What changed in this filing

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Item 1. Financial Statements

2021-10-26 compared with 2021-07-27 · 256 added, 233 removed, 752 unchanged (39% of the section changed)

3 unchanged sentences

(in millions)

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Current assets:

43 unchanged sentences

(in millions, except per share amounts)

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

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

47 unchanged sentences

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

Issuance of common and treasury stock pursuant to Employee stock plans — 10 — — 3 13

Share-based compensation — 14 — — — 14

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

Comprehensive income — — 446 131 — 577

Balance at September 30, 2021 $ 888 $ 4,251 $ 15,706 $ 267 $ ( 10,862 ) $ 10,250

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

14 unchanged sentences

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

Issuance of common and treasury stock pursuant to Employee stock plans — 9 — — 4 13

Share-based compensation — 2 — — — 2

Stock warrants — 5 — — — 5

Comprehensive income (loss) — — ( 1,157 ) 28 — ( 1,129 )

Balance at September 30, 2020 $ 888 $ 4,175 $ 15,685 $ ( 102 ) $ ( 10,877 ) $ 9,769

See accompanying notes.

1 unchanged sentence

Condensed Consolidated Statement of Cash Flows

(in millions) (unaudited)

Three months ended Six months ended

June 30, June 30,

(in millions)

Three months ended Nine months ended

September 30, September 30,

2021 2020 2021 2020

1 unchanged sentence

Net income (loss) $ 446 $ ( 1,157 ) $ 909 $ ( 2,166 )

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

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

Depreciation and amortization 322 315 949 940

2 unchanged sentences

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

Loss on partial extinguishment of convertible notes 12 — 12 —

Changes in certain assets and liabilities:

4 unchanged sentences

Other liabilities ( 88 ) ( 106 ) ( 275 ) ( 312 )

Cash collateral received from derivative counterparties 48 12 86 7

Cash collateral received from (provided to) derivative counterparties 42 ( 5 ) 128 2

Other, net ( 20 ) ( 19 ) 12 ( 95 )

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

Net cash provided by (used in) operating activities ( 575 ) ( 1,050 ) 2,075 ( 531 )

CASH FLOWS FROM INVESTING ACTIVITIES:

1 unchanged sentence

Supplier proceeds — — — 428

Assets constructed for others ( 3 ) — ( 3 ) —

Proceeds from sale-leaseback transactions — — — 815

1 unchanged sentence

Proceeds from sales of short-term and other investments 1,251 1,191 3,747 2,956

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

Net cash used in investing activities ( 412 ) ( 434 ) ( 1,081 ) ( 107 )

CASH FLOWS FROM FINANCING ACTIVITIES:

11 unchanged sentences

Payments of cash dividends — — — ( 188 )

Payments of terminated interest rate derivative instruments — ( 31 ) — ( 31 )

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

Capitalized financing items — 44 — ( 133 )

Other, net 18 20 46 29

Net cash provided by financing activities 617 7,182 1,081 8,956

Net cash provided by (used in) financing activities ( 157 ) 1,242 923 10,199

NET CHANGE IN CASH AND CASH EQUIVALENTS ( 1,144 ) ( 242 ) 1,917 9,561

1 unchanged sentence

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,980 $ 12,109 $ 12,980 $ 12,109

Three months ended Six months ended

June 30, June 30,

Three months ended Nine months ended

September 30, September 30,

2021 2020 2021 2020

6 unchanged sentences

Assets constructed for others $ — $ 35 $ 309 $ 110

Remeasurement of right-of-use asset and lease liability $ 343 $ — $ 343 $ —

See accompanying notes.

2 unchanged sentences

Basis of Presentation

Worldwide Pandemic

New Accounting Pronouncements

Financial Derivative Instruments

Comprehensive Inco me (Loss)

Net Income (Loss) Per Share

Fair Value Measurements

Supplemental Financial Information

Commitments and Contingencies

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

BASIS OF PRESENTATION

Southwest Airlines Co.

(the "Company" or "Southwest") operates Southwest Airlines, a major passenger airline that provides scheduled air transportation in the United States and near-international markets.

2 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 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.

The unaudited Condensed Consolidated Financial Statements for the interim periods ended September 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.

6 unchanged sentences

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

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.

Operating results for the three and nine months ended September 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 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.

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

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

In the unaudited Condensed Consolidated Statement of Stockholders' Equity, for the 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.

In the unaudited Condensed Consolidated Statement of Stockholders' Equity, for the nine months ended September 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.

8 unchanged sentences

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 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.

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.

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

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.

In third quarter 2021, the Company experienced softness in bookings and elevated trip cancellations, especially close-in, as a result of the rise in COVID-19 cases associated with the Delta variant.

The Company continues to monitor demand for air travel and proactively adjust its published flight schedules and capacity in response.

the "PSP1 Payroll Support Program" in April 2020 under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act");

the "PSP2 Payroll Support Program” in January 2021 under the Consolidated Appropriations Act, 2021;

and the "PSP3 Payroll Support Program" in April 2021 under the American Rescue Plan Act of 2021.

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

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

1 unchanged sentence

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.

The following table provides the details from each of these programs:

Southwest Airlines Co.

18 unchanged sentences

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

The promissory note under the PSP1 Payroll Support Program ("PSP1 Note") matures in full on April 19, 2030, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity.

Amounts outstanding under the PSP1 Note bear interest at a rate of 1.00 percent before April 20, 2025, and afterwards, at a rate equal to the Secured Overnight Financing Rate ("SOFR") or other benchmark replacement rate consistent with customary market conventions plus a margin of 2.00 percent.

The PSP1 Note contains customary representations and warranties and events of default.

Each warrant issued pursuant to the PSP1 Payroll Support Program is exercisable at a strike price of $ 36.47 per share of common stock and will expire on the fifth anniversary of the issue date of such warrant.

The promissory note under the PSP2 Payroll Support Program ("PSP2 Note") matures in full on January 15, 2031, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity.

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

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

Each warrant issued pursuant to the PSP2 Payroll Support Program is exercisable at a strike price of $ 46.28 per share of common stock and will expire on the fifth anniversary of the issue date of such warrant.

The promissory note under the PSP3 Payroll Support Program ("PSP3 Note") matures in full on April 23, 2031, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity.

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

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

Each warrant issued pursuant to the PSP3 Payroll Support Program is exercisable at a strike price of $ 58.51 per share of common stock and will expire on the fifth anniversary of the issue date of such warrant.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

In connection with the receipt of Payroll Support, the Company is subject to certain restrictions, including the elimination of share repurchases and dividends through September 30, 2022;

and limits on executive compensation until April 1, 2023.

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

As of September 30, 2021, all grant portions of the Payroll Support programs received had been allocated and classified as a contra-expense line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

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

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

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

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

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.

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

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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.

During third quarter 2021, approximately 1,000 Employees returned from the Extended ETO program and less than 500 Employees remained on Extended ETO leave as of September 30, 2021.

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

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

Approximately 300 Employees elected this conversion option during the first nine 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.

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

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

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

For both the Voluntary Separation Program and Extended ETO programs combined, approximately $ 405 million of the liability balances were relieved during the first nine months of 2021 through payments to Employees, leaving a balance of $ 369 million as of September 30, 2021.

During the first nine months 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 $ 140 million credit to expense during the first nine months of 2021.

Both the initial charge and the partial reversal were classified within Payroll support and voluntary Employee programs, net, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss), and are in addition to the allocation of the PSP2 Payroll Support Program and PSP3 Payroll Support Program funds utilized to fund salaries, wages, and benefits, which totaled $ 763 million and $ 2.7 billion for the three and nine months ended September 30, 2021, respectively.

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

As of September 30, 2021, 24 aircraft remained in storage, and given the

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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.

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.

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.

expectation that this storage was temporary in nature, the Company has continued to record depreciation expense associated with them.

NEW ACCOUNTING PRONOUNCEMENTS

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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.

Under this standard, 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.

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

There were no material LIBOR-related contract modifications during the 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.

Notes to Condensed Consolidated Financial Statements

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

On August 5, 2020, the FASB issued ASU No.

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The denominator could also be affected as the Company will be required to use the if-converted method to calculate diluted shares.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

FINANCIAL DERIVATIVE INSTRUMENTS

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Notes to Condensed Consolidated Financial Statements

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

As of September 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

June 30, 2021 Derivative underlying commodity type as of

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

September 30, 2021 Derivative underlying commodity type as of

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

Remainder of 2021 321 WTI crude oil and Brent crude oil

1 unchanged sentence

2023 769 WTI crude oil and Brent crude oil

Beyond 2023 106 WTI crude oil

2024 358 WTI crude oil

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

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In a situation where it becomes probable that a fuel hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

All cash flows associated with purchasing and selling fuel derivatives are classified as Other operating cash flows in the unaudited Condensed Consolidated Statement of Cash Flows.

The following table presents the location of all assets and liabilities associated with the Company’s derivative instruments within the unaudited Condensed Consolidated Balance Sheet:

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Asset derivatives Liability derivatives

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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 June 30, December 31,

Balance Sheet September 30, December 31,

(in millions) location 2021 2020

1 unchanged sentence

Cash collateral deposits held from counterparties for fuel contracts - noncurrent Offset against Other assets 93 31

Receivable from third parties for fuel contracts Accounts and other receivables 8 —

All of the Company's fuel derivative instruments and interest rate swaps are subject to agreements that follow the netting guidance in the applicable accounting standards for derivatives and hedging.

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

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

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

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Offsetting of derivative assets

1 unchanged sentence

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

June 30, 2021 December 31, 2020

September 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

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

June 30, 2021 December 31, 2020

September 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

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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 and six months ended June 30, 2021 and 2020:

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

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

Three months ended September 30, 2021 Three months ended September 30, 2020

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

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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

Nine months ended September 30, 2021 Nine months ended September 30, 2020

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

14 unchanged sentences

Three months ended

September 30,

(in millions) 2021 2020

4 unchanged sentences

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

Six months ended

Nine months ended

September 30,

(in millions) 2021 2020

5 unchanged sentences

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

September 30,

(in millions) 2021 2020

4 unchanged sentences

(Gain) loss recognized in income on derivatives

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

Nine months ended

Location of (gain) loss recognized in income on derivatives

September 30,

(in millions) 2021 2020

2 unchanged sentences

Total $ ( 13 ) $ 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.

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three and nine months ended September 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.

5 unchanged sentences

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

September 30,

(in millions) 2021 2020

2 unchanged sentences

Premium expense recognized in income on derivatives

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

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

September 30,

(in millions) 2021 2020

2 unchanged sentences

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

Included in the Company’s cumulative unrealized gains from fuel hedges as of 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.

Included in the Company’s cumulative unrealized gains from fuel hedges as of September 30, 2021, recorded in AOCI, were approximately $ 173 million in net unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to September 30, 2021.

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 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.

Several of the Company's interest rate swap agreements qualify for the "shortcut" or "critical terms match methods" 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 ("-8") aircraft leases for aircraft originally scheduled to be received between July 2019 and February 2020.

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

As a result of the grounding of the MAX aircraft, those deliveries were significantly delayed.

As a result of the grounding of the Boeing 737 MAX ("MAX") aircraft, those deliveries were significantly delayed.

These original agreements were subsequently terminated in third quarter 2019, and the Company entered into new interest rate swap agreements based on revised expected aircraft delivery dates.

As the revised delivery dates were also not met, these subsequent agreements were subsequently de-designated as hedges and the agreements terminated.

The Company received three of the twelve aircraft in December 2020, and an additional eight aircraft in first quarter 2021.

The remaining delivery is expected during third quarter 2021.

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

All of the associated aircraft had been delivered to the Company as of September 30, 2021.

As a result of the discontinued hedges, the Company had cumulative losses "frozen" in AOCI as of September 30, 2021, of $ 59 million, which will be recognized in earnings over the 9 -year lease terms of each aircraft.

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

If hedge accounting is achieved, all periodic changes in fair value of the interest rate swaps are recorded in AOCI.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Credit Risk and Collateral

1 unchanged sentence

At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements.

However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past.

However, the Company has not

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

experienced any significant credit loss as a result of counterparty nonperformance in the past.

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

At 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.

At September 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 June 30, 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 September 30, 2021, at which such postings are triggered:

Counterparty (CP)

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

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

Three months ended June 30,

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

Three months ended September 30,

(in millions) 2021 2020

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deferred taxes of $ 39 and $ 5

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

Unrealized gain on interest rate derivative instruments, net of

deferred taxes of $ 1 and $ —

2 unchanged sentences

COMPREHENSIVE INCOME (LOSS) $ 577 $ ( 1,129 )

Six months ended June 30,

Nine months ended September 30,

(in millions) 2021 2020

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COMPREHENSIVE INCOME (LOSS) $ 1,300 $ ( 2,207 )

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 )

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

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

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

Changes in fair value 166 2 — ( 39 ) 129

Reclassification to earnings 2 1 — ( 1 ) 2

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

Balance at September 30, 2021 $ 442 $ ( 56 ) $ ( 43 ) $ ( 76 ) $ 267

Southwest Airlines Co.

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Reclassification to earnings 36 4 — ( 60 ) (a) 4 ( 16 )

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

Balance at September 30, 2021 $ 442 $ ( 56 ) $ ( 43 ) $ — $ ( 76 ) $ 267

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

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

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

Three months ended September 30, 2021

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

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Total reclassifications for the period $ 2 Net of tax

Six months ended June 30, 2021

Nine months ended September 30, 2021

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

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

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

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

Three months ended September 30, Nine months ended September 30,

(in millions) 2021 2020 2021 2020

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Total passenger revenues $ 4,227 $ 1,454 $ 9,508 $ 6,003

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:

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

Balance as of

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

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

Air traffic liability - passenger travel and ancillary passenger services $ 3,464 $ 2,686

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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 and six months ended June 30, 2021 and 2020 were as follows (in millions):

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

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

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

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Revenue recognized from points redeemed - Other ( 14 ) ( 16 ) ( 37 ) ( 44 )

Unused funds converted to loyalty points — 105 — 105

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

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 June 30, 2021 and 2020 were as follows (in millions):

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

Air traffic liability

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Revenue from current period sales ( 7,199 )

Balance at June 30, 2021 $ 8,679

Balance at September 30, 2021 $ 8,236

Air traffic liability

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Revenue from current period sales ( 3,921 )

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.

Balance at September 30, 2020 $ 7,094

During 2020 and in parts of 2021, the Company has experienced a significantly higher number of Customer-driven flight cancellations as a result of the COVID-19 pandemic, including those associated with the Delta variant of the virus.

See Note 2 for further information.

As a result, the amount of Customer travel funds held in Air traffic liability, that are estimated to be redeemed for future 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.

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 September 30, 2021, remains much higher than historical levels.

The amount of such Customer funds represents approximately 17 percent and 28 percent of the total Air traffic liability balance at September 30, 2021, and December 31, 2020, respectively, compared to approximately 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.

At September 30, 2021, $ 1.4 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 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.

Assumptions used to generate spoilage estimates can be impacted by several factors including, but not limited to:

fare increases, fare sales, changes to the Company's ticketing policies, changes to the Company’s refund, exchange, and unused funds policies, seat availability, and economic factors.

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.

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

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

Assumptions used to generate breakage estimates can be impacted by several factors including, but not limited to:

fare increases;

changes to the Company's ticketing policies;

changes to the Company’s refund, exchange, and unused funds policies;

seat availability;

and economic factors.

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 the twelve-months following the representative balance sheet date.

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.

(“Chase”), through which the Company sells loyalty points and certain marketing components, which consist of the use of the brand and access to Rapid Rewards Member lists, licensing and advertising elements, and the use of the Company’s resource team.

(“Chase”), through which the Company sells loyalty points and certain marketing components, which consist of the use of the

brand and access to Rapid Rewards Member lists, licensing and advertising elements, and the use of the Company’s resource team.

In 2018, Chase and Southwest executed a multi-year extension of the Agreement, extending the decades-long relationship between the parties.

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

For the three months ended 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.

For the three months ended September 30, 2021 and 2020, the Company recognized $ 355 million and $ 282 million, respectively.

For the nine months ended September 30, 2021 and 2020, the Company recognized $ 987 million and $ 859 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 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,

Three months ended September 30, Nine months ended September 30,

2021 2020 2021 2020

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Diluted $ 0.73 $ ( 1.96 ) $ 1.49 $ ( 3.89 )

(a) Because the Company intends to settle conversions by paying cash up to the principal amount of the convertible notes, with any excess conversion value settled in shares of common stock, the convertible notes are being accounted for using the treasury stock method for the purposes of Net income (loss) per share.

Antidilutive amounts excluded from calculations:

Convertible debt (a) — 5 — 2

Restricted stock units — 1 — 1

(a) Because the Company intends to settle conversions by paying cash up to the principal amount of the convertible notes, with any excess conversion value settled in cash or shares of common stock, the convertible notes are being accounted for using the treasury stock method for the purposes of Net income (loss) per share.

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

For the three and 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.

For the three and nine months ended September 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.

See Note 8 for further information on the convertible notes.

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

As of September 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.

25 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 June 30, 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 September 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 June 30, 2021 (Level 1) (Level 2) (Level 3)

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

Assets (in millions)

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Treasury bills 2,249 2,249 — —

Certificates of deposit 1 — 1 —

Time deposits 775 — 775 —

29 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 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:

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2021, 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 nine months ended September 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

Balance at June 30, 2021 $ 502

Total gains (losses) for the period

Included in earnings ( 3 ) (a)

Included in other comprehensive income 166

Purchases 41 (b)

Sales ( 7 ) (b)

Settlements ( 18 )

Balance at June 30, 2021 $ 502

Balance at September 30, 2021 $ 681

The amount of total gains for the period

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change in unrealized gains or losses relating

to assets still held at June 30, 2021

to assets still held at September 30, 2021

The amount of total gains for the period

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change in unrealized gains or losses relating

to assets still held at June 30, 2021

to assets still held at September 30, 2021

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

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

Fair value measurements using significant unobservable inputs (Level 3)

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Included in other comprehensive income 533

Purchases 41 (b)

Sales ( 7 ) (b)

Settlements ( 26 )

Balance at June 30, 2021 $ 502

Balance at September 30, 2021 $ 681

The amount of total gains for the period

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change in unrealized gains or losses relating

to assets still held at June 30, 2021

to assets still held at September 30, 2021

The amount of total gains for the period

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change in unrealized gains or losses relating

to assets still held at June 30, 2021

to assets still held at September 30, 2021

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

The significant unobservable input used in the fair value measurement of the Company’s derivative option contracts is implied volatility.

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

The following table presents a range and weighted average of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 at June 30, 2021:

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

The significant unobservable input used in the fair value measurement of the Company’s derivative option contracts is implied volatility.

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 Third quarter 2021 17 - 33 %

Fourth quarter 2021 27 - 33 %

Fuel derivatives Option model Implied volatility Fourth quarter 2021 22 - 37 %

2022 30 - 43 %

2023 28 - 34 %

Beyond 2023 23 - 25 %

2024 26 - 31 %

(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 June 30, 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;

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Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election.

The Company intends, however, to settle conversions by paying cash up to the principal amount, with any excess conversion value settled in shares of common stock.

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

The Company intends to

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

settle conversions by paying cash up to the principal amount of the convertible notes, with any excess conversion value settled in cash or shares of common stock.

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

The liability component was determined by estimating the fair value of a hypothetical issuance of an identical offering excluding the conversion feature of the Convertible Notes.

The 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 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

The initial carrying amount of the equity component was calculated as the difference between the liability component and the face amount of the Convertible Notes.

During the three months ended September 30, 2021, the Company repurchased $ 80 million in principal of the Convertible Notes for $ 121 million in cash.

The Company accounted for the repurchase as a partial debt extinguishment, which resulted in (i) a loss of $ 12 million reflected in Other (gains) and losses, net, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended September 30, 2021, (ii) a $ 12 million reduction in debt discount and issuance costs, and (iii) a $ 42 million reduction to Capital in excess of par value related to the reacquisition of the equity component in the accompanying unaudited Condensed Consolidated Balance Sheet as of September 30, 2021.

Additionally, an immaterial number of conversions were exercised and settled during the first nine months of 2021.

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

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

Carrying amount of equity component $ 361 $ 403

Liability component:

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Net carrying amount $ 1,932 $ 1,945

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.

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

The Company recognized $ 40 million of interest expense associated with the Convertible Notes during the three months ended September 30, 2021, including $ 29 million of non-cash amortization of the debt discount, $ 4 million of non-cash amortization of debt issuance costs, and $ 7 million of contractual coupon interest.

The Company recognized $ 96 million of interest expense associated with the Convertible Notes during the nine months ended September 30, 2021, including $ 66 million of non-cash amortization of the debt discount, $ 8 million of non-cash amortization of debt issuance costs, and $ 22 million of contractual coupon interest.

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

As of September 30, 2021, the if-converted value of the Convertible Notes exceeded the principal amount by $ 748 million, using the closing stock price on September 30, 2021.

The Convertible Notes did not meet the criteria to be converted as of the date of the financial statements, and thus are classified as Long-term debt in the accompanying unaudited Condensed Consolidated Balance Sheet as of September 30, 2021.

Southwest Airlines Co.

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SUPPLEMENTAL FINANCIAL INFORMATION

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

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

Trade receivables $ 67 $ 46

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Accounts and other receivables $ 1,479 $ 1,130

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

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

Derivative contracts $ 251 $ 90

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Other assets $ 919 $ 722

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

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

Accounts payable trade $ 234 $ 111

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Accounts payable $ 1,229 $ 931

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

Deferred Payroll Support Program grant proceeds $ 763 $ —

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

Extended Emergency Time Off $ 17 $ 393

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Accrued liabilities $ 1,687 $ 2,259

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

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

Extended Emergency Time Off $ — $ 57

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Other noncurrent liabilities $ 1,098 $ 1,247

(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.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(a) Includes approximately $ 472 million and $ 470 million, as of September 30, 2021 and December 31, 2020, respectively, 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.

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

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

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

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.

Other Operating Expenses

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

COMMITMENTS AND CONTINGENCIES

5 unchanged sentences

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.

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

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

Dallas Love Field

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 for Series 2010 and 2012 bonds issued by the LFAMC.

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

All of the outstanding Series 2010 bonds, in the principal amount of $ 310 million were redeemed on September 28, 2021 (Redemption Date) at the redemption price plus accrued interest of $ 7 million.

The source of the funds used to pay the principal and interest on the Series 2010 bonds was proceeds from the sale of LFAMC General Airport

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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.

Revenue Bonds, Series 2021, which also occurred on the Redemption Date.

As the Series 2010 bonds have been fully repaid following the Redemption Date, the Company’s guarantee associated with the Series 2010 bonds no longer exists.

This refinancing transaction was considered a lease modification in accordance with applicable guidance, and the Company's obligation was remeasured as of the transaction date.

This remeasurement resulted in a reduction of the Company's right-of-use asset and lease liability in the amount of $ 343 million, which has been reflected in the unaudited Condensed Consolidated Balance Sheet as of September 30, 2021.

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

As of September 30, 2021, $ 89 million of principal remained outstanding associated with the Series 2012 bonds.

The net present value of the future principal and interest payments associated with the bonds was $ 100 million as of September 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.

Based on growth opportunities and ongoing fleet modernization plans for more fuel efficient aircraft, the Company has entered into supplemental agreements with The Boeing Company ("Boeing") during 2021 to increase its 2022 firm orders of 737 MAX 7 ("-7") aircraft.

Additionally, the Company accelerated options into 2022, 2023, 2024, and 2025, and added new options into 2026 and 2027.

During third quarter 2021, the Company exercised eight of its 2022 options for -7 aircraft.

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.

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

The delivery schedule for the -7 is dependent on the FAA issuing required certifications and approvals to Boeing and the Company.

The FAA will ultimately determine the timing of the -7 certification and entry into service, and the Company therefore offers no assurances that current estimations and timelines are correct.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

The Boeing Company

Firm Orders MAX 8

Firm Orders MAX 7 or 8 Options Additional MAX 8s Total

-7 Firm Orders -8 Firm Orders -7 or -8 Options Additional -8s Total

2021 — 19 — 9 28 (a)

2022 64 — 50 — 114

2023 30 — 60 — 90

2022 72 — 42 — 114 (b)

2023 30 — 60 — 90 (c)

2024 30 — 56 — 86

6 unchanged sentences

2031 — 10 — — 10

234 149 (b) 268 9 (c) 660

(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 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 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.

242 149 (d) 260 9 (e) 660

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

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

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

(e) These 9 additional -8 aircraft were leased from various third parties and delivered as of September 30, 2021.

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

$ 33 million for 2021, $ 1.7 billion in 2022, $ 1.2 billion in 2023, $ 1.1 billion in 2024, $ 837 million in 2025, $ 961 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").

The Company's management does not expect that the outcome of any of its currently ongoing legal proceedings or the outcome of any adjustments presented by the IRS, individually or collectively, will have a material adverse effect on the Company's financial condition, results of operations, or cash flow.

BOEING 737 MAX AIRCRAFT GROUNDING AND RETURN TO SERVICE

On March 13, 2019, the FAA issued an emergency order for all U.S.

airlines to ground all Boeing MAX aircraft.

The Company immediately complied with the order and grounded all 34 MAX aircraft in its fleet.

On November 18, 2020, the FAA rescinded the emergency order and issued official requirements to enable U.S.

airlines to return the Boeing 737 MAX to service.

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 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 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, 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 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 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