What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-27 compared with 2020-10-27 · 337 added, 495 removed, 219 unchanged (79% of the section changed)

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, 2020 and 2019 are included below.

Relevant comparative operating statistics for the three months ended March 31, 2021 and 2020 are included below.

The Company provides these operating statistics because they are commonly used in the airline industry and, as such, allow readers to compare the Company’s performance against its results for the prior year period, as well as against the performance of the Company’s peers.

Three months ended September 30,

In the first quarter of both years, most of these operating statistics were significantly impacted by the COVID-19 pandemic and decisions the Company made as a result of the pandemic.

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

Three months ended March 31,

2021 2020 Change

29 unchanged sentences

Active fulltime equivalent Employees 56,051 (j) 60,922 (8.0) %

Aircraft at end of period 734 (k)(l) 752 (k) (2.4) %

Nine months ended September 30,

2020 2019 Change

Revenue passengers carried (000s) 41,622 99,758 (58.3) %

Enplaned passengers (000s) 51,833 121,480 (57.3) %

Revenue passenger miles (RPMs) (in millions) (a)

41,437 98,121 (57.8) %

Available seat miles (ASMs) (in millions) (b)

79,701 117,250 (32.0) %

Load factor (c)

52.0 % 83.7 % (31.7) pts.

Average length of passenger haul (miles) 996 984 1.2 %

Average aircraft stage length (miles) 740 746 (0.8) %

Trips flown 696,586 1,022,311 (31.9) %

Seats flown (000s) (d)

106,271 154,312 (31.1) %

Seats per trip (e)

152.6 150.9 1.1 %

Average passenger fare $ 144.22 $ 154.99 (6.9) %

Passenger revenue yield per RPM (cents) (f)

14.49 15.76 (8.1) %

Operating revenues per ASM (cents) (g)

8.83 14.24 (38.0) %

Passenger revenue per ASM (cents) (h)

7.53 13.19 (42.9) %

Operating expenses per ASM (cents) (i)

Aircraft at end of period (k)(l)

730 742 (1.6) %

Operating expenses per ASM, excluding fuel (cents) 10.26 9.52 7.8 %

Operating expenses per ASM, excluding fuel and profitsharing (cents) 10.26 9.18 11.8 %

Fuel costs per gallon, including fuel tax $ 1.52 $ 2.09 (27.3) %

Fuel costs per gallon, including fuel tax, economic $ 1.56 $ 2.09 (25.4) %

Fuel consumed, in gallons (millions) 985 1,550 (36.5) %

Active fulltime equivalent Employees 57,931 (j) 60,590 (4.4) %

Aircraft at end of period 734 (k)(l) 752 (k) (2.4) %

(a) A revenue passenger mile is one paying passenger flown one mile.

13 unchanged sentences

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 10,684 Employees participating in the Extended Emergency Time Off program as of September 30, 2020.

(j) Included 8,164 Employees participating in the Extended Emergency Time Off program as of March 31, 2021.

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

(k) Included 34 Boeing MAX 737 aircraft in long-term storage.

(k) Included 7 Boeing 737 MAX aircraft in temporary storage as of March 31, 2021, and 34 Boeing 737 MAX aircraft in long term storage as of March 31, 2020.

See Note 11 to the unaudited Condensed Consolidated Financial Statements for further information.

(l) Included 70 Boeing 737 Next Generation aircraft removed from active fleet and placed in long-term storage as of September 30, 2020.

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

Financial Overview

As a result of concerns related to the COVID-19 pandemic, the Company began to see a negative impact on bookings for future travel in late February 2020, which quickly accelerated during the remainder of first quarter and continued throughout second and third quarters.

In late February 2020, the Company began to see a negative impact from the COVID-19 pandemic, which quickly accelerated during first quarter 2020 and continued throughout 2020.

The Company continued to experience significant negative impacts to passenger demand and bookings through the entirety of first quarter 2021, although modest improvements in leisure bookings were noted in mid-February 2021 that steadily improved through March 2021.

The Company's financial results in both years, on both a GAAP and Non-GAAP basis, were significantly impacted by the pandemic and resulting effect on demand and passenger bookings.

In addition, GAAP results in first quarter 2021 included $1.2 billion in Payroll Support Program Extension grants.

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

The Company recorded third quarter and year-to-date GAAP and non-GAAP results for 2020 and 2019 as noted in the following tables.

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

Three months ended Nine months ended

(in millions, except per share amounts) September 30, September 30,

GAAP 2020 2019 Percent Change 2020 2019 Percent Change

Operating income (loss) $ (1,411) $ 819 n.m.

$ (2,648) $ 2,292 n.m.

Net income (loss) $ (1,157) $ 659 n.m.

$ (2,166) $ 1,787 n.m.

Net income (loss) per share, diluted $ (1.96) $ 1.23 n.m.

$ (3.89) $ 3.29 n.m.

Operating income (loss) $ (1,577) $ 819 n.m.

$ (3,841) $ 2,292 n.m.

Net income (loss) $ (1,173) $ 659 n.m.

$ (2,751) $ 1,787 n.m.

Net income (loss) per share, diluted $ (1.99) $ 1.23 n.m.

$ (4.95) $ 3.29 n.m.

The significant decrease in both GAAP and non-GAAP Net income (loss), as well as Operating income (loss) and non-GAAP Operating income (loss), year-over-year, for both the quarter and year-to-date periods noted above, was primarily due to the negative impacts of the COVID-19 pandemic on passenger demand and bookings.

These impacts combined to result in a 68.2 percent decrease in Operating revenues in third quarter 2020, and a 57.9 percent decrease in Operating revenues for the nine months ended September 30, 2020.

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

While the Company has historically provided its calculation of non-GAAP return on invested capital (“ROIC”) as a measure of financial performance used by management to quantify the Company’s effectiveness in generating returns relative to the capital invested in the business, the Company has chosen not to present ROIC in this Form 10-Q and does not expect to present it again until and if the operating environment normalizes sufficiently to return the Company to operating income instead of operating loss.

The COVID-19 pandemic has materially and adversely affected passenger demand and bookings, thereby materially and adversely affecting operating income and cash flows from operations.

As a result, management ceased focus on ROIC and instead has focused on bolstering the Company’s liquidity through cost reductions, financings, sale-leaseback transactions, and securities offerings.

In this environment, management believes ROIC is not a meaningful measure of financial performance, nor is it being used by management to evaluate the business in the current environment.

See Liquidity and Capital Resources for a discussion of the Company’s liquidity.

COVID-19 Pandemic

See Notes 2 and 8 to the unaudited Condensed Consolidated Financial Statements for further information on the significant impacts to the Company’s operations, financial performance, and liquidity from the COVID-19 pandemic.

Since March 2020, the Company has experienced significant year-over-year negative impacts to passenger demand and bookings due to the COVID-19 pandemic.

As previously disclosed, the Company was encouraged by

improvements in May and June 2020 leisure passenger traffic trends, compared with March and April 2020;

however, the improving trends in revenue and bookings stalled in early July 2020, and remained depressed for the remainder of the month, due to the rise in COVID-19 cases.

In August and September 2020, the Company experienced modest improvements in close-in leisure passenger demand and bookings, compared with July 2020.

Thus far, the Company continues to experience modest improvements in close-in leisure passenger demand in October 2020 and bookings for November 2020.

The following table presents selected preliminary estimates of operating revenue, load factor, and capacity for October and November 2020.

October 2020 November 2020

Operating revenue year-over-year Down 65% to 70% Down 60% to 65%

Previous estimation Down 65% to 75% (a)

In response to the far-reaching impacts of the COVID-19 pandemic, the Company took, and continues to assess and modify, measures to support the well-being of both its Employees and passengers, including procedures and policies intended to maintain cleanliness on aircraft and at facilities, and mitigate the spread of the virus.

The Company also continues to monitor guidelines and recommendations from the Centers for Disease Control and Prevention applicable to the Company’s daily operations, as well as how the majority of the Company’s office and clerical Employees work on a daily basis.

As detailed in Note 2 to the unaudited Condensed Consolidated Financial Statements, in connection with the major negative impact of COVID-19 on air carriers, in 2020, the Company received significant financial assistance from the U.S.

Department of Treasury ("Treasury") pursuant to the Payroll Support Program established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").

In January 2021, the Company entered into definitive documentation with Treasury for further payroll support under the Consolidated Appropriations Act, 2021 (the "Payroll Support Program Extension").

As of March 31, 2021, amounts received under the Payroll Support Program Extension were approximately $1.7 billion and a portion has been recognized in the financial statements as a grant to directly offset qualifying payroll expenses incurred by the Company, including specified benefits, between January 2021 and March 2021.

As consideration for the Payroll Support Program Extension, during first quarter 2021, the Company issued a promissory note (the "PSP2 Note") in favor of Treasury in the aggregate amount of $488 million and issued warrants (each, a "PSP2 Warrant") valued at a total of $23 million to purchase up to an aggregate of 1.1 million shares of the Company's common stock, subject to adjustment pursuant to the terms of the PSP2 Warrants.

Of the approximate $1.7 billion of further payroll support proceeds as of March 31, 2021, $1.2 billion consisted of a grant that does not require repayment.

The grant of $1.2 billion was allocated on a pro-rata basis as a contra-expense line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) during first quarter 2021, with the remaining $23 million allocated to the value of PSP2 Warrants issued from the Company to Treasury.

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

On April 23, 2021, the Company received an additional $259 million related to the Payroll Support Program Extension, for which the Company provided Treasury consideration in the form of an increase of the PSP2 Note in an amount of $78 million and a PSP2 Warrant to purchase up to 168 thousand shares of the Company's common stock under the PSP2 Warrant Agreement.

After taking into account the additional support under the Payroll Support Program Extension, the Company has received $2.0 billion of payroll support under the Payroll Support Program Extension, for which the Company has provided Treasury with a PSP2 Note in the aggregate amount of $566 million and PSP2 Warrants to purchase up to 1.2 million shares of the Company's common stock.

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

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

On April 23, 2021, the Company entered into definitive documentation with Treasury for further payroll support under the American Rescue Plan Act of 2021 (the "PSP3 Payroll Support Program").

Amounts received or to be received under the PSP3 Payroll Support Program are expected to total approximately $1.9 billion, all or a portion of which will again be utilized to directly offset qualifying payroll expenses incurred by the Company, including specified benefits, through at least September 30, 2021.

Of this total, approximately $1.3 billion consists of a grant that will not require repayment.

The Company currently expects this grant of $1.3 billion will be classified as a contra-expense line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) during second quarter and third quarter 2021.

As consideration for the PSP3 Payroll Support Program, the Company is expected to issue a promissory note in favor of Treasury in the aggregate amount of approximately $526 million and issue warrants (each, a "PSP3 Warrant") valued at a total of approximately $18 million to purchase up to an aggregate of approximately 899 thousand shares of the Company's common stock, subject to adjustment pursuant to the terms of the PSP3 Warrants.

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

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

During second quarter 2020, the Company introduced Voluntary Separation Program 2020 and the Extended Emergency Time Off ("Extended ETO") program which helped closer align staffing to reduced flight schedules and enabled the Company to avoid involuntary furloughs and layoffs.

Employees had until July 15, 2020, to determine whether to participate in one of these programs, and approximately 15,000 Employees elected to do so.

The Company continues to evaluate and evolve its Extended ETO program in 2021.

In accordance with applicable accounting guidance, the Company recorded a total charge of $1.4 billion in 2020 related to the special termination benefits for Employees who had accepted the Company's offer to participate in its Voluntary Separation Program 2020 and the special benefits for Employees who participated in its Extended ETO program.

The accrual is being reduced as program benefits are paid or as it becomes no longer probable that Employees will remain on leave for their elected terms.

This program has allowed the Company to reduce its fixed cost structure in the near-term, while maintaining the ability to adjust to a recovery in travel demand.

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

As a result of these voluntary programs, the Company's salaries, wages, and benefits costs were lowered by approximately $412 million in first quarter 2021.

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

Thus far, the Company continues to experience improvements in leisure passenger demand and bookings for April and May 2021 travel, with expectations of improving passenger traffic and fares compared with March 2021.

The Company continues to experience an increase in bookings farther out on the booking curve, with approximately 35 percent and 20 percent of anticipated bookings currently in place for June and July, respectively.

These represent fairly typical future booking patterns;

however, business travel continues to significantly lag leisure and is expected to have a significant negative impact on close-in demand and average passenger fares.

The following table presents selected preliminary estimates of operating revenue, load factor, and capacity for April and May 2021:

April 2021 Estimated

Operating revenue compared with 2019 (a) Down 40% to 45% Down 35% to 40%

Previous estimation (b) (b)

Load factor 75% to 80% 75% to 80%

Previous estimation 45% to 55% (a)

Capacity year-over-year Down ~45% Down ~35%

Previous estimation Down 40% to 45% Down 35% to 40%

(a) No previous estimation provided.

The Company estimates its December 2020 capacity to decrease in the range of 40 to 45 percent, year-over-year.

The Company estimates its fourth quarter 2020 capacity to decrease approximately 40 percent, year-over-year.

Excluding Fuel and oil expense, special items, and prior year profitsharing expense, fourth quarter 2020 operating expenses are expected to decrease in the range of 20 to 25 percent, year-over-year, representing a sequential improvement compared with the Company's third quarter 2020 operating expenses year-over-year decrease in operating expenses, primarily due to lower capacity and higher cost savings driven by its voluntary separation and extended leave programs.

Previous estimation (b) (b)

ASMs year-over-year Up ~83% Up ~127%

Previous estimation (b) (b)

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

(b) Remains unchanged from the previously provided estimation.

The Company estimates its June 2021 capacity to decrease approximately 4 percent as compared with June 2019.

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

Excluding Fuel and oil expense, special items, and profitsharing expense, the Company's second quarter 2021 operating expenses are expected to increase in the range of 10 to 15 percent, year-over-year, which includes an estimated $325 million of salaries, wages, and benefits cost savings from voluntary separation and extended leave programs.

See Note 2 to the unaudited Condensed Consolidated Financial Statements for further description of these programs.

The year-over-year projections do not reflect the potential impact of Fuel and oil expense, special items, and profitsharing expense in both years because the Company cannot reliably predict or estimate these items or expenses or their impact to its financial statements in future periods, especially considering the significant volatility of the Fuel and oil expense line item.

Second quarter 2021 operating expenses, excluding fuel and oil expense, special items, and profitsharing, are also expected to increase compared with first quarter 2021, with 60 to 70 percent of the sequential increase attributable to variable, flight-driven expenses as capacity is expected to increase to near-2019 levels by June 2021.

These variable, flight-driven cost increases are primarily in salaries, wages, and benefits due to staffing increases;

maintenance expense to return aircraft to revenue service, along with higher flight-driven maintenance expenses as flight levels increase;

landing fees;

and personnel, passenger, and revenue-related costs.

In addition, the Company is experiencing cost increases primarily due to airport cost inflation;

higher aircraft ownership costs due to MAX deliveries;

and certain favorable tax and insurance settlements realized in first quarter 2021 operating expenses that are non-recurring in second quarter 2021.

Despite increasing capacity and operating expenses, both sequentially and year-over-year, second quarter 2021 operating expenses are estimated to remain below second quarter 2019 levels.

The projections do not reflect the potential impact of Fuel and oil expense, special items, and profitsharing expense because the Company cannot reliably predict or estimate these items or expenses or their impact to its financial statements in future periods, especially considering the significant volatility of the Fuel and oil expense line item.

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

In response to the far-reaching impacts of the COVID-19 pandemic, the Company has taken significant measures to enhance and expand upon its already generous and flexible ticketing policies, and to support the well-being of both its Employees and passengers on a daily basis.

These have included, but are not limited to the following:

• Travel funds created because of a flight cancellation between March 1, 2020 and September 7, 2020, will now expire September 7, 2022.

• Travel funds that would otherwise have expired between March 1, 2020 and September 7, 2020, will now expire September 7, 2022.

• Rapid Rewards® loyalty program members who have travel funds that were set to expire, or funds that were created between March 1, 2020 and September 7, 2020, have the option to convert those travel funds into Rapid Rewards points at the same rate as they are able to purchase a ticket with points today, through December 15, 2020.

• All Rapid Rewards loyalty program members' qualifying progress on April 1, 2020 received a "boost" of 15,000 tier qualifying points and 10 flight credits toward A-List and A-List Preferred status, and 25,000 Companion Pass qualifying points and 25 flight credits toward Companion Pass status.

• All current A-List and A-List Preferred tier status members on April 1, 2020 earned status has been extended through December 31, 2021.

• Companion pass members earned status on April 1, 2020 has been extended through June 30, 2021.

• Enhanced aircraft cleaning procedures have been applied since March 4, 2020.

• Procedures and protocol have been implemented with the requirement that Employees and Customers (age two or over) must wear masks or face coverings.

• Measures to support physical distancing, including messaging to Customers and Employees, and modified boarding procedures, have been implemented.

• The number of seats available for sale on each flight has been limited to allow for the middle seat to remain open through November 2020.

• A Customer health declaration, which must be acknowledged prior to travel, has been implemented.

• An Employee health declaration, which all Employees are expected to acknowledge, has been implemented.

• The Company continues to offer the ability to work remotely to most of the Company’s office and clerical Employees, including the vast majority of its more than 6,000 Employees at the Company’s headquarters campus in Dallas, Texas.

The Company continues to communicate with its entire workforce on the employment of best practices and Centers for Disease Control and Prevention guidelines in the current environment while at work, especially considering that a large portion of its Employees come into direct contact with Customers on a daily basis.

On October 22, 2020, the Company announced that it will resume selling all available seats for travel beginning December 1, 2020.

As detailed in Note 2 to the unaudited Condensed Consolidated Financial Statements, in connection with the major negative impact of COVID-19 on air carriers, the Company has been receiving significant financial assistance from the U.S.

Department of Treasury (the "Treasury") pursuant to the Payroll Support Program established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act" or the "Act").

Amounts received under the Payroll Support Program were approximately $3.4 billion and were utilized to directly offset payroll expenses incurred by the Company, including specified benefits, between April 2020 and September 2020.

Of this total, $2.4 billion consists of a grant that does not require repayment.

Approximately $2.3 billion of the direct payroll support of $2.4 billion was allocated on a pro-rata basis as a contra-expense line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) between second and third quarters of 2020, with the remaining $40 million allocated to the value of warrants issued from the Company to the Treasury.

In accordance with restrictions contained in the CARES Act, and except as permitted or required under the Payroll Support Program, the Company did not (1) conduct involuntary terminations or furloughs or (2) reduce the salaries, wages, or benefits of any Employee, in each case between the date of the Payroll Support Program agreement and September 30, 2020.

During second quarter 2020, the Company introduced Voluntary Separation Program 2020 and the Extended Emergency Time Off ("Extended ETO") program with the goal of aligning staffing to reduced flight schedules and to avoid involuntary furloughs and layoffs to the extent possible.

Approximately 15,200 Employees, or 25 percent of the Company's workforce, are participating in one of these voluntary programs:

approximately 4,200 elected Voluntary Separation Program 2020, and approximately 11,000 are participating in the Extended ETO program.

Employees had until July 15, 2020, to elect to participate in these voluntary programs.

In accordance with applicable accounting guidance, the Company accrued a charge of $307 million in second quarter 2020 and $485 million in third quarter 2020 related to the special termination benefits for Employees who had accepted the Company's offer to participate in Voluntary Separation Program 2020, which will be reduced as program benefits are paid.

The Company also accrued a charge of $613 million in third quarter 2020 related to special benefits for Employees who had accepted the Company's offer to participate in its Extended ETO program.

This program will allow the Company to reduce its fixed cost structure in the near-term, while maintaining the ability to adjust to a recovery in travel demand.

If all voluntary program requests are granted, the total potential voluntary program costs could be up to approximately $1.7 billion;

however, the Company did not accrue approximately $300 million of estimated voluntary program costs beyond February 2022, or approximately 18 months, based on the uncertainty of its future capacity levels and required staffing.

Based primarily on third quarter 2020 cash payments made of approximately $195 million, the remaining accrual balance related to Voluntary Separation Program 2020 and Extended ETO was $1.2 billion as of September 30, 2020.

See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.

As a result of these voluntary programs, the Company's salaries, wages, and benefits costs were lowered by $143 million in third quarter 2020.

In addition, the Company expects the

cost savings from these programs to be approximately $400 million in fourth quarter 2020 and approximately $1.1 billion in 2021, with Voluntary Separation Program 2020 run-rate cost savings of approximately $500 million in 2022 and beyond.

If there are no Employees recalled early from the Extended ETO program, the net present value of the program through 2025 exceeds $2 billion.

These voluntary programs are expected to allow the Company to significantly reduce its labor costs and cash burn immediately, while preserving jobs and maintaining the flexibility to more quickly adjust to a recovery in travel demand.

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

As the pandemic and its devastating effects on the industry continue, the Company continues to urge federal leaders to pass an economic relief package that includes a clean, six-month extension of the CARES Act Payroll Support Program to further protect jobs and crucial air travel to communities across the Nation.

Based on the risk that such a stimulus package may not occur, the Company has communicated its intent to implement temporary pay rate reductions to its non-contract Employees and has begun negotiations with its Union Leaders to reach agreement on reasonable, temporary concessions for union contract Employees beginning January 1, 2021, in return for no layoffs or furloughs through the end of 2021, barring unforeseen and catastrophic changes to its business.

These pay reductions and concessionary efforts would represent cost savings of at least $500 million beginning in 2021.

In the event that the Company is unable to reach agreement on temporary concessions with Unions, it plans to—as a last resort—furlough Employees in early 2021.

If the federal government extends the much-needed Payroll Support Program for the airline industry, the Company intends to discontinue or reverse these pay reduction and concessionary efforts through 2021.

Company Overview

The Company ended third quarter 2020 with 734 aircraft in its fleet.

In response to capacity reductions due to the effects of the COVID-19 pandemic, the Company currently has approximately 100 aircraft in long-term storage, including the Company's 34 Boeing 737 MAX 8 aircraft that were grounded as of March 13, 2019, to comply with the FAA's emergency order issued for all U.S.

airlines to ground all MAX aircraft, and is managing 50 to 150 aircraft in short-term parking to provide greater flexibility to adapt to the seasonal demand patterns of the fourth quarter.

See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information on the effects of the COVID-19 pandemic.

The Company has not received any MAX aircraft deliveries since February 2019, and Boeing is not currently delivering new MAX aircraft.

See Note 12 to the unaudited Condensed Consolidated Financial Statements for further information.

The Company returned two leased Boeing 737-700 aircraft and retired one owned 737-700 aircraft during third quarter 2020.

The Company expects to return three leased 737-700 aircraft during fourth quarter 2020.

Upon a rescission of the FAA order to ground the MAX fleet, the Company will work closely with Boeing and the FAA to safely reintroduce the 34 MAX 8 aircraft currently in its fleet into service and estimates it will take the Company several months to comply with applicable FAA requirements, including all necessary Pilot simulator training.

Regulatory approval of MAX return to service is subject to Boeing's ongoing work with the FAA, who will determine the timing of MAX return to service.

The MAX will likely remain out of the Company's published flight schedules until at least second quarter 2021.

On November 18, 2020, the Federal Aviation Administration (the "FAA") issued official requirements to enable airlines to return the Boeing 737 MAX to service.

The Company has worked to meet the FAA's requirements by modifying certain operating procedures, implementing enhanced Pilot training requirements, installing FAA-approved flight control software updates, and completing other required maintenance tasks specific to the MAX aircraft.

The Company returned the MAX to service on March 11, 2021, after the Company met all FAA requirements and Pilots received updated, MAX-related training.

In April 2021, the Company removed 32 of its MAX aircraft from service due to a Boeing production issue related to the electrical power system on a subset of MAX aircraft.

Upon learning of the issue, the Company immediately removed these aircraft from service, out of an abundance of caution, and is currently awaiting more guidance from Boeing and the FAA regarding the appropriate corrective actions.

The Company has covered impacted flights with other aircraft in the fleet and has not experienced significant operational disruptions.

Once the Company receives formal guidance from Boeing and the FAA, the Company anticipates the actions necessary to return the affected 32 aircraft to service will take two to

three days per aircraft and several weeks in total.

The Company is in the process of returning its stored 737-700 aircraft to revenue service to support flight schedules in summer 2021 and beyond.

On March 24, 2021, the Company entered into Supplemental Agreement No.

12 (the "Supplement") to its aircraft purchase agreement with Boeing relating to the Company's purchase of Boeing 737 MAX 7 and 737 MAX 8 aircraft.

Pursuant to the Supplement (i) the Company added 100 firm orders for the MAX 7, with the first 30 to be delivered in 2022;

(ii) the Company added 155 MAX aircraft options;

(iii) the order book was extended to include deliveries through 2031;

and (iv) the Company converted 70 MAX 8 firm orders to MAX 7 firm orders.

The Supplement also includes certain confidential credits, discounts, and other concessions provided to the Company by Boeing.

Based on the Company's existing delivery schedule with Boeing, as reflected in Note 10 to the unaudited Condensed Consolidated Financial Statements, the Company's contractual aircraft capital spending commitments associated with firm orders for all years 2021 through 2026, which consists of 169 MAX firm orders from Boeing (135 MAX 7 and 34 MAX 8 aircraft), are approximately $5.1 billion.

The Company’s capital commitments associated with its existing firm orders are as follows:

none for 2021 (due to previously agreed upon delivery credits provided by The Boeing Company to the Company due to the settlement of 2020 estimated damages relating to the FAA grounding of the 737 MAX aircraft and progress payments made to date on undelivered aircraft) and approximately $700 million in 2022 (net of progress payments made on undelivered MAX aircraft and previously agreed upon delivery credits provided by Boeing to the Company).

The Company estimates its 2021 capital expenditures to be approximately $500 million, primarily driven by technology, facilities, and operational investments.

See Note 10 to the unaudited Condensed Consolidated Financial Statements for further information.

The Company offers no assurances that current estimations and timelines are correct.

Any changes to current estimations could result in further delays in MAX aircraft deliveries, additional flight schedule adjustments and reductions beyond 2020, and additional financial damages.

As previously disclosed, the Company has an interim agreement with Boeing to take no more than 48 MAX aircraft through December 31, 2021.

The timeline and quantity of deliveries through 2021 is not yet finalized.

The Company will continue discussions with Boeing to restructure its aircraft order book and make any further adjustments to the delivery schedule as circumstances related to the MAX groundings and COVID-19 pandemic evolve.

The Company also has flexibility with its retirement plans of Boeing 737-700 aircraft, and continues to plan for multiple scenarios for its fleet and capacity plans.

The FAA's timetables and directives will determine the timing of MAX return to service, and the timing of future aircraft deliveries is subject to change.

The Company offers no assurances that current estimations and timelines are correct.

The Company has published its flight schedule through April 11, 2021.

The Company previously announced its intention to begin service to both Miami International Airport and Palm Springs International Airport, on November 15, 2020, as well as new service that will commence on December 19, 2020, to both Montrose Regional Airport (Telluride and Crested Butte) and Yampa Valley Regional Airport (Steamboat Springs).

The addition of these airports is intended to further strengthen the Company's route system in Florida, California, and Colorado.

The Company also recently announced its intention to begin service to Chicago O'Hare International Airport, and return to Houston's George Bush Intercontinental Airport, in first half 2021, which will complement existing service in both cities and reinforce the Company's long-standing commitment to both metropolitan areas.

On October 22, 2020, the Company announced its intention to add service in first half 2021 to Colorado Springs Municipal Airport, Savannah/Hilton Head International Airport in Georgia, and a return to Jackson-Medgar Wiley Evers International Airport in Mississippi.

The Company is leveraging additional airports in cornerstone cities where its Customer base is large, along with adding easier access to popular leisure-oriented destinations from across the Company's domestic-focused network.

These additional service points on the Company's map are low-risk opportunities it can provide Customers now, all the while better positioning the Company as travel demand rebounds.

As previously reported, the Company suspended international operations in first quarter 2020, and resumed service to Mexico and the Caribbean via Cancun, San Jose del Cabo/Los Cabos, Montego Bay, and Nassau on July 1, 2020, and Puerto Vallarta, Mexico on October 8, 2020.

In response to new local restrictions by the Bahamian government, the Company temporarily suspended operations to Nassau effective July 22, 2020.

Service to the Company’s other international destinations is expected to resume pending the easing of government restrictions, including resumed service to Punta Cana, Dominican Republic, and Aruba on November 4, 2020, as well as Havana, Cuba on December 6, 2020.

The Company ended first quarter 2021 with 730 aircraft in its fleet.

During first quarter 2021, 20 Boeing 737 MAX aircraft were delivered and the Company returned eight leased 737-700 aircraft.

The Company expects eight additional Boeing 737 MAX aircraft to be delivered by December 31, 2021 and expects to retire up to nine more 737-700 aircraft in 2021.

In response to capacity reductions due to the effects of the COVID-19 pandemic, as of March 31, 2021, the Company had approximately 66 aircraft in temporary storage.

These stored aircraft provide greater flexibility to adapt to the seasonal demand patterns that are currently expected to develop during second quarter 2021.

The Company continues the acceleration of fleet modernization efforts to replace its 737-700 aircraft with the MAX, and the development of tangible steps that are aimed at improving upon the Company's environmental stewardship and supporting the environmental sustainability goal to be carbon neutral by 2050.

See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information on the effects of the COVID-19 pandemic.

The Company has published its flight schedule through November 5, 2021.

The Company is pursuing additional revenue opportunities that utilize idle aircraft and Employees to provide Southwest's legendary Customer Service to new, popular destinations.

The Company is leveraging additional airports in or near cities where its Customer base is large, along with adding easier access to popular leisure-oriented destinations from across its domestic-focused network.

These additional service points on the Company's map are opportunities it can provide Customers now, all while better positioning the Company for a travel demand rebound.

During 2021, the Company has begun service to new destinations including:

• Chicago O'Hare International Airport and Sarasota Bradenton International Airport - February 14, 2021

• Colorado Springs Municipal Airport and Savannah/Hilton Head International Airport - March 11, 2021

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

• Fresno Yosemite International Airport - April 25, 2021

The Company has also announced other new destinations and expected service commencement dates including:

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

• Myrtle Beach International Airport - May 23, 2021

• Bozeman Yellowstone International Airport - May 27, 2021

• Jackson-Medgar Wiley Evers International Airport in Mississippi - June 6, 2021

• Eugene Airport in Oregon - August 29, 2021

• Bellingham International Airport in Washington - Second half 2021

Material Changes in Results of Operations

Comparison of three months ended September 30, 2020 and September 30, 2019

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

Operating Revenues

Total operating revenues for third quarter 2020 decreased by $3.8 billion, or 68.2 percent, year-over-year, to $1.8 billion, due primarily to the sharp decline in passenger demand and bookings, as well as capacity reductions, resulting from the COVID-19 pandemic.

Third quarter 2020 RASM was 6.78 cents, and decreased 52.7 percent, compared with third quarter 2019, primarily driven by a year-over-year Load factor decrease of 38.6 points, and a year-over-year passenger revenue yield decrease of 23.1 percent.

Passenger revenues for third quarter 2020 decreased by $3.8 billion, or 72.2 percent, year-over-year.

Total operating revenues for first quarter 2021 decreased by $2.2 billion, or 51.5 percent, year-over-year, to $2.1 billion, driven primarily by the continued weak Passenger demand and bookings due to the COVID-19 pandemic throughout first quarter 2021.

First quarter 2021 operating revenues per available seat mile (RASM) were 8.86 cents, and decreased 26.0 percent, compared with first quarter 2020, primarily driven by the drop in passenger demand caused by the COVID-19 pandemic, which contributed to the Load factor decrease of 3.4 points, and the passenger revenue yield decrease of 28.4 percent, year-over-year.

Passenger revenues for first quarter 2021 decreased by $2.1 billion, or 55.5 percent, year-over-year.

On a unit basis, Passenger revenues decreased 32.0 percent, year-over-year.

The decrease in Passenger revenues on both a dollar and unit basis was primarily due to the impact of the COVID-19 pandemic, which resulted in significant reductions in capacity and a sharp decline in passenger demand and bookings.

Freight revenues for third quarter 2020 decreased by $1 million, or 2.4 percent, compared with third quarter 2019, primarily due to reduced demand.

Other revenues for third quarter 2020 decreased by $69 million, or 18.8 percent, compared with third quarter 2019.

Freight revenues for first quarter 2021 increased by $4 million, or 10.3 percent, compared with first quarter 2020, primarily due to increased demand as businesses reduce pandemic driven restrictions.

Other revenues for first quarter 2021 decreased by $53 million, or 15.1 percent, compared with first quarter 2020.

The decrease was primarily due to a decrease in income from business partners, including Chase Bank USA, N.A.

("Chase") and the impact on spend on the Company's co-brand card, driven by the decline in consumer spending due to economic uncertainty and widespread restrictions related to the COVID-19 pandemic.

("Chase") and the impact on spend on the Company's co-brand card, driven by the decline in consumer spending resulting from the COVID-19 pandemic.

Operating Expenses

Operating expenses for third quarter 2020 decreased by $1.6 billion, or 33.5 percent, compared with third quarter 2019, while capacity decreased 32.8 percent versus the same prior year period.

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.

Operating expenses for first quarter 2021 decreased by $2.5 billion, or 57.3 percent, compared with first quarter 2020, while capacity decreased 34.5 percent over the same prior year period.

The operating expense decrease was primarily due to the $1.2 billion in grants allocated to fund eligible salaries, wages, and benefits through the Payroll Support Program Extension.

Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs.

However, the Company's Operating expenses are largely fixed once flight schedules are published, and the Company has experienced significant ASM reductions as a result of flight schedule adjustments related to the COVID-19 pandemic.

Flight schedule adjustments are expected to drive unit cost pressure for the duration of the COVID-19 pandemic, excluding any impacts associated with grants received under the CARES Act or other legislation.

See "Company Overview" above and Notes 2 and 12 to the unaudited Condensed Consolidated Financial Statements for further information.

The following table presents the Company's Operating expenses per ASM for the third quarter of 2020 and 2019, followed by explanations of these changes on a per ASM basis and dollar basis:

Three months ended September 30, Per ASM

See "COVID-19 Pandemic" above and Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.

The following table presents the Company's Operating expenses per ASM for the first quarter of 2021 and 2020, followed by explanations of these changes on a per ASM basis and dollar basis:

Three months ended March 31, Per ASM

change Percent

8 unchanged sentences

Total 8.00 ¢ 12.29 ¢ (4.29) ¢ (34.9) %

Operating expenses per ASM for third quarter 2020 decreased by 1.1 percent, compared with third quarter 2019.

The year-over-year unit cost decrease in third quarter 2020 was primarily driven by decreases in market jet fuel prices, coupled with the funding received through the Payroll Support Program, net of an accrual made for Employees that elected to participate in Voluntary Separation Program 2020 or Extended ETO, partially offset by significant capacity reductions as a result of the COVID-19 pandemic.

Operating expenses per ASM for first quarter 2021 decreased by 34.9 percent, compared with first quarter 2020.

The year-over-year unit cost decrease in first quarter 2021 was primarily driven by the funding received through the Payroll Support Program Extension, coupled with decreases in market jet fuel prices.

These decreases were partially offset by significant capacity reductions as a result of the COVID-19 pandemic.

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

Operating expenses per ASM for third quarter 2020, excluding Fuel and oil expense, special items, and profitsharing (a non-GAAP financial measure), increased 23.4 percent, compared with third quarter 2019.

Operating expenses per ASM for first quarter 2021, excluding Fuel and oil expense, profitsharing, and special items, (a non-GAAP financial measure), increased 23.4 percent, compared with first quarter 2020.

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

The majority of the year-over-year unit cost increase in third quarter 2020 was driven by lower capacity as a result of significant capacity reductions due to the COVID-19 pandemic.

Salaries, wages, and benefits expense for third quarter 2020 decreased by $324 million, or 16.2 percent, compared with third quarter 2019.

On a per ASM basis, third quarter 2020 Salaries, wages, and benefits expense increased 24.8 percent, compared with third quarter 2019, as the dollar decrease was more than offset by the 32.8 percent decrease in capacity.

On a dollar basis, the decrease was primarily the result of no profitsharing expense accrual in third quarter 2020 due to the Company's net loss, compared with a profitsharing accrual of $144 million in third quarter 2019.

Excluding profitsharing in both years, the decrease was driven by lower salaries, wages, and benefits expense, as a result of Voluntary Separation Program 2020, Extended ETO, and other time off programs offered by the Company.

Payroll support and voluntary Employee programs, net for third quarter 2020 was a net decrease to expense of $149 million, compared with no amounts for third quarter 2019.

On a per ASM basis, third quarter 2020 Payroll support and voluntary Employee programs, net was a net reduction of 0.57 cents.

During third quarter 2020, the Company recognized $1.2 billion of Payroll Support Program proceeds as part of the CARES Act, a $485 million accrual related to the cost associated with Voluntary Separation Program 2020, and a $613 million accrual related to the cost associated with the Extended ETO elections made and accepted prior to September 30, 2020.

The majority of the year-over-year unit cost increase in first quarter 2021 was driven by significant capacity reductions due to the COVID-19 pandemic.

Salaries, wages, and benefits expense for first quarter 2021 decreased by $283 million, or 15.3 percent, compared with first quarter 2020.

On a per ASM basis, first quarter 2021 Salaries, wages, and benefits expense increased 29.6 percent, compared with first quarter 2020, as the dollar decrease was more than offset by the 34.5 percent decrease in capacity.

On a dollar basis, the decrease was primarily driven by lower salaries, wages, and benefits expense, as a result of Voluntary Separation Program 2020, Extended ETO, and other time off programs offered by the Company.

Payroll support and voluntary Employee programs, net for first quarter 2021 was a net decrease to expense of $1.4 billion, compared with no amounts for first quarter 2020.

On a per ASM basis, first quarter 2021 Payroll support and voluntary Employee programs, net was a net reduction of 6.25 cents.

During first quarter 2021, the items included in this line item include:

• $1.2 billion of Payroll Support Program Extension proceeds;

• $116 million of the Employee Retention Tax Credit for continuing to pay Employees' salaries during the time they were not working as a result of the decline in business due to the pandemic;

• A $115 million net reduction in the Extended ETO liability.

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

Fuel and oil expense for third quarter 2020 decreased by $711 million, or 65.2 percent, compared with third quarter 2019.

On a per ASM basis, third quarter 2020 Fuel and oil expense decreased 48.0 percent, due to lower market jet fuel prices.

Fuel and oil expense for first quarter 2021 decreased by $401 million, or 46.1 percent, compared with first quarter 2020.

On a per ASM basis, first quarter 2021 Fuel and oil expense decreased 17.9 percent, due primarily to lower market jet fuel prices.

On a dollar basis, the majority of the decrease was attributable to a significant decrease in fuel gallons consumed, and the remainder of the decrease was due to lower market jet fuel prices.

The Company's average economic jet fuel cost per gallon decreased 40.6 percent, year-over-year, to $1.23 for third quarter 2020, from $2.07 for third quarter 2019.

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:

Three months ended March 31,

Economic fuel costs per gallon $ 1.70 $ 1.90

Fuel hedging premium expense (in millions) $ 25 $ 24

Fuel hedging premium expense per gallon $ 0.09 $ 0.05

Fuel hedging cash settlement gains per gallon $ 0.01 $ —

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

These figures include $.08 per gallon in premium expense with no cash settlements from fuel derivative contracts in third quarter 2020, compared with $.04 per gallon in premium expense with no cash settlements from fuel derivative contracts in third quarter 2019.

The market decline in fuel prices reduced the Company's third quarter 2020 Fuel and oil expense by approximately $257 million compared to its original third quarter 2020 fuel projection in January 2020.

The Company continued to operate fewer of its oldest, least fuel-efficient Boeing 737-700 aircraft as a result of capacity reductions due to the COVID-19 pandemic which, combined with lower Load factors, resulted in a year-over-year improvement of 10.0 percent in ASMs per gallons ("fuel efficiency") in third quarter 2020.

The Company currently estimates a fourth quarter 2020 year-over-year fuel efficiency improvement similar to the year-over-year improvement experienced in third quarter 2020, driven by the continued operation of fewer of its 737-700 aircraft as a result of capacity reductions due to the pandemic.

As of October 15, 2020, on an economic basis, the Company had derivative contracts in place related to expected future fuel consumption as follows:

The Company had a reduced schedule and lower Load factors during first quarter 2021, which, combined with the Company continuing to operate fewer of its oldest, least fuel-efficient Boeing 737-700 aircraft as a result of capacity reductions due to the COVID-19 pandemic, resulted in a year-over-year improvement of 4.7 percent in ASMs per gallons ("fuel efficiency") in first quarter 2021.

While the Company expects to return more of its 737-700 aircraft to service to support planned capacity increases, second quarter 2021 fuel efficiency is currently estimated to be sequentially in line with first quarter 2021, on a nominal basis, also taking into account the return of its most fuel-efficient aircraft, the MAX, to service in March 2021.

As of April 15, 2021, on an economic basis, the Company had derivative contracts in place related to expected future fuel consumption as follows:

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

8 unchanged sentences

As a result of applying hedge accounting in prior periods, the Company has amounts in Accumulated other comprehensive income (loss) ("AOCI") that will be recognized in earnings in future periods when the underlying fuel derivative contracts settle.

The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties—see Note 4 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the amount of deferred losses in AOCI at September 30, 2020, 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, 2020 Amount of losses deferred in AOCI at September 30, 2020 (net of tax)

The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties—see Note 4 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI at March 31, 2021, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

Year Fair value of fuel derivative contracts at March 31, 2021 Amount of gains (losses) deferred in AOCI at March 31, 2021 (net of tax)

Remainder of 2021 $ 33 $ (26)

1 unchanged sentence

Total $ 249 $ 9

Assuming no changes to the Company's current fuel derivative portfolio, but including all previous hedge activity for fuel derivatives that have not yet settled, and considering only the expected net cash receipts related to hedges that will settle, the Company is providing the below sensitivity table for fourth quarter 2020 jet fuel prices at different crude oil assumptions as of October 15, 2020, and for expected premium costs associated with settling contracts.

Assuming no changes to the Company's current fuel derivative portfolio, but including all previous hedge activity for fuel derivatives that have not yet settled, and considering only the expected net cash receipts related to hedges that will settle, the Company is providing the below sensitivity table for second quarter 2021 and full year 2021 jet fuel prices at different crude oil assumptions as of April 15, 2021, and for expected premium costs associated with settling contracts.

Estimated economic fuel price per gallon,

including taxes and fuel hedging premiums (d)

including taxes and fuel hedging premiums (e)

Average Brent Crude Oil

price per barrel Fourth Quarter 2020 (c)

price per barrel Second Quarter 2021 (c) Full Year 2021 (d)

$40 $1.35 - $1.45 $1.35 - $1.45

4 unchanged sentences

$90 $2.10 - $2.20 $2.10 - $2.20

Estimated fuel hedging premium expense per gallon (b) $.09

Estimated premium costs (b) $24 million

(a) Brent crude oil average market price as of October 15, 2020, was approximately $43 per barrel for fourth quarter 2020.

Estimated fuel hedging premium expense per gallon (b) $0.06 (f)

Estimated premium costs (b) $25 million $100 million

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

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

(c) Based on the Company's existing fuel derivative contracts and market prices as of October 15, 2020, fourth quarter 2020 GAAP and economic fuel costs are estimated to be in the $1.20 to $1.30 per gallon range, including fuel hedging premium expense of approximately $24 million, or $.09 per gallon, and no cash settlements from fuel derivative contracts.

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

See Note Regarding Use of Non-GAAP Financial Measures.

(d) The Company's current fuel derivative contracts contain a combination of instruments based in WTI and Brent crude oil;

however, the economic fuel price per gallon sensitivities provided, assume the relationship between Brent crude oil and refined products based on market prices as of October 15, 2020.

Maintenance materials and repairs expense for third quarter 2020 decreased by $128 million, or 40.9 percent, compared with third quarter 2019.

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

See Note Regarding Use of Non-GAAP Financial Measures.

(e) Economic fuel cost projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate the hedge accounting impact associated with the volatility of the energy markets, the impact of COVID-19 cases on air travel demand, or the impact to the Company's financial statements in future periods.

See Note Regarding Use of Non-GAAP Financial Measures.

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

Maintenance materials and repairs expense for first quarter 2021 decreased by $99 million, or 36.4 percent, compared with first quarter 2020.

On a per ASM basis, Maintenance materials and repairs expense decreased 2.6 percent, as the dollar decrease was largely offset by the 34.5 percent decrease in capacity in response to the COVID-19 pandemic.

On a dollar basis, approximately 50 percent of the decrease was due to lower engine maintenance expense due to decreased flight hours, approximately 25 percent of the decrease was due to the timing of regular airframe maintenance checks, and the majority of the remainder of the decrease was due to reduced operations and placing a portion of the fleet in storage.

Landing fees and airport rentals expense for third quarter 2020 decreased by $37 million, or 10.7 percent, compared with third quarter 2019.

On a per ASM basis, Landing fees and airport rentals expense increased 31.8 percent, compared with third quarter 2019, as the dollar decrease was more than offset by the 32.8 percent decrease in capacity in response to the COVID-19 pandemic.

On a dollar basis, the majority of the decrease was due to a reduced number of Trips flown in third quarter 2020 as a result of the COVID-19 pandemic.

Depreciation and amortization expense for third quarter 2020 increased by $7 million, or 2.3 percent, compared with third quarter 2019.

On a per ASM basis, Depreciation and amortization expense increased by 52.6 percent, compared with third quarter 2019, primarily as a result of the 32.8 percent decrease in capacity in response to the COVID-19 pandemic.

On a dollar basis, the increase was primarily associated with the deployment of new technology assets.

Other operating expenses, net for third quarter 2020 decreased by $274 million, or 36.0 percent, compared with third quarter 2019.

On a per ASM basis, Other operating expenses, net decreased 4.1 percent, compared with third quarter 2019, primarily as a result of the 32.8 percent decrease in capacity in response to the COVID-19 pandemic.

On a dollar basis, approximately 35 percent of the decrease was due to lower credit card fees driven by a severe

reduction in revenues associated with the COVID-19 pandemic, and the majority of the remainder of the decrease was from various cost savings as a result of supporting a reduced operation and other efforts to reduce discretionary spend.

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

Interest expense for third quarter 2020 increased by $81 million, or 270.0 percent, compared with third quarter 2019, primarily due to higher debt balances.

For further information on the Company's debt transactions in third quarter 2020, see Note 8 to the unaudited Condensed Consolidated Financial Statements.

Based on current debt outstanding and current market interest rates, the Company currently expects fourth quarter 2020 interest expense to be approximately $113 million.

Capitalized interest for third quarter 2020 increased by $1 million, or 10.0 percent, compared with third quarter 2019, primarily due to interest on technology projects.

Interest income for third quarter 2020 decreased by $19 million, or 82.6 percent, compared with third quarter 2019, due to lower interest rates, partially offset by higher cash balances.

Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities.

See Note 4 to the unaudited Condensed Consolidated Financial Statements for further information on the Company's hedging activities.

The following table displays the components of Other (gains) losses, net, for the three months ended September 30, 2020 and 2019:

Three months ended September 30,

(in millions) 2020 2019

Mark-to-market impact from fuel contracts settling in current and future periods $ 23 $ —

Premium cost of fuel contracts not designated as hedges 11 —

Mark-to-market impact from interest rate swap agreements (1) —

The Company's effective tax rate was approximately 25.0 percent in third quarter 2020, compared with 19.5 percent in third quarter 2019.

The higher third quarter tax rate was a result of the impact of the Company's current forecasted full year 2020 net loss, which would allow the Company to carry back such losses to claim tax refunds against taxes paid related to the tax years 2015 through 2019, some of which were at higher rates than the current year.

The Company currently estimates its annual 2020 effective tax rate to be in the range of 24 to 26 percent.

Comparison of nine months ended September 30, 2020 and September 30, 2019

Operating Revenues

Passenger revenues for the nine months ended September 30, 2020, decreased by $9.5 billion, or 61.2 percent, compared with the first nine months of 2019.

On a unit basis, Passenger revenues decreased 42.9 percent, year-over-year.

The decreases in Passenger revenues on both a dollar and unit basis were primarily due to the impact of the COVID-19 pandemic, which resulted in unprecedented levels of close-in trip cancellations in March 2020, and significant reductions in capacity and a sharp decline in passenger demand and bookings during the nine months ended September 30, 2020.

Freight revenues for the nine months ended September 30, 2020, decreased by $11 million, or 8.5 percent, compared with the nine months ended September 30, 2019, primarily due to fewer trips flown, coupled with worldwide supply chain disruptions which reduced cargo demand.

Other revenues for the nine months ended September 30, 2020, decreased by $193 million, or 17.4 percent, year-over-year.

The decrease was primarily due to a decrease in income from business partners, including Chase and the impact on spend on the Company's co-brand card, driven by the decline in consumer spending due to economic uncertainty and widespread restrictions related to the COVID-19 pandemic.

Operating Expenses

Operating expenses for the nine months ended September 30, 2020, decreased by $4.7 billion, or 32.8 percent, compared with the first nine months of 2019, while capacity decreased 32.0 percent over the same prior year period.

Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs.

However, the Company's operating expenses are largely fixed once flight schedules are published, and the Company has experienced significant ASM reductions as a result of flight schedule adjustments related to the COVID-19 pandemic.

Flight cancellations are expected to drive unit cost pressure for the duration of the COVID-19 pandemic, excluding any impacts associated with grants received under the CARES Act or other legislation.

The following table presents the Company's Operating expenses per ASM for the first nine months of 2020 and 2019, followed by explanations of these changes on a per ASM basis and dollar basis:

Nine months ended September 30, Per ASM Percent

(in cents, except for percentages) 2020 2019 change change

Salaries, wages, and benefits 6.58 ¢ 5.16 ¢ 1.42 ¢ 27.5 %

Payroll support and voluntary Employee programs, net (1.17) — (1.17) n.m.

Fuel and oil 1.89 2.77 (0.88) (31.8)

Maintenance materials and repairs 0.75 0.78 (0.03) (3.8)

Landing fees and airport rentals 1.16 0.88 0.28 31.8

Depreciation and amortization 1.18 0.77 0.41 53.2

Other operating expenses, net 1.76 1.93 (0.17) (8.8)

Total 12.15 ¢ 12.29 ¢ (0.14) ¢ (1.1) %

Operating expenses per ASM for the first nine months of 2020 decreased by 1.1 percent, compared with the first nine months of 2019.

The majority of the year-over-year unit cost decrease in the first nine months of 2020 was driven by the funding received through the Payroll Support Program, net of an accrual made for Employees that elected to participate in Voluntary Separation Program 2020 or Extended ETO programs, coupled with decreases in market jet fuel prices, partially offset by significant capacity reductions as a result of the COVID-19 pandemic.

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

Operating expenses per ASM for the first nine months of 2020, excluding Fuel and oil expense, special items, and profitsharing (a non-GAAP financial measure), increased 27.6 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.

The majority of the year-over-year unit cost increase for the first nine months of 2020 was driven by lower capacity as a result of significant capacity reductions due to the COVID-19 pandemic.

Salaries, wages, and benefits expense for the first nine months of 2020 decreased by $801 million, or 13.2 percent, compared with the first nine months of 2019.

On a per ASM basis, Salaries, wages, and benefits expense for the first nine months of 2020 increased 27.5 percent, compared with the first nine months of 2019, as the dollar decrease was more than offset by the 32.0 percent decrease in capacity.

On a dollar basis, the decrease was primarily the result of no profitsharing expense accrual for the first nine months of 2020 due to the Company's net loss, compared with a profitsharing accrual of $403 million for the first nine months of 2019.

Excluding profitsharing in both years, the

decrease was driven by lower salaries, wages, and benefits expense, as a result of Voluntary Separation Program 2020, Extended ETO, and other time off programs offered by the Company.

Payroll support and voluntary Employee programs, net for the first nine months of 2020 was a net decrease to expense of $933 million, compared with no amounts for the first nine months of 2019.

On a per ASM basis, Payroll support and voluntary Employee programs, net for the first nine months of 2020 was a net reduction of 1.17 cents.

The Company recognized a $2.3 billion allocation of Payroll Support Program proceeds in the first nine months of 2020 as part of the CARES Act and recognized $792 million and $613 million in cost associated with the Voluntary Separation Program 2020 and Extended ETO elections, respectively.

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

Fuel and oil expense for the first nine months of 2020 decreased by $1.7 billion, or 53.5 percent, compared with the first nine months of 2019.

On a per ASM basis, Fuel and oil expense for the first nine months of 2020 decreased 31.8 percent, due to lower market jet fuel prices.

On a dollar basis, the majority of the decrease was attributable to a significant decrease in fuel gallons consumed, and the remainder of the decrease was due to lower market jet fuel prices.

The Company's average economic jet fuel cost per gallon decreased 25.4 percent, year-over-year, to $1.56 for the first nine months of 2020, from $2.09 for the first nine months of 2019.

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

These figures include $.07 per gallon in premium expense with no cash settlements from fuel derivative contracts for the first nine months of 2020, compared with $.05 per gallon in premium expense and $.03 per gallon in favorable cash settlements from fuel derivative contracts for the first nine months of 2019.

The Company continued to operate fewer of its oldest, least fuel-efficient Boeing 737-700 aircraft as a result of capacity reductions due to the COVID-19 pandemic, which, combined with lower Load factors, resulted in a year-over-year improvement of 7.0 percent in fuel efficiency in the first nine months of 2020.

Maintenance materials and repairs expense for the first nine months of 2020 decreased by $319 million, or 34.8 percent, compared with the first nine months of 2019.

On a per ASM basis, Maintenance materials and repairs expense decreased 3.8 percent, compared with the first nine months of 2019, as the dollar decreases were largely offset by the 32.0 percent decrease in capacity.

On a dollar basis, approximately 55 percent of the decrease was due to lower engine maintenance expense due to decreased flight hours, approximately 25 percent was due to the timing of regular airframe maintenance checks, and the remainder of the decrease was due to reduced operations and placing a portion of the fleet in storage.

Landing fees and airport rentals expense for the first nine months of 2020 decreased by $114 million, or 11.0 percent, compared with the first nine months of 2019.

On a per ASM basis, Landing fees and airport rentals expense increased 31.8 percent, compared with the first nine months of 2019, as the dollar decrease was more than offset by the 32.0 percent decrease in capacity.

On a dollar basis, the majority of the decrease was due to reduced number of Trips flown in the first nine months of 2020 as a result of the COVID-19 pandemic.

Depreciation and amortization expense for the first nine months of 2020 increased by $34 million, or 3.8 percent, compared with the first nine months of 2019.

On a per ASM basis, Depreciation and amortization expense increased 53.2 percent, compared with the first nine months of 2019, primarily as a result of the 32.0 percent decrease in capacity in response to the COVID-19 pandemic.

On a dollar basis, the majority of the increase was associated with the deployment of new technology assets.

Other operating expenses, net for the first nine months of 2020 decreased by $855 million, or 37.8 percent, compared with the first nine months of 2019.

On a per ASM basis, Other operating expenses, net decreased 8.8 percent, compared with the first nine months of 2019.

On both a dollar and per ASM basis, the majority of the decreases were due to $222 million gains from the sale-leaseback of 20 aircraft to third parties in two separate transactions in second quarter 2020.

The gains from the sale-leaseback transactions were considered special items and thus excluded from the Company's non-GAAP results.

See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail

regarding non-GAAP financial measures.

See Note 8 to the Company's unaudited Condensed Consolidated Financial Statements for further information.

Excluding these special items, on a per ASM basis, Other operating expenses increased as the dollar decrease was more than offset by the 32.0 percent decrease in capacity in response to the COVID-19 pandemic.

On a dollar basis, approximately 40 percent of the decrease was due to lower credit card fees driven by a severe reduction in revenues associated with the COVID-19 pandemic, and the majority of the remainder of the decrease was from various cost savings as a result of supporting a reduced operation and efforts to reduce discretionary spend.

On a dollar basis, approximately 50 percent of the decrease was due to lower engine maintenance expense due to the reduction in flight hours and the majority of the remainder of the decrease was due to reduced operations and placing a portion of the fleet in storage.

Landing fees and airport rentals expense for first quarter 2021 decreased by $26 million, or 7.7 percent, compared with first quarter 2020.

On a per ASM basis, Landing fees and airport rentals expense increased 40.6 percent, compared with first quarter 2020, as the dollar decrease was more than offset by the 34.5 percent decrease in capacity in response to the COVID-19 pandemic and as a significant portion of space rentals are essentially fixed in the short term.

On a dollar basis, the decrease was primarily due to lower landing fees as a result of the reduced number of Trips flown in first quarter 2021 as a result of the COVID-19 pandemic.

Depreciation and amortization expense for first quarter 2021 increased by $1 million, or 0.3 percent, compared with first quarter 2020.

On a per ASM basis, Depreciation and amortization expense increased by 53.4 percent, compared

with first quarter 2020, primarily as a result of the 34.5 percent decrease in capacity in response to the COVID-19 pandemic and continued storage of a portion of the Company's fleet.

On a dollar basis, Depreciation and amortization expense was relatively flat as the Company reduced capital expenditures in response to the pandemic.

Other operating expenses, net for first quarter 2021 decreased by $235 million, or 33.7 percent, compared with first quarter 2020.

Included within this line item was aircraft rentals expense in the amounts of $51 million and $57 million for the periods ended March 31, 2021 and 2020, respectively.

On a per ASM basis, Other operating expenses, net increased 0.5 percent, compared with first quarter 2020, in line with the 34.5 percent decrease in capacity in response to the COVID-19 pandemic.

On a dollar basis, approximately 70 percent of the decrease was due to various savings as a result of supporting a reduced operation and other efforts to reduce discretionary spend.

The majority of the remainder of the decrease was due to lower credit card fees driven by a significant reduction in revenues associated with the COVID-19 pandemic.

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

Interest expense for the first nine months of 2020 increased by $145 million, or 161.1 percent, compared with the first nine months of 2019, primarily due to higher debt balances in the first nine months of 2020, and a $9 million write-off of remaining unamortized costs from the Company's 364-day term loan entered into in first quarter 2020 and repaid in full during second quarter 2020.

For further information on the Company's debt transactions in the first nine months of 2020, see Note 8 to the unaudited Condensed Consolidated Financial Statements.

Capitalized interest for the first nine months of 2020 decreased by $4 million, or 14.8 percent, compared with the first nine months of 2019, primarily due to Boeing's halt of production of the Company's undelivered MAX aircraft through May 2020.

This decrease was partially offset by interest on technology projects.

Interest income for the first nine months of 2020 decreased by $40 million, or 57.1 percent, compared with the first nine months of 2019, due to lower interest rates, partially offset by higher cash balances.

Interest expense for first quarter 2021 increased by $86 million, compared with first quarter 2020, primarily due to higher debt balances.

Based on current debt outstanding and current market interest rates, the Company currently expects second quarter 2021 interest expense to be approximately $115 million.

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

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

Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities.

See Note 4 to the unaudited Condensed Consolidated Financial Statements for further information on the Company's hedging activities.

The following table displays the components of Other (gains) losses, net, for the nine months ended September 30, 2020 and 2019:

Nine months ended September 30,

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

Three months ended March 31,

(in millions) 2021 2020

2 unchanged sentences

Mark-to-market impact from interest rate swap agreements — 24

The Company's effective tax rate was approximately 25.9 percent for the first nine months of 2020, compared with 22.0 percent for the first nine months of 2019.

The higher tax rate for the first nine months of 2020 was a result of the impact of the Company's current forecasted full year 2020 net loss, which would allow the Company to carry back such losses to claim tax refunds against taxes paid related to the tax years 2015 through 2019, some of which were at higher rates than the current year.

Other (a) (60) 2

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

The Company's effective tax rate was approximately 20.6 percent in first quarter 2021, compared with 34.3 percent in first quarter 2020.

The prior year higher first quarter tax rate was a result of the anticipated Net operating loss for full year 2020, which allowed the Company to carry back losses to receive tax refunds on amounts paid from 2015 through 2019.

The Company currently estimates its annual 2021 effective tax rate to be approximately 23 percent.

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

2020 2019 Change 2020 2019 Change

Three months ended March 31, Percent

2021 2020 Change

Fuel and oil expense, unhedged $ 464 $ 846

2 unchanged sentences

Fuel and oil expense, as reported $ 469 $ 870

Contracts settling in the current period, but for which losses were reclassified from AOCI (a) 6 — 16 —

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) 8 —

Premium cost of fuel contracts not designated as hedges 11 —

Fuel and oil expense, excluding special items (economic) $ 488 $ 870 (43.9)

Total operating expenses, as reported $ 3,204 $ 4,820 $ 9,683 $ 14,406

Total operating expenses, net, as reported $ 1,853 $ 4,344

Payroll support and voluntary Employee programs, net

Contracts settling in the current period, but for which losses were reclassified from AOCI (a) 6 — 16 —

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) 8 —

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) 1 —

Premium cost of fuel contracts not designated as hedges 11 —

Gain from aircraft sale-leaseback transactions — — 222 —

Total operating expenses, excluding special items $ 3,321 $ 4,344 (23.5)%

1 unchanged sentence

Payroll support and voluntary Employee programs, net (1,448) —

Contracts settling in the current period, but for which losses were reclassified from AOCI (a) (6) — (16) —

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (8) —

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) (1) —

Premium cost of fuel contracts not designated as hedges (11) —

Gain from aircraft sale-leaseback transactions — — (222) —

Operating income (loss), excluding special items $ (1,577) $ 819 n.m.

$ (3,841) $ 2,292 n.m.

Operating loss, excluding special items $ (1,269) $ (110) n.m.

Other (gains) losses, net, as reported $ (48) $ 28

1 unchanged sentence

Premium cost of fuel contracts not designated as hedges (11) —

Add (Deduct):

Mark-to-market impact from interest rate swap agreements — (24)

Other (gains) losses, net, excluding special items $ 2 $ 3 (33.3)% $ 5 $ 8 (37.5)%

Other (gains) losses, net, excluding special items $ (60) $ 2 n.m.

Income (loss) before income taxes, as reported $ 146 $ (144)

Payroll support and voluntary Employee programs, net (1,448) —

Contracts settling in the current period, but for which losses were reclassified from AOCI (a) (6) — (16) —

Gain from aircraft sale-leaseback transactions — — (222) —

Mark-to-market impact from fuel contracts settling in current and future periods (a) 23 — 40 —

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (8) —

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) (1) —

Mark-to-market impact from fuel contracts settling in current and future periods 1 2

Mark-to-market impact from interest rate swap agreements — 24

Income (loss) before income taxes, excluding special items $ (1,675) $ 819 n.m.

$ (4,028) $ 2,291 n.m.

Provision for income taxes, as reported $ (385) $ 160 $ (759) $ 504

Net income (loss) tax impact of fuel and special items, excluding GAAP to Non-GAAP tax rate difference (b) (41) — (350) —

GAAP to Non-GAAP tax rate difference (c) (76) — (168) —

Provision for income taxes, net, excluding special items $ (502) $ 160 n.m.

$ (1,277) $ 504 n.m.

Loss before income taxes, excluding special items $ (1,310) $ (118) n.m.

Provision (benefit) for income taxes, as reported $ 30 $ (50)

Add (Deduct):

Net income (loss) tax impact of fuel and special items (b) (325) 9

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

Three months ended March 31, Percent

2021 2020 Change

Net income (loss), as reported $ 116 $ (94)

Payroll support and voluntary Employee programs, net (1,448) —

Contracts settling in the current period, but for which losses were reclassified from AOCI (a) (6) — (16) —

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (8) —

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) (1) —

Mark-to-market impact from fuel contracts settling in current and future periods (a) 1 2

Gain from aircraft sale-leaseback transactions — — (222) —

Add (Deduct):

Mark-to-market impact from interest rate swap agreements — 24

Net income (loss) tax impact of special items, excluding GAAP to Non-GAAP tax rate difference (b) 41 — 350 —

GAAP to Non-GAAP tax rate difference (c) 76 — 168 —

Net income (loss), excluding special items $ (1,173) $ 659 n.m.

$ (2,751) $ 1,787 n.m.

Add (Deduct):

Net income (loss) tax impact of special items (b) 325 (9)

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

Net income (loss) per share, diluted, as reported $ 0.19 $ (0.18)

Add (Deduct):

Impact of special items (2.38) 0.05

Net impact of net income (loss) above from fuel contracts divided by dilutive shares (0.01) —

Net income (loss) tax impact of special items, excluding GAAP to Non-GAAP tax rate difference (b) 0.07 — 0.63 —

GAAP to Non-GAAP tax rate difference (c) 0.13 — 0.30 —

Net income (loss) per share, diluted, excluding special items $ (1.99) $ 1.23 n.m.

$ (4.95) $ 3.29 n.m.

Add (Deduct):

Net income (loss) tax impact of special items (b) 0.53 (0.02)

GAAP to Non-GAAP diluted weighted average shares difference (c) (0.05) —

Net loss per share, diluted, excluding special items $ (1.72) $ (0.15) n.m.

Operating expenses per ASM (cents) 8.00 ¢ 12.29 ¢

5 unchanged sentences

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

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

(c) Adjustment related to GAAP and Non-GAAP diluted weighted average shares difference, due to the Company being in a Net income position on a GAAP basis versus a Net loss position on a Non-GAAP basis.

See Note 7 to the unaudited Condensed Consolidated Financial Statements for further information.

Note Regarding Use of Non-GAAP Financial Measures

5 unchanged sentences

Total operating expenses, non-GAAP;

Operating income (loss), non-GAAP;

Operating loss, non-GAAP;

Other (gains) losses, net, non-GAAP;

Income (loss) before income taxes, non-GAAP;

Provision for income taxes, net, non-GAAP;

Net income (loss), non-GAAP;

Net income (loss) per share, diluted, non-GAAP;

Loss before income taxes, non-GAAP;

Benefit for income taxes, net, non-GAAP;

Net loss, non-GAAP;

Net loss per share, diluted, non-GAAP;

and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents).

9 unchanged sentences

Financial measures identified as non-GAAP (or as excluding special items) have been adjusted to exclude special items.

Special items include:

Proceeds related to the Payroll Support Program under the CARES Act, which were used to pay Employee salaries, wages, and benefits;

Accrued charges related to the special termination benefits upon Employees accepting Voluntary Separation Program 2020 or Extended ETO as of September 30, 2020;

Gains associated with the sale-leaseback of ten Boeing 737-800 aircraft and ten Boeing 737 MAX 8 aircraft to third parties;

Unrealized losses related to twelve forward-starting interest rate swap agreements.

During the first nine months of 2020, the interest rate swap agreements, which were related to twelve 737 MAX 8 aircraft leases (with deliveries originally scheduled between June 2020 and September 2020), were de-designated due to the scheduled delivery range no longer being probable, resulting in the mark-to-market changes being recorded to earnings.

For the periods presented, in addition to the items discussed above, special items include:

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

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

Adjustments for prior period losses reclassified from AOCI associated with forward-starting interest rate swap agreements that were terminated in prior periods related to eleven 737 MAX 8 aircraft leases;

Unrealized losses related to nine forward-starting interest rate swap agreements.

During first quarter 2020, the interest rate swap agreements, which were related to nine 737 MAX 8 aircraft leases (with deliveries originally scheduled between June 2020 and September 2020), were de-designated as hedges due to the scheduled delivery range no longer being probable, resulting in the mark-to-market changes being recorded to earnings.

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.

2 unchanged sentences

Total operating expenses, non-GAAP;

Operating income (loss), non-GAAP;

Operating loss, non-GAAP;

Other (gains) losses, net, non-GAAP;

Income (loss) before income taxes, non-GAAP;

Provision for income taxes, net, non-GAAP;

Net income (loss), non-GAAP;

Net income (loss) per share, diluted, non-GAAP;

Loss before income taxes, non-GAAP;

Benefit for income taxes, net, non-GAAP;

Net loss, non-GAAP;

Net loss per share, diluted, non-GAAP;

and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents).

The Company has also utilized and provided average cash burn and average daily core cash burn.

Average cash burn is a non-GAAP financial measure.

The Company has also utilized and provided average cash burn and average daily core cash burn which are non-GAAP financial measures.

Cash burn is a supplemental measure that most U.S.

airlines began providing in 2020 to measure liquidity in light of the negative financial effects of the pandemic.

For the three months ended September 30, 2020, average daily core cash burn was approximately $16 million, calculated as Loss before income taxes, non-GAAP, of $1.7 billion (as provided in the above Non-GAAP reconciliation), adjusted for Depreciation and amortization expense of $315 million;

Capital expenditures of $89 million;

and adjusted amortizing debt service payments of approximately $59 million;

divided by 92 days in the period.

The Company utilizes average daily core cash burn to monitor the performance of its core business as a proxy for its ability to achieve sustainable cash and profit break-even results.

Given that the Company’s cash burn calculation is derived from Loss before income taxes, non-GAAP, the Company excludes the following items in its calculation of average core cash burn:

financing transactions;

Payroll Support Program proceeds;

Supplier proceeds;

voluntary separation and Extended ETO program payments;

and other changes in working capital.

Cash burn methodology varies by airline, and the Company’s third quarter 2020 average daily core cash burn of $16 million may differ materially by utilizing cash burn calculations that adjust for changes in working capital.

Utilizing an alternative cash burn approach, which adjusts for changes in working capital-including changes in Air traffic liability and cash payments for voluntary separation and Extended ETO programs, among other items-the Company’s third quarter 2020 daily cash burn was also approximately $16 million.

The COVID-19 pandemic has materially and adversely affected passenger demand and bookings, thereby materially and adversely affecting operating income and cash flows from operations.

In this environment, management believes ROIC is not a meaningful measure of financial performance, nor is it being used by management to evaluate the business in the current environment.

See Liquidity and Capital Resources for a discussion of the Company’s liquidity.

The Company utilizes average daily core cash burn to monitor the performance of its core business as a proxy for its ability to achieve sustainable break-even or positive results on a cash basis.

Cash burn methodology may vary by airline, but see the Company's calculation of cash burn below:

(in millions, except for Days in the period) Three months ended March 31, 2021

Loss before income taxes, non-GAAP $ (1,310)

Depreciation and amortization expense 312

Capital expenditures ( 95 )

Debt service payments (67)

Core cash burn $ (1,160)

Days in the period 90

Average daily core cash burn $ (13)

Core cash burn, prior to changes in working capital $ (1,160)

Increase in Air traffic liability 599

Payments associated with Voluntary Employee Programs (188)

Other (a) 315

Core cash burn, adjusted for changes in working capital $ (434)

Days in the period 90

Average daily core cash burn, adjusted for changes in working capital $ (5)

(a) Adjustment primarily related to the prepayment in fourth quarter 2020 from Chase for Rapid Reward points expected to be purchased in 2021.

See Note 9 to the unaudited condensed Consolidated Financial Statements for further information.

Liquidity and Capital Resources

1 unchanged sentence

travel industry created an urgent liquidity crisis for the entire airline industry, including the Company.

However, due to the Company's low balance sheet leverage, large base of unencumbered assets, and investment-grade credit ratings, the Company was able to quickly access additional liquidity during the first nine months of 2020, as Customer cancellations spiked and sales and revenues dropped while the Company continued to experience significant fixed operating expenses.

See Note 2 and Note 8 to the unaudited Condensed Consolidated Financial Statements for further information regarding the impact of the COVID-19 pandemic, as well as the transactions completed and assistance obtained under the CARES Act.

However, due to the Company's pre-pandemic low balance sheet leverage, large base of unencumbered assets, and investment-grade credit ratings, the Company was able to quickly access additional liquidity during 2020 and 2021, as Customer cancellations spiked and sales and revenues dropped while the Company continued to experience significant fixed operating expenses.

See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information regarding the impact of the COVID-19 pandemic and assistance obtained under the CARES Act, Payroll Support Program Extension, and PSP3 Payroll Support Program.

Much uncertainty remains about the time it will take for air travel demand to recover, and the Company continues to assess its immediate and near-term liquidity needs.

The Company also continues to assess various sources and options including public and private financings to bolster its liquidity and believes that, given current market conditions, it has opportunities to do so.

Net cash used in operating activities was $1.1 billion for the three months ended September 30, 2020, compared with $1.1 billion provided by operating activities in the same prior year period.

For the nine months ended September 30, 2020, net cash used in operating activities was $531 million, compared with $3.2 billion provided by operating activities in the nine months ended September 30, 2019.

The operating cash flows for the nine months ended September 30, 2020, were affected primarily by the Company's Net loss (as adjusted for noncash items), and a $65 million decrease in Accounts payable and accrued expenses due to the Company's $667 million profitsharing distribution to Employees for 2019, a significant decline in amounts payable for passenger excise taxes and segment fees as a result of the decline in passenger ticket sales, and the suspension of collection of certain ticket taxes as dictated by the CARES Act.

These were partially offset by $2.4 billion in Payroll Support Program grant proceeds received as part of the CARES Act, of which approximately $2.3 billion of this direct payroll support were used to offset eligible costs and thus included in operating activities, with the remaining $40 million allocated to the value of warrants issued and thus included in financing activities, and the $1.2 billion associated with the Company's Voluntary Separation Program 2020 and Extended ETO plans, which represents the amounts accrued, net of amounts reduced during the nine months ended September 30, 2020.

These net decreases in operating activities were partially offset by a $1.6 billion increase in Air traffic liability.

The increase in Air traffic liability was due to ticket sales in January and February 2020 for future travel that have not been flown, as a result of the COVID-19 pandemic, and growth in Rapid Rewards points earned due to multiple bonus point offers throughout the first nine months of 2020.

For the nine months ended September 30, 2019, in addition to the Company's Net income (as adjusted for noncash items), there was an $897 million increase in Air traffic liability as a result of bookings for future travel and sales of loyalty points to business partners.

Net cash provided by operating activities is primarily used to finance capital expenditures, repay debt, and provide working capital.

Net cash provided by operating activities was $645 million for the three months ended March 31, 2021, compared with $377 million used in operating activities in the same prior year period.

Operating cash inflows are primarily derived from providing air transportation to Customers.

The vast majority of tickets are purchased prior to the day on which travel is provided and, in some cases, several months before the anticipated travel date.

Operating cash outflows are related to the recurring expenses of airline operations.

The operating cash flows for both periods presented, were affected primarily by the COVID-19 pandemic, which resulted in a significant drop in travel demand, sales, and revenues.

Operating cash flows for the three months ended March 31, 2021, included $1.2 billion in Payroll Support Program Extension grant proceeds received as part of the Consolidated Appropriations Act, 2021 of which nearly all of this direct payroll support was used to offset eligible costs and thus included in operating activities, with the remaining $23 million allocated to the value of PSP2 Warrants issued and thus included in financing activities.

These net increases in operating cash flows were also a result of a $599 million increase in Air traffic liability driven by increased ticket sales related to an increase in leisure travel demand.

For the three months ended March 31, 2020, the operating cash flows were affected primarily by a $1.3 billion decrease in Accounts payable and accrued expenses, primarily due to the Company's payout of its 2019 $667 million ProfitSharing distribution to Employees in March 2020, as well as a significant decline in amounts payable for passenger excise taxes and segment fees as a result of the March 2020 drop in passenger ticket sales.

These were partially offset by a $701 million increase in Air traffic liability.

The increase in Air traffic liability resulted from January and February 2020 bookings, which were then significantly impacted by a decline in Customer demand and increased trip cancellations attributable to concerns relating to the COVID-19 pandemic, primarily in March 2020.

Historically, the Company has also used net cash provided by operations to fund stock repurchases and pay dividends;

however these shareholder return activities have been suspended due to restrictions associated with the CARES Act.

however these shareholder return activities have been suspended due to restrictions associated with the payroll assistance under the CARES Act, Payroll Support Program Extension, and PSP3 Payroll Support Program.

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

Net cash used in investing activities was $434 million during the three months ended September 30, 2020, compared with $359 million used in investing activities in the same prior year period.

Net cash used in investing activities totaled $107 million during the nine months ended September 30, 2020, compared with $447 million used in the same prior year period.

Net cash used in investing activities totaled $201 million during the three months ended March 31, 2021, compared with $5 million used 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.

The Company also raised $815 million from the sale-leaseback of 20 aircraft (see Note 8 to the unaudited Condensed Consolidated Financial Statements for more details on the sale-leaseback transactions) and received $428 million of Supplier proceeds during the nine months ended September 30, 2020, which the Company considers an offset to its aircraft capital expenditures.

See Note 12 to the unaudited Condensed Consolidated Financial Statements for further information.

During the nine months ended September 30, 2020, Capital expenditures were $425 million, compared with $766 million in the same prior year period, the majority of which included ongoing technology projects, airport and other facility construction projects, and progress payments related to new aircraft to be delivered to the Company for both periods.

Capital expenditures decreased, year-over-year, largely due to a decrease in technology project expenditures, progress payments, and several projects being placed into service since September 30, 2019.

Company has more than offset its originally planned annual 2020 capital spending of approximately $1.4 billion to $1.5 billion, primarily due to its fleet delivery expectations with Boeing, with its receipt of proceeds from sale-leaseback transactions, supplier proceeds, and the cancellation or deferral of the majority of its capital investment projects originally planned for 2020.

In light of the current environment, the Company and Boeing agreed to an arrangement requiring the Company to take delivery of no more than 48 aircraft through December 31, 2021.

The Company will continue discussions with Boeing to restructure its aircraft order book, and make any further adjustments to the delivery schedule and its capital expenditures as circumstances related to the MAX groundings and COVID-19 pandemic evolve.

During the three months ended March 31, 2021, Capital expenditures were $95 million, compared with $224 million in the same prior year period.

Capital expenditures decreased, year-over-year, largely due to a decrease in technology project expenditures and several projects being placed into service since March 31, 2020.

In addition, the Company did not make progress payments on future deliveries during the three months ended March 31, 2021, compared to the same prior year period, when progress payments were made.

See Notes 2 and 11 to the unaudited Condensed Consolidated Financial Statements for further information.

Net cash provided by financing activities was $1.2 billion during the three months ended September 30, 2020, compared with $690 million used in financing activities for the same prior year period.

Net cash provided by financing activities was $10.2 billion during the nine months ended September 30, 2020, compared with $2.1 billion used in financing activities for the same prior year period.

During the nine months ended September 30, 2020, the Company borrowed $13.6 billion, through various transactions, as explained in detail in Notes 2 and 8 to the unaudited Condensed Consolidated Financial Statements.

These financings were partially offset by the repayment in second quarter 2020 of all $3.7 billion borrowed under the Company's Amended and Restated 364-Day Credit Agreement and full repayment of the $1.0 billion drawn under the Company's Amended and Restated Revolving Credit Agreement.

See Note 8 to the unaudited Condensed Consolidated Financial Statements for further information on the Company's debt agreements.

In the first nine months of 2020, the Company also repurchased $451 million of its outstanding common stock, paid $188 million in cash dividends to Shareholders, and repaid $295 million in debt and finance lease obligations.

The Company expects to repay approximately $543 million in debt and finance lease obligations during the remainder of 2020.

During the nine months ended September 30, 2019, the Company repurchased $1.45 billion of its outstanding common stock, paid $372 million in cash dividends to Shareholders, and repaid $245 million in debt and finance lease obligations.

Since March, the Company has reduced annual 2020 spending by approximately $8 billion, compared with original plans.

Average daily core cash burn was approximately $16 million in third quarter 2020, compared with second quarter 2020 average core cash burn of $23 million per day.

The Company's average core cash burn in October is currently estimated to be approximately $12 million per day, and in fourth quarter 2020 is currently estimated to be approximately $11 million per day, driven primarily by continued modest improvements in close-in leisure demand and booking trends, as well as cost savings from voluntary Employee leave programs.

As a result of previously agreed upon delivery credits provided by Boeing to the Company due to the settlement of 2020 estimated damages relating to the FAA grounding of the 737 MAX aircraft and progress payments made to date on undelivered aircraft, the Company currently estimates no aircraft capital expenditures in 2021.

Therefore, the Company currently estimates its annual 2021 capital expenditures to be approximately $500 million, driven primarily by technology, facilities, and operational investments.

The Company cannot predict when the effects of the COVID-19 pandemic on air travel will end, but

the Company expects that its capital expenditures will increase from current levels if U.S.

air travel returns to pre-pandemic levels.

Net cash provided by financing activities was $464 million during the three months ended March 31, 2021, compared with $1.8 billion provided by financing activities for the same prior year period.

During the three months ended March 31, 2021, the Company borrowed $488 million of loan proceeds under the Payroll Support Program Extension.

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

The Company repaid $67 million in debt and finance lease obligations during the three months ended March 31, 2021, and is scheduled to repay approximately $153 million in debt and finance lease obligations during the remainder of 2021.

During the three months ended March 31, 2020, the Company borrowed $2.5 billion, through various transactions, in order to improve its liquidity position as a result of the onset of the pandemic.

The Company also repurchased $451 million of its outstanding common stock, paid $188 million in cash dividends to Shareholders, and repaid $78 million in debt and finance lease obligations.

Average daily core cash burn was approximately $13 million in first quarter 2021, compared with fourth quarter 2020 average core cash burn of $12 million per day.

Average core cash burn was approximately $9 million per day in March 2021.

Including changes in working capital — most notably, cash flow from future bookings — average core cash flow turned positive in March 2021, and the Company generated approximately $4 million per day, as revenue and booking trends improved.

The Company's average core cash burn (which excludes changes in working capital) in second quarter 2021 is currently estimated to be in the range of approximately $2 million to $4 million per day.

Based on current booking trends and cost outlook, the Company is hopeful it can achieve breakeven average core cash flow, or better, by June 2021.

Cash burn is a supplemental measure that most U.S.

airlines began providing in 2020 to measure liquidity in light of the negative financial effects of the pandemic.

Average core cash burn is calculated as Loss before income taxes, non-GAAP, adjusted for Depreciation and amortization expense;

Average daily core cash burn is calculated as Loss before income taxes, non-GAAP, adjusted for Depreciation and amortization expense;

Capital expenditures;

and adjusted amortizing debt service payments;

divided by 92 days in the period.

The Company utilizes average daily core cash burn to monitor the performance of its core business as a proxy for its ability to achieve sustainable cash and break-even earnings results.

Average core cash burn projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate those items or their impact to its financial statements in future periods.

divided by the number of days in the period.

The Company utilizes average daily core cash burn to monitor the performance of its core business as a proxy for its ability to achieve sustainable break-even or positive results on a cash basis.

Average core cash burn projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate those items or expenses or their impact to its financial statements in future periods.

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.

Given that the Company’s cash burn calculation is derived from Loss before income taxes, non-GAAP, the Company excludes the following items in its calculation of average core cash burn:

financing transactions;

Payroll Support Program proceeds;

Supplier proceeds;

voluntary separation and Extended ETO program payments;

and other changes in working capital.

As a result of the significant actions taken by the Company to bolster liquidity and its belief that it can secure additional financing at favorable terms, if needed, the Company decided not to participate in the separate secured loan program established under the CARES Act with respect to a potential loan with an estimated principal amount of approximately $2.8 billion.

The Company is a "well-known seasoned issuer" and has an effective shelf registration statement registering an indeterminate amount of debt and equity securities for future sales.

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

Utilizing an alternative cash burn approach, which adjusts for changes in working capital, among other items, the Company's first quarter 2021 daily cash burn was approximately $5 million.

Cash burn methodology varies by airline, and the Company’s first quarter 2021 average daily core cash burn of $13 million may differ materially by utilizing cash burn calculations that adjust for changes in working capital.

The Company is a "well-known seasoned issuer" and currently has an effective shelf registration statement registering an indeterminate amount of debt and equity securities for future sales.

The Company currently intends to use the proceeds from any future securities sales off this shelf registration statement for general corporate purposes.

The Company has access to $1.0 billion under its Amended and Restated Revolving Credit Agreement.

The Amended and Restated Revolving Credit Agreement has an accordion feature that would allow the Company, subject to, among other things, the procurement of incremental commitments, to increase the size of the facility to $1.5 billion.

The Company has access to $1.0 billion under its Amended and Restated Revolving Credit Facility, as amended (the "Revolving Credit Facility").

The Revolving Credit Facility has an accordion feature that would allow the Company, subject to, among other things, the procurement of incremental commitments, to increase the size of the facility to $1.5 billion.

Interest on the facility is based on the Company's credit ratings at the time of borrowing.

At the Company's current ratings, the interest cost would be LIBOR plus a spread of 200.0 basis points.

The facility contains a financial covenant requiring a minimum coverage ratio of adjusted pre-tax income to fixed obligations, as defined.

However, the Company has a holiday on meeting this financial covenant through March 31, 2021.

The facility also contains a financial covenant to maintain unrestricted cash and cash equivalents of $2.5 billion at all times under the Amended and Restated Revolving Credit Agreement;

the Company was compliant with this requirement as of September 30, 2020.

There were no amounts outstanding under the Amended and Restated Revolving Credit Agreement as of September 30, 2020.

On March 17, 2020, Moody's downgraded the Company's credit ratings to "Baa1" from "A3." On March 18, 2020, Standard & Poor's downgraded the Company's credit ratings to "BBB" from "BBB+." On April 10, 2020, Fitch downgraded the Company's credit ratings to "BBB+" from "A-." The downgrades of the Company's investment-grade ratings were based on the Company's increased level of credit risk as a result of the financial impacts of the COVID-19 pandemic.

See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information on the impacts of the COVID-19 pandemic.

Although not the case at September 30, 2020, due to the Company's recent significant financing activities, the Company has historically carried a working capital deficit, in which its current liabilities exceed its current assets.

The facility contains a financial covenant to maintain total liquidity, as defined in the Revolving Credit Facility, of $1.5 billion at all times under the Revolving Credit Facility;

the Company was compliant with this requirement as of March 31, 2021.

There were no amounts outstanding under the Revolving Credit Facility as of March 31, 2021.

Although not the case at March 31, 2021, due to the Company's significant financing activities, the Company has historically carried a working capital deficit, in which its current liabilities exceed its current assets.

This is common within the airline industry and is primarily due to the nature of the Air traffic liability account, which is related to advance ticket sales, unused funds available to Customers, and loyalty deferred revenue, which are performance obligations for future Customer flights, do not require future settlement in cash, and are mostly nonrefundable.

See Note 6 to the unaudited Condensed Consolidated Financial Statements for further information.

The Company has various options available to meet its capital and operating commitments, including unrestricted cash and short-term investments of $14.6 billion as of September 30, 2020, and anticipated future internally generated funds from operations.

The Company has various options available to meet its capital and operating commitments, including unrestricted cash and short-term investments of $14.3 billion as of March 31, 2021, and anticipated future internally generated funds from operations.

However, the COVID-19 pandemic continues to evolve and could have a material adverse impact on the Company's ability to meet its capital and operating commitments.

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The Company will continue to consider various financing options to maximize liquidity and supplement cash requirements, as necessary.

Contractual Obligations and Contingent Liabilities and Commitments

As previously disclosed, the Company has an agreement with Boeing to take delivery of no more than 48 MAX aircraft through December 31, 2021.

While the Company and Boeing continue discussions to restructure the Company's aircraft order book, the delivery schedule below reflects existing contractual commitments.

In addition to the firm deliveries from Boeing, the Company has existing agreements with various third parties to lease 16 MAX aircraft.

The Company will continue collaborating with Boeing to review its aircraft order book and make any further adjustments to the delivery schedule as circumstances related to the MAX groundings and COVID-19 pandemic evolve.

The Company offers no assurances that current estimations and timelines are correct.

As of September 30, 2020, the Company had firm deliveries and options for Boeing 737 MAX 7 and 737 MAX 8 aircraft as follows:

The Boeing Company

Firm Orders MAX 8

Firm Orders MAX 8 Options Additional MAX 8s Total

2020-2021 7 100 — 16 123 (a)(b)

2022 — 27 14 — 41

2023 12 22 23 — 57

2024 11 30 23 — 64

2025 — 40 36 — 76

2026 — — 19 — 19

30 219 (c) 115 16 (d) 380

(a) 2020-2021 Contractual Detail

The Boeing Company

Firm Orders MAX 8

Firm Orders Additional MAX 8s Total

2019 Contractual Deliveries 7 20 13 40

2020 Contractual Deliveries — 35 3 38

2021 Contractual Deliveries — 45 — 45

2020-2021 Contractual Total 7 100 16 123

The 2020-2021 combined contractual total includes 40 contractual aircraft that the Company expected to be delivered in 2019, but were not received due to the MAX groundings, and up to 38 contractual aircraft previously expected in 2020.

The Company is in discussions with Boeing to restructure its delivery schedule for the MAX aircraft and both parties have agreed to an interim arrangement that the Company will take no more than 48 MAX deliveries through the end of 2021, instead of the 123 shown above.

(b) Includes one contractual aircraft delivery that shifted from 2019 to 2021.

(c) The Company has flexibility to substitute 737 MAX 7 in lieu of 737 MAX 8 firm orders, upon written advance notification as stated in the contract.

(d) To be acquired in leases from various third parties.

Based on the Company's existing commitment contract with Boeing as reflected in the delivery schedule above, in which the Company has shifted its 2019 and year-to-date 2020 obligations into future periods, the Company's capital commitments associated with its firm orders are as follows:

$2.8 billion combined for remaining 2020 and 2021 (of which $1.7 billion is contractually related to 2021), $1.2 billion in 2022, $1.6 billion in 2023, $1.9 billion in 2024, and $1.5 billion thereafter.

However, based on the interim arrangement with Boeing that the Company will take no more than 48 MAX aircraft through December 31, 2021, as noted above, the Company's combined commitments for the remaining portion of 2020 and full year 2021 would be a total of no more than $1 billion.

The Company's aircraft spending will continue to be impacted by the status of the grounding of the MAX aircraft, as all MAX deliveries are suspended until the FAA order is rescinded.

The Company is in discussions with Boeing to refresh its order book and the timeline of future deliveries is uncertain.

For aircraft commitments with Boeing, the Company is required to make cash deposits toward the purchase of aircraft in advance.

These deposits are classified as Deposits on flight equipment purchase contracts in the unaudited Condensed Consolidated Balance Sheet until the aircraft is delivered, at which time deposits previously made are deducted from the final purchase price of the aircraft and are reclassified as Flight equipment.

The Company returned two leased Boeing 737-700 aircraft and retired one owned Boeing 737-700 aircraft during third quarter 2020, and expects to return three leased Boeing 737-700 aircraft during fourth quarter 2020.

The following table details information on the aircraft in the Company's fleet as of September 30, 2020:

On March 24, 2021, the Company entered into the Supplement to its aircraft purchase agreement with Boeing relating to the Company's purchase of Boeing 737 MAX 7 and 737 MAX 8 aircraft.

Pursuant to the Supplement (i) the Company added 100 firm orders for the MAX 7, with the first 30 to be delivered in 2022;

(ii) the Company added 155 MAX aircraft options;

(iii) the order book was extended to include deliveries through 2031;

and (iv) the Company converted 70 MAX 8 firm orders to MAX 7 firm orders.

The Supplement also includes certain confidential credits, discounts, and other concessions provided to the Company by Boeing.

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

Age (Yrs) Number

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737-800 175 6 207 190 17

737 MAX 8 175 2 34 (b) 21 13

737 MAX 8 175 2 61 (a) 33 28

Totals 12 730 593 137

(a) Included 70 Boeing 737 Next Generation aircraft removed from active fleet and placed in long-term storage as of September 30, 2020.

(b) All 34 of the Company's MAX 8 aircraft were grounded as of March 13, 2019, to comply with an FAA emergency order issued for all U.S.

airlines to ground all MAX aircraft.

See Note 12 to the unaudited Condensed Consolidated Financial Statements for further information.

(a) Included 59 Boeing 737 Next Generation and 7 Boeing 737 MAX 8 aircraft removed from active fleet and in temporary storage as of March 31, 2021.

Cautionary Statement Regarding Forward-Looking Statements

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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 financial outlook, projections, and expectations, including underlying assumptions and estimates, in particular related to the anticipated impact of the COVID-19 pandemic;

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

• the Company’s goals and expectations with respect to its Voluntary Separation Program 2020 and Extended ETO program;

• the Company's plans, estimates, expectations, and assumptions related to the return of the 737 MAX to service and related fleet planning assumptions, including with respect to the Company’s fleet order book and delivery schedule and fleet retirement plans;

• the Company’s network plans and related expected benefits;

• the Company’s expected flight schedule adjustments and the related impact on the Company’s results of operations;

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

• the Company's expectations with respect to capital expenditures, daily cash burn, and liquidity, including its ability to meet its ongoing capital, operating, and other obligations, and the Company’s anticipated needs for, and sources of, funds;

• the Company’s expectations related to payroll support pursuant to the American Rescue Plan Act of 2021;

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

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

• the Company’s fleet plans and related expectations;

• the Company's initiatives, including its environmental sustainability goal;

• the Company's network plans and related expectations;

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

• the Company's expectations with respect to capital expenditures, cash burn/cash flows, and liquidity, including its ability to meet its ongoing capital, operating, and other obligations, and the Company’s anticipated needs for, and sources of, funds;

• the Company's assessment of market risks;

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Factors that could cause these differences include, among others:

• the extent of the COVID-19 pandemic, including the duration, spread, severity, and any recurrence of the COVID-19 pandemic;

• the extent of the COVID-19 pandemic, including the duration, spread, severity, and any recurrence of the COVID-19 pandemic, including through any new variant strains of the underlying virus;

the effectiveness and availability of vaccines;

the duration and scope of related government orders and restrictions;

the duration and scope of the Company’s related self-imposed restrictions to address customer and employee health concerns;

the duration and scope of the Company's actions to address Customer and Employee health concerns;

the extent of the impact of the COVID-19 pandemic on overall demand for air travel and the Company's related business plans and decisions;

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and any negative impact of the COVID-19 pandemic on the Company's access to capital;

• the impact of economic conditions, governmental actions, extreme or severe weather and natural disasters, fears of terrorism or war, actions of competitors, fuel prices, consumer perception, and other factors beyond the Company's control, on consumer behavior and the Company's results of operations and business decisions, plans, strategies, and results;

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

• the impact of fears or actual outbreaks of other diseases, economic conditions, extreme or severe weather and natural disasters, fears of terrorism or war, actions of competitors, consumer perception, 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 with respect to the Company's fleet order book, delivery schedule, and other performance requirements under its agreements with the Company, including with respect to the Company’s ability to return all of its MAX aircraft to revenue service;

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

• the impact of the Company's obligations and restrictions related to its participation in the U.S.

Treasury's Payroll Support Program, including restrictions and obligations associated with its loan from, and warrants issued to, the U.S.

Treasury's payroll support programs, including restrictions and obligations associated with its loans from, and warrants

issued to, the U.S.

and any related negative impact on the Company’ ability to retain key Employees;

• the Company’s ability to obtain additional payroll support or other financing from the U.S.

Treasury and the impact of any related additional restrictions on the manner in which the Company operates its business;

• the enactment or adoption of future laws, statutes, and regulations and interpretations or enforcement of current and future laws, statutes, and regulations that affect the terms or application of the Payroll Support Program documents and that may have a material adverse effect on the Company;

• the Company's dependence on Boeing and the FAA with respect to the timing of the return of the 737 MAX to service and any related changes to the Company's operational and financial assumptions and decisions;

• the Company's dependence on Boeing with respect to the Company's fleet order book and delivery schedule;

• the Company’s dependence on other third parties for products and services, and the impact on the Company’s operations and results of operations of any third party delays or non-performance;

• the enactment or adoption of future laws, statutes, and regulations and interpretations or enforcement of current and future laws, statutes, and regulations that affect the terms or application of the Company’s payroll support agreements with the U.S.

Treasury and that may have a material adverse effect on the Company;

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

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

• 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;

• other factors as set forth in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2019, and in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2020.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis