SOUTHWEST AIRLINES CO.

FORM 10-Q

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Southwest Airlines Co.

Condensed Consolidated Balance Sheet

(in millions)

(unaudited)


		March 31, 2022		December 31, 2021			March 31, 2023		December 31, 2022
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	13,098	$	12,480	Cash and cash equivalents	$	8,359	$	9,492
Short-term investments	Short-term investments	2,642		3,024		Short-term investments	3,315		2,800
Accounts and other receivables	Accounts and other receivables	1,692		1,357		Accounts and other receivables	1,250		1,040
Inventories of parts and supplies, at cost	Inventories of parts and supplies, at cost	623		537		Inventories of parts and supplies, at cost	736		790
Prepaid expenses and other current assets	Prepaid expenses and other current assets	767		638		Prepaid expenses and other current assets	614		686
Total current assets	Total current assets	18,822		18,036		Total current assets	14,274		14,808

Property and equipment, at cost:	Property and equipment, at cost:					Property and equipment, at cost:
Flight equipment	Flight equipment	21,147		21,226		Flight equipment	24,577		23,725
Ground property and equipment	Ground property and equipment	6,472		6,342		Ground property and equipment	7,008		6,855
Deposits on flight equipment purchase contracts	Deposits on flight equipment purchase contracts	254		—		Deposits on flight equipment purchase contracts	283		376
Assets constructed for others	Assets constructed for others	9		6		Assets constructed for others	34		28
		27,882		27,574			31,902		30,984
Less allowance for depreciation and amortization	Less allowance for depreciation and amortization	12,945		12,732		Less allowance for depreciation and amortization	13,878		13,642
		14,937		14,842			18,024		17,342
Goodwill	Goodwill	970		970		Goodwill	970		970
Operating lease right-of-use assets	Operating lease right-of-use assets	1,555		1,590		Operating lease right-of-use assets	1,380		1,394
Other assets	Other assets	978		882		Other assets	898		855
		$	37,262	$	36,320		$	35,546	$	35,369

LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	1,648	$	1,282	Accounts payable	$	1,729	$	2,004
Accrued liabilities	Accrued liabilities	1,360		1,624		Accrued liabilities	2,118		2,043
Current operating lease liabilities	Current operating lease liabilities	240		239		Current operating lease liabilities	233		225
Air traffic liability	Air traffic liability	6,406		5,566		Air traffic liability	7,217		6,064
Current maturities of long-term debt	Current maturities of long-term debt	415		453		Current maturities of long-term debt	32		42
Total current liabilities	Total current liabilities	10,069		9,164		Total current liabilities	11,329		10,378

Long-term debt less current maturities	Long-term debt less current maturities	10,309		10,274		Long-term debt less current maturities	7,999		8,046
Air traffic liability - noncurrent	Air traffic liability - noncurrent	2,204		2,159		Air traffic liability - noncurrent	1,980		2,186
Deferred income taxes	Deferred income taxes	1,826		1,770		Deferred income taxes	1,888		1,985

Noncurrent operating lease liabilities	Noncurrent operating lease liabilities	1,277		1,315		Noncurrent operating lease liabilities	1,112		1,118
Other noncurrent liabilities	Other noncurrent liabilities	1,160		1,224		Other noncurrent liabilities	936		969
Stockholders' equity:	Stockholders' equity:					Stockholders' equity:
Common stock	Common stock	888		888		Common stock	888		888
Capital in excess of par value	Capital in excess of par value	3,940		4,224		Capital in excess of par value	4,058		4,037
Retained earnings	Retained earnings	15,551		15,774		Retained earnings	15,995		16,261
Accumulated other comprehensive income	Accumulated other comprehensive income	891		388		Accumulated other comprehensive income	197		344
Treasury stock, at cost	Treasury stock, at cost	(10,853)		(10,860)		Treasury stock, at cost	(10,836)		(10,843)
Total stockholders' equity	Total stockholders' equity	10,417		10,414		Total stockholders' equity	10,302		10,687
		$	37,262	$	36,320		$	35,546	$	35,369

See accompanying notes.

Southwest Airlines Co.

Condensed Consolidated Statement of Comprehensive Income (Loss)

(in millions, except per share amounts)

(unaudited)


		Three months ended March 31,				Three months ended March 31,
		2022		2021				2023		2022
OPERATING REVENUES:	OPERATING REVENUES:						OPERATING REVENUES:
Passenger	Passenger	$	4,135	$	1,712		Passenger	$	5,105	$	4,135
Freight	Freight	42		43			Freight	41		42

Other	Other	517		297			Other	560		517
Total operating revenues	Total operating revenues	4,694		2,052			Total operating revenues	5,706		4,694

OPERATING EXPENSES, NET:	OPERATING EXPENSES, NET:						OPERATING EXPENSES, NET:
Salaries, wages, and benefits	Salaries, wages, and benefits	2,229		1,571			Salaries, wages, and benefits	2,478		2,229
Payroll support and voluntary Employee programs, net		—		(1,448)

Fuel and oil	Fuel and oil	1,004		469			Fuel and oil	1,547		1,004
Maintenance materials and repairs	Maintenance materials and repairs	211		173			Maintenance materials and repairs	240		211

Landing fees and airport rentals	Landing fees and airport rentals	346		313			Landing fees and airport rentals	408		346
Depreciation and amortization	Depreciation and amortization	324		312			Depreciation and amortization	365		324
Other operating expenses	Other operating expenses	731		463			Other operating expenses	952		731
Total operating expenses, net	Total operating expenses, net	4,845		1,853			Total operating expenses, net	5,990		4,845

OPERATING INCOME (LOSS)		(151)		199
OPERATING LOSS							OPERATING LOSS	(284)		(151)

OTHER EXPENSES (INCOME):	OTHER EXPENSES (INCOME):						OTHER EXPENSES (INCOME):
Interest expense	Interest expense	93		114			Interest expense	66		93
Capitalized interest	Capitalized interest	(9)		(11)			Capitalized interest	(6)		(9)
Interest income	Interest income	(3)		(2)			Interest income	(125)		(3)
Loss on extinguishment of debt							Loss on extinguishment of debt	—		72
Other (gains) losses, net	Other (gains) losses, net	144		(48)			Other (gains) losses, net	(14)		72
Total other expenses (income)	Total other expenses (income)	225		53			Total other expenses (income)	(79)		225

INCOME (LOSS) BEFORE INCOME TAXES		(376)		146
PROVISION (BENEFIT) FOR INCOME TAXES		(98)		30
LOSS BEFORE INCOME TAXES							LOSS BEFORE INCOME TAXES	(205)		(376)
BENEFIT FOR INCOME TAXES							BENEFIT FOR INCOME TAXES	(46)		(98)

NET INCOME (LOSS)		$	(278)	$	116
NET LOSS							NET LOSS	$	(159)	$	(278)

NET INCOME (LOSS) PER SHARE, BASIC		$	(0.47)	$	0.20
NET LOSS PER SHARE, BASIC							NET LOSS PER SHARE, BASIC	$	(0.27)	$	(0.47)

NET INCOME (LOSS) PER SHARE, DILUTED		$	(0.47)	$	0.19
NET LOSS PER SHARE, DILUTED							NET LOSS PER SHARE, DILUTED	$	(0.27)	$	(0.47)

COMPREHENSIVE INCOME		$	225	$	180
COMPREHENSIVE INCOME (LOSS)							COMPREHENSIVE INCOME (LOSS)	$	(306)	$	225

WEIGHTED AVERAGE SHARES OUTSTANDING	WEIGHTED AVERAGE SHARES OUTSTANDING						WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	Basic	592		591			Basic	594		592
Diluted	Diluted	592		609			Diluted	594		592

See accompanying notes.

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		Treasury stock		Total			Common Stock		Capital in excess of par value		Retained earnings		Accumulated other comprehensive income		Treasury stock		Total
Balance at December 31, 2021		$	888	$	4,224	$	15,774	$	388	$	(10,860)	$	10,414
Balance at December 31, 2022														Balance at December 31, 2022	$	888	$	4,037	$	16,261	$	344	$	(10,843)	$	10,687

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	—		—		—		—		7		7		Issuance of common and treasury stock pursuant to Employee stock plans	—		1		—		—		7		8
Share-based compensation	Share-based compensation	—		16		—		—		—		16		Share-based compensation	—		20		—		—		—		20

Cash dividends, $0.18 per share														Cash dividends, $0.18 per share	—		—		(107)		—		—		(107)

Comprehensive income (loss)	Comprehensive income (loss)	—		—		(278)		503		—		225		Comprehensive income (loss)	—		—		(159)		(147)		—		(306)
Balance at March 31, 2022		$	888	$	3,940	$	15,551	$	891	$	(10,853)	$	10,417
Balance at March 31, 2023														Balance at March 31, 2023	$	888	$	4,058	$	15,995	$	197	$	(10,836)	$	10,302

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



	Common Stock		Capital in excess of par value		Retained earnings		Accumulated other comprehensive income		Treasury stock		Total
Balance at December 31, 2021	$	888	$	4,224	$	15,774	$	388	$	(10,860)	$	10,414

Cumulative effect of adopting Accounting Standards Update No. 2020-06, Debt	—		(300)		55		—		—		(245)
Issuance of common and treasury stock pursuant to Employee stock plans	—		—		—		—		7		7
Share-based compensation	—		16		—		—		—		16


Comprehensive income (loss)	—		—		(278)		503		—		225
Balance at March 31, 2022	$	888	$	3,940	$	15,551	$	891	$	(10,853)	$	10,417

See accompanying notes.

Southwest Airlines Co.

Condensed Consolidated Statement of Cash Flows

(in millions)

(unaudited)


		Three months ended				Three months ended
		March 31,				March 31,
		2022		2021				2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:	CASH FLOWS FROM OPERATING ACTIVITIES:						CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(278)	$	116
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Net loss							Net loss	$	(159)	$	(278)
Adjustments to reconcile net loss to cash provided by operating activities:							Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	324		312			Depreciation and amortization	365		324

Impairment of long-lived assets	Impairment of long-lived assets	16		—			Impairment of long-lived assets	—		16
Unrealized mark-to-market adjustment on available for sale securities	Unrealized mark-to-market adjustment on available for sale securities	5		—			Unrealized mark-to-market adjustment on available for sale securities	(4)		5
Unrealized/realized (gain) loss on fuel derivative instruments	Unrealized/realized (gain) loss on fuel derivative instruments	34		(7)			Unrealized/realized (gain) loss on fuel derivative instruments	—		34
Deferred income taxes	Deferred income taxes	(97)		5			Deferred income taxes	(52)		(97)

Loss on partial extinguishment of convertible and unsecured notes		72		—
Loss on extinguishment of debt							Loss on extinguishment of debt	—		72
Changes in certain assets and liabilities:	Changes in certain assets and liabilities:						Changes in certain assets and liabilities:
Accounts and other receivables	Accounts and other receivables	(334)		(234)			Accounts and other receivables	(232)		(334)
Other assets	Other assets	(44)		(11)			Other assets	50		(44)
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	177		(66)			Accounts payable and accrued liabilities	(72)		177
Air traffic liability	Air traffic liability	885		599			Air traffic liability	947		885
Other liabilities	Other liabilities	(105)		(122)			Other liabilities	(47)		(105)

Cash collateral received from derivative counterparties		385		38
Cash collateral received from (provided to) derivative counterparties							Cash collateral received from (provided to) derivative counterparties	(30)		385
Other, net	Other, net	31		15			Other, net	(60)		31
Net cash provided by operating activities	Net cash provided by operating activities	1,071		645			Net cash provided by operating activities	706		1,071

CASH FLOWS FROM INVESTING ACTIVITIES:	CASH FLOWS FROM INVESTING ACTIVITIES:						CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	Capital expenditures	(510)		(95)			Capital expenditures	(1,046)		(510)

Assets constructed for others	Assets constructed for others	(4)		—			Assets constructed for others	(6)		(4)

Purchases of short-term investments	Purchases of short-term investments	(925)		(1,324)			Purchases of short-term investments	(2,204)		(925)
Proceeds from sales of short-term and other investments	Proceeds from sales of short-term and other investments	1,300		1,218			Proceeds from sales of short-term and other investments	1,679		1,300

Net cash used in investing activities	Net cash used in investing activities	(139)		(201)			Net cash used in investing activities	(1,577)		(139)

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

Proceeds from Payroll Support Program loan and warrants		—		511

Proceeds from Employee stock plans	Proceeds from Employee stock plans	6		13			Proceeds from Employee stock plans	9		6

Payments of long-term debt and finance lease obligations	Payments of long-term debt and finance lease obligations	(93)		(67)			Payments of long-term debt and finance lease obligations	(59)		(93)

Payments of cash dividends							Payments of cash dividends	(214)		—

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

Other, net	Other, net	3		7			Other, net	2		3
Net cash provided by (used in) financing activities		(314)		464
Net cash used in financing activities							Net cash used in financing activities	(262)		(314)

NET CHANGE IN CASH AND CASH EQUIVALENTS	NET CHANGE IN CASH AND CASH EQUIVALENTS	618		908			NET CHANGE IN CASH AND CASH EQUIVALENTS	(1,133)		618
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	12,480		11,063			CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	9,492		12,480

CASH AND CASH EQUIVALENTS AT END OF PERIOD	CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	13,098	$	11,971		CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	8,359	$	13,098

CASH PAYMENTS FOR:	CASH PAYMENTS FOR:						CASH PAYMENTS FOR:
Interest, net of amount capitalized	Interest, net of amount capitalized	$	20	$	17		Interest, net of amount capitalized	$	19	$	20
Income taxes	Income taxes	$	4	$	1		Income taxes	$	2	$	4

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)		$	245	$	—
Adoption of Accounting Standards Update 2020-06, Debt							Adoption of Accounting Standards Update 2020-06, Debt	$	—	$	245
Right-of-use assets acquired under operating leases	Right-of-use assets acquired under operating leases	$	24	$	218		Right-of-use assets acquired under operating leases	$	47	$	24
Flight equipment acquired against supplier credit memo		$	—	$	305
Assets constructed for others		$	—	$	32

See accompanying notes.

3. New Accounting Pronouncements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Basis of Presentation

2. ~~Worldwide Pandemic~~

4.3. Financial Derivative Instruments

5.4. Comprehensive Income (Loss)

6.5. Revenue

7.6. Net ~~Income (Loss)~~Loss Per Share

8.7. Fair Value Measurements

9.8. Supplemental Financial Information

~~10.~~ 9. Commitments and Contingencies

~~11.~~10. 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.

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

The accompanying unaudited Condensed Consolidated Financial Statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States ("GAAP") for complete financial statements. The unaudited Condensed Consolidated Financial Statements for the interim periods ended March 31, ~~2022~~2023 and ~~2021~~2022 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 43 for further information on fuel and the Company's hedging program. Operating results for the three months ended March 31, ~~2022,~~2023, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, ~~2022.~~2023. 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, ~~2021.~~2022.


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

~~2. WORLDWIDE PANDEMIC~~

~~As a result~~Certain prior period amounts have been reclassified to conform to the current presentation. In the unaudited Condensed Consolidated Statement 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 experienced significant disruptions in travel and reduced bookings throughout the remainder of 2020 and for the entirety of 2021 as a result of the pandemic and subsequent variants of COVID-19. Following a significant negative impact to revenues and bookings in January and February 2022, which included increased trip cancellations and staffing challenges associated with the Omicron variant, the Company saw improvements in revenue trends in March 2022 as COVID-19 cases significantly trended downward. The Company continues to monitor demand for air travel and proactively adjust its published flight schedules and capacity.

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

(dollars in millions, shares in thousands) Grant Promissory Note Warrants Total Payroll Support Proceeds Warrants (shares) Warrant strike price Promissory Note Maturity Date
PSP1 $ 2,337 $ 976 $ 40 $ 3,354 2,676 $36.47/share April 19, 2030
PSP2 $ 1,393 $ 566 $ 27 $ 1,987 1,223 $46.28/share January 15, 2031
PSP3 $ 1,310 $ 526 $ 18 $ 1,852 899 $58.51/share April 23, 2031
Total $ 5,040 $ 2,068 $ 85 $ 7,193 4,798

In connection with the receipt of Payroll Support, the Company is 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. 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 $1.2 billionComprehensive Income for the three months ended March 31, ~~2021 in~~2022, the ~~accompanying unaudited Condensed Consolidated Statement~~Company has reclassified $72 million from Other (gains) losses, net to Loss on extinguishment of ~~Comprehensive Income (Loss).~~debt.

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

2. NEW ACCOUNTING PRONOUNCEMENTS


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

~~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 up to five years, all subject to early recalls. Approximately 12,000 Employees participated in the Extended ETO program in 2020 and 2021 combined. The Company had no Employees remaining on Extended ETO as of 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 $32 million of the liability balances were relieved during the first three months of 2022 through payments to Employees, leaving a balance of $296 million as of March 31, 2022, all of which relates to the Voluntary Separation Program. During first quarter 2021, the Company determined that it was no longer probable that the 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 $115 million credit to expense during first quarter 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).

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

~~3. NEW ACCOUNTING PRONOUNCEMENTS~~

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

On January 7, 2021, the FASB issued ASU 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,~~2024, any new hedging relationships entered into after December 31, ~~2022,~~2024, or to existing hedging relationships evaluated for effectiveness existing as of December 31, ~~2022,~~2024, that apply certain optional practical expedients. This standard was effective immediately and may be applied (i) on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or (ii) on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The Company had no material LIBOR-related contract modifications during the three months ended March 31, ~~2022.~~


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

2023.

On August 5, 2020, the FASB issued ASU 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 reduced the number of accounting models for convertible debt instruments and convertible preferred stock, made targeted improvements to the disclosures for convertible instruments and earnings-per-share ("EPS") guidance, and 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, and the Company adopted this standard as of January 1, 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 reclassified the remaining equity component of $300 million, from Additional paid-in capital to Long-term debt associated with its 1.25% Convertible Senior Notes due 2025 (the “Convertible Notes”), and no longer records amortization of the debt discount to Interest expense. The cumulative effect from prior period amortization of the debt discount that has been recorded to Interest expense, offset by reductions to Capital in excess of par value related to the requisition of the equity component through previous repurchases, resulted in a $55 million adjustment to the opening balance of Retained earnings upon adoption. The new standard requires the use of the if-converted method to calculate diluted EPS, which is generally more dilutive, rather than the treasury stock method as was the Company's policy pre-adoption. The first quarter 2022 impact of adopting this new standard was an increase to the Company's Net loss in the amount of $36 million, or $0.06 per diluted share, as a result of higher losses recognized on the Company’s extinguishment transactions following the elimination of the equity component of the Convertible Notes, partially offset by the elimination of the non-cash interest expense associated with the prior debt discount amortization. See Note 7.


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

4.3. 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~~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.~~purchase or hold any financial derivative instruments for trading or speculative purposes.

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

129


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

As of March 31, ~~2022,~~2023, the Company had fuel derivative instruments in place to provide coverage at varying price levels. The following table provides information about the Company’s volume of fuel hedging on an economic basis:

Maximum fuel hedged as of

March 31, 2022

Derivative underlying commodity type as of

March 31, 2023

Derivative underlying commodity type as of

Period (by year)

(gallons in millions) (a)

March 31, 2022

Period (by year)

(gallons in millions) (a)

March 31, 2023

Remainder of 2022

915

WTI crude oil and Brent crude oil

2023

769

WTI crude oil and Brent crude oil

Remainder of 2023

813

West Texas Intermediate ("WTI") crude oil and Brent crude oil

2024

358

WTI crude oil and Brent crude oil

2024

1,265

WTI crude oil and Brent crude oil

2025

227

Brent crude oil

(a) Due to the types of derivatives utilized by the Company and different price levels of those contracts, these volumes represent the maximum economic hedge in place and may vary significantly as market prices and the Company's flight schedule fluctuate.

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. Qualification is re-evaluated quarterly, and all periodic changes in fair value of the derivatives designated as hedges are recorded in Accumulated other comprehensive income ("AOCI") until the underlying jet fuel is consumed. See Note 5.4.

If a derivative ceases to qualify for hedge accounting, any change in the fair value of derivative instruments since the last reporting period would be recorded in Other (gains) losses, net, in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) in the period of the change; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense. Factors that have and may continue to lead to the loss of hedge accounting include: significant fluctuation in energy prices, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging. Increased volatility in these commodity markets for an extended period of time, especially if such volatility were to worsen, could cause the Company to lose hedge accounting altogether for the commodities used in its fuel hedging program, which would create further volatility in the Company’s GAAP financial results. However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the Company the opportunity to stabilize jet fuel costs. When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent changes in fair value of those positions are marked to market through earnings. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de-designated as hedges are concurrently marked to market through earnings. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs. In a situation where it becomes probable that a fuel hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings.

~~During 2021, as~~ The Company did not have any such situations where a ~~result of the drop in demand for air travel compared with 2019 due~~derivative ceased to ~~the pandemic, the Company was in an estimated "over-hedged" position and was required to de-designate a portion of its fuel hedges~~qualify for hedge accounting ~~purposes. However,~~during 2022, or during the ~~impact of such de-designations was not material to 2021 financial results.~~three months ended March 31, 2023.

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


		Asset derivatives
	Balance Sheet	Fair value at		Fair value at
(in millions)	location	3/31/2023		12/31/2022
Derivatives designated as hedges (a)
Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	228	$	352
Fuel derivative contracts (gross)	Other assets	167		160



Interest rate derivative contracts	Other assets	13		14


Total derivatives designated as hedges		$	408	$	526

(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.


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

Asset derivatives Liability derivatives
Balance Sheet Fair value at Fair value at Fair value at Fair value at
(in millions) location 3/31/2022 12/31/2021 3/31/2022 12/31/2021
Derivatives designated as hedges (a)
Fuel derivative contracts (gross) Prepaid expenses and other current assets $ 849 $ 409 $ — $ —
Fuel derivative contracts (gross) Other assets 470 287 — —
Interest rate derivative contracts Other assets 3 — — —
Interest rate derivative contracts Other noncurrent liabilities — — 1 4
Total derivatives designated as hedges $ 1,322 $ 696 $ 1 $ 4
Derivatives not designated as hedges (a)
Fuel derivative contracts (gross) Prepaid expenses and other current assets $ — $ — $ 46 $ —
Total derivatives $ 1,322 $ 696 $ 47 $ 4

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


		Balance Sheet	March 31,		December 31,			Balance Sheet	March 31,		December 31,
(in millions)	(in millions)	location	2022		2021		(in millions)	location	2023		2022
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	$	410	$	80	Cash collateral deposits held from counterparties for fuel contracts - current	Offset against Prepaid expenses and other current assets	$	65	$	106
Cash collateral deposits held from counterparties for fuel contracts - noncurrent	Cash collateral deposits held from counterparties for fuel contracts - noncurrent	Offset against Other assets	150		95		Cash collateral deposits held from counterparties for fuel contracts - noncurrent	Offset against Other assets	11		—

Receivable from third parties for fuel contracts	Receivable from third parties for fuel contracts	Accounts and other receivables	111		8		Receivable from third parties for fuel contracts	Accounts and other receivables	15		34

All of the Company's fuel derivative instruments and interest rate swaps are subject to agreements that follow the netting guidance in the applicable accounting standards for derivatives and hedging. The types of derivative instruments the Company has determined are subject to netting requirements in the accompanying unaudited Condensed Consolidated Balance Sheet are those in which the Company pays or receives cash for transactions with the same counterparty and in the same currency via one net payment or receipt. For cash collateral held by the Company or provided to counterparties, the Company nets such amounts against the fair value of the Company's derivative portfolio by each counterparty. The Company has elected to utilize netting for both its fuel derivative instruments and interest rate swap agreements and also classifies such amounts as either current or noncurrent, based on the net fair value position with each of the Company's counterparties in the unaudited Condensed Consolidated Balance Sheet. If its fuel derivative instruments are in a net asset position with a counterparty, cash collateral amounts held are first netted against current outstanding derivative asset amounts associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of noncurrent outstanding derivative instruments. As of March 31, ~~2022, 0~~2023, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

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


Offsetting of derivative assets
(in millions)
		(i)		(ii)		(iii) = (i) + (ii)			(i)		(ii)		(iii) = (i) + (ii)
		March 31, 2023							December 31, 2022
Description	Balance Sheet location	Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet		Net amounts of assets presented in the Balance Sheet			Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet		Net amounts of assets presented in the Balance Sheet
Fuel derivative contracts	Prepaid expenses and other current assets	$	228	$	(65)	$	163		$	352	$	(106)	$	246
Fuel derivative contracts	Other assets	$	167	$	(11)	$	156	(a)	$	160	$	—	$	160	(a)



Interest rate derivative contracts	Other assets	$	13	$	—	$	13	(a)	$	14	$	—	$	14	(a)

(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 8.


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

Offsetting of derivative assets
(in millions)
(i) (ii) (iii) = (i) + (ii) (i) (ii) (iii) = (i) + (ii)
March 31, 2022 December 31, 2021
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 Prepaid expenses and other current assets $ 849 $ (456) (b) $ 393 $ 409 $ (80) $ 329
Fuel derivative contracts Other assets $ 470 $ (150) $ 320 (a) $ 287 $ (95) $ 192 (a)
Interest rate derivative contracts Other assets $ 3 $ — $ 3 (a) $ — $ — $ — (a)

~~(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 9.~~

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


Offsetting of derivative liabilities
(in millions)
		(i)		(ii)		(iii) = (i) + (ii)		(i)		(ii)		(iii) = (i) + (ii)
		March 31, 2023						December 31, 2022
Description	Balance Sheet location	Gross amounts of recognized liabilities		Gross amounts offset in the Balance Sheet		Net amounts of liabilities presented in the Balance Sheet		Gross amounts of recognized liabilities		Gross amounts offset in the Balance Sheet		Net amounts of liabilities presented in the Balance Sheet
Fuel derivative contracts	Prepaid expenses and other current assets	$	65	$	(65)	$	—	$	106	$	(106)	$	—
Fuel derivative contracts	Other assets	$	11	$	(11)	$	—	$	—	$	—	$	—

Offsetting of derivative liabilities
(in millions)
(i) (ii) (iii) = (i) + (ii) (i) (ii) (iii) = (i) + (ii)
March 31, 2022 December 31, 2021
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 Prepaid expenses and other current assets $ 456 $ (456) (b) $ — $ 80 $ (80) $ —
Fuel derivative contracts Other assets $ 150 $ (150) $ — (a) $ 95 $ (95) $ — (a)
Interest rate derivative contracts Other noncurrent liabilities $ 1 $ — $ 1 $ 4 $ — $ 4

~~(a)~~ The ~~net amounts~~following tables present the impact of derivative ~~assets~~instruments and ~~liabilities are reconciled to the individual line item amounts presented in~~their location within the unaudited Condensed Consolidated ~~Balance Sheet in Note 9.~~Statement of Comprehensive Income (Loss) for the three months ended March 31, 2023 and 2022:

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


Location and amount recognized in income on cash flow and fair value hedging relationships
	Three months ended March 31, 2023				Three months ended March 31, 2022
(in millions)	Fuel and oil		Other operating expenses			Fuel and oil		Other operating expenses
Total	$	(28)	$	2		$	(203)	$	2

(Gain) loss on cash flow hedging relationships:
Commodity contracts:
Amount of (gain) reclassified from AOCI into income	(28)		—			(203)		—
Interest contracts:
Amount of loss reclassified from AOCI into income	—		2			—		2


Derivatives designated and qualified in cash flow hedging relationships
	(Gain) loss recognized in AOCI on derivatives, net of tax
	Three months ended
	March 31,
(in millions)	2023		2022
Fuel derivative contracts	$	125	$	(654)
Interest rate derivatives	2		(4)
Total	$	127	$	(658)

1512


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

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2022 and 2021:

Location and amount recognized in income on cash flow and fair value hedging relationships
Three months ended March 31, 2022 Three months ended March 31, 2021
(in millions) Fuel and oil Other (gains)/losses, net Other operating expenses Fuel and oil Other (gains)/losses, net Interest expense
Total $ (203) $ — $ 2 $ 16 $ 6 $ 1
(Gain) loss on cash flow hedging relationships:
Commodity contracts:
Amount of (gain) loss reclassified from AOCI into income (203) — — 16 6 —
Interest contracts:
Amount of loss reclassified from AOCI into income — — 2 — — 1

Derivatives designated and qualified in cash flow hedging relationships
Gain recognized in AOCI on derivatives, net of tax
Three months ended
March 31,
(in millions) 2022 2021
Fuel derivative contracts $ 654 $ 84
Interest rate derivatives 4 9
Total $ 658 $ 93

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

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


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

	Three months ended				Location of (gain) loss recognized in income on derivatives
	March 31,
(in millions)	2023		2022
Fuel derivative contracts	$	—	$	34	Other (gains) losses, net

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three months ended March 31, ~~2022~~2023 and ~~2021.~~2022. Gains and/or losses associated with fuel derivatives that qualify for hedge accounting are ultimately recorded to Fuel and oil expense. Gains and/or losses associated with fuel derivatives that do not qualify for hedge accounting are recorded to Other (gains) and losses, net. The following


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

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


		Premium expense recognized in income on derivatives						Premium expense recognized in income on derivatives

		Three months ended				Location of premium expense recognized in income on derivatives		Three months ended				Location of premium expense recognized in income on derivatives
		March 31,						March 31,
(in millions)	(in millions)	2022		2021			(in millions)	2023		2022
Fuel derivative contracts designated as hedges	Fuel derivative contracts designated as hedges	$	26	$	14	Fuel and oil	Fuel derivative contracts designated as hedges	$	30	$	26	Fuel and oil
Fuel derivative contracts not designated as hedges		—		11		Other (gains) losses, net

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets or provided by third parties. Included in the Company’s cumulative unrealized gains from fuel hedges as of March 31, ~~2022,~~2023, recorded in AOCI, were approximately ~~$578~~$75 million in unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to March 31, ~~2022.~~2023.

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~~hedges. The Company did not have any interest rate swap agreements ~~that have qualified~~designated as fair value hedges, as defined, induring the ~~applicable accounting guidance for derivative instruments and hedging. Several~~periods presented. All of the Company's interest rate swap agreements qualify for the "shortcut" or "critical terms match" methods of accounting for hedges, which dictate that the hedges were assumed to be perfectly effective at origination, and, thus, there was no ineffectiveness to be recorded in earnings.

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 experienced any significant credit loss as a result of counterparty nonperformance in the past. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. At March 31, ~~2022,~~2023, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating. The Company also had agreements with counterparties in which cash deposits and letters of credit were required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds. In certain cases, the Company has the ability to substitute among these different forms of collateral at its discretion.

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

1713


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

Counterparty (CP)
(in millions) A B C D E F G Other (a) Total
Fair value of fuel derivatives $ 315 $ 161 $ 303 $ 124 $ 146 $ 96 $ 101 $ 27 $ 1,273
Cash collateral held from CP 341 25 84 19 58 33 — — 560
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)
The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of March 31, 2023, at which such postings are triggered:

Counterparty (CP)

(in millions)

Other (a)

Total

Fair value of fuel derivatives

395

Cash collateral held from CP

—

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 < $16 million.

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

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

4. COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting and actuarial gains/losses arising from the Company’s postretirement benefit obligation. The differences between Net loss and Comprehensive income (loss) for the three months ended March 31, 2023 and 2022 were as follows:


	Three months ended March 31,
(in millions)	2023		2022
NET LOSS	$	(159)	$	(278)
Unrealized gain (loss) on fuel derivative instruments, net of deferred taxes of ($44) and $151	(147)		498
Unrealized gain on interest rate derivative instruments, net of deferred taxes of $0 and $2	—		5

Total other comprehensive income (loss)	$	(147)	$	503
COMPREHENSIVE INCOME (LOSS)	$	(306)	$	225


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

~~5. COMPREHENSIVE INCOME (LOSS)~~

Comprehensive income (loss) includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting, unrealized gains and losses on certain investments, and actuarial gains/losses arising from the Company’s postretirement benefit obligation. The differences between Net income (loss) and Comprehensive income (loss) for the three months ended March 31, 2022 and 2021 were as follows:

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

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three months ended March 31, ~~2022:~~2023:


(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 impact		Accumulated other comprehensive income
Balance at December 31, 2021		$	492	$	(57)	$	66	$	(113)	$	388
Balance at December 31, 2022												Balance at December 31, 2022	$	305	$	(32)	$	170		$	(99)	$	344
Changes in fair value	Changes in fair value	852		5		—		(199)		658		Changes in fair value	(163)		(2)		—			38		(127)
Reclassification to earnings	Reclassification to earnings	(203)		2		—		46		(155)		Reclassification to earnings	(28)		2		—		(a)	6		(20)
Balance at March 31, 2022		$	1,141	$	(50)	$	66	$	(266)	$	891
Balance at March 31, 2023												Balance at March 31, 2023	$	114	$	(32)	$	170		$	(55)	$	197

The following table illustrates the significant amounts reclassified out of each component of AOCI for the three months ended March 31, ~~2022:~~2023:

Three months ended March 31, ~~2022~~2023

(in millions)

Amounts reclassified from AOCI

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

AOCI components

Unrealized ~~gain~~(gain) on fuel derivative instruments

~~(203)~~(28)

Fuel and oil expense

~~(47)~~(6)

Less: Tax expense

~~(156)~~(22)

Net of tax

Unrealized loss on interest rate derivative instruments

~~Interest expense~~Other operating expenses

1—

Less: Tax expense

Net of tax

Total reclassifications for the period

~~(155)~~(20)

Net of tax

6.5. REVENUE

Passenger Revenues

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

Revenue is categorized by revenue source as the Company believes it best depicts the nature, amount, timing, and uncertainty of revenue and cash flow. The following table provides the components of Passenger revenue recognized for the three months ended March 31, ~~2022~~2023 and ~~2021:~~2022:


		Three months ended March 31,				Three months ended March 31,
(in millions)	(in millions)	2022		2021			(in millions)	2023		2022
Passenger non-loyalty	Passenger non-loyalty	$	3,364	$	1,354		Passenger non-loyalty	$	4,082	$	3,364
Passenger loyalty - air transportation	Passenger loyalty - air transportation	624		278			Passenger loyalty - air transportation	825		624
Passenger ancillary sold separately	Passenger ancillary sold separately	147		80			Passenger ancillary sold separately	198		147
Total passenger revenues	Total passenger revenues	$	4,135	$	1,712		Total passenger revenues	$	5,105	$	4,135


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

As of March 31, ~~2022,~~2023, and December 31, ~~2021,~~2022, the components of Air traffic liability, including contract liabilities based on tickets sold and unused flight credits available to the Customer, both of which are net of recorded breakage, and loyalty points available for redemption, within the unaudited Condensed Consolidated Balance Sheet were as follows:


		Balance as of					Balance as of
(in millions)	(in millions)	March 31, 2022		December 31, 2021		(in millions)	March 31, 2023		December 31, 2022
Air traffic liability - passenger travel and ancillary passenger services	Air traffic liability - passenger travel and ancillary passenger services	$	3,726	$	2,936	Air traffic liability - passenger travel and ancillary passenger services	$	4,007	$	3,061
Air traffic liability - loyalty program	Air traffic liability - loyalty program	4,884		4,789		Air traffic liability - loyalty program	5,190		5,189
Total Air traffic liability	Total Air traffic liability	$	8,610	$	7,725	Total Air traffic liability	$	9,197	$	8,250

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 ~~although they remain reusable, for a period of time, in the form of a flight credit~~ that can be applied by Customers towards the purchase of future travel. These flight credits are typically created as a result of a prior ticket cancellation or ~~exchange.~~exchange, and are reflected net of associated breakage. Rollforwards of the Company's Air traffic liability - loyalty program for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022 were as follows (in millions):


		Three months ended March 31,				Three months ended March 31,
		2022		2021				2023		2022
Air traffic liability - loyalty program - beginning balance	Air traffic liability - loyalty program - beginning balance	$	4,789	$	4,447		Air traffic liability - loyalty program - beginning balance	$	5,189	$	4,789
Amounts deferred associated with points awarded	Amounts deferred associated with points awarded	736		466			Amounts deferred associated with points awarded	846		736
Revenue recognized from points redeemed - Passenger	Revenue recognized from points redeemed - Passenger	(624)		(278)			Revenue recognized from points redeemed - Passenger	(825)		(624)
Revenue recognized from points redeemed - Other	Revenue recognized from points redeemed - Other	(17)		(12)			Revenue recognized from points redeemed - Other	(20)		(17)

Air traffic liability - loyalty program - ending balance	Air traffic liability - loyalty program - ending balance	$	4,884	$	4,623		Air traffic liability - loyalty program - ending balance	$	5,190	$	4,884

Air traffic liability includes consideration received for ticket and loyalty related performance obligations which have not been satisfied as of a given date. Rollforwards of the amounts included in Air traffic liability as of March 31, ~~2022~~2023 and ~~2021~~2022 were as follows (in millions):


	Air traffic liability

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


	Air traffic liability

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


	~~Air traffic liability~~

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

~~During 2020 and in parts of 2021,~~On July 28, 2022, the Company ~~experienced a significantly higher number of Customer-driven~~announced that all existing Customer flight cancellations as a result of the COVID-19 pandemic. See Note 2 for further information. As a result, the amount of Customer travel funds held in Air traffic liability that are estimated to be redeemed for future travelcredits as of ~~March 31, 2022, remains much higher~~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 ~~historical levels. The amount of such Customer funds represents approximately 9 percent and 16 percent of~~10 minutes prior to the total Air traffic liability balance at March 31, 2022, and December 31, 2021, 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,scheduled departure. As the Company ~~significantly relaxed its previous policies with regards~~continues to the time period within which these funds can be redeemed, which is typically twelve months from the original date of purchase. For all Customer travel funds created or that would have otherwise expired between March 1 and September 7, 2020 associated with flight cancellations, the Company extended the expiration date to September 7, 2022. At March 31, 2022, $1.2 billion of extended Customer travel funds with a September 7, 2022 expiration date remain in Air traffic liability, although the Company has estimatedbelieve that a portion of ~~those~~Customer flight credits issued after July 28, 2022, will not be ~~redeemed. As a result, recognition of these travel funds as flown revenue, refunds, or~~redeemed, it continues to estimate and record breakage ~~revenue will likely be more volatile over the remaining life of these funds and may not be comparable to historical trends.~~

~~Recognition of revenue~~ associated with the Company’s loyalty liability can be difficult to predict, as the number of award seats available to members is not currently restricted and they could choose to redeem their points at any time that a seat is available.such amounts. 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 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.

~~All performance obligations related to freight services sold are completed within twelve months or less; therefore, the Company has 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-branded Chase~~® ~~Visa credit card, but also include commissions and advertising associated with Southwest.com~~®. All amounts classified as Other revenues are paid monthly, coinciding with the Company fulfilling its deliverables; therefore, the Company has elected to not disclose the amount of the remaining transaction price and its expected timing of recognition for such services provided.

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

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

~~7. NET INCOME (LOSS) PER SHARE~~

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

Three months ended March 31,
2022 2021
NUMERATOR:
Net income (loss) $ (278) $ 116
DENOMINATOR:
Weighted-average shares outstanding, basic 592 591
Dilutive effects of Convertible Notes — (a) 16 (b)
Dilutive effect of stock warrants — 1
Dilutive effect of restricted stock units — 1
Adjusted weighted-average shares outstanding, diluted 592 609
NET INCOME (LOSS) PER SHARE:
Basic $ (0.47) $ 0.20
Diluted $ (0.47) $ 0.19

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

(b) Prior to the adoption of ASU 2020-06, the Convertible Notes were accounted for using the treasury stock method for the purposes of Net income (loss) per share. For the three months ended March 31, 2021, the average market price of the Company's common stock exceeded the conversion price per share of $38.48 and as such, the common shares underlying the Convertible Notes were included in the diluted calculation.

1916


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

8.Customer flight credits represents approximately 7 percent and 9 percent of the total Air traffic liability balance at March 31, 2023, and December 31, 2022, respectively.

The Company recognized revenue related to the marketing, advertising, and other travel-related benefits of the revenue associated with various loyalty partner agreements including, but not limited to, the Agreement with Chase, within Other operating revenues. For the three months ended March 31, 2023 and 2022, the Company recognized $521 million and $486 million, respectively.

6. NET 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). Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average of shares outstanding during the period. Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.


	Three months ended March 31,
	2023		2022
NUMERATOR:
Net loss	$	(159)	$	(278)
Add: Interest expense	—		—
Net loss attributable to common stockholders	(159)		(278)

DENOMINATOR:




Weighted-average shares outstanding, basic and diluted	594		592

NET LOSS PER SHARE:



Basic	$	(0.27)	$	(0.47)
Diluted	$	(0.27)	$	(0.47)

Antidilutive amounts excluded from calculations:
Convertible debt	42		47
Restricted stock units	3		—
Stock warrants	1		—

7. FAIR VALUE MEASUREMENTS

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

As of March 31, ~~2022,~~2023, the Company held certain items that are required to be measured at fair value on a recurring basis. These included cash equivalents, short-term investments (primarily treasury ~~bills and certificates of deposit)~~bills), interest rate derivative


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

contracts, fuel derivative contracts, and available-for-sale securities. The majority of the Company’s cash equivalents and short-term investments consist of instruments classified as Level 1. However, the Company has certificates of deposit, commercial paper, and 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. Equity securities primarily consist of investments with readily determinable market values associated with the Company’s excess benefit plan.

The Company’s fuel and interest rate derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange. Fuel derivative instruments currently consist solely of option contracts, whereas interest rate derivatives consist solely of swap agreements. See Note 43 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).

2018


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

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at March 31, ~~2022,~~2023, and December 31, ~~2021:~~2022:


				Fair value measurements at reporting date using:									Fair value measurements at reporting date using:
				Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs					Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
Description	Description	March 31, 2022		(Level 1)		(Level 2)		(Level 3)		Description	March 31, 2023		(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)	$	12,478	$	12,478	$	—	$	—	Cash equivalents (a)	$	7,497	$	7,497	$	—	$	—
Commercial paper	Commercial paper	270		—		270		—		Commercial paper	224		—		224		—

Certificates of deposit										Certificates of deposit	13		—		13		—

Time deposits	Time deposits	350		—		350		—		Time deposits	625		—		625		—
Short-term investments:	Short-term investments:									Short-term investments:
Treasury bills	Treasury bills	2,292		2,292		—		—		Treasury bills	3,116		3,116		—		—

Certificates of deposit	Certificates of deposit	25		—		25		—		Certificates of deposit	150		—		150		—
Time deposits	Time deposits	325		—		325		—		Time deposits	49		—		49		—

Fuel derivatives:	Fuel derivatives:									Fuel derivatives:
Option contracts (b)	Option contracts (b)	1,319		—		—		1,319		Option contracts (b)	395		—		—		395
Interest rate derivatives (see Note 4)		3		—		3		—
Interest rate derivatives (see Note 3)										Interest rate derivatives (see Note 3)	13		—		13		—
Equity Securities	Equity Securities	261		261		—		—		Equity Securities	236		236		—		—
Total assets	Total assets	$	17,323	$	15,031	$	973	$	1,319	Total assets	$	12,318	$	10,849	$	1,074	$	395
Liabilities
Fuel derivatives:
Option contracts (b)		$	(46)	$	—	$	—	$	(46)
Interest rate derivatives (see Note 4)		(1)		—		(1)		—
Total liabilities		$	(47)	$	—	$	(1)	$	(46)

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

(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as a net asset. See Note 4.3.


				Fair value measurements at reporting date using:									Fair value measurements at reporting date using:
				Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs					Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
Description	Description	December 31, 2021		(Level 1)		(Level 2)		(Level 3)		Description	December 31, 2022		(Level 1)		(Level 2)		(Level 3)
Assets	Assets	(in millions)								Assets	(in millions)
Cash equivalents:	Cash equivalents:									Cash equivalents:
Cash equivalents (a)	Cash equivalents (a)	$	12,340	$	12,340	$	—	$	—	Cash equivalents (a)	$	9,040	$	9,040	$	—	$	—
Commercial paper	Commercial paper	90		—		90		—		Commercial paper	179		—		179		—

Certificates of deposit										Certificates of deposit	23		—		23		—
Time deposits	Time deposits	50		—		50		—		Time deposits	250		—		250		—
Short-term investments:	Short-term investments:									Short-term investments:
Treasury bills	Treasury bills	2,399		2,399		—		—		Treasury bills	2,226		2,226		—		—

Certificates of deposit										Certificates of deposit	124		—		124		—
Time deposits	Time deposits	625		—		625		—		Time deposits	450		—		450		—

Fuel derivatives:	Fuel derivatives:									Fuel derivatives:

Option contracts (b)	Option contracts (b)	696		—		—		696		Option contracts (b)	512		—		—		512

Interest rate derivatives (see Note 3)										Interest rate derivatives (see Note 3)	14		—		14		—
Equity Securities	Equity Securities	288		288		—		—		Equity Securities	235		235		—		—
Total assets	Total assets	$	16,488	$	15,027	$	765	$	696	Total assets	$	13,053	$	11,501	$	1,040	$	512
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 3.

2119


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

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

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

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, ~~2022,~~2023, or the year ended December 31, ~~2021.~~2022. The following table presents the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, ~~2022:~~2023:

Fair value measurements using significant unobservable inputs (Level 3)

(in millions)

Fuel derivatives

Balance at December 31, ~~2021~~2022

~~696~~512

Total gains (losses) for the period

~~Included in earnings~~

~~(34)~~

~~(a)~~

Included in other comprehensive income

~~852~~(163)

Purchases

104

(a)

Settlements

(58)

Balance at March 31, 2023

395

~~Sales~~

~~(12)~~

~~(b)~~

~~Settlements~~

~~(229)~~

~~Balance at March 31, 2022~~

~~1,273~~

The amount of total losses ~~for the period~~

~~included in earnings attributable to the~~

~~change in unrealized gains or losses relating~~

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

~~(34)~~

~~(a)~~

~~The amount of total gains~~ for the period

included in other comprehensive income attributable to the

change in unrealized gains or losses relating

to assets still held at March 31, ~~2022~~2023

~~719~~ (145)

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

~~(b)~~ The ~~sale~~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.

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

The following table presents a range and weighted average of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 at March 31, ~~2022:~~2023:


Quantitative information about Level 3 fair value measurements	Quantitative information about Level 3 fair value measurements							Quantitative information about Level 3 fair value measurements
		Valuation technique	Unobservable input	Period (by year)	Range	Weighted Average (a)			Valuation technique	Unobservable input	Period (by year)	Range	Weighted Average (a)
Fuel derivatives	Fuel derivatives	Option model	Implied volatility	Second quarter 2022	47-73%	57	%	Fuel derivatives	Option model	Implied volatility	Second quarter 2023	26-42%	35	%
				Third quarter 2022	47-67%	54	%				Third quarter 2023	32-43%	38	%
				Fourth quarter 2022	42-59%	49	%				Fourth quarter 2023	34-42%	38	%
				2023	32-51%	43	%				2024	31-42%	33	%
				2024	27-42%	33	%				2025	30-31%	30	%

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

The carrying amounts and estimated fair values of the Company’s short-term and long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, at March 31, ~~2022,~~2023, are presented in the table below. The fair values of the Company’s publicly held long-term debt are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company has categorized these agreements as Level 2. 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.


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


(in millions)	Carrying value	Estimated fair value	Fair value level hierarchy



1.25% Convertible Notes due 2025	1,611	1,831	Level 2
5.25% Notes due 2025	1,302	1,308	Level 2

3.00% Notes due 2026	300	281	Level 2

3.45% Notes due 2027	300	281	Level 2
5.125% Notes due 2027	1,727	1,727	Level 2
7.375% Debentures due 2027	113	121	Level 2

2.625% Notes due 2030	500	427	Level 2
1.000% PSP1 Loan due 2030	976	866	Level 3
1.000% PSP2 Loan due 2031	566	487	Level 3
1.000% PSP3 Loan due 2031	526	448	Level 3

8. SUPPLEMENTAL FINANCIAL INFORMATION


(in millions)	March 31, 2023		December 31, 2022
Trade receivables	$	64	$	117
Credit card receivables	185		85
Business partners and other suppliers	545		478
Taxes receivable	129		133
Fuel hedging and receivables	15		34
Other	312		193
Accounts and other receivables	$	1,250	$	1,040


(in millions)	March 31, 2023		December 31, 2022
Derivative contracts	$	169	$	174
Intangible assets, net	295		296

Equity securities	236		261
Other	198		124
Other assets	$	898	$	855


(in millions)	March 31, 2023		December 31, 2022
Accounts payable trade	$	272	$	277
Salaries, withholdings and payroll taxes	368		456
Ticket taxes and fees	434		242
Aircraft maintenance payable	91		65
Fuel payable	113		188

Dividends payable	—		107
Customer reimbursements and refunds (a)	17		311
Accrued third party services	240		196
Other payable	194		162
Accounts payable	$	1,729	$	2,004


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


(in millions)	March 31, 2023		December 31, 2022


Voluntary Separation Program	$	69	$	72
Profitsharing and savings plans	32		167



Vacation pay	495		484

Health	289		261

Workers compensation	166		164
Property and income taxes	53		37
Interest	164		45
Bonus and incentive pay (b)	626		563
Other	224		250
Accrued liabilities	$	2,118	$	2,043


(in millions)	March 31, 2023		December 31, 2022

Voluntary Separation Program	$	125	$	147
Postretirement obligation	242		241


Other deferred compensation	326		331

Other	243		250
Other noncurrent liabilities	$	936	$	969

(a) This amount includes customer reimbursement expenses due to the Company's December 2022 operational disruption and refund submissions that had yet to be processed.

(b) Primarily consists of anticipated contract labor ratification bonuses and/or accruals. Also includes non-contract incentive pay.

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

Other Operating Expenses

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

9. COMMITMENTS AND CONTINGENCIES

William P. Hobby Airport

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

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

Based on the MOA, as well as a terminal lease amendment expected to be finalized prior to the beginning of significant construction, the Company has determined that it does not control the assets during the construction


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

~~determine~~period for accounting purposes, and thus will record the ~~fair value of these agreements are unobservable. The Company utilizes indicative pricing from counterparties~~amounts funded for the project as a receivable until reimbursed by the City, 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 November 2022 $ 300 $ 301 Level 2
Pass Through Certificates due August 2022 - 6.19% 33 33 Level 2
4.75% Notes due 2023 1,250 1,280 Level 2
1.25% Convertible Notes due 2025 1,933 2,644 Level 2
5.25% Notes due 2025 1,550 1,627 Level 2
3.00% Notes due 2026 300 295 Level 2
3.45% Notes due 2027 300 297 Level 2
5.125% Notes due 2027 1,970 2,106 Level 2
7.375% Debentures due 2027 116 131 Level 2
2.625% Notes due 2030 500 459 Level 2
1.000% PSP1 due 2030 976 919 Level 3
1.000% PSP2 due 2031 566 523 Level 3
1.000% PSP3 due 2031 526 483 Level 3
balance is derecognized.

Contractual Obligations and Contingent Liabilities and Commitments

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

~~9. SUPPLEMENTAL FINANCIAL INFORMATION~~

(in millions) March 31, 2022 December 31, 2021
Trade receivables $ 70 $ 58
Credit card receivables 217 83
Business partners and other suppliers 497 432
Taxes receivable 698 699
Fuel hedging and receivables 111 8
Other 99 77
Accounts and other receivables $ 1,692 $ 1,357
The delivery schedule below reflects commitments, although the timing of future deliveries is uncertain. For purposes of the delivery schedule below, the Company has included the remaining 46 of its 2022 contractual undelivered aircraft within its 2023 commitments, and has not made any further adjustments to this schedule based on current estimations. The Company now expects it will receive approximately 70 -8 aircraft deliveries in 2023. The Company retains significant flexibility to manage its fleet size, including opportunities to accelerate fleet modernization efforts if growth opportunities do not materialize. Given the current supply chain and aircraft delivery delays, the Company will continue working with Boeing to solidify future delivery dates.

(in millions) March 31, 2022 December 31, 2021
Derivative contracts $ 323 $ 192
Intangible assets, net 295 295
Other 360 395
Other assets $ 978 $ 882

(in millions) March 31, 2022 December 31, 2021
Accounts payable trade $ 320 $ 156
Salaries payable 259 287
Taxes payable excluding income taxes 319 200
Aircraft maintenance payable 53 42
Fuel payable 208 170
Other payable 489 427
Accounts payable $ 1,648 $ 1,282
Additional information regarding the Company's order book is included in the following table as of March 31, 2023:


	The Boeing Company
	-7 Firm Orders		-8 Firm Orders		-7 or -8 Options	Total
2023	31		105		—	136	(c)
2024	45		11		30	86
2025	30		—		56	86
2026	30		15		40	85
2027	15		15		6	36
2028	15		15		—	30
2029	20		30		—	50
2030	—		55		—	55
2031	—		—		—	—
	186	(a)	246	(b)	132	564

(a) The delivery timing for the -7 is dependent on the Federal Aviation Administration ("FAA") issuing required certifications and approvals to Boeing and the Company. The FAA will ultimately determine the timing of the -7 certification and entry into service, and the Company therefore offers no assurances that current estimations and timelines are correct.

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

(c) Includes 30 -8 deliveries received through March 31, 2023. In addition, the Company has included the remaining 46 of its 2022 contractual undelivered aircraft (14 -7s and 32 -8s) within its 2023 commitments. Due to Boeing's supply chain challenges and the current status of the -7 certification, the Company currently estimates approximately 70 -8 aircraft deliveries in 2023. The 2023 detail is as follows:


	The Boeing Company
	-7 Firm Orders	-8 Firm Orders	Total
2022 Contractual Deliveries Remaining	14	32	46
2023 Contractual Deliveries	17	73	90
2023 Total	31	105	136

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


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

(in millions) March 31, 2022 December 31, 2021
Voluntary Separation Program $ 85 $ 92
Profitsharing and savings plans 65 262
Vacation pay 456 451
Health 153 152
Workers compensation 138 141
Property and income taxes 61 65
Interest 107 46
Deferred supplier payments (a) — 80
Other 295 335
Accrued liabilities $ 1,360 $ 1,624

(in millions) March 31, 2022 December 31, 2021
Voluntary Separation Program $ 211 $ 233
Postretirement obligation 333 330
Other deferred compensation 334 369
Other 282 292
Other noncurrent liabilities $ 1,160 $ 1,224

~~(a) Represents amounts owed at~~order commitments with Boeing, the Company has assumed that any aircraft that were contractually due but remain undelivered as of December 31, ~~2021 for aircraft deliveries received that will be relieved via future payments to supplier.~~

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

~~Other Operating Expenses~~

~~10. COMMITMENTS AND CONTINGENCIES~~

~~Dallas Love Field~~

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

Although the City of Dallas received commitments from various sources that helped to fund portions of the LFMP project, including the Federal Aviation Administration ("FAA"), the Transportation Security Administration, and the City of Dallas' Aviation Fund, the majority of the funds used were from the issuance of bonds. The Company guaranteed principal and interest payments on bonds issued by the LFAMC (the "Series 2010" bonds and the "Series 2012" bonds). Given2022, have been rolled into the Company’s guarantee associated with the bonds issued to fund LFMP, the remaining debt service amount was considered a minimum lease payment under the adoption of ASC Topic 842, Leases, and therefore was recorded as a lease liability with a corresponding right-of-use asset within the Company’s unaudited Condensed Consolidated Balance Sheet.


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

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

As of March 31, 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 $89 million as of March 31, 2022, and was reflected as part of the Company's operating lease 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 first quarter 2022, the Company exercised 15 Boeing 737-8 ("-8") options for delivery in 2022 and 12 Boeing 737-7 ("-7") options for delivery in 2023. Fleet and capacity plans will continue to evolve2023 commitments, until such time as the Company ~~manages through~~and Boeing revise the ~~COVID-19 recovery period, and it will continue to evaluate its remaining Boeing 737 MAX ("MAX") options for 2022. However, with its cost-effective~~aircraft order book, the Company retains significant flexibility to manage its fleet size, including opportunities to accelerate fleet modernization efforts if growth opportunities do not materialize. Additional information regarding the Company's delivery schedule is included in the following table as of March 31, 2022:

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

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

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

Based on the Company's existing agreement with Boeing, capital commitments associated with its firm orders as of March 31, ~~2022,~~2023, were: ~~$2.1 billion remaining in 2022, $1.9~~$1.6 billion in 2023 ~~$1.0~~(of which approximately $956 million relates to 46 MAX aircraft that were contractually committed for 2022 but were not received), $1.5 billion in 2024, ~~$839~~$993 million in 2025, ~~$975 million~~$1.4 billion in 2026, ~~$1.0~~$1.1 billion in 2027, $1.3 billion in 2028, and ~~$6.0~~$4.5 billion thereafter. ~~In addition, subsequent~~

Subsequent to March 31, ~~2022,~~2023 and through ~~May 2, 2022, due to the current status of the -7 certification,~~April 27, 2023, the Company ~~converted 40 2022 -7 firm orders into 2022 -8 orders, moved 1 2022 -7 firm order into 2023, and accelerated 1 2023 -8 option into~~


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

~~2022. In April 2022, the Company also~~has exercised ~~16 -8 options for delivery in 2022, exercised 2~~11 -7 options for delivery in ~~2023, accelerated~~2024, and ~~exercised 10 2023 -8 options into 2022, and shifted 10 2022 MAX~~converted eight 2024 -7 firm orders ~~into 2023. Combined,~~to -8 firm orders, resulting in the Company's ~~aircraft order book activity subsequent to March 31, 2022, has resulted in additional~~2024 capital commitments ~~associated with firm orders of $689 million and $188 million in 2022 and 2023, respectively.~~increasing to $1.7 billion.

Contingencies

The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business ~~including, but not limited~~and records a liability for such claims when it is probable that a loss will be incurred and the amount is reasonably estimable.

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

The Company is a defendant in class action litigation asserting it has not provided paid short-term military leave to certain employees, in violation of the federal Uniformed Services Employment and Reemployment Rights Act (“USERRA”). The ~~Company's management does not expect that~~United States District Court for the ~~outcome~~Northern District of ~~any of its currently ongoing legal proceedings or~~California previously issued an order to effectively stay the ~~outcome of any adjustments presented~~action, pending an appeal from an order by the ~~IRS, individually~~United States District Court for the Eastern District of Washington granting summary judgment in favor of an airline in a separate case involving substantially the same claims at issue in this action. On February 1, 2023, the Ninth Circuit reversed the district court’s grant of summary judgment and remanded the separate airline case to the District Court. The Ninth Circuit’s decision may adversely affect the Company’s defenses in the USERRA proceeding and may give rise to additional litigation in this or ~~collectively, will have~~other areas. The Company is currently not able to estimate a ~~material adverse effect on~~range of possible loss with regards to the ~~Company's financial condition, results of operations, or cash flow.~~

litigation to which it is a defendant.

~~11.~~10. FINANCING ACTIVITIES

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

Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2025, in the event certain conditions are met, as stated in the offering documents. AsThe Convertible Notes did not meet the criteria to be converted as of the date of the financial statements, and thus are classified as Long-term debt in the accompanying unaudited Condensed Consolidated Balance Sheet as of March 31, ~~2022, the conditions were not met to convert.~~

2023. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election. The Company intends to settle conversions by paying cash up to the principal amount of the Convertible Notes, with any excess conversion value settled in cash or shares of common stock. The initial conversion rate iswas 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,~~ However, based on the ~~Company bifurcated~~Company's cash dividends paid in January 2023 and March 2023, 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 thebond 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.~~rate changed to 26.1250 on January 9, 2023,

2624


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

and changed to 26.2650 on March 7, 2023. The ~~Company adopted ASU 2020-06, as~~net carrying amount and principal amount 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~~was $1.6 billion as of March 31, 2023 and ~~following the adoption of ASU 2020-06:~~

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

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


		Three months ended March 31,					Three months ended March 31,
(in millions)	(in millions)	2022		2021		(in millions)	2023		2022
Non-cash amortization of the debt discount		$	—	$	19

Non-cash amortization of debt issuance costs	Non-cash amortization of debt issuance costs	3		2		Non-cash amortization of debt issuance costs	3		3
Contractual coupon interest	Contractual coupon interest	6		7		Contractual coupon interest	5		6
Total interest expense	Total interest expense	$	9	$	28	Total interest expense	$	8	$	9

The unamortized debt issuance costs ~~have historically been~~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 three months ended March 31, ~~2022.~~

~~During~~2023. The effective interest rate associated with the Convertible Notes was approximately 1.9 percent for the three months ended March 31, ~~2022,~~2023.

The following table presents the ~~Company paid $323 million in debt and finance lease obligations, including~~impact of the partial extinguishment of ~~$164 million in principal of~~ the Company's Convertible Notes ~~for $230 million in cash. The Company accounted for these repurchases as a partial~~and early prepayment of debt extinguishment, which resulted in (i) a loss of $69 million reflected in Other (gains) losses, net, and (ii) a $3 million reduction in remaining unamortized debt issuance costs in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)(excluding payments on finance leases) for the three months ended March 31, 2022. ~~In addition the Company recorded the~~No such instances of partial extinguishment or early prepayment of ~~$30 million in principal of its 5.125% Notes due 2027~~debt occurred for ~~a cash payment of $34 million, which resulted in a loss of $3 million reflected in Other (gains) losses, net, during~~ the three months ended March 31, 2023.


	Three months ended March 31, 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	$	230	$	164	$	69	$	(3)	$	—
5.125% Notes due 2027	34		30		3		—		1


Total	$	264	$	194	$	72	$	(3)	$	1

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

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

2725

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

Relevant comparative operating statistics for the three months ended March 31, ~~2022, 2021,~~2023 and ~~2019~~2022 are included below. The Company provides these operating statistics because they are commonly used in the airline industry and, as such, allow readers to compare the Company’s performance against its results for the prior year period, as well as against the performance of the Company’s peers. The Company believes a comparison of its first quarter 2022 operating statistics to first quarter 2019 (pre-pandemic) is relevant and useful as the Company continues to recover from the pandemic. In the first three months of 2021 and 2022, most of these operating statistics were significantly impacted by the COVID-19 pandemic and decisions the Company made as a result of the pandemic. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.


		Three months ended March 31,															Three months ended March 31,
		2022			2021			2022 Change to 2021			2019			2022 Change to 2019					2023			2022			Change
Revenue passengers carried (000s)	Revenue passengers carried (000s)	26,029			14,225			83.0	%		31,296			(16.8)	%			Revenue passengers carried (000s)	30,231			26,029			16.1	%
Enplaned passengers (000s)	Enplaned passengers (000s)	32,005			17,927			78.5	%		37,813			(15.4)	%			Enplaned passengers (000s)	37,666			32,005			17.7	%
Revenue passenger miles (RPMs) (in millions)(a)	Revenue passenger miles (RPMs) (in millions)(a)	26,483			14,875			78.0	%		30,704			(13.7)	%			Revenue passenger miles (RPMs) (in millions)(a)	29,547			26,483			11.6	%
Available seat miles (ASMs) (in millions)(b)	Available seat miles (ASMs) (in millions)(b)	34,384			23,146			48.6	%		37,885			(9.2)	%			Available seat miles (ASMs) (in millions)(b)	38,062			34,384			10.7	%
Load factor(c)	Load factor(c)	77.0		%	64.3		%	12.7		pts.	81.0		%	(4.0)		pts.		Load factor(c)	77.6		%	77.0		%	0.6		pts.
Average length of passenger haul (miles)	Average length of passenger haul (miles)	1,017			1,046			(2.8)	%		981			3.7	%			Average length of passenger haul (miles)	977			1,017			(3.9)	%
Average aircraft stage length (miles)	Average aircraft stage length (miles)	765			772			(0.9)	%		751			1.9	%			Average aircraft stage length (miles)	715			765			(6.5)	%
Trips flown	Trips flown	287,751			192,401			49.6	%		326,390			(11.8)	%			Trips flown	334,121			287,751			16.1	%
Seats flown (000s)(d)	Seats flown (000s)(d)	44,547			29,791			49.5	%		49,473			(10.0)	%			Seats flown (000s)(d)	52,719			44,547			18.3	%
Seats per trip(e)	Seats per trip(e)	154.8			154.8			—	%		151.6			2.1	%			Seats per trip(e)	157.8			154.8			1.9	%
Average passenger fare	Average passenger fare	$	158.88		$	120.36		32.0	%		$	151.61		4.8	%			Average passenger fare	$	168.88		$	158.88		6.3	%
Passenger revenue yield per RPM (cents)(f)	Passenger revenue yield per RPM (cents)(f)	15.62			11.51			35.7	%		15.45			1.1	%			Passenger revenue yield per RPM (cents)(f)	17.28			15.62			10.6	%
Operating revenues per ASM (cents)(g)	Operating revenues per ASM (cents)(g)	13.65			8.86			54.1	%		13.59			0.4	%			Operating revenues per ASM (cents)(g)	14.99			13.65			9.8	%
Passenger revenue per ASM (cents)(h)	Passenger revenue per ASM (cents)(h)	12.03			7.40			62.6	%		12.52			(3.9)	%			Passenger revenue per ASM (cents)(h)	13.41			12.03			11.5	%
Operating expenses per ASM (cents)(i)	Operating expenses per ASM (cents)(i)	14.09			8.00			76.1	%		12.26			14.9	%			Operating expenses per ASM (cents)(i)	15.74			14.09			11.7	%
Operating expenses per ASM, excluding fuel (cents)	Operating expenses per ASM, excluding fuel (cents)	11.17			5.98			86.8	%		9.58			16.6	%			Operating expenses per ASM, excluding fuel (cents)	11.67			11.17			4.5	%
Operating expenses per ASM, excluding fuel and profitsharing (cents)	Operating expenses per ASM, excluding fuel and profitsharing (cents)	11.06			5.88			88.1	%		9.35			18.3	%			Operating expenses per ASM, excluding fuel and profitsharing (cents)	11.67			11.06			5.5	%
Fuel costs per gallon, including fuel tax	Fuel costs per gallon, including fuel tax	$	2.30		$	1.63		41.1	%		$	2.05		12.2	%			Fuel costs per gallon, including fuel tax	$	3.19		$	2.30		38.7	%
Fuel costs per gallon, including fuel tax, economic	Fuel costs per gallon, including fuel tax, economic	$	2.30		$	1.70		35.3	%		$	2.05		12.2	%			Fuel costs per gallon, including fuel tax, economic	$	3.19		$	2.30		38.7	%
Fuel consumed, in gallons (millions)	Fuel consumed, in gallons (millions)	436			286			52.4	%		493			(11.6)	%			Fuel consumed, in gallons (millions)	483			436			10.8	%
Active fulltime equivalent Employees~~(j)~~	Active fulltime equivalent Employees~~(j)~~	58,865			56,051			5.0	%		59,436			(1.0)	%			Active fulltime equivalent Employees~~(j)~~	69,868			58,865			18.7	%
Aircraft at end of period~~(k)~~(j)	Aircraft at end of period~~(k)~~(j)	722			730			(1.1)	%		753			(4.1)	%			Aircraft at end of period~~(k)~~(j)	793			722			9.8	%

(a) A revenue passenger mile is one paying passenger flown one mile. Also referred to as "traffic," which is a measure of demand for a given period.

(b) An available seat mile is one seat (empty or full) flown one mile. Also referred to as "capacity," which is a measure of the space available to carry passengers in a given period.

(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" 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",~~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 ~~8,164 Employees on Extended Emergency Time Off as of March 31, 2021. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.~~

~~(k) Included~~ four Boeing 737 Next Generation aircraft in ~~temporary~~ storage as of March 31, ~~2022. Also included seven Boeing 737 MAX ("MAX")~~2023 and ~~59 Boeing 737 Next Generation aircraft in temporary storage as of~~ March 31, ~~2021.~~

2022.

2927

Financial Overview

~~Since~~In late December 2022, the Company experienced a wide-scale operational disruption as historically extreme winter weather across a significant portion of the United States impacted its operational plan and flight schedules. Subsequent to Winter Storm Elliott, the Company was challenged to realign flight crews, flight schedules, and aircraft for a period of several days during this peak demand travel period. The Company returned to a normal operating schedule on December 30, 2022. This disruption and subsequent recovery efforts resulted in the cancellation of more than 16,700 flights during the period from December 21 through December 31, 2022. For first quarter 2023, these events also created a deceleration in bookings, primarily isolated to January and February ~~2020,~~2023, as well as increased expenses primarily in the form of reimbursing Customers for costs incurred as a result of the flight cancellations. The Company estimates the financial impact of this disruption on the first quarter 2023 results was approximately $380 million on a pre-tax basis.

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

•Creating an early indicator dashboard that closely monitors operational health and signals an alert if the Company approaches predefined operational thresholds;

•Establishing supplemental staffing that can quickly mobilize to support Crew recovery efforts;

•Updating and upgrading the Company's Crew optimization software; and

•Implementing organizational changes designed to improve coordination and communication between the Company's operating teams.

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

•Improve Winter Operations: The Company plans to reinforce airport infrastructure, increase available equipment, and bolster overall winter preparedness at key airports where there is potential for severe winter weather in order to help its Employees function more effectively in severe weather. Additionally, the Company plans to (i) increase available equipment to manage the effects of winter weather such as deicing trucks, pads, and ground equipment; (ii) increase storage capacity of deicing fluid at key airports; (iii) add engine covers and heaters to protect aircraft and ground equipment in very low temperatures; (iv) implement new tools that provide Pilots additional real-time insight into the amount of time they have to depart after an aircraft has been deiced; and (v) add staff at airports where extreme cold requires rotating Ground Operations Employees working outside.

•Accelerate Operational Investments: The Company is currently budgeted to spend more than $1.3 billion on investments, upgrades, and maintenance of information technology systems in 2023 and is reprioritizing its timeline for upgrading tools and technology to assist the Company recover its operations faster during extreme winter weather.

•Enhance Cross-Team Collaboration: The Company is enhancing collaboration across Teams and improving the tools and procedures to streamline communication and decision-making, and has already consolidated the Team that designs the flight schedule with the ~~COVID-19 pandemic; however,~~Team overseeing the day-to-day operations into one Department.

No assurance can be given that these efforts to boost operational resiliency in key areas across the Company ~~saw steady improvement throughout much~~will be successful. See "Risk Factors – The airline industry is made up of ~~2021~~inherently complex systems, and is affected by many conditions that are beyond its control, which can impact the Company's business strategies and results of operations" included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

The Company recorded first quarter results for 2023 and 2022 ~~with intermittent periods of decelerated demand that coincided with COVID-19 variant surges. The Company's financial results in both years,~~ on ~~both~~ an accounting principles generally accepted in the United States ("GAAP") and ~~Non-GAAP~~non-GAAP basis, ~~were significantly impacted by the pandemic and the resulting effect on demand and passenger bookings.~~

~~The Company recorded first quarter GAAP and non-GAAP results for 2022, 2021, and 2019~~ as noted in the following ~~tables. The Company believes comparisons of certain financial results to 2019 continue to be relevant given the significant impacts in 2020 and 2021 resulting from the pandemic.~~table. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

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

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


	Three months ended March 31,
(in millions, except per share amounts)
GAAP	2023		2022		2023 Change to 2022
Operating loss	$	(284)	$	(151)	88.1	%
Net loss	$	(159)	$	(278)	(42.8)	%
Net loss per share, diluted	$	(0.27)	$	(0.47)	(42.6)	%

Non-GAAP
Operating loss	$	(284)	$	(135)	110.4
Net loss	$	(163)	$	(191)	(14.7)
Net loss per share, diluted	$	(0.27)	$	(0.32)	(15.6)

The comparison of the Company's ~~GAAP~~ financial results, ~~were comparatively worse in first quarter~~as shown above on a GAAP and non-GAAP basis for the three months ended March 31, 2023, versus the three months ended March 31, 2022, ~~versus first quarter 2021, primarily due to $1.2 billion in grant allocations of payroll funding support ("Payroll Support") from~~reflect the ~~United States Department~~effects of the ~~Treasury ("Treasury") in 2021 utilized to fund a portion~~Omicron variant of ~~salaries, wages,~~COVID-19, which reduced travel demand and ~~benefits. See below~~created staffing challenges for the Company, particularly during January and ~~Note 2 to~~February 2022, as well as the ~~unaudited Condensed Consolidated Financial Statements for further information.~~previously mentioned Winter Storm Elliott and the Company's December 2022 operational disruption. On a ~~non-GAAP~~GAAP basis, the Company's ~~Operating~~results for the three months ended March 31, 2022 also included a $72 million loss ~~and Net loss improved significantly in first quarter 2022 versus the same prior year period~~on extinguishment of debt due to the significant recovery in travel demand, which was aided by a reduction in COVID-19 cases and hospitalizations, a significant increase in vaccinations, and a decline in travel-related restrictions acrossrepurchase of the ~~United States.~~Company's Convertible Senior Notes (the "Convertible Notes"). See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures. These impacts combined resulted in a 128.8 percent increase in Operating revenues for the three months ended March 31, 2022, versus the same prior year period. Operating revenues for first quarter 2022 continued to fall below first quarter 2019 pre-pandemic levels primarily due to lower capacity and load factors in first quarter 2022; however, Operating expenses exceeded first quarter 2019 pre-pandemic levels primarily due to higher salaries, wages and benefits and fuel prices in first quarter 2022.

~~2022~~2023 Outlook

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

2023:

2Q ~~2022~~2023 Estimation

~~Operating revenue compared with 2019~~RASM (a), year-over-year

UpDown 8% to ~~12%~~

~~Load factor~~

~~~85%~~11%

ASMs ~~compared with 2019~~(b), year-over-year

~~Down ~7%~~Up ~14%

Economic fuel costs per gallon ~~(b)~~(c)(d)

$~~3.05~~2.45 to ~~$3.15~~$2.55

Fuel hedging premium expense per gallon

$~~0.05~~0.06

Fuel hedging cash settlement gains per gallon

$~~0.61~~0.13

ASMs per gallon (fuel efficiency)

7678 to 7880

CASM-X ~~(d) compared with 2019~~ (e), year-over-year (f)

Up ~~14%~~5% to ~~18%~~8%

~~Debt~~Scheduled debt repayments (millions)

~$2010

Interest expense (millions)

~$9065


									~~2022~~ 2023 Estimation
ASMs ~~compared with 2019 (f)~~(b), year-over-year									~~Down ~4%~~Up 14% to 15%
Economic fuel costs per gallon ~~(b)~~(c)(d)									$~~2.75~~2.60 to ~~$2.85~~$2.70
Fuel hedging premium expense per gallon									$~~0.04~~0.06
Fuel hedging cash settlement gains per gallon									$~~0.54~~0.10
CASM-X ~~(d) compared with 2019~~ (e), year-over-year (f)									~~Up 12%~~Down 2% to ~~16%~~4%
~~Debt~~Scheduled debt repayments (millions)									~$~~650~~85
Interest expense (millions)									~$~~360~~250
Aircraft (g)									814
Effective tax rate ~~(h)~~									~~24%~~23% to ~~26%~~24%
Capital spending (billions) ~~(i)~~(h)									~$~~5.0~~3.5

(a) Operating revenue per available seat mile (RASM, or unit revenues).

(b) Available seat miles (ASMs, or capacity). The Company's flight schedule is currently published for sale through November 4, 2023. The Company ~~believes that operating revenues compared with 2019~~currently expects third quarter 2023 capacity to increase in the range of 11 percent to 13 percent, and fourth quarter 2023 capacity to increase in the range of 20 percent to 22 percent, both year-over-year. Included in the Company's updated capacity guidance is a ~~relevant measure~~decrease in previously planned year-over-year capacity as a result of ~~performance due to~~delivery delays at Boeing, planned in the ~~significant impacts in 2020 and 2021~~post-summer time period from ~~the pandemic.~~September through December 2023.

~~(b)~~(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~~Measures (also referred to as "excluding special items").

~~(c)~~(d) Based on the Company's existing fuel derivative contracts and market prices as of April ~~21, 2022,~~19, 2023, second quarter ~~second half,~~ and full year ~~2022~~2023 economic fuel costs per gallon are estimated to be in the range of ~~$3.05~~$2.45 to ~~$3.15, $2.75~~$2.55 and $2.60 to ~~$2.85, and $2.75 to $2.85,~~$2.70, respectively. Economic fuel cost projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate the hedge accounting impact associated with the volatility of the energy markets, ~~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.

~~(d)~~(e) Operating expenses per available seat mile, excluding fuel and oil expense, special items, and profitsharing ~~and special items.~~(CASM-X).

~~(e)~~(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.

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

(g) Aircraft on property, end of ~~period; net of~~ ~~22 retirements planned in the remaining three quarters of 2022. Reflects all exercised activity as of April 28, 2022 and the assumption that~~period. Due to delivery delays, the Company ~~exercises all 12~~ ~~remaining 2022 options.~~now estimates approximately 70 Boeing 737 MAX 8 ("-8") aircraft deliveries in 2023, compared with its previous guidance of approximately 90 -8 aircraft deliveries. The Company now expects to retire 26 Boeing 737-700 ("-700") aircraft in 2023, compared with its previous guidance to retire 27 -700 aircraft. As a result, the Company now expects to end 2023 with 814 aircraft. The delivery schedule for the ~~Boeing 737-7~~737 MAX 7 ("-7") is dependent on the Federal Aviation Administration ("FAA") issuing required certifications and approvals to The Boeing Company ("Boeing") and the Company. The FAA will ultimately determine the timing of the -7 certification and entry into service, and Boeing may continue to experience supply chain challenges, so the Company therefore offers no assurances that current estimations and timelines are correct.

(h) The Company now estimates its 2023 capital spending to be approximately $3.5 billion, which assumes approximately 70 -8 aircraft deliveries, compared with its previous 2023 capital spending estimate of approximately $4.0 billion, which assumed approximately 90 -8 aircraft deliveries. The Company now estimates its full year 2023 aircraft spending to be approximately $2.3 billion, compared with its previous guidance of approximately $2.8 billion, and continues to estimate its full year 2023 non-aircraft capital spending to be approximately $1.2 billion.

The Company's ~~estimated effective tax rate~~second quarter 2023 RASM guidance includes a headwind of approximately four and a half points, year-over-year. This headwind is ~~impacted~~driven by approximately $300 million of additional breakage revenue in second quarter 2022—a higher-than-normal amount related to flight credits issued during the ~~extinguishment~~pandemic that were set to expire unused—and the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits, which resulted in the percentage of ~~$164 million~~breakage revenue normalizing to historical levels beginning in ~~principal of its 1.25% Convertible Senior Notes due 2025 (the “Convertible Notes”) for a cash payment of $230 million, which occurred in first~~third quarter 2022. ~~The loss on partial extinguishment of Convertible Notes is largely disallowed as a deduction for tax purposes.~~Flight credits that never expire, along with Rapid Rewards points that never expire, are industry-leading, Customer-friendly policies.

3130

~~(i) Represents~~The current ~~contractual payments~~booking curve appears to ~~Boeing for firm aircraft~~have returned close to pre-pandemic norms, and leisure demand and yields continue to be strong heading into the ~~assumptions that~~busy summer travel season. While March 2023 managed business revenues largely recovered to March 2019 levels, the Company ~~exercises~~ ~~all 12~~ ~~remaining 2022 options,~~expects corporate revenue trends to continue to be choppy as Customer travel patterns evolve post-pandemic. However, the Company continues to expect further sequential recovery in ~~addition to ~$900 million non-aircraft capital spending. Excluding any further~~managed business revenues in second quarter 2023 compared with first quarter 2023, driven by anticipated growth in corporate accounts and passengers.

~~option exercises,~~

The Company recently selected the Amadeus Network Revenue Management product as its new revenue management system provider—slightly ahead of the mid-2023 implementation timing outlined at the Company's 2022 ~~capital spending would be ~$4.2 billion, also including ~$900 million~~Investor Day. The Company was pleased with initial observations during the production pilot and is excited about the potential for incremental revenue, driven primarily by improved science in ~~non-aircraft capital spending.~~forecasting and network optimization. The Amadeus product is now fully implemented and is currently managing all bookings and departure dates.

~~COVID-19 Pandemic Impacts~~

~~As detailed in Note 2~~The Company expects second quarter 2023 CASM-X 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 Treasuryincrease in the ~~form~~range of ~~Payroll Support, and this assistance had a significant impact on~~5 percent to 8 percent, year-over-year. In addition to general inflationary cost pressures, the year-over-year increase is primarily due to higher labor rates, including market wage rate accruals, for all Employee work groups, as well as the timing of planned maintenance expenses for the Company's ~~reported GAAP financial results in 2021. Such impact ended in third quarter 2021, and the Company's first quarter 2022 results did not reflect the benefit of this Payroll Support, and~~Boeing 737-800 ("-800") fleet. The Company currently expects its ~~future periods are not expected~~full year 2023 CASM-X to ~~benefit from such Payroll Support. However, future cash flows will be impacted through the portion of Payroll Support that was~~decrease in the ~~form~~range of ~~loans that will have~~2 percent to ~~be repaid to Treasury.~~4 percent, year-over-year.

~~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 elected to participate in one of these programs. All Employees that elected to participate in the Extended ETO program have since returned or been recalled to work, or have chosen to permanently separate from the Company, and no Employees remained on Extended ETO as of March 31, 2022. The Company realized approximately $1.1 billion of full year 2021 cost savings from the Voluntary Separation Program and Extended ETO but expects no material cost savings from these programs in 2022 and beyond. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.Overview

The Company continues to have a smaller workforce than it did prior to the COVID-19 pandemic. However, in addition to recalling all of the Employees that participated in Extended ETO, the Company met its 2021 hiring goals and is planning to add more than 10,000 additional Employees during 2022 as it strives to provide sufficient staffing to support its anticipated flight schedule plans for 2022 and beyond. For the three months ended March 31, ~~2022,~~2023, the Company ~~met its hiring goals, adding 3,300~~hired approximately 2,900 Employees, net of attrition. The Company's number of active full-time equivalent Employees increased by 18.7 percent from March 31, 2022 to March 31, 2023, while the year-over-year increase in capacity or ASMs was 10.7 percent. The Company ~~is making~~has made additional investments to attract and retain talent, including ~~the decision to further raise~~raising the Company's starting hourly pay rates ~~from $15 per hour to $17 per hour~~ for certain of its workgroups, subject, in each case, to acceptance of such change by the applicable union. ~~The Company also continues to evaluate staffing needs to align with planned flight activity.~~

~~In September 2021,~~On January 31, 2023, the ~~President of~~Company's 50 Facilities Maintenance Technicians, represented by the ~~United States issued an Executive Order establishing~~Aircraft Mechanics Fraternal Association ("AMFA"), ratified a ~~vaccination requirement for employees of covered federal contractors.~~new four-year collective bargaining agreement with the Company. The federal government required that federal contractors have their workforce vaccinated (or request an accommodation) by December 8, 2021. The deadline was later extended to January 4, 2022. The Company started an active campaign to notify Employees of the need to submit proof of COVID-19 vaccination, or apply for an accommodation, by January 4, 2022. On December 3, 2021, the company announced that 93 percent of its Employees were vaccinated, or had requested an accommodation. Due to legal challenges to the vaccine mandate, the Company announced on December 20, 2021, that it is no longer imposing a deadline for compliance. However, if the vaccine mandate is revived, the Company will resume efforts to work with Employees who have not yet either submitted proof of vaccination or requested an accommodation.newly ratified agreement becomes amendable in November 2027.

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

On April 19, 2023, the Company ~~Overview~~reached a tentative collective-bargaining agreement with TWU 550, which represents the Company's 12 Meteorologists. The ratification vote is scheduled to conclude by April 30, 2023. If the tentative agreement is ratified, it will become amendable in June 2028.

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

The Company ~~has~~ entered into supplemental agreements in 2022 with ~~The~~ Boeing ~~Company ("Boeing")~~ to increase aircraft orders and accelerate certain options with the ~~goal~~goals 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. See Note 109 to the unaudited Condensed Consolidated Financial Statements for 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 ~~446 Boeing 737-700 ("-700")~~419 -700 aircraft over the next 10 to 15 years to support the modernization of the Company's fleet, a key component of its environmental sustainability efforts.

The ~~Company ended first quarter 2022~~Company's order book with ~~722~~ Boeing 737 aircraft, compared with the Company's previous guidance of 725 aircraft, due to three scheduled aircraft deliveries planned in first quarter 2022 shifting to later in 2022. As expected, the Company retired five owned -700 aircraft, and returned one leased -700 aircraft during first quarter 2022. Asas of March 31, ~~2022, four -700 aircraft remained in temporary storage due to first quarter and second quarter 2022 capacity remaining below respective 2019 levels. The Company continues to expect to retire~~2023 consists of a total of ~~28 -700~~432 MAX firm orders (186 -7 aircraft and 246 -8 aircraft) for the years 2023 through 2030 and 132 MAX options (-7s or -8s) for the years 2024 through 2027. Additionally in ~~2022.~~April 2023, the Company exercised 11 -7 options for delivery in 2024. Given Boeing's supply chain challenges and the current status of the -7 certification, aircraft delivery delays are currently expected to extend into 2024.

The Company has published its flight schedule through November ~~5, 2022. During 2022,~~4, 2023. However, the Company is ~~focusing on restoring~~expected to publish updated flight schedules for post-summer 2023 in light of the recently announced aircraft delivery delays from Boeing. Despite the delays, the Company continues to expect its network ~~primarily in cities with a very strong Customer base~~to be roughly restored to pre-pandemic levels by ~~adding city pair frequencies and connecting new service with existing points-of-strength to increase Customer depth.~~

~~The COVID-19 pandemic has had a particularly negative impact on international operations and led to~~ the ~~Company's suspension~~end of ~~international operations at the beginning of the pandemic.~~this year. The Company ~~has since resumed service~~remains focused on maturing new markets that launched during the pandemic and shifting capacity growth to ~~all 14 of its international destinations.~~

On March 24, 2022, the Company announced a new fare product, Wanna Get Away Plus™, expected to be available to Customers in second quarter 2022. Wanna Get Away Plus is expected to provide Customers with more flexibility, choice, and rewards for a modest buy-up from the Company's Wanna Get Away® fare product. In addition to all of the usual day of travel benefits and booking flexibility offered to Customers across all of the Company's fares, Wanna Get Away Plus provides additional benefits as compared to the Wanna Get Away fare product, including:

•~~Transferable flight credit(s), a new benefit that generally enables Customers to make a one-time transfer of eligible unused flight credit to a new traveler for future use;~~

•~~More flexibility through same-day confirmed change/same-day standby; and~~

•~~More earning power in the Company's Rapid Rewards® loyalty program, with 8X points awarded on flights instead of the 6X points awarded on Wanna Get Away fares.~~

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

On March 28, 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 6,000 Customer Service Agents, Customer Representatives, and Source of Support Representatives. The ratification vote is scheduled to conclude on May 6, 2022. If the tentative agreement is ratified, it will become amendable May 6, 2026.restoring core markets.

As part of its commitment to corporate sustainability, ~~on April 22, 2022,~~ the Company ~~published~~is expected to publish its ~~2021~~2022 One Report describing the Company's sustainability strategies on May 3, 2023, which include the Company’s fuel conservation and emissions ~~reduction~~mitigation initiatives and other efforts to ~~reduce~~minimize greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling. The Company also ~~published~~is expected to publish its ~~first ever~~ Diversity, Equity, and Inclusion ("DEI") ~~Report.~~Report on May 3, 2023. A companion piece to the One Report, the DEI Report takes a deeper dive into the Company's DEI goals ~~commitments,~~ and initiatives and highlights the ~~path forward.~~Company's DEI plans for the future. Information contained in the Southwest One Report and/or the DEI Report is not incorporated by reference into, and does not constitute a part of, this Form 10-Q. While the Company believes that the disclosures contained in the Southwest One Report, the DEI Report, and other voluntary disclosures regarding environmental, social, and governance (“ESG”) matters are responsive to various areas of investor interest, the Company believes that certain of these disclosures do not currently address matters that are material in the near term to the Company’s operations, strategy, financial condition, or financial results, although this view may change in the future based on new information that could materially alter the estimates, assumptions, or timelines used to create these disclosures. Given the estimates,

assumptions, and timelines used to create the Southwest One Report, the DEI Report, and other voluntary disclosures, the materiality of these disclosures is inherently difficult to ~~assess in advance.~~assess.

Material Changes in Results of Operations

Comparison of three months ended March 31, ~~2022~~2023 and March 31, ~~2021~~2022

Operating Revenues

Total operating revenues for first quarter ~~2022~~2023 increased by ~~$2.6~~$1.0 billion, or ~~128.8~~21.6 percent, year-over-year, to ~~$4.7~~achieve a first quarter record of $5.7 billion. First quarter ~~2022~~2023 operating revenues per ASM (RASM) were ~~13.65~~14.99 cents, an increase of ~~54.1~~9.8 percent, compared with first quarter ~~2021.~~2022. The dollar increase was ~~driven~~ primarily ~~by the improvements~~due to an improvement in leisure ~~Passenger~~and business travel demand ~~and bookings~~ in first quarter ~~2022~~2023 versus ~~the severe impacts to demand and bookings from the COVID-19 pandemic in~~ first quarter 2021. In addition, demand strengthened considerably throughout the quarter, and the Company's operating revenues for March 2022 were strong and above March 2019 levels, which represented the first monthly operating revenue increase relative to respective 2019 levels since the pandemic began.2022. For first quarter ~~2022,~~2023, the year-over-year RASM increase was primarily driven by ~~a 35.7 percent improvement~~an increase in yield ~~and~~of 10.6 percent coupled with an increase in Load factor of ~~12.7~~0.6 points.

Passenger revenues for first quarter ~~2022~~2023 increased by ~~$2.4 billion,~~$970 million, or ~~141.5~~23.5 percent, year-over-year. On a unit basis, Passenger revenues increased ~~35.7~~11.5 percent, year-over-year. The year-over-year increase in Passenger revenues on both a dollar and unit basis was primarily due to ~~easing of negative impacts associated with the COVID-19 pandemic, which resulted in~~ improvements in ~~Passenger~~both leisure and business demand and bookings, the majority of which were for leisure oriented travel. These increases were achieved despite $430 million of headwinds experienced during first quarter 2022. Approximately $380 million of the operating revenue headwinds related to softness in bookings and increased passenger cancellations in January and February 2022 associated with the Omicron variant, which is higher than the Company's previous estimate of $330 million. In addition, the Company's flight cancellations in January 2022 due to available staffing challenges—~~exacerbated by weather~~—resulted in a $50 million negative impact to operating revenues, as previously estimated. The Company's first quarter 2022 revenue performance from its loyalty program was strong and included incremental revenue from its new co-brand credit card agreement, as expected. First quarter 2022 managed business revenues decreased 55 percent, compared with first quarter 2019. March 2022 managed business revenues decreased 36 percent compared with March 2019, outperforming the Company's previous guidance of down approximately 40 percent, driven by an increase in business passengers and yields and boosted by its participation in Global Distribution System platforms. The Company currently expects April 2022 managed business revenues to decrease approximately 30 percent, compared with April 2019, and currently expects continued sequential improvement in May and June 2022, compared with their respective 2019 levelsbookings.

Other revenues for first quarter ~~2022~~2023 increased by ~~$220~~$43 million, or ~~74.1~~8.3 percent, compared with first quarter ~~2021. The~~2022. On a dollar basis, approximately 45 percent of the increase was ~~primarily~~ due to ~~an increase in income~~revenue from ~~business partners, including~~ Chase Bank USA, ~~N.A.~~N.A ("Chase")~~. The improving economy throughout 2021 and~~, as the rebound in travel demand also resulted in higher spend on the Company's ~~co-branded credit card, as well as additional revenues earned through the Company's rental car and hotel partners. Additionally, the Company received incremental revenue from its new~~ co-brand credit card, ~~agreement secured~~and approximately 35 percent of the increase was due to higher rates earned with business partners in ~~December 2021.~~first quarter 2023.

Operating Expenses

Operating expenses for first quarter ~~2022~~2023 increased by ~~$3.0~~$1.1 billion, or ~~161.5~~23.6 percent, compared with first quarter ~~2021,~~2022, while capacity increased ~~48.6~~10.7 percent over the same prior year period. Approximately 5047.4 percent of the ~~operating expense~~dollar increase was due to ~~$1.2 billion in Payroll Support allocated to offset a portion of salaries, wages~~higher Fuel and ~~benefits in first quarter 2021 compared with no support received in first quarter 2022, 20~~oil expense and 21.7 percent of the increase was due to higher Salaries, wages, and ~~benefits, and 20 percent of the increase was due to higher Fuel and oil expense.~~benefits. Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been

largely driven by changes in capacity, or ASMs. The following table presents the Company's Operating expenses per ASM for the first quarter of ~~2022~~2023 and ~~2021,~~2022, 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.


	Three months ended March 31,				Per ASM change		Percent change
(in cents, except for percentages)	2023		2022
Salaries, wages, and benefits	6.51	¢	6.48	¢	0.03	¢	0.5	%

Fuel and oil	4.07		2.92		1.15		39.4
Maintenance materials and repairs	0.63		0.61		0.02		3.3
Landing fees and airport rentals	1.07		1.01		0.06		5.9
Depreciation and amortization	0.96		0.94		0.02		2.1
Other operating expenses	2.50		2.13		0.37		17.4
Total	15.74	¢	14.09	¢	1.65	¢	11.7	%

Three months ended March 31, Per ASM
change Percent
change
(in cents, except for percentages) 2022 2021
Salaries, wages, and benefits 6.48 ¢ 6.79 ¢ (0.31) ¢ (4.6) %
Payroll support and voluntary Employee programs, net — (6.25) 6.25 (100.0)
Fuel and oil 2.92 2.02 0.90 44.6
Maintenance materials and repairs 0.61 0.75 (0.14) (18.7)
Landing fees and airport rentals 1.01 1.35 (0.34) (25.2)
Depreciation and amortization 0.94 1.35 (0.41) (30.4)
Other operating expenses 2.13 1.99 0.14 7.0
Total 14.09 ¢ 8.00 ¢ 6.09 ¢ 76.1 %

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

Operating expenses per ASM for first quarter ~~2022~~2023 increased by ~~76.1~~11.7 percent, compared with first quarter ~~2021,~~2022, primarily due to ~~first quarter 2021 including Payroll Support from~~a significant increase in the ~~Consolidated Appropriations Act, 2021.~~Company's fuel cost per gallon, and higher Salaries, wages, and benefits. Operating expenses per ASM for first quarter ~~2022,~~2023, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), ~~decreased 9.2~~increased 5.9 percent, compared with first quarter ~~2021~~2022 primarily due to ~~a significant~~continued inflationary cost pressures, in particular with higher labor rates, including market wage rate accruals, for all Employee work groups, increased technology spending, and higher rates for airport and benefits costs. The remainder of the increase was driven primarily by operational disruption-related expenses, including travel expense reimbursements to Customers and an increase in ~~capacity. See Note Regarding Use~~the expected redemption rate of ~~Non-GAAP Financial Measures and the Reconciliation~~Rapid Rewards points offered as a gesture of ~~Reported Amounts~~goodwill to ~~Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.~~Customers.

Salaries, wages, and benefits expense for first quarter ~~2022~~2023 increased by ~~$658~~$249 million, or ~~41.9~~11.2 percent, compared with first quarter ~~2021.~~2022. On a per ASM basis, first quarter ~~2022~~2023 Salaries, wages, and benefits expense ~~decreased 4.6~~increased 0.5 percent, compared with first quarter ~~2021.~~2022. On a dollar basis, approximately 65 percent of the increase was ~~primarily~~ driven by ~~higher salaries~~an increase in capacity and ~~wages~~number of trips flown, and 20 percent of the increase was due to ~~significantly more trips,~~ step/pay rate increases for certain workgroups, and $127 million of additional salaries, wages, and benefits expense as a result of incentive pay offered to the Company's Operations Employees through early February 2022 in an effort to address available staffing challenges related to the Omicron variant.

~~Payroll support and voluntary Employee programs, net (a reduction to expense) had no amounts for first quarter 2022. First quarter 2021 consisted of the following items:~~

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

•$116 million credit to expense associated with the Employee Retention Tax Credit for continuing to pay Employees' salaries during the time they were not working, as allowed under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), and subsequent legislation;

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

~~See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.~~which included open labor contract accruals.

Fuel and oil expense for first quarter ~~2022~~2023 increased by ~~$535~~$543 million, or ~~114.1~~54.1 percent, compared with first quarter ~~2021.~~2022. On a per ASM basis, first quarter ~~2022~~2023 Fuel and oil expense increased ~~44.6~~39.4 percent. On a dollar basis, approximately 5580 percent of the increase was attributable to an increase in the Company's average economic jet fuel ~~prices,~~cost per gallon, and the remainder of the increase was due to an increase in fuel gallons consumed. The Company's first quarter ~~2022~~2023 average economic jet fuel price of ~~$2.30~~$3.19 per gallon is net of approximately ~~$229~~$58 million in ~~gains~~cash settlements from hedging activities. On a per ASM basis, the majority of the change was also due to higher average economic jet fuel prices. The following table provides more information on the Company's economic fuel cost per gallon, including the impact of fuel hedging premium expense and fuel derivative contract settlements:

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


	Three months ended March 31,
	2023		2022
Economic fuel costs per gallon	$	3.19	$	2.30
Fuel hedging premium expense (in millions)	$	30	$	26
Fuel hedging premium expense per gallon	$	0.06	$	0.06
Fuel hedging cash settlement gain per gallon	$	0.12	$	0.52

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

The Company's first quarter ~~2022~~2023 available seat miles per gallon ("fuel efficiency") ~~declined 2.6~~decreased 0.1 percent, year-over-year, due to ~~the Company's return~~network restoration, which includes bringing back additional short-haul flights, adding pressure to ~~service~~fuel efficiency. However, continued deliveries of ~~more of its least fuel-efficient aircraft, the -700. When compared with first quarter 2019, fuel efficiency improved 2.6 percent in first quarter 2022 due to more 737 MAX aircraft,~~ the Company's most fuel-efficient aircraft, in the ~~fleet. The~~ MAX, ~~remains~~are expected to offset this pressure and remain critical to the Company's efforts to modernize its fleet, reduce carbon emissions intensity, and achieve its near-term environmental sustainability goals. ~~The Company expects second quarter 2022 fuel efficiency to be in the range of 76 to 78 ASMs per gallon, on a nominal basis.~~

The Company's multi-year fuel ~~hedge is providing excellent protection~~hedging program continues to provide insurance against ~~rising~~spikes in energy prices and significantly offset the market price increase, year-over-year, in jet fuel in first quarter ~~2022.~~2023. 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 April ~~21, 2022.~~19, 2023.


	Estimated economic fuel price per gallon, including taxes and fuel hedging premiums (b)
Average Brent Crude Oil price per barrel	2Q ~~2022 (b)~~2023	~~2H 2022 (b)~~2023
$8060	$~~2.50~~1.85 - ~~$2.60~~$1.95	$2.20 - $2.30
$70	$2.15 - $2.25	$2.40 - $2.50
$9080	$~~2.70~~2.35 - ~~$2.80~~$2.45	$~~2.55~~2.60 - ~~$2.65~~$2.70
Current Market (a)	$~~3.05~~2.45 - ~~$3.15~~$2.55	$2.60 - $2.70
$90	$2.60 - $2.70	$2.75 - $2.85
$~~110~~100	$~~3.10~~2.80 - ~~$3.20~~$2.90	$~~2.95~~2.90 - ~~$3.05~~$3.00
$~~120~~110	$~~3.25~~3.00 - ~~$3.35~~$3.10	$~~3.15~~3.05 - ~~$3.25~~
~~$130~~	~~$3.45 - $3.55~~	~~$3.45 - $3.55~~$3.15

Fair market value	$~~295~~70 million	$~~468~~262 million
Estimated premium costs	$2630 million	$26121 million

(a) Brent crude oil average market prices as of April ~~21, 2022,~~19, 2023, were ~~approximately $107~~$83 and ~~$102~~ $82per barrel for second quarter ~~2022~~ and ~~second half 2022,~~full year 2023, respectively.

(b)Based on the Company's existing fuel derivative contracts and market prices as of April ~~21, 2022,~~19, 2023, second quarter ~~second half,~~ and full year ~~2022~~2023 economic fuel costs per gallon are estimated to be in the range ~~of $3.05~~of $2.45 to ~~$3.15, $2.75~~$2.55 and $2.60 to ~~$2.85, and $2.75 to $2.85, respectively.~~$2.70, respectively. Economic fuel cost projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate the hedge accounting impact associated with the volatility of the energy markets ~~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.

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


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


Period			Maximum fuel hedged percentage (a)(b)
2023			50%
2024			51%
2025			10%

(a) Based on the Company's current available seat mile ~~plans for full year 2022.~~plans. The Company is currently 6351 percent hedged for second quarter ~~2022~~2023 and 6048 percent hedged for second half ~~2022.~~2023.

(b) Due to uncertainty regarding available seat mile plans in future years, the Company believes that providing the maximum percent of fuel consumption covered by derivative contracts in 2023 and 2024 relative to 2019 fuel gallons consumed is a more relevant measure for future coverage.

~~(c)~~ The Company's maximum fuel hedged percentage is calculated using the maximum number of gallons that are covered by derivative contracts 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 43 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI at March 31, ~~2022,~~2023, 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 March 31, 2022 Amount of gains deferred in AOCI at March 31, 2022 (net of tax)
Remainder of 2022 $ 682 $ 494
2023 461 307
2024 130 72
Total $ 1,273 $ 873


Year	Fair value of fuel derivative contracts at March 31, 2023		Amount of gains (losses) deferred in AOCI at March 31, 2023 (net of tax)
Remainder of 2023	$	187	$	74
2024	177		14
2025	31		(1)

Total	$	395	$	87

Maintenance materials and repairs expense for first quarter ~~2022~~2023 increased by ~~$38~~$29 million, or ~~22.0~~13.7 percent, compared with first quarter ~~2021.~~2022. On a per ASM basis, Maintenance materials and repairs expense ~~decreased 18.7~~increased 3.3 percent, compared with first quarter ~~2021.~~2022. On a dollar and per ASM basis, ~~approximately 60 percent of~~ the increase was 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. There were multiple other increases on a dollar basis, primarily ~~related~~due to an increase in engine shop visits and various repairs as a result of deferring costs and reduced operations in first quarter 2021 due to the COVID-19 pandemic. These increases were partially offset by a decrease in engines and components expense due to the "power-by-the-hour" contract for the -700 engines expiring at the end of 2021, in which expense was incurred based primarily uponother engine ~~hours flown. At January 1, 2022, a time and materials contract commenced, pursuant to which -700 engine expense is based on actual~~ repairs.

Landing fees and airport rentals expense for first quarter ~~2022~~2023 increased by ~~$33~~$62 million, or ~~10.5~~17.9 percent, compared with first quarter ~~2021.~~2022. On a per ASM basis, Landing fees and airport rentals expense ~~decreased 25.2~~increased 5.9 percent, compared with first quarter ~~2021.~~2022. On a dollar and per ASM basis, ~~approximately 75 percent of~~ the increase was primarily due to ~~an increase~~higher rental and landing fee rates throughout the network, partially offset by higher settlements received from various airports in ~~landing fees from the increased number of trips flown.~~first quarter 2023.

Depreciation and amortization expense for first quarter ~~2022~~2023 increased by ~~$12~~$41 million, or ~~3.8~~12.7 percent, compared with first quarter ~~2021.~~2022. On a per ASM basis, Depreciation and amortization expense ~~decreased~~increased by ~~30.4~~2.1 percent, compared with first quarter ~~2021.~~2022. On a dollar and per ASM basis, approximately 70 percent of the increase was primarily ~~associated with higher depreciation expense associated with owned~~due to the acquisition of 98 -8 aircraft since first quarter 2022, and ~~engines, including~~ the ~~28 -700s planned~~remaining increase was primarily due to decreasing the airframe salvage value for ~~retirement~~the entire -700 fleet, which was a change in estimate made near the end of third quarter 2022. This change in estimate was not material to first quarter 2023, nor is it expected to be material to future periods.

Other operating expenses for first quarter ~~2022~~2023 increased by ~~$268~~$221 million, or ~~57.9~~30.2 percent, compared with first quarter ~~2021.~~2022. Included within this line item was aircraft rentals expense in the amounts of ~~$48~~$50 million and ~~$51~~$48 million for the three-month periods ended March 31, ~~2022~~2023 and ~~2021,~~2022, respectively. On a per ASM basis, Other

operating expenses increased ~~7.0~~17.4 percent, compared with first quarter ~~2021.~~2022. On a dollar and per ASM basis, 25approximately 40 percent of the increase was due to higher ~~revenue related~~interrupted trip expense driven by costs associated with the December 2022 operational disruption, approximately 15 percent was due to higher personnel expenses ~~(including credit card processing charges) and 15~~driven by an increase in Crew overnights associated with the increase in capacity, approximately 10 percent of the increase was due to higher ~~insurance~~professional fees driven by an increase in technology spending, and ~~taxes. The~~the majority of the remainder of the year-over-year increase was due to various flight-driven expenses.

Other

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

Interest expense for first quarter ~~2022~~2023 decreased by ~~$21~~$27 million, or ~~18.4~~29.0 percent, compared with first quarter ~~2021,~~2022, primarily due to ~~elimination of the~~various debt ~~discount due to the adoption of ASU 2020-06. See Note 3 to the unaudited Condensed Consolidated Financial Statements for further information.~~

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

Interest income for first quarter ~~2022~~2023 increased by $1$122 million, ~~or 50.0 percent,~~ compared with first quarter ~~2021,~~2022, primarily due to higher interest ~~rates.~~rates earned on the Company's cash and short-term investments.

Loss on extinguishment of debt for first quarter 2023 decreased by $72 million compared with first quarter 2022, primarily due to the partial extinguishment of the Company's Convertible Notes in first quarter 2022, compared to none in first quarter 2023.

The following table displays the components of Other (gains) losses, net, for the three months ended March 31, ~~2022~~2023 and ~~2021:~~2022:


		Three months ended March 31,					Three months ended March 31,
(in millions)	(in millions)	2022		2021		(in millions)	2023		2022
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	$	34	$	1	Mark-to-market impact from fuel contracts settling in current and future periods	$	—	$	34
Premium cost of fuel contracts not designated as hedges		—		11

Unrealized mark-to-market adjustment on available for sale securities	Unrealized mark-to-market adjustment on available for sale securities	5		—		Unrealized mark-to-market adjustment on available for sale securities	(4)		5
Mark-to-market impact on deferred compensation plan investments	Mark-to-market impact on deferred compensation plan investments	33		—		Mark-to-market impact on deferred compensation plan investments	(10)		33
Correction on investment gains related to prior periods		—		(60)
Loss on partial extinguishment of convertible and unsecured notes		72		—

		$	144	$	(48)

							$	(14)	$	72

Income Taxes

The Company's effective tax rate was ~~approximately 26.1~~22.0 percent in first quarter ~~2022,~~2023, compared with ~~20.6~~26.1 percent in first quarter ~~2021.~~2022. The ~~higher~~year-over-year decline in the tax rate ~~for first quarter 2022~~ was primarily due to the absence of losses on ~~the Company's~~ convertible debt repurchases, which ~~are~~were largely disallowed as a tax deduction ~~for tax purposes.~~in 2022. The Company currently estimates its annual ~~2022~~2023 effective tax rate to be ~~approximately 24~~in the range of 23 percent to 2624 percent.

3936

Reconciliation of Reported Amounts to Non-GAAP Financial Measures (excluding special items) (unaudited)

(in millions, except per share amounts and per ASM amounts)

Three months ended March 31, Percent
2022 2021 Change
Fuel and oil expense, unhedged $ 1,207 $ 464
Add: Premium cost of fuel contracts designated as hedges 26 14
Deduct: Fuel hedge gains included in Fuel and oil expense, net (229) (9)
Fuel and oil expense, as reported $ 1,004 $ 469
Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) — 8
Add: Premium cost of fuel contracts not designated as hedges — 11
Fuel and oil expense, excluding special items (economic) $ 1,004 $ 488 105.7
Total operating expenses, net, as reported $ 4,845 $ 1,853
Add: Payroll support and voluntary Employee programs, net — 1,448
Add: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) — 8
Add: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — 1
Add: Premium cost of fuel contracts not designated as hedges — 11
Deduct: Impairment of long-lived assets (16) $ —
Total operating expenses, excluding special items $ 4,829 $ 3,321 45.4
Deduct: Fuel and oil expense, excluding special items (economic) (1,004) (488)
Operating expenses, excluding Fuel and oil expense and special items $ 3,825 $ 2,833 35.0
Deduct: Profitsharing expense (37) (24)
Operating expenses, excluding Fuel and oil expense, special items, and profitsharing $ 3,788 $ 2,809 34.9
Operating income (loss), as reported $ (151) $ 199
Deduct: Payroll support and voluntary Employee programs, net — (1,448)
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) — (8)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — (1)
Deduct: Premium cost of fuel contracts not designated as hedges — (11)
Add: Impairment of long-lived assets 16 —
Operating loss, excluding special items $ (135) $ (1,269) (89.4)
Other (gains) losses, net, as reported $ 144 $ (48)
Deduct: Mark-to-market impact from fuel contracts settling in current and future periods (a) (34) (1)
Deduct: Premium cost of fuel contracts not designated as hedges — (11)
Deduct: Unrealized mark-to-market adjustment on available for sale investments (5) —
Deduct: Loss on partial extinguishment of convertible and unsecured notes (72) —
Other (gains) losses, net, excluding special items $ 33 $ (60) n.m.
Income (loss) before income taxes, as reported $ (376) $ 146
Deduct: Payroll support and voluntary Employee programs, net — (1,448)
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) — (8)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — (1)
Add: Mark-to-market impact from fuel contracts settling in current and future periods (a) 34 1
Add: Impairment of long-lived assets 16 —
Add: Unrealized mark-to-market adjustment on available for sale investments 5 —


	Three months ended March 31,				Percent
	2023		2022		Change




Fuel and oil expense, unhedged	$	1,575	$	1,207
Add: Premium cost of fuel contracts designated as hedges	30		26
Deduct: Fuel hedge gains included in Fuel and oil expense, net	(58)		(229)
Fuel and oil expense, as reported (economic)	$	1,547	$	1,004	54.1




Total operating expenses, net, as reported	$	5,990	$	4,845





Deduct: Impairment of long-lived assets	—		$	(16)
Total operating expenses, excluding special items	$	5,990	$	4,829	24.0
Deduct: Fuel and oil expense, as reported (economic)	(1,547)		(1,004)
Operating expenses, excluding Fuel and oil expense and special items	$	4,443	$	3,825	16.2
Deduct: Profitsharing expense	—		(37)
Operating expenses, excluding Fuel and oil expense, special items, and profitsharing	$	4,443	$	3,788	17.3

Operating loss, as reported	$	(284)	$	(151)





Add: Impairment of long-lived assets	—		16
Operating loss, excluding special items	$	(284)	$	(135)	110.4

Other (gains) losses, net, as reported	$	(14)	$	72
Deduct: Mark-to-market impact from fuel contracts settling in current and future periods (a)	—		(34)

Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities	4		(5)



Other (gains) losses, net, excluding special items	$	(10)	$	33	n.m.

Loss before income taxes, as reported	$	(205)	$	(376)




Add: Mark-to-market impact from fuel contracts settling in current and future periods (a)	—		34

Add: Impairment of long-lived assets	—		16
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities	(4)		5
Add: Loss on extinguishment of debt	—		72
Loss before income taxes, excluding special items	$	(209)	$	(249)	(16.1)

Benefit for income taxes, as reported	$	(46)	$	(98)
Add: Net loss tax impact of fuel and special items (b)	—		40

Benefit for income taxes, net, excluding special items	$	(46)	$	(58)	(20.7)



Net loss, as reported	$	(159)	$	(278)




Add: Mark-to-market impact from fuel contracts settling in current and future periods (a)	—		34

Add: Loss on extinguishment of debt	—		72
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities	(4)		5
Deduct: Net loss tax impact of special items (b)	—		(40)
Add: Impairment of long-lived assets	—		16
Deduct: GAAP to Non-GAAP tax rate difference (c)	—		—
Net loss, excluding special items	$	(163)	$	(191)	(14.7)

4037

Three months ended March 31, Percent
2022 2021 Change
Add: Loss on partial extinguishment of convertible and unsecured notes 72 —
Loss before income taxes, excluding special items $ (249) $ (1,310) (81.0)
Provision (benefit) for income taxes, as reported $ (98) $ 30
Add (Deduct): Net income (loss) tax impact of fuel and special items (b) 40 (325)
Benefit for income taxes, net, excluding special items $ (58) $ (295) (80.3)
Net income (loss), as reported $ (278) $ 116
Deduct: Payroll support and voluntary Employee programs, net — (1,448)
Deduct: Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) — (8)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — (1)
Add: Mark-to-market impact from fuel contracts settling in current and future periods (a) 34 1
Add: Loss on partial extinguishment of convertible and unsecured notes 72 —
Add: Impairment of long-lived assets 16 —
Add: Unrealized mark-to-market adjustment on available for sale investments 5 —
Add (Deduct): Net income (loss) tax impact of special items (b) (40) 325
Net loss, excluding special items $ (191) $ (1,015) (81.2)
Net income (loss) per share, diluted, as reported $ (0.47) $ 0.19
Add (Deduct): Impact of special items 0.16 (2.38)
Add (Deduct): Net impact of net income (loss) above from fuel contracts divided by dilutive shares 0.06 (0.01)
Add (Deduct): Net income (loss) tax impact of special items (b) (0.07) 0.53
Deduct: GAAP to Non-GAAP diluted weighted average shares difference (c) — (0.05)
Net loss per share, diluted, excluding special items $ (0.32) $ (1.72) (81.4)
Operating expenses per ASM (cents) 14.09 ¢ 8.00 ¢
Add (Deduct): Impact of special items (0.04) 6.25
Deduct: Fuel and oil expense divided by ASMs (2.92) (2.02)
Deduct: Profitsharing expense divided by ASMs (0.11) (0.10)
Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents) 11.02 ¢ 12.13 ¢ (9.2)


	Three months ended March 31,						Percent
	2023			2022			Change

Net loss per share, diluted, as reported	$	(0.27)		$	(0.47)
Add: Impact of special items	—			0.16
Add: Net impact of net loss above from fuel contracts divided by dilutive shares	—			0.06
Deduct: Net loss tax impact of special items (b)	—			(0.07)


Net loss per share, diluted, excluding special items	$	(0.27)		$	(0.32)		(15.6)

Operating expenses per ASM (cents)	15.74		¢	14.09		¢
Deduct: Impact of special items	—			(0.04)
Deduct: Fuel and oil expense divided by ASMs	(4.07)			(2.92)
Deduct: Profitsharing expense divided by ASMs	—			(0.11)
Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)	11.67		¢	11.02		¢	5.9

(a) See Note 43 to the unaudited Condensed Consolidated Financial Statements for further information.

(b) Tax amounts for each individual special item are calculated at the Company's effective rate for the applicable period and totaled in this line item.

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

4138

Note Regarding Use of Non-GAAP Financial Measures

The Company's unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP. These GAAP financial statements may include (i) unrealized noncash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges and benefits the Company believes are unusual and/or infrequent in nature and thus may make comparisons to its prior or future performance difficult.

As a result, the Company also provides financial information in this filing that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information (also referred to as "excluding special items"), including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides additional insight to investors as supplemental information to its GAAP results. The non-GAAP measures provided that relate to the Company’s performance on an economic fuel cost basis include Fuel and oil expense, non-GAAP; Total operating expenses, non-GAAP; Operating expenses, non-GAAP excluding Fuel and oil expense; Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing; Operating loss, non-GAAP; Other (gains) losses, net, non-GAAP; Loss before income taxes, non-GAAP; Benefit for income taxes, net, non-GAAP; Net loss, non-GAAP; Net loss per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents). The Company's economic Fuel and oil expense results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis has historically been utilized by the Company, as well as some of the other airlines that utilize fuel hedging, as it reflects the Company’s actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts that are designated as hedges are reflected as a component of Fuel and oil expense, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide further insight into the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude ~~any~~the unrealized, noncash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company's management, as well as investors and analysts, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations, and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.

Further information on (i) the Company's fuel hedging program, (ii) the requirements of accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments is included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021~~2022 and Note 43 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 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 12 Boeing 737-8 ("-8") aircraft leases;

4.Noncash impairment charges, primarily associated with adjustments to the salvage values for previously retired airframes;

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

6.3.Losses associated with the partial extinguishment of the Company's Convertible Notes and early prepayment of debt. These losses are also now presented as a separate line item in the unaudited Condensed

Consolidated Statement of Comprehensive Income (Loss), rather than its prior presentation where it was included as a component of Other (gains) losses, net. Such losses are incurred as a result of opportunistic decisions made by the Company to prepay portions of its debt, most of which was incurred during the pandemic in order to provide liquidity during the prolonged downturn in air travel.

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

4340

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 provided by operating activities ~~was $1.1 billion~~ for the three months ended March 31, ~~2022, compared with $645~~2023 was $706 million, and net cash provided by operating activities infor the ~~same prior year period.~~three months ended March 31, 2022 was $1.1 billion. Operating cash inflows are historically primarily derived from providing air transportation to Customers. The vast majority of tickets are purchased prior to the day on which travel is provided and, in some cases, several months before the anticipated travel date. Operating cash outflows are related to the recurring expenses of airline operations. The operating cash flows for the three months ended March 31, 2023, were largely impacted by the Company's net income (as adjusted for noncash items), a $947 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, a $215 million decrease due to the payment of Customer reimbursement expenses related to the December 2022 operational disruption, a $127 million decrease due to the funding of the Company's ProfitSharing Plan contribution for 2022, and a $106 million decrease related to the purchase of fuel derivative instruments, which is included within Other, net operating cash flows in the accompanying unaudited Condensed Consolidated Statement of Cash Flows. The operating cash flows for the three months ended March 31, 2022 included an $885 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, and included a $385 million increase in cash collateral received from derivative counterparties due to an increase in the value of the Company's fuel hedge portfolio, driven by increases in the forward curve year-to-date. The operating cash flows for the three months ended March 31, 2021, included $1.2 billion in Payroll Support grant proceeds received, and were also driven by an increase in Air Traffic Liability of $599 million as a result of increased ticket sales from the increase in travel demand. These increases were partially offset by amounts paid out under the Company's Voluntary Separation Program and Extended ETO plans during the three months ended March 31, 2021, which totaled approximately $188 million. Net cash provided by operating activities is primarily used to finance capital expenditures, repay debt, pay dividends, and provide working capital. Historically, the Company has also used net cash provided by operating activities to fund stock repurchases and pay dividends; however, these Shareholder return activities have been suspended due to restrictions associated with Payroll Support. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information

Net cash used in investing activities ~~totaled $139 million during~~for the three months ended March 31, 2023 was $1.6 billion, and net cash used in investing activities for the three months ended March 31, 2022 ~~compared with $201 million used in investing activities in the same prior year period.~~was $139 million. Investing activities in both years included Capital expenditures and changes in the balance of the Company's short-term and noncurrent investments. During the three months ended March 31, ~~2022,~~2023, Capital expenditures were ~~$510 million,~~$1.0 billion, compared with ~~$95~~$510 million in the same prior year period. Capital expenditures increased, year-over-year, largely due to an increase in progress and delivery payments made onfor current period and future aircraft deliveries during the three months ended March 31, ~~2022,~~2023, compared to the same prior year period, when progress payments were not made due to delivery credits provided by Boeing to the Company resulting from the settlement of 2020 estimated damages relating to the FAA grounding of the MAX aircraft.period.

~~The~~Based on anticipated aircraft delivery delays from Boeing, the Company ~~continues~~now expects it will receive approximately 70 -8 aircraft deliveries in 2023. Due to ~~estimate~~these recent changes to expected 2023 aircraft deliveries, the Company now estimates its ~~2022~~2023 capital spending to be approximately ~~$5.0~~$3.5 billion. This assumes approximately $2.3 billion ~~which assumes the exercise of its 12 remaining 2022 Boeing~~in aircraft ~~order book options and remains unchanged despite the shift of -7 firm orders to -8 firm orders as the Company contemplated various scenarios in its 2022 plan. The Company’s 2022~~ capital spending, ~~guidance~~and continues to ~~include~~assume approximately ~~$900 million~~$1.2 billion in non-aircraft capital ~~spending.~~spending, which includes tens of millions in operational disruption-related investments.

Net cash used in financing activities for the three months ended March 31, 2023 was ~~$314~~$262 million, ~~during~~and net cash used in financing activities for the three months ended March 31, 2022 ~~compared with $464~~was $314 million. The Company paid $214 million ~~provided by financing activities for~~in cash dividends to Shareholders and repaid $59 million in finance lease obligations during first quarter 2023. The Company may engage in early debt repurchases from time to time and some of these early future repurchases are not included in the ~~same prior year period.~~ Company's current maturities of long-term debt. The Company's 2023 total debt repayments are expected to be $85 million. During the three months ended March 31, 2022, the Company repaid $323 million in debt and finance lease obligations, including the early extinguishment of $164 million in principal of its Convertible Notes for a cash payment of $230 million during the three months ended March 31, 2022, and is scheduled to repay approximately $21 million in debt and finance lease obligations during second quarter 2022. During the three months ended March 31, 2021, the Company borrowed $488 million of loan proceeds under the PSP2 Payroll Support Program. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. The Company repaid $67 million in debt and finance lease obligations during the three months ended March 31, 2021.million.

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

The Company has access to $1.0 billion under its amended and restated revolving credit facility (the "Amended A&R Credit Agreement"). The Amended A&R Credit Agreement has an accordion feature that would allow the Company, subject to, among other things, the procurement of incremental commitments, to increase the size of the facility to $1.5 billion. Interest on the facility is based on the Company's credit ratings at the time of borrowing. At the Company's current ratings, the interest cost would be the London Interbank Offered Rate ("LIBOR") plus a spread of 200 basis points. The facility contains a financial covenant to maintain total liquidity, as defined in the Amended A&R Credit Agreement, of $1.5 billion at all times under the Amended A&R Credit Agreement; the Company was compliant with this requirement as of March 31, 2022. There were no amounts outstanding under the Amended A&R Credit Agreement as of March 31, ~~2022.~~2023. See Note 10 to the Consolidated Financial Statements for further information.

Although not the case at March 31, ~~2022~~2023 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 65 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 ~~$15.7~~$11.7 billion as of March 31, ~~2022,~~2023, and anticipated future internally generated funds from operations. ~~However,~~In addition, the ~~COVID-19 pandemic~~Company continues to ~~evolve~~maintain a large base of unencumbered assets and ~~could have a material adverse impact on the Company's ability to meet its capital~~investment-grade credit ratings by all three major credit agencies (Moody's, S&P Global, and ~~operating commitments. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information on the impacts of the COVID-19.~~Fitch).

As of March 31, ~~2022,~~2023, the Company's total firm and option order book with Boeing was ~~632~~564 aircraft. See Note 109 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 March 31, ~~2022:~~
Average
Age (Yrs) Number
of Aircraft Number
Owned Number
Leased
Type Seats
737-700 143 17 446 (a) 364 82
737-800 175 7 207 190 17
737 -8 175 2 69 40 29
Totals 13 722 594 128
2023:


		Average Age (Yrs)	Number of Aircraft	Number Owned	Number Leased
Type	Seats
737-700	143	18	419	379	40
737-800	175	8	207	190	17
737 -8	175	2	167	138	29
Totals		12	793	707	86

~~(a) Included~~ 4 ~~Boeing 737 Next Generation aircraft in temporary storage as of March 31, 2022.~~

Critical Accounting Policies and Estimates

For information regarding the Company’s Critical Accounting Policies and Estimates, see the "Critical Accounting Policies and Estimates" section of "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021.~~2022.

4542

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.~~1934 ("Exchange Act"). Forward-looking statements are based on, and include statements about, the Company's estimates, expectations, beliefs, intentions, and strategies for the future, and the assumptions underlying these forward-looking statements. Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, statements related to the following:

•the Company’s expectations with respect to steps taken to mitigate the risk of an operational disruption recurrence;

•the Company’s expectations associated with its tactical action plan to boost operational resiliency, including with respect to expected benefits and planned expenditures;

•the Company’s financial guidance for second quarter and full year ~~2022~~2023 and factors that could impact ~~actual~~the Company’s financial results;

•the Company’s ~~plans~~capacity guidance;

•the Company’s estimated fuel costs, hedging gains, and fuel efficiency and the assumptions underlying the Company’s fuel-related expectations and estimates, including expectations related to ~~capacity decisions;~~the Company’s fuel derivative contracts;

•the Company’s plans and expectations for the repayment of debt, its effective tax rate, and its capital spending;

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

•the Company’s ~~hiring plans~~expectations regarding passenger demand, revenue trends, and ~~expectations;~~bookings, including with respect to managed business revenues and the potential benefits of a new revenue management system;

•the Company’s fleet and network-related goals, including without limitation with respect to growth opportunities and frequencies, reduction of operating costs, further modernizing its fleet with less carbon-intensive aircraft, restoration of the Company’s network and core markets, and maturation of newer markets;

•the Company’s expectations related to its ~~new fare product, Wanna Get Away Plus™;~~

•~~the Company's expectations~~policy change with respect to ~~Customer demand, including with respect to business travel;~~the expiration of flight credits;

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

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

•~~the Company’s expectations with respect to~~ capital ~~expenditures,~~spending guidance, in particular with respect to aircraft capital ~~expenditures;~~

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

•the Company’s expectations with respect to its ability to meet its ongoing capital and operating commitments, including underlying assumptions and factors that could impact this ability;

•the Company's assessment of market risks; and

•the Company's plans and expectations related to legal and regulatory proceedings.

While management believes these forward-looking statements are reasonable as and when made, forward-looking statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Therefore, actual results may differ materially from what is expressed in or indicated by the Company's forward-looking statements or from historical experience or the Company's present expectations. Factors that could cause these differences include, among others:

•the impact of fears or actual outbreaks of diseases, extreme or severe weather and natural disasters, actions of competitors (including, without limitation, pricing, scheduling, capacity, and network decisions, and consolidation and alliance activities), consumer perception, economic conditions, banking conditions, fears of terrorism or war, socio-demographic trends, and other factors beyond the Company's control on consumer behavior and the Company's results of operations and business decisions, plans, strategies, and results;

•the Company's dependence on Boeing, Boeing’s suppliers, and the FAA with respect to the Company's fleet plans and deliveries, and other operational strategies and goals;

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

•the impact of fuel price changes, fuel price volatility, volatility of commodities used by the Company for hedging jet fuel, and any changes to the Company’s fuel hedging strategies and positions on the Company's business plans and results of operations;

•the Company's 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 other third parties, in particular with respect to its technology plans, its tactical action plans and expectations related to operational resiliency, its fuel supply, Global Distribution Systems, and the impact on the Company's operations and results of operations of any third party delays or non-performance;

•the Company's ability to obtain and maintain adequate infrastructure and equipment to support its operations and initiatives;

•the emergence of additional costs or effects associated with the December 2022 operational disruption, including litigation, government investigation and actions, and internal actions;

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

•any further negative developments related to the 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 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 ~~labor and hiring matters on the Company’s business decisions, plans, and strategies;~~

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

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

•the impact of fears or actual outbreaks of other diseases, extreme or severe weather and natural disasters, actions of competitors (including, without limitation, pricing, scheduling, capacity, and network decisions, and consolidation and alliance activities), consumer perception, economic conditions, fears of terrorism or war, socio-demographic trends, and other factors beyond the Company's control on consumer behavior and the Company's results of operations and business decisions, plans, strategies, and results;

•~~the impact of~~ fears or actual acts of terrorism or war, political instability, cyber-attacks, and other factors beyond the Company’s control on the Company’s plans, financial results, operations, and ability to adequately insure against risks;

•~~the Company's ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives;~~

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

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

•other factors as set forth in the Company's filings with the Securities and Exchange Commission (the "SEC"), 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, ~~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.

4744

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Hedging

As discussed in Note 43 to the unaudited Condensed Consolidated Financial Statements, the Company endeavors to acquire jet fuel at the lowest possible price and to reduce volatility in operating expenses through its fuel hedging program with the use of financial derivative instruments. At March 31, ~~2022,~~2023, the estimated fair value of outstanding contracts was ana net asset of ~~$1.3 billion.~~$395 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 March 31, ~~2022,~~2023, the Company had ~~nine~~eight 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 March 31, ~~2022,~~2023, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating. The Company also had agreements with counterparties in which cash deposits and/or letters of credit 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 43 to the unaudited Condensed Consolidated Financial Statements for the fair values of fuel derivatives, amounts held as collateral, and applicable collateral posting threshold amounts as of March 31, ~~2022,~~2023, at which such postings are triggered.

At March 31, ~~2022, $560~~2023, $76 million in cash collateral deposits were held by the Company from counterparties based on the Company's outstanding fuel derivative instrument portfolio. Due to the types of derivatives held as of March 31, ~~2022,~~2023, the Company does not have cash collateral exposure. See Note 43 to the unaudited Condensed Consolidated Financial Statements.

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

Financial Market Risk

The Company currently has agreements with organizations that process credit card transactions arising from purchases of air travel tickets by its Customers utilizing American Express, Discover, and MasterCard/VISA. Credit card processors have financial risk associated with tickets purchased for travel because the processor generally forwards the cash related to the purchase to the Company soon after the purchase is completed, but the air travel generally occurs after that time; therefore, the processor will have liability if the Company does not ultimately provide the air travel. Under these processing agreements, and based on specified conditions, increasing amounts of cash reserves could be required to be posted with the counterparty. There was no cash reserved for this purpose as of March 31, ~~2022.~~2023.

A majority of the Company’s sales transactions are processed by Chase Paymentech. Should chargebacks processed by Chase Paymentech reach a certain level, proceeds from advance ticket sales could be held back and used to

4845

establish a reserve account to cover such chargebacks and any other disputed charges that might occur. Additionally, cash reserves are required to be established if the Company’s credit rating falls to specified levels below investment grade. Cash reserve requirements are based on the Company’s public debt rating and a corresponding percentage of the Company’s Air traffic liability. As of March 31, ~~2022,~~2023, no holdbacks were in place.

See Item 7A "Quantitative and Qualitative Disclosures About Market Risk" in the Company's Annual Report on Form 10-K for the year ended December 31, ~~2021,~~2022, for further information about market risk, and Note 43 to the unaudited Condensed Consolidated Financial Statements in this Form 10-Q for further information about the Company's fuel derivative instruments.

4946

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~~SEC's rules and forms. These include controls and procedures designed to ensure that this information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of March 31, ~~2022.~~2023. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of March 31, ~~2022,~~2023, at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule ~~13a-15(f) of~~13a–15(f) under the Exchange Act) during the fiscal quarter ended March 31, ~~2022,~~2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On June 30, 2015, the U.S. Department of Justice ("DOJ") issued a Civil Investigative Demand ("CID") to the Company. The CID 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, which the Court denied on October 28, 2016. On December 20, 2017, the Company reached an agreement to settle these cases with a proposed class of all persons who purchased domestic airline transportation services from July 1, 2011, to the date of the settlement. The Company agreed to pay $15 million and to provide certain cooperation with the plaintiffs as set forth in the settlement agreement. After notice was provided to the proposed settlement class and the Court held a fairness hearing the Court issued an order granting final approval of the settlement on May 9, 2019. On June 10, 2019, certain objectors filed notices of appeal to the United States Court of Appeals for the District of Columbia Circuit, which the Court dismissed on July 9, 2021, for lack of jurisdiction because the district court's order approving the settlements was not a final appealable order. The case is continuing as to the remaining defendants. The Company denies all allegations of wrongdoing.

On January 7, 2019, a complaint alleging a violation of the federal Uniformed Services Employment and Reemployment Rights Act (“USERRA”) and seeking a certification as a class action was filed against the Company in the United States District Court for the Northern District of California. The complaint alleges that the Company violates section 4316(b) of USERRA because it does not provide paid “short-term” military leave (i.e., a military leave of 14 days or fewer) but does provide paid jury duty leave, bereavement leave, and sick leave, which the plaintiff alleges are “comparable” forms of leave under USERRA and its implementing regulations. The complaint seeks declaratory and injunctive relief, damages, liquidated damages, interest, and attorneys’ fees, expert fees, and litigation costs. On February 3, 2021, the court granted the plaintiff’s motion for class certification and issued an order certifying a class comprised of current or former Employees who, during their employment with the Company at any time from October 10, 2004, through the date of judgment in this action, have taken short-term military leave and were subject to a collective bargaining agreement, except for Employees subject to the Transport Workers Union Local 550 agreement covering meteorologists. On January 11, 2022, the court granted the parties’ stipulated request to vacate the trial date as the Department of Defense had not yet produced the class members’ military pay and service records pursuant to the Company’s third-party subpoena. On August 18, 2022, the court entered an order that effectively stayed the action, except for attention to the third-party subpoena, until after the Ninth Circuit issued its opinion in the matter of Clarkson v. Alaska Airlines, Inc. and Horizon Industries, Inc., an appeal from an order by the United States District Court for the Eastern District of Washington granting summary judgment in defendants’ favor on substantially the same claims at issue in this action. The Ninth Circuit issued its order in Clarkson on February 1, 2023, reversing the district court’s grant of summary judgment and remanding the Clarkson case to the District Court with instructions to consider the “pay during leave” issue in the first instance.

The Company denies all allegations of wrongdoing, believes the plaintiff’s positions are without merit, and intends to vigorously defend itself in all respects.

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. On September 3, 2021, the trial court issued an order under Rule 23(a) and 23(b)(3) certifying four classes of persons associated with ticket purchases for flights during the period of August 29, 2017, through March 13, 2019, comprised of (i) those who purchased tickets (without being reimbursed) for flights on Southwest Airlines during the class period, except for those whose flights were solely on routes where, at the time of the ticket purchase(s), a

MAX plane was not scheduled for use (or actually used) and had not previously been used, (ii) those who reimbursed a Southwest Airlines ticket purchaser and thus bore the economic burden for a Southwest Airlines ticket for a flight meeting the preceding criteria set forth in (i) above, (iii) those who purchased tickets (without being reimbursed) for flights on American Airlines during the class period, except for those whose flights were solely on routes where, at the time of ticket purchase(s), a MAX plane was not scheduled for use (or actually used) and had not previously been used, and (iv) those who reimbursed an American Airlines ticket purchaser and thus bore the economic burden for an American Airlines ticket for a flight meeting the preceding criteria set forth in (iii) above. On September 17, 2021, the Company filed a petition for permission immediately to appeal the class certification ruling to the Fifth Circuit Court of Appeals. Boeing also filed such a petition. Plaintiffs filed their oppositions to the petitions on September 27, 2021. On September 30, 2021, the Fifth Circuit Court of Appeals granted the Company (and Boeing) permission to appeal the class certification ruling. On December 22, 2021, in response to a motion to stay the trial court proceedings filed by the Company and Boeing, the Fifth Circuit stayed all proceedings, including the pursuit of any discovery, in the trial court pending disposition of the class certification appeal by the Fifth Circuit. ~~On January 7, 2022, the Company and Boeing each filed briefs in support of the appeal, and the~~Following full briefing ~~of both sides~~ on the merits of the appeal, ~~was recently completed. The Company intends to strenuously pursue~~a three-judge panel of the Fifth Circuit heard oral argument of the appeal ~~including, without limitation, through any oral argument~~on July 5, 2022. On November 21, 2022, the Fifth Circuit issued an opinion concluding that, ~~might~~among other things, the plaintiffs "have offered no plausible theory of economic harm" and "have suffered no injury in fact and lack Article III standing," and so their "case therefore must be ~~set~~dismissed." The Fifth Circuit reversed the trial court's September 3, 2021 certification order and remanded the case to the trial court with instructions to dismiss the case for lack of jurisdiction. On December 5, 2022, the plaintiffs filed a Petition for Rehearing En Banc, which sought to have the appeal reheard by the Fifth Circuit. ~~The Company further denies all allegations~~On March 9, 2023, the Fifth Circuit denied the Petition for Rehearing. On March 23, 2023, the trial court entered a final judgment dismissing the case for lack of wrongdoing, including those in the complaint that were not originally dismissed. The Company believes the plaintiffs' positions are without merit and intends to vigorously defend itself in all respects.jurisdiction.

On February 19, 2020, a complaint alleging violations of federal securities laws and seeking certification as a class action was filed against the Company and certain of its officers in the United States District Court for the Northern District of Texas in Dallas. A lead plaintiff has been appointed in the case, and 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.~~itself in all respects.

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 (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 plaintiff in 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 made in the Derivative Action.

On August 26, 2021, a complaint alleging breach of contract and seeking certification as a class action was filed against the Company in the United States District Court for the Western District of Texas in Waco. The complaint alleges that the Company breached its Contract of Carriage and other alleged agreements in connection with its use of the allegedly defective ~~737~~ MAX aircraft manufactured by The Boeing Company. The complaint seeks damages on behalf of putative classes of customers who provided valuable consideration, whether in money or other form (e.g., voucher, miles/points, etc.), in exchange for a ticket for air transportation with the Company, which transportation took place between August 29, 2017, and March 13, 2019. The complaint generally seeks money

damages, declaratory relief, and attorneys’ fees and other costs. On October 27, 2021, the Company filed a multi-faceted motion challenging the ~~Complaint~~complaint based upon lack of subject matter jurisdiction, the existence of the prior-filed Sherman Complaint on appeal in the Fifth Circuit, improper venue, and failure to state a claim, and seeking to have the complaint's class contentions stricken. That motion was fully briefed by both parties asand was argued to a United States Magistrate Judge on June 27, 2022. On July 5, 2022, the Magistrate Judge granted the motion in part and ordered the case stayed until the issuance of ~~December 22, 2021, and is now awaiting determination by~~ the ~~court.~~Fifth Circuit's opinion in the Sherman Complaint. On November 28, 2022, the parties jointly notified the Court of the Fifth Circuit's decision regarding the Sherman Complaint. On March 23, 2023, the parties jointly notified the Court of the dismissal of the Sherman Complaint for lack of jurisdiction. The Company denies all allegations of wrongdoing, ~~and~~ believes the plaintiffs' positions are without merit, and intends to vigorously defend itself in all respects.

Two complaints alleging violations of federal securities laws and seeking certification as a class action have been filed (on January 10, 2023 and March 13, 2023, respectively) against the Company and certain of its officers in the United States District Court for the Southern District of Texas in Houston. The complaints seek damages on behalf of a putative class of persons who purchased or otherwise acquired the Company's common stock between June 13, 2020, and December 31, 2022. The complaints assert claims under Sections 10(b) and 20 of the Securities Exchange Act and allege that the Company made material misstatements to investors regarding the Company's internal technology and alleged vulnerability to large-scale flight disruptions. The complaints generally seek money damages, pre-judgment and post-judgment interest, and attorneys' fees and other costs. The deadline in the first of these two cases to file a motion seeking appointment of lead plaintiff was March 13, 2023; four separate motions were filed, and the parties seeking appointment have continued filing briefs on the issue. The Court has set a status conference for May 22, 2023. The Company denies all allegations of wrongdoing in the complaint, believes the plaintiffs' positions are without merit, and intends to vigorously defend itself in all respects.

Since about January 24, 2023, the Company’s senior officers and Board of Directors have received multiple derivative demand letters from legal counsel for purported Southwest shareholders demanding that the Board investigate claims, initiate legal action, and take remedial measures in connection with the service disruptions occurring in December 2022. Generally, the demand letters broadly assert that the Company’s directors and senior officers did not make sufficient investments in internal technology systems to prevent large-scale flight disruptions, did not exercise sufficient oversight over the Company’s operations, approved or received unwarranted compensation, caused the Company to make materially misleading public statements, and breached their fiduciary

duties to the Company. Additionally, since January 27, 2023, the Company has received multiple letters from counsel for purported Southwest shareholders making statutory demands for the production of various books and records of the Company, purportedly in an effort to investigate possible derivative claims similar to those made the subject of the derivative demands discussed above. The Company and its Board of Directors intend to address the derivative and books and records demands in accordance with the applicable Texas statutes governing such demands.

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

The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business, including, but not limited to, examinations by the Internal Revenue Service.

The Company’s management does not expect that the outcome in any of its currently ongoing legal proceedings or the outcome of any proposed adjustments presented to date by the Internal Revenue Service, individually or collectively, will have a material adverse effect on the Company’s financial condition, results of operations, or cash flow.

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Item 1A. Risk Factors

There have been no material changes to the factors disclosed in Item 1A. Risk Factors in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021.~~2022.

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

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

5452

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~~Third Amended and Restated Bylaws of the Company, effective ~~November 17, 2016~~February 1, 2023 (incorporated by reference to Exhibit ~~3.1~~3.2 to the Company’s ~~Current~~Annual Report on Form ~~8-K filed November 21, 2016~~10-K for the year ended December 31, 2022 (File No. 1-7259)).
~~10.1~~			~~Form of Restricted Cash Award and Terms and Conditions.~~
~~10.2~~			~~Form of Restricted Cash Performance Award and Terms and Conditions.~~
~~10.3~~			~~Letter Agreement between Southwest Airlines Co. and Gary C. Kelly, effective as of February 1, 2022.~~
31.1			Rule 13a-14(a) Certification of Chief Executive Officer.
31.2			Rule 13a-14(a) Certification of Chief Financial Officer.
32.1			Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. (1)
101.INS			XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH			Inline XBRL Taxonomy Extension Schema Document.
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

(1) Furnished, not filed.

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