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 September 30, ~~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 October ~~22, 2021: 591,919,907~~27, 2022: 593,752,004

TABLE OF CONTENTS TO FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheet as of September 30, ~~2021~~2022 and December 31, ~~2020~~2021

Condensed Consolidated Statement of Comprehensive Income ~~(Loss)~~ for the three and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021

Condensed Consolidated Statement of Stockholders' Equity as of September 30 , 2022 and 2021 ~~and 2020~~

Condensed Consolidated Statement of Cash Flows for the three and nine months ended September 30 , 2022 and 2021 ~~and 2020~~

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)

September 30, 2021 December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents $ 12,980 $ 11,063
Short-term investments 3,024 2,271
Accounts and other receivables 1,479 1,130
Inventories of parts and supplies, at cost 511 414
Prepaid expenses and other current assets 560 295
Total current assets 18,554 15,173
Property and equipment, at cost:
Flight equipment 21,262 20,877
Ground property and equipment 6,287 6,083
Deposits on flight equipment purchase contracts — 305
Assets constructed for others 3 309
27,552 27,574
Less allowance for depreciation and amortization 12,496 11,743
15,056 15,831
Goodwill 970 970
Operating lease right-of-use assets 1,611 1,892
Other assets 919 722
$ 37,110 $ 34,588
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,229 $ 931
Accrued liabilities 1,687 2,259
Current operating lease liabilities 243 306
Air traffic liability 5,751 3,790
Current maturities of long-term debt 225 220
Total current liabilities 9,135 7,506
Long-term debt less current maturities 11,013 10,111
Air traffic liability - noncurrent 2,485 3,343
Deferred income taxes 1,795 1,634
Construction obligation — 309
Noncurrent operating lease liabilities 1,334 1,562
Other noncurrent liabilities 1,098 1,247
Stockholders' equity:
Common stock 888 888
Capital in excess of par value 4,251 4,191
Retained earnings 15,706 14,777
Accumulated other comprehensive income (loss) 267 (105)
Treasury stock, at cost (10,862) (10,875)
Total stockholders' equity 10,250 8,876
$ 37,110 $ 34,588


	September 30, 2022		December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	10,443	$	12,480
Short-term investments	3,230		3,024
Accounts and other receivables	1,316		1,357
Inventories of parts and supplies, at cost	776		537
Prepaid expenses and other current assets	653		638
Total current assets	16,418		18,036

Property and equipment, at cost:
Flight equipment	22,505		21,226
Ground property and equipment	6,727		6,342
Deposits on flight equipment purchase contracts	587		—
Assets constructed for others	19		6
	29,838		27,574
Less allowance for depreciation and amortization	13,501		12,732
	16,337		14,842
Goodwill	970		970
Operating lease right-of-use assets	1,449		1,590
Other assets	772		882
	$	35,946	$	36,320

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,553	$	1,282
Accrued liabilities	1,881		1,624
Current operating lease liabilities	233		239
Air traffic liability	6,368		5,566
Current maturities of long-term debt	381		453
Total current liabilities	10,416		9,164

Long-term debt less current maturities	8,315		10,274
Air traffic liability - noncurrent	2,057		2,159
Deferred income taxes	1,995		1,770

Noncurrent operating lease liabilities	1,183		1,315
Other noncurrent liabilities	1,056		1,224
Stockholders' equity:
Common stock	888		888
Capital in excess of par value	3,989		4,224
Retained earnings	16,588		15,774
Accumulated other comprehensive income	305		388
Treasury stock, at cost	(10,846)		(10,860)
Total stockholders' equity	10,924		10,414
	$	35,946	$	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 September 30,				Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
		2021		2020		2021		2020			2022		2021		2022		2021
OPERATING REVENUES:	OPERATING REVENUES:									OPERATING REVENUES:
Passenger	Passenger	$	4,227	$	1,454	$	9,508	$	6,003	Passenger	$	5,613	$	4,227	$	15,867	$	9,508
Freight	Freight	47		41		140		118		Freight	44		47		133		140

Other	Other	405		298		1,091		914		Other	563		405		1,642		1,091
Total operating revenues	Total operating revenues	4,679		1,793		10,739		7,035		Total operating revenues	6,220		4,679		17,642		10,739

OPERATING EXPENSES, NET:	OPERATING EXPENSES, NET:									OPERATING EXPENSES, NET:
Salaries, wages, and benefits	Salaries, wages, and benefits	2,122		1,678		5,518		5,245		Salaries, wages, and benefits	2,322		2,122		6,771		5,518
Payroll support and voluntary Employee programs, net	Payroll support and voluntary Employee programs, net	(776)		(149)		(2,963)		(933)		Payroll support and voluntary Employee programs, net	—		(776)		—		(2,963)
Fuel and oil	Fuel and oil	990		379		2,261		1,507		Fuel and oil	1,750		990		4,390		2,261
Maintenance materials and repairs	Maintenance materials and repairs	250		185		646		597		Maintenance materials and repairs	204		250		624		646

Landing fees and airport rentals	Landing fees and airport rentals	376		308		1,092		922		Landing fees and airport rentals	395		376		1,128		1,092
Depreciation and amortization	Depreciation and amortization	322		315		949		940		Depreciation and amortization	335		322		984		949
Other operating expenses	Other operating expenses	662		488		1,710		1,405		Other operating expenses	819		662		2,343		1,710
Total operating expenses, net	Total operating expenses, net	3,946		3,204		9,213		9,683		Total operating expenses, net	5,825		3,946		16,240		9,213

OPERATING INCOME (LOSS)		733		(1,411)		1,526		(2,648)
OPERATING INCOME										OPERATING INCOME	395		733		1,402		1,526

OTHER EXPENSES (INCOME):	OTHER EXPENSES (INCOME):									OTHER EXPENSES (INCOME):
Interest expense	Interest expense	115		111		343		235		Interest expense	86		115		272		343
Capitalized interest	Capitalized interest	(9)		(11)		(27)		(23)		Capitalized interest	(11)		(9)		(31)		(27)
Interest income	Interest income	(2)		(4)		(6)		(30)		Interest income	(70)		(2)		(101)		(6)
Loss on extinguishment of debt										Loss on extinguishment of debt	76		12		192		12
Other (gains) losses, net	Other (gains) losses, net	29		35		(32)		95		Other (gains) losses, net	(39)		17		57		(44)
Total other expenses (income)	Total other expenses (income)	133		131		278		277		Total other expenses (income)	42		133		389		278

INCOME (LOSS) BEFORE INCOME TAXES		600		(1,542)		1,248		(2,925)
PROVISION (BENEFIT) FOR INCOME TAXES		154		(385)		339		(759)
INCOME BEFORE INCOME TAXES										INCOME BEFORE INCOME TAXES	353		600		1,013		1,248
PROVISION FOR INCOME TAXES										PROVISION FOR INCOME TAXES	76		154		254		339

NET INCOME (LOSS)		$	446	$	(1,157)	$	909	$	(2,166)
NET INCOME										NET INCOME	$	277	$	446	$	759	$	909

NET INCOME (LOSS) PER SHARE, BASIC		$	0.75	$	(1.96)	$	1.54	$	(3.89)
NET INCOME PER SHARE, BASIC										NET INCOME PER SHARE, BASIC	$	0.47	$	0.75	$	1.28	$	1.54

NET INCOME (LOSS) PER SHARE, DILUTED		$	0.73	$	(1.96)	$	1.49	$	(3.89)
NET INCOME PER SHARE, DILUTED										NET INCOME PER SHARE, DILUTED	$	0.44	$	0.73	$	1.21	$	1.49

COMPREHENSIVE INCOME (LOSS)		$	577	$	(1,129)	$	1,300	$	(2,207)
COMPREHENSIVE INCOME										COMPREHENSIVE INCOME	$	(223)	$	577	$	676	$	1,300

WEIGHTED AVERAGE SHARES OUTSTANDING	WEIGHTED AVERAGE SHARES OUTSTANDING									WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	Basic	592		590		591		556		Basic	593		592		593		591
Diluted	Diluted	607		590		610		556		Diluted	639		607		643		610

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			Common Stock		Capital in excess of par value		Retained earnings		Accumulated other comprehensive income		Treasury stock		Total
Balance at December 31, 2020		$	888	$	4,191��	$	14,777	$	(105)	$	(10,875)	$	8,876
Balance at December 31, 2021														Balance at December 31, 2021	$	888	$	4,224	$	15,774	$	388	$	(10,860)	$	10,414

Cumulative effect of adopting Accounting Standards Update No. 2016-01, Financial Instruments (See Note 1)		—		—		19		(19)		—		—
Cumulative effect of adopting Accounting Standards Update No. 2020-06, Debt (See Note 3)														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	Issuance of common and treasury stock pursuant to Employee stock plans	—		(8)		—		—		8		—		Issuance of common and treasury stock pursuant to Employee stock plans	—		—		—		—		7		7
Share-based compensation	Share-based compensation	—		14		—		—		—		14		Share-based compensation	—		16		—		—		—		16

Stock warrants		—		23		—		—		—		23

Comprehensive income	Comprehensive income	—		—		116		64		—		180		Comprehensive income	—		—		(278)		503		—		225
Balance at March 31, 2021		$	888	$	4,220	$	14,912	$	(60)	$	(10,867)	$	9,093
Balance at March 31, 2022														Balance at March 31, 2022	$	888	$	3,940	$	15,551	$	891	$	(10,853)	$	10,417

Issuance of common and treasury stock pursuant to Employee stock plans	Issuance of common and treasury stock pursuant to Employee stock plans	—		11		—		—		2		13		Issuance of common and treasury stock pursuant to Employee stock plans	—		10		—		—		3		13
Share-based compensation	Share-based compensation	—		16		—		—		—		16		Share-based compensation	—		16		—		—		—		16
Stock warrants		—		22		—		—		—		22

Comprehensive income		—		—		348		196		—		544
Balance at June 30, 2021		$	888	$	4,269	$	15,260	$	136	$	(10,865)	$	9,688

Comprehensive income (loss)														Comprehensive income (loss)	—		—		760		(86)		—		674
Balance at June 30, 2022														Balance at June 30, 2022	$	888	$	3,966	$	16,311	$	805	$	(10,850)	$	11,120
Issuance of common and treasury stock pursuant to Employee stock plans	Issuance of common and treasury stock pursuant to Employee stock plans	—		10		—		—		3		13		Issuance of common and treasury stock pursuant to Employee stock plans	—		9		—		—		4		13
Share-based compensation	Share-based compensation	—		14		—		—		—		14		Share-based compensation	—		14		—		—		—		14

Equity feature of partial extinguishment of convertible notes		—		(42)		—		—		—		(42)

Comprehensive income	Comprehensive income	—		—		446		131		—		577		Comprehensive income	—		—		277		(500)		—		(223)
Balance at September 30, 2021		$	888	$	4,251	$	15,706	$	267	$	(10,862)	$	10,250
Balance at September 30, 2022														Balance at September 30, 2022	$	888	$	3,989	$	16,588	$	305	$	(10,846)	$	10,924


		Common Stock		Capital in excess of par value		Retained earnings		Accumulated other comprehensive income (loss)		Treasury stock		Total			Common Stock		Capital in excess of par value		Retained earnings		Accumulated other comprehensive income (loss)		Treasury stock		Total
Balance at December 31, 2019		$	808	$	1,581	$	17,945	$	(61)	$	(10,441)	$	9,832
Repurchase of common stock		—		—		—		—		(451)		(451)
Balance at December 31, 2020														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														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	Issuance of common and treasury stock pursuant to Employee stock plans	—		(8)		—		—		6		(2)		Issuance of common and treasury stock pursuant to Employee stock plans	—		(8)		—		—		8		—
Share-based compensation	Share-based compensation	—		9		—		—		—		9		Share-based compensation	—		14		—		—		—		14
Cash dividends, $0.180 per share		—		—		(94)		—		—		(94)
Comprehensive loss		—		—		(94)		(125)		—		(219)
Balance at March 31, 2020		$	808	$	1,582	$	17,757	$	(186)	$	(10,886)	$	9,075
Issuance of common stock, net of issuance costs		80		2,144		—		—		—		2,224

Issuance of common and treasury stock pursuant to Employee stock plans		—		8				—		5		13
Share-based compensation		—		(2)		—		—		—		(2)
Stock warrants	Stock warrants	—		35		—		—		—		35		Stock warrants	—		23		—		—		—		23
Equity feature of convertible notes, net of issuance costs		—		392		—		—		—		392
Comprehensive income														Comprehensive income	—		—		116		64		—		180
Balance at March 31, 2021														Balance at March 31, 2021	$	888	$	4,220	$	14,912	$	(60)	$	(10,867)	$	9,093

Comprehensive income (loss)		—		—		(915)		56		—		(859)
Balance at June 30, 2020		$	888	$	4,159	$	16,842	$	(130)	$	(10,881)	$	10,878

Issuance of common and treasury stock pursuant to Employee stock plans	Issuance of common and treasury stock pursuant to Employee stock plans	—		9		—		—		4		13		Issuance of common and treasury stock pursuant to Employee stock plans	—		11		—		—		2		13
Share-based compensation	Share-based compensation	—		2		—		—		—		2		Share-based compensation	—		16		—		—		—		16
Stock warrants	Stock warrants	—		5		—		—		—		5		Stock warrants	—		22		—		—		—		22

Comprehensive income (loss)	Comprehensive income (loss)	—		—		(1,157)		28		—		(1,129)		Comprehensive income (loss)	—		—		348		196		—		544
Balance at September 30, 2020		$	888	$	4,175	$	15,685	$	(102)	$	(10,877)	$	9,769
Balance at June 30, 2021														Balance at June 30, 2021	$	888	$	4,269	$	15,260	$	136	$	(10,865)	$	9,688

Issuance of common and treasury stock pursuant to Employee stock plans														Issuance of common and treasury stock pursuant to Employee stock plans	—		10		—		—		3		13
Share-based compensation														Share-based compensation	—		14		—		—		—		14

Equity feature of Convertible Notes, net of issuance costs														Equity feature of Convertible Notes, net of issuance costs	—		(42)		—		—		—		(42)

Comprehensive income														Comprehensive income	—		—		446		131		—		577
Balance at September 30, 2021														Balance at September 30, 2021	$	888	$	4,251	$	15,706	$	267	$	(10,862)	$	10,250

See accompanying notes.

Table of Contents

Southwest Airlines Co.

Condensed Consolidated Statement of Cash Flows

(in millions)

(unaudited)

Three months ended Nine months ended
September 30, September 30,
2021 2020 2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 446 $ (1,157) $ 909 $ (2,166)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Depreciation and amortization 322 315 949 940
Unrealized/realized (gain) loss on fuel derivative instruments (2) 17 (25) 25
Deferred income taxes 67 (298) 42 (528)
Gain on sale-leaseback transactions — — — (222)
Loss on partial extinguishment of convertible notes 12 — 12 —
Changes in certain assets and liabilities:
Accounts and other receivables (23) (123) (819) (60)
Other assets 59 84 64 366
Accounts payable and accrued liabilities (948) 26 (25) (65)
Air traffic liability (442) 216 1,103 1,584
Other liabilities (88) (106) (275) (312)
Cash collateral received from (provided to) derivative counterparties 42 (5) 128 2
Other, net (20) (19) 12 (95)
Net cash provided by (used in) operating activities (575) (1,050) 2,075 (531)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (135) (89) (325) (425)
Supplier proceeds — — — 428
Assets constructed for others (3) — (3) —
Proceeds from sale-leaseback transactions — — — 815
Purchases of short-term investments (1,525) (1,536) (4,500) (3,881)
Proceeds from sales of short-term and other investments 1,251 1,191 3,747 2,956
Net cash used in investing activities (412) (434) (1,081) (107)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock — — — 2,294
Proceeds from issuance of long-term debt — 1,125 — 5,622
Proceeds from term loan credit facility — — — 3,683
Proceeds from revolving credit facility — — — 1,000
Proceeds from convertible notes — — — 2,300
Proceeds from Payroll Support Program loan and warrants — 130 1,136 1,016
Proceeds from Employee stock plans 13 13 39 36
Repurchase of common stock — — — (451)
Payments of long-term debt and finance lease obligations (67) (59) (177) (295)
Payments of term loan credit facility — — — (3,683)
Payments of revolving credit facility — — — (1,000)
Payments of cash dividends — — — (188)
Payments of terminated interest rate derivative instruments — (31) — (31)
Payments for repurchases and conversions of convertible debt (121) — (121) —
Capitalized financing items — 44 — (133)
Other, net 18 20 46 29
Net cash provided by (used in) financing activities (157) 1,242 923 10,199
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,144) (242) 1,917 9,561
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,124 12,351 11,063 2,548
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,980 $ 12,109 $ 12,980 $ 12,109


		Three months ended				Nine months ended					Three months ended				Nine months ended
		September 30,				September 30,					September 30,				September 30,
											2022		2021		2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:										CASH FLOWS FROM OPERATING ACTIVITIES:
Net income										Net income	$	277	$	446	$	759	$	909
Adjustments to reconcile net income to cash provided by operating activities:										Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization										Depreciation and amortization	335		322		984		949

Impairment of long-lived assets										Impairment of long-lived assets	4		—		35		—
Unrealized mark-to-market adjustment on available for sale securities										Unrealized mark-to-market adjustment on available for sale securities	—		—		7		—
Unrealized/realized (gain) loss on fuel derivative instruments										Unrealized/realized (gain) loss on fuel derivative instruments	(26)		(2)		(11)		(25)
Deferred income taxes										Deferred income taxes	76		67		250		42

Loss on extinguishment of debt										Loss on extinguishment of debt	76		12		192		12
Changes in certain assets and liabilities:										Changes in certain assets and liabilities:
Accounts and other receivables										Accounts and other receivables	58		(23)		162		(819)
Other assets										Other assets	30		59		(14)		64
Accounts payable and accrued liabilities										Accounts payable and accrued liabilities	(70)		(948)		436		(25)
Air traffic liability										Air traffic liability	(93)		(442)		700		1,103
Other liabilities										Other liabilities	(83)		(88)		(292)		(275)

Cash collateral received from (provided to) derivative counterparties										Cash collateral received from (provided to) derivative counterparties	(325)		42		(41)		128
Other, net										Other, net	(25)		(20)		44		12
Net cash provided by (used in) operating activities										Net cash provided by (used in) operating activities	234		(575)		3,211		2,075

CASH FLOWS FROM INVESTING ACTIVITIES:										CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures										Capital expenditures	(1,072)		(135)		(2,568)		(325)

Assets constructed for others										Assets constructed for others	(7)		(3)		(14)		(3)

Purchases of short-term investments										Purchases of short-term investments	(1,743)		(1,525)		(4,213)		(4,500)
Proceeds from sales of short-term and other investments										Proceeds from sales of short-term and other investments	1,702		1,251		3,982		3,747

Net cash used in investing activities										Net cash used in investing activities	(1,120)		(412)		(2,813)		(1,081)

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

Proceeds from Payroll Support Program loan and warrants										Proceeds from Payroll Support Program loan and warrants	—		—		—		1,136

Proceeds from Employee stock plans										Proceeds from Employee stock plans	12		13		32		39

Payments of long-term debt and finance lease obligations										Payments of long-term debt and finance lease obligations	(1,679)		(67)		(1,825)		(177)

Payments for repurchases and conversions of convertible debt										Payments for repurchases and conversions of convertible debt	(239)		(121)		(648)		(121)

Other, net										Other, net	1		18		6		46
Net cash provided by (used in) financing activities										Net cash provided by (used in) financing activities	(1,905)		(157)		(2,435)		923

NET CHANGE IN CASH AND CASH EQUIVALENTS										NET CHANGE IN CASH AND CASH EQUIVALENTS	(2,791)		(1,144)		(2,037)		1,917
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD										CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	13,234		14,124		12,480		11,063

CASH AND CASH EQUIVALENTS AT END OF PERIOD										CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	10,443	$	12,980	$	10,443	$	12,980
		2021		2020		2021		2020
CASH PAYMENTS FOR:	CASH PAYMENTS FOR:									CASH PAYMENTS FOR:
Interest, net of amount capitalized	Interest, net of amount capitalized	$	22	$	7	$	188	$	61	Interest, net of amount capitalized	$	42	$	22	$	203	$	188
Income taxes	Income taxes	$	114	$	7	$	291	$	17	Income taxes	$	8	$	114	$	19	$	291

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	$	53	$	6	$	283	$	692	Right-of-use assets acquired under operating leases	$	14	$	53	$	42	$	283
Flight equipment acquired against supplier credit memo	Flight equipment acquired against supplier credit memo	$	—	$	—	$	512	$	—	Flight equipment acquired against supplier credit memo	$	—	$	—	$	—	$	512
Assets constructed for others	Assets constructed for others	$	—	$	35	$	309	$	110	Assets constructed for others	$	—	$	—	$	—	$	309
Remeasurement of right-of-use asset and lease liability	Remeasurement of right-of-use asset and lease liability	$	343	$	—	$	343	$	—	Remeasurement of right-of-use asset and lease liability	$	—	$	343	$	—	$	343

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 ~~Inco~~me ~~(Loss)~~Income

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 September 30, ~~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 and nine months ended September 30, ~~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.

Certain prior period amounts have been reclassified to conform to the current presentation. In the unaudited Condensed Consolidated Statement of Comprehensive Income ~~(Loss),~~ for the ~~nine months ended September 30, 2021, Payroll support~~three and voluntary Employee programs, net, includes the correction of previously under accrued 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~~ nine months ended September 30, 2021, the Company ~~recorded a decrease~~has reclassified $12 million, in both periods, from Other (gains) losses, net to Loss on extinguishment 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 Standards 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.~~

debt.

108


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 a negative impact on~~experienced significant disruptions in travel and reduced bookings ~~for future travel~~ throughout ~~2020. The Company proactively canceled a significant portion~~the remainder of ~~its scheduled flights in March~~ 2020 and ~~continued adjusting capacity throughout 2020, as~~for the ~~Company grounded a significant portion~~entirety of ~~its fleet and operated a significantly reduced portion of its previously scheduled capacity. The Company continued to experience negative impacts to passenger demand and bookings early in~~ 2021 due to the pandemic, in particular with respect to business travel, although as a result of declining reported COVID-19 cases throughout the United States, easing travel restrictions, lifting of business restrictions, and an increase in the number of individuals vaccinated, domestic leisure travel demand and bookings improved during second quarter 2021. In third quarter 2021, the Company experienced softness in bookings and elevated trip cancellations, especially close-in, as a result of the ~~rise~~pandemic and subsequent variants of COVID-19. Following a significant negative impact to revenues and bookings in ~~COVID-19 cases~~January and February 2022, which included increased trip cancellations and staffing challenges associated with the ~~Delta variant. The~~Omicron variant, the Company ~~continues to monitor demand~~saw improvements in revenue trends in March 2022 and throughout second quarter 2022 as COVID-19 cases significantly trended downward and bookings for ~~air~~summer travel ~~and proactively adjust its published flight schedules and capacity in response.~~accelerated. Strong revenue trends, especially for leisure travel, continued throughout third quarter 2022.

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 ("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"); the "PSP2 Payroll Support Program” in January 2021 under the Consolidated Appropriations Act, 2021; and the "PSP3 Payroll Support Program" in April 2021 under the American Rescue Plan Act of 2021.

As consideration for its receipt of funding under each of these Payroll Support programs, the Company issued a promissory note in favor of Treasury (classified as a component of Long term debt less current maturities in the unaudited Condensed Consolidated Balance Sheet) and entered into a warrant agreement with Treasury ~~pursuant to which~~(classified as a component of Stockholders' equity in the Company agreed to issue warrants to purchase common stock of the Company to Treasury, subject to adjustment pursuant to the terms of the warrants. Under each of the three Payroll Support programs, funds were received in multiple disbursements. Upon each initial disbursement of Payroll Support under each of the three Payroll Support programs, the Company provided a promissory note and issued warrants to Treasury. Upon each subsequent disbursement of Payroll Support under each of the three Payroll Support programs, (i) the principal amount of the applicable promissory note was increased and (ii) the Company issued additional warrants to Treasury.unaudited Condensed Consolidated Balance Sheet). The following table provides the details from ~~each of these~~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

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

(in millions, except shares in thousands) Grant Promissory Note Warrants Total Payroll Support Proceeds Warrants (shares)
PSP1 Payroll Support Program
April 21, 2020 $ 1,152 $ 459 $ 18 $ 1,630 1,258
May 29, 2020 448 196 8 652 536
June 30, 2020 448 196 9 652 536
July 30, 2020 225 97 3 326 268
September 30, 2020 64 28 2 94 78
$ 2,337 $ 976 $ 40 $ 3,354 2,676
PSP2 Payroll Support Program
January 15, 2021 $ 625 $ 229 $ 9 $ 864 495
March 5, 2021 591 259 14 864 560
April 23, 2021 177 78 4 259 168
$ 1,393 $ 566 $ 27 $ 1,987 1,223
PSP3 Payroll Support Program
April 23, 2021 $ 670 $ 248 $ 9 $ 926 424
June 3, 2021 640 278 9 926 475
$ 1,310 $ 526 $ 18 $ 1,852 899
Total $ 5,040 $ 2,068 $ 85 $ 7,193 4,798

The promissory note under the PSP1 Payroll Support Program ("PSP1 Note") matures in full on April 19, 2030, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity. Amounts outstanding under the PSP1 Note bear interest at a rate of 1.00 percent before April 20, 2025, 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 PSP1 Note contains customary representations and warranties and events of default. Each warrant issued pursuant to the PSP1 Payroll Support Program is exercisable at a strike price of $36.47 per share of common stock and will expire on the fifth anniversary of the issue date of such warrant.

The promissory note under the PSP2 Payroll Support Program ("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. 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 SOFR 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. Each warrant issued pursuant to the PSP2 Payroll Support Program 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 warrant.

The promissory note under the PSP3 Payroll Support Program ("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. 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 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. Each warrant issued pursuant to the PSP3 Payroll Support Program 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 warrant.

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

In connection with the receipt of Payroll Support, the Company ishas been subject to 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 three Payroll Support programs, funds received were used solely to pay qualifying employee salaries, wages, and benefits. ~~As of September 30, 2021, all~~All grant portions of the Payroll Support programs received had been allocated and classified as a contra-expense line item in the Company's financial statements by the end of 2021, including approximately $763 million and $2.7 billion for the three and nine months ended September 30, 2021, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss). The Company has an option to prepay the promissory notes at any time without premium or penalty. Warrants will be settled through net share settlement or net cash settlement, at the Company’s option. The Company has also granted Treasury certain demand underwritten offering and piggyback registration rights with respect to the warrants and the underlying common stock. The warrants do not have voting rights and include adjustments for below market issuances, payment of dividends, and other customary anti-dilution provisions.Income.

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


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

Company in exchange for severance, medical/dental coverage for a specified period of time, and travel privileges based on years of service. A total of over 4,200 Employees ~~initially~~ elected to participate in Voluntary Separation Program.

In conjunction with Voluntary Separation Program, 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 of up to five years, all subject to early recalls. Approximately ~~11,000~~12,000 Employees participated in the Extended ETO ~~program. During third quarter~~program in 2020 and 2021 ~~approximately 1,000~~combined. The Company had no Employees ~~returned from the Extended ETO program and less than 500 Employees remained~~remaining on Extended ETO leave as of September 30, 2021. 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 Voluntary Separation Program beginning on September 1, 2020, until up to 90 days before the end of their respective Extended ETO term. Approximately 300 Employees elected this conversion option during the first nine months of 2021.past March 31, 2022.

The purpose of Voluntary Separation Program and Extended ETO was 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 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 or Extended ETO offers. The Company accrued expenses totaling $1.4 billion for its Voluntary Separation Program and Extended ETO program in 2020, which are being reduced as program benefits are paid. For both the Voluntary Separation Program and Extended ETO programs combined, approximately ~~$405~~$86 million of the liability balances were relieved during the first nine months of ~~2021~~2022 through payments to Employees, leaving a balance of ~~$369~~$242 million as of September 30, ~~2021.~~2022. The liability associated with the Extended ETO program was fully relieved at March 31, 2022. During the first nine months of 2021, the Company determined that it was no longer probable that athe remaining portion of the Employees 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 net $140 million credit to expense during the first nine months of 2021. Both the initial charge and the partial 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 PSP2 Payroll Support Program and PSP3 Payroll Support Program funds utilized to fund salaries, wages, and benefits, which totaled $763 million and $2.7 billion for the three and nine months ended September 30, 2021, respectively.Income.

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 September 30, ~~2021, 24~~2022, no Boeing aircraft remained in ~~storage, and given the~~

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~expectation that this storage was temporary in nature, the Company has continued to record depreciation expense associated with them.~~short or long-term storage.

3. NEW ACCOUNTING PRONOUNCEMENTS

On May 3, 2021, the ~~Financial Accounting Standards Board (the "FASB")~~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, ~~including interim periods within those fiscal years. Under this~~and the standard ~~issuers should apply~~was adopted and applied prospectively by the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard. Early adoption is permitted, including adoption in an interim period. If an issuer elects to early adopt the new standard in an interim period, the guidance should be appliedCompany as of January 1, 2022, but the ~~beginning of the fiscal year that includes that interim period. The Company is evaluating this new standard, but does~~adoption and application did not ~~expect it to~~ have a ~~material~~significant impact on the Company's financial statements ~~or disclosures.~~and disclosures, including interim periods.

On January 7, 2021, the FASB issued ASU ~~No.~~ 2021-01, Reference Rate Reform (Topic 848). This new standard provides optional temporary guidance for entities transitioning away from London Interbank Offered Rate ("LIBOR") to new reference interest rates so that derivatives affected by the 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


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

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 no material LIBOR-related contract modifications during the nine months ended September 30, 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.

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. The~~2021, and 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. For the three and nine months ended September 30, 2022, the impacts of adopting this new standard were decreases to the Company's Net income in the amounts of $36 million, or $0.08 per diluted share, and $94 million, or $0.22 per diluted share, respectively, 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.

1411


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 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.

1512


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

As of September 30, ~~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

September 30, 2021

Derivative underlying commodity type as of

September 30, 2022

Derivative underlying commodity type as of

Period (by year)

(gallons in millions) (a)

September 30, 2021

Period (by year)

(gallons in millions) (a)

September 30, 2022

Remainder of 2021

321

WTI crude oil and Brent crude oil

2022

1,220

WTI crude oil and Brent crude oil

Remainder of 2022

305

WTI crude oil, Brent crude oil, and Heating oil

2023

769

WTI crude oil and Brent crude oil

2023

1,084

WTI crude oil and Brent crude oil

2024

358

WTI crude oil

2024

358

WTI 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 initially does not qualify or ceases to qualify for hedge accounting, any change in the fair value of the derivative ~~instruments~~instrument 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. Certain types of derivative instruments do not qualify for hedge accounting, including those that result in a net sold position (sold gallons exceeding purchased gallons). Increased volatility in ~~these~~certain 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 certain derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes ~~derivative instruments~~they 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.

During 2021, as a result of the drop in demand for air travel compared with 2019 due to 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:

1613


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


			Asset derivatives				Liability derivatives						Asset derivatives				Liability derivatives
		Balance Sheet	Fair value at		Fair value at		Fair value at		Fair value at			Balance Sheet	Fair value at		Fair value at		Fair value at		Fair value at
(in millions)	(in millions)	location	9/30/2021		12/31/2020		9/30/2021		12/31/2020		(in millions)	location	9/30/2022		12/31/2021		9/30/2022		12/31/2021
Derivatives designated as hedges (a)	Derivatives designated as hedges (a)										Derivatives designated as hedges (a)
Fuel derivative contracts (gross)	Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	322	$	9	$	—	$	—	Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	371	$	409	$	—	$	—
Fuel derivative contracts (gross)	Fuel derivative contracts (gross)	Other assets	343		121		—		—		Fuel derivative contracts (gross)	Other assets	168		287		—		—

Interest rate derivative contracts	Interest rate derivative contracts	Other assets	1		—		—		—		Interest rate derivative contracts	Other assets	14		—		—		—

Interest rate derivative contracts	Interest rate derivative contracts	Other noncurrent liabilities	—		—		2		6		Interest rate derivative contracts	Other noncurrent liabilities	—		—		—		4
Total derivatives designated as hedges	Total derivatives designated as hedges		$	666	$	130	$	2	$	6	Total derivatives designated as hedges		$	553	$	696	$	—	$	4
Derivatives not designated as hedges (a)	Derivatives not designated as hedges (a)										Derivatives not designated as hedges (a)
Fuel derivative contracts (gross)	Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	16	$	4	$	—	$	—	Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	26	$	—	$	29	$	—

Total derivatives	Total derivatives		$	682	$	134	$	2	$	6	Total derivatives		$	579	$	696	$	29	$	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	September 30,		December 31,			Balance Sheet	September 30,		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	$	69	$	3	Cash collateral deposits held from counterparties for fuel contracts - current	Offset against Prepaid expenses and other current assets	$	96	$	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	93		31		Cash collateral deposits held from counterparties for fuel contracts - noncurrent	Offset against Other assets	38		95

Receivable from third parties for fuel contracts	Receivable from third parties for fuel contracts	Accounts and other receivables	8		—		Receivable from third parties for fuel contracts	Accounts and other receivables	56		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 September 30, ~~2021,~~2022, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.


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:

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~


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)
			September 30, 2021							December 31, 2020									September 30, 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	$	338	$	(69)	$	269		$	13	$	(3)	$	10		Fuel derivative contracts	Prepaid expenses and other current assets	$	397	$	(125)	(b)	$	272		$	409	$	(80)	$	329
Fuel derivative contracts	Fuel derivative contracts	Other assets	$	343	$	(93)	$	250	(a)	$	121	$	(31)	$	90	(a)	Fuel derivative contracts	Other assets	$	168	$	(38)		$	130	(a)	$	287	$	(95)	$	192	(a)

Interest rate derivative contracts	Interest rate derivative contracts	Other assets	$	1	$	—	$	1	(a)	$	—	$	—	$	—	(a)	Interest rate derivative contracts	Other assets	$	14	$	—		$	14	(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)
			September 30, 2021							December 31, 2020									September 30, 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	$	69	$	(69)	$	—		$	3	$	(3)	$	—		Fuel derivative contracts	Prepaid expenses and other current assets	$	125	$	(125)	(b)	$	—		$	80	$	(80)	$	—
Fuel derivative contracts	Fuel derivative contracts	Other assets	$	93	$	(93)	$	—	(a)	$	31	$	(31)	$	—	(a)	Fuel derivative contracts	Other assets	$	38	$	(38)		$	—	(a)	$	95	$	(95)	$	—	(a)

Interest rate derivative contracts	Interest rate derivative contracts	Other noncurrent liabilities	$	2	$	—	$	2		$	6	$	—	$	6		Interest rate derivative contracts	Other noncurrent liabilities	$	—	$	—		$	—		$	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.

1815


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 and nine months ended September 30, ~~2021~~2022 and ~~2020:~~2021:


Location and amount recognized in income on cash flow and fair value hedging relationships	Location and amount recognized in income on cash flow and fair value hedging relationships													Location and amount recognized in income on cash flow and fair value hedging relationships
		Three months ended September 30, 2021						Three months ended September 30, 2020							Three months ended September 30, 2022				Three months ended September 30, 2021
(in millions)	(in millions)	Fuel and oil		Other (gains)/losses, net		Other operating expenses		Fuel and oil		Other (gains)/losses, net		Interest expense		(in millions)	Fuel and oil		Other operating expenses			Fuel and oil		Other operating expenses
Total	Total	$	2	$	—	$	1	$	18	$	22	$	2	Total	$	(195)	$	2		$	2	$	1

Loss on cash flow hedging relationships:
(Gain) loss on cash flow hedging relationships:														(Gain) loss on cash flow hedging relationships:
Commodity contracts:	Commodity contracts:													Commodity contracts:
Amount of loss reclassified from AOCI into income		2		—		—		18		22		—
Amount of (gain) loss reclassified from AOCI into income														Amount of (gain) loss reclassified from AOCI into income	(195)		—			2		—
Interest contracts:	Interest contracts:													Interest contracts:
Amount of loss reclassified from AOCI into income	Amount of loss reclassified from AOCI into income	—		—		1		—		—		—		Amount of loss reclassified from AOCI into income	—		2			—		1

Impact of fair value hedging relationships:
Interest contracts:
Hedged items		—		—		—		—		—		4
Derivatives designated as hedging instruments		—		—		—		—		—		(2)


Location and amount recognized in income on cash flow and fair value hedging relationships	Location and amount recognized in income on cash flow and fair value hedging relationships													Location and amount recognized in income on cash flow and fair value hedging relationships
		Nine months ended September 30, 2021						Nine months ended September 30, 2020							Nine months ended September 30, 2022						Nine months ended September 30, 2021
(in millions)	(in millions)	Fuel and oil		Other (gains)/losses, net		Other operating expenses		Fuel and oil		Other (gains)/losses, net		Interest expense		(in millions)	Fuel and oil		Other (gains)/losses, net		Other operating expenses		Fuel and oil		Other (gains)/losses, net		Other operating expenses
Total	Total	$	30	$	6	$	4	$	54	$	38	$	6	Total	$	(703)	$	—	$	5	$	30	$	6	$	4

Loss on cash flow hedging relationships:
(Gain) loss on cash flow hedging relationships														(Gain) loss on cash flow hedging relationships
Commodity contracts:	Commodity contracts:													Commodity contracts:
Amount of loss reclassified from AOCI into income		30		6		—		54		38		—
Amount of (gain) loss reclassified from AOCI into income														Amount of (gain) loss reclassified from AOCI into income	(703)		—		—		30		6		—
Interest contracts:	Interest contracts:													Interest contracts:
Amount of loss reclassified from AOCI into income	Amount of loss reclassified from AOCI into income	—		—		4		—		—		1		Amount of loss reclassified from AOCI into income	—		—		5		—		—		4

Impact of fair value hedging relationships:
Interest contracts:
Hedged items		—		—		—		—		—		11
Derivatives designated as hedging instruments		—		—		—		—		—		(6)


Derivatives designated and qualified in cash flow hedging relationships
	(Gain) loss recognized in AOCI on derivatives, net of tax
	Three months ended
	September 30,
(in millions)	2022		2021
Fuel derivative contracts	$	354	$	(128)
Interest rate derivatives	(2)		(1)
Total	$	352	$	(129)

1916


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


Derivatives designated and qualified in cash flow hedging relationships	Derivatives designated and qualified in cash flow hedging relationships					Derivatives designated and qualified in cash flow hedging relationships
		(Gain) loss recognized in AOCI on derivatives, net of tax					(Gain) loss recognized in AOCI on derivatives, net of tax
		Three months ended					Nine months ended
		September 30,					September 30,
(in millions)	(in millions)	2021		2020		(in millions)	2022		2021
Fuel derivative contracts	Fuel derivative contracts	$	(128)	$	17	Fuel derivative contracts	$	(438)	$	(402)
Interest rate derivatives	Interest rate derivatives	(1)		(3)		Interest rate derivatives	(14)		(5)
Total	Total	$	(129)	$	14	Total	$	(452)	$	(407)

Derivatives designated and qualified in cash flow hedging relationships
(Gain) loss recognized in AOCI on derivatives, net of tax
Nine months ended
September 30,
(in millions) 2021 2020
Fuel derivative contracts $ (402) $ 91
Interest rate derivatives (5) 30
Total $ (407) $ 121


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

	Three months ended				Location of gain recognized in income on derivatives
	September 30,
(in millions)	2022		2021
Fuel derivative contracts	$	(38)	$	3	Other (gains) losses, net

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

Three months ended Location of (gain) loss recognized in income on derivatives
September 30,
(in millions) 2021 2020
Fuel derivative contracts $ 3 $ 1 Other (gains) losses, net
Interest rate derivatives — (1) Other (gains) losses, net
Total $ 3 $ —


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

	Nine months ended				Location of (gain) loss recognized in income on derivatives
	September 30,
(in millions)	2022		2021
Fuel derivative contracts	$	(23)	$	(13)	Other (gains) losses, net

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

Nine months ended Location of (gain) loss recognized in income on derivatives
September 30,
(in millions) 2021 2020
Fuel derivative contracts $ (13) $ 2 Other (gains) losses, net
Interest rate derivatives — 28 Other (gains) losses, net
Total $ (13) $ 30

The Company also recorded expense (benefit) associated with premiums paid for fuel derivative contracts that settled/expired during the three and nine months ended September 30, ~~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 tables present the impact of premiums paid or received for fuel derivative contracts and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income ~~(Loss)~~ during the period the contract settles:


	Premium (benefit) expense recognized in income on derivatives

	Three months ended				Location of premium (benefit) expense recognized in income on derivatives
	September 30,
(in millions)	2022		2021
Fuel derivative contracts designated as hedges	$	26	$	14	Fuel and oil
Fuel derivative contracts not designated as hedges	(14)		11		Other (gains) losses, net


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

Premium expense recognized in income on derivatives

Three months ended Location of premium expense recognized in income on derivatives
September 30,
(in millions) 2021 2020
Fuel derivative contracts designated as hedges $ 14 $ 13 Fuel and oil
Fuel derivative contracts not designated as hedges 11 11 Other (gains) losses, net


		Premium expense recognized in income on derivatives						Premium (benefit) expense recognized in income on derivatives

		Nine months ended				Location of premium expense recognized in income on derivatives		Nine months ended				Location of premium (benefit) expense recognized in income on derivatives
		September 30,						September 30,
(in millions)	(in millions)	2021		2020			(in millions)	2022		2021
Fuel derivative contracts designated as hedges	Fuel derivative contracts designated as hedges	$	43	$	51	Fuel and oil	Fuel derivative contracts designated as hedges	$	79	$	43	Fuel and oil
Fuel derivative contracts not designated as hedges	Fuel derivative contracts not designated as hedges	32		22		Other (gains) losses, net	Fuel derivative contracts not designated as hedges	(14)		32		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 unrealized gains from fuel hedges as of September 30, ~~2021,~~2022, recorded in AOCI, were approximately ~~$173~~$194 million in net unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to September 30, ~~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" or "critical terms ~~match methods"~~match" methods of accounting for hedges, which ~~dictates~~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 ("-8") aircraft leases for aircraft 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 Boeing 737 MAX ("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. All of the associated aircraft had been delivered to the Company as of September 30, 2021. As a result of the discontinued hedges, the Company had cumulative losses "frozen" in AOCI as of September 30, 2021, of $59 million, which will be recognized in earnings over the 9-year lease terms of each aircraft.

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.

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

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

experienced any significant credit loss as a result of counterparty nonperformance in the past. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. At September 30, ~~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 September 30, ~~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 $ 158 $ 84 $ 160 $ 77 $ 78 $ 55 $ 54 $ 15 $ 681
Cash collateral held from CP 162 — — — — — — — 162
Option to substitute LC for cash N/A N/A (b)
(b)

(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) (d) (d) (d) (d) (d) (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

134

119

536

Cash collateral held from CP

134

—

134

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 < ~~$11~~$8 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.

2219


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 and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 were as follows:

Three months ended September 30,
(in millions) 2021 2020
NET INCOME (LOSS) $ 446 $ (1,157)
Unrealized gain on fuel derivative instruments, net of
deferred taxes of $39 and $5
129 14
Unrealized gain on interest rate derivative instruments, net of
deferred taxes of $1 and $—
2 3
Other, net of deferred taxes of $— and $3 — 11
Total other comprehensive income $ 131 $ 28
COMPREHENSIVE INCOME (LOSS) $ 577 $ (1,129)


	Three months ended September 30,
(in millions)	2022		2021
NET INCOME	$	277	$	446
Unrealized gain (loss) on fuel derivative instruments, net of deferred taxes of ($153) and $39	(504)		129
Unrealized gain on interest rate derivative instruments, net of deferred taxes of $— and $1	4		2

Total other comprehensive income (loss)	$	(500)	$	131
COMPREHENSIVE INCOME (LOSS)	$	(223)	$	577

Nine months ended September 30,
(in millions) 2021 2020
NET INCOME (LOSS) $ 909 $ (2,166)
Unrealized gain (loss) on fuel derivative instruments, net of
deferred taxes of $131 and ($6)
430 (20)
Unrealized gain (loss) on interest rate derivative instruments, net of
deferred taxes of $2 and ($9)
8 (29)
Other, net of deferred taxes of ($13) and $2 (47) 8
Total other comprehensive income (loss) $ 391 $ (41)
COMPREHENSIVE INCOME (LOSS) $ 1,300 $ (2,207)


	Nine months ended September 30,
(in millions)	2022		2021
NET INCOME	$	759	$	909
Unrealized gain (loss) on fuel derivative instruments, net of deferred taxes of ($31) and $131	(101)		430
Unrealized gain on interest rate derivative instruments, net of deferred taxes of $5 and $2	18		8
Other, net of deferred taxes of $— and ($13)	—		(47)
Total other comprehensive income (loss)	$	(83)	$	391
COMPREHENSIVE INCOME	$	676	$	1,300

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three and nine months ended September 30, ~~2021:~~2022:


(in millions)	(in millions)	Fuel derivatives		Interest rate derivatives		Defined benefit plan items		Deferred tax		Accumulated other comprehensive income		(in millions)	Fuel derivatives		Interest rate derivatives		Defined benefit plan items			Deferred tax		Accumulated other comprehensive income
Balance at June 30, 2021		$	274	$	(59)	$	(43)	$	(36)	$	136
Balance at June 30, 2022												Balance at June 30, 2022	$	1,017	$	(38)	$	66		$	(240)	$	805
Changes in fair value	Changes in fair value	166		2		—		(39)		129		Changes in fair value	(462)		2		—			108		(352)
Reclassification to earnings	Reclassification to earnings	2		1		—		(1)		2		Reclassification to earnings	(195)		2		—		(a)	45		(148)
Balance at September 30, 2021		$	442	$	(56)	$	(43)	$	(76)	$	267
Balance at September 30, 2022												Balance at September 30, 2022	$	360	$	(34)	$	66		$	(87)	$	305


(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	571		18		—			(137)		452
Reclassification to earnings	(703)		5		—		(a)	163		(535)
Balance at September 30, 2022	$	360	$	(34)	$	66		$	(87)	$	305


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

(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) — — — (31) 12 (19)
Changes in fair value 525 6 — — (124) 407
Reclassification to earnings 36 4 — (60) (a) 4 (16)
Balance at September 30, 2021 $ 442 $ (56) $ (43) $ — $ (76) $ 267

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

The following ~~tables illustrate~~table illustrates the significant amounts reclassified out of each component of AOCI for the three and nine months ended September 30, ~~2021:~~2022:


Three months ended September 30, ~~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	$	2 (195)	Fuel and oil expense

	1 (45)		Less: Tax expense
	$	1 (150)	Net of tax
Unrealized loss on interest rate derivative instruments	$	12	Other operating expenses
	—		Less: Tax expense
	$	12	Net of tax




Total reclassifications for the period	$	2 (148)	Net of tax

Nine months ended September 30, ~~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

30 (703)

Fuel and oil expense

~~Other (gains) losses, net~~

8 (164)

Less: Tax expense

28 (539)

Net of tax

Unrealized loss on interest rate derivative instruments

~~Interest expense~~Other operating expenses

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

~~(16)~~(535)

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 ~~within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)~~ for the three and nine months ended September 30, ~~2021~~2022 and ~~2020:~~2021:

Three months ended September 30, Nine months ended September 30,
(in millions) 2021 2020 2021 2020
Passenger non-loyalty $ 3,443 $ 1,183 $ 7,672 $ 4,966
Passenger loyalty - air transportation 621 205 1,448 747
Passenger ancillary sold separately 163 66 388 290
Total passenger revenues $ 4,227 $ 1,454 $ 9,508 $ 6,003


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2022		2021		2022		2021
Passenger non-loyalty	$	4,630	$	3,443	$	13,112	$	7,672
Passenger loyalty - air transportation	791		621		2,236		1,448
Passenger ancillary sold separately	192		163		519		388
Total passenger revenues	$	5,613	$	4,227	$	15,867	$	9,508

As of September 30, ~~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 breakage,~~ within the unaudited Condensed Consolidated Balance Sheet were as follows:


		Balance as of					Balance as of
(in millions)	(in millions)	September 30, 2021		December 31, 2020		(in millions)	September 30, 2022		December 31, 2021
Air traffic liability - passenger travel and ancillary passenger services	Air traffic liability - passenger travel and ancillary passenger services	$	3,464	$	2,686	Air traffic liability - passenger travel and ancillary passenger services	$	3,540	$	2,936
Air traffic liability - loyalty program	Air traffic liability - loyalty program	4,772		4,447		Air traffic liability - loyalty program	4,885		4,789
Total Air traffic liability	Total Air traffic liability	$	8,236	$	7,133	Total Air traffic liability	$	8,425	$	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~~flight credits not currently associated with a ticket ~~but represent funds effectively refunded and made available for use to~~that can be applied by Customers towards the purchase ~~a ticket for a~~of future travel. These flight ~~that occurs prior to their expiration. These funds~~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 and nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 were as follows (in millions):


		Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
		2021		2020		2021		2020				2022		2021		2022		2021
Air traffic liability - loyalty program - beginning balance	Air traffic liability - loyalty program - beginning balance	$	4,719	$	3,856	$	4,447	$	3,385		Air traffic liability - loyalty program - beginning balance	$	4,885	$	4,719	$	4,789	$	4,447
Amounts deferred associated with points awarded	Amounts deferred associated with points awarded	688		447		1,810		1,488			Amounts deferred associated with points awarded	815		688		2,395		1,810
Revenue recognized from points redeemed - Passenger	Revenue recognized from points redeemed - Passenger	(621)		(205)		(1,448)		(747)			Revenue recognized from points redeemed - Passenger	(791)		(621)		(2,236)		(1,448)
Revenue recognized from points redeemed - Other	Revenue recognized from points redeemed - Other	(14)		(16)		(37)		(44)			Revenue recognized from points redeemed - Other	(24)		(14)		(63)		(37)
Unused funds converted to loyalty points		—		105		—		105

Air traffic liability - loyalty program - ending balance	Air traffic liability - loyalty program - ending balance	$	4,772	$	4,187	$	4,772	$	4,187		Air traffic liability - loyalty program - ending balance	$	4,885	$	4,772	$	4,885	$	4,772

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 September 30, ~~2021~~2022 and ~~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)	16,630
Revenue from amounts included in contract liability opening balances	(3,750)
Revenue from current period sales	(12,180)
Balance at September 30, 2022	$	8,425


	Air traffic liability

Balance at December 31, 2020	$	7,133
Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)	10,648
Revenue from amounts included in contract liability opening balances	(2,346)
Revenue from current period sales	(7,199)
Balance at September 30, 2021	$	8,236


	~~Air traffic liability~~

~~Balance at December 31, 2019~~	$	~~5,510~~
~~Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)~~	~~7,631~~
~~Revenue from amounts included in contract liability opening balances~~	~~(2,126)~~
~~Revenue from current period sales~~	~~(3,921)~~
~~Balance at September 30, 2020~~	$	~~7,094~~

During 2020 and in parts of 2021, the Company ~~has~~ experienced a significantly higher number of Customer-driven flight cancellations as a result of the COVID-19 ~~pandemic, including those associated with the Delta variant of the virus.~~pandemic. See Note 2 for further information. As a result, the amount of Customer ~~travel funds~~flight credits held in Air traffic liability that are estimated to be redeemed for future travel ~~as of September 30, 2021, remains~~has remained much higher than historical levels. The amount of such Customer funds represents approximately 17 percent and 28 percent of the total Air traffic liability balance at September 30, 2021, and December 31, 2020, respectively, compared to approximately 2 percent of the Air traffic liability balance as of December 31, 2019. In order to provide additional flexibility to Customers who hold these ~~funds,~~flight credits, the Company significantly relaxed its previous policies with regards to the time period within which these ~~funds~~flight credits can be redeemed, which ~~is typically~~was previously twelve months from the original date of purchase. For all Customer ~~travel funds~~flight credits created or that would have otherwise expired between March 1 and September 7, 2020, associated with flight cancellations, the Company previously extended the expiration date to September 7, 2022. ~~At September 30, 2021, $1.4~~

On July 28, 2022, the Company announced that all existing Customer flight credits as of that date, as well as any future flight credits issued, will no longer expire and will thus remain redeemable by Customers. Flight credits for non-refundable fares will be issued as long as the flight is cancelled more than 10 minutes prior to the scheduled departure. This announcement is considered a contract modification under applicable accounting guidance and the Company accounted for such change prospectively in third quarter 2022. The Company’s balance of existing Customer flight credits as of the modification date was approximately $1.9 billion, ~~of Customer travel funds remain in Air traffic liability with a~~including the extended flight credits that had been set to expire on September 7, ~~2022 expiration date, although~~2022. As the Company ~~has estimated~~continues to believe that a portion of ~~those~~Customer flight credits issued after July 28, 2022, will not be ~~redeemed.~~redeemed, it has estimated and recorded in third quarter 2022, and expects to continue to estimate and record, breakage associated with such amounts. The ~~Company~~amount of breakage realized on a prospective basis, however, is expected to be lower and more stable than it has ~~limited data available to predict~~been during the occurrence or timing of performance obligation satisfaction on these funds due to certain constraints including, but 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. As a result, recognition of these travel funds as flown revenue, refunds, or 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.pandemic.

~~Breakage estimates are based on~~The amount of Customer flight credits represents approximately 6 percent and 16 percent of the ~~Company's Customers' historical travel behavior,~~total Air traffic liability balance at September 30, 2022, and December 31, 2021, respectively, compared to approximately 2 percent of the Air traffic liability balance as well as assumptions about Customers' future travel behavior. Assumptions used to generate breakage 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.of December 31, 2019.

Recognition of revenue associated with the Company’s loyalty liability can be difficult to predict, as the number of award seats available to ~~members~~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 and fares. The entire balance classified as Air traffic liability—noncurrent relates to loyalty points that were estimated to be redeemed in periods beyond the ~~twelve-months~~twelve months following the representative balance sheet date. 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 of the date the points are issued.

~~The~~All performance obligations related to freight services sold are completed within twelve months or less; therefore, the Company has ~~a co-branded~~elected to not disclose the amount of 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-brand Chase® Visa credit card, ~~agreement (the “Agreement”)~~but also include commissions and advertising associated with ~~Chase Bank USA, N.A. (“Chase”), through which~~Southwest.com®. All amounts classified as Other revenues are paid monthly, coinciding with the Company ~~sells loyalty points and certain marketing components, which consist~~fulfilling its deliverables; therefore, the Company has elected to not disclose the amount of the ~~use~~remaining transaction price and its expected timing of ~~the~~recognition for such services provided.

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 September 30, ~~2021~~2022 and ~~2020,~~2021, the Company recognized ~~$355~~$521 million and ~~$282~~$355 million, respectively. For the nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, the Company recognized $1.5 billion and $987 million, respectively.

The Company is also required to collect certain taxes and ~~$859 million, respectively.~~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.

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 and nine months ended September 30, 2022 and 2021, an immaterial number of shares

Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
NUMERATOR:
Net income (loss) $ 446 $ (1,157) $ 909 $ (2,166)
DENOMINATOR:
Weighted-average shares outstanding, basic 592 590 591 556
Dilutive effects of convertible notes (a) 14 — 17 —
Dilutive effect of stock warrants 1 — 1 —
Dilutive effect of restricted stock units — — 1 —
Adjusted weighted-average shares outstanding, diluted 607 590 610 556
NET INCOME (LOSS) PER SHARE:
Basic $ 0.75 $ (1.96) $ 1.54 $ (3.89)
Diluted $ 0.73 $ (1.96) $ 1.49 $ (3.89)
Antidilutive amounts excluded from calculations:
Convertible debt (a) — 5 — 2
Restricted stock units — 1 — 1


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

related to the Company's restricted stock units and stock warrants were excluded from the denominator because inclusion of such shares would be antidilutive.


	Three months ended September 30,						Nine months ended September 30,
	2022			2021			2022			2021
NUMERATOR:
Net income	$	277		$	446		$	759		$	909
Add: Interest expense	5		(a)	—			17		(a)	—
Net income attributable to common stockholders	282			446			776			909

DENOMINATOR:
Weighted-average shares outstanding, basic	593			592			593			591
Dilutive effects of Convertible Notes	45		(a)	14		(b)	49		(a)	17		(b)
Dilutive effect of stock warrants	—			1			—			1
Dilutive effect of restricted stock units	1			—			1			1
Adjusted weighted-average shares outstanding, diluted	639			607			643			610

NET INCOME PER SHARE:



Basic	$	0.47		$	0.75		$	1.28		$	1.54
Diluted	$	0.44		$	0.73		$	1.21		$	1.49

(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 diluted net income per share, which requires the Company to assume that all Convertible Notes were converted and outstanding for the entire period. 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. For the three and nine months ended September 30, 2022, all shares issuable on conversion were included in 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 cash or shares of common stock, the convertible notes are being~~Convertible Notes were accounted for using the treasury stock method for the purposes of ~~Net~~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 and nine months ended September 30, 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.~~

~~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 September 30, ~~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)~~time deposits), 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.


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

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 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).~~Income.

2523


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 September 30, ~~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	September 30, 2021		(Level 1)		(Level 2)		(Level 3)		Description	September 30, 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)	$	12,790	$	12,790	$	—	$	—	Cash equivalents (a)	$	10,088	$	10,088	$	—	$	—
Commercial paper	Commercial paper	90		—		90		—		Commercial paper	315		—		315		—

Certificates of deposit										Certificates of deposit	15		—		15		—

Time deposits	Time deposits	100		—		100		—		Time deposits	25		—		25		—
Short-term investments:	Short-term investments:									Short-term investments:
Treasury bills	Treasury bills	2,249		2,249		—		—		Treasury bills	2,424		2,424		—		—

Certificates of deposit										Certificates of deposit	131		—		131		—
Time deposits	Time deposits	775		—		775		—		Time deposits	675		—		675		—

Fuel derivatives:	Fuel derivatives:									Fuel derivatives:
Option contracts (b)	Option contracts (b)	681		—		—		681		Option contracts (b)	565		—		—		565
Interest rate derivatives (see Note 4)	Interest rate derivatives (see Note 4)	1		—		1		—		Interest rate derivatives (see Note 4)	14		—		14		—
Other available-for-sale securities		260		260		—		—
Equity Securities										Equity Securities	216		216		—		—
Total assets	Total assets	$	16,946	$	15,299	$	966	$	681	Total assets	$	14,468	$	12,728	$	1,175	$	565
Liabilities	Liabilities									Liabilities
Interest rate derivatives (see Note 4)		$	(2)	$	—	$	(2)	$	—
Fuel derivatives:										Fuel derivatives:
Option contracts (b)										Option contracts (b)	$	(29)	$	—	$	—	$	(29)

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

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


			Fair value measurements at reporting date using:
			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
Description	December 31, 2021		(Level 1)		(Level 2)		(Level 3)
Assets	(in millions)
Cash equivalents:
Cash equivalents (a)	$	12,340	$	12,340	$	—	$	—
Commercial paper	90		—		90		—

Time deposits	50		—		50		—
Short-term investments:
Treasury bills	2,399		2,399		—		—

Time deposits	625		—		625		—



Fuel derivatives:


Option contracts (b)	696		—		—		696


Equity Securities	288		288		—		—
Total assets	$	16,488	$	15,027	$	765	$	696
Liabilities






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

(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.

Fair value measurements at reporting date using:
Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs
Description December 31, 2020 (Level 1) (Level 2) (Level 3)
Assets (in millions)
Cash equivalents:
Cash equivalents (a) $ 10,663 $ 10,663 $ — $ —
Commercial paper 90 — 90 —
Certificates of deposit 10 — 10 —
Time deposits 300 — 300 —
Short-term investments:
Treasury bills 1,800 1,800 — —
Certificates of deposit 46 — 46 —
Time deposits 425 — 425 —
Fuel derivatives:
Option contracts (b) 134 — — 134
Other available-for-sale securities 259 259 — —
Total assets $ 13,727 $ 12,722 $ 871 $ 134
Liabilities
Interest rate derivatives (see Note 4) $ (6) $ — $ (6) $ —

~~(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.~~


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

~~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 nine months ended September 30, ~~2021,~~2022, or the year ended December 31, ~~2020.~~2021. The following tables present the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, ~~2021:~~2022:

Fair value measurements using significant unobservable inputs (Level 3)

(in millions)

Fuel derivatives

Balance at June 30, ~~2021~~2022

~~502~~1,127

Total gains (losses) for the period

Included in earnings

~~(3)~~38

(a)

Included in other comprehensive income

~~166~~ (462)

Purchases

4152

(b)

~~Sales~~

~~(7)~~

~~(b)~~

Settlements

~~(18)~~(219)

Balance at September 30, ~~2021~~2022

~~681~~536

The amount of total gains for the period

included in earnings attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, ~~2021~~2022

421

(a)

The amount of total losses for the period

included in other comprehensive income attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, 2022

(395)

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

(b) The purchase 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.


Fair value measurements using significant unobservable inputs (Level 3)
(in millions)	Fuel derivatives
Balance at December 31, 2021	$	696
Total gains for the period
Included in earnings	23		(a)
Included in other comprehensive income	571
Purchases	25		(b)

Settlements	(779)
Balance at September 30, 2022	$	536
The amount of total gains for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at September 30, 2022	$	11	(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 September 30, ~~2021~~2022	$	~~177~~94

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

(b) The purchase ~~and sale~~ of fuel derivatives ~~are~~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.


~~Fair value measurements using significant unobservable inputs (Level 3)~~
~~(in millions)~~	~~Fuel derivatives~~
~~Balance at December 31, 2020~~	$	~~134~~
~~Total gains for the period~~
~~Included in earnings~~	6		~~(a)~~
~~Included in other comprehensive income~~	~~533~~
~~Purchases~~	41		~~(b)~~
~~Sales~~	~~(7)~~		~~(b)~~
~~Settlements~~	~~(26)~~
~~Balance at September 30, 2021~~	$	~~681~~
~~The amount of total gains for the period~~ ~~included in earnings attributable to the~~ ~~change in unrealized gains or losses relating~~ ~~to assets still held at September 30, 2021~~	$	10	~~(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 September 30, 2021~~	$	~~510~~

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

(b) The purchase and sale of fuel derivatives are recorded gross based on the structure of the derivative instrument and whether a contract with multiple derivatives was purchased as a single instrument or separate instruments.

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

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.


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

The following table presents a range and weighted average of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 at September 30, ~~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	Fourth quarter 2021	22-37%	30	%	Fuel derivatives	Option model	Implied volatility	Fourth quarter 2022	33-59%	47	%
				2022	30-43%	35	%				2023	42-56%	50	%
				2023	28-34%	31	%				2024	36-48%	41	%
				2024	26-31%	28	%

(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 September 30, ~~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. All privately held debt agreements are categorized as Level 3. The Company has determined the estimated fair value of this debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes indicative pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items.

(in millions) Carrying value Estimated fair value Fair value level hierarchy
2.75% Notes due 2022 $ 300 $ 307 Level 2
Pass Through Certificates due 2022 - 6.24% 71 73 Level 2
4.75% Notes due 2023 1,250 1,331 Level 2
1.25% Convertible Notes due 2025 1,932 3,326 Level 2
5.25% Notes due 2025 1,550 1,755 Level 2
Term Loan Agreement payable through 2025 - 1.53% 100 100 Level 3
3.00% Notes due 2026 300 320 Level 2
Term Loan Agreement payable through 2026 - 1.31% 149 147 Level 3
3.45% Notes due 2027 300 324 Level 2
5.125% Notes due 2027 2,000 2,341 Level 2
7.375% Debentures due 2027 117 143 Level 2
Term Loan Agreement payable through 2028 - 1.53% 165 165 Level 3
2.625% Notes due 2030 500 508 Level 2
1.000% Payroll Support Program Loan due April 2030 976 941 Level 3
1.000% Payroll Support Program Loan due January 2031 566 537 Level 3
1.000% Payroll Support Program Loan due April 2031 526 492 Level 3


(in millions)	Carrying value		Estimated fair value		Fair value level hierarchy
2.75% Notes due November 2022	$	300	$	300	Level 2


1.25% Convertible Notes due 2025	1,611		1,851		Level 2
5.25% Notes due 2025	1,332		1,334		Level 2

3.00% Notes due 2026	300		275		Level 2

3.45% Notes due 2027	300		271		Level 2
5.125% Notes due 2027	1,801		1,766		Level 2
7.375% Debentures due 2027	114		120		Level 2

2.625% Notes due 2030	500		403		Level 2
1.000% PSP1 due 2030	976		829		Level 3
1.000% PSP2 due 2031	566		463		Level 3
1.000% PSP3 due 2031	526		422		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”).~~

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

settle conversions by paying cash up to the principal amount of the convertible notes, with any excess conversion value settled in cash or shares of common stock. The initial conversion rate is 25.9909 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $38.48 per share of common stock).

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 initial carrying amount of the equity component was calculated as the difference between the liability component and the face amount of the Convertible Notes. During the three months ended September 30, 2021, the Company repurchased $80 million in principal of the Convertible Notes for $121 million in cash. The Company accounted for the repurchase as a partial debt extinguishment, which resulted in (i) a loss of $12 million reflected in Other (gains) and losses, net, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended September 30, 2021, (ii) a $12 million reduction in debt discount and issuance costs, and (iii) a $42 million reduction to Capital in excess of par value related to the reacquisition of the equity component in the accompanying unaudited Condensed Consolidated Balance Sheet as of September 30, 2021. Additionally, an immaterial number of conversions were exercised and settled during the first nine months of 2021. The following table details the equity and liability component recognized related to the Convertible Notes as of September 30, 2021, and December 31, 2020:

(in millions) September 30, 2021 December 31, 2020
Carrying amount of equity component $ 361 $ 403
Liability component:
Principal amount $ 2,221 $ 2,300
Unamortized debt discount (289) (355)
Net carrying amount $ 1,932 $ 1,945

The effective interest rate on the liability component was approximately 5.2 percent for the three and nine months ended September 30, 2021. The Company recognized $40 million of interest expense associated with the Convertible Notes during the three months ended September 30, 2021, including $29 million of non-cash amortization of the debt discount, $4 million of non-cash amortization of debt issuance costs, and $7 million of contractual coupon interest. The Company recognized $96 million of interest expense associated with the Convertible Notes during the nine months ended September 30, 2021, including $66 million of non-cash amortization of the debt discount, $8 million of non-cash amortization of debt issuance costs, and $22 million of contractual coupon interest. The 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, less amounts that were or will be required to be accelerated to expense immediately upon conversion.

As of September 30, 2021, the if-converted value of the Convertible Notes exceeded the principal amount by $748 million, using the closing stock price on September 30, 2021. The Convertible Notes did not meet the criteria to be converted as of the date of the financial statements, and thus are classified as Long-term debt in the accompanying unaudited Condensed Consolidated Balance Sheet as of September 30, 2021.

2926


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

9. SUPPLEMENTAL FINANCIAL INFORMATION


(in millions)	(in millions)	September 30, 2021		December 31, 2020		(in millions)	September 30, 2022		December 31, 2021
Trade receivables	Trade receivables	$	67	$	46	Trade receivables	$	85	$	58
Credit card receivables	Credit card receivables	122		35		Credit card receivables	158		83
Business partners and other suppliers	Business partners and other suppliers	426		274		Business partners and other suppliers	561		432
Taxes receivable (a)	Taxes receivable (a)	710		740		Taxes receivable (a)	233		699
Fuel hedging and receivables						Fuel hedging and receivables	56		8
Other	Other	154		35		Other	223		77
Accounts and other receivables	Accounts and other receivables	$	1,479	$	1,130	Accounts and other receivables	$	1,316	$	1,357


(in millions)	(in millions)	September 30, 2021		December 31, 2020		(in millions)	September 30, 2022		December 31, 2021
Derivative contracts	Derivative contracts	$	251	$	90	Derivative contracts	$	144	$	192
Intangible assets, net	Intangible assets, net	295		295		Intangible assets, net	295		295

Other	Other	373		337		Other	333		395
Other assets	Other assets	$	919	$	722	Other assets	$	772	$	882


(in millions)	(in millions)	September 30, 2021		December 31, 2020		(in millions)	September 30, 2022		December 31, 2021
Accounts payable trade	Accounts payable trade	$	234	$	111	Accounts payable trade	$	279	$	156
Salaries payable	Salaries payable	247		201		Salaries payable	250		287
Taxes payable excluding income taxes	Taxes payable excluding income taxes	163		49		Taxes payable excluding income taxes	212		200
Aircraft maintenance payable	Aircraft maintenance payable	72		95		Aircraft maintenance payable	61		42
Fuel payable	Fuel payable	114		66		Fuel payable	252		170

Other payable	Other payable	399		409		Other payable	499		427
Accounts payable	Accounts payable	$	1,229	$	931	Accounts payable	$	1,553	$	1,282


(in millions)	(in millions)	September 30, 2021		December 31, 2020		(in millions)	September 30, 2022		December 31, 2021

Extended Emergency Time Off		$	17	$	393

Voluntary Separation Program	Voluntary Separation Program	98		143		Voluntary Separation Program	$	74	$	92
Profitsharing and savings plans	Profitsharing and savings plans	210		25		Profitsharing and savings plans	199		262

Vendor prepayment (b)		—		600

Vacation pay	Vacation pay	450		436		Vacation pay	471		451

Health	Health	137		111		Health	243		152

Workers compensation	Workers compensation	141		161		Workers compensation	155		141
Property and income taxes	Property and income taxes	78		84		Property and income taxes	61		65
Interest	Interest	110		49		Interest	108		46
Deferred supplier payments ~~(c)~~(b)	Deferred supplier payments ~~(c)~~(b)	142		—		Deferred supplier payments ~~(c)~~(b)	—		80
Bonus and incentive pay (c)						Bonus and incentive pay (c)	330		150
Other	Other	304		257		Other	240		185
Accrued liabilities	Accrued liabilities	$	1,687	$	2,259	Accrued liabilities	$	1,881	$	1,624


(in millions)	(in millions)	September 30, 2021		December 31, 2020		(in millions)	September 30, 2022		December 31, 2021
Extended Emergency Time Off		$	—	$	57

Voluntary Separation Program	Voluntary Separation Program	254		321		Voluntary Separation Program	$	168	$	233
Postretirement obligation	Postretirement obligation	436		428		Postretirement obligation	333		330

Other deferred compensation	Other deferred compensation	341		353		Other deferred compensation	296		369

Other	Other	67		88		Other	259		292
Other noncurrent liabilities	Other noncurrent liabilities	$	1,098	$	1,247	Other noncurrent liabilities	$	1,056	$	1,224

3027


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

(a) ~~Includes~~This amount includes approximately $472 million ~~and $470 million,~~ as of ~~September 30, 2021 and~~ December 31, ~~2020, respectively,~~2021 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. The refund was received by the Company during second quarter 2022. These amounts as of September 30, 2022 and December 31, 2021 also include excise taxes remitted to taxing authorities for which the subsequent flights were canceled by Customers, resulting in amounts due back to the Company.

(b) In fourth quarter 2020, the Company received a $600 million prepayment from Chase for Rapid Rewards points that were subsequently issued to Members during the first half of 2021, based on cardholder activity on the Visa credit card associated with its loyalty program.

~~(c)~~ Represents amounts owed at December 31, 2021 for aircraft deliveries received that ~~will be~~were subsequently relieved via future payments to supplier. ~~See Note 11 for further information.~~

(c) Includes anticipated contract labor ratification bonuses and/or accruals, and non-contract bonuses and incentive pay.

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

Other Operating Expenses

Other operating expenses consist of aircraft rentals, distribution costs, advertising expenses, personnel expenses, professional fees, and other operating costs, none of which individually exceeded 10 percent of Operating 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 Terminals 1 and 2 (the "Terminal 1.5 Project"). The Terminal 1.5 Project included ticketing, baggage claim, passenger screening, and a bus gate. Construction on the Terminal 1.5 Project began during third quarter 2017 and was substantially completed at December 31, 2020. The project final cost was approximately $410 million. During second quarter 2021, LAWA repaid the outstanding loan and purchased the remaining completed assets for accounting purposes, at which time the Terminal 1.5 Project right-of-use asset and lease liability of $365 million on the balance sheet were de-recognized in accordance with applicable accounting guidance. This repayment was also reported as a supplemental noncash transaction on the unaudited Condensed Consolidated Statement of Cash Flows, net of Assets constructed for others additions during the period.

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 ~~for Series 2010 and 2012~~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.

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

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~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~~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, which has been reflected in the unaudited Condensed Consolidated Balance Sheet as of September 30, 2021.

This refinancing transaction results in a reduction of the Company’s future maturities of lease liabilities, which includes both principal and interest, by $8 million during the remainder of 2021, by $16 million each in 2022, 2023, 2024, 2025, and by $474 million beyond 2025.

As of September 30, ~~2021, $89~~2022, $79 million of principal remained 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 ~~$100~~$88 million as of September 30, ~~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

~~Based on growth opportunities and ongoing fleet modernization plans for more fuel efficient aircraft,~~During third quarter 2022, the Company ~~has~~ entered into a supplemental ~~agreements~~agreement with The Boeing Company ("Boeing") ~~during 2021~~ to ~~increase~~replace the majority of its ~~2022 firm orders of~~2023 Boeing 737 MAX 7 ("-7") ~~aircraft. Additionally,~~firm orders with Boeing 737 MAX 8 ("-8") firm orders, among other adjustments to its near-term contractual order book. The Company also exercised five -8 options for delivery in 2022 and four -7 options for delivery in 2023.

While the Company ~~accelerated options into~~remains contractually scheduled to receive 114 MAX deliveries this year, the Company


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

continues to expect a portion of its deliveries to shift out of 2022 ~~2023, 2024,~~due to Boeing's supply chain challenges and ~~2025, and added new options into 2026 and 2027. During third quarter 2021,~~the current status of the -7 certification, which has not yet been achieved but is expected in 2022 or 2023. Based on recent discussions with Boeing regarding the pace of expected deliveries for the remainder of this year, the Company ~~exercised~~ 8 ~~of its 2022 options for -7 aircraft. Fleet and capacity plans will continue~~continues to ~~evolve as the Company manages through this recovery period, and~~estimate it will ~~continue to evaluate its remaining MAX options for~~receive a total of 66 -8 aircraft deliveries in 2022, including 31 -8 deliveries in fourth quarter 2022, and no -7 deliveries in 2022. ~~However, with its cost-effective order book, the~~The Company retains significant flexibility to manage its fleet size, including opportunities to accelerate fleet modernization efforts if growth opportunities do not materialize. Given the current supply chain and aircraft delivery delays, the Company will continue working with Boeing to solidify future delivery dates.

Additional information regarding the Company's ~~delivery schedule~~contractual order book is included in the following table as of September 30, ~~2021.~~2022:


	The Boeing Company
	-7 Firm Orders		-8 Firm Orders		-7 or -8 Options	Total
2022	14		100		—	114	(c)
2023	42		48		—	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
	196	(a)	278	(b)	158	632

(a) The delivery ~~schedule~~timing 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 the -7 certification and entry into service, and the Company therefore offers no ~~assurances~~assurance that current estimations and timelines are correct.

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

The Boeing Company
-7 Firm Orders -8 Firm Orders -7 or -8 Options Additional -8s Total
2021 — 19 — 9 28 (a)
2022 72 — 42 — 114 (b)
2023 30 — 60 — 90 (c)
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
242 149 (d) 260 9 (e) 660

~~(a) All 28 -8s were delivered as of September 30, 2021, consisting of 19 owned and 9 leased aircraft.~~

(b) ~~During third quarter 2021, the Company exercised 8 -7 options for delivery in 2022.~~

~~(c) The Company exercised 8 -7 options for delivery in 2023 on October 1, 2021.~~

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

~~(e) These 9 additional~~(c) Includes 35 -8 ~~aircraft were leased from various third parties and delivered as of~~deliveries received through September 30, ~~2021.~~2022, and 31 expected -8 deliveries in fourth quarter 2022, for a total of 66 -8 deliveries in 2022. While the Company is contractually scheduled to receive 114 MAX deliveries, including options, this year, a portion of its deliveries are expected to shift out of 2022 due to Boeing's supply chain challenges and the current status of the -7 certification. Furthermore, given the current ongoing status of the -7 certification and pace of expected deliveries for the remainder of this year, it is the Company's assumption that it will receive no -7 aircraft deliveries in 2022, and has the ability to convert -7s to -8s as noted in footnote (b).

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 as of September 30, ~~2021, were as follows: $33 million for 2021, $1.7~~2022, were: $1.9 billion remaining in 2022, ~~$1.2~~$2.3 billion in 2023, $932 million in 2024, $853 million in 2025, $999 million in 2026, $1.1 billion in ~~2024, $837 million in 2025, $961 million in 2026,~~2027, and ~~$7.0~~$6.4 billion thereafter.

Contingencies

The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business ~~including, but~~and records a liability for such claims when it is probable that a loss will be incurred and the amount is reasonably estimable. In recent years, the airline industry has experienced an increase in litigation asserting the application of state and local employment laws, particularly in California. On June 30, 2022, the U.S. Supreme Court denied review of the Ninth Circuit’s ruling in Bernstein v. Virgin America, Inc., which held that federal law did not ~~limited~~preempt the California state meal-and-rest-break regulations for flight attendants at issue. The Company is a defendant in multiple proceedings asserting wage and hour claims with respect to ~~examinations~~certain employees who work in, or are based in, California. The Bernstein decision may adversely affect the Company’s defenses in some or all of those proceedings and may give rise to additional litigation in these or other areas previously believed to be preempted by ~~the Internal Revenue Service ("IRS").~~federal law. The ~~Company's management does~~Company is currently not ~~expect that the outcome~~able to estimate a range 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.possible loss.

3329


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

11. 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 September 30, 2022, the conditions were not met that would allow holders to exercise their conversion option.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election. The Company intends to settle conversions by paying cash up to the principal amount of the Convertible Notes, with any excess conversion value settled in cash or shares of common stock. The initial conversion rate is 25.9909 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $38.48 per share of common stock).

The Company adopted ASU 2020-06, as of January 1, 2022, utilizing the modified retrospective method approach. See Note 3 for further information. Upon adoption, the Company reclassified the remaining equity component, of $300 million, from Additional paid-in capital to Long-term debt associated with its Convertible Notes, and no longer records amortization of the debt discount to Interest expense. The following table details the equity and liability component recognized related to the Convertible Notes, prior to and following the adoption of ASU 2020-06:


(in millions)	September 30, 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	$	1,611	$	2,097
Unamortized debt discount	—		(255)
Net carrying amount	$	1,611	$	1,842

The Company recognized interest expense associated with the Convertible Notes as follows:


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


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2022		2021		2022		2021
Non-cash amortization of the debt discount	$	—	$	19	$	—	$	55
Non-cash amortization of debt issuance costs	3		2		9		6
Contractual coupon interest	5		7		18		22
Total interest expense	$	8	$	28	$	27	$	83

The unamortized debt issuance costs are being recognized as non-cash interest expense based on the 5-year term of the notes, through May 1, 2025, less amounts that were or will be required to be accelerated immediately upon conversion or repurchases. The Company had no changes to conversion terms, contingencies, or exercise prices during the nine months ended September 30, 2022. The effective interest rate associated with the Convertible Notes was approximately 1.9 percent for the three and nine months ended September 30, 2022.

During the three and nine months ended September 30, 2022, the Company paid $1.9 billion and $2.5 billion, respectively, in debt and finance lease obligations, which included scheduled debt and lease payments, partial extinguishment of Convertible Notes, and the early prepayment of debt. The following tables present the impact of the partial extinguishment of the Company's Convertible Notes and early prepayment of debt (excluding payments on finance leases), including $1.3 billion in prepayments for all of the Company's outstanding 4.75% Notes due 2023, within the unaudited Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2022:


	Three months ended September 30, 2022
(in millions)	Cash paid for debt and interest		Principal repayment		Loss on extinguishment		Non-cash amortization of debt discount and (issuance) costs		Accrued Interest
1.25% Convertible Notes due 2025	$	240	$	184	$	59	$	(3)	$	—
5.125% Notes due 2027	149		143		3		1		2
4.75% Notes due 2023	1,274		1,247		8		—		19
5.25% Notes due 2025	227		217		6		—		4
Total	$	1,890	$	1,791	$	76	$	(2)	$	25


	Nine months ended September 30, 2022
(in millions)	Cash paid for debt and interest		Principal repayment		Loss on extinguishment		Non-cash amortization of debt discount and (issuance) costs		Accrued Interest
1.25% Convertible Notes due 2025	$	649	$	486	$	171	$	(9)	$	1
5.125% Notes due 2027	209		199		6		2		2
4.75% Notes due 2023	1,278		1,250		9		—		19
5.25% Notes due 2025	228		218		6		—		4
Total	$	2,364	$	2,153	$	192	$	(7)	$	26


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

The Company has access to $1.0 billion under its amended and restated revolving credit facility (the "Amended A&R Credit Agreement"). In July 2022, this facility was amended to extend the expiration date to August 2025, and to change the benchmark rate from London Interbank Offered Rate ("LIBOR") to the Secured Overnight Financing Rate ("SOFR"). There were no amounts outstanding under the Amended A&R Credit Agreement as of September 30, 2022.

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

Relevant comparative operating statistics for the three and nine months ended September 30, 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. InFor the ~~first~~three and nine months ended September 30, 2022, the Company believes a comparison of ~~both years,~~its 2022 to 2019 (pre-pandemic) operating statistics is relevant and useful as the Company continues to recover from the pandemic. For the three and nine months ended September 30, 2022 and 2021, 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 September 30,										Three months ended September 30,
		2021			2020			Change				2022			2021			2022 Change to 2021			2019			2022 Change to 2019
Revenue passengers carried (000s)	Revenue passengers carried (000s)	29,303			11,621			152.2	%		Revenue passengers carried (000s)	34,434			29,303			17.5	%		33,538			2.7	%
Enplaned passengers (000s)	Enplaned passengers (000s)	36,534			15,064			142.5	%		Enplaned passengers (000s)	43,157			36,534			18.1	%		41,098			5.0	%
Revenue passenger miles (RPMs) (in millions)(a)	Revenue passenger miles (RPMs) (in millions)(a)	31,285			11,888			163.2	%		Revenue passenger miles (RPMs) (in millions)(a)	33,534			31,285			7.2	%		32,889			2.0	%
Available seat miles (ASMs) (in millions)(b)	Available seat miles (ASMs) (in millions)(b)	38,756			26,464			46.4	%		Available seat miles (ASMs) (in millions)(b)	39,272			38,756			1.3	%		39,379			(0.3)	%
Load factor(c)	Load factor(c)	80.7		%	44.9		%	35.8		pts.	Load factor(c)	85.4		%	80.7		%	4.7		pts.	83.5		%	1.9		pts.
Average length of passenger haul (miles)	Average length of passenger haul (miles)	1,068			1,023			4.4	%		Average length of passenger haul (miles)	974			1,068			(8.8)	%		981			(0.7)	%
Average aircraft stage length (miles)	Average aircraft stage length (miles)	808			736			9.8	%		Average aircraft stage length (miles)	711			808			(12.0)	%		737			(3.5)	%
Trips flown	Trips flown	305,758			231,105			32.3	%		Trips flown	351,218			306,173			14.7	%		348,237			0.9	%
Seats flown (000s)(d)	Seats flown (000s)(d)	47,471			35,491			33.8	%		Seats flown (000s)(d)	54,609			47,544			14.9	%		52,441			4.1	%
Seats per trip(e)	Seats per trip(e)	155.3			153.6			1.1	%		Seats per trip(e)	155.5			155.3			0.1	%		150.6			3.3	%
Average passenger fare	Average passenger fare	$	144.24		$	125.07		15.3	%		Average passenger fare	$	163.01		$	144.24		13.0	%		$	155.95		4.5	%
Passenger revenue yield per RPM (cents)(f)	Passenger revenue yield per RPM (cents)(f)	13.51			12.23			10.5	%		Passenger revenue yield per RPM (cents)(f)	16.74			13.51			23.9	%		15.90			5.3	%
Operating revenues per ASM (cents)(g)	Operating revenues per ASM (cents)(g)	12.07			6.78			78.0	%		Operating revenues per ASM (cents)(g)	15.84			12.07			31.2	%		14.32			10.6	%
Passenger revenue per ASM (cents)(h)	Passenger revenue per ASM (cents)(h)	10.91			5.49			98.7	%		Passenger revenue per ASM (cents)(h)	14.29			10.91			31.0	%		13.28			7.6	%
Operating expenses per ASM (cents)(i)	Operating expenses per ASM (cents)(i)	10.18			12.11			(15.9)	%		Operating expenses per ASM (cents)(i)	14.83			10.18			45.7	%		12.24			21.2	%
Operating expenses per ASM, excluding fuel (cents)	Operating expenses per ASM, excluding fuel (cents)	7.63			10.67			(28.5)	%		Operating expenses per ASM, excluding fuel (cents)	10.38			7.63			36.0	%		9.47			9.6	%
Operating expenses per ASM, excluding fuel and profitsharing (cents)	Operating expenses per ASM, excluding fuel and profitsharing (cents)	7.43			10.67			(30.4)	%		Operating expenses per ASM, excluding fuel and profitsharing (cents)	10.23			7.43			37.7	%		9.11			12.3	%
Fuel costs per gallon, including fuel tax	Fuel costs per gallon, including fuel tax	$	2.01		$	1.18		70.3	%		Fuel costs per gallon, including fuel tax	$	3.39		$	2.01		68.7	%		$	2.07		63.8	%
Fuel costs per gallon, including fuel tax, economic	Fuel costs per gallon, including fuel tax, economic	$	2.04		$	1.23		65.9	%		Fuel costs per gallon, including fuel tax, economic	$	3.34		$	2.04		63.7	%		$	2.07		61.4	%
Fuel consumed, in gallons (millions)	Fuel consumed, in gallons (millions)	491			320			53.4	%		Fuel consumed, in gallons (millions)	515			491			4.9	%		524			(1.7)	%
Active fulltime equivalent Employees(j)	Active fulltime equivalent Employees(j)	53,984			57,931			(6.8)	%		Active fulltime equivalent Employees(j)	64,123			53,984			18.8	%		60,590			5.8	%
Aircraft at end of period(k)	Aircraft at end of period(k)	737			734			0.4	%		Aircraft at end of period(k)	742			737			0.7	%		752			(1.3)	%

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		Nine months ended September 30,										Nine months ended September 30,
		2021			2020			Change				2022			2021			2022 Change to 2021			2019			2022 Change to 2019
Revenue passengers carried (000s)	Revenue passengers carried (000s)	69,686			41,622			67.4	%		Revenue passengers carried (000s)	93,688			69,686			34.4	%		99,758			(6.1)	%
Enplaned passengers (000s)	Enplaned passengers (000s)	87,247			51,833			68.3	%		Enplaned passengers (000s)	116,446			87,247			33.5	%		121,480			(4.1)	%
Revenue passenger miles (RPMs) (in millions)(a)	Revenue passenger miles (RPMs) (in millions)(a)	73,850			41,437			78.2	%		Revenue passenger miles (RPMs) (in millions)(a)	92,540			73,850			25.3	%		98,121			(5.7)	%
Available seat miles (ASMs) (in millions)(b)	Available seat miles (ASMs) (in millions)(b)	95,316			79,701			19.6	%		Available seat miles (ASMs) (in millions)(b)	110,978			95,316			16.4	%		117,250			(5.3)	%
Load factor(c)	Load factor(c)	77.5		%	52.0		%	25.5		pts.	Load factor(c)	83.4		%	77.5		%	5.9		pts.	83.7		%	(0.3)		pts.
Average length of passenger haul (miles)	Average length of passenger haul (miles)	1,060			996			6.4	%		Average length of passenger haul (miles)	988			1,060			(6.8)	%		984			0.4	%
Average aircraft stage length (miles)	Average aircraft stage length (miles)	794			740			7.3	%		Average aircraft stage length (miles)	733			794			(7.7)	%		746			(1.7)	%
Trips flown	Trips flown	766,979			696,586			10.1	%		Trips flown	965,817			767,453			25.8	%		1,022,311			(5.5)	%
Seats flown (000s)(d)	Seats flown (000s)(d)	119,088			106,271			12.1	%		Seats flown (000s)(d)	149,913			119,171			25.8	%		154,312			(2.9)	%
Seats per trip(e)	Seats per trip(e)	155.3			152.6			1.8	%		Seats per trip(e)	155.2			155.3			(0.1)	%		150.9			2.8	%
Average passenger fare	Average passenger fare	$	136.45		$	144.22		(5.4)	%		Average passenger fare	$	169.37		$	136.45		24.1	%		$	154.99		9.3	%
Passenger revenue yield per RPM (cents)(f)	Passenger revenue yield per RPM (cents)(f)	12.88			14.49			(11.1)	%		Passenger revenue yield per RPM (cents)(f)	17.15			12.88			33.2	%		15.76			8.8	%
Operating revenues per ASM (cents)(g)	Operating revenues per ASM (cents)(g)	11.27			8.83			27.6	%		Operating revenues per ASM (cents)(g)	15.90			11.27			41.1	%		14.24			11.7	%
Passenger revenue per ASM (cents)(h)	Passenger revenue per ASM (cents)(h)	9.98			7.53			32.5	%		Passenger revenue per ASM (cents)(h)	14.30			9.98			43.3	%		13.19			8.4	%
Operating expenses per ASM (cents)(i)	Operating expenses per ASM (cents)(i)	9.67			12.15			(20.4)	%		Operating expenses per ASM (cents)(i)	14.63			9.67			51.3	%		12.29			19.0	%
Operating expenses per ASM, excluding fuel (cents)	Operating expenses per ASM, excluding fuel (cents)	7.29			10.26			(28.9)	%		Operating expenses per ASM, excluding fuel (cents)	10.68			7.29			46.5	%		9.52			12.2	%
Operating expenses per ASM, excluding fuel and profitsharing (cents)	Operating expenses per ASM, excluding fuel and profitsharing (cents)	7.10			10.26			(30.8)	%		Operating expenses per ASM, excluding fuel and profitsharing (cents)	10.52			7.10			48.2	%		9.18			14.6	%
Fuel costs per gallon, including fuel tax	Fuel costs per gallon, including fuel tax	$	1.87		$	1.52		23.0	%		Fuel costs per gallon, including fuel tax	$	3.05		$	1.87		63.1	%		$	2.09		45.9	%
Fuel costs per gallon, including fuel tax, economic	Fuel costs per gallon, including fuel tax, economic	$	1.92		$	1.56		23.1	%		Fuel costs per gallon, including fuel tax, economic	$	3.03		$	1.92		57.8	%		$	2.09		45.0	%
Fuel consumed, in gallons (millions)	Fuel consumed, in gallons (millions)	1,203			985			22.1	%		Fuel consumed, in gallons (millions)	1,438			1,203			19.5	%		1,550			(7.2)	%
Active fulltime equivalent Employees(j)	Active fulltime equivalent Employees(j)	53,984			57,931			(6.8)	%		Active fulltime equivalent Employees(j)	64,123			53,984			18.8	%		60,590			5.8	%
Aircraft at end of period(k)	Aircraft at end of period(k)	737			734			0.4	%		Aircraft at end of period(k)	742			737			0.7	%		752			(1.3)	%

(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.

(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," "cost per available seat mile," or ~~"CASM"~~"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 less than 500 ~~and a total of 10,684~~ Employees on Extended Emergency Time Off as of September 30, ~~2021 and September 30, 2020, respectively.~~2021. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.

(k) Included 24 Boeing 737 Next Generation aircraft in ~~temporary~~ storage as of September 30, 2021. Also included 34 Boeing 737 MAX ~~and 70 Boeing 737 Next Generation~~("MAX") aircraft in ~~long-term~~long term storage as of September 30, ~~2020. See Note 11 to the unaudited Condensed Consolidated Financial Statements for further information.~~2019.

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Financial Overview

In late February 2020, the Company began to see a negative impact from the COVID-19 pandemic, which quickly accelerated during first quarter 2020 and has continued throughout 2021. While the pandemic has continued to negatively impact results, the Company saw steady improvement as the year progressed through July, although the summer surge in COVID-19 cases decelerated the demand for travel in August and early September. The Company's financial results in ~~both years,~~2021 and thus far in 2022, on both ~~a GAAP~~an accounting principles generally accepted in the United States ("GAAP") basis and ~~Non-GAAP~~non-GAAP basis, were ~~significantly~~ impacted by the effects of the COVID-19 pandemic, ~~and the resulting effect on~~which began in early 2020. The strong travel demand ~~and passenger bookings.~~that began in March 2022 continued through third quarter 2022, producing operating revenues of $6.2 billion, a Company third quarter record. Leisure revenue trends were elevated compared with 2019 levels, while managed business revenues were down 28 percent compared with third quarter 2019.

The Company recorded third quarter and year-to-date GAAP and non-GAAP results for 2022, 2021, and ~~2020~~2019 as noted in the following tables. ~~See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.~~
Three months ended Nine months ended
(in millions, except per share amounts) September 30, September 30,
GAAP 2021 2020 Percent Change 2021 2020 Percent Change
Operating income (loss) $ 733 $ (1,411) n.m. $ 1,526 $ (2,648) n.m.
Net income (loss) $ 446 $ (1,157) n.m. $ 909 $ (2,166) n.m.
Net income (loss) per share, diluted $ 0.73 $ (1.96) n.m. $ 1.49 $ (3.89) n.m.

Non-GAAP
Operating loss $ (59) $ (1,577) (96.3) $ (1,490) $ (3,841) (61.2)
Net loss $ (135) $ (1,173) (88.5) $ (1,356) $ (2,751) (50.7)
Net loss per share, diluted $ (0.23) $ (1.99) (88.4) $ (2.29) $ (4.95) (53.7)

The significant increase in GAAP Net income (loss) and Operating income (loss), and significant decrease in non-GAAP Net loss and Operating loss, year-over-year, for both the quarter and year-to-date periods noted above, was primarily due to improvements in domestic leisure demand and bookings in 2021 as impacts from the COVID-19 pandemic eased. These impacts combined to result in a 161.0 percent increase in Operating revenues in third quarter 2021, and a 52.7 percent increase in Operating revenues for the nine months ended September 30, 2021. In addition, GAAP results for the three and nine months ended September 30, 2021, included ~~$763 million and $2.7 billion, respectively, in grant allocations of~~impacts associated with payroll funding support ("Payroll Support") ~~from~~programs with the United States Department of the Treasury ("Treasury") ~~utilized to fund salaries, wages, and benefits. See below and~~, as referenced in Note 2 to the unaudited Condensed Consolidated Financial ~~Statements for further information.~~

Statements. The Company believes comparisons of current year financial results to 2019 are relevant and show how the Company has continued to recover 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.


	Three months ended September 30,
(in millions, except per share amounts)
GAAP	2022		2021		2022 Change to 2021		2019		2022 Change to 2019
Operating income	$	395	$	733	(46.1)	%	$	819	(51.8)	%
Net income	$	277	$	446	(37.9)	%	$	659	(58.0)	%
Net income per share, diluted	$	0.44	$	0.73	(39.4)	%	$	1.23	(64.0)	%

Non-GAAP
Operating income (loss)	$	425	$	(59)	n.m.		$	819	(48.1)	%
Net income (loss)	$	316	$	(135)	n.m.		$	659	(52.0)	%
Net income (loss) per share, diluted	$	0.50	$	(0.23)	n.m.		$	1.23	(59.0)	%


	Nine months ended September 30,
(in millions, except per share amounts)
GAAP	2022		2021		2022 Change to 2021		2019		2022 Change to 2019
Operating income	$	1,402	$	1,526	(8.1)	%	$	2,292	(38.8)	%
Net income	$	759	$	909	(16.5)	%	$	1,787	(57.5)	%
Net income per share, diluted	$	1.21	$	1.49	(18.9)	%	$	3.29	(63.3)	%

Non-GAAP
Operating income (loss)	$	1,463	$	(1,490)	n.m.		$	2,292	(36.2)	%
Net income (loss)	$	950	$	(1,356)	n.m.		$	1,787	(46.8)	%
Net income (loss) per share, diluted	$	1.51	$	(2.29)	n.m.		$	3.29	(54.2)	%

The comparison of the Company's financial results, as shown above on a GAAP basis for the three and nine months ended September 30, 2022 versus the three and nine months ended September 30, 2021, were impacted by the Payroll Support that significantly benefited 2021 results. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. On a non-GAAP basis, the Company's financial results improved significantly for the three and nine months ended September 30, 2022, versus the same prior year period due to the

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significant recovery in travel demand, which was aided by a reduction in COVID-19 cases and hospitalizations, an 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 32.9 percent and 64.3 percent increase in Operating revenues for the three and nine months ended September 30, 2022, respectively, versus the same prior year periods. Operating revenues for the three and nine months ended September 30, 2022, exceeded the comparative 2019 pre-pandemic levels primarily due to higher yields. Operating expenses for the three and nine months ended September 30, 2022, exceeded the comparative pre-pandemic 2019 levels primarily due to higher salaries, wages, and benefits and fuel prices.

2022 Outlook

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

4Q 2022 Estimation

Operating revenue compared with 2019 (a)

Up 13% to 17%

ASMs compared with 2019 (b)

Down ~2%

Economic fuel costs per gallon (c)(d)

$3.15 to $3.25

Fuel hedging premium expense per gallon

$0.03

Fuel hedging cash settlement gains per gallon

$0.37

ASMs per gallon (fuel efficiency)

77 to 79

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

Up 14% to 18%

Scheduled debt repayments (millions)

~$320

Interest expense (millions)

~$70


									2022 Estimation
ASMs compared with 2019 (b)									Down ~4.5%
Economic fuel costs per gallon (c)(d)									$3.05 to $3.15
Fuel hedging premium expense per gallon									$0.04
Fuel hedging cash settlement gains per gallon									$0.50
CASM-X (e) compared with 2019 (f)									Up 14% to 15%
Scheduled debt repayments (billions)									~$2.6
Interest expense (millions)									~$340
Aircraft (g)									768
Effective tax rate									24% to 26%
Capital spending (billions) (h)									~$4.0

(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) Available seat miles (ASMs, or capacity). The Company's flight schedule is currently published for sale through July 10, 2023. The Company's fourth quarter 2022 guidance declined slightly from its previous estimation of down one percent to two percent, compared with fourth quarter 2019, primarily due to flight cancellations from the impact of Hurricane Ian. The Company continues to expect first quarter 2023 capacity to be up approximately 10 percent, compared with first quarter 2022, and currently expects second quarter 2023 capacity to be up approximately 14 percent, compared with second quarter 2022.

(c) 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").

(d) Based on the Company's existing fuel derivative contracts and market prices as of October 19, 2022, fourth quarter and full year 2022 economic fuel costs per gallon are estimated to be in the range of $3.15 to $3.25 and $3.05 to $3.15, respectively, compared with the Company's previous estimations in the range of $3.00 to $3.10 and $2.95 to $3.05, 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 cases on air travel

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demand, or the impact to its financial statements in future periods. Accordingly, the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort. See Note Regarding Use of Non-GAAP Financial Measures.

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

(f) 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 financial statements in future periods, especially considering the significant volatility of the fuel and oil expense line item. Accordingly, the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for these projected results is not meaningful or available without unreasonable effort.

(g) Aircraft on property, end of period. The Company ended third quarter 2022 with 742 Boeing 737 aircraft. During fourth quarter 2022, the Company continues to expect 31 Boeing 737 MAX 8 (-8) aircraft deliveries. The Company now expects to retire 26 Boeing 737-700 (-700) aircraft in 2022, including 5 -700 retirements in fourth quarter 2022, compared with its previous guidance of 29 -700 retirements this year. As a result, the Company now expects to end the year with 768 aircraft, compared with its previous guidance of 765 aircraft. The delivery schedule for the Boeing 737 MAX 7 (-7) is dependent on the Federal Aviation Administration ("FAA") issuing required certifications and approvals to Boeing and the Company. The FAA will ultimately determine the timing of the -7 certification and entry into service, and the Company therefore offers no assurances that current estimations and timelines are correct. Furthermore, given the current ongoing status of the -7 certification and pace of expected deliveries for the remainder of this year, it is the Company's assumption that it will receive no -7 aircraft deliveries in 2022, and that the remaining 48 MAX aircraft reflected in its 2022 contractual order book will shift out of 2022.

(h) Represents the Company's current expectation, which assumes a total of 66 -8 aircraft deliveries in 2022. The Company continues to estimate $900 million in non-aircraft capital spending in 2022.

COVID-19 Pandemic Impacts

In response to the far-reaching impacts of the COVID-19 pandemic, the Company took, and continues to assess and modify, measures to support the well-being of both its Employees and passengers, including procedures and policies intended to maintain an elevated level of cleanliness on aircraft and at facilities, and mitigate the spread of the virus. The Company also continues to monitor guidelines and recommendations from the Centers for Disease Control and Prevention applicable to the Company’s daily operations, and the manner in which the majority of the Company’s office and clerical Employees work on a daily basis.

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, the Company ~~has~~ received significant financial assistance from

Treasury in the form of Payroll Support, and this assistance ~~has~~ had a significant impact on the Company's reported GAAP financial results ~~through~~in 2021. Such impact ended in third quarter ~~2021.~~2021, and the Company's 2022 results do not reflect the benefit of this Payroll Support, and its future periods are not expected to benefit from such Payroll Support. However, future cash flows will be impacted through the portion of Payroll Support that was in the form of loans that remain outstanding and will have to be repaid to 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 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. During third quarter 2021, approximately 1,000 Employees returned from~~participate in the Extended ETO program have since returned or been recalled to work, or have chosen to permanently separate from the Company, and ~~less than 500~~no Employees ~~remained~~were on Extended ETO ~~leave as~~past March 31, 2022. The Company realized approximately $1.1 billion of ~~September 30, 2021. In accordance with applicable accounting guidance,~~full year 2021 cost savings from the ~~Company accrued a total charge of $1.4 billion in 2020 related to the special termination benefits for Employees who had accepted the Company's offer to participate in its~~ Voluntary Separation Program 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.~~material cost savings from these programs in 2022 and beyond. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. ~~As a result of these voluntary programs,~~

For the ~~Company's salaries, wages,~~three and ~~benefits costs were lowered by approximately $185 million for the three~~nine months ended September 30, ~~2021. The~~2022, the Company ~~estimates annual 2021 cost savings from these programs to be in the range~~hired approximately 1,800 and 9,000 Employees, respectively, net of ~~$1.0 billion to $1.1 billion.~~

attrition. The Company has ~~a significantly smaller workforce than it did prior~~been making additional investments to attract and retain talent, including the ~~COVID-19 pandemic. However,~~decision in ~~addition~~fourth quarter 2021 to ~~recalling a significant portion of~~further raise the Employees that remained on Extended ETO during the first nine months of 2021, the Company is also aggressively hiring to a goal of approximately 5,000 new Employees by the end of this year, and the Company is currently more than halfway toward that goal. The Company has also increased its minimum wage toCompany's starting hourly pay rates from $15 per hour to ~~retain and attract new Employees~~$17 per hour for certain of its workgroups, subject, in ~~the competitive labor market. The Company continues~~each case, to ~~evaluate staffing needs to align with planned flight activity.~~

~~On September 9, 2021, the President~~acceptance of the United States issued an order establishing vaccination requirements for employees of covered federal contractors (the “Vaccine Executive Order”). The Company is considered a covered federal contractor and, therefore, subject to actionssuch change by the government to implement the Vaccine Executive Order. The Company is requiring all Employees to submit proof of COVID-19 vaccination, or apply for an accommodation, by November 24, 2021. The Company recently launched a Vaccination Participation Pay Program to incentivize Employees with the equivalent of two days of pay, with the incentive intended to cover the time needed to become vaccinated.applicable union.

Company Overview

The Company has entered into supplemental agreements in 2022 with The Boeing Company ("Boeing") to increase aircraft orders and accelerate certain options with the goal of improving potential growth opportunities ~~restoring its~~and frequencies to better align with the pre-pandemic operational route network, ~~closer to pre-pandemic levels,~~ lowering operating costs, and further modernizing its fleet with less carbon-intensive aircraft. ~~During third quarter 2021,~~See Note 10 to the ~~Company exercised eight options~~unaudited Condensed Consolidated

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Financial Statements for aircraft delivery in 2022, which increased the Company's 2022 firm orders to 72 with 42 remaining options, and the Company's order book with Boeing as of September 30, 2021, consists of a total of 391 MAX firm orders (242 Boeing 737 MAX-7 ("-7") aircraft and 149 Boeing 737 MAX-8 ("-8") aircraft) and 260 MAX options (-7s or -8s) for years 2021 through 2031.further information. The Company ~~continues to expect~~expects that more than half of the MAX aircraft in its firm order book will replace a significant amount of its ~~461~~431 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.

The Company received 23 -8 aircraft during third quarter 2022, as expected, for a year-to-date total of 35 -8 aircraft deliveries received as of September 30, 2022. The Company ended third quarter ~~2021~~2022 with ~~737 Boeing 737~~742 aircraft, ~~in its fleet, including 69 -8 aircraft. During third quarter 2021,~~which reflects 11 -700 aircraft retirements during the quarter. While the Company ~~took~~remains contractually scheduled to receive 114 MAX deliveries this year, the Company continues to expect a portion of its deliveries to shift out of 2022 due to Boeing's supply chain challenges and the current status of the -7 certification, and that aircraft delivery delays are currently expected to extend into 2024. Based on continued discussions with Boeing regarding the pace of ~~one~~expected deliveries for the remainder of this year, the Company continues to estimate it will receive a total of 66 -8 aircraft ~~and does not expect any additional~~ deliveries in 2021. As of September 30, 2021, 24 -700 aircraft remained in temporary storage due to fourth quarter 2021 capacity remaining below fourth quarter 2019 levels. The Company still expects to return one leased -700 aircraft to the lessor2022, including 31 -8 deliveries in fourth quarter ~~2021,~~2022, and no -7 deliveries in ~~October 2021 made the decision~~2022. The Company now expects to ~~accelerate the retirement of eight~~retire 26 -700

~~owned~~ aircraft ~~from~~in 2022, ~~into~~including 5 -700 retirements in fourth quarter ~~2021, for~~2022. As a ~~total of 18 retirements in 2021. The~~result, the Company now expects to end ~~2021~~the year with ~~728 total~~768 aircraft. For information about potential impacts resulting from prolonged delays in the FAA issuing required certifications or approvals for the -7, see "Risk Factors – Operational Risks" included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Additionally in October 2022, the Company converted 17 2023 -7 firm orders to -8 firm orders, exercised three -7 options for delivery in 2024, accelerated 15 -7 firm orders from 2030 into 2026, and accelerated 10 -8 firm orders from 2031 into 2030.

The Company has published its flight schedule through ~~April 24, 2022. During 2021, the Company is pursuing additional revenue opportunities that utilize idle aircraft to provide service to new, popular destinations.~~July 10, 2023. The Company is ~~leveraging additional airports~~expected to be limited by Pilot staffing constraints for the majority of 2023; therefore, it is not expected that aircraft delivery delays would result in ~~or near cities where its Customer base is large, along with adding easier access~~required changes to ~~popular leisure-oriented destinations from across its domestic-focused network. These additional service points on~~ the Company's ~~route map are opportunities it can provide Customers now, all while better positioning the Company for a travel demand rebound.~~published flight schedules. During ~~2021,~~2022, the Company has ~~begun~~primarily focused on restoring its network, principally in cities with a very strong Customer base, by adding city pair frequencies and connecting new service with existing points-of-strength to ~~new destinations including:~~increase Customer depth.

•~~Chicago O'Hare International Airport~~In July 2022, the Company announced that flight credits will no longer expire. The Company expects that this policy change, combined with its other attractive brand attributes, will contribute to an increase in Customer loyalty. Flight credits resulting from canceling reservations previously were valid for no longer than one year from the date of original purchase. Flight credits for non-refundable fares will be issued as long as the reservation is cancelled more than 10 minutes prior to the scheduled departure. Flight credits or refunds for refundable fares will be issued regardless of cancellation time. Flight credits unexpired on, or created on or after July 28, 2022 do not expire and ~~Sarasota Bradenton International Airport - February 14, 2021~~

•~~Colorado Springs Municipal Airport 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~~

•~~Destin-Fort Walton Beach Airport - May 6, 2021~~

•~~Myrtle Beach International Airport - May 23, 2021~~

•~~Bozeman Yellowstone International Airport - May~~will show an expiration date (12/31/2040) until the Company's systems are updated. A flight credit with an expiration date on or before July 27, ~~2021~~

•~~Jackson-Medgar Wiley Evers International Airport~~2022, has expired in ~~Mississippi - June 6, 2021~~

•~~Eugene Airport in Oregon - August 29, 2021~~accordance with its existing expiration date.

On October 11, 2022, the Company's nearly 170 Aircraft Appearance Technicians, represented by the Aircraft Mechanics Fraternal Association ("AMFA"), ratified a new five-year collective-bargaining agreement with the Company. The ~~Company has also announced other new destinations and expected service commencement dates including:~~

•~~Bellingham International Airport~~newly ratified agreement becomes amenable in ~~Washington - November 7, 2021~~

•~~Syracuse Hancock International Airport in New York - November 14, 2021~~July 2027.

The COVID-19 pandemic has had a particularly negative impact on international operations and led to the Company's suspension of international operations in first quarter 2020. The Company has since resumed service to Aruba, Mexico, Costa Rica, Jamaica, the Dominican Republic, Cuba, the Bahamas, and Turks and Caicos. With the easing of government restrictions and the continued increase in demand for beach and leisure destinations, the Company intends to resume service to Belize by November 7, 2021 and the Cayman Islands in 2022. The Company will focus on restoring the frequency of flights between existing airports in the short-term.

Although less severe than prior waves of rising COVID-19 cases, the negative effects associated with the Delta variant are estimated to have impacted August and September 2021 operating revenues by approximately $100 million and $200 million, respectively. Despite the demand deceleration, third quarter 2021 operating revenues and revenue passengers reached 83 percent and 87 percent of 2019 levels, respectively, which is meaningful progress and a strong indication of the pent-up demand for air travel. Revenue and booking trends began to significantly improve in the second half of September 2021 as COVID-19 cases declined, which resulted in an improvement in the Company's September and third quarter 2021 operating revenues, as compared with the Company's previous estimation. September 2021 managed business revenues declined 73 percent compared with September 2019.

The Company is encouraged by recent improvements in underlying revenue trends as COVID-19 cases have declined; however, the lingering effects from the deceleration in bookings in third quarter 2021 are estimated to negatively impact fourth quarter 2021 Operating revenues by approximately $100 million. ForOn October 2021, despite the improvement in revenue and booking trends experienced in the second half of September 2021 continuing, thus far, into this month, October operating revenues include two headwinds—an estimated $40 million negative impact due to the lingering effects of the Delta variant and an estimated $75 million negative impact as a result of flight cancellations from operational challenges experienced earlier this month and related Customer refunds and gestures of goodwill. Despite these headwinds, and based on current bookings, the Company's guidance for October 2021 operating revenues remains unchanged, as the recent improvement in travel demand trends offsets the aforementioned headwinds. Business revenues continue to lag leisure revenue trends; however, the Company is encouraged by the recent improvement in business travel demand resulting in steady improvements in business

~~bookings, thus far, in October 2021. Beyond October 2021, the current booking curve for the holidays is trending in line with 2019 levels.~~

~~The following table presents selected preliminary estimates of Operating revenues and Load factor for October and fourth quarter 2021:~~

Estimated
October 2021

Estimated
4Q 2021

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

~~Down 20% to 30%~~

~~Down 15% to 25%~~

~~Previous estimation~~

~~(b)~~

~~Load factor~~

~~78% to 83%~~

~~80% to 85%~~

~~Previous estimation~~

~~(b)~~

(a) The Company believes that operating revenues compared with 2019 is a more relevant measure of performance than a year-over-year comparison due to the significant impacts in 2020 due to the pandemic.

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

~~The Company expects its fourth quarter 2021 capacity to remain below fourth quarter 2019 levels. The following table presents capacity estimates for fourth quarter 2021:~~

Estimated
October 2021

Estimated
November 2021

Estimated
December 2021

Estimated
4Q 2021

~~ASMs year-over-year~~

~~Up ~68%~~

~~Up ~42%~~

~~Up ~55%~~

~~Up ~54%~~

~~Previous estimation~~

~~(a)~~

~~ASMs compared with 2019~~

~~Down ~6%~~

~~Down ~7%~~

~~Down ~12%~~

~~Down ~8%~~

~~Previous estimation~~

~~(a)~~

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

Based on current cost trends and reduced capacity plans, fourth quarter 2021 operating expenses, excluding fuel and oil expense, special items, and profitsharing, are expected to be comparable with fourth quarter 2019 levels, and increase in the range of 8 percent to 12 percent on a unit basis as compared with fourth quarter 2019. The projection does not reflect the potential impact of Fuel and oil expense, special items, and profitsharing expense because the Company cannot reliably predict or estimate these items or expenses or their impact to the Company's 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. The Company is experiencing cost increases primarily due to inflation in labor rates and airport costs. Additionally, the Company currently expects four to five points of the unit cost increase in fourth quarter 2021 to be attributable to investments in the operation to bolster staffing, cost inflation related to lower productivity, and vaccination incentive pay.

Based on the current cost outlook, and despite the current momentum in revenue trends, the Company does not expect to be profitable in fourth quarter 2021. Except for higher fuel prices, fourth quarter 2021's overall results are trending better than third quarter 2021.

~~During August 2021,~~26, 2022, the Company reached a tentative collective-bargaining agreement with the International Association of Machinists and Aerospace Workers, AFL-CIO ("IAM"), which represents the Company's ~~approximately 6,800 Employees in the~~more than 8,000 Customer Service Agents, Customer Representatives, and Source of Support ~~Representatives workgroup.~~Representatives. The ratification vote is scheduled to conclude ~~on October 29, 2021.~~in December 2022. If the tentative agreement is ratified, it will become amendable in ~~2025.~~December 2027.

As part of its commitment to corporate sustainability, on April 22, 2022, the Company published its 2021 One Report describing the Company's sustainability strategies, which include the Company’s fuel conservation and emissions mitigation initiatives and other efforts to minimize greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling. The Company ~~went live with Sabre's Global Distribution System~~also published its first ever Diversity, Equity, and Inclusion ("~~GDS"~~DEI") ~~platform~~Report on July 26, 2021, achieving its goal of enabling industry-standard corporate bookings through multiple GDS platforms. In addition to Sabre, the Company is currently accepting corporate bookings through Amadeus's GDS platform and Travelport's multiple GDS platforms (Apollo, Worldspan, and Galileo). The Company's enhancement of its GDS channel strategy is partApril 22, 2022. A companion piece

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~~of its larger "channel of choice" offering and complements its "direct connect" strategy, as well as its existing SWABIZ® direct travel management tool. The goal is~~ to ~~distribute Southwest's everyday low fares to more business travelers through their preferred channel and grow~~the One Report, the DEI Report takes a deeper dive into the Company's ~~managed business revenues.~~DEI goals, commitments, and initiatives and highlights the expected path forward. Information contained in the Southwest One Report and/or the DEI Report is not incorporated by reference into, and does not constitute a part of, this Form 10-Q. While the Company believes that the disclosures contained in the Southwest One Report, the DEI Report, and other voluntary disclosures regarding environmental, social, and governance (“ESG”) matters are responsive to various areas of investor interest, the Company believes that these disclosures do not currently address matters that are material in the near term to the Company’s operations, strategy, financial condition, or financial results, although this view may change in the future based on new information that could materially alter the estimates, assumptions, or timelines used to create these disclosures. Given the estimates, assumptions, and timelines used to create the Southwest One Report and other voluntary disclosures, the materiality of these disclosures is inherently difficult to assess.

Material Changes in Results of Operations

Comparison of three months ended September 30, ~~2021~~2022 and September 30, ~~2020~~2021

Operating Revenues

Total operating revenues for third quarter ~~2021~~2022 increased by ~~$2.9~~$1.5 billion, or ~~161.0~~32.9 percent, year-over-year, to ~~$4.7~~$6.2 billion. Third quarter ~~2021~~2022 operating revenues per ASM (RASM) were ~~12.07~~15.84 cents, an increase of ~~78.0~~31.2 percent, compared with third quarter ~~2020.~~2021. The dollar increase was ~~driven~~ primarily bydue to the ~~improvements~~improvement in leisure ~~Passenger~~travel demand ~~and bookings~~ in third quarter ~~2021~~2022 versus the ~~severe~~ impacts to demand and bookings from the COVID-19 pandemic in third quarter ~~2020. The~~2021. For third quarter 2022, the year-over-year RASM increase was primarily driven by ~~a 10.5 percent improvement~~an increase in yield ~~and~~of 23.9 percent coupled with an increase in Load factor of ~~35.8~~4.7 points. Also, as anticipated, the Company's third quarter 2022 operating revenues included a five point sequential operating revenue growth headwind from second quarter to third quarter 2022 unit revenues, compared with their respective 2019 levels, due to a shift in the timing of recognition of breakage revenue associated with the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits. See Note 6 to the unaudited condensed Consolidated Financial Statements for additional information.

Passenger revenues for third quarter ~~2021~~2022 increased by ~~$2.8~~$1.4 billion, or ~~190.7~~32.8 percent, year-over-year. On a unit basis, Passenger revenues increased ~~98.7~~31.0 percent, year-over-year. The year-over-year increase in Passenger revenues on both a dollar and unit basis was primarily due to ~~travel restrictions easing and an increase in the numbers of persons vaccinated, which resulted in~~ improvements in both leisure ~~Passenger~~and business demand and bookings.

~~Freight revenues for~~ The Company's revenue performance in third quarter ~~2021~~2022 was strong, despite a negative impact of approximately $18 million due to the flight disruptions caused by Hurricane Ian in late September 2022. This negative impact in third quarter 2022 was more than offset by improving leisure demand and close-in bookings in September 2022. In addition, the Company's third quarter 2022 operating revenues benefited from its loyalty program, including elevated point redemptions for flights and incremental revenue from its co-brand credit card agreement, as well as increased ~~by $6 million, or 14.6~~Upgraded Boarding take-rates following the new digital self-service launch in August 2022. While third quarter 2022 managed business revenues remained below 2019 levels, and softened in July and August compared with June 2022, the Company experienced sequential improvement from August to September, with September 2022 managed business revenues down 25 percent compared with ~~third~~September 2019 levels. Based on current trends, fourth quarter ~~2020, primarily due~~2022 managed business revenues are estimated to ~~increased demand as businesses reduced pandemic driven restrictions.~~be down in the range of 20 percent to 25 percent, compared with fourth quarter 2019.

Other revenues for third quarter ~~2021~~2022 increased by ~~$107~~$158 million, or ~~35.9~~39.0 percent, compared with third quarter ~~2020.~~2021. On a dollar basis, approximately 65 percent of the increase was due the Company's co-brand credit card agreement secured in December 2021. The remaining increase was primarily due to ~~an increase in income~~revenue from business partners ~~including Chase Bank USA, N.A. ("Chase"),~~ and ~~the impact on~~improved retail spend on the Company's ~~co-branded~~co-brand credit card ~~driven by the increase in consumer spending resulting from the improving economy in 2021 as compared~~ with ~~earlier stages of the COVID-19 pandemic.~~Chase Bank USA, N.A ("Chase").

Operating Expenses

Operating expenses for third quarter ~~2021~~2022 increased by ~~$742 million,~~$1.9 billion, or ~~23.2~~47.6 percent, compared with third quarter ~~2020,~~2021, while capacity increased ~~46.4~~1.3 percent over the same prior year period. ~~The~~ Approximately 40 percent of the

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operating expense increase was ~~primarily~~ due to ~~higher jet fuel prices. These increases were partially offset by the~~$763 million in Payroll Support ~~programs grant allocations~~allocated to offset a portion of ~~$763 million~~salaries, wages, and benefits in third quarter 2021, compared with ~~a $1.2 billion Payroll Support grant allocation~~no support received in third quarter ~~2020.~~2022. In addition, 40 percent of the dollar increase was due to higher Fuel and oil expense and 10 percent of the increase was due to higher Salaries, wages, and benefits. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs. In third quarter 2020, ASMs were significantly impacted by the significant drop in demand as a result of the COVID-19 pandemic, which led to numerous flight cancellations and flight schedule adjustments. The Company increased capacity to match the higher demand during third quarter 2021 and incurred more variable, flight-driven expenses as a result. See "COVID-19 Pandemic Impacts" 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 third quarter of ~~2021~~2022 and ~~2020,~~2021, followed by explanations of these changes on a dollar ~~basis. Unless otherwise specified, changes on a~~and per ASM 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.~~if applicable.


	Three months ended September 30,				Per ASM change		Percent change
(in cents, except for percentages)	2022		2021
Salaries, wages, and benefits	5.92	¢	5.48	¢	0.44	¢	8.0	%
Payroll support and voluntary Employee programs, net	—		(2.00)		2.00		n.m.
Fuel and oil	4.45		2.55		1.90		74.5
Maintenance materials and repairs	0.52		0.65		(0.13)		(20.0)
Landing fees and airport rentals	1.01		0.97		0.04		4.1
Depreciation and amortization	0.85		0.83		0.02		2.4
Other operating expenses	2.08		1.70		0.38		22.4
Total	14.83	¢	10.18	¢	4.65	¢	45.7	%

Three months ended September 30, Per ASM
change Percent
change
(in cents, except for percentages) 2021 2020
Salaries, wages, and benefits 5.48 ¢ 6.34 ¢ (0.86) ¢ (13.6) %
Payroll support and voluntary Employee programs, net (2.00) (0.57) (1.43) 250.9
Fuel and oil 2.55 1.44 1.11 77.1
Maintenance materials and repairs 0.65 0.70 (0.05) (7.1)
Landing fees and airport rentals 0.97 1.16 (0.19) (16.4)
Depreciation and amortization 0.83 1.19 (0.36) (30.3)
Other operating expenses 1.70 1.85 (0.15) (8.1)
Total 10.18 ¢ 12.11 ¢ (1.93) ¢ (15.9) %

Operating expenses per ASM for third quarter ~~2021 decreased~~2022 increased by ~~15.9~~45.7 percent, compared with third quarter ~~2020.~~2021, primarily due to Payroll Support allocated in third quarter 2021 in addition to a significant increase in the Company's fuel cost per gallon, and higher Salaries, wages, and benefits. Operating expenses per ASM for third quarter ~~2021,~~2022, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), ~~decreased 16.1~~increased 8.4 percent, compared with third quarter ~~2020.~~2021 primarily due to higher salaries and wages arising from a 14.7 percent increase in trips flown and step/pay rate increases for certain workgroups. The Company also continues to operate at suboptimal productivity levels, as headcount has grown at a faster pace than capacity, especially during 2022, and which is expected to continue into 2023. Headcount is expected to increase further in fourth quarter 2022 to support plans for network restoration in 2023, while capacity levels are expected to decline seasonally in fourth quarter 2022 compared with third quarter 2022, relative to their respective 2019 levels. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Salaries, wages, and benefits expense for third quarter ~~2021~~2022 increased by ~~$444~~$200 million, or ~~26.5~~9.4 percent, compared with third quarter ~~2020.~~2021. On a per ASM basis, third quarter ~~2021~~2022 Salaries, wages, and benefits expense ~~decreased 13.6~~increased 8.0 percent, compared with third quarter ~~2020.~~2021. On a dollar basis, approximately 50 percent of the increase was ~~primarily~~due to step/pay rate increases for certain workgroups, which included accruals associated with open labor contracts, and the remaining increase was driven by ~~a significant~~the 14.7 percent increase in trips ~~and overtime hours, and wage rate increases.~~flown.

Payroll support and voluntary Employee programs, net (a reduction to expense) had no amounts for third quarter ~~2021 increased $627 million, compared with third quarter 2020. On a per ASM basis, third~~2022. Third quarter 2021 ~~Payroll support and voluntary Employee programs, net increased 250.9 percent, compared with third quarter 2020. On both a dollar and per ASM basis, the increases were~~consisted primarily ~~due to the Payroll Support grant benefit~~ of $763 million ~~in third quarter 2021, compared with a net~~of Payroll Support proceeds allocated (credit to expense) and ~~Voluntary Employee program benefit of $149~~a $10 million net reduction in ~~third quarter 2020, as~~ the ~~$1.2 billion Payroll Support grant was partially offset by a $1.1 billion charge related to costs associated with the Voluntary Separation Program and~~ Extended ETO ~~programs.~~ liability (reduction to expense) 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 third quarter ~~2021~~2022 increased by ~~$611~~$760 million, or ~~161.2~~76.8 percent, compared with third quarter ~~2020.~~2021. On a per ASM basis, third quarter ~~2021~~2022 Fuel and oil expense increased ~~77.1~~74.5 percent. On a dollar basis, approximately 7090 percent of the increase was attributable to an increase in jet fuel prices, and the remainder of the increase was due to an increase in fuel gallons consumed. The Company's third quarter 2022 average economic jet fuel price of $3.34 per gallon is net of approximately $219 million in gains from hedging activities. On a per ASM

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basis, the majority of the change was due to 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 September 30,					Three months ended September 30,
		2021		2020			2022		2021
Economic fuel costs per gallon	Economic fuel costs per gallon	$	2.04	$	1.23	Economic fuel costs per gallon	$	3.34	$	2.04
Fuel hedging premium expense (in millions)	Fuel hedging premium expense (in millions)	$	25	$	24	Fuel hedging premium expense (in millions)	$	12	$	25
Fuel hedging premium expense per gallon	Fuel hedging premium expense per gallon	$	0.05	$	0.08	Fuel hedging premium expense per gallon	$	0.02	$	0.05
Fuel hedging cash settlement gains per gallon		$	0.04	$	—
Fuel hedging cash settlement gain per gallon						Fuel hedging cash settlement gain per gallon	$	0.43	$	0.04

See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

The Company's third quarter ~~2021~~2022 available seat miles per gallon ("fuel efficiency") ~~declined 4.5~~decreased 3.4 percent, year-over-year, ~~due to~~but increased 1.5 percent when compared with third quarter 2019. The year-over-year decrease was primarily driven by the Company's ~~return to service of~~increased Load factor, partially offset by operating more of its ~~least~~most fuel-efficient -8 aircraft versus the ~~-700. When~~prior year. The increase when compared with third quarter

2019 ~~fuel efficiency improved 5.1 percent in third quarter 2021~~was due to ~~the March 2021 return to service of~~operating more MAX aircraft, the Company's most fuel-efficient aircraft, as a percentage of its fleet. The MAX remains critical to the ~~MAX. The Company expects fourth quarter 2021 fuel efficiency~~Company's efforts to ~~be in line with third quarter 2021, on a nominal basis.~~modernize its fleet, reduce carbon emissions intensity, and achieve its near-term environmental sustainability goals.

~~As of October 14, 2021, on an economic basis, the Company had derivative contracts in place related to expected future fuel consumption as follows:~~

Period Maximum fuel hedged (gallons in millions) (a)(b)
Remainder of 2021 321
2022 1,220
2023 769
2024 358

(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's ~~gallons that are covered by derivative contracts represent the maximum number of gallons hedged for each respective period, which may be at different strike~~multi-year fuel hedging program continues to provide insurance against spikes in energy prices and ~~at strike prices materially higher than~~significantly offset the ~~current~~ market ~~prices. The volume of gallons covered by derivative contracts that ultimately get exercised~~price increase in any given period may vary significantly from the volumes provided, as market prices and the Company's fuel consumption fluctuates. Based on the Company's available seat mile plans for annual 2021, its maximum percent of estimated fuel consumption covered by fuel derivative contracts is 77 percent. The Company believes that providing the maximum percent of fuel consumption covered by derivative contracts in future years relative to 2019 fuel gallons consumed is a more relevant measure for future coverage, due to uncertainty regarding available seat mile plans in future years. Based on 2019 fuel gallons consumed, the Company's maximum percent of fuel consumption covered by fuel derivative contracts is 59 percent in 2022, 37 percent in 2023, and 17 percent beyond 2023.

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 September 30, 2021, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

Year Fair value of fuel derivative contracts at September 30, 2021 Amount of gains deferred in AOCI at September 30, 2021 (net of tax)
Remainder of 2021 $ 55 $ 15
2022 376 209
2023 192 95
2024 58 20
Total $ 681 $ 339

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 fourth quarter 2021 jet fuel ~~prices at different crude oil assumptions as of October 14, 2021, and for expected premium costs associated with settling contracts.~~


						Estimated economic fuel price per gallon, including taxes and fuel hedging premiums (d)
Average Brent Crude Oil price per barrel						~~Fourth Quarter 2021 (c)~~
~~$60~~						~~$1.80 - $1.90~~
~~$70~~						~~$2.05 - $2.15~~
~~Current Market (a)~~						~~$2.25 - $2.35~~
~~$90~~						~~$2.35 - $2.45~~
~~$100~~						~~$2.50 - $2.60~~
~~Estimated fuel hedging premium expense per gallon (b)~~						~~$0.05~~
~~Estimated premium costs (b)~~						~~$25 million~~

~~(a) Brent crude oil average market price as of October 14, 2021, was approximately $83 per barrel for fourth~~in third quarter ~~2021.~~

~~(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 October 14, 2021, fourth quarter 2021 economic fuel costs are estimated to be in the $2.25 to $2.35 per gallon range, including fuel hedging premium expense of approximately $25 million, or $0.05 per gallon, and $0.18 per gallon in favorable cash settlements from fuel derivative contracts. See Note Regarding Use of Non-GAAP Financial Measures.

~~(d)~~2022. The Company's current fuel derivative contracts contain a combination of instruments based in West Texas Intermediate, ~~and~~ Brent crude ~~oil; however, the~~oil, and refined products, such as heating oil. The economic fuel price per gallon sensitivities provided in the table below assume the relationship between Brent crude oil and refined products based on market prices as of October ~~14, 2021.~~19, 2022.


			Estimated economic fuel price per gallon, including taxes and fuel hedging premiums (b)
Average Brent Crude Oil price per barrel			4Q 2022
$70			$2.65 - $2.75
$80			$2.90 - $3.00
Current Market (a)			$3.15 - $3.25
$100			$3.35 - $3.45
$110			$3.60 - $3.70
$120			$3.90 - $4.00

Fair market value			$189 million
Estimated premium costs			$13 million

(a) Brent crude oil average market prices as of October 19, 2022, was$91 per barrel for fourth quarter 2022.

(b) Based on the Company's existing fuel derivative contracts and market prices as of October 19, 2022, fourth quarter and full year 2022 economic fuel costs per gallon are estimated to be in the range of $3.15 to $3.25 and $3.05 to $3.15, respectively, compared with the Company's previous estimations in the range of $3.00 to $3.10 and $2.95 to $3.05, 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 cases on air travel demand, or the impact to its financial statements in future periods. Accordingly, the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort. See Note Regarding Use of Non-GAAP Financial Measures.

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In addition, the Company is providing its maximum percentage of estimated fuel consumption covered by fuel derivative contracts in the following table:


Period			Maximum fuel hedged percentage (a)(b)
2022			63%
2023			50%
2024			15%

(a) Based on the Company's current available seat mile plans. The Company is currently 61 percent hedged for fourth quarter 2022.

(b) The Company's maximum fuel hedged percentage is calculated using the maximum number of gallons that are covered by derivative contracts divided by the Company's estimate of total fuel gallons to be consumed for each respective period. The Company's maximum number of gallons that are covered by derivative contracts may be at different strike prices and at strike prices materially higher than the current market prices. The volume of gallons covered by derivative contracts that ultimately get exercised in any given period may vary significantly from the volumes used to calculate the Company's maximum fuel hedged percentages, as market prices and the Company's fuel consumption fluctuate.

As a result of applying hedge accounting in prior periods, the Company has amounts in Accumulated other comprehensive income ("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 September 30, 2022, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):


Year	Fair value of fuel derivative contracts at September 30, 2022		Amount of gains deferred in AOCI at September 30, 2022 (net of tax)
Remainder of 2022	$	128	$	80
2023	321		156
2024	87		44

Total	$	536	$	280

Maintenance materials and repairs expense for third quarter ~~2021 increased~~2022 decreased by ~~$65~~$46 million, or ~~35.1~~18.4 percent, compared with third quarter ~~2020.~~2021. On a per ASM basis, Maintenance materials and repairs expense decreased ~~7.1~~20.0 percent, compared with third quarter ~~2020.~~2021. On a dollar and per ASM basis, ~~approximately 50 percent of~~ the ~~increase~~decrease was primarily due to ~~higher~~a decrease in engines and components expense driven by the "power-by-the-hour" contract for the Company's -700 engines that expired 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. This decrease was partially offset by an increase in the cost of various airframe and engine repairs as a result of maintenance ~~expense~~vendor price escalation, and an increase in heavy check volume due to ~~the increase~~deferring costs and reduced operations in ~~flight hours, and the majority of the remainder of the increase was~~third quarter 2021 due to ~~the timing of regular airframe maintenance checks as some costs had previously been deferred while a portion of the fleet was placed into temporary storage during~~ the COVID-19 pandemic.

Landing fees and airport rentals expense for third quarter ~~2021~~2022 increased by ~~$68~~$19 million, or ~~22.1~~5.1 percent, compared with third quarter ~~2020.~~2021. On a per ASM basis, Landing fees and airport rentals expense ~~decreased 16.4~~increased 4.1 percent, compared with third quarter ~~2020.~~2021. On a dollar and per ASM basis, approximately 6080 percent of the increase was due to ana 14.7 percent increase in ~~space rental rates at many airports, and the remainder of the increase was due to higher landing fees from the increased number of Trips~~trips flown.

Depreciation and amortization expense for third quarter ~~2021~~2022 increased by $7$13 million, or ~~2.2~~4.0 percent, compared with third quarter ~~2020.~~2021. On a per ASM basis, Depreciation and amortization expense ~~decreased~~increased by ~~30.3~~2.4 percent, compared with third quarter ~~2020.~~2021. On a dollar and per ASM basis, approximately 50 percent of the increase was ~~primarily~~ due to the ~~deployment~~acquisition of ~~new technology assets.~~35 -8 aircraft since third quarter 2021, 25 percent was due to accelerating the depreciation for 2022 -700 retirements, and 25 percent was due to decreasing the airframe salvage value for the entire -700 fleet,

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which was a change in estimate made near the end of third quarter 2022. This change in estimate was not material to third quarter 2022, nor is it material to future periods.

Other operating expenses for third quarter ~~2021~~2022 increased by ~~$174~~$157 million, or ~~35.7~~23.7 percent, compared with third quarter ~~2020.~~2021. Included within this line item was aircraft rentals expense in the amounts of ~~$53~~$49 million and ~~$57~~$53 million for the three-month periods ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively. On a per ASM basis, Other operating expenses ~~decreased 8.1~~increased 22.4 percent, compared with third quarter ~~2020.~~2021. On a dollar and per ASM basis, approximately 3530 percent ~~of the increase was primarily due to higher credit card fees driven by increases in Passenger revenues in third quarter 2021, and the majority of the remainder~~ of the increase was due to higher revenue related expenses (including credit card processing charges) and approximately 20 percent of the increase was due to higher personnel expenses. The majority of the remainder was due to various flight-driven ~~expenses, both as a result of improvements in leisure passenger demand and an increased number of Trips flown in third quarter 2021.~~

expenses.

~~Other~~The Company continues to experience inflationary cost pressures in fourth quarter 2022, in particular with higher rates for labor, benefits, and airports. Fourth quarter 2022 costs are also pressured by the shifting of favorable airport settlements into third quarter 2022, as well as increased cost headwinds due to operating at suboptimal productivity levels.

The Company continues to estimate full year 2023 CASM-X to decrease compared with full year 2022, which includes estimated wage rate accruals for all workgroups beginning April 1, 2022 and forward. Fleet utilization is expected to be limited by Pilot staffing constraints for the majority of 2023, resulting in continued cost headwinds due to operating at suboptimal productivity levels until the Company is able to optimize staffing with its fleet—which is foundational to the plan to improve operating leverage. Due to operating at suboptimal productivity levels and ongoing inflationary cost pressures, first half 2023 CASM-X is currently expected to be in the range of flat to up 2 percent compared with first half 2022. The Company currently expects year-over-year capacity growth rate in second half 2023 to accelerate relative to year-over-year capacity growth rate in first half 2023. As such, second half 2023 CASM-X is currently expected to decrease in the low-to-mid single digit range compared with second half 2022. 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 financial statements in future periods, especially considering the significant volatility of the fuel and oil expense line item. Accordingly, the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for these projected results is not meaningful or available without unreasonable effort.

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

Interest expense for third quarter ~~2021 increased~~2022 decreased by $4$29 million, or ~~3.6~~25.2 percent, compared with third 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 fourth quarter 2021 interest expense to be approximately $115 million.~~

~~Capitalized interest for third quarter 2021 decreased by $2 million, or 18.2 percent, compared with third quarter 2020, primarily due to timing of aircraft deliveries and payments.~~

~~Interest income for third quarter 2021 decreased by $2 million, or 50.0 percent, compared with third quarter 2020, due to lower interest rates.~~

~~Other (gains) losses, net, primarily includes amounts recorded~~discount as a result of the Company's ~~hedging activities.~~adoption of ASU 2020-06 and various debt repurchases throughout 2022. See Note 43 to the unaudited Condensed Consolidated Financial Statements for further ~~information~~information.

Capitalized interest for third quarter 2022 increased by $2 million, or 22.2 percent, compared with third quarter 2021, primarily due to an increase in average progress payment balances for scheduled future aircraft deliveries.

Interest income for third quarter 2022 increased by $68 million, compared with third quarter 2021, primarily due to higher interest rates.

Loss on extinguishment of debt for third quarter 2022 increased by $64 million, compared with third quarter 2021, primarily due to repurchases of $184 million face value of the Company's ~~hedging activities.~~ 1.25 percent Convertible Notes due 2025 (the "Convertible Notes") in third quarter 2022.

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The following table displays the components of Other (gains) losses, net, for the three months ended September 30, ~~2021~~2022 and ~~2020:~~2021:


		Three months ended September 30,					Three months ended September 30,
(in millions)	(in millions)	2021		2020		(in millions)	2022		2021
Mark-to-market impact from fuel contracts settling in current and future periods	Mark-to-market impact from fuel contracts settling in current and future periods	$	3	$	23	Mark-to-market impact from fuel contracts settling in current and future periods	$	(38)	$	3
Premium cost of fuel contracts not designated as hedges	Premium cost of fuel contracts not designated as hedges	11		11		Premium cost of fuel contracts not designated as hedges	(14)		11
Mark-to-market impact from interest rate swap agreements		—		(1)
Mark-to-market loss on deferred compensation plan investment		1		—
Loss on partial extinguishment of convertible notes		12		—

Mark-to-market impact on deferred compensation plan investments						Mark-to-market impact on deferred compensation plan investments	13		1

Other	Other	2		2		Other	—		2
		$	29	$	35		$	(39)	$	17

Income Taxes

The Company's effective tax rate was approximately 21.6 percent in third quarter 2022, compared with 25.7 percent in third quarter ~~2021, compared with 25.0 percent in third quarter 2020.~~2021. The ~~higher~~lower tax rate for third quarter ~~2021~~2022 was primarily due to ~~the significant variance in projected full year Income (loss) before income taxes between the two periods due~~provision-to-return adjustments related to ~~impacts of the COVID-19 pandemic as well as the Company's ability to carry back 2020 losses to receive~~federal tax ~~refunds on amounts paid from 2015 through 2019, when the statutory~~credits and a tax ~~rate was 35 percent.~~deduction for convertible debt losses. The Company currently estimates its annual ~~2021~~2022 effective tax rate to be approximately 2724 percent to 26 percent.

Comparison of nine months ended September 30, ~~2021~~2022 and September 30, ~~2020~~2021

Operating Revenues

Passenger revenues for the nine months ended September 30, ~~2021,~~2022, increased by ~~$3.5~~$6.4 billion, or ~~58.4~~66.9 percent, compared with the first nine months of ~~2020.~~2021. On a unit basis, Passenger revenues increased ~~32.5~~33.2 percent, year-over-year. The increase in Passenger revenues on both a dollar and unit basis ~~were~~was primarily due to easing of negative impacts associated with the COVID-19 pandemic, which resulted in improvements in ~~leisure~~ Passenger demand and bookings, the majority of which were for leisure oriented travel, in the first nine months of ~~2021,~~2022, compared with the severe impacts to demand and bookings from the COVID-19 pandemic for the majority of the first nine months of ~~2020.~~

~~Freight revenues for~~2021. For the first nine months ~~ended September 30, 2021, increased~~of 2022, the year-over-year RASM increase was primarily driven by ~~$22 million, or 18.6~~an increase in yield of 33.2 percent ~~compared~~coupled with ~~the nine months ended September 30, 2020, primarily due to increased demand as businesses reduced pandemic driven restrictions during 2021.~~

an increase in Load factor of 5.9 points.

Other revenues for the nine months ended September 30, ~~2021,~~2022, increased by ~~$177~~$551 million, or ~~19.4~~50.5 percent, year-over-year. ~~The~~On a dollar basis, approximately 55 percent of the increase was associated with additional revenues generated from the Company's new co-brand credit card agreement secured in December 2021. The remaining increase in Other revenues is primarily due to ~~an increase in income~~revenue from business partners, including Chase, ~~and~~as the ~~impact on~~rebound in travel demand also resulted in higher spend on the Company's ~~co-branded~~co-brand credit card, ~~driven by~~as well as additional revenues earned through the ~~increase in consumer spending resulting from the improving economy in 2021 as compared with earlier stages of the COVID-19 pandemic.~~Company's rental car and hotel partners.

Operating Expenses

Operating expenses for the nine months ended September 30, ~~2021, decreased~~2022, increased by ~~$470 million,~~$7.0 billion, or ~~4.9~~76.3 percent, compared with the first nine months of ~~2020,~~2021, while capacity increased ~~19.6~~16.4 percent over the same prior year period. Approximately 40 percent of the operating expense increase was due to $2.7 billion in Payroll Support allocated to offset a portion of salaries, wages, and benefits in the first nine months of 2021, compared with no support received in the first nine months of 2022. In addition, approximately 30 percent of the increase was due to higher Fuel and oil expense and approximately 20 percent of the increase was due to higher Salaries, wages, and benefits. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs. However, the Company's flight schedules are largely fixed once flight schedules are published, and the Company experienced significant ASM reductions in second and third quarter 2020 as a result of flight schedule adjustments related to the COVID-19 pandemic. The Company has experienced significant ASM increases as a result of flight schedule adjustments related to the improving economy in 2021 as compared with earlier stages of the COVID-19 pandemic. See "COVID-19 Pandemic Impacts" 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 nine months 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 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.

Nine months ended September 30, Per ASM Percent
(in cents, except for percentages) 2021 2020 change change
Salaries, wages, and benefits 5.78 ¢ 6.58 ¢ (0.80) ¢ (12.2) %
Payroll support and voluntary Employee programs, net (3.11) (1.17) (1.94) 165.8
Fuel and oil 2.38 1.89 0.49 25.9
Maintenance materials and repairs 0.68 0.75 (0.07) (9.3)
Landing fees and airport rentals 1.15 1.16 (0.01) (0.9)
Depreciation and amortization 1.00 1.18 (0.18) (15.3)
Other operating expenses 1.79 1.76 0.03 1.7
Total 9.67 ¢ 12.15 ¢ (2.48) ¢ (20.4) %

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	Nine months ended September 30,				Per ASM		Percent
(in cents, except for percentages)	2022		2021		change		change
Salaries, wages, and benefits	6.11	¢	5.78	¢	0.33	¢	5.7	%
Payroll support and voluntary Employee programs, net	—		(3.11)		3.11		n.m.
Fuel and oil	3.95		2.38		1.57		66.0
Maintenance materials and repairs	0.56		0.68		(0.12)		(17.6)
Landing fees and airport rentals	1.02		1.15		(0.13)		(11.3)
Depreciation and amortization	0.89		1.00		(0.11)		(11.0)

Other operating expenses	2.10		1.79		0.31		17.3
Total	14.63	¢	9.67	¢	4.96	¢	51.3	%

Operating expenses per ASM for the first nine months of ~~2021 decreased~~2022 increased by ~~20.4~~51.3 percent, compared with the first nine months of ~~2020.~~2021. The majority of the year-over-year unit cost ~~decrease~~increase was driven by Payroll Support received in the first nine months of 2021, ~~was driven by the increase in Payroll Support funding. This decrease was partially offset by an increase in jet fuel prices and an increase in fuel gallons consumed, and $222 million of gains~~including from the ~~sale-leaseback~~Consolidated Appropriations Act, 2021 and the American Rescue Plan Act of 20 aircraft to third parties in two separate transactions during second quarter 2020, which reduced Other operating expenses in second quarter 2020. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.2021. Operating expenses per ASM for the first nine months of ~~2021,~~2022, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), ~~decreased 12.8~~increased 2.7 percent, year-over-year. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Salaries, wages, and benefits expense for the first nine months of ~~2021~~2022 increased by ~~$273 million,~~$1.3 billion, or ~~5.2~~22.7 percent, compared with the first nine months of ~~2020.~~2021. On a per ASM basis, Salaries, wages, and benefits expense for the first nine months of ~~2021 decreased 12.2~~2022 increased 5.7 percent, compared with the first nine months of ~~2020.~~2021. On a dollar basis, approximately 40 percent of the ~~majority~~increase was driven by an increase in trips, approximately 20 percent of the increase was due to ~~the $186 million profitsharing expense accrual in the first nine months of 2021, compared~~step/pay rate increases for certain workgroups, which included accruals associated with ~~no profitsharing expense accrual in the first nine months of 2020. The remainder~~open labor contracts, and approximately 10 percent of the increase was ~~primarily due~~driven by $127 million of additional salaries, wages, and benefits expense as a result of incentive pay offered to ~~a significant increase~~the Company's Operations Employees through early February 2022 in ~~trips and overtime hours, and wage rate increases.~~an effort to address available staffing challenges related to the Omicron variant of COVID-19.

Payroll support and voluntary Employee programs, net (a reduction to expense) had no amounts for the first nine months of ~~2021 was an increase of $2.0 billion, or 217.6 percent, compared with the first nine months of 2020. On a per ASM basis, Payroll support and voluntary Employee programs, net for the~~2022. The first nine months of 2021 ~~increased by 165.8 percent. On both a dollar and per ASM basis,~~consisted primarily of the changes were primarily due to the significant increase in Payroll Support grant proceeds received in the first nine months of 2021 compared with the same prior year period. The primary components of this line item included:following items:

•~~The Payroll Support programs' grant allocation of $2.7 billion in the first nine months of 2021, compared with a $2.3 billion allocation in the first nine months of 2020;~~

•~~The $792 million accrual for charges related~~$2.7 billion of Payroll Support proceeds allocated (credit to ~~the Voluntary Separation Program in the first nine months of 2020;~~expense);

•~~The $140~~$140 million net reduction in the Extended ETO liability ~~in the first nine months of 2021, compared with the $613 million accrual for charges related~~(reduction to ~~the Extended ETO liability in the first nine months of 2020;~~expense) relating to certain Employees being recalled prior to their previously elected return dates; and

•~~The $120~~$120 million incredit to expense associated with the Employee Retention Tax ~~Credits recorded in 2021~~Credit for continuing to pay Employees' salaries during the time they were not working, as allowed under the CARES Act, and subsequent legislation.

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

Fuel and oil expense for the first nine months of ~~2021~~2022 increased by ~~$754 million,~~$2.1 billion, or ~~50.0~~94.2 percent, compared with the first nine months of ~~2020.~~2021. On a per ASM basis, Fuel and oil expense for the first nine months of ~~2021~~2022 increased ~~25.9~~66.0 percent. On a dollar basis, approximately 6080 percent of the increase was attributable to an increase in jet fuel prices per gallon, and the remainder of the increase was due to an increase in fuel gallons consumed. On a per ASM basis, the increase was primarily due to 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:

Nine months ended September 30,
2021 2020
Economic fuel costs per gallon $ 1.92 $ 1.56
Fuel hedging premium expense (in millions) $ 75 $ 73
Fuel hedging premium expense per gallon $ 0.06 $ 0.07
Fuel hedging cash settlement gains per gallon $ 0.02 $ —

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	Nine months ended September 30,
	2022		2021
Economic fuel costs per gallon	$	3.03	$	1.92
Fuel hedging premium expense (in millions)	$	65	$	75
Fuel hedging premium expense per gallon	$	0.05	$	0.06
Fuel hedging cash settlement gains per gallon	$	0.54	$	0.02

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.

Maintenance materials and repairs expense for the first nine months of ~~2021 increased~~2022 decreased by ~~$49~~$22 million, or ~~8.2~~3.4 percent, compared with the first nine months of ~~2020.~~2021. On a per ASM basis, Maintenance materials and repairs expense decreased ~~9.3~~17.6 percent, compared with the first nine months of ~~2020.~~2021. On a dollar basis, ~~approximately 50 percent of~~ the ~~increase~~decrease was primarily due to ~~higher engine maintenance~~a decrease in engines and components expense due to the ~~increase in flight hours, and~~"power-by-the-hour" contract for the ~~majority~~Company's -700 engines expiring at the end of ~~the remainder of the increase~~2021. This decrease was ~~due to~~partially offset by the timing of regular airframe maintenance 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 smaller increases on a dollar basis, primarily related to an increase in various repairs as a result of deferring costs and reduced operations in the first nine months of 2021 due to the COVID-19 pandemic.

Landing fees and airport rentals expense for the first nine months of ~~2021~~2022 increased by ~~$170~~$36 million, or ~~18.4~~3.3 percent, compared with the first nine months of ~~2020.~~2021. On a per ASM basis, Landing fees and airport rentals expense decreased ~~0.9~~11.3 percent, compared with the first nine months of ~~2020.~~2021. On a dollar basis, the increase was primarily due to an increase in landing fees from the increased number of trips flown, partially offset by higher settlements and credits from various airports received in 2022.

Depreciation and amortization expense for the first nine months of 2022 increased by $35 million, or 3.7 percent, compared with the first nine months of 2021. On a per ASM basis, Depreciation and amortization expense decreased 11.0 percent, compared with the first nine months of 2021. On a dollar basis, approximately 50 percent of the increase was due to ~~an increase~~higher depreciation expense associated with the Company's Next-Gen fleet of -700 owned aircraft and engines planned for accelerated retirement dates in ~~space rental rates at many airports,~~2022, and ~~the remainder~~approximately 35 percent of the increase was due to ~~higher landing fees from~~ the ~~increased number~~acquisition of ~~Trips flown.~~

Depreciation and amortization expense for the first nine months of 2021 increased by $9 million, or 1.0 percent, compared with the first nine months of 2020. On a per ASM basis, Depreciation and amortization expense decreased 15.3 percent, compared with the first nine months of 2020. On a dollar basis, the majority of the increase was associated with the deployment of new technology assets during35 -8 aircraft since third quarter 2021.

Other operating expenses for the first nine months of ~~2021~~2022 increased by ~~$305~~$633 million, or ~~21.7~~37.0 percent, compared with the first nine months of ~~2020.~~2021. Included within this line item was aircraft rentals expense in the amount of $146 million and $155 million for ~~both~~ the ~~nine-month periods~~nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively. On a per ASM basis, Other operating expenses increased ~~1.7~~17.3 percent, compared with the first nine months of ~~2020.~~2021. On a dollar and per ASM basis, approximately 25 percent of the increase was ~~primarily~~ due to ~~$222 million in gains from~~higher revenue related expenses (including credit card processing charges) and approximately 20 percent of the ~~sale-leaseback~~increase was due to higher personnel expenses. The majority of ~~20 aircraft~~the remaining increase was due to ~~third parties in two separate transactions during second quarter 2020, which reduced Other operating expenses in second quarter 2020.~~

~~Other~~various flight-driven expenses.

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

Interest expense for the first nine months of ~~2021 increased~~2022 decreased by ~~$108~~$71 million, or ~~46.0~~20.7 percent, compared with the first nine months of ~~2020,~~2021, primarily due to ~~higher~~elimination of the debt ~~balances in~~discount due to the ~~first nine months~~adoption of ~~2021.~~ASU 2020-06. See Note 3 to the unaudited Condensed Consolidated Financial Statements for further information.

Capitalized interest for the first nine months of ~~2021~~2022 increased by $4 million, or ~~17.4~~14.8 percent, compared with the first nine months of ~~2020,~~2021, primarily due to ~~Boeing resuming production of the Company's undelivered MAX aircraft.~~an increase in average progress payment balances for scheduled future aircraft deliveries.

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Interest income for the first nine months of ~~2021 decreased~~2022 increased by ~~$24~~$95 million, ~~or 80.0 percent,~~ compared with the first nine months of ~~2020,~~2021, due to ~~lower~~higher interest rates.

~~Other (gains) losses, net,~~Loss on extinguishment of debt for the first nine months of 2022 increased by $180 million, compared with the first nine months of 2021, primarily ~~includes amounts recorded as a result~~due to repurchases of $468 million face value of the Company's ~~hedging activities. See Note 4 to~~Convertible Notes due 2025 during the ~~unaudited Condensed Consolidated Financial Statements for further information on the Company's hedging activities.~~ first nine months of 2022.

The following table displays the components of Other (gains) losses, net, for the nine months ended September 30, ~~2021~~2022 and ~~2020:~~2021:

Nine months ended September 30,
(in millions) 2021 2020
Mark-to-market impact from fuel contracts settling in current and future periods $ (6) $ 40
Premium cost of fuel contracts not designated as hedges 32 22
Mark-to-market impact from interest rate swap agreements — 28
Mark-to-market gain on deferred compensation plan investment (17) —
Correction on investment gains related to prior periods (a) (60) —
Loss on partial extinguishment of convertible notes 12 —
Other 7 5
$ (32) $ 95

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


	Nine months ended September 30,
(in millions)	2022		2021
Mark-to-market impact from fuel contracts settling in current and future periods	$	(23)	$	(6)
Premium cost of fuel contracts not designated as hedges	(14)		32

Unrealized mark-to-market adjustment on available for sale securities	7		—
Mark-to-market impact on deferred compensation plan investment	84		(17)
Correction on investment gains related to prior periods	—		(60)

Other	3		7
	$	57	$	(44)

Income Taxes

The Company's effective tax rate was approximately 25.1 percent for the first nine months of 2022, compared with 27.1 percent for the first nine months of ~~2021, compared with 25.9 percent for~~2021. The year-over-year decline in the ~~first nine months of 2020. The higher~~ tax rate ~~for the first nine months of 2021 was primarily~~is due to higher state ~~taxes.~~taxes in 2021 and tax planning benefits recognized in 2022 related to federal tax credits and a tax deduction for convertible debt losses.

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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 September 30, Percent Nine months ended September 30, Percent
2021 2020 Change 2021 2020 Change
Fuel and oil expense, unhedged $ 999 $ 372 $ 2,264 $ 1,472
Add: Premium cost of fuel contracts designated as hedges 14 13 43 51
Deduct: Fuel hedge gains included in Fuel and oil expense, net (23) (6) (46) (16)
Fuel and oil expense, as reported $ 990 $ 379 $ 2,261 $ 1,507
Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) 5 6 19 16
Add: Premium cost of fuel contracts not designated as hedges 11 11 32 22
Fuel and oil expense, excluding special items (economic) $ 1,006 $ 396 154.0 $ 2,312 $ 1,545 49.6
Total operating expenses, net, as reported $ 3,946 $ 3,204 $ 9,213 $ 9,683
Add: Payroll support and voluntary Employee programs, net 776 149 2,963 933
Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) 5 6 19 16
Add: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — — 2 —
Add: Premium cost of fuel contracts not designated as hedges 11 11 32 22
Add: Gain from aircraft sale-leaseback transactions — — — 222
Total operating expenses, excluding special items $ 4,738 $ 3,370 40.6 $ 12,229 $ 10,876 12.4
Deduct: Fuel and oil expense, excluding special items (economic) (1,006) (396) (2,312) (1,545)
Operating expenses, excluding Fuel and oil expense and special items $ 3,732 $ 2,974 25.5 $ 9,917 $ 9,331 6.3
Deduct: Profitsharing expense (77) — (186) —
Operating expenses, excluding Fuel and oil expense, special items, and profitsharing $ 3,655 $ 2,974 22.9 $ 9,731 $ 9,331 4.3
Operating income (loss), as reported $ 733 $ (1,411) $ 1,526 $ (2,648)
Deduct: Payroll support and voluntary Employee programs, net (776) (149) (2,963) (933)
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (5) (6) (19) (16)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — — (2) —
Deduct: Premium cost of fuel contracts not designated as hedges (11) (11) (32) (22)
Deduct: Gain from aircraft sale-leaseback transactions — — — (222)
Operating loss, excluding special items $ (59) $ (1,577) (96.3) $ (1,490) $ (3,841) (61.2)
Other (gains) losses, net, as reported $ 29 $ 35 $ (32) $ 95
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a) (3) (23) 6 (40)
Deduct: Premium cost of fuel contracts not designated as hedges (11) (11) (32) (22)
Add (Deduct): Mark-to-market impact from interest rate swap agreements — 1 — (28)
Deduct: Loss on partial extinguishment of convertible notes (12) — (12) —
Other (gains) losses, net, excluding special items $ 3 $ 2 50.0% $ (70) $ 5 n.m.


	Three months ended September 30,				Percent	Nine months ended September 30,				Percent
	2022		2021		Change	2022		2021		Change




Fuel and oil expense, unhedged	$	1,931	$	999		$	5,079	$	2,264
Add: Premium cost of fuel contracts designated as hedges	26		14			79		43
Deduct: Fuel hedge gains included in Fuel and oil expense, net	(207)		(23)			(768)		(46)
Fuel and oil expense, as reported	$	1,750	$	990		$	4,390	$	2,261
Add (Deduct): Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a)	(12)		5			(12)		19
Add (Deduct): Premium cost of fuel contracts not designated as hedges	(14)		11			(14)		32
Fuel and oil expense, excluding special items (economic)	$	1,724	$	1,006	71.4	$	4,364	$	2,312	88.8

Total operating expenses, net, as reported	$	5,825	$	3,946		$	16,240	$	9,213
Add: Payroll support and voluntary Employee programs, net	—		776			—		2,963
Add (Deduct): Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a)	(12)		5			(12)		19
Add: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	—		—			—		2
Add (Deduct): Premium cost of fuel contracts not designated as hedges	(14)		11			(14)		32

Deduct: Impairment of long-lived assets	(4)		$	—		$	(35)	$	—
Total operating expenses, excluding special items	$	5,795	$	4,738	22.3	$	16,179	$	12,229	32.3
Deduct: Fuel and oil expense, excluding special items (economic)	(1,724)		(1,006)			(4,364)		(2,312)
Operating expenses, excluding Fuel and oil expense and special items	$	4,071	$	3,732	9.1	$	11,815	$	9,917	19.1
Deduct: Profitsharing expense	(57)		(77)			(175)		(186)
Operating expenses, excluding Fuel and oil expense, special items, and profitsharing	$	4,014	$	3,655	9.8	$	11,640	$	9,731	19.6

Operating income, as reported	$	395	$	733		$	1,402	$	1,526
Deduct: Payroll support and voluntary Employee programs, net	—		(776)			—		(2,963)
Add (Deduct): Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a)	12		(5)			12		(19)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	—		—			—		(2)
Add (Deduct): Premium cost of fuel contracts not designated as hedges	14		(11)			14		(32)

Add: Impairment of long-lived assets	4		—			35		$	—
Operating income (loss), excluding special items	$	425	$	(59)	n.m.	$	1,463	$	(1,490)	n.m.

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Three months ended September 30, Percent Nine months ended September 30, Percent
2021 2020 Change 2021 2020 Change
Income (loss) before income taxes, as reported $ 600 $ (1,542) $ 1,248 $ (2,925)
Deduct: Payroll support and voluntary Employee programs, net (776) (149) (2,963) (933)
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (5) (6) (19) (16)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — — (2) —
Deduct: Gain from aircraft sale-leaseback transactions — — — (222)
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a) 3 23 (6) 40
Add (Deduct): Mark-to-market impact from interest rate swap agreements — (1) — 28
Add: Loss on partial extinguishment of convertible notes 12 — 12 —
Loss before income taxes, excluding special items $ (166) $ (1,675) (90.1) $ (1,730) $ (4,028) (57.1)
Provision (benefit) for income taxes, as reported $ 154 $ (385) $ 339 $ (759)
Deduct: Net income (loss) tax impact of fuel and special items (b) (185) (41) (713) (350)
Deduct: GAAP to Non-GAAP tax rate difference (c) — (76) — (168)
Benefit for income taxes, net, excluding special items $ (31) $ (502) (93.8) $ (374) $ (1,277) (70.7)
Net income (loss), as reported $ 446 $ (1,157) $ 909 $ (2,166)
Deduct: Payroll support and voluntary Employee programs, net (776) (149) (2,963) (933)
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (5) (6) (19) (16)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — — (2) —
Deduct: Gain from aircraft sale-leaseback transactions — — — (222)
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a) 3 23 (6) 40
Add (Deduct): Mark-to-market impact from interest rate swap agreements — (1) — 28
Add: Loss on partial extinguishment of convertible notes 12 — 12 —
Add: Net income (loss) tax impact of special items (b) 185 41 713 350
Add: GAAP to Non-GAAP tax rate difference (c) — 76 — 168
Net loss, excluding special items $ (135) $ (1,173) (88.5) $ (1,356) $ (2,751) (50.7)
Net income (loss) per share, diluted, as reported $ 0.73 $ (1.96) $ 1.49 $ (3.89)
Deduct: Impact of special items (1.25) (0.22) (4.84) (1.96)
Deduct: Net impact of net income (loss) above from fuel contracts divided by dilutive shares — (0.01) (0.04) (0.03)
Add: Net income (loss) tax impact of special items (b) 0.30 0.07 1.17 0.63
Add: GAAP to Non-GAAP tax rate difference (c) — 0.13 — 0.30
Deduct: GAAP to Non-GAAP diluted weighted average shares difference (d) (0.01) — (0.07) —
Net loss per share, diluted, excluding special items $ (0.23) $ (1.99) (88.4) $ (2.29) $ (4.95) (53.7)


	Three months ended September 30,				Percent	Nine months ended September 30,				Percent
	2022		2021		Change	2022		2021		Change
Other (gains) losses, net, as reported	$	(39)	$	17		$	57	$	(44)
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a)	38		(3)			23		6
Add (Deduct): Premium cost of fuel contracts not designated as hedges	14		(11)			14		(32)
Deduct: Unrealized mark-to-market adjustment on available for sale securities	—		—			(7)		—


Other (gains) losses, net, excluding special items	$	13	$	3	n.m.	$	87	$	(70)	n.m.

Income before income taxes, as reported	$	353	$	600		$	1,013	$	1,248
Deduct: Payroll support and voluntary Employee programs, net	—		(776)			—		(2,963)
Add (Deduct): Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a)	12		(5)			12		(19)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	—		—			—		(2)

Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a)	(38)		3			(23)		(6)

Add: Impairment of long-lived assets	4		—			35		—
Add: Unrealized mark-to-market adjustment on available for sale securities	—		—			7		—
Add: Loss on extinguishment of debt	76		12			192		12
Income (loss) before income taxes, excluding special items	$	407	$	(166)	n.m.	$	1,236	$	(1,730)	n.m.

Provision for income taxes, as reported	$	76	$	154		$	254	$	339
Add (Deduct): Net income (loss) tax impact of fuel and special items (b)	15		(185)			32		(713)

Provision (benefit) for income taxes, net, excluding special items	$	91	$	(31)	n.m.	$	286	$	(374)	n.m.



Net income, as reported	$	277	$	446		$	759	$	909
Deduct: Payroll support and voluntary Employee programs, net	—		(776)			—		(2,963)
Add (Deduct): Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a)	12		(5)			12		(19)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)	—		—			—		(2)

Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a)	(38)		3			(23)		(6)

Add: Loss on extinguishment of debt	76		12			192		12
Add: Impairment of long-lived assets	4		—			35		—
Add: Unrealized mark-to-market adjustment on available for sale securities	—		—			7		—
Add (Deduct): Net income (loss) tax impact of special items (b)	(15)		185			(32)		713

Net income (loss), excluding special items	$	316	$	(135)	n.m.	$	950	$	(1,356)	n.m.

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		Three months ended September 30,				Percent	Nine months ended September 30,				Percent		Three months ended September 30,						Percent	Nine months ended September 30,						Percent
		2021		2020		Change	2021		2020		Change		2022			2021			Change	2022			2021			Change

Net income per share, diluted, as reported												Net income per share, diluted, as reported	$	0.44		$	0.73			$	1.21		$	1.49
Add (Deduct): Impact of special items												Add (Deduct): Impact of special items	0.12			(1.25)				0.38			(4.84)
Deduct: Net impact of net income (loss) above from fuel contracts divided by dilutive shares												Deduct: Net impact of net income (loss) above from fuel contracts divided by dilutive shares	(0.04)			—				(0.02)			(0.04)
Add (Deduct): Net income (loss) tax impact of special items (b)												Add (Deduct): Net income (loss) tax impact of special items (b)	(0.02)			0.30				(0.06)			1.17

Deduct: GAAP to Non-GAAP diluted weighted average shares difference (c)												Deduct: GAAP to Non-GAAP diluted weighted average shares difference (c)	—			(0.01)				—			(0.07)
Net income (loss) per share, diluted, excluding special items												Net income (loss) per share, diluted, excluding special items	$	0.50		$	(0.23)		n.m.	$	1.51		$	(2.29)		n.m.

Operating expenses per ASM (cents)	Operating expenses per ASM (cents)	10.18	¢	12.11	¢		9.67	¢	12.15	¢		Operating expenses per ASM (cents)	14.83		¢	10.18		¢		14.63		¢	9.67		¢
Add: Impact of special items		2.00		0.57			3.11		1.45
Add (Deduct): Impact of special items												Add (Deduct): Impact of special items	(0.01)			2.00				(0.03)			3.11
Deduct: Fuel and oil expense divided by ASMs	Deduct: Fuel and oil expense divided by ASMs	(2.55)		(1.44)			(2.38)		(1.89)			Deduct: Fuel and oil expense divided by ASMs	(4.45)			(2.55)				(3.95)			(2.38)
Deduct: Profitsharing expense divided by ASMs	Deduct: Profitsharing expense divided by ASMs	(0.20)		—			(0.19)		—			Deduct: Profitsharing expense divided by ASMs	(0.15)			(0.20)				(0.16)			(0.19)
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)	9.43	¢	11.24	¢	(16.1)	10.21	¢	11.71	¢	(12.8)	Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)	10.22		¢	9.43		¢	8.4	10.49		¢	10.21		¢	2.7

(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 tax rate differences, primarily due to the Payroll Support being excluded as a special item, and reflecting the anticipated benefit of carrying back full year 2020 projected net losses to claim tax refunds against previous cash taxes paid relating to tax years 2015 through 2019, some of which were at higher rates than the current year.

~~(d) 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 three and nine months ended September 30, 2021. See Note 7 to the unaudited Condensed Consolidated Financial Statements for further information.

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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,~~income (loss), non-GAAP; Other (gains) losses, net, non-GAAP; ~~Loss~~Income (loss) before income taxes, non-GAAP; ~~Benefit~~Provision (benefit) for income taxes, net, non-GAAP; Net ~~loss,~~income (loss), non-GAAP; Net ~~loss~~income (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 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 ~~twelve~~12 -8 aircraft leases;

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4.~~Gains~~Noncash impairment charges, primarily associated with adjustments to the ~~sale-leaseback of ten Boeing 737-800 aircraft and ten Boeing -8 aircraft to third parties;~~salvage values for previously retired airframes;

5.Unrealized losses related to twelve forward-starting interest rate swap agreements. During the first nine months of 2020, the interest rate swap agreements, which were related to twelve -8 aircraft leases (with deliveries originally scheduled between June 2020 and September 2020), were de-designated as hedges due to the scheduled delivery range no longer being probable, resulting in the mark-to-market ~~changes being recorded to earnings;~~adjustment associated with certain available for sale securities; and

6.Losses associated with the partial extinguishment of the Company's ~~convertible notes.~~Convertible Notes and early prepayment of debt.

In third quarter 2022, management determined that presentation within its income statement would be enhanced by classification of Loss on extinguishment of debt as a separate line item, rather than its prior presentation where it was included as a component of Other (gains) losses, net. Such losses are incurred as a result of opportunistic decisions made by the Company to prepay portions of its debt, most of which was taken on during the pandemic in order to provide liquidity during the prolonged downturn in air travel. Due to the nature of these losses, which are difficult to accurately predict, and due to the fact that they are not representative of the Company’s day-to-day airline operating performance, the Company has included such amounts as special items and thus excluded them from certain of its non-GAAP measures in the accompanying reconciliations.

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,~~income (loss), non-GAAP; Other (gains) losses, net, non-GAAP; ~~Loss~~Income (loss) before income taxes, non-GAAP; ~~Benefit~~Provision (benefit) for income taxes, net, non-GAAP; Net ~~loss,~~income (loss), non-GAAP; Net ~~loss~~income (loss) per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents).

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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, 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 Payroll Support programs.

Net cash ~~used in~~provided by operating activities was ~~$575~~$234 million for the three months ended September 30, ~~2021,~~2022, compared with ~~$1.1 billion~~$575 million used in operating activities in the same prior year period. ~~For the nine months ended September 30, 2021, net~~Net cash provided by operating activities was $3.2 billion for the nine months ended September 30, 2022, compared with $2.1 billion ~~compared with $531 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 the nine months ended September 30, 2022, were largely impacted by the Company's net income (as adjusted for noncash items), a $700 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, and a $472 million cash tax refund from the Internal Revenue Service associated with the 2020 tax year. Operating cash flows for the nine months ended September 30, 2021, included $2.7 billion in Payroll Support program grant proceeds ~~received. The net increase in operating cash flows was~~received and were also ~~a result of a $1.1 billion~~driven by an increase in Air traffic liability ~~driven by~~of $1.1 billion as a result of increased ticket sales ~~related to an~~from the increase in leisure travel demand. The operating cash flows for the nine months ended September 30, 2020, were negatively affected primarily by (i) the Company's Net loss (as adjusted for noncash items), (ii) the Company's payout in 2020 of its 2019 $667 million profitsharing distribution to Employees, (iii) a significant decline in amounts payable for passenger excise taxes and segment fees as a result of the decline in passenger ticket sales, and (iv) the suspension of collection of certain ticket taxes as dictated by the CARES Act. The operating cash flows for the nine months ended September 30, 2020, were also negatively affected by the amounts paid out under the Company's Voluntary Separation Program 2020 and Extended ETO plans during the nine months ended September 30, 2020. These net decreases in cash from operating activities were partially offset by a $1.6 billion increase in Air traffic liability and by $2.4 billion in Payroll Support program grant proceeds received. Net cash provided by operating activities is primarily used to finance capital expenditures, repay debt, and provide working capital. Historically, the Company ~~has~~ also used ~~net~~Net cash provided by operating activities to fund stock repurchases and pay dividends; however these shareholder return activities ~~have been~~were suspended through September 30, 2022, due to restrictions associated with the payroll assistance under the Payroll Support programs and the Company's amended and restated revolving credit facility. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.

Net cash used in investing activities totaled ~~$412 million~~$1.1 billion during the three months ended September 30, ~~2021,~~2022, compared with ~~$434~~$412 million used in investing activities in the same prior year period. Net cash used in investing activities was ~~$1.1~~$2.8 billion during the nine months ended September 30, ~~2021,~~2022, compared with ~~$107 million~~$1.1 billion 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 nine months ended September 30, 2020, the Company also raised $815 million from the sale-leaseback of 20 aircraft and received $428 million of Supplier proceeds, which the Company considers an offset to its aircraft capital expenditures. During the nine months ended September 30, 2021,2022, Capital expenditures were ~~$325 million,~~$2.6 billion, compared with ~~$425~~$325 million in the same prior year period. Capital expenditures ~~decreased,~~increased, year-over-year, largely due to ~~a decrease~~an increase in ~~facilities project expenditures~~progress and ~~several projects being placed into service since September 30, 2020. In addition, the Company was not required to make progress~~delivery payments onmade for current period and future aircraft deliveries ~~or payments for new delivered -8 aircraft~~ during the nine months ended September 30, ~~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 to date on undelivered aircraft, the Company currently estimates relatively minimal aircraft capital expenditures in 2021. Therefore, the Company currently estimates its annual 2021 capital expenditures to be in the range ofaircraft.

~~$500 million~~The Company continues to ~~$600 million driven primarily by technology, facilities, and operational investments, as well as aircraft related~~estimate its 2022 capital ~~expenditures. Based on 72 firm orders currently planned in 2022, as discussed in "Company Overview," the Company's contractual aircraft capital expenditures for 2022 are estimated~~spending to be approximately ~~$1.7 billion. Further,~~$4.0 billion, which assumes a total of 66 -8 aircraft deliveries in 2022. See Note 10 to the ~~Company's total contractual aircraft~~unaudited Condensed Consolidated Financial Statements for further information. The Company’s 2022 capital ~~expenditures for all years 2022 through 2026, which currently represents 200 MAX firm orders (185 -7 and 15 -8 aircraft), are estimated~~spending guidance continues to beinclude approximately ~~$6.0 billion. Fleet and other~~$900 million in non-aircraft capital investment plans are expected to continue to evolve as the Company manages through this pandemic recovery period, and the Company intends to evaluate the exercise of its remaining 42 MAX options for 2022 as decision deadlines occur throughout the remainder of this year.spending.

Net cash used in financing activities was ~~$157 million~~$1.9 billion during the three months ended September 30, ~~2021,~~2022, compared with ~~$1.2 billion provided by~~$157 million used in financing activities for the same prior year period. Net cash used in financing activities was $2.4 billion during the nine months ended September 30, 2022, compared with $923 million provided by financing activities ~~was $923~~for the same year period. The Company repaid $2.5 billion in debt and finance lease obligations, including a $1.3 billion prepayment for all of its outstanding 4.75% Notes due 2023 and the extinguishment of $486 million in principal of its Convertible Notes for cash payments totaling $648 million during the nine months ended September 30, ~~2021, compared with $10.2 billion provided by financing activities for~~2022. The Company may engage in early debt repurchases from time to time and some of these early

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future repurchases are not included in the ~~prior year period.~~ Company's current maturities of long-term debt. The Company's 2022 total debt repayments is expected to be $2.6 billion. During the nine months ended September 30, 2021, the Company borrowed $1.1 billion of loan proceeds under Payroll Support programs. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. The Company repaid $298 million in debt and finance lease obligations, including the extinguishment of $80 million in principal of its ~~convertible notes~~Convertible Notes for a cash payment of $121 million during the nine months ended September 30, ~~2021, and is scheduled to repay approximately $182 million in debt and finance lease obligations in fourth quarter~~ 2021. During the nine months ended September 30, 2020, the Company borrowed $13.6 billion, through various transactions, in order to improve its liquidity position as a result of the onset of the pandemic. An additional $2.3 billion was raised from a public offering of 80.5 million shares of common stock. These financings were partially offset by the full repayment of $3.7 billion borrowed under the Company's Amended and Restated 364-Day Credit Agreement and $1.0 billion drawn under the Company's Revolving Credit Facility. The Company also repurchased $451 million of its outstanding common stock, paid $188 million in cash dividends to Shareholders, and repaid $295 million in debt and finance lease obligations during the first nine months of 2020.

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 ~~Revolving Credit Facility. During third quarter 2021, the expiration of this~~amended and restated revolving credit facility (the "Amended A&R Credit Agreement"). In July 2022, this facility was ~~extended~~amended to extend the expiration date to August ~~2023.~~2025, and to change the benchmark rate from the London Interbank Offered Rate to the Secured Overnight Financing Rate ("SOFR"). 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~~SOFR plus a credit spread adjustment of 10 basis points plus 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 September 30, ~~2021.~~2022. There were no amounts outstanding under the ~~Revolving~~Amended A&R Credit ~~Facility~~Agreement as of September 30, ~~2021.~~2022.

Although not the case at September 30, ~~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~~flight credits 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 ~~$16.0~~$13.7 billion as of September 30, ~~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.~~COVID-19.

~~During 2021,~~As of September 30, 2022, the Company has entered into supplemental agreements to its aircraft purchase agreement with Boeing to increase its 2022 firm orders of -7 aircraft. Additionally, the Company accelerated options into 2022, 2023, 2024, and 2025, and added new options into 2026 through 2027, bringing theCompany's total firm and option order book ~~to 660 aircraft as of September 30, 2021, less 19 purchased aircraft delivered in the first nine months of 2021.~~with Boeing was 632 aircraft. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.

The following table details information on the aircraft in the Company's fleet as of September 30, ~~2021:~~
Average
Age (Yrs) Number
of Aircraft Number
Owned Number
Leased
Type Seats
737-700 143 17 461 (a) 375 86
737-800 175 6 207 190 17
737 -8 175 2 69 40 29
Totals 13 737 605 132
2022:

~~(a) Included 24 Boeing 737 Next Generation aircraft~~


		Average Age (Yrs)	Number of Aircraft	Number Owned	Number Leased
Type	Seats
737-700	143	18	431	351	80
737-800	175	7	207	190	17
737 -8	175	2	104	75	29
Totals		13	742	616	126

Critical Accounting Policies and Estimates

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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 ~~temporary storage~~the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

On July 28, 2022, the Company announced that all existing Customer flight credits as of that date, as well as any future flight credits issued, will no longer expire and will thus remain redeemable by Customers. This policy change required a change in the Company's process for estimating breakage associated with its revenue recognition policy. The Company is providing an updated Revenue Recognition Critical Accounting Policy below for the three months ended September 30, ~~2021.~~2022.

Revenue Recognition

Tickets sold for Passenger air travel are initially deferred as Air traffic liability. Passenger revenue is recognized and Air traffic liability is reduced when the service is provided (i.e., when the flight takes place). Air traffic liability primarily represents tickets sold for future travel dates, travel credits that are expected to be used in the future, and loyalty benefits that are expected to be redeemed in the future. Air traffic liability typically fluctuates throughout the year based on seasonal travel patterns, fare sale activity, and activity associated with the Company’s loyalty program.

For air travel on Southwest, the amount of tickets that will go unused, referred to as breakage, is estimated and recognized in Passenger revenue once the scheduled flight date has passed, in proportion to the pattern of rights exercised by the Customer, in accordance with Accounting Standards Codification 606, Revenue From Contracts With Customers ("ASC 606"). Estimating the amount of tickets that will ultimately go unused involves some level of subjectivity and judgment. The majority of the Company's tickets sold are nonrefundable, although flight credits created when a Customer cancels or modifies an existing flight itinerary can be applied towards the purchase of future travel. Unused flight credits are the primary source of breakage. Breakage estimates are based on historical experience over many years. Fully refundable tickets rarely go unused.

As a result of the COVID-19 pandemic, for all Customer flight credits created or scheduled to expire between March 1 and September 7, 2020 associated with flight cancellations, the Company initially extended the expiration date to September 7, 2022. See Note 6 to the Consolidated Financial Statements for further information regarding these extended flight credits. Since the Company did not have historical data to enable it to accurately estimate the pattern of usage of these extended credits, these credits have been classified as a current liability throughout their history. Subsequently, on July 28, 2022, the Company modified its policy and announced that all unexpired flight credits as of that date, including these extended flight credits, will no longer have an expiration date and thus will be able to be redeemed by Customers indefinitely. This change in policy was considered a contract modification under ASC 606 and the Company accounted for such change prospectively in third quarter 2022. On a sequential basis compared to second quarter 2022 results, this policy change to eliminate expiration dates on qualifying flight credits, in particular those that were set to expire on September 7, 2022, resulted in an estimated negative impact to third quarter breakage revenue in the range of $250 million to $300 million. However, since the majority of this estimated breakage was associated with the extended flight credits, the estimated impacts of this flight credit policy change beyond third quarter 2022 is not expected to be material. The Company’s balance of existing Customer flight credits as of the modification date was approximately $1.9 billion, including the extended travel credits that had been set to expire on September 7, 2022.

Also as a result of changes in observed Customer travel habits and behaviors during 2021 and the first six months of 2022, the Company increased its estimates of “normal” Customer flight credits that are expected to go unused, as Customer redemptions of these "normal" credits had been at a slower rate than the Company’s historical data for similar credits in periods prior to the COVID-19 pandemic. However, although the Company continues to believe a portion of Customer flight credits will go unused following the Company's change in policy, including a portion of flight credits issued after July 28, 2022, the Company expects its prospective breakage rate associated with such flight credits to be at or slightly lower than historical pre-pandemic levels.

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Observed Customer behavior that differs from historical experience can cause actual ticket breakage to differ significantly from estimates. Assumptions about Customer behavior are reviewed frequently and corresponding adjustments are made to breakage estimates, as needed, when observed behaviors differ from historical experience. Assumptions about Customer behavior 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 travel credit policies, seat availability, and economic factors. The Company’s estimation techniques have been consistently applied from year to year; however, as with any estimates, actual ticket breakage may vary from estimated amounts.

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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~~Company’s financial guidance for fourth quarter and full year 2022 and factors that could impact the Company’s financial results;

•the Company’s capacity guidance;

•the Company’s estimated fuel costs, hedging gains, and fuel efficiency and the assumptions underlying the Company’s fuel-related expectations ~~with respect~~and estimates, including expectations related to the ~~benefits associated with its voluntary separation and extended leave programs;~~Company’s fuel derivative contracts;

•the Company’s plans and expectations ~~related to~~for the ~~Vaccine Executive Order (see also Item 1A, Risk Factors);~~repayment of debt, its effective tax rate, and its capital spending;

•the Company’s fleet plans, including underlying expectations and ~~its related goals, strategies, and expectations, including with respect to fuel efficiency and reduction in carbon emissions;~~dependencies;

•the Company’s fleet and network-related goals, including without limitation with respect to growth opportunities and frequencies, restoration of the Company’s network, ~~plans;~~reduction of operating costs, further fleet modernization with less carbon-intensive aircraft, and fleet utilization;

•the Company’s ~~revenue, load factor, and capacity estimates and expectations;~~

•~~the Company's other financial~~ expectations ~~and projected results of operations, including the Company’s underlying assumptions and estimates, in particular~~ related to ~~expectations regarding investments in the Company’s operations and People;~~

•~~the Company’s goals~~its policy change with respect to ~~distributing fares to business travelers and growing managed business revenues;~~

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

•the Company’s expectations with respect to managed business revenues;

•the Company’s cash flow expectations and capital ~~expenditures and its related underlying assumptions,~~spending guidance, in particular with respect to aircraft capital ~~expenditures;~~

•expenditures and underlying aircraft delivery expectations; ~~the Company’s plans for the repayment of debt;~~

•the Company’s expectations with respect to ~~cash flows and liquidity, including~~ 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:

•any negative developments related to the COVID-19 pandemic, including, for example, with respect to (i) the duration, spread, severity, or any recurrence of the COVID-19 pandemic or any new variant strains of the underlying virus; (ii) the effectiveness, availability, and usage of COVID-19 vaccines; (iii) the impact of ~~the Vaccine Executive Order and other governmental actions on the Company's business plans and its ability to retain key Employees; (iv) the extent~~fears or actual outbreaks of ~~the impact of COVID-19 on overall demand for air travel and the Company's related business plans and decisions; and (v) the impact of COVID-19 on the Company's access to capital;~~

•~~the impact of labor matters on the Company’s business decisions, plans, and strategies;~~

•~~the Company's dependence on Boeing with respect to the Company's operations, strategies, and goals;~~

•~~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 impact of~~diseases, extreme or severe weather and natural disasters, actions of competitors (including, without limitation, pricing, scheduling, capacity, and network decisions, and consolidation and alliance activities), 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 Company's dependence on Boeing and the FAA with respect to the Company's fleet plans and deliveries, and other operational strategies and goals;

•the impact of labor and hiring matters on the Company’s business decisions, plans, and 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;

•any further negative developments related to the COVID-19 pandemic, including, for example, with respect to (i) the duration, spread, severity, or any recurrence of the COVID-19 pandemic or any new variant strains of the underlying virus; (ii) the effectiveness, availability, and usage of COVID-19 vaccines; (iii) the impact

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of government mandates, directives, orders, regulations, and other governmental actions related to COVID-19 on the Company’s business plans and its ability to retain key Employees; (iv) the extent of the impact of COVID-19 on overall demand for air travel and the Company's related business plans and decisions; and (v) the impact of the COVID-19 pandemic on the Company's access to capital;

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

•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 impact of the Company's obligations and restrictions related to its participation in Treasury's payroll support programs and any related negative impact on the Company’s ability to retain key Employees;

•further delays in, or the inability of the U.S. government, to agree upon a solution regarding budget deficits and the debt ceiling, which could result in a default or downgrade on its debts. This, in turn, could result in a material adverse effect of the Company’s investment portfolio; 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, its Quarterly Report on Form 10-Q for the quarter ended June 30,~~ 2021 and in this Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2021.~~2022.

Caution should be taken not to place undue reliance on the Company's forward-looking statements, which represent the Company's views only as of the date this report is filed. The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Hedging

As discussed in Note 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 September 30, ~~2021,~~2022, the estimated fair value of outstanding contracts was ana net asset of ~~$681~~$536 million.

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 September 30, ~~2021,~~2022, the Company had ~~ten~~nine counterparties for which the derivatives held were ana net asset. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. However, if one or more of these counterparties were in a net liability position to the Company and were unable to meet their obligations, any open derivative contracts with the counterparty could be subject to early termination, which could result in substantial losses for the Company. At September 30, ~~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 September 30, 2022, at which such postings are triggered.

At September 30, ~~2021, $162~~2022, $134 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 September 30, ~~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 September 30, ~~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 September 30, ~~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 September 30, ~~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 September 30, ~~2021,~~2022, at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

~~There~~During third quarter 2022, the Company implemented a new human capital management system, which includes processing of the Company's payroll. The Company's management has determined that the internal controls and procedures related to the information produced in the new human capital management system were effective as of the end of the period covered by this report.

Except as noted above, there were no changes in the Company’s internal control over financial reporting (as defined in Rule ~~13a-15(f)~~13a–15(f) under the Exchange Act) during the fiscal quarter ended September 30, ~~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 of~~Circuit, which the ~~objectors~~Court dismissed ~~their appeals. On~~on July 9, 2021, ~~the court of appeals dismissed the appeal of the remaining objectors~~ for lack of jurisdiction because the district court's order approving the settlements was not a final appealable order. The case is continuing as to the remaining defendants. The Company denies all allegations of wrongdoing.

On 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.~~Sherman ("Sherman Complaint"). The complaint alleges that Boeing and the Company colluded to conceal defects with the Boeing 737 MAX ("MAX") aircraft in violation of the Racketeer Influenced and Corrupt Organization Act ("RICO") and also asserts related state law claims based upon the same alleged facts. The complaint seeks damages on behalf of putative classes of customers who purchased tickets for air travel from either the Company or American Airlines between August 29, 2017, and March 13, 2019. The complaint generally seeks money damages, equitable monetary relief, injunctive relief, declaratory relief, and attorneys’ fees and other costs. On September 13, 2019, the Company filed a motion to dismiss the complaint and to strike certain class allegations. Boeing also moved to dismiss. On February 14, 2020, the trial court issued a ruling that granted in part and denied in part the motions to dismiss the complaint. The trial court order, among other things: (i) dismissed without prejudice various state law claims that the plaintiffs abandoned in response to the motions, (ii) dismissed with prejudice the remaining state law claims, including fraud by concealment, fraud by misrepresentation, and negligent misrepresentation on the grounds that federal law preempts those claims, and (iii) found that plaintiffs lack Article III standing to pursue one of the plaintiffs’ theories of RICO injury. The order denied the motion to dismiss with respect to two RICO claims premised upon a second theory of RICO injury and denied the motion to strike the class allegations at the pleadings

stage. ~~Discovery is ongoing, class certification briefing has been completed, and a class certification hearing was held before the court on April 26, 2021.~~ 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

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purchase(s), a MAX plane was not scheduled for use (or actually used) and had not previously been used, (ii) those who reimbursed a Southwest Airlines ticket purchaser and thus bore the economic burden for a Southwest Airlines ticket for a flight meeting the preceding criteria set forth in (i) above, (iii) those who purchased tickets (without being reimbursed) for flights on American Airlines during the class period, except for those whose flights were solely on routes where, at the time of ticket purchase(s), a MAX plane was not scheduled for use (or actually used) and had not previously been used, and (iv) those who reimbursed an American Airlines ticket purchaser and thus bore the economic burden for an American Airlines ticket for a flight meeting the preceding criteria set forth in (iii) above. On September 17, 2021, the Company filed a petition for permission immediately to appeal the class certification ruling to the Fifth Circuit Court of Appeals. Boeing also filed such a petition. Plaintiffs filed their oppositions to the petitions on September 27, 2021. On ~~or about October 6,~~September 30, 2021, the Fifth Circuit Court of Appeals granted the Company (and Boeing) permission to appeal the class certification ruling. AOn December 22, 2021, in response to a motion to stay the trial court proceedings filed by the Company and Boeing, the Fifth Circuit stayed all proceedings, including the pursuit of any discovery, in the trial court pending disposition of the class certification appeal by the Fifth Circuit. Following full briefing ~~schedule has yet to be set by~~on the merits of the appeal, a three-judge panel of the Fifth Circuit heard oral argument of the appeal on July 5, 2022, and the Company is awaiting a decision from the Fifth Circuit. The Company (and Boeing) have filed motions to stay all trial court proceedings pending an appeal ruling by the Fifth Circuit Court of Appeals. The Company intends to strenuously pursue that appeal. The Company further denies all allegations of wrongdoing, ~~including those in the complaint that were not dismissed. The Company~~ believes the plaintiffs' positions are without merit, and intends to continue vigorously ~~defend~~defending 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 ~~Southwest’s~~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 damages, declaratory relief, and attorneys’ fees and other costs. ~~The Company’s deadline to respond to~~On October 27, 2021, the Company filed a multi-faceted motion challenging the Complaint based upon lack of subject matter jurisdiction, the existence of the prior-filed

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Sherman Complaint on appeal in the ~~Complaint is October~~Fifth Circuit, improper venue, and failure to state a claim, and seeking to have the complaint's class contentions stricken. That motion was fully briefed by both parties and was argued to a United States Magistrate Judge on June 27, ~~2021.~~2022. On July 5, 2022, the Magistrate Judge granted the motion in part and ordered the case stayed until the issuance of the Fifth Circuit's opinion in the Sherman Complaint. 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

Except for the additional risk factor set forth below, 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.

~~The~~Conflicting federal, state, and local laws and regulations may impose additional requirements and restrictions on the Company’s ~~business is labor intensive; therefore,~~operations, which could increase the ~~Company would be adversely affected if it were unable to employ sufficient numbers of qualified Employees to maintain its operations.~~Company’s operating costs, result in service disruptions, and increase litigation risk.

~~The Company’s success depends on its ability to attract and retain skilled personnel. The Company's Pilots~~Airlines are subject to extensive regulatory and legal requirements at the ~~FAA's mandatory retirement age of 65,~~federal, state, and ~~all operational employees are subject to training~~local levels that require substantial compliance costs and ~~certification standards. As of September 30, 2021,~~that may be inconsistent with each other. These laws could affect the Company had a significantly smaller workforce than it did prior to the COVID-19 pandemic, while the demand for leisure travel throughout the domestic airline industry increased in the first nine months of 2021, as comparedCompany’s relationship with 2020. Competition for skilled personnel may continue to intensify if overall industry capacity increases and/or the Company were to incur attrition at levels higher than it has historically. The Company has recently determined to increase the minimum compensation of certain of its workforce and ~~may continue to be required~~cause its expenses to increase ~~existing levels~~without an ability to pass through these costs.In recent years, the airline industry has experienced an increase in litigation asserting the application of ~~compensation~~state and local employment laws, particularly in California. On June 30, 2022, the U.S. Supreme Court denied review of the Ninth Circuit’s ruling in Bernstein v. Virgin America, Inc., which held that federal law did not preempt the California state meal-and-rest-break regulations for flight attendants at issue. The Company is a defendant in multiple proceedings asserting wage and hour claims with respect to ~~retain~~certain employees who work in, or ~~supplement its skilled workforce.~~ are based in, California.The ~~inability to recruit and retain skilled personnel or the unexpected loss of key skilled personnel could~~Bernstein decision may adversely affect the Company’s ~~operations.~~

~~In response~~defenses in some or all of those proceedings and may give rise to ~~the COVID-19 pandemic,~~additional litigation in these or other areas previously believed to be preempted by federal law.Application of state and local ~~agencies have issued~~ laws regulations, and orders relating to health and occupational safety. Laws, regulations, orders, or other government actions requiring that employees be vaccinated could materially adversely affect the Company's operations.

On September 9, 2021, the President of the United States issued Executive Orders establishing vaccination requirements for federal employees of covered agencies and employees of covered federal contractors. Subject to limited exceptions, federal employees of covered agencies are required to be fully vaccinated against COVID-19 by November 22, 2021. Further, federal agencies are expected to include a requirement, in contractual agreements with covered federal contractors, that those contractors’ employees be fully vaccinated or qualify for an accommodation by December 8, 2021. The Company is considered a covered federal contractor and, therefore, subject to actions by the government to implement Executive Order 14042.

The Company is requiring Employees to submit proof of COVID-19 vaccination, or apply for an accommodation, by November 24, 2021. The Company is unable to predict the extent to which individuals may fail to become fully vaccinated or qualify for an accommodation. The extent to which the Company's Employees choose to comply or qualify for an accommodation could result in a negative impact to the Company's operations. Furthermore, the Company’s ability to effectively hire and retain new Employees could be negatively impacted if potential candidates are unable or unwilling to comply with the vaccination requirement. Federal agencies employing personnel critical to the Company’s operations ~~such as air traffic control, security,~~may conflict with federal laws—or with the laws of other states and ~~customs staffing,~~local governments—and may subject the Company to additional requirements and restrictions.Moreover, application of these state and local laws may result in operational disruption, increased litigation risk, and negative effects on the Company’s collective bargaining agreements. Adverse litigation results in any of these cases could ~~be similarly impacted by~~adversely impact the ~~Executive Order requiring the vaccination of federal employees. A reduction~~Company’s operational flexibility and result in the ~~number~~imposition of ~~federal employees available to support the Company's operations~~damages and fines, which could ~~materially adversely affect the Company's operations.~~potentially be significant.

The Company is also dependent on third party vendors and service providers to support its operations. To the extent third party vendors or service providers are subject to vaccination laws, regulations, orders, or other government actions and they or their employees are unable or unwilling to comply with applicable requirements, the Company’s arrangements with those vendors or providers could be adversely impacted, the Company may be unable to maintain its arrangement with such parties, or at competitive terms, and the Company's operations could be materially adversely affected.

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

(c) On May 15, 2019, the Company’s Board of Directors authorized the repurchase of up to $2.0 billion of the Company’s common stock. Subject to certain conditions, including restrictions on the Company pursuant to 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

None

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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			~~Third~~Fourth Amendment to Revolving Credit Facility Agreement dated as of August 3, 2016, as amended by the First Amendment dated as of March 30, 2020, ~~and~~ the Second Amendment dated as of November 23, 2020,and the Third Amendment dated as of July 28, 2021, among Southwest Airlines Co., the banks party thereto, JPMorgan Chase Bank, N.A., as Paying Agent and Collateral Agent, and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Co-Administrative Agents, dated as of July ~~28, 2021.~~19, 2022.
10.2			Supplemental Agreement No. 18 to Purchase Agreement No. 3729, dated December 13, 2011, between The Boeing Company and the Company. (1)
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. ~~(1)~~(2)
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 is both not material and is of the type that the registrant treats as private or confidential.

(2) Furnished, not filed.

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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.

October ~~26, 2021~~28, 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)


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

Remainder of 2021			321
2022			1,220
2023			769
2024			358