UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, ~~2022~~2023


			or


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


			For the transition period from ________ to ________

Commission File No. 1-7259

SOUTHWEST AIRLINES CO.

(Exact name of registrant as specified in its charter)


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

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

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


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock ($1.00 par value)	LUV	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.


Large accelerated filer	x	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

Number of shares of Common Stock outstanding as of the close of business on October ~~27, 2022: 593,752,004~~26, 2023: 596,115,380

TABLE OF CONTENTS TO FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheet as of September 30, ~~2022~~2023 and December 31, ~~2021~~2022

Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022

Condensed Consolidated Statement of Stockholders' Equity as of September 30,, 2023 and 2022 ~~and 2021~~

Condensed Consolidated Statement of Cash Flows for the three and nine months ended September 30,, 2023 and 2022 ~~and 2021~~

Notes to Condensed Consolidated Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

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

Item 3. Defaults Upon Senior Securities

Item 4. Mine Safety Disclosures

Item 5. Other Information

Item 6. Exhibits

SIGNATURES

Table of Contents

SOUTHWEST AIRLINES CO.

FORM 10-Q

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Southwest Airlines Co.

Condensed Consolidated Balance Sheet

(in millions)

(unaudited)


		September 30, 2022		December 31, 2021			September 30, 2023		December 31, 2022
ASSETS	ASSETS					ASSETS
Current assets:	Current assets:					Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	10,443	$	12,480	Cash and cash equivalents	$	9,497	$	9,492
Short-term investments	Short-term investments	3,230		3,024		Short-term investments	2,236		2,800
Accounts and other receivables	Accounts and other receivables	1,316		1,357		Accounts and other receivables	1,467		1,040
Inventories of parts and supplies, at cost	Inventories of parts and supplies, at cost	776		537		Inventories of parts and supplies, at cost	799		790
Prepaid expenses and other current assets	Prepaid expenses and other current assets	653		638		Prepaid expenses and other current assets	632		686
Total current assets	Total current assets	16,418		18,036		Total current assets	14,631		14,808

Property and equipment, at cost:	Property and equipment, at cost:					Property and equipment, at cost:
Flight equipment	Flight equipment	22,505		21,226		Flight equipment	25,724		23,725
Ground property and equipment	Ground property and equipment	6,727		6,342		Ground property and equipment	7,344		6,855
Deposits on flight equipment purchase contracts	Deposits on flight equipment purchase contracts	587		—		Deposits on flight equipment purchase contracts	345		376
Assets constructed for others	Assets constructed for others	19		6		Assets constructed for others	51		28
		29,838		27,574			33,464		30,984
Less allowance for depreciation and amortization	Less allowance for depreciation and amortization	13,501		12,732		Less allowance for depreciation and amortization	14,389		13,642
		16,337		14,842			19,075		17,342
Goodwill	Goodwill	970		970		Goodwill	970		970
Operating lease right-of-use assets	Operating lease right-of-use assets	1,449		1,590		Operating lease right-of-use assets	1,288		1,394
Other assets	Other assets	772		882		Other assets	1,016		855
		$	35,946	$	36,320		$	36,980	$	35,369

LIABILITIES AND STOCKHOLDERS' EQUITY	LIABILITIES AND STOCKHOLDERS' EQUITY					LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:	Current liabilities:					Current liabilities:
Accounts payable	Accounts payable	$	1,553	$	1,282	Accounts payable	$	1,736	$	2,004
Accrued liabilities	Accrued liabilities	1,881		1,624		Accrued liabilities	2,880		2,043
Current operating lease liabilities	Current operating lease liabilities	233		239		Current operating lease liabilities	220		225
Air traffic liability	Air traffic liability	6,368		5,566		Air traffic liability	7,246		6,064
Current maturities of long-term debt	Current maturities of long-term debt	381		453		Current maturities of long-term debt	30		42
Total current liabilities	Total current liabilities	10,416		9,164		Total current liabilities	12,112		10,378

Long-term debt less current maturities	Long-term debt less current maturities	8,315		10,274		Long-term debt less current maturities	7,984		8,046
Air traffic liability - noncurrent	Air traffic liability - noncurrent	2,057		2,159		Air traffic liability - noncurrent	1,754		2,186
Deferred income taxes	Deferred income taxes	1,995		1,770		Deferred income taxes	2,157		1,985

Noncurrent operating lease liabilities	Noncurrent operating lease liabilities	1,183		1,315		Noncurrent operating lease liabilities	1,039		1,118
Other noncurrent liabilities	Other noncurrent liabilities	1,056		1,224		Other noncurrent liabilities	880		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	3,989		4,224		Capital in excess of par value	4,135		4,037
Retained earnings	Retained earnings	16,588		15,774		Retained earnings	16,657		16,261
Accumulated other comprehensive income	Accumulated other comprehensive income	305		388		Accumulated other comprehensive income	201		344
Treasury stock, at cost	Treasury stock, at cost	(10,846)		(10,860)		Treasury stock, at cost	(10,827)		(10,843)
Total stockholders' equity	Total stockholders' equity	10,924		10,414		Total stockholders' equity	11,054		10,687
		$	35,946	$	36,320		$	36,980	$	35,369

See accompanying notes.

Table of Contents

Southwest Airlines Co.

Condensed Consolidated Statement of Comprehensive Income (Loss)

(in millions, except per share amounts)

(unaudited)


		Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
OPERATING REVENUES:	OPERATING REVENUES:									OPERATING REVENUES:
Passenger	Passenger	$	5,613	$	4,227	$	15,867	$	9,508	Passenger	$	5,912	$	5,613	$	17,426	$	15,867
Freight	Freight	44		47		133		140		Freight	44		44		131		133

Other	Other	563		405		1,642		1,091		Other	569		563		1,711		1,642
Total operating revenues	Total operating revenues	6,220		4,679		17,642		10,739		Total operating revenues	6,525		6,220		19,268		17,642

OPERATING EXPENSES, NET:
OPERATING EXPENSES:										OPERATING EXPENSES:
Salaries, wages, and benefits	Salaries, wages, and benefits	2,322		2,122		6,771		5,518		Salaries, wages, and benefits	2,728		2,322		7,991		6,771
Payroll support and voluntary Employee programs, net		—		(776)		—		(2,963)

Fuel and oil	Fuel and oil	1,750		990		4,390		2,261		Fuel and oil	1,564		1,750		4,514		4,390
Maintenance materials and repairs	Maintenance materials and repairs	204		250		624		646		Maintenance materials and repairs	326		204		836		624

Landing fees and airport rentals	Landing fees and airport rentals	395		376		1,128		1,092		Landing fees and airport rentals	457		395		1,324		1,128
Depreciation and amortization	Depreciation and amortization	335		322		984		949		Depreciation and amortization	375		335		1,107		984
Other operating expenses	Other operating expenses	819		662		2,343		1,710		Other operating expenses	958		819		2,868		2,343
Total operating expenses, net		5,825		3,946		16,240		9,213
Total operating expenses										Total operating expenses	6,408		5,825		18,640		16,240

OPERATING INCOME	OPERATING INCOME	395		733		1,402		1,526		OPERATING INCOME	117		395		628		1,402

OTHER EXPENSES (INCOME):	OTHER EXPENSES (INCOME):									OTHER EXPENSES (INCOME):
Interest expense	Interest expense	86		115		272		343		Interest expense	63		86		193		272
Capitalized interest	Capitalized interest	(11)		(9)		(31)		(27)		Capitalized interest	(4)		(11)		(15)		(31)
Interest income	Interest income	(70)		(2)		(101)		(6)		Interest income	(156)		(70)		(425)		(101)
Loss on extinguishment of debt	Loss on extinguishment of debt	76		12		192		12		Loss on extinguishment of debt	—		76		—		192
Other (gains) losses, net	Other (gains) losses, net	(39)		17		57		(44)		Other (gains) losses, net	(23)		(39)		(44)		57
Total other expenses (income)	Total other expenses (income)	42		133		389		278		Total other expenses (income)	(120)		42		(291)		389

INCOME BEFORE INCOME TAXES	INCOME BEFORE INCOME TAXES	353		600		1,013		1,248		INCOME BEFORE INCOME TAXES	237		353		919		1,013
PROVISION FOR INCOME TAXES	PROVISION FOR INCOME TAXES	76		154		254		339		PROVISION FOR INCOME TAXES	44		76		202		254

NET INCOME	NET INCOME	$	277	$	446	$	759	$	909	NET INCOME	$	193	$	277	$	717	$	759

NET INCOME PER SHARE, BASIC	NET INCOME PER SHARE, BASIC	$	0.47	$	0.75	$	1.28	$	1.54	NET INCOME PER SHARE, BASIC	$	0.32	$	0.47	$	1.20	$	1.28

NET INCOME PER SHARE, DILUTED	NET INCOME PER SHARE, DILUTED	$	0.44	$	0.73	$	1.21	$	1.49	NET INCOME PER SHARE, DILUTED	$	0.31	$	0.44	$	1.15	$	1.21

COMPREHENSIVE INCOME		$	(223)	$	577	$	676	$	1,300
COMPREHENSIVE INCOME (LOSS)										COMPREHENSIVE INCOME (LOSS)	$	336	$	(223)	$	574	$	676

WEIGHTED AVERAGE SHARES OUTSTANDING	WEIGHTED AVERAGE SHARES OUTSTANDING									WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	Basic	593		592		593		591		Basic	596		593		595		593
Diluted	Diluted	639		607		643		610		Diluted	640		639		639		643

See accompanying notes.

Table of Contents

Southwest Airlines Co.

Condensed Consolidated Statement of Stockholders' Equity

(in millions, except per share amounts)

(unaudited)


		Common Stock		Capital in excess of par value		Retained earnings		Accumulated other comprehensive income		Treasury stock		Total			Common Stock		Capital in excess of par value		Retained earnings		Accumulated other comprehensive income (loss)		Treasury stock		Total
Balance at December 31, 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 loss														Comprehensive loss	—		—		(159)		(147)		—		(306)
Balance at March 31, 2023														Balance at March 31, 2023	$	888	$	4,058	$	15,995	$	197	$	(10,836)	$	10,302

Issuance of common and treasury stock pursuant to Employee stock plans														Issuance of common and treasury stock pursuant to Employee stock plans	—		11		—		—		5		16
Share-based compensation														Share-based compensation	—		34		—		—		—		34
Cash dividends, $0.18 per share														Cash dividends, $0.18 per share	—		—		(107)		—		—		(107)

Comprehensive income (loss)														Comprehensive income (loss)	—		—		683		(139)		—		544
Balance at June 30, 2023														Balance at June 30, 2023	$	888	$	4,103	$	16,571	$	58	$	(10,831)	$	10,789
Issuance of common and treasury stock pursuant to Employee stock plans														Issuance of common and treasury stock pursuant to Employee stock plans	—		9		—		—		4		13
Share-based compensation														Share-based compensation	—		23		—		—		—		23
Cash dividends, $0.18 per share														Cash dividends, $0.18 per share	—		—		(107)		—		—		(107)

Comprehensive income	Comprehensive income	—		—		(278)		503		—		225		Comprehensive income	—		—		193		143		—		336
Balance at March 31, 2022		$	888	$	3,940	$	15,551	$	891	$	(10,853)	$	10,417

Issuance of common and treasury stock pursuant to Employee stock plans		—		10		—		—		3		13
Share-based compensation		—		16		—		—		—		16

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

Comprehensive income		—		—		277		(500)		—		(223)
Balance at September 30, 2022		$	888	$	3,989	$	16,588	$	305	$	(10,846)	$	10,924
Balance at September 30, 2023														Balance at September 30, 2023	$	888	$	4,135	$	16,657	$	201	$	(10,827)	$	11,054

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
Issuance of common and treasury stock pursuant to Employee stock plans — 11 — — 2 13
Share-based compensation — 16 — — — 16
Stock warrants — 22 — — — 22
Comprehensive income (loss) — — 348 196 — 544
Balance at June 30, 2021 $ 888 $ 4,269 $ 15,260 $ 136 $ (10,865) $ 9,688
Issuance of common and treasury stock pursuant to Employee stock plans — 10 — — 3 13
Share-based compensation — 14 — — — 14
Equity feature of Convertible Notes, net of issuance costs — (42) — — — (42)
Comprehensive income — — 446 131 — 577
Balance at September 30, 2021 $ 888 $ 4,251 $ 15,706 $ 267 $ (10,862) $ 10,250



	Common Stock		Capital in excess of par value		Retained earnings		Accumulated other comprehensive income (loss)		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


Issuance of common and treasury stock pursuant to Employee stock plans	—		10		—		—		3		13
Share-based compensation	—		16		—		—		—		16



Comprehensive income (loss)	—		—		760		(86)		—		674
Balance at June 30, 2022	$	888	$	3,966	$	16,311	$	805	$	(10,850)	$	11,120
Issuance of common and treasury stock pursuant to Employee stock plans	—		9		—		—		4		13
Share-based compensation	—		14		—		—		—		14
Comprehensive income (loss)	—		—		277		(500)		—		(223)
Balance at September 30, 2022	$	888	$	3,989	$	16,588	$	305	$	(10,846)	$	10,924

See accompanying notes.

Table of Contents

Southwest Airlines Co.

Condensed Consolidated Statement of Cash Flows

(in millions)

(unaudited)


		Three months ended				Nine months ended					Three months ended				Nine months ended
		September 30,				September 30,					September 30,				September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:	CASH FLOWS FROM OPERATING ACTIVITIES:									CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	Net income	$	277	$	446	$	759	$	909	Net income	$	193	$	277	$	717	$	759
Adjustments to reconcile net income to cash provided by operating activities:	Adjustments to reconcile net income to cash provided by operating activities:									Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	Depreciation and amortization	335		322		984		949		Depreciation and amortization	375		335		1,107		984

Impairment of long-lived assets	Impairment of long-lived assets	4		—		35		—		Impairment of long-lived assets	—		4		—		35
Unrealized mark-to-market adjustment on available for sale securities	Unrealized mark-to-market adjustment on available for sale securities	—		—		7		—		Unrealized mark-to-market adjustment on available for sale securities	—		—		(4)		7
Unrealized/realized (gain) loss on fuel derivative instruments		(26)		(2)		(11)		(25)
Unrealized/realized (gain) on fuel derivative instruments										Unrealized/realized (gain) on fuel derivative instruments	(21)		(26)		(14)		(11)
Deferred income taxes	Deferred income taxes	76		67		250		42		Deferred income taxes	57		76		214		250

Loss on extinguishment of debt	Loss on extinguishment of debt	76		12		192		12		Loss on extinguishment of debt	—		76		—		192
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	58		(23)		162		(819)		Accounts and other receivables	(216)		58		(405)		162
Other assets	Other assets	30		59		(14)		64		Other assets	(35)		30		74		(14)
Accounts payable and accrued liabilities	Accounts payable and accrued liabilities	(70)		(948)		436		(25)		Accounts payable and accrued liabilities	352		(70)		645		436
Air traffic liability	Air traffic liability	(93)		(442)		700		1,103		Air traffic liability	(59)		(93)		750		700
Other liabilities	Other liabilities	(83)		(88)		(292)		(275)		Other liabilities	(89)		(83)		(180)		(292)

Cash collateral received from (provided to) derivative counterparties	Cash collateral received from (provided to) derivative counterparties	(325)		42		(41)		128		Cash collateral received from (provided to) derivative counterparties	40		(325)		(6)		(41)
Other, net	Other, net	(25)		(20)		44		12		Other, net	19		(25)		(159)		44
Net cash provided by (used in) operating activities		234		(575)		3,211		2,075
Net cash provided by operating activities										Net cash provided by operating activities	616		234		2,739		3,211

CASH FLOWS FROM INVESTING ACTIVITIES:	CASH FLOWS FROM INVESTING ACTIVITIES:									CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	Capital expenditures	(1,072)		(135)		(2,568)		(325)		Capital expenditures	(842)		(1,072)		(2,812)		(2,568)

Assets constructed for others	Assets constructed for others	(7)		(3)		(14)		(3)		Assets constructed for others	(8)		(7)		(23)		(14)

Purchases of short-term investments	Purchases of short-term investments	(1,743)		(1,525)		(4,213)		(4,500)		Purchases of short-term investments	(1,620)		(1,743)		(5,347)		(4,213)
Proceeds from sales of short-term and other investments	Proceeds from sales of short-term and other investments	1,702		1,251		3,982		3,747		Proceeds from sales of short-term and other investments	2,406		1,702		5,914		3,982

Net cash used in investing activities	Net cash used in investing activities	(1,120)		(412)		(2,813)		(1,081)		Net cash used in investing activities	(64)		(1,120)		(2,268)		(2,813)

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

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

Proceeds from Employee stock plans	Proceeds from Employee stock plans	12		13		32		39		Proceeds from Employee stock plans	13		12		36		32

Payments of long-term debt and finance lease obligations	Payments of long-term debt and finance lease obligations	(1,679)		(67)		(1,825)		(177)		Payments of long-term debt and finance lease obligations	(11)		(1,679)		(78)		(1,825)

Payments of cash dividends										Payments of cash dividends	(214)		—		(428)		—

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

Other, net	Other, net	1		18		6		46		Other, net	(1)		1		4		6
Net cash provided by (used in) financing activities		(1,905)		(157)		(2,435)		923
Net cash used in financing activities										Net cash used in financing activities	(213)		(1,905)		(466)		(2,435)

NET CHANGE IN CASH AND CASH EQUIVALENTS	NET CHANGE IN CASH AND CASH EQUIVALENTS	(2,791)		(1,144)		(2,037)		1,917		NET CHANGE IN CASH AND CASH EQUIVALENTS	339		(2,791)		5		(2,037)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	13,234		14,124		12,480		11,063		CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	9,158		13,234		9,492		12,480

CASH AND CASH EQUIVALENTS AT END OF PERIOD	CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	10,443	$	12,980	$	10,443	$	12,980	CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	9,497	$	10,443	$	9,497	$	10,443

CASH PAYMENTS FOR:	CASH PAYMENTS FOR:									CASH PAYMENTS FOR:
Interest, net of amount capitalized	Interest, net of amount capitalized	$	42	$	22	$	203	$	188	Interest, net of amount capitalized	$	19	$	42	$	134	$	203
Income taxes	Income taxes	$	8	$	114	$	19	$	291	Income taxes	$	1	$	8	$	9	$	19

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	$	14	$	53	$	42	$	283	Right-of-use assets acquired under operating leases	$	9	$	14	$	78	$	42
Flight equipment acquired against supplier credit memo		$	—	$	—	$	—	$	512
Assets constructed for others		$	—	$	—	$	—	$	309
Remeasurement of right-of-use asset and lease liability		$	—	$	343	$	—	$	343

See accompanying notes.

Table of Contents

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Basis of Presentation

2. ~~Worldwide Pandemic~~

3. New Accounting Pronouncements

4.3. Financial Derivative Instruments

5.4. Comprehensive Income (Loss)

5. Revenue

6. ~~Revenue~~

7. Net Income 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. 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. These events also created a deceleration in bookings, primarily isolated to January and February 2023, as well as increased first quarter 2023 expenses by approximately $55 million, which are included in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the nine months ended September 30, 2023. These first quarter 2023 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. There were no material impacts to operating revenues or expenses beyond first quarter 2023 as a result of this disruption.

The accompanying unaudited Condensed Consolidated Financial Statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States ("GAAP") for complete financial statements. The unaudited Condensed Consolidated Financial Statements for the interim periods ended September 30, ~~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~~performed 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 and nine months ended September 30, ~~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.~~

Certain prior period amounts have been reclassified to conform to the current presentation. In the unaudited Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2021, the Company has reclassified $12 million, in both periods, from Other (gains) losses, net to Loss on extinguishment of debt.


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

~~2. WORLDWIDE PANDEMIC~~

As a result of the rapid spread of the novel coronavirus, COVID-19, throughout the world, including into the United States, on March 11, 2020, the World Health Organization classified the virus as a pandemic. The speed with which the effects of the COVID-19 pandemic changed the U.S. economic landscape, outlook, and in particular the travel industry, was swift and unexpected. The Company 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 and throughout second quarter 2022 as COVID-19 cases significantly trended downward and bookings for summer travel accelerated. Strong revenue trends, especially for leisure travel, continued throughout third quarter 2022.

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

As consideration for its receipt of funding under each of these Payroll Support programs, the Company issued a promissory note in favor of Treasury (classified as a component of Long term debt less current maturities in the unaudited Condensed Consolidated Balance Sheet) and entered into a warrant agreement with Treasury (classified as a component of Stockholders' equity in the unaudited Condensed Consolidated Balance Sheet). 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 has been subject to certain restrictions, including the elimination of share repurchases and dividends through September 30, 2022; and limits on executive compensation until April 1, 2023.

Under each of the three Payroll Support programs, funds received were used solely to pay qualifying employee salaries, wages, and benefits. All grant portions of the Payroll Support programs received had been allocated and classified as a contra-expense line item in the Company's financial statements by the end of 2021, including approximately $763 million and $2.7 billion for the three and nine months ended September 30, 2021, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income.

On June 1, 2020, the Company announced Voluntary Separation Program 2020 ("Voluntary Separation Program"), a voluntary separation program that allowed eligible Employees the opportunity to voluntarily separate from the


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

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

~~In conjunction with Voluntary Separation Program, the Company also offered certain contract Employees the option to take voluntary Extended Emergency Time Off ("Extended ETO"), for periods between~~ ~~six~~ and 18 months, with the exception of Pilots, who could elect to take Extended ETO for periods of up to five years, all subject to early recalls. Approximately 12,000 Employees participated in the Extended ETO program in 2020 and 2021 combined. The Company had no Employees remaining on Extended ETO past March 31, 2022.

The purpose of Voluntary Separation Program and Extended ETO was to maintain a reduced workforce to operate at reduced capacity relative to the Company's operations prior to the COVID-19 pandemic. In accordance with the accounting guidance in Accounting Standards Codification ("ASC") Topic 712 (Compensation — Nonretirement Postemployment Benefits), the Company accrued charges related to the special termination benefits described above upon Employees accepting Voluntary Separation Program or Extended ETO offers. The Company accrued expenses totaling $1.4 billion for its Voluntary Separation Program and Extended ETO program in 2020, which are being reduced as program benefits are paid. For both the Voluntary Separation Program and Extended ETO programs combined, approximately $86 million of the liability balances were relieved during the first nine months of 2022 through payments to Employees, leaving a balance of $242 million as of September 30, 2022. The liability associated with the Extended ETO program was fully relieved at March 31, 2022. During the first nine months of 2021, the Company determined that it was no longer probable that 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 $140 million credit to expense during the first nine months of 2021. Both the initial charge and the partial reversal were classified within Payroll support and voluntary Employee programs, net, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income.

In response to flight schedule adjustments due to the effects of the COVID-19 pandemic, a number of aircraft were taken out of the Company’s schedule beginning in late March 2020, and placed in short-term storage, as well as some in a longer term storage program. As of September 30, 2022, no Boeing aircraft remained in short or long-term storage.

3.2. 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

108


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

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.

~~On August 5, 2020,~~ The Company had no material LIBOR-related contract modifications during 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. For the three and nine months ended September 30, 2022, the impacts of adopting this new standard were decreases to the Company's Net income in the amounts of $36 million, or $0.08 per diluted share, and $94 million, or $0.22 per diluted share, respectively, as a result of higher losses recognized on the Company’s extinguishment transactions following the elimination of the equity component of the Convertible Notes, partially offset by the elimination of the non-cash interest expense associated with the prior debt discount amortization. See Note 7.2023.


~~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)~~protection, which the Company defines as prices significantly higher than historical average levels), 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.


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

As of September 30, ~~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

September 30, 2022

Derivative underlying commodity type as of

September 30, 2023

Derivative underlying commodity type as of

Period (by year)

(gallons in millions) (a)

September 30, 2022

Period (by year)

(gallons in millions) (a)

September 30, 2023

Remainder of 2022

305

WTI crude oil, Brent crude oil, and Heating oil

2023

1,084

WTI crude oil and Brent crude oil

Remainder of 2023

271

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

2024

358

WTI crude oil

2024

1,265

WTI crude oil and Brent crude oil

2025

1,033

Brent crude oil

2026

176

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


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

are recorded in Accumulated other comprehensive income ("AOCI") until the underlying jet fuel is consumed. See Note 5.4.

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

~~During 2021, as~~ 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.~~nine months ended September 30, 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				Liability derivatives
	Balance Sheet	Fair value at		Fair value at		Fair value at		Fair value at
(in millions)	location	9/30/2023		12/31/2022		9/30/2023		12/31/2022
Derivatives designated as hedges (a)
Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	250	$	352	$	—	$	—
Fuel derivative contracts (gross)	Other assets	223		160		—		—



Interest rate derivative contracts	Other assets	23		14		—		—


Total derivatives designated as hedges		$	496	$	526	$	—	$	—
Derivatives not designated as hedges (a)
Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	42	$	—	$	28	$	—





Total derivatives		$	538	$	526	$	28	$	—

(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.

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


	Balance Sheet	September 30,		December 31,
(in millions)	location	2023		2022
Cash collateral deposits held from counterparties for fuel contracts - current	Offset against Prepaid expenses and other current assets	$	70	$	106
Cash collateral deposits held from counterparties for fuel contracts - noncurrent	Offset against Other assets	30		—




Receivable from third parties for fuel contracts	Accounts and other receivables	45		34


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 9/30/2022 12/31/2021 9/30/2022 12/31/2021
Derivatives designated as hedges (a)
Fuel derivative contracts (gross) Prepaid expenses and other current assets $ 371 $ 409 $ — $ —
Fuel derivative contracts (gross) Other assets 168 287 — —
Interest rate derivative contracts Other assets 14 — — —
Interest rate derivative contracts Other noncurrent liabilities — — — 4
Total derivatives designated as hedges $ 553 $ 696 $ — $ 4
Derivatives not designated as hedges (a)
Fuel derivative contracts (gross) Prepaid expenses and other current assets $ 26 $ — $ 29 $ —
Total derivatives $ 579 $ 696 $ 29 $ 4

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

Balance Sheet September 30, December 31,
(in millions) location 2022 2021
Cash collateral deposits held from counterparties for fuel contracts - current Offset against Prepaid expenses and other current assets $ 96 $ 80
Cash collateral deposits held from counterparties for fuel contracts - noncurrent Offset against Other assets 38 95
Receivable from third parties for fuel contracts Accounts and other receivables 56 8

All of the Company's fuel derivative instruments and interest rate swaps are subject to agreements that follow the netting guidance in the applicable accounting standards for derivatives and hedging. The types of derivative instruments the Company has determined are subject to netting requirements in the accompanying unaudited Condensed Consolidated Balance Sheet are those in which the Company pays or receives cash for transactions with the same counterparty and in the same currency via one net payment or receipt. For cash collateral held by the Company or provided to counterparties, the Company nets such amounts against the fair value of the Company's derivative portfolio by each counterparty. The Company has elected to utilize netting for both its fuel derivative instruments and interest rate swap agreements and also classifies such amounts as either current or noncurrent, based on the net fair value position with each of the Company's counterparties in the unaudited Condensed Consolidated Balance Sheet. If its fuel derivative instruments are in a net asset position with a counterparty, cash collateral amounts held are first netted against current outstanding derivative asset amounts associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of noncurrent outstanding derivative instruments. As of September 30, ~~2022,~~2023, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.


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

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


Offsetting of derivative assets	Offsetting of derivative assets																	Offsetting of derivative assets
(in millions)	(in millions)																	(in millions)
			(i)		(ii)			(iii) = (i) + (ii)			(i)		(ii)		(iii) = (i) + (ii)					(i)		(ii)		(iii) = (i) + (ii)			(i)		(ii)		(iii) = (i) + (ii)
			September 30, 2022								December 31, 2021									September 30, 2023							December 31, 2022
Description	Description	Balance Sheet location	Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet			Net amounts of assets presented in the Balance Sheet			Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet		Net amounts of assets presented in the Balance Sheet			Description	Balance Sheet location	Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet		Net amounts of assets presented in the Balance Sheet			Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet		Net amounts of assets presented in the Balance Sheet
Fuel derivative contracts	Fuel derivative contracts	Prepaid expenses and other current assets	$	397	$	(125)	(b)	$	272		$	409	$	(80)	$	329		Fuel derivative contracts	Prepaid expenses and other current assets	$	292	$	(98)	$	194		$	352	$	(106)	$	246
Fuel derivative contracts	Fuel derivative contracts	Other assets	$	168	$	(38)		$	130	(a)	$	287	$	(95)	$	192	(a)	Fuel derivative contracts	Other assets	$	223	$	(30)	$	193	(a)	$	160	$	—	$	160	(a)

Interest rate derivative contracts	Interest rate derivative contracts	Other assets	$	14	$	—		$	14	(a)	$	—	$	—	$	—	(a)	Interest rate derivative contracts	Other assets	$	23	$	—	$	23	(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 9.

~~(b) Includes the current portion of cash collateral deposits held from counterparties and derivative liability associated with fuel contracts.~~8.


Offsetting of derivative liabilities	Offsetting of derivative liabilities																	Offsetting of derivative liabilities
(in millions)	(in millions)																	(in millions)
			(i)		(ii)			(iii) = (i) + (ii)			(i)		(ii)		(iii) = (i) + (ii)					(i)		(ii)		(iii) = (i) + (ii)		(i)		(ii)		(iii) = (i) + (ii)
			September 30, 2022								December 31, 2021									September 30, 2023						December 31, 2022
Description	Description	Balance Sheet location	Gross amounts of recognized liabilities		Gross amounts offset in the Balance Sheet			Net amounts of liabilities presented in the Balance Sheet			Gross amounts of recognized liabilities		Gross amounts offset in the Balance Sheet		Net amounts of liabilities presented in the Balance Sheet			Description	Balance Sheet location	Gross amounts of recognized liabilities		Gross amounts offset in the Balance Sheet		Net amounts of liabilities presented in the Balance Sheet		Gross amounts of recognized liabilities		Gross amounts offset in the Balance Sheet		Net amounts of liabilities presented in the Balance Sheet
Fuel derivative contracts	Fuel derivative contracts	Prepaid expenses and other current assets	$	125	$	(125)	(b)	$	—		$	80	$	(80)	$	—		Fuel derivative contracts	Prepaid expenses and other current assets	$	98	$	(98)	$	—	$	106	$	(106)	$	—
Fuel derivative contracts	Fuel derivative contracts	Other assets	$	38	$	(38)		$	—	(a)	$	95	$	(95)	$	—	(a)	Fuel derivative contracts	Other assets	$	30	$	(30)	$	—	$	—	$	—	$	—

Interest rate derivative contracts		Other noncurrent liabilities	$	—	$	—		$	—		$	4	$	—	$	4

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

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

1511


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

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and nine months ended September 30, ~~2022~~2023 and ~~2021:~~2022:


Location and amount recognized in income on cash flow and fair value hedging relationships	Location and amount recognized in income on cash flow and fair value hedging relationships								Location and amount recognized in income on cash flow and fair value hedging relationships
		Three months ended September 30, 2022				Three months ended September 30, 2021						Three months ended September 30, 2023				Three months ended September 30, 2022
(in millions)	(in millions)	Fuel and oil		Other operating expenses			Fuel and oil			Other operating expenses			(in millions)	Fuel and oil			Other operating expenses		Fuel and oil		Other operating expenses
Total	Total	$	(195)	$	2		$	2		$	1		Total	$	(52)		$	2	$	(195)	$	2

(Gain) loss on cash flow hedging relationships:
(Gain) loss on cash flow hedging relationships													(Gain) loss on cash flow hedging relationships
Commodity contracts:	Commodity contracts:												Commodity contracts:
Amount of (gain) loss reclassified from AOCI into income		(195)		—			2			—
Amount of (gain) reclassified from AOCI into income													Amount of (gain) reclassified from AOCI into income	(52)			—		(195)		—
Interest contracts:	Interest contracts:												Interest contracts:
Amount of loss reclassified from AOCI into income	Amount of loss reclassified from AOCI into income	—		2			—			1			Amount of loss reclassified from AOCI into income	—			2		—		2


Location and amount recognized in income on cash flow and fair value hedging relationships	Location and amount recognized in income on cash flow and fair value hedging relationships													Location and amount recognized in income on cash flow and fair value hedging relationships
		Nine months ended September 30, 2022						Nine months ended September 30, 2021							Nine months ended September 30, 2023		Nine months ended September 30, 2022
(in millions)	(in millions)	Fuel and oil		Other (gains)/losses, net		Other operating expenses		Fuel and oil		Other (gains)/losses, net		Other operating expenses		(in millions)	Fuel and oil		Other operating expenses		Fuel and oil		Other operating expenses
Total	Total	$	(703)	$	—	$	5	$	30	$	6	$	4	Total	$	(93)	$	5	$	(703)	$	5

(Gain) loss on cash flow hedging relationships	(Gain) loss on cash flow hedging relationships													(Gain) loss on cash flow hedging relationships
Commodity contracts:	Commodity contracts:													Commodity contracts:
Amount of (gain) loss reclassified from AOCI into income		(703)		—		—		30		6		—
Amount of (gain) reclassified from AOCI into income														Amount of (gain) reclassified from AOCI into income	(93)		—		(703)		—
Interest contracts:	Interest contracts:													Interest contracts:
Amount of loss reclassified from AOCI into income	Amount of loss reclassified from AOCI into income	—		—		5		—		—		4		Amount of loss reclassified from AOCI into income	—		5		—		5


Derivatives designated and qualified in cash flow hedging relationships	Derivatives designated and qualified in cash flow hedging relationships					Derivatives designated and qualified in cash flow hedging relationships
		(Gain) loss recognized in AOCI on derivatives, net of tax					(Gain) loss recognized in AOCI on derivatives, net of tax
		Three months ended					Three months ended
		September 30,					September 30,
(in millions)	(in millions)	2022		2021		(in millions)	2023		2022
Fuel derivative contracts	Fuel derivative contracts	$	354	$	(128)	Fuel derivative contracts	$	(175)	$	354
Interest rate derivatives	Interest rate derivatives	(2)		(1)		Interest rate derivatives	(7)		(2)
Total	Total	$	352	$	(129)	Total	$	(182)	$	352

1612


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


Derivatives designated and qualified in cash flow hedging relationships	Derivatives designated and qualified in cash flow hedging relationships					Derivatives designated and qualified in cash flow hedging relationships
		(Gain) loss recognized in AOCI on derivatives, net of tax					(Gain) loss recognized in AOCI on derivatives, net of tax
		Nine months ended					Nine months ended
		September 30,					September 30,
(in millions)	(in millions)	2022		2021		(in millions)	2023		2022
Fuel derivative contracts	Fuel derivative contracts	$	(438)	$	(402)	Fuel derivative contracts	$	78	$	(438)
Interest rate derivatives	Interest rate derivatives	(14)		(5)		Interest rate derivatives	(7)		(14)
Total	Total	$	(452)	$	(407)	Total	$	71	$	(452)

Derivatives not designated as hedges

(Gain) loss recognized in income on derivatives

Three months ended

Location of gain recognized in income on derivatives

Three months ended

Location of (gain) loss recognized in income on derivatives

September 30,

(in millions)

2022

2021

(in millions)

2023

2022

Fuel derivative contracts

(38)

Other (gains) losses, net

Fuel derivative contracts

(33)

(38)

Other (gains) losses, net

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

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


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

	Nine months ended				Location of (gain) loss recognized in income on derivatives
	September 30,
(in millions)	2023		2022
Fuel derivative contracts	$	(26)	$	(23)	Other (gains) losses, net

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


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

		Three months ended				Location of premium (benefit) expense recognized in income on derivatives		Three months ended				Location of premium expense (benefit) recognized in income on derivatives
		September 30,						September 30,
(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	Fuel derivative contracts not designated as hedges	(14)		11		Other (gains) losses, net	Fuel derivative contracts not designated as hedges	—		(14)		Other (gains) losses, net

1713


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


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

		Nine months ended				Location of premium (benefit) expense recognized in income on derivatives		Nine months ended				Location of premium expense (benefit) recognized in income on derivatives
		September 30,						September 30,
(in millions)	(in millions)	2022		2021			(in millions)	2023		2022
Fuel derivative contracts designated as hedges	Fuel derivative contracts designated as hedges	$	79	$	43	Fuel and oil	Fuel derivative contracts designated as hedges	$	91	$	79	Fuel and oil
Fuel derivative contracts not designated as hedges	Fuel derivative contracts not designated as hedges	(14)		32		Other (gains) losses, net	Fuel derivative contracts not designated as hedges	$	—	$	(14)	Other (gains) losses, net

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets or provided by third parties. Included in the Company’s cumulative unrealized gains from fuel hedges as of September 30, ~~2022,~~2023, recorded in AOCI, were approximately ~~$194~~$77 million in ~~net~~ unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to September 30, ~~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. AtAs of September 30, ~~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 September 30, ~~2022,~~2023, at which such postings are triggered:

1814


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

Counterparty (CP)

(in millions)

Other (a)

Total

(in millions)

Total

Fair value of fuel derivatives

134

119

536

Fair value of fuel derivatives

120

487

Cash collateral held from CP

134

—

134

Cash collateral held from CP

100

—

100

Option to substitute LC for cash

N/A

(b)

N/A

(b)

Option to substitute LC for cash

N/A

(a)

N/A

(a)

N/A

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 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)

Cash is received from CP

>0(b)

>150(b)

>250(b)

>125(b)

>100(b)

>70(b)

>100(b)

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

Cash is received from CP

(d)

Cash is received from CP

(c)

(a) ~~Individual counterparties with fair value of fuel derivatives < $8 million.~~

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

~~(c)~~(b) Thresholds may vary based on changes in credit ratings within investment grade.

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

1915


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

5.4. COMPREHENSIVE INCOME (LOSS)

Comprehensive income ~~(loss)~~ includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting ~~unrealized gains and losses on certain investments,~~ and actuarial gains/losses arising from the Company’s postretirement benefit obligation. The differences between Net income and Comprehensive income (loss) for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022 were as follows:


		Three months ended September 30,					Three months ended September 30,
(in millions)	(in millions)	2022		2021		(in millions)	2023		2022
NET INCOME	NET INCOME	$	277	$	446	NET INCOME	$	193	$	277
Unrealized gain (loss) on fuel derivative instruments, net of deferred taxes of ($153) and $39		(504)		129
Unrealized gain on interest rate derivative instruments, net of deferred taxes of $— and $1		4		2
Unrealized gain (loss) on fuel derivative instruments, net of deferred taxes of $41 and ($153)						Unrealized gain (loss) on fuel derivative instruments, net of deferred taxes of $41 and ($153)	135		(504)
Unrealized gain on interest rate derivative instruments, net of deferred taxes of $2 and $—						Unrealized gain on interest rate derivative instruments, net of deferred taxes of $2 and $—	8		4

Total other comprehensive income (loss)	Total other comprehensive income (loss)	$	(500)	$	131	Total other comprehensive income (loss)	$	143	$	(500)
COMPREHENSIVE INCOME (LOSS)	COMPREHENSIVE INCOME (LOSS)	$	(223)	$	577	COMPREHENSIVE INCOME (LOSS)	$	336	$	(223)

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


	Nine months ended September 30,
(in millions)	2023		2022
NET INCOME	$	717	$	759
Unrealized loss on fuel derivative instruments, net of deferred taxes of ($45) and ($31)	(150)		(101)
Unrealized gain on interest rate derivative instruments, net of deferred taxes of $2 and $5	11		18
Other, net of deferred taxes of $4 and $—	(4)		—
Total other comprehensive loss	$	(143)	$	(83)
COMPREHENSIVE INCOME	$	574	$	676

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three and nine months ended September 30, ~~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 (loss)
Balance at June 30, 2022		$	1,017	$	(38)	$	66		$	(240)	$	805
Balance at June 30, 2023													Balance at June 30, 2023	$	(65)	$	(29)	$	170	$	(18)	$	58
Changes in fair value	Changes in fair value	(462)		2		—			108		(352)		Changes in fair value	228		8		—		(55)		181
Reclassification to earnings	Reclassification to earnings	(195)		2		—		(a)	45		(148)		Reclassification to earnings	(52)		2		—		12		(38)
Balance at September 30, 2022		$	360	$	(34)	$	66		$	(87)	$	305
Balance at September 30, 2023													Balance at September 30, 2023	$	111	$	(19)	$	170	$	(61)	$	201

(in millions) Fuel derivatives Interest rate derivatives Defined benefit plan items Deferred tax Accumulated other comprehensive income
Balance at December 31, 2021 $ 492 $ (57) $ 66 $ (113) $ 388
Changes in fair value 571 18 — (137) 452
Reclassification to earnings (703) 5 — (a) 163 (535)
Balance at September 30, 2022 $ 360 $ (34) $ 66 $ (87) $ 305


(in millions)	Fuel derivatives		Interest rate derivatives		Defined benefit plan items		Deferred tax impact		Accumulated other comprehensive income (loss)
Balance at December 31, 2022	$	305	$	(32)	$	170	$	(99)	$	344
Changes in fair value	(101)		8		—		21		(72)
Reclassification to earnings	(93)		5		—		17		(71)
Balance at September 30, 2023	$	111	$	(19)	$	170	$	(61)	$	201

2016


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

The following ~~table illustrates~~tables illustrate the significant amounts reclassified out of each component of AOCI for the three and nine months ended September 30, ~~2022:~~2023:

Three months ended September 30, ~~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) on fuel derivative instruments

~~(195)~~(52)

Fuel and oil expense

~~(45)~~(12)

Less: Tax expense

~~(150)~~(40)

Net of tax

Unrealized loss on interest rate derivative instruments

Other operating expenses

—

Less: Tax expense

Net of tax

Total reclassifications for the period

~~(148)~~(38)

Net of tax

Nine months ended September 30, ~~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) on fuel derivative instruments

~~(703)~~(93)

Fuel and oil expense

~~(164)~~(22)

Less: Tax expense

~~(539)~~(71)

Net of tax

Unrealized loss on interest rate derivative instruments

Other operating expenses

Less: Tax expense

Net of tax

Other

—

Other

Less: Tax Expense

(4)

Net of tax

Total reclassifications for the period

~~(535)~~(71)

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 and nine months ended September 30, ~~2022~~2023 and ~~2021:~~2022:

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


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


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022
Passenger non-loyalty	$	4,758	$	4,630	$	14,023	$	13,112
Passenger loyalty - air transportation	916		791		2,730		2,236
Passenger ancillary sold separately	238		192		673		519
Total passenger revenues	$	5,912	$	5,613	$	17,426	$	15,867

As of September 30, ~~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)	September 30, 2022		December 31, 2021		(in millions)	September 30, 2023		December 31, 2022
Air traffic liability - passenger travel and ancillary passenger services	Air traffic liability - passenger travel and ancillary passenger services	$	3,540	$	2,936	Air traffic liability - passenger travel and ancillary passenger services	$	4,004	$	3,061
Air traffic liability - loyalty program	Air traffic liability - loyalty program	4,885		4,789		Air traffic liability - loyalty program	4,996		5,189
Total Air traffic liability	Total Air traffic liability	$	8,425	$	7,725	Total Air traffic liability	$	9,000	$	8,250

The balance in ~~Air~~"Air traffic liability - passenger travel and ancillary passenger ~~services~~services" also includes flight credits not currently associated with a ticket 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~~"Air traffic liability - loyalty ~~program~~program" for the three and nine months ended September 30, ~~2022~~2023 and ~~2021~~2022 were as follows (in millions):


		Three months ended September 30,				Nine months ended September 30,					Three months ended September 30,				Nine months ended September 30,
		2022		2021		2022		2021			2023		2022		2023		2022
Air traffic liability - loyalty program - beginning balance	Air traffic liability - loyalty program - beginning balance	$	4,885	$	4,719	$	4,789	$	4,447	Air traffic liability - loyalty program - beginning balance	$	5,079	$	4,885	$	5,189	$	4,789
Amounts deferred associated with points awarded	Amounts deferred associated with points awarded	815		688		2,395		1,810		Amounts deferred associated with points awarded	859		815		2,609		2,395
Revenue recognized from points redeemed - Passenger	Revenue recognized from points redeemed - Passenger	(791)		(621)		(2,236)		(1,448)		Revenue recognized from points redeemed - Passenger	(916)		(791)		(2,730)		(2,236)
Revenue recognized from points redeemed - Other	Revenue recognized from points redeemed - Other	(24)		(14)		(63)		(37)		Revenue recognized from points redeemed - Other	(26)		(24)		(72)		(63)

Air traffic liability - loyalty program - ending balance	Air traffic liability - loyalty program - ending balance	$	4,885	$	4,772	$	4,885	$	4,772	Air traffic liability - loyalty program - ending balance	$	4,996	$	4,885	$	4,996	$	4,885

Air traffic liability includes consideration received for ticket and loyalty related performance obligations which have not been satisfied as of a given date. Rollforwards of the amounts included in Air traffic liability as of September 30, ~~2022~~2023 and ~~2021~~2022 were as follows (in millions):


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


	Air traffic liability

Balance at December 31, 2022	$	8,250
Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)	18,249
Revenue from amounts included in contract liability opening balances	(5,263)
Revenue from current period sales	(12,236)
Balance at September 30, 2023	$	9,000


	Air traffic liability

Balance at December 31, 2021	$	7,725
Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)	16,630
Revenue from amounts included in contract liability opening balances	(3,750)
Revenue from current period sales	(12,180)
Balance at September 30, 2022	$	8,425


	~~Air traffic liability~~

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

During 2020 and in parts of 2021, the Company experienced a significantly higher number of Customer-driven flight cancellations as a result of the COVID-19 pandemic. See Note 2 for further information. As a result, the amount of Customer flight credits held in Air traffic liability that are estimated to be redeemed for future travel has remained much higher than historical levels. In order to provide additional flexibility to Customers who hold these flight credits, the Company significantly relaxed its previous policies with regards to the time period within which these flight credits can be redeemed, which was previously twelve months from the original date of purchase. For all Customer flight credits created or that would have otherwise expired between March 1 and September 7, 2020, associated with flight cancellations, the Company previously extended the expiration date to September 7, 2022.

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

~~The amount of~~ Customer flight credits represents approximately 67 percent and 169 percent of the total Air traffic liability balance atas of September 30, ~~2022,~~2023, and December 31, ~~2021, respectively, compared to approximately 2 percent of the Air traffic liability balance as of December 31, 2019.~~

Recognition of revenue associated with the Company’s loyalty liability can be difficult to predict, as the number of award seats available to Members is not currently restricted and they could choose to redeem their points at any time that a seat is available. The performance obligations classified as a current liability related to the Company’s loyalty program were estimated based on expected redemptions utilizing historical redemption patterns, and forecasted flight availability and fares. The entire balance classified as Air traffic liability—noncurrent relates to loyalty points that were estimated to be redeemed in periods beyond the twelve months 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-brand 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.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 Bank USA, N.A, within Other operating revenues. For the three months ended September 30, ~~2022~~2023 and ~~2021,~~2022, the Company recognized ~~$521~~$526 million and ~~$355~~$521 million, respectively. For the nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, the Company recognized $1.6 billion and $1.5 billion, ~~and $987 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.

7.6. NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share (in millions except per share amounts). Basic net income per share is calculated by dividing net income by the weighted average of shares outstanding during the period. Diluted net income 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. For the three and nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, 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.

2119


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

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


		Three months ended September 30,						Nine months ended September 30,							Three months ended September 30,				Nine months ended September 30,
		2022			2021			2022			2021				2023		2022		2023			2022
NUMERATOR:	NUMERATOR:													NUMERATOR:
Net income	Net income	$	277		$	446		$	759		$	909		Net income	$	193	$	277	$	717		$	759
Add: Interest expense	Add: Interest expense	5		(a)	—			17		(a)	—			Add: Interest expense	5		5		15			17
Net income attributable to common stockholders	Net income attributable to common stockholders	282			446			776			909			Net income attributable to common stockholders	198		282		732			776

DENOMINATOR:	DENOMINATOR:													DENOMINATOR:
Weighted-average shares outstanding, basic	Weighted-average shares outstanding, basic	593			592			593			591			Weighted-average shares outstanding, basic	596		593		595			593
Dilutive effects of Convertible Notes	Dilutive effects of Convertible Notes	45		(a)	14		(b)	49		(a)	17		(b)	Dilutive effects of Convertible Notes	42		45		42		(a)	49
Dilutive effect of stock warrants		—			1			—			1

Dilutive effect of restricted stock units	Dilutive effect of restricted stock units	1			—			1			1			Dilutive effect of restricted stock units	2		1		2			1
Adjusted weighted-average shares outstanding, diluted	Adjusted weighted-average shares outstanding, diluted	639			607			643			610			Adjusted weighted-average shares outstanding, diluted	640		639		639			643

NET INCOME PER SHARE:	NET INCOME PER SHARE:													NET INCOME PER SHARE:

Basic	Basic	$	0.47		$	0.75		$	1.28		$	1.54		Basic	$	0.32	$	0.47	$	1.20		$	1.28
Diluted	Diluted	$	0.44		$	0.73		$	1.21		$	1.49		Diluted	$	0.31	$	0.44	$	1.15		$	1.21

(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 diluted net income per share, which requires the Company to assume that all Convertible Notes were converted and outstanding for the entire period. Using this method, the numerator is affected by adding back interest expense and the denominator is affected by including the effect of potential share settlement, if the effect is more dilutive, regardless of the type of settlement. For the three and nine months ended September 30, 2022, all shares issuable on conversion were included in the denominator. See Notes
3 ~~and 11 for further information regarding the new standard and the Convertible Notes.~~

(b) Prior to the adoption of ASU 2020-06, the Convertible Notes were accounted for using the treasury stock method for the purposes of net income per share. For the three and nine months ended September 30, 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.

8.7. FAIR VALUE MEASUREMENTS

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

As of September 30, ~~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 time deposits)~~bills), interest rate derivative 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.


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

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


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

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.~~Income (Loss).

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


			Fair value measurements at reporting date using:
			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
Description	September 30, 2023		(Level 1)		(Level 2)		(Level 3)
Assets	(in millions)
Cash equivalents:
Cash equivalents (a)	$	9,166	$	9,166	$	—	$	—
Commercial paper	314		—		314		—
Certificates of deposit	17		—		17		—


Short-term investments:
Treasury bills	2,029		2,029		—		—

Certificates of deposit	207		—		207		—


Fuel derivatives:
Option contracts (b)	515		—		—		515
Interest rate derivatives (see Note 3)	23		—		23		—
Equity Securities	249		249		—		—
Total assets	$	12,520	$	11,444	$	561	$	515
Liabilities
Fuel derivatives:
Option contracts (b)	$	(28)	$	—	$	—	$	(28)

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

(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as a net asset. See Note 3.


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

~~The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2022, and December 31, 2021:~~

Fair value measurements at reporting date using:
Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs
Description September 30, 2022 (Level 1) (Level 2) (Level 3)
Assets (in millions)
Cash equivalents:
Cash equivalents (a) $ 10,088 $ 10,088 $ — $ —
Commercial paper 315 — 315 —
Certificates of deposit 15 — 15 —
Time deposits 25 — 25 —
Short-term investments:
Treasury bills 2,424 2,424 — —
Certificates of deposit 131 — 131 —
Time deposits 675 — 675 —
Fuel derivatives:
Option contracts (b) 565 — — 565
Interest rate derivatives (see Note 4) 14 — 14 —
Equity Securities 216 216 — —
Total assets $ 14,468 $ 12,728 $ 1,175 $ 565
Liabilities
Fuel derivatives:
Option contracts (b) $ (29) $ — $ — $ (29)

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

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


				Fair value measurements at reporting date using:									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 4.


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

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, ~~2022,~~2023, or the year ended December 31, ~~2021.~~2022. The following tables present the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, ~~2022:~~2023:

Fair value measurements using significant unobservable inputs (Level 3)

(in millions)

Fuel derivatives

Balance at June 30, ~~2022~~2023

~~1,127~~316

Total gains (losses) for the period

Included in earnings

3833

(a)

Included in other comprehensive income

~~(462)~~228

Purchases

524

(b)

Settlements

~~(219)~~(94)

Balance at September 30, ~~2022~~2023

~~536~~487

The amount of total gains for the period

included in earnings attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, ~~2022~~2023

21 (16)

(a)

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

included in other comprehensive income attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, ~~2022~~2023

~~(395)~~(182)

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

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


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

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

2326

(a)

Included in other comprehensive income

~~571~~ (100)

Purchases

25245

(b)

Settlements

~~(779)~~(196)

Balance at September 30, ~~2022~~2023

~~536~~487

The amount of total gains for the period

included in earnings attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, ~~2022~~2023

11 (14)

(a)

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

included in other comprehensive income attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, ~~2022~~2023

9426

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

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


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

The following table presents a range and weighted average of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 atas of September 30, ~~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	Fourth quarter 2022	33-59%	47	%	Fuel derivatives	Option model	Implied volatility	Fourth quarter 2023	19-41%	31	%
				2023	42-56%	50	%				2024	26-38%	28	%
				2024	36-48%	41	%				2025	24-28%	25	%
											2026	23-26%	25	%

(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, atas of September 30, ~~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.

(in millions) Carrying value Estimated fair value Fair value level hierarchy
2.75% Notes due November 2022 $ 300 $ 300 Level 2
1.25% Convertible Notes due 2025 1,611 1,851 Level 2
5.25% Notes due 2025 1,332 1,334 Level 2
3.00% Notes due 2026 300 275 Level 2
3.45% Notes due 2027 300 271 Level 2
5.125% Notes due 2027 1,801 1,766 Level 2
7.375% Debentures due 2027 114 120 Level 2
2.625% Notes due 2030 500 403 Level 2
1.000% PSP1 due 2030 976 829 Level 3
1.000% PSP2 due 2031 566 463 Level 3
1.000% PSP3 due 2031 526 422 Level 3


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

~~9. SUPPLEMENTAL FINANCIAL INFORMATION~~

(in millions) September 30, 2022 December 31, 2021
Trade receivables $ 85 $ 58
Credit card receivables 158 83
Business partners and other suppliers 561 432
Taxes receivable (a) 233 699
Fuel hedging and receivables 56 8
Other 223 77
Accounts and other receivables $ 1,316 $ 1,357

(in millions) September 30, 2022 December 31, 2021
Derivative contracts $ 144 $ 192
Intangible assets, net 295 295
Other 333 395
Other assets $ 772 $ 882

(in millions) September 30, 2022 December 31, 2021
Accounts payable trade $ 279 $ 156
Salaries payable 250 287
Taxes payable excluding income taxes 212 200
Aircraft maintenance payable 61 42
Fuel payable 252 170
Other payable 499 427
Accounts payable $ 1,553 $ 1,282

(in millions) September 30, 2022 December 31, 2021
Voluntary Separation Program $ 74 $ 92
Profitsharing and savings plans 199 262
Vacation pay 471 451
Health 243 152
Workers compensation 155 141
Property and income taxes 61 65
Interest 108 46
Deferred supplier payments (b) — 80
Bonus and incentive pay (c) 330 150
Other 240 185
Accrued liabilities $ 1,881 $ 1,624

(in millions) September 30, 2022 December 31, 2021
Voluntary Separation Program $ 168 $ 233
Postretirement obligation 333 330
Other deferred compensation 296 369
Other 259 292
Other noncurrent liabilities $ 1,056 $ 1,224

2723


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



5.25% Notes due 2025	1,302	1,287	Level 2
1.25% Convertible Notes due 2025	1,611	1,616	Level 2
3.00% Notes due 2026	300	278	Level 2
7.375% Debentures due 2027	111	104	Level 2
3.45% Notes due 2027	300	275	Level 2
5.125% Notes due 2027	1,727	1,683	Level 2
2.625% due 2030	500	414	Level 2



1.000% Payroll Support Program Loan due 2030 (a)	976	893	Level 3
1.000% Payroll Support Program Loan due 2031 (a)	566	500	Level 3
1.000% Payroll Support Program Loan due 2031 (a)	526	457	Level 3

(a) ~~This amount includes approximately $472 million as of December 31, 2021 associated with a significant cash tax refund expected as a result~~The interest rate will change to Secured Overnight Financing Rate +2% on the fifth anniversary of the CARES Act allowing entities to carry back 2020 losses to prior periods of up to five years, and claim refunds of federal taxes paid. The refund was received by the Company during second quarter 2022. These amounts as of September 30, 2022 and December 31, 2021 also include excise taxes remitted to taxing authorities for which the subsequent flights were canceled by Customers, resulting in amounts due back to the Company.

~~(b) Represents amounts owed at December 31, 2021 for aircraft deliveries received that were subsequently relieved via future payments to supplier.~~

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

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

~~Other Operating Expenses~~

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

~~10. COMMITMENTS AND CONTINGENCIES~~8. SUPPLEMENTAL FINANCIAL INFORMATION


(in millions)	September 30, 2023		December 31, 2022
Trade receivables	$	142	$	117
Credit card receivables	382		85
Business partners and other suppliers	606		478
Taxes receivable	53		133
Fuel hedging and receivables	45		34
Other	239		193
Accounts and other receivables	$	1,467	$	1,040

~~Dallas Love Field~~


(in millions)	September 30, 2023		December 31, 2022
Derivative contracts	$	216	$	174
Intangible assets, net	296		296

Equity securities	249		235
Other	255		150
Other assets	$	1,016	$	855

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). Given the Company’s guarantee associated with the bonds issued to fund LFMP, the remaining debt service amount was considered a minimum lease payment under the adoption of ASC Topic 842, Leases, and therefore was recorded as a lease liability with a corresponding right-of-use asset within the Company’s unaudited Condensed Consolidated Balance Sheet.

All of the outstanding Series 2010 bonds, in the principal amount of $310 million, were redeemed by LFAMC on September 28, 2021 (Redemption Date). 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.

As of September 30, 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 $88 million as of September 30, 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~~

During third quarter 2022, the Company entered into a supplemental agreement 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 contractual order book. The Company also exercised five -8 options for delivery in 2022 and four -7 options for delivery in 2023.

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


(in millions)	September 30, 2023		December 31, 2022
Accounts payable trade	$	329	$	277
Salaries, withholdings and payroll taxes	338		456
Ticket taxes and fees	357		242
Aircraft maintenance payable	121		65
Fuel payable	153		188

Dividends payable	—		107
Customer reimbursements and refunds (a)	6		311
Accrued third party services	225		196
Other payable	207		162
Accounts payable	$	1,736	$	2,004

2824


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

continues to expect a portion of its deliveries to shift out of 2022 due to Boeing's supply chain challenges and the current status of the -7 certification, which has not yet been achieved but is expected in 2022 or 2023. Based on recent discussions with Boeing regarding the pace of expected deliveries for the remainder of this year, the Company continues to estimate it will receive a total of 66 -8 aircraft deliveries in 2022, including 31 -8 deliveries in fourth quarter 2022, and no -7 deliveries in 2022. 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)	September 30, 2023		December 31, 2022


Voluntary Separation Program	$	65	$	72
Profitsharing and savings plans	184		167



Vacation pay	513		484

Health	315		261

Workers compensation	128		164
Property and income taxes	64		37
Interest	72		45
Bonus and incentive pay (b)	1,250		563
Other	289		250
Accrued liabilities	$	2,880	$	2,043


(in millions)	September 30, 2023		December 31, 2022

Voluntary Separation Program	$	83	$	147
Postretirement obligation	246		241


Other deferred compensation	327		331

Other	224		250
Other noncurrent liabilities	$	880	$	969

~~Additional information regarding~~(a) As of December 31, 2022, included customer reimbursement expenses due to the Company's ~~contractual order book~~December 2022 operational disruption and refund submissions that had yet to be processed. As of September 30, 2023, amounts primarily consist of normal current activity.

(b) Primarily consists of anticipated contract labor ratification bonuses and/or accruals. Also includes non-contract incentive pay. Included in Salaries, wages and benefits expense for the three and nine months ended September 30, 2023, is incremental expense of $96 million and $180 million, respectively, for changes in estimate related to the contract ratification bonus for the Company’s Flight Attendants as part of the tentative agreement reached in October 2023 with the Transport Workers Union 556 ("TWU 556"). The cumulative $180 million is included in the ~~following table~~balance as of September 30, ~~2022:~~

The Boeing Company
-7 Firm Orders -8 Firm Orders -7 or -8 Options Total
2022 14 100 — 114 (c)
2023 42 48 — 90
2024 30 — 56 86
2025 30 — 56 86
2026 15 15 40 70
2027 15 15 6 36
2028 15 15 — 30
2029 20 30 — 50
2030 15 45 — 60
2031 — 10 — 10
196 (a) 278 (b) 158 632
2023. The Company began accruing for all of its open labor contracts on April 1, 2022, and this incremental $180 million expense extends the timeframe covered by the ratification bonus to the date the Flight Attendant contract became amendable on November 1, 2018, to compensate for missed wage increases over that time period.

~~(a) The delivery timing for the -7 is dependent~~For further information on ~~the FAA issuing required certifications~~fuel derivative 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.

~~(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 35 -8 deliveries received through September 30, 2022, and 31 expected -8 deliveries in fourth quarter 2022, for a total of 66 -8 deliveries in 2022. While the Company is contractually scheduled to receive 114 MAX deliveries, including options, this year, a portion of its deliveries are expected to shift out of 2022 due to Boeing's supply chain challenges and the current status of the -7 certification. Furthermore, given the current ongoing status of the -7 certification and pace of expected deliveries for the remainder of this year, it is the Company's assumption that it will receive no -7 aircraft deliveries in 2022, and has the ability to convert -7s to -8s as noted in footnote (b).interest rate derivative contracts, see Note 3.

Other Operating Expenses

9. COMMITMENTS AND CONTINGENCIES

Commitments

On October 25, 2023, the Company entered into a supplemental agreement with The Boeing Company ("Boeing") relating to its contractual order book for Boeing 737-7 and Boeing 737-8 aircraft. Based on the Company's ~~existing~~ agreement with Boeing, capital commitments associated with ~~its~~ firm orders as of ~~September 30, 2022,~~October 26, 2023, were: ~~$1.9 billion~~$133 million remaining in ~~2022, $2.3~~2023, $2.1 billion in ~~2023, $932 million in~~ 2024, ~~$853 million~~$1.7 billion in 2025, ~~$999 million~~$1.8 billion in 2026, ~~$1.1~~$2.6 billion in 2027, $2.9 billion in 2028, and ~~$6.4~~$5.3 billion thereafter.

~~Contingencies~~

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

2925


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

Contingencies

Based on the wide-scale operational disruption for the Company, which led to the cancelation of a significant number of flights between December 21 and December 29, 2022, the Company could be subject to fines and/or penalties resulting from investigations by the Department of Transportation or other government agencies. See Note 1. On October 27, 2023, the Department of Transportation notified the Company that it has determined the Company had failed to provide adequate customer service assistance, prompt flight status notifications, and proper and prompt refunds and that the assessment of a civil penalty is warranted. The Company could also face monetary damages or other costs resulting from litigation initiated by Customers and/or Shareholders. The Company is currently not able to estimate a range of possible loss for such items.

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

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

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 most recent cash dividends declared in August 2023, the ~~Convertible Notes for accounting purposes between a liability component and an equity component utilizing applicable guidance.~~bond conversion rate changed to 26.5559 on September 5, 2023. The ~~liability component was determined by estimating the fair value of a hypothetical issuance of an identical offering excluding the conversion feature of the Convertible Notes. The initial~~net carrying amount ~~of the equity component was calculated as the difference between the liability component~~ and ~~the face~~principal amount of the Convertible ~~Notes.~~Notes was $1.6 billion as of September 30, 2023 and December 31, 2022.

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

(in millions) September 30, 2022 December 31, 2021
Equity component:
Carrying amount of Convertible Notes $ — $ 311
Carrying amount of issuance costs — (11)
Net carrying amount $ — $ 300
Liability component:
Principal amount $ 1,611 $ 2,097
Unamortized debt discount — (255)
Net carrying amount $ 1,611 $ 1,842

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

3026


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

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


	Three months ended September 30,				Nine months ended September 30,
(in millions)	2023		2022		2023		2022

Non-cash amortization of debt issuance costs	$	3	$	3	$	8	$	9
Contractual coupon interest	5		5		15		18
Total interest expense	$	8	$	8	$	23	$	27

The unamortized debt issuance costs are being recognized as non-cash interest expense based on the 5-year term of the notes, through May 1, 2025, less amounts that were or will be required to be accelerated immediately upon conversion or repurchases. The Company had no changes to ~~conversion terms,~~ contingencies ~~or exercise prices~~ during the nine months ended September 30, ~~2022.~~2023. The effective interest rate associated with the Convertible Notes was approximately 1.9 percent for the three and nine months ended September 30, ~~2022.~~2023.

During the three and nine months ended September 30, 2022, the Company paid $1.9 billion and $2.5 billion, respectively, in debt and finance lease obligations, which included scheduled debt and lease payments, partial extinguishment of Convertible Notes, and the early prepayment of debt.

The following tables present the impact of the partial extinguishment of the Company's Convertible Notes and early prepayment of debt (excluding payments on finance leases)~~, including $1.3 billion in prepayments for all of the Company's outstanding 4.75% Notes due 2023, within the unaudited Condensed Consolidated Statement of Comprehensive Income~~ for the three and nine months ended September 30, ~~2022:~~2022. No such instances of partial extinguishment or early prepayment of debt occurred for the three and nine months ended September 30, 2023.


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


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

3127


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

The Company has access to $1.0 billion under its amended and restated revolving credit facility (the "Amended A&R Credit Agreement"). In ~~July 2022,~~August 2023, this facility was amended to (i) extend the ~~expiration date~~maturity to August ~~2025,~~4, 2028, (ii) release all aircraft and ~~to change~~other assets constituting collateral securing the ~~benchmark rate from London Interbank Offered Rate ("LIBOR")~~loans made under the credit facility, (iii) delete all provisions and terminate all agreements, in each case, relating to the ~~Secured Overnight Financing Rate ("SOFR"). There~~grant of such collateral, (iv) eliminate the role of “Collateral Agent” under the credit facility after giving effect to the amendment, terminations, and releases, (v) eliminate the minimum liquidity covenant, (vi) add a Coverage Ratio financial covenant, (vii) amend the Collateral Coverage Test covenant requiring that a pool of lien-free specified aircraft and related assets have a minimum aggregate appraised value, and add certain covenants with respect to such pool of assets, (viii) amend the pricing and fees, (ix) increase certain materiality thresholds, (x) grant longer grace periods for certain defaults, and (xi) update and amend certain other provisions. For the nine months ended September 30, 2023 and 2022, there were no amounts outstanding under the Amended A&R Credit ~~Agreement as of September 30, 2022.~~

Agreement.

3228

Table of Contents

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

Relevant comparative operating statistics for the three and nine months ended September 30, ~~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. For the three and nine months ended September 30, 2022, the Company believes a comparison of its 2022 to 2019 (pre-pandemic) operating statistics is relevant and useful as the Company continues to recover from the pandemic. For the three and nine months ended September 30, 2022 and 2021, most of these operating statistics were significantly impacted by the COVID-19 pandemic and decisions the Company made as a result of the pandemic. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.

Three months ended September 30,
2022 2021 2022 Change to 2021 2019 2022 Change to 2019
Revenue passengers carried (000s) 34,434 29,303 17.5 % 33,538 2.7 %
Enplaned passengers (000s) 43,157 36,534 18.1 % 41,098 5.0 %
Revenue passenger miles (RPMs) (in millions)(a)
33,534 31,285 7.2 % 32,889 2.0 %
Available seat miles (ASMs) (in millions)(b)
39,272 38,756 1.3 % 39,379 (0.3) %
Load factor(c)
85.4 % 80.7 % 4.7 pts. 83.5 % 1.9 pts.
Average length of passenger haul (miles) 974 1,068 (8.8) % 981 (0.7) %
Average aircraft stage length (miles) 711 808 (12.0) % 737 (3.5) %
Trips flown 351,218 306,173 14.7 % 348,237 0.9 %
Seats flown (000s)(d)
54,609 47,544 14.9 % 52,441 4.1 %
Seats per trip(e)
155.5 155.3 0.1 % 150.6 3.3 %
Average passenger fare $ 163.01 $ 144.24 13.0 % $ 155.95 4.5 %
Passenger revenue yield per RPM (cents)(f)
16.74 13.51 23.9 % 15.90 5.3 %
Operating revenues per ASM (cents)(g)
15.84 12.07 31.2 % 14.32 10.6 %
Passenger revenue per ASM (cents)(h)
14.29 10.91 31.0 % 13.28 7.6 %
Operating expenses per ASM (cents)(i)
14.83 10.18 45.7 % 12.24 21.2 %
Operating expenses per ASM, excluding fuel (cents) 10.38 7.63 36.0 % 9.47 9.6 %
Operating expenses per ASM, excluding fuel and profitsharing (cents) 10.23 7.43 37.7 % 9.11 12.3 %
Fuel costs per gallon, including fuel tax $ 3.39 $ 2.01 68.7 % $ 2.07 63.8 %
Fuel costs per gallon, including fuel tax, economic $ 3.34 $ 2.04 63.7 % $ 2.07 61.4 %
Fuel consumed, in gallons (millions) 515 491 4.9 % 524 (1.7) %
Active fulltime equivalent Employees(j)
64,123 53,984 18.8 % 60,590 5.8 %
Aircraft at end of period(k)
742 737 0.7 % 752 (1.3) %


	Three months ended September 30,
	2023			2022			Change
Revenue passengers carried (000s)	35,349			34,434			2.7	%
Enplaned passengers (000s)	44,598			43,157			3.3	%
Revenue passenger miles (RPMs) (in millions)(a)	35,624			33,534			6.2	%
Available seat miles (ASMs) (in millions)(b)	44,169			39,272			12.5	%
Load factor(c)	80.7		%	85.4		%	(4.7)		pts.
Average length of passenger haul (miles)	1,008			974			3.5	%
Average aircraft stage length (miles)	735			711			3.4	%
Trips flown	374,926			351,218			6.8	%
Seats flown (000s)(d)	59,494			54,609			8.9	%
Seats per trip(e)	158.7			155.5			2.1	%
Average passenger fare	$	167.24		$	163.01		2.6	%
Passenger revenue yield per RPM (cents)(f)	16.60			16.74			(0.8)	%
Operating revenues per ASM (cents)(g)	14.77			15.84			(6.8)	%
Passenger revenue per ASM (cents)(h)	13.38			14.29			(6.4)	%
Operating expenses per ASM (cents)(i)	14.51			14.83			(2.2)	%
Operating expenses per ASM, excluding fuel (cents)	10.97			10.38			5.7	%
Operating expenses per ASM, excluding fuel and profitsharing (cents)	10.88			10.23			6.4	%
Fuel costs per gallon, including fuel tax	$	2.80		$	3.39		(17.4)	%
Fuel costs per gallon, including fuel tax, economic	$	2.78		$	3.34		(16.8)	%
Fuel consumed, in gallons (millions)	557			515			8.2	%
Active fulltime equivalent Employees	74,181			64,123			15.7	%
Aircraft at end of period(j)	817			742			10.1	%

3329

Table of Contents


		Nine months ended September 30,															Nine months ended September 30,
		2022			2021			2022 Change to 2021			2019			2022 Change to 2019					2023			2022			Change
Revenue passengers carried (000s)	Revenue passengers carried (000s)	93,688			69,686			34.4	%		99,758			(6.1)	%			Revenue passengers carried (000s)	101,296			93,688			8.1	%
Enplaned passengers (000s)	Enplaned passengers (000s)	116,446			87,247			33.5	%		121,480			(4.1)	%			Enplaned passengers (000s)	127,050			116,446			9.1	%
Revenue passenger miles (RPMs) (in millions)(a)	Revenue passenger miles (RPMs) (in millions)(a)	92,540			73,850			25.3	%		98,121			(5.7)	%			Revenue passenger miles (RPMs) (in millions)(a)	100,676			92,540			8.8	%
Available seat miles (ASMs) (in millions)(b)	Available seat miles (ASMs) (in millions)(b)	110,978			95,316			16.4	%		117,250			(5.3)	%			Available seat miles (ASMs) (in millions)(b)	124,810			110,978			12.5	%
Load factor(c)	Load factor(c)	83.4		%	77.5		%	5.9		pts.	83.7		%	(0.3)		pts.		Load factor(c)	80.7		%	83.4		%	(2.7)		pts.
Average length of passenger haul (miles)	Average length of passenger haul (miles)	988			1,060			(6.8)	%		984			0.4	%			Average length of passenger haul (miles)	994			988			0.6	%
Average aircraft stage length (miles)	Average aircraft stage length (miles)	733			794			(7.7)	%		746			(1.7)	%			Average aircraft stage length (miles)	726			733			(1.0)	%
Trips flown	Trips flown	965,817			767,453			25.8	%		1,022,311			(5.5)	%			Trips flown	1,074,136			965,817			11.2	%
Seats flown (000s)(d)	Seats flown (000s)(d)	149,913			119,171			25.8	%		154,312			(2.9)	%			Seats flown (000s)(d)	170,116			149,913			13.5	%
Seats per trip(e)	Seats per trip(e)	155.2			155.3			(0.1)	%		150.9			2.8	%			Seats per trip(e)	158.4			155.2			2.1	%
Average passenger fare	Average passenger fare	$	169.37		$	136.45		24.1	%		$	154.99		9.3	%			Average passenger fare	$	172.03		$	169.37		1.6	%
Passenger revenue yield per RPM (cents)(f)	Passenger revenue yield per RPM (cents)(f)	17.15			12.88			33.2	%		15.76			8.8	%			Passenger revenue yield per RPM (cents)(f)	17.31			17.15			0.9	%
Operating revenues per ASM (cents)(g)	Operating revenues per ASM (cents)(g)	15.90			11.27			41.1	%		14.24			11.7	%			Operating revenues per ASM (cents)(g)	15.44			15.90			(2.9)	%
Passenger revenue per ASM (cents)(h)	Passenger revenue per ASM (cents)(h)	14.30			9.98			43.3	%		13.19			8.4	%			Passenger revenue per ASM (cents)(h)	13.96			14.30			(2.4)	%
Operating expenses per ASM (cents)(i)	Operating expenses per ASM (cents)(i)	14.63			9.67			51.3	%		12.29			19.0	%			Operating expenses per ASM (cents)(i)	14.93			14.63			2.1	%
Operating expenses per ASM, excluding fuel (cents)	Operating expenses per ASM, excluding fuel (cents)	10.68			7.29			46.5	%		9.52			12.2	%			Operating expenses per ASM, excluding fuel (cents)	11.32			10.68			6.0	%
Operating expenses per ASM, excluding fuel and profitsharing (cents)	Operating expenses per ASM, excluding fuel and profitsharing (cents)	10.52			7.10			48.2	%		9.18			14.6	%			Operating expenses per ASM, excluding fuel and profitsharing (cents)	11.19			10.52			6.4	%
Fuel costs per gallon, including fuel tax	Fuel costs per gallon, including fuel tax	$	3.05		$	1.87		63.1	%		$	2.09		45.9	%			Fuel costs per gallon, including fuel tax	$	2.85		$	3.05		(6.6)	%
Fuel costs per gallon, including fuel tax, economic	Fuel costs per gallon, including fuel tax, economic	$	3.03		$	1.92		57.8	%		$	2.09		45.0	%			Fuel costs per gallon, including fuel tax, economic	$	2.85		$	3.03		(5.9)	%
Fuel consumed, in gallons (millions)	Fuel consumed, in gallons (millions)	1,438			1,203			19.5	%		1,550			(7.2)	%			Fuel consumed, in gallons (millions)	1,578			1,438			9.7	%
Active fulltime equivalent Employees~~(j)~~	Active fulltime equivalent Employees~~(j)~~	64,123			53,984			18.8	%		60,590			5.8	%			Active fulltime equivalent Employees~~(j)~~	74,181			64,123			15.7	%
Aircraft at end of period~~(k)~~(j)	Aircraft at end of period~~(k)~~(j)	742			737			0.7	%		752			(1.3)	%			Aircraft at end of period~~(k)~~(j)	817			742			10.1	%

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

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

(d) Seats flown is calculated using total number of seats available by aircraft type multiplied by the total trips flown by the same aircraft type during a particular period.

(e) Seats per trip is calculated by dividing seats flown by trips flown.

(f) Calculated as passenger revenue divided by revenue passenger miles. Also referred to as "yield," this is the average cost paid by a paying passenger to fly one mile, which is a measure of revenue production and fares.

(g) Calculated as operating revenues divided by available seat miles. Also referred to as "operating unit revenues" or "RASM," this is a measure of operating revenue production based on the total available seat miles flown during a particular period.

(h) Calculated as passenger revenue divided by available seat miles. Also referred to as "passenger unit revenues," this is a measure of passenger revenue production based on the total available seat miles flown during a particular period.

(i) Calculated as operating expenses divided by available seat miles. Also referred to as "unit costs," "cost per available seat mile," or "CASM," this is the average cost to fly an aircraft seat (empty or full) one mile, which is a measure of cost efficiencies.

(j) Included ~~less than 500 Employees on Extended Emergency Time Off as of September 30, 2021. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.~~

~~(k) Included 24~~three Boeing 737 Next Generation aircraft in storage as of September 30, ~~2021. Also included 34 Boeing 737 MAX ("MAX") aircraft in long term storage as of September 30, 2019.~~

2023.

3430

Table of Contents

Financial Overview

In late December 2022, the Company experienced a wide-scale operational disruption as historically extreme winter weather across a significant portion of the United States impacted its operational plan and flight schedules. Subsequent to Winter Storm Elliott, the Company was challenged to realign flight crews, flight schedules, and aircraft for a period of several days during this peak demand travel period. This disruption and subsequent recovery efforts resulted in the cancellation of more than 16,700 flights during the period from December 21 through December 31, 2022. For first quarter 2023, these events also created a deceleration in bookings, primarily isolated to January and February 2023, as well as increased expenses primarily in the form of reimbursing Customers for costs incurred as a result of the flight cancellations. The financial impact of this disruption on the first quarter 2023 results was approximately $380 million on a pre-tax basis. There were no material impacts to operating revenues or expenses in 2023 following first quarter as a result of this disruption.

To boost operational resiliency in key areas across the Company and to mitigate the risk of a recurrence, the Company developed a three-part tactical action plan focused on improving winter operations, accelerating operational-related investments, and enhancing cross-team collaboration. The Company's ~~financial~~action plan was released in March 2023 and key winter operations steps were completed as of October 2023, as planned.

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

The Company recorded third quarter and ~~thus far in~~year-to-date results for 2023 and 2022 on ~~both~~ an accounting principles generally accepted in the United States ("GAAP") ~~basis~~ and non-GAAP basis, were impacted by the effects of the COVID-19 pandemic, which began in early 2020. The strong travel demand that began in March 2022 continued through third quarter 2022, producing operating revenues of $6.2 billion, a Company third quarter record. Leisure revenue trends were elevated compared with 2019 levels, while managed business revenues were down 28 percent compared with third quarter 2019.

~~The Company recorded third quarter and year-to-date GAAP and non-GAAP results for 2022, 2021, and 2019~~ as noted in the following tables. GAAP results for the three and nine months ended September 30, 2021, included impacts associated with payroll funding support ("Payroll Support") programs with the United States Department of the Treasury ("Treasury"), as referenced in Note 2 to the unaudited Condensed Consolidated Financial Statements. The Company believes comparisons of current year financial results to 2019 are relevant and show how the Company has continued to recover from the pandemic. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

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

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


		Nine months ended September 30,											Three months ended September 30,
(in millions, except per share amounts)	(in millions, except per share amounts)											(in millions, except per share amounts)
GAAP	GAAP	2022		2021		2022 Change to 2021		2019		2022 Change to 2019				GAAP	2023		2022		Change
Operating income	Operating income	$	1,402	$	1,526	(8.1)	%	$	2,292	(38.8)	%			Operating income	$	117	$	395	(70.4)	%
Net income	Net income	$	759	$	909	(16.5)	%	$	1,787	(57.5)	%			Net income	$	193	$	277	(30.3)	%
Net income per share, diluted	Net income per share, diluted	$	1.21	$	1.49	(18.9)	%	$	3.29	(63.3)	%			Net income per share, diluted	$	0.31	$	0.44	(29.5)	%

Non-GAAP	Non-GAAP													Non-GAAP
Operating income (loss)		$	1,463	$	(1,490)	n.m.		$	2,292	(36.2)	%
Net income (loss)		$	950	$	(1,356)	n.m.		$	1,787	(46.8)	%
Net income (loss) per share, diluted		$	1.51	$	(2.29)	n.m.		$	3.29	(54.2)	%
Operating income														Operating income	$	224	$	425	(47.3)
Net income														Net income	$	240	$	316	(24.1)
Net income per share, diluted														Net income per share, diluted	$	0.38	$	0.50	(24.0)

The ~~comparison of the~~ Company's financial results ~~as shown above~~for the three months ended September 30, 2023, on a GAAP and non-GAAP basis, decreased compared to the same prior year period primarily due to higher salaries, wages, and benefits expense and maintenance materials and repairs expense. On a GAAP basis, the Company's results for the three months ended September 30, 2023 also included incremental expense of $96 million related to the contract ratification bonus for the Company’s Flight Attendants as part of the tentative agreement reached in October 2023, and ~~nine~~for the three months ended September 30, 2022, ~~versus the three and nine months ended September 30, 2021, were impacted by the Payroll Support that significantly benefited 2021 results. See Note 2~~also included a $76 million loss on extinguishment of debt due to the ~~unaudited Condensed Consolidated Financial Statements for further information. On a non-GAAP basis,~~repurchase of the Company's ~~financial results improved significantly for the three and nine months ended September 30, 2022, versus the same prior year period due to the~~Convertible Senior Notes (the "Convertible Notes").

3531

Table of Contents

significant recovery in travel demand, which was aided by a reduction in COVID-19 cases and hospitalizations, an increase in vaccinations, and a decline in travel-related restrictions across the United States. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP


	Nine months ended September 30,
(in millions, except per share amounts)
GAAP	2023		2022		Change
Operating income	$	628	$	1,402	(55.2)	%
Net income	$	717	$	759	(5.5)	%
Net income (loss) per share, diluted	$	1.15	$	1.21	(5.0)	%

Non-GAAP
Operating income	$	832	$	1,463	(43.1)	%
Net income	$	836	$	950	(12.0)	%
Net income per share, diluted	$	1.33	$	1.51	(11.9)	%

The Company's financial ~~measures. These impacts combined resulted in a 32.9 percent and 64.3 percent increase in Operating revenues~~results for the ~~three and~~ nine months ended September 30, 2023, on a GAAP and non-GAAP basis, included a negative financial impact of approximately $380 million on a pre-tax basis related to the December 2022 ~~respectively, versus~~operational disruption. Additionally, Operating income decreased compared to the same prior year periods. Operating revenues for the three and nine months ended September 30, 2022, exceeded the comparative 2019 pre-pandemic levels primarily due to higher yields. Operating expenses for the three and nine months ended September 30, 2022, exceeded the comparative pre-pandemic 2019 levelsperiod primarily due to higher salaries, wages, and benefits expense and ~~fuel prices.~~maintenance materials and repairs expense. On a GAAP basis, the Company's results for the nine months ended September 30, 2023 also included incremental expense of $180 million related to the contract ratification bonus for the Company’s Flight Attendants as part of the tentative agreement reached in October 2023, and for the nine months ended September 30, 2022 also included a $192 million loss on extinguishment of debt due to the repurchase of a portion of the Company's Convertible Notes.

~~2022~~2023 Outlook

The following tables present current selected financial guidance for fourth quarter and full year ~~2022:~~2023:

4Q ~~2022~~2023 Estimation

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

~~Up 13%~~Down 9% to ~~17%~~11%

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

~~Down ~2%~~Up ~21%

Economic fuel costs per gallon (c)(d)

$~~3.15~~2.90 to ~~$3.25~~$3.00

Fuel hedging premium expense per gallon

$~~0.03~~0.05

Fuel hedging cash settlement gains per gallon

$~~0.37~~0.19

ASMs per gallon (fuel efficiency)

7778 to 7980

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

~~Up 14%~~Down 16% to ~~18%~~19%

Scheduled debt repayments (millions)

~$~~320~~7

Interest expense (millions)

~$7063

Table of Contents


									~~2022~~ 2023 Estimation
ASMs ~~compared with 2019~~ (b), year-over-year									~~Down ~4.5%~~Up 14% to 15%
Economic fuel costs per gallon (c)(d)									$~~3.05~~2.85 to ~~$3.15~~$2.95
Fuel hedging premium expense per gallon									$~~0.04~~0.06
Fuel hedging cash settlement gains per gallon									$~~0.50~~0.14
CASM-X (e) ~~compared with 2019~~ , year-over-year (c)(f)(g)									~~Up 14%~~Down 1% to ~~15%~~2%
Scheduled debt repayments ~~(billions)~~(millions)									~$~~2.6~~85
Interest expense (millions)									~$~~340~~256
Aircraft ~~(g)~~(h)									~~768~~814
Effective tax rate									~~24% to 26%~~~23%
Capital spending (billions) ~~(h)~~									~$~~4.0~~3.5

(a) ~~The Company believes that operating revenues compared with 2019 is a relevant measure of performance due to the significant impacts in 2020 and 2021 from the pandemic.~~Operating revenue per available seat mile ("RASM" or "unit revenues").

(b) Available seat miles ~~(ASMs,~~("ASMs" or ~~capacity)~~"capacity"). The Company's flight schedule is currently published for sale through ~~July 10, 2023. The~~August 4, 2024. Adjusting for the December 2022 operational disruption, which lowered capacity in fourth quarter 2022, the Company's fourth quarter ~~2022 guidance declined slightly from its previous estimation of down one~~2023 capacity would have been up roughly 15 percent, ~~to two percent, compared with fourth quarter 2019, primarily due to flight cancellations from the impact of Hurricane Ian.~~ year-over-year. The Company ~~continues to expect~~now expects first quarter ~~2023~~2024 capacity to ~~be up~~increase in the range of approximately 10 percent to 12 percent, year-over-year, of which all is from the carryover effect of capacity growth in 2023, compared with ~~first quarter 2022, and currently~~its previous guidance to increase in the range of 14 percent to 16 percent, year-over-year. The Company also expects ~~second quarter 2023~~full year 2024 capacity to ~~be up approximately 14~~increase in the range of 6 percent ~~compared with second quarter 2022.~~to 8 percent, year-over-year.

(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").

(d) Based on the Company's existing fuel derivative contracts and market prices as of October ~~19, 2022,~~18, 2023, fourth quarter and full year ~~2022~~2023 economic fuel costs per gallon are estimated to be in the range of ~~$3.15~~$2.90 to ~~$3.25~~$3.00 and ~~$3.05~~$2.85 to ~~$3.15, respectively, compared with the Company's previous estimations in the range of $3.00 to $3.10 and~~ $2.95, ~~to $3.05,~~ respectively. Economic fuel cost projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate the hedge accounting impact associated with the volatility of the energy markets, ~~the impact of COVID-19 cases on air travel~~

~~Table of Contents~~

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

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

(f) Projections do not reflect the potential impact of fuel and oil expense, special items, and profitsharing because the Company cannot reliably predict or estimate those items or expenses or their impact to its financial statements in future periods, especially considering the significant volatility of the fuel and oil expense line item. Accordingly, the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for these projected results is not meaningful or available without unreasonable effort.

(g) 2023 CASM-X guidance excludes the impact of approximately $84 million related to labor accrual adjustments in second quarter 2023 that related primarily to prior periods. The Company has treated this amount, and the approximately $96 million labor accrual adjustment in third quarter 2023, as special items in its year-to-date 2023 Non-GAAP financial results. See the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for further information.

(h) Aircraft on property, end of period. The Company ~~ended third quarter 2022 with 742~~now plans for approximately 85 Boeing ~~737 aircraft. During fourth quarter 2022, the Company continues to expect 31 Boeing 737 MAX 8 (-8)~~737-8 ("-8") aircraft ~~deliveries. The Company now expects to retire 26~~deliveries and 41 Boeing 737-700 ~~(-700)~~("-700") aircraft ~~in 2022, including 5 -700~~ retirements in ~~fourth quarter 2022, compared with its previous guidance of 29 -700 retirements this year. As a result, the Company now expects~~2023, and still plans to end the year with ~~768 aircraft,~~814 aircraft. This is compared with its previous ~~guidance of 765 aircraft.~~plan for approximately 70 -8 deliveries and 26 -700 retirements. The delivery schedule for the Boeing ~~737 MAX 7 (-7)~~737-7 ("-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. Furthermore, given the current ongoing status of the -7 certification and pace of expected deliveries for the remainder of this year, it is the Company's assumption that it will receive no -7 aircraft deliveries in 2022, and that the remaining 48 MAX aircraft reflected in its 2022 contractual order book will shift out of 2022.

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

~~COVID-19 Pandemic Impacts~~

~~As detailed~~Thus far in ~~Note 2~~fourth quarter 2023, overall demand for travel remains stable, including strong bookings to-date for the holiday travel periods. While leisure demand remains healthy, leisure trends appear to ~~the unaudited Condensed Consolidated Financial Statements, in connection with the major negative impact of COVID-19~~be returning to historically seasonal norms, and business travel trends continue to be stable. Based on ~~air carriers,~~current trends, the Company received significant financial assistance from Treasury in the form of Payroll Support, and this assistance had a significant impact on the Company's reported GAAP financial results in 2021. Such impact ended in thirdanticipates record fourth quarter 2021, and the Company's 2022 results do not reflect the benefit of this Payroll Support, and its future periods are not expected to benefit from such Payroll Support. However, future cash flows will be impacted through the portion of Payroll Support that was in the form of loans that remain outstanding and will have to be repaid to Treasury.operating revenue driven by record fourth quarter passengers.

~~During second~~The Company expects fourth quarter ~~2020,~~2023 RASM to decline in the range of 9 percent to 11 percent, year-over-year. This decline includes an approximate one and one-half point offset from the December 2022 operational disruption. The expected RASM decline is driven by higher-than-seasonally-normal ASM growth in fourth quarter 2023 as the

Table of Contents

Company ~~introduced Voluntary Separation Program 2020 ("Voluntary Separation Program")~~closes out the restoration of the network and normalizes the ~~Extended Emergency Time Off ("Extended ETO") program~~utilization of the fleet. Further, unit revenue pressure is also driven by higher-than-normal investment in development markets and schedules that are not ideally matched to current business travel trends. The Company is addressing these challenges in its 2024 network plan by adjusting capacity and further optimizing the network.

The Company expects fourth quarter 2023 CASM-X to decrease in the range of 16 percent to 19 percent, year-over-year, 15-points of which ~~helped closer align staffing~~relates to ~~reduced flight schedules~~elevated operating expenses and ~~enabled~~lower capacity levels in fourth quarter 2022 as a result of the ~~Company to avoid involuntary furloughs~~December 2022 operational disruption. The guidance range is inclusive of higher labor rates and ~~layoffs~~market wage rate accruals for all Employee workgroups, including wage rate increases associated with the ~~impacts~~recently announced tentative agreement with the Transport Workers 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 America Union Local 556 ("TWU 556").

Company and no Employees were on Extended ETO past 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

For the ~~three and~~ nine months ended September 30, ~~2022,~~2023, the Company hired approximately ~~1,800 and 9,000~~7,300 Employees, ~~respectively,~~ net of attrition. The Company's number of active full-time equivalent Employees increased by 15.7 percent from September 30, 2022 to September 30, 2023, primarily to support the Company's restoration of its flight schedule after emerging from the pandemic, as well as the year-over-year growth in its fleet. The Company has ~~been making~~made additional investments to attract and retain talent, including ~~the decision in fourth quarter 2021 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.

On July 27, 2023, the Company's 2,865 Mechanics & Related Employees, represented by the Aircraft Mechanics Fraternal Association ("AMFA"), voted to ratify a four-year contract extension with the Company. The newly ratified agreement becomes amendable in August 2027.

On August 15, 2023, the Company ~~Overview~~reached a tentative collective-bargaining agreement with the Transport Workers Union Local 555 ("TWU 555"), which represents the Company's more than 17,000 Ramp, Operations, Provisioning, and Cargo Agents. However, during September 2023, TWU 555 membership voted not to ratify the agreement. The Company will continue to engage in discussions on a new agreement with TWU 555.

On October 6, 2023, the Company's more than 480 Material Specialists, represented by the International Brotherhood of Teamsters ("IBT"), voted to ratify a three-year contract extension with the Company. The newly ratified agreement becomes amendable in October 2026.

On October 25, 2023, the Company reached a tentative collective-bargaining agreement with TWU 556, which represents the Company's nearly 19,000 Flight Attendants. The ratification vote is scheduled to conclude in fourth quarter 2023. If the tentative agreement is ratified, it will become amendable in December 2028.

The Company ~~has entered into supplemental agreements~~remains in ~~2022 with The Boeing Company ("Boeing") to increase aircraft orders and accelerate certain options~~negotiations for a new collective-bargaining agreement with the ~~goal~~Southwest Airlines Pilots Association, which represents the Company’s almost 10,000 Pilots. The Company’s consolidated financial statements include market wage rate accruals for the Pilots for all periods after the current collective-bargaining agreement’s September 2020 amendable date.

During third quarter 2023, the Company announced two new benefits as part of ~~improving potential growth opportunities~~an ongoing commitment to provide Customers with more choices, more flexibility, and ~~frequencies~~more value when they fly Southwest. Customers traveling on Wanna Get Away® fares now are able to ~~better align with~~make same-day standby changes and add standby listings online or on the ~~pre-pandemic operational route network, lowering operating costs,~~Southwest app. Previously, Rapid Rewards Tier Members and ~~further modernizing~~Customers traveling on Business Select®, Anytime, and Wanna Get Away Plus™ fares had flexibility to list on a different flight free of charge on their day of scheduled travel. This new offering expands the same-day standby benefit to all Southwest Customers. The Company also began offering free inflight Internet for Customers who purchase a Business Select fare.

During October 2023, the Company announced enhancements to its ~~fleet with less carbon-intensive aircraft. See Note 10~~Rapid Rewards loyalty program to ~~the unaudited Condensed Consolidated~~reward loyal Members by making it easier for Customers to earn tier status and making credit card spend count double toward

3734

Table of Contents

~~Financial Statements~~tier requirements, awarding A-List Preferred Members with up to two complimentary premium drinks, and, starting in spring of 2024, allowing Customers to pay for ~~further information.~~ flights by using a combination of cash and Rapid Rewards points, starting with as few as 1,000 points.

The Company ~~expects~~ended third quarter 2023 with 817 Boeing 737 aircraft, including 206 -8 aircraft. During third quarter 2023, the Company retired four -700 aircraft and took delivery of 18 -8 aircraft. On October 25, 2023, the Company secured an order book with Boeing that ~~more than half~~is expected to help modernize the Company's fleet with less carbon-intensive aircraft and enable the Company's long-term plan for orderly and measured growth. In light of the ~~MAX~~new order book, the Company now plans for approximately 85 -8 deliveries from Boeing in 2023, and plans to accelerate additional -700 aircraft retirements into 2023, retiring a total of approximately 41 -700 aircraft in ~~its firm~~2023. As a result, the Company continues to expect to end 2023 with 814 aircraft. The revised order book with Boeing will ~~replace a significant amount of its 431 Boeing 737-700 ("-700") aircraft over the next 10 to 15 years~~continue to support the modernization of the Company's fleet, a key component of its environmental sustainability efforts.

The ~~Company received 23 -8 aircraft during third quarter 2022, as expected, for a year-to-date total of 35 -8 aircraft deliveries received~~Company's order book with Boeing as of September 30, 2022. The Company ended third quarter 2022 with 742 aircraft, which reflects 11 -700 aircraft retirements during the quarter. While the Company remains contractually scheduled to receive 114 MAX deliveries this year, the Company continues to expect a portionOctober 26, 2023, consists of its deliveries to shift out of 2022 due to Boeing's supply chain challenges and the current status of the -7 certification, and that aircraft delivery delays are currently expected to extend into 2024. Based on continued discussions with Boeing regarding the pace of expected deliveries for the remainder of this year, the Company continues to estimate it will receive a total of 66573 MAX firm orders (302 -7 aircraft and 271 -8 aircraft deliveries in 2022, including 31 -8 deliveries in fourth quarter 2022, and no -7 deliveries in 2022. The Company now expects to retire 26 -700 aircraft in 2022, including 5 -700 retirements in fourth quarter 2022. As a result, the Company now expects to end the year with 768 aircraft. For information about potential impacts resulting from prolonged delays in the FAA issuing required certifications or approvalsaircraft) for the ~~-7, see "Risk Factors – Operational Risks" included in the Company’s Annual Report on Form 10-K~~years 2023 through 2031 and 207 MAX options (-7s or -8s) for the ~~fiscal year ended December 31, 2021.~~

Additionally in October 2022, the Company converted 17 2023 -7 firm orders to -8 firm orders, exercised three -7 options for delivery in 2024, accelerated 15 -7 firm orders from 2030 into 2026, and accelerated 10 -8 firm orders from 2031 into 2030.years 2025 through 2031.

The Company has published its flight schedule for sale through ~~July 10, 2023.~~August 4, 2024. The Company is ~~expected to be limited by Pilot staffing constraints~~in the midst of planning for ~~the majority of 2023; therefore, it~~2024 and is ~~not expected that aircraft delivery delays would result in required changes to the Company's published flight schedules. During 2022, the Company has primarily~~ focused on ~~restoring its network, principally in cities with a very strong Customer base, by adding city pair frequencies~~operational excellence and ~~connecting new service with existing points-of-strength~~driving out inefficiencies, increasing productivity, improving reliability, and returning margins back to ~~increase Customer depth.~~

In July 2022, the Company announced that flight credits will no longer expire. The Company expects that this policy change, combined with its other attractive brand attributes, will contribute to an increase in Customer loyalty. Flight credits resulting from canceling reservations previously were valid for no longer than one year from the date of original purchase. Flight credits for non-refundable fares will be issued as long as the reservation is cancelled more than 10 minutes prior to the scheduled departure. Flight credits or refunds for refundable fares will be issued regardless of cancellation time. Flight credits unexpired on, or created on or after July 28, 2022 do not expire and will show an expiration date (12/31/2040) until the Company's systems are updated. A flight credit with an expiration date on or before July 27, 2022, has expired in accordance with its existing expiration date.

On October 11, 2022, the Company's nearly 170 Aircraft Appearance Technicians, represented by the Aircraft Mechanics Fraternal Association ("AMFA"), ratified a new five-year collective-bargaining agreement with the Company. The newly ratified agreement becomes amenable in July 2027.

On October 26, 2022, the Company reached a tentative collective-bargaining agreement with the International Association of Machinists and Aerospace Workers, AFL-CIO ("IAM"), which represents the Company's more than 8,000 Customer Service Agents, Customer Representatives, and Source of Support Representatives. The ratification vote is scheduled to conclude in December 2022. If the tentative agreement is ratified, it will become amendable in December 2027.historical levels.

As part of its commitment to corporate sustainability, ~~on April 22, 2022,~~ the Company published its ~~2021~~2022 One Report describing the Company's sustainability strategies on May 3, 2023, which include the Company’s fuel conservation and emissions mitigation initiatives and other efforts to minimize greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling. The Company also published its ~~first ever~~ Diversity, Equity, and Inclusion ("DEI") Report on ~~April 22, 2022.~~May 3, 2023. A companion piece

~~Table of Contents~~

to the One Report, the DEI Report takes a deeper dive into the Company's DEI goals ~~commitments,~~ and initiatives and highlights the ~~expected 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.

Material Changes in Results of Operations

Comparison of three months ended September 30, ~~2022~~2023 and September 30, ~~2021~~2022

Operating Revenues

Total operating revenues for third quarter ~~2022~~2023 increased by ~~$1.5 billion,~~$305 million, or ~~32.9~~4.9 percent, year-over-year, to ~~$6.2~~achieve a third quarter Company record of $6.5 billion. Passenger revenues for third quarter 2023 increased by $299 million, or 5.3 percent, year-over-year. Other revenues for third quarter 2023 increased by $6 million, or 1.1 percent, year-over-year. These revenue increases were primarily due to a 12.5 percent increase in capacity and a 2.6 percent higher average fare, aided by increases in loyalty revenue and ancillary passenger revenues. The Company's Rapid Rewards® loyalty program continues to be a point of strength, with record third quarter new Member additions, a third quarter record level of Member engagement, and record third quarter spend on the Company's co-branded Chase® Visa credit card. Third quarter ~~2022 operating revenues per ASM (RASM) were 15.84~~2023 RASM was 14.77 cents, ~~an increase~~a decrease of ~~31.2~~6.8 percent, compared with third quarter ~~2021. The dollar increase was primarily due to the improvement~~2022. Also on a unit basis, third quarter Passenger revenues decreased 6.4 percent, year-over-year. These year-over-year per unit decreases were largely driven by a 4.7 point decrease in ~~leisure travel~~Load factor as capacity growth outpaced demand in third quarter ~~2022 versus the impacts to demand and bookings from the COVID-19 pandemic in third quarter 2021. For third quarter 2022, the year-over-year RASM increase was primarily driven by an increase in yield~~2023.

Table of 23.9 percent coupled with an increase in Load factor of 4.7 points. Also, as anticipated, the Company's third quarter 2022 operating revenues included a five point sequential operating revenue growth headwind from second quarter to third quarter 2022 unit revenues, compared with their respective 2019 levels, due to a shift in the timing of recognition of breakage revenue associated with the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits. See Note 6 to the unaudited condensed Consolidated Financial Statements for additional information.

Contents

Passenger revenues for third quarter 2022 increased by $1.4 billion, or 32.8 percent, year-over-year. On a unit basis, Passenger revenues increased 31.0 percent, year-over-year. The year-over-year increase in Passenger revenues on both a dollar and unit basis was primarily due to improvements in both leisure and business demand and bookings. The Company's revenue performance in third quarter 2022 was strong, despite a negative impact of approximately $18 million due to the flight disruptions caused by Hurricane Ian in late September 2022. This negative impact in third quarter 2022 was more than offset by improving leisure demand and close-in bookings in September 2022. In addition, the Company's third quarter 2022 operating revenues benefited from its loyalty program, including elevated point redemptions for flights and incremental revenue from its co-brand credit card agreement, as well as increased Upgraded Boarding take-rates following the new digital self-service launch in August 2022. While third quarter 2022 managed business revenues remained below 2019 levels, and softened in July and August compared with June 2022, the Company experienced sequential improvement from August to September, with September 2022 managed business revenues down 25 percent compared with September 2019 levels. Based on current trends, fourth quarter 2022 managed business revenues are estimated to be down in the range of 20 percent to 25 percent, compared with fourth quarter 2019.

Other revenues for third quarter 2022 increased by $158 million, or 39.0 percent, compared with third quarter 2021. On a dollar basis, approximately 65 percent of the increase was due the Company's co-brand credit card agreement secured in December 2021. The remaining increase was primarily due to revenue from business partners and improved retail spend on the Company's co-brand credit card with Chase Bank USA, N.A ("Chase").

Operating Expenses

Operating expenses for third quarter ~~2022~~2023 increased by ~~$1.9 billion,~~$583 million, or ~~47.6~~10.0 percent, compared with third quarter ~~2021,~~2022, while capacity increased ~~1.3~~12.5 percent over the same prior year period. ~~Approximately 40 percent of the~~

~~Table of Contents~~

operating expense increase was due to $763 million in Payroll Support allocated to offset a portion of salaries, wages, and benefits in third quarter 2021, compared with no support received in third quarter 2022. In addition, 40 percentThe vast majority of the dollar increase was due to higher Salaries, wages, and benefits expense, partially offset by a year-over-year decrease in Fuel and oil ~~expense and 10 percent of the increase was due to higher Salaries, wages, and benefits.~~expense. 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 third quarter of ~~2022~~2023 and ~~2021,~~2022, followed by explanations of these changes on a dollar ~~and~~basis. Unless otherwise specified, changes on a per ASM basis ~~if applicable.~~were driven by changes in capacity, which increased and caused the Company's fixed costs to be spread over significantly more ASMs.


	Three months ended September 30,				Per ASM change		Percent change
(in cents, except for percentages)	2023		2022
Salaries, wages, and benefits	6.17	¢	5.92	¢	0.25	¢	4.2	%

Fuel and oil	3.54		4.45		(0.91)		(20.4)
Maintenance materials and repairs	0.74		0.52		0.22		42.3
Landing fees and airport rentals	1.04		1.01		0.03		3.0
Depreciation and amortization	0.85		0.85		—		—
Other operating expenses	2.17		2.08		0.09		4.3
Total	14.51	¢	14.83	¢	(0.32)	¢	(2.2)	%

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

Operating expenses per ASM for third quarter ~~2022 increased~~2023 decreased by ~~45.7~~2.2 percent, compared with third quarter ~~2021,~~2022, primarily due to ~~Payroll Support allocated in third quarter 2021 in addition to~~ a significant ~~increase~~decrease in the Company's fuel cost per ~~gallon, and higher Salaries, wages, and benefits.~~gallon. Operating expenses per ASM for third quarter ~~2022,~~2023, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased ~~8.4~~4.4 percent, compared with third quarter ~~2021~~2022, primarily due to general inflationary cost pressures, in particular higher ~~salaries and wages arising from a 14.7 percent increase in trips flown and step/pay~~labor rates for all Employee workgroups, including market wage rate ~~increases for certain workgroups. The Company also continues to operate at suboptimal productivity levels,~~accruals associated with open contract labor agreements, as headcount has grown at a faster pace than capacity, especially during 2022, and which is expected to continue into 2023. Headcount is expected to increase further in fourth quarter 2022 to support plans for network restoration in 2023, while capacity levels are expected to decline seasonally in fourth quarter 2022 compared with third quarter 2022, relative to their respective 2019 levels.well as the timing of planned maintenance expenses. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Salaries, wages, and benefits expense for third quarter ~~2022~~2023 increased by ~~$200~~$406 million, or ~~9.4~~17.5 percent, compared with third quarter ~~2021.~~2022. On a per ASM basis, third quarter ~~2022~~2023 Salaries, wages, and benefits expense increased ~~8.0~~4.2 percent, compared with third quarter ~~2021.~~2022. On a dollar basis, approximately 5060 percent of the increase was due to step/pay rate increases for certain workgroups, ~~which included~~including market wage rate accruals ~~associated~~for open collective bargaining agreements (inclusive of $96 million on a GAAP basis in additional compensation in third quarter 2023 for past services, as part of the contract ratification bonus negotiated as part of the tentative agreement reached with ~~open labor contracts,~~TWU 556), and approximately 20 percent of the ~~remaining~~ increase was driven by ~~the 14.7 percent~~an increase in capacity and/or number of trips flown.

Payroll support and voluntary Employee programs, net (a reduction to expense) had no amounts for third quarter 2022. Third quarter 2021 consisted primarily of $763 million of Payroll Support proceeds allocated (credit to expense) and a $10 million net reduction in the Extended ETO liability (reduction to expense) relating to certain Employees being recalled prior to their previously elected return dates.

See Note 2Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to ~~the unaudited Condensed Consolidated~~Non-GAAP Financial ~~Statements~~Measures for ~~further information.~~additional detail regarding non-GAAP measures.

Fuel and oil expense for third quarter ~~2022 increased~~2023 decreased by ~~$760~~$186 million, or ~~76.8~~10.6 percent, compared with third quarter ~~2021.~~2022. On a per ASM basis, third quarter ~~2022~~2023 Fuel and oil expense ~~increased 74.5~~decreased 20.4 percent. On a dollar basis, ~~approximately 90 percent of~~ the ~~increase~~decrease was primarily attributable to ~~an increase~~a decrease in the Company's average economic jet fuel ~~prices, and the remainder of the increase was due to~~cost per gallon, partially offset by an increase in fuel gallons consumed. The Company's third quarter ~~2022~~2023 average economic jet fuel price of ~~$3.34~~$2.78 per gallon is net of approximately ~~$219~~$94 million in ~~gains~~cash settlements from hedging activities. On a per ASM

~~Table of Contents~~

basis, the majority of the change was also due to ~~higher~~lower 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 September 30,
2022 2021
Economic fuel costs per gallon $ 3.34 $ 2.04
Fuel hedging premium expense (in millions) $ 12 $ 25
Fuel hedging premium expense per gallon $ 0.02 $ 0.05
Fuel hedging cash settlement gain per gallon $ 0.43 $ 0.04

Table of Contents


	Three months ended September 30,
	2023		2022
Economic fuel costs per gallon	$	2.78	$	3.34
Fuel hedging premium expense (in millions)	$	30	$	12
Fuel hedging premium expense per gallon	$	0.05	$	0.02
Fuel hedging cash settlement gain per gallon	$	0.16	$	0.43

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

The Company's third quarter ~~2022~~2023 available seat miles per gallon ("fuel efficiency") ~~decreased 3.4~~increased 3.9 percent, year-over-year, ~~but increased 1.5 percent when compared with third quarter 2019. The year-over-year decrease was primarily driven by~~due to the ~~Company's increased Load factor, partially offset by~~Company operating more of its most fuel-efficient ~~-8 aircraft versus the prior year. The increase when compared with third quarter 2019 was due to operating more~~ MAX aircraft ~~the Company's most fuel-efficient aircraft, as a percentage of~~within its fleet. The continued deliveries of MAX ~~remains~~aircraft are expected to remain critical to the Company's efforts to modernize its fleet, reduce carbon emissions intensity, and achieve its near-term environmental sustainability goals.

The Company's multi-year fuel hedging program continues to provide ~~insurance~~protection against spikes in energy ~~prices and significantly offset the market price increase in jet fuel in third quarter 2022.~~prices. The Company's current fuel derivative contracts contain a combination of instruments based in West Texas Intermediate and Brent crude oil, and refined products, such as heating oil. The economic fuel price per gallon sensitivities provided in the table below assume the relationship between Brent crude oil and refined products based on market prices as of October ~~19, 2022.~~18, 2023.


	Estimated economic fuel price per gallon, including taxes and fuel hedging premiums (b)
Average Brent Crude Oil price per barrel	4Q ~~2022~~2023	2023

$70	$~~2.65~~2.45 - ~~$2.75~~$2.55	$2.75 - $2.85
$80	$2.70 - $2.80	$2.80 - $2.90
Current Market (a)	$2.90 - $3.00	$2.85 - $2.95
$90	$2.95 - $3.05	$2.85 - $2.95
$100	$3.15 - $3.25	$2.90 - $3.00
~~Current Market (a)~~	~~$3.15 - $3.25~~
~~$100~~	~~$3.35 - $3.45~~
$110	$~~3.60~~3.40 - ~~$3.70~~$3.50	$2.95 - $3.05
~~$120~~	~~$3.90 - $4.00~~

Fair market value	$~~189~~110 million	$306 million
Estimated premium costs	$1330 million	$121 million

(a) Brent crude oil average market prices as of October ~~19, 2022, was$91~~18, 2023, were $89 and $84 per barrel for fourth quarter ~~2022.~~and full year 2023, respectively.

(b) Based on the Company's existing fuel derivative contracts and market prices as of October ~~19, 2022,~~18, 2023, fourth quarter and full year ~~2022~~2023 economic fuel costs per gallon are estimated to be in the range o~~f $3.15~~of $2.90 to ~~$3.25~~$3.00 and ~~$3.05~~$2.85 to ~~$3.15, respectively, compared with the Company's previous estimations in the range of $3.00 to $3.10 and~~ $2.95, ~~to $3.05, respectively~~.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.

4137

Table of Contents

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


Period	Period	Maximum fuel hedged percentage (a)(b)	Period	Maximum fuel hedged percentage (a)(b)
2022		63%
2023	2023	50%	2023	50%
2024	2024	15%	2024	55%
2025			2025	43%
2026			2026	Less than 10%

(a) Based on the Company's current available seat mile plans. The Company is currently 6147 percent hedged for fourth quarter ~~2022.~~2023.

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

As a result of applying hedge accounting in prior periods, the Company has amounts in Accumulated other comprehensive income ("AOCI") that will be recognized in earnings in future periods when the underlying fuel derivative contracts settle. The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties—see Note 43 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI atas of September 30, ~~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 September 30, 2022 Amount of gains deferred in AOCI at September 30, 2022 (net of tax)
Remainder of 2022 $ 128 $ 80
2023 321 156
2024 87 44
Total $ 536 $ 280


Year	Fair value of fuel derivative contracts at September 30, 2023		Amount of gains (losses) deferred in AOCI at September 30, 2023 (net of tax)
Remainder of 2023	$	122	$	59
2024	191		26
2025	144		(3)
2026	$	30	$	4
Total	$	487	$	86

Maintenance materials and repairs expense for third quarter ~~2022 decreased~~2023 increased by ~~$46~~$122 million, or ~~18.4~~59.8 percent, compared with third quarter ~~2021.~~2022. On a per ASM basis, Maintenance materials and repairs expense ~~decreased 20.0~~increased 42.3 percent, compared with third quarter ~~2021.~~2022. On a dollar and per ASM basis, the ~~decrease~~increase was primarily due to ~~a decrease~~an increase in ~~engines~~engine shop visits and ~~components expense driven by~~various other engine repairs. These engine expenses are associated with both the ~~"power-by-the-hour" contract for the Company's~~Company’s -700 ~~engines that expired at the end of 2021, in which expense was incurred based primarily upon engine hours flown. At January 1, 2022, a time and materials contract commenced, pursuant~~fleet, due to ~~which -700 engine expense is based on actual repairs. This decrease was partially offset by~~ an increase in the ~~cost~~number of ~~various airframe and engine repairs~~engines inducted for planned performance shop restoration visits as a result of their utilization, and planned shop visits for the Company's Boeing 737-800 ("-800") fleet, as -800 aircraft emerge from their maintenance ~~vendor price escalation, and an increase~~“honeymoon” period, during which the engines have required significantly lower levels of maintenance while in ~~heavy check volume due to deferring costs and reduced operations in third quarter 2021 due to~~ the ~~COVID-19 pandemic.~~early phases of their useful lives.

Landing fees and airport rentals expense for third quarter ~~2022~~2023 increased by ~~$19~~$62 million, or ~~5.1~~15.7 percent, compared with third quarter ~~2021.~~2022. On a per ASM basis, Landing fees and airport rentals expense increased ~~4.1~~3.0 percent, compared with third quarter ~~2021.~~2022. On a dollar ~~and per ASM~~ basis, approximately 8050 percent of the increase was ~~due~~attributable to ~~a 14.7~~an increase in airport rental expense throughout the network driven by higher rates and approximately 40 percent of the increase was attributable to higher landing fees, primarily driven both by the increase in trips ~~flown.~~flown and higher rates charged by airports.

Depreciation and amortization expense for third quarter ~~2022~~2023 increased by ~~$13~~$40 million, or ~~4.0~~11.9 percent, compared with third quarter ~~2021.~~2022. On a per ASM basis, Depreciation and amortization expense ~~increased by 2.4 percent,~~remained flat, compared with third quarter ~~2021.~~2022. On a dollar ~~and per ASM~~ basis, ~~approximately 50 percent of~~ the increase was primarily due to the acquisition of 35102 -8 aircraft since third quarter ~~2021, 25 percent was due to accelerating the depreciation for 2022 -700 retirements, and 25 percent was due to decreasing the airframe salvage value for the entire -700 fleet,~~2022.

4238

Table of Contents

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

Other operating expenses for third quarter ~~2022~~2023 increased by ~~$157~~$139 million, or ~~23.7~~17.0 percent, compared with third quarter ~~2021.~~2022. Included within this line item was aircraft rentals expense in the amounts of $49 million ~~and $53 million~~ for each of the three-month periods ended September 30, ~~2022~~2023 and ~~2021, respectively.~~2022. On a per ASM basis, Other operating expenses increased ~~22.4~~4.3 percent, compared with third quarter ~~2021.~~2022. On a dollar ~~and per ASM~~ basis, approximately 3020 percent of the increase was due to higher ~~revenue related~~advertising expenses, ~~(including credit card processing charges)~~approximately 20 percent of the increase was due to higher personnel expenses driven by an increase in Crew lodging expense associated with the increase in trips and inflationary pressure, and approximately 20 percent of the increase was due to higher ~~personnel expenses.~~professional fees, driven by an increase in technology spending. The ~~majority~~remainder of the ~~remainder~~year-over-year increase was primarily due to various flight-driven expenses.

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

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

Other expenses (income)

Interest expense for third quarter ~~2022~~2023 decreased by ~~$29~~$23 million, or ~~25.2~~26.7 percent, compared with third quarter ~~2021,~~2022, primarily due to ~~elimination of the debt discount as a result of the Company's adoption of ASU 2020-06 and~~ various debt repurchases ~~throughout~~since third quarter 2022. See Note 310 to the unaudited Condensed Consolidated Financial Statements for further information.

Capitalized interest for third quarter ~~2022 increased~~2023 decreased by $2$7 million, or ~~22.2~~63.6 percent, compared with third quarter ~~2021,~~2022, primarily due to ~~an increase~~a significant amount of assets being placed into service since third quarter 2022, most notably the delivery of 18 -8 aircraft in ~~average progress payment balances for scheduled future aircraft deliveries.~~third quarter 2023.

Interest income for third quarter ~~2022~~2023 increased by ~~$68~~$86 million, compared with third 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 third quarter ~~2022 increased~~2023 decreased by ~~$64~~$76 million compared with third quarter ~~2021,~~2022, primarily due to ~~repurchases of $184 million face value~~the partial extinguishment of the Company's ~~1.25 percent~~ Convertible Notes ~~due 2025 (the "Convertible Notes")~~ in third quarter ~~2022.~~2022, compared to none in third quarter 2023.

~~Table of Contents~~

The following table displays the components of Other (gains) losses, net, for the three months ended September 30, ~~2022~~2023 and ~~2021:~~2022:


		Three months ended September 30,					Three months ended September 30,
(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	$	(38)	$	3	Mark-to-market impact from fuel contracts settling in current and future periods	$	(33)	$	(38)
Premium cost of fuel contracts not designated as hedges	Premium cost of fuel contracts not designated as hedges	(14)		11		Premium cost of fuel contracts not designated as hedges	—		(14)

Mark-to-market impact on deferred compensation plan investments	Mark-to-market impact on deferred compensation plan investments	13		1		Mark-to-market impact on deferred compensation plan investments	9		13
Other						Other	1		—

Other		—		2
		$	(39)	$	17		$	(23)	$	(39)

Income Taxes

The Company's effective tax rate was ~~approximately 21.6~~18.5 percent in third quarter ~~2022,~~2023, compared with ~~25.7~~21.6 percentin third quarter ~~2021.~~2022. The ~~lower~~year-over-year decline in the tax rate ~~for third quarter 2022~~ was primarily due to ~~provision-to-return adjustments related to federal tax credits and~~the absence of losses on convertible debt repurchases, which were largely disallowed as a tax deduction ~~for convertible debt losses.~~in 2022. The Company currently estimates its annual ~~2022~~2023 effective tax rate to be approximately ~~24 percent to 26~~23 percent.

Comparison of nine months ended September 30, ~~2022~~2023 and September 30, ~~2021~~2022

Operating Revenues

Passenger revenues for the nine months ended September 30, ~~2022,~~2023, increased by ~~$6.4~~$1.6 billion, or ~~66.9~~9.8 percent, compared with the first nine months of ~~2021.~~2022. On a unit basis, Passenger revenues ~~increased 33.2~~decreased 2.4 percent, year-over-year. The ~~increase in Passenger revenues on both a~~ dollar ~~and unit basis~~increase was primarily due to ~~easing~~a 12.5 percent increase in capacity and improvement in leisure and

Table of ~~negative impacts associated with~~Contents

business travel demand for the ~~COVID-19 pandemic, which resulted in improvements in Passenger demand and bookings, the majority of which were for leisure oriented travel, in the first~~ nine months ~~of 2022, compared with~~ended September 30, 2023 versus 2022. For the ~~severe impacts to demand and bookings from the COVID-19 pandemic for the majority of the first~~ nine months ~~of 2021. For the first nine months of 2022,~~ended September 30, 2023, the year-over-year ~~RASM increase~~Passenger revenue yield per ASM decrease was primarily driven by ~~an increase in yield of 33.2~~a 2.7 percent ~~coupled with an increase~~decrease in Load factor as the capacity growth of ~~5.9 points.~~12.5 percent outpaced the growth in demand of 8.8 percent for the nine months ended September 30, 2023.

Other revenues for the nine months ended September 30, ~~2022,~~2023, increased by ~~$551~~$69 million, or ~~50.5~~4.2 percent, year-over-year. On a dollar basis, ~~approximately 55 percent of~~ the increase was ~~associated with additional revenues generated from the Company's new co-brand credit card agreement secured in December 2021. The remaining increase in Other revenues is~~ primarily due to additional marketing revenue from ~~business partners, including~~ Chase ~~as the rebound in travel demand also resulted in higher~~Bank USA, N.A., driven by improved retail spend on the Company's co-brand credit ~~card, as well as additional revenues earned through the Company's rental car and hotel partners.~~card.

Operating Expenses

Operating expenses for the nine months ended September 30, ~~2022,~~2023, increased by ~~$7.0~~$2.4 billion, or ~~76.3~~14.8 percent, compared with the first nine months of ~~2021,~~2022, while capacity increased ~~16.4~~12.5 percent over the same prior year period. Approximately 40 percent of the operating expense increase was due to $2.7 billion in Payroll Support allocated to offset a portion of salaries, wages, and benefits in the first nine months of 2021, compared with no support received in the first nine months of 2022. In addition, approximately 30 percent of the increase was due to higher Fuel and oil expense and approximately 2050 percent of the increase was due to higher Salaries, wages, and ~~benefits.~~benefits expense, approximately 20 percent was due to higher Other operating expenses, and approximately 10 percent was due to higher Maintenance, materials, and repairs expense. 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 nine months 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~~and caused the Company's fixed costs to be spread over significantly more ASMs.

~~Table of Contents~~


		Nine months ended September 30,				Per ASM		Percent			Nine months ended September 30,				Per ASM		Percent
(in cents, except for percentages)	(in cents, except for percentages)	2022		2021		change		change		(in cents, except for percentages)	2023		2022		change		change
Salaries, wages, and benefits	Salaries, wages, and benefits	6.11	¢	5.78	¢	0.33	¢	5.7	%	Salaries, wages, and benefits	6.40	¢	6.11	¢	0.29	¢	4.7	%
Payroll support and voluntary Employee programs, net		—		(3.11)		3.11		n.m.

Fuel and oil	Fuel and oil	3.95		2.38		1.57		66.0		Fuel and oil	3.61		3.95		(0.34)		(8.6)
Maintenance materials and repairs	Maintenance materials and repairs	0.56		0.68		(0.12)		(17.6)		Maintenance materials and repairs	0.67		0.56		0.11		19.6
Landing fees and airport rentals	Landing fees and airport rentals	1.02		1.15		(0.13)		(11.3)		Landing fees and airport rentals	1.06		1.02		0.04		3.9
Depreciation and amortization	Depreciation and amortization	0.89		1.00		(0.11)		(11.0)		Depreciation and amortization	0.89		0.89		—		—

Other operating expenses	Other operating expenses	2.10		1.79		0.31		17.3		Other operating expenses	2.30		2.10		0.20		9.5
Total	Total	14.63	¢	9.67	¢	4.96	¢	51.3	%	Total	14.93	¢	14.63	¢	0.30	¢	2.1	%

Operating expenses per ASM for the first nine months of ~~2022~~2023 increased by ~~51.3~~2.1 percent, compared with the first nine months of ~~2021.~~2022. The majority of the year-over-year unit cost increase was driven by ~~Payroll Support received~~higher salaries, wages, and benefits expense, partially offset by a decrease in the ~~first nine months of 2021, including from the Consolidated Appropriations Act, 2021 and the American Rescue Plan Act of 2021.~~Company's fuel cost per gallon. Operating expenses per ASM for the first nine months of ~~2022,~~2023, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased ~~2.7~~5.2 percent, year-over-year. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Salaries, wages, and benefits expense for the first nine months of ~~2022~~2023 increased by ~~$1.3~~$1.2 billion, or ~~22.7~~18.0 percent, compared with the first nine months of ~~2021.~~2022. On a per ASM basis, Salaries, wages, and benefits expense for the first nine months of ~~2022~~2023 increased ~~5.7~~4.7 percent, compared with the first nine months of ~~2021.~~2022. On a dollar basis, approximately ~~40 percent of the increase was driven by an increase in trips, approximately 20~~50 percent of the increase was due to step/pay rate increases for certain workgroups, ~~which included~~including market wage rate accruals ~~associated~~for open collective bargaining agreements (inclusive of $180 million on a GAAP basis in additional compensation related to past services negotiated as part of the tentative agreement reached with ~~open labor contracts,~~TWU 556) and approximately 1030 percent of the increase was driven by ~~$127 million~~an increase in capacity and/or number 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 of COVID-19.

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

•~~$2.7 billion of Payroll Support proceeds allocated (credit to expense);~~

•~~$140 million net reduction in the Extended ETO liability (reduction to expense) relating to certain Employees being recalled prior to their previously elected return dates; and~~

•$120 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 CARES Act, and subsequent legislation.

trips flown. See Note 2Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to ~~the unaudited Condensed Consolidated~~Non-GAAP Financial ~~Statements~~Measures for ~~further information.~~additional detail regarding non-GAAP measures.

Fuel and oil expense for the first nine months of ~~2022~~2023 increased by ~~$2.1 billion,~~$124 million, or ~~94.2~~2.8 percent, compared with the first nine months of ~~2021.~~2022. On a per ASM basis, Fuel and oil expense for the first nine months of ~~2022 increased 66.0~~ 2023 decreased 8.6

Table of Contents

percent. On a dollar basis, ~~approximately 80 percent of~~ the increase was primarily attributable ~~to an increase in jet fuel prices per gallon, and the remainder of the increase was due~~ to an increase in fuel gallons consumed. ~~On a per ASM basis, the increase was primarily due to higher jet fuel prices.~~ The following table provides more information on the Company's economic fuel cost per gallon, including the impact of fuel hedging premium expense and fuel derivative contracts:

~~Table of Contents~~


		Nine months ended September 30,					Nine months ended September 30,
		2022		2021			2023		2022
Economic fuel costs per gallon	Economic fuel costs per gallon	$	3.03	$	1.92	Economic fuel costs per gallon	$	2.85	$	3.03
Fuel hedging premium expense (in millions)	Fuel hedging premium expense (in millions)	$	65	$	75	Fuel hedging premium expense (in millions)	$	91	$	65
Fuel hedging premium expense per gallon	Fuel hedging premium expense per gallon	$	0.05	$	0.06	Fuel hedging premium expense per gallon	$	0.06	$	0.05
Fuel hedging cash settlement gains per gallon	Fuel hedging cash settlement gains per gallon	$	0.54	$	0.02	Fuel hedging cash settlement gains per gallon	$	0.12	$	0.54

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

Maintenance materials and repairs expense for the first nine months of ~~2022 decreased~~2023 increased by ~~$22~~$212 million, or ~~3.4~~34.0 percent, compared with the first nine months of ~~2021.~~2022. On a per ASM basis, Maintenance materials and repairs expense ~~decreased 17.6~~increased 19.6 percent, compared with the first nine months of ~~2021.~~2022. On a dollar and per ASM basis, the ~~decrease~~increase was primarily due to a decrease in engines and components expense due to the "power-by-the-hour" contract for the Company's -700 engines expiring at the end of 2021. This decrease was partially offset by the timing of regular airframe maintenance checks as some costs had previously been deferred while a portion of the fleet was placed into temporary storage during the COVID-19 pandemic. There were multiple other smaller increases on a dollar basis, primarily related to an increase in engine shop visits and various ~~repairs as a result of deferring costs and reduced operations in the first nine months of 2021 due to the COVID-19 pandemic.~~other engine repairs.

Landing fees and airport rentals expense for the first nine months of ~~2022~~2023 increased by ~~$36~~$196 million, or ~~3.3~~17.4 percent, compared with the first nine months of ~~2021.~~2022. On a per ASM basis, Landing fees and airport rentals expense ~~decreased 11.3~~increased 3.9 percent, compared with the first nine months of ~~2021.~~2022. On a dollar basis, approximately 50 percent of the increase was attributable to higher landing fees, primarily driven by the increase in trips flown and higher rates charged by airports and approximately 45 percent of the increase was largely due to ~~an increase in landing fees from~~higher airport rental expense throughout the ~~increased number of trips flown, partially offset by~~network, associated with both higher ~~settlements~~rates and ~~credits from various airports received in 2022.~~additional space leased at airports.

Depreciation and amortization expense for the first nine months of ~~2022~~2023 increased by ~~$35~~$123 million, or ~~3.7~~12.5 percent, compared with the first nine months of ~~2021.~~2022. On a per ASM basis, Depreciation and amortization expense ~~decreased 11.0 percent,~~remained flat, compared with the first nine months of ~~2021.~~2022. On a dollar basis, ~~approximately 50 percent of~~ the increase was due to higher depreciation expense associated with the Company's Next-Gen fleet of -700 owned aircraft and engines planned for accelerated retirement dates in 2022, and approximately 35 percent of the increase wasprimarily due to the acquisition of 35102 -8 aircraft since third quarter ~~2021.~~2022.

Other operating expenses for the first nine months of ~~2022~~2023 increased by ~~$633~~$525 million, or ~~37.0~~22.4 percent, compared with the first nine months of ~~2021.~~2022. Included within this line item was aircraft rentals expense in the amount of ~~$146~~$149 million and ~~$155~~$146 million for the nine months ended September 30, ~~2022~~2023 and ~~2021,~~2022, respectively. On a per ASM basis, Other operating expenses increased ~~17.3~~9.5 percent, compared with the first nine months of ~~2021.~~2022. On a dollar and per ASM basis, approximately 2515 percent of the increase was due to higher ~~revenue related expenses (including credit card processing charges) and~~interrupted trip expense, primarily in first quarter 2023 driven by costs associated with the Company's December 2022 operational disruption, approximately 2015 percent of the increase was due to higher personnel ~~expenses.~~expenses, and approximately 15 percent of the increase was due to higher professional fees driven by an increase in technology projects. The majority of the remaining increase was due to various flight-driven expenses.

Other expenses (income)

Interest expense for the first nine months of ~~2022~~2023 decreased by ~~$71~~$79 million, or ~~20.7~~29.0 percent, compared with the first nine months of ~~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.~~repurchases since third quarter 2022.

Capitalized interest for the first nine months of ~~2022 increased~~2023 decreased by $4$16 million, or ~~14.8~~51.6 percent, compared with the first nine months of ~~2021,~~2022, primarily due to ~~an increase in average progress payment balances for scheduled future~~a significant amount of assets being placed into service, most notably 102 MAX aircraft ~~deliveries.~~being delivered since third quarter 2022.

~~Table of Contents~~

Interest income for the first nine months of ~~2022~~2023 increased by ~~$95~~$324 million, compared with the first nine months of ~~2021,~~2022, primarily due to higher interest ~~rates.~~rates earned on the Company's cash and short-term investments.

Table of Contents

Loss on extinguishment of debt for the first nine months of ~~2022 increased~~2023 decreased by ~~$180~~$192 million, compared with the first nine months of ~~2021,~~2022, primarily due to ~~repurchases of $468 million face value~~the partial extinguishment of the Company's Convertible Notes ~~due 2025 during~~in the first nine months of ~~2022.~~2022, compared with none in the first nine months of 2023.

The following table displays the components of Other (gains) losses, net, for the nine months ended September 30, ~~2022~~2023 and ~~2021:~~2022:


		Nine months ended September 30,					Nine months ended September 30,
(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	$	(23)	$	(6)	Mark-to-market impact from fuel contracts settling in current and future periods	$	(26)	$	(23)
Premium cost of fuel contracts not designated as hedges	Premium cost of fuel contracts not designated as hedges	(14)		32		Premium cost of fuel contracts not designated as hedges	—		(14)

Unrealized mark-to-market adjustment on available for sale securities	Unrealized mark-to-market adjustment on available for sale securities	7		—		Unrealized mark-to-market adjustment on available for sale securities	(4)		7
Mark-to-market impact on deferred compensation plan investment	Mark-to-market impact on deferred compensation plan investment	84		(17)		Mark-to-market impact on deferred compensation plan investment	(17)		84
Correction on investment gains related to prior periods		—		(60)

Other	Other	3		7		Other	3		3
		$	57	$	(44)		$	(44)	$	57

Income Taxes

The Company's effective tax rate was approximately 22.0 percent for the first nine months of 2023, compared with 25.1 percent for the first nine months of ~~2022, compared with 27.1 percent for the first nine months of 2021.~~2022. The year-over-year decline in the tax rate iswas primarily due to ~~higher state taxes in 2021 and tax planning benefits recognized in 2022 related to federal tax credits and~~the absence of losses on convertible debt repurchases, which were largely disallowed as a tax deduction ~~for convertible debt losses.~~in 2022.

4742

Table of Contents

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

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


		Three months ended September 30,				Percent	Nine months ended September 30,				Percent		Three months ended September 30,				Percent	Nine months ended September 30,				Percent
		2022		2021		Change	2022		2021		Change		2023		2022		Change	2023		2022		Change

Fuel and oil expense, unhedged	Fuel and oil expense, unhedged	$	1,931	$	999		$	5,079	$	2,264		Fuel and oil expense, unhedged	$	1,616	$	1,931		$	4,608	$	5,079
Add: Premium cost of fuel contracts designated as hedges	Add: Premium cost of fuel contracts designated as hedges	26		14			79		43			Add: Premium cost of fuel contracts designated as hedges	30		26			91		79
Deduct: Fuel hedge gains included in Fuel and oil expense, net	Deduct: Fuel hedge gains included in Fuel and oil expense, net	(207)		(23)			(768)		(46)			Deduct: Fuel hedge gains included in Fuel and oil expense, net	(82)		(207)			(185)		(768)
Fuel and oil expense, as reported	Fuel and oil expense, as reported	$	1,750	$	990		$	4,390	$	2,261		Fuel and oil expense, as reported	$	1,564	$	1,750	(10.6)	$	4,514	$	4,390
Add (Deduct): Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a)		(12)		5			(12)		19
Add (Deduct): Premium cost of fuel contracts not designated as hedges		(14)		11			(14)		32
Deduct: Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (b)												Deduct: Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (b)	(11)		(12)			(12)		(12)
Deduct: Premium benefit of fuel contracts not designated as hedges												Deduct: Premium benefit of fuel contracts not designated as hedges	—		(14)			—		(14)
Fuel and oil expense, excluding special items (economic)	Fuel and oil expense, excluding special items (economic)	$	1,724	$	1,006	71.4	$	4,364	$	2,312	88.8	Fuel and oil expense, excluding special items (economic)	$	1,553	$	1,724	(9.9)	$	4,502	$	4,364	3.2

Total operating expenses, net, as reported		$	5,825	$	3,946		$	16,240	$	9,213
Add: Payroll support and voluntary Employee programs, net		—		776			—		2,963
Add (Deduct): Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a)		(12)		5			(12)		19
Add: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)		—		—			—		2
Add (Deduct): Premium cost of fuel contracts not designated as hedges		(14)		11			(14)		32
Total operating expenses, as reported												Total operating expenses, as reported	$	6,408	$	5,825		$	18,640	$	16,240

Deduct: Labor contract adjustment (a)												Deduct: Labor contract adjustment (a)	(96)		—			(180)		—
Deduct: Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (b)												Deduct: Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (b)	(11)		(12)			(12)		(12)

Deduct: Premium benefit of fuel contracts not designated as hedges												Deduct: Premium benefit of fuel contracts not designated as hedges	—		(14)			—		(14)

Deduct: Impairment of long-lived assets	Deduct: Impairment of long-lived assets	(4)		$	—		$	(35)	$	—		Deduct: Impairment of long-lived assets	—		(4)			—		(35)
Deduct: Litigation settlement												Deduct: Litigation settlement	—		—			(12)		—
Total operating expenses, excluding special items	Total operating expenses, excluding special items	$	5,795	$	4,738	22.3	$	16,179	$	12,229	32.3	Total operating expenses, excluding special items	$	6,301	$	5,795	8.7	$	18,436	$	16,179	14.0
Deduct: Fuel and oil expense, excluding special items (economic)	Deduct: Fuel and oil expense, excluding special items (economic)	(1,724)		(1,006)			(4,364)		(2,312)			Deduct: Fuel and oil expense, excluding special items (economic)	(1,553)		(1,724)			(4,502)		(4,364)
Operating expenses, excluding Fuel and oil expense and special items	Operating expenses, excluding Fuel and oil expense and special items	$	4,071	$	3,732	9.1	$	11,815	$	9,917	19.1	Operating expenses, excluding Fuel and oil expense and special items	$	4,748	$	4,071	16.6	$	13,934	$	11,815	17.9
Deduct: Profitsharing expense	Deduct: Profitsharing expense	(57)		(77)			(175)		(186)			Deduct: Profitsharing expense	(38)		(57)			(158)		(175)
Operating expenses, excluding Fuel and oil expense, special items, and profitsharing	Operating expenses, excluding Fuel and oil expense, special items, and profitsharing	$	4,014	$	3,655	9.8	$	11,640	$	9,731	19.6	Operating expenses, excluding Fuel and oil expense, special items, and profitsharing	$	4,710	$	4,014	17.3	$	13,776	$	11,640	18.4

Operating income, as reported	Operating income, as reported	$	395	$	733		$	1,402	$	1,526		Operating income, as reported	$	117	$	395		$	628	$	1,402
Deduct: Payroll support and voluntary Employee programs, net		—		(776)			—		(2,963)
Add (Deduct): Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a)		12		(5)			12		(19)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a)		—		—			—		(2)
Add (Deduct): Premium cost of fuel contracts not designated as hedges		14		(11)			14		(32)

Add: Labor contract adjustment (a)												Add: Labor contract adjustment (a)	96		—			180		—
Add: Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (b)												Add: Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (b)	11		12			12		12

Add: Premium benefit of fuel contracts not designated as hedges												Add: Premium benefit of fuel contracts not designated as hedges	—		14			—		14

Add: Impairment of long-lived assets	Add: Impairment of long-lived assets	4		—			35		$	—		Add: Impairment of long-lived assets	—		4			—		35
Operating income (loss), excluding special items		$	425	$	(59)	n.m.	$	1,463	$	(1,490)	n.m.
Add: Litigation settlement												Add: Litigation settlement	—		—			12		—
Operating income, excluding special items												Operating income, excluding special items	$	224	$	425	(47.3)	$	832	$	1,463	(43.1)

4843

Table of Contents

Three months ended September 30, Percent Nine months ended September 30, Percent
2022 2021 Change 2022 2021 Change
Other (gains) losses, net, as reported $ (39) $ 17 $ 57 $ (44)
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a) 38 (3) 23 6
Add (Deduct): Premium cost of fuel contracts not designated as hedges 14 (11) 14 (32)
Deduct: Unrealized mark-to-market adjustment on available for sale securities — — (7) —
Other (gains) losses, net, excluding special items $ 13 $ 3 n.m. $ 87 $ (70) n.m.
Income before income taxes, as reported $ 353 $ 600 $ 1,013 $ 1,248
Deduct: Payroll support and voluntary Employee programs, net — (776) — (2,963)
Add (Deduct): Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a) 12 (5) 12 (19)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — — — (2)
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a) (38) 3 (23) (6)
Add: Impairment of long-lived assets 4 — 35 —
Add: Unrealized mark-to-market adjustment on available for sale securities — — 7 —
Add: Loss on extinguishment of debt 76 12 192 12
Income (loss) before income taxes, excluding special items $ 407 $ (166) n.m. $ 1,236 $ (1,730) n.m.
Provision for income taxes, as reported $ 76 $ 154 $ 254 $ 339
Add (Deduct): Net income (loss) tax impact of fuel and special items (b) 15 (185) 32 (713)
Provision (benefit) for income taxes, net, excluding special items $ 91 $ (31) n.m. $ 286 $ (374) n.m.
Net income, as reported $ 277 $ 446 $ 759 $ 909
Deduct: Payroll support and voluntary Employee programs, net — (776) — (2,963)
Add (Deduct): Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a) 12 (5) 12 (19)
Deduct: Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — — — (2)
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods (a) (38) 3 (23) (6)
Add: Loss on extinguishment of debt 76 12 192 12
Add: Impairment of long-lived assets 4 — 35 —
Add: Unrealized mark-to-market adjustment on available for sale securities — — 7 —
Add (Deduct): Net income (loss) tax impact of special items (b) (15) 185 (32) 713
Net income (loss), excluding special items $ 316 $ (135) n.m. $ 950 $ (1,356) n.m.


	Three months ended September 30,				Percent	Nine months ended September 30,				Percent
	2023		2022		Change	2023		2022		Change
Other (gains) losses, net, as reported	$	(23)	$	(39)		$	(44)	$	57
Add: Mark-to-market impact from fuel contracts settling in current and future periods (b)	33		38			26		23
Add: Premium benefit of fuel contracts not designated as hedges	—		14			—		14
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities	—		—			4		(7)

Other (gains) losses, net, excluding special items	$	10	$	13	(23.1)%	$	(14)	$	87	n.m.

Income before income taxes, as reported	$	237	$	353		$	919	$	1,013

Add: Labor contract adjustment (a)	96		—			180		—
Add: Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (b)	11		12			12		12


Deduct: Mark-to-market impact from fuel contracts settling in current and future periods (b)	(33)		(38)			(26)		(23)

Add: Impairment of long-lived assets	—		4			—		35
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities	—		—			(4)		7
Add: Loss on extinguishment of debt	—		76			—		192
Add: Litigation settlement	—		—			12		—
Income before income taxes, excluding special items	$	311	$	407	(23.6)	$	1,093	$	1,236	(11.6)

Provision for income taxes, as reported	$	44	$	76		$	202	$	254
Add: Net income tax impact of fuel and special items (c)	27		15			55		32

Provision for income taxes, net, excluding special items	$	71	$	91	(22.0)	$	257	$	286	(10.1)



Net income, as reported	$	193	$	277		$	717	$	759

Add: Labor contract adjustment (a)	96		—			180		—
Add: Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (b)	11		12			12		12


Deduct: Mark-to-market impact from fuel contracts settling in current and future periods (b)	(33)		(38)			(26)		(23)
Add: Loss on extinguishment of debt	—		76			—		192
Add (Deduct): Unrealized mark-to-market adjustment on available for sale securities	—		—			(4)		7
Deduct: Net income tax impact of special items (c)	(27)		(15)			(55)		(32)
Add: Impairment of long-lived assets	—		4			—		35
Add: Litigation settlement	—		—			12		—

Net income, excluding special items	$	240	$	316	(24.1)	$	836	$	950	(12.0)

4944

Table of Contents

Three months ended September 30, Percent Nine months ended September 30, Percent
2022 2021 Change 2022 2021 Change
Net income per share, diluted, as reported $ 0.44 $ 0.73 $ 1.21 $ 1.49
Add (Deduct): Impact of special items 0.12 (1.25) 0.38 (4.84)
Deduct: Net impact of net income (loss) above from fuel contracts divided by dilutive shares (0.04) — (0.02) (0.04)
Add (Deduct): Net income (loss) tax impact of special items (b) (0.02) 0.30 (0.06) 1.17
Deduct: GAAP to Non-GAAP diluted weighted average shares difference (c) — (0.01) — (0.07)
Net income (loss) per share, diluted, excluding special items $ 0.50 $ (0.23) n.m. $ 1.51 $ (2.29) n.m.
Operating expenses per ASM (cents) 14.83 ¢ 10.18 ¢ 14.63 ¢ 9.67 ¢
Add (Deduct): Impact of special items (0.01) 2.00 (0.03) 3.11
Deduct: Fuel and oil expense divided by ASMs (4.45) (2.55) (3.95) (2.38)
Deduct: Profitsharing expense divided by ASMs (0.15) (0.20) (0.16) (0.19)
Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents) 10.22 ¢ 9.43 ¢ 8.4 10.49 ¢ 10.21 ¢ 2.7


	Three months ended September 30,						Percent	Nine months ended September 30,						Percent
	2023			2022			Change	2023			2022			Change

Net income per share, diluted, as reported	$	0.31		$	0.44			$	1.15		$	1.21
Add (Deduct): Impact of special items	0.14			0.12				0.29			0.38
Deduct: Net impact of net income above from fuel contracts divided by dilutive shares	(0.03)			(0.04)				(0.02)			(0.02)
Deduct: Net income tax impact of special items (c)	(0.04)			(0.02)				(0.09)			(0.06)


Net income per share, diluted, excluding special items	$	0.38		$	0.50		(24.0)	$	1.33		$	1.51		(11.9)

Operating expenses per ASM (cents)	14.51		¢	14.83		¢		14.93		¢	14.63		¢
Deduct: Impact of special items	(0.24)			(0.01)				(0.16)			(0.03)
Deduct: Fuel and oil expense divided by ASMs	(3.52)			(4.45)				(3.61)			(3.95)
Deduct: Profitsharing expense divided by ASMs	(0.08)			(0.15)				(0.12)			(0.16)
Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)	10.67		¢	10.22		¢	4.4	11.04		¢	10.49		¢	5.2

(a) Represents changes in estimate related to the contract ratification bonus for the Company’s Flight Attendants as part of the tentative agreement reached in October 2023 with TWU 556. The Company began accruing for all of its open labor contracts on April 1, 2022, and this incremental $180 million expense extends the timeframe covered by the ratification bonus to the date the Flight Attendant contract became amendable on November 1, 2018, to compensate for missed wage increases over that time period. The Company’s consolidated financial statements for the three and nine months ended September 30, 2023 include market rate wage accrual for all workgroups with open collective bargaining agreements. The Company had not previously included an approximate $84 million adjustment associated with ongoing labor contract negotiations during second quarter 2023 as a special item, but has now included such amount in its calculation of Non-GAAP financial measures for the year-to-date period ended September 30, 2023. The Company is therefore providing adjusted reconciliation schedules for second quarter 2023 as supplemental information below. See the Note Regarding Use of Non-GAAP Financial Measures for further information.

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

~~(b)~~(c) 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~~

Revised Three Months Ended June 30, 2023 Reconciliation of Reported Amounts to ~~GAAP~~Non-GAAP Financial Measures (excluding special items) (unaudited)

(in millions, except per share amounts and ~~Non-GAAP diluted weighted average shares difference, due to~~per ASM amounts)


	Three months ended June 30,				Percent
	2023		2022		Change




Fuel and oil expense, unhedged	$	1,418	$	1,942
Add: Premium cost of fuel contracts designated as hedges	30		26
Deduct: Fuel hedge gains included in Fuel and oil expense, net	(45)		(332)
Fuel and oil expense, as reported (economic)	$	1,403	$	1,636	(14.2)




Total operating expenses, as reported	$	6,242	$	5,570

Deduct: Labor contract adjustment	(84)		—




Deduct: Impairment of long-lived assets	—		(15)
Deduct: Litigation settlement	(12)		—
Total operating expenses, excluding special items	$	6,146	$	(5,555)	n.m.
Deduct: Fuel and oil expense, as reported (economic)	(1,403)		(1,636)
Operating expenses, excluding Fuel and oil expense and special items	$	4,743	$	3,919	16.6
Deduct: Profitsharing expense	(121)		(81)
Operating expenses, excluding Fuel and oil expense, special items, and profitsharing	$	4,622	$	3,838	17.3

Table of Contents


	Three months ended June 30,						Percent
	2023			2022			Change
Operating income, as reported	$	795		$	1,158

Add: Labor contract adjustment	84			—




Add: Impairment of long-lived assets	—			15
Add: Litigation settlement	12			—
Operating income, excluding special items	$	891		$	1,173		(24.0)

Other (gains) losses, net, as reported	$	(7)		$	25
Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods	(6)			20

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

Other (gains) losses, net, excluding special items	$	(13)		$	41		n.m.

Income before income taxes, as reported	$	886		$	1,036

Add: Labor contract adjustment	84			—



Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods	6			(20)

Add: Impairment of long-lived assets	—			15
Add: Unrealized mark-to-market adjustment on available for sale securities	—			4
Add: Loss on extinguishment of debt	—			43
Add: Litigation settlement	12			—
Income before income taxes, excluding special items	$	988		$	1,078		(8.3)

Provision for income taxes, as reported	$	203		$	276
Add (Deduct): Net income tax impact of fuel and special items (a)	27			(23)

Provision for income taxes, net, excluding special items	$	230		$	253		(9.1)



Net income, as reported	$	683		$	760

Add: Labor contract adjustment	84			—



Add (Deduct): Mark-to-market impact from fuel contracts settling in current and future periods	6			(20)
Add: Loss on extinguishment of debt	—			43
Add: Unrealized mark-to-market adjustment on available for sale securities	—			4
Add (Deduct): Net income tax impact of fuel and special items (a)	(27)			23
Add: Impairment of long-lived assets	—			15
Add: Litigation settlement	12			—

Net income, excluding special items	$	758		$	825		(8.1)

Net income per share, diluted, as reported	$	1.08		$	1.20
Add: Impact of special items	0.14			0.08
Add (Deduct): Net impact of net income above from fuel contracts divided by dilutive shares	0.01			(0.03)
Add (Deduct): Net income tax impact of special items (a)	(0.04)			0.05


Net income per share, diluted, excluding special items	$	1.19		$	1.30		(8.5)

Operating expenses per ASM (cents)	14.66		¢	14.92		¢
Deduct: Impact of special items	(0.23)			(0.04)
Deduct: Fuel and oil expense divided by ASMs	(3.29)			(4.38)
Deduct: Profitsharing expense divided by ASMs	(0.29)			(0.22)
Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)	10.85		¢	10.28		¢	5.5

(a) Tax amounts for each individual special item are calculated at the ~~Company being in a Net income position on a GAAP basis versus a Net loss position on a Non-GAAP basis~~Company's effective rate for the ~~three~~applicable period and ~~nine months ended September 30, 2021. See Note 7 to the unaudited Condensed Consolidated Financial Statements for further information.~~

totaled in this line item.

5046

Table of Contents

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 income, ~~(loss),~~ non-GAAP; Other (gains) losses, net, non-GAAP; Income ~~(loss)~~ before income taxes, non-GAAP; Provision ~~(benefit)~~ for income taxes, net, non-GAAP; Net income, ~~(loss),~~ non-GAAP; Net income ~~(loss)~~ per share, diluted, non-GAAP; and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents). The Company's economic Fuel and oil expense results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis has historically been utilized by the Company, as well as some of the other airlines that utilize fuel hedging, as it reflects the Company’s actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts that are designated as hedges are reflected as a component of Fuel and oil expense, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide further insight into the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude ~~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 -8 aircraft leases;~~

~~Table of Contents~~

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 securities; ~~and~~

6.3.Losses associated with the partial extinguishment of the Company's Convertible Notes and early prepayment of debt.

In third quarter 2022, management determined that presentation within its income statement would be enhanced by classification of Loss on extinguishment of debt as a separate line item, rather than its prior presentation where it was included as a component of Other (gains) losses, net. Such losses are incurred as a result of opportunistic decisions made by the Company to

Table of Contents

prepay portions of its debt, most of which was ~~taken on~~incurred during the pandemic in order to provide liquidity during the prolonged downturn in air ~~travel. Due to the nature of these losses,~~travel;

4.A charge associated with a tentative litigation settlement regarding certain California state meal-and-rest-break regulations for flight attendants; and

5.Incremental expense associated with ongoing labor contract negotiations with TWU 556 which ~~are difficult to accurately predict, and due to the fact that they are not representative of~~represents the Company’s ~~day-to-day airline operating performance, the Company has included such amounts as special items and thus excluded them from certain of its non-GAAP measures~~Flight Attendants. The change in estimate recognized in the ~~accompanying reconciliations.~~second and third quarters of 2023 relates to additional compensation for services performed by Employees outside of those applicable fiscal periods.

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

~~Table of Contents~~

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 ~~$234~~$616 million for the three months ended September 30, ~~2022,~~2023, compared with ~~$575~~$234 million ~~used in~~ provided by operating activities in the same prior year period. Net cash provided by operating activities was ~~$3.2~~$2.7 billion for the nine months ended September 30, ~~2022,~~2023, compared with ~~$2.1~~$3.2 billion provided by operating activities in the same prior year ~~period.~~period. Operating cash inflows are historically primarily derived from providing air transportation to Customers. The vast majority of tickets are purchased prior to the day on which travel is provided and, in some cases, several months before the anticipated travel date. Operating cash outflows are related to the recurring expenses of airline operations. The operating cash flows for the nine months ended September 30, 2023, were largely impacted by the Company's net income (as adjusted for noncash items), a $750 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, partially offset by a $245 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, and a $215 million decrease due to the payment of Customer reimbursement expenses in first quarter 2023 related to the December 2022 operational disruption. The operating cash flows for the nine months ended September 30, 2022, were largely impacted by the Company's net income (as adjusted for noncash items), a $700 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, and a $472 million cash tax refund from the Internal Revenue Service associated with the 2020 tax year. Operating cash flows for the nine months ended September 30, 2021, included $2.7 billion in Payroll Support program grant proceeds received and were also driven by an increase in Air traffic liability of $1.1 billion as a result of increased ticket sales from the increase in leisure travel demand. Net cash provided by operating activities is primarily used to finance capital expenditures, repay debt, pay dividends, and provide working capital. Historically, the Company also used Net cash provided by operating activities to fund stock repurchases and pay dividends; however these shareholder return activities were suspended through September 30, 2022, due to restrictions associated with the payroll assistance under the Payroll Support programs and the Company's amended and restated revolving credit facility. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.

Net cash used in investing activities totaled ~~$1.1 billion~~$64 million during the three months ended September 30, ~~2022,~~2023, compared with ~~$412 million~~$1.1 billion used in investing activities in the same prior year period. Net cash used in investing activities ~~was $2.8 billion during~~for the nine months ended September 30, ~~2022,~~2023, was $2.3 billion, compared with ~~$1.1~~$2.8 billion used in investing activities in the same prior year period. Investing activities in both years included Capital expenditures and changes in the balance of the Company's short-term and noncurrent investments. During the nine months ended September 30, ~~2022,~~2023, Capital expenditures were ~~$2.6~~$2.8 billion, compared with ~~$325 million~~$2.6 billion in the same prior year period. Capital expenditures increased, year-over-year, largely due to an increase in progress and delivery payments made for current period and future aircraft deliveries during the nine months ended September 30, ~~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~~period.

Table of ~~2020 estimated damages relating to the FAA grounding of the MAX aircraft.~~Contents

The Company continues to estimate its ~~2022~~2023 capital spending to be roughly $3.5 billion, which includes approximately $2.3 billion in aircraft capital spending, assuming approximately 85 -8 deliveries in 2023 and $1.2 billion in non-aircraft capital spending, including tens of millions in operational investments related to the Company's winter operations plan. The Company continues to estimate its total annual capital spending to be approximately ~~$4.0~~$4 billion, ~~which assumes a total of 66 -8 aircraft deliveries in 2022. See Note 10 to~~on average, for the unaudited Condensed Consolidated Financial Statements for further information. The Company’s 2022 capital spending guidance continues to include approximately $900 million in non-aircraft capital spending.five years 2023 through 2027.

Net cash used in financing activities was ~~$1.9 billion~~$213 million during the three months ended September 30, ~~2022,~~2023, compared with ~~$157 million~~$1.9 billion used in financing activities for the same prior year period. Net cash used in financing activities was ~~$2.4 billion~~$466 million during the nine months ended September 30, ~~2022,~~2023, compared with ~~$923 million provided by~~$2.4 billion used in financing activities for the same prior year period. The Company paid $428 million in cash dividends to Shareholders and repaid $78 million in finance lease obligations during the nine months ended September 30, 2023. The Company may engage in early debt repurchases from time to time and some of these early repurchases are not included in the Company's current maturities of long-term debt. The Company's 2023 total scheduled debt repayments are expected to be $85 million. During the nine months ended September 30, 2022, the Company repaid $2.5 billion in debt and finance lease obligations, including a $1.3 billion prepayment for all of its outstanding 4.75% Notes due 2023 and the early extinguishment of $486 million in principal of its Convertible Notes for cash payments totaling $648 ~~million during the nine months ended September 30, 2022. The Company may engage in early debt repurchases from time to time and some of these early~~

~~Table of Contents~~

~~future repurchases are not included in the Company's current maturities of long-term debt.~~ ~~The Company's 2022 total debt repayments is expected to be $2.6 billion.~~ During the nine months ended September 30, 2021, the Company borrowed $1.1 billion of loan proceeds under Payroll Support programs. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. The Company repaid $298 million in debt and finance lease obligations, including the extinguishment of $80 million in principal of its Convertible Notes for a cash payment of $121 million during the nine months ended September 30, 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"). In ~~July 2022,~~August 2023, this facility was amended to, among other things, (i) extend the expiration date to August ~~2025,~~2028, (ii) release all aircraft and to change the benchmark rate from the London Interbank Offered Rate to the Secured Overnight Financing Rate ("SOFR"). 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~~assets constituting collateral securing loans under the facility, ~~to $1.5 billion. Interest on~~(iii) eliminate 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 SOFR plus~~minimum liquidity covenant, (iv) add a ~~credit spread adjustment of 10 basis points plus 200 basis points. The facility contains a~~Coverage Ratio financial covenant, ~~to maintain total liquidity, as defined in~~and (v) amend the ~~Amended A&R Credit Agreement,~~covenant requiring that a pool of ~~$1.5 billion at all times under the Amended A&R Credit Agreement; the Company was compliant with this requirement as of September 30, 2022.~~lien-free specified aircraft and related assets have a minimum aggregate appraised value. There were no amounts outstanding under the Amended A&R Credit Agreement as of September 30, ~~2022.~~2023. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.

Although not the case at September 30, ~~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 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 ~~$13.7~~$11.7 billion as of September 30, ~~2022,~~2023, and anticipated future internally generated funds from operations. ~~However, the COVID-19 pandemic~~The Company continues to ~~evolve and could~~ have a ~~material adverse impact on~~large base of unencumbered assets with a net book value of more than $14.5 billion, including aircraft valued in excess of $12.0 billion and more than $2.5 billion in non-aircraft assets such as spare engines, ground equipment, and real estate. In addition, the Company continues to maintain investment-grade credit ratings by all three major credit agencies (Moody's, S&P Global, and Fitch).

Contractual Obligations

On October 25, 2023, the Company entered into a supplemental agreement with Boeing relating to its contractual order book for -7 and -8 aircraft. This agreement, which extends the order book to 2031, provides flexibility in support of the Company's ~~ability~~growth plans and fleet modernization.

Table of Contents

The Company now plans for approximately 85 -8 aircraft deliveries from Boeing and 41 -700 retirements in 2023. The delivery schedule below reflects contractual commitments, although the timing of future deliveries could be affected by any potential or prolonged delays in the manufacturing process or with the -7 certification. The Company retains significant flexibility to ~~meet~~manage its ~~capital and operating commitments. See Note 2~~fleet size, including opportunities to ~~the unaudited Condensed Consolidated Financial Statements for further information on the impacts of the COVID-19.~~accelerate fleet modernization efforts if growth opportunities do not materialize.

As of October 26, 2023, the Company had firm deliveries and options for -7 and -8 aircraft as follows:


	The Boeing Company
	-7 Firm Orders		-8 Firm Orders		-7 or -8 Options	Total
2023	—		85		—	85	(c)
2024	27		53		—	80
2025	54		3		23	80
2026	59		—		26	85
2027	19		46		25	90
2028	15		50		25	90
2029	38		34		18	90
2030	45		—		45	90
2031	45		—		45	90
	302	(a)	271	(b)	207	780

(a) The delivery timing for the -7 is dependent on the FAA issuing required certifications and approvals to Boeing and the Company. The FAA will ultimately determine the timing of the -7 certification and entry into service, and the Company therefore offers no assurances 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 69 -8 deliveries received year-to-date through September 30, ~~2022,~~2023. The Company now plans for approximately 85 -8 aircraft deliveries in 2023.

Based on the Company's ~~total firm and option order book~~revised agreement with Boeing, ~~was 632 aircraft. See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.~~capital commitments associated with its firm orders as of October 26, 2023, were: $133 million remaining in 2023, $2.1 billion in 2024, $1.7 billion in 2025, $1.8 billion in 2026, $2.6 billion in 2027, $2.9 billion in 2028, and $5.3 billion thereafter.

The following table details information on the aircraft in the Company's fleet as of September 30, ~~2022:~~2023:


			Average Age (Yrs)		Number of Aircraft		Number Owned			Number Leased					Average Age (Yrs)			Number of Aircraft			Number Owned				Number Leased
Type	Type	Seats				Type			Seats
737-700	737-700	143		18				431			351		80	737-700			143			18			404	(a)			369	35
737-800	737-800	175	7		207		190			17		737-800	175			8			207			190				17
737 -8	737 -8	175	2		104		75			29		737 -8	175		2			206			177				29
Totals	Totals		13		742		616			126		Totals			12			817			736				81

(a) Included three Boeing 737 Next Generation aircraft in storage as of September 30, 2023.

Critical Accounting Policies and Estimates

~~Table of Contents~~

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.~~

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

~~Revenue Recognition~~

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

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

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

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

5550

Table of Contents

Observed Customer behavior that differs from historical experience can cause actual ticket breakage to differ significantly from estimates. Assumptions about Customer behavior are reviewed frequently and corresponding adjustments are made to breakage estimates, as needed, when observed behaviors differ from historical experience. Assumptions about Customer behavior can be impacted by several factors including, but not limited to: fare increases, fare sales, changes to the Company's ticketing policies, changes to the Company’s refund, exchange and unused travel credit policies, seat availability, and economic factors. The Company’s estimation techniques have been consistently applied from year to year; however, as with any estimates, actual ticket breakage may vary from estimated amounts.

~~Table of Contents~~

~~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 boost operational resiliency and to mitigate the risk of an operational disruption recurrence, including with respect to expected benefits;

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

•the Company’s capacity guidance;

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

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

•the Company’s fleet plans, including with respect to fleet modernization, fleet utilization, flexibility benefits, and expected fleet deliveries and retirements, and underlying expectations and dependencies;

•the Company’s expectations regarding passenger demand, revenue trends, and bookings;

•the Company’s labor plans and expectations;

•the Company’s fleet and network-related goals, including without limitation with respect to ~~growth opportunities~~restoring and ~~frequencies, restoration~~better optimizing its network, normalizing the utilization of ~~the Company’s network, reduction of operating costs, further~~its fleet, ~~modernization with less carbon-intensive aircraft,~~operational excellence, driving out inefficiencies, increasing productivity, and ~~fleet utilization;~~improving reliability;

•the Company’s ~~expectations related to its policy change~~goals with respect to ~~the expiration of flight credits;~~returning margins back to historical levels;

•the Company’s plans and expectations with respect to ~~managed business revenues;~~the Customer experience and the Rapid Rewards loyalty program;

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

•the Company’s expectations with respect to 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 or actual acts 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, capacity and operational plans, and other operational plans, strategies, and goals;

•the Company's dependence on its workforce, including its ability to employ and retain sufficient numbers of qualified Employees to effectively and efficiently maintain its operations;

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

Table of Contents

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

•~~any further negative developments related~~the Company's ability to timely and effectively implement, transition, and maintain the ~~COVID-19 pandemic, including, for example,~~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 ~~(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,~~its technology plans, its plans and ~~usage of COVID-19 vaccines; (iii) the impact~~

~~Table of Contents~~

~~of government mandates, directives, orders, regulations, and other governmental actions~~expectations related to ~~COVID-19 on the Company’s business plans~~operational excellence and ~~its ability to retain key Employees; (iv) the extent of the impact of COVID-19 on overall demand for air travel~~reliability, fuel supply, maintenance, environmental sustainability, Global Distribution Systems, and the ~~Company's related business plans and decisions; and (v) the~~ impact ~~of the COVID-19 pandemic~~ on the Company's ~~access~~operations and results of operations of any third party delays or non-performance;

•the Company's ability to ~~capital;~~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 ~~actions~~regulations and other governmental ~~regulations~~actions on the Company's plans, strategies, financial results, and operations;

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

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

•the Company's dependence on third parties, in particular with respect to its fuel supply, and the impact on the Company's operations and results of operations of any third party delays or non-performance; 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 and in this Quarterly Report on Form 10-Q for the quarter ended September 30,~~ 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.

~~Table of Contents~~

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. AtAs of September 30, ~~2022,~~2023, the estimated fair value of outstanding contracts was a net asset of ~~$536~~$487 million.

The Company's credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are in an asset position to the Company. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. As of September 30, ~~2022,~~2023, the Company had ~~nine~~eight counterparties for which the derivatives held were a net asset. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. However, if one or more of these counterparties were in a net liability position to the Company and were unable to meet their obligations, any open derivative contracts with the counterparty could be subject to early termination, which could result in substantial losses for the Company. AtAs of September 30, ~~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 September 30, ~~2022,~~2023, at which such postings are triggered.

Table of Contents

As of September 30, ~~2022, $134~~2023, $100 million in cash collateral deposits were held by the Company from counterparties based on the Company's outstanding fuel derivative instrument portfolio. Due to the types of derivatives held as of September 30, ~~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 September 30, ~~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

~~Table of Contents~~

establish a reserve account to cover such chargebacks and any other disputed charges that might occur. Additionally, cash reserves are required to be established if the Company’s credit rating falls to specified levels below investment grade. Cash reserve requirements are based on the Company’s public debt rating and a corresponding percentage of the Company’s Air traffic liability. As of September 30, ~~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.

~~Table of Contents~~

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"))~~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 September 30, ~~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 September 30, ~~2022,~~2023, at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

Table of Contents

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

~~Except as noted above, there~~There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a–15(f) under the Exchange Act) during the fiscal quarter ended September 30, ~~2022,~~2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

6154

Table of Contents

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 ~~July 11,~~January 7, 2019, a complaint alleging ~~violations~~a violation of the federal Uniformed Services Employment and ~~state laws~~Reemployment Rights Act (“USERRA”) and seeking a certification as a class action was filed against ~~Boeing and~~ the Company in the United States District Court for the ~~Eastern~~Northern District of ~~Texas in Sherman ("Sherman Complaint").~~California. The complaint alleges that ~~Boeing and~~ the Company ~~colluded to conceal defects with~~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 ~~Boeing 737 MAX ("MAX") aircraft in violation~~plaintiff alleges are “comparable” forms of ~~the Racketeer Influenced~~leave under USERRA and ~~Corrupt Organization Act ("RICO") and also asserts related state law claims based upon the same alleged facts.~~its implementing regulations. 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,~~declaratory and ~~March 13, 2019. The complaint generally seeks money damages, equitable monetary relief,~~ injunctive relief, ~~declaratory relief,~~damages, liquidated damages, interest, and attorneys’ fees, expert fees, and ~~other~~litigation 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 granted the plaintiff’s motion for class certification and 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,~~a class comprised of ~~(i) those~~current or former Employees who, ~~purchased tickets (without being reimbursed)~~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 ~~flights on Southwest Airlines during~~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 ~~period,~~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 ~~those whose flights were solely~~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 ~~routes where,~~substantially the same claims at issue in this action. The Ninth Circuit issued its order in Clarkson on February 1, 2023, reversing the ~~time~~district court’s grant of summary judgment and remanding the ~~ticket~~Clarkson case to the District Court with instructions to consider the “pay during leave” issue in the first instance.

6255

Table of Contents

purchase(s), a MAX plane was not scheduled for use (or actually used) and had not previously been used, (ii) those who reimbursed a Southwest Airlines ticket purchaser and thus bore the economic burden for a Southwest Airlines ticket for a flight meeting the preceding criteria set forth in (i) above, (iii) those who purchased tickets (without being reimbursed) for flights on American Airlines during the class period, except for those whose flights were solely on routes where, at the time of ticket purchase(s), a MAX plane was not scheduled for use (or actually used) and had not previously been used, and (iv) those who reimbursed an American Airlines ticket purchaser and thus bore the economic burden for an American Airlines ticket for a flight meeting the preceding criteria set forth in (iii) above. On September 17, 2021, the Company filed a petition for permission immediately to appeal the class certification ruling to the Fifth Circuit Court of Appeals. Boeing also filed such a petition. Plaintiffs filed their oppositions to the petitions on September 27, 2021. On September 30, 2021, the Fifth Circuit Court of Appeals granted the Company (and Boeing) permission to appeal the class certification ruling. On December 22, 2021, in response to a motion to stay the trial court proceedings filed by the Company and Boeing, the Fifth Circuit stayed all proceedings, including the pursuit of any discovery, in the trial court pending disposition of the class certification appeal by the Fifth Circuit. Following full briefing on the merits of the appeal, a three-judge panel of the Fifth Circuit heard oral argument of the appeal on July 5, 2022, and the Company is awaiting a decision from the Fifth Circuit. The Company denies all allegations of wrongdoing, believes the ~~plaintiffs'~~plaintiff’s positions are without merit, and intends to ~~continue~~ vigorously ~~defending~~defend itself in all respects.

On February 19, 2020, a complaint alleging violations of federal securities laws and seeking certification as a class action was filed against the Company and certain of its officers in the United States District Court for the Northern District of Texas in ~~Dallas.~~Dallas (the "2020 Securities Litigation"). 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~~2020. On September 20, 2023, the District Court issued an opinion granting the Company's motion ~~is now fully briefed, although~~to dismiss as to all claims. On October 5, 2023, the ~~parties have each supplemented their prior briefing~~District Court entered a final judgment dismissing the suit in its entirety with ~~regard to more recent case holdings in other matters.~~prejudice. 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~~Action, pending the ~~Derivative Action shall have the right to reopen the action following the~~District Court's final resolution of the Company's motion to dismiss in the ongoing ~~litigation~~2020 Securities Litigation brought under the federal securities laws or upon the occurrence of certain other conditions. On October 5, 2023, the District Court entered a final judgment dismissing the 2020 Securities Litigation in its entirety with prejudice. 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 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~~a prior-filed

~~Table of Contents~~

~~Sherman Complaint~~ complaint on appeal in the Fifth Circuit (the "Sherman Complaint"), improper venue, and failure to state a claim, and seeking to have the complaint's class contentions stricken. That motion was fully briefed by both parties and was argued to a United States Magistrate Judge on June 27, 2022. On July 5, 2022, the Magistrate Judge granted the motion in part and ordered the case stayed until the issuance of the Fifth Circuit's opinion in the Sherman Complaint. On November 28, 2022, the parties jointly notified the Court of the Fifth Circuit's decision regarding the Sherman Complaint. On March 23, 2023, the parties jointly notified the Court of the dismissal of the Sherman Complaint for lack of jurisdiction. The Company denies all allegations of wrongdoing, believes the plaintiffs' positions are without merit, and intends to 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,

Table of Contents

2020, and December 31, 2022. The complaints assert claims under Sections 10(b) and 20 of the 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 three of the parties seeking appointment have continued to contest the issue. On July 17, 2023, the Court signed an order consolidating the two federal securities cases into the first-filed suit and also appointed plaintiff Michael Berry as lead plaintiff in the consolidated case, with his counsel of record to serve as lead counsel and liaison counsel. On September 15, 2023, the lead plaintiff filed an amended complaint that expanded the class period to include persons who purchased or otherwise acquired the Company's common stock between February 4, 2020, and March 14, 2023, while continuing to assert claims under Sections 10(b) and 20 of the Exchange Act based on alleged misstatements regarding the Company's internal technology and alleged vulnerability to large-scale flight disruptions. 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. On June 13, 2023, a shareholder derivative suit was filed against certain of the Company’s current and former officers and directors in the 14th Judicial District Court of Dallas County, Texas, asserting claims for damages from alleged breach of fiduciary duty, waste of corporate assets, and unjust enrichment derivatively on the Company’s behalf against the individual defendants based on similar factual allegations as contained in the demand letters and in the federal class action complaints. On June 15, 2023, a second shareholder derivative suit was filed against certain of the Company’s current and former officers and directors in the United States District Court for the Northern District of Texas, asserting claims under Section 14(a) of the Exchange Act and for damages from alleged breach of fiduciary duty, indemnification, and unjust enrichment derivatively on the Company’s behalf against the individual defendants based on similar factual allegations as contained in the demand letters and in the federal class action complaints. The Company and its Board of Directors intend to address the derivative and books and records demands and the shareholder derivative suits in accordance with the applicable Texas statutes governing such demands and litigation. Pursuant to those statutes, a committee of independent and disinterested directors has been appointed to conduct an inquiry regarding the allegations in the derivative suits and derivative demand letters.

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. On October 27, 2023, the Department of Transportation notified the Company that it has determined the Company failed to provide adequate customer service assistance, prompt flight status notifications, and proper and prompt refunds and that the assessment of a civil penalty is warranted. The Company intends to engage with the Department of Transportation to resolve the matter, which may involve payment of a civil penalty.

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. Nevertheless, an adverse outcome for any of these matters could be material.

6457

Table of Contents

Item 1A. Risk Factors

~~Except for the additional risk factor set forth below, there~~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.~~

Conflicting federal, state, and local laws and regulations may impose additional requirements and restrictions on the Company’s operations, which could increase the Company’s operating costs, result in service disruptions, and increase litigation risk.

Airlines are subject to extensive regulatory and legal requirements at the federal, state, and local levels that require substantial compliance costs and that may be inconsistent with each other. These laws could affect the Company’s relationship with its workforce and cause its expenses to increase without an ability to pass through these costs.In recent years, the airline industry has experienced an increase in litigation asserting the application of state and local employment laws, particularly in California. On June 30, 2022, the U.S. Supreme Court denied review of the Ninth Circuit’s ruling in ~~Bernstein v. Virgin America, Inc.~~, which held that federal law did not preempt the California state meal-and-rest-break regulations for flight attendants at issue. The Company is a defendant in multiple proceedings asserting wage and hour claims with respect to certain employees who work in, or are based in, California.~~The~~ ~~Bernstein~~ decision may adversely affect the Company’s defenses in some or all of those proceedings and may give rise to additional litigation in these or other areas previously believed to be preempted by federal law.Application of state and local laws to the Company’s operations may conflict with federal laws—or with the laws of other states and local governments—and may subject the Company to additional requirements and restrictions.Moreover, application of these state and local laws may result in operational disruption, increased litigation risk, and negative effects on the Company’s collective bargaining agreements. Adverse litigation results in any of these cases could adversely impact the Company’s operational flexibility and result in the imposition of damages and fines, which could potentially be significant.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~~(a) On October 25, 2023, the Company entered into Supplemental Agreement No. 20 (the “Supplement”) to its Purchase Agreement No. 3729 with Boeing relating to the Company's purchase of -8 and -7 aircraft (collectively, “MAX aircraft”). Pursuant to the Supplement, the Company added 108 firm orders and 108 MAX aircraft options. The Supplement also amended the order book’s delivery schedule to better allocate deliveries from 2023 through 2031.

The Company continues to estimate its 2023 capital spending to be approximately $3.5 billion. This assumes approximately $2.3 billion in aircraft capital spending and $1.2 billion in non-aircraft capital spending, which includes tens of millions in operational investments related to the Company’s winter operations plan. The Company continues to estimate its total annual capital spending to be approximately $4 billion, on average, for the five years 2023 through 2027.

As a result of the Supplement, the Company has the following contractual firm deliveries and options for -7 and -8 aircraft:

New 737 Contractual Order Book as of October 26, 2023:


	The Boeing Company
	-7 Firm Orders		-8 Firm Orders		-7 or -8 Options	Total
2023	—		85		—	85	(c)
2024	27		53		—	80
2025	54		3		23	80
2026	59		—		26	85
2027	19		46		25	90
2028	15		50		25	90
2029	38		34		18	90
2030	45		—		45	90
2031	45		—		45	90
	302	(a)	271	(b)	207	780

6558

Table of Contents

(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 69 -8 deliveries received year-to-date through September 30, 2023. The Company now plans for approximately 85 -8 aircraft deliveries in 2023.

The foregoing summary of the Supplement does not purport to be complete and is qualified in its entirety by reference to the full text of the Supplement, a copy of which will be filed with the Company's Annual Report on Form 10-K for the fiscal year ending December 31, 2023.

(b) None

Table of Contents

Item 6. Exhibits


3.1			Restated Certificate of Formation of the Company, effective May 18, 2012 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (File No. 1-7259)).
3.2			~~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			~~Fourth~~Fifth Amendment to Revolving Credit Facility Agreement dated as of August 3, 2016, as amended by the First Amendment dated as of March 30, 2020, the Second Amendment dated as of November 23, 2020, ~~and~~the Third Amendment dated as of July 28, 2021, and the Fourth Amendment dated as of July 19, 2022, among Southwest Airlines Co., the banks party thereto, JPMorgan Chase Bank, N.A., as Paying Agent and Collateral Agent, and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Co-Administrative Agents, dated as of ~~July 19, 2022.~~
~~10.2~~			~~Supplemental Agreement No. 18 to Purchase Agreement No. 3729, dated December 13, 2011, between The Boeing Company and the Company. (1)~~ August 4, 2023.
31.1			Rule 13a-14(a) Certification of Chief Executive Officer.
31.2			Rule 13a-14(a) Certification of Chief Financial Officer.
32.1			Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. ~~(2)~~(1)
101.INS			XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH			Inline XBRL Taxonomy Extension Schema Document.
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

(1) ~~Certain confidential information contained in this agreement has been omitted because it is both not material and is of the type that the registrant treats as private or confidential.~~

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

6660

Table of Contents

SIGNATURES

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


	SOUTHWEST AIRLINES CO.

October ~~28, 2022~~27, 2023	By:	/s/ Tammy Romo

		Tammy Romo
		Executive Vice President & Chief Financial Officer
		(On behalf of the Registrant and in
		her capacity as Principal Financial
		and Accounting Officer)

6761


(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


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

Total	$	536	$	280