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Item 2. Management’s Discussion and Analysis

2021-10-26 compared with 2021-07-27 · 286 added, 307 removed, 386 unchanged (61% of the section changed)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Relevant comparative operating statistics for the three and six months ended June 30, 2021 and 2020 are included below.

Relevant comparative operating statistics for the three and nine months ended September 30, 2021 and 2020 are included below.

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

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

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

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

Three months ended June 30,

Three months ended September 30,

2021 2020 Change

Revenue passengers carried (000s) 26,158 5,253 n.m.

Enplaned passengers (000s) 32,786 6,990 n.m.

Revenue passengers carried (000s) 29,303 11,621 152.2 %

Enplaned passengers (000s) 36,534 15,064 142.5 %

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

27,689 5,614 n.m.

31,285 11,888 163.2 %

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

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737 734 0.4 %

Six months ended June 30,

Nine months ended September 30,

2021 2020 Change

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

(j) Included 1,446 Employees participating in the Extended Emergency Time Off program as of June 30, 2021.

(j) Included less than 500 and a total of 10,684 Employees on Extended Emergency Time Off as of September 30, 2021 and September 30, 2020, respectively.

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

(k) Included 39 Boeing 737 Next Generation aircraft in temporary storage as of June 30, 2021 .

Also included 34 Boeing 737 MAX and 77 Boeing 737 Next Generation aircraft in long-term storage as of June 30, 2020.

(k) Included 24 Boeing 737 Next Generation aircraft in temporary storage as of September 30, 2021.

Also included 34 Boeing 737 MAX and 70 Boeing 737 Next Generation aircraft in long-term storage as of September 30, 2020.

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

Financial Overview

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

The Company continued to experience 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 COVID-19 cases throughout the United States, easing travel restrictions, lifting of business restrictions, and an increase in the numbers of persons vaccinated, domestic leisure travel demand and bookings improved during second quarter 2021.

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

In addition, GAAP results for the three and six months ended June 30, 2021 included $1.5 billion and $2.7 billion, respectively, in grants of payroll funding support ("Payroll Support") from the United States Department of Treasury ("Treasury").

See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information on payroll support programs administered through Treasury, as well as the significant impacts to the Company’s operations, financial performance, and liquidity from the COVID-19 pandemic.

The Company recorded second quarter and year-to-date GAAP and non-GAAP results for 2021 and 2020 as noted in the following tables.

In late February 2020, the Company began to see a negative impact from the COVID-19 pandemic, which quickly accelerated during first quarter 2020 and has continued throughout 2021.

While the pandemic has continued to negatively impact results, the Company saw steady improvement as the year progressed through July, although the summer surge in COVID-19 cases decelerated the demand for travel in August and early September.

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

The Company recorded third quarter and year-to-date GAAP and non-GAAP results for 2021 and 2020 as noted in the following tables.

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

Three months ended Six Months Ended

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

Three months ended Nine months ended

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

GAAP 2021 2020 Percent Change 2021 2020 Percent Change

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Net loss per share, diluted $ (0.23) $ (1.99) (88.4) $ (2.29) $ (4.95) (53.7)

The significant increase in GAAP Net income (loss) and Operating income (loss), and significant decrease in non-GAAP Net loss and Operating loss, year-over-year, for both the quarter and year-to-date periods noted above, was primarily due to the declining COVID-19 cases throughout the United States, easing travel restrictions, lifting of business restrictions, and an increase in the numbers of persons vaccinated, as domestic leisure travel demand and bookings improved rapidly during 2021.

These impacts combined to result in a 297.6 percent increase in Operating revenues in second quarter 2021, and a 15.6 percent increase in Operating revenues for the six months ended June 30, 2021.

The significant increase in GAAP Net income (loss) and Operating income (loss), and significant decrease in non-GAAP Net loss and Operating loss, year-over-year, for both the quarter and year-to-date periods noted above, was primarily due to improvements in domestic leisure demand and bookings in 2021 as impacts from the COVID-19 pandemic eased.

These impacts combined to result in a 161.0 percent increase in Operating revenues in third quarter 2021, and a 52.7 percent increase in Operating revenues for the nine months ended September 30, 2021.

In addition, GAAP results for the three and nine months ended September 30, 2021, included $763 million and $2.7 billion, respectively, in grant allocations of payroll funding support ("Payroll Support") from the United States Department of Treasury ("Treasury") utilized to fund salaries, wages, and benefits.

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

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COVID-19 Pandemic Impacts

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

The Company also continues to monitor guidelines and recommendations from the Centers for Disease Control and Prevention

applicable to the Company’s daily operations, and the manner in which the majority of the Company’s office and clerical Employees work on a daily basis.

As detailed in Note 2 to the unaudited Condensed Consolidated Financial Statements, in connection with the major negative impact of COVID-19 on air carriers, the Company has received significant financial assistance from Treasury in the form of Payroll Support, and this assistance will continue to have a significant impact on the Company's reported GAAP financial results at least through third quarter 2021.

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

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

Treasury in the form of Payroll Support, and this assistance has had a significant impact on the Company's reported GAAP financial results through third quarter 2021.

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

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

During second quarter 2021, 7,000 Employees returned from the Extended ETO program and 1,466 Employees remained on Extended ETO leave as of June 30, 2021, although most of those Employees will be recalled by September 30, 2021.

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.

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

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

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

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

As a result of these voluntary programs, the Company's salaries, wages, and benefits costs were lowered by approximately $325 million for the three months ended June 30, 2021.

As a result of these voluntary programs, the Company's salaries, wages, and benefits costs were lowered by approximately $185 million for the three months ended September 30, 2021.

The Company estimates annual 2021 cost savings from these programs to be in the range of $1.0 billion to $1.1 billion.

The Company has a significantly smaller workforce than it did prior to the COVID-19 pandemic.

However, in addition to recalling a significant portion of the Employees that remained on Extended ETO during the first nine months of 2021, the Company is also aggressively hiring to a goal of approximately 5,000 new Employees by the end of this year, and the Company is currently more than halfway toward that goal.

The Company has also increased its minimum wage to $15 per hour to retain and attract new Employees in the competitive labor market.

The Company continues to evaluate staffing needs to align with planned flight activity.

On September 9, 2021, the President of the United States issued an order establishing vaccination requirements for employees of covered federal contractors (the “Vaccine Executive Order”).

The Company is considered a covered federal contractor and, therefore, subject to actions by the government to implement the Vaccine Executive Order.

The Company is requiring all Employees to submit proof of COVID-19 vaccination, or apply for an accommodation, by November 24, 2021.

The Company recently launched a Vaccination Participation Pay Program to incentivize Employees with the equivalent of two days of pay, with the incentive intended to cover the time needed to become vaccinated.

Company Overview

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

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

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

Subsequently, during April 2021, the Company became aware of a Boeing production issue related to the electrical power system on a subset of MAX aircraft.

Upon learning of the issue, the Company immediately removed 32 MAX aircraft from service for review.

As of June 30, 2021, all MAX aircraft have received the repairs and maintenance as directed by the FAA and The Boeing Company ("Boeing"), and have been returned to service.

Based on growth opportunities and ongoing fleet modernization plans for a less carbon-intensive aircraft, the Company recently entered into supplemental agreements with Boeing 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.

On July 1, 2021, the Company exercised three options for delivery in 2022 and intends to exercise another three options in July 2021 for 2022 delivery.

Upon the planned exercise of these three additional options, the Company's 2022 firm orders will increase to 70 with 44 remaining options, and its order book with Boeing will consist of a total of 389 MAX firm orders (240 MAX 7 and 149 MAX 8) and 262 MAX options (MAX 7 or MAX 8) for years 2021 through 2031.

The Company continues to expect that more than half of the MAX aircraft in its firm order book will replace a significant amount of its 461 737-700 aircraft over the next 10 to 15 years to support the modernization of its fleet, a key component of its environmental sustainability efforts.

The Company ended second quarter 2021 with 736 aircraft in its fleet, including 68 Boeing MAX 8 aircraft.

During second quarter 2021, the Company took delivery of seven Boeing 737 MAX 8 ("MAX 8") aircraft.

The Company expects delivery of one additional leased Boeing 737 MAX 8 aircraft by December 31, 2021.

Also during second quarter 2021, the Company returned one leased 737-700 aircraft and expects to retire one more 737-700 aircraft in 2021, for a total of 10 retirements in 2021.

As of June 30, 2021, 39 737-700 aircraft remained in temporary storage due to the prolonged period of depressed capacity levels.

These aircraft are expected to have required maintenance checks completed and be returned to service by the end of this year.

The Company has published its flight schedule through January 5, 2022.

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

The Company has entered into supplemental agreements with The Boeing Company ("Boeing") to increase aircraft orders and accelerate certain options with the goal of improving potential growth opportunities, restoring its network closer to pre-pandemic levels, lowering operating costs, and further modernizing its fleet with less carbon-intensive aircraft.

During third quarter 2021, the Company exercised eight options for aircraft delivery in 2022, which increased the Company's 2022 firm orders to 72 with 42 remaining options, and the Company's order book with Boeing as of September 30, 2021, consists of a total of 391 MAX firm orders (242 Boeing 737 MAX-7 ("-7") aircraft and 149 Boeing 737 MAX-8 ("-8") aircraft) and 260 MAX options (-7s or -8s) for years 2021 through 2031.

The Company continues to expect that more than half of the MAX aircraft in its firm order book will replace a significant amount of its 461 Boeing 737-700 ("-700") aircraft over the next 10 to 15 years to support the modernization of the Company's fleet, a key component of its environmental sustainability efforts.

The Company ended third quarter 2021 with 737 Boeing 737 aircraft in its fleet, including 69 -8 aircraft.

During third quarter 2021, the Company took delivery of one -8 aircraft, and does not expect any additional deliveries in 2021.

As of September 30, 2021, 24 -700 aircraft remained in temporary storage due to fourth quarter 2021 capacity remaining below fourth quarter 2019 levels.

The Company still expects to return one leased -700 aircraft to the lessor in fourth quarter 2021, and in October 2021 made the decision to accelerate the retirement of eight -700

owned aircraft from 2022 into fourth quarter 2021, for a total of 18 retirements in 2021.

The Company expects to end 2021 with 728 total aircraft.

The Company has published its flight schedule through April 24, 2022.

During 2021, the Company is pursuing additional revenue opportunities that utilize idle aircraft to provide service to new, popular destinations.

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

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

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

• Eugene Airport in Oregon - August 29, 2021

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

• Bellingham International Airport in Washington - November 7, 2021

• Syracuse Hancock International Airport in New York - November 14, 2021

The Company began additional service to Hawaii from Los Angeles and Las Vegas on June 6, 2021, and from Phoenix on June 27, 2021.

Alongside established Hawaii service at five other California airports, these three additional gateways with nonstop service to multiple airports in the Hawaiian Islands now give Southwest Customers in more than 40 cities on the mainland low-fare connecting or same-plane access to Hawaii.

The COVID-19 pandemic had a particularly negative impact on international operations and led to the Company's suspension of international operations in first quarter 2020.

The Company has since resumed service to Aruba, Mexico, Costa Rica, Jamaica, the Dominican Republic, and Cuba.

With the easing of government restrictions and continued increase in demand for beach and leisure destinations, the Company intends to resume service to its remaining international destinations, including Belize, the Bahamas, Turks and Caicos, and the Cayman Islands, by November 7, 2021.

Thus far, the Company continues to experience typical leisure booking patterns for summer and fall 2021 travel.

Based on current bookings, leisure passenger traffic and fares in July 2021 are expected to trend higher than July 2019 levels.

The Company's revenue outlook for August 2021 is impacted by less holiday travel, an estimated one to two point headwind, compared with August 2019, as the Labor Day holiday weekend falls in September 2021, whereas it was split between August and September in 2019.

Despite steady weekly improvements in business bookings, thus far, in July, the lag in business travel recovery is expected to continue to have a negative impact on close-in demand and average passenger fares in third quarter 2021.

The following table presents selected preliminary estimates of operating revenue and load factor for July and August 2021:

July 2021 Estimated

The COVID-19 pandemic has had a particularly negative impact on international operations and led to the Company's suspension of international operations in first quarter 2020.

The Company has since resumed service to Aruba, Mexico, Costa Rica, Jamaica, the Dominican Republic, Cuba, the Bahamas, and Turks and Caicos.

With the easing of government restrictions and the continued increase in demand for beach and leisure destinations, the Company intends to resume service to Belize by November 7, 2021 and the Cayman Islands in 2022.

The Company will focus on restoring the frequency of flights between existing airports in the short-term.

Although less severe than prior waves of rising COVID-19 cases, the negative effects associated with the Delta variant are estimated to have impacted August and September 2021 operating revenues by approximately $100 million and $200 million, respectively.

Despite the demand deceleration, third quarter 2021 operating revenues and revenue passengers reached 83 percent and 87 percent of 2019 levels, respectively, which is meaningful progress and a strong indication of the pent-up demand for air travel.

Revenue and booking trends began to significantly improve in the second half of September 2021 as COVID-19 cases declined, which resulted in an improvement in the Company's September and third quarter 2021 operating revenues, as compared with the Company's previous estimation.

September 2021 managed business revenues declined 73 percent compared with September 2019.

The Company is encouraged by recent improvements in underlying revenue trends as COVID-19 cases have declined;

however, the lingering effects from the deceleration in bookings in third quarter 2021 are estimated to negatively impact fourth quarter 2021 Operating revenues by approximately $100 million.

For October 2021, despite the improvement in revenue and booking trends experienced in the second half of September 2021 continuing, thus far, into this month, October operating revenues include two headwinds—an estimated $40 million negative impact due to the lingering effects of the Delta variant and an estimated $75 million negative impact as a result of flight cancellations from operational challenges experienced earlier this month and related Customer refunds and gestures of goodwill.

Despite these headwinds, and based on current bookings, the Company's guidance for October 2021 operating revenues remains unchanged, as the recent improvement in travel demand trends offsets the aforementioned headwinds.

Business revenues continue to lag leisure revenue trends;

however, the Company is encouraged by the recent improvement in business travel demand resulting in steady improvements in business

bookings, thus far, in October 2021.

Beyond October 2021, the current booking curve for the holidays is trending in line with 2019 levels.

The following table presents selected preliminary estimates of Operating revenues and Load factor for October and fourth quarter 2021:

October 2021 Estimated

Operating revenue compared with 2019 (a) Down 20% to 30% Down 15% to 25%

Previous estimation Down 15% to 20% (b)

Load factor ~85% ~80%

Previous estimation (b) (b)

Load factor 78% to 83% 80% to 85%

Previous estimation (b) (b)

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

(b) Remains unchanged from the previously provided estimation.

The Company expects its third quarter 2021 capacity to increase from second quarter 2021 levels, based on the expectation of further improvement in travel demand.

The Company is in the process of adjusting its published flight schedules for September and October 2021.

Including these adjustments, the following table presents capacity estimates for third quarter 2021:

July 2021 Estimated

August 2021 Estimated

September 2021 Estimated

The Company expects its fourth quarter 2021 capacity to remain below fourth quarter 2019 levels.

The following table presents capacity estimates for fourth quarter 2021:

October 2021 Estimated

November 2021 Estimated

December 2021 Estimated

ASMs year-over-year Up ~68% Up ~42% Up ~55% Up ~54%

Previous estimation (a) Up ~39% (a) (a)

ASMs compared with 2019 Down ~3% Up ~3% Comparable Comparable

Previous estimation (a) Comparable (a) (a)

(a) Remains unchanged from previously provided estimation.

In addition, the Company currently expects its fourth quarter 2021 capacity to increase approximately 68 percent, year-over-year, and to be comparable with fourth quarter 2019.

Based on current cost trends, third quarter 2021 operating expenses and unit costs, excluding fuel and oil expense, special items, and profitsharing, are expected to increase in the range of one to five percent, compared with third quarter 2019.

The Company currently estimates three to four points of the unit cost increase in third quarter 2021 to be attributable to ramp up costs and premium pay being offered to Operations Employees.

Another one point is attributable to lower estimated cost savings from voluntary leave programs due to higher than projected Employee recalls.

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

Previous estimation (a) (a) (a) (a)

ASMs compared with 2019 Down ~6% Down ~7% Down ~12% Down ~8%

Previous estimation (a) (a) (a) (a)

(a) Remains unchanged from the previously provided estimation.

Based on current cost trends and reduced capacity plans, fourth quarter 2021 operating expenses, excluding fuel and oil expense, special items, and profitsharing, are expected to be comparable with fourth quarter 2019 levels, and increase in the range of 8 percent to 12 percent on a unit basis as compared with fourth quarter 2019.

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

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

The Company now estimates annual 2021 cost savings from these programs to be approximately $1.0 billion.

The Company expects third quarter 2021 cost savings from these programs to be approximately $150 million.

To support the return of flight activity, the Company expects to recall the vast majority of its Employees early from voluntary time-off by the end of third quarter 2021, which is expected to reduce the Company's prior forecasted savings from voluntary leave programs beyond second quarter 2021.

The Company is experiencing cost increases primarily due to inflation in labor rates and airport costs.

Additionally, the Company currently expects four to five points of the unit cost increase in fourth quarter 2021 to be attributable to investments in the operation to bolster staffing, cost inflation related to lower productivity, and vaccination incentive pay.

Based on the current cost outlook, and despite the current momentum in revenue trends, the Company does not expect to be profitable in fourth quarter 2021.

Except for higher fuel prices, fourth quarter 2021's overall results are trending better than third quarter 2021.

During August 2021, the Company reached a tentative collective-bargaining agreement with the International Association of Machinists and Aerospace Workers, AFL-CIO, which represents the Company's approximately 6,800 Employees in the Customer Service Agents, Customer Representatives, and Source of Support Representatives workgroup.

The ratification vote is scheduled to conclude on October 29, 2021.

If the tentative agreement is ratified, it will become amendable in 2025.

The Company went live with Sabre's Global Distribution System ("GDS") platform on July 26, 2021, achieving its goal of enabling industry-standard corporate bookings through multiple GDS platforms.

In addition to Sabre, the Company is currently accepting corporate bookings through Amadeus's GDS platform and Travelport's multiple GDS platforms (Apollo, Worldspan, and Galileo).

The Company's enhancement of its GDS channel strategy is part

of its larger "channel of choice" offering and complements its "direct connect" strategy, as well as its existing SWABIZ® direct travel management tool.

The goal is to distribute Southwest's everyday low fares to more business travelers through their preferred channel and grow the Company's managed business revenues.

Material Changes in Results of Operations

Comparison of three months ended June 30, 2021 and June 30, 2020

Comparison of three months ended September 30, 2021 and September 30, 2020

Operating Revenues

Total operating revenues for second quarter 2021 increased by $3.0 billion, year-over-year, to $4.0 billion, driven primarily by the improvements in leisure Passenger demand and bookings throughout second quarter 2021 versus

the severe impacts to demand and bookings from the COVID-19 pandemic in second quarter 2020.

Second quarter 2021 operating revenues per available seat mile (RASM) were 11.99 cents, and increased 113.0 percent, compared with second quarter 2020, primarily driven by the improvement in passenger demand as impacts from the COVID-19 pandemic eased, which also contributed to the Load factor increase of 51.5 points, and the passenger revenue yield increase of 2.8 percent, year-over-year.

Passenger revenues for second quarter 2021 increased by $2.9 billion, year-over-year.

Total operating revenues for third quarter 2021 increased by $2.9 billion, or 161.0 percent, year-over-year, to $4.7 billion.

Third quarter 2021 operating revenues per ASM (RASM) were 12.07 cents, an increase of 78.0 percent, compared with third quarter 2020.

The dollar increase was driven primarily by the improvements in leisure Passenger demand and bookings in third quarter 2021 versus the severe impacts to demand and bookings from the COVID-19 pandemic in third quarter 2020.

The RASM increase was primarily driven by a 10.5 percent improvement in yield and an increase in Load factor of 35.8 points.

Passenger revenues for third quarter 2021 increased by $2.8 billion, or 190.7 percent, year-over-year.

On a unit basis, Passenger revenues increased 98.7 percent, year-over-year.

The increase in Passenger revenues on both a dollar and unit basis was primarily due to travel restrictions easing and business restrictions lifting which resulted in improvements in leisure Passenger demand and bookings.

Freight revenues for second quarter 2021 increased by $12 million, or 31.6 percent, compared with second quarter 2020, primarily due to increased demand as businesses reduced pandemic driven restrictions.

Other revenues for second quarter 2021 increased by $123 million, or 46.2 percent, compared with second quarter 2020.

The increase in Passenger revenues on both a dollar and unit basis was primarily due to travel restrictions easing and an increase in the numbers of persons vaccinated, which resulted in improvements in leisure Passenger demand and bookings.

Freight revenues for third quarter 2021 increased by $6 million, or 14.6 percent, compared with third quarter 2020, primarily due to increased demand as businesses reduced pandemic driven restrictions.

Other revenues for third quarter 2021 increased by $107 million, or 35.9 percent, compared with third quarter 2020.

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

("Chase") and the impact on spend on the Company's co-branded card, driven by an increase in consumer spending.

("Chase"), and the impact on spend on the Company's co-branded card, driven by the increase in consumer spending resulting from the improving economy in 2021 as compared with earlier stages of the COVID-19 pandemic.

Operating Expenses

Operating expenses for second quarter 2021 increased by $1.3 billion, or 59.9 percent, compared with second quarter 2020, while capacity increased 86.8 percent over the same prior year period.

The operating expense increase was primarily due to higher market jet fuel prices and the significant increase in fuel gallons consumed, coupled with significant increases in trips flown and other variable flight-driven expenses.

Operating expenses for third quarter 2021 increased by $742 million, or 23.2 percent, compared with third quarter 2020, while capacity increased 46.4 percent over the same prior year period.

The operating expense increase was primarily due to higher jet fuel prices.

These increases were partially offset by the Payroll Support programs grant allocations of $763 million in third quarter 2021, compared with a $1.2 billion Payroll Support grant allocation in third quarter 2020.

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

In second quarter 2020, ASMs were significantly impacted by the dramatic and severe drop in demand as a result of the COVID-19 pandemic which led to numerous flight cancellations and flight schedule adjustments.

The Company increased capacity to match the higher demand during second quarter 2021 and incurred more variable, flight-driven expenses as a result.

In third quarter 2020, ASMs were significantly impacted by the significant drop in demand as a result of the COVID-19 pandemic, which led to numerous flight cancellations and flight schedule adjustments.

The Company increased capacity to match the higher demand during third quarter 2021 and incurred more variable, flight-driven expenses as a result.

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

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

Three months ended June 30, Per ASM

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

Unless otherwise specified, changes on a per ASM basis were driven by changes in capacity, which increased with the improvement of travel demand, causing the Company's fixed costs to be spread over significantly more ASMs.

Three months ended September 30, Per ASM

change Percent

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Depreciation and amortization 0.83 1.19 (0.36) (30.3)

Other operating expenses, net 1.76 1.23 0.53 43.1

Other operating expenses 1.70 1.85 (0.15) (8.1)

Total 10.18 ¢ 12.11 ¢ (1.93) ¢ (15.9) %

Operating expenses per ASM for second quarter 2021 decreased by 14.4 percent, compared with second quarter 2020.

Operating expenses per ASM for second quarter 2021, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), decreased 39.3 percent, compared with second quarter 2020.

On both a GAAP and non-GAAP basis, excluding Fuel and oil expense, profitsharing, and special items, the unit cost decreases in second quarter 2021 were primarily driven by the 86.8 percent increase in capacity as Trips flown increased with the improvement of travel demand, causing the Company's fixed costs to be spread over significantly

Operating expenses per ASM for third quarter 2021 decreased by 15.9 percent, compared with third quarter 2020.

Operating expenses per ASM for third quarter 2021, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), decreased 16.1 percent, compared with third quarter 2020.

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

Salaries, wages, and benefits expense for second quarter 2021 increased by $111 million, or 6.5 percent, compared with second quarter 2020.

On a per ASM basis, second quarter 2021 Salaries, wages, and benefits expense decreased 43.0 percent, compared with second quarter 2020, as the dollar increases were more than offset by the 86.8 percent increase in capacity due to a more stable and efficient flight schedule.

On a dollar basis, the increase was primarily driven by a profitsharing expense accrual of $85 million in second quarter 2021, compared with no profitsharing expense accrual in second quarter 2020.

Payroll support and voluntary Employee programs, net (a reduction to expense) for second quarter 2021 resulted in a decrease of $44 million, compared with second quarter 2020.

On a per ASM basis, second quarter 2021 Payroll support and voluntary Employee programs, net decreased 49.3 percent, compared with second quarter 2020, as the dollar increases were more than offset by the 86.8 percent increase in capacity.

On a dollar basis, the increase was primarily due to the decrease in the Payroll Support programs grant allocation of $724 million in second quarter 2021, compared with a $1.1 billion allocation in second quarter 2020, partially offset by a $307 million accrual related to the cost associated with the Voluntary Separation Program elections made prior to June 30, 2020.

Salaries, wages, and benefits expense for third quarter 2021 increased by $444 million, or 26.5 percent, compared with third quarter 2020.

On a per ASM basis, third quarter 2021 Salaries, wages, and benefits expense decreased 13.6 percent, compared with third quarter 2020.

On a dollar basis, the increase was primarily driven by a significant increase in trips and overtime hours, and wage rate increases.

Payroll support and voluntary Employee programs, net (a reduction to expense) for third quarter 2021 increased $627 million, compared with third quarter 2020.

On a per ASM basis, third quarter 2021 Payroll support and voluntary Employee programs, net increased 250.9 percent, compared with third quarter 2020.

On both a dollar and per ASM basis, the increases were primarily due to the Payroll Support grant benefit of $763 million in third quarter 2021, compared with a net Payroll Support and Voluntary Employee program benefit of $149 million in third quarter 2020, as the $1.2 billion Payroll Support grant was partially offset by a $1.1 billion charge related to costs associated with the Voluntary Separation Program and Extended ETO programs.

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

Fuel and oil expense for second quarter 2021 increased by $546 million, or 212.5 percent, compared with second quarter 2020.

On a per ASM basis, second quarter 2021 Fuel and oil expense increased 67.4 percent, due primarily to higher market jet fuel prices.

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

Fuel and oil expense for third quarter 2021 increased by $611 million, or 161.2 percent, compared with third quarter 2020.

On a per ASM basis, third quarter 2021 Fuel and oil expense increased 77.1 percent.

On a dollar basis, approximately 70 percent of the increase was attributable to an increase in jet fuel prices, and the remainder of the increase was due to an increase in fuel gallons consumed.

On a per ASM basis, the majority of the change was due to higher jet fuel prices.

The following table provides more information on the Company's economic fuel cost per gallon, including the impact of fuel hedging premium expense and fuel derivative contracts:

Three months ended June 30,

Three months ended September 30,

Economic fuel costs per gallon $ 2.04 $ 1.23

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

The Company's second quarter 2021 available seat miles per gallon ("fuel efficiency") declined 8.7 percent, year-over-year, due to the return to service of more of its least fuel-efficient aircraft, the Boeing 737-700, to support higher demand.

When compared with second quarter 2019, fuel efficiency improved 4.5 percent in second quarter 2021 driven primarily by the March 2021 return to service of the Company's most fuel-efficient aircraft, the MAX.

The MAX is critical to the Company's efforts to modernize its fleet, reduce carbon emissions intensity, and achieve carbon neutrality by 2050.

The Company expects third quarter 2021 fuel efficiency to be sequentially in line with second quarter 2021, on a nominal basis.

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

The Company's third quarter 2021 available seat miles per gallon ("fuel efficiency") declined 4.5 percent, year-over-year, due to the Company's return to service of more of its least fuel-efficient aircraft, the -700.

When compared with third quarter

2019, fuel efficiency improved 5.1 percent in third quarter 2021 due to the March 2021 return to service of the Company's most fuel-efficient aircraft, the MAX.

The Company expects fourth quarter 2021 fuel efficiency to be in line with third quarter 2021, on a nominal basis.

As of October 14, 2021, on an economic basis, the Company had derivative contracts in place related to expected future fuel consumption as follows:

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

Remainder of 2021 321

Beyond 2023 106

(a) The Company’s hedge position includes prices at which the Company considers "catastrophic" coverage.

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

The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties—see Note 4 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI at June 30, 2021, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

Year Fair value of fuel derivative contracts at June 30, 2021 Amount of gains deferred in AOCI at June 30, 2021 (net of tax)

The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties—see Note 4 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI at September 30, 2021, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

Year Fair value of fuel derivative contracts at September 30, 2021

Amount of gains deferred in AOCI at September 30, 2021 (net of tax)

Remainder of 2021 $ 55 $ 15

Beyond 2023 20 8

Total $ 681 $ 339

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

Assuming no changes to the Company's current fuel derivative portfolio, but including all previous hedge activity for fuel derivatives that have not yet settled, and considering only the expected net cash receipts related to hedges that will settle, the Company is providing the below sensitivity table for fourth quarter 2021 jet fuel prices at different crude oil assumptions as of October 14, 2021, and for expected premium costs associated with settling contracts.

Estimated economic fuel price per gallon,

including taxes and fuel hedging premiums (e)

including taxes and fuel hedging premiums (d)

Average Brent Crude Oil

price per barrel Third Quarter 2021 (c) Fourth Quarter 2021 (d)

price per barrel Fourth Quarter 2021 (c)

$60 $1.80 - $1.90

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$100 $2.50 - $2.60

$100 $2.45 - $2.55 $2.55 - $2.65

Estimated fuel hedging premium expense per gallon (b) $0.05

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

(a) Brent crude oil average market prices as of July 15, 2021, were approximately $73 and $71 per barrel for third quarter 2021 and fourth quarter 2021, respectively.

Estimated premium costs (b) $25 million

(a) Brent crude oil average market price as of October 14, 2021, was approximately $83 per barrel for fourth quarter 2021.

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

(c) Based on the Company's existing fuel derivative contracts and market prices as of July 15, 2021, third quarter 2021 economic fuel costs are estimated to be in the $2.05 to $2.15 per gallon range, including fuel hedging premium expense of approximately $25 million, or $.05 per gallon, and $.04 per gallon in favorable cash settlements from fuel derivative contracts.

See Note Regarding Use of Non-GAAP Financial Measures.

(d) Based on the Company's existing fuel derivative contracts and market prices as of July 15, 2021, fourth quarter 2021 economic fuel costs are estimated to be in the $2.05 to $2.15 per gallon range, including fuel hedging premium expense of approximately $25 million, or $.05 per gallon, and $.02 per gallon in favorable cash settlements from fuel derivative contracts.

(c) Based on the Company's existing fuel derivative contracts and market prices as of October 14, 2021, fourth quarter 2021 economic fuel costs are estimated to be in the $2.25 to $2.35 per gallon range, including fuel hedging premium expense of approximately $25 million, or $0.05 per gallon, and $0.18 per gallon in favorable cash settlements from fuel derivative contracts.

See Note Regarding Use of Non-GAAP Financial Measures.

(e) The Company's current fuel derivative contracts contain a combination of instruments based in West Texas Intermediate and Brent crude oil;

however, the economic fuel price per gallon sensitivities provided assume the relationship between Brent crude oil and refined products based on market prices as of July 15, 2021.

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

however, the economic fuel price per gallon sensitivities provided assume the relationship between Brent crude oil and refined products based on market prices as of October 14, 2021.

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

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See Note Regarding Use of Non-GAAP Financial Measures.

Maintenance materials and repairs expense for second quarter 2021 increased by $82 million, or 58.6 percent, compared with second quarter 2020.

On a per ASM basis, Maintenance materials and repairs expense decreased 15.4 percent, compared with second quarter 2020, as a substantial portion of the increase in ASMs in second quarter 2021 were produced by aircraft for which a comparable level of airframe maintenance costs were not required due to timing.

On a dollar basis, approximately 50 percent of the increase was due to higher engine maintenance expense due to the increase in flight hours and the majority of the remainder of the increase was due to increased operations and operating aircraft that had previously been in storage.

Landing fees and airport rentals expense for second quarter 2021 increased by $128 million, or 46.5 percent, compared with second quarter 2020.

On a per ASM basis, Landing fees and airport rentals expense decreased 21.4 percent, compared with second quarter 2020, as the additional space and higher airport rental rates across the network, were more than offset by the significant increase in capacity year-over-year.

On a dollar basis, the increase was primarily due to higher landing fees as a result of the increased number of Trips flown in second quarter 2021 as a result of improvements in leisure passenger demand associated with the easing of the COVID-19 pandemic.

Depreciation and amortization expense for second quarter 2021 increased by $2 million, or 0.6 percent, compared with second quarter 2020.

On a per ASM basis, Depreciation and amortization expense decreased by 46.3 percent, compared with second quarter 2020, as the dollar increase was more than offset by the 86.8 percent increase in capacity.

On a dollar basis, the increase was due to the deployment of new technology assets.

Other operating expenses, net, for second quarter 2021 increased by $366 million, or 166.4 percent, compared with second quarter 2020.

Included within this line item was aircraft rentals expense in the amounts of $52 million and $41 million for the periods ended June 30, 2021 and 2020, respectively.

On a per ASM basis, Other operating expenses, net increased 43.1 percent, compared with second quarter 2020.

On a dollar and per ASM basis, the increases were primarily due to $222 million of gains from the sale-leaseback of 20 aircraft to third parties in two separate transactions during second quarter 2020, which reduced Other operating expenses, net in second quarter 2020 and were considered special items and thus excluded from the Company's non-GAAP results for the three months ended June 30, 2020.

On a dollar basis, the remaining increase was primarily due to higher credit card fees driven by increases in revenue in second quarter 2021 as a result of improvements in leisure passenger demand associated with the easing of the COVID-19 pandemic.

Maintenance materials and repairs expense for third quarter 2021 increased by $65 million, or 35.1 percent, compared with third quarter 2020.

On a per ASM basis, Maintenance materials and repairs expense decreased 7.1 percent, compared with third quarter 2020.

On a dollar basis, approximately 50 percent of the increase was due to higher engine maintenance expense due to the increase in flight hours, and the majority of the remainder of the increase was due to the timing of regular airframe maintenance checks as some costs had previously been deferred while a portion of the fleet was placed into temporary storage during the COVID-19 pandemic.

Landing fees and airport rentals expense for third quarter 2021 increased by $68 million, or 22.1 percent, compared with third quarter 2020.

On a per ASM basis, Landing fees and airport rentals expense decreased 16.4 percent, compared with third quarter 2020.

On a dollar basis, approximately 60 percent of the increase was due to an increase in space rental rates at many airports, and the remainder of the increase was due to higher landing fees from the increased number of Trips flown.

Depreciation and amortization expense for third quarter 2021 increased by $7 million, or 2.2 percent, compared with third quarter 2020.

On a per ASM basis, Depreciation and amortization expense decreased by 30.3 percent, compared with third quarter 2020.

On a dollar basis, the increase was primarily due to the deployment of new technology assets.

Other operating expenses for third quarter 2021 increased by $174 million, or 35.7 percent, compared with third quarter 2020.

Included within this line item was aircraft rentals expense in the amounts of $53 million and $57 million for the three-month periods ended September 30, 2021 and 2020, respectively.

On a per ASM basis, Other operating expenses decreased 8.1 percent, compared with third quarter 2020.

On a dollar basis, approximately 35 percent of the increase was primarily due to higher credit card fees driven by increases in Passenger revenues in third quarter 2021, and the majority of the remainder of the increase was due to various flight-driven expenses, both as a result of improvements in leisure passenger demand and an increased number of Trips flown in third quarter 2021.

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

Interest expense for second quarter 2021 increased by $20 million, or 20.8 percent, compared with second quarter 2020, primarily due to higher debt balances.

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

Capitalized interest for second quarter 2021 increased by $1 million, or 14.3 percent, compared with second quarter 2020, primarily due to Boeing resuming production of the Company's undelivered MAX aircraft.

Interest income for second quarter 2021 decreased by $7 million, or 77.8 percent, compared with second quarter 2020, due to lower interest rates.

Interest expense for third quarter 2021 increased by $4 million, or 3.6 percent, compared with third quarter 2020, primarily due to higher debt balances.

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

Capitalized interest for third quarter 2021 decreased by $2 million, or 18.2 percent, compared with third quarter 2020, primarily due to timing of aircraft deliveries and payments.

Interest income for third quarter 2021 decreased by $2 million, or 50.0 percent, compared with third quarter 2020, due to lower interest rates.

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

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

The following table displays the components of Other (gains) losses, net, for the three months ended June 30, 2021 and 2020:

Three months ended June 30,

The following table displays the components of Other (gains) losses, net, for the three months ended September 30, 2021 and 2020:

Three months ended September 30,

(in millions) 2021 2020

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

Mark-to-market gain on deferred compensation plan investment (17) —

The Company's effective tax rate was approximately 30.7 percent in second quarter 2021, compared with 26.2 percent in second quarter 2020.

The higher tax rate for second quarter 2021 was primarily due to higher state taxes than previously estimated.

The Company currently estimates its annual 2021 effective tax rate to be approximately 26 percent, compared with its previous guidance of approximately 23 percent, also due to the higher state taxes than previously estimated.

Comparison of six months ended June 30, 2021 and June 30, 2020

Mark-to-market loss on deferred compensation plan investment 1 —

Loss on partial extinguishment of convertible notes 12 —

The Company's effective tax rate was approximately 25.7 percent in third quarter 2021, compared with 25.0 percent in third quarter 2020.

The higher tax rate for third quarter 2021 was due to the significant variance in projected full year Income (loss) before income taxes between the two periods due to impacts of the COVID-19 pandemic as well as the Company's ability to carry back 2020 losses to receive tax refunds on amounts paid from 2015 through 2019, when the statutory tax rate was 35 percent.

The Company currently estimates its annual 2021 effective tax rate to be approximately 27 percent.

Comparison of nine months ended September 30, 2021 and September 30, 2020

Operating Revenues

Passenger revenues for the six months ended June 30, 2021, increased by $733 million, or 16.1 percent, compared with the first six months of 2020.

Passenger revenues for the nine months ended September 30, 2021, increased by $3.5 billion, or 58.4 percent, compared with the first nine months of 2020.

On a unit basis, Passenger revenues increased 32.5 percent, year-over-year.

The increase in Passenger revenues on both a dollar and unit basis were primarily due to the improvements in leisure

Passenger demand and bookings in the first six months of 2021, compared with the severe impacts to demand and bookings from the COVID-19 pandemic for the majority of the first six months of 2020, including as a result of unprecedented levels of close-in trip cancellations, and significant reductions in capacity during the March through June period.

Freight revenues for the six months ended June 30, 2021, increased by $15 million, or 19.5 percent, compared with the six months ended June 30, 2020, primarily due to increased demand as businesses reduced pandemic driven restrictions during 2021.

Other revenues for the six months ended June 30, 2021, increased by $70 million, or 11.4 percent, year-over-year.

The increase was primarily due to an increase in income from business partners, including Chase, and the impact on spend on the Company's co-branded card, driven by the increase in consumer spending resulting from the improving economy in 2021 as compared to the earliest stages of the COVID-19 pandemic.

The increase in Passenger revenues on both a dollar and unit basis were primarily due to the improvements in leisure Passenger demand and bookings in the first nine months of 2021, compared with the severe impacts to demand and bookings from the COVID-19 pandemic for the majority of the first nine months of 2020.

Freight revenues for the nine months ended September 30, 2021, increased by $22 million, or 18.6 percent, compared with the nine months ended September 30, 2020, primarily due to increased demand as businesses reduced pandemic driven restrictions during 2021.

Other revenues for the nine months ended September 30, 2021, increased by $177 million, or 19.4 percent, year-over-year.

Operating Expenses

Operating expenses for the six months ended June 30, 2021, decreased by $1.2 billion, or 18.7 percent, compared with the first six months of 2020, while capacity increased 6.2 percent over the same prior year period.

Operating expenses for the nine months ended September 30, 2021, decreased by $470 million, or 4.9 percent, compared with the first nine months of 2020, while capacity increased 19.6 percent over the same prior year period.

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

However, the Company's flight schedules are largely fixed once flight schedules are published, and the Company experienced significant ASM reductions in second quarter 2020 as a result of flight schedule adjustments related to the COVID-19 pandemic.

The Company has experienced significant ASM increases as a result of flight schedule adjustments related to the improving economy in 2021 as compared to the earliest stages of the COVID-19 pandemic.

Flight schedule adjustments are expected to result in further declines to unit costs if the increase in air travel demand continues, excluding any impacts associated with Payroll Support grants.

However, the Company's flight schedules are largely fixed once flight schedules are published, and the Company experienced significant ASM reductions in second and third quarter 2020 as a result of flight schedule adjustments related to the COVID-19 pandemic.

The Company has experienced significant ASM increases as a result of flight schedule adjustments related to the improving economy in 2021 as compared with earlier stages of the COVID-19 pandemic.

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

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

Six months ended June 30, Per ASM Percent

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

Nine months ended September 30, Per ASM Percent

(in cents, except for percentages) 2021 2020 change change

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Depreciation and amortization 1.00 1.18 (0.18) (15.3)

Other operating expenses, net 1.85 1.73 0.12 6.9

Other operating expenses 1.79 1.76 0.03 1.7

Total 9.67 ¢ 12.15 ¢ (2.48) ¢ (20.4) %

Operating expenses per ASM for the first six months of 2021 decreased by 23.5 percent, compared with the first six months of 2020.

The majority of the year-over-year unit cost decrease in the first six months of 2021 was driven by the increase in Payroll Support funding.

This decrease was partially offset by an increase in market jet fuel prices and $222 million of gains from the sale-leaseback of 20 aircraft to third parties in two separate transactions during second quarter 2020, which reduced Other operating expenses, net in second quarter 2020.

Operating expenses per ASM for the first nine months of 2021 decreased by 20.4 percent, compared with the first nine months of 2020.

The majority of the year-over-year unit cost decrease in the first nine months of 2021 was driven by the increase in Payroll Support funding.

This decrease was partially offset by an increase in jet fuel prices and an increase in fuel gallons consumed, and $222 million of gains from the sale-leaseback of 20 aircraft to third parties in two separate transactions during second quarter 2020, which reduced Other operating expenses in second quarter 2020.

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

Operating expenses per ASM for the first six months of 2021, excluding Fuel and oil expense, profitsharing and special items, (a non-GAAP financial measure), decreased 10.1 percent, year-over-year.

Operating expenses per ASM for the first nine months of 2021, excluding Fuel and oil expense, profitsharing and special items (a non-GAAP financial measure), decreased 12.8 percent, year-over-year.

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

Salaries, wages, and benefits expense for the first six months of 2021 decreased by $173 million, or 4.8 percent, compared with the first six months of 2020.

On a per ASM basis, Salaries, wages, and benefits expense for the first six months of 2021 decreased 10.4 percent, compared with the first six months of 2020.

On both a dollar and per ASM basis, the majority of the decreases were primarily driven by lower salaries, wages, and benefits expense, as a result of Voluntary Separation Program, Extended ETO, and other time off programs offered by the Company.

The decrease was partially offset by the $109 million profitsharing expense accrual in the first six months of 2021, compared with no profitsharing expense accrual in the first six months of 2020.

Payroll support and voluntary Employee programs, net (a reduction to expense) for the first six months of 2021 was an increase of $1.4 billion, compared with the first six months of 2020.

On a per ASM basis, Payroll support and voluntary Employee programs, net for the first six months of 2021 increased by 163.3 percent.

On both a dollar and per ASM basis, the changes were primarily due to the significant increase in Payroll Support grant proceeds received in the first half of 2021 compared with the same prior year period.

This was coupled with:

• The Payroll Support programs' grant allocation of $1.9 billion in the first six months of 2021, compared with a $1.1 billion allocation in the first six months of 2020;

• The $307 million accrual for charges related to the Voluntary Separation Program in the first six months of 2020;

• The $130 million net reduction in the Extended ETO liability in the first six months of 2021;

Salaries, wages, and benefits expense for the first nine months of 2021 increased by $273 million, or 5.2 percent, compared with the first nine months of 2020.

On a per ASM basis, Salaries, wages, and benefits expense for the first nine months of 2021 decreased 12.2 percent, compared with the first nine months of 2020.

On a dollar basis, the majority of the increase was due to the $186 million profitsharing expense accrual in the first nine months of 2021, compared with no profitsharing expense accrual in the first nine months of 2020.

The remainder of the increase was primarily due to a significant increase in trips and overtime hours, and wage rate increases.

Payroll support and voluntary Employee programs, net (a reduction to expense) for the first nine months of 2021 was an increase of $2.0 billion, or 217.6 percent, compared with the first nine months of 2020.

On a per ASM basis, Payroll support and voluntary Employee programs, net for the first nine months of 2021 increased by 165.8 percent.

On both a dollar and per ASM basis, the changes were primarily due to the significant increase in Payroll Support grant proceeds received in the first nine months of 2021 compared with the same prior year period.

The primary components of this line item included:

• The Payroll Support programs' grant allocation of $2.7 billion in the first nine months of 2021, compared with a $2.3 billion allocation in the first nine months of 2020;

• The $792 million accrual for charges related to the Voluntary Separation Program in the first nine months of 2020;

• The $140 million net reduction in the Extended ETO liability in the first nine months of 2021, compared with the $613 million accrual for charges related to the Extended ETO liability in the first nine months of 2020;

• The $120 million in Employee Retention Tax Credits recorded in 2021 for continuing to pay Employees' salaries during the time they were not working, as allowed under the CARES Act, and subsequent legislation.

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

Fuel and oil expense for the first six months of 2021 increased by $144 million, or 12.8 percent, compared with the first six months of 2020.

On a per ASM basis, Fuel and oil expense for the first six months of 2021 increased 6.1 percent, due to higher market jet fuel prices.

On a dollar basis, the majority of the increase was attributable to higher market jet fuel prices, and the remainder of the increase was due to an increase in fuel gallons consumed.

Fuel and oil expense for the first nine months of 2021 increased by $754 million, or 50.0 percent, compared with the first nine months of 2020.

On a per ASM basis, Fuel and oil expense for the first nine months of 2021 increased 25.9 percent.

On a dollar basis, approximately 60 percent of the increase was attributable to an increase in jet fuel prices per gallon, and the remainder of the increase was due to an increase in fuel gallons consumed.

On a per ASM basis, the increase was primarily due to higher jet fuel prices.

The following table provides more information on the Company's economic fuel cost per gallon, including the impact of fuel hedging premium expense and fuel derivative contracts:

Six months ended June 30,

Nine months ended September 30,

Economic fuel costs per gallon $ 1.92 $ 1.56

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

Maintenance materials and repairs expense for the first six months of 2021 decreased by $17 million, or 4.1 percent, compared with the first six months of 2020.

On a per ASM basis, Maintenance materials and repairs expense decreased 9.1 percent, compared with the first six months of 2020, as a result of the timing of regular airframe maintenance checks, and deferring some of these costs by placing a portion of the fleet in storage during the COVID-19 pandemic.

On a dollar basis, the majority of the decrease was due to lower engine maintenance expense due to the decrease in flight hours.

Landing fees and airport rentals expense for the first six months of 2021 increased by $102 million, or 16.6 percent, compared with the first six months of 2020.

On a per ASM basis, Landing fees and airport rentals expense increased 10.4 percent, compared with the first six months of 2020, as higher costs from additional space and higher

airport rental rates across the network were exceeded by the significant increase in capacity year-over-year.

On a dollar basis, the majority of the increase was due to an increased number of Trips flown and the increase in space rental rates in the first six months of 2021.

Depreciation and amortization expense for the first six months of 2021 increased by $3 million, or 0.5 percent, compared with the first six months of 2020.

On a per ASM basis, Depreciation and amortization expense decreased 5.1 percent, compared with the first six months of 2020, as the dollar increase was more than offset by the 6.2 percent increase in capacity.

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

Other operating expenses, net for the first six months of 2021 increased by $132 million, or 14.4 percent, compared with the first six months of 2020.

Included within this line item was aircraft rentals expense in the amounts of $103 million and $98 million for the periods ended June 30, 2021 and 2020, respectively.

On a per ASM basis, Other operating expenses, net increased 6.9 percent, compared with the first six months of 2020.

On both a dollar and per ASM basis, the increases were primarily due to gains from the sale-leaseback of 20 aircraft to third parties in two separate transactions during second quarter 2020, which reduced Other operating expenses, net in second quarter 2020 and were considered special items and thus excluded from the Company's non-GAAP results for the six months ended June 30, 2020.

Maintenance materials and repairs expense for the first nine months of 2021 increased by $49 million, or 8.2 percent, compared with the first nine months of 2020.

On a per ASM basis, Maintenance materials and repairs expense decreased 9.3 percent, compared with the first nine months of 2020.

Landing fees and airport rentals expense for the first nine months of 2021 increased by $170 million, or 18.4 percent, compared with the first nine months of 2020.

On a per ASM basis, Landing fees and airport rentals expense decreased 0.9 percent, compared with the first nine months of 2020.

On a dollar basis, approximately 50 percent of the increase was due to an increase in space rental rates at many airports, and the remainder of the increase was due to higher landing fees from the increased number of Trips flown.

Depreciation and amortization expense for the first nine months of 2021 increased by $9 million, or 1.0 percent, compared with the first nine months of 2020.

On a per ASM basis, Depreciation and amortization expense decreased 15.3 percent, compared with the first nine months of 2020.

On a dollar basis, the majority of the increase was associated with the deployment of new technology assets during 2021.

Other operating expenses for the first nine months of 2021 increased by $305 million, or 21.7 percent, compared with the first nine months of 2020.

Included within this line item was aircraft rentals expense in the amount of $155 million for both the nine-month periods ended September 30, 2021 and 2020, respectively.

On a per ASM basis, Other operating expenses increased 1.7 percent, compared with the first nine months of 2020.

On a dollar basis, the increase was primarily due to $222 million in gains from the sale-leaseback of 20 aircraft to third parties in two separate transactions during second quarter 2020, which reduced Other operating expenses in second quarter 2020.

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

Interest expense for the first six months of 2021 increased by $105 million, or 84.7 percent, compared with the first six months of 2020, primarily due to higher debt balances in the first six months of 2021.

Capitalized interest for the first six months of 2021 increased by $7 million, or 58.3 percent, compared with the first six months of 2020, primarily due to Boeing resuming production of the Company's undelivered MAX aircraft.

Interest income for the first six months of 2021 decreased by $22 million, or 84.6 percent, compared with the first six months of 2020, due to lower interest rates.

Interest expense for the first nine months of 2021 increased by $108 million, or 46.0 percent, compared with the first nine months of 2020, primarily due to higher debt balances in the first nine months of 2021.

Capitalized interest for the first nine months of 2021 increased by $4 million, or 17.4 percent, compared with the first nine months of 2020, primarily due to Boeing resuming production of the Company's undelivered MAX aircraft.

Interest income for the first nine months of 2021 decreased by $24 million, or 80.0 percent, compared with the first nine months of 2020, due to lower interest rates.

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

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

The following table displays the components of Other (gains) losses, net, for the six months ended June 30, 2021 and 2020:

Six months ended June 30,

The following table displays the components of Other (gains) losses, net, for the nine months ended September 30, 2021 and 2020:

Nine months ended September 30,

(in millions) 2021 2020

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Correction on investment gains related to prior periods (a) (60) —

Loss on partial extinguishment of convertible notes 12 —

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

The Company's effective tax rate was approximately 28.4 percent for the first six months of 2021, compared with 27.0 percent for the first six months of 2020.

The higher tax rate for the first six months of 2021 was primarily due to higher state taxes than previously estimated.

The Company's effective tax rate was approximately 27.1 percent for the first nine months of 2021, compared with 25.9 percent for the first nine months of 2020.

The higher tax rate for the first nine months of 2021 was primarily due to higher state taxes.

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

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

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

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

2021 2020 Change 2021 2020 Change

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Premium cost of fuel contracts not designated as hedges (11) (11) (32) (22)

Add (Deduct):

Mark-to-market impact from interest rate swap agreements — 1 — (28)

Loss on partial extinguishment of convertible notes (12) — (12) —

Other (gains) losses, net, excluding special items $ 3 $ 2 50.0% $ (70) $ 5 n.m.

$ (73) $ 3 n.m.

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

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

2021 2020 Change 2021 2020 Change

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Mark-to-market impact from fuel contracts settling in current and future periods (a) 3 23 (6) 40

Add (Deduct):

Mark-to-market impact from interest rate swap agreements — (1) — 28

Loss on partial extinguishment of convertible notes 12 — 12 —

Loss before income taxes, excluding special items $ (166) $ (1,675) (90.1) $ (1,730) $ (4,028) (57.1)

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Mark-to-market impact from fuel contracts settling in current and future periods (a) 3 23 (6) 40

Add (Deduct):

Mark-to-market impact from interest rate swap agreements — (1) — 28

Loss on partial extinguishment of convertible notes 12 — 12 —

Net income (loss) tax impact of special items (b) 185 41 713 350

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Net loss per share, diluted, excluding special items $ (0.23) $ (1.99) (88.4) $ (2.29) $ (4.95) (53.7)

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

2021 2020 Change 2021 2020 Change

Operating expenses per ASM (cents) 10.18 ¢ 12.11 ¢ 9.67 ¢ 12.15 ¢

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

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

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

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

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

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

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

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

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

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

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

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

Losses associated with the partial extinguishment of the Company's convertible notes.

Because management believes special items can distort the trends associated with the Company’s ongoing performance as an airline, the Company believes that evaluation of its financial performance can be enhanced by a supplemental presentation of results that exclude the impact of special items in order to enhance consistency and comparativeness with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods.

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

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

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

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

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

Cash burn/flow methodology may vary by airline, and the Company's second quarter 2021 average daily core cash burn/flow may differ materially by utilizing cash burn/flow calculations that adjust for changes in working capital - including changes for Air traffic liability and cash payments for voluntary separation and extended emergency time off payments, among other items.

See the Company's calculation of cash burn/flow below:

Three months ended

(in millions, except for Days in the period) June 30, 2021

Loss before income taxes, non-GAAP $ (255)

Depreciation and amortization expense 315

Capital expenditures (95)

Debt service payments (43)

Core cash burn $ (78)

Days in the period 91

Average daily core cash burn $ (1)

Core cash burn, prior to changes in working capital $ (78)

Increase in Air traffic liability 946

Payments associated with Voluntary Employee Programs (159)

Cash payments for income taxes (176)

Core cash flow, adjusted for changes in working capital $ 523

Days in the period 91

Average daily core cash flow, adjusted for changes in working capital $ 6

Liquidity and Capital Resources

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See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information regarding the impact of the COVID-19 pandemic and assistance obtained under Payroll Support programs.

Net cash provided by operating activities was $2.0 billion for the three months ended June 30, 2021, compared with $897 million provided by operating activities in the same prior year period.

For the six months ended June 30, 2021, net cash provided by operating activities was $2.7 billion, compared with $520 million provided by operating activities in the same prior year period.

Net cash used in operating activities was $575 million for the three months ended September 30, 2021, compared with $1.1 billion used in operating activities in the same prior year period.

For the nine months ended September 30, 2021, net cash provided by operating activities was $2.1 billion, compared with $531 million used in operating activities in the same prior year period.

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

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

Operating cash flows for the six months ended June 30, 2021, included $2.7 billion in Payroll Support program grant proceeds, of which $1.9 billion was used to offset eligible costs, and was thus included in operating activities, as well as $45 million allocated to the value of warrants issued and thus included in financing activities.

Operating cash flows for the nine months ended September 30, 2021, included $2.7 billion in Payroll Support program grant proceeds received.

The net increase in operating cash flows was also a result of a $1.1 billion increase in Air traffic liability driven by increased ticket sales related to an increase in leisure travel demand.

For the six months ended June 30, 2020, the operating cash flows were affected primarily by $2.0 billion in Payroll Support program grant proceeds received, of which $1.1 billion was used to offset eligible costs, and the $307 million accrual of expected costs for the Voluntary Separation Program.

The increase in operating cash flows was also a result of a $1.4 billion increase in Air traffic liability.

This increase was partially offset by the Company's Net loss (as adjusted for non-cash items) and a $90 million decrease in Accounts payable and accrued expenses due to the Company's payout in 2020 of its 2019 $667 million profitsharing distribution to Employees, a significant decline in amounts payable for passenger excise taxes and segment fees as a result of the decline in passenger ticket sales, and the suspension of collection of certain ticket taxes as dictated by the CARES Act.

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

The operating cash flows for the nine months ended September 30, 2020, were also negatively affected by the amounts paid out under the Company's Voluntary Separation Program 2020 and Extended ETO plans during the nine months ended September 30, 2020.

These net decreases in cash from operating activities were partially offset by a $1.6 billion increase in Air traffic liability and by $2.4 billion in Payroll Support program grant proceeds received.

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

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

however these shareholder return activities have been suspended due to restrictions associated with the payroll assistance under the Payroll Support programs.

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

however these shareholder return activities have been suspended due to restrictions associated with the payroll assistance under the Payroll Support programs and the Company's amended and restated revolving credit facility.

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

Net cash used in investing activities totaled $469 million during the three months ended June 30, 2021, compared with $332 million provided by investing activities in the same prior year period.

Net cash used in investing activities was $670 million during the six months ended June 30, 2021, compared with $327 million provided by investing activities in the same prior year period.

Net cash used in investing activities totaled $412 million during the three months ended September 30, 2021, compared with $434 million used in investing activities in the same prior year period.

Net cash used in investing activities was $1.1 billion during the nine months ended September 30, 2021, compared with $107 million used in investing activities in the same prior year period.

Investing activities in both years included Capital expenditures, and changes in the balance of the Company's short-term and noncurrent investments.

The Company also raised $815 million from the sale-leaseback of 20 aircraft and received $428 million of Supplier proceeds during the six months ended June 30, 2020, which the Company considers an offset to its aircraft capital expenditures.

During the six months ended June 30, 2021, Capital expenditures were $190 million, compared with $336 million in the same prior year period.

Capital expenditures decreased, year-over-year, largely due to a decrease in technology and facilities project expenditures and several projects being placed into service since June 30, 2020.

In addition, the Company did not make progress payments on future aircraft deliveries or payments for new delivered MAX 8 aircraft during the six months ended June 30, 2021, compared to the same prior year period, when progress payments were made.

During the nine months ended September 30, 2020, the Company also raised $815 million from the sale-leaseback of 20 aircraft and received $428 million of Supplier proceeds, which the Company considers an offset to its aircraft capital expenditures.

During the nine months ended September 30, 2021, Capital expenditures were $325 million, compared with $425 million in the same prior year period.

Capital expenditures decreased, year-over-year, largely due to a decrease in facilities project expenditures and several projects being placed into service since September 30, 2020.

In addition, the Company was not required to make progress payments on future aircraft deliveries or payments for new delivered -8 aircraft during the nine months ended September 30, 2021, compared to the same prior year period, when progress payments were made.

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

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Therefore, the Company currently estimates its annual 2021 capital expenditures to be in the range of

$500 million to $600 million.

$500 million to $600 million driven primarily by technology, facilities, and operational investments, as well as aircraft related capital expenditures.

Based on 72 firm orders currently planned in 2022, as discussed in "Company Overview," the Company's contractual aircraft capital expenditures for 2022 are estimated to be approximately $1.7 billion.

Further, the Company's total contractual aircraft capital expenditures for all years 2021 through 2026, which represents 209 MAX firm orders (175 MAX 7 and 34 MAX 8 aircraft), are estimated to be approximately $5.7 billion.

Further, the Company's total contractual aircraft capital expenditures for all years 2022 through 2026, which currently represents 200 MAX firm orders (185 -7 and 15 -8 aircraft), are estimated to be approximately $6.0 billion.

Fleet and other capital investment plans are expected to continue to evolve as the Company manages through this pandemic recovery period, and the Company intends to evaluate the exercise of its remaining 42 MAX options for 2022 as decision deadlines occur throughout the remainder of this year.

Net cash provided by financing activities was $617 million during the three months ended June 30, 2021, compared with $7.2 billion provided by financing activities for the same prior year period.

Net cash provided by financing activities was $1.1 billion during the six months ended June 30, 2021, compared with $9.0 billion provided by financing activities for the same year period.

During the six months ended June 30, 2021, the Company borrowed $1.1 billion of loan proceeds under Payroll Support programs.

Net cash used in financing activities was $157 million during the three months ended September 30, 2021, compared with $1.2 billion provided by financing activities for the same prior year period.

Net cash provided by financing activities was $923 million during the nine months ended September 30, 2021, compared with $10.2 billion provided by financing activities for the prior year period.

During the nine months ended September 30, 2021, the Company borrowed $1.1 billion of loan proceeds under Payroll Support programs.

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

The Company repaid $109 million in debt and finance lease obligations during the six months ended June 30, 2021, and is scheduled to repay approximately $111 million in debt and finance lease obligations during the remainder of 2021.

During the six months ended June 30, 2020, the Company borrowed $12.3 billion, through various transactions, in order to improve its liquidity position as a result of the onset of the pandemic.

An additional $2.3 billion was raised from a public offering of 80,500,000 shares of common stock.

These financings were partially offset by the full repayment of the $3.7 billion borrowed under the Company's Amended and Restated 364-Day Credit Agreement and the $1.0 billion drawn under the Company's Amended and Restated Revolving Credit Facility, as amended (the "Revolving Credit Facility").

The Company also repurchased $451 million of its outstanding common stock, paid $188 million in cash dividends to Shareholders, and repaid $237 million in debt and finance lease obligations during the first six months of 2020.

Average core cash burn was approximately $1 million per day in second quarter 2021;

however, the Company achieved positive average daily core cash flow in June 2021, of approximately $4 million.

Based on current booking trends and cost outlook, the Company is hopeful to be profitable, both on a GAAP and non-GAAP basis, in third and fourth quarter 2021.

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

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

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

capital expenditures;

and adjusted amortizing debt service payments;

divided by the number of days in the period.

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

financing transactions;

Payroll Support proceeds;

voluntary separation and extended emergency time off program payments;

and other changes in working capital.

Cash burn/flow methodology varies by airline, and the Company’s average daily core cash burn/flow may differ materially by utilizing cash burn/flow calculations that adjust for changes in working capital.

Utilizing an alternative cash burn/flow approach, which adjusts for changes in working capital—including changes in Air traffic liability and cash payments for voluntary separation and extended emergency time off program payments, among other items—the Company generated average core cash flow of approximately $11 million per day in June 2021, and approximately $6 million per day in second quarter 2021.

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

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

The Company repaid $298 million in debt and finance lease obligations, including the extinguishment of $80 million in principal of its convertible notes for a cash payment of $121 million during the nine months ended September 30, 2021, and is scheduled to repay approximately $182 million in debt and finance lease obligations in fourth quarter 2021.

During the nine months ended September 30, 2020, the Company borrowed $13.6 billion, through various transactions, in order to improve its liquidity position as a result of the onset of the pandemic.

An additional $2.3 billion was raised from a public offering of 80.5 million shares of common stock.

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

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

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

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The Company has access to $1.0 billion under its Revolving Credit Facility.

During third quarter 2021, the expiration of this revolving credit facility was extended to August 2023.

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

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

the Company was compliant with this requirement as of June 30, 2021.

There were no amounts outstanding under the Revolving Credit Facility as of June 30, 2021.

Although not the case at June 30, 2021, due to the Company's significant financing activities, the Company has historically carried a working capital deficit, in which its current liabilities exceed its current assets.

the Company was compliant with this requirement as of September 30, 2021.

There were no amounts outstanding under the Revolving Credit Facility as of September 30, 2021.

Although not the case at September 30, 2021, due to the Company's significant financing activities, the Company has historically carried a working capital deficit, in which its current liabilities exceed its current assets.

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

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

The Company has various options available to meet its capital and operating commitments, including unrestricted cash and short-term investments of $16.9 billion as of June 30, 2021, and anticipated future internally generated funds from operations.

The Company believes it has various options available to meet its capital and operating commitments, including unrestricted cash and short-term investments of $16.0 billion as of September 30, 2021, and anticipated future internally generated funds from operations.

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

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

During second quarter 2021, the Company entered into supplemental agreements to its aircraft purchase agreement with Boeing 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.

During 2021, the Company has entered into supplemental agreements to its aircraft purchase agreement with Boeing to increase its 2022 firm orders of -7 aircraft.

Additionally, the Company accelerated options into 2022, 2023, 2024, and 2025, and added new options into 2026 through 2027, bringing the total firm and option order book to 660 aircraft as of September 30, 2021, less 19 purchased aircraft delivered in the first nine months of 2021.

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

The following table details information on the aircraft in the Company's fleet as of June 30, 2021:

The following table details information on the aircraft in the Company's fleet as of September 30, 2021:

Age (Yrs) Number

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737-800 175 6 207 190 17

737 MAX 8 175 2 68 (a) 40 28

737 -8 175 2 69 40 29

Totals 13 737 605 132

(a) Included 39 Boeing 737 Next Generation aircraft in temporary storage as of June 30, 2021.

(a) Included 24 Boeing 737 Next Generation aircraft in temporary storage as of September 30, 2021.

Cautionary Statement Regarding Forward-Looking Statements

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Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, statements related to the following:

• the Company’s financial outlook, expectations, and projected results of operations, including underlying assumptions and estimates, in particular related to expectations regarding passenger demand, depressed demand for business travel, costs associated with voluntary separation and extended leave programs, and flight-driven cost increases;

• the Company’s expectations with respect to capacity and load factors, including underlying assumptions and estimates;

• the Company’s expectations with respect to capital expenditures and its related underlying assumptions, in particular with respect to aircraft capital expenditures;

• the Company’s fleet plans and related expectations;

• the Company’s network plans and expectations;

• the Company’s expectations related to fuel efficiency, including the Company’s underlying assumptions;

• the Company's initiatives;

• the Company's expectations with respect to the benefits associated with its voluntary separation and extended leave programs;

• the Company’s plans and expectations related to the Vaccine Executive Order (see also Item 1A, Risk Factors);

• the Company’s fleet plans and its related goals, strategies, and expectations, including with respect to fuel efficiency and reduction in carbon emissions;

• the Company’s network plans;

• the Company’s revenue, load factor, and capacity estimates and expectations;

• the Company's other financial expectations and projected results of operations, including the Company’s underlying assumptions and estimates, in particular related to expectations regarding investments in the Company’s operations and People;

• the Company’s goals with respect to distributing fares to business travelers and growing managed business revenues;

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

• the Company’s expectations with respect to capital expenditures and its related underlying assumptions, in particular with respect to aircraft capital expenditures;

• the Company’s plans for the repayment of debt;

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

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Factors that could cause these differences include, among others:

• any negative developments related to the COVID-19 pandemic, including, for example, with respect to (i) the duration, spread, severity, or any recurrence of the COVID-19 pandemic;

(ii) any new variant strains of the underlying virus;

(iii) the effectiveness, availability, and usage of vaccines;

(iv) the duration and scope of governmental orders and restrictions related to COVID-19;

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

(vi) the impact of COVID-19 on the Company's ability to retain key Employees;

and (vii) the impact of COVID-19 on the Company's access to capital;

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

• any negative developments related to the COVID-19 pandemic, including, for example, with respect to (i) the duration, spread, severity, or any recurrence of the COVID-19 pandemic or any new variant strains of the underlying virus;

(ii) the effectiveness, availability, and usage of COVID-19 vaccines;

(iii) the impact of the Vaccine Executive Order and other governmental actions on the Company's business plans and its ability to retain key Employees;

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

and (v) the impact of COVID-19 on the Company's access to capital;

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

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

• the Company's dependence on Boeing with respect to the Company's operations, strategies, and goals;

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

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

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

• the Company's dependence on Boeing with respect to the Company's fleet, fuel, and capital expenditure plans and expectations;

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

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

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

• the impact of the Company's obligations and restrictions related to its participation in Treasury's payroll support programs and any related negative impact on the Company’s ability to retain key Employees;

• other factors as set forth in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, and in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 .

• further delays in, or the inability of the U.S.

government, to agree upon a solution regarding budget deficits and the debt ceiling, which could result in a default or downgrade on its debts.

This, in turn, could result in a material adverse effect of the Company’s investment portfolio;

• other factors as set forth in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, its Quarterly Report on Form 10-Q for the quarter ended June 30, 2021, and in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2021.

Caution should be taken not to place undue reliance on the Company's forward-looking statements, which represent the Company's views only as of the date this report is filed.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis