issuance) costsAccrued Interest
1.25% Convertible Notes due 2025$230 $164 $69 $(3)$— 
5.125% Notes due 202734 30 3 — 1 
Total$264 $194 $72 $(3)$1 

The Company has access to $1.0 billion under its amended and restated revolving credit facility (the "Amended A&R Credit Agreement"). In July 2022, this facility was amended to extend the expiration date to August 2025 and to change the benchmark rate from LIBOR to the Secured Overnight Financing Rate ("SOFR"). For the three months ended March 31, 2023 and 2022, there were no amounts outstanding under the Amended A&R Credit Agreement.

On December 5, 2022, the Company signed an aircraft sale agreement with AerCap Ireland Limited (“AerCap”) to purchase 39 -700 aircraft, all of which were already in the Company's fleet under finance lease terms. As each aircraft was purchased, the Company relieved its related lease liability but continues to recognize the cost of the aircraft within Property and equipment in the unaudited Condensed Consolidated Balance Sheet. As of March 31, 2023, the Company had completed the purchase of all 39 aircraft, including the 31 aircraft purchased in 2022. The Company paid the lessor $88 million as part of this transaction for the remaining eight aircraft in first quarter 2023, of which $50 million was recorded as the elimination of the Company’s remaining finance lease obligation for the aircraft, and which was also reflected within Payments of long-term debt and finance lease obligations in the accompanying unaudited Condensed Consolidated Statement of Cash Flows. The remaining $38 million was the net purchase price of the aircraft and is included as part of the Company’s Capital expenditures for the three months ended March 31, 2023. The Company has 28 finance leased aircraft remaining. There was no gain or loss recorded as a result of these transactions.

25
Table of Contents
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations


Relevant comparative operating statistics for the three and nine months ended September 30, 2017March 31, 2023 and 20162022 are included below. The Company provides these operating statistics because they are commonly used in the airline industry and, as such, allow readers to compare the Company’s performance against its results for the prior year period, as well as against the performance of the Company’s peers.
 Three months ended March 31,
 20232022Change
Revenue passengers carried (000s)30,231 26,029 16.1 %
Enplaned passengers (000s)37,666 32,005 17.7 %
Revenue passenger miles (RPMs) (in millions)(a)
29,547 26,483 11.6 %
Available seat miles (ASMs) (in millions)(b)
38,062 34,384 10.7 %
Load factor(c)
77.6 %77.0 %0.6 pts.
Average length of passenger haul (miles)977 1,017 (3.9)%
Average aircraft stage length (miles)715 765 (6.5)%
Trips flown334,121 287,751 16.1 %
Seats flown (000s)(d)
52,719 44,547 18.3 %
Seats per trip(e)
157.8 154.8 1.9 %
Average passenger fare$168.88 $158.88 6.3 %
Passenger revenue yield per RPM (cents)(f)
17.28 15.62 10.6 %
Operating revenues per ASM (cents)(g)
14.99 13.65 9.8 %
Passenger revenue per ASM (cents)(h)
13.41 12.03 11.5 %
Operating expenses per ASM (cents)(i)
15.74 14.09 11.7 %
Operating expenses per ASM, excluding fuel (cents)11.67 11.17 4.5 %
Operating expenses per ASM, excluding fuel and profitsharing (cents)11.67 11.06 5.5 %
Fuel costs per gallon, including fuel tax$3.19 $2.30 38.7 %
Fuel costs per gallon, including fuel tax, economic$3.19 $2.30 38.7 %
Fuel consumed, in gallons (millions)483 436 10.8 %
Active fulltime equivalent Employees69,868 58,865 18.7 %
Aircraft at end of period(j)
793 722 9.8 %
  Three months ended September 30,   
  2017 2016 Change
Revenue passengers carried 33,029,537
 31,768,550
 4.0 % 
Enplaned passengers 40,232,993
 38,852,737
 3.6 % 
Revenue passenger miles (RPMs) (000s)(a)
 33,128,227
 32,315,952
 2.5 % 
Available seat miles (ASMs) (000s)(b)
 39,053,164
 37,881,510
 3.1 % 
Load factor(c)
 84.8% 85.3% (0.5)pts
Average length of passenger haul (miles) 1,003
 1,017
 (1.4)% 
Average aircraft stage length (miles) 756
 764
 (1.0)% 
Trips flown 341,086
 332,420
 2.6 % 
Seats flown(d)
 50,850,348
 49,050,147
 3.7 % 
Seats per trip(e)
 149.08
 147.55
 1.0 % 
Average passenger fare $143.67
 $146.96
 (2.2)% 
Passenger revenue yield per RPM (cents)(f)
 14.32
 14.45
 (0.9)% 
Operating revenues per ASM (cents)(g)
 13.50
 13.57
 (0.5)% 
Passenger revenue per ASM (cents)(h)
 12.15
 12.32
 (1.4)% 
Operating expenses per ASM (cents)(i)
 11.36
 11.73
 (3.2)% 
Operating expenses per ASM, excluding fuel (cents) 8.79
 9.25
 (5.0)% 
Operating expenses per ASM, excluding fuel and profitsharing (cents) 8.47
 8.98
 (5.7)% 
Fuel costs per gallon, including fuel tax $1.92
 $1.83
 4.9 % 
Fuel costs per gallon, including fuel tax, economic $2.00
 $2.02
 (1.0)% 
Fuel consumed, in gallons (millions) 521
 513
 1.6 % 
Active fulltime equivalent Employees 55,671
 53,072
 4.9 % 
Aircraft at end of period 687
 714
 (3.8)% 



  Nine months ended September 30,   
  2017 2016 Change
Revenue passengers carried 96,561,189
 92,712,998
 4.2 % 
Enplaned passengers 117,248,334
 112,960,419
 3.8 % 
Revenue passenger miles (RPMs) (000s)(a)
 96,851,582
 93,431,810
 3.7 % 
Available seat miles (ASMs) (000s)(b)
 115,924,258
 111,374,942
 4.1 % 
Load factor(c)
 83.5% 83.9% (0.4)pts
Average length of passenger haul (miles) 1,003
 1,008
 (0.5)% 
Average aircraft stage length (miles) 760
 763
 (0.4)% 
Trips flown 1,010,703
 981,409
 3.0 % 
Seats flown(d)
 150,258,237
 144,264,317
 4.2 % 
Seats per trip(e)
 148.67
 147.00
 1.1 % 
Average passenger fare $149.16
 $150.69
 (1.0)% 
Passenger revenue yield per RPM (cents)(f)
 14.87
 14.95
 (0.5)% 
Operating revenues per ASM (cents)(g)
 13.71
 13.78
 (0.5)% 
Passenger revenue per ASM (cents)(h)
 12.42
 12.54
 (1.0)% 
Operating expenses per ASM (cents)(i)
 11.35
 11.17
 1.6 % 
Operating expenses per ASM, excluding fuel (cents) 8.83
 8.74
 1.0 % 
Operating expenses per ASM, excluding fuel and profitsharing (cents) 8.46
 8.33
 1.6 % 
Fuel costs per gallon, including fuel tax $1.88
 $1.79
 5.0 % 
Fuel costs per gallon, including fuel tax, economic $1.96
 $1.87
 4.8 % 
Fuel consumed, in gallons (millions) 1,544
 1,498
 3.1 % 
Active fulltime equivalent Employees 55,671
 53,072
 4.9 % 
Aircraft at end of period 687
 714
 (3.8)% 


(a) 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.
(b) 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.
(c) Revenue passenger miles divided by available seat miles.
(d) 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.
(e) Seats per trip is calculated usingby dividing seats flown divided by trips flown. Also referred to as "gauge."
(f) 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.
(g) Calculated as operating revenues divided by available seat miles. Also referred to as "operating unit revenues,revenues" or "RASM," this is a measure of operating revenue production based on the total available seat miles flown during a particular period.
(h) 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.
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(i) Calculated as operating expenses divided by available seat miles. Also referred to as "unit costs" orcosts," "cost per available seat mile," or "CASM," this is the average cost to fly an aircraft seat (empty or full) one mile, which is a measure of cost efficiencies.


(j) Included four Boeing 737 Next Generation aircraft in storage as of March 31, 2023 and March 31, 2022.

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Financial Overview


In late December 2022, the Company experienced a wide-scale operational disruption as historically extreme winter weather across a significant portion of the United States impacted its operational plan and flight schedules. Subsequent to Winter Storm Elliott, the Company was challenged to realign flight crews, flight schedules, and aircraft for a period of several days during this peak demand travel period. The Company returned to a normal operating schedule on December 30, 2022. This disruption and subsequent recovery efforts resulted in the cancellation of more than 16,700 flights during the period from December 21 through December 31, 2022. For first quarter 2023, these events also created a deceleration in bookings, primarily isolated to January and February 2023, as well as increased expenses primarily in the form of reimbursing Customers for costs incurred as a result of the flight cancellations. The Company estimates the financial impact of this disruption on the first quarter 2023 results was approximately $380 million on a pre-tax basis.

During and immediately following the disruption, the Company took measures to mitigate the risk of a recurrence, including:

•Creating an early indicator dashboard that closely monitors operational health and signals an alert if the Company approaches predefined operational thresholds;
•Establishing supplemental staffing that can quickly mobilize to support Crew recovery efforts;
•Updating and upgrading the Company's Crew optimization software; and
•Implementing organizational changes designed to improve coordination and communication between the Company's operating teams.

In addition, the Company conducted a thorough internal review, working with its Board of Directors, and engaged aviation consultancy Oliver Wyman for a third-party assessment. As a result of the Company's review and Oliver Wyman's assessment, the Company has developed a three-part tactical action plan to boost operational resiliency in key areas across the Company:

•Improve Winter Operations: The Company plans to reinforce airport infrastructure, increase available equipment, and bolster overall winter preparedness at key airports where there is potential for severe winter weather in order to help its Employees function more effectively in severe weather. Additionally, the Company plans to (i) increase available equipment to manage the effects of winter weather such as deicing trucks, pads, and ground equipment; (ii) increase storage capacity of deicing fluid at key airports; (iii) add engine covers and heaters to protect aircraft and ground equipment in very low temperatures; (iv) implement new tools that provide Pilots additional real-time insight into the amount of time they have to depart after an aircraft has been deiced; and (v) add staff at airports where extreme cold requires rotating Ground Operations Employees working outside.
•Accelerate Operational Investments: The Company is currently budgeted to spend more than $1.3 billion on investments, upgrades, and maintenance of information technology systems in 2023 and is reprioritizing its timeline for upgrading tools and technology to assist the Company recover its operations faster during extreme winter weather.
•Enhance Cross-Team Collaboration: The Company is enhancing collaboration across Teams and improving the tools and procedures to streamline communication and decision-making, and has already consolidated the Team that designs the flight schedule with the Team overseeing the day-to-day operations into one Department.

No assurance can be given that these efforts to boost operational resiliency in key areas across the Company will be successful. See "Risk Factors – The airline industry is made up of inherently complex systems, and is affected by many conditions that are beyond its control, which can impact the Company's business strategies and results of operations" included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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The Company recorded thirdfirst quarter results for 2023 and year-to-date GAAP2022 on an accounting principles generally accepted in the United States ("GAAP") and non-GAAP results for 2017 and 2016basis, as noted in the following tables.table. See 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.

 Three months ended March 31,
(in millions, except per share amounts)
GAAP202320222023 Change to 2022
Operating loss$(284)$(151)88.1 %
Net loss$(159)$(278)(42.8)%
Net loss per share, diluted$(0.27)$(0.47)(42.6)%
  
Non-GAAP
Operating loss$(284)$(135)110.4 
Net loss$(163)$(191)(14.7)
Net loss per share, diluted$(0.27)$(0.32)(15.6)

The comparison of the Company's financial results, as shown above on a GAAP and non-GAAP basis for the three months ended March 31, 2023, versus the three months ended March 31, 2022, reflect the effects of the Omicron variant of COVID-19, which reduced travel demand and created staffing challenges for the Company, particularly during January and February 2022, as well as the previously mentioned Winter Storm Elliott and the Company's December 2022 operational disruption. On a GAAP basis, the Company's results for the three months ended March 31, 2022 also included a $72 million loss on extinguishment of debt due to the repurchase of the Company's Convertible Senior Notes (the "Convertible Notes"). See 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.

2023 Outlook

The following tables present current selected financial guidance for second quarter and full year 2023:
2Q 2023 Estimation
RASM (a), year-over-yearDown 8% to 11%
ASMs (b), year-over-yearUp ~14%
Economic fuel costs per gallon (c)(d)$2.45 to $2.55
Fuel hedging premium expense per gallon$0.06
Fuel hedging cash settlement gains per gallon$0.13
ASMs per gallon (fuel efficiency)78 to 80
CASM-X (e), year-over-year (f)Up 5% to 8%
Scheduled debt repayments (millions)~$10
Interest expense (millions)~$65
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  Three months ended   Nine months ended  
(in millions, except per share amounts) September 30,   September 30,  
GAAP 2017 2016 Percent Change 2017 2016 Percent Change
Operating income $834
 $695
 20.0 % $2,742
 $2,915
 (5.9)%
Net income $503
 $388
 29.6 % $1,600
 $1,722
 (7.1)%
Net income per share, diluted $0.84
 $0.62
 35.5 % $2.64
 $2.70
 (2.2)%
   
  
 

     

Non-GAAP     

     

Operating income $871
 $972
 (10.4)% $2,709
  $3,190
 (15.1)%
Net income $528
 $582
 (9.3)% $1,648
 $1,907
 (13.6)%
Net income per share, diluted $0.88
 $0.93
 (5.4)% $2.72
 $3.00
 (9.3)%

 2023 Estimation
ASMs (b), year-over-yearUp 14% to 15%
Economic fuel costs per gallon (c)(d)$2.60 to $2.70
Fuel hedging premium expense per gallon$0.06
Fuel hedging cash settlement gains per gallon$0.10
CASM-X (e), year-over-year (f)Down 2% to 4%
Scheduled debt repayments (millions)~$85
Interest expense (millions)~$250
Aircraft (g)814
Effective tax rate23% to 24%
Capital spending (billions) (h)~$3.5

(a) Operating revenue per available seat mile (RASM, or unit revenues).
Third(b) Available seat miles (ASMs, or capacity). The Company's flight schedule is currently published for sale through November 4, 2023. The Company currently expects third quarter 2017 Net income was $503 million, a 29.6 percentincrease year-over-year, or $0.84 per diluted share. This increase was attributable2023 capacity to a 1.6 percent increase in Passenger revenues driven bythe range of 11 percent to 13 percent, and fourth quarter 2023 capacity to increase in the range of 20 percent to 22 percent, both year-over-year. Included in the Company's updated capacity guidance is a 3.1 percentdecrease in previously planned year-over-year capacity growth and strong demandas a result of delivery delays at Boeing, planned in the post-summer time period from September through December 2023.
(c) See Note Regarding Use of Non-GAAP Financial Measures for low-fare air travel. Prior year results included $356 million of ratification bonuses accrued in Salaries, wages, and benefit expense associated with tentative collective-bargaining agreements reached with multiple unionized workgroups. The Company considered these accrued contract ratification bonuses aadditional information on special item in its presentation of financial results. Excludingitems. In addition, information regarding special items in both years, third quarter 2017 non-GAAP Net income was $528 million, a 9.3 percent decrease year-over-year, or $0.88 per diluted share. Operating income for third quarter 2017 was $834 million, and non-GAAP Operating income for third quarter 2017, was $871 million.

For the nine months ended September 30, 2017, Net income was $1.60 billion, a 7.1 percent decrease year-over-year, or $2.64 per diluted share, and non-GAAP Net income was $1.65 billion, a 13.6 percent decrease year-over-year, or $2.72 per diluted share. These decreases were primarily due to a 6.0 percent increase in Salaries, wages, and benefits expense, primarily due to wage rate increases resulting from amended collective-bargaining agreements reached with multiple unionized workgroups, coupled with an 8.1 percent increase in Fuel and oil expense, primarily due to increases in market prices. The decrease in Net income was reduced by a 3.1 percent increase in Passenger revenues driven by a 4.1 percent year-over-year capacity growth and strong demand for low-fare air travel. Prior yeareconomic results is included $356 million of contract ratification bonuses accrued in Salaries, wages, and benefit expense associated with tentative collective-bargaining agreements reached with multiple unionized workgroups. Operating income for the nine months ended September 30, 2017 was $2.74 billion, and non-GAAP Operating income for the nine months ended September 30, 2017, was $2.71 billion.

For the twelve months ended September 30, 2017, the Company's earnings performance, combined with its actions to manage invested capital, produced a 26.8 percent pre-tax non-GAAP return on invested capital ("ROIC"), compared with the Company's ROIC of 32.3 percent for the twelve months ended September 30, 2016. The primary cause of the year-over-year decline in ROIC was the decrease in Operating income for the twelve months ended September 30, 2017, compared with the twelve months ended September 30, 2016. See the Company's calculation of ROIC in the accompanying table Reconciliation of Reported Amounts to Non-GAAP Measures (also referred to as "excluding special items").
(d) Based on the Company's existing fuel derivative contracts and market prices as of April 19, 2023, second quarter and full year 2023 economic fuel costs per gallon are estimated to be in the range of $2.45 to $2.55 and $2.60 to $2.70, respectively. Economic fuel cost projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate the hedge accounting impact associated with the volatility of the energy markets, or the impact to its financial statements in future periods. Accordingly, the Company believes a reconciliation tables as well asof non-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort. See Note Regarding Use of Non-GAAP Financial Measures.

(e) Operating expenses per available seat mile, excluding fuel and oil expense, special items, and profitsharing (CASM-X).
(f) Projections do not reflect the potential impact of fuel and oil expense, special items, and profitsharing because the Company Overviewcannot reliably predict or estimate those items or expenses or their impact to its financial statements in future periods, especially considering the significant volatility of the fuel and oil expense line item. Accordingly, the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for these projected results is not meaningful or available without unreasonable effort.
The(g) Aircraft on property, end of period. Due to delivery delays, the Company ended third quarter 2017 with 687 aircraft in its fleet, which reflects the third quarter delivery of 6 new 737-800 aircraft fromnow estimates approximately 70 Boeing 9 new 737 MAX 8 ("-8") aircraft from Boeing, and 6 pre-owneddeliveries in 2023, compared with its previous guidance of approximately 90 -8 aircraft deliveries. The Company now expects to retire 26 Boeing 737-700 ("-700") aircraft from


third parties. Additionally,in 2023, compared with its previous guidance to retire 27 -700 aircraft. As a result, the Company currentlynow expects to takeend 2023 with 814 aircraft. The delivery of 11 new 737-800 aircraft, 5 newschedule for the 737 MAX 8 aircraft,7 ("-7") is dependent on the Federal Aviation Administration ("FAA") issuing required certifications and 4 pre-owned 737-700 aircraft during fourth quarter 2017.approvals to The 737 MAX 8 aircraft was placedBoeing Company ("Boeing") and the Company. The FAA will ultimately determine the timing of the -7 certification and entry into service, on October 1, 2017.and Boeing may continue to experience supply chain challenges, so the Company therefore offers no assurances that current estimations and timelines are correct.
(h) The Company also retirednow estimates its 2023 capital spending to be approximately $3.5 billion, which assumes approximately 70 -8 aircraft deliveries, compared with its previous 2023 capital spending estimate of approximately $4.0 billion, which assumed approximately 90 -8 aircraft deliveries. The Company now estimates its full year 2023 aircraft spending to be approximately $2.3 billion, compared with its previous guidance of approximately $2.8 billion, and continues to estimate its full year 2023 non-aircraft capital spending to be approximately $1.2 billion.

The Company's second quarter 2023 RASM guidance includes a headwind of approximately four and a half points, year-over-year. This headwind is driven by approximately $300 million of additional breakage revenue in second quarter 2022—a higher-than-normal amount related to flight credits issued during the remaining 69 Boeing 737-300 ("Classic") aircraft duringpandemic that were set to expire unused—and the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits, which resulted in the percentage of breakage revenue normalizing to historical levels beginning in third quarter 2017, as part2022. Flight credits that never expire, along with Rapid Rewards points that never expire, are industry-leading, Customer-friendly policies.

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Table of an accelerated retirement schedule for its Classic aircraft. Contents
The Company recorded a charge of $63 million relatedcurrent booking curve appears to the leased portion of the Classic fleet, representing the remaining net lease payments duehave returned close to pre-pandemic norms, and certain lease return requirements that may haveleisure demand and yields continue to be performed on these leased aircraft priorstrong heading into the busy summer travel season. While March 2023 managed business revenues largely recovered to their returnMarch 2019 levels, the Company expects corporate revenue trends to the lessors,continue to be choppy as ofCustomer travel patterns evolve post-pandemic. However, the cease-use date. After taking into account scheduled deliveries for new and pre-owned aircraft during fourth quarter 2017, the Company's fleet is expected to increase to 707 aircraft by year-end 2017. For 2018, the Company's current firm aircraft commitments would result in 750 aircraft in the Company's fleet by year-end. The Company continues to expect its 2018 year-over-year ASM growth to be less than 5.7 percent,further sequential recovery in managed business revenues in second quarter 2023 compared with first half 2018 year-over-year ASMquarter 2023, driven by anticipated growth in corporate accounts and passengers.

The Company recently selected the Amadeus Network Revenue Management product as its new revenue management system provider—slightly ahead of the mid-2023 implementation timing outlined at the Company's 2022 Investor Day. The Company was pleased with initial observations during the production pilot and is excited about the potential for incremental revenue, driven primarily by improved science in forecasting and network optimization. The Amadeus product is now fully implemented and is currently managing all bookings and departure dates.

The Company expects second quarter 2023 CASM-X to increase in the range of three5 percent to four percent. The Company continues8 percent, year-over-year. In addition to expectgeneral inflationary cost pressures, the retirementyear-over-year increase is primarily due to higher labor rates, including market wage rate accruals, for all Employee work groups, as well as the timing of its Classic aircraft to produce significant incremental cost savings and improvements in pre-tax results of at least $200 million, cumulatively, byplanned maintenance expenses for the end of 2020.
During July 2017, the Company announced new scheduled international service beginning in 2018 between Indianapolis and Cancun, seasonally, and between Fort Lauderdale and Aruba. During August 2017, the Company announced 19 new routes from California cities, beginning in 2018. Among the new routes, the Company added new service from both San Jose and Sacramento to San Jose del Cabo/Cabo San Lucas, and from both Columbus, Ohio and New Orleans, Louisiana to Cancun, beginning in 2018 and subject to requisite government approvals. During October 2017, the Company announced plans to begin selling tickets in 2018 for service to Hawaii, subject to requisite governmental approvals, including approval from the FAA for Extended Operations (ETOPS), a regulatory requirement to operate between the U.S. mainland and the Hawaiian Islands.
The Company plans to continue its route network and schedule optimization efforts through the addition of new markets and itineraries, while also pruning less profitable flights from its schedule.Company's Boeing 737-800 ("-800") fleet. The Company currently expects its fourth quarter 2017 ASMsfull year 2023 CASM-X to decrease in the range of 2 percent to 4 percent, year-over-year.

Company Overview

For the three months ended March 31, 2023, the Company hired approximately 2,900 Employees, net of attrition. The Company's number of active full-time equivalent Employees increased by 18.7 percent from March 31, 2022 to March 31, 2023, while the year-over-year increase in the onecapacity or ASMs was 10.7 percent. The Company has made additional investments to two percent range, compared with fourth quarter 2016.
During September 2017,attract and retain talent, including raising the Company's starting hourly pay rates for certain of its workgroups, subject, in each case, to acceptance of such change by the applicable union.

On January 31, 2023, the Company's 50 Facilities Maintenance Technicians, represented by the Aircraft Mechanics Fraternal Association ("AMFA"), ratified a new four-year collective bargaining agreement with the Company. The newly ratified agreement becomes amendable in November 2027.

On February 4, 2023, the Company's more than 400 Dispatchers, represented by the Transportation Workers of America, AFL-CIO, Local 550 ("TWU 550"), ratified a new four-year collective bargaining agreement with the Company. The newly ratified agreement becomes amendable in June 2027.

On April 19, 2023, the Company reached a tentative collective-bargaining agreement with TWU 550, which represents the Company. ACompany's 12 Meteorologists. The ratification vote has not yet been scheduled.is scheduled to conclude by April 30, 2023. If the tentative agreement is ratified, it will become amendable in June 2028.


The Company ended first quarter 2023 with 793 Boeing 737 aircraft, including 167 -8 aircraft. During first quarter 2023, the Company retired seven -700 aircraft, took delivery of 30 -8 aircraft, and completed the purchase of eight finance lease -700 aircraft. While the Company was contractually scheduled to receive 114 MAX deliveries in 2022, a portion of these deliveries shifted out of 2022 due to Boeing's supply chain challenges and the current status of the -7 certification, and aircraft delivery delays extended into 2023. As a result, the Company now expects to end 2023 with 814 aircraft. For information about potential impacts resulting from prolonged delays related to the 737 MAX family of aircraft, see "Risk Factors – Operational Risks" included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

The Company continued to return value to its Shareholders during third quarter 2017 through a $300 million accelerated share repurchase program, which was launchedentered into supplemental agreements in August 20172022 with a financial institution in a privately negotiated transaction ("Third Quarter 2017 ASR Program"). The Company received 5.3 million shares in total under the Third Quarter 2017 ASR Program, which was completed in October 2017. The purchase was recorded as a treasury share repurchase for purposes of calculating earnings per share. The launch of the Third Quarter 2017 ASR Program brings total repurchases of common stock in 2017 to $1.25 billion. The Company has $1.7 billion remaining under its May 2017 $2.0 billion share repurchase authorization. See Part II, Item 2 for further information on the Company's share repurchase authorization. The Company also made dividend payments totaling $75 million during third quarter 2017.

Material Changes in Results of Operations

Comparison of three months ended September 30, 2017 and September 30, 2016

Operating Revenues

Passenger revenues for third quarter 2017 increased by $76 million, or 1.6 percent, year-over-year. Holding all other factors constant, the increase was primarily attributable to a 3.1 percent increase in capacity, partially offset by approximately $100 million in reduced revenues as a result of the hurricanes and earthquakes (the "natural disasters") during third quarter 2017. The Company canceled approximately 5,000 flights due to the natural disasters. On a unit basis, Passenger revenues decreased 1.4 percent, year-over-year, largely driven by a 0.9 percent decrease in Passenger revenue yield due to the industry's competitive domestic fare environment. Load factor remained solid at 84.8 percent.



Freight revenues for third quarter 2017 were flat, compared with third quarter 2016. Based on current trends, the Company expects fourth quarter 2017 Freight revenuesBoeing to increase comparedaircraft orders and accelerate certain options with fourth quarter 2016.

Other revenues for third quarter 2017 increased by $56 million, or 13.1 percent, year-over-year. Approximately 75 percentthe goals of improving potential growth opportunities and frequencies to better align with the increase was due to an increase in revenue associatedpre-pandemic operational route network, lowering operating costs, and further modernizing its fleet with cardholder spend on the Company's co-branded Chase® Visa credit card, and the remainder of the increase was due to higher ancillary revenues. The Company currently expects Other revenues in fourth quarter 2017 to increase, compared with fourth quarter 2016.

Third quarter 2017 unit revenue results included headwinds of less than a point from the Company's new reservation system that are not expected to continue in fourth quarter 2017. The Company continues to expect the benefits from the new reservation system capabilities to produce incremental improvements to 2018 pre-tax results of an estimated $200 million.

While the revenue yield environment remains competitive, passenger revenue yields for October, on a year-over-year basis, have improved sequentially from August and September year-over-year trends, and travel demand remains solid. Based on these trends and current bookings, the Company expects fourth quarter 2017 operating unit revenues to increase in the range of up slightly to 1.5 percent, as compared with fourth quarter 2016.

ASU No. 2014-09, Revenue from Contracts with Customers is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Therefore, the Company plans to adopt the standard as of January 1, 2018, utilizing the full retrospective method of adoption allowed by the standard, in order to provide for comparative results in all periods presented.carbon-intensive aircraft. See Note 29 to the unaudited Condensed Consolidated Financial Statements for further information.

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information. The Company expects that more than half of the MAX aircraft in its firm order book will replace a significant amount of its 419 -700 aircraft over the next 10 to 15 years to support the modernization of the Company's fleet, a key component of its environmental sustainability efforts. The Company's order book with Boeing as of March 31, 2023 consists of a total of 432 MAX firm orders (186 -7 aircraft and 246 -8 aircraft) for the years 2023 through 2030 and 132 MAX options (-7s or -8s) for the years 2024 through 2027. Additionally in April 2023, the Company exercised 11 -7 options for delivery in 2024. Given Boeing's supply chain challenges and the current status of the -7 certification, aircraft delivery delays are currently expected to extend into 2024.

The Company has published its flight schedule through November 4, 2023. However, the Company is expected to publish updated flight schedules for post-summer 2023 in light of the recently announced aircraft delivery delays from Boeing. Despite the delays, the Company continues to expect its network to be roughly restored to pre-pandemic levels by the end of this year. The Company remains focused on maturing new markets that launched during the pandemic and shifting capacity growth to restoring core markets.

As part of its commitment to corporate sustainability, the Company is expected to publish its 2022 One Report describing the Company's sustainability strategies on May 3, 2023, which include the Company’s fuel conservation and emissions mitigation initiatives and other efforts to minimize greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling. The Company also is expected to publish its Diversity, Equity, and Inclusion ("DEI") Report on May 3, 2023. A companion piece to the One Report, the DEI Report takes a deeper dive into the Company's DEI goals and initiatives and highlights the Company's DEI plans for the future. Information contained in the Southwest One Report and/or the DEI Report is not incorporated by reference into, and does not constitute a part of, this Form 10-Q. While the Company believes that the disclosures contained in the Southwest One Report, the DEI Report, and other voluntary disclosures regarding environmental, social, and governance (“ESG”) matters are responsive to various areas of investor interest, the Company believes that certain of these disclosures do not currently address matters that are material in the near term to the Company’s operations, strategy, financial condition, or financial results, although this view may change in the future based on new information that could materially alter the estimates, assumptions, or timelines used to create these disclosures. Given the estimates, assumptions, and timelines used to create the Southwest One Report, the DEI Report, and other voluntary disclosures, the materiality of these disclosures is inherently difficult to assess.
Material Changes in Results of Operations

Comparison of three months ended March 31, 2023 and March 31, 2022

Operating Revenues

Total operating revenues for first quarter 2023 increased by $1.0 billion, or 21.6 percent, year-over-year, to achieve a first quarter record of $5.7 billion. First quarter 2023 operating revenues per ASM (RASM) were 14.99 cents, an increase of 9.8 percent, compared with first quarter 2022. The dollar increase was primarily due to an improvement in leisure and business travel demand in first quarter 2023 versus first quarter 2022. For first quarter 2023, the year-over-year RASM increase was primarily driven by an increase in yield of 10.6 percent coupled with an increase in Load factor of 0.6 points.

Passenger revenues for first quarter 2023 increased by $970 million, or 23.5 percent, year-over-year. On a unit basis, Passenger revenues increased 11.5 percent, year-over-year. The year-over-year increase in Passenger revenues on both a dollar and unit basis was primarily due to improvements in both leisure and business demand and bookings.

Other revenues for first quarter 2023 increased by $43 million, or 8.3 percent, compared with first quarter 2022. On a dollar basis, approximately 45 percent of the increase was due to revenue from Chase Bank USA, N.A ("Chase"), as the rebound in travel demand also resulted in higher spend on the Company's co-brand credit card, and approximately 35 percent of the increase was due to higher rates earned with business partners in first quarter 2023.
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Operating Expenses


Operating expenses for thirdfirst quarter 2017 decreased2023 increased by $7 million,$1.1 billion, or 0.223.6 percent, compared with thirdfirst quarter 2016,2022, while capacity increased 3.110.7 percent over the same prior year period. Approximately 47.4 percent of the dollar increase was due to higher Fuel and oil expense and 21.7 percent of the increase was due to higher Salaries, wages, and benefits. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs. The following table presents the Company's Operating expenses per ASM for the thirdfirst quarter of 20172023 and 2016,2022, followed by explanations of these changes on a dollar basis. Unless otherwise specified, changes on a per ASM basis and dollar basis:were driven by changes in capacity, which increased with the improvement of travel demand, causing the Company's fixed costs to be spread over significantly more ASMs.

 Three months ended March 31,Per ASM
change		Percent
change
(in cents, except for percentages)20232022
Salaries, wages, and benefits6.51 ¢6.48 ¢0.03 ¢0.5 %
Fuel and oil4.07 2.92 1.15 39.4 
Maintenance materials and repairs0.63 0.61 0.02 3.3 
Landing fees and airport rentals1.07 1.01 0.06 5.9 
Depreciation and amortization0.96 0.94 0.02 2.1 
Other operating expenses2.50 2.13 0.37 17.4 
Total15.74 ¢14.09 ¢1.65 ¢11.7 %
 Three months ended September 30, 
Per ASM
change
 
Percent
change
(in cents, except for percentages)2017 2016  
Salaries, wages, and benefits
4.60¢ 
5.04¢ 
(0.44)¢ (8.7)%
Fuel and oil2.57
 2.48
 0.09
 3.6
Maintenance materials and repairs0.67
 0.68
 (0.01) (1.5)
Aircraft rentals0.13
 0.15
 (0.02) (13.3)
Landing fees and other rentals0.83
 0.81
 0.02
 2.5
Depreciation and amortization0.77
 0.83
 (0.06) (7.2)
Other operating expenses1.79
 1.74
 0.05
 2.9
Total
11.36¢ 
11.73¢ 
(0.37)¢ (3.2)%


Operating expenses per ASM for thirdfirst quarter 2017 decreased2023 increased by 3.211.7 percent, compared with thirdfirst quarter 2016,2022, primarily due to $356 million of ratification bonuses accrueda significant increase in the Company's fuel cost per gallon, and higher Salaries, wages, and benefits expense in third quarter 2016, associated with tentative collective-bargaining agreements reached with multiple unionized workgroups. This decrease was partially offset by an increase in market jet fuel prices, coupled with charges associated with grounding the Company's remaining Classic aircraft on September 29, 2017. See discussion of Other operating expenses below for further information.benefits. Operating expenses per ASM for thirdfirst quarter 2017,2023, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 3.95.9 percent, compared with thirdfirst quarter 2016,2022 primarily due to continued inflationary cost pressures, in particular with higher labor rates, including market wage rate increasesaccruals, for all Employee work groups, increased technology spending, and higher rates for airport and benefits costs. The remainder of the increase was driven primarily by operational disruption-related expenses, including travel expense reimbursements to Customers and an increase in the expected redemption rate of Rapid Rewards points offered as a resultgesture of amended collective-bargaining agreements reachedgoodwill to Customers.

Salaries, wages, and benefits expense for first quarter 2023 increased by $249 million, or 11.2 percent, compared with multiple unionizedfirst quarter 2022. On a per ASM basis, first quarter 2023 Salaries, wages, and benefits expense increased 0.5 percent, compared with first quarter 2022. On a dollar basis, approximately 65 percent of the increase was driven by an increase in capacity and number of trips flown, and 20 percent of the increase was due to step/pay rate increases for certain workgroups, which included open labor contract accruals.



Fuel and oil expense for first quarter 2023 increased by $543 million, or 54.1 percent, compared with first quarter 2022. On a per ASM basis, first quarter 2023 Fuel and oil expense increased 39.4 percent. On a dollar basis, approximately 80 percent of the increase was attributable to an increase in the Company's average economic jet fuel cost per gallon, and the remainder of the increase was due to an increase in fuel gallons consumed. The Company's first quarter 2023 average economic jet fuel price of $3.19 per gallon is net of approximately $58 million in cash settlements from hedging activities. On a per ASM basis, the majority of the change was also due to higher average economic jet fuel prices. The following table provides more information on the Company's economic fuel cost per gallon, including the impact of fuel hedging premium expense and fuel derivative contract settlements:
workgroups during or since third quarter 2016.
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Three months ended March 31,
20232022
Economic fuel costs per gallon$3.19 $2.30 
Fuel hedging premium expense (in millions)$30 $26 
Fuel hedging premium expense per gallon$0.06 $0.06 
Fuel hedging cash settlement gain per gallon$0.12 $0.52 

See 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.

The Company's first quarter 2023 available seat miles per gallon ("fuel efficiency") decreased 0.1 percent, year-over-year, due to network restoration, which includes bringing back additional short-haul flights, adding pressure to fuel efficiency. However, continued deliveries of the Company's most fuel-efficient aircraft, the MAX, are expected to offset this pressure and remain critical to the Company's efforts to modernize its fleet, reduce carbon emissions intensity, and achieve its near-term environmental sustainability goals.

The Company's multi-year fuel hedging program continues to provide insurance against spikes in energy prices and significantly offset the market price increase, year-over-year, in jet fuel in first quarter 2023. The Company's current fuel derivative contracts contain a combination of instruments based in West Texas Intermediate and Brent crude oil, and refined products, such as heating oil. The economic fuel price per gallon sensitivities provided in the table below assume the relationship between Brent crude oil and refined products based on market prices as of April 19, 2023.

Estimated economic fuel price per gallon,
including taxes and fuel hedging premiums (b)
Average Brent Crude Oil
price per barrel		2Q 20232023
$60$1.85 - $1.95$2.20 - $2.30
$70$2.15 - $2.25$2.40 - $2.50
$80$2.35 - $2.45$2.60 - $2.70
Current Market (a)$2.45 - $2.55$2.60 - $2.70
$90$2.60 - $2.70$2.75 - $2.85
$100$2.80 - $2.90$2.90 - $3.00
$110$3.00 - $3.10$3.05 - $3.15
Fair market value$70 million$262 million
Estimated premium costs$30 million$121 million
(a) Brent crude oil average market prices as of April 19, 2023, were$83 and $82per barrel for second quarter and full year 2023, respectively.
(b) Based on current trendsthe Company's existing fuel derivative contracts and excluding Fuelmarket prices as of April 19, 2023, second quarter and oil expense, special items, and profitsharing expense, the Company expects its fourth quarter 2017 unitfull year 2023 economic fuel costs per gallon are estimated to be in the range of flatof $2.45 to up 1.5 percent, year-over-year. The year-over-year$2.55 and $2.60 to $2.70, respectively. Economic fuel cost projections do not reflect the potential impact of Fuel and oil expense, special items and profitsharing expense in both years because the Company cannot reliably predict or estimate those itemsthe hedge accounting impact associated with the volatility of the energy markets or expenses or theirthe impact to its financial statements in future periods, especially considering the significant volatility of the Fuel and oil expense line item. Accordingly, the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort.
Salaries, wages, and benefits expense for third quarter 2017 decreased by $114 million, or 6.0 percent, compared with third quarter 2016. On a per ASM basis, third quarter 2017 Salaries, wages, and benefits expense decreased 8.7 percent, compared with third quarter 2016. On both a dollar and per ASM basis, the majority of the decreases were the result of $356 million of ratification bonuses accrued in third quarter 2016, associated with tentative collective-bargaining agreements reached with multiple unionized workgroups. This decrease was partially offset by higher salaries and resulting contributions to the Company sponsored 401(k) plans, primarily driven by wage rate increases as a result of amended collective-bargaining agreements reached during or since third quarter 2016. Based on current cost trends and anticipated capacity, the Company expects fourth quarter 2017 Salaries, wages, and benefits expense per ASM, excluding special items and profitsharing expense, to increase, compared with fourth quarter 2016. The year-over-year projection does not reflect the potential impact of special items and profitsharing expense in both years because the Company cannot reliably predict or estimate those items or expense or their impact to the Company's financial statements in future periods. Accordingly, the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort.

Fuel and oil expense for third quarter 2017 increased by $62 million, or 6.6 percent, compared with third quarter 2016. On a per ASM basis, third quarter 2017 Fuel and oil expense increased 3.6 percent, compared with third quarter 2016. On both a dollar and per ASM basis, the increases were attributable to higher market jet fuel prices, partially offset by a decrease in net hedging losses recognized compared to third quarter 2016. See Note Regarding Use of Non-GAAP Financial Measures and the ReconciliationMeasures.

34
Table of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures. The Company's average economic jet fuel cost per gallon decreased 1.0 percent, year-over-year, from $2.02 for third quarter 2016 to $2.00 for third quarter 2017. The Company also slightly improved its fuel efficiency during third quarter 2017, compared with the same prior year period, when measured on the basis of ASMs generated per gallon of fuel. Fuel gallons consumed increased 1.6 percent, as compared with third quarter 2016, while year-over-year capacity increased 3.1 percent. As a result of the Company's fuel hedging program,Contents
In addition, the Company recognized net losses totaling $117 million in Fuel and oil expense for third quarter 2017, compared with net losses totaling $189 million for third quarter 2016. These totals include cash settlements realized from the settlementis providing its maximum percentage of estimated fuel consumption covered by fuel derivative contracts associated within the following table:
PeriodMaximum fuel hedged percentage (a)(b)
202350%
202451%
202510%
(a) Based on the Company's economic fuel hedge totaling $163 million paid to counterparties for third quarter 2017, compared with $287 million paid to counterparties for third quarter 2016. Additionally, these totals exclude gains and/or losses recognized from hedge ineffectiveness and from derivatives that did not qualify for hedge accounting. Those items are recorded as a component of Other (gains) losses, net. See Note 3 to the unaudited Condensed Consolidated Financial Statements.

As of October 20, 2017, on an economic basis, the Company had derivative contracts in place related to expected future fuel consumption as follows:

PeriodMaximum percent of estimated fuel consumption covered by fuel derivative contracts at varying West Texas Intermediate/Brent Crude Oil, Heating Oil, and Gulf Coast Jet Fuel-equivalent price levels (a)
201879%
201963%
Beyond 2019 (b)10%


(a) The Company’s hedge position can vary significantly at different price levels, including prices at which the Company considers "catastrophic" coverage. The percentages provided are not indicative of the Company's hedge coverage at every price, but represent the highest level of coverage at a single price.current available seat mile plans. The Company believes its coverage related to 2017 is best reflected within the jet fuel forecast price sensitivity table provided below. See Note 3 to the unaudited Condensed Consolidated Financial Statementscurrently 51 percent hedged for further information.second quarter 2023 and 48 percent hedged for second half 2023.
(b) The Company's coveragemaximum fuel hedged percentage is calculated using the maximum number of gallons that are covered by derivative contracts divided by the Company's estimate of total fuel gallons to be consumed for 2020 was approximately 10 percenteach respective period. The Company's maximum number of estimatedgallons that are covered by derivative contracts may be at different strike prices and at strike prices materially higher than the current market prices. The volume of gallons covered by derivative contracts that ultimately get exercised in any given period may vary significantly from the volumes used to calculate the Company's maximum fuel consumption. The coverage beyond 2020 was not significant.hedged percentages, as market prices and the Company's fuel consumption fluctuate.


As a result of applying hedge accounting in prior periods, including related to hedge positions that have either been offset or settled early on a cash basis, the Company has amounts in Accumulated other comprehensive income (loss) ("AOCI") that 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 3 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the amount of deferred gains/lossesamounts in AOCI at September 30, 2017,March 31, 2023, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):


YearFair value of fuel derivative contracts at March 31, 2023Amount of gains (losses) deferred in AOCI at March 31, 2023 (net of tax)
Remainder of 2023$187 $74 
2024177 14 
202531 (1)
Total$395 $87 
Year Fair value (liability) of fuel derivative contracts at September 30, 2017 Amount of gains (losses) deferred in AOCI at September 30, 2017 (net of tax)
Remainder of 2017 $(133) $(80)
2018 55
 (49)
2019 50
 (6)
Beyond 2019 18
 (1)
Total $(10) $(136)

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 3 to the unaudited Condensed 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 the below sensitivity table for fourth quarter 2017 jet fuel prices at different crude oil assumptions as of October 20, 2017, and for expected premium costs associated with settling contracts.

Estimated economic jet fuel price per gallon,
including taxes
Average Brent Crude Oil price per barrel4Q 2017 (b)
$30$1.35 - $1.40
$40$1.55 - $1.60
Current Market (a)Approximately $2.10
$70$2.10 - $2.15
$80$2.25 - $2.30
Estimated premium costs (c)Approximately $34 million
(a) Brent crude oil average market price as of October 20, 2017, was approximately $57 per barrel for fourth quarter 2017.
(b) The economic fuel price per gallon sensitivities provided assume the relationship between Brent crude oil and refined products based on market prices as of October 20, 2017. Economic fuel cost projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate the hedge accounting impact associated with the volatility of the energy markets or the impact to its financial statements in future periods. Accordingly, the Company believes a reconciliation of non-


GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort.
(c) Fuel hedge premium expense is recognized as a component of Other (gains) losses, net.


Maintenance materials and repairs expense for thirdfirst quarter 20172023 increased $5by $29 million, or 1.913.7 percent, compared with thirdfirst quarter 2016.2022. On a per ASM basis, Maintenance materials and repairs expense decreased 1.5increased 3.3 percent, compared with thirdfirst quarter 2016, as the dollar increases were more than offset by the 3.1 percent increase in capacity.2022. On a dollar basis, the majority of the increase was due to an increase in Boeing 737-700 engine maintenance resulting from increased utilization and additional flight hours, partially offset by a decrease in airframe expenses due to the timing of regular maintenance checks and the retirement of the Company's Classic fleet. The Company currently expects Maintenance materials and repairs expense per ASM for fourth quarter 2017 to be comparable with fourth quarter 2016.

Aircraft rentals expense for third quarter 2017 decreased by $5 million, or 8.9 percent, compared with third quarter 2016. On a per ASM basis, Aircraft rentals expense decreased 13.3 percent, compared with third quarter 2016. On both a dollar and per ASM basis, the majority of the decreases wereincrease was primarily due to lease returnsan increase in engine shop visits and the purchase of nine 737-300 aircraft that were previously on operating leases since third quarter 2016. See the accompanying Note Regarding Use of Non-GAAP Financial Measures for further information. The Company currently expects Aircraft rentals expense per ASM for fourth quarter 2017 to decrease, compared with fourth quarter 2016.various other engine repairs.


Landing fees and otherairport rentals expense for thirdfirst quarter 20172023 increased by $17$62 million, or 5.517.9 percent, compared with thirdfirst quarter 2016.2022. On a per ASM basis, Landing fees and otherairport rentals expense increased 2.55.9 percent, compared with thirdfirst quarter 2016.2022. On a dollar and per ASM basis, the majority of the increase was due to the 2.6 percent increase in Trips flown and a change in fleet mix to larger capacity aircraft, coupled with airport rate escalations for capital investments at many airports across Company's network. The increase per ASM was primarily due to rate escalations at manyhigher rental and landing fee rates throughout the network, partially offset by higher settlements received from various airports across the Company's network. The Company currently expects Landing fees and other rentals expense per ASM for fourthin first quarter 2017 to increase, compared with fourth quarter 2016.2023.


Depreciation and amortization expense for thirdfirst quarter 2017 decreased2023 increased by $13$41 million, or 4.112.7 percent, compared with thirdfirst quarter 2016.2022. On a per ASM basis, Depreciation and amortization expense decreased 7.2increased by 2.1 percent, compared with thirdfirst quarter 2016.2022. On both a dollar and per ASM basis, the majorityapproximately 70 percent of the decreases wereincrease was primarily due to the resultacquisition of 98 -8 aircraft since first quarter 2022, and the retirementremaining increase was primarily due to decreasing the airframe salvage value for the entire -700 fleet, which was a change in estimate made near the end of the Company's Classic fleet, partially offset by increasesthird quarter 2022. This change in depreciation associated with the deployment of new technology assets. The Company currently expects Depreciation and amortization expense per ASM for fourthestimate was not material to first quarter 20172023, nor is it expected to decrease, compared with fourth quarter 2016.be material to future periods.


Other operating expenses for thirdfirst quarter 2017increased2023 increased by $41$221 million,, or 6.230.2 percent,, compared with thirdfirst quarter 2016.2022. Included within this line item was aircraft rentals expense in the amounts of $50 million and $48 million for the three-month periods ended March 31, 2023 and 2022, respectively. On a per ASM basis, Other
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Table of Contents
operating expenses increased 2.917.4 percent, compared with thirdfirst quarter 2016.2022. On both a dollar and per ASM basis, approximately 40 percent of the increase was due to higher interrupted trip expense driven by costs associated with the December 2022 operational disruption, approximately 15 percent was due to higher personnel expenses driven by an increase in Crew overnights associated with the increase in capacity, approximately 10 percent of the increase was due to higher professional fees driven by an increase in technology spending, and the majority of the increases were attributable to charges totaling $83 million in third quarter 2017, associated with the retirement of the Company's Classic aircraft. These charges included a $63 million aircraft grounding charge related to the leased portion of the Classic fleet, representing the remaining net lease payments due and certain lease return requirements that may have to be performed on these leased aircraft prior to their return to the lessors, as of the cease-use date. The charges also included $20 million of lease termination expenses associated with four Classic aircraft that were acquired during third quarter 2017 prior to their grounding. These charges related to the grounding or cease-use of the Classic fleet were considered special items and thus excluded from the Company's non-GAAP results. The remainder of the year-over-year increases were primarilyincrease was due to higher travel expenses for Flight Crews and higher hotel rates. These increases were partially offset by lower contract programming and consulting expenses due to the Company completing several technology projects, including the transition to its new reservation system during second quarter 2017. See 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. The Company currently expects Other operating expenses per ASM for fourth quarter 2017, excluding special items in both periods, to increase, compared with fourth quarter 2016. The year-over-year projection does not reflect the potential impact of special items in both years because the Company cannot reliably predict or estimate those items or their impact to the Company's financial statements in future periods. Accordingly, the Company believes avarious flight-driven expenses.


reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort.

Other


Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses.


Interest expense for thirdfirst quarter 20172023 decreased by $3$27 million, or 9.729.0 percent, compared with thirdfirst quarter 2016,2022, primarily due to threevarious debt facilities maturingrepurchases since thirdfirst quarter 2016, including the Company's remaining 5.25% convertible senior notes in October 2016, $300 million of 5.75% senior unsecured notes in December 2016, and $300 million of 5.125% senior unsecured notes in March 2017. These were partially offset by the issuance of two debt facilities since third quarter 2016, including a $215 million floating rate term loan in October 2016 and $300 million of 3.00% senior unsecured notes in November 2016.2022.

Capitalized interest for third quarter 2017 increased by $3 million, or 25.0 percent, compared with third quarter 2016, primarily due to an increase in average progress payment balances for scheduled future aircraft deliveries.


Interest income for thirdfirst quarter 20172023 increased by $3$122 million, or 50.0 percent, compared with thirdfirst quarter 2016,2022, primarily due to higher interest rates.rates earned on the Company's cash and short-term investments.


Other (gains) losses, net,Loss on extinguishment of debt for first quarter 2023 decreased by $72 million compared with first quarter 2022, primarily includes amounts recorded as a resultdue to the partial extinguishment of the Company's hedging activities. See Note 3Convertible Notes in first quarter 2022, compared to the unaudited Condensed Consolidated Financial Statements for further information on the Company's hedging activities. none in first quarter 2023.

The following table displays the components of Other (gains) losses, net, for the three months ended September 30, 2017March 31, 2023 and 2016:2022:
Three months ended March 31,
(in millions)20232022
Mark-to-market impact from fuel contracts settling in current and future periods$— $34 
Unrealized mark-to-market adjustment on available for sale securities(4)5 
Mark-to-market impact on deferred compensation plan investments(10)33 
 $(14)$72 
 Three months ended September 30,
(in millions)2017 2016
Mark-to-market impact from fuel contracts settling in future periods$(3) $20
Ineffectiveness from fuel hedges settling in future periods8
 (4)
Realized ineffectiveness and mark-to-market (gains) or losses(1) 15
Premium cost of fuel contracts34
 34
Other1
 (1)
 $39
 $64


Income Taxes


The Company's effective tax rate was approximately 36.422.0 percent in thirdfirst quarter 2017,2023, compared with 37.226.1 percent in thirdfirst quarter 2016. This decrease was primarily attributable to higher tax credits applied during third quarter 2017, compared with third quarter 2016.2022. The Company projects a full year 2017 effective tax rate of approximately 36 to 37 percent based on currently forecasted financial results.

Comparison of nine months ended September 30, 2017 to nine months ended September 30, 2016

Operating Revenues

Passenger revenues for the nine months ended September 30, 2017, increased $432 million, or 3.1 percent, compared with the first nine months of 2016. Holding all other factors constant, the majority of the increase was attributable to a 4.1 percent increase in capacity, partially offset by approximately $100 million in reduced revenues as a result of the natural disasters during third quarter 2017. On a unit basis, Passenger revenues decreased 1.0 percent, year-over-year largely driven by a 0.5 percent decrease in Passenger revenue yield due to the industry's competitive domestic fare environment. Load factor remained solid at 83.5 percent.



Freight revenues for the nine months ended September 30, 2017, were relatively flat, compared with the first nine months of 2016.

Other revenues for the nine months ended September 30, 2017, increased by $116 million, or 9.3 percent, compared with the first nine months of 2016, primarily as a result of an increase in revenue associated with cardholder spend on the Company's co-branded Chase® Visa credit card.

Operating Expenses

Operating expenses for the nine months ended September 30, 2017, increased by $720 million, or 5.8 percent, compared with the first nine months of 2016, while capacity increased 4.1 percent over the same period. Historically, except for changesdecline in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs. The following table presents the Company's Operating expenses per ASM for the first nine months of 2017 and 2016, followed by explanations of these changes on a per ASM basis and dollar basis:
 Nine months ended September 30, Per ASM Percent
(in cents, except for percentages)2017 2016 change change
Salaries, wages, and benefits
4.65¢ 
4.56¢ 
0.09¢ 2.0 %
Fuel and oil2.52
 2.43
 0.09
 3.7
Maintenance materials and repairs0.65
 0.72
 (0.07) (9.7)
Aircraft rentals0.14
 0.16
 (0.02) (12.5)
Landing fees and other rentals0.84
 0.82
 0.02
 2.4
Depreciation and amortization0.81
 0.81
 —
 —
Other operating expenses1.74
 1.67
 0.07
 4.2
Total
11.35¢ 
11.17¢ 
0.18¢ 1.6 %

Operating expenses per ASM for the first nine months of 2017increased by 1.6 percent, compared with the first nine months of 2016, primarily due to increases in market jet fuel prices, wagetax rate increases as a result of amended collective-bargaining agreements reached with multiple unionized workgroups during or since third quarter 2016, and charges associated with the grounding of the Company's remaining Classic aircraft. This increase was partially offset by $356 million of ratification bonuses accrued in third quarter 2016, associated with tentative collective-bargaining agreements reached with multiple unionized workgroups. Operating expenses per ASM for the first nine months of 2017, excluding Fuel and oil expense and special items (a non-GAAP financial measure), increased 4.3 percent, year-over-year, primarily due to wage rate increases as a result of amended collective-bargaining agreements reached with multiple unionized workgroups during or since third quarter 2016. See 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.
Salaries, wages, and benefits expense for the first nine months of 2017 increased by $306 million, or 6.0 percent, compared with the first nine months of 2016. Salaries, wages, and benefits expense per ASM for the first nine months of 2017 increased 2.0 percent, compared with the first nine months of 2016. On both a dollar and per ASM basis, the majority of the increases were the result of higher salaries and resulting contributions to the Company sponsored 401(k) plans, primarily driven by wage rate increases as a result of amended collective-bargaining agreements reached during or since third quarter 2016. These increases were partially offset by $356 million of ratification bonuses accrued during the first nine months of 2016, associated with tentative collective-bargaining agreements reached with multiple unionized workgroups.



Fuel and oil expense for the first nine months of 2017 increased by $219 million, or 8.1 percent, compared with the first nine months of 2016. On a per ASM basis, Fuel and oil expense for the first nine months of 2017 increased 3.7 percent, compared with the first nine months of 2016. On both a dollar and per ASM basis, the increases were attributable to higher market jet fuel prices, partially offset by a decrease in net hedging losses recognized compared to the first nine months of 2016. See 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. The Company's average economic jet fuel cost per gallon increased 4.8 percent, year-over-year, from $1.87 during the first nine months of 2016 to $1.96 during the first nine months of 2017. The Company also improved its fuel efficiency during the first nine months of 2017, compared with the same prior year period, when measured on the basis of ASMs generated per gallon of fuel. Fuel gallons consumed increased 3.1 percent, compared with the first nine months of 2016, while year-over-year capacity increased 4.1 percent. As a result of the Company's fuel hedging program, the Company recognized net losses totaling $346 million in Fuel and oil expense for the first nine months of 2017, compared with net losses totaling $652 million for the first nine months of 2016. These totals include cash settlements realized from the settlement of fuel derivative contracts associated with the Company's economic fuel hedge totaling $475 million paid to counterparties for the first nine months of 2017, compared with $772 million paid to counterparties for the first nine months of 2016. Additionally, these totals exclude gains and/or losses recognized from hedge ineffectiveness and from derivatives that did not qualify for hedge accounting. These items are recorded as a component of Other (gains) losses, net. See Note 3 to the unaudited Condensed Consolidated Financial Statements.

Maintenance materials and repairs expense for the first nine months of 2017 decreased by $43 million, or 5.4 percent, compared with the first nine months of 2016. On a per ASM basis, Maintenance materials and repairs expense decreased 9.7 percent, compared with the first nine months of 2016. On both a dollar and per ASM basis, the majority of the decreases were attributable to a decrease in airframe maintenance expenses primarily as a result of the retirement of the Company's Classic fleet, partially offset by increases in Boeing 737-700 engine maintenance due to increased utilization and additional flight hours.

Aircraft rentals expense for the first nine months of 2017 decreased by $16 million, or 9.2 percent, compared with the first nine months of 2016. On a per ASM basis, Aircraft rentals expense decreased by 12.5 percent, compared with the first nine months of 2016. On both a dollar and per ASM basis, the majority of the decreases were due to 737-300 lease returns and the purchase of nine 737-300 aircraft that were previously on operating leases since third quarter 2016. See the accompanying Note Regarding Use of Non-GAAP Financial Measures for further information.

Landing fees and other rentals expense for the first nine months of 2017 increased by $51 million, or 5.6 percent, compared with the first nine months of 2016. On a per ASM basis, Landing fees and other rentals expense increased 2.4 percent, compared with the first nine months of 2016. On a dollar basis, the majority of the increase was due to the 3.0 percent increase in Trips flown and a change in fleet mix to larger capacity aircraft, coupled with airport rate escalations for capital projects at many airports across the Company's network. The increase per ASM was primarily due to rate escalations at many airports across the Company's network.

Depreciation and amortization expense for the first nine monthsabsence of 2017 increased by $36 million, or 4.0 percent, compared with the first nine months of 2016. On a per ASM basis, Depreciation and amortization expense remained flat, compared with the first nine months of 2016. On a dollar basis, the majority of the increase was associated with the deployment of new technology assets. This increase was partially offset by a net decrease in depreciation expense related to the Company's flight equipment, as the decrease from the retirement of the Company's Classic fleet exceeded the additional depreciation from the addition of new 737-800 aircraft and pre-owned 737-700 aircraftlosses on capital leases.

Other operating expenses for the first nine months of 2017 increased by $167 million, or 9.0 percent, compared with the first nine months of 2016. On a per ASM basis, Other operating expenses increased 4.2 percent, compared with the first nine months of 2016. On a dollar basis, approximately 50 percent of the increase was attributable to charges totaling $96 million during the first nine months of 2017, associated with the grounding of the Company's remaining Classic aircraft. These charges included a $63 million aircraft grounding charge related to the leased portion of the Classic fleet, representing the remaining net lease payments due and certain lease return requirements that may have to be performed on these leased aircraft prior to their return to the lessors, as of the cease-use date. The charges also


included $33 million of lease termination expenses associated with eight Classic aircraft thatconvertible debt repurchases, which were acquired during the first nine months of 2017 prior to their grounding. These charges related to the grounding or cease-use of the Classic fleet were considered special items and thus excluded from the Company's non-GAAP results. See 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. Approximately 40 percent of the increase was attributable to increased personnel expenses due to higher travel expenses for Flight Crews and higher hotel rates, as well as new Heart-themed uniforms for the Company's operations personnel. The remainder of the increase was due to revenue related costs driven by the 4.2 percent increase in Revenue Passengers carried. On a per ASM basis, the majority of the increase was due to the charges from the grounding of the Company's Classic fleet.

Other

Other expenses (income) include interest expense, capitalized interest, interest income, and other gains and losses.

Interest expense for the first nine months of 2017 decreased by $9 million, or 9.7 percent, compared with the first nine months of 2016, primarily due to three debt facilities maturing since third quarter 2016, including the Company's remaining 5.25% convertible senior notes in October 2016, $300 million of 5.75% senior unsecured notes in December 2016, and $300 million of 5.125% senior unsecured notes in March 2017. These were partially offset by the issuance of two debt facilities since third quarter 2016, including a $215 million floating rate term loan in October 2016 and $300 million of 3.00% senior unsecured notes in November 2016.

Capitalized interest for the first nine months of 2017 increased by $4 million, or 11.8 percent, compared with the first nine months of 2016, primarily due to interest on facility construction projects.

Interest income for the first nine months of 2017 increased by $7 million, or 41.2 percent, compared with the first nine months of 2016, primarily due to higher interest rates.

Other (gains) losses, net, primarily includes amounts recordedlargely disallowed as a result of the Company's hedging activities. See Note 3 to the unaudited Condensed Consolidated Financial Statements for further information on the Company's hedging activities.tax deduction in 2022. The following table displays the components of Other (gains) losses, net, for the nine months ended September 30, 2017 and 2016:

 Nine months ended September 30,
(in millions)2017 2016
Mark-to-market impact from fuel contracts settling in future periods$66
 $16
Ineffectiveness from fuel hedges settling in future periods29
 (3)
Realized ineffectiveness and mark-to-market (gains) or losses14
 7
Premium cost of fuel contracts102
 117
Other(4) (2)
 $207
 $135

Income Taxes

The Company'sCompany currently estimates its annual 2023 effective tax rate was approximately 36.3to be in the range of 23 percent for the first nine monthsto 24 percent.
36
Table of 2017, compared with the 37.1 percent rate for the first nine months of 2016. This decrease was primarily attributable to higher tax credits applied during the first nine months of 2017, compared with the first nine months of 2016.Contents




Reconciliation of Reported Amounts to Non-GAAP Financial Measures (excluding special items) (unaudited)
(in millions, except per share amounts and per ASM amounts)
Three months ended March 31,Percent
 20232022Change
Fuel and oil expense, unhedged$1,575 $1,207 
Add: Premium cost of fuel contracts designated as hedges30 26 
Deduct: Fuel hedge gains included in Fuel and oil expense, net(58)(229) 
Fuel and oil expense, as reported (economic)$1,547 $1,004 54.1
Total operating expenses, net, as reported$5,990 $4,845  
Deduct: Impairment of long-lived assets— $(16)
Total operating expenses, excluding special items$5,990 $4,829 24.0
Deduct: Fuel and oil expense, as reported (economic)(1,547)(1,004)
Operating expenses, excluding Fuel and oil expense and special items$4,443 $3,825 16.2
Deduct: Profitsharing expense— (37)
Operating expenses, excluding Fuel and oil expense, special items, and profitsharing$4,443 $3,788 17.3
Operating loss, as reported$(284)$(151) 
Add: Impairment of long-lived assets— 16 
Operating loss, excluding special items$(284)$(135)110.4
Other (gains) losses, net, as reported$(14)$72 
Deduct: Mark-to-market impact from fuel contracts settling in current and future periods (a)— (34)
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities4 (5)
Other (gains) losses, net, excluding special items$(10)$33 n.m.
 Loss before income taxes, as reported$(205)$(376)
Add: Mark-to-market impact from fuel contracts settling in current and future periods (a)— 34 
Add: Impairment of long-lived assets— 16 
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities(4)5 
Add: Loss on extinguishment of debt— 72 
Loss before income taxes, excluding special items$(209)$(249)(16.1)
Benefit for income taxes, as reported$(46)$(98)
Add: Net loss tax impact of fuel and special items (b)— 40 
Benefit for income taxes, net, excluding special items$(46)$(58)(20.7)
Net loss, as reported$(159)$(278)
Add: Mark-to-market impact from fuel contracts settling in current and future periods (a)— 34 
Add: Loss on extinguishment of debt— 72 
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities(4)5 
Deduct: Net loss tax impact of special items (b)— (40)
Add: Impairment of long-lived assets— 16 
Deduct: GAAP to Non-GAAP tax rate difference (c)— — 
Net loss, excluding special items$(163)$(191)(14.7)
37
Table of Contents
 Three months ended September 30, Percent Nine months ended September 30, Percent
 2017 2016 Change 2017 2016 Change
Fuel and oil expense, unhedged$886
 $751
   $2,569
 $2,044
  
Add: Fuel hedge (gains) losses included in Fuel and oil expense, net117
 190
   346
 652
  
Fuel and oil expense, as reported$1,003
 $941
   $2,915
 $2,696
  
Add: Net impact from fuel contracts46
 97
   129
 120
  
Fuel and oil expense, excluding special items (economic)$1,049
 $1,038
 1.1% $3,044
 $2,816
 8.1%
            
Total operating expenses, as reported$4,437
 $4,444
   $13,155
 $12,435
  
Deduct: Contract ratification bonuses—
 (356)   —
 (356)  
Add (Deduct): Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period settled contracts(1) 15
   14
 7
  
Add: Contracts settling in the current period, but for which gains and/or (losses) have been recognized in a prior period (a)47
 82
   115
 113
  
Deduct: Asset impairment—
 —
   —
 (21)  
Deduct: Lease termination expense(20) (18)   (33) (18)  
Deduct: Aircraft grounding charge(63) —
   (63) —
  
Total operating expenses, excluding special items$4,400
 $4,167
 5.6% $13,188
 $12,160
 8.5%
            
Operating income, as reported$834
 $695
   $2,742
 $2,915
  
Add: Contract ratification bonuses—
 356
   —
 356
  
Add (Deduct): Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period settled contracts1
 (15)   (14) (7)  
Deduct: Contracts settling in the current period, but for which gains and/or (losses) have been recognized in a prior period (a)(47) (82)   (115) (113)  
Add: Asset impairment—
 —
   —
 21
  
Add: Lease termination expense20
 18
   33
 18
  
Add: Aircraft grounding charge63
 —
   63
 —
  
Operating income, excluding special items$871
 $972
 (10.4)% $2,709
 $3,190
 (15.1)%
            
Net income, as reported$503
 $388
   $1,600
 $1,722
  
Add: Contract ratification bonuses—
 356
   —
 356
  
Add (Deduct): Mark-to-market impact from fuel contracts settling in future periods(3) 20
   66
 16
  
Add (Deduct): Ineffectiveness from fuel hedges settling in future periods8
 (4)   29
 (3)  
Deduct: Other net impact of fuel contracts settling in the current or a prior period (excluding reclassifications)(47) (82)   (115) (113)  
Add: Asset impairment—
 —
   —
 21
  
Add: Lease termination expense20
 18
   33
 18
  
Add: Aircraft grounding charge63
 —
   63
 —
  
Deduct: Net income tax impact from fuel and special items (b)(16) (114)   (28) (110)  
Net income, excluding special items$528
 $582
 (9.3)% $1,648
 $1,907
 (13.6)%
Three months ended March 31,Percent
 20232022Change
Net loss per share, diluted, as reported$(0.27)$(0.47)
Add: Impact of special items— 0.16 
Add: Net impact of net loss above from fuel contracts divided by dilutive shares— 0.06 
Deduct: Net loss tax impact of special items (b)— (0.07)
Net loss per share, diluted, excluding special items$(0.27)$(0.32)(15.6)
Operating expenses per ASM (cents)15.74 ¢14.09 ¢
Deduct: Impact of special items— (0.04)
Deduct: Fuel and oil expense divided by ASMs(4.07)(2.92)
Deduct: Profitsharing expense divided by ASMs— (0.11)
Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)11.67 ¢11.02 ¢5.9



Net income per share, diluted, as reported$0.84
 $0.62
   $2.64
 $2.70
  
Deduct: Net impact to net income above from fuel contracts divided by dilutive shares(0.07) (0.11)   (0.03) (0.16)  
Add: Impact of special items0.14
 0.60
   0.16
 0.62
  
Deduct: Net income tax impact of fuel and special items (b)(0.03) (0.18)   (0.05) (0.16)  
Net income per share, diluted, excluding special items$0.88
 $0.93
 (5.4)% $2.72
 $3.00
 (9.3)%
            
Operating expenses per ASM (cents)
11.36¢ 
11.73¢   
11.35¢ 
11.17¢  
Deduct: Fuel and oil expense divided by ASMs(2.57) (2.48)   (2.52) (2.43)  
Deduct: Impact of special items(0.21) (0.99)   (0.08) (0.35)  
Operating expenses per ASM, excluding Fuel and oil and special items (cents)
8.58¢ 
8.26¢ 3.9% 
8.75¢ 
8.39¢ 4.3%

(a) As a result of prior hedge ineffectiveness and/or contracts markedSee Note 3 to market through earnings.the unaudited Condensed Consolidated Financial Statements for further information.
(b) Tax amounts for each individual special item are calculated at the Company's effective rate for the applicable period and totaled in this line item.


Non-GAAP Return on Invested Capital (ROIC) (in millions) (unaudited)
38
    
 Twelve Months Ended Twelve Months Ended
 September 30, 2017 September 30, 2016
Operating income, as reported$3,588
 $3,940
Contract ratification bonuses—
 495
Net impact from fuel contracts(211) (300)
Acquisition and integration costs—
 7
Asset impairment—
 21
Lease termination expense37
 18
Aircraft grounding charge63
 —
Operating income, non-GAAP$3,477
 $4,181
Net adjustment for aircraft leases (a)110
 115
Adjustment for fuel hedge accounting (b)(137) (160)
Adjusted Operating income, non-GAAP (A)$3,450
 $4,136
    
Debt, including capital leases (c)$3,184
 $3,160
Equity (c)8,404
 7,538
Net present value of aircraft operating leases (c)837
 1,066
Average invested capital$12,425
 $11,764
Equity adjustment for hedge accounting (b)426
 1,044
Adjusted average invested capital (B)$12,851
 $12,808
    
Non-GAAP ROIC, pre-tax (A/B)26.8% 32.3%

(a) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impactTable of eliminating aircraft rent expense and replacing with estimated depreciation expense for those same aircraft). The Company makes this adjustment to enhance comparability to other entities that have different capital structures by utilizing alternative financing decisions.Contents
(b) The Adjustment for fuel hedge accounting in the numerator is due to the Company’s accounting policy decision to classify fuel hedge accounting premiums below the Operating income line, and thus is adjusting Operating income to reflect such policy decision. The Equity adjustment for hedge accounting in the denominator adjusts for the cumulative impacts, in Accumulated other comprehensive income and Retained earnings, of gains and/or losses associated with hedge accounting related to fuel hedge derivatives that will settle in future periods. The current period impact of these gains and/or losses are reflected in the Net impact from fuel contracts in the numerator.
(c) Calculated as an average of the five most recent quarter end balances or remaining obligations. The Net present value of aircraft operating leases represents the assumption that all aircraft in the Company’s fleet are owned, as it reflects the remaining contractual commitments discounted at the Company's estimated incremental borrowing rate as of the time each individual lease was signed.




Note Regarding Use of Non-GAAP Financial Measures


The Company's unaudited Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP").GAAP. These GAAP financial statements may include (i) unrealized noncash 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 unusual and/or infrequent in nature and thus may make comparisons to its prior or future performance difficult.


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 (also referred to as "excluding special items"), 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 additional insight to investors as supplemental information to its GAAP results. The non-GAAP measures provided that relate to the Company’s performance on an economic fuel cost basis include Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating expenses, non-GAAP excluding Fuel and oil expense; Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing; Operating loss, non-GAAP; Other (gains) losses, net, non-GAAP; Loss before income taxes, non-GAAP; Benefit for income taxes, net, non-GAAP; Net income,loss, non-GAAP; and Net incomeloss per share, diluted, non-GAAP.non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents). The Company's economic Fuel and oil expense 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 has historically been utilized by the Company, as well as some of the other airlines that utilize fuel hedging, as it 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 that are designated as hedges are reflected as a component of Other (gains) losses, net,Fuel and oil expense, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide further insight oninto the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, noncash 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 and analysts, 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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2022 and Note 3 to the unaudited Condensed Consolidated Financial Statements.


The Company’s GAAP results in the applicable periods may include other charges or benefits that are also deemed "special items," that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends. Financial measures identified as non-GAAP (or as excluding special items) have been adjusted to exclude special items. SpecialFor the periods presented, in addition to the items discussed above, special items include:
1.Contract ratification bonuses recorded for certain workgroups. As the bonuses would only be paid at ratification of the associated tentative agreement and would not represent an ongoing expense to the Company, management believes its results for the associated periods are more usefully compared if the impacts of ratification bonus amounts are excluded from results. Generally, union contract agreements cover a specified three- to five- year period, although such contracts officially never expire, and the agreed upon terms remain in place until a revised agreement is reached, which can be several years following the amendable date;
2.Expenses associated with the Company’s acquisition and integration of AirTran Holdings, LLC, the parent company of AirTran Airways, Inc. ("AirTran"). Such expenses were primarily incurred during the acquisition and integration period of the two companies from 2011 through 2015 as a result of the Company’s acquisition of AirTran, which closed on May 2, 2011. The exclusion of these expenses provides investors with a more



1.Noncash impairment charges, primarily associated with adjustments to the salvage values for previously retired airframes;
applicable basis2.Unrealized mark-to-market adjustment associated with certain available for sale securities; and
3.Losses associated with the partial extinguishment of the Company's Convertible Notes and early prepayment of debt. These losses are also now presented as a separate line item in the unaudited Condensed
39
Table of Contents
Consolidated Statement of Comprehensive Income (Loss), rather than its prior presentation where it was included as a component of Other (gains) losses, net. Such losses are incurred as a result of opportunistic decisions made by the Company to prepay portions of its debt, most of which was incurred during the pandemic in order to compare resultsprovide liquidity during the prolonged downturn in future periods now that the integration process has been completed;air travel.
3.A noncash impairment charge related to leased slots at Newark Liberty International Airport as a result of the FAA announcement in April 2016 that this airport was being changed to a Level 2 schedule-facilitated airport from its previous designation as Level 3 (a "slot" is the right of an air carrier, pursuant to regulations of the FAA, to operate a takeoff or landing at a specific time at certain airports);
4.Lease termination costs recorded as a result of the Company acquiring 13 of its Boeing 737-300 aircraft off operating leases as part of the Company’s strategic effort to remove its Classic aircraft from operations on or before September 29, 2017, in the most economically advantageous manner possible. The Company had not budgeted for these early lease termination costs, as they were subject to negotiations being concluded with the third party lessors. The Company recorded the fair value of the aircraft acquired off operating leases, as well as any associated remaining obligations to the balance sheet as debt; and
5.An Aircraft grounding charge recorded in third quarter 2017, as a result of the Company grounding its remaining Boeing 737-300 aircraft on September 29, 2017. The loss was a result of the remaining net lease payments due and certain lease return requirements that may have to be performed on these leased aircraft prior to their return to the lessors as of the cease-use date. The Company had not budgeted for the lease return requirements, as they are subject to negotiation with third party lessors.


Because management believes each of thesespecial items can distort the trends associated with the Company’s ongoing performance as an airline, the Company believes that evaluation of its financial performance can be enhanced by a supplemental presentation of results that exclude the impact of thesespecial items in order to enhance consistency and comparativeness with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods. The following measures are often provided, excluding special items, and utilized by the Company’s management, analysts, and investors to enhance comparability of year-over-year results, as well as to industry trends: Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating expenses, non-GAAP excluding Fuel and oil expense; Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing; Operating loss, non-GAAP; Other (gains) losses, net, non-GAAP; Loss before income taxes, non-GAAP; Benefit for income taxes, net, non-GAAP; Net income,loss, non-GAAP; Net incomeloss per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and special items.profitsharing (cents).

40
The Company has also provided its calculation
Table of return on invested capital, which is a measure of financial performance used by management to evaluate its investment returns on capital. Return on invested capital is not a substitute for financial results as reported in accordance with GAAP, and should not be utilized in place of such GAAP results. Although return on invested capital is not a measure defined by GAAP, it is calculated by the Company, in part, using non-GAAP financial measures. Those non-GAAP financial measures are utilized for the same reasons as those noted above for Net income, non-GAAP and Operating income, non-GAAP - the comparable GAAP measures include charges or benefits that are deemed "special items" that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends, and the Company’s profitability targets and estimates, both internally and externally, are based on non-GAAP results since in the vast majority of cases the "special items" cannot be reliably predicted or estimated. The Company believes non-GAAP return on invested capital is a meaningful measure because it quantifies the Company's effectiveness in generating returns 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 differ; therefore, the Company is providing an explanation of its calculation for non-GAAP return on invested capital in the accompanying reconciliation, in order to allow investors to compare and contrast its calculation to those provided by other companies.Contents



Liquidity and Capital Resources


Net cash provided by operating activities was $996 million for the three months ended September 30, 2017, compared with $856 March 31, 2023 was $706 million, provided by operating activities in the same prior year period. For the nine months ended September 30, 2017,and net cash provided by operating activities was $3.4 billion, compared with $3.6 billion provided by operating activities infor the ninethree months ended September 30, 2016. March 31, 2022 was $1.1 billion. Operating cash inflows are historically primarily derived from providing air transportation to Customers. The vast majority of tickets are purchased prior to the day on which travel is provided and, in some cases, several months before the anticipated travel date. Operating cash outflows are related to the recurring expenses of airline operations. The operating cash flows for the ninethree months ended September 30, 2017,March 31, 2023, were largely impacted by the Company's Netnet income (as adjusted for noncash items), and an $817a $947 million increase in Air traffic liability asdriven by higher ticket sales related to an increase in travel demand, a result$215 million decrease due to the payment of bookingsCustomer reimbursement expenses related to the December 2022 operational disruption, a $127 million decrease due to the funding of the Company's ProfitSharing Plan contribution for future travel2022, and salesa $106 million decrease related to the purchase of frequent flyer points to business partners. Additionally, the Company had net cash inflows of $286 million in cash collateral from fuel derivative counterparties duringinstruments, which is included within Other, net operating cash flows in the nine months ended September 30, 2017. See Note 3 to theaccompanying unaudited Condensed Consolidated Financial Statements. ForStatement of Cash Flows. The operating cash flows for the ninethree months ended September 30, 2016, in addition to the Company's Net income (as adjusted for noncash items), there was a $686March 31, 2022 included an $885 million increase in Air traffic liability asdriven by higher ticket sales related to an increase in travel demand, and included a result of bookings for future travel and sales of frequent flyer points to business partners, and the Company had net cash inflows of $230$385 million increase in cash collateral received from derivative counterparties due to an increase in the value of the Company's fuel derivative counterparties.hedge portfolio, driven by increases in the forward curve year-to-date. Net cash provided by operating activities is primarily used to finance capital expenditures, repay debt, fund stock repurchases, pay dividends, and provide working capital.


Net cash used in investing activities was $620 million duringfor the three months ended September 30, 2017, compared with $584 million used in investing activities in the same prior year period. NetMarch 31, 2023 was $1.6 billion, and net cash used in investing activities duringfor the ninethree months ended September 30, 2017, totaled $1.7 billion, versus $1.4 billion used in investing activities in the same prior year period.March 31, 2022 was $139 million. Investing activities in both years included Capital expenditures primarily related to aircraft and other equipment, payments associated with airport construction projects, denoted as Assets constructed for others, and changes in the balance of the Company's short-term and noncurrent investments. During the ninethree months ended September 30, 2017,March 31, 2023, Capital expenditures were $1.6$1.0 billion, the majority of which was payments for new aircraft delivered to the Company, but also included airport and other facility construction projects. This compared with $1.4 billion$510 million in Capital expenditures during the same prior year period. DuringCapital expenditures increased, year-over-year, largely due to an increase in progress and delivery payments made for current period and future aircraft deliveries during the ninethree months ended September 30, 2017, the Company's transactions in short-term and noncurrent investments resulted in a net cash inflow of $43 million,March 31, 2023, compared with a net cash inflow of $1 million duringto the same prior year period.


Based on anticipated aircraft delivery delays from Boeing, the Company now expects it will receive approximately 70 -8 aircraft deliveries in 2023. Due to these recent changes to expected 2023 aircraft deliveries, the Company now estimates its 2023 capital spending to be approximately $3.5 billion. This assumes approximately $2.3 billion in aircraft capital spending, and continues to assume approximately $1.2 billion in non-aircraft capital spending, which includes tens of millions in operational disruption-related investments.

Net cash used in financing activities was $453 million duringfor the three months ended September 30, 2017, compared with $346March 31, 2023 was $262 million, and net cash used in financing activities for the same prior year period. Net cash used in financing activities during the ninethree months ended September 30, 2017,March 31, 2022 was $1.9 billion, compared with $1.8 billion used$314 million. The Company paid $214 million in financing activities forcash dividends to Shareholders and repaid $59 million in finance lease obligations during first quarter 2023. The Company may engage in early debt repurchases from time to time and some of these early future repurchases are not included in the same prior year period.Company's current maturities of long-term debt. The Company's 2023 total debt repayments are expected to be $85 million. During the ninethree months ended September 30, 2017,March 31, 2022, the Company repaid $534$323 million in debt and capitalfinance lease obligations, repurchased $1.25 billionincluding the early extinguishment of $164 million in principal of its outstanding common stock through accelerated share repurchase programs and open market share repurchases, and paid $274 million in dividends to Shareholders. During the nine months ended September 30, 2016, the Company repaid $171 million in debt and capital lease obligations, repurchased approximately $1.5 billionConvertible Notes for a cash payment of its outstanding common stock through accelerated share repurchase programs, and paid $222 million in dividends to Shareholders.$230 million.

The Company is a "well-known seasoned issuer" and currently has an effective shelf registration statement registering an indeterminate amount of debt and equity securities for future sales. The Company currently intends to use the proceeds from any future securities sales off this shelf registration statement for general corporate purposes.

On August 14, 2017, Standard & Poor's upgraded the Company's investment grade credit ratings to "BBB+" from "BBB." The upgrade of the Company’s investment grade rating was based on the Company's consistent profitability and cost advantage, exceptional liquidity, and manageable funded debt. The Company maintained its investment grade credit ratings of "A3" with Moody's and "BBB+" with Fitch.


The Company has access to a $1.0 billion unsecured revolving credit facility. During third quarter 2017, the Company exercisedunder its right to extend the expiration of thisamended and restated revolving credit facility to August 2022. The revolving credit agreement has an accordion feature that would allow the Company, subject to, among other things, the procurement of incremental commitments, to increase the size of the facility to $1.5 billion. Interest on the facility is based on the Company's credit ratings at the time of borrowing. At the Company's current ratings, the interest cost would be LIBOR


plus a spread of 100.0 basis points. The facility contains a financial covenant requiring a minimum coverage ratio of adjusted pre-tax income to fixed obligations, as defined. As of September 30, 2017, the Company was in compliance with this covenant and there(the "Amended A&R Credit Agreement"). There were no amounts outstanding under the revolving credit facility.Amended A&R Credit Agreement as of March 31, 2023. See Note 10 to the Consolidated Financial Statements for further information.


On May 17, 2017,Although not the Company’s Board of Directors authorizedcase at March 31, 2023 due to the repurchase of up to $2.0 billionCompany's significant financing activities throughout the early stages of the Company’s common stock in a new share repurchase authorization. Under this $2.0 billion share repurchase authorization, in August 2017,pandemic, the Company launched the Third Quarter 2017 ASR Program and advanced $300 million to a financial institution in a privately negotiated transaction. The Company received 5.3 million shares in total under the Third Quarter 2017 ASR Program, which was completed in October 2017. The purchase was recorded as a treasury share repurchase for purposes of calculating earnings per share. The launch of the Third Quarter 2017 ASR Program brings total repurchases of common stock in 2017 to $1.25 billion as of September 30, 2017. The Company had $1.7 billion remaining under its May 2017 $2.0 billion share repurchase authorization as of September 30, 2017.

The Company routinely carrieshas historically carried a working capital deficit, in which its current liabilities
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exceed its current assets. This is common within the airline industry and is primarily due to the nature of the Air traffic liability account, which is related to advance ticket sales, unused flight credits available to Customers, and frequent flyerloyalty deferred revenue, which are performance obligations for future customerCustomer flights, do not require future settlement in cash, and are mostly nonrefundable. See Note 5 to the unaudited Condensed Consolidated Financial Statements for further information.

The Company believes thatit has various options available to meet its current liquidity position,capital and operating commitments, including unrestricted cash and short-term investments of $3.0$11.7 billion as of September 30, 2017,March 31, 2023, and anticipated future internally generated funds from operations, and its fully available, unsecured revolving credit facility of $1.0 billion that expires in August 2022, will enable it to meet its future known obligations in the ordinary course of business. However, if a liquidity need were to arise,operations. In addition, the Company believes it has accesscontinues to financing arrangements because of its investment grade credit ratings,maintain a large valuebase of unencumbered assets and modest leverage, which should enable it to meet its ongoing capital, operating,investment-grade credit ratings by all three major credit agencies (Moody's, S&P Global, and other liquidity requirements. The Company will continue to consider various borrowing or leasing options to maximize liquidity and supplement cash requirements, as necessary.Fitch).


Contractual Obligations and Contingent Liabilities and Commitments

The Company has contractual obligations and commitments primarily with regard to future purchases of aircraft, repayment of debt, and lease arrangements. As of September 30, 2017,March 31, 2023, the Company hadCompany's total firm deliveries and options for Boeing 737-700, 737-800, 737 MAX 7, and 737 MAX 8 aircraft as follows:

 
The Boeing Company

    
 -800 Firm Orders MAX 7
Firm
Orders		MAX 8
Firm
Orders		 MAX 8 Options Additional -700sTotal 
201739—14 — 1871(b)
201826—13 — 443 
2019—15— 5 —20 
2020—14— 8 —22 
2021—113 20 —34 
2022——15 21 —36 
2023——34 23 —57 
2024——41 23 —64 
2025——40 36 —76 
2026——— 36 —36 
2027——— 23 —23 
Total6530170(a)195 22482 
(a) The Company has flexibility to substitute 737 MAX 7 in lieu of 737 MAX 8 aircraft beginning in 2019.
(b) Includes 28 737-800s, 14 737-700s, and 9 737 MAX-8s delivered as of September 30, 2017.



The Company's capital commitments associated with the firm orders and additional aircraft in the above aircraft table are as follows: $159 million remaining in 2017, $1.0 billion in 2018, $612 million in 2019, $817 million in 2020, $960 million in 2021, and $5.3 billion thereafter.

For aircraft commitmentsoption order book with Boeing the Company is requiredwas 564 aircraft. See Note 9 to make cash deposits toward the purchase of aircraft in advance. These deposits are classified as Deposits on flight equipment purchase contracts in the unaudited Condensed Consolidated Balance Sheet until the aircraft is delivered, at which time deposits previously made are deducted from the final purchase price of the aircraft and are reclassified as Flight equipment.Financial Statements for further information.


The following table details information on the aircraft in the Company's fleet as of September 30, 2017:March 31, 2023:

  Average
Age (Yrs)		Number
 of Aircraft		Number
Owned		Number
Leased
TypeSeats
737-70014318 419 379 40 
737-8001758 207 190 17 
737 -81752 167 138 29 
Totals 12 793 707 86 



Critical Accounting Policies and Estimates

For information regarding the Company’s Critical Accounting Policies and Estimates, see the "Critical Accounting Policies and Estimates" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

42
    
Average
Age (Yrs)
 
Number
 of Aircraft
 
Number
Owned
 
Number
Leased
Type Seats    
737-700 143 13
 508
 397
 111
737-800 175 3
 170
 163
 7
737 MAX 8 175 —
 9
 9
 —
Totals   10
 687
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Cautionary Statement Regarding Forward-Looking Statements


This Form 10-Q contains "forward-looking statements"“forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.1934 ("Exchange Act"). 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, statements related to the following:


the Company’s fleet and capacity plans and related financial expectations, including the Company’s specific financial expectations related to the accelerated retirement of its Classic aircraft;
the Company’s network and schedule optimization plans and strategies;
•the Company’s expectations with respect to steps taken to mitigate the functionality and relatedrisk of an operational and financialdisruption recurrence;
•the Company’s expectations associated with its tactical action plan to boost operational resiliency, including with respect to expected benefits and opportunities associated with the Company’s new reservation system;planned expenditures;
•the Company’s financial outlookguidance for second quarter and projected results of operations, includingfull year 2023 and factors that could impact the Company’s financial results;
•the Company’s capacity guidance;
•the Company’s estimated fuel costs, hedging gains, and fuel efficiency and the assumptions underlying the Company’s projections;fuel-related expectations and estimates, including expectations related to the Company’s fuel derivative contracts;
•the Company’s plans and expectations for the repayment of debt, its effective tax rate, and its capital spending;
•the Company’s fleet plans, including underlying expectations and dependencies;
•the Company’s expectations regarding passenger demand, revenue trends, and bookings, including with respect to managing risk associatedmanaged business revenues and the potential benefits of a new revenue management system;
•the Company’s fleet and network-related goals, including without limitation with changing jet fuel prices;respect to growth opportunities and frequencies, reduction of operating costs, further modernizing its fleet with less carbon-intensive aircraft, restoration of the Company’s network and core markets, and maturation of newer markets;
•the Company'sCompany’s expectations related to its policy change with respect to the expiration of flight credits;
•the Company’s cash flow expectations and capital spending guidance, in particular with respect to aircraft capital expenditures and underlying aircraft delivery expectations;
•the Company’s expectations with respect to liquidityits ability to meet its ongoing capital and capital expenditures,operating commitments, including its plans for repayment of debtunderlying assumptions and capital lease obligations, as well as its anticipated needs for, and sources of, funds;factors that could impact this ability;
•the Company's assessment of market risks; and
•the Company's plans and expectations related to legal and regulatory proceedings.


While 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. Factors that could cause these differences include, among others:


•the impact of changes in consumer behavior,fears or actual outbreaks of diseases, extreme or severe weather and natural disasters, actions of competitors (including, without limitation, pricing, scheduling, capacity, and network decisions, and consolidation and alliance activities), fuel prices,consumer perception, economic conditions, natural disasters,banking conditions, fears of terrorism or war, socio-demographic trends, and other factors beyond the Company's control on consumer behavior and the Company's results of operations and business decisions, plans, strategies, and results;
•the Company's dependence on Boeing, Boeing’s suppliers, and the FAA with respect to the Company's fleet plans and deliveries, and other operational strategies and goals;
•the impact of labor and hiring matters on the Company’s controlbusiness decisions, plans, strategies, and results;
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•the impact of fuel price changes, fuel price volatility, volatility of commodities used by the Company for hedging jet fuel, and any changes to the Company’s fuel hedging strategies and positions on the Company's business decisions, plans and strategies;results of operations;
the Company's dependence on third parties, in particular with respect to its fleet and technology plans and expectations;
•the Company's ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives;
changes•the Company's dependence on other third parties, in the price of aircraftparticular with respect to its technology plans, its tactical action plans and expectations related to operational resiliency, its fuel supply, Global Distribution Systems, and the impact of hedge accounting, and any changes toon the Company's fuel hedging strategiesoperations and positions;results of operations of any third party delays or non-performance;
•the Company’sCompany's ability to timelyobtain and effectively prioritizemaintain adequate infrastructure and equipment to support its initiativesoperations and related expenditures;initiatives;
•the emergence of additional costs or effects associated with the December 2022 operational disruption, including litigation, government investigation and actions, and internal actions;
•the impact of governmental regulations and other governmental actions on the Company's plans, strategies, financial results, and operations;
•any further negative developments related to the CompanyCOVID-19 pandemic, including, for example, with respect to (i) the duration, spread, severity, or any recurrence of the COVID-19 pandemic or any new variant strains of the underlying virus; (ii) the effectiveness, availability, and usage of COVID-19 vaccines; (iii) the impact of government mandates, directives, orders, regulations, and other governmental actions related to COVID-19 on the Company’s business plans and its operations;ability to retain key Employees; (iv) the extent of the impact of COVID-19 on overall demand for air travel and the Company's related business plans and decisions; and (v) the impact of the COVID-19 pandemic on the Company's access to capital;
•the impact of fears or actual acts of terrorism or war, political instability, cyber-attacks, and other factors beyond the Company’s control on the Company’s plans, financial results, operations, and ability to adequately insure against risks; and
•other factors as set forth in the Company's filings with the Securities and Exchange Commission (the "SEC"), including the detailed factors discussed under the heading "Risk Factors"“Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2022.


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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk


Hedging

As discussed in Note 3 to the unaudited Condensed Consolidated Financial Statements, the Company endeavors to acquire jet fuel at the lowest possible price and to reduce volatility in operating expenses through its fuel hedging


program with the use of financial derivative instruments. At September 30, 2017,March 31, 2023, the estimated fair value of outstanding contracts excluding the impact of cash collateral provided to or held by counterparties, was a net liabilityasset of $10$395 million.


The Company's credit exposure related to fuel derivative instruments is represented by the fair value of contracts that eventually settleare in an asset position to the Company. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. As of September 30, 2017,March 31, 2023, the Company had sixeight counterparties infor which the derivatives held were a net asset. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. However, if one or more of these counterparties were in a net liability position to the Company and were unable to meet their obligations, any open derivative contracts with the counterparty could be subject to early termination, which could result in substantial losses for the Company. At September 30, 2017,March 31, 2023, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating. The Company also had agreements with counterparties in which cash deposits and/or letters of credit and/or pledged aircraft are required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds. Refer to the counterparty credit risk and collateral table provided in Note 3 to the unaudited Condensed Consolidated Financial Statements for the fair values of fuel derivatives, amounts held as collateral, and applicable collateral posting threshold amounts as of March 31, 2023, at which such postings are triggered.
 
At September 30, 2017, $14March 31, 2023, $76 million in cash collateral deposits were providedheld by the Company tofrom counterparties based on itsthe Company's outstanding fuel derivative instrument portfolio. Due to the terms of the Company's current fuel hedging agreements with counterparties and the types of derivatives held inas of March 31, 2023, the Company's judgment, itCompany does not have significant additional cash collateral exposure. Given its investment grade credit rating, the Company can meet any additional significant collateral calls by posting aircraft and/or letters of credit. As an example, if market prices for the commodities used in the Company's fuel hedging activities were to decrease by 25 percent from market prices as of September 30, 2017, given the Company's current fuel derivative portfolio, its aircraft collateral facilities, and its investment grade credit rating, it would likely provide an additional $45 million in cash collateral. At September 30, 2017, the Company had $1.6 billion of aircraft available to be posted as collateral if the need were to arise. In addition, the Company would expect to also benefit from lower market prices paid for fuel used in its operations. See Note 3 to the unaudited Condensed Consolidated Financial Statements.


The Company is also subject to the risk that the fuel derivatives it uses to hedge against fuel price volatility do not provide adequate protection. For example,The Company has found that financial derivative instruments in periods where jet fuel prices are expected to more closely correlate to changes in the prices ofcommodities, such as WTI crude oil, Brent crude oil, the Company may chooseand refined products, such as heating oil and unleaded gasoline, can be useful in decreasing its exposure to mitigate this risk by entering into morejet fuel hedges that are Brent crude oil based.price volatility. In addition, to add further protection, the Company may periodically enter into jet fuel derivatives for short-term timeframes. Jet fuel is not widely traded on an organized futures exchange and, therefore, there are limited opportunities to hedge directly in jet fuel for time horizons longer than approximately 24 months into the future. 


Financial Market Risk

The Company currently has agreements with organizations that process credit card transactions arising from purchases of air travel tickets by its Customers utilizing American Express, Discover, and MasterCard/VISA. Credit card processors have financial risk associated with tickets purchased for travel because the processor generally forwards the cash related to the purchase to the Company soon after the purchase is completed, but the air travel generally occurs after that time; therefore, the processor will have liability if the Company does not ultimately provide the air travel. Under these processing agreements, and based on specified conditions, increasing amounts of cash reserves could be required to be posted with the counterparty. There was no cash reserved for this purpose as of March 31, 2023.

A majority of the Company’s sales transactions are processed by Chase Paymentech. Should chargebacks processed by Chase Paymentech reach a certain level, proceeds from advance ticket sales could be held back and used to
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establish a reserve account to cover such chargebacks and any other disputed charges that might occur. Additionally, cash reserves are required to be established if the Company’s credit rating falls to specified levels below investment grade. Cash reserve requirements are based on the Company’s public debt rating and a corresponding percentage of the Company’s Air traffic liability. As of March 31, 2023, no holdbacks were in place.

See Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, 2016,2022, for further information about market risk, and Note 3 to the unaudited Condensed Consolidated Financial Statements in this Form 10-Q for further information about the Company's fuel derivative instruments.


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Item 4. Controls and Procedures


Disclosure Controls and Procedures


The Company maintains disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act, of 1934 (the "Exchange Act")) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission'sSEC's rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated


to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of September 30, 2017.March 31, 2023. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of September 30, 2017,March 31, 2023, at the reasonable assurance level.


Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f)13a–15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2017,March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.






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PART II. OTHER INFORMATION


Item 1.     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 Holdings, Inc. and its subsidiary AirTran Airways, Inc. (collectively with AirTran Holdings, Inc., "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 sought 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 opposed. 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. On July 12, 2016, the Court granted plaintiffs’ motion to certify a class of all persons who paid first bag fees to AirTran or Delta from December 8, 2008 to November 1, 2014 (the date on which AirTran stopped charging first bag fees). Defendants have appealed that decision, and the appeal is pending. On March 29, 2017, the Court granted defendants’ motion for summary judgment and dismissed all claims against AirTran. On April 13, 2017, the plaintiffs filed a notice of appeal from the district court's judgment, and on April 24, 2017, AirTran filed a conditional notice of cross-appeal to appeal the Court's order certifying a class. The appeals of the class certification and summary judgment orders have been consolidated and are currently pending. 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 seekssought information and documents about the Company’s capacity from January 2010 to the date of the CID, 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 date of the CID.capacity. The Company is cooperating fully with the DOJ CID and these twothe state inquiries.inquiry.


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 were 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. 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. On March 25, 2016, the plaintiffs filed a Consolidated Amended Complaint in the consolidated cases alleging that the defendants conspired to restrict capacity from 2009 to present.


The plaintiffs seek to bring their claims on behalf of a class of persons who purchased tickets for domestic airline travel on the defendants' airlines from July 1, 2011 to present. They seek treble damages, injunctive relief, and attorneys' fees and expenses. On May 11, 2016, the defendants moved to dismiss the Consolidated Amended Complaint, andwhich the Court denied on October 28, 2016,2016. On December 20, 2017, the Company reached an agreement to settle these cases with a proposed class of all persons who purchased domestic airline transportation services from July 1, 2011, to the date of the settlement. The Company agreed to pay $15 million and to provide certain cooperation with the plaintiffs as set forth in the settlement agreement. After notice was provided to the proposed settlement class and the Court deniedheld a fairness hearing the Court issued an order granting final approval of the settlement on May 9, 2019. On June 10, 2019, certain objectors filed notices of appeal to the United States Court of Appeals for the District of Columbia Circuit, which the Court dismissed on July 9, 2021, for lack of jurisdiction because the district court's order approving the settlements was not a final appealable order. The case is continuing as to the remaining defendants. The Company denies all allegations of wrongdoing.

On January 7, 2019, a complaint alleging a violation of the federal Uniformed Services Employment and Reemployment Rights Act (“USERRA”) and seeking a certification as a class action was filed against the Company in the United States District Court for the Northern District of California. The complaint alleges that the Company violates section 4316(b) of USERRA because it does not provide paid “short-term” military leave (i.e., a military leave of 14 days or fewer) but does provide paid jury duty leave, bereavement leave, and sick leave, which the plaintiff alleges are “comparable” forms of leave under USERRA and its implementing regulations. The complaint seeks declaratory and injunctive relief, damages, liquidated damages, interest, and attorneys’ fees, expert fees, and litigation costs. On February 3, 2021, the court granted the plaintiff’s motion for class certification and issued an order certifying a class comprised of current or former Employees who, during their employment with the Company at any time from October 10, 2004, through the date of judgment in this motion.action, have taken short-term military leave and were subject to a collective bargaining agreement, except for Employees subject to the Transport Workers Union Local 550 agreement covering meteorologists. On January 11, 2022, the court granted the parties’ stipulated request to vacate the trial date as the Department of Defense had not yet produced the class members’ military pay and service records pursuant to the Company’s third-party subpoena. On August 18, 2022, the court entered an order that effectively stayed the action, except for attention to the third-party subpoena, until after the Ninth Circuit issued its opinion in the matter of Clarkson v. Alaska Airlines, Inc. and Horizon Industries, Inc., an appeal from an order by the United States District Court for the Eastern District of Washington granting summary judgment in defendants’ favor on substantially the same claims at issue in this action. The parties are currently engagedNinth Circuit issued its order in discovery. Clarkson on February 1, 2023, reversing the district court’s grant of summary judgment and remanding the Clarkson case to the District Court with instructions to consider the “pay during leave” issue in the first instance.
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The Company denies all allegations of wrongdoing, believes the plaintiff’s positions are without merit, and intends to vigorously defend these civil cases.itself in all respects.


In addition, onOn July 8, 2015,11, 2019, a complaint alleging violations of federal and state laws and seeking certification as a class action was filed against Boeing and the Company was named as a defendant in a putative class action filed in the Federal Court in 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 residents traveling in the United States District Court for the Eastern District of Texas in Sherman ("Sherman Complaint"). The complaint alleges that Boeing and the Company colluded to conceal defects with the Boeing 737 MAX ("MAX") aircraft in violation of the Racketeer Influenced and Corrupt Organization Act ("RICO") and also asserts related state law claims based upon the same alleged facts. The complaint seeks damages on behalf of putative classes of customers who purchased tickets for air travel from either the Company or American Airlines between August 29, 2017, and March 13, 2019. The complaint generally seeks money damages, equitable monetary relief, injunctive relief, declaratory relief, and attorneys’ fees and other costs. On September 13, 2019, the Company filed a motion to dismiss the complaint and to strike certain class allegations. Boeing also moved to dismiss. On February 14, 2020, the trial court issued a ruling that granted in part and denied in part the motions to dismiss the complaint. The trial court order, among other things: (i) dismissed without prejudice various state law claims that the plaintiffs abandoned in response to the motions, (ii) dismissed with prejudice the remaining state law claims, including fraud by concealment, fraud by misrepresentation, and negligent misrepresentation on the grounds that federal law preempts those claims, and (iii) found that plaintiffs lack Article III standing to pursue one of the plaintiffs’ theories of RICO injury. The order denied the motion to dismiss with respect to two RICO claims premised upon a second theory of RICO injury and denied the motion to strike the class allegations at the pleadings stage. On September 3, 2021, the trial court issued an order under Rule 23(a) and 23(b)(3) certifying four classes of persons associated with ticket purchases for flights during the period of August 29, 2017, through March 13, 2019, comprised of (i) those who purchased tickets (without being reimbursed) for flights on Southwest Airlines during the class period, except for those whose flights were solely on routes where, at the time of the ticket purchase(s), a MAX plane was not scheduled for use (or actually used) and had not previously been used, (ii) those who reimbursed a Southwest Airlines ticket purchaser and thus bore the economic burden for a Southwest Airlines ticket for a flight meeting the preceding criteria set forth in (i) above, (iii) those who purchased tickets (without being reimbursed) for flights on American Airlines during the class period, except for those whose flights were solely on routes where, at the time of ticket purchase(s), a MAX plane was not scheduled for use (or actually used) and had not previously been used, and (iv) those who reimbursed an American Airlines ticket purchaser and thus bore the economic burden for an American Airlines ticket for a flight meeting the preceding criteria set forth in (iii) above. On September 17, 2021, the Company filed a petition for permission immediately to appeal the class certification ruling to the Fifth Circuit Court of Appeals. Boeing also filed such a petition. Plaintiffs filed their oppositions to the petitions on September 27, 2021. On September 30, 2021, the Fifth Circuit Court of Appeals granted the Company (and Boeing) permission to appeal the class certification ruling. On December 22, 2021, in response to a motion to stay the trial court proceedings filed by the Company and Boeing, the Fifth Circuit stayed all proceedings, including the pursuit of any discovery, in the trial court pending disposition of the class certification appeal by the Fifth Circuit. Following full briefing on the merits of the appeal, a three-judge panel of the Fifth Circuit heard oral argument of the appeal on July 5, 2022. On November 21, 2022, the Fifth Circuit issued an opinion concluding that, among other things, the plaintiffs "have offered no plausible theory of economic harm" and "have suffered no injury in fact and lack Article III standing," and so their "case therefore must be dismissed." The Fifth Circuit reversed the trial court's September 3, 2021 certification order and remanded the case to the trial court with instructions to dismiss the case for lack of jurisdiction. On December 5, 2022, the plaintiffs filed a Petition for Rehearing En Banc, which sought to have the appeal reheard by the Fifth Circuit. On March 9, 2023, the Fifth Circuit denied the Petition for Rehearing. On March 23, 2023, the trial court entered a final judgment dismissing the case for lack of jurisdiction.

On February 19, 2020, a complaint alleging violations of federal securities laws and seeking certification as a class action was filed against the Company and certain of its officers in the United States District Court for the Northern District of Texas in Dallas. A lead plaintiff has been appointed in the case, and Canada. Similar lawsuits werean amended complaint was filed on July 2, 2020. The amended complaint seeks damages on behalf of a putative class of persons who purchased the Company’s common stock between February 7, 2017, and January 29, 2020. The amended complaint asserts claims under Sections 10(b) and 20 of the Securities Exchange Act and alleges that the Company made material misstatements to investors regarding the Company’s safety and maintenance practices and its compliance with federal regulations and requirements. The amended complaint generally seeks money damages, pre-judgment and post-judgment interest, and attorneys’ fees and other costs. On August 17, 2020, the Company and the individual defendants filed a motion to dismiss. On October 1, 2020, the lead plaintiff filed a response in opposition to the
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motion to dismiss. The Company filed a reply on or about October 21, 2020, such that the motion is now fully briefed, although the parties have each supplemented their prior briefing with regard to more recent case holdings in other matters. The Company denies all allegations of wrongdoing, including those in the amended complaint. The Company believes the plaintiffs' positions are without merit and intends to vigorously defend itself in all respects.

On June 22, 2020, a derivative action for breach of fiduciary duty was filed in the SupremeUnited States District Court for the Northern District of British Columbia on July 15, 2015, Court of Queen's Bench for Saskatchewan on August 4, 2015, Superior CourtTexas naming the members of the ProvinceCompany's Board of Quebec on September 21, 2015,Directors as defendants and Ontario Superior Court of Justice on October 6, 2015. In December 2015, the Company entered into Tollingas a nominal defendant (the "Derivative Action"). The plaintiff alleges unspecified damage to Company’s reputation, goodwill, and Discontinuance agreements with putative class counselstanding in the Federal Courtcommunity, as well as damage from exposure to civil and British Columbiaregulatory liability and Ontario proceedingsdefense costs. According to the lawsuit, these damages arise from the Company’s alleged failure to comply with safety and a discontinuance agreement with putative class counselrecord maintenance regulations and false statements in public filings regarding the Company’s safety practices. The plaintiff alleges the Board, in the Quebec proceeding.absence of good faith, exhibited reckless disregard for its duties of oversight. On October 7, 2020, the Court entered an order staying and administratively closing the Derivative Action. The other defendants entered into an agreement withplaintiff in the same putative class counselDerivative Action shall have the right to stayreopen the Federal Court, British Columbia and Quebec proceedings and to proceed in Ontario. On June 10, 2016,action following the Federal Court granted plaintiffs'resolution of the Company's motion to discontinue thatdismiss in the ongoing litigation brought under the federal securities laws or upon the occurrence of certain other conditions. The Board and Company deny all allegations of wrongdoing made in the Derivative Action.

On August 26, 2021, a complaint alleging breach of contract and seeking certification as a class action against the Company without prejudice and stayed the action against the other defendants. On July 13, 2016, the plaintiff unilaterally discontinued the actionwas filed against the Company in British Columbia.the United States District Court for the Western District of Texas in Waco. The complaint alleges that the Company breached its Contract of Carriage and other alleged agreements in connection with its use of the allegedly defective MAX aircraft manufactured by The Boeing Company. The complaint seeks damages on behalf of putative classes of customers who provided valuable consideration, whether in money or other form (e.g., voucher, miles/points, etc.), in exchange for a ticket for air transportation with the Company, which transportation took place between August 29, 2017, and March 13, 2019. The complaint generally seeks money damages, declaratory relief, and attorneys’ fees and other costs. On February 14, 2017,October 27, 2021, the Quebec CourtCompany filed a multi-faceted motion challenging the complaint based upon lack of subject matter jurisdiction, the existence of the prior-filed Sherman Complaint on appeal in the Fifth Circuit, improper venue, and failure to state a claim, and seeking to have the complaint's class contentions stricken. That motion was fully briefed by both parties and was argued to a United States Magistrate Judge on June 27, 2022. On July 5, 2022, the Magistrate Judge granted the plaintiff’s motion in part and ordered the case stayed until the issuance of the Fifth Circuit's opinion in the Sherman Complaint. On November 28, 2022, the parties jointly notified the Court of the Fifth Circuit's decision regarding the Sherman Complaint. On March 23, 2023, the parties jointly notified the Court of the dismissal of the Sherman Complaint for lack of jurisdiction. The Company denies all allegations of wrongdoing, believes the plaintiffs' positions are without merit, and intends to discontinue the Quebec proceedingvigorously defend itself in all respects.

Two complaints alleging violations of federal securities laws and seeking certification as a class action have been filed (on January 10, 2023 and March 13, 2023, respectively) against the Company and to staycertain of its officers in the United States District Court for the Southern District of Texas in Houston. The complaints seek damages on behalf of a putative class of persons who purchased or otherwise acquired the Company's common stock between June 13, 2020, and December 31, 2022. The complaints assert claims under Sections 10(b) and 20 of the Securities Exchange Act and allege that proceeding against the other defendants. On March 10, 2017, the Ontario Court granted the plaintiff’s motion to discontinue that proceeding as to the Company. On September 29, 2017, the Company made material misstatements to investors regarding the Company's internal technology and the other defendants entered into a tolling agreement suspending any limitations periods that may applyalleged vulnerability to possible claims among them for contributionlarge-scale flight disruptions. The complaints generally seek money damages, pre-judgment and indemnity arising from the Canadian litigation. The Saskatchewan claim has not been served on the Company, and the time for the Company to respond to that complaint has not yet begun to run. The plaintiff in that case generally seeks damages (including punitive damages in certain cases), prejudgmentpost-judgment interest, disgorgement of any benefits accrued by the defendants as a result of the allegations, injunctive relief, and attorneys' fees and other costs. The deadline in the first of these two cases to file a motion seeking appointment of lead plaintiff was March 13, 2023; four separate motions were filed, and the parties seeking appointment have continued filing briefs on the issue. The Court has set a status conference for May 22, 2023. The Company denies all allegations of wrongdoing in the complaint, believes the plaintiffs' positions are without merit, and intends to vigorously defend this civil caseitself in Canada.all respects.


Since about January 24, 2023, the Company’s senior officers and Board of Directors have received multiple derivative demand letters from legal counsel for purported Southwest shareholders demanding that the Board investigate claims, initiate legal action, and take remedial measures in connection with the service disruptions occurring in December 2022. Generally, the demand letters broadly assert that the Company’s directors and senior officers did not make sufficient investments in internal technology systems to prevent large-scale flight disruptions, did not exercise sufficient oversight over the Company’s operations, approved or received unwarranted compensation, caused the Company to make materially misleading public statements, and breached their fiduciary
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duties to the Company. Additionally, since January 27, 2023, the Company has received multiple letters from counsel for purported Southwest shareholders making statutory demands for the production of various books and records of the Company, purportedly in an effort to investigate possible derivative claims similar to those made the subject of the derivative demands discussed above. The Company and its Board of Directors intend to address the derivative and books and records demands in accordance with the applicable Texas statutes governing such demands.

Based on the Company's wide-scale operational disruption, which led to the cancelation of a significant number of flights between December 21 and December 29, 2022, the Company could be subject to fines and/or penalties resulting from investigations by the Department of Transportation or other governmental agencies.

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.


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Item 1A. Risk Factors


There have been no material changes to the factors disclosed in Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2022.




Item 2. Unregistered Sales of Equity Securities and Use of Proceeds


(c) On May 15, 2019, the Company’s Board of Directors authorized the repurchase of up to $2.0 billion of the Company’s common stock. Subject to certain conditions, repurchases may be made in accordance with applicable securities laws in open market or private, including accelerated, repurchase transactions from time to time, depending on market conditions. The Company has suspended share repurchase activity until further notice. The Company has approximately $899 million remaining under its current share repurchase authorization.

Issuer Purchases of Equity Securities (1)
  (a) (b) (c) (d)
      
Total number of
shares purchased
as part of publicly
announced plans
or programs
 
Maximum dollar
value of shares that
may yet be purchased
under the plans
or programs
       
  
Total number
of shares
purchased
 
Average
price paid
per share
  
     
Period    
July 1, 2017 through
 July 31, 2017

 1,564,332
 $—
(2)1,564,332
 $2,000,000,000
August 1, 2017 through
 August 31, 2017

 4,130,592
 $—
(3)4,130,592
 $1,700,000,000
September 1, 2017 through
 September 30, 2017

 —
 $—
 —
 $1,700,000,000
Total 5,694,924
   5,694,924
 

(1)On May 17, 2017, the Company’s Board of Directors authorized the repurchase of up to $2.0 billion of the Company’s common stock. Repurchases are made in accordance with applicable securities laws in open market, private, or accelerated repurchase transactions from time to time, depending on market conditions, and may be discontinued at any time.
(2)Under the Company’s previous share repurchase authorization completed in second quarter 2017, the Company entered an accelerated share repurchase program with a third party financial institution in second quarter 2017 (the "Second Quarter 2017 ASR Program"), pursuant to which the Company paid $400 million on May 8, 2017, and received an initial delivery of 5,075,798 shares on June 9, 2017, representing an estimated 75 percent of the shares to be purchased by the Company under the Second Quarter 2017 ASR Program based on a volume-weighted average price of $59.104 per share of the Company’s common stock on the New York Stock Exchange during a calculation period between May 8, 2017 and June 8, 2017. Final settlement of this Second Quarter 2017 ASR Program occurred in July 2017 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 July 2017. Upon settlement, the third party financial institution delivered 1,564,332 additional shares of the Company’s common stock to the Company. In total, the average purchase price per share for the 6,640,130 shares repurchased under the Second Quarter 2017 ASR Program, upon completion of the Second Quarter 2017 ASR Program in July 2017, was $60.24.
(3)Under the Third Quarter 2017 ASR Program, the Company paid $300 million in August 2017 and received an initial delivery of 4,130,592 shares during August 2017, representing an estimated 75 percent of the shares to be purchased by the Company under the Third Quarter 2017 ASR Program based on a volume-weighted average price of $54.4716 per share of the Company’s common stock on the New York Stock Exchange during a calculation period between August 1, 2017 and August 24, 2017. Final settlement of the Third Quarter 2017 ASR Program occurred in October 2017 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 2017. Upon settlement, the third party financial institution delivered 1,206,365 additional shares of the Company's common stock to the Company. In total, the average purchase price per share for the 5,336,957 shares repurchased under the Third Quarter 2017 ASR Program, upon completion of the Third Quarter 2017 ASR Program in October 2017, was $56.21.


Item 3. Defaults Upon Senior Securities


None


Item 4. Mine Safety Disclosures

Not applicable


Item 5.Other Information


None

52


Table of Contents
Item 6. Exhibits
3.1
Restated Certificate of Formation of the Company, effective May 18, 2012 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (File No. 1-7259)).
3.2
SecondThird Amended and Restated Bylaws of the Company, effective November 17, 2016February 1, 2023 (incorporated by reference to Exhibit 3.13.2 to the Company’s CurrentAnnual Report on Form 8-K filed November 21, 201610-K for the year ended December 31, 2022 (File No. 1-7259)).
10.131.1
Supplemental Agreement No. 103 to Purchase Agreement No. 1810, dated January 19, 1994, between The Boeing Company and the Company. (1)
10.2
Supplemental Agreement No. 6 to Purchase Agreement No. 3729, dated December 13, 2011, between The Boeing Company and the Company. (1)
10.3
Supplemental Agreement No. 7 to Purchase Agreement No. 3729, dated December 13, 2011, between The Boeing Company and the Company. (1)
10.4
Supplemental Letter Agreement No. 6-1162-KLK-0059R3 to Purchase Agreement No. 1810, dated January 19, 1994, between The Boeing Company and the Company, and Purchase Agreement No. 3729, dated December 13, 2011, between The Boeing Company and the Company. (1)
10.5
Amended and Restated Southwest Airlines Co. 2005 Excess Benefit Plan (as amended and restated, effective as of January 1, 2018). (2)
10.6
Southwest Airlines Co. Deferred Compensation Plan for Senior Leadership and Non-Employee Members of the Southwest Airlines Co. Board of Directors (as amended and restated, effective as of January 1, 2018). (2)
31.1
Rule 13a-14(a) Certification of Chief Executive Officer.
31.2
Rule 13a-14(a) Certification of Chief Financial Officer.
32.1
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. (3)(1)
101.INSXBRL Instance Document.Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHInline XBRL Taxonomy Extension Schema Document.
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.
101.LABInline XBRL Taxonomy Extension LabelsLabel Linkbase Document.
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).



(1) Pursuant to 17 CFR 240.24b-2, confidential information has been omitted and has been filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Application filed with the Commission
(2) Management contract or compensatory plan or arrangement.
(3) Furnished, not filed.

53

Table of Contents






SIGNATURES
 


 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 

SOUTHWEST AIRLINES CO.
November 1, 2017April 28, 2023ByBy:/s/   Tammy Romo
Tammy Romo
Executive Vice President & Chief Financial Officer
(On behalf of the Registrant and in
her capacity as Principal Financial
and Accounting Officer)

5354