UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2021~~2022


			or


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


			For the transition period from ________ to ________

Commission File No. 1-7259

SOUTHWEST AIRLINES CO.

(Exact name of registrant as specified in its charter)


Texas		74-1563240
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)
P.O. Box 36611
Dallas,	Texas	75235-1611
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (214) 792-4000

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock ($1.00 par value)	LUV	New 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 x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes x 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 filer	x	Accelerated filer	☐
Non-accelerated filer	☐	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 x

Number of shares of Common Stock outstanding as of the close of business on April ~~23, 2021: 591,376,576~~28, 2022: 592,956,438

TABLE OF CONTENTS TO FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheet as of March 31, ~~2021~~2022 and December 31, ~~2020~~2021

Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021

Condensed Consolidated Statement of Stockholders' Equity as of March 31, ~~2021~~2022 and ~~2020~~2021

Condensed Consolidated Statement of Cash Flows for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021

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

Table of Contents

SOUTHWEST AIRLINES CO.

FORM 10-Q

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Southwest Airlines Co.

Condensed Consolidated Balance Sheet

(in millions)

(unaudited)

March 31, 2021 December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents $ 11,971 $ 11,063
Short-term investments 2,377 2,271
Accounts and other receivables 937 1,130
Inventories of parts and supplies, at cost 448 414
Prepaid expenses and other current assets 367 295
Total current assets 16,100 15,173
Property and equipment, at cost:
Flight equipment 20,876 20,877
Ground property and equipment 6,111 6,083
Deposits on flight equipment purchase contracts 53 305
Assets constructed for others 341 309
27,381 27,574
Less allowance for depreciation and amortization 11,733 11,743
15,648 15,831
Goodwill 970 970
Operating lease right-of-use assets 2,032 1,892
Other assets 743 722
$ 35,493 $ 34,588
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,094 $ 931
Accrued liabilities 1,665 2,259
Current operating lease liabilities 292 306
Air traffic liability 4,906 3,790
Current maturities of long-term debt 225 220
Total current liabilities 8,182 7,506
Long-term debt less current maturities 10,546 10,111
Air traffic liability - noncurrent 2,826 3,343
Deferred income taxes 1,660 1,634
Construction obligation 341 309
Noncurrent operating lease liabilities 1,722 1,562
Other noncurrent liabilities 1,123 1,247
Stockholders' equity:
Common stock 888 888
Capital in excess of par value 4,220 4,191
Retained earnings 14,912 14,777
Accumulated other comprehensive loss (60) (105)
Treasury stock, at cost (10,867) (10,875)
Total stockholders' equity 9,093 8,876
$ 35,493 $ 34,588


	March 31, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	13,098	$	12,480
Short-term investments	2,642		3,024
Accounts and other receivables	1,692		1,357
Inventories of parts and supplies, at cost	623		537
Prepaid expenses and other current assets	767		638
Total current assets	18,822		18,036

Property and equipment, at cost:
Flight equipment	21,147		21,226
Ground property and equipment	6,472		6,342
Deposits on flight equipment purchase contracts	254		—
Assets constructed for others	9		6
	27,882		27,574
Less allowance for depreciation and amortization	12,945		12,732
	14,937		14,842
Goodwill	970		970
Operating lease right-of-use assets	1,555		1,590
Other assets	978		882
	$	37,262	$	36,320

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,648	$	1,282
Accrued liabilities	1,360		1,624
Current operating lease liabilities	240		239
Air traffic liability	6,406		5,566
Current maturities of long-term debt	415		453
Total current liabilities	10,069		9,164

Long-term debt less current maturities	10,309		10,274
Air traffic liability - noncurrent	2,204		2,159
Deferred income taxes	1,826		1,770

Noncurrent operating lease liabilities	1,277		1,315
Other noncurrent liabilities	1,160		1,224
Stockholders' equity:
Common stock	888		888
Capital in excess of par value	3,940		4,224
Retained earnings	15,551		15,774
Accumulated other comprehensive income	891		388
Treasury stock, at cost	(10,853)		(10,860)
Total stockholders' equity	10,417		10,414
	$	37,262	$	36,320

See accompanying notes.

Table of Contents

Southwest Airlines Co.

Condensed Consolidated Statement of Comprehensive Income (Loss)

(in millions, except per share amounts)

(unaudited)

Three months ended March 31,
2021 2020
OPERATING REVENUES:
Passenger $ 1,712 $ 3,845
Freight 43 39
Other 297 350
Total operating revenues 2,052 4,234
OPERATING EXPENSES, NET:
Salaries, wages, and benefits 1,571 1,854
Payroll support and voluntary Employee programs, net (1,448) 0
Fuel and oil 469 870
Maintenance materials and repairs 173 272
Landing fees and airport rentals 313 339
Depreciation and amortization 312 311
Other operating expenses 463 698
Total operating expenses, net 1,853 4,344
OPERATING INCOME (LOSS) 199 (110)
OTHER EXPENSES (INCOME):
Interest expense 114 28
Capitalized interest (11) (5)
Interest income (2) (17)
Other (gains) losses, net (48) 28
Total other expenses (income) 53 34
INCOME (LOSS) BEFORE INCOME TAXES 146 (144)
PROVISION (BENEFIT) FOR INCOME TAXES 30 (50)
NET INCOME (LOSS) $ 116 $ (94)
NET INCOME (LOSS) PER SHARE, BASIC $ 0.20 $ (0.18)
NET INCOME (LOSS) PER SHARE, DILUTED $ 0.19 $ (0.18)
COMPREHENSIVE INCOME (LOSS) $ 180 $ (219)
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 591 515
Diluted 609 515


	Three months ended March 31,
	2022		2021
OPERATING REVENUES:
Passenger	$	4,135	$	1,712
Freight	42		43

Other	517		297
Total operating revenues	4,694		2,052

OPERATING EXPENSES, NET:
Salaries, wages, and benefits	2,229		1,571
Payroll support and voluntary Employee programs, net	—		(1,448)
Fuel and oil	1,004		469
Maintenance materials and repairs	211		173

Landing fees and airport rentals	346		313
Depreciation and amortization	324		312
Other operating expenses	731		463
Total operating expenses, net	4,845		1,853

OPERATING INCOME (LOSS)	(151)		199

OTHER EXPENSES (INCOME):
Interest expense	93		114
Capitalized interest	(9)		(11)
Interest income	(3)		(2)
Other (gains) losses, net	144		(48)
Total other expenses (income)	225		53

INCOME (LOSS) BEFORE INCOME TAXES	(376)		146
PROVISION (BENEFIT) FOR INCOME TAXES	(98)		30

NET INCOME (LOSS)	$	(278)	$	116

NET INCOME (LOSS) PER SHARE, BASIC	$	(0.47)	$	0.20

NET INCOME (LOSS) PER SHARE, DILUTED	$	(0.47)	$	0.19

COMPREHENSIVE INCOME	$	225	$	180

WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	592		591
Diluted	592		609

See accompanying notes.

Table of Contents

Southwest Airlines Co.

Condensed Consolidated Statement of Stockholders' Equity

(in millions, except per share amounts)

(unaudited)

Common Stock Capital in excess of par value Retained earnings Accumulated other comprehensive income (loss) Treasury stock Total
Balance at December 31, 2020 $ 888 $ 4,191 $ 14,777 $ (105) $ (10,875) $ 8,876
Cumulative effect of adopting Accounting Standards Update No. 2016-01, Financial Instruments (See Note 1) 0 0 19 (19) 0 0
Issuance of common and treasury stock pursuant to Employee stock plans 0 (8) 0 0 8 0
Share-based compensation 0 14 0 0 0 14
Stock warrants 0 23 0 0 0 23
Comprehensive income 0 0 116 64 0 180
Balance at March 31, 2021 $ 888 $ 4,220 $ 14,912 $ (60) $ (10,867) $ 9,093



	Common Stock		Capital in excess of par value		Retained earnings		Accumulated other comprehensive income		Treasury stock		Total
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 (See Note 3)	—		(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

Common Stock Capital in excess of par value Retained earnings Accumulated other comprehensive loss Treasury stock Total
Balance at December 31, 2019 $ 808 $ 1,581 $ 17,945 $ (61) $ (10,441) $ 9,832
Repurchase of common stock 0 0 0 0 (451) (451)
Issuance of common and treasury stock pursuant to Employee stock plans 0 (8) 0 0 6 (2)
Share-based compensation 0 9 0 0 0 9
Cash dividends, $0.180 per share 0 0 (94) 0 0 (94)
Comprehensive loss 0 0 (94) (125) 0 (219)
Balance at March 31, 2020 $ 808 $ 1,582 $ 17,757 $ (186) $ (10,886) $ 9,075



	Common Stock		Capital in excess of par value		Retained earnings		Accumulated other comprehensive income (loss)		Treasury stock		Total
Balance at December 31, 2020	$	888	$	4,191	$	14,777	$	(105)	$	(10,875)	$	8,876

Cumulative effect of adopting Accounting Standards Update No. 2016-01, Financial Instruments	—		—		19		(19)		—		—
Issuance of common and treasury stock pursuant to Employee stock plans	—		(8)		—		—		8		—
Share-based compensation	—		14		—		—		—		14

Stock warrants	—		23		—		—		—		23
Comprehensive income	—		—		116		64		—		180
Balance at March 31, 2021	$	888	$	4,220	$	14,912	$	(60)	$	(10,867)	$	9,093

See accompanying notes.

Table of Contents

Southwest Airlines Co.

Condensed Consolidated Statement of Cash Flows

(in millions)

(unaudited)


		Three months ended				Three months ended
		March 31,				March 31,
		2021		2020				2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:	CASH FLOWS FROM OPERATING ACTIVITIES:						CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	Net income (loss)	$	116	$	(94)		Net income (loss)	$	(278)	$	116
Adjustments to reconcile net income (loss) to cash used in operating activities:
Adjustments to reconcile net income (loss) to cash provided by operating activities:							Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	312		311			Depreciation and amortization	324		312

Impairment of long-lived assets							Impairment of long-lived assets	16		—
Unrealized mark-to-market adjustment on available for sale securities							Unrealized mark-to-market adjustment on available for sale securities	5		—
Unrealized/realized (gain) loss on fuel derivative instruments	Unrealized/realized (gain) loss on fuel derivative instruments	(7)		2			Unrealized/realized (gain) loss on fuel derivative instruments	34		(7)
Deferred income taxes	Deferred income taxes	5		(49)			Deferred income taxes	(97)		5

Loss on partial extinguishment of convertible and unsecured notes							Loss on partial extinguishment of convertible and unsecured notes	72		—
Changes in certain assets and liabilities:	Changes in certain assets and liabilities:						Changes in certain assets and liabilities:
Accounts and other receivables	Accounts and other receivables	(234)		183			Accounts and other receivables	(334)		(234)
Other assets	Other assets	(11)		58			Other assets	(44)		(11)
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	(66)		(1,291)			Accounts payable and accrued liabilities	177		(66)
Air traffic liability	Air traffic liability	599		701			Air traffic liability	885		599
Other liabilities	Other liabilities	(122)		(132)			Other liabilities	(105)		(122)

Cash collateral received from (provided to) derivative counterparties		38		(5)
Cash collateral received from derivative counterparties							Cash collateral received from derivative counterparties	385		38
Other, net	Other, net	15		(61)			Other, net	31		15
Net cash provided by (used in) operating activities		645		(377)
Net cash provided by operating activities							Net cash provided by operating activities	1,071		645

CASH FLOWS FROM INVESTING ACTIVITIES:	CASH FLOWS FROM INVESTING ACTIVITIES:						CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	Capital expenditures	(95)		(224)			Capital expenditures	(510)		(95)
Supplier proceeds		0		300

Assets constructed for others							Assets constructed for others	(4)		—

Purchases of short-term investments	Purchases of short-term investments	(1,324)		(1,029)			Purchases of short-term investments	(925)		(1,324)
Proceeds from sales of short-term and other investments	Proceeds from sales of short-term and other investments	1,218		948			Proceeds from sales of short-term and other investments	1,300		1,218

Net cash used in investing activities	Net cash used in investing activities	(201)		(5)			Net cash used in investing activities	(139)		(201)

CASH FLOWS FROM FINANCING ACTIVITIES:	CASH FLOWS FROM FINANCING ACTIVITIES:						CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from issuance of long-term debt		0		500
Proceeds from term loan credit facility		0		1,000
Proceeds from revolving credit facility		0		1,000

Proceeds from Payroll Support Program loan and warrants	Proceeds from Payroll Support Program loan and warrants	511		0			Proceeds from Payroll Support Program loan and warrants	—		511

Proceeds from Employee stock plans	Proceeds from Employee stock plans	13		11			Proceeds from Employee stock plans	6		13

Repurchase of common stock		0		(451)

Payments of long-term debt and finance lease obligations	Payments of long-term debt and finance lease obligations	(67)		(78)			Payments of long-term debt and finance lease obligations	(93)		(67)

Payments of cash dividends		0		(188)

Payments for repurchases and conversions of convertible debt							Payments for repurchases and conversions of convertible debt	(230)		—

Other, net	Other, net	7		(20)			Other, net	3		7
Net cash provided by financing activities		464		1,774
Net cash provided by (used in) financing activities							Net cash provided by (used in) financing activities	(314)		464

NET CHANGE IN CASH AND CASH EQUIVALENTS	NET CHANGE IN CASH AND CASH EQUIVALENTS	908		1,392			NET CHANGE IN CASH AND CASH EQUIVALENTS	618		908
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	11,063		2,548			CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	12,480		11,063

CASH AND CASH EQUIVALENTS AT END OF PERIOD	CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	11,971	$	3,940		CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	13,098	$	11,971

CASH PAYMENTS FOR:	CASH PAYMENTS FOR:						CASH PAYMENTS FOR:
Interest, net of amount capitalized	Interest, net of amount capitalized	$	17	$	14		Interest, net of amount capitalized	$	20	$	17
Income taxes	Income taxes	$	1	$	5		Income taxes	$	4	$	1

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:	SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:						SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Adoption of Accounting Standards Update 2020-06, Debt (See Note 3)							Adoption of Accounting Standards Update 2020-06, Debt (See Note 3)	$	245	$	—
Right-of-use assets acquired under operating leases	Right-of-use assets acquired under operating leases	$	218	$	25		Right-of-use assets acquired under operating leases	$	24	$	218
Flight equipment acquired against supplier credit memo							Flight equipment acquired against supplier credit memo	$	—	$	305
Assets constructed for others	Assets constructed for others	$	32	$	34		Assets constructed for others	$	—	$	32

See accompanying notes.

Table of Contents

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Basis of Presentation

2. Worldwide Pandemic

3. New Accounting Pronouncements

4. Financial Derivative Instruments

5. Comprehensive Income (Loss)

6. Revenue

7. Net Income (Loss) Per Share

8. Fair Value Measurements

9. Supplemental Financial Information

10. Commitments and Contingencies

11. Financing Activities


Notes to Condensed Consolidated Financial Statements			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.

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 March 31, ~~2021~~2022 and ~~2020~~2021 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. However, beginning in early 2020, as a result of the COVID-19 pandemic, the Company's results have not always been in line with such historical trends. See Note 2 for further information. 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, have created, and may continue to create, significant volatility in the Company's financial results. See Note 4 for further information on fuel and the Company's hedging program. Operating results for the three months ended March 31, ~~2021,~~2022, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, ~~2021.~~2022. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

In the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss), for the three months ended March 31, 2021, Payroll support and voluntary Employee programs, net, includes the correction of previously underaccrued payroll tax credits, related to fourth quarter 2020, of $88 million, pre-tax. Other gains and losses, net, includes gains of $60 million, pre-tax, to correct investment gains related to prior periods previously recorded in Accumulated other comprehensive income (loss) ("AOCI").

In the unaudited Condensed Consolidated Statement of Stockholders' Equity, for the three months ended March 31, 2021, the Company recorded a decrease of $19 million, net of tax, in AOCI and a corresponding increase in Retained earnings to correct the amount of the impact of the cumulative effect of adopting Accounting Standard Update ("ASU") 2016-01, Financial Instruments in 2018.

~~These corrections are not considered material to prior period financial statements and are not expected to be material to the full year 2021 financial statements.~~


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

2. WORLDWIDE PANDEMIC

As a result of the rapid spread of the novel coronavirus, COVID-19, throughout the world, including into the United States, on March 11, 2020, the World Health Organization classified the virus as a pandemic. The speed with which the effects of the COVID-19 pandemic changed the U.S. economic landscape, outlook, and in particular the travel industry, was swift and unexpected. The Company ~~saw~~experienced significant disruptions in travel and reduced bookings throughout the remainder of 2020 and for the entirety of 2021 as a result of the pandemic and subsequent variants of COVID-19. Following a significant negative impact onto revenues and bookings ~~for future travel throughout 2020.~~in January and February 2022, which included increased trip cancellations and staffing challenges associated with the Omicron variant, the Company saw improvements in revenue trends in March 2022 as COVID-19 cases significantly trended downward. The Company continues to monitor demand for air travel and proactively ~~canceled a significant portion of~~adjust its ~~scheduled flights in March 2020~~published flight schedules and ~~continued adjusting capacity throughout 2020, as the Company grounded a significant portion of its fleet and operated a significantly reduced portion of its previously scheduled~~ capacity. ~~The Company continued to experience significant negative impacts to passenger demand and bookings through first quarter 2021 due to the pandemic.~~

~~In April 2020,~~Since the start of the pandemic, the Company entered into definitive documentation with the United States Department of the Treasury ("Treasury") with respect to payroll funding support ~~pursuant to the Payroll Support Program~~ ("Payroll Support") pursuant to three separate Payroll Support programs: the "PSP1 Payroll Support Program" in April 2020 under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act")~~. During 2020,~~; the ~~Company received a total of $3.4 billion of relief funds~~"PSP2 Payroll Support Program” in January 2021 under the ~~CARES Act.~~ Consolidated Appropriations Act, 2021; and the "PSP3 Payroll Support Program" in April 2021 under the American Rescue Plan Act of 2021.

As consideration for ~~the~~each of these Payroll Support programs, the Company issued a promissory note in favor of Treasury and entered into a warrant agreement with ~~Treasury, pursuant to which~~Treasury. The following table provides the details from the PSP1, PSP2 and PSP3 Payroll Support programs:


(dollars in millions, shares in thousands)	Grant		Promissory Note		Warrants		Total Payroll Support Proceeds		Warrants (shares)	Warrant strike price	Promissory Note Maturity Date


PSP1	$	2,337	$	976	$	40	$	3,354	2,676	$36.47/share	April 19, 2030







PSP2	$	1,393	$	566	$	27	$	1,987	1,223	$46.28/share	January 15, 2031





PSP3	$	1,310	$	526	$	18	$	1,852	899	$58.51/share	April 23, 2031




Total	$	5,040	$	2,068	$	85	$	7,193	4,798

In connection with the receipt of Payroll Support, the Company ~~agreed~~is subject to ~~issue warrants to purchase common stock~~certain restrictions, including the elimination of share repurchases and dividends through September 30, 2022; and limits on executive compensation until April 1, 2023.

Under each of the Company to Treasury. During 2020, the Company provided the promissory note in the aggregate amount of $976 million and issued warrants valued at a total of $40 million to purchase up to an aggregate of 2.7 million shares of the Company's common stock, subject to adjustment pursuant to the terms of the warrants.three Payroll Support programs, funds received were used solely to pay qualifying employee salaries, wages, and benefits.

On January 15, 2021, the Company entered into definitive documentation with Treasury with respect to funding support under the Consolidated Appropriations Act, 2021 (the "Payroll Support Program Extension"). Payroll Support Program Extension funds were used solely to pay qualifying employee wages and benefits. As of March 31, 2021, the Company had received $1.7 billion associated with the Payroll Support Program Extension. As consideration for the Payroll Support Program Extension, the Company issued a promissory note (the "PSP2 Note") in favor of Treasury and entered into a warrant agreement (the "PSP2 Warrant Agreement") with Treasury pursuant to which the Company agreed to issue warrants (each, a "PSP2 Warrant") to purchase common stock of the Company to Treasury. As of March 31, 2021, the Company had provided a PSP2 Note in the aggregate amount of $488 million and issued PSP2 Warrants valued at a total of $23 million to purchase up to an aggregate of 1.1 million shares of the Company's common stock, subject to adjustment pursuant to the terms of the PSP2 Warrants. Pursuant to the terms All grant portions of the Payroll Support Program Extension, the payroll support funds could only be utilized to pay qualifying salaries, wages, and benefits, as defined. As of March 31, 2021, excluding the $488 million PSP2 Note and value allocated to the PSP2 Warrants, all Payroll Support Program Extension fundsprograms received had been allocated ~~to reduce eligible costs~~and classified as a contra-expense line item in the ~~accompanying unaudited Condensed Consolidated Statement~~Company's financial statements by the end of ~~Comprehensive Income (Loss)~~2021, including approximately $1.2 billion for the three months ended March 31, ~~2021.~~

~~On April 23,~~ 2021 ~~the Company received an additional $259 million related to the Payroll Support Program Extension, for which the Company provided Treasury consideration~~ in the form of an increase of the PSP2 Note in an amount of $78 million and a PSP2 Warrant to purchase up to 168 thousand shares of the Company's common stock under the PSP2 Warrant Agreement. The grant portion of the payroll support funds will be allocated to reduce qualifying employee salaries, wages, and benefits during second quarter 2021. After taking into account the additional support under the Payroll Support Program Extension, the Company has received $2.0 billion of payroll support under the Payroll Support Program Extension, for which the Company has provided Treasury with a PSP2 Note in the aggregate amount of $566 million and PSP2 Warrants to purchase up to 1.2 million shares of the Company's common stock.

The PSP2 Note matures in full on January 15, 2031, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity. The Company has an option to prepay the PSP2 Note at any time without premium or penalty. Amounts outstanding under the PSP2 Note bear interest at a rate of 1.00 percent before January 15, 2026, and, afterwards, at a rate equal to the Secured Overnight Financing Rate or other benchmark replacement rate consistent with customary market conventions plus a margin of 2.00 percent. The PSP2 Note contains customary representations and warranties and events of default.

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Also under the terms of the Payroll Support (discussed above) and Payroll Support Program Extension, the Company is prohibited from repurchasing its common stock and from paying dividends with respect to its common stock through March 31, 2022.

The PSP2 Warrant Agreement sets out the Company’s obligations to issue PSP2 Warrants in connection with disbursements of funding support pursuant to the Payroll Support Program Extension and to file or designate a resale shelf registration statement for the PSP2 Warrants and the underlying shares of common stock. The Company has also granted Treasury certain demand underwritten offering and piggyback registration rights with respect to the PSP2 Warrants and the underlying common stock. Each PSP2 Warrant is exercisable at a strike price of $46.28 per share of common stock and will expire on the fifth anniversary of the issue date of such PSP2 Warrant. The PSP2 Warrants will be settled through net share settlement or net cash settlement, at the Company’s option. The PSP2 Warrants include adjustments for below market issuances, payment of dividends, and other customary anti-dilution provisions. The PSP2 Warrants do not have voting rights.

On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021, which includes provisions for an expected $14 billion of further payroll support ("PSP3 Payroll Support") for eligible U.S. airlines (the "PSP3 Payroll Support Program"). On April 23, 2021, the Company finalized an agreement with Treasury in which the Company is expected to receive an aggregate of approximately $1.9 billion in PSP3 Payroll Support funds that will be used to pay qualifying employee salaries, wages, and benefits through at least September 30, 2021. The Company received an initial installment of $926 million on April 23, 2021, and expects to receive the remainder of PSP3 Payroll Support funds during second quarter 2021.

As consideration for the PSP3 Payroll Support, on April 23, 2021, the Company issued a promissory note (the "PSP3 Note") in favor of Treasury and entered into a warrant agreement with Treasury (the "PSP3 Warrant Agreement"), pursuant to which the Company agreed to issue warrants (each, a "PSP3 Warrant") to purchase common stock of the Company to Treasury. The PSP3 Note was issued for $248 million and the Company issued a PSP3 Warrant valued at a total of $9 million to purchase up to an aggregate of 424 thousand shares of the Company's common stock, subject to adjustment pursuant to the terms of the PSP3 Warrant. Upon each subsequent disbursement of PSP3 Payroll Support to the Company after April 23, 2021, (i) the principal amount of the PSP3 Note will automatically be increased in an amount equal to 30 percent of any such disbursement and (ii) the Company will issue an additional PSP3 Warrant to Treasury in an amount equal to 10 percent of the principal amount of the increase to the PSP3 Note in connection with such disbursement of PSP3 Payroll Support, divided by the strike price of $58.51 (which was the closing price of the Company's common stock on March 10, 2021). The PSP3 Payroll Support funds received can only be utilized to pay qualifying salaries, wages, and benefits, as defined. Excluding the amounts allocated to the PSP3 Note and value allocated to the PSP3 Warrants, all PSP3 Payroll Support funds received are expected to be allocated to reduce eligible costs in the year ended December 31, 2021. The Company currently expects the grant portion of the direct payroll support of $1.3 billion will be classified as a contra-expense line item in theaccompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

On June 1, 2020, the Company announced Voluntary Separation Program 2020 ("Voluntary Separation Program"), a voluntary separation program that allowed eligible Employees the opportunity to voluntarily separate from the Company in exchange for severance, medical/dental coverage for a specified period of time, and travel privileges based on years of service. ~~Virtually all~~A total of ~~the Company’s~~over 4,200 Employees ~~hired before June 1, 2020 were eligible~~elected to participate in Voluntary Separation ~~Program 2020.~~Program.


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

In conjunction with Voluntary Separation Program, ~~2020,~~ the Company also offered certain contract Employees the option to take voluntary Extended Emergency Time Off ("Extended ETO"), for periods between six and 18 months, with the exception of Pilots, who could elect to take Extended ETO for periods up to five ~~years.~~years, all subject to early recalls. Approximately ~~11,000~~12,000 Employees participated in the Extended ETO program in 2020 and ~~8,164~~2021 combined. The Company had no Employees ~~remained~~remaining on Extended ETO ~~leave~~ as of March 31, 2021. Employees taking Extended ETO do not perform any work for the Company and are considered inactive while on leave, but do get paid a portion of their wages and continue to receive all associated benefits, as well as accrue service credit for all benefits. Contract employees who elected to take Extended ETO for periods between 12 and 18 months and had 10 or more years of service were given the opportunity to convert to the

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

2022.

~~Voluntary Separation Program 2020 beginning on September 1, 2020, until up to 90 days before the end of their respective Extended ETO term.~~

The purpose of Voluntary Separation Program ~~2020~~ and Extended ETO iswas to maintain a reduced workforce to operate at reduced capacity relative to the Company's operations prior to the COVID-19 pandemic. In accordance with the accounting guidance in ~~ASC~~Accounting Standards Codification ("ASC") Topic 712 (Compensation — Nonretirement Postemployment Benefits), the Company accrued charges related to the special termination benefits described above upon Employees accepting Voluntary Separation Program ~~2020~~ or Extended ETO ~~offers,~~offers. The Company accrued expenses totaling $1.4 billion for its Voluntary Separation Program and Extended ETO program in 2020, which ~~have been~~are being reduced as program benefits are paid. For both the Voluntary Separation Program and Extended ETO programs combined, approximately $32 million of the liability balances were relieved during the first three months of 2022 through payments to Employees, leaving a balance of $296 million as of March 31, 2022, all of which relates to the Voluntary Separation Program. During first quarter 2021, the Company determined that it was no longer probable that athe remaining portion of the Employees ~~remaining~~ on Extended ETO would remain on such leave for their entire elected term. Therefore, a portion of the accruals previously recorded were reversed, resulting in a ~~$141~~net $115 million credit to ~~expense. In addition,~~expense during first quarter 2021. Both the ~~Company continues to be subject to overstaffing levels in certain workgroups~~initial charge and ~~locations, and offered some of~~ the Employees on Extended ETO the opportunity to extend their leave periods by one, two, or three months. Based on the acceptances received, the Company accrued an additional $26 million in expense associated with the program. Both of these items arepartial reversal were classified within Payroll support and voluntary Employee programs, net, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)~~, and are in addition to the allocation of the Payroll Support Program Extension funds utilized to fund salaries, wages, and benefits, which totaled $1.2 billion during first quarter 2021.~~

The Company accrued expense totaling $620 million for its Extended ETO program in 2020, and considering the adjustments described above, as well as payments subsequently made, $190 million remains accrued as of March 31, 2021. The balance consists of future wages and benefits for the Employees that will not be working during their leave. The Company accrued amounts for up to the first 18 months from inception for all Employees that elected Extended ETO, but did not include amounts related to Pilots for periods beyond February 2022, based on the uncertainty of the Company's future capacity levels, and because it is not currently probable that such Employees will not be recalled to work beyond that timeframe. Therefore, future adjustments to the amounts accrued may become necessary at a later date. For both the Voluntary Support Program 2020 and Extended ETO programs combined, approximately $188 million of the liability balances were relieved during first quarter 2021 through payments to Employees, leaving a balance of $611 million as of March 31, 2021..

In response to flight schedule adjustments due to the effects of the COVID-19 pandemic, a number of aircraft were taken out of the Company’s schedule beginning in late March 2020, and placed in short-term storage, as well as some in a longer term storage program. As of March 31, ~~2021, 66~~2022, 4 aircraft remained in ~~temporary or long-term storage. Given~~storage, and given the ~~current~~ expectation that ~~these aircraft have been placed~~this storage was temporary in ~~storage temporarily,~~nature, the Company has continued to record depreciation expense associated with them.

3. NEW ACCOUNTING PRONOUNCEMENTS

On May 3, 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, and the standard was adopted and applied prospectively by the Company as of January 1, 2022, but the adoption and application did not have a significant impact on the Company's financial statements and disclosures, including interim periods.

On January 7, 2021, the ~~Financial Accounting Standards Board (the "FASB")~~FASB issued ASU ~~No.~~ 2021-01, Reference Rate Reform (Topic 848). This new standard provides optional temporary guidance for entities transitioning away from ~~LIBOR~~London Interbank Offered Rate ("LIBOR") to new reference interest rates so that derivatives affected by the discounting 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, 2022, any new hedging relationships entered into after December 31, 2022, or to existing hedging relationships evaluated for effectiveness existing as of December 31, 2022, that apply certain optional practical expedients. This standard iswas effective immediately and may 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 March 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 date of the issuance of a final update, up to the date that financial statements are available to be issued. The Company ~~is currently evaluating its contracts that reference LIBOR and the potential impacts of applying the optional temporary guidance under this standard. There were~~had no material LIBOR-related contract modifications during ~~first quarter 2021, and~~ the ~~Company will provide additional information about the transition to new reference rates for affected contracts and adoption of this standard at a future date, if material.~~

three months ended March 31, 2022.


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

On August 5, 2020, the FASB issued ASU ~~No.~~ 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This new standard ~~reduces~~reduced the number of accounting models for convertible debt instruments and convertible preferred stock, ~~enhances information transparency by making~~made targeted improvements to the disclosures for convertible instruments and earnings-per-share ~~(EPS)~~("EPS") guidance, and ~~amends~~amended the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. This standard is effective for fiscal years beginning after December 15, ~~2021. Companies may elect early adoption for periods beginning no earlier than December 15, 2020, including interim periods within those fiscal years. The FASB specified that an entity should adopt~~2021, and the ~~guidance as of the beginning of its annual fiscal year. The~~ Company ~~plans to adopt~~adopted this standard as of January 1, ~~2022.~~2022, utilizing the modified retrospective method. Under the modified approach, the Company applied guidance to all financial instruments that were outstanding as of the beginning of the year of adoption with the cumulative effect recognized as an adjustment to the opening balance of retained earnings. Upon adoption, the Company ~~will reclassify~~reclassified the remaining equity component of $300 million, from Additional paid-in capital to Long-term debt associated with its ~~convertible notes,~~1.25% Convertible Senior Notes due 2025 (the “Convertible Notes”), and no longer ~~record~~records amortization of the debt discount to Interest expense. The ~~computation~~cumulative effect from prior period amortization of ~~diluted net income (loss) per share will be affected in the numerator as the Company will no longer record~~ the debt discount ~~amortization in~~that has been recorded to Interest expense, ~~and may have~~offset by reductions to ~~add back Interest expense~~Capital in excess of par value related to the ~~numerator.~~requisition of the equity component through previous repurchases, resulted in a $55 million adjustment to the opening balance of Retained earnings upon adoption. The ~~denominator could also be affected as~~new standard requires the ~~Company will be required to~~ use of the if-converted method to calculate diluted ~~shares.~~EPS, which is generally more dilutive, rather than the treasury stock method as was the Company's policy pre-adoption. The first quarter 2022 impact of adopting this new standard was an increase to the Company's Net loss in the amount of $36 million, or $0.06 per diluted share, as a result of higher losses recognized on the Company’s extinguishment transactions following the elimination of the equity component of the Convertible Notes, partially offset by the elimination of the non-cash interest expense associated with the prior debt discount amortization. See Note 7.


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

4. FINANCIAL DERIVATIVE INSTRUMENTS

Fuel Contracts

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 the 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.

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

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

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.


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

As of March 31, ~~2021,~~2022, the Company had fuel derivative instruments in place to provide coverage ~~in future periods~~ at varying price levels. The following table provides information about the Company’s volume of fuel hedging on an economic basis:

Maximum fuel hedged as of
March 31, 2021 Derivative underlying commodity type as of
Period (by year) (gallons in millions) (a) March 31, 2021
Remainder of 2021 962 WTI crude oil and Brent crude oil
2022 1,220 WTI crude oil and Brent crude oil
2023 643 WTI crude oil and Brent crude oil
Beyond 2023 106 WTI crude oil

Maximum fuel hedged as of

March 31, 2022

Derivative underlying commodity type as of

Period (by year)

(gallons in millions) (a)

March 31, 2022

Remainder of 2022

915

WTI crude oil and Brent crude oil

2023

769

WTI crude oil and Brent crude oil

2024

358

WTI crude oil and 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. Qualification is re-evaluated quarterly, and all periodic changes in fair value of the derivatives designated as hedges are recorded in ~~AOCI~~Accumulated other comprehensive income ("AOCI") until the underlying jet fuel is consumed. See Note 5.

If a derivative ceases to qualify for hedge accounting, any change in the fair value of derivative instruments since the last reporting period would be recorded in Other (gains) losses, net, in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) 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. Factors that have and may continue to lead to the loss of hedge accounting include: significant fluctuation in energy prices, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging. Increased volatility in these commodity markets for an extended period of time, especially if such volatility were to worsen, could cause the Company to lose hedge accounting altogether for the commodities used in its fuel hedging program, which would create further volatility in the Company’s GAAP financial results. However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the Company the opportunity to stabilize jet fuel costs. 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.

~~Southwest Airlines Co.~~

~~Notes~~During 2021, as a result of the drop in demand for air travel compared with 2019 due to ~~Condensed Consolidated Financial Statements~~

~~(unaudited)~~the pandemic, the Company was in an estimated "over-hedged" position and was required to de-designate a portion of its fuel hedges for hedge accounting purposes. However, the impact of such de-designations was not material to 2021 financial results.

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:


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

Asset derivatives Liability derivatives
Balance Sheet Fair value at Fair value at Fair value at Fair value at
(in millions) location 3/31/2021 12/31/2020 3/31/2021 12/31/2020
Derivatives designated as hedges (a)
Fuel derivative contracts (gross) Prepaid expenses and other current assets $ 58 $ 9 $ 0 $ 0
Fuel derivative contracts (gross) Other assets 182 121 0 0
Interest rate derivative contracts Other assets 6 0 0 0
Interest rate derivative contracts Other noncurrent liabilities 0 0 0 6
Total derivatives designated as hedges $ 246 $ 130 $ 0 $ 6
Derivatives not designated as hedges (a)
Fuel derivative contracts (gross) Prepaid expenses and other current assets $ 9 $ 4 $ 0 $ 0
Total derivatives $ 255 $ 134 $ 0 $ 6


		Asset derivatives				Liability derivatives
	Balance Sheet	Fair value at		Fair value at		Fair value at		Fair value at
(in millions)	location	3/31/2022		12/31/2021		3/31/2022		12/31/2021
Derivatives designated as hedges (a)
Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	849	$	409	$	—	$	—
Fuel derivative contracts (gross)	Other assets	470		287		—		—



Interest rate derivative contracts	Other assets	3		—		—		—

Interest rate derivative contracts	Other noncurrent liabilities	—		—		1		4
Total derivatives designated as hedges		$	1,322	$	696	$	1	$	4
Derivatives not designated as hedges (a)
Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	—	$	—	$	46	$	—





Total derivatives		$	1,322	$	696	$	47	$	4

(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 4.

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	March 31,		December 31,			Balance Sheet	March 31,		December 31,
(in millions)	(in millions)	location	2021		2020		(in millions)	location	2022		2021
Cash collateral deposits held from counterparties for fuel contracts - current	Cash collateral deposits held from counterparties for fuel contracts - current	Offset against Prepaid expenses and other current assets	$	15	$	3	Cash collateral deposits held from counterparties for fuel contracts - current	Offset against Prepaid expenses and other current assets	$	410	$	80
Cash collateral deposits held from counterparties for fuel contracts - noncurrent	Cash collateral deposits held from counterparties for fuel contracts - noncurrent	Offset against Other assets	57		31		Cash collateral deposits held from counterparties for fuel contracts - noncurrent	Offset against Other assets	150		95

Receivable from third parties for fuel contracts							Receivable from third parties for fuel contracts	Accounts and other receivables	111		8

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 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. 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. As of March 31, ~~2021,~~2022, 0 cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

1314


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

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 assets	Offsetting 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)
			March 31, 2021							December 31, 2020									March 31, 2022								December 31, 2021
Description	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			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
Fuel derivative contracts	Fuel derivative contracts	Prepaid expenses and other current assets	$	67	$	(15)	$	52		$	13	$	(3)	$	10		Fuel derivative contracts	Prepaid expenses and other current assets	$	849	$	(456)	(b)	$	393		$	409	$	(80)	$	329
Fuel derivative contracts	Fuel derivative contracts	Other assets	$	182	$	(57)	$	125	(a)	$	121	$	(31)	$	90	(a)	Fuel derivative contracts	Other assets	$	470	$	(150)		$	320	(a)	$	287	$	(95)	$	192	(a)

Interest rate derivative contracts	Interest rate derivative contracts	Other assets	$	6	$	0	$	6	(a)	$	0	$	0	$	0	(a)	Interest rate derivative contracts	Other assets	$	3	$	—		$	3	(a)	$	—	$	—	$	—	(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 9.

(b) Includes the current portion of cash collateral deposits held from counterparties and derivative liability associated with fuel contracts.


Offsetting of derivative liabilities	Offsetting 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)
			March 31, 2021							December 31, 2020									March 31, 2022								December 31, 2021
Description	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			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
Fuel derivative contracts	Fuel derivative contracts	Prepaid expenses and other current assets	$	15	$	(15)	$	0		$	3	$	(3)	$	0		Fuel derivative contracts	Prepaid expenses and other current assets	$	456	$	(456)	(b)	$	—		$	80	$	(80)	$	—
Fuel derivative contracts	Fuel derivative contracts	Other assets	$	57	$	(57)	$	0	(a)	$	31	$	(31)	$	0	(a)	Fuel derivative contracts	Other assets	$	150	$	(150)		$	—	(a)	$	95	$	(95)	$	—	(a)

Interest rate derivative contracts	Interest rate derivative contracts	Other noncurrent liabilities	$	0	$	0	$	0		$	6	$	0	$	6		Interest rate derivative contracts	Other noncurrent liabilities	$	1	$	—		$	1		$	4	$	—	$	4

(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 9.

(b) Includes the current portion of cash collateral deposits held from counterparties and derivative liability associated with fuel contracts.

1415


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

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 months ended March 31, ~~2021~~2022 and ~~2020:~~2021:

Location and amount recognized in income on cash flow and fair value hedging relationships
Three months ended March 31, 2021 Three months ended March 31, 2020
(in millions) Fuel and oil Other (gains)/losses, net Other operating expenses Fuel and oil Other (gains)/losses, net Interest expense
Total $ 16 $ 6 $ 1 $ 22 $ 2 $ 2
Loss on cash flow hedging relationships:
Commodity contracts:
Amount of loss reclassified from AOCI into income 16 6 0 22 2 0
Interest contracts:
Amount of loss reclassified from AOCI into income 0 0 1 0 0 0
Impact of fair value hedging relationships:
Interest contracts:
Hedged items 0 0 0 0 0 4
Derivatives designated as hedging instruments 0 0 0 0 0 (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) 2021 2020
Fuel derivative contracts $ (84) $ 84
Interest rate derivatives (9) 32
Total $ (93) $ 116


Location and amount recognized in income on cash flow and fair value hedging relationships
	Three months ended March 31, 2022						Three months ended March 31, 2021
(in millions)	Fuel and oil		Other (gains)/losses, net		Other operating expenses		Fuel and oil		Other (gains)/losses, net		Interest expense
Total	$	(203)	$	—	$	2	$	16	$	6	$	1

(Gain) loss on cash flow hedging relationships:
Commodity contracts:
Amount of (gain) loss reclassified from AOCI into income	(203)		—		—		16		6		—
Interest contracts:
Amount of loss reclassified from AOCI into income	—		—		2		—		—		1


Derivatives not designated as hedges
		(Gain) loss recognized in income on derivatives
Derivatives designated and qualified in cash flow hedging relationships							Derivatives designated and qualified in cash flow hedging relationships
					(Gain) loss recognized in income on derivatives											Gain recognized in AOCI on derivatives, net of tax
				Location of (gain) loss recognized in income on derivatives								Three months ended
		March 31,								March 31,
(in millions)	(in millions)	2021					2020				(in millions)	2022				2021
Fuel derivative contracts	Fuel derivative contracts	$	(5)				$	0			Other (gains) losses, net		Fuel derivative contracts	$	654			$	84
Interest rate derivatives	Interest rate derivatives	0			24				Other (gains) losses, net		Interest rate derivatives	4				9
Total	Total	$	(5)		$	24					Total	$	658			$	93

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~


Derivatives not designated as hedges
	(Gain) loss recognized in income on derivatives

	Three months ended				Location of (gain) loss recognized in income on derivatives
	March 31,
(in millions)	2022		2021
Fuel derivative contracts	$	34	$	(5)	Other (gains) losses, net

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three months ended March 31, ~~2021~~2022 and ~~2020.~~2021. Gains and/or losses associated with fuel derivatives that qualify for hedge accounting are ultimately recorded to Fuel and oil expense. Gains and/or losses associated with fuel derivatives that do not qualify for hedge accounting are recorded to Other (gains) and losses, net. The following


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

table presents the impact of premiums paid for fuel derivative contracts and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) during the period the contract settles:

Premium expense recognized in income on derivatives

Three months ended Location of premium expense recognized in income on derivatives
March 31,
(in millions) 2021 2020
Fuel derivative contracts designated as hedges $ 14 $ 24 Fuel and oil
Fuel derivative contracts not designated as hedges 11 0 Other (gains) losses, net


	Premium expense recognized in income on derivatives

	Three months ended				Location of premium expense recognized in income on derivatives
	March 31,
(in millions)	2022		2021
Fuel derivative contracts designated as hedges	$	26	$	14	Fuel and oil
Fuel derivative contracts not designated as hedges	—		11		Other (gains) losses, net

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 ~~losses~~gains from fuel hedges as of March 31, ~~2021,~~2022, recorded in AOCI, were approximately ~~$19~~$578 million in ~~net~~ unrealized ~~losses,~~gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to March 31, ~~2021.~~2022.

Interest Rate Swaps

The Company is party to certain interest rate swap agreements that are accounted for as cash flow hedges, and has in the past held interest rate swap agreements that have qualified as fair value hedges, as defined in the applicable accounting guidance for derivative instruments and hedging. Several of the Company's interest rate swap agreements qualify for the "shortcut" ~~method~~or "critical terms match" methods of accounting for hedges, which ~~dictated~~dictate that the hedges were assumed to be perfectly effective at origination, and, thus, there was no ineffectiveness to be recorded in earnings.

During 2019, the Company had entered into forward-starting interest rate swap agreements related to a series of 12 Boeing 737 MAX 8 aircraft leases originally scheduled to be received between July 2019 and February 2020. These lease contracts exposed the Company to interest rate risk as the rental payments were subject to adjustment and would become fixed based on the 9-year swap rate at the time of delivery. As a result of the grounding of the MAX aircraft, those deliveries were significantly delayed. These original agreements were subsequently terminated in third quarter 2019, and the Company entered into new interest rate swap agreements based on revised expected aircraft delivery dates. As the revised delivery dates were also not met, these subsequent agreements were subsequently de-designated as hedges and the agreements terminated. The Company received 3 of the 12 aircraft in December 2020, and an additional 8 aircraft in first quarter 2021. The remaining delivery is expected during third quarter 2021. As a result of the discontinued hedges, the Company had cumulative losses "frozen" in AOCI, which are being recognized in earnings over the 9-year lease terms of each aircraft upon delivery. Therefore, the Company has reclassified approximately $1 million in losses from AOCI into Other operating expenses, in the unaudited Condensed Consolidated Statement of Income (Loss) for the three months ended March 31, 2021. NaN such reclassifications occurred in 2020. The cumulative amounts remaining in AOCI as of March 31, 2021, associated with future aircraft deliveries, was $62 million.

For the Company’s interest rate swap agreements that do not qualify for the "shortcut" or "critical terms match" methods of accounting, ineffectiveness is assessed at each reporting period. If hedge accounting is achieved, all periodic changes in fair value of the interest rate swaps are recorded in AOCI.

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Credit Risk and Collateral

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 March 31, ~~2021,~~2022, 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 letters of credit were 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.

The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of March 31, ~~2021,~~2022, at which such postings are triggered:

Counterparty (CP)
(in millions) A B C D E F G Other (a) Total
Fair value of fuel derivatives $ 60 $ 28 $ 60 $ 28 $ 30 $ 21 $ 18 $ 4 $ 249
Cash collateral held from CP 72 0 0 0 0 0 0 0 72
Option to substitute LC for cash N/A N/A 0 (b)
0 (b)

0 (b) N/A 0 (b)
If credit rating is investment
grade, fair value of fuel
derivative level at which:
Cash is provided to CP >(100) >(50) >(75)
>(125)

>(40) >(65) >(100)
Cash is received from CP >0(c) >150(c) >250(c) >125(c) >100(c) >70(c) >100(c)
If credit rating is non-investment
grade, fair value of fuel derivative level at which:
Cash is received from CP 0 (d) 0 (d) 0 (d) 0 (d) 0 (d) 0 (d) 0 (d)


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

Counterparty (CP)

(in millions)

Other (a)

Total

Fair value of fuel derivatives

315

161

303

124

146

101

1,273

Cash collateral held from CP

341

—

560

Option to substitute LC for cash

N/A

(b)

N/A

(b)

If credit rating is investment
grade, fair value of fuel
derivative level at which:

Cash is provided to CP

>(100)

>(50)

>(75)

>(125)

>(40)

>(65)

>(100)

Cash is received from CP

>0(c)

>150(c)

>250(c)

>125(c)

>100(c)

>70(c)

>100(c)

If credit rating is non-investment
grade, fair value of fuel derivative level at which:

Cash is received from CP

(d)

(a) Individual counterparties with fair value of fuel derivatives < $4$16 million.

(b) The Company has the option to substitute letters of credit for 100 percent of cash collateral requirement.

(d) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.

1718


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

5. 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 income (loss) and Comprehensive income (loss) for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021 were as follows:

Three months ended March 31,
(in millions) 2021 2020
NET INCOME (LOSS) $ 116 $ (94)
Unrealized gain (loss) on fuel derivative instruments, net of
deferred taxes of $30 and ($19)
101 (65)
Unrealized gain (loss) on interest rate derivative instruments, net of
deferred taxes of $3 and ($10)
10 (32)
Other, net of deferred taxes of ($13) and ($9) (47) (28)
Total other comprehensive income (loss) $ 64 $ (125)
COMPREHENSIVE INCOME (LOSS) $ 180 $ (219)


	Three months ended March 31,
(in millions)	2022		2021
NET INCOME (LOSS)	$	(278)	$	116
Unrealized gain on fuel derivative instruments, net of deferred taxes of $151 and $30	498		101
Unrealized gain on interest rate derivative instruments, net of deferred taxes of $2 and $3	5		10
Other, net of deferred taxes of $— and ($13)	—		(47)
Total other comprehensive income	$	503	$	64
COMPREHENSIVE INCOME	$	225	$	180

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three months ended March 31, ~~2021:~~2022:

(in millions) Fuel derivatives Interest rate derivatives Defined benefit plan items Other Deferred tax Accumulated other comprehensive income (loss)
Balance at December 31, 2020 $ (119) $ (66) $ (43) $ 91 $ 32 $ (105)
Cumulative effect of adopting ASU 2016-01 as of January 1, 2018 — See Note 1 0 0 0 (31) 12 (19)
Changes in fair value 109 12 0 0 (28) 93
Reclassification to earnings 22 1 0 (60) (a) 8 (29)
Balance at March 31, 2021 $ 12 $ (53) $ (43) $ 0 $ 24 $ (60)

~~(a) Investment gains related to prior periods that were reclassified from AOCI into Other (gains) losses, net. See Note 1.~~


(in millions)	Fuel derivatives		Interest rate derivatives		Defined benefit plan items		Deferred tax		Accumulated other comprehensive income
Balance at December 31, 2021	$	492	$	(57)	$	66	$	(113)	$	388
Changes in fair value	852		5		—		(199)		658
Reclassification to earnings	(203)		2		—		46		(155)
Balance at March 31, 2022	$	1,141	$	(50)	$	66	$	(266)	$	891

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

The following ~~tables illustrate~~table illustrates the significant amounts reclassified out of each component of AOCI for the three months ended March 31, ~~2021:~~2022:

Three months ended March 31, ~~2021~~2022

(in millions)

Amounts reclassified from AOCI

Affected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)

AOCI components

Unrealized ~~loss~~gain on fuel derivative instruments

16 (203)

Fuel and oil expense

~~Other (gains) losses, net~~

5 (47)

Less: Tax expense

17 (156)

Net of tax

Unrealized loss on interest rate derivative instruments

~~Other operating expenses~~Interest expense

Less: Tax expense

Net of tax

~~Unrealized gain on deferred compensation plan investment (See Note 1)~~

~~(60)~~

~~Other (gains) losses, net~~

~~(13)~~

~~Less: Tax expense~~

~~(47)~~

~~Net of tax~~

Total reclassifications for the period

~~(29)~~(155)

Net of tax

6. 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, ~~2021~~2022 and ~~March 31, 2020:~~2021:

Three months ended March 31,
(in millions) 2021 2020
Passenger non-loyalty $ 1,354 $ 3,220
Passenger loyalty - air transportation 278 461
Passenger ancillary sold separately 80 164
Total passenger revenues $ 1,712 $ 3,845


	Three months ended March 31,
(in millions)	2022		2021
Passenger non-loyalty	$	3,364	$	1,354
Passenger loyalty - air transportation	624		278
Passenger ancillary sold separately	147		80
Total passenger revenues	$	4,135	$	1,712

As of March 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, the components of Air traffic liability, ~~and Air traffic liability - noncurrent,~~ including contract liabilities based on tickets sold and unused ~~funds~~flight credits available to the Customer, both of which are net of recorded breakage, and loyalty points available for redemption, ~~net of expected spoilage,~~ within the unaudited Condensed Consolidated Balance Sheet were as follows:


		Balance as of					Balance as of
(in millions)	(in millions)	March 31, 2021		December 31, 2020		(in millions)	March 31, 2022		December 31, 2021
Air traffic liability - passenger travel and ancillary passenger services	Air traffic liability - passenger travel and ancillary passenger services	$	3,109	$	2,686	Air traffic liability - passenger travel and ancillary passenger services	$	3,726	$	2,936
Air traffic liability - loyalty program	Air traffic liability - loyalty program	4,623		4,447		Air traffic liability - loyalty program	4,884		4,789
Total Air traffic liability	Total Air traffic liability	$	7,732	$	7,133	Total Air traffic liability	$	8,610	$	7,725

The balance in Air traffic liability - passenger travel and ancillary passenger services also includes unused funds that are available for use by Customers and are not currently associated with a ticket, ~~but represent funds effectively refunded and made available for use to purchase a ticket~~although they remain reusable, for a period of time, in the form of a flight credit that ~~occurs prior to their expiration.~~can be applied towards the purchase of future travel. These ~~funds~~flight credits are typically created as a result of a prior ticket cancellation or exchange. Rollforwards of the Company's Air traffic liability - loyalty program for the three months ended March 31, ~~2021~~2022 and ~~March 31, 2020~~2021 were as follows (in millions):


		Three months ended March 31,				Three months ended March 31,
		2021		2020				2022		2021
Air traffic liability - loyalty program - beginning balance	Air traffic liability - loyalty program - beginning balance	$	4,447	$	3,385		Air traffic liability - loyalty program - beginning balance	$	4,789	$	4,447
Amounts deferred associated with points awarded	Amounts deferred associated with points awarded	466		656			Amounts deferred associated with points awarded	736		466
Revenue recognized from points redeemed - Passenger	Revenue recognized from points redeemed - Passenger	(278)		(461)			Revenue recognized from points redeemed - Passenger	(624)		(278)
Revenue recognized from points redeemed - Other	Revenue recognized from points redeemed - Other	(12)		(19)			Revenue recognized from points redeemed - Other	(17)		(12)

Air traffic liability - loyalty program - ending balance	Air traffic liability - loyalty program - ending balance	$	4,623	$	3,561		Air traffic liability - loyalty program - ending balance	$	4,884	$	4,623

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, ~~2021~~2022 and ~~March 31, 2020~~2021 were as follows (in millions):


	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


	Air traffic liability

Balance at December 31, 2020	$	7,133
Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)	2,324
Revenue from amounts included in contract liability opening balances	(743)
Revenue from current period sales	(982)
Balance at March 31, 2021	$	7,732


	~~Air traffic liability~~

~~Balance at December 31, 2019~~	$	~~5,510~~
~~Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)~~	~~4,565~~
~~Revenue from amounts included in contract liability opening balances~~	~~(1,949)~~
~~Revenue from current period sales~~	~~(1,915)~~
~~Balance at March 31, 2020~~	$	~~6,211~~

During 2020 and in parts of 2021, the Company experienced a significantly higher number of Customer-driven flight cancellations as a result of the COVID-19 pandemic. See Note 2 for further information. As a result, the amount of Customer travel funds held ~~by the Company, net of spoilage,~~in Air traffic liability that ~~can~~are estimated to be redeemed for future travel as of March 31, ~~2021,~~2022, remains much higher than historical levels. The amount of such Customer funds represents approximately 229 percent and 16 percent of the total Air traffic liability balance at March 31, 2022, and December 31, 2021, asrespectively, compared to approximately ~~28 percent of the total Air traffic liability balance at December 31, 2020. Both of these recent periods represent a significantly higher portion than the approximate~~ 2 percent of the Air traffic liability balance ~~that Customer funds made up~~ as of December 31, 2019. In order to provide additional flexibility to Customers who hold these funds, the Company ~~has~~ significantly relaxed its previous policies with regards to the time period within which these funds can be redeemed, which is typically twelve months from the original date of purchase. For all Customer travel funds created or that would have otherwise expired between March 1 and September 7, 2020 associated with flight cancellations, the Company ~~has~~ extended the expiration date to September 7, 2022. At March 31, ~~2021, $1.8~~2022, $1.2 billion of extended Customer travel funds ~~remain in Air traffic liability~~ with a September 7, 2022 expiration ~~date. The~~date remain in Air traffic liability, although the Company has ~~limited data available to predict the occurrence or timing~~estimated that a portion of ~~performance obligation satisfaction on these funds due to certain constraints including, but~~those will not limited to, consumer confidence, economic health, vaccines, and uncertainty regarding customer travel fund redemption patterns for funds that live longer than 12 months as this is unprecedented in Company history.be redeemed. As a result, recognition of these travel funds as flown revenue, refunds, or ~~spoilage~~breakage revenue will likely be more volatile ~~from period to period compared to what previous Customer behavior~~

~~may indicate, as cumulative revenue recognized is constrained to amounts that are not probable of being reversed. Despite~~over the ~~possibility that some~~remaining life of these ~~travel~~ funds may be redeemed beyond the following twelve-month period, the Company has continued to classify them as "current" in the accompanying unaudited Condensed Consolidated Balance Sheet as they remain a demand liability and ~~the Company has limited data to enable it to accurately estimate the portion that will~~may not be ~~redeemed for travel in the subsequent twelve months.~~comparable to historical trends.

Recognition of revenue associated with the Company’s loyalty liability can be difficult to predict, as the number of award seats available to members is not currently restricted and they could choose to redeem their points at any time that a seat is available. The performance obligations classified as a current liability related to the Company’s loyalty program were estimated based on expected redemptions utilizing historical redemption patterns, and forecasted flight availability ~~fares,~~ and ~~coefficients.~~fares. The entire balance classified as Air traffic liability—noncurrent relates to loyalty points that were estimated to be redeemed in periods beyond 12the twelve months following the representative balance sheet date. ~~The~~Based on historical experience as well as current forecasted redemptions, the Company expects the majority of loyalty points to be redeemed within approximately two ~~years.~~years of the date the points are issued.

~~Spoilage estimates~~All performance obligations related to freight services sold are ~~based on~~completed within twelve months or less; therefore, the ~~Company's Customers' historical travel behavior, as well as assumptions about the Customers' future travel behavior. Assumptions used~~Company has elected to ~~generate spoilage estimates can be impacted by several factors including, but~~ not limited to: fare increases, fare sales, changes to the Company's ticketing policies, changes to the Company’s refund, exchange, and unused funds policies, seat availability, and economic factors. Given the unprecedented amount of 2020 Customer flight cancellations anddisclose the amount of ~~travel funds provided,~~the remaining transaction price and its expected timing of recognition for freight shipments.

Other revenues primarily consist of marketing royalties associated with the Company’s co-branded Chase® Visa credit card, but also include commissions and advertising associated with Southwest.com®. All amounts classified as Other revenues are paid monthly, coinciding with the Company ~~expects additional variability in~~fulfilling its deliverables; therefore, the Company has elected to not disclose the amount of ~~spoilage revenue recorded in future periods, as~~ the ~~estimates~~remaining transaction price and its expected timing of ~~the portion of sold tickets that will expire unused may differ from historical experience.~~recognition for such services provided.

The Company has a co-branded credit card agreement (the “Agreement”) with Chase Bank USA, N.A. (“Chase”), through which the Company sells loyalty points and certain marketing components, which consist of the use of the brand and access to Rapid Rewards Member lists, licensing and advertising elements, and the use of the Company’s resource team. In 2018, Chase and Southwest executed a multi-year extension of the Agreement, extending the decades-long relationship between the parties. The Company recognized revenue related to the marketing, advertising, and other travel-related benefits of the revenue associated with various loyalty partner agreements including, but not limited to, the Agreement with Chase,

within Other operating revenues. For the three months ended March 31, ~~2021~~2022 and ~~March 31, 2020,~~2021, the Company recognized ~~$280~~$486 million and ~~$321~~$280 million, respectively.

The Company is also required to collect certain taxes and fees from Customers on behalf of government agencies and remit these back to the applicable governmental entity on a periodic basis. These taxes and fees include foreign and U.S. federal transportation taxes, federal security charges, and airport passenger facility charges. These items are collected from Customers at the time they purchase their tickets, are excluded from the contract transaction price, and are therefore not included in Passenger revenue. The Company records a liability upon collection from the Customer and relieves the liability when payments are remitted to the applicable governmental agency.

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

7. NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net income (loss) per share (in millions, except per share amounts). For the three months ended March 31, 2022, 47 million shares related to the Convertible Notes and an immaterial number of shares related to the Company's restricted stock units and stock warrants were excluded from the denominator because inclusion of such shares would be antidilutive. An immaterial number of shares related to the Company's restricted stock units were excluded from the denominator for ~~both periods presented,~~the three months ended March 31, 2021, because inclusion of such shares would be antidilutive.


		Three months ended March 31,				Three months ended March 31,
		2021		2020				2022			2021
NUMERATOR:	NUMERATOR:						NUMERATOR:
Net income (loss)	Net income (loss)	$	116	$	(94)		Net income (loss)	$	(278)		$	116

DENOMINATOR:	DENOMINATOR:						DENOMINATOR:
Weighted-average shares outstanding, basic	Weighted-average shares outstanding, basic	591		515			Weighted-average shares outstanding, basic	592			591
Dilutive effects of convertible notes (a)		16		0
Dilutive effects of Convertible Notes							Dilutive effects of Convertible Notes	—		(a)	16		(b)
Dilutive effect of stock warrants	Dilutive effect of stock warrants	1		0			Dilutive effect of stock warrants	—			1
Dilutive effect of restricted stock units	Dilutive effect of restricted stock units	1		0			Dilutive effect of restricted stock units	—			1
Adjusted weighted-average shares outstanding, diluted	Adjusted weighted-average shares outstanding, diluted	609		515			Adjusted weighted-average shares outstanding, diluted	592			609

NET INCOME (LOSS) PER SHARE:	NET INCOME (LOSS) PER SHARE:						NET INCOME (LOSS) PER SHARE:

Basic	Basic	$	0.20	$	(0.18)		Basic	$	(0.47)		$	0.20
Diluted	Diluted	$	0.19	$	(0.18)		Diluted	$	(0.47)		$	0.19

(a) ~~Because~~As of January 1, 2022, the Company ~~intends~~adopted ASU 2020-06 using the modified retrospective method. The standard requires the Company to ~~settle conversions~~apply the if-converted method for purposes of Net income (loss) per share. Using this method, the numerator is affected by ~~paying cash up~~adding back interest expense and the denominator is affected by including the effect of potential share settlement, if the effect is more dilutive, regardless of the type of settlement. As a result, the Company will include all shares issuable upon conversion in the denominator if the Company has Net income for the period. For the three months ended March 31, 2022, the Company incurred a Net loss, thus all shares are considered antidilutive and have been excluded from the denominator. See Notes 3 and 11 for further information regarding the new standard and the Convertible Notes.

(b) Prior to the ~~principal amount~~adoption of ASU 2020-06, the ~~convertible notes, with any excess conversion value settled in shares of common stock, the convertible notes are being~~Convertible Notes were accounted for using the treasury stock method for the purposes of Net income (loss) per share. Using this method, the denominator will be affected when the average share price of the Company's common stock for a given period is greater than the conversion price of approximately $38.48 per share, and the Company reports Net income for the given period. For the three months ended March 31, 2021, the average market price of the Company's common stock exceeded ~~this~~the conversion price per share of $38.48 and as such, the common shares underlying the ~~convertible notes~~Convertible Notes were included in the diluted calculation. ~~See Note 8 for further information on the convertible notes.~~


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

8. 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 March 31, ~~2021,~~2022, 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), interest rate derivative contracts, fuel derivative contracts, and available-for-sale securities. The majority of the Company’s short-term investments consist of instruments classified as Level 1. However, the Company has certificates of deposit, commercial paper, and time 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-sale~~Equity securities primarily consist of investments ~~in equity securities~~ 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 currently consist solely of option contracts, whereas interest rate derivatives consist solely of swap agreements. See Note 4 for further information on the Company’s

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

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 a 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 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 Salaries, wages, and benefits line and Other (gains) losses line, respectively, of the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

2120


Notes to Condensed Consolidated Financial Statements			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 March 31, ~~2021,~~2022, and December 31, ~~2020:~~2021:


				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 assets		Significant other observable inputs		Significant unobservable inputs
Description	Description	March 31, 2021		(Level 1)		(Level 2)		(Level 3)		Description	March 31, 2022		(Level 1)		(Level 2)		(Level 3)
Assets	Assets	(in millions)								Assets	(in millions)
Cash equivalents:	Cash equivalents:									Cash equivalents:
Cash equivalents (a)	Cash equivalents (a)	$	11,600	$	11,600	$	0	$	0	Cash equivalents (a)	$	12,478	$	12,478	$	—	$	—
Commercial paper	Commercial paper	90		0		90		0		Commercial paper	270		—		270		—
Certificates of deposit		6		0		6		0

Time deposits	Time deposits	275		0		275		0		Time deposits	350		—		350		—
Short-term investments:	Short-term investments:									Short-term investments:
Treasury bills	Treasury bills	1,800		1,800		0		0		Treasury bills	2,292		2,292		—		—

Certificates of deposit	Certificates of deposit	27		0		27		0		Certificates of deposit	25		—		25		—
Time deposits	Time deposits	550		0		550		0		Time deposits	325		—		325		—

Fuel derivatives:	Fuel derivatives:									Fuel derivatives:
Option contracts (b)	Option contracts (b)	249		0		0		249		Option contracts (b)	1,319		—		—		1,319
Interest rate derivatives (see Note 4)	Interest rate derivatives (see Note 4)	6		0		6		0		Interest rate derivatives (see Note 4)	3		—		3		—
Other available-for-sale securities		240		240		0		0
Equity Securities										Equity Securities	261		261		—		—
Total assets	Total assets	$	14,843	$	13,640	$	954	$	249	Total assets	$	17,323	$	15,031	$	973	$	1,319
Liabilities										Liabilities
Fuel derivatives:										Fuel derivatives:
Option contracts (b)										Option contracts (b)	$	(46)	$	—	$	—	$	(46)
Interest rate derivatives (see Note 4)										Interest rate derivatives (see Note 4)	(1)		—		(1)		—
Total liabilities										Total liabilities	$	(47)	$	—	$	(1)	$	(46)

(a) Cash equivalents are primarily composed of money market investments.

(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as ana net asset. See Note 4.


				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 assets		Significant other observable inputs		Significant unobservable inputs
Description	Description	December 31, 2020		(Level 1)		(Level 2)		(Level 3)		Description	December 31, 2021		(Level 1)		(Level 2)		(Level 3)
Assets	Assets	(in millions)								Assets	(in millions)
Cash equivalents:	Cash equivalents:									Cash equivalents:
Cash equivalents (a)	Cash equivalents (a)	$	10,663	$	10,663	$	0	$	0	Cash equivalents (a)	$	12,340	$	12,340	$	—	$	—
Commercial paper	Commercial paper	90		0		90		0		Commercial paper	90		—		90		—
Certificates of deposit		10		0		10		0

Time deposits	Time deposits	300		0		300		0		Time deposits	50		—		50		—
Short-term investments:	Short-term investments:									Short-term investments:
Treasury bills	Treasury bills	1,800		1,800		0		0		Treasury bills	2,399		2,399		—		—
Certificates of deposit		46		0		46		0

Time deposits	Time deposits	425		0		425		0		Time deposits	625		—		625		—

Fuel derivatives:	Fuel derivatives:									Fuel derivatives:

Option contracts (b)	Option contracts (b)	134		0		0		134		Option contracts (b)	696		—		—		696

Other available-for-sale securities		259		259		0		0
Equity Securities										Equity Securities	288		288		—		—
Total assets	Total assets	$	13,727	$	12,722	$	871	$	134	Total assets	$	16,488	$	15,027	$	765	$	696
Liabilities	Liabilities									Liabilities

Interest rate derivatives (see Note 4)	Interest rate derivatives (see Note 4)	$	(6)	$	0	$	(6)	$	0	Interest rate derivatives (see Note 4)	$	(4)	$	—	$	(4)	$	—


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

(a) Cash equivalents are primarily composed of money market investments.

(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as an asset. See Note 4.

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, ~~2021,~~2022, or the year ended December 31, ~~2020.~~2021. The following table presents the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, ~~2021:~~2022:

Fair value measurements using significant unobservable inputs (Level 3)

(in millions)

Fuel derivatives

Balance at December 31, ~~2020~~2021

~~134~~696

Total gains (losses) for the period

Included in earnings

~~(1)~~(34)

(a)

Included in other comprehensive income

~~117~~852

Sales

(12)

(b)

Settlements

~~(1)~~(229)

Balance at March 31, ~~2021~~2022

~~249~~1,273

The amount of total losses for the period

included in earnings attributable to the

change in unrealized gains or losses relating

to assets still held at March 31, ~~2021~~2022

~~(2)~~(34)

(a)

The amount of total gains 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, ~~2021~~2022

~~116~~719

(a) Included in Other (gains) losses, net, within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

(b) The sale of fuel derivatives is recorded gross based on the structure of the derivative instrument and whether a contract with multiple derivatives was 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, an increase (decrease) in implied volatility would have resulted in a higher (lower) fair value measurement, respectively, for the Company’s derivative option contracts.

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 March 31, ~~2021:~~2022:


Quantitative information about Level 3 fair value measurements	Quantitative information about Level 3 fair value measurements							Quantitative information about Level 3 fair value measurements
		Valuation technique	Unobservable input	Period (by year)	Range	Weighted Average (a)			Valuation technique	Unobservable input	Period (by year)	Range	Weighted Average (a)
Fuel derivatives	Fuel derivatives	Option model	Implied volatility	Second quarter 2021	22-46%	32	%	Fuel derivatives	Option model	Implied volatility	Second quarter 2022	47-73%	57	%
				Third quarter 2021	30-40%	33	%				Third quarter 2022	47-67%	54	%
				Fourth quarter 2021	29-36%	31	%				Fourth quarter 2022	42-59%	49	%
				2022	25-34%	29	%				2023	32-51%	43	%
				2023	23-26%	25	%				2024	27-42%	33	%
				Beyond 2023	23-25%	24	%

(a) Implied volatility weighted by the notional amount (barrels of fuel) that will settle in respective period.

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 March 31, ~~2021,~~2022, 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 5 of the Company’s~~All 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


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

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.

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~


(in millions)	(in millions)	Carrying value		Estimated fair value		Fair value level hierarchy	(in millions)	Carrying value		Estimated fair value		Fair value level hierarchy
2.75% Notes due 2022		$	300	$	309	Level 2
Pass Through Certificates due 2022 - 6.24%		105		107		Level 2
2.75% Notes due November 2022							2.75% Notes due November 2022	$	300	$	301	Level 2
Pass Through Certificates due August 2022 - 6.19%							Pass Through Certificates due August 2022 - 6.19%	33		33		Level 2
4.75% Notes due 2023	4.75% Notes due 2023	1,250		1,350		Level 2	4.75% Notes due 2023	1,250		1,280		Level 2
1.25% Convertible Notes due 2025	1.25% Convertible Notes due 2025	1,963		3,968		Level 2	1.25% Convertible Notes due 2025	1,933		2,644		Level 2
5.25% Notes due 2025	5.25% Notes due 2025	1,550		1,765		Level 2	5.25% Notes due 2025	1,550		1,627		Level 2
Term Loan Agreement payable through 2025 - 1.59%		112		112		Level 3

3.00% Notes due 2026	3.00% Notes due 2026	300		317		Level 2	3.00% Notes due 2026	300		295		Level 2
Term Loan Agreement payable through 2026 - 1.34%		159		157		Level 3

3.45% Notes due 2027	3.45% Notes due 2027	300		318		Level 2	3.45% Notes due 2027	300		297		Level 2
5.125% Notes due 2027	5.125% Notes due 2027	2,000		2,301		Level 2	5.125% Notes due 2027	1,970		2,106		Level 2
7.375% Debentures due 2027	7.375% Debentures due 2027	119		145		Level 2	7.375% Debentures due 2027	116		131		Level 2
Term Loan Agreement payable through 2028 - 1.60%		178		177		Level 3

2.625% Notes due 2030	2.625% Notes due 2030	500		492		Level 2	2.625% Notes due 2030	500		459		Level 2
1.000% Payroll Support Program Loan due 2030		976		941		Level 3
1.000% Payroll Support Program Loan due 2031		488		460		Level 3
1.000% PSP1 due 2030							1.000% PSP1 due 2030	976		919		Level 3
1.000% PSP2 due 2031							1.000% PSP2 due 2031	566		523		Level 3
1.000% PSP3 due 2031							1.000% PSP3 due 2031	526		483		Level 3

~~Convertible Notes~~

~~On May 1, 2020, the Company completed the public offering of $2.3 billion aggregate principal amount of 1.250% Convertible Senior Notes due 2025 (the “Convertible Notes”).~~

Upon issuance, the Company bifurcated the Convertible Notes for accounting purposes between a liability component and an equity component utilizing applicable guidance. The liability component was determined by estimating the fair value of a hypothetical issuance of an identical offering excluding the conversion feature of the Convertible Notes. The carrying amount of the equity component was calculated as the difference between the liability component and the face amount of the Convertible Notes, which was determined to be $403 million. The equity component is not remeasured as long as it continues to meet the conditions for equity classification, which it had as of March 31, 2021, and December 31, 2020. The following table details the liability component recognized related to the Convertible Notes as of March 31, 2021, and December 31, 2020:

(in millions) March 31, 2021 December 31, 2020
Liability component:
Principal amount $ 2,300 $ 2,300
Unamortized debt discount (337) (355)
Net carrying amount $ 1,963 $ 1,945

The effective interest rate on the liability component approximates 5.2 percent for the three months ended March 31, 2021. The Company recognized $28 million of interest expense associated with the Convertible Notes during the three months ended March 31, 2021, including $19 million of non-cash amortization of the debt discount, $2 million of non-cash amortization of debt issuance costs, and $7 million of contractual coupon interest. The

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~unamortized debt discount and issuance costs will be recognized as non-cash interest expense over the 5-year term of the notes, through May 1, 2025.~~

As of March 31, 2021, the if-converted value of the Convertible Notes exceeded the principal amount by $881 million, using the average stock price for the three months ended March 31, 2021. The Convertible Notes did not meet the criteria to be converted throughout first quarter 2021. However, the conversion criteria were subsequently met, and holders of the Convertible Notes are able to convert during the calendar quarter beginning April 1, 2021.

9. SUPPLEMENTAL FINANCIAL INFORMATION


(in millions)	(in millions)	March 31, 2021		December 31, 2020		(in millions)	March 31, 2022		December 31, 2021
Trade receivables	Trade receivables	$	59	$	46	Trade receivables	$	70	$	58
Credit card receivables	Credit card receivables	92		35		Credit card receivables	217		83
Business partners and other suppliers ~~(a)~~	Business partners and other suppliers ~~(a)~~	73		274		Business partners and other suppliers ~~(a)~~	497		432
Taxes receivable ~~(b)~~	Taxes receivable ~~(b)~~	705		740		Taxes receivable ~~(b)~~	698		699
Fuel hedging and receivables						Fuel hedging and receivables	111		8
Other	Other	8		35		Other	99		77
Accounts and other receivables	Accounts and other receivables	$	937	$	1,130	Accounts and other receivables	$	1,692	$	1,357


(in millions)	(in millions)	March 31, 2021		December 31, 2020		(in millions)	March 31, 2022		December 31, 2021
Derivative contracts	Derivative contracts	$	131	$	90	Derivative contracts	$	323	$	192
Intangible assets, net	Intangible assets, net	295		295		Intangible assets, net	295		295

Other	Other	317		337		Other	360		395
Other assets	Other assets	$	743	$	722	Other assets	$	978	$	882

(in millions) March 31, 2021 December 31, 2020
Accounts payable trade $ 169 $ 111
Salaries payable 197 201
Taxes payable excluding income taxes 190 49
Aircraft maintenance payable 83 95
Fuel payable 98 66
Other payable 357 409
Accounts payable $ 1,094 $ 931

(in millions) March 31, 2021 December 31, 2020
Extended Emergency Time Off $ 190 $ 393
Voluntary Separation Program 2020 124 143
Profitsharing and savings plans 46 25
Vendor prepayment (a) 277 600
Vacation pay 443 436
Health 109 111
Workers compensation 163 161
Property and income taxes 80 84
Interest 111 49
Other 122 257
Accrued liabilities $ 1,665 $ 2,259


(in millions)	March 31, 2022		December 31, 2021
Accounts payable trade	$	320	$	156
Salaries payable	259		287
Taxes payable excluding income taxes	319		200
Aircraft maintenance payable	53		42
Fuel payable	208		170

Other payable	489		427
Accounts payable	$	1,648	$	1,282

2523


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

(in millions) March 31, 2021 December 31, 2020
Extended Emergency Time Off $ 0 $ 57
Voluntary Separation Program 2020 297 321
Postretirement obligation 430 428
Other deferred compensation 319 353
Other 77 88
Other noncurrent liabilities $ 1,123 $ 1,247


(in millions)	March 31, 2022		December 31, 2021


Voluntary Separation Program	$	85	$	92
Profitsharing and savings plans	65		262



Vacation pay	456		451

Health	153		152

Workers compensation	138		141
Property and income taxes	61		65
Interest	107		46
Deferred supplier payments (a)	—		80
Other	295		335
Accrued liabilities	$	1,360	$	1,624


(in millions)	March 31, 2022		December 31, 2021

Voluntary Separation Program	$	211	$	233
Postretirement obligation	333		330


Other deferred compensation	334		369

Other	282		292
Other noncurrent liabilities	$	1,160	$	1,224

(a) ~~In fourth quarter 2020, the Company~~Represents amounts owed at December 31, 2021 for aircraft deliveries received ~~a $600 million prepayment from Chase for Rapid Rewards points expected~~that will be relieved via future payments to be purchased during 2021, based on cardholder activity on the Visa credit card associated with its loyalty program. During first quarter 2021, $323 million was reclassified to deferred revenue in Air Traffic liability--loyalty (including $106 million that would have been a receivable from business partners as of March 31, 2021), and the remainder is expected to be reclassified during second quarter 2021.

(b) Both periods include approximately $470 million associated with a significant cash tax refund expected as a result of the CARES Act allowing entities to carry back 2020 losses to prior periods of up to five years, and claim refunds of federal taxes paid. This amount also includes excise taxes remitted to taxing authorities for which the subsequent flights were canceled by Customers, resulting in amounts due back to the Company.supplier.

For further information on fuel derivative and interest rate derivative contracts, see Note 4.

Other Operating Expenses

Other operating expenses ~~consists~~consist of aircraft rentals, distribution costs, advertising expenses, personnel expenses, professional fees, and other operating costs, none of which individually exceeded 10 percent of Operating ~~expenses for the three months ended March 31, 2021.~~expenses.

10. COMMITMENTS AND CONTINGENCIES

~~Los Angeles International Airport~~

In October 2017, the Company executed a lease agreement with Los Angeles World Airports ("LAWA") (the "T1.5 Lease"). Under the T1.5 Lease, the Company oversaw and managed the design, development, financing, construction, and commissioning of a passenger processing facility between Terminal 1 and 2 (the "Terminal 1.5 Project"). The Terminal 1.5 Project includes ticketing, baggage claim, passenger screening, and a bus gate at a cost not to exceed $464 million for site improvements and non-proprietary improvements. Construction on the Terminal 1.5 Project began during third quarter 2017 and was substantially completed at December 31, 2020; however, the Terminal 1.5 Project will not be placed into service until second quarter 2021, at which time LAWA is expected to repay the outstanding loan and purchase the remaining completed assets for accounting purposes. The costs incurred to fund the Terminal 1.5 Project are included within Assets Constructed for Others ("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. Upon completion of any individual asset as part of the overall project, the asset and associated liability on the balance sheet are de-recognized in accordance with applicable accounting guidance.

Funding for this project is primarily through the Regional Airports Improvement Corporation (the "RAIC"), which is a quasi-governmental special purpose entity that is acting as a conduit borrower under a syndicated credit facility provided by a group of lenders. A loan made under the credit facility for the Terminal 1.5 Project is being used to reimburse the Company for the site improvements and non-proprietary improvements of the Terminal 1.5 Project, and the outstanding loan will be repaid with the proceeds of LAWA’s payments to purchase completed construction phases. The Company guaranteed the obligation of the RAIC under the credit facility associated with the Terminal 1.5 Project. As of March 31, 2021, the Company's outstanding guaranteed obligation under the credit facility for the Terminal 1.5 Project was $364 million.

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

Construction costs recorded in ACFO for the Terminal 1.5 Project, which exclude costs associated with assets that were previously completed and placed into service, were $341 million and $309 million, as of March 31, 2021, and December 31, 2020, respectively.

Dallas Love Field

During 2008, the City of Dallas approved the Love Field Modernization Project ("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 the "LFAMC," a Texas non-profit "local government corporation" established by the City of Dallas to act on the City of Dallas' behalf to facilitate the development of the LFMP), the Company managed this project. Major construction was effectively completed in 2014. During second quarter 2017, the City of Dallas approved using the remaining bond funds for additional terminal construction projects, which were effectively completed in 2018.

Although the City of Dallas received commitments from various sources that helped to fund portions of the 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 bonds issued by the ~~LFAMC.~~ LFAMC (the "Series 2010" bonds and the "Series 2012" bonds). Given the Company’s guarantee associated with the bonds issued to fund LFMP, the remaining debt service amount was considered a minimum lease payment under the adoption of ASC Topic 842, Leases, and therefore was recorded as a lease liability with a corresponding right-of-use asset within the Company’s unaudited Condensed Consolidated Balance Sheet.


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

All of the outstanding Series 2010 bonds, in the principal amount of $310 million, were redeemed by LFAMC on September 28, 2021 (Redemption Date) at the redemption price plus accrued interest of $7 million. The source of the funds used to pay the principal and interest on the Series 2010 bonds was proceeds from the sale of LFAMC General Airport Revenue Bonds, Series 2021, which also occurred on the Redemption Date. As the Series 2010 bonds have been fully repaid following the Redemption Date, the Company's guarantee associated with the Series 2010 bonds no longer exists. This refinancing transaction was considered a lease modification in accordance with applicable guidance, and the Company's obligation was remeasured as of the transaction date. This remeasurement resulted in a reduction of the Company's right-of-use asset and lease liability in the amount of $343 million.

As of March 31, ~~2021, $399~~2022, $79 million of principal remained ~~outstanding.~~outstanding associated with the Series 2012 bonds. The net present value of the future principal and interest payments associated with the Series 2012 bonds was ~~$438~~$89 million as of March 31, ~~2021,~~2022, and was reflected as part of the Company's operating lease ~~right–of–use~~right-of-use assets and lease obligations in the unaudited Condensed Consolidated Balance Sheet.

Contractual Obligations and Contingent Liabilities and Commitments

~~On March 24, 2021,~~Based on growth opportunities and ongoing fleet modernization plans for more fuel efficient aircraft, during first quarter 2022, the Company ~~entered into Supplemental Agreement No.~~exercised 15 Boeing 737-8 ("-8") options for delivery in 2022 and 12 ~~(the "Supplement"~~Boeing 737-7 ("-7") options for delivery in 2023. Fleet and capacity plans will continue to evolve as the Company manages through the COVID-19 recovery period, and it will continue to evaluate its ~~aircraft purchase agreement with The Boeing Company ("Boeing") relating to the Company's purchase of~~remaining Boeing 737 MAX ~~7 and 737 MAX 8 aircraft. Pursuant to the Supplement (i)~~("MAX") options for 2022. However, with its cost-effective order book, the Company ~~added 100 firm orders for~~retains significant flexibility to manage its fleet size, including opportunities to accelerate fleet modernization efforts if growth opportunities do not materialize. Additional information regarding the ~~MAX 7, with~~Company's delivery schedule is included in the first 30 to be delivered in 2022; (ii) the Company added 155 MAX aircraft options; (iii) the order book was extended to include deliveries through 2031; and (iv) the Company converted 70 MAX 8 firm orders to MAX 7 firm orders. The Supplement also includes certain confidential credits, discounts, and other concessions provided to the Company by Boeing.

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~As of March 31, 2021, based on the Supplement to its aircraft purchase agreement with Boeing, the Company had firm deliveries and options for Boeing 737 MAX 7 and 737 MAX 8 aircraft as follows:~~

The Boeing Company
MAX 7
Firm Orders MAX 8
Firm Orders MAX 7 or 8 Options Additional MAX 8s Total
2021 0 19 0 9 28 (a)
2022 30 0 42 0 72
2023 30 0 38 0 68
2024 30 0 40 0 70
2025 30�� 0 40 0 70
2026 15 15 40 0 70
2027 15 15 30 0 60
2028 15 15 30 0 60
2029 20 30 10 0 60
2030 15 45 0 0 60
2031 0 10 0 0 10
200 149 (b) 270 9 (c) 628

~~(a) Includes 20 737 MAX 8s delivered~~following table as of March 31, ~~2021, consisting~~2022:


	The Boeing Company
	-7 Firm Orders		-8 Firm Orders		-7 or -8 Options	Total
2022	72		15		27	114
2023	64		—		26	90
2024	30		—		56	86
2025	30		—		56	86
2026	15		15		40	70
2027	15		15		6	36
2028	15		15		—	30
2029	20		30		—	50
2030	15		45		—	60
2031	—		10		—	10
	276	(a)	145	(b)	211	632

(a) The delivery schedule for the -7 is dependent on the FAA issuing required certifications and approvals to Boeing and the Company. The FAA will ultimately determine the timing of ~~12 owned~~the -7 certification and ~~8 leased aircraft.~~entry into service, and the Company therefore offers no assurance that current estimations and timelines are correct. The Company entered into an agreement with Boeing in April 2022 to replace the majority of its -7 firm orders with -8 firm orders in the short-term, among other adjustments to its near-term order book.

(b) The Company has flexibility to designate firm orders or options as ~~MAX 7~~-7s or ~~MAX 8,~~-8s, upon written advance notification as stated in the contract.

(c) These 9 additional MAX 8 aircraft are leases to be acquired from various third parties, including 8 leased MAX 8 aircraft delivered in first quarter 2021. The Company also received 7 leased MAX 8 aircraft in fourth quarter 2020, for a total of 16 MAX 8 operating leased aircraft from third parties in 2020 and 2021, combined.

Based on the Company's existing agreement with Boeing, ~~as reflected in the delivery schedule above, the Company's cash~~ capital commitments associated with its firm orders ~~are~~ as ~~follows: NaN for 2021 (due to previously agreed upon delivery credits provided by The Boeing Company to the Company due to the settlement~~ of ~~2020 estimated damages relating to the FAA grounding of the 737 MAX aircraft and progress payments made to date on undelivered aircraft), $700 million~~March 31, 2022, were: $2.1 billion remaining in 2022, ~~$1.1~~$1.9 billion in 2023, $1.0 billion in 2024, ~~$1.1~~$839 million in 2025, $975 million in 2026, $1.0 billion in ~~2025, $1.2~~2027, and $6.0 billion thereafter. In addition, subsequent to March 31, 2022, and through May 2, 2022, due to the current status of the -7 certification, the Company converted 40 2022 -7 firm orders into 2022 -8 orders, moved 1 2022 -7 firm order into 2023, and accelerated 1 2023 -8 option into


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

2022. In April 2022, the Company also exercised 16 -8 options for delivery in ~~2026,~~2022, exercised 2 -7 options for delivery in 2023, accelerated and ~~$7.2 billion thereafter.~~exercised 10 2023 -8 options into 2022, and shifted 10 2022 MAX firm orders into 2023. Combined, the Company's aircraft order book activity subsequent to March 31, 2022, has resulted in additional capital commitments associated with firm orders of $689 million and $188 million in 2022 and 2023, respectively.

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.

11. ~~BOEING 737 MAX AIRCRAFT GROUNDING AND RETURN TO SERVICE~~FINANCING ACTIVITIES

On May 1, 2020, the Company completed the public offering of $2.3 billion aggregate principal amount of 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 on May 1 and November 1, beginning November 1, 2020.

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. As of March ~~13, 2019,~~31, 2022, the ~~FAA issued an emergency order for all U.S. airlines~~conditions were not met to ~~ground all Boeing MAX aircraft.~~convert.

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 ~~immediately complied~~intends to settle conversions by paying cash up to the principal amount of the Convertible Notes, with ~~the order and grounded all 34 MAX aircraft~~any excess conversion value settled in ~~its fleet. On November 18, 2020, the FAA rescinded the emergency order and issued official requirements~~cash or shares of common stock. The initial conversion rate is 25.9909 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to ~~enable U.S. airlines to return the Boeing 737 MAX to service. The Company returned the MAX to revenue service on March 11, 2021, after~~an initial conversion price of approximately $38.48 per share of common stock).

Upon issuance, the Company ~~met all FAA requirements~~bifurcated the Convertible Notes for accounting purposes between a liability component and ~~Pilots received updated, MAX-related training.~~an equity component utilizing applicable guidance. The liability component was determined by estimating the fair value of a hypothetical issuance of an identical offering excluding the conversion feature of the Convertible Notes. The initial carrying amount of the equity component was calculated as the difference between the liability component and the face amount of the Convertible Notes.


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

The ~~most significant financial impacts~~Company adopted ASU 2020-06, as of January 1, 2022, utilizing the ~~grounding to~~modified retrospective method approach. See Note 3 for further information. Upon adoption, the Company ~~were~~reclassified the ~~lost revenues, operating income, and operating cash flows, and delayed~~remaining equity component, of $300 million, from Additional paid-in capital ~~expenditures, directly~~to Long-term debt associated with its ~~grounded MAX fleet~~Convertible Notes, and ~~other new aircraft that were not able~~no longer records amortization of the debt discount to ~~be delivered. In July 2019,~~Interest expense. The ~~Boeing Company ("Boeing") announced a~~

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~$4.9 billion after-tax charge for "potential concessions~~following table details the equity and ~~other considerations to customers for disruptions~~liability component recognized related to the ~~737 MAX grounding." In January 2020, Boeing announced an additional pre-tax charge~~Convertible Notes, prior to and following the adoption of ~~$2.6 billion related to "estimated potential concessions and other considerations to customers related to the 737 MAX grounding."~~ASU 2020-06:

During 2019, the Company entered into a Memorandum of Understanding with Boeing to compensate Southwest for estimated financial damages incurred during 2019 related to the grounding of the MAX. The terms of the agreement are confidential, but are intended to provide for a substantial portion of the Company’s financial damages associated with both the 34 MAX aircraft that were grounded as of March 13, 2019, as well as the 41 additional MAX aircraft the Company was scheduled to receive (28 owned MAX from Boeing and 13 leased MAX from third parties) from March 13, 2019 through December 31, 2019. In accordance with applicable accounting principles, the Company will account for substantially all of the proceeds received from Boeing as a reduction in cost basis spread across both the existing 31 owned MAX in the Company’s fleet at the time, and the Company’s future firm aircraft deliveries as of the date of the agreement. No material financial impacts of the agreement were realized in the Company’s earnings during the years ended December 31, 2019 and 2020.


(in millions)	March 31, 2022		December 31, 2021
Equity component:
Carrying amount of Convertible Notes	$	—	$	311
Carrying amount of issuance costs	—		(11)
Net carrying amount	$	—	$	300
Liability component:
Principal amount	$	1,933	$	2,097
Unamortized debt discount	—		(255)
Net carrying amount	$	1,933	$	1,842

~~During December 2020,~~The Company recognized interest expense associated with the ~~Company entered into an agreement with Boeing to compensate~~Convertible Notes as follows:


	Three months ended March 31,
(in millions)	2022		2021
Non-cash amortization of the debt discount	$	—	$	19
Non-cash amortization of debt issuance costs	3		2
Contractual coupon interest	6		7
Total interest expense	$	9	$	28

The unamortized debt issuance costs have historically been recognized as non-cash interest expense based on the ~~Company for estimated financial damages incurred during 2020 related to the grounding~~5-year term of the ~~MAX.~~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 conversion terms, of the agreement are confidential, but the compensation is in the form of credit memos taken against future payments due to Boeing as aircraft are delivered in accordance with the amended delivery schedule,contingencies, or as future progress payments are due. In accordance with applicable accounting principles, the Company has accounted for substantially all of the compensation received from Boeing as a reduction in cost basis spread across both the existing owned MAX in the Company’s fleet, and the Company’s future firm aircraft deliveries from Boeing as of the date of the agreement. No material financial impacts of the agreement were realized in the Company’s earningsexercise prices during the three months ended March 31, ~~2021.~~2022.

During the three months ended March 31, 2022, the Company paid $323 million in debt and finance lease obligations, including the extinguishment of $164 million in principal of the Convertible Notes for $230 million in cash. The Company accounted for these repurchases as a partial debt extinguishment, which resulted in (i) a loss of $69 million reflected in Other (gains) losses, net, and (ii) a $3 million reduction in remaining unamortized debt issuance costs in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2022. In addition the Company recorded the extinguishment of $30 million in principal of its 5.125% Notes due 2027 for a cash payment of $34 million, which resulted in a loss of $3 million reflected in Other (gains) losses, net, during the three months ended March 31, 2022.

2927

Table of Conten ts

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

Relevant comparative operating statistics for the three months ended March 31, 2022, 2021, and ~~2020~~2019 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. The Company believes a comparison of its first quarter 2022 operating statistics to first quarter 2019 (pre-pandemic) is relevant and useful as the Company continues to recover from the pandemic. In the first ~~quarter~~three months of ~~both years,~~2021 and 2022, most of these operating statistics were significantly impacted by the COVID-19 pandemic and decisions the Company made as a result of the pandemic. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.


		Three months ended March 31,											Three months ended March 31,
		2021				2020			Change				2022			2021			2022 Change to 2021			2019			2022 Change to 2019
Revenue passengers carried (000s)	Revenue passengers carried (000s)	14,225				24,748			(42.5)	%		Revenue passengers carried (000s)	26,029			14,225			83.0	%		31,296			(16.8)	%
Enplaned passengers (000s)	Enplaned passengers (000s)	17,927				29,779			(39.8)	%		Enplaned passengers (000s)	32,005			17,927			78.5	%		37,813			(15.4)	%
Revenue passenger miles (RPMs) (in millions)(a)	Revenue passenger miles (RPMs) (in millions)(a)	14,875				23,935			(37.9)	%		Revenue passenger miles (RPMs) (in millions)(a)	26,483			14,875			78.0	%		30,704			(13.7)	%
Available seat miles (ASMs) (in millions)(b)	Available seat miles (ASMs) (in millions)(b)	23,146				35,350			(34.5)	%		Available seat miles (ASMs) (in millions)(b)	34,384			23,146			48.6	%		37,885			(9.2)	%
Load factor(c)	Load factor(c)	64.3		%		67.7		%	(3.4)		pts.	Load factor(c)	77.0		%	64.3		%	12.7		pts.	81.0		%	(4.0)		pts.
Average length of passenger haul (miles)	Average length of passenger haul (miles)	1,046				967			8.2	%		Average length of passenger haul (miles)	1,017			1,046			(2.8)	%		981			3.7	%
Average aircraft stage length (miles)	Average aircraft stage length (miles)	772				737			4.7	%		Average aircraft stage length (miles)	765			772			(0.9)	%		751			1.9	%
Trips flown	Trips flown	192,401				312,393			(38.4)	%		Trips flown	287,751			192,401			49.6	%		326,390			(11.8)	%
Seats flown (000s)(d)	Seats flown (000s)(d)	29,791				47,130			(36.8)	%		Seats flown (000s)(d)	44,547			29,791			49.5	%		49,473			(10.0)	%
Seats per trip(e)	Seats per trip(e)	154.8				150.9			2.6	%		Seats per trip(e)	154.8			154.8			—	%		151.6			2.1	%
Average passenger fare	Average passenger fare	$	120.36			$	155.37		(22.5)	%		Average passenger fare	$	158.88		$	120.36		32.0	%		$	151.61		4.8	%
Passenger revenue yield per RPM (cents)(f)	Passenger revenue yield per RPM (cents)(f)	11.51				16.07			(28.4)	%		Passenger revenue yield per RPM (cents)(f)	15.62			11.51			35.7	%		15.45			1.1	%
Operating revenues per ASM (cents)(g)	Operating revenues per ASM (cents)(g)	8.86				11.98			(26.0)	%		Operating revenues per ASM (cents)(g)	13.65			8.86			54.1	%		13.59			0.4	%
Passenger revenue per ASM (cents)(h)	Passenger revenue per ASM (cents)(h)	7.40				10.88			(32.0)	%		Passenger revenue per ASM (cents)(h)	12.03			7.40			62.6	%		12.52			(3.9)	%
Operating expenses per ASM (cents)(i)	Operating expenses per ASM (cents)(i)	8.00				12.29			(34.9)	%		Operating expenses per ASM (cents)(i)	14.09			8.00			76.1	%		12.26			14.9	%
Operating expenses per ASM, excluding fuel (cents)	Operating expenses per ASM, excluding fuel (cents)	5.98				9.83			(39.2)	%		Operating expenses per ASM, excluding fuel (cents)	11.17			5.98			86.8	%		9.58			16.6	%
Operating expenses per ASM, excluding fuel and profitsharing (cents)	Operating expenses per ASM, excluding fuel and profitsharing (cents)	5.88				9.83			(40.2)	%		Operating expenses per ASM, excluding fuel and profitsharing (cents)	11.06			5.88			88.1	%		9.35			18.3	%
Fuel costs per gallon, including fuel tax	Fuel costs per gallon, including fuel tax	$	1.63			$	1.90		(14.2)	%		Fuel costs per gallon, including fuel tax	$	2.30		$	1.63		41.1	%		$	2.05		12.2	%
Fuel costs per gallon, including fuel tax, economic	Fuel costs per gallon, including fuel tax, economic	$	1.70			$	1.90		(10.5)	%		Fuel costs per gallon, including fuel tax, economic	$	2.30		$	1.70		35.3	%		$	2.05		12.2	%
Fuel consumed, in gallons (millions)	Fuel consumed, in gallons (millions)	286				457			(37.4)	%		Fuel consumed, in gallons (millions)	436			286			52.4	%		493			(11.6)	%
Active fulltime equivalent Employees(j)	Active fulltime equivalent Employees(j)	56,051			(j)	60,922			(8.0)	%		Active fulltime equivalent Employees(j)	58,865			56,051			5.0	%		59,436			(1.0)	%
Aircraft at end of period~~(l)~~(k)	Aircraft at end of period~~(l)~~(k)	730				742			(1.6)	%		Aircraft at end of period~~(l)~~(k)	722			730			(1.1)	%		753			(4.1)	%

(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.

(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 by dividing seats flown by trips flown.

(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.

Table of Conten ts

(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.

(i) Calculated as operating expenses divided by available seat miles. Also referred to as "unit ~~costs,"~~costs", "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 8,164 Employees ~~participating in the~~on Extended Emergency Time Off ~~program~~ as of March 31, 2021. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.

(k) Included 7four Boeing 737 ~~MAX~~Next Generation aircraft in temporary storage as of March 31, ~~2021, and 34~~2022. Also included seven Boeing 737 MAX ~~aircraft in long term storage as of March 31, 2020. See Note 11 to the unaudited Condensed Consolidated Financial Statements for further information.~~

~~(l) Included~~("MAX") and 59 ~~and 93~~ Boeing 737 Next Generation aircraft ~~removed from active fleet and~~ in temporary storage as of March 31, ~~2021 and 2020, respectively.~~2021.

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Table of Conten ts

Financial Overview

InSince late February 2020, the Company ~~began to see a~~has experienced negative ~~impact from~~impacts associated with the COVID-19 ~~pandemic, which quickly accelerated during first quarter 2020~~pandemic; however, the Company saw steady improvement throughout much of 2021 and ~~continued throughout 2020. The Company continued to experience significant negative impacts to passenger~~2022, with intermittent periods of decelerated demand ~~and bookings through the entirety of first quarter 2021, although modest improvements in leisure bookings were noted in mid-February 2021~~ that ~~steadily improved through March 2021.~~coincided with COVID-19 variant surges. The Company's financial results in both years, on both ~~a GAAP~~an accounting principles generally accepted in the United States ("GAAP") and Non-GAAP basis, were significantly impacted by the pandemic and the resulting effect on demand and passenger bookings. ~~In addition, GAAP results in~~

The Company recorded first quarter GAAP and non-GAAP results for 2022, 2021, ~~included $1.2 billion~~and 2019 as noted in ~~Payroll Support Program Extension grants. See Note 2~~the following tables. The Company believes comparisons of certain financial results to 2019 continue to be relevant given the ~~unaudited Condensed Consolidated Financial Statements for further information.~~

significant impacts in 2020 and 2021 resulting from the pandemic. 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.

~~COVID-19 Pandemic~~


	Three months ended March 31,
(in millions, except per share amounts)
GAAP	2022		2021		2022 Change to 2021	2019		2022 Change to 2019
Operating income (loss)	$	(151)	$	199	n.m.	$	505	n.m.
Net income (loss)	$	(278)	$	116	n.m.	$	387	n.m.
Net income (loss) per share, diluted	$	(0.47)	$	0.19	n.m.	$	0.70	n.m.

Non-GAAP
Operating income (loss)	$	(135)	$	(1,269)	(89.4)	$	505	n.m.
Net income (loss)	$	(191)	$	(1,015)	(81.2)	$	387	n.m.
Net income (loss) per share, diluted	$	(0.32)	$	(1.72)	(81.2)	$	0.70	n.m.

~~In response~~The Company's GAAP financial results were comparatively worse in first quarter 2022 versus first quarter 2021, primarily due to $1.2 billion in grant allocations of payroll funding support ("Payroll Support") from the United States Department of the Treasury ("Treasury") in 2021 utilized to fund a portion of salaries, wages, and benefits. See below and Note 2 to the ~~far-reaching~~unaudited Condensed Consolidated Financial Statements for further information. On a non-GAAP basis, the Company's Operating loss and Net loss improved significantly in first quarter 2022 versus the same prior year period due to the significant recovery in travel demand, which was aided by a reduction in COVID-19 cases and hospitalizations, a significant increase in vaccinations, and a decline in travel-related restrictions across the United States. 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. These impacts combined resulted in a 128.8 percent increase in Operating revenues for the three months ended March 31, 2022, versus the same prior year period. Operating revenues for first quarter 2022 continued to fall below first quarter 2019 pre-pandemic levels primarily due to lower capacity and load factors in first quarter 2022; however, Operating expenses exceeded first quarter 2019 pre-pandemic levels primarily due to higher salaries, wages and benefits and fuel prices in first quarter 2022.

2022 Outlook

The following tables present current selected financial guidance for second quarter and full year 2022:

Table of Conten ts

2Q 2022 Estimation

Operating revenue compared with 2019 (a)

Up 8% to 12%

Load factor

~85%

ASMs compared with 2019

Down ~7%

Economic fuel costs per gallon (b)(c)

$3.05 to $3.15

Fuel hedging premium expense per gallon

$0.05

Fuel hedging cash settlement gains per gallon

$0.61

ASMs per gallon (fuel efficiency)

76 to 78

CASM-X (d) compared with 2019 (e)

Up 14% to 18%

Debt repayments (millions)

~$20

Interest expense (millions)

~$90


									2022 Estimation
ASMs compared with 2019 (f)									Down ~4%
Economic fuel costs per gallon (b)(c)									$2.75 to $2.85
Fuel hedging premium expense per gallon									$0.04
Fuel hedging cash settlement gains per gallon									$0.54
CASM-X (d) compared with 2019 (e)									Up 12% to 16%
Debt repayments (millions)									~$650
Interest expense (millions)									~$360
Aircraft (g)									814
Effective tax rate (h)									24% to 26%
Capital spending (billions) (i)									~$5.0

(a) The Company believes that operating revenues compared with 2019 is a relevant measure of performance due to the significant impacts in 2020 and 2021 from the pandemic.

(b) See Note Regarding Use of Non-GAAP Financial Measures for additional information on special items. In addition, information regarding special items and economic results is included in the accompanying table Reconciliation of Reported Amounts to Non-GAAP Items (also referred to as "excluding special items").

(c) Based on the Company's existing fuel derivative contracts and market prices as of April 21, 2022, second quarter, second half, and full year 2022 economic fuel costs per gallon are estimated to be in the range of $3.05 to $3.15, $2.75 to $2.85, and $2.75 to $2.85, 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, the impact of COVID-19 ~~pandemic,~~cases on air travel demand, or the impact to its financial statements in future periods. Accordingly, the Company ~~took, and continues to assess and modify,~~believes a reconciliation of non-GAAP financial measures to ~~support~~ the ~~well-being~~equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort. See Note Regarding Use of ~~both~~Non-GAAP Financial Measures.

(d) Operating expenses per available seat mile, excluding fuel and oil expense, profitsharing, and special items.

(e) Projections do not reflect the potential impact of fuel and oil expense, special items, and profitsharing because the Company cannot reliably predict or estimate those items or expenses or their impact to its ~~Employees~~financial statements in future periods, especially considering the significant volatility of the fuel and ~~passengers, including procedures~~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.

(f) While the Company's flight schedule remains published for sale through November 5, 2022, the Company recently adjusted its published flight schedules for June through August 2022 to provide additional buffer to the operation in light of continued available staffing challenges headed into the busy summer travel season. The Company will continue to monitor staffing trends, along with booking and ~~policies intended~~cancellation trends, and adjust capacity, as needed. As such, the Company's actual flown capacity may differ from currently published flight schedules or current guidance.

(g) Aircraft on property, end of period; net of 22 retirements planned in the remaining three quarters of 2022. Reflects all exercised activity as of April 28, 2022 and the assumption that the Company exercises all 12 remaining 2022 options. The delivery schedule for the Boeing 737-7 ("-7") is dependent on the Federal Aviation Administration ("FAA") issuing required certifications and approvals to ~~maintain cleanliness~~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.

(h) The Company's estimated effective tax rate is impacted by the extinguishment of $164 million in principal of its 1.25% Convertible Senior Notes due 2025 (the “Convertible Notes”) for a cash payment of $230 million, which occurred in first quarter 2022. The loss on partial extinguishment of Convertible Notes is largely disallowed as a deduction for tax purposes.

Table of Conten ts

(i) Represents current contractual payments to Boeing for firm aircraft and ~~at facilities, and mitigate~~ the ~~spread of~~assumptions that the ~~virus. The~~ Company exercises all 12 remaining 2022 options, in addition to ~$900 million non-aircraft capital spending. Excluding any further option exercises, the Company's 2022 capital spending would be ~$4.2 billion, also continues to monitor guidelines and recommendations from the Centers for Disease Control and Prevention applicable to the Company’s daily operations, as well as how the majority of the Company’s office and clerical Employees work on a daily basis.including ~$900 million in non-aircraft capital spending.

COVID-19 Pandemic Impacts

As detailed in Note 2 to the unaudited Condensed Consolidated Financial Statements, in connection with the major negative impact of COVID-19 on air carriers, ~~in 2020,~~ the Company has received significant financial assistance from ~~the U.S. Department of~~ Treasury ~~("Treasury") pursuant to the Payroll Support Program established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").~~

In January 2021, the Company entered into definitive documentation with Treasury for further payroll support under the Consolidated Appropriations Act, 2021 (the "Payroll Support Program Extension"). As of March 31, 2021, amounts received under the Payroll Support Program Extension were approximately $1.7 billion and a portion has been recognized in the financial statements as a grant to directly offset qualifying payroll expenses incurred by the Company, including specified benefits, between January 2021 and March 2021. As consideration for the Payroll Support Program Extension, during first quarter 2021, the Company issued a promissory note (the "PSP2 Note") in favor of Treasury in the aggregate amount of $488 million and issued warrants (each, a "PSP2 Warrant") valued at a total of $23 million to purchase up to an aggregate of 1.1 million shares of the Company's common stock, subject to adjustment pursuant to the terms of the PSP2 Warrants. Of the approximate $1.7 billion of further payroll support proceeds as of March 31, 2021, $1.2 billion consisted of a grant that does not require repayment. The grant of $1.2 billion was allocated on a pro-rata basis as a contra-expense line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) during first quarter 2021, with the remaining $23 million allocated to the value of PSP2 Warrants issued from the Company to Treasury. See Note 2 to the unaudited Condensed Financial Statements for further information.

~~On April 23, 2021, the Company received an additional $259 million related to the Payroll Support Program Extension, for which the Company provided Treasury consideration~~ in the form of ~~an increase of the PSP2 Note in an amount of $78 million~~Payroll Support, and this assistance had a ~~PSP2 Warrant to purchase up to 168 thousand shares of~~significant impact on the Company's ~~common stock under~~reported GAAP financial results in 2021. Such impact ended in third quarter 2021, and the ~~PSP2 Warrant Agreement. After taking into account~~Company's first quarter 2022 results did not reflect the ~~additional support under the~~benefit of this Payroll Support, ~~Program Extension,~~and its future periods are not expected to benefit from such Payroll Support. However, future cash flows will be impacted through the ~~Company has received $2.0 billion~~portion of ~~payroll support under the~~ Payroll Support ~~Program Extension, for which the Company has provided Treasury with a PSP2 Note~~that was in the ~~aggregate amount~~form of ~~$566 million and PSP2 Warrants to purchase up to 1.2 million shares of the Company's common stock.~~

In accordance with restrictions contained in the Payroll Support Program Extension, and except as permitted or required under the Payroll Support Program Extension, the Company has not (1) conducted involuntary

terminations or furloughs or (2) reduced the salaries, wages, or benefits, as defined, of any employee, in each case between the date of the Payroll Support Program Extension agreement and March 31, 2021.

On April 23, 2021, the Company entered into definitive documentation with Treasury for further payroll support under the American Rescue Plan Act of 2021 (the "PSP3 Payroll Support Program"). Amounts received orloans that will have to be ~~received under the PSP3 Payroll Support Program are expected~~repaid to total approximately $1.9 billion, all or a portion of which will again be utilized to directly offset qualifying payroll expenses incurred by the Company, including specified benefits, through at least September 30, 2021. Of this total, approximately $1.3 billion consists of a grant that will not require repayment. The Company currently expects this grant of $1.3 billion will be classified as a contra-expense line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) during second quarter and third quarter 2021. As consideration for the PSP3 Payroll Support Program, the Company is expected to issue a promissory note in favor of Treasury in the aggregate amount of approximately $526 million and issue warrants (each, a "PSP3 Warrant") valued at a total of approximately $18 million to purchase up to an aggregate of approximately 899 thousand shares of the Company's common stock, subject to adjustment pursuant to the terms of the PSP3 Warrants. See Note 2 to the unaudited Condensed Financial Statements for further information.

In accordance with restrictions contained in the PSP3 Payroll Support Program, and except as permitted or required under the PSP3 Payroll Support Program, the Company has agreed not to (1) conduct involuntary terminations or furloughs or (2) reduce the salaries, wages, or benefits, as defined, of any employee, in each case between the date of the PSP3 Payroll Support Program agreement and the later of September 30, 2021 or the date on which the Company has expended all of the PSP3 Payroll Support Program funds.Treasury.

During second quarter 2020, the Company introduced Voluntary Separation Program 2020 ("Voluntary Separation Program") and the Extended Emergency Time Off ("Extended ETO") program which helped closer align staffing to reduced flight schedules and enabled the Company to avoid involuntary furloughs and ~~layoffs.~~layoffs associated with the impacts of the pandemic. Approximately 16,000 Employees ~~had until July 15, 2020, to determine whether~~elected to participate in one of these ~~programs, and approximately 15,000~~programs. All Employees that elected to ~~do so. The Company continues to evaluate and evolve its~~participate in the Extended ETO program ~~in 2021. In accordance with applicable accounting guidance,~~have since returned or been recalled to work, or have chosen to permanently separate from the Company, ~~recorded a total charge~~and no Employees remained on Extended ETO as of ~~$1.4~~March 31, 2022. The Company realized approximately $1.1 billion ~~in 2020 related to~~of full year 2021 cost savings from the ~~special termination benefits for Employees who had accepted the Company's offer to participate in its~~ Voluntary Separation Program ~~2020~~ and ~~the special benefits for Employees who participated in its~~ Extended ETO ~~program. The accrual is being reduced as program benefits are paid or as it becomes~~but expects no ~~longer probable that Employees will remain on leave for their elected terms. This program has allowed the Company to reduce its fixed~~material cost ~~structure~~savings from these programs in ~~the near-term, while maintaining the ability to adjust to a recovery in travel demand.~~2022 and beyond. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. ~~As a result of these voluntary programs, the Company's salaries, wages, and benefits costs were lowered by approximately $412 million in first quarter 2021.~~

See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information on the significant impacts to the Company’s operations, financial performance, and liquidity from the COVID-19 pandemic.

Thus far, the Company continues to experience improvements in leisure passenger demand and bookings for April and May 2021 travel, with expectations of improving passenger traffic and fares compared with March 2021. The Company continues to ~~experience an increase~~have a smaller workforce than it did prior to the COVID-19 pandemic. However, in ~~bookings farther out on~~addition to recalling all of the ~~booking curve, with approximately 35 percent~~Employees that participated in Extended ETO, the Company met its 2021 hiring goals and ~~20 percent~~is planning to add more than 10,000 additional Employees during 2022 as it strives to provide sufficient staffing to support its anticipated flight schedule plans for 2022 and beyond. For the three months ended March 31, 2022, the Company met its hiring goals, adding 3,300 Employees, net of ~~anticipated bookings currently~~attrition. The Company is making additional investments to attract and retain talent, including the decision to further raise the Company's starting hourly pay rates from $15 per hour to $17 per hour for certain of its workgroups, subject, in ~~place for June and July, respectively. These represent fairly typical future booking patterns; however, business travel~~each case, to acceptance of such change by the applicable union. The Company also continues to ~~significantly lag leisure and is expected~~evaluate staffing needs to ~~have a significant negative impact on close-in demand and average passenger fares.~~align with planned flight activity.

In September 2021, the President of the United States issued an Executive Order establishing a vaccination requirement for employees of covered federal contractors. The ~~following table presents selected preliminary estimates of operating revenue, load factor, and capacity for April and May 2021:~~

Estimated
April 2021

Estimated
May 2021

~~Operating revenue compared with 2019 (a)~~

~~Down 40% to 45%~~

~~Down 35% to 40%~~

~~Previous estimation~~

~~(b)~~

~~Load factor~~

~~75% to 80%~~

~~Previous estimation~~

~~(b)~~

~~ASMs year-over-year~~

~~Up ~83%~~

~~Up ~127%~~

~~Previous estimation~~

~~(b)~~

~~(a)~~federal government required that federal contractors have their workforce vaccinated (or request an accommodation) by December 8, 2021. The deadline was later extended to January 4, 2022. The Company ~~believes~~started an active campaign to notify Employees of the need to submit proof of COVID-19 vaccination, or apply for an accommodation, by January 4, 2022. On December 3, 2021, the company announced that ~~operating revenues compared with 2019 is a more relevant measure~~93 percent of ~~performance than a year-over-year comparison due~~its Employees were vaccinated, or had requested an accommodation. Due to legal challenges to the ~~significant impacts in 2020 due to the pandemic.~~

~~(b) Remains unchanged from the previously provided estimation.~~

The Company estimates its June 2021 capacity to decrease approximately 4 percent as compared with June 2019. The Company estimates its second quarter 2021 capacity to increase approximately 90 percent, year-over-year, and decrease approximately 15 percent as compared with 2019, driven by improving passenger demand and bookings.

Excluding Fuel and oil expense, special items, and profitsharing expense, the Company's second quarter 2021 operating expenses are expected to increase in the range of 10 to 15 percent, year-over-year, which includes an estimated $325 million of salaries, wages, and benefits cost savings from voluntary separation and extended leave programs. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further description of these programs. Second quarter 2021 operating expenses, excluding fuel and oil expense, special items, and profitsharing, are also expected to increase compared with first quarter 2021, with 60 to 70 percent of the sequential increase attributable to variable, flight-driven expenses as capacity is expected to increase to near-2019 levels by June 2021. These variable, flight-driven cost increases are primarily in salaries, wages, and benefits due to staffing increases; maintenance expense to return aircraft to revenue service, along with higher flight-driven maintenance expenses as flight levels increase; landing fees; and personnel, passenger, and revenue-related costs. In addition,vaccine mandate, the Company announced on December 20, 2021, that it is experiencing cost increases primarily due to airport cost inflation; higher aircraft ownership costs due to MAX deliveries; and certain favorable tax and insurance settlements realized in first quarter 2021 operating expenses that are non-recurring in second quarter 2021. Despite increasing capacity and operating expenses, both sequentially and year-over-year, second quarter 2021 operating expenses are estimated to remain below second quarter 2019 levels. The projections do not reflectno longer imposing a deadline for compliance. However, if the ~~potential impact of Fuel and oil expense, special items, and profitsharing expense because~~vaccine mandate is revived, the Company ~~cannot reliably predict~~will resume efforts to work with Employees who have not yet either submitted proof of vaccination or estimate these 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 projected results is not meaningful or available without unreasonable effort.requested an accommodation.

Company Overview

~~On November 18, 2020, the Federal Aviation Administration (the "FAA") issued official requirements to enable airlines to return the Boeing 737 MAX to service.~~ The Company has worked to meet the FAA's requirements by modifying certain operating procedures, implementing enhanced Pilot training requirements, installing FAA-approved flight control software updates, and completing other required maintenance tasks specific to the MAX aircraft. The Company returned the MAX to service on March 11, 2021, after the Company met all FAA requirements and Pilots received updated, MAX-related training. In April 2021, the Company removed 32 of its MAX aircraft from service due to a Boeing production issue related to the electrical power system on a subset of MAX aircraft. Upon learning of the issue, the Company immediately removed these aircraft from service, out of an abundance of caution, and is currently awaiting more guidance from Boeing and the FAA regarding the appropriate corrective actions. The Company has covered impacted flights with other aircraft in the fleet and has not experienced significant operational disruptions. Once the Company receives formal guidance from Boeing and the FAA, the Company anticipates the actions necessary to return the affected 32 aircraft to service will take two to

~~three days per aircraft and several weeks in total. The Company is in the process of returning its stored 737-700 aircraft to revenue service to support flight schedules in summer 2021 and beyond.~~

~~On March 24, 2021, the Company~~ entered into ~~Supplemental Agreement No. 12 (the "Supplement") to its aircraft purchase agreement~~supplemental agreements with Boeing relating to the Company's purchase of Boeing 737 MAX 7 and 737 MAX 8 aircraft. Pursuant to the Supplement (i) the Company added 100 firm orders for the MAX 7, with the first 30 to be delivered in 2022; (ii) the Company added 155 MAX aircraft options; (iii) the order book was extended to include deliveries through 2031; and (iv) the Company converted 70 MAX 8 firm orders to MAX 7 firm orders. The Supplement also includes certain confidential credits, discounts, and other concessions provided to the Company by Boeing.

Based on the Company's existing delivery schedule with Boeing, as reflected in Note 10 to the unaudited Condensed Consolidated Financial Statements, the Company's contractual aircraft capital spending commitments associated with firm orders for all years 2021 through 2026, which consists of 169 MAX firm orders from Boeing (135 MAX 7 and 34 MAX 8 aircraft), are approximately $5.1 billion. The Company’s capital commitments associated with its existing firm orders are as follows: none for 2021 (due to previously agreed upon delivery credits provided by The Boeing Company ("Boeing") to increase aircraft orders and accelerate certain options with the ~~Company due~~goal of improving potential growth opportunities, restoring its network closer to ~~the settlement of 2020 estimated damages relating to the FAA grounding of the 737 MAX aircraft~~pre-pandemic levels, lowering operating costs, and progress payments made to date on undelivered aircraft) and approximately $700 million in 2022 (net of progress payments made on undelivered MAX aircraft and previously agreed upon delivery credits provided by Boeing to the Company). The Company estimatesfurther modernizing its ~~2021 capital expenditures to be approximately $500 million, primarily driven by technology, facilities, and operational investments.~~fleet with less carbon-intensive aircraft. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information. The Company continues to expect that more than half of the MAX aircraft in its firm order book will replace a significant amount of its 446 Boeing 737-700 ("-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.

Table of Conten ts

The Company ended first quarter ~~2021~~2022 with ~~730~~722 Boeing 737 aircraft, compared with the Company's previous guidance of 725 aircraft, due to three scheduled aircraft deliveries planned in ~~its fleet. During~~ first quarter ~~2021, 20 Boeing 737 MAX aircraft were delivered and~~2022 shifting to later in 2022. As expected, the Company retired five owned -700 aircraft, and returned ~~eight~~one leased ~~737-700 aircraft. The Company expects eight additional Boeing 737 MAX~~-700 aircraft ~~to be delivered by December 31, 2021 and expects to retire up to nine more 737-700 aircraft in 2021. In response to capacity reductions due to the effects of the COVID-19 pandemic, as~~during first quarter 2022. As of March 31, ~~2021, the Company had approximately 66~~2022, four -700 aircraft remained in temporary ~~storage. These stored aircraft provide greater flexibility~~storage due to ~~adapt to the seasonal demand patterns that are currently expected to develop during~~first quarter and second quarter ~~2021.~~2022 capacity remaining below respective 2019 levels. The Company continues ~~the acceleration~~to expect to retire a total of ~~fleet modernization efforts to replace its 737-700~~28 -700 aircraft with the MAX, and the development of tangible steps that are aimed at improving upon the Company's environmental stewardship and supporting the environmental sustainability goal to be carbon neutral by 2050. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information on the effects of the COVID-19 pandemic.in 2022.

The Company has published its flight schedule through November 5, ~~2021.~~2022. During 2022, the Company is focusing on restoring its network, primarily in cities with a very strong Customer base by adding city pair frequencies and connecting new service with existing points-of-strength to increase Customer depth.

The COVID-19 pandemic has had a particularly negative impact on international operations and led to the Company's suspension of international operations at the beginning of the pandemic. The Company has since resumed service to all 14 of its international destinations.

On March 24, 2022, the Company announced a new fare product, Wanna Get Away Plus™, expected to be available to Customers in second quarter 2022. Wanna Get Away Plus is ~~pursuing additional revenue opportunities that utilize idle aircraft and Employees~~expected to provide ~~Southwest's legendary Customer Service to new, popular destinations. The Company is leveraging additional airports in or near cities where its Customer base is large, along~~Customers with ~~adding easier access to popular leisure-oriented destinations~~more flexibility, choice, and rewards for a modest buy-up from ~~across its domestic-focused network. These additional service points on~~ the Company's ~~map are opportunities it can provide~~Wanna Get Away® fare product. In addition to all of the usual day of travel benefits and booking flexibility offered to Customers ~~now,~~across all ~~while better positioning~~of the ~~Company for a travel demand rebound. During 2021,~~Company's fares, Wanna Get Away Plus provides additional benefits as compared to the ~~Company has begun service to new destinations~~Wanna Get Away fare product, including:

•~~Chicago O'Hare International Airport and Sarasota Bradenton International Airport - February 14, 2021~~Transferable flight credit(s), a new benefit that generally enables Customers to make a one-time transfer of eligible unused flight credit to a new traveler for future use;

•~~Colorado Springs Municipal Airport~~More flexibility through same-day confirmed change/same-day standby; and ~~Savannah/Hilton Head International Airport - March 11, 2021~~

•~~Houston's George Bush Intercontinental Airport and Santa Barbara Airport - April 12, 2021~~

•~~Fresno Yosemite International Airport - April 25, 2021~~More earning power in the Company's Rapid Rewards® loyalty program, with 8X points awarded on flights instead of the 6X points awarded on Wanna Get Away fares.

On February 8, 2022, the Company reached a tentative collective-bargaining agreement with the Transport Workers Union Local 550 ("TWU 550"), which represents the Company's approximately 400 Employees in the Dispatchers workgroup. However, during March 2022, the TWU 550 membership voted not to ratify the agreement. The Company ~~has also announced other~~will continue to engage in discussions on a new ~~destinations~~agreement with TWU 550.

On March 28, 2022, the Company reached a tentative collective-bargaining agreement with the International Association of Machinists and ~~expected service commencement dates including:~~

•~~Destin-Fort Walton Beach Airport -~~Aerospace Workers, AFL-CIO ("IAM"), which represents the Company's approximately 6,000 Customer Service Agents, Customer Representatives, and Source of Support Representatives. The ratification vote is scheduled to conclude on May 6, ~~2021~~2022. If the tentative agreement is ratified, it will become amendable May 6, 2026.

•~~Myrtle Beach International Airport - May 23,~~As part of its commitment to corporate sustainability, on April 22, 2022, the Company published its 2021

•~~Bozeman Yellowstone International Airport - May 27, 2021~~

•~~Jackson-Medgar Wiley Evers International Airport~~ One Report describing the Company's sustainability strategies, which include the Company’s fuel conservation and emissions reduction initiatives and other efforts to reduce greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling. The Company also published its first ever Diversity, Equity, and Inclusion ("DEI") Report. A companion piece to the One Report, the DEI Report takes a deeper dive into the Company's DEI goals, commitments, and initiatives and highlights the path forward. Information contained in ~~Mississippi - June 6, 2021~~the Southwest One 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 and other voluntary disclosures regarding environmental, social, and governance (“ESG”) matters are responsive to various areas of investor interest, the Company believes that 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,

3433

Table of Conten ts

•~~Eugene Airport~~assumptions, and timelines used to create the Southwest One Report and other voluntary disclosures, the materiality of these disclosures is inherently difficult to assess in ~~Oregon - August 29, 2021~~

•~~Bellingham International Airport in Washington - Second half 2021~~advance.

Material Changes in Results of Operations

Comparison of three months ended March 31, ~~2021~~2022 and March 31, ~~2020~~2021

Operating Revenues

Total operating revenues for first quarter ~~2021 decreased~~2022 increased by ~~$2.2~~$2.6 billion, or ~~51.5~~128.8 percent, year-over-year, to ~~$2.1 billion, driven primarily by the continued weak Passenger demand and bookings due to the COVID-19 pandemic throughout first quarter 2021.~~$4.7 billion. First quarter ~~2021~~2022 operating revenues per ~~available seat mile~~ASM (RASM) were ~~8.86~~13.65 cents, ~~and decreased 26.0~~an increase of 54.1 percent, compared with first quarter ~~2020,~~2021. The dollar increase was driven primarily by the improvements in leisure Passenger demand and bookings in first quarter 2022 versus the severe impacts to demand and bookings from the COVID-19 pandemic in first quarter 2021. In addition, demand strengthened considerably throughout the quarter, and the Company's operating revenues for March 2022 were strong and above March 2019 levels, which represented the first monthly operating revenue increase relative to respective 2019 levels since the pandemic began. For first quarter 2022, the year-over-year RASM increase was primarily driven by ~~the drop~~a 35.7 percent improvement in ~~passenger demand caused by the COVID-19 pandemic, which contributed to the~~yield and an increase in Load factor ~~decrease~~ of ~~3.4 points, and the passenger revenue yield decrease of 28.4 percent, year-over-year.~~12.7 points.

Passenger revenues for first quarter ~~2021 decreased~~2022 increased by ~~$2.1~~$2.4 billion, or ~~55.5~~141.5 percent, year-over-year. On a unit basis, Passenger revenues ~~decreased 32.0~~increased 35.7 percent, year-over-year. The ~~decrease~~year-over-year increase in Passenger revenues on both a dollar and unit basis was primarily due to ~~the impact~~easing of negative impacts associated with the COVID-19 pandemic, which resulted in ~~significant reductions~~improvements in ~~capacity and a depressed passenger~~Passenger demand and bookings, ~~throughout~~ the majority of which were for leisure oriented travel. These increases were achieved despite $430 million of headwinds experienced during first quarter ~~2021, versus primarily only impacting March~~2022. Approximately $380 million of the operating revenue headwinds related to softness in bookings and increased passenger cancellations in January and February 2022 associated with the Omicron variant, which is higher than the Company's previous estimate of $330 million. In addition, the Company's flight cancellations in January 2022 due to available staffing challenges—exacerbated by weather—resulted in a $50 million negative impact to operating revenues, as previously estimated. The Company's first quarter ~~of 2020.~~

~~Freight~~2022 revenue performance from its loyalty program was strong and included incremental revenue from its new co-brand credit card agreement, as expected. First quarter 2022 managed business revenues ~~for first quarter 2021 increased by $4 million, or 10.3~~decreased 55 percent, compared with first quarter ~~2020, primarily due~~2019. March 2022 managed business revenues decreased 36 percent compared with March 2019, outperforming the Company's previous guidance of down approximately 40 percent, driven by an increase in business passengers and yields and boosted by its participation in Global Distribution System platforms. The Company currently expects April 2022 managed business revenues to ~~increased demand as businesses reduce pandemic driven restrictions.~~decrease approximately 30 percent, compared with April 2019, and currently expects continued sequential improvement in May and June 2022, compared with their respective 2019 levels

Other revenues for first quarter ~~2021 decreased~~2022 increased by ~~$53~~$220 million, or ~~15.1~~74.1 percent, compared with first quarter ~~2020.~~2021. The ~~decrease~~increase was primarily due to ~~a decrease~~an increase in income from business partners, including Chase Bank USA, N.A. ("Chase"). The improving economy throughout 2021 and ~~the impact on~~rebound in travel demand resulted in higher spend on the Company's co-branded credit card, as well as additional revenues earned through the Company's rental car and hotel partners. Additionally, the Company received incremental revenue from its new co-brand credit card ~~driven by the decline~~agreement secured in ~~consumer spending resulting from the COVID-19 pandemic.~~December 2021.

Operating Expenses

Operating expenses for first quarter ~~2021 decreased~~2022 increased by ~~$2.5~~$3.0 billion, or ~~57.3~~161.5 percent, compared with first quarter ~~2020,~~2021, while capacity ~~decreased 34.5~~increased 48.6 percent over the same prior year period. ~~The~~Approximately 50 percent of the operating expense ~~decrease~~increase was ~~primarily~~ due to ~~the~~ $1.2 billion in ~~grants~~Payroll Support allocated to ~~fund eligible~~offset a portion of salaries, wages and benefits ~~through~~in first quarter 2021 compared with no support received in first quarter 2022, 20 percent of the ~~Payroll Support Program Extension.~~increase was due to higher Salaries, wages, and benefits, and 20 percent of the increase was due to higher Fuel and oil expense. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been

Table of Conten ts

largely driven by changes in capacity, or ASMs. However, the Company's Operating expenses are largely fixed once flight schedules are published, and the Company has experienced significant ASM reductions as a result of flight schedule adjustments related to the COVID-19 pandemic. Flight schedule adjustments are expected to drive unit cost pressure for the duration of the COVID-19 pandemic, excluding any impacts associated with grants received under the CARES Act, the Payroll Support Program Extension, the PSP3 Payroll Support Program, or other legislation. See "COVID-19 Pandemic" above and Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. The following table presents the Company's Operating expenses per ASM for the first quarter of ~~2021~~2022 and ~~2020,~~2021, 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)	2022		2021
Salaries, wages, and benefits	6.48	¢	6.79	¢	(0.31)	¢	(4.6)	%
Payroll support and voluntary Employee programs, net	—		(6.25)		6.25		(100.0)
Fuel and oil	2.92		2.02		0.90		44.6
Maintenance materials and repairs	0.61		0.75		(0.14)		(18.7)
Landing fees and airport rentals	1.01		1.35		(0.34)		(25.2)
Depreciation and amortization	0.94		1.35		(0.41)		(30.4)
Other operating expenses	2.13		1.99		0.14		7.0
Total	14.09	¢	8.00	¢	6.09	¢	76.1	%

Three months ended March 31, Per ASM
change Percent
change
(in cents, except for percentages) 2021 2020
Salaries, wages, and benefits 6.79 ¢ 5.24 ¢ 1.55 ¢ 29.6 %
Payroll support and voluntary Employee programs, net (6.25) — (6.25) n.m.
Fuel and oil 2.02 2.46 (0.44) (17.9)
Maintenance materials and repairs 0.75 0.77 (0.02) (2.6)
Landing fees and airport rentals 1.35 0.96 0.39 40.6
Depreciation and amortization 1.35 0.88 0.47 53.4
Other operating expenses, net 1.99 1.98 0.01 0.5
Total 8.00 ¢ 12.29 ¢ (4.29) ¢ (34.9) %

Based on current cost trends, the Company expects second quarter 2022 operating expenses per ASM, excluding fuel and oil expense, profitsharing, and special items to increase in the range of 14 percent to 18 percent compared with second quarter 2019, due to labor rate inflation across all workgroups; inflation in airport costs; and headwinds from operating at suboptimal productivity levels. The Company continues to experience higher unit cost inflation as it continues to navigate the pandemic recovery and capacity levels remain muted due to available staffing challenges. The Company's second quarter 2022 published flight schedules include increased short-haul trips in business markets to support the anticipated increase in business travel, relative to its first quarter 2022 flight schedules. Compared with respective 2019 levels, the increase in short-haul trips is expected to drive a sequential 5-point decrease in average stage length from first quarter 2022 to second quarter 2022, adding further pressure to second quarter 2022 operating expenses per ASM, excluding fuel and oil expense, profitsharing, and special items. Based on current second half 2022 capacity plans, the Company currently expects operating expenses per ASM, excluding fuel and oil expense, profitsharing, and special items trends to ease sequentially from first half 2022 to second half 2022, but remain elevated above its longer-term expected run rate as the Company scales and better optimizes its network and operations.

Operating expenses per ASM for first quarter ~~2021 decreased~~2022 increased by ~~34.9~~76.1 percent, compared with first quarter ~~2020. The year-over-year unit cost decrease in~~2021, primarily due to first quarter 2021 ~~was primarily driven by the funding received through the~~including Payroll Support ~~Program Extension, coupled with decreases in market jet fuel prices. These decreases were partially offset by significant capacity reductions as a result of~~from the ~~COVID-19 pandemic. See Note 2 to the unaudited Condensed~~ Consolidated ~~Financial Statements for further information.~~Appropriations Act, 2021. Operating expenses per ASM for first quarter ~~2021,~~2022, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), ~~increased 23.4~~decreased 9.2 percent, compared with first quarter ~~2020.~~2021 primarily due to a significant increase in capacity. 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 majority of the year-over-year unit cost increase in first quarter 2021 was driven by significant capacity reductions due to the COVID-19 pandemic.~~

Salaries, wages, and benefits expense for first quarter ~~2021 decreased~~2022 increased by ~~$283~~$658 million, or ~~15.3~~41.9 percent, compared with first quarter ~~2020.~~2021. On a per ASM basis, first quarter ~~2021~~2022 Salaries, wages, and benefits expense ~~increased 29.6~~decreased 4.6 percent, compared with first quarter ~~2020, as the dollar decrease was more than offset by the 34.5 percent decrease in capacity.~~2021. On a dollar basis, the ~~decrease~~increase was primarily driven by ~~lower~~higher salaries and wages due to significantly more trips, step/pay rate increases for certain workgroups, and $127 million of additional salaries, wages, and benefits expense as a result of ~~Voluntary Separation Program 2020, Extended ETO, and other time off programs~~incentive pay offered byto the ~~Company.~~Company's Operations Employees through early February 2022 in an effort to address available staffing challenges related to the Omicron variant.

Payroll support and voluntary Employee programs, net ~~for first quarter 2021 was a net decrease~~(a reduction to ~~expense of $1.4 billion, compared with~~expense) had no amounts for first quarter ~~2020. On a per ASM basis, first~~2022. First quarter 2021 ~~Payroll support and voluntary Employee programs, net was a net reduction~~consisted of ~~6.25 cents. During first quarter 2021,~~ the ~~items included in this line item include:~~following items:

Table of Conten ts

•$1.2 billion of Payroll Support ~~Program Extension proceeds;~~proceeds allocated (credit to expense);

•$116 million ofcredit to expense associated with the Employee Retention Tax Credit for continuing to pay Employees' salaries during the time they were not working, as ~~a result of~~allowed under the ~~decline in business due to the pandemic;~~Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), and subsequent legislation;

•A $115 million net reduction in the Extended ETO ~~liability.~~liability relating to certain Employees being recalled prior to their previously elected return dates.

See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.

Fuel and oil expense for first quarter ~~2021 decreased~~2022 increased by ~~$401~~$535 million, or ~~46.1~~114.1 percent, compared with first quarter ~~2020.~~2021. On a per ASM basis, first quarter ~~2021~~2022 Fuel and oil expense ~~decreased 17.9~~increased 44.6 percent. On a dollar basis, approximately 55 percent ~~due primarily~~of the increase was attributable to ~~lower market~~an increase in jet fuel ~~prices.~~prices, and the remainder of the increase was due to an increase in fuel gallons consumed. The Company's first quarter 2022 average economic jet fuel price of $2.30 per gallon is net of approximately $229 million in gains from hedging activities. On a ~~dollar~~per ASM basis, the majority of the ~~decrease was attributable to a significant decrease in fuel gallons consumed, and the remainder of the decrease~~change was due to ~~lower market~~higher 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 ~~contracts:~~contract settlements:


		Three months ended March 31,					Three months ended March 31,
		2021		2020			2022		2021
Economic fuel costs per gallon	Economic fuel costs per gallon	$	1.70	$	1.90	Economic fuel costs per gallon	$	2.30	$	1.70
Fuel hedging premium expense (in millions)	Fuel hedging premium expense (in millions)	$	25	$	24	Fuel hedging premium expense (in millions)	$	26	$	25
Fuel hedging premium expense per gallon	Fuel hedging premium expense per gallon	$	0.09	$	0.05	Fuel hedging premium expense per gallon	$	0.06	$	0.09
Fuel hedging cash settlement gains per gallon		$	0.01	$	—
Fuel hedging cash settlement gain per gallon						Fuel hedging cash settlement gain per gallon	$	0.52	$	0.01

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 had a reduced schedule and lower Load factors during~~Company's first quarter ~~2021, which, combined with the Company continuing to operate fewer of its oldest, least fuel-efficient Boeing 737-700 aircraft as a result of capacity reductions~~2022 available seat miles per gallon ("fuel efficiency") declined 2.6 percent, year-over-year, due to the ~~COVID-19 pandemic, resulted in a year-over-year improvement~~Company's return to service of ~~4.7~~more of its least fuel-efficient aircraft, the -700. When compared with first quarter 2019, fuel efficiency improved 2.6 percent ~~in ASMs per gallons ("fuel efficiency")~~ in first quarter ~~2021. While~~2022 due to more 737 MAX aircraft, the Company's most fuel-efficient aircraft, in the fleet. The MAX remains critical to the Company's efforts to modernize its fleet, reduce carbon emissions intensity, and achieve its near-term environmental sustainability goals. The Company expects ~~to return more of its 737-700 aircraft to service to support planned capacity increases,~~ second quarter ~~2021~~2022 fuel efficiency to be in the range of 76 to 78 ASMs per gallon, on a nominal basis.

The Company's fuel hedge is ~~currently~~providing excellent protection against rising energy prices and significantly offset the market price increase in jet fuel in first quarter 2022. The Company's current fuel derivative contracts contain a combination of instruments based in West Texas Intermediate and Brent crude oil; however, 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 21, 2022.

Table of Conten ts


	Estimated economic fuel price per gallon, including taxes and fuel hedging premiums
Average Brent Crude Oil price per barrel	2Q 2022 (b)	2H 2022 (b)
$80	$2.50 - $2.60	$2.40 - $2.50
$90	$2.70 - $2.80	$2.55 - $2.65
Current Market (a)	$3.05 - $3.15	$2.75 - $2.85
$110	$3.10 - $3.20	$2.95 - $3.05
$120	$3.25 - $3.35	$3.15 - $3.25
$130	$3.45 - $3.55	$3.45 - $3.55

Fair market value	$295 million	$468 million
Estimated premium costs	$26 million	$26 million

(a) Brent crude oil average market prices as of April 21, 2022, were approximately $107 and $102 per barrel for second quarter 2022 and second half 2022, respectively.

(b) Based on the Company's existing fuel derivative contracts and market prices as of April 21, 2022, second quarter, second half, and full year 2022 economic fuel costs per gallon are estimated to be ~~sequentially~~ in ~~line~~the range of $3.05 to $3.15, $2.75 to $2.85, and $2.75 to $2.85, 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 ~~first quarter 2021,~~the volatility of the energy markets, the impact of COVID-19 cases on air travel demand, or the impact to its financial statements in future periods. Accordingly, the Company believes a ~~nominal basis, also taking into account~~reconciliation of non-GAAP financial measures to the ~~return~~equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort. See Note Regarding Use of ~~its most fuel-efficient aircraft, the MAX, to service in March 2021.~~Non-GAAP Financial Measures.

~~As of April 15, 2021, on an economic basis,~~In addition, the Company ~~had~~is providing its maximum percent of estimated fuel consumption covered by fuel derivative contracts in ~~place related~~the following table:


Period			Maximum fuel hedged percentage (c)
2022			63% (a)
2023			37% (b)
2024			17% (b)

(a) Based on the Company's available seat mile plans for full year 2022. The Company is currently 63 percent hedged for second quarter 2022 and 60 percent hedged for second half 2022.

(b) Due to ~~expected~~uncertainty regarding available seat mile plans in future years, the Company believes that providing the maximum percent of fuel consumption ~~as follows:~~

Period Maximum fuel hedged (gallons in millions) (a)(b)
Remainder of 2021 962
2022 1,220
2023 643
Beyond 2023 106

(a) The Company’s hedge position includes prices at which the Company considers "catastrophic" coverage. The maximum gallons provided are not indicative of the Company's hedge coverage at every price, but represent the highest level of coverage at a single price. See Note 4 to the unaudited Condensed Consolidated Financial Statements for further information.

~~(b) The Company holds~~covered by derivative contracts ~~at various Brent crude oil, West Texas Intermediate ("WTI") crude oil,~~in 2023 and ~~heating oil price levels~~2024 relative to ~~provide protection against energy market price fluctuations. These~~2019 fuel gallons consumed is a more relevant measure for future coverage.

(c) The Company's maximum fuel hedged percentage is calculated using the maximum number of gallons that are covered by derivative contracts ~~represent~~divided by the Company's estimate of total fuel gallons to be consumed for each respective period. The Company's maximum number of gallons ~~hedged for each respective period, which~~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 ~~provided,~~used to calculate the Company's maximum fuel hedged percentages, as market prices and the Company's fuel consumption ~~fluctuates.~~fluctuate.

Table of Conten ts

As a result of applying hedge accounting in prior periods, 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 4 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI at March 31, ~~2021,~~2022, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):


Year	Year	Fair value of fuel derivative contracts at March 31, 2021		Amount of gains (losses) deferred in AOCI at March 31, 2021 (net of tax)		Year	Fair value of fuel derivative contracts at March 31, 2022		Amount of gains deferred in AOCI at March 31, 2022 (net of tax)
Remainder of 2021		$	33	$	(26)
2022		140		28
Remainder of 2022						Remainder of 2022	$	682	$	494
2023	2023	64		5		2023	461		307
Beyond 2023		12		2
2024						2024	130		72

Total	Total	$	249	$	9	Total	$	1,273	$	873

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 receipts related to hedges that will settle, the Company is providing the below sensitivity table for second quarter 2021 and full year 2021 jet fuel prices at different crude oil assumptions as of April 15, 2021, and for expected premium costs associated with settling contracts.


	Estimated economic fuel price per gallon, including taxes and fuel hedging premiums (e)
Average Brent Crude Oil price per barrel	~~Second Quarter 2021 (c)~~	~~Full Year 2021 (d)~~
~~$40~~	~~$1.35 - $1.45~~	~~$1.35 - $1.45~~
~~$50~~	~~$1.55 - $1.65~~	~~$1.55 - $1.65~~
~~Current Market (a)~~	~~$1.85 - $1.95~~	~~$1.85 - $1.95~~
~~$70~~	~~$1.90 - $2.00~~	~~$1.90 - $2.00~~
~~$80~~	~~$2.00 - $2.10~~	~~$2.00 - $2.10~~
~~$90~~	~~$2.10 - $2.20~~	~~$2.10 - $2.20~~
~~Estimated fuel hedging premium expense per gallon (b)~~	~~$0.06~~	~~(f)~~
~~Estimated premium costs (b)~~	~~$25 million~~	~~$100 million~~

~~(a) Brent crude oil average market prices as of April 15, 2021, were approximately $66 and $64 per barrel for second quarter 2021 and full year 2021, respectively.~~

~~(b) Fuel hedging premium expense per gallon is included in the Company's estimated economic fuel price per gallon estimates above.~~

(c) Based on the Company's existing fuel derivative contracts and market prices as of April 15, 2021, second quarter 2021 economic fuel costs are estimated to be in the $1.85 to $1.95 per gallon range, including fuel hedging premium expense of approximately $25 million, or $0.06 per gallon, and $0.01 per gallon in favorable cash settlements from fuel derivative contracts. See Note Regarding Use of Non-GAAP Financial Measures.

(d) Based on the Company's existing fuel derivative contracts and market prices as of April 15, 2021, annual 2021 economic fuel costs are estimated to be in the $1.85 to $1.95 per gallon range, including fuel hedging premium expense of approximately $100 million and no cash settlements from fuel derivative contracts, on a per gallon basis. See Note Regarding Use of Non-GAAP Financial Measures.

(e) 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, the impact of COVID-19 cases on air travel demand, or the 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. See Note Regarding Use of Non-GAAP Financial Measures.

~~(f) Due to continued uncertainty regarding available seat mile plans for 2021, the Company cannot reasonably provide an estimate for its full year 2021 fuel hedging premium expense per gallon.~~

Maintenance materials and repairs expense for first quarter ~~2021 decreased~~2022 increased by ~~$99~~$38 million, or ~~36.4~~22.0 percent, compared with first quarter ~~2020.~~2021. On a per ASM basis, Maintenance materials and repairs expense decreased ~~2.6~~18.7 percent, ~~as the dollar decrease was largely offset by the 34.5 percent decrease in capacity in response to the COVID-19 pandemic.~~compared with first quarter 2021. On a dollar basis, approximately 5060 percent of the ~~decrease~~increase was due to ~~lower engine~~the timing of regular airframe maintenance ~~expense due to the reduction in flight hours and the majority of the remainder of the decrease was due to reduced operations and placing~~checks as some costs had previously been deferred while a portion of the fleet was placed into temporary storage during the COVID-19 pandemic. There were multiple other increases on a dollar basis, primarily related to an increase in ~~storage.~~various repairs as a result of deferring costs and reduced operations in first quarter 2021 due to the COVID-19 pandemic. These increases were partially offset by a decrease in engines and components expense due to the "power-by-the-hour" contract for the -700 engines expiring at the end of 2021, in which expense was incurred based primarily upon engine hours flown. At January 1, 2022, a time and materials contract commenced, pursuant to which -700 engine expense is based on actual repairs.

Landing fees and airport rentals expense for first quarter ~~2021 decreased~~2022 increased by ~~$26~~$33 million, or ~~7.7~~10.5 percent, compared with first quarter ~~2020.~~2021. On a per ASM basis, Landing fees and airport rentals expense ~~increased 40.6~~decreased 25.2 percent, compared with first quarter 2020, as the dollar decrease was more than offset by the 34.5 percent decrease in capacity in response to the COVID-19 pandemic and as a significant portion of space rentals are essentially fixed in the short term.2021. On a dollar basis, approximately 75 percent of the ~~decrease~~increase was ~~primarily~~ due to ~~lower~~an increase in landing fees ~~as a result of~~from the ~~reduced~~increased number of ~~Trips flown in first quarter 2021 as a result of the COVID-19 pandemic.~~trips flown.

Depreciation and amortization expense for first quarter ~~2021~~2022 increased by $1$12 million, or ~~0.3~~3.8 percent, compared with first quarter ~~2020.~~2021. On a per ASM basis, Depreciation and amortization expense ~~increased~~decreased by ~~53.4~~30.4 percent, compared

with first quarter ~~2020, primarily as a result of the 34.5 percent decrease in capacity in response to the COVID-19 pandemic and continued storage of a portion of the Company's fleet.~~2021. On a dollar basis, ~~Depreciation~~the increase was primarily associated with higher depreciation expense associated with owned aircraft and ~~amortization expense was relatively flat as~~engines, including the ~~Company reduced capital expenditures~~28 -700s planned for retirement in ~~response to the pandemic.~~2022.

Other operating expenses ~~net~~ for first quarter ~~2021 decreased~~2022 increased by ~~$235~~$268 million, or ~~33.7~~57.9 percent, compared with first quarter ~~2020.~~2021. Included within this line item was aircraft rentals expense in the amounts of ~~$51~~$48 million and ~~$57~~$51 million for the three-month periods ended March 31, ~~2021~~2022 and ~~2020,~~2021, respectively. On a per ASM basis, Other operating expenses ~~net~~ increased ~~0.5~~7.0 percent, compared with first quarter ~~2020, in line with the 34.5 percent decrease in capacity in response to the COVID-19 pandemic.~~2021. On a dollar basis, ~~approximately 70~~25 percent of the ~~decrease~~increase was due to ~~various savings as a result~~higher revenue related expenses (including credit card processing charges) and 15 percent of ~~supporting a reduced operation~~the increase was due to higher insurance and ~~other efforts to reduce discretionary spend.~~taxes. The majority of the remainder ~~of the decrease~~ was due to ~~lower credit card fees driven by a significant reduction in revenues associated with the COVID-19 pandemic.~~various flight-driven expenses.

Other

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

Interest expense for first quarter ~~2021 increased~~2022 decreased by ~~$86~~$21 million, or 18.4 percent, compared with first quarter ~~2020,~~2021, primarily due to ~~higher~~elimination of the debt ~~balances. Based on current debt outstanding and current market interest rates, the Company currently expects second quarter 2021 interest expense to be approximately $115 million.~~

~~Capitalized interest for first quarter 2021 increased by $6 million, compared with first quarter 2020, primarily~~discount due to ~~Boeing resuming production~~the adoption of ~~the Company's undelivered MAX aircraft.~~

~~Interest income for first quarter 2021 decreased by $15 million, compared with first quarter 2020, due to lower interest rates.~~

~~Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities.~~ASU 2020-06. See Note 43 to the unaudited Condensed Consolidated Financial Statements for further ~~information on the Company's hedging activities.~~ information.

Table of Conten ts

Capitalized interest for first quarter 2022 decreased by $2 million, or 18.2 percent, compared with first quarter 2021, primarily due to several large technology and facilities projects that were completed and placed into service since first quarter 2021.

Interest income for first quarter 2022 increased by $1 million, or 50.0 percent, compared with first quarter 2021, primarily due to higher interest rates.

The following table displays the components of Other (gains) losses, net, for the three months ended March 31, ~~2021~~2022 and ~~2020:~~2021:

Three months ended March 31,
(in millions) 2021 2020
Mark-to-market impact from fuel contracts settling in current and future periods $ 1 $ 2
Premium cost of fuel contracts not designated as hedges 11 —
Mark-to-market impact from interest rate swap agreements — 24
Other (a) (60) 2
$ (48) $ 28

~~(a) See Note 1 to the unaudited Condensed Consolidated Financial Statements for further information.~~


	Three months ended March 31,
(in millions)	2022		2021
Mark-to-market impact from fuel contracts settling in current and future periods	$	34	$	1
Premium cost of fuel contracts not designated as hedges	—		11

Unrealized mark-to-market adjustment on available for sale securities	5		—
Mark-to-market impact on deferred compensation plan investments	33		—
Correction on investment gains related to prior periods	—		(60)
Loss on partial extinguishment of convertible and unsecured notes	72		—

	$	144	$	(48)

Income Taxes

The Company's effective tax rate was approximately 26.1 percent in first quarter 2022, compared with 20.6 percent in first quarter ~~2021, compared with 34.3 percent in~~2021. The higher tax rate for first quarter ~~2020. The prior year higher first quarter~~2022 was primarily due to losses on the Company's convertible debt repurchases, which are largely disallowed as a deduction for tax ~~rate was a result of the anticipated Net operating loss for full year 2020, which allowed the Company to carry back losses to receive tax refunds on amounts paid from 2015 through 2019.~~purposes. The Company currently estimates its annual ~~2021~~2022 effective tax rate to be approximately 2324 percent to 26 percent.

Table of Conten ts

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	Three months ended March 31,				Percent
		2021		2020		Change			2022		2021		Change

Fuel and oil expense, unhedged	Fuel and oil expense, unhedged	$	464	$	846			Fuel and oil expense, unhedged	$	1,207	$	464
Add: Premium cost of fuel contracts designated as hedges	Add: Premium cost of fuel contracts designated as hedges	14		24				Add: Premium cost of fuel contracts designated as hedges	26		14
Deduct: Fuel hedge gains included in Fuel and oil expense, net	Deduct: Fuel hedge gains included in Fuel and oil expense, net	(9)		—				Deduct: Fuel hedge gains included in Fuel and oil expense, net	(229)		(9)
Fuel and oil expense, as reported	Fuel and oil expense, as reported	$	469	$	870			Fuel and oil expense, as reported	$	1,004	$	469
Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	8		—				Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	—		8
Add: Premium cost of fuel contracts not designated as hedges	Add: Premium cost of fuel contracts not designated as hedges	11		—				Add: Premium cost of fuel contracts not designated as hedges	—		11
Fuel and oil expense, excluding special items (economic)	Fuel and oil expense, excluding special items (economic)	$	488	$	870	(43.9)		Fuel and oil expense, excluding special items (economic)	$	1,004	$	488	105.7

Total operating expenses, net, as reported	Total operating expenses, net, as reported	$	1,853	$	4,344			Total operating expenses, net, as reported	$	4,845	$	1,853
Add: Payroll support and voluntary Employee programs, net	Add: Payroll support and voluntary Employee programs, net	1,448		—				Add: Payroll support and voluntary Employee programs, net	—		1,448
Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	8		—				Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	—		8
Add: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	Add: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	1		—				Add: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	—		1
Add: Premium cost of fuel contracts not designated as hedges	Add: Premium cost of fuel contracts not designated as hedges	11		—				Add: Premium cost of fuel contracts not designated as hedges	—		11

Deduct: Impairment of long-lived assets								Deduct: Impairment of long-lived assets	(16)		$	—
Total operating expenses, excluding special items	Total operating expenses, excluding special items	$	3,321	$	4,344	(23.5)%		Total operating expenses, excluding special items	$	4,829	$	3,321	45.4
Deduct: Fuel and oil expense, excluding special items (economic)								Deduct: Fuel and oil expense, excluding special items (economic)	(1,004)		(488)
Operating expenses, excluding Fuel and oil expense and special items								Operating expenses, excluding Fuel and oil expense and special items	$	3,825	$	2,833	35.0
Deduct: Profitsharing expense								Deduct: Profitsharing expense	(37)		(24)
Operating expenses, excluding Fuel and oil expense, special items, and profitsharing								Operating expenses, excluding Fuel and oil expense, special items, and profitsharing	$	3,788	$	2,809	34.9

Operating income (loss), as reported	Operating income (loss), as reported	$	199	$	(110)			Operating income (loss), as reported	$	(151)	$	199
Deduct: Payroll support and voluntary Employee programs, net	Deduct: Payroll support and voluntary Employee programs, net	(1,448)		—				Deduct: Payroll support and voluntary Employee programs, net	—		(1,448)
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	(8)		—				Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	—		(8)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	(1)		—				Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	—		(1)
Deduct: Premium cost of fuel contracts not designated as hedges	Deduct: Premium cost of fuel contracts not designated as hedges	(11)		—				Deduct: Premium cost of fuel contracts not designated as hedges	—		(11)

Add: Impairment of long-lived assets								Add: Impairment of long-lived assets	16		—
Operating loss, excluding special items	Operating loss, excluding special items	$	(1,269)	$	(110)	n.m.		Operating loss, excluding special items	$	(135)	$	(1,269)	(89.4)

Other (gains) losses, net, as reported	Other (gains) losses, net, as reported	$	(48)	$	28			Other (gains) losses, net, as reported	$	144	$	(48)
Deduct: Mark-to-market impact from fuel contracts settling in current and future periods (a)	Deduct: Mark-to-market impact from fuel contracts settling in current and future periods (a)	(1)		(2)				Deduct: Mark-to-market impact from fuel contracts settling in current and future periods (a)	(34)		(1)
Deduct: Premium cost of fuel contracts not designated as hedges	Deduct: Premium cost of fuel contracts not designated as hedges	(11)		—				Deduct: Premium cost of fuel contracts not designated as hedges	—		(11)
Deduct: Mark-to-market impact from interest rate swap agreements		—		(24)
Deduct: Unrealized mark-to-market adjustment on available for sale investments								Deduct: Unrealized mark-to-market adjustment on available for sale investments	(5)		—

Deduct: Loss on partial extinguishment of convertible and unsecured notes								Deduct: Loss on partial extinguishment of convertible and unsecured notes	(72)		—
Other (gains) losses, net, excluding special items	Other (gains) losses, net, excluding special items	$	(60)	$	2	n.m.		Other (gains) losses, net, excluding special items	$	33	$	(60)	n.m.

Income (loss) before income taxes, as reported	Income (loss) before income taxes, as reported	$	146	$	(144)			Income (loss) before income taxes, as reported	$	(376)	$	146
Deduct: Payroll support and voluntary Employee programs, net	Deduct: Payroll support and voluntary Employee programs, net	(1,448)		—				Deduct: Payroll support and voluntary Employee programs, net	—		(1,448)
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	(8)		—				Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	—		(8)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	(1)		—				Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	—		(1)
Add: Mark-to-market impact from fuel contracts settling in current and future periods		1		2
Add: Mark-to-market impact from interest rate swap agreements		—		24
Loss before income taxes, excluding special items		$	(1,310)	$	(118)	n.m.

Provision (benefit) for income taxes, as reported		$	30	$	(50)
Add (Deduct): Net income (loss) tax impact of fuel and special items (b)		(325)		9
Add: Mark-to-market impact from fuel contracts settling in current and future periods (a)								Add: Mark-to-market impact from fuel contracts settling in current and future periods (a)	34		1

Benefit for income taxes, net, excluding special items		$	(295)	$	(41)	n.m.

Add: Impairment of long-lived assets								Add: Impairment of long-lived assets	16		—
Add: Unrealized mark-to-market adjustment on available for sale investments								Add: Unrealized mark-to-market adjustment on available for sale investments	5		—

Table of Conten ts


										Three months ended March 31,						Percent
										2022			2021			Change
Add: Loss on partial extinguishment of convertible and unsecured notes									Add: Loss on partial extinguishment of convertible and unsecured notes	72			—
Loss before income taxes, excluding special items									Loss before income taxes, excluding special items	$	(249)		$	(1,310)		(81.0)

Provision (benefit) for income taxes, as reported									Provision (benefit) for income taxes, as reported	$	(98)		$	30
Add (Deduct): Net income (loss) tax impact of fuel and special items (b)									Add (Deduct): Net income (loss) tax impact of fuel and special items (b)	40			(325)

Benefit for income taxes, net, excluding special items									Benefit for income taxes, net, excluding special items	$	(58)		$	(295)		(80.3)

		Three months ended March 31,						Percent
		2021			2020			Change
Net income (loss), as reported	Net income (loss), as reported	$	116		$	(94)			Net income (loss), as reported	$	(278)		$	116
Deduct: Payroll support and voluntary Employee programs, net	Deduct: Payroll support and voluntary Employee programs, net	(1,448)			—				Deduct: Payroll support and voluntary Employee programs, net	—			(1,448)
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	(8)			—				Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a)	—			(8)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	(1)			—				Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	—			(1)

Add: Mark-to-market impact from fuel contracts settling in current and future periods (a)	Add: Mark-to-market impact from fuel contracts settling in current and future periods (a)	1			2				Add: Mark-to-market impact from fuel contracts settling in current and future periods (a)	34			1
Add: Mark-to-market impact from interest rate swap agreements		—			24

Add: Loss on partial extinguishment of convertible and unsecured notes									Add: Loss on partial extinguishment of convertible and unsecured notes	72			—
Add: Impairment of long-lived assets									Add: Impairment of long-lived assets	16			—
Add: Unrealized mark-to-market adjustment on available for sale investments									Add: Unrealized mark-to-market adjustment on available for sale investments	5			—
Add (Deduct): Net income (loss) tax impact of special items (b)	Add (Deduct): Net income (loss) tax impact of special items (b)	325			(9)				Add (Deduct): Net income (loss) tax impact of special items (b)	(40)			325

Net loss, excluding special items	Net loss, excluding special items	$	(1,015)		$	(77)		n.m.	Net loss, excluding special items	$	(191)		$	(1,015)		(81.2)

Net income (loss) per share, diluted, as reported	Net income (loss) per share, diluted, as reported	$	0.19		$	(0.18)			Net income (loss) per share, diluted, as reported	$	(0.47)		$	0.19
Add (Deduct): Impact of special items	Add (Deduct): Impact of special items	(2.38)			0.05				Add (Deduct): Impact of special items	0.16			(2.38)
Deduct: Net impact of net income (loss) above from fuel contracts divided by dilutive shares		(0.01)			—
Add (Deduct): Net impact of net income (loss) above from fuel contracts divided by dilutive shares									Add (Deduct): Net impact of net income (loss) above from fuel contracts divided by dilutive shares	0.06			(0.01)
Add (Deduct): Net income (loss) tax impact of special items (b)	Add (Deduct): Net income (loss) tax impact of special items (b)	0.53			(0.02)				Add (Deduct): Net income (loss) tax impact of special items (b)	(0.07)			0.53

Deduct: GAAP to Non-GAAP diluted weighted average shares difference (c)	Deduct: GAAP to Non-GAAP diluted weighted average shares difference (c)	(0.05)			—				Deduct: GAAP to Non-GAAP diluted weighted average shares difference (c)	—			(0.05)
Net loss per share, diluted, excluding special items	Net loss per share, diluted, excluding special items	$	(1.72)		$	(0.15)		n.m.	Net loss per share, diluted, excluding special items	$	(0.32)		$	(1.72)		(81.4)

Operating expenses per ASM (cents)	Operating expenses per ASM (cents)	8.00		¢	12.29		¢		Operating expenses per ASM (cents)	14.09		¢	8.00		¢
Add: Impact of special items		6.25			—
Add (Deduct): Impact of special items									Add (Deduct): Impact of special items	(0.04)			6.25
Deduct: Fuel and oil expense divided by ASMs	Deduct: Fuel and oil expense divided by ASMs	(2.02)			(2.46)				Deduct: Fuel and oil expense divided by ASMs	(2.92)			(2.02)
Deduct: Profitsharing expense divided by ASMs	Deduct: Profitsharing expense divided by ASMs	(0.10)			—				Deduct: Profitsharing expense divided by ASMs	(0.11)			(0.10)
Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)	Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)	12.13		¢	9.83		¢	23.4%	Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)	11.02		¢	12.13		¢	(9.2)

(a) See Note 4 to 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.

(c) Adjustment related to GAAP and Non-GAAP diluted weighted average shares difference, due to the Company being in a Net income position on a GAAP basis versus a Net loss position on a Non-GAAP ~~basis.~~basis for the quarter ended March 31, 2021. See Note 7 to the unaudited Condensed Consolidated Financial Statements for further information.

Table of Conten ts

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 loss, non-GAAP; Net loss per share, diluted, 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 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 into the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude ~~the~~any 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, ~~2020~~2021 and Note 4 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. For the periods presented, in addition to the items discussed above, special items include:

1.Proceeds related to the Payroll Support ~~Program Extension,~~programs, which were used to pay a portion of Employee salaries, wages, and benefits;

2.Charges and adjustments to previously accrued amounts related to the Company's extended leave ~~program;~~programs;

3.Adjustments for prior period losses reclassified from AOCI associated with forward-starting interest rate swap agreements that were terminated in prior periods related to ~~eleven 737 MAX 8~~12 Boeing 737-8 ("-8") aircraft leases; ~~and~~

Table of Conten ts

4.Unrealized losses related to nine forward-starting interest rate swap agreements. During first quarter 2020, the interest rate swap agreements, which were related to nine 737 MAX 8 aircraft leases (with deliveries originally scheduled between June 2020 and September 2020), were de-designated as hedges dueNoncash impairment charges, primarily associated with adjustments to the ~~scheduled delivery range no longer being probable, resulting in~~salvage values for previously retired airframes;

5.Unrealized mark-to-market adjustment associated with certain available for sale investments; and

6.Losses associated with the ~~mark-to-market changes being recorded to earnings.~~partial extinguishment of the Company's Convertible Notes and early prepayment of debt.

Because management believes special 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 special 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 loss, non-GAAP; Net loss per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents).

The Company has also utilized and provided average cash burn and average daily core cash burn which are non-GAAP financial measures. Cash burn is a supplemental measure that most U.S. airlines began providing in 2020 to measure liquidity in light of the negative financial effects of the pandemic. The Company utilizes average daily core cash burn to monitor the performance of its core business as a proxy for its ability to achieve sustainable break-even or positive results on a cash basis. Cash burn methodology may vary by airline, but see the Company's calculation of cash burn below:

~~(in millions, except for Days in the period)~~

~~Three months ended March 31, 2021~~

~~Loss before income taxes, non-GAAP~~

~~(1,310)~~

~~Depreciation and amortization expense~~

~~312~~

~~Capital expenditures~~

~~(95)~~

~~Debt service payments~~

~~(67)~~

~~Core cash burn~~

~~(1,160)~~

~~Days in the period~~

~~Average daily core cash burn~~

~~(13)~~

~~Core cash burn, prior to changes in working capital~~

~~(1,160)~~

~~Increase in Air traffic liability~~

~~599~~

~~Payments associated with Voluntary Employee Programs~~

~~(188)~~

~~Other (a)~~

~~315~~

~~Core cash burn, adjusted for changes in working capital~~

~~(434)~~

~~Days in the period~~

~~Average daily core cash burn, adjusted for changes in working capital~~

~~(5)~~

(a) Adjustment primarily related to the prepayment in fourth quarter 2020 from Chase for Rapid Reward points expected to be purchased in 2021. See Note 9 to the unaudited condensed Consolidated Financial Statements for further information.

Table of Conten ts

Liquidity and Capital Resources

The enormous impact of the COVID-19 pandemic on the U.S. travel industry created an urgent liquidity crisis for the entire airline industry, including the Company. However, due to the Company's pre-pandemic low balance sheet leverage, large base of unencumbered assets, and investment-grade credit ratings, the Company was able to quickly access additional liquidity during 2020, ~~and 2021,~~ as Customer cancellations and ticket refunds spiked and sales and revenues dropped while the Company continued to experience significant fixed operating expenses. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information regarding the impact of the COVID-19 pandemic and assistance obtained under ~~the CARES Act,~~ Payroll Support Program Extension, and PSP3 Payroll Support Program. Much uncertainty remains about the time it will take for air travel demand to recover, and the Company continues to assess its immediate and near-term liquidity needs. The Company also continues to assess various sources and options including public and private financings to bolster its liquidity and believes that, given current market conditions, it has opportunities to do so.programs.

Net cash provided by operating activities was ~~$645 million~~$1.1 billion for the three months ended March 31, ~~2021,~~2022, compared with ~~$377~~$645 million ~~used in~~provided by operating activities in the same prior year period. 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 ~~both periods presented, were affected primarily~~the three months ended March 31, 2022 included an $885 million increase in Air traffic liability driven by ~~the COVID-19 pandemic, which resulted in a significant drop~~higher ticket sales related to an increase in travel demand, ~~sales,~~ and ~~revenues. Operating~~included a $385 million increase in cash collateral received from derivative counterparties due to an increase in the fuel hedge portfolio, driven by increases in the forward curve year-to-date. The operating cash flows for the three months ended March 31, 2021, included $1.2 billion in Payroll Support ~~Program Extension~~ grant proceeds received, ~~as part~~and were also driven by an increase in Air Traffic Liability of ~~the Consolidated Appropriations Act, 2021 of which nearly all of this direct payroll support was used to offset eligible costs and thus included in operating activities, with the remaining $23~~$599 million ~~allocated to the value of PSP2 Warrants issued and thus included in financing activities. These net increases in operating cash flows were also~~as a result of ~~a $599 million increase in Air traffic liability driven by~~ increased ticket sales ~~related to an~~from the increase in ~~leisure~~ travel demand. ~~For~~These increases were partially offset by amounts paid out under the Company's Voluntary Separation Program and Extended ETO plans during the three months ended March 31, ~~2020, the~~2021, which totaled approximately $188 million. Net cash provided by operating ~~cash flows were affected~~activities is primarily ~~by a $1.3 billion decrease in Accounts payable~~used to finance capital expenditures, repay debt, and accrued expenses, primarily due to the Company's payout of its 2019 $667 million ProfitSharing distribution to Employees in March 2020, as well as a significant decline in amounts payable for passenger excise taxes and segment fees as a result of the March 2020 drop in passenger ticket sales. These were partially offset by a $701 million increase in Air traffic liability. The increase in Air traffic liability resulted from January and February 2020 bookings, which were then significantly impacted by a decline in Customer demand and increased trip cancellations attributable to concerns relating to the COVID-19 pandemic, primarily in March 2020.provide working capital. Historically, the Company has also used net cash provided by ~~operations~~operating activities to fund stock repurchases and pay dividends; however, these ~~shareholder~~Shareholder return activities have been suspended due to restrictions associated with ~~the payroll assistance under the CARES Act,~~ Payroll ~~Support Program Extension, and PSP3 Payroll Support Program.~~Support. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further ~~information.~~information

Net cash used in investing activities totaled ~~$201~~$139 million during the three months ended March 31, ~~2021,~~2022, compared with $5$201 million used in investing activities in the same prior year period. Investing activities in both years included Capital expenditures, and changes in the balance of the Company's short-term and noncurrent investments. During the three months ended March 31, ~~2021,~~2022, Capital expenditures were ~~$95~~$510 million, compared with ~~$224~~$95 million in the same prior year period. Capital expenditures ~~decreased,~~increased, year-over-year, largely due to ~~a decrease~~an increase in ~~technology project expenditures and several projects being placed into service since March 31, 2020. In addition, the Company did not make~~ progress payments made on future aircraft deliveries during the three months ended March 31, ~~2021,~~2022, compared to the same prior year period, when progress payments were ~~made. See Notes 2 and 11~~not made due to ~~the unaudited Condensed Consolidated Financial Statements for further information. As a result of previously agreed upon~~ delivery credits provided by Boeing to the Company ~~due to~~resulting from the settlement of 2020 estimated damages relating to the FAA grounding of the ~~737~~ MAX ~~aircraft and progress payments made~~aircraft.

The Company continues to ~~date on undelivered aircraft, the Company currently estimates no aircraft~~estimate its 2022 capital ~~expenditures in 2021. Therefore, the Company currently estimates its annual 2021 capital expenditures~~spending to be approximately ~~$500 million, driven primarily by technology, facilities,~~$5.0 billion, which assumes the exercise of its 12 remaining 2022 Boeing aircraft order book options and ~~operational investments. The Company cannot predict when~~remains unchanged despite the ~~effects~~shift of ~~the COVID-19 pandemic on air travel will end, but~~

-7 firm orders to -8 firm orders as the Company ~~expects that~~contemplated various scenarios in its 2022 plan. The Company’s 2022 capital ~~expenditures will increase from current levels if U.S. air travel returns~~spending guidance continues to ~~pre-pandemic levels.~~include approximately $900 million in non-aircraft capital spending.

Net cash ~~provided by~~used in financing activities was ~~$464~~$314 million during the three months ended March 31, ~~2021,~~2022, compared with ~~$1.8 billion~~$464 million provided by financing activities for the same prior year period. The Company repaid $323 million in debt and finance lease obligations, including the extinguishment of $164 million in principal of its Convertible Notes for a cash payment of $230 million during the three months ended March 31, 2022, and is scheduled to repay approximately $21 million in debt and finance lease obligations during second quarter 2022. During the three months ended March 31, 2021, the Company borrowed $488 million of loan proceeds under the PSP2 Payroll Support ~~Program Extension.~~Program. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. The Company repaid $67 million in debt and finance lease obligations during the three months ended March 31, ~~2021, and is scheduled to repay approximately $153 million in debt and finance lease obligations during the remainder of~~ 2021. During the three months ended March 31, 2020, the Company borrowed $2.5 billion, through various transactions, in order to improve its liquidity position as a result of the onset of the pandemic. The Company also repurchased $451 million of its outstanding common stock, paid $188 million in cash dividends to Shareholders, and repaid $78 million in debt and finance lease obligations.

~~Average daily core cash burn was approximately $13 million in first quarter 2021, compared with fourth quarter 2020 average core cash burn~~

Table of $12 million per day. Average core cash burn was approximately $9 million per day in March 2021. Including changes in working capital — most notably, cash flow from future bookings — average core cash flow turned positive in March 2021, and the Company generated approximately $4 million per day, as revenue and booking trends improved. The Company's average core cash burn (which excludes changes in working capital) in second quarter 2021 is currently estimated to be in the range of approximately $2 million to $4 million per day. Based on current booking trends and cost outlook, the Company is hopeful it can achieve breakeven average core cash flow, or better, by June 2021. Cash burn is a supplemental measure that most U.S. airlines began providing in 2020 to measure liquidity in light of the negative financial effects of the pandemic. Average daily core cash burn is calculated as Loss before income taxes, non-GAAP, adjusted for Depreciation and amortization expense; Capital expenditures; and adjusted amortizing debt service payments; divided by the number of days in the period. The Company utilizes average daily core cash burn to monitor the performance of its core business as a proxy for its ability to achieve sustainable break-even or positive results on a cash basis. Average core cash burn projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate those items or expenses or their 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. 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 including the cash burn formula.

Conten ts

Utilizing an alternative cash burn approach, which adjusts for changes in working capital, among other items, the Company's first quarter 2021 daily cash burn was approximately $5 million. Cash burn methodology varies by airline, and the Company’s first quarter 2021 average daily core cash burn of $13 million may differ materially by utilizing cash burn calculations that adjust for changes in working capital.

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.

The Company has access to $1.0 billion under its ~~Amended~~amended and ~~Restated Revolving~~restated revolving credit facility (the "Amended A&R Credit ~~Facility, as amended (the "Revolving Credit Facility"~~Agreement"). The ~~Revolving~~Amended A&R Credit ~~Facility~~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~~the London Interbank Offered Rate ("LIBOR") plus a spread of ~~200.0~~200 basis points. The facility contains a financial covenant to maintain total liquidity, as defined in the ~~Revolving~~Amended A&R Credit ~~Facility,~~Agreement, of $1.5 billion at all times under the ~~Revolving~~Amended A&R Credit ~~Facility;~~Agreement; the Company was compliant with this requirement as of March 31, ~~2021.~~2022. There were no amounts outstanding under the ~~Revolving~~Amended A&R Credit ~~Facility~~Agreement as of March 31, ~~2021.~~2022.

Although not the case at March 31, ~~2021,~~2022 due to the Company's significant financing activities throughout the early stages of the pandemic, the Company has historically carried a working capital deficit, in which its current liabilities 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 funds available to Customers, and loyalty deferred revenue, which are performance obligations for future Customer flights, do not require future settlement in cash, and are mostly nonrefundable. See Note 6 to the unaudited Condensed Consolidated Financial Statements for further information.

The Company believes it has various options available to meet its capital and operating commitments, including unrestricted cash and short-term investments of ~~$14.3~~$15.7 billion as of March 31, ~~2021,~~2022, and anticipated future internally generated funds from operations. However, the COVID-19 pandemic continues to evolve and could have a material adverse impact on the Company's ability to meet its capital and operating commitments. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information on the impacts of the ~~COVID-19 pandemic. The Company will continue to consider various financing options to maximize liquidity and supplement cash requirements, as necessary.~~COVID-19.

OnAs of March ~~24, 2021, the Company entered into the Supplement to its aircraft purchase agreement with Boeing relating to~~31, 2022, the Company's ~~purchase of Boeing 737 MAX 7~~total firm and 737 MAX 8 aircraft. Pursuant to the Supplement (i) the Company added 100 firm orders for the MAX 7, with the first 30 to be delivered in 2022; (ii) the Company added 155 MAX aircraft options; (iii) theoption order book was extended to include deliveries through 2031; and (iv) the Company converted 70 MAX 8 firm orders to MAX 7 firm orders. The Supplement also includes certain confidential credits, discounts, and other concessions provided632 aircraft. See Note 10 to the ~~Company by Boeing.~~unaudited Condensed Consolidated Financial Statements for further information.

The following table details information on the aircraft in the Company's fleet as of March 31, ~~2021:~~

Average
Age (Yrs) Number
of Aircraft Number
Owned Number
Leased
Type Seats
737-700 143 16 462 (a) 370 92
737-800 175 6 207 190 17
737 MAX 8 175 2 61 (a) 33 28
Totals 12 730 593 137
2022:


		Average Age (Yrs)	Number of Aircraft		Number Owned	Number Leased
Type	Seats
737-700	143	17	446	(a)	364	82
737-800	175	7	207		190	17
737 -8	175	2	69		40	29
Totals		13	722		594	128

(a) Included 594 Boeing 737 Next Generation ~~and 7 Boeing 737 MAX 8~~ aircraft ~~removed from active fleet and~~ in temporary storage as of March 31, ~~2021.~~2022.

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, 2021.

Table of Conten ts

Cautionary Statement Regarding Forward-Looking Statements

This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are based on, and include statements about, the Company's estimates, expectations, beliefs, intentions, and strategies for the future, and the assumptions underlying these forward-looking statements. Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, statements related to the following:

•the Company’s ~~expectations related to payroll support pursuant to the American Rescue Plan Act of 2021;~~financial guidance for second quarter and full year 2022 and factors that could impact actual results;

•the Company’s ~~financial outlook, expectations, and projected results of operations, including underlying assumptions and estimates, in particular~~plans related to ~~the anticipated lessening of the negative impact of the COVID-19 pandemic;~~

•~~the Company’s~~ capacity ~~plans and expectations, including underlying assumptions and estimates, in particular related to the anticipated lessening of the negative impact of the COVID-19 pandemic on demand and bookings;~~decisions;

•the Company’s fleet plans and expectations, including underlying assumptions and dependencies, and the Company’s related goals with respect to improvement of potential growth opportunities, restoration of its network, reduction of operating costs, and further fleet modernization with less carbon-intensive aircraft;

•the Company’s hiring plans and expectations;

•the ~~Company's initiatives, including~~Company’s expectations related to its ~~environmental sustainability goal;~~new fare product, Wanna Get Away Plus™;

•the Company's ~~network plans and~~expectations with respect to Customer demand, including with respect to business travel;

•the Company’s expectations related ~~expectations;~~to fuel efficiency;

•the Company’s plans, expectations, and estimates related to fuel ~~efficiency and fuel~~ costs, ~~and~~ the Company’s related management of risk associated with changing jet fuel prices, ~~including~~and the Company’s assumptions underlying ~~the~~its fuel-related expectations and estimates;

•the ~~Company's~~Company’s expectations with respect to capital expenditures, ~~cash burn/cash flows, and liquidity, including~~in particular with respect to aircraft capital expenditures;

•the Company’s plans for the repayment of debt;

•the Company’s expectations with respect to its ability to meet its ongoing capital and operating commitments, including underlying assumptions and ~~other obligations, and the Company’s 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 extent of~~any negative developments related to the COVID-19 pandemic, including, for example, with respect to (i) the duration, spread, severity, ~~and~~or any recurrence of the COVID-19 pandemic ~~including through~~or any new variant strains of the underlying virus; (ii) the effectiveness, availability, and ~~availability~~usage of COVID-19 vaccines; (iii) the ~~duration~~impact of government mandates, directives, orders, regulations, and ~~scope of~~other governmental actions related ~~government orders~~to COVID-19 on the Company’s business plans and ~~restrictions; the duration and scope of the Company's actions~~its ability to ~~address Customer and Employee health concerns;~~retain key Employees; (iv) the extent of the impact of ~~the~~ COVID-19 ~~pandemic~~ on overall demand for air travel and the Company's related business plans and decisions; ~~any negative impact of~~and (v) the ~~COVID-19 pandemic on the Company's ability to retain key Employees; and any negative~~ impact of the COVID-19 pandemic on the Company's access to capital;

•the impact of ~~fears or actual outbreaks of other diseases, economic conditions, extreme or severe weather~~labor and ~~natural disasters, fears of terrorism or war, actions of competitors, consumer perception, and other factors beyond~~hiring matters on the ~~Company's control, on consumer behavior and the Company's results of operations and~~Company’s business decisions, plans, ~~strategies,~~ and ~~results;~~

•the Company's dependence on Boeing with respect to the Company's fleet order book, delivery schedule, and other performance requirements under its agreements with the Company, including with respect to the Company’s ability to return all of its MAX aircraft to revenue service;

•~~the Company's and Boeing's dependence on other third-party providers to perform in accordance with expectations in connection with the manufacture and delivery of aircraft;~~

•the impact of the Company's obligations and restrictions related to its participation in the U.S. Treasury's payroll support programs, including restrictions and obligations associated with its loans from, and warrants

~~issued to, the U.S. Treasury; and any related negative impact on the Company’ ability to retain key Employees;~~

•the enactment or adoption of future laws, statutes, and regulations and interpretations or enforcement of current and future laws, statutes, and regulations that affect the terms or application of the Company’s payroll support agreements with the U.S. Treasury and that may have a material adverse effect on the Company;

•~~the impact of governmental actions and governmental regulations on the Company's plans, strategies, financial results, and operations;~~

•~~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;~~strategies;

•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 plans and results of operations;

•the Company's dependence on Boeing with respect to the Company's fleet, fuel, and other operational strategies and goals;

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•the impact of governmental actions and governmental regulations on the Company's plans, strategies, financial results, and operations;

•the impact of fears or actual outbreaks of other 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), consumer perception, economic 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 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;

•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;

•the Company's dependence on third parties, in particular with respect to its fuel supply, carbon emissions strategies, and corporate travel enhancements, and the impact on the Company's operations and results of operations of any third party delays or non-performance;

•the Company's dependence on Boeing and the FAA with respect to certification of the -7 aircraft; and

•other factors as set forth in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2020.~~2021.

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 4 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 March 31, ~~2021,~~2022, the estimated fair value of outstanding contracts was an asset of ~~$249 million.~~$1.3 billion.

The Company's credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are 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 March 31, ~~2021,~~2022, the Company had nine counterparties for which the derivatives held were an 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 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 March 31, ~~2021,~~2022, 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 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 4 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, 2022, at which such postings are triggered.

At March 31, ~~2021, $72~~2022, $560 million in cash collateral deposits were held by the Company from counterparties based on the Company's outstanding fuel derivative instrument portfolio. Due to the types of derivatives held as of March 31, ~~2021,~~2022, the Company does not have cash collateral exposure. See Note 4 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. The Company has found that financial derivative instruments in commodities, such as 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. 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, ~~2021.~~2022.

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, ~~2021,~~2022, 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, ~~2020,~~2021, for further information about market risk, and Note 4 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'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 March 31, ~~2021.~~2022. 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 March 31, ~~2021,~~2022, 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) ~~under~~of the Exchange Act) during the ~~fiscal~~ quarter ended March 31, ~~2021,~~2022, 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

On June 30, 2015, the U.S. Department of Justice ("DOJ") issued a Civil Investigative Demand ("CID") to the Company. The CID ~~seeks~~sought 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. The Company is cooperating fully with the DOJ CID and the state 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, ~~and~~which the Court denied on October 28, ~~2016, the Court denied this motion.~~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. ~~The Court granted preliminary approval of the settlement on January 3, 2018, and the plaintiffs~~After notice was provided ~~notice~~ to the proposed settlement ~~class. The~~class and the Court held a fairness hearing ~~on March 22, 2019, and it~~the Court issued an order granting final approval of the settlement on May 9, 2019. On June 10, 2019, ~~three sets of~~certain objectors filed notices of appeal to the United States Court of Appeals for the District of Columbia ~~Circuit. Two sets~~Circuit, which the Court dismissed on July 9, 2021, for lack of ~~the objectors dismissed their appeals, and the Company and the other settling parties moved to dismiss the remaining appeal~~jurisdiction because the district ~~court did~~court's order approving the settlements was not certify the approval order as appealable. The court of appeals ordered the parties to brief the jurisdictional issue and the merits of the objections raised in the appeal, and oral argument was held on April 14, 2021.a final appealable order. The case is continuing as to the remaining defendants. The Company denies all allegations of wrongdoing.

On July 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 in the United States District Court for the Eastern District of Texas in Sherman. 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. ~~Discovery is ongoing,~~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

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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 ~~briefing has been completed, and~~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 ~~hearing~~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. On January 7, 2022, the Company and Boeing each filed briefs in support of the appeal, and the briefing of both sides on the merits of the appeal was ~~held before~~recently completed. The Company intends to strenuously pursue the ~~court on April 26, 2021.~~appeal, including, without limitation, through any oral argument that might be set by the Fifth Circuit. The Company further denies all allegations of wrongdoing, including those in the complaint that were not originally dismissed. The Company believes the plaintiffs' positions are without merit and intends to vigorously defend ~~itself.~~itself in all respects.

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 an 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 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.

On June 22, 2020, a derivative action for breach of fiduciary duty was filed in the United States District Court for the Northern District of Texas naming the members of the Company's Board of Directors as defendants and the Company as a nominal ~~defendant.~~defendant (the "Derivative Action"). The plaintiff alleges unspecified damage to Company’s reputation, goodwill, and standing in the community, as well as damage from exposure to civil and regulatory liability and defense costs. According to the lawsuit, these damages arise from the Company’s alleged failure to comply with safety and record maintenance regulations and false statements in public filings regarding the Company’s safety practices. The plaintiff alleges the Board, in the 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 ~~lawsuit is~~plaintiff in ~~its early stages, and~~ the Derivative Action shall have the right to reopen the action following the resolution of the Company's motion to dismiss 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.~~wrongdoing made in the Derivative Action.

On August 26, 2021, a complaint alleging breach of contract and seeking certification as a class action was filed against the Company in 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 737 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

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damages, declaratory relief, and attorneys’ fees and other costs. On October 27, 2021, the Company filed a multi-faceted motion challenging the Complaint based upon lack of subject matter jurisdiction, 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 as of December 22, 2021, and is now awaiting determination by the court. The Company denies all allegations of wrongdoing and believes the plaintiffs' positions are without merit and intends to vigorously defend itself in all respects.

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 ~~IRS.~~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 ~~IRS,~~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, ~~2020.~~

2021.

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

(a) In connection with funding that the Company had received under the Payroll Support Program Extension, the Company has issued PSP2 Warrants to acquire up to 1.2 million shares of the Company's common stock since January 2021 to Treasury under an exemption from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. For additional information regarding the PSP2 Warrants, see Note 2 of the unaudited Condensed Consolidated Financial Statements.

(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, including restrictions on the Company pursuant to the ~~CARES Act, the~~ Payroll Support ~~Program Extension, and the PSP3 Payroll Support Program~~programs through September 30, 2022, 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 announced it has suspended further share repurchase activity until further notice. The Company has approximately $899 million remaining under its current share repurchase authorization.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

On January 15, 2021, the Company entered into definitive documentation with the United States Department of the Treasury (“Treasury”) with respect to funding support pursuant to Subtitle A of Title IV of Division N of the Consolidated Appropriations Act, 2021 (the “PSP Extension Law”). On January 15, 2021, the Company entered into a payroll support program extension agreement (the "Payroll Support Program Extension"), pursuant to which the Company received payroll support funding (“PSP2 Payroll Support”) under the PSP Extension Law. As consideration for the PSP2 Payroll Support, the Company issued a promissory note (the “PSP2 Note”) in favor of Treasury and entered into a warrant agreement with Treasury (the “PSP2 Warrant Agreement” and, together with the Payroll Support Program Extension and the PSP2 Note, the “PSP2 Payroll Support Documents”), pursuant to which the Company agreed to issue warrants (each, a “PSP2 Warrant”) to purchase common stock of the Company to Treasury in connection with each disbursement of PSP2 Payroll Support. The Company received disbursements of PSP2 Payroll Support on each of January 15, 2021 and March 5, 2021.

On April 23, 2021, the Company received additional PSP2 Payroll Support from Treasury in the amount of $259,105,560 (the “Additional PSP2 Support”), for which the Company provided Treasury consideration in the form of an increase of the PSP2 Note in an amount of $77,731,668 and a PSP2 Warrant to purchase up to 167,960 shares of the Company’s common stock under the PSP2 Warrant Agreement. After taking into account the Additional PSP2 Support, the Company has received $1,986,475,960 of PSP2 Payroll Support, for which the Company has provided Treasury with a PSP2 Note in the aggregate amount of $565,942,788 and PSP2 Warrants to purchase up to 1,222,867 shares of the Company’s common stock.

None

A description of the PSP2 Payroll Support Documents can be found in the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission on January 15, 2021, and a copy of each PSP2 Payroll Support Document is attached as an exhibit thereto. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.

On April 23, 2021, the Company entered into definitive documentation with Treasury with respect to funding support pursuant to Section 7301 of the American Rescue Plan Act of 2021 (the “ARP”). Funds received under the ARP must be used to pay qualifying employee salaries, wages and benefits. The Company’s expected aggregate receipts under the program total $1,852,786,128, for which the Company expects to provide Treasury consideration in the form of (i) a promissory note in an amount equal to $525,835,838 and (ii) warrants to purchase up to an aggregate of 898,711 shares of the Company’s common stock, subject to adjustments by Treasury pursuant to the terms of the warrants in each case. Funds are expected to be disbursed to the Company in multiple installments.

On April 23, 2021, the Company entered into a Payroll Support Program 3 Agreement (the “PSP3 Agreement”) with Treasury, pursuant to which the Company will receive payroll support funding (“PSP3 Payroll Support”) under the ARP. On April 23, 2021, the Company received $926,393,064, or 50 percent, of the total expected PSP3 Payroll Support (the “Initial PSP3 Payroll Support”) pursuant to the ARP. Pursuant to the PSP3 Agreement and the ARP, in connection with the receipt of PSP3 Payroll Support, the Company is subject to certain restrictions, including prohibitions against involuntary furloughs and reductions in employee pay rates and benefits from the date of the PSP3 Agreement through the later of September 30, 2021 and the date the Company has expended all of the PSP3 Payroll Support; the elimination of share repurchases and dividends through September 30, 2022; and limits on executive compensation until April 1, 2023.

As consideration for the PSP3 Payroll Support, on April 23, 2021, the Company issued a promissory note (the “PSP3 Note”) in favor of Treasury and entered into a warrant agreement with Treasury (the “PSP3 Warrant Agreement” and together with the PSP3 Agreement and the PSP3 Note, the “PSP3 Payroll Support Documents”), pursuant to which the Company agreed to issue warrants (each, a “PSP3 Warrant”) to purchase common stock of the Company to Treasury. In connection with the disbursement of the Initial PSP3 Payroll Support on April 23, 2021, the PSP3 Note was issued in an initial amount of $247,917,919, and the Company issued a PSP3 Warrant to purchase up to 423,719 shares of common stock. Upon each subsequent disbursement of PSP3 Payroll Support to the Company under the PSP3 Agreement after April 23, 2021, (i) the principal amount of the PSP3 Note will automatically be increased in an amount equal to 30 percent of any such disbursement and (ii) the Company will issue an additional PSP3 Warrant to Treasury in an amount equal to 10 percent of the principal amount of the increase to the PSP3 Note in connection with such disbursement of PSP3 Payroll Support, divided by the strike price of $58.51 (which was the closing price of the Company’s common stock on March 10, 2021).

The PSP3 Note matures in full on April 23, 2031, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity. The Company has an option to prepay the PSP3 Note at any time without premium or penalty. Amounts outstanding under the PSP3 Note bear interest at a rate of 1.00 percent before April 23, 2026 and, afterwards, at a rate equal to the Secured Overnight Financing Rate (SOFR) or other benchmark replacement rate consistent with customary market conventions plus a margin of 2.00 percent. The PSP3 Note contains customary representations and warranties and events of default.

The PSP3 Warrant Agreement sets out the Company’s obligations to issue PSP3 Warrants in connection with disbursements of PSP3 Payroll Support and to file or designate a resale shelf registration statement for the PSP3 Warrants and the underlying shares of common stock. The Company has also granted Treasury certain demand underwritten offering and piggyback registration rights with respect to the PSP3 Warrants and the underlying common stock. Each PSP3 Warrant is exercisable at a strike price of $58.51 per share of common stock and will expire on the fifth anniversary of the issue date of such PSP3 Warrant. The PSP3 Warrants will be settled through net share settlement or net cash settlement, at the Company’s option. The PSP3 Warrants include adjustments for below market issuances, payment of dividends and other customary anti-dilution provisions. The PSP3 Warrants do not have voting rights.

The description of the PSP3 Payroll Support Documents in this Item 5 is qualified in its entirety by reference to the full text of each of the PSP3 Payroll Support Documents, copies of which are filed as exhibits to this Quarterly Report on Form 10-Q.

The PSP3 Payroll Support Documents are not intended to be a source of factual, business, or operational information about the Company or its subsidiaries. The representations and warranties and covenants contained in the PSP3 Payroll Support Documents were made only for purposes of such agreements and as of specific dates, were solely for the benefit of the parties to such agreements, and may be subject to limitations agreed upon by the parties, including being qualified by disclosures for the purpose of allocating contractual risk between the parties instead of establishing matters as facts; and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors or security holders. Accordingly, investors should not rely on the representations, warranties, and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company.

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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			Second Amended and Restated Bylaws of the Company, effective November 17, 2016 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 21, 2016 (File No. 1-7259)).
10.1			~~Supplemental Agreement No. 12 to Purchase Agreement No. 3729, dated December 13, 2011, between The Boeing Company~~Form of Restricted Cash Award and ~~the Company. (1)~~Terms and Conditions.
10.2			~~Supplemental Letter Agreement No. 6-1162-CAF-0390R2, to Purchase Agreement No. 3729, dated December 13, 2011, between The Boeing Company~~Form of Restricted Cash Performance Award and ~~the Company. (1)~~Terms and Conditions.
10.3			~~Mortgage and Security~~Letter Agreement ~~Supplement No. 1, dated March 30, 2021,~~ between Southwest Airlines Co. and ~~JPMorgan Chase Bank, N.A., acting as an administrative agent, pursuant to the Revolving Credit Facility Agreement dated~~Gary C. Kelly, effective as of ~~August 3, 2016, as amended.~~
~~10.4~~			~~Payroll Support Program 3 Agreement by and between Southwest Airlines Co. and the United States Department of the Treasury, dated April 23, 2021.~~
~~10.5~~			~~Warrant Agreement by and between Southwest Airlines Co. and the United States Department of the Treasury, dated April 23, 2021.~~
~~10.6~~			~~Promissory Note, from Southwest Airlines Co. to the United States Department of the Treasury, dated April 23, 2021.~~February 1, 2022.
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. ~~(2)~~(1)
101.INS			XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH			Inline XBRL Taxonomy Extension Schema Document.
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

(1) ~~Certain confidential information contained in this agreement has been omitted because it (i) is not material and (ii) would likely cause competitive harm to the Company if publicly disclosed.~~

~~(2)~~ Furnished, not filed.

5755

Table of Conten ts

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.

~~April 27, 2021~~May 2, 2022	By:	/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)

5856


Location and amount recognized in income on cash flow and fair value hedging relationships
	Three months ended March 31, 2021						Three months ended March 31, 2020
(in millions)	Fuel and oil		Other (gains)/losses, net		Other operating expenses		Fuel and oil		Other (gains)/losses, net		Interest expense
Total	$	16	$	6	$	1	$	22	$	2	$	2

Loss on cash flow hedging relationships:
Commodity contracts:
Amount of loss reclassified from AOCI into income	16		6		0		22		2		0
Interest contracts:
Amount of loss reclassified from AOCI into income	0		0		1		0		0		0

Impact of fair value hedging relationships:
Interest contracts:
Hedged items	0		0		0		0		0		4
Derivatives designated as hedging instruments	0		0		0		0		0		(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)	2021		2020
Fuel derivative contracts	$	(84)	$	84
Interest rate derivatives	(9)		32
Total	$	(93)	$	116


	The Boeing Company
	MAX 7 Firm Orders	MAX 8 Firm Orders		MAX 7 or 8 Options	Additional MAX 8s		Total
2021	0	19		0	9		28	(a)
2022	30	0		42	0		72
2023	30	0		38	0		68
2024	30	0		40	0		70
2025	30��	0		40	0		70
2026	15	15		40	0		70
2027	15	15		30	0		60
2028	15	15		30	0		60
2029	20	30		10	0		60
2030	15	45		0	0		60
2031	0	10		0	0		10
	200	149	(b)	270	9	(c)	628


Period			Maximum fuel hedged (gallons in millions) (a)(b)

Remainder of 2021			962
2022			1,220
2023			643
Beyond 2023			106