What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-02-07 compared with 2021-02-08 · 407 added, 478 removed, 269 unchanged (77% of the section changed)

1 unchanged sentence

YEAR IN REVIEW

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

As a consequence, the Company experienced its first annual net loss in 48 years.

The Company's prior trend of 47 consecutive years of profitability was a feat unmatched in the U.S.

airline industry.

Both GAAP and non-GAAP results, shown in the following tables, were impacted by the pandemic.

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 2021.

While the pandemic has continued to negatively impact results, the Company saw steady improvement as the year progressed, with intermittent periods of decelerated demand that coincided with COVID-19 surges.

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 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.

4 unchanged sentences

Net income (loss) per share, diluted $ 1.61 $ (5.44) n.m.

Operating income (loss) $ (5,032) $ 2,957 n.m.

Net income (loss) $ (3,512) $ 2,300 n.m.

Net income (loss) per share, diluted $ (6.22) $ 4.27 n.m.

The COVID-19 pandemic depressed the demand for air travel and negatively impacted both GAAP and non-GAAP results year-over-year.

Operating revenues for the year ended December 31, 2020 decreased 59.7 percent as the Company experienced load factors and yields that were considerably lower than historical levels.

The Company took action to reduce capacity and swiftly cut costs, which generated a reduction in operating expenses of 33.9 percent.

However, due to the fixed nature of a large portion of the Company's cost structure, especially in the short-term, the reduction in operating expenses was not enough to overcome the dramatic decline in revenues.

For periods prior to second quarter 2020, the Company provided its calculation of non-GAAP return on invested capital (“ROIC”) as a measure of financial performance used by management to quantify the Company’s effectiveness in generating returns relative to the capital invested in the business.

By second quarter 2020, the precipitous drop in passenger demand and bookings caused by COVID-19 resulted in a material and adverse effect on the Company’s operating income and cash flows from operations.

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

Accordingly, the Company has chosen not to present ROIC in this Form 10-K and does not expect to present it again until and if the operating environment normalizes sufficiently to return the Company to operating income instead of operating loss.

See Notes 2 and 7 to the Consolidated Financial Statements for further information on the significant impacts to the Company’s operations, financial performance, and liquidity from the COVID-19 pandemic.

Thus far in 2021, the Company experienced stalled demand in January and bookings for February 2021, primarily driven by the high level of COVID-19 cases and hospitalizations, as well as a seasonally weaker time period for leisure travel demand following the holidays.

However, trip cancellations have stabilized and January 2021 operating revenues are expected to improve slightly compared with the Company's previous estimations for January

2021 operating revenues provided mid-December 2020, primarily due to stronger leisure passenger demand in the January holiday return travel period and a slight improvement in load factor.

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

January 2021 Estimated

February 2021

Operating revenues year-over-year Down 65% to 70% Down 65% to 75%

Previous estimation Down 65% to 75% (a)

As compared with 2019 Down 65% to 70% Down 65% to 75%

Load factor 50% to 55% 50% to 55%

Previous estimation 45% to 55% (a)

ASMs year-over-year Down ~41% Down ~46%

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

As compared with 2019 Down ~43% Down ~45%

(a) No previous estimation provided.

The Company estimates its March 2021 capacity to decrease approximately 16 percent, year-over-year, or 31 percent, compared with March 2019.

The Company estimates its first quarter 2021 capacity to decrease approximately 35 percent year-over-year, primarily driven by the continued negative effects of the pandemic.

Excluding Fuel and oil expense and special items, first quarter 2021 operating expenses are expected to decrease in the range of 15 to 20 percent, year-over-year, primarily due to lower capacity, year-over-year, as well as an estimated $400 million of cost savings from voluntary separation and extended leave programs.

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

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

Operating loss $ (1,281) $ (5,032) (74.5)

Net loss $ (1,271) $ (3,512) (63.8)

Net loss per share, diluted $ (2.15) $ (6.22) (65.4)

The significant improvement in both GAAP Net income (loss) and Operating income (loss), year-over-year, was primarily due to the rebound in domestic leisure demand and bookings in 2021 as impacts from the COVID-19 pandemic eased.

This resulted in a 74.5 percent increase in Operating revenues in 2021 versus 2020, although 2021 Operating revenues were still well below 2019 levels.

Further, the Company received $2.7 billion in grant allocations of payroll funding support ("Payroll Support") from the United States Department of Treasury ("Treasury") in 2021, compared with $2.3 billion received in 2020, which the Company utilized in both years to offset a portion of salaries, wages, and benefits.

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

On a quarterly basis, demand for air travel improved each period of 2021.

Although the Company's GAAP financial results benefited from the impact of Payroll Support recognized during the first three quarters of the year, the Company was able to generate a profit during fourth quarter 2021 despite having no further allocation of Payroll Support.

Operating Statistics

The Company provides the operating data below for the three years ended December 31, 2021, because these statistics are commonly used in the airline industry and, therefore, allow readers to compare the Company’s performance against its results for prior periods, as well as against the performance of the Company’s peers.

Year ended December 31,

2021 2020 2021 Change to 2020 2019 2020 Change to 2019 2021 Change to 2019 (l)

Operating Data:

Revenue passengers carried (000s) 99,111 54,088 83.2 % 134,056 (59.7) % (26.1) %

Enplaned passengers (000s) 123,264 67,785 81.8 % 162,681 (58.3) % (24.2) %

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

103,562 54,221 91.0 % 131,345 (58.7) % (21.2) %

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

132,006 103,456 27.6 % 157,254 (34.2) % (16.1) %

Load factor (c)

78.5 % 52.4 % 26.1 pts.

83.5 % (31.1) pts.

Average length of passenger haul (miles) 1,045 1,002 4.3 % 980 2.2 % 6.6 %

Average aircraft stage length (miles) 790 743 6.3 % 748 (0.7) % 5.6 %

Trips flown 1,066,934 897,540 18.9 % 1,367,727 (34.4) % (22.0) %

Seats flown (000s) (d)

165,580 137,405 20.5 % 206,390 (33.4) % (19.8) %

Seats per trip (e)

155.2 153.1 1.4 % 150.9 1.5 % 2.8 %

Average passenger fare $ 141.92 $ 141.72 0.1 % $ 154.98 (8.6) % (8.4) %

Passenger revenue yield per RPM (cents) (f)

13.58 14.14 (4.0) % 15.82 (10.6) % (14.2) %

Operating revenues per ASM (cents) (g)(j)

11.96 8.75 36.7 % 14.26 (38.6) % (16.1) %

Passenger revenue per ASM (cents) (h)

10.66 7.41 43.9 % 13.21 (43.9) % (19.3) %

Operating expenses per ASM (cents) (i)

10.66 12.43 (14.2) % 12.38 0.4 % (13.9) %

Operating expenses per ASM, excluding fuel (cents) 8.15 10.65 (23.5) % 9.62 10.7 % (15.3) %

Operating expenses per ASM, excluding fuel and profitsharing (cents) 7.98 10.65 (25.1) % 9.19 15.9 % (13.2) %

Fuel costs per gallon, including fuel tax $ 1.98 $ 1.45 36.6 % $ 2.09 (30.6) % (5.3) %

Fuel costs per gallon, including fuel tax, economic $ 2.01 $ 1.49 34.9 % $ 2.09 (28.7) % (3.8) %

Fuel consumed, in gallons (millions) 1,668 1,273 31.0 % 2,077 (38.7) % (19.7) %

Active fulltime equivalent Employees (j) 55,093 56,537 (2.6) % 60,767 (7.0) % (9.3) %

Aircraft at end of period (k) 728 718 1.4 % 747 (3.9) % (2.5) %

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

Also referred to as "traffic," which is a measure of demand for a given period.

(b) An available seat mile is one seat (empty or full) flown one mile.

Also referred to as "capacity," which is a measure of the space available to carry passengers in a given period.

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

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

(f) Calculated as passenger revenue divided by revenue passenger miles.

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

(g) Calculated as operating revenues divided by available seat miles.

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

(h) Calculated as passenger revenue divided by available seat miles.

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

(i) Calculated as operating expenses divided by available seat miles.

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

(j) Included less than 250 and 10,421 Employees participating in the Extended Emergency Time Off program as of December 31, 2021 and 2020, respectively.

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

(k) Included six Boeing 737 Next Generation aircraft in temporary storage and 60 in long-term storage as of December 31, 2021 and 2020, respectively.

Also included 32 and 34 Boeing MAX 737 in long-term storage as of December 31, 2020 and 2019, respectively.

See Note 17 to the Consolidated Financial Statements for further information.

(l) The Company believes certain comparisons with 2019 are more relevant measures of performance than year-over-year comparisons due to the significant impacts in 2020 due to the pandemic.

The following tables present selected financial guidance for first quarter and full year 2022:

1Q 2022 Estimation Previous estimation

Operating revenue compared with 2019 (a) Down 10% to 15% (e)

Load factor 75% to 80% (e)

ASMs compared with 2019 Down ~9% (e)

Economic fuel costs per gallon $2.25 to $2.35 (e)

Fuel hedging premium expense per gallon $0.06 (e)

Fuel hedging cash settlement gains per gallon $0.35 (e)

ASMs per gallon (fuel efficiency) Nominally in line with 4Q21 (e)

CASM-X (b) compared with 2019 Up 20% to 24% (e)

Debt repayments (millions) ~$60 (e)

Interest expense (millions) ~$90 (e)

Aircraft (c) 725 (e)

2022 Estimation Previous estimation

ASMs compared with 2019 Down ~4% (e)

Economic fuel costs per gallon $2.25 to $2.35 (e)

Fuel hedging premium expense per gallon $0.05 (e)

Fuel hedging cash settlement gains per gallon $0.28 (e)

CASM-X (b) compared with 2019 Up 12% to 16% (e)

Debt repayments (millions) ~$455 (e)

Interest expense (millions) ~$360 (e)

Aircraft (c) 814 (e)

Effective tax rate 23% to 25% (e)

Capital spending (billions) (d) ~$5.0 (e)

(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 2021 due to the pandemic.

(b) Operating expenses per available seat mile, excluding fuel and oil expense, profitsharing, and special items.

net of 6 and 28 re tirements planned in first quarter 2022 and full year 2022, respectively.

Two aircraft originally planned for delivery in first quarter 2022 have shifted into the Company's second quarter 2022 planned delivery schedule.

Reflects 12 options exercised through February 3, 2022, five and seven for delivery in first quarter and second quarter 2022, respectively, and the assumption that the Company exercises all 30 remaining 2022 options.

The delivery schedule for the Boeing 737-7 (-7) is dependent on the Federal Aviation Administration ("FAA") issuing required certifications and approvals to The Boeing Company ("Boeing") and the Company.

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

(d) Represents current contractual payments to Boeing for firm aircraft and the assumptions that the Company exercises a ll 30 r emaining 2022 options, in addition to ~$900 million non-aircraft capital spending.

Excluding any further option exercises in 2022, the Company's 2022 capital spending would be ~$3.4 billion, also including ~$900 million in non-aircraft capital spending

(e) Remains unchanged from previously reported estimation.

Following strong travel demand during the fourth quarter 2021 holiday period, the Company is experiencing a revenue headwind in first quarter 2022 due to a softness in bookings and an increase in trip cancellations associated with the Omicron variant.

January and February are seasonally weaker time periods for leisure travel demand, but further softness in leisure bookings related to the Omicron variant, combined with lower than expected business

travel demand, is estimated to reduce operating revenues in January and February 2022 by $330 million, combined.

The Company canceled more than 5,600 flights in January 2022, with the majority attributable to available staffing challenges as a result of the Omicron variant, as well as weather-related cancellations, driving an estimated $50 million negative impact to January 2022 operating revenues.

First quarter 2022 managed business revenues are expected to be down 45 percent to 55 percent versus first quarter 2019 levels.

The Company remains optimistic about the return of business travel demand in 2022 based on the momentum experienced in fourth quarter 2021 before the impact of the Omicron variant.

The Company is also encouraged by recent improvements in booking trends, especially for March 2022, and current revenue trends for spring break travel appear to be in line with typical seasonal expectations.

Based on current cost trends and reduced capacity plans, first quarter 2022 operating expenses, excluding fuel and oil expense, special items, and profitsharing, are expected to increase in the range of 20 percent to 24 percent on a unit basis as compared with first 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.

COVID-19 Pandemic

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

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

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

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

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

• All Rapid Rewards loyalty program members with an account opened by December 31, 2020 received a "boost" of 15,000 tier qualifying points and 10 flight credits toward A-List and A-List Preferred status, and 25,000 Companion Pass qualifying points and 25 flight credits toward Companion Pass status.

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

• Companion pass members earned status on April 1, 2020 has been extended through December 31, 2021.

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

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

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

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

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

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

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

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

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

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

Of the approximate $3.4 billion, $2.4 billion consists of a grant that does not require repayment.

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

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

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

Amounts received or to be received under the Payroll Support Program Extension are expected to total approximately $1.7 billion and will be utilized to directly offset payroll expenses incurred by the Company, including specified benefits, between January 2021 and March 2021.

Of this total, approximately $1.2 billion consists of a grant that will not require repayment.

The Company currently expects this direct payroll support of $1.2 billion will be classified as a contra-expense line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) during first quarter 2021.

The Company has issued a promissory note in favor of the Treasury in an initial amount of approximately $229 million and expects the amount to total approximately $488 million once the remaining payroll support is received.

See Note 2 for further information.

In accordance with restrictions contained in the Payroll Support Program Extension, and except as permitted or required under the Payroll Support Program Extension, the Company has agreed not to (1) conduct involuntary terminations or furloughs or (2) reduce the salaries, wages, or benefits of any Employee, in each case between the date of the Payroll Support Program Extension agreement and March 31, 2021.

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

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

The Company continues to evaluate and evolve its Extended ETO program in early 2021, including offering additional

Extended ETO opportunities of one, two, or three month durations to certain Employees who are either not currently participating in Extended ETO, or who are currently on Extended ETO set to expire in coming months.

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

the accrual is being reduced as program benefits are paid.

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

See Note 2 to the Consolidated Finan cial Statements for further information.

As a result of these voluntary programs, the Company's salaries, wages, and benefits costs were lowered by approximately $565 million in 2020.

The Company expects an incremental $600 million of annual 2021 cost savings from these two programs, for a total reduction in salaries, wages, and benefits of approximately $1.2 billion, compared with annual 2019.

In addition, Employees could take Emergency Time Off (“ETO”) for a calendar month, or Time Off Without Pay ("TOWOP") or Leave Without Pay ("LWOP") in smaller time increments.

Between March 2020 and December 2020, the ETO, TOWOP, and LWOP programs accounted for a savings of approximately $265 million.

The Company continues to experience cost pressure due to inflation in labor rates and airport costs, as well as unit cost headwinds from operating at suboptimal productivity levels.

Additionally, the Company has temporarily extended incentive pay to its Operations Employees through early February 2022, which is expected to result in an additional $150 million of salaries, wages, and benefits expense in first quarter 2022, compared to the $100 million in incentive pay earned by Employees during fourth quarter 2021.

Furthermore, the Company is reducing its first quarter 2022 capacity to provide additional stability during this challenging environment.

With the Omicron variant and weather impacting the Company's results, the Company expects losses in January and February and a return to profitability in March 2022.

Based on the Company's current plan, while the Company no longer expects to be profitable in first quarter, the Company expects to be profitable for the remaining three quarters of this year, and for full year 2022.

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 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.

As detailed in Note 2 to the 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 has had a significant impact on the Company's reported GAAP financial results in 2021.

Such impact ended in third quarter 2021, and the Company's fourth quarter 2021 results do not reflect the benefit of this Payroll Support, and its future period results are not expected to benefit from such Payroll Support.

However, future cash flows will be impacted through the portion of Payroll Support that was in the form of loans that will have to be repaid to Treasury.

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.

Approximately 16,000 Employees elected to participate in one of these programs.

During 2021, approximately 11,400 Employees returned from the Extended ETO program and less than 250 Employees remained on Extended ETO leave as of December 31, 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.

The Company realized approximately $1.1 billion of full year 2021 cost savings from the Voluntary Separation Program and Extended ETO compared with full year 2019, and expects no material cost savings from these programs in 2022 and beyond.

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

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

However, in addition to recalling nearly all of the Employees that participated in Extended ETO, the Company met its 2021 hiring goals and is planning to add at least 8,000 additional Employees during 2022 as it strives to provide sufficient staffing to support its anticipated flight schedule plans for 2022 and beyond.

The Company is making additional investments to attract and retain talent, including the recent decision to further raise the Company's starting hourly pay rates from $15 per hour to $17 per hour for (i) Southwest Ramp, Operations, Provisioning, and Freight Agents, (ii) Southwest Customer Service Agents, Customer Representatives, and Source of Support Representatives, (iii) Southwest Flight Simulator Technicians, and (iv) Southwest Aircraft Appearance Technicians.

The Company is currently in discussions with its workgroups to enact this increase in pay rates.

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

In September 2021, the President of the United States issued an Executive Order establishing a vaccination requirement for employees of covered federal contractors.

The federal government required that federal contractors have their workforce vaccinated (or request an accommodation) by December 8, 2021.

The deadline was later extended to January 4, 2022.

The Company started an active campaign to notify Employees of the need to submit proof of COVID-19 vaccination, or apply for an accommodation, by January 4, 2022.

On December 3, 2021, the company announced that 93 percent of its Employees were vaccinated, or had requested an accommodation.

Due to legal challenges to the vaccine mandate, the Company announced on December 20, 2021, that it is no longer imposing a deadline for compliance.

However, if the vaccine mandate is revived, the Company will resume efforts to work with Employees who have not yet either submitted proof of vaccination or requested an accommodation.

Company Overview

As of December 31, 2020, the Company operated approximately 50 percent of the daily departures operated as of December 31, 2019, prior to the impacts of the pandemic.

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

The Company 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 fourth quarter 2021, the Company exercised 22 Boeing 737 MAX 7 ("-7") options for delivery in 2023, and through February 3, 2022, the Company has exercised another 24 Boeing options- 12 -8 options for delivery in 2022, and 12 -7 options for delivery in 2023.

The Company's order book with Boeing as of December 31, 2021, consists of a total of 394 MAX firm orders (264 -7 aircraft and 130 Boeing 737 MAX-8 ("-8") aircraft) and 238 MAX options (-7s or -8s) for years 2022 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 452 Boeing 737-700 ("-700") aircraft over the next 10 to 15 years to support the modernization of its fleet, a key cost initiative and component of its environmental sustainability efforts.

The Company ended 2021 with 728 Boeing 737 aircraft, including 69 -8 aircraft.

During 2021, the Company retired 8 owned -700 aircraft, which were accelerated from 2022 into fourth quarter 2021, and returned 10 leased -700 aircraft, of which one occurred during fourth quarter 2021.

In addition, the Company took delivery of 28 -8 aircraft during 2021.

As of December 31, 2021, six -700 aircraft remained in temporary storage due to fourth quarter 2021 and first quarter 2022 capacity remaining below respective 2019 levels.

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

During 2021, the Company pursued 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.

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

The Company launched service to six new destinations in 2020:

• Hilo International Airport - January 19, 2020

• Cozumel International Airport - March 7, 2020

• Miami International Airport and Palm Springs International Airport - November 15, 2020

• Montrose Regional Airport (Telluride and Crested Butte) and Yampa Valley Regional Airport (Steamboat Springs) - December 19, 2020

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

These additional service points on the Company's route map are opportunities it can provide Customers now, all while better

positioning the Company for a travel demand rebound.

During 2021, the Company began service to new destinations including:

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

2 unchanged sentences

• Fresno Yosemite International Airport - April 25, 2021

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

• Myrtle Beach International Airport - May 23, 2021

• Bozeman Yellowstone International Airport - May 27, 2021

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

As previously reported, the Company suspended international operations in first quarter 2020 and has resumed selected service as follows:

• Mexico and the Caribbean via Cancun, San Jose del Cabo/Los Cabos, and Montego Bay - July 1, 2020

• Puerto Vallarta, Mexico - October 8, 2020

• Punta Cana, Dominican Republic, and Aruba - November 4, 2020

• Havana, Cuba - December 6, 2020

The Company also resumed service to Nassau on July 1, 2020, but in response to new local restrictions imposed by the Bahamian government, the Company again suspended operations effective July 22, 2020.

The Company is scheduled to resume service to Cozumel, Mexico in first quarter 2021.

Service to the Company’s other international destinations is expected to resume pending the easing of government restrictions.

The Company achieved its goal of launching global distribution system ("GDS") access for corporate travelers in 2020, now at industry-standard participation with Amadeus' GDS platform and Travelport's multiple GDS platforms:

Apollo, Worldspan, and Galileo.

Also, in December 2020, the Company reached a full-participation GDS

agreement with Sabre, planned to launch in the second half of 2021.

The Company's enhancement of its GDS channel strategy complements its goal of distributing its everyday low fares to more corporate travelers through their preferred channel.

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 is currently working 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 has scheduled the MAX return to revenue service on March 11, 2021, after the Company is expected to have met all FAA requirements and all active Pilots are expected to have received updated, MAX-related training.

The Company continues its fleet modernization program and expects to retire a significant amount of its Boeing 737-700 fleet over the next 10-15 years.

The Company evaluates whether to adhere to or alter its aircraft retirement plans in light of the COVID-19 pandemic and other factors, including whether to retain aircraft longer or accelerate retirements and replacements.

The Company plans to use the Boeing 737 MAX 8 aircraft in its fleet modernization program and believes it will also have use for smaller aircraft such as the Boeing 737 MAX 7.

During December 2020, the Company took delivery of seven new leased Boeing 737 MAX 8 aircraft from third parties.

The Company recently reached an agreement with The Boeing Company (the "Boeing Agreement") to take delivery of the delayed MAX aircraft and currently expects to receive 35 MAX 8 deliveries through the end of 2021 consisting of 19 purchased aircraft and 16 leased aircraft (including the seven leases received in December 2020).

Based on current delivery and retirements plans, the Company currently expects its fleet in 2021 to decrease from its fleet of 747 aircraft as of December 31, 2019.

The details of the Boeing Agreement, which included the settlement of 2020 estimated damages relating to the grounding of the Company’s 737 MAX 8 aircraft, are confidential.

However, as a result of certain delivery credits provided in the Boeing Agreement, as well as progress payments made to date on undelivered aircraft, the Company currently estimates an immaterial amount of aircraft capital expenditures in 2021.

See Note 17 to the Consolidated Financial Statements and “Liquidity and Capital Resources” for further information.

The Company and Boeing are in discussions to change the Company’s aircraft order book, and the Company expects to make further adjustments to the delivery schedule.

The Company offers no assurances that current estimations and timelines will not be changed.

• Eugene Airport in Oregon - August 29, 2021

• Bellingham International Airport in Washington - November 7, 2021

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

The COVID-19 pandemic had a particularly negative impact on the Company's international operations and led to the Company's suspension of international operations at the beginning of the pandemic.

The Company has since resumed service to 13 of its 14 international destinations.

The Company’s operations to the Cayman Islands are temporarily suspended due to impacts from the COVID-19 pandemic, but with the easing of government restrictions and the continued increase in demand for beach and leisure destinations, the Company intends to resume service to the Cayman Islands in 2022.

In 2021, the Company announced goals to (i) achieve carbon neutrality by 2050, (ii) maintain carbon neutral growth (to 2019 levels) through the end of the decade, and (iii) reduce carbon emissions intensity per available seat mile (including scope 1 and scope 2 emissions) by at least 20 percent by 2030.

The Company also announced a series of actions and initiatives designed to assist the Company in achieving these goals, including agreements with various third parties intended to facilitate the development, production, and usage of commercialized sustainable aviation fuel;

the launch of a carbon-offset program that allows Customers to contribute funds for the purchase of carbon offsets for Southwest;

and arrangements with nonprofit organizations seeking to address climate change and reduce carbon emissions in aviation.

As part of its commitment to corporate sustainability, the Company has published the Southwest One Report describing the Company's sustainability strategies, which include the Company’s fuel conservation and emissions reduction initiatives and other efforts to reduce greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling.

Information contained in the Southwest One Report is not incorporated by reference into, and does not constitute a part of, this Form 10-K.

While the Company believes that the disclosures contained in the Southwest One Report and other voluntary disclosures regarding environmental, social, and governance (“ESG”) matters are responsive to various areas of investor interest, the Company believes that these disclosures do not currently address matters that are material in the near term to the Company’s operations, strategy, financial condition, or financial results, although this view may change in the future based on new information that could materially alter the estimates, assumptions, or timelines used to create these disclosures.

Given the estimates, assumptions and timelines used to create the Southwest One Report and other voluntary disclosures, the materiality of these disclosures is inherently difficult to assess in advance.

2021 Compared with 2020

Operating Revenues

Passenger revenues for 2020 decreased by $13.1 billion, or 63.1 percent, compared with 2019.

On a unit basis, Passenger revenues decreased 43.9 percent, year-over-year.

The decreases in Passenger revenues on both a dollar and unit basis were primarily due to the impact of the COVID-19 pandemic, which resulted in significant reductions in capacity and a sharp decline in passenger demand and bookings during 2020.

Freight revenues for 2020 decreased by $11 million, or 6.4 percent, compared with 2019, primarily due to fewer trips flown, coupled with worldwide supply chain disruptions which reduced cargo demand.

This reduction was partially offset by an increase in freight only activities, as the Company transported supplies in response to the COVID-19 pandemic.

Other revenues for 2020 decreased by $258 million, or 17.4 percent, compared with 2019.

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

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

Passenger revenues for 2021 increased by $6.4 billion, or 83.5 percent, compared with 2020.

On a unit basis, Passenger revenues increased 43.9 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 2021, compared with the severe decline in demand and bookings resulting from the COVID-19 pandemic for the majority of 2020.

Freight revenues for 2021 increased by $26 million, or 16.1 percent, compared with 2020, primarily due to increased demand for consumer goods.

Other revenues for 2021 increased by $315 million, or 25.8 percent, compared with 2020.

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

The improving economy throughout 2021 and rebound in travel demand resulted in higher spend on the Company's co-branded credit card, as well as additional revenues earned through the Company's rental car and hotel partners.

Operating Expenses

Operating expenses for 2020 decreased by $6.6 billion, or 33.9 percent, compared with 2019, while capacity decreased 34.2 percent over the same period.

Operating expenses for 2021 increased by $1.2 billion, or 9.4 percent, compared with 2020, while capacity increased 27.6 percent over the same period.

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

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

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

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

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

However, the Company's Operating expenses are largely fixed once flight schedules are published, and ASM reductions as a result of flight schedule adjustments have a negative impact on Operating expenses per ASM.

The following table presents the Company's Operating expenses per ASM for 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.

Year ended December 31, Per ASM Percent

1 unchanged sentence

Salaries, wages, and benefits 5.87 ¢ 6.58 ¢ (0.71) ¢ (10.8) %

Payroll support and voluntary Employee programs, net (0.94) — (0.94) n.m.

Payroll support and voluntary Employee programs, net (2.24) (0.94) (1.30) 138.3

Fuel and oil 2.51 1.78 0.73 41.0

2 unchanged sentences

Depreciation and amortization 0.96 1.21 (0.25) (20.7)

Other operating expenses, net 1.87 1.92 (0.05) (2.6)

Other operating expenses 1.81 1.87 (0.06) (3.2)

Total 10.66 ¢ 12.43 ¢ (1.77) ¢ (14.2) %

Operating expenses per ASM for 2020 increased by 0.4 percent, compared with 2019.

The year-over-year unit cost increase in 2020 was primarily driven by significant capacity reductions as a result of the COVID-19 pandemic.

The increase was partially offset by decreases in market jet fuel prices, coupled with the funding received through the Payroll Support Program, net of an accrual made for Employees that elected to participate in Voluntary Separation Program 2020 or Extended ETO programs.

Operating expenses per ASM for 2021 decreased by 14.2 percent, compared with 2020.

The year-over-year unit cost decrease in 2021 was enhanced by the increase in Payroll Support funding as such allocations are accounted for as a direct reduction to the Company's operating expenses.

This decrease in operating expenses was partially offset by an increase in both jet fuel prices and 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 8 to the Consolidated Financial Statements for further information.

Operating expenses per ASM for 2020, excluding Fuel and oil expense, special items, and profitsharing (a non-GAAP financial measure), increased 28.1 percent year-over-year, primarily due to the significant reduction in capacity associated with the COVID-19 pandemic.

Operating expenses per ASM for 2021, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), decreased 13.3 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 2020 decreased by $1.5 billion, or 17.9 percent, compared with 2019.

On a per ASM basis, Salaries, wages, and benefits expense for 2020 increased 24.9 percent, compared with 2019.

On a dollar basis, the decrease was primarily the result of no profitsharing expense accrual in 2020 due to the Company's net loss, compared with a profitsharing accrual of $667 million in 2019.

On a per ASM basis, however, the dollar decrease was more than offset by the 34.2 percent decrease in capacity.

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

On October 5, 2020, the Company announced planned pay reductions for non-contract Employees and its intention to approach union leaders for concessions, in further efforts to reduce operating expenses, as there was uncertainty surrounding an extension of the Payroll Support Program.

The Company conducted negotiations with various unionized Employee groups.

WARN notices were subsequently issued to various groups that were unable to reach agreements on concessions.

These WARN notices and pay reduction intentions were retracted after the Payroll Support Program Extension was signed into law.

Salaries, wages, and benefits expense for 2021 increased by $932 million, or 13.7 percent, compared with 2020.

On a per ASM basis, Salaries, wages, and benefits expense for 2021 decreased 10.8 percent, compared with 2020.

On a dollar basis, approximately 55 percent of the increase was due to higher salaries and wages due to significantly more trips, step increases for certain workgroups, recalls from Extended ETO (which led to higher salaries), incentive pay offered to certain workgroups, and increased overtime hours across the network.

The largest portion of the remainder of the increase was due to the $230 million profitsharing expense accrual in 2021, compared with no profitsharing expense accrual in 2020.

The following table sets forth the Company’s unionized Employee groups with amendable contracts that are currently in negotiations on collective-bargaining agreements:

2 unchanged sentences

Southwest Flight Attendants 14,600 Transportation Workers of America, AFL-CIO, Local 556 ("TWU 556") November 2018

Southwest Ramp, Operations, Provisioning, Freight Agents 12,600 Transportation Workers of America, AFL-CIO, Local 555 ("TWU 555") February 2021

Southwest Customer Service Agents, Customer Representatives, and Source of Support Representatives 6,100 International Association of Machinists and Aerospace Workers, AFL-CIO ("IAM 142") December 2018

Southwest Aircraft Appearance Technicians 160 Aircraft Mechanics Fraternal Association ("AMFA") November 2020

Southwest Aircraft Appearance Technicians 170 AMFA November 2020

Southwest Dispatchers 400 Transportation Workers of America, AFL-CIO, Local 550 ("TWU 550") June 2019

Southwest Flight Crew Training Instructors 130 Transportation Workers of America, AFL-CIO, Local 557 ("TWU 557") January 2022

Southwest Meteorologists 10 TWU 550 June 2019

During January 2021, the Company's Flight Crew Training Instructors, represented by Transportation Workers of America, ratified a tentative collective-bargaining agreement with the Company.

The newly ratified contract becomes amendable in January 2022.

Payroll support and voluntary Employee programs, net for 2020 was a net decrease to expense of $967 million, compared with no amounts for 2019.

On a per ASM basis, Payroll support and voluntary Employee programs, net for 2020 was a net reduction of 0.94 cents.

The Company recognized a $2.3 billion allocation of Payroll Support Program proceeds as a reduction to 2020 expenses as part of the CARES Act.

The Company also recognized a total of $1.4 billion in expense in 2020 associated with the Voluntary Separation Program 2020 and Extended ETO elections.

Given the unusual nature of each of these items, the Company has chosen to net them within a single line item in the Consolidated Statement of Income (Loss).

During August 2021, the Company reached a tentative collective-bargaining agreement with IAM 142, which represents the Company's approximately 6,100 Employees in the Customer Service Agents, Customer Representatives, and Source of Support Representatives workgroup.

However, the IAM 142 membership voted not to ratify the agreement.

The Company will continue to engage in discussions on a new agreement with IAM 142.

Payroll support and voluntary Employee programs, net (a reduction to expense) for 2021 was an increase of $2.0 billion, or 206.1 percent, compared with 2020.

On a per ASM basis, Payroll support and voluntary Employee programs, net for 2021 increased by 138.3 percent.

On both a dollar and per ASM basis, the changes were due to the components of this line item as noted below:

• The $745 million accrual for charges related to the Voluntary Separation Program in 2020;

• The $140 million net reduction in the Extended ETO liability in 2021, compared with the $625 million accrual for charges related to the Extended ETO liability in 2020;

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

• The $117 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 Consolidated Financial Statements for further information.

Fuel and oil expense for 2020 decreased by $2.5 billion, or 57.5 percent, compared with 2019.

On a per ASM basis, Fuel and oil expense decreased 35.5 percent, compared with 2019, due to lower market jet fuel prices.

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

The following table provides more information on the Company's economic fuel cost per gallon:

Fuel and oil expense for 2021 increased by $1.5 billion, or 79.0 percent, compared with 2020.

On a per ASM basis, Fuel and oil expense for 2021 increased 41.0 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.

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:

Year ended December 31,

1 unchanged sentence

Economic fuel costs per gallon $ 2.01 $ 1.49

Fuel hedging premium expense (in millions) $ 100 $ 98

Fuel hedging premium expense per gallon $ 0.06 $ 0.08

1 unchanged sentence

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 continued to operate fewer of its oldest, least fuel-efficient Boeing 737-700 aircraft as a result of capacity reductions due to the COVID-19 pandemic, which, combined with lower Load factors, resulted in a year-over-year improvement of 7.4 percent in fuel efficiency in 2020.

The Company currently estimates first quarter 2021 fuel efficiency to improve in the range of five to six percent, year-over-year, primarily driven by a continuation of lower utilization of its 737-700

aircraft and the Company's continued efforts to reduce its fuel consumption through fleet modernization with the anticipated benefits of the reintroduction of the MAX aircraft.

The Company's fourth quarter 2021 available seat miles per gallon ("fuel efficiency") declined 4.2 percent, year-over-year, due to the removal from storage and return to service of more of the Company's least fuel-efficient aircraft, the -700, to support sequentially increasing flight schedules.

When compared with fourth quarter 2019, fuel efficiency improved 3.8 percent in fourth quarter 2021 due to the March 2021 return to service of the Company's most fuel-efficient aircraft, the MAX.

The MAX remains critical to the Company's efforts to modernize its fleet, reduce carbon emissions intensity, and achieve its near-term environmental sustainability goals.

See Note 17 to the Consolidated Financial Statements for further information.

As of January 20, 2022, 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)

Beyond 2023 101

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

1 unchanged sentence

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

(b) The Company holds derivative contracts at various Brent crude oil and West Texas Intermediate ("WTI") crude oil price levels to provide protection against energy market price fluctuations.

These gallons that are covered by derivative contracts represent the maximum number of gallons hedged for each respective period, which may be at different strike prices and at strike prices materially higher than the current market prices.

(b) The Company's gallons that are covered by derivative contracts represent the maximum number of gallons hedged for each respective period, which may be at different strike prices and at strike prices materially higher than the current market prices.

The volume of gallons covered by derivative contracts that ultimately get exercised in any given period may vary significantly from the volumes provided, as market prices and the Company's fuel consumption fluctuates.

Based on the Company's available seat mile plans for full year 2022, its maximum percent of estimated fuel consumption covered by fuel derivative contracts is 64 percent.

The Company believes that providing the maximum percent of fuel consumption covered by derivative contracts in future years relative to 2019 fuel gallons consumed is a more relevant measure for future coverage, due to uncertainty regarding available seat mile plans in future years.

Based on 2019 fuel gallons consumed, the Company's maximum percent of fuel consumption covered by fuel derivative contracts is 37 percent in 2023 and 17 percent in 2024.

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 11 to the Consolidated Financial Statements for further information), as well as the amount of deferred losses in AOCI at December 31, 2020, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

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 11 to the Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI at December 31, 2021, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

Year Fair value of fuel

derivative contracts

at December 31, 2020 Amount of losses deferred

at December 31, 2021 Amount of gains deferred

in AOCI at December 31,

1 unchanged sentence

2022 $ 409 $ 234

Beyond 2023 9 —

Total $ 696 $ 377

2 unchanged sentences

Average Brent Crude Oil

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

price per barrel First Quarter 2022 (c)

Full Year 2022 (d)

$60 $1.80 - $1.90 $1.85 - $1.95

3 unchanged sentences

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

$80 $1.90 - $2.00 $2.15 - $2.25

Estimated fuel hedging premium expense per gallon (b) $0.09 (f)

Estimated fuel hedging premium expense per gallon (b) $0.06 $0.05

Estimated premium costs (b) $26 million $96 million

1 unchanged sentence

(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 January 21, 2021, first quarter 2021 economic fuel costs are estimated to be in the $1.60 to $1.70 per gallon range, including fuel hedging premium expense of approximately $25 million, or $.09 per gallon, and no cash settlements from fuel derivative contracts, on a per gallon basis.

(c) Based on the Company's existing fuel derivative contracts and market prices as of January 20, 2022, first quarter 2022 economic fuel costs are estimated to be in the $2.25 to $2.35 per gallon range, including fuel hedging premium expense of approximately $26 million, or $0.06 per gallon, and $0.35 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 January 21, 2021, annual 2021 economic fuel costs are estimated to be in the $1.65 to $1.75 per gallon range, including fuel hedging premium expense of approximately $100 million and no cash settlements from fuel derivative contracts, on a per gallon basis.

(d) Based on the Company's existing fuel derivative contracts and market prices as of January 20, 2022, full year 2022 economic fuel costs are estimated to be in the $2.25 to $2.35 per gallon range, including fuel hedging premium expense of approximately $96 million, or $0.05 per gallon, and $0.28 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 WTI and Brent crude oil;

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

however, the economic fuel price per gallon sensitivities provided, assume the relationship between Brent crude oil and refined products based on market prices as of January 20, 2022.

2 unchanged sentences

See Note Regarding Use of Non-GAAP Financial Measures.

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

Maintenance materials and repairs expense for 2020 decreased by $473 million, or 38.7 percent, compared with 2019.

On a per ASM basis, Maintenance materials and repairs expense decreased 7.7 percent, compared with 2019, as the dollar decrease was largely offset by the 34.2 percent decrease in capacity in response to the COVID-19 pandemic.

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

Landing fees and airport rentals expense for 2020 decreased by $123 million, or 9.0 percent, compared with 2019.

On a per ASM basis, Landing fees and airport rentals expense increased 39.1 percent, compared with 2019, as the dollar decrease was more than offset by the 34.2 percent decrease in capacity in response to the COVID-19 pandemic.

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

Maintenance materials and repairs expense for 2021 increased by $104 million, or 13.9 percent, compared with 2020.

On a per ASM basis, Maintenance materials and repairs expense decreased 9.7 percent, compared with 2020.

On a dollar basis, approximately 50 percent 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.

The majority of the remainder of the increase was due to higher engine maintenance expense due to the increase in flight hours.

Landing fees and airport rentals expense for 2021 increased by $216 million, or 17.4 percent, compared with 2020.

On a per ASM basis, Landing fees and airport rentals expense decreased 9.1 percent, compared with 2020.

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

Depreciation and amortization expense for 2021 increased by $17 million, or 1.4 percent, compared with 2020.

On a per ASM basis, Depreciation and amortization expense increased 55.1 percent, compared with 2019, primarily as a result of the 34.2 percent decrease in capacity in response to the COVID-19 pandemic.

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

Other operating expenses, net for 2020 decreased by $1.1 billion, or 36.4 percent, compared with 2019.

On a per ASM basis, Other operating expenses, net decreased 2.6 percent, compared with 2019.

On both a dollar and per ASM basis, a significant portion of the decreases were due to $222 million gains from the sale-leaseback of ten 737-800 and ten 737 MAX 8 aircraft to third parties in two separate transactions in second quarter 2020, which reduced Other operating expenses for second quarter 2020.

The gains were partially offset by $32 million in impairment charges associated with 20 of the Company's Boeing 737-700 aircraft that were retired in fourth quarter 2020.

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

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

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

Excluding these special items, on a per ASM basis, Other operating expenses increased as the dollar decrease was more than offset by the 34.2 percent decrease in capacity in response to the COVID-19 pandemic.

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

On a per ASM basis, Depreciation and amortization expense decreased 20.7 percent, compared with 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 2021 increased by $468 million, or 24.3 percent, compared with 2020.

Included within this line item was aircraft rentals expenses in the amount of $205 million and $209 million for 2021 and 2020, respectively.

On a per ASM basis, Other operating expenses decreased 3.2 percent, compared with 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.

Excluding the impact of this 2020 sale-leaseback gain, the increase in Other operating expenses on a dollar basis was primarily due to higher revenue related expenses, including credit card processing charges.

See Note 8 to the Consolidated Financial Statements for more information.

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

Interest expense for 2020 increased by $231 million, or 195.8 percent, compared with 2019, primarily due to higher debt balances in 2020, and a $9 million write-off of remaining unamortized costs from the Company's 364-day term loan entered into in first quarter 2020 and repaid in full during second quarter 2020.

For further information on the Company's debt transactions in 2020, see Note 7 to the Consolidated Financial Statements.

Based on current debt outstanding and current market interest rates, the Company expects first quarter 2021 interest expense to be approximately $113 million.

Capitalized interest for 2020 decreased by $1 million, or 2.8 percent, compared with 2019, primarily due to Boeing's halt of production of the Company's undelivered MAX aircraft.

The decrease was partially offset by capitalized interest on technology projects.

Interest income for 2020 decreased by $58 million, or 64.4 percent, compared with 2019, due to lower interest rates, partially offset by higher cash balances.

Interest expense for 2021 increased by $118 million, or 33.8 percent, compared with 2020, primarily due to higher debt balances.

See Note 7 to the Consolidated Financial Statements for more information.

Capitalized interest for 2021 increased by $1 million, or 2.9 percent, compared with 2020, primarily due to Boeing resuming production of the Company's undelivered MAX aircraft.

Interest income for 2021 decreased by $19 million, or 59.4 percent, compared with 2020, due to lower interest rates.

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

6 unchanged sentences

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

Mark-to-market gain on deferred compensation plan investment (33) —

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

Loss on partial extinguishment of convertible notes 28 —

Post-retirement curtailment charge — 53

The Company's annual 2020 effective tax rate was 27.8 percent, higher than the federal statutory tax rate primarily due to the Company's annual net operating loss ("NOL") which, under the CARES Act, can be applied to prior tax years beginning with 2015, when the Company was subject to a higher federal statutory tax rate.

The Company's estimated tax refund from its annual 2020 NOL carryback is approximately $470 million.

The Company estimates its first quarter 2021 effective tax rate to be in the range of 21 to 22 percent, lower than the annual 2020 tax rate, as the NOL carryback provisions available under the CARES Act are not applicable to years beyond 2020.

The Company's annual 2021 effective tax rate was 26.3 percent, compared with 27.8 percent in 2020.

The higher tax rate for 2020 was primarily due to the net loss incurred during 2020, resulting in a tax benefit and refund of previously paid taxes, when the Company was subject to a higher federal statutory tax rate, as was allowed under the CARES act.

2020 Compared with 2019

7 unchanged sentences

Fuel and oil expense, as reported $ 3,310 $ 1,849

Contracts settling in the current period, but for which losses were reclassified from AOCI (a) 25 —

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) 8 25

Premium cost of fuel contracts not designated as hedges 43 34

Fuel and oil expense, excluding special items (economic) $ 3,361 $ 1,908 76.2 %

Total operating expenses, as reported $ 12,864 $ 19,471

Total operating expenses, net, as reported $ 14,069 $ 12,864

Payroll support and voluntary Employee programs, net 2,960 967

Contracts settling in the current period, but for which losses were reclassified from AOCI (a) 25 —

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) 8 25

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) 3 —

Premium cost of fuel contracts not designated as hedges 43 34

2 unchanged sentences

Total operating expenses, excluding special items $ 17,071 $ 14,080 21.2 %

Fuel and oil expense, excluding special items (economic) (3,361) (1,908)

Operating expenses, excluding Fuel and oil expense and special items $ 13,710 $ 12,172 12.6 %

Profitsharing expense (230) —

Operating expenses, excluding Fuel and oil expense, special items, and profitsharing $ 13,480 $ 12,172 10.7 %

Operating income (loss), as reported $ 1,721 $ (3,816)

Payroll support and voluntary Employee programs, net (2,960) (967)

Contracts settling in the current period, but for which losses were reclassified from AOCI (a) (25) —

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (8) (25)

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) (3) —

Premium cost of fuel contracts not designated as hedges (43) (34)

1 unchanged sentence

Impairment of long-lived assets 12 32

Operating income (loss), excluding special items $ (5,032) $ 2,957 n.m.

Operating loss, excluding special items $ (1,281) $ (5,032) (74.5) %

Other (gains) losses, net, as reported $ (22) $ 158

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

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current and future periods 7 (40)

Premium cost of fuel contracts not designated as hedges (43) (34)

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

Loss on partial extinguishment of convertible notes (28) —

Post-retirement curtailment charge — (53)

Other (gains) losses, net, excluding special items $ 3 $ 8 (62.5) %

Other (gains) losses, net, excluding special items $ (86) $ 3 n.m.

Year ended December 31, Percent

2021 2020 Change

Income (loss) before income taxes, as reported $ 1,325 $ (4,256)

Payroll support and voluntary Employee programs, net (2,960) (967)

Contracts settling in the current period, but for which losses were reclassified from AOCI (a) (25) —

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (8) (25)

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) (3) —

Gain from aircraft sale-leaseback transactions — (222)

Impairment of long-lived assets 12 32

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current and future periods (a) (7) 40

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

Loss on partial extinguishment of convertible notes 28 —

Post-retirement curtailment charge — 53

Income (loss) before income taxes, excluding special items $ (5,317) $ 2,957 n.m.

Loss before income taxes, excluding special items $ (1,613) $ (5,317) (69.7) %

Provision (benefit) for income taxes, as reported $ 348 $ (1,182)

Net income (loss) tax impact of fuel and special items, excluding GAAP to Non-GAAP tax rate difference (b) (376) —

Net income (loss) tax impact of fuel and special items (b) (690) (376)

GAAP to Non-GAAP tax rate difference (c) — (247)

Provision (benefit) for income taxes, net, excluding special items $ (1,805) $ 657 n.m.

Benefit for income taxes, net, excluding special items $ (342) $ (1,805) (81.1) %

Net income (loss), as reported $ 977 $ (3,074)

Payroll support and voluntary Employee programs, net (2,960) (967)

Contracts settling in the current period, but for which losses were reclassified from AOCI (a) (25) —

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (8) (25)

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) (3) —

Gain from aircraft sale-leaseback transactions — (222)

Impairment of long-lived assets 12 32

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current and future periods (a) (7) 40

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

Loss on partial extinguishment of convertible notes 28 —

Post-retirement curtailment charge — 53

Net income (loss) tax impact of special items, excluding GAAP to Non-GAAP tax rate difference (b) 376 —

Net income (loss) tax impact of special items (b) 690 376

GAAP to Non-GAAP tax rate difference (c) — 247

Net income (loss), excluding special items $ (3,512) $ 2,300 n.m.

Net loss, excluding special items $ (1,271) $ (3,512) (63.8) %

Net income (loss) per share, diluted, as reported $ 1.61 $ (5.44)

1 unchanged sentence

Net impact of net income (loss) above from fuel contracts divided by dilutive shares (0.02) (0.04)

Net income (loss) tax impact of special items, excluding GAAP to Non-GAAP tax rate difference (b) 0.66 —

Net income (loss) tax impact of special items (b) 1.12 0.66

GAAP to Non-GAAP tax rate difference (c) — 0.43

Net income (loss) per share, diluted, excluding special items $ (6.22) $ 4.27 n.m.

GAAP to Non-GAAP diluted weighted average shares difference (d) (0.06) —

Net loss per share, diluted, excluding special items $ (2.15) $ (6.22) (65.4) %

Year ended December 31, Percent

2021 2020 Change

Operating expenses per ASM (cents) 10.66 ¢ 12.43 ¢

5 unchanged sentences

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

The Non-GAAP tax rate considers the appropriate tax treatment for special items and also reflects the anticipated benefit of carrying back full year 2020 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.

The impact to Net income (loss) may not be equivalent to the special item multiplied by the effective tax rate, in all cases.

(c) Adjustment related to GAAP and Non-GAAP tax rate differences, primarily due to the Payroll Support Program being excluded as a special 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 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 for the year ended December 31, 2021.

See Note 4 to the Consolidated Financial Statements for further information.

Note Regarding Use of Non-GAAP Financial Measures

5 unchanged sentences

Total operating expenses, non-GAAP;

Operating income (loss), non-GAAP;

Operating expenses, non-GAAP excluding Fuel and oil expense;

Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing;

Operating loss, non-GAAP;

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

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

Provision (benefit) for income taxes, net, non-GAAP;

Net income (loss), non-GAAP;

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

Loss before income taxes, non-GAAP;

Benefit for income taxes, net, non-GAAP;

Net loss, non-GAAP;

Net loss per share, diluted, non-GAAP;

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

10 unchanged sentences

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

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

Accrued charges related to the special termination benefits upon Employees accepting Voluntary Separation Program 2020 or Extended ETO as of December 31, 2020;

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

A noncash impairment charge related to 20 Boeing 737-700 aircraft that were retired during 2020;

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

During 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;

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

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

Adjustments for prior period losses reclassified from AOCI associated with forward-starting interest rate swap agreements that were terminated in prior periods related to 12 -8 aircraft leases;

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

A noncash impairment charge related to 20 Boeing 737-700 aircraft that were retired during 2020 and 8 Boeing 737-700 aircraft that were retired in 2021;

Unrealized losses related to 12 forward-starting interest rate swap agreements.

During 2020, the interest rate swap agreements, which were related to 12 -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;

A post-retirement curtailment charge related to Employees who accepted Voluntary Separation Program 2020 and elected to participate in the Company's retiree medical benefits plan.

3 unchanged sentences

Total operating expenses, non-GAAP;

Operating income (loss), non-GAAP;

Operating expenses, non-GAAP excluding Fuel and oil expense;

Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing;

Operating loss, non-GAAP;

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

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

Provision (benefit) for income taxes, net, non-GAAP;

Net income (loss), non-GAAP;

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

Loss before income taxes, non-GAAP;

Benefit for income taxes, net, non-GAAP;

Net loss, non-GAAP;

Net loss per share, diluted, non-GAAP;

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

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

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

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

For the three months ended December 31, 2020, average daily core cash burn was approximately $12 million, calculated as Loss before income taxes, non-GAAP, of $1.3 billion (as provided in the Non-GAAP reconciliation below), adjusted for Depreciation and amortization expense of $316 million;

Capital expenditures of $90 million;

and adjusted amortizing debt service payments of approximately $43 million;

divided by the number of days in the period.

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

The following table provides the components of Loss before income taxes, non-GAAP for the three months ended December 31, 2020:

Three months ended

(in millions) December 31, 2020

Loss before income taxes, as reported $ (1,331)

Payroll support and voluntary Employee programs, net (34)

Contracts settling in the current period, but for which losses were reclassified from AOCI (a) (9)

Impairment of long-lived assets 32

Post-retirement curtailment charge 53

Loss before income taxes, excluding special items $ (1,289)

(a) See Note 11 to Consolidated Financial Statements for further information.

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

financing transactions;

Payroll Support Program proceeds;

Supplier proceeds;

voluntary separation and extended emergency time off program payments;

and other changes in working capital.

Cash burn methodology varies by airline, and the Company’s fourth quarter 2020 average daily core cash burn of $12 million may differ materially by utilizing cash burn calculations that adjust for changes in working capital.

Utilizing an alternative cash burn approach, which adjusts for changes in working capital, among other items, the Company’s fourth quarter 2020 daily cash burn was approximately $15 million.

Liquidity and Capital Resources

1 unchanged sentence

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

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

See Note 2 and Note 7 to the Consolidated Financial Statements for further information regarding the impact of the COVID-19 pandemic, as well as the transactions completed and assistance obtained under the CARES Act.

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

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

Net cash used in operating activities for 2020 was $1.1 billion, and net cash provided by operating activities for 2019 was $4.0 billion.

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

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

Net cash provided by operating activities for 2021 was $2.3 billion, and net cash used in operating activities for 2020 was $1.1 billion.

Operating cash inflows are historically primarily derived from ticket sales associated with providing air transportation to Customers.

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

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

The operating cash flows for 2020 were affected primarily by the COVID-19 pandemic, which resulted in a significant drop in travel demand, sales, and revenues, leading to the Company's Net loss (as adjusted for noncash items), the Company's funding of its $667 million 2019 profitsharing distribution to Employees in 2020, a significant decline in amounts payable for passenger excise taxes and segment fees as a result of the decline in passenger ticket sales, and the suspension of collection of certain ticket taxes as dictated by the CARES Act.

These were partially offset by $2.4 billion in Payroll Support Program grant proceeds received as part of the CARES Act, of which approximately $2.3 billion of this direct payroll support were used to offset eligible costs and thus included in operating activities, with the remaining $40 million allocated to the value of warrants issued and thus included in financing activities.

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

The increase in Air traffic liability was due to ticket sales in 2020 for future travel that have not been flown, as a result of the significant number of Customer trip cancellations associated with the COVID-19 pandemic, and growth in Rapid Rewards points earned due to multiple loyalty credit card promotions throughout 2020.

The operating cash flows for 2019 were impacted primarily by the Company's results of operations, as adjusted for non-cash items as well as changes in the Air traffic liability and Accrued liabilities balances.

Operating cash flows for 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 $591 million increase in Air traffic liability driven by increased ticket sales related to an increase in leisure travel demand.

The operating cash flows for 2020 were affected primarily by (i) the initial, most significant, impacts of the COVID-19 pandemic, which resulted in a significant drop in travel demand, sales, and revenues, leading to the Company's Net loss (as adjusted for noncash items), and (ii) the Company's funding of its $667 million 2019 profitsharing distribution to Employees in 2020.

In 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.

The increase in Air traffic liability was due to ticket sales in early 2020 for future travel that have not been flown as a result of the significant number of Customer trip cancellations associated with the COVID-19 pandemic, and growth in Rapid Rewards points earned due to multiple loyalty credit card promotions throughout 2020.

Cash flows associated with entering into new fuel derivatives, which are classified as Other, net, operating cash flows, were net outflows of $34 million in 2021 and $129 million in 2020.

1 unchanged sentence

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 CARES Act and the Payroll Support Program Extension.

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 $1.0 billion amended and restated revolving credit facility (the "Amended A&R Credit Agreement").

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

Net cash used in investing activities for 2020 and 2019 was $16 million and $303 million, respectively.

Net cash used in investing activities for 2021 and 2020 was $1.3 billion and $16 million, respectively.

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

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

See Note 17 to the Consolidated Financial Statements for further information on Supplier proceeds.

During 2020, Capital expenditures were $515 million, compared with $1.0 billion in the same prior year period, the majority of which included ongoing technology projects, airport and other facility construction projects, and progress payments related to future aircraft deliveries from the manufacturer.

Capital expenditures decreased, year-over-year, largely due to a decrease in technology project expenditures, progress payments, and several projects in process during 2019 but completed and placed into service during 2020.

The Company more than offset its originally planned annual 2020 capital spending of approximately $1.4 billion to $1.5 billion, primarily due to no purchased aircraft deliveries from Boeing, combined with its receipt of proceeds from sale-leaseback transactions, Supplier proceeds, and the cancellation or deferral of the majority of its capital investment projects originally

planned for 2020.

See Notes 5 and 17 to the Condensed Consolidated Financial Statements for further information.

As a result of certain delivery credits provided in the Boeing Agreement, as well as progress payments made to date on undelivered aircraft, the Company currently estimates an immaterial amount of aircraft capital expenditures in 2021.

Therefore, the Company currently estimates its annual 2021 capital expenditures to be no more than $500 million, driven primarily by technology, facilities, and operational investments.

The Company has reduced its combined 2020 and 2021 capital spending by approximately $5.5 billion, compared with planning projections prior to the pandemic.

The Company continues its fleet modernization program and expects to retire a significant amount of its Boeing 737-700 fleet over the next 10-15 years.

The Company plans to use the Boeing 737 MAX 8 aircraft in its fleet modernization program and believes it will also have use for a smaller aircraft such as the Boeing 737 MAX 7.

In light of the current environment, the Company expects to take delivery of 35 MAX 8 aircraft through December 31, 2021, including 16 leased aircraft, 7 of which were delivered in December 2020.

The Company and Boeing are in discussions to change the Company’s aircraft order book and to formally revise the existing purchase agreement for years after 2021.

As a result, the Company expects to make further adjustments to its aircraft purchase quantities, aircraft variants, delivery schedule and related capital expenditures, although no assurance can be given about the outcome of discussions.

The Company cannot predict when the effects of the COVID-19 pandemic on air travel will end, but the Company expects that its capital expenditures will increase from current levels after U.S.

air travel returns to normal.

Net cash provided by financing activities for 2020 was $9.7 billion, and net cash used in financing activities for 2019 was $3.0 billion.

During 2020, the Company borrowed $13.6 billion, through various transactions, as explained in detail in Notes 2 and 7 to the Consolidated Financial Statements.

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 repayment in 2020 of all $3.7 billion borrowed under the Company's Amended and Restated 364-Day Credit Agreement, the full repayment of the $1.0 billion drawn under the Company's $1.0 billion revolving credit facility, and the full repayment of the $500 million 2.65% Notes due 2020.

See Note 7 to Consolidated Financial Statements for further information on the Company's debt agreements.

During 2019, the Company repurchased $2.0 billion of its outstanding common stock, repaid $615 million in debt and finance lease obligations, and paid $372 million in cash dividends to Shareholders.

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

See Note 17 to the Consolidated Financial Statements for further information.

During 2021, Capital expenditures were $505 million, compared with $515 million in the same prior year period.

The Company continues to estimate its 2022 capital spending to be approximately $5.0 billion, including approximately $900 million in non-aircraft capital spending.

This includes 12 2022 -8 options exercised through February 3, 2022, and assumes the Company exercises all 30 remaining 2022 options.

Fleet and other capital investment plans are expected to evolve as the Company continues to manage through the pandemic, and the Company intends to continue evaluating the exercise of its remaining 30 MAX options for 2022 as decision deadlines occur.

Net cash provided by financing activities for 2021 and 2020 was $359 million and $9.7 billion, respectively.

During 2021, the Company borrowed $1.1 billion under Payroll Support programs.

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

The Company repaid $905 million in debt and finance lease obligations, including the extinguishment of $203 million in principal of its convertible notes for cash payments totaling $293 million during 2021.

During 2020, the Company borrowed $13.6 billion, through various transactions, in order to improve its liquidity position as a result 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 Amended A&R Credit Agreement.

The Company also repurchased $451 million of its outstanding common stock and paid $188 million in cash dividends to Shareholders in 2020 prior to restrictions associated with the payroll assistance under the Payroll Support programs.

Additionally, the Company repaid $839 million in other debt and finance lease obligations during 2020.

A discussion of the Company's most significant drivers impacting cash flow for 2019 are included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2020, under Part II Item 7, Liquidity and Capital Resources.

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

Average daily core cash burn was approximately $12 million in fourth quarter 2020.

The Company expects average core cash burn of approximately $17 million per day in the first quarter of 2021, as a result of continued softness in demand and a seasonally weaker travel period in January and February 2021, as well as rising fuel prices.

Including certain changes in working capital, the Company expects average core cash burn in first quarter 2021 to be in the range of $10 million to $15 million per day, compared with approximately $15 million per day in fourth quarter 2020.

While vaccine availability should mark the beginning of the end of the pandemic, current passenger booking trends do not indicate significant improvement through March 2021.

In response to current trends, the Company's capacity plans remain conservative through, at least, March 2021, and the Company will continue to monitor bookings and adjust flight activity, accordingly.

While the Company hopes to achieve cash burn break even in 2021, it is wholly dependent upon a substantial rebound in passenger traffic and revenue;

and, it is difficult to predict the timing of such a rebound, especially with respect to business travel.

In order to achieve cash burn break even, the Company continues to estimate operating revenues will need to recover to a range of 60 to 70 percent of 2019 levels, which is roughly double current levels.

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

See Note Regarding Use of Non-GAAP Financial

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

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

The Company's average daily core cash burn was approximately $14 million in December 2020 and approximately $12 million in fourth quarter 2020.

Utilizing an alternative cash burn approach, which adjusts for changes in working capital-including changes in Air traffic liability and cash payments for voluntary separation and Extended ETO programs, among other items — the Company's average daily core cash burn was approximately $18 million in December 2020 and approximately $15 million in fourth quarter 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.

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

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

The Company has access to $1.0 billion under its Amended A&R Credit Agreement.

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

4 unchanged sentences

There were no amounts outstanding under the Amended A&R Credit Agreement as of December 31, 2021.

The Company entered into the following share repurchases during 2020, which were each recorded as a treasury share purchase for purposes of calculating earnings per share.

See Part II, Item 5 for further information on the Company's share repurchase authorizations.

Share repurchases (in millions) Shares received Cash paid

First Quarter 2020 Accelerated Share Repurchase Program 6.4 $ 366

Open Market Share Repurchases 1.9 85

Total 8.3 $ 451

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

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

Although not the case at December 31, 2020 due to the Company's recent significant financing activities, the Company has historically carried a working capital deficit, in which its current liabilities exceed its current assets.

Although not the case at December 31, 2021 due to the Company's significant financing activities in 2020 and 2021, 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 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 $13.3 billion as of December 31, 2020, 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 $15.5 billion as of December 31, 2021, and anticipated future internally generated funds from operations.

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

See Note 2 to the Consolidated Financial

Statements for further information on the impacts of the COVID-19 pandemic.

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

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

The following discussion includes various short-term and long-term material cash requirements from known contractual and other obligations, but does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time.

Given the Company's current liquidity position, available resources, and prevailing outlook, it expects to be able to fulfill both its short-term and long-term material cash requirements.

The amounts disclosed are based on various estimates, including estimates regarding the timing of payments, prevailing interest rates, volumes purchased, the occurrence of certain events and other factors.

Accordingly, the actual results may vary materially from the amounts discussed herein.

See Note 7 to the Consolidated Financial Statements for further detail on the Company's debt and the timing of expected and future principal payments.

The Company also has significant future obligations associated with fixed interest payments associated with its debt.

As of December 31, 2021, future interest payments associated with its fixed rate debt (excluding interest associated with finance leases) were $343 million in 2022, $301 million in 2023, $271 million in 2024, $217 million in 2025, $163 million in 2026, and $193 million thereafter.

The Company's Convertible Notes did not meet the criteria to be converted by holders as of the date of the financial statements, and thus are classified as Long-term debt in the accompanying Consolidated Balance Sheet as of December 31, 2021.

If the provisions were met to allow holders to exercise their conversion option on these instruments, all of the remaining convertible notes would be reclassified as a current obligation.

Also, the Company has engaged in transactions with certain convertible debt holders to purchase their instruments in private transactions from time to time in cash, and may continue to do so in future periods.

The Company considers its prevailing stock price, the trading price of its convertible debt instruments, and its available liquidity in determining how much of these instruments it may attempt to repurchase in such transactions.

The Company enters into leases for aircraft, airports and other real property, and other types of equipment in the normal course of business.

See Note 8 to the Consolidated Financial Statements for further detail.

Aircraft purchase commitments

The Company is required to make cash deposits toward the purchase of aircraft in advance.

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

See Part I, Item 2 for a complete table of the Company's contractual firm deliveries and options for -7 and -8 aircraft, and Note 5 to the Consolidated Financial Statements for the financial commitments related to these firm deliveries.

The Company's other material cash requirements primarily consist of outlays associated with normal operating expenses of the airline, including payroll, fuel, airport costs, etc.

While many of these expenses are variable in nature, some of the expenditures can be somewhat fixed in the short-term due to the lead-time involved in publishing the Company's flight schedule in advance and providing for resources to be available to operate those schedules.

The Company has a large net deferred tax liability on its Consolidated Balance Sheet.

2 unchanged sentences

Based on the Company’s scheduled future aircraft deliveries from Boeing and existing tax laws in effect, the Company will continue to accelerate the cash income tax benefits related to aircraft purchases.

However, due to the Company's net taxable loss incurred in 2020, and a provision within the CARES Act that allows entities to carry back such 2020 losses to prior periods of up to five years, and claim refunds of federal taxes paid, the Company expects to receive a significant cash tax refund once it completes all the necessary requirements to make the appropriate filings with the Internal Revenue Service.

However, due to the Company's net taxable loss incurred in 2020, and a provision within the CARES Act that allows entities to carry back such 2020 losses to prior periods of up to five years, and claim refunds of federal taxes paid, the Company expects to receive a significant cash tax refund of $472 million associated with this taxable loss from the Internal Revenue Service in the first six months of 2022.

See Note 15 to the Consolidated Financial Statements for further information.

1 unchanged sentence

The Company expects to be able to continue to meet such obligations utilizing cash and investments on hand, as well as cash generated from its ongoing operations.

Off-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments

The Company has contractual obligations and commitments primarily with regard to future purchases of aircraft, payment of debt, and lease arrangements.

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

See Part I, Item 2 for a complete table of the Company’s contractual firm deliveries and options for Boeing 737 MAX 7 and 737 MAX 8 aircraft, Note 5 to the Consolidated Financial Statements for the financial commitments related to these firm deliveries, and Note 17 to the Consolidated Financial Statements for further information about the MAX groundings and expected return to service.

The leasing of aircraft (including the sale and leaseback of aircraft) provides flexibility to the Company as a source of financing.

Although the Company is responsible for all maintenance, insurance, and expense associated with operating leased aircraft, and retains the risk of loss for these aircraft, it has generally not made guarantees to the lessors regarding the residual value (or market value) of the aircraft at the end of the lease terms.

Assets and obligations under operating leases are included in the Company’s Consolidated Balance Sheet.

See Note 3 and Note 8 to the Consolidated Financial Statements for further information.

Disclosure of the expected contractual obligations associated with the Company’s leased aircraft is included below.

As of December 31, 2020, the Company had 184 leased aircraft, including 47 Boeing 717-200 aircraft ("B717s") subleased to Delta.

Of these leased aircraft, 112 are under operating leases, including 45 B717s subleased to Delta.

See Note 8 to the Consolidated Financial Statements for further information on this transaction.

The Company is required to provide standby letters of credit to support certain obligations that arise in the ordinary course of business and may choose to provide letters of credit in place of posting cash collateral related to its fuel hedging positions.

Although the letters of credit are off-balance sheet, the majority of the obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet.

Outstanding letters of credit totaled $138 million at December 31, 2020.

The following table aggregates the Company’s material expected contractual obligations and commitments as of December 31, 2020:

Obligations by period (in millions)

Contractual obligations 2021 2022 - 2023 2024 - 2025 Thereafter Total

Long-term debt (a) $ 136 $ 1,763 $ 3,987 $ 4,291 $ 10,177

Interest commitments - fixed (b) 340 625 469 298 1,732

Interest commitments - floating (c) 8 11 8 3 30

Facility and other operating lease commitments 91 122 83 557 853

Aircraft operating lease commitments (d) 280 350 266 599 1,495

Aircraft finance lease commitments (e) 102 192 164 156 614

Aircraft purchase commitments (f) 3,727 2,778 3,416 — 9,921

Other commitments 150 252 183 293 878

Total contractual obligations $ 4,834 $ 6,093 $ 8,576 $ 6,197 $ 25,700

(a) Includes principal only.

See Note 7 to the Consolidated Financial Statements for additional information.

(b) Related to fixed-rate debt (either at issuance or through swaps) only.

(c) Interest obligations associated with floating-rate debt is estimated utilizing forward interest rate curves as of December 31, 2020, and can be subject to significant fluctuation.

(d) Includes the impact of the B717 sublease transaction entered into in 2012.

See Note 8 to the Consolidated Financial Statements for additional information.

(e) Includes principal and interest on finance leases.

See Note 8 to the Consolidated Financial Statements for additional information.

(f) This reflects firm orders for purchased MAX aircraft from Boeing;

assuming a shift of the 27 MAX aircraft and 35 MAX aircraft contractually scheduled for delivery in 2019 and 2020, respectively, into 2021, due to the MAX grounding from March 13, 2019 until late 2020 which consisted of $743 million from 2019 and $1.3 billion from 2020.

See Note 5 to the Consolidated Financial Statements for further information.

See Part I, Item 2 for a complete table of the Company’s contractual firm deliveries.

Airport Projects

The Company periodically enters into commitments associated with various airport improvement projects that could impact its future liquidity needs in differing ways.

These projects, which are typical within the airline industry, include the construction of new facilities and the rebuilding or modernization of existing facilities and are discussed in more detail in Note 5 to the Consolidated Financial Statements.

Dallas Love Field

For the rebuilding of the facilities at Dallas Love Field, the Company guaranteed principal, premium, and interest on $456 million in bonds issued by the Love Field Airport Modernization Corporation ("LFAMC") that were utilized to fund the majority of the project.

The amount of bonds outstanding as of December 31, 2020, was $399 million.

Repayment of the bonds is through the "Facilities Payments" described below.

Reimbursement of the Company for its payment of Facilities Payments is made through recurring ground rents, fees, and other revenues collected at the airport.

Prior to the issuance of the bonds by the LFAMC, the Company entered into two separate funding agreements:

(i) a "Facilities Agreement" pursuant to which the Company is obligated to make debt service payments on the principal and interest amounts associated with the bonds ("Facilities Payments"), less other sources of funds the City of Dallas may apply to the repayment of the bonds (including, but not limited to, passenger facility charges collected from passengers originating from the airport);

and (ii) a "Revenue Credit Agreement" pursuant to which the City of Dallas reimburses the Company for the Facilities Payments made by the Company.

A majority of the monies transferred from the City of Dallas to the Company under the Revenue Credit Agreement originate from a reimbursement account created in the "Use and Lease Agreement" between the City of Dallas and the Company.

The Use and Lease Agreement is a 20-year agreement providing for, among other things, the Company’s lease of space at the Airport from the City of Dallas.

The remainder of such monies transferred from the City of Dallas to the Company under the Revenue Credit Agreement originates from (i) use and lease agreements with other airlines, (ii) various concession agreements, and (iii) other airport miscellaneous revenues.

The Company’s liquidity could be impacted by this project to the extent there are timing differences between the Company’s payment of the Facilities Payments pursuant to the Facilities Agreement and the transfer of monies back to the Company pursuant to the Revenue Credit Agreement;

however, the Company does not currently expect that to occur.

The project has not had a significant impact on the Company’s capital resources or financial position.

Los Angeles International Airport

In October 2017, the Company executed a lease agreement (the "T1.5 Lease") with Los Angeles World Airports ("LAWA"), which owns and operates Los Angeles International Airport ("LAX").

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

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

Funding for the Terminal 1.5 Project is primarily through the Regional Airports Improvement Corporation (the "RAIC"), which is a quasi-governmental special purpose entity that acts as a conduit borrower under a syndicated credit facility provided by a group of lenders.

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

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

As of December 31, 2020, the Company's outstanding guaranteed obligation under the credit facility for the Terminal 1.5 Project was $318 million.

The Company’s liquidity could be impacted by this project under certain circumstances;

however, the Company does not expect this to occur based on its past experience with other projects.

This project is not expected to have a significant impact on the Company’s capital resources or financial position.

Construction on the Terminal 1.5 Project began during third quarter 2017 and was substantially completed as of December 31, 2020;

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

10 unchanged sentences

Air traffic liability primarily represents tickets sold for future travel dates, funds that are past flight date and remain unused, but are expected to be used in the future, and the Company’s liability for loyalty benefits that are expected to be redeemed in the future.

Air traffic liability fluctuates throughout the year based on seasonal travel patterns, fare sale activity, and activity associated with the Company’s loyalty program.

Air traffic liability typically fluctuates throughout the year based on seasonal travel patterns, fare sale activity, and activity associated with the Company’s loyalty program.

See Note 1 to the Consolidated Financial Statements for information about the Company's revenue recognition policies.

For air travel on Southwest, the amount of tickets that will expire unused are estimated and recognized in Passenger revenue once the scheduled flight date has passed.

For air travel on Southwest, the amount of tickets that will expire unused, referred to as breakage, are estimated and recognized in Passenger revenue once the scheduled flight date has passed, in proportion to the pattern of rights exercised by the Customer, as per Accounting Standards Codification 606, Revenue From Contracts With Customers.

Estimating the amount of tickets that will expire unused involves some level of subjectivity and judgment.

The majority of the Company's tickets sold are nonrefundable, which is the primary source of unused tickets.

The Company has a No Show policy that applies to fares that are not canceled or changed by a Customer at least ten minutes prior to a flight's scheduled departure.

See Note 1 to the Consolidated Financial Statements for further information.

According to the Company’s current "Contract of Carriage," all refundable tickets that are sold but not flown on the travel date can be reused for another flight up to a year from the date of sale, or some tickets can be refunded.

This policy also applies to unused Customer funds that may be the result of an exchange downgrade, in which a Customer exchanges their ticket from a previously purchased flight for a lower priced ticket, with the price difference being effectively refunded through it being made available for use by the Customer towards travel up to twelve months from the date of original purchase.

As a result of the COVID-19 pandemic, for all Customer travel funds created or scheduled to expire between March 1 and September 7, 2020 associated with flight cancellations, the Company has extended the expiration date to September 7, 2022.

Further, the Company announced in August 2020, that it would allow qualified travel funds to be converted to Rapid Rewards points through December 15, 2020.

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

The majority of the Company's tickets sold are nonrefundable, although the funds remain reusable, for a period of time, in the form of a flight credit that can be applied towards the purchase of future travel.

Flight credits are typically created when a Customer cancels or modifies an existing flight itinerary.

These unused flight credits are the primary source of breakage.

Breakage estimates are based on historical experience over many years, and the Company has consistently applied this accounting method to estimate revenue from unused tickets at the date of scheduled travel.

Fully refundable tickets rarely expire unused.

Estimates of tickets that will expire unused are based on historical experience over many years.

The Company has consistently applied this accounting method to estimate revenue from unused tickets at the date of scheduled travel.

Holding other factors constant, a 10 percent change in the Company’s estimate of the amount of tickets that will expire unused would have resulted in a $26 million, or less than one percent, change in Passenger revenues recognized for the year ended December 31, 2020.

Events and circumstances outside of historical fare sale activity or historical Customer travel patterns can result in actual spoiled tickets differing significantly from estimates.

The Company evaluates its estimates within a narrow range of acceptable amounts.

If actual spoilage results in an amount outside of this range, estimates and assumptions are reviewed and adjustments to Air traffic liability and to Passenger revenue are recorded, as necessary.

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

As a result of the COVID-19 pandemic, for all Customer flight credits created or scheduled to expire between March 1 and September 7, 2020 associated with flight cancellations, the Company has extended the expiration date to September 7, 2022.

See Note 6 to the Consolidated Financial Statements for further information regarding these extended flight credits.

Since the Company did not have historical data to enable it to accurately estimate the pattern of usage of these extended credits, these credits have been classified as a current liability throughout their history.

Due to the significant increase in time allowed by the Company for these Customers to redeem such credits for future travel, the percentage of the extended credits that will ultimately expire unused is currently expected to be lower than the Company’s historical experience with flight credits that were not extended (“normal” flight credits), and this lack of historical experience also impacts the Company's ability to estimate ultimate expirations.

Therefore, as a result of the significant volume of these extended credits and the Company's lack of historical experience associated with such extended travel credits, recognition of expected breakage will likely create volatility in certain Passenger revenue metrics through September 2022.

For the year ended December 31, 2021, holding other factors constant, a 10 percent change in the Company’s estimate of the amount of these extended credits that will expire unused would have resulted in an immaterial change in Passenger revenues recognized.

Also as a result of changes in observed Customer travel habits and behaviors during 2021, the Company has increased its estimates of “normal” Customer flight credits that are expected to expire unused.

Although very little of these funds have yet to reach their expiration dates, Customer redemptions of these "normal" credits have been at a slower rate than the Company’s historical data would suggest for similar credits in periods prior to the COVID-19 pandemic.

Based on historical Customer behavior, holding other factors constant, a 10 percent change in the

Company’s estimate of the amount of "normal" tickets and/or flight credits that will expire unused would have resulted in a $59 million, or less than one percent, change in Passenger revenues recognized for the year ended December 31, 2021.

Observed Customer behavior that differs from historical experience can cause actual ticket breakage to differ significantly from estimates.

Assumptions about Customer behavior are reviewed frequently and corresponding adjustments are made to breakage estimates, as needed, when observed behaviors differ from historical experience.

Assumptions about Customer behavior can be impacted by several factors including, but not limited to:

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

The Company’s estimation techniques have been

consistently applied from year to year;

however, as with any estimates, actual spoiled tickets may vary from estimated amounts.

Given the unprecedented amount of 2020 Customer flight cancellations and the amount of travel funds available to Customers for use through September 2022, the Company expects additional variability in the amount of spoilage revenue recorded in future periods, especially as a percentage of revenues, as the estimates of the portion of sold tickets that will expire unused may differ from historical experience and the Company's overall revenues remain well below pre-COVID-19 pandemic levels.

Impairment Accounting

The Company applies a fair value based impairment test to the carrying value of goodwill and indefinite-lived intangible assets annually on October 1st, or more frequently if certain events or circumstances indicate that an impairment loss may have been incurred.

The Company assesses the value of goodwill and indefinite-lived intangible assets under either a qualitative or quantitative approach.

Under a qualitative approach, the Company considers various market factors, including applicable key assumptions also used in the quantitative assessment listed below.

These factors are analyzed to determine if events and circumstances could reasonably have affected the fair value of goodwill and indefinite-lived intangible assets.

If the Company determines that it is more likely than not that an indefinite-lived intangible asset or reporting unit goodwill is impaired, the quantitative approach is used to assess the asset or reporting unit fair value and the amount of the impairment.

Under a quantitative approach, the fair value of the Company's indefinite-lived intangible assets or reporting unit is calculated based on key market participant assumptions.

If the indefinite-lived intangible assets' carrying value exceeds the fair value calculated using the quantitative approach, an impairment charge is recorded for the difference in fair value and carrying value.

If the reporting unit carrying value exceeds the reporting unit fair value calculated using the quantitative approach, an impairment charge is recorded for the difference between fair value and carrying value, limited to the amount of goodwill in the reporting unit.

When performing a quantitative impairment assessment of goodwill and indefinite-lived intangible assets, fair value is estimated based on (i) recent market transactions, where available, (ii) projected discounted cash flows (an income approach), or (iii) a combination of limited market transactions and the lease savings method (which reflects potential annual after-tax lease savings arising from owning the certain indefinite-lived intangibles rather than leasing them from another airline at market rates).

Key Assumptions.

Key assumptions and/or estimates made in the Company's quantitative impairment tests included the following:

(i) a projection of revenues, expenses, and cash flows;

(ii) terminal period revenue growth and cash flows;

(iii) an estimated weighted average cost of capital;

(iv) an assumed discount rate, depending on the asset, (v) a tax rate, and (vi) market purchase prices and/or lease rates for comparable assets.

The Company believes these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made.

However, actual results and amounts may be significantly different from the Company's estimates.

Due to the drastic reduction in air travel as a result of the pandemic in 2020, the Company determined that it would perform a quantitative assessment of its Goodwill and indefinite-lived intangible assets.

Based on the result of the annual impairment tests performed as of October 1, 2020, no impairment was determined to exist for Goodwill or indefinite-lived intangible assets, as the fair values of the reporting unit and indefinite-lived intangible assets exceeded their respective carrying values.

Future impairment of Goodwill and indefinite-lived intangible assets may result from changes in assumptions, estimates, or circumstances, some of which are beyond the Company’s control.

Factors which could result in an impairment of Goodwill, holding other assumptions constant, could include, but are not limited to:

(i) a significant reduction in passenger demand as a result of domestic or global economic conditions;

(ii) significantly higher prices for jet fuel;

(iii) lower fares or passenger yields as a result of increased competition or lower demand;

(iv) a significant increase in future capital expenditure commitments;

and (v) significant disruptions to the Company’s operations as a result of both internal and external events such as terrorist activities, actual or threatened war, labor actions by Employees, or further industry regulation.

Factors which could result in an impairment of owned domestic slots, holding other assumptions constant, could include, but are not limited to:

(i) a change in competition in the slotted airport;

(ii) a change in governmental regulations in the slotted airport;

(iii) significantly higher prices for jet fuel;

and (iv) increased competition at a nearby airport.

Long lived assets.

Long-lived assets, which primarily consist of Flight equipment and related assets, are evaluated for impairment when events and circumstances indicate the assets may be impaired.

Indicators include, but are not limited to:

(i) a decision to permanently remove long-lived assets from operations, (ii) significant changes in the estimated useful life, (iii) significant changes in projected cash flows, (iv) significant decreases in market value and (v) changes in technology.

For long-lived assets held for sale, when the carrying amount of these assets is greater than the fair value, less the cost to sell, depreciation is discontinued and an impairment loss is recorded.

In evaluating the potential for impairment associated with aircraft used in operations, assets are grouped at the entire Boeing 737 fleet level, as the Company has determined this is the lowest level for which there are identifiable cash flows.

Future cash flows are estimated based on projections of capacity, passenger yield, fuel, labor costs, and other relevant factors.

If an impairment were to exist, the impairment loss recognized is the amount by which the fleet's carrying amount exceeds its estimated fair value.

Aircraft fair values are estimated using published sources, appraisals, and bids received from third parties, as available.

In 2020, the Company recorded an impairment charge of $32 million, associated with 20 of the Company's Boeing 737-700 aircraft that were retired early in fourth quarter 2020.

The Company’s estimation techniques have been consistently applied from year to year;

however, as with any estimates, actual ticket breakage may vary from estimated amounts.

Given the unprecedented amount of 2020 Customer flight cancellations and the amount of travel funds available to Customers for use through September 2022, the Company expects additional variability in the amount of breakage recorded in future periods, especially as a percentage of revenues, as the estimates of the portion of sold tickets that will expire unused may differ from historical experience and the Company's overall revenues remain below pre-COVID-19 pandemic levels.

Fair Value Measurements and Financial Derivative Instruments

10 unchanged sentences

dollar, geopolitical events, the extent of the COVID-19 pandemic, and general economic conditions, among other items.

The financial derivative instruments utilized by the Company primarily are a combination of collars, purchased call options, call spreads, put spreads, and fixed price swap agreements.

Historically, the financial derivative instruments utilized by the Company primarily are a combination of collars, purchased call options, call spreads, put spreads, and fixed price swap agreements.

The Company enters into financial derivative instruments with third party institutions in "over-the-counter" markets.

4 unchanged sentences

The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds.

Due to the fact that certain inputs used in determining the estimated fair value of its option contracts are considered unobservable (primarily implied volatility), the Company has categorized these option contracts as Level 3.

Due to the fact that certain inputs used in determining the estimated fair value of its

option contracts are considered unobservable (primarily implied volatility), the Company has categorized these option contracts as Level 3.

Although implied volatility is not directly observable, it is derived primarily from changes in market prices, which are observable.

Based on the Company’s portfolio of option contracts as of

December 31, 2020, a 10 percent change in implied volatility, holding all other factors constant, would have resulted in a change in the fair value of this portfolio of less than $15 million.

Based on the Company’s portfolio of option contracts as of December 31, 2021, a 10 percent change in implied volatility, holding all other factors constant, would have resulted in a change in the fair value of this portfolio of less than $105 million.

Fair values for financial derivative instruments are estimated prior to the time that the financial derivative instruments settle.

15 unchanged sentences

Under the Southwest Rapid Rewards loyalty program, Members earn points for every dollar spent on Southwest base fares.

The amount of points earned under the program is based on the fare and fare class purchased, with higher fare products (e.g., Business Select) earning more points than lower fare products (e.g., Wanna Get Away).

Each fare class is associated with a points earning multiplier, and points for flights are calculated by multiplying the fare for the flight by the fare class multiplier.

Likewise, the amount of points required to be redeemed for a flight can differ based on the fare purchased.

The amount of points earned under the program is based on the fare amount and fare type, with higher fare types (e.g., Business Select) earning more points than lower fare types (e.g., Wanna Get Away).

Each fare type is associated with a points earning multiplier, and points for flights are calculated by multiplying the fare amount for the flight by the fare type multiplier.

Likewise, the amount of points required to be redeemed for a flight can differ based on the fare type purchased.

Under the program, (i) Members are able to redeem their points for every available seat, every day, on every flight, with no blackout dates;

4 unchanged sentences

The Company also sells points and related services to business partners participating in the loyalty program.

Liabilities are recorded for the relative standalone selling price of the Rapid Rewards points which are awarded each period.

Liabilities are recorded for the relative standalone selling price of the Rapid Rewards points which are

awarded each period.

The liabilities recorded represent the total number of points expected to be redeemed by Members, regardless of whether the Members may have enough to qualify for a full travel award.

At December 31,

2020, the loyalty liabilities were approximately $4.4 billion, including $1.1 billion classified within Air traffic liability and $3.3 billion classified as Air traffic liability – noncurrent.

At December 31, 2021, the loyalty liabilities were approximately $4.8 billion, including $2.6 billion classified within Air traffic liability and $2.2 billion classified as Air traffic liability – noncurrent.

In order to determine the value of each loyalty point, certain assumptions must be made at the time of measurement, which include an allocation of passenger revenue between the flight and loyalty points earned by passengers, and the fair value of Rapid Rewards points, which are generally based on their redemption value to the Customer.

5 unchanged sentences

These elements are combined into two performance obligations, transportation and marketing, and consideration from the Agreement is allocated based on the relative selling price of each performance obligation.

Significant management judgment was used to estimate the selling price of each of the performance obligations in the Agreement at inception.

Significant management judgment was used to estimate the selling price of each of the performance obligations in the Agreement at inception, including each time in which the Agreement has been materially amended.

The objective is to determine the price at which the Company would transact a sale if the product or service was sold on a stand-alone basis.

2 unchanged sentences

The Company records revenue related to air transportation when the transportation is delivered and revenue related to marketing elements when the performance obligation is satisfied.

A one percent increase or decrease in the Company's estimate of the standalone selling prices, implemented as of January 1, 2020, resulting in an allocation of proceeds to air transportation would

not have had a material impact on the Company's Operating revenues for the year ended December 31, 2020.

A one percent increase or decrease in the Company's estimate of the standalone selling prices, implemented as of January 1, 2021, causing a change to the allocation of proceeds to air transportation would not have had a material impact on the Company's Operating revenues for the year ended December 31, 2021.

Under its current program, Southwest estimates the portion of loyalty points that will not be redeemed.

In estimating the spoilage, the Company takes into account the Member’s past behavior, as well as several factors related to the Member’s account that are expected to be indicative of the likelihood of future point redemption.

In estimating the breakage, the Company takes into account the Member’s past behavior, as well as several factors related to the Member’s account that are expected to be indicative of the likelihood of future point redemption.

These factors are typically representative of a Member’s level of engagement in the loyalty program.

They include, but are not limited to, tenure with the program, points accrued in the program, and points redeemed in the program.

The Company believes it has obtained sufficient historical behavioral data to develop a predictive statistical model to analyze the amount of spoilage expected for all loyalty points.

The Company updates this model at least annually, and applies the new spoilage rates effective October 1st each year, or more frequently if required by changes in the business.

Changes in the spoilage rates applied annually in recent years have not had a material impact on Passenger revenues.

For the year ended December 31, 2020, based on actual redemptions of points sold to business partners and earned through flights, a hypothetical one percentage point change in the estimated spoilage rate would have resulted in a change to Passenger revenue of approximately $61 million (an increase in spoilage would have resulted in an increase in revenue and a decrease in spoilage would have resulted in a decrease in revenue).

The Company believes it has obtained sufficient historical behavioral data to develop a predictive statistical model to analyze the amount of breakage expected for all loyalty points.

The Company updates this model at least annually, and applies the new breakage rates effective October 1st each year, or more frequently if required by changes in the business.

Changes in the breakage rates applied annually in recent years have not had a material impact on Passenger revenues.

For the year ended December 31, 2021, based on actual redemptions of points sold to business partners and earned through flights, a hypothetical one percentage point change in the estimated breakage rate would have resulted in a change to Passenger revenue of approximately $100 million (an increase in breakage would have resulted in an increase in revenue and a decrease in breakage would have resulted in a decrease in revenue).

Given that Member behavior will continue to develop as the program matures, the Company expects the current estimates may change in future periods.

1 unchanged sentence

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-K

Item 7. Management’s Discussion and Analysis