What changed in this filing

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Item 1. Financial Statements

2021-07-27 compared with 2021-04-27 · 336 added, 214 removed, 649 unchanged (46% of the section changed)

3 unchanged sentences

(in millions)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Current assets:

35 unchanged sentences

Retained earnings 15,260 14,777

Accumulated other comprehensive loss ( 60 ) ( 105 )

Accumulated other comprehensive income (loss) 136 ( 105 )

Treasury stock, at cost ( 10,865 ) ( 10,875 )

5 unchanged sentences

(in millions, except per share amounts)

Three months ended March 31,

Three months ended June 30, Six months ended June 30,

2021 2020 2021 2020

OPERATING REVENUES:

36 unchanged sentences

2016-01, Financial Instruments (See Note 1) — — 19 ( 19 ) — —

— — 19 ( 19 ) — —

Issuance of common and treasury stock pursuant to Employee stock plans — ( 8 ) — — 8 —

3 unchanged sentences

Balance at March 31, 2021 $ 888 $ 4,220 $ 14,912 $ ( 60 ) $ ( 10,867 ) $ 9,093

Common Stock Capital in excess of par value Retained earnings Accumulated other comprehensive loss Treasury stock Total

Issuance of common and treasury stock pursuant to Employee stock plans — 11 — — 2 13

Share-based compensation — 16 — — — 16

Stock warrants — 22 — — — 22

Comprehensive income — — 348 196 — 544

Balance at June 30, 2021 $ 888 $ 4,269 $ 15,260 $ 136 $ ( 10,865 ) $ 9,688

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

Balance at December 31, 2019 $ 808 $ 1,581 $ 17,945 $ ( 61 ) $ ( 10,441 ) $ 9,832

6 unchanged sentences

Balance at March 31, 2020 $ 808 $ 1,582 $ 17,757 $ ( 186 ) $ ( 10,886 ) $ 9,075

Issuance of common stock, net of issuance costs 80 2,144 — — — 2,224

Issuance of common and treasury stock pursuant to Employee stock plans — 8 — 5 13

Share-based compensation — ( 2 ) — — — ( 2 )

Stock warrants — 35 — — — 35

Equity feature of convertible notes, net of issuance costs — 392 — — — 392

Comprehensive income (loss) — — ( 915 ) 56 — ( 859 )

Balance at June 30, 2020 $ 888 $ 4,159 $ 16,842 $ ( 130 ) $ ( 10,881 ) $ 10,878

See accompanying notes.

1 unchanged sentence

Condensed Consolidated Statement of Cash Flows

(in millions)

Three months ended

(in millions) (unaudited)

Three months ended Six months ended

June 30, June 30,

2021 2020 2021 2020

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) $ 348 $ ( 915 ) $ 463 $ ( 1,009 )

Adjustments to reconcile net income (loss) to cash used in operating activities:

Adjustments to reconcile net income (loss) to cash provided by operating activities:

Depreciation and amortization 315 313 627 624

1 unchanged sentence

Deferred income taxes ( 30 ) ( 181 ) ( 26 ) ( 230 )

Gain on sale-leaseback transactions — ( 222 ) — ( 222 )

Changes in certain assets and liabilities:

4 unchanged sentences

Other liabilities ( 64 ) ( 74 ) ( 186 ) ( 206 )

Cash collateral received from (provided to) derivative counterparties 38 ( 5 )

Cash collateral received from derivative counterparties 48 12 86 7

Other, net 17 ( 14 ) 32 ( 76 )

Net cash provided by (used in) operating activities 645 ( 377 )

Net cash provided by operating activities 2,005 897 2,650 520

CASH FLOWS FROM INVESTING ACTIVITIES:

1 unchanged sentence

Supplier proceeds — 128 — 428

Proceeds from sale-leaseback transactions — 815 — 815

Purchases of short-term investments ( 1,651 ) ( 1,316 ) ( 2,975 ) ( 2,345 )

Proceeds from sales of short-term and other investments 1,277 818 2,495 1,765

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

Net cash provided by (used in) investing activities ( 469 ) 332 ( 670 ) 327

CASH FLOWS FROM FINANCING ACTIVITIES:

Issuance of common stock — 2,294 — 2,294

Proceeds from issuance of long-term debt — 3,997 — 4,497

1 unchanged sentence

Proceeds from revolving credit facility — — — 1,000

Proceeds from convertible notes — 2,300 — 2,300

Proceeds from Payroll Support Program loan and warrants 625 885 1,136 885

2 unchanged sentences

Payments of long-term debt and finance lease obligations ( 43 ) ( 159 ) ( 109 ) ( 237 )

Payments of term loan credit facility — ( 3,683 ) — ( 3,683 )

Payments of revolving credit facility — ( 1,000 ) — ( 1,000 )

Payments of cash dividends — — — ( 188 )

Capitalized financing items — ( 171 ) — ( 176 )

Other, net 22 23 28 8

3 unchanged sentences

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,124 $ 12,351 $ 14,124 $ 12,351

Three months ended Six months ended

June 30, June 30,

2021 2020 2021 2020

CASH PAYMENTS FOR:

3 unchanged sentences

Right-of-use assets acquired under operating leases $ 12 $ 661 $ 230 $ 686

Flight equipment acquired against supplier credit memo $ 207 $ — $ 512 $ —

Assets constructed for others $ ( 341 ) $ 41 $ ( 309 ) $ 75

8 unchanged sentences

Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States ("GAAP") for complete financial statements.

The unaudited Condensed Consolidated Financial Statements for the interim periods ended March 31, 2021 and 2020 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods.

The unaudited Condensed Consolidated Financial Statements for the interim periods ended June 30, 2021 and 2020 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods.

This includes all normal and recurring adjustments and elimination of significant intercompany transactions.

1 unchanged sentence

In many years, the Company's revenues, as well as its Operating income and Net income, have been better in its second and third fiscal quarters than in its first and fourth fiscal quarters.

However, beginning in early 2020, as a result of the COVID-19 pandemic, the Company's results have not been in line with such historical trends.

However, beginning in early 2020, as a result of the COVID-19 pandemic, the Company's results have not always been in line with such historical trends.

See Note 2 for further information.

2 unchanged sentences

See Note 4 for further information on fuel and the Company's hedging program.

Operating results for the three months ended March 31, 2021, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2021.

Operating results for the three and six months ended June 30, 2021, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2021.

For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

In the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss), for the three months ended March 31, 2021, Payroll support and voluntary Employee programs, net, includes the correction of previously underaccrued payroll tax credits, related to fourth quarter 2020, of $ 88 million, pre-tax.

In the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss), for the six months ended June 30, 2021, Payroll support and voluntary Employee programs, net, includes the correction of previously underaccrued payroll tax credits, related to fourth quarter 2020, of $ 88 million, pre-tax.

Other gains and losses, net, includes gains of $ 60 million, pre-tax, to correct investment gains related to prior periods previously recorded in Accumulated other comprehensive income (loss) ("AOCI").

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

In the unaudited Condensed Consolidated Statement of Stockholders' Equity, for the six months ended June 30, 2021, the Company recorded a decrease of $ 19 million, net of tax, in AOCI and a corresponding increase in Retained earnings to correct the amount of the impact of the cumulative effect of adopting Accounting Standards Update ("ASU") 2016-01, Financial Instruments in 2018.

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

7 unchanged sentences

The Company proactively canceled a significant portion of its scheduled flights in March 2020 and continued adjusting capacity throughout 2020, as the Company grounded a significant portion of its fleet and operated a significantly reduced portion of its previously scheduled capacity.

The Company continued to experience significant negative impacts to passenger demand and bookings through first quarter 2021 due to the pandemic.

In April 2020, the Company entered into definitive documentation with the United States Department of Treasury ("Treasury") with respect to funding support pursuant to the Payroll Support Program ("Payroll Support") under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").

The Company continued to experience negative impacts to passenger demand and bookings early in 2021 due to the pandemic, in particular with respect to business travel, although as a result of declining reported COVID-19 cases throughout the United States, easing travel restrictions, lifting of business restrictions, and an increase in the number of individuals vaccinated, domestic leisure travel demand and bookings improved during second quarter 2021.

Since the start of the pandemic, the Company entered into definitive documentation with the United States Department of Treasury ("Treasury") with respect to payroll funding support ("Payroll Support") pursuant to three separate Payroll Support programs as described below.

In April 2020, the Company entered into definitive documentation (the "PSP1 Payroll Support Program") with Treasury with respect to Payroll Support under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act").

During 2020, the Company received a total of $ 3.4 billion of relief funds under the CARES Act.

As consideration for the Payroll Support, the Company issued a promissory note in favor of Treasury and entered into a warrant agreement with Treasury, pursuant to which the Company agreed to issue warrants to purchase common stock of the Company to Treasury.

As consideration for this Payroll Support, the Company issued a promissory note in favor of Treasury and entered into a warrant agreement with Treasury, pursuant to which the Company agreed to issue warrants to purchase common stock of the Company to Treasury.

During 2020, the Company provided the promissory note in the aggregate amount of $ 976 million and issued warrants valued at a total of $ 40 million to purchase up to an aggregate of 2.7 million shares of the Company's common stock, subject to adjustment pursuant to the terms of the warrants.

Payroll Support funds were used solely to pay qualifying employee salaries, wages, and benefits.

On January 15, 2021, the Company entered into definitive documentation with Treasury with respect to funding support under the Consolidated Appropriations Act, 2021 (the "Payroll Support Program Extension").

Payroll Support Program Extension funds were used solely to pay qualifying employee wages and benefits.

As of March 31, 2021, the Company had received $ 1.7 billion associated with the Payroll Support Program Extension.

As consideration for the Payroll Support Program Extension, the Company issued a promissory note (the "PSP2 Note") in favor of Treasury and entered into a warrant agreement (the "PSP2 Warrant Agreement") with Treasury pursuant to which the Company agreed to issue warrants (each, a "PSP2 Warrant") to purchase common stock of the Company to Treasury.

As of March 31, 2021, the Company had provided a PSP2 Note in the aggregate amount of $ 488 million and issued PSP2 Warrants valued at a total of $ 23 million to purchase up to an aggregate of 1.1 million shares of the Company's common stock, subject to adjustment pursuant to the terms of the PSP2 Warrants.

Pursuant to the terms of the Payroll Support Program Extension, the payroll support funds could only be utilized to pay qualifying salaries, wages, and benefits, as defined.

As of March 31, 2021, excluding the $ 488 million PSP2 Note and value allocated to the PSP2 Warrants, all Payroll Support Program Extension funds received had been allocated to reduce eligible costs in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2021.

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

The grant portion of the payroll support funds will be allocated to reduce qualifying employee salaries, wages, and benefits during second quarter 2021.

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

In January 2021, the Company entered into definitive documentation (the "PSP2 Payroll Support Program") with Treasury with respect to Payroll Support under the Consolidated Appropriations Act, 2021 ("Consolidated Appropriations Act").

During the first six months of 2021, the Company received a total of $ 2.0 billion of relief funds under the Consolidated Appropriations Act.

As consideration for this Payroll Support, the Company issued a promissory note ("PSP2 Note") in favor of Treasury and entered into a warrant agreement with Treasury, pursuant to which the Company agreed to issue warrants ("PSP2 Warrants") to purchase common stock of the Company to Treasury.

Each PSP2 Warrant is exercisable at a strike price of $ 46.28 per share of common stock and will expire on the fifth anniversary of the issue date of such PSP2 Warrant.

During 2021, the Company provided the promissory note in the aggregate amount of $ 566 million and issued warrants valued at a total of $ 27 million to purchase up to an aggregate of 1.2 million shares of the Company's common stock, subject to adjustment pursuant to the terms of the warrants.

The PSP2 Note matures in full on January 15, 2031, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity.

The Company has an option to prepay the PSP2 Note at any time without premium or penalty.

Amounts outstanding under the PSP2 Note bear interest at a rate of 1.00 percent before January 15, 2026, and, afterwards, at a rate equal to the Secured Overnight Financing Rate or other benchmark replacement rate consistent with customary market conventions plus a margin of 2.00 percent.

Amounts outstanding under the PSP2 Note bear interest at a rate of 1.00 percent before January 15, 2026, and, afterwards, at a rate equal to the Secured Overnight Financing Rate (SOFR) or other benchmark replacement rate consistent with customary market conventions plus a margin of 2.00 percent.

The PSP2 Note contains customary representations and warranties and events of default.

In April 2021, the Company entered into definitive documentation (the "PSP3 Payroll Support Program") with Treasury with respect to Payroll Support under the American Rescue Plan Act of 2021 ("American Rescue Act").

During second quarter 2021, the Company received a total of $ 1.9 billion of relief funds under the American Rescue Act.

As consideration for this Payroll Support, the Company issued a promissory note ("PSP3 Note") in favor of Treasury and entered into a warrant agreement with Treasury, pursuant to which the Company agreed to issue warrants ("PSP3 Warrants") to purchase common stock of the Company to Treasury.

Each PSP3 Warrant is

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

The PSP2 Warrant Agreement sets out the Company’s obligations to issue PSP2 Warrants in connection with disbursements of funding support pursuant to the Payroll Support Program Extension and to file or designate a resale shelf registration statement for the PSP2 Warrants and the underlying shares of common stock.

The Company has also granted Treasury certain demand underwritten offering and piggyback registration rights with respect to the PSP2 Warrants and the underlying common stock.

Each PSP2 Warrant is exercisable at a strike price of $ 46.28 per share of common stock and will expire on the fifth anniversary of the issue date of such PSP2 Warrant.

The PSP2 Warrants will be settled through net share settlement or net cash settlement, at the Company’s option.

The PSP2 Warrants include adjustments for below market issuances, payment of dividends, and other customary anti-dilution provisions.

The PSP2 Warrants do not have voting rights.

On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021, which includes provisions for an expected $ 14 billion of further payroll support ("PSP3 Payroll Support") for eligible U.S.

airlines (the "PSP3 Payroll Support Program").

On April 23, 2021, the Company finalized an agreement with Treasury in which the Company is expected to receive an aggregate of approximately $ 1.9 billion in PSP3 Payroll Support funds that will be used to pay qualifying employee salaries, wages, and benefits through at least September 30, 2021.

The Company received an initial installment of $ 926 million on April 23, 2021, and expects to receive the remainder of PSP3 Payroll Support funds during second quarter 2021.

As consideration for the PSP3 Payroll Support, on April 23, 2021, the Company issued a promissory note (the "PSP3 Note") in favor of Treasury and entered into a warrant agreement with Treasury (the "PSP3 Warrant Agreement"), pursuant to which the Company agreed to issue warrants (each, a "PSP3 Warrant") to purchase common stock of the Company to Treasury.

The PSP3 Note was issued for $ 248 million and the Company issued a PSP3 Warrant valued at a total of $ 9 million to purchase up to an aggregate of 424 thousand shares of the Company's common stock, subject to adjustment pursuant to the terms of the PSP3 Warrant.

Upon each subsequent disbursement of PSP3 Payroll Support to the Company after April 23, 2021, (i) the principal amount of the PSP3 Note will automatically be increased in an amount equal to 30 percent of any such disbursement and (ii) the Company will issue an additional PSP3 Warrant to Treasury in an amount equal to 10 percent of the principal amount of the increase to the PSP3 Note in connection with such disbursement of PSP3 Payroll Support, divided by the strike price of $ 58.51 (which was the closing price of the Company's common stock on March 10, 2021).

The PSP3 Payroll Support funds received can only be utilized to pay qualifying salaries, wages, and benefits, as defined.

Excluding the amounts allocated to the PSP3 Note and value allocated to the PSP3 Warrants, all PSP3 Payroll Support funds received are expected to be allocated to reduce eligible costs in the year ended December 31, 2021.

The Company currently expects the grant portion of the direct payroll support of $ 1.3 billion will be classified as a contra-expense line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

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

exercisable at a strike price of $ 58.51 per share of common stock and will expire on the fifth anniversary of the issue date of such PSP3 Warrant.

During second quarter 2021, the Company provided the promissory note in the aggregate amount of $ 526 million and issued warrants valued at a total of $ 18 million to purchase up to an aggregate of 899 thousand shares of the Company's common stock, subject to adjustment pursuant to the terms of the warrants.

The PSP3 Note matures in full on April 23, 2031, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity.

Amounts outstanding under the PSP3 Note bear interest at a rate of 1.00 percent before April 23, 2026, and, afterwards, at a rate equal to the Secured Overnight Financing Rate (SOFR) or other benchmark replacement rate consistent with customary market conventions plus a margin of 2.00 percent.

The PSP3 Note contains customary representations and warranties and events of default.

Pursuant to the PSP3 Payroll Support Program, in connection with the receipt of Payroll Support, the Company is subject to certain restrictions, including prohibitions against involuntary furloughs and reductions in employee pay rates and benefits through the later of September 30, 2021, and the date the Company has expended all of the Payroll Support under the PSP3 Payroll Support Program;

the elimination of share repurchases and dividends through September 30, 2022;

and limits on executive compensation until April 1, 2023.

Under each of the three Payroll Support programs, funds were received in multiple disbursements.

Upon each initial disbursement of Payroll Support under each of the three Payroll Support programs, the Company provided a promissory note and issued warrants to Treasury.

Upon each subsequent disbursement of Payroll Support under each of the three Payroll Support programs, (i) the principal amount of the applicable promissory note was increased and (ii) the Company issued additional warrants to Treasury.

Under each of the three Payroll Support programs, funds received were used solely to pay qualifying employee salaries, wages, and benefits.

The allocated to date grant portions of the Payroll Support received have been classified as a contra-expense line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

The Company currently expects the remaining unallocated grant portion of Payroll Support of $ 763 million will be classified as a contra-expense line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) in third quarter 2021.

The Company has an option to prepay the promissory notes at any time without premium or penalty.

Warrants will be settled through net share settlement or net cash settlement, at the Company’s option.

The Company has also granted Treasury certain demand underwritten offering and piggyback registration rights with respect to the warrants and the underlying common stock.

The warrants do not have voting rights and include adjustments for below market issuances, payment of dividends, and other customary anti-dilution provisions.

Refer to the table below for more detail.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(in millions, except shares in thousands) Grant Promissory Note Warrants ($) Total Payroll Support Proceeds Warrants (shares)

PSP1 Payroll Support Program

April 21, 2020 $ 1,152 $ 459 $ 18 $ 1,630 1,258

May 29, 2020 448 196 8 652 536

June 30, 2020 448 196 9 652 536

July 30, 2020 225 97 3 326 268

September 30, 2020 64 28 2 94 78

$ 2,337 $ 976 $ 40 $ 3,354 2,676

PSP2 Payroll Support Program

January 15, 2021 $ 625 $ 229 $ 9 $ 864 495

March 5, 2021 591 259 14 864 560

April 23, 2021 177 78 4 259 168

$ 1,393 $ 566 $ 27 $ 1,987 1,223

PSP3 Payroll Support Program

April 23, 2021 $ 670 $ 248 $ 9 $ 926 424

June 3, 2021 640 278 9 926 475

$ 1,310 $ 526 $ 18 $ 1,852 899

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

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

Virtually all of the Company’s Employees hired before June 1, 2020 were eligible to participate in Voluntary Separation Program.

In conjunction with Voluntary Separation Program 2020, the Company also offered certain contract Employees the option to take voluntary Extended Emergency Time Off ("Extended ETO"), for periods between six and 18 months, with the exception of Pilots, who could elect to take Extended ETO for periods up to five years .

Approximately 11,000 Employees participated in the Extended ETO program, and 8,164 Employees remained on Extended ETO leave as of March 31, 2021.

A total of over 4,200 Employees initially elected to participate in Voluntary Separation Program.

In conjunction with Voluntary Separation Program, the Company also offered certain contract Employees the option to take voluntary Extended Emergency Time Off ("Extended ETO"), for periods between six and 18 months, with the exception of Pilots, who could elect to take Extended ETO for periods up to five years , all subject to early recalls.

Approximately 11,000 Employees participated in the Extended ETO program.

During second quarter 2021, approximately 7,000 Employees returned from the Extended ETO program and 1,466 Employees remained on Extended ETO leave as of June 30, 2021.

Employees taking Extended ETO do not perform any work for the Company and are considered inactive while on leave, but do get paid a portion of their wages and continue to receive all associated benefits, as well as accrue service credit for all benefits.

Contract employees who elected to take Extended ETO for periods between 12 and 18 months and had 10 or more years of service were given the opportunity to convert to the

Contract employees who elected to take Extended ETO for periods between 12 and 18 months and had 10 or more years of service were given the opportunity to convert to the Voluntary Separation Program beginning on September 1, 2020, until up to 90 days before the end of their respective Extended ETO term.

Approximately 300 Employees elected this conversion option during the first six months of 2021.

The purpose of Voluntary Separation Program and Extended ETO was to maintain a reduced workforce to operate at reduced capacity relative to the Company's operations prior to the COVID-19 pandemic.

In accordance with the accounting guidance in ASC Topic 712 (Compensation — Nonretirement Postemployment Benefits), the Company accrued charges related to the special termination benefits described above upon Employees accepting Voluntary Separation Program or Extended ETO offers.

The Company accrued expenses totaling $ 1.4 billion for its Voluntary Separation Program and Extended ETO program in 2020, which are being reduced as program benefits are paid.

For both the Voluntary Separation Program and Extended ETO programs combined, approximately $ 348 million of the liability balances were relieved during first and second quarter 2021 through payments to Employees, leaving a

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

The purpose of Voluntary Separation Program 2020 and Extended ETO is to maintain a reduced workforce to operate at reduced capacity relative to the Company's operations prior to the COVID-19 pandemic.

During first quarter 2021, the Company determined that it was no longer probable that a portion of the Employees remaining on Extended ETO would remain on such leave for their entire elected term.

Therefore, a portion of the accruals previously recorded were reversed, resulting in a $ 141 million credit to expense.

In addition, the Company continues to be subject to overstaffing levels in certain workgroups and locations, and offered some of the Employees on Extended ETO the opportunity to extend their leave periods by one, two, or three months.

Based on the acceptances received, the Company accrued an additional $ 26 million in expense associated with the program.

Both of these items are classified within Payroll support and voluntary Employee programs, net, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss), and are in addition to the allocation of the Payroll Support Program Extension funds utilized to fund salaries, wages, and benefits, which totaled $ 1.2 billion during first quarter 2021.

The Company accrued expense totaling $ 620 million for its Extended ETO program in 2020, and considering the adjustments described above, as well as payments subsequently made, $ 190 million remains accrued as of March 31, 2021.

The balance consists of future wages and benefits for the Employees that will not be working during their leave.

balance of $ 436 million as of June 30, 2021.

The balance consists of future wages and some benefits for the Employees that will not be working during their leave, or who have been permanently separated.

The Company accrued amounts for up to the first 18 months from inception for all Employees that elected Extended ETO, but did not include amounts related to Pilots for periods beyond February 2022, based on the uncertainty of the Company's future capacity levels, and because it is not currently probable that such Employees will not be recalled to work beyond that timeframe.

Therefore, future adjustments to the amounts accrued may become necessary at a later date.

For both the Voluntary Support Program 2020 and Extended ETO programs combined, approximately $ 188 million of the liability balances were relieved during first quarter 2021 through payments to Employees, leaving a balance of $ 611 million as of March 31, 2021.

During the first half of 2021, the Company determined that it was no longer probable that a portion of the Employees on Extended ETO would remain on such leave for their entire elected term.

Therefore, a portion of the accruals previously recorded were reversed, resulting in a net $ 115 million and $ 15 million credit to expense in first and second quarter 2021, respectively.

Future adjustments to the amounts accrued may become necessary at a later date.

Both of these items are classified within Payroll support and voluntary Employee programs, net, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss), and are in addition to the allocation of the PSP2 Payroll Support Program and PSP3 Payroll Support Program funds utilized to fund salaries, wages, and benefits, which totaled $ 724 million and $ 1.9 billion for the three and six months ended June 30, 2021, respectively.

In response to flight schedule adjustments due to the effects of the COVID-19 pandemic, a number of aircraft were taken out of the Company’s schedule beginning in late March 2020, and placed in short-term storage, as well as some in a longer term storage program.

As of March 31, 2021, 66 aircraft remained in temporary or long-term storage.

As of June 30, 2021, 39 aircraft remained in storage, all of which are expected to be placed back into service by December 31, 2021.

Given the current expectation that these aircraft have been placed in storage temporarily, the Company has continued to record depreciation expense associated with them.

NEW ACCOUNTING PRONOUNCEMENTS

On January 7, 2021, the Financial Accounting Standards Board (the "FASB") issued ASU No.

On May 3, 2021, the Financial Accounting Standards Board (the "FASB") issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options.

This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange.

This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

Issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard.

Early adoption is permitted, including adoption in an interim period.

If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period.

The Company is evaluating this new standard, but does not expect it to have a material impact on the Company's financial statements or disclosures.

On January 7, 2021, the FASB issued ASU No.

2021-01, Reference Rate Reform (Topic 848).

This new standard provides optional temporary guidance for entities transitioning away from LIBOR to new reference rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions with Topic 848.

This new standard provides optional temporary guidance for entities transitioning away from London Interbank Offered Rate ("LIBOR") to new reference interest rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions with Topic 848.

These amendments do not apply to any contract modifications made after December 31, 2022, any new hedging relationships entered into after December 31, 2022, or to existing hedging relationships evaluated for effectiveness existing as of December 31, 2022, that apply certain optional practical expedients.

1 unchanged sentence

The Company is currently evaluating its contracts that reference LIBOR and the potential impacts of applying the optional temporary guidance under this standard.

There were no LIBOR-related contract modifications during first quarter 2021, and the Company will provide additional information about the transition to new reference rates for affected contracts and adoption of this standard at a future date, if material.

There were no material LIBOR-related contract modifications during the six months ended June 30, 2021, and the Company will provide additional information about the transition to new reference rates for affected contracts and adoption of this standard at a future date, if material.

Southwest Airlines Co.

5 unchanged sentences

This standard is effective for fiscal years beginning after December 15, 2021.

Companies may elect early adoption for periods beginning no earlier than December 15, 2020, including interim periods within those fiscal years.

The FASB specified that an entity should adopt the guidance as of the beginning of its annual fiscal year.

The Company plans to adopt this standard as of January 1, 2022.

17 unchanged sentences

For example, the Company may enter into "out-of-the-money" option contracts (including "catastrophic" protection), which may not generate intrinsic gains at settlement if market prices do not rise above the option strike price.

Therefore, even though the Company may have an economic hedge in place for a particular period, that hedge may not produce any hedging

Therefore, even though the Company may have an economic hedge in place for a particular period, that hedge may not produce any hedging gains at settlement and may even produce hedging losses depending on market prices, the types of instruments held, and the strike prices of those instruments.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

gains at settlement and may even produce hedging losses depending on market prices, the types of instruments held, and the strike prices of those instruments.

As of March 31, 2021, the Company had fuel derivative instruments in place to provide coverage in future periods at varying price levels.

As of June 30, 2021, the Company had fuel derivative instruments in place to provide coverage in future periods at varying price levels.

The following table provides information about the Company’s volume of fuel hedging on an economic basis:

Maximum fuel hedged as of

March 31, 2021 Derivative underlying commodity type as of

Period (by year) (gallons in millions) (a) March 31, 2021

June 30, 2021 Derivative underlying commodity type as of

Period (by year) (gallons in millions) (a) June 30, 2021

Remainder of 2021 641 WTI crude oil and Brent crude oil

34 unchanged sentences

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

Balance Sheet March 31, December 31,

Balance Sheet June 30, December 31,

(in millions) location 2021 2020

6 unchanged sentences

If its fuel derivative instruments are in a net asset position with a counterparty, cash collateral amounts held are first netted against current outstanding derivative asset amounts associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of noncurrent outstanding derivative instruments.

As of March 31, 2021, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

As of June 30, 2021, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

Southwest Airlines Co.

4 unchanged sentences

(i) (ii) (iii) = (i) + (ii) (i) (ii) (iii) = (i) + (ii)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Description Balance Sheet location Gross amounts of recognized assets Gross amounts offset in the Balance Sheet Net amounts of assets presented in the Balance Sheet Gross amounts of recognized assets Gross amounts offset in the Balance Sheet Net amounts of assets presented in the Balance Sheet

6 unchanged sentences

(i) (ii) (iii) = (i) + (ii) (i) (ii) (iii) = (i) + (ii)

March 31, 2021 December 31, 2020

June 30, 2021 December 31, 2020

Description Balance Sheet location Gross amounts of recognized liabilities Gross amounts offset in the Balance Sheet Net amounts of liabilities presented in the Balance Sheet Gross amounts of recognized liabilities Gross amounts offset in the Balance Sheet Net amounts of liabilities presented in the Balance Sheet

5 unchanged sentences

Notes to Condensed Consolidated Financial Statements

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020:

Location and amount recognized in income on cash flow and fair value hedging relationships

Three months ended March 31, 2021 Three months ended March 31, 2020

Three months ended June 30, 2021 Three months ended June 30, 2020

(in millions) Fuel and oil Other (gains)/losses, net Other operating expenses Fuel and oil Other (gains)/losses, net Interest expense

9 unchanged sentences

Derivatives designated as hedging instruments — — — — — ( 2 )

Location and amount recognized in income on cash flow and fair value hedging relationships

Six months ended June 30, 2021 Six months ended June 30, 2020

(in millions) Fuel and oil Other (gains)/losses, net Other operating expenses Fuel and oil Other (gains)/losses, net Interest expense

Total $ 28 $ 6 $ 2 $ 36 $ 16 $ 4

Loss on cash flow hedging relationships:

Commodity contracts:

Amount of loss reclassified from AOCI into income 28 6 — 36 16 —

Interest contracts:

Amount of loss reclassified from AOCI into income — — 2 — — 1

Impact of fair value hedging relationships:

Interest contracts:

Hedged items — — — — — 7

Derivatives designated as hedging instruments — — — — — ( 4 )

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Derivatives designated and qualified in cash flow hedging relationships

5 unchanged sentences

Total $ ( 186 ) $ ( 9 )

Derivatives designated and qualified in cash flow hedging relationships

(Gain) loss recognized in AOCI on derivatives, net of tax

Six months ended

(in millions) 2021 2020

Fuel derivative contracts $ ( 275 ) $ 75

Interest rate derivatives ( 4 ) 32

Total $ ( 279 ) $ 107

Derivatives not designated as hedges

5 unchanged sentences

Total $ ( 12 ) $ 6

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three months ended March 31, 2021 and 2020.

Derivatives not designated as hedges

(Gain) loss recognized in income on derivatives

Six months ended Location of (gain) loss recognized in income on derivatives

(in millions) 2021 2020

Fuel derivative contracts $ ( 16 ) $ 1 Other (gains) losses, net

Interest rate derivatives — 29 Other (gains) losses, net

Total $ ( 16 ) $ 30

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three and six months ended June 30, 2021 and 2020.

Gains and/or losses associated with fuel derivatives that qualify for hedge accounting are ultimately recorded to Fuel and oil expense.

Gains and/or losses associated with fuel derivatives that do not qualify for hedge accounting are recorded to Other (gains) and losses, net.

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

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

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Premium expense recognized in income on derivatives

3 unchanged sentences

Fuel derivative contracts not designated as hedges 10 11 Other (gains) losses, net

Premium expense recognized in income on derivatives

Six months ended Location of premium expense recognized in income on derivatives

(in millions) 2021 2020

Fuel derivative contracts designated as hedges $ 29 $ 38 Fuel and oil

Fuel derivative contracts not designated as hedges 21 11 Other (gains) losses, net

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets or provided by third parties.

Included in the Company’s cumulative net unrealized losses from fuel hedges as of March 31, 2021, recorded in AOCI, were approximately $ 19 million in net unrealized losses, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to March 31, 2021.

Included in the Company’s cumulative unrealized gains from fuel hedges as of June 30, 2021, recorded in AOCI, were approximately $ 88 million in net unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to June 30, 2021.

Interest Rate Swaps

The Company is party to certain interest rate swap agreements that are accounted for as cash flow hedges, and has in the past held interest rate swap agreements that have qualified as fair value hedges, as defined in the applicable accounting guidance for derivative instruments and hedging.

Several of the Company's interest rate swap agreements qualify for the "shortcut" method of accounting for hedges, which dictated that the hedges were assumed to be perfectly effective, and, thus, there was no ineffectiveness to be recorded in earnings.

During 2019, the Company had entered into forward-starting interest rate swap agreements related to a series of 12 Boeing 737 MAX 8 aircraft leases originally scheduled to be received between July 2019 and February 2020.

Several of the Company's interest rate swap agreements qualify for the "shortcut" method of accounting for hedges, which dictates that the hedges were assumed to be perfectly effective at origination, and, thus, there was no ineffectiveness to be recorded in earnings.

During 2019, the Company had entered into forward-starting interest rate swap agreements related to a series of 12 Boeing 737 MAX 8 ("MAX 8") aircraft leases originally scheduled to be received between July 2019 and February 2020.

These lease contracts exposed the Company to interest rate risk as the rental payments were subject to adjustment and would become fixed based on the 9 -year swap rate at the time of delivery.

5 unchanged sentences

As a result of the discontinued hedges, the Company had cumulative losses "frozen" in AOCI, which are being recognized in earnings over the 9 -year lease terms of each aircraft upon delivery.

Therefore, the Company has reclassified approximately $ 1 million in losses from AOCI into Other operating expenses, in the unaudited Condensed Consolidated Statement of Income (Loss) for the three months ended March 31, 2021.

Therefore, the Company has reclassified approximately $ 1 million and $ 2 million in losses from AOCI into Other operating expenses, in the unaudited Condensed Consolidated Statement of Income (Loss) for the three and six months ended June 30, 2021, respectively.

No such reclassifications occurred in 2020.

The cumulative amounts remaining in AOCI as of March 31, 2021, associated with future aircraft deliveries, was $ 62 million.

The cumulative amount remaining in AOCI as of June 30, 2021, associated with these leased aircraft, was $ 60 million.

For the Company’s interest rate swap agreements that do not qualify for the "shortcut" or "critical terms match" methods of accounting, ineffectiveness is assessed at each reporting period.

7 unchanged sentences

To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty.

At March 31, 2021, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating.

At June 30, 2021, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating.

The Company also had agreements with counterparties in which cash deposits and letters of credit were required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds.

In certain cases, the Company has the ability to substitute among these different forms of collateral at its discretion.

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

The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of June 30, 2021, at which such postings are triggered:

Counterparty (CP)

19 unchanged sentences

Comprehensive income (loss) includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting, unrealized gains and losses on certain investments, and actuarial gains/losses arising from the Company’s postretirement benefit obligation.

The differences between Net income (loss) and Comprehensive income (loss) for the three months ended March 31, 2021 and 2020 were as follows:

Three months ended March 31,

The differences between Net income (loss) and Comprehensive income (loss) for the three and six months ended June 30, 2021 and 2020 were as follows:

Three months ended June 30,

(in millions) 2021 2020

NET INCOME (LOSS) $ 348 $ ( 915 )

Unrealized gain on fuel derivative instruments, net of

deferred taxes of $ 61 and $ 9

Unrealized gain (loss) on interest rate derivative instruments, net of

deferred taxes of ($ 1 ) and $ —

Other, net of deferred taxes of $ — and $ 8

Total other comprehensive income $ 196 $ 56

COMPREHENSIVE INCOME (LOSS) $ 544 $ ( 859 )

Six months ended June 30,

(in millions) 2021 2020

NET INCOME (LOSS) $ 463 $ ( 1,009 )

Unrealized gain (loss) on fuel derivative instruments, net of

3 unchanged sentences

Other, net of deferred taxes of ($ 13 ) and ($ 1 )

( 47 ) ( 28 )

Total other comprehensive income (loss) $ 260 $ ( 69 )

COMPREHENSIVE INCOME (LOSS) $ 723 $ ( 1,078 )

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

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three and six months ended June 30, 2021:

(in millions) Fuel derivatives Interest rate derivatives Defined benefit plan items Deferred tax Accumulated other comprehensive income (loss)

Balance at March 31, 2021 $ 12 $ ( 53 ) $ ( 43 ) $ 24 $ ( 60 )

Changes in fair value 250 ( 7 ) — ( 57 ) 186

Reclassification to earnings 12 1 — ( 3 ) 10

Balance at June 30, 2021 $ 274 $ ( 59 ) $ ( 43 ) $ ( 36 ) $ 136

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(in millions) Fuel derivatives Interest rate derivatives Defined benefit plan items Other Deferred tax Accumulated other comprehensive income (loss)

3 unchanged sentences

Reclassification to earnings 34 2 — ( 60 ) (a) 5 ( 19 )

Balance at March 31, 2021 $ 12 $ ( 53 ) $ ( 43 ) $ — $ 24 $ ( 60 )

Balance at June 30, 2021 $ 274 $ ( 59 ) $ ( 43 ) $ — $ ( 36 ) $ 136

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

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

Three months ended March 31, 2021

The following tables illustrate the significant amounts reclassified out of each component of AOCI for the three and six months ended June 30, 2021:

Three months ended June 30, 2021

(in millions) Amounts reclassified from AOCI Affected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)

1 unchanged sentence

Unrealized loss on fuel derivative instruments $ 12 Fuel and oil expense

6 Other (gains) losses, net

$ 9 Net of tax

1 unchanged sentence

$ 1 Net of tax

Total reclassifications for the period $ 10 Net of tax

Six months ended June 30, 2021

(in millions) Amounts reclassified from AOCI Affected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)

AOCI components

Unrealized loss on fuel derivative instruments $ 28 Fuel and oil expense

6 Other (gains) losses, net

$ 26 Net of tax

Unrealized loss on interest rate derivative instruments $ 2 Interest expense

$ 2 Net of tax

Unrealized gain on deferred compensation plan investment (See Note 1) $ ( 60 ) Other (gains) losses, net

3 unchanged sentences

Revenue is categorized by revenue source as the Company believes it best depicts the nature, amount, timing, and uncertainty of revenue and cash flow.

The following table provides the components of Passenger revenue recognized for the three months ended March 31, 2021 and March 31, 2020:

Three months ended March 31,

The following table provides the components of Passenger revenue recognized within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and six months ended June 30, 2021 and 2020:

Three months ended June 30, Six months ended June 30,

(in millions) 2021 2020 2021 2020

3 unchanged sentences

Total passenger revenues $ 3,569 $ 704 $ 5,282 $ 4,549

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

As of June 30, 2021, and December 31, 2020, the components of Air traffic liability and Air traffic liability - noncurrent, including contract liabilities based on tickets sold, unused funds available to the Customer, and loyalty points available for redemption, net of expected spoilage, within the unaudited Condensed Consolidated Balance Sheet were as follows:

Balance as of

(in millions) March 31, 2021 December 31, 2020

(in millions) June 30, 2021 December 31, 2020

Air traffic liability - passenger travel and ancillary passenger services $ 3,960 $ 2,686

3 unchanged sentences

These funds are typically created as a result of a prior ticket cancellation or exchange.

Rollforwards of the Company's Air traffic liability - loyalty program for the three months ended March 31, 2021 and March 31, 2020 were as follows (in millions):

Three months ended March 31,

Rollforwards of the Company's Air traffic liability - loyalty program for the three and six months ended June 30, 2021 and 2020 were as follows (in millions):

Three months ended June 30, Six months ended June 30,

2021 2020 2021 2020

Air traffic liability - loyalty program - beginning balance $ 4,623 $ 3,561 $ 4,447 $ 3,385

4 unchanged sentences

Air traffic liability includes consideration received for ticket and loyalty related performance obligations which have not been satisfied as of a given date.

Rollforwards of the amounts included in Air traffic liability as of March 31, 2021 and March 31, 2020 were as follows (in millions):

Rollforwards of the amounts included in Air traffic liability as of June 30, 2021 and 2020 were as follows (in millions):

Air traffic liability

3 unchanged sentences

Revenue from current period sales ( 3,705 )

Balance at March 31, 2021 $ 7,732

Balance at June 30, 2021 $ 8,679

Air traffic liability

3 unchanged sentences

Revenue from current period sales ( 2,641 )

Balance at March 31, 2020 $ 6,211

Balance at June 30, 2020 $ 6,879

During 2020, the Company experienced a significantly higher number of Customer-driven flight cancellations as a result of the COVID-19 pandemic.

See Note 2 for further information.

As a result, the amount of Customer travel funds held by the Company, net of spoilage, that can be redeemed for future travel as of March 31, 2021, represents approximately 22 percent of the total Air traffic liability balance at March 31, 2021, as compared to approximately 28 percent of the total Air traffic liability balance at December 31, 2020.

Both of these recent periods represent a significantly higher portion than the approximate 2 percent of the Air traffic liability balance that Customer funds made up as of December 31, 2019.

In order to provide additional flexibility to Customers who hold these funds, the Company has significantly relaxed its previous policies with regards to the time period within which these funds can be redeemed, which is typically twelve months from the original date of purchase.

For all Customer travel funds created or that would have otherwise expired between March 1 and September 7, 2020 associated with flight cancellations, the Company has extended the expiration date to September 7, 2022.

At March 31, 2021, $1.8 billion of Customer travel funds remain in Air traffic liability with a September 7, 2022 expiration date.

As a result, the amount of Customer travel funds held in Air traffic liability, that are estimated to be redeemed for future travel as of June 30, 2021, remains much higher than historical levels.

The amount of such Customer funds represent approximately 15 percent and 28 percent of the total Air traffic liability balance at June 30, 2021, and December 31, 2020, respectively, compared to approximately two percent of the Air traffic liability balance as of December 31, 2019.

In order to provide additional flexibility to Customers who hold these funds, the Company significantly relaxed its previous policies with regards to the time period within which these funds can be redeemed, which is typically twelve months from the original date of purchase.

For all Customer travel funds created or that would have otherwise expired between March 1 and September 7, 2020 associated with flight cancellations, the Company extended the expiration date to September 7, 2022.

At June 30, 2021, $ 1.5 billion of Customer travel funds remain in Air traffic liability with a September 7, 2022 expiration date, although the Company has estimated that a portion of those will not be redeemed.

The Company has limited data available to predict the occurrence or timing of performance obligation satisfaction on these funds due to certain constraints including, but not limited to, consumer confidence, economic health, vaccines, and uncertainty regarding customer travel fund redemption patterns for funds that live longer than 12 months as this is unprecedented in Company history.

As a result, recognition of these travel funds as flown revenue, refunds, or spoilage revenue will likely be more volatile from period to period compared to what previous Customer behavior

may indicate, as cumulative revenue recognized is constrained to amounts that are not probable of being reversed.

Despite the possibility that some of these travel funds may be redeemed beyond the following twelve-month period, the Company has continued to classify them as "current" in the accompanying unaudited Condensed Consolidated Balance Sheet as they remain a demand liability and the Company has limited data to enable it to accurately estimate the portion that will not be redeemed for travel in the subsequent twelve months.

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

The performance obligations classified as a current liability related to the Company’s loyalty program were estimated based on expected redemptions utilizing historical redemption patterns, and forecasted flight availability, fares, and coefficients.

The entire balance classified as Air traffic liability—noncurrent relates to loyalty points that were estimated to be redeemed in periods beyond 12 months following the representative balance sheet date.

The Company expects the majority of loyalty points to be redeemed within two years.

As a result, recognition of these travel funds as flown revenue, refunds, or spoilage revenue will likely be more volatile from period to period compared to what previous Customer behavior may indicate, as cumulative revenue recognized is constrained to amounts that are not probable of being reversed.

Despite the possibility that some of these travel funds may be redeemed beyond the upcoming twelve-month period, the Company has continued to classify them as "current" in the accompanying unaudited Condensed Consolidated Balance Sheet as they remain a demand liability and the Company has limited data to enable it to accurately estimate the portion that will not be redeemed for travel in the following twelve-month period.

Spoilage estimates are based on the Company's Customers' historical travel behavior, as well as assumptions about the Customers' future travel behavior.

2 unchanged sentences

Given the unprecedented amount of 2020 Customer flight cancellations and the amount of travel funds provided, the Company expects additional variability in the amount of spoilage revenue recorded in future periods, as the estimates of the portion of sold tickets that will expire unused may differ from historical experience.

The entire balance classified as Air traffic liability—noncurrent relates to

loyalty points that were estimated to be redeemed in periods beyond the twelve-months following the representative balance sheet date.

Based on historical experience as well as current forecasted redemptions, the Company expects the majority of loyalty points to be redeemed within approximately two years of the date the points are issued.

The Company has a co-branded credit card agreement (the “Agreement”) with Chase Bank USA, N.A.

2 unchanged sentences

The Company recognized revenue related to the marketing, advertising, and other travel-related benefits of the revenue associated with various loyalty partner agreements including, but not limited to, the Agreement with Chase, within Other operating revenues.

For the three months ended March 31, 2021 and March 31, 2020, the Company recognized $ 280 million and $ 321 million, respectively.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

For the three months ended June 30, 2021 and 2020, the Company recognized $ 352 million and $ 256 million, respectively.

For the six months ended June 30, 2021 and 2020, the Company recognized $ 632 million and $ 577 million, respectively.

NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net income (loss) per share (in millions, except per share amounts).

An immaterial number of shares related to the Company's restricted stock units were excluded from the denominator for both periods presented, because inclusion of such shares would be antidilutive.

Three months ended March 31,

An immaterial number of shares related to the Company's restricted stock units and stock warrants were excluded from the denominator for the three and six months ended June 30, 2020, because inclusion of such shares would be antidilutive.

Three months ended June 30, Six months ended June 30,

2021 2020 2021 2020

Net income (loss) $ 348 $ ( 915 ) $ 463 $ ( 1,009 )

9 unchanged sentences

Using this method, the denominator will be affected when the average share price of the Company's common stock for a given period is greater than the conversion price of approximately $ 38.48 per share, and the Company reports Net income for the given period.

For the three months ended March 31, 2021, the average market price of the Company's common stock exceeded this conversion price per share and as such, the common shares underlying the convertible notes were included in the diluted calculation.

For the three and six months ended June 30, 2021, the average market price of the Company's common stock exceeded this conversion price per share and as such, the common shares underlying the convertible notes were included in the diluted calculation.

The convertible notes stipulated that holders of the notes could not elect to convert their convertible notes to shares of common stock until after June 30, 2020, subject to certain terms contained therein, and therefore there was no dilutive impact related to the notes until July 1, 2020.

See Note 8 for further information on the convertible notes.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

FAIR VALUE MEASUREMENTS

4 unchanged sentences

and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of March 31, 2021, the Company held certain items that are required to be measured at fair value on a recurring basis.

As of June 30, 2021, the Company held certain items that are required to be measured at fair value on a recurring basis.

These included cash equivalents, short-term investments (primarily treasury bills and certificates of deposit), interest rate derivative contracts, fuel derivative contracts, and available-for-sale securities.

4 unchanged sentences

Fuel derivative instruments currently consist solely of option contracts, whereas interest rate derivatives consist solely of swap agreements.

See Note 4 for further information on the Company’s

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

derivative instruments and hedging activities.

See Note 4 for further information on the Company’s derivative instruments and hedging activities.

The fair values of swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets.

18 unchanged sentences

Notes to Condensed Consolidated Financial Statements

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2021, and December 31, 2020:

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2021, and December 31, 2020:

Fair value measurements at reporting date using:

Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs

Description March 31, 2021 (Level 1) (Level 2) (Level 3)

Description June 30, 2021 (Level 1) (Level 2) (Level 3)

Assets (in millions)

2 unchanged sentences

Commercial paper 90 — 90 —

Certificates of deposit 6 — 6 —

Time deposits 275 — 275 —

8 unchanged sentences

Total assets $ 17,637 $ 16,168 $ 967 $ 502

Interest rate derivatives (see Note 4) $ ( 3 ) $ — $ ( 3 ) $ —

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

22 unchanged sentences

Notes to Condensed Consolidated Financial Statements

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2021, or the year ended December 31, 2020.

The following table presents the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2021:

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2021, or the year ended December 31, 2020.

The following tables present the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2021:

Fair value measurements using significant unobservable inputs (Level 3)

(in millions) Fuel derivatives

Balance at March 31, 2021 $ 249

Total gains for the period

Included in earnings 12 (a)

Included in other comprehensive income 250

Settlements ( 9 )

Balance at June 30, 2021 $ 502

The amount of total gains for the period

included in earnings attributable to the

change in unrealized gains or losses relating

to assets still held at June 30, 2021

The amount of total gains for the period

included in other comprehensive income attributable to the

change in unrealized gains or losses relating

to assets still held at June 30, 2021

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

Fair value measurements using significant unobservable inputs (Level 3)

(in millions) Fuel derivatives

Balance at December 31, 2020 $ 134

Total gains (losses) for the period

Total gains for the period

Included in earnings 10 (a)

1 unchanged sentence

Settlements ( 9 )

Balance at March 31, 2021 $ 249

The amount of total losses for the period

Balance at June 30, 2021 $ 502

The amount of total gains for the period

included in earnings attributable to the

change in unrealized gains or losses relating

to assets still held at March 31, 2021

to assets still held at June 30, 2021

The amount of total gains for the period

1 unchanged sentence

change in unrealized gains or losses relating

to assets still held at March 31, 2021

to assets still held at June 30, 2021

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

1 unchanged sentence

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

The following table presents a range and weighted average of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 at March 31, 2021:

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Quantitative information about Level 3 fair value measurements

Valuation technique Unobservable input Period (by year) Range Weighted Average (a)

Fuel derivatives Option model Implied volatility Second quarter 2021 22 - 46 %

Third quarter 2021 30 - 40 %

Fuel derivatives Option model Implied volatility Third quarter 2021 17 - 33 %

Fourth quarter 2021 27 - 33 %

3 unchanged sentences

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

The carrying amounts and estimated fair values of the Company’s short-term and long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, at March 31, 2021, are presented in the table below.

The fair values of the Company’s publicly held long-term debt are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets;

therefore, the Company has categorized these agreements as Level 2.

Debt under five of the Company’s debt agreements is not publicly held.

All privately held debt agreements are categorized as Level 3.

The Company has determined the estimated fair value of this debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable.

The Company utilizes indicative pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

25 unchanged sentences

500 513 Level 2

1.000 % Payroll Support Program Loan due 2030

1.000 % Payroll Support Program Loan due April 2030

976 956 Level 3

1.000 % Payroll Support Program Loan due 2031

1.000 % Payroll Support Program Loan due January 2031

566 542 Level 3

1.000 % Payroll Support Program Loan due April 2031

526 500 Level 3

Convertible Notes

3 unchanged sentences

The initial conversion rate is 25.9909 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $ 38.48 per share of common stock).

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Upon issuance, the Company bifurcated the Convertible Notes for accounting purposes between a liability component and an equity component utilizing applicable guidance.

1 unchanged sentence

The carrying amount of the equity component was calculated as the difference between the liability component and the face amount of the Convertible Notes, which was determined to be $ 403 million.

The equity component is not remeasured as long as it continues to meet the conditions for equity classification, which it had as of March 31, 2021, and December 31, 2020.

The following table details the liability component recognized related to the Convertible Notes as of March 31, 2021, and December 31, 2020:

(in millions) March 31, 2021 December 31, 2020

The equity component is not remeasured as long as it continues to meet the conditions for equity classification, which it had as of June 30, 2021, and December 31, 2020.

The following table details the liability component recognized related to the Convertible Notes as of June 30, 2021, and December 31, 2020:

(in millions) June 30, 2021 December 31, 2020

Liability component:

2 unchanged sentences

Net carrying amount $ 1,982 $ 1,945

The effective interest rate on the liability component approximates 5.2 percent for the three months ended March 31, 2021.

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

The effective interest rate on the liability component was approximately 5.2 percent for the three and six months ended June 30, 2021.

The Company recognized $ 28 million of interest expense associated with the Convertible Notes during the three months ended June 30, 2021, including $ 19 million of non-cash amortization of the debt discount, $ 2 million of non-cash amortization of debt issuance costs, and $ 7 million of contractual coupon interest.

The Company recognized $ 56 million of interest expense associated with the Convertible Notes during the six months ended June 30, 2021, including $ 37 million of non-cash amortization of the debt discount, $ 4 million of non-cash amortization of debt issuance costs, and $ 15 million of contractual coupon interest.

The unamortized debt discount and issuance costs will be recognized as non-cash interest expense over the 5 -year term of the notes, through May 1, 2025, less any amounts that would be required to be accelerated to expense immediately upon any future conversions.

As of June 30, 2021, the if-converted value of the Convertible Notes exceeded the principal amount by $ 874 million, using the closing stock price on June 30, 2021.

The Convertible Notes met the criteria to be converted beginning April 1, 2021, and thus have been reclassified as part of Current maturities of long-term debt in the accompanying unaudited Condensed Consolidated Balance Sheet as of June 30, 2021.

An immaterial number of conversions were exercised in second quarter 2021, which will be settled in third quarter 2021.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

As of March 31, 2021, the if-converted value of the Convertible Notes exceeded the principal amount by $ 881 million, using the average stock price for the three months ended March 31, 2021.

The Convertible Notes did not meet the criteria to be converted throughout first quarter 2021.

However, the conversion criteria were subsequently met, and holders of the Convertible Notes are able to convert during the calendar quarter beginning April 1, 2021.

SUPPLEMENTAL FINANCIAL INFORMATION

(in millions) March 31, 2021 December 31, 2020

(in millions) June 30, 2021 December 31, 2020

Trade receivables $ 81 $ 46

Credit card receivables 129 35

Business partners and other suppliers (a) 73 274

Taxes receivable (b) 705 740

Business partners and other suppliers 380 274

Taxes receivable (a) 696 740

Accounts and other receivables $ 1,328 $ 1,130

(in millions) March 31, 2021 December 31, 2020

(in millions) June 30, 2021 December 31, 2020

Derivative contracts $ 207 $ 90

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Other assets $ 837 $ 722

(in millions) March 31, 2021 December 31, 2020

(in millions) June 30, 2021 December 31, 2020

Accounts payable trade $ 219 $ 111

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Accounts payable $ 1,378 $ 931

(in millions) March 31, 2021 December 31, 2020

(in millions) June 30, 2021 December 31, 2020

Deferred Payroll Support Program grant proceeds $ 763 $ —

Extended Emergency Time Off 48 393

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Profitsharing and savings plans 136 25

Vendor prepayment (a) 277 600

Vendor prepayment (b) — 600

Vacation pay 448 436

3 unchanged sentences

Interest 47 49

Deferred supplier payments (c) 151 —

Other 292 257

2 unchanged sentences

Notes to Condensed Consolidated Financial Statements

(in millions) March 31, 2021 December 31, 2020

(in millions) June 30, 2021 December 31, 2020

Extended Emergency Time Off $ — $ 57

3 unchanged sentences

Other noncurrent liabilities $ 1,120 $ 1,247

(a) In fourth quarter 2020, the Company received a $ 600 million prepayment from Chase for Rapid Rewards points expected to be purchased during 2021, based on cardholder activity on the Visa credit card associated with its loyalty program.

During first quarter 2021, $ 323 million was reclassified to deferred revenue in Air Traffic liability--loyalty (including $ 106 million that would have been a receivable from business partners as of March 31, 2021), and the remainder is expected to be reclassified during second quarter 2021.

(b) Both periods include approximately $ 470 million associated with a significant cash tax refund expected as a result of the CARES Act allowing entities to carry back 2020 losses to prior periods of up to five years , and claim refunds of federal taxes paid.

(a) Both periods include approximately $ 470 million associated with a significant cash tax refund expected as a result of the CARES Act allowing entities to carry back 2020 losses to prior periods of up to five years and claim refunds of federal taxes paid.

This amount also includes excise taxes remitted to taxing authorities for which the subsequent flights were canceled by Customers, resulting in amounts due back to the Company.

(b) In fourth quarter 2020, the Company received a $ 600 million prepayment from Chase for Rapid Rewards points that were subsequently issued to Members during the six months ended June 30, 2021, based on cardholder activity on the Visa credit card associated with its loyalty program.

See Note 11 for further information.

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

Other Operating Expenses

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

Other Operating Expenses, net

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

COMMITMENTS AND CONTINGENCIES

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In October 2017, the Company executed a lease agreement with Los Angeles World Airports ("LAWA") (the "T1.5 Lease").

Under the T1.5 Lease, the Company oversaw and managed the design, development, financing, construction, and commissioning of a passenger processing facility between Terminal 1 and 2 (the "Terminal 1.5 Project").

The Terminal 1.5 Project includes ticketing, baggage claim, passenger screening, and a bus gate at a cost not to exceed $ 464 million for site improvements and non-proprietary improvements.

The Terminal 1.5 Project included ticketing, baggage claim, passenger screening, and a bus gate.

Construction on the Terminal 1.5 Project began during third quarter 2017 and was substantially completed at December 31, 2020.

however, the Terminal 1.5 Project will not be placed into service until second quarter 2021, at which time LAWA is expected to repay the outstanding loan and purchase the remaining completed assets for accounting purposes.

The costs incurred to fund the Terminal 1.5 Project are included within Assets Constructed for Others ("ACFO") and all amounts that have been or will be reimbursed will be included within Construction obligation on the accompanying unaudited Condensed Consolidated Balance Sheet.

Upon completion of any individual asset as part of the overall project, the asset and associated liability on the balance sheet are de-recognized in accordance with applicable accounting guidance.

Funding for this project is primarily through the Regional Airports Improvement Corporation (the "RAIC"), which is a quasi-governmental special purpose entity that is acting as a conduit borrower under a syndicated credit facility provided by a group of lenders.

A loan made under the credit facility for the Terminal 1.5 Project is being used to reimburse the Company for the site improvements and non-proprietary improvements of the Terminal 1.5 Project, and the outstanding loan will be repaid with the proceeds of LAWA’s payments to purchase completed construction phases.

The Company guaranteed the obligation of the RAIC under the credit facility associated with the Terminal 1.5 Project.

As of March 31, 2021, the Company's outstanding guaranteed obligation under the credit facility for the Terminal 1.5 Project was $ 364 million.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

The project final cost was approximately $ 410 million.

During second quarter 2021, LAWA repaid the outstanding loan and purchased the remaining completed assets for accounting purposes, at which time the Terminal 1.5 Project remaining asset and liability of $ 365 million on the balance sheet were de-recognized in accordance with applicable accounting guidance.

This item was also reported as a supplemental noncash transaction on the unaudited Condensed Consolidated Statement of Cash Flows, net of Assets constructed for others additions during the period.

Dallas Love Field

3 unchanged sentences

During second quarter 2017, the City of Dallas approved using the remaining bond funds for additional terminal construction projects, which were effectively completed in 2018.

Although the City of Dallas received commitments from various sources that helped to fund portions of the LFMP project, including the Federal Aviation Administration ("FAA"), the Transportation Security Administration, and the City of Dallas' Aviation Fund, the majority of the funds used were from the issuance of bonds.

The Company guaranteed principal and interest payments on bonds issued by the LFAMC.

As of March 31, 2021, $ 399 million of principal remained outstanding.

The net present value of the future principal and interest payments associated with the bonds was $ 438 million as of March 31, 2021, and was reflected as part of the Company's operating lease right–of–use assets and lease obligations in the unaudited Condensed Consolidated Balance Sheet.

Contractual Obligations and Contingent Liabilities and Commitments

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

12 (the "Supplement") to its aircraft purchase agreement with The Boeing Company ("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.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

the City of Dallas' Aviation Fund, the majority of the funds used were from the issuance of bonds.

The Company guaranteed principal and interest payments on bonds issued by the LFAMC.

As of June 30, 2021, $ 399 million of principal remained outstanding.

The net present value of the future principal and interest payments associated with the bonds was $ 432 million as of June 30, 2021, and was reflected as part of the Company's operating lease right–of–use assets and lease obligations in the unaudited Condensed Consolidated Balance Sheet.

Contractual Obligations and Contingent Liabilities and Commitments

Based on growth opportunities and ongoing fleet modernization plans for more climate-friendly aircraft, the Company entered into three supplemental agreements with The Boeing Company ("Boeing") during second quarter 2021 to increase its 2022 firm orders by 34 Boeing 737 MAX 7 ("MAX 7") aircraft (consisting of two 2022 options exercised and 32 options accelerated and exercised from later years), resulting in 234 firm orders for MAX 7 aircraft as of June 30, 2021.

Additionally, the Company accelerated 10 options into 2022, 32 options into 2023, 16 options into 2024, 16 options into 2025, and added 32 new options into 2026 through 2027, bringing the total firm and option order book to 660 aircraft as of June 30, 2021.

Fleet and capacity plans will continue to evolve as the Company manages through this recovery period, and it will continue to evaluate its remaining MAX options for 2022.

However, with its cost-effective order book, the Company retains significant flexibility to manage its fleet size, including opportunities to accelerate fleet modernization efforts if growth opportunities do not materialize.

Additional information regarding the Company's delivery schedule is included in the following table as of June 30, 2021.

The Boeing Company

13 unchanged sentences

234 149 (b) 268 9 (c) 660

(a) Includes 20 737 MAX 8s delivered as of March 31, 2021, consisting of 12 owned and 8 leased aircraft.

(a) Includes 27 737 MAX 8s delivered as of June 30, 2021, consisting of 19 owned and 8 leased aircraft.

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

(c) These 9 additional MAX 8 aircraft are leases to be acquired from various third parties, including 8 leased MAX 8 aircraft delivered in first quarter 2021.

(c) These 9 additional MAX 8 aircraft are leases acquired from various third parties, including 8 leased MAX 8 aircraft delivered as of June 30, 2021.

The Company also received 7 leased MAX 8 aircraft in fourth quarter 2020, for a total of 16 MAX 8 operating leased aircraft from third parties in 2020 and 2021, combined.

Based on the Company's existing agreement with Boeing as reflected in the delivery schedule above, the Company's cash capital commitments associated with its firm orders are as follows:

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), $ 700 million in 2022, $ 1.1 billion in 2023, $ 1.0 billion in 2024, $ 1.1 billion in 2025, $ 1.2 billion in 2026, and $ 7.2 billion thereafter.

Based on the Company's existing agreement with Boeing as reflected in the delivery schedule above, the Company's cash capital commitments associated with its firm orders as of June 30, 2021, are as follows:

no ne for 2021 (due to previously agreed upon delivery credits provided by Boeing to the Company due to settlement of 2020 estimated damages related to the FAA grounding of the 737 MAX aircraft and progress payments made to date on undelivered aircraft), $ 1.5 billion in 2022, $ 1.2 billion in 2023, $ 1.1 billion in 2024, $ 835 million in 2025, $ 971 million in 2026, and $ 7.0 billion thereafter.

Contingencies

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

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

The most significant financial impacts of the grounding to the Company were the lost revenues, operating income, and operating cash flows, and delayed capital expenditures, directly associated with its grounded MAX fleet and other new aircraft that were not able to be delivered.

In July 2019, The Boeing Company ("Boeing") announced a

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

$ 4.9 billion after-tax charge for "potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding." In January 2020, Boeing announced an additional pre-tax charge of $ 2.6 billion related to "estimated potential concessions and other considerations to customers related to the 737 MAX grounding."

The most significant financial impacts of the grounding resulting from the FAA's emergency order were the lost revenues, operating income, and operating cash flows, and delayed capital expenditures, directly associated with the Company's grounded MAX fleet and other new aircraft that were not able to be delivered.

In July 2019, Boeing announced a $ 4.9 billion after-tax charge for "potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding." In January 2020, Boeing announced an additional pre-tax charge of $ 2.6 billion related to "estimated potential concessions and other considerations to customers related to the 737 MAX grounding."

During 2019, the Company entered into a Memorandum of Understanding with Boeing to compensate Southwest for estimated financial damages incurred during 2019 related to the grounding of the MAX.

The terms of the agreement are confidential, but are intended to provide for a substantial portion of the Company’s financial damages associated with both the 34 MAX aircraft that were grounded as of March 13, 2019, as well as the 41 additional MAX aircraft the Company was scheduled to receive ( 28 owned MAX from Boeing and 13 leased MAX from third parties) from March 13, 2019 through December 31, 2019.

The terms of the agreement are confidential, but were intended to provide for a substantial portion of the Company’s financial damages associated with both the 34 MAX aircraft that were grounded as of March 13, 2019, as well as the 41 additional MAX aircraft the Company was scheduled to receive ( 28 owned MAX from Boeing and 13 leased MAX from third parties) from March 13, 2019 through December 31, 2019.

In accordance with applicable accounting principles, the Company will account for substantially all of the proceeds received from Boeing as a reduction in cost basis spread across both the existing 31 owned MAX in the Company’s fleet at the time, and the Company’s future firm aircraft deliveries as of the date of the agreement.

No material financial impacts of the agreement were realized in the Company’s earnings during the years ended December 31, 2019 and 2020.

No material financial impacts of the agreement were realized in the Company’s earnings during the years ended December 31, 2019 and 2020, or the three and six months ended June 30, 2021.

During December 2020, the Company entered into an agreement with Boeing to compensate the Company for estimated financial damages incurred during 2020 related to the grounding of the MAX.

The terms of the agreement are confidential, but the compensation is in the form of credit memos taken against future payments due to Boeing as aircraft are delivered in accordance with the amended delivery schedule, or as future progress payments are due.

The terms of the agreement are confidential, but the compensation is in the form of credit memos taken against future payments due to Boeing as aircraft have been and are delivered in accordance with the amended delivery schedule, or as future progress payments are due.

In accordance with applicable accounting principles, the Company has accounted for substantially all of the compensation received from Boeing as a reduction in cost basis spread across both the existing owned MAX in the Company’s fleet, and the Company’s future firm aircraft deliveries from Boeing as of the date of the agreement.

No material financial impacts of the agreement were realized in the Company’s earnings during the three months ended March 31, 2021.

No material financial impacts of the agreement were realized in the Company’s earnings during the three and six months ended June 30, 2021.

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 1. Financial Statements