What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-02-07 compared with 2021-02-08 · 463 added, 511 removed, 1118 unchanged (47% of the section changed)

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2,000,000,000 shares authorized;

888,111,634 and 807,611,634 shares issued in 2020 and 2019 respectively

888,111,634 shares issued in 2021 and 2020

Capital in excess of par value 4,224 4,191

Retained earnings 15,774 14,777

Accumulated other comprehensive loss ( 105 ) ( 61 )

Accumulated other comprehensive income (loss) 388 ( 105 )

Treasury stock, at cost:

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deferred taxes of $ 142 , $ 2 , and ($ 16 )

4 ( 53 ) ( 26 )

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

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Cumulative effect of adopting Accounting Standards Update No.

2017-12, Targeted Improvements to Accounting for Hedging Activities

— — 18 ( 18 ) — —

Balance after adjustment for the new accounting standard $ 808 $ 1,451 $ 13,850 $ ( 6 ) $ ( 6,462 ) $ 9,641

Repurchase of common stock — — — — ( 2,000 ) ( 2,000 )

Issuance of common and treasury stock pursuant to Employee stock plans — 13 — — 10 23

Share-based compensation — 46 — — — 46

Cash dividends, $ 0.605 per share

— — ( 348 ) — — ( 348 )

Comprehensive income — — 2,465 26 — 2,491

Balance at December 31, 2018 (as reported) $ 808 $ 1,510 $ 15,967 $ 20 $ ( 8,452 ) $ 9,853

Cumulative effect of adopting Accounting Standards Update No.

2016-02, Leases, codified in Accounting Standards Codification 842 (See Note 3 to the Consolidated Financial Statements for additional information)

2016-02, Leases, codified in Accounting Standards Codification 842

— — 55 — — 55

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Balance at December 31, 2020 $ 888 $ 4,191 $ 14,777 $ ( 105 ) $ ( 10,875 ) $ 8,876

Cumulative effect of adopting Accounting Standards Update No.

2016-01, Financial Instruments — — 20 ( 20 ) — —

Issuance of common and treasury stock pursuant to Employee stock plans — 22 — — 15 37

Share-based compensation — 58 — — — 58

Stock warrants — 45 — — — 45

Equity feature of partial extinguishment of convertible notes — ( 92 ) — — — ( 92 )

Comprehensive income — — 977 513 — 1,490

Balance at December 31, 2021 $ 888 $ 4,224 $ 15,774 $ 388 $ ( 10,860 ) $ 10,414

See accompanying notes.

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Gain on sale-leaseback transactions — ( 222 ) —

Loss on partial extinguishment of convertible notes 28 — —

Changes in certain assets and liabilities:

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Other liabilities ( 103 ) ( 306 ) ( 277 )

Cash collateral received from (provided to) derivative counterparties 9 25 ( 15 )

Cash collateral received from derivative counterparties 141 9 25

Other, net 28 ( 95 ) ( 108 )

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Proceeds from sales of short-term and other investments 5,071 4,336 2,446

Other, net — — 5

Net cash used in investing activities ( 1,264 ) ( 16 ) ( 303 )

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Repurchase of common stock — ( 451 ) ( 2,000 )

Reimbursement for assets constructed for others — — 170

Payments of long-term debt and finance lease obligations ( 612 ) ( 839 ) ( 615 )

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Payments of terminated interest rate derivative instruments — ( 59 ) —

Repayment of construction obligation — — ( 30 )

Payments for repurchases and conversions of convertible debt ( 293 ) — —

Capitalized financing items — ( 134 ) —

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SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:

Flight equipment acquired against supplier credit memo $ 569 $ — $ —

Assets constructed for others $ 309 $ 145 $ 65

Supplier receivables $ — $ — $ 428

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

See accompanying notes.

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Summary of Significant Accounting Policies

Worldwide Pandemic

New Accounting Pronouncements

Net Income (Loss) Per Share

Commitments and Contingencies

Financing Activities

Financial Derivative Instruments

Fair Value Measurements

Accumulated Other Comprehensive Income (Loss)

Employee Retirement Plans

Supplemental Financial Information

Boeing 737 MAX Grounding and Return to Ser vice

Report of Independent Registered Public Accounting Firm

Notes to Consolidated Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Southwest Airlines Co.

(the "Company") operates Southwest Airlines, a major domestic airline.

The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries, which include AirTran Holdings, LLC, the successor to AirTran Holdings, Inc.

("AirTran Holdings"), the former parent company of AirTran Airways, Inc., and Triple Crown Assurance Co., an insurance captive.

(the "Company" or "Southwest") operates Southwest Airlines, a major domestic airline.

The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries, which include AirTran Holdings, LLC, the successor to AirTran Holdings, Inc., the former parent company of AirTran Airways, Inc., and Triple Crown Assurance Co., an insurance captive.

The accompanying Consolidated Financial Statements include the results of operations and cash flows for all periods presented and all significant inter-entity balances and transactions have been eliminated.

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Actual results could differ from these estimates.

Effective as of January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No.

2016-02, Leases,

codified in Accounting Standards Codification ("ASC") 842 (the "New Lease Standard").

All amounts and disclosures set forth in this Form 10-K, reflect the adoption of this ASU, while all periods prior to 2019 remain in accordance with prior accounting requirements.

See Note 3 for further information.

Cash and Cash Equivalents

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Cash and cash equivalents are stated at cost, which approximates fair value.

As of December 31, 2020 and 2019, $ 34 million and $ 25 million, respectively, in cash collateral deposits were held by the Company from its fuel hedge counterparties, and no cash collateral deposits were held by or provided by the Company to its interest rate hedge counterparties for both periods.

As of December 31, 2021 and 2020, $ 175 million and $ 34 million, respectively, in cash collateral deposits were held by the Company from its fuel hedge counterparties, and no cash collateral deposits were held by or provided by the Company to its interest rate hedge counterparties for either period.

Cash collateral amounts provided or held associated with fuel and interest rate derivative instruments are not restricted in any way and earn interest income at an agreed upon rate that approximates the rates earned on short-term securities issued by the U.S.

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All of these investments are classified as available-for-sale securities and are stated at fair value, which approximates cost.

For all short-term investments, at each reset period or upon reinvestment, the Company accounts for the transaction as Proceeds from sales of short-term investments for the security relinquished, and Purchases of short-investments for the security purchased, in the accompanying Consolidated Statement of Cash Flows.

For all short-term investments, at each reset period or upon reinvestment, the Company accounts for the transaction as Proceeds from sales of short-term and other investments for the security relinquished, and Purchases of short-term investments for the security purchased, in the accompanying Consolidated Statement of Cash Flows.

Unrealized gains and losses, net of tax, if any, are recognized in Accumulated other comprehensive income (loss) ("AOCI") in the accompanying Consolidated Balance Sheet.

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Accounts and other receivables are initially recorded at cost and are evaluated for collectability in every period.

They primarily consist of the amounts due from the Company's business partners and other suppliers, amounts due from business partners in the Company’s loyalty program, and tax receivables from overpayment or net operating losses that are allowed to be carried back to prior periods to claim refunds against prior taxes paid.

They primarily consist of the amounts due from the Company's business partners and other suppliers, amounts due from credit card companies associated with sales of tickets for future travel, amounts due from business partners in

Notes to Consolidated Financial Statements

the Company’s loyalty program, and tax receivables from overpayment or net operating losses that are allowed to be carried back to prior periods to claim refunds against prior taxes paid.

See Note 16 for further information.

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In addition, the provision for doubtful accounts and write-offs for 2021, 2020, and 2019 were each immaterial.

Inventories primarily consist of aircraft fuel, flight equipment expendable parts, materials, and supplies.

Inventories primarily consist of aircraft fuel and flight equipment expendable parts, materials, and supplies.

All of these items are carried at average cost, less an allowance for obsolescence.

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See Note 5 for further information.

The Company evaluates its long-lived assets used in operations for impairment when events and circumstances indicate that the undiscounted cash flows to be generated by that asset are less than the carrying amounts of the asset and may not be recoverable.

Factors that would indicate potential impairment include, but are not limited to, significant decreases in the market value of the long-lived asset(s), a significant change in the long-lived asset’s physical condition, and operating or cash flow losses associated with the use of the long-lived asset.

If an asset is deemed to be impaired, an impairment loss is recorded for the excess of the asset book value in relation to its estimated fair value.

No aircraft impairment charges were deemed necessary for the majority of 2020.

For the purpose of impairment assessment, the Company evaluates its all Boeing fleet as one asset group.

However, during fourth quarter 2020, the Company made the decision to permanently ground, and accelerate the retirement of, 20 of its 737-700 aircraft as of December 31, 2020.

This action resulted in the Company recording $ 32 million in impairment charges associated with these 20 aircraft.

The Company evaluates its long-lived assets used in operations for impairment when events and circumstances indicate that the undiscounted cash flows to be generated by that asset group are less than the carrying amounts of the asset group and may not be recoverable.

Factors that would indicate potential impairment include, but are not limited to, significant decreases in the market value of the long-lived asset group, a significant change in the long-lived asset group’s physical condition, and operating or cash flow losses associated with the use of the long-lived asset group.

If an asset group is deemed to be impaired, an impairment loss is recorded for the excess of the asset group's book value in relation to its estimated fair value.

During 2021 and 2020, the Company recorded impairment charges of $ 12 million and $ 32 million, respectively, associated with the accelerated retirement of 8 and 20 of its 737-700 aircraft.

The Company determines if an arrangement is a lease at inception.

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Lease payments include fixed and in-substance fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, fees paid by the lessee to the owners of a special-purpose entity for restructuring the transaction, and probable amounts the lessee will owe under a residual value guarantee.

Lease payments do not include (i) variable lease payments other than those that depend on an index or rate, (ii) any guarantee by the lessee of the lessor’s debt, or (iii) any amount allocated to non-lease components, if such election is made upon adoption, per the provisions of the New Lease Standard.

Lease payments do not include (i) variable lease payments other than those that depend on an index or rate, (ii) any guarantee by the lessee of the lessor’s debt, or (iii) any amount allocated to non-lease components, if such election was made upon adoption, per the provisions of the Accounting Standards Codification ("ASC") 842.

The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments, since the Company does not know the actual implicit rates in its leases.

The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rate.

The Company gives consideration to its recent debt issuances as well as

Notes to Consolidated Financial Statements

publicly available data for instruments with similar characteristics when calculating its incremental borrowing rate.

Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

The Company combines lease and nonlease components for all asset groups.

The Company combines lease and non-lease components for all asset groups.

The Company's lease term includes any option to extend the lease when it is reasonably certain to be exercised based on considering all relevant economic factors.

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The cost of scheduled inspections and repairs and routine maintenance costs for all aircraft and engines are charged to Maintenance materials and repairs expense within the accompanying Consolidated Statement of Income (Loss) as incurred.

The Company has maintenance agreements related to certain of its aircraft engines with external service providers, including agreements that effectively transfer the risk of performance of such work to the service provider.

The Company has maintenance agreements related to certain aircraft engines with external service providers, including agreements that effectively transfer the risk of performance of such work to the service provider.

Under the agreements where the risk of performance is deemed transferred to the counterparty, the appropriate expense is recorded commensurate with the period in which the corresponding level of service is provided.

Generally, expense is recorded on a straight-line basis over the term of the agreement based on the Company's best estimate of expected future aircraft utilization.

For its engine maintenance contracts that do not transfer risk to the service provider, the Company records expense on a time and materials basis when an engine repair event takes place.

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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).

The Company applied the quantitative approach during its annual 2020 impairment tests.

Key assumptions and/or estimates made in the Company's 2020 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 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.

As a 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.

The Company’s intangible assets primarily consist of acquired rights to certain airport owned takeoff and landing slots (a "slot" is the right of an air carrier, pursuant to regulations of the Federal Aviation Administration ("FAA"), to operate a takeoff or landing at a specific time at certain airports) at certain domestic slot-controlled airports.

Indefinite lived slots of $ 295 million are included as a component of Other assets in the Company's Consolidated Balance Sheet, as of December 31, 2021 and 2020.

The Company applied the qualitative approach during its 2021 impairment tests, and no impairment was determined to exist for Goodwill or indefinite-lived intangible assets.

Revenue Recognition

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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.

The majority of the Company’s tickets sold are nonrefundable.

The majority of the Company’s tickets

Notes to Consolidated Financial Statements

sold are nonrefundable.

Southwest 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.

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A small percentage of tickets (or partial tickets) expire unused.

The Company estimates the amount of tickets that expire unused and recognizes such amounts in Passenger revenue once the scheduled flight date has lapsed in proportion to the pattern of flights taken by the Customers.

The Company estimates the amount of tickets that expire unused and recognizes such amounts in Passenger revenue in proportion to the pattern of flights taken by the Customers, once the flight date has lapsed.

Based on the Company's revenue recognition policy, revenue is recorded at the flight date for a Customer who does not change his/her itinerary and loses his/her funds as the Company has then fulfilled its performance obligation.

Amounts collected from passengers for ancillary services are also recognized when the service is provided, which is typically the flight date.

Initial spoilage estimates for both tickets and funds available for future use are routinely adjusted and ultimately finalized once the tickets expire, which is typically twelve months after the original purchase date.

Initial breakage estimates for both tickets and funds available for future use are routinely adjusted and ultimately finalized once the tickets expire, which is typically twelve months after the original purchase date.

However, during 2020, the Company extended the expiration dates for a significant amount of tickets and funds beyond its normal twelve months.

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

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

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

Assumptions about the Customers' future travel 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.

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

Given the unprecedented amount of 2020 and 2021 Customer flight cancellations and the amount of flight credits provided, the Company expects additional variability in the amount of breakage revenue recorded in future periods, as the estimates of the portion of sold tickets that will expire unused may differ from historical experience.

See Note 6 for further information.

Approximately $ 475 million, approximately $ 184 million, and approximately $ 615 million of the Company's Operating revenues in 2021, 2020, and 2019, respectively, were attributable to foreign operations.

The remainder of

the Company's Operating revenues, approximately $ 8.9 billion, approximately $ 21.8 billion, and approximately $ 21.4 billion in 2020, 2019, and 2018, respectively, were attributable to domestic operations.

The remainder of the Company's Operating revenues, approximately $ 15.3 billion, approximately $ 8.9 billion, and approximately $ 21.8 billion in 2021, 2020, and 2019, respectively, were attributable to domestic operations.

Loyalty Program

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Points earned from business partner activity, which primarily consist of points sold, along with related marketing services, to companies participating in the Rapid Rewards loyalty program, are valued using a relative fair value methodology based on the contractual rate which partners pay to Southwest to award Rapid Rewards points to the business partner’s customers.

For points that are expected to remain unused, the Company recognizes spoilage in proportion to the pattern of points used by the Customer, which approximates the average period over which the population of Rapid Reward Members redeem their points.

For points that are expected to remain unused, the Company recognizes breakage in proportion to the pattern of points used by the Customer, which approximates the average period over which the population of Rapid Reward Members redeem their points.

The Company records passenger revenue related to air transportation when the transportation is delivered.

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See Note 6 for further information.

Notes to Consolidated Financial Statements

Advertising costs are charged to expense as incurred.

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These instruments are accounted for as cash flow hedges upon proper qualification.

The Company also has had interest rate swap agreements to convert certain floating-rate debt to a fixed-rate and had interest rate swap agreements to convert portions of its fixed-rate debt to floating rates.

The Company has forward-stating interest rate swap agreements, the primary objective of which is to hedge forecasted debt issuances.

The Company also has interest rate swap agreements to convert certain floating-rate debt to a fixed-rate.

The Company has forward-starting interest rate swap agreements, the primary objective of which is to hedge forecasted debt issuances.

These interest rate hedges are appropriately designated as cash flow hedges.

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All cash flows associated with purchasing and selling derivatives are classified as operating cash flows in the Consolidated Statement of Cash Flows, within Changes in certain assets and liabilities.

The Company classifies its

cash collateral provided to or held from counterparties in a "net" presentation on the Consolidated Balance Sheet against the fair value of the derivative positions with those counterparties.

The Company classifies its cash collateral provided to or held from counterparties in a "net" presentation on the Consolidated Balance Sheet against the fair value of the derivative positions with those counterparties.

See Note 11 for further information.

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The Company uses a combination of insurance and self-insurance mechanisms, including a wholly-owned captive insurance entity and participation in a reinsurance treaty, to provide for the potential liabilities associated with certain risks, including workers’ compensation, healthcare benefits, general liability, and aviation liability.

Notes to Consolidated Financial Statements

Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.

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Approximately 82 percent of the Company’s full-time equivalent Employees are unionized and are covered by collective-bargaining agreements.

A percentage of the Company's unionized Employees, including its Pilots, Flight Attendants, Customer Service Agents, Dispatchers, Aircraft Appearance Technicians, and Meteorologists, which had contracts that became amendable on or before December 31, 2020, are in discussions on labor agreements.

A portion of the Company's unionized Employees, including its Pilots, Flight Attendants, Customer Service Agents, Ramp Agents, Dispatchers, Aircraft Appearance Technicians, and Meteorologists, which had contracts that became amendable on or before December 31, 2021, are in discussions on labor agreements.

Those unionized Employee groups in discussions represent approximately 77 percent of the Company’s full-time equivalent Employees as of December 31, 2021.

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airlines to ground the MAX aircraft, including the 34 MAX aircraft in the Company's fleet.

On November 18, 2020, the FAA rescinded its order to ground the MAX fleet.

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 currently estimates that the MAX will return to service on March 11, 2021 after all active Pilots have received updated, MAX-related training.

The MAX fleet grounding has adversely affected the Company's operating results, and could have a material adverse effect on the Company's operating results in future periods.

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

airlines to return the MAX to service.

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

Boeing no longer manufactures versions of the 737 other than the MAX family of aircraft.

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In particular, if the Company’s growth were to be dependent upon the introduction of a new aircraft make and model to the Company’s fleet, the Company would need to, among other things, (i) develop and implement new maintenance, operating, and training programs, (ii) secure extensive regulatory approvals, and (iii) implement new technologies.

The requirements associated with operating a new aircraft make and model could take an extended period of time to fulfill and would likely impose substantial costs on the Company.

The requirements associated with

Notes to Consolidated Financial Statements

operating a new aircraft make and model could take an extended period of time to fulfill and would likely impose substantial costs on the Company.

A shift away from a single fleet type could also add complexity to the Company’s operations, present operational and compliance risks, and materially increase the Company's costs.

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The Company has historically entered into agreements with some of its co-brand, payment, and loyalty partners that contain exclusivity aspects which place certain confidential restrictions on the Company from entering into certain arrangements with other payment and loyalty partners.

These arrangements generally extend for the terms of the agreements, none of which currently extend beyond October 31, 2030.

Some of these agreements automatically renew on an annual basis, unless either party objects to such extension.

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As a result of the rapid spread of the novel coronavirus, COVID-19, throughout the world, including into the United States, on March 11, 2020, the World Health Organization classified the virus as a pandemic.

The speed with which the effects of the COVID-19 pandemic have changed the U.S.

economic landscape, outlook, and in particular the travel industry, were swift and unexpected.

The Company began to see a negative impact on bookings for future

travel in late February 2020, which quickly accelerated during the remainder of first quarter and into second quarter, when trip cancellations outpaced new passenger bookings during the majority of March and April 2020.

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

The Company continued to experience significant negative impacts to passenger demand and bookings through the remainder of 2020 due to the pandemic.

Based on these events and the uncertainty they created, the Company immediately began to focus on its liquidity, including quickly and substantially enhancing its cash holdings.

Throughout 2020, the Company raised a total of $ 18.9 billion in capital, net of transaction fees.

On April 20, 2020, the Company entered into definitive documentation with the United States Department of Treasury (the "Treasury") with respect to funding support pursuant to the Payroll Support Program ("Payroll Support") under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act").

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

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

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

Pursuant to the terms of the Payroll Support Program agreement and the CARES Act, the Payroll Support funds could only be utilized to pay qualifying salaries, wages, and benefits, as defined in the CARES Act.

As of December 31, 2020, excluding the $ 976 million Note and value allocated to the Warrants, all Payroll Support funds received have been allocated to reduce eligible costs in the accompanying Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2020.

The Note matures in full on April 19, 2030, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity.

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

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

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

Also under the Cares Act terms, as supplemented by the Payroll Support Program Extension (discussed below), the Company is prohibited from repurchasing its common stock and from paying dividends or making capital contributions with respect to its common stock through March 31, 2022.

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

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

Each Warrant is exercisable at a strike price of $ 36.47 per share of common stock and will expire on the fifth anniversary of the issue date of such Warrant.

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

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

The Warrants do not have voting rights.

In addition to obtaining financing under the CARES Act and accessing the capital markets, the Company believes it has made significant progress on bolstering its liquidity through efforts including aggressively evaluating all capital spending, discretionary spending, and non-essential costs for near-term cost reductions or deferrals;

reducing the Company's published flight schedule;

placing a significant number of aircraft in storage;

implementing voluntary separation and time-off programs for Employees;

substantially suspending all hiring;

reducing the Chief Executive Officer's salary by 20 percent;

reducing the other named executive officer salaries and Board of Director cash

retainer fees by 20 percent through December 31, 2020;

and modifying vendor and supplier payment terms.

The Company will continue evaluating the need for further flight schedule adjustments.

On December 27, 2020, President Trump signed into law the Consolidated Appropriations Act, 2021 (the "Payroll Support Program Extension").

Among other items, this Payroll Support Program Extension will provide up to an additional $ 15 billion in support to U.S.

airlines through payroll support grants as well as loans that will require repayment to the U.S.

During January 2021, the Company completed its application for such additional support, and finalized an agreement with the Treasury in which it will receive approximately $ 1.7 billion in funds that will be used to pay qualifying Employee wages and benefits through at least March 31, 2021.

The Company received an initial installment of $ 864 million in January 2021, and expects to receive the remainder of funds during first quarter 2021.

As consideration for the payroll support received in January 2021, the Company issued a promissory note in favor of the Treasury and entered into a warrant agreement with the Treasury, pursuant to which the Company agreed to issue warrants to purchase common stock of the Company to the Treasury.

The promissory note was issued for $ 229 million and warrants were valued at a total of $ 9 million to purchase up to an aggregate of 495 thousand shares of the Company's common stock, subject to adjustment pursuant to the terms of the warrants.

Once the second installment is received, the Company will issue the remaining $ 259 million promissory note and warrants to purchase up to an additional 560 thousand shares of the Company's common stock.

The funds received during 2021 can only be utilized to pay qualifying salaries, wages, and benefits, as defined.

Excluding the amounts allocated to the promissory note and value allocated to the Warrants, all funds received during 2021 are expected to be allocated to reduce eligible costs in the year ended December 31, 2021.

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

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

A total of over 4,200 Employees elected to participate in Voluntary Separation Program 2020, consisting of the following breakdown among workgroups:

1,060 from Ground Operations and Provisioning, 725 Flight Attendants, 630 Pilots, 390 from Customer Support and Services, 185 from Maintenance, 90 from other Contract groups, and 1,140 Managerial and Administrative Employees.

Voluntary Separation Program 2020 participants’ last day of work primarily fell between August 15, 2020 and September 30, 2020, as assigned by the Company based on the operational needs of particular work locations and departments, determined on an individual-by-individual basis.

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

Approximately 11,000 Employees participated in the Extended ETO program, and 10,421 employees remained on Extended ETO leave as of December 31, 2020.

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

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

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

In accordance with the accounting guidance in ASC Topic 712 (Compensation — Nonretirement Postemployment Benefits), the Company accrued charges related to the special termination benefits described above upon Employees accepting Voluntary Separation Program 2020 or Extended ETO offers, which will be reduced as program benefits are paid.

Costs incurred for Voluntary Separation Program 2020 and Extended ETO, which totaled $ 1.4 billion throughout 2020, are recorded as a component of Payroll support and voluntary Employee programs, net, in the accompanying Consolidated Statement of Comprehensive Income (Loss).

Within that line item, these charges are netted against the

allocation of the remainder of the Payroll Support Program funds utilized to fund salaries, wages, and benefits, which totaled $ 2.3 billion throughout 2020.

The Company accrued expenses totaling $ 620 million for its Extended ETO program throughout 2020, consisting of future wages and benefits for the Employees that will not be working.

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

Therefore, future adjustments to the amounts accrued as of December 31, 2020, may become necessary at a later date.

For both the Voluntary Support Program 2020 and Extended ETO programs combined, approximately $ 454 million of the liability balances were relieved during 2020 (primarily through payments to Employees), leaving a balance of $ 914 million as of December 31, 2020.

The speed with which the effects of the COVID-19 pandemic changed the U.S.

economic landscape, outlook, and in particular the travel industry, was swift and unexpected.

The Company saw a negative impact on bookings for future travel throughout 2020.

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

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

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

In fourth quarter 2021, the Company experienced increased leisure travel bookings due to holiday demand, despite the surge in COVID-19 cases associated with the Omicron variant.

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

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

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

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

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

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

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

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

Upon each subsequent disbursement of Payroll Support under each of the three Payroll Support programs, (i) the principal amount of the applicable promissory

Notes to Consolidated Financial Statements

note was increased and (ii) the Company issued additional warrants to Treasury.

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

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

PSP1 Payroll Support Program

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

May 29, 2020 448 196 8 652 536

June 30, 2020 448 196 9 652 536

July 30, 2020 225 97 3 326 268

September 30, 2020 64 28 2 94 78

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

PSP2 Payroll Support Program

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

March 5, 2021 591 259 14 864 560

April 23, 2021 177 78 4 259 168

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

PSP3 Payroll Support Program

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

June 3, 2021 640 278 9 926 475

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

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

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

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

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

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

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

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

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

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

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

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

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

Each warrant issued pursuant to the PSP3 Payroll Support

Notes to Consolidated Financial Statements

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

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

and limits on executive compensation until April 1, 2023.

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

As of December 31, 2021, all grant portions of the Payroll Support programs received had been allocated and classified as a contra-expense line item in the Consolidated Statement of Income (Loss).

Although there is no directly applicable U.S.

GAAP guidance related to such government assistance received, the Company analogized its facts and circumstances, and has utilized the accounting principles within International Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance, with respect to the Payroll Support funds received.

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

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

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

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

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

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

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

Approximately 12,000 Employees participated in the Extended ETO program in 2020 and 2021 combined.

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

The Company expects all remaining Employees on Extended ETO to be recalled in first quarter 2022.

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

Approximately 360 Employees elected this conversion option during 2021.

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

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

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

For both the Voluntary Separation Program and Extended ETO programs combined, approximately $ 446 million of the liability balances were relieved during 2021 through payments to Employees, leaving a balance of $ 328 million as of December 31, 2021.

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

Therefore, a portion of the accruals previously recorded were reversed, resulting in a net $ 140 million credit to expense during 2021.

Both the initial charge and the partial reversal were classified within Payroll support and voluntary Employee programs, net, in the accompanying Consolidated Statement of Income (Loss), and are in addition to the allocation of the PSP2 Payroll Support Program and PSP3 Payroll Support Program funds utilized to fund salaries, wages, and benefits, which totaled $ 2.7 billion for the year ended December 31, 2021.

Notes to Consolidated Financial Statements

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

In addition, during fourth quarter 2020, the Company made the decision to permanently retire 20 of its older 737-700 aircraft, given the expected return to service of the Company's Boeing MAX 737 aircraft on March 11, 2021.

The early retirement of these 20 737-700s resulted in an impairment charge of $ 32 million in 2020, which is classified within Other operating expenses in the Consolidated Statement of Income (Loss).

As of December 31, 2020, 92 aircraft remained in temporary storage.

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

As a result of the events and impacts surrounding the COVID-19 pandemic, including the Company's net loss incurred during the year ended December 31, 2020, and the significant number of aircraft that have been placed in storage, the Company considered whether these conditions indicated that it was more likely than not that the Company’s $ 970 million in Goodwill and its $ 295 million in indefinite-lived intangible assets were impaired.

As a 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, See Note 1 for further information.

In addition, the Company has assessed whether any impairment of its amortizable assets existed, and has determined that no charges were deemed necessary under applicable accounting standards as of December 31, 2020.

The Company’s assumptions about future conditions important to its assessment of potential impairment of its amortizable assets, indefinite-lived intangible assets, and Goodwill, including the impacts of the COVID-19 pandemic and other ongoing impacts to its business, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.

As of December 31, 2021, six aircraft remained in storage, and given the expectation that this storage was temporary in nature, the Company has continued to record depreciation expense associated with them.

NEW ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES

On August 5, 2020, the Financial Accounting Standards Board (the "FASB") issued ASU No.

On November 17, 2021, the Financial Accounting Standards Board (the "FASB") issued ASU 2021-10, Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance.

The new standard increases transparency of government assistance by focusing on the types of assistance given, an entity's accounting for the assistance, and the effect of the assistance on the entity's financial statements to allow for more comparable information for investors and other financial statement users.

This standard is effective for all entities under the scope for financial statements issued for annual periods beginning after December 15, 2021, but early adoption is permitted.

The Company adopted the standard early as of December 31, 2021.

See Note 2 for further information on the Company's treatment of government assistance received.

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

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

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

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

Under this standard, issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard.

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

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

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

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

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

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

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

This standard was effective immediately and may be applied (i) on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or (ii) on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued.

The Company had no material LIBOR-related contract modifications during the year ended December 31, 2021.

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

2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

This new standard reduces the number of accounting models for convertible debt instruments and convertible preferred stock, enhances information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance, and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions.

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

Companies may elect early adoption for periods beginning after December 15, 2020.

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

The Company is evaluating this new standard and plans to provide additional information about its expected impact on the Company's financial statements and disclosures at a future date.

On December 18, 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

This new standard eliminates certain exceptions in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences.

It also clarifies and simplifies other aspects of the accounting for income taxes.

This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted in any interim period within that year.

The Company elected to early adopt this standard as of January 1, 2020.

The most significant impact to the Company is the removal of a limit on the tax benefit recognized on pre-tax losses in interim periods.

However, the early adoption as of January 1, 2020, did not have an impact on the Company's financial statements or disclosures for 2020.

On August 29, 2018, the FASB issued ASU No.

2018-15, Intangibles—Goodwill and Other—Internal-Use Software.

This standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40, Accounting for Internal-Use Software, to determine which implementation costs to (i) capitalize as assets and amortize over the term of the hosting arrangement or (ii) expense as incurred.

This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and the standard was adopted and applied prospectively by the Company as of January 1, 2020, but it did not have a significant impact on the Company's financial statements and disclosures.

On August 28, 2018, the FASB issued ASU No.

2018-13, Fair Value Measurement.

This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years.

This standard requires changes to the disclosure requirements for fair value measurements for certain Level 3 items, and specifies that some of the changes must be applied prospectively, while others should be applied retrospectively.

The Company adopted the standard as of January 1, 2020, but it did not have a significant impact on the Company's financial statements or disclosures.

See Note 12 for further information on the Company's fair value measurements.

On January 26, 2017, the FASB issued ASU No.

2017-04, Simplifying the Test for Goodwill Impairment.

The new standard eliminates Step 2 from the goodwill impairment test.

An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value.

On June 16, 2016, the FASB issued ASU No.

2016-13, Measurement of Credit Losses on Financial Instruments.

The new standard requires the use of an “expected loss” model on certain types of financial instruments.

The standard also amends the impairment model for available-for-sale debt securities and requires estimated credit losses to be recorded as allowances instead of reductions to amortized cost of the securities.

On February 25, 2016, the FASB issued the New Lease Standard.

The New Lease Standard requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases (with the exception of short-term leases, as defined in the New Lease Standard) at the lease commencement date and recognize expenses on the income statement in a similar manner to the legacy guidance in ASC 840, Leases ("ASC 840").

The Company adopted the provisions of the New Lease Standard effective January 1, 2019, using the modified retrospective adoption method, utilizing the simplified transition option available in the New Lease Standard, which allows entities to continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year of adoption.

The Company elected the package of practical expedients available under the transition provisions of the New Lease Standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) not reassessing lease classification, and (iii) not revaluing initial direct costs for existing leases.

In addition, the New Lease Standard eliminated the previous build-to-suit lease accounting guidance and resulted in derecognition of build-to-suit assets and liabilities that remained on the balance sheet after the end of the construction period, including the related deferred taxes.

However, given the Company's guarantee associated with the bonds issued to fund the Dallas Love Field Modernization Program (the "LFMP"), the remaining debt service amount as of the adoption date was considered a minimum rental payment under the New Lease Standard, and therefore was recorded as a lease liability with a corresponding right-of-use asset on the Consolidated Balance Sheet that will be reduced through debt service payments made in 2019 and beyond.

See Note 8 for disclosures related to the New Lease Standard, and Note 5 for further information on the Company’s build-to-suit projects.

This new standard reduces the number of accounting models for convertible debt instruments and convertible preferred stock, makes targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance, and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions.

This standard is effective for fiscal years beginning after December 15, 2021 and the Company will adopt this standard as of January 1, 2022, utilizing the modified retrospective method.

Under the modified approach, the Company will apply the guidance to all financial instruments that are outstanding as of the

Notes to Consolidated Financial Statements

beginning of the year of adoption with the cumulative effect recognized as an adjustment to the opening balance of retained earnings.

Upon adoption, the Company will reclassify the remaining equity component, estimated at $ 300 million, from Additional paid-in capital to Long-term debt associated with its convertible notes, and no longer record amortization of the debt discount to Interest expense.

The cumulative effect from amortization of the debt discount that has been recorded to Interest expense, offset by reductions to Capital in excess of par value related to the requisition of the equity component through repurchases, will result in an estimated $ 56 million adjustment to the opening balance of retained earnings upon adoption.

The computation of diluted net income (loss) per share will be affected in the numerator as the Company will no longer record the debt discount amortization in Interest expense and may have to add back Interest expense to the numerator.

The denominator could also be affected as the Company will be required to use the if-converted method to calculate diluted shares, which assumes all shares to have been converted at the beginning of the period.

NET INCOME (LOSS) PER SHARE

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

An immaterial number of shares related to the Company's restricted stock units, stock warrants, and convertible notes were excluded from the denominator for fiscal year ended December 31, 2020, because inclusion of such shares would be antidilutive.

An immaterial number of shares related to the Company's restricted stock units, stock warrants, and convertible notes were excluded from the denominator for the fiscal year ended December 31, 2020, because inclusion of such shares would be antidilutive.

Year ended December 31,

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Weighted-average shares outstanding, basic 592 565 538

Dilutive effects of convertible notes (a) 15 — —

Dilutive effects of stock warrants 1 — —

Dilutive effect of restricted stock units 1 — 1

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Diluted $ 1.61 $ ( 5.44 ) $ 4.27

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

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

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

See Note 7 for further information on the convertible notes.

COMMITMENTS AND CONTINGENCIES

The Company has contractual obligations and commitments primarily with regard to future purchases of aircraft, repayment of debt (see Note 7), and lease arrangements (see Note 8).

During the year ended December 31, 2020, the Company leased seven new Boeing 737 MAX 8 aircraft.

The Company expects to lease an additional nine new 737 MAX 8 aircraft in 2021.

The Company has firm orders in place with Boeing for 219 737 MAX 8 aircraft and 30 737 MAX 7 aircraft, as well as options for 115 737 MAX 8 aircraft as of December 31, 2020.

The Company's 34 Boeing 737 MAX 8 aircraft were previously grounded on March 13, 2019, upon the FAA emergency order for all U.S.

airlines to ground all MAX aircraft.

On November 18, 2020, the FAA rescinded the emergency order and issued official requirements to enable airlines to return the 737 MAX to service.

See Note 17 for further information.

All MAX deliveries that should have occurred in 2019 and 2020 based on the Company's existing commitment contract with Boeing have been assumed to shift into future periods.

However, the Company reached an agreement with The Boeing Company (the "Boeing Agreement") in December 2020, for the Company to begin to take delivery of the delayed MAX aircraft, with the expectation that the Company will take delivery of 35 MAX 8 aircraft, including the 16 leased aircraft discussed above, through the end of 2021, and that the parties expect to formally revise the existing purchase agreement in 2021 for future deliveries.

Based on the Company's current contract with Boeing (prior to the recent Boeing Agreement), capital commitments associated with its firm orders are as follows:

$ 1.7 billion in 2021, $ 1.2 billion in 2022, $ 1.6 billion in 2023, $ 1.9 billion in 2024, and $ 1.5 billion in 2025.

In addition, the capital commitments associated with the contractual MAX deliveries that did not take place in 2019 and 2020, which are assumed to shift to future periods, total $ 2.1 billion ($ 743 million from 2019 and $ 1.3 billion from 2020).

However, based on the Boeing Agreement, the Company is expected to take no more than 19 purchased MAX aircraft through December 31, 2021.

The Boeing Agreement also stipulated a confidential settlement for estimated financial damages incurred by the Company in 2020 as a result of the MAX grounding, in the form of credits that can be taken against future payments due to Boeing.

With respect to the 19 expected purchased MAX deliveries, considering contractual progress payments that have been made to Boeing and expected credits from Boeing, the Company expects its actual aircraft capital expenditures during 2021 to be immaterial.

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

During the year ended December 31, 2021, the Company leased nine new Boeing 737 MAX 8 ("-8") aircraft.

The Company had firm orders in place with Boeing

Notes to Consolidated Financial Statements

for 130 -8 aircraft and 264 737 MAX 7 ("-7") aircraft, as well as options for 238 -8 aircraft, as of December 31, 2021.

See Note 17 for further information on the Company's MAX aircraft.

Based on the Company's existing agreement with Boeing, capital commitments associated with its firm orders as of December 31, 2021, were:

$ 1.8 billion in 2022, $ 1.6 billion in 2023, $ 1.1 billion in 2024, $ 837 million in 2025, $ 961 million in 2026, and $ 6.9 billion thereafter.

In addition, subsequent to December 31, 2021, and through February 3, 2022, the Company has exercised 12 -8 options for delivery in 2022 and 12 -7 options for delivery in 2023, resulting in additional capital commitments associated with firm orders of $ 474 million and $ 254 million in 2022 and 2023, respectively.

Los Angeles International Airport

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

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

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

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

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

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

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

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

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

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

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

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

Construction costs recorded in ACFO for the Terminal 1.5 Project, which exclude costs associated with assets that were previously completed and placed into service, were $ 309 million and $ 164 million, as of December 31, 2020, and December 31, 2019, respectively.

The project final cost was approximately $ 410 million.

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

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

Dallas Love Field

During 2008, the City of Dallas approved the LFMP, a project to reconstruct Dallas Love Field with modern, convenient air travel facilities.

During 2008, the City of Dallas approved the Love Field Modernization Project ("LFMP"), a project to reconstruct Dallas Love Field with modern, convenient air travel facilities.

Pursuant to a Program Development Agreement with the City of Dallas and the Love Field Airport Modernization Corporation (or the "LFAMC," a Texas non-profit "local government corporation" established by the City of Dallas to act on the City of Dallas' behalf to facilitate the development of the LFMP), the Company managed this project.

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

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

As of December 31, 2020, $ 399 million of principal remained outstanding.

The net present value of the future principal and interest payments associated with the bonds were $ 433

million and $ 444 million as of December 31, 2020 and December 31, 2019, respectively, and was reflected as part of the Company's operating lease right-of-use assets and lease obligations in the Consolidated Balance Sheet.

The Company guaranteed principal and interest payments on bonds issued by LFAMC (the "Series 2010" bonds and the "Series 2012" bonds).

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

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

The source of the funds used to pay the principal and interest on the Series 2010 bonds was proceeds from the sale of LFAMC General Airport Revenue Bonds, Series 2021, which also occurred on the Redemption Date.

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

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

This remeasurement resulted in a reduction of the Company's right-of-use asset and lease liability in the amount of $ 343 million, which has been reflected in the Consolidated Balance Sheet as of December 31, 2021.

As of December 31, 2021, $ 79 million of principal remained outstanding associated with the Series 2012 bonds.

The net present values of the future principal and interest payments associated with the bonds were $ 89 million and

Notes to Consolidated Financial Statements

$ 433 million as of December 31, 2021 and 2020, respectively, and were reflected as part of the Company's operating lease right–of–use assets and lease obligations in the Consolidated Balance Sheet.

Contingencies

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Total passenger revenues $ 14,066 $ 7,665 $ 20,776

Passenger non-loyalty includes all revenues recognized from Passengers related to flights paid for primarily with cash or credit card.

Passenger non-loyalty includes all revenues recognized from Passengers for flights purchased primarily with cash or credit card.

All Customers purchasing a ticket on Southwest Airlines are generally able to check up to two bags at no extra charge (with certain exceptions as stated in the Company's published Contract of Carriage), and the Company also does not charge a fee for a Customer to make a change to their flight after initial purchase, although fare differences may apply.

Passenger loyalty - air transportation primarily consists of the revenue recognized associated with award flights taken by loyalty program members upon redemption of loyalty points.

Passenger ancillary sold separately includes any revenue recognized associated with ancillary fees charged separately, such as in-flight purchases, EarlyBird Check-In ® , and Upgraded Boarding.

Passenger loyalty - air transportation primarily consists of the revenue associated with award flights taken by loyalty program members upon redemption of loyalty points.

Passenger ancillary sold separately includes any revenue associated with ancillary fees charged separately, such as in-flight purchases, EarlyBird Check-In ® , and Upgraded Boarding.

In order to determine the value of each loyalty point, certain assumptions must be made at the time of measurement, which include the following:

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The value can differ, however, based on demand, the amount of time prior to the

Notes to Consolidated Financial Statements

flight, and other factors.

The fare mix during the period measured represents a constraint, which could result in the assumptions above changing at the measurement date, as fare classes can have different coefficients used to determine the total loyalty points needed to purchase an award ticket.

The mixture of these fare classes and changes in the coefficients used by the Company could cause the fair value per point to increase or decrease.

The Company utilizes historical behavioral data to develop a predictive statistical model to analyze the amount of spoilage expected for points sold to business partners and earned through flight.

The Company continues to evaluate expected spoilage annually and applies appropriate adjustments in the fourth quarter of each year, or other times, if changes in Customer behavior are detected.

Changes to spoilage estimates impact revenue recognition prospectively.

The mix of fare classes during the period measured represents a constraint, which could result in the assumptions above changing at the measurement date, as fare classes can have different coefficients used to determine the total loyalty points needed to purchase an award ticket.

The mixture of these fare classes and changes in the coefficients used by the Company could cause the fair value per point to fluctuate.

The Company utilizes historical behavioral data to develop a predictive statistical model to analyze the amount of breakage expected for points sold to business partners and earned through flight.

The Company continues to evaluate expected breakage annually and applies appropriate adjustments in the fourth quarter of each year, or other times, if significant changes in Customer behavior are detected.

Changes to breakage estimates impact revenue recognition prospectively.

Due to the size of the Company’s liability for loyalty benefits, changes in Customer behavior and/or expected future redemption patterns could result in significant variations in Passenger revenue.

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

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

In fourth quarter 2021, Chase and the Company executed a multi-year extension of the Agreement, extending the decades-long relationship between the parties.

The Company estimated the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to each of the two performance obligations identified in the Agreement, which have been characterized as a transportation component and a marketing component.

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These performance obligations are satisfied each month that the Agreement is active.

As of the years ended December 31, 2020 and 2019, the components of Air traffic liability, including contract liabilities based on tickets sold, unused funds available to the Customer, and loyalty points available for redemption, net of expected spoilage, within the Consolidated Balance Sheet were as follows:

As of the years ended December 31, 2021 and 2020, the components of Air traffic liability, including contract liabilities based on tickets sold and unused flight credits available to the Customer, both of which are net of recorded breakage, and loyalty points available for redemption, within the Consolidated Balance Sheet were as follows:

Notes to Consolidated Financial Statements

Balance as of

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Total Air traffic liability $ 7,725 $ 7,133

The balance in Air traffic liability - passenger travel and ancillary passenger services also includes unused funds that are available for use by Customers and are not currently associated with a ticket, but represent funds effectively refunded and made available for use to purchase a ticket for a flight that occurs prior to their expiration.

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

The balance in Air traffic liability - passenger travel and ancillary passenger services also includes unused funds that are available for use by Customers and are not currently associated with a ticket, although they remain reusable, for a period of time, in the form of a flight credit that can be applied towards the purchase of future travel.

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

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

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Balance at December 31, 2020 $ 7,133

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

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

See Note 2 for further information.

As a result, the amount of Customer travel funds held by the Company, net of spoilage, that can be redeemed for future travel as of December 31, 2020, far exceeds previous periods and represents approximately 28 percent of the total Air traffic liability balance at December 31, 2020, as compared to approximately 2 percent of the total Air traffic liability balance at December 31, 2019.

As a result, the amount of Customer travel funds held in Air traffic liability that are estimated to be redeemed for future travel as of December 31, 2021, remains much higher than historical levels.

The amount of such Customer funds represents approximately 16 percent and 28 percent of the total Air traffic liability balance, net of breakage, at December 31, 2021, and December 31, 2020, respectively, compared to approximately 2 percent of the Air traffic liability balance as of December 31, 2019.

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

For all Customer travel funds created or 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.

At December 31 2020, $ 2.1 billion of Customer travel funds

remain in Air traffic liability with a September 7, 2022 expiration date.

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

As a result, recognition of these travel funds as flown revenue, refunds, or spoilage revenue will likely be more volatile from period to period compared to past periods.

Further, as presented in the above tables, 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.

Further, as presented in the above tables, the Company provided a benefit to Rapid Reward members to allow qualified travel funds to be converted to Rapid Rewards points through December 15, 2020.

For all Customer travel funds created or that would have otherwise expired

Notes to Consolidated Financial Statements

between March 1 and September 7, 2020 associated with flight cancellations, the Company extended the expiration date to September 7, 2022.

At December 31 2021, $ 1.3 billion of extended Customer travel funds remain in Air traffic liability with a September 7, 2022 expiration date, although the Company has estimated that a portion of those will not be redeemed.

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

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

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

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

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

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

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

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

All performance obligations related to freight services sold are completed within twelve months or less;

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The Company records a liability upon collection from the Customer and relieves the liability when payments are remitted to the applicable governmental agency.

Notes to Consolidated Financial Statements

FINANCING ACTIVITIES

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

737 Aircraft Notes payable through April 2020 $ — $ 20

Term Loan Agreement payable through May 2020 - 5.223 %

2.65 % Notes due November 2020

2.75 % Notes due 2022

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2.625 % Notes due 2030

1.000 % Payroll Support Program Loan due 2030 (See Note 2)

1.000 % Payroll Support Program Loan due April 2030 (See Note 2)

1.000 % Payroll Support Program Loan due January 2031 (See Note 2)

1.000 % Payroll Support Program Loan due April 2031 (See Note 2)

Finance leases 459 542

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$ 10,274 $ 10,111

AirTran Holdings was party to aircraft purchase financing facilities.

Each note was secured by a first mortgage on the aircraft to which it related.

The notes bore interest at a floating rate per annum equal to a margin plus the three or six-month LIBOR in effect at the commencement of each semi-annual or three-month period, as applicable.

Principal and interest under the notes were payable semi-annually or every three months as applicable.

The three remaining notes matured in 2020 (February and April) and were redeemed in full utilizing available cash on hand.

As discussed further in Note 11, a portion of the above floating-rate debt had been effectively converted to a fixed rate via interest rate swap agreements which expired as the underlying notes matured.

In third quarter 2020, the Company entered into agreements with a financing institution to borrow $ 125 million ($ 121 million, net of fees) secured by four Boeing 737-800 aircraft.

These borrowings, which were recorded as a financing transaction in the Company's Consolidated Statement of Cash Flows, and as debt in the accompanying Consolidated Balance Sheet, bear interest at a rate equal to the 3 month LIBOR plus 1.4 percent, payable in quarterly installments through September 29, 2025.

During 2020, the Company entered into agreements with a financing institution to borrow $ 125 million ($ 121 million, net of fees) secured by four Boeing 737-800 aircraft.

These borrowings, which were recorded as a financing transaction in the Company's Consolidated Statement of Cash Flows, and as debt in the accompanying Consolidated Balance Sheet, bore interest at a rate equal to the 3 month LIBOR plus 1.4 percent, and were payable in quarterly installments through September 29, 2025.

The Company prepaid the loans in full on December 29, 2021, utilizing available cash on hand.

During 2020, the Company issued $ 2.0 billion of unsecured notes due 2027, of which $ 1.3 billion was issued June 8, 2020 (the “$ 1.3 billion 2027 Notes”) and $ 700 million was issued July 31, 2020 (the “$ 700 million 2027 Notes”).

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The $ 700 million 2027 Notes were issued at a premium and this premium has been included within Capitalized financing items in the Consolidated Statement of Cash Flows.

A portion of the proceeds from the $ 1.3 billion 2027 Notes were used to repay a portion of the outstanding Amended and Restated 364-Day Credit Agreement balance.

A portion of the proceeds from the $ 1.3 billion 2027 Notes was used to repay a portion of the outstanding Amended and Restated 364 -Day Credit Agreement balance.

See below for more information regarding the Amended and Restated 364 -Day Credit Agreement.

In second quarter 2020, the Company, through special purpose entities, entered into agreements with a financing institution and trusts to borrow $ 197 million ($ 190 million, net of fees) secured by six Boeing 737-800 aircraft.

These borrowings, which were recorded as a financing transaction in the Company's Consolidated Statement of Cash Flows, and as debt in the accompanying unaudited Condensed Consolidated Balance Sheet, bear interest at a rate equal to the 3 month LIBOR plus 1.4 percent, payable in quarterly installments through June 30, 2028.

The special purpose entities were determined to be variable interest entities for which the Company is the primary beneficiary, and therefore were consolidated in the accompanying Consolidated Financial Statements.

During 2020, the Company, through special purpose entities, entered into agreements with a financing institution and trusts to borrow $ 197 million ($ 190 million, net of fees) secured by six Boeing 737-800 aircraft.

These borrowings, which were recorded as a financing transaction in the Company's Consolidated Statement of Cash Flows, and as debt in the accompanying Consolidated Balance Sheet, bore interest at a rate equal to the 3 month LIBOR plus 1.4 percent.

The special purpose entities were determined to be variable interest entities for which the Company was the primary beneficiary, and therefore were consolidated in the accompanying Consolidated Financial Statements as of December 31, 2020.

The Company prepaid the loans in full on December 31, 2021, utilizing available cash on hand.

Notes to Consolidated Financial Statements

During 2020, the Company issued $ 1.55 billion of unsecured notes due 2025, of which $ 1.25 billion was issued May 4, 2020 (the “$ 1.25 billion 2025 Notes”) and $ 300 million was issued July 31, 2020 (the “$ 300 million 2025 Notes”).

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The proceeds from the $ 750 million 2023 Notes and a portion of the proceeds of the $ 500 million 2023 Notes were used to repay a portion of the outstanding Amended and Restated 364 -Day Credit Agreement balance.

On May 1, 2020, the Company completed the public offering of $ 2.3 billion aggregate principal amount of 1.250 % Convertible Senior Notes due 2025 (the “Convertible Notes”), which included the full exercise of the underwriters' option to buy an additional $ 300 million aggregate principal amount of Convertible Notes.

The Convertible Notes bear interest at the rate of 1.25 % per year and will mature on May 1, 2025.

Interest on the notes is payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020.

Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2025, only under the following circumstances:

(1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 percent of the conversion price on each applicable trading day;

(2) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98 percent of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

or (3) upon the occurrence of specified corporate events as defined.

On or after February 1, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances.

As of December 31, 2020, conditions had not been met to convert.

On May 1, 2020, the Company completed the public offering of $ 2.3 billion aggregate principal amount of 1.250 % Convertible Senior Notes due 2025 (the “Convertible Notes”).

The Convertible Notes bear interest at a rate of 1.25 % and will mature on May 1, 2025.

Interest on the notes is payable semi-annually in arrears on May 1 and November 1, beginning November 1, 2020.

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

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

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

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

The conversion rate will be subject to adjustment in some events, but will not be adjusted for any accrued and unpaid interest.

In addition, in the event of certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event in certain circumstances.

In the event of a “Fundamental Change,” as defined, the holders may require the Company to purchase for cash all or a portion of their notes at a purchase price equal to 100

percent of the principal amount of the notes, plus accrued and unpaid interest, if any.

The Company may not redeem the notes at its option prior to the maturity date.

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

The liability component was determined by estimating the fair value of a hypothetical issuance of an identical offering excluding the conversion feature of the Convertible Notes, which has been estimated at $ 1.9 billion, and is reflected as a component of Long-term debt in the Consolidated Balance Sheet.

The effective interest rate of this liability was 5.2 percent.

The equity component was calculated as the difference between the liability component and the face amount of the Convertible Notes, determined to be $ 403 million, and was classified within Additional paid in capital in the Consolidated Balance Sheet.

The Convertible Notes proceeds are also shown within the financing activities section in the Consolidated Statement of Cash Flows.

The amount of the equity component in the transaction also represents a discount on the liability portion of the Convertible Notes, and as such is being amortized as a non-cash component of interest expense over the 5-year term of the notes.

The costs incurred in the issuance, including underwriters' discount, totaling $ 62 million, are classified as a cash outflow within the financing activities section in the Consolidated Statement of Cash Flows, and is also being amortized to expense over the term of the notes.

Issuance costs attributable to the equity component of $ 11 million were netted with the equity component in the Consolidated Statement of Stockholders' Equity.

The amortization expense for debt discounts and debt issuance costs for 2020 was $ 48 million and $ 5 million, respectively.

The Company did not have convertible instruments during 2019 or 2018.

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

The Convertible Notes stipulated that holders of the notes may not elect to convert their Convertible Notes to shares of common stock until after June 30, 2020, and therefore there was no dilutive impact related to the notes prior to July 1, 2020.

As consideration for the Payroll Support funding, the Company agreed to issue Warrants to the Treasury to purchase the Company's common stock in connection with each disbursement of Payroll Support to the Company.

The Company accounts for the Warrants using the treasury stock method.

Using this method, the denominator will be affected when the average share price of the Company's common stock for a given period is greater than the warrant exercise price of $ 36.47 per share.

While the Company is reporting a net loss, all potential shares are considered antidilutive and have no impact on Net income (loss) per share.

On March 12, 2020, the Company entered into a new $ 1.0 billion 364-day term loan credit facility agreement (the “364-Day Credit Agreement”) with a syndicate of lenders identified in the 364-Day Credit Agreement.

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

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

During the year ended December 31, 2021, the Company repurchased $ 203 million in principal of the Convertible Notes for $ 293 million in cash.

The Company accounted for these repurchases as a partial debt extinguishment, which resulted in (i) a loss of $ 28 million reflected in Other (gains) losses, net, in the accompanying Consolidated Statement of Income (Loss) for the year ended December 31, 2021, (ii) a $ 30 million reduction in remaining unamortized debt discount and issuance costs, and (iii) a $ 92 million reduction to Capital in excess of par value related to the reacquisition of the equity component in the accompanying Consolidated Balance Sheet.

Additionally, an immaterial number of conversions were exercised and settled during 2021.

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

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

Carrying amount of equity component $ 311 $ 403

Liability component:

Principal amount $ 2,097 $ 2,300

Unamortized debt discount ( 255 ) ( 355 )

Net carrying amount $ 1,842 $ 1,945

The effective interest rate on the liability component was approximately 5.2 percent for the year ended December 31, 2021.

The Company recognized $ 110 million of interest expense associated with the Convertible Notes during the year ended December 31, 2021, including $ 73 million of non-cash amortization of the debt

Notes to Consolidated Financial Statements

discount, $ 9 million of non-cash amortization of debt issuance costs, and $ 28 million of contractual coupon interest.

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

Upon adoption of ASU 2020-06 as of January 1, 2022, the debt discount amortization will cease to be recorded to Interest expense.

See Note 3 for further information.

As of December 31, 2021, the if-converted value of the Convertible Notes exceeded the principal amount by $ 238 million, using the closing stock price on December 31, 2021.

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

On March 12, 2020, the Company entered into a $ 1.0 billion 364 -day term loan credit facility agreement (the “ 364 -Day Credit Agreement”) with a syndicate of lenders identified in the 364 -Day Credit Agreement.

The 364 -Day Credit Agreement was drawn in full on the closing date.

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The Amended and Restated 364 -Day Credit Agreement was originally set to mature in full on March 29, 2021.

The outstanding Amended and Restated 364-Day Credit Agreement balance was repaid in full in second quarter 2020, and the agreement has been terminated.

Concurrently with entering into the Amended and Restated 364-Day Credit Agreement on March 30, 2020, the Company also amended its existing $ 1.0 billion revolving credit facility expiring in August 2022 (the “Amended and Restated Revolving Credit Agreement”) to (i) amend the pricing and fees, (ii) amend certain covenants and provisions, (iii) add certain covenants, and (iv) provide for the grant of a security interest in certain aircraft and

related assets.

The outstanding Amended and Restated 364 -Day Credit Agreement balance was repaid in full in second quarter 2020, and the agreement was terminated.

Concurrently with entering into the Amended and Restated 364 -Day Credit Agreement on March 30, 2020, the Company also amended its existing $ 1.0 billion revolving credit facility (the “Amended and Restated Revolving Credit Agreement”) to (i) amend the pricing and fees, (ii) amend certain covenants and provisions, (iii) add certain covenants, and (iv) provide for the grant of a security interest in certain aircraft and related assets.

In second quarter 2020, the Company repaid in full the $ 1.0 billion drawn on the Amended and Restated Revolving Credit Agreement.

On November 23, 2020, the Company amended the Amended and Restated Revolving Credit Agreement to (i) amend the pricing and fees, (ii) amend certain covenants and provisions, (iii) remove a financial covenant, and (iv) amend an exhibit for conforming changes to the compliance certificate (the "Amendment," and the Amended and Restated Revolving Credit Agreement as amended by the Amendment, the "Amended A&R Credit Agreement").

The amount of the loan commitments, the tenor, and the collateral under the Amended and Restated Revolving Credit Agreement remain unchanged by the Amendment.

On July 28, 2021, the Company amended the Amended and Restated Revolving Credit Agreement, as amended by the Second Amendment, to (i) extend the maturity to August 3, 2023;

(ii) add a covenant to prohibit the Company from purchasing any equity security of the Company listed on a national securities exchange and payment of dividends or other capital distributions with respect to the common stock of the Company during the period from July 28, 2021, through September 30, 2022;

(iii) update certain provisions regarding a successor interest rate to LIBOR and certain other market changes;

and (iv) amend certain other covenants and provisions (the “Third Amendment,” and the Amended and Restated Revolving Credit Agreement as amended by the Second Amendment and the Third Amendment, the "Amended A&R Credit Agreement").

The amount of the loan commitments and the collateral under the Amended and Restated Revolving Credit Agreement remain unchanged by the Second Amendment and the Third Amendment.

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

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The underlying LIBOR rate is subject to a floor of 1 percent per annum and the “alternate base rate” is subject to a floor of 1 percent per annum.

Notes to Consolidated Financial Statements

The Amended A&R Credit Agreement contains customary representations and warranties, covenants, and events of default.

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The Company borrowed the full $ 215 million and secured this loan with the requisite seven aircraft mortgages.

The loan matures on October 31, 2026, and is repayable via semi-annual installments of principal that began on April 30, 2018.

The loan bears interest at the LIBO Rate (as defined in the term loan agreement) plus 1.10 percent, which equates to a current rate of 1.34 percent, and interest is payable semi-annually in installments.

During November 2015, the Company issued $ 500 million senior unsecured notes due 2020.

The notes bore interest at 2.65 percent, payable semi-annually in arrears on May 5 and November 5.

Concurrently, the Company entered into a fixed-to-floating interest rate swap to convert the interest on these unsecured notes to a floating rate until their maturity.

The notes were redeemed early in full on October 5, 2020, utilizing available cash on hand.

On May 6, 2008, the Company entered into a term loan agreement providing for loans to the Company aggregating up to $ 600 million, to be secured by first-lien mortgages on 21 of the Company’s 737-700 aircraft.

On May 9, 2008, the Company borrowed the full $ 600 million and secured these loans with the requisite 21 aircraft mortgages.

The loans matured and were fully repaid on May 9, 2020.

The loans bore interest at the LIBO Rate (as defined in the term loan agreement) plus 0.95 percent.

Pursuant to the terms of the term loan agreement, the Company entered into an interest rate swap agreement to convert the variable rate on the term loan to a fixed 5.223 percent until maturity.

The loan was set to mature on October 31, 2026, and was repayable via semi-annual installments of principal that began on April 30, 2018.

The loan bore interest at the LIBO Rate (as defined in the term loan agreement) plus 1.10 percent, and interest was payable semi-annually in installments.

The Company prepaid the loan in full on November 1, 2021, utilizing available cash on hand.

On October 3, 2007, grantor trusts established by the Company issued $ 500 million Pass Through Certificates consisting of $ 412 million 6.15 percent Series A certificates and $ 88 million 6.65 percent Series B certificates.

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The debentures may be redeemed, at the option of the Company, in whole at any time or in part from time to time, at a redemption price equal to the greater of the principal amount of the debentures plus accrued interest at the date of redemption or the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the date of redemption at the comparable treasury rate plus 20 basis points, plus accrued interest at the date of redemption.

Notes to Consolidated Financial Statements

The Company is required to provide standby letters of credit to support certain obligations that arise in the ordinary course of business.

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The net book value of the assets pledged as collateral for the Company’s secured borrowings, primarily aircraft, was $ 2.2 billion at December 31, 2021.

Other Financings

During 2020, the Company entered into sale-leaseback arrangements and issued common stock.

See Notes 8 and 9, respectively, for further information.

As of December 31, 2020, aggregate annual principal maturities of debt and finance leases (not including amounts associated with interest on finance leases) for the five-year period ending December 31, 2025, and thereafter, were $ 220 million in 2021, $ 524 million in 2022, $ 1.4 billion in 2023, $ 152 million in 2024, $ 4.0 billion in 2025, and $ 4.4 billion thereafter.

As of December 31, 2021, aggregate annual principal maturities of debt and finance leases (not including amounts associated with interest on finance leases) for the five-year period ending December 31, 2026, and thereafter, were $ 453 million in 2022, $ 1.3 billion in 2023, $ 81 million in 2024, $ 3.7 billion in 2025, $ 350 million in 2026, and $ 5.1 billion thereafter.

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

The accounting for these leases follows the requirements of the New Lease Standard, which the Company adopted as of January 1, 2019.

See Note 3 for further information.

The accounting for these leases follows the requirements of ASC 842, Leases.

As of December 31, 2021, the Company held aircraft leases with remaining terms ranging from one month to 12 years.

The aircraft leases generally can be renewed for three months to six years at rates based on fair market value at the end of the lease term.

The aircraft leases generally can be renewed for three months to three years at rates based on the fair market value at the end of the lease term.

Residual value guarantees included in the Company's lease agreements are not material.

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Boeing 717-200 aircraft ("B717s") to Delta at agreed-upon lease rates.

Eight and 20 operating leases expired during 2019 and 2020, respectively.

Ten owned B717s were sold in 2019.

The proceeds from the sale, which were not material, were netted within Capital expenditures in the Consolidated Statement of Cash Flows.

Excluding the 20 aircraft for which operating leases expired during 2020, the following remained:

45 on operating leases and two on finance leases.

The sublease terms for the 45 B717s on operating lease and the two B717s on finance lease coincide with the Company's remaining lease terms for these aircraft from the original lessor, which have remaining lease terms ranging from approximately one month to four years .

The Company's future sublease income associated with the 45 B717s on operating lease as of December 31, 2020, was as follows:

$ 41 million in 2021, $ 17 million in 2022, $ 7 million in 2023, and $ 1 million in 2024.

The two B717s classified by the Company as finance leases are accounted for as direct financing leases, and the remaining 45 subleases are accounted for as operating leases.

The Company's future sublease income associated with the 14 remaining B717s on operating lease as of December 31, 2021, was as follows:

$ 17 million in 2022, $ 7 million in 2023, and $ 1 million in 2024.

There are no contingent payments and no significant residual value conditions associated with the transaction.

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All of the leases from the sale-leasebacks are accounted for as operating leases, and thus are now reflected as part of the Company’s Operating lease right-of-use assets and operating lease liabilities in the accompanying Consolidated Balance Sheet.

The 737-800 and 737 MAX 8 sale-leaseback transactions resulted in a recognized gain of $ 153 million and $ 69 million, respectively, reflected within Other operating expenses, net in the accompanying Consolidated Statement of Comprehensive Income (Loss).

For 2020, the 737-800 and 737 MAX 8 sale-leaseback transactions resulted in a recognized gain of $ 153 million and $ 69 million, respectively, reflected within Other operating expenses, net in the accompanying Consolidated Statement of Income (Loss).

At each airport where the Company conducts flight operations, the Company has lease agreements, generally with a governmental unit or authority, for the use of airport terminals, airfields, office space, cargo warehouses, gates, and/or maintenance facilities.

These leases are classified as operating lease agreements and have lease terms remaining ranging from one month to 39 years.

Certain leases can be renewed from 6 months to ten years .

Certain leases can be renewed from 1 year to ten years .

The majority of the airport terminal leases contain certain provisions for periodic adjustments to rates that depend upon airport operating costs or use of the facilities, and are reset at least annually.

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The Company also leases certain technology assets, fuel storage tanks, and various other equipment that qualify as leases under the applicable accounting guidance.

The remaining lease terms range from three months to six years .

Certain leases can be renewed from six months to five years .

The remaining lease terms range from three months to five years .

Certain leases can be renewed from six months to three years .

Notes to Consolidated Financial Statements

Lease-related assets and liabilities recorded on the Consolidated Balance Sheet were as follows:

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Operating Operating lease right-of-use assets (net) $ 1,590 $ 1,892

Finance Property and equipment (net of allowance for depreciation and amortization of $ 567 and $ 455 )

Finance Property and equipment (net of allowance for depreciation and amortization of $ 679 million and $ 567 million)

Total lease assets $ 2,146 $ 2,559

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Total lease liabilities $ 2,013 $ 2,410

The components of lease costs, included in the Consolidated Statement of Comprehensive Income (Loss), were as follows:

(in millions) Statement of Comprehensive Income (Loss) location Year ended December 31, 2020 Year ended December 31, 2019

The components of lease costs, included in the Consolidated Statement of Income (Loss), were as follows:

(in millions) Statement of Comprehensive Income (Loss) location Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019

Operating lease cost - aircraft (a) Other operating expenses $ 204 $ 216 $ 182

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Total net finance lease cost $ 131 $ 135 $ 142

(a) Net of sublease income of $78 million and $97 million for the years ended December 31, 2020 and 2019.

(a) Net of sublease income of $ 41 million, $ 78 million, and $ 97 million for the years ended December 31, 2021, 2020, and 2019.

Supplemental cash flow information related to leases, included in the Consolidated Statement of Cash Flows, was as follows:

Notes to Consolidated Financial Statements

( in millions )

Year ended December 31, 2020 Year ended December 31, 2019

Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019

Cash paid for amounts included in the measurement of lease liabilities:

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Finance leases 3.8 % 3.8 %

(a) Upon adoption of the New Lease Standard, the incremental borrowing rate used for existing leases was established as of January 1, 2019.

As of December 31, 2020, the Company had additional operating lease commitments that had not yet commenced of approximately $ 291 million for nine Boeing 737 MAX 8 aircraft contractually to be delivered in 2021, each with lease terms of nine years .

(a) Upon adoption of ASU No.

2016-02, Leases, codified in ASC 842, the incremental borrowing rate used for existing leases was established as of January 1, 2019.

The Company has one class of capital stock, its common stock.

On May 1, 2020, the Company completed the public offering of 80.5 million shares of $ 1.00 par value common stock of the Company, which included the full exercise of the underwriters’ option to purchase an additional 10.5 million shares of common stock, at a public offering price of $ 28.50 per share.

As discussed further in Note 2, in connection with funding that the Company has received under the CARES Act, the Company issued Warrants to acquire up to 2.7 million shares of the Company's common stock to the Treasury.

As discussed further in Note 2, in connection with funding that the Company has received under the PSP1 Payroll Support Program, PSP2 Payroll Support Program, and PSP3 Payroll Support Program, the Company issued Warrants to acquire up to 4.8 million shares of the Company's common stock to Treasury.

Holders of shares of common stock are entitled to receive dividends when and if declared by the Board of Directors and are entitled to one vote per share on all matters submitted to a vote of the Shareholders.

Pursuant to the Payroll Support Program under the CARES Act, as supplemented by the Payroll Support Program Extension, the Company is prohibited from paying dividends with respect to its common stock through March 31, 2022.

See Note 2 for further information on the CARES Act.

At December 31, 2020, the Company had 60 million shares of common stock reserved for issuance pursuant to Employee equity plans (of which 25 million shares had not been granted) through various share-based compensation arrangements.

In connection with the receipt of Payroll Support, the Company is prohibited from paying dividends with respect to its common stock through September 30, 2022.

See Note 2 for further information on the Payroll Support programs.

At December 31,

Notes to Consolidated Financial Statements

2021, the Company had 60 million shares of common stock reserved for issuance pursuant to Employee equity plans (of which 22 million shares had not been granted) through various share-based compensation arrangements.

See Note 10 to the Consolidated Financial Statements for information regarding the Company's equity plans.

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Under the Company’s Amended and Restated 2007 Equity Incentive Plan ("2007 Equity Plan"), which has been approved by Shareholders, the Company granted restricted stock units ("RSUs") and performance-based restricted stock units ("PBRSUs") to certain Employees during 2021, 2020, and 2019.

Outstanding RSUs vest over three years , subject generally to the individual’s continued employment or service.

PBRSUs granted are subject to the Company’s performance with respect to a three-year simple average of Return on Invested Capital, after taxes and excluding special items, for the defined performance period and are also subject generally to the individual’s continued employment or service.

The number of PBRSUs vesting on the vesting date will be interpolated based on the Company's Return on Invested Capital performance and ranges from zero PBRSUs to 200 percent of granted PBRSUs.

The RSUs are scheduled to vest with respect to one-third of the shares covered thereby annually.

Other than in connection with death or disability, vesting is subject to the individual’s continued service as an Employee, Board member, or advisor through the vesting date.

However, with respect to the RSUs granted in 2021, provided that the individual's service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” any outstanding unvested RSUs will remain outstanding as if the individual’s service has not terminated and will continue to vest in accordance with the schedule set forth in the notice of the grant.

An individual's termination of service will be considered a "qualified retirement" if (a) the individual has completed at least 10 years of continuous service;

(b) the individual’s age plus completed years of continuous service equal at least 65 at the time of the individual’s termination of service;

and (c) the individual has not been terminated for cause.

With respect to PBRSUs granted in 2021, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's cumulative Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for the years 2022 and 2023 and ranges from 10 percent of granted PBRSUs to 300 percent of granted PBRSUs, only after a minimum performance level has been achieved.

However, in the event the Company's pre-tax return on invested capital exceeds the median (i.e., 50th percentile) return on invested capital of certain of the Company's peer group of domestic mainline carriers subject to the Securities and Exchange Commission's reporting requirements, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 50 percent.

With respect to PBRSUs granted in 2021, provided that the individual's service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” such individual’s PBRSUs will remain outstanding as if the individual’s service has not terminated and will otherwise be settleable in accordance with the notice of grant and applicable terms and conditions;

however, the number of shares received upon settlement will be prorated based on the individual’s number of days of service between the date of grant and the end of the performance period.

Under the 2019 and 2020 grants, PBRSUs granted are subject to the Company’s performance with respect to a three-year simple average of return on invested capital, after taxes and excluding special items, for the defined performance period and are also subject generally to the individual’s continued employment or service.

Under the 2019 and 2020 grants, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's return on invested capital performance and ranges from zero PBRSUs to 200 percent of granted

Notes to Consolidated Financial Statements

Forfeiture rates are estimated at the time of grant based on historical actuals for similar grants, and are trued-up to actuals over the vesting period.

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Common stock purchases are paid for through periodic payroll deductions.

Notes to Consolidated Financial Statements

The following table provides information about the Company’s ESPP activity during 2021, 2020, and 2019:

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Due to the treatment of RSUs for tax purposes, the Company’s effective tax rate from year to year is subject to variability.

Notes to Consolidated Financial Statements

FINANCIAL DERIVATIVE INSTRUMENTS

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The Company does not purchase or hold any financial derivative instruments for trading or speculative purposes.

a sold put option), call spreads (which include a purchased call option and a sold call option), put spreads (which include a purchased put option and a sold put option), and fixed price swap agreements in its portfolio.

The Company has used financial derivative instruments for both short-term and long-term timeframes, and primarily uses a mixture of purchased call options, collar structures (which include both a purchased call option and a sold put option), call spreads (which include a purchased call option and a sold call option), put spreads (which include a purchased put option and a sold put option), and fixed price swap agreements in its portfolio.

Although the use of collar structures and swap agreements can reduce the overall cost of hedging, these instruments carry more risk than purchased call options in that the Company could end up in a liability position when the collar structure or swap agreement settles.

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

For 2020, the Company had fuel derivative instruments in place for up to 77 percent of its fuel consumption.

As of December 31, 2020, the Company also had fuel derivative instruments in place to provide coverage at varying price levels.

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

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

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2023 769 WTI crude oil and Brent crude oil

2023 643 WTI crude oil and Brent crude oil

Beyond 2023 101 WTI crude oil

2024 358 WTI crude oil

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

Notes to Consolidated Financial Statements

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges.

All periodic changes in fair value of the derivatives designated as hedges are recorded in AOCI until the underlying jet fuel is consumed.

The Company's results are subject to the possibility that the derivatives will no longer qualify for hedge accounting, in which case any change in the fair value of derivative instruments since the last reporting period would be recorded in Other (gains) losses, net, in the Consolidated Statement of Income (Loss) in the period of the change;

Qualification is re-evaluated quarterly, and all periodic changes in fair value of the derivatives designated as hedges are recorded in AOCI until the underlying jet fuel is consumed.

If a derivative ceases to qualify for hedge accounting, any change in the fair value of derivative instruments since the last reporting period would be recorded in Other (gains) losses, net, in the Consolidated Statement of Income (Loss) in the period of the change;

however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense.

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Increased volatility in these commodity markets for an extended period of time, especially if such volatility were to worsen, could cause the Company to lose hedge accounting altogether for the commodities used in its fuel hedging program, which would create further volatility in the Company’s GAAP financial results.

However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the

Company the opportunity to stabilize jet fuel costs.

However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the Company the opportunity to stabilize jet fuel costs.

When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent changes in fair value of those positions are marked to market through earnings.

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

During 2020, as a result of the drastic drop in demand for air travel due to the COVID-19 pandemic, the Company's forecast for 2020 and 2021 fuel purchases and consumption was significantly reduced, causing the Company to be in an estimated "over-hedged" position for second, third, and fourth quarter 2020, and full year 2021.

Therefore, the Company de-designated a portion of its fuel hedges related to these periods, and has reclassified approximately $ 39 million in losses from AOCI into Other (gains) losses, net, during 2020.

The Company did not have any such situations occur during 2019 or 2018.

During 2020 and 2021, as a result of the drastic drop in demand for air travel due to the COVID-19 pandemic, the Company's forecast for 2020 and 2021 fuel purchases and consumption was significantly reduced, causing the Company to be in an estimated "over-hedged" position for second, third, and fourth quarter 2020, and full year 2021.

Therefore, the Company de-designated a portion of its fuel hedges related to these periods, and has reclassified approximately $ 39 million and $ 6 million in losses from AOCI into Other (gains) losses, net, during 2020 and 2021, respectively.

The Company did not have any such situations occur during 2019.

Accounting pronouncements pertaining to derivative instruments and hedging are complex with stringent requirements, including the documentation of a Company hedging strategy, statistical analysis to qualify a commodity for hedge accounting both on a historical and a prospective basis, and strict contemporaneous documentation that is required at the time each hedge is designated by the Company.

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

Notes to Consolidated Financial Statements

Asset derivatives Liability derivatives

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Fuel derivative contracts (gross) Other assets 287 121 — —

Interest rate derivative contracts Other assets — 2 — —

Interest rate derivative contracts Accrued liabilities — — — 5

Interest rate derivative contracts Other noncurrent liabilities — — 4 6

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Cash collateral deposits held from counterparties for fuel contracts - noncurrent Offset against Other assets 95 31

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

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

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

No cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

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

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

Notes to Consolidated Financial Statements

Offsetting of derivative assets

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Fuel derivative contracts Other assets $ 287 $ ( 95 ) $ 192 (a) $ 121 $ ( 31 ) $ 90 (a)

Interest rate derivative contracts Other assets $ — $ — $ — (a) $ 2 $ — $ 2 (a)

(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the Consolidated Balance Sheet in Note 16.

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Fuel derivative contracts Other assets $ 95 $ ( 95 ) $ — (a) $ 31 $ ( 31 ) $ — (a)

Interest rate derivative contracts Accrued liabilities $ — $ — $ — $ 5 $ — $ 5

Interest rate derivative contracts Other noncurrent liabilities $ 4 $ — $ 4 $ 6 $ — $ 6

(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the Consolidated Balance Sheet in Note 16.

The following tables present the impact of derivative instruments and their location within the Consolidated Statement of Income (Loss) for the year ended December 31, 2020 and 2019:

Notes to Consolidated Financial Statements

The following tables present the impact of derivative instruments and their location within the Consolidated Statement of Income (Loss) for the years ended December 31, 2021 and 2020:

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

Year ended December 31, 2021 Year ended December 31, 2020

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

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

Total $ 4 $ 6 $ 6 $ 70 $ 39 $ 6

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Derivatives designated and qualified in cash flow hedging relationships

Loss recognized in AOCI on derivatives, net of tax

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

(in millions) 2021 2020

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Derivatives not designated as hedges

Loss recognized in income on derivatives

December 31, Location of loss recognized in income on derivatives

(Gain) Loss recognized in income on derivatives

December 31, Location of (gain) loss recognized in income on derivatives

(in millions) 2021 2020

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

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

The following table presents the impact

Notes to Consolidated Financial Statements

of premiums paid for fuel derivative contracts and their location within the Consolidated Statement of Income (Loss) during the period the contract settles:

Premium expense recognized in income on derivatives

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

Included in the Company’s cumulative net unrealized losses from fuel hedges as of December 31, 2020, recorded in AOCI, were approximately $ 54 million in unrealized losses, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to December 31, 2020.

Included in the Company’s cumulative net unrealized gains from fuel hedges as of December 31, 2021, recorded in AOCI, were approximately $ 234 million in unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to December 31, 2021.

Interest Rate Swaps

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

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

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

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

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

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

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

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

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

As a result of the discontinued hedges, the Company had cumulative losses "frozen" in AOCI as of December 31, 2021, of $ 57 million, which will be recognized in earnings over the 9 -year lease terms of each aircraft.

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

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

The ineffectiveness associated with all of the Company’s interest rate swap agreements for all periods presented was not material.

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

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

The primary objective of these interest rate derivatives, which qualified as cash flow hedges, was to hedge the forecasted monthly rental payments.

These swap agreements provided for a single payment at maturity based upon the change in the 9-year swap rate between the execution date and the termination date.

All 12 swap agreements were terminated during third quarter 2019, resulting in $ 32 million being "frozen" in AOCI.

Three of these leased aircraft were received in December 2020 and the remainder are expected to be received during 2021.

The earnings impact of the interest rate swaps associated with the aircraft received in 2020 was not material.

During third quarter 2019, the Company entered into 12 separate forward-starting interest rate swap agreements, related to a series of 12 Boeing 737 MAX 8 aircraft leases.

The third quarter 2019 swaps contain similar terms as the third quarter 2019 terminated swaps discussed above, except that the related 737 MAX 8 deliveries were scheduled to occur between June 2020 and September 2020.

During the year ended December 31, 2020, all 12 of the aircraft leases became no longer probable to be received within the scheduled delivery range.

Therefore, the 12 associated swap agreements were de-designated and $ 31 million was "frozen" in AOCI.

Three of these aircraft leases were received in December 2020 and the remainder are expected to be received during 2021.

The earnings impact of the interest rate swaps associated with the aircraft received in 2020 was not material.

The mark-to-market changes for these swap agreements were recorded in earnings, resulting in a $ 28 million unrealized loss to Other (gains) and losses, net, in the Consolidated Statement of Comprehensive Income (Loss) for the year ended December 31, 2020.

In addition, the 12 swap agreements were terminated resulting in $ 59 million paid to the counterparty during 2020.

The fair values of the interest rate swap agreements, which are adjusted regularly, have been aggregated by counterparty for classification in the Consolidated Balance Sheet.

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Credit Risk and Collateral

Notes to Consolidated Financial Statements

Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company at the reporting date.

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

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

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

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

Counterparty (CP)

(in millions) A B C D E F Other (a) Total

(in millions) A B C D E F G Other (a) Total

Fair value of fuel derivatives $ 160 $ 90 $ 162 $ 78 $ 77 $ 55 $ 59 $ 15 $ 696

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Letters of credit (LC) — — — — — — — —

Option to substitute LC for cash N/A N/A ( 75 ) to ( 150 ) or >( 550 )(b)

( 125 ) to ( 150 ) or >( 550 )(c)

Option to substitute LC for cash N/A N/A (b)

If credit rating is investment

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Cash is provided to CP >( 100 )

( 75 ) to ( 150 ) or >( 550 )(d)

( 125 ) to ( 150 ) or >( 550 )(d)

Cash is received from CP > 0 (d)

Cash can be pledged to

CP as collateral ( 200 ) to ( 600 )(e)

N/A ( 150 ) to ( 550 )(b)

( 150 ) to ( 550 )(b)

Cash is received from CP > 0 (c)

If credit rating is non-investment

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level at which:

Cash is provided to CP ( 0 ) to ( 200 ) or >( 600 )

( 0 ) to ( 150 ) or >( 550 )

Cash is received from CP (f)

Cash can be pledged to

CP as collateral ( 200 ) to ( 600 )

N/A ( 150 ) to ( 550 )

( 150 ) to ( 550 )

Cash is received from CP (d)

(a) Individual counterparties with fair value of fuel derivatives <$ 10 million.

(b) The Company has the option of providing cash or letters of credit as collateral.

(d) Thresholds may vary based on changes in credit ratings within investment grade.

(e) The Company has the option of providing cash as collateral.

(f) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.

(b) The Company has the option to substitute letters of credit for 100 percent of cash collateral requirement.

(d) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.

Notes to Consolidated Financial Statements

FAIR VALUE MEASUREMENTS

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However, the Company has certificates of deposit, commercial paper, and time deposits that are classified as Level 2, due to the fact that the fair value for these instruments is determined utilizing observable inputs in non-active markets.

Other available-for-sale securities primarily consist of investments associated with the Company’s excess benefit plan.

Equity securities primarily consist of investments with readily determinable market values associated with the Company’s excess benefit plan.

The Company’s fuel and interest rate derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange.

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The Company’s Treasury Department, which reports to the Chief Financial Officer, determines the value of option contracts utilizing an option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are provided by financial institutions that trade these contracts.

The option pricing model used by the Company is an industry standard model for valuing options and is the same model used by the broker/dealer community (i.e., the Company’s counterparties).

The option pricing model used by the Company is an industry standard model for valuing options and is a similar model used by the broker/dealer community (i.e., the Company’s counterparties).

The inputs to this option pricing model are the option strike price, underlying price, risk free rate of interest, time to expiration, and volatility.

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Assets related to the funded portions of the deferred compensation plans are held in a rabbi trust, and the Company remains liable to these participants for the unfunded portion of the plans.

The Company records changes in the fair value of the assets in the Company's earnings.

The Company records changes in the fair value of plan obligations and plan assets, which net to zero, within the Salaries, wages, and benefits line and Other (gains) losses line, respectively, of the Consolidated Statement of Income (Loss).

Notes to Consolidated Financial Statements

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

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Commercial paper 90 — 90 —

Certificates of deposit 10 — 10 —

Time deposits 50 — 50 —

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Treasury bills 2,399 2,399 — —

Certificates of deposit 46 — 46 —

Time deposits 625 — 625 —

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Option contracts (b) 696 — — 696

Other available-for-sale securities 259 259 — —

Equity Securities 288 288 — —

Total assets $ 16,488 $ 15,027 $ 765 $ 696

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Certificates of deposit 10 — 10 —

Time deposits 300 — 300 —

Short-term investments:

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Time deposits 425 — 425 —

Interest rate derivatives (see Note 11) 2 — 2 —

Fuel derivatives:

Option contracts (b) 134 — — 134

Other available-for-sale securities 197 197 — —

Equity Securities 259 259 — —

Total assets $ 13,727 $ 12,722 $ 871 $ 134

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

Notes to Consolidated Financial Statements

(b) In the Consolidated Balance Sheet amounts are presented as an asset.

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Balance at December 31, 2020 $ 134

Total (realized or unrealized) losses for the period

Total gains for the period

Included in earnings 7 (a)

Included in other comprehensive loss ( 65 )

Included in other comprehensive income 609

Purchases 41 (b)

Sales ( 7 ) (b)

Settlements ( 88 )

Balance at December 31, 2021 $ 696

The amount of total losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2020 $ ( 15 ) (a)

The amount of total losses for the period included in other comprehensive loss attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2020 $ ( 41 )

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

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

The amount of total gains for the period included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2021 $ 541

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

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

Fair value measurements using significant unobservable inputs (Level 3)

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Balance at December 31, 2019 $ 110

Total losses (realized or unrealized) included in other comprehensive income (loss) ( 112 )

Purchases 133 (a)

Sales ( 2 ) (a)

Settlements ( 47 )

Total losses for the period

Included in earnings ( 40 ) (a)

Included in other comprehensive loss ( 65 )

Purchases 129 (b)

Balance at December 31, 2020 $ 134

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

The amount of total losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2020 $ ( 15 ) (a)

The amount of total losses for the period included in other comprehensive loss attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2020 $ ( 41 )

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

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

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

Notes to Consolidated Financial Statements

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

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2024 26 - 33 %

Beyond 2023 25 - 26 %

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

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

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

All privately held debt agreements are categorized as Level 3.

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

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1,550 1,724 Level 2

Term Loan Agreement payable through 2025 - 1.65 %

119 119 Level 3

3.00 % Notes due 2026

300 314 Level 2

Term Loan Agreement payable through 2026 - 1.34 %

159 155 Level 3

3.45 % Notes due 2027

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116 140 Level 2

Term Loan Agreement payable through 2028 - 1.65 %

184 183 Level 3

2.625 % Notes due 2030

500 499 Level 2

1.000 % Payroll Support Program Loan due 2030

1.000 % Payroll Support Program Loan due April 2030

976 958 Level 3

1.000 % Payroll Support Program Loan due January 2031

566 548 Level 3

1.000 % Payroll Support Program Loan due April 2031

526 507 Level 3

Notes to Consolidated Financial Statements

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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Balance at December 31, 2020 $ ( 119 ) $ ( 66 ) $ ( 43 ) $ 91 $ 32 $ ( 105 )

Cumulative effect of adopting ASU 2016-01 as of January 1, 2018 — — — ( 31 ) 11 ( 20 )

Changes in fair value 601 3 109 — ( 166 ) 547

Reclassification to earnings 109 1 — — ( 25 ) 85

Reclassification to earnings 10 6 — ( 60 ) (a) 10 ( 34 )

Balance at December 31, 2021 $ 492 $ ( 57 ) $ 66 $ — $ ( 113 ) $ 388

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

The following table illustrates the significant amounts reclassified out of each component of AOCI for the year ended December 31, 2021:

Year ended December 31, 2021

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

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

AOCI components

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$ 8 Net of tax

Unrealized loss on interest rate derivative instruments $ 1 Interest expense

Unrealized loss on interest rate derivative instruments 6 Other operating expenses

$ 5 Net of tax

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

$ ( 47 ) Net of tax

Total reclassifications for the period $ ( 34 ) Net of tax

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The Southwest Airlines Co.

401(k) Plan includes Company matching contributions and the Southwest Airlines Pilots Retirement Saving Plan has non-elective Company contributions.

401(k) Plan includes Company matching contributions and the Southwest

Notes to Consolidated Financial Statements

Airlines Pilots Retirement Saving Plan has non-elective Company contributions.

In addition, the Southwest Airlines Co.

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No Employee contributions to the ProfitSharing Plan are allowed.

Amounts associated with the Company's defined contribution plans expensed in 2020, 2019, and 2018, reflected as a component of Salaries, wages, and benefits, were $ 561 million, $ 1.2 billion, and $ 1.0 billion, respectively.

Amounts associated with the Company's defined contribution plans expensed in 2021, 2020, and 2019, reflected as a component of Salaries, wages, and benefits, were $ 749 million, $ 561 million, and $ 1.2 billion, respectively.

Postretirement Benefit Plans

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Benefits paid ( 24 ) ( 10 )

Actuarial loss 63 38

Actuarial (gain)/loss ( 109 ) 63

Curtailment — 53

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APBO at end of period $ 330 $ 428

During 2020, the Company recorded a $ 63 million actuarial loss as an increase to the APBO with an offset to AOCI.

This actuarial loss is reflected above and resulted from changes in certain key assumptions used to determine the Company’s year-end obligation.

The assumption change that resulted in the largest portion of the actuarial loss was a reduction in the discount rate used, which caused the funded position to deteriorate.

During 2020, the Company also recognized a Curtailment charge and Special termination benefit charge as a result of elections to participate in the plan by eligible Employees upon separating from the Company via Voluntary Separation Plan 2020.

See Note 2 for further information.

During 2021, the Company recorded a $ 109 million actuarial gain as a decrease to the APBO with an offset to AOCI.

This actuarial gain is reflected above and resulted from changes in certain key assumptions used to determine the Company’s year-end obligation.

The assumption changes that resulted in the largest portion of the actuarial gain were the expected participation and retirement rates in the Plan for future qualifying retirees, which reflect lower expectations as to utilization of benefits based on recent history, combined with census data and other demographic changes.

All plans are unfunded, and benefits are paid as they become due.

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Consolidated Balance Sheet liability $ ( 330 ) $ ( 428 )

Notes to Consolidated Financial Statements

The consolidated periodic postretirement benefit cost for the years ended December 31, 2021, 2020, and 2019, included the following:

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The selection of a discount rate is made annually and is selected by the Company based upon comparison of the expected future cash flows associated with the Company’s future payments under its consolidated postretirement obligations to a yield curve created using high quality bonds that closely match those expected future cash flows.

This rate decreased during 2020 due to market conditions.

This rate increased during 2021 due to market conditions.

The assumed healthcare trend rate is also reviewed at least annually and is determined based upon both historical experience with the Company’s healthcare benefits paid and expectations of how those trends may or may not change in future years.

Notes to Consolidated Financial Statements

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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Operating lease liabilities 371 443

Residual travel funds 117 —

Customer travel credits 305 117

Construction obligation — 72

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Net deferred tax liability $ 1,770 $ 1,634

(a) At December 31, 2020, the Company had approximately $ 852 million of state net operating loss carryforwards to reduce future state taxable income.

(a) At December 31, 2021 and 2020, the Company had approximately $ 44 million and $ 65 million, respectively, of state net operating loss carryforwards (tax effected) to reduce future state taxable income.

These state net operating loss carryforwards will expire in years 2025 - 2040 if unused.

The Company's income tax benefit recorded was 27.8 percent for 2020, which is higher than its tax rate of 22.2 percent for 2019.

The higher effective tax rate in 2020 reflects the benefit of carrying back 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 provision (benefit) for income taxes is composed of the following:

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$ 348 $ ( 1,182 ) $ 657

(a) The CARES Act allows entities to carry back 2020 losses to prior periods of up to five years , and claim refunds of federal taxes paid, and the Company expects to receive a significant cash tax refund once it completes all the necessary requirements to make the appropriate filings with the IRS.

(a) The CARES Act allows entities to carry back 2020 losses to prior periods of up to five years, and claim refunds of federal taxes paid.

The Company has filed the refund claim with the IRS, and expects a refund of $ 472 million in the first six months of 2022.

(b) The benefit is representative of the excess refund generated as the result of carrying the 2020 losses back to a period when the federal statutory tax rate was 35 percent as opposed to the current tax rate of 21 percent.

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federal corporate tax rate from the previous rate of 35 percent to 21 percent.

Notes to Consolidated Financial Statements

The effective tax rate on Income (loss) before income taxes differed from the federal income tax statutory rate for the following reasons:

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Taxes receivable (a) 699 740

Accounts and other receivables $ 1,130 $ 1,086

Accounts and other receivables (b) $ 1,357 $ 1,130

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

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Fuel payable 170 66

Dividends payable — 93

Other payable 427 409

Accounts payable $ 1,282 $ 931

Notes to Consolidated Financial Statements

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

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Interest 46 49

Deferred supplier payments (c) 80 —

Other 332 257

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Other noncurrent liabilities $ 1,224 $ 1,247

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

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

(a) This amount includes approximately $ 472 million and $ 470 million, as of December 31, 2021 and 2020, respectively, associated with a significant cash tax refund expected as a result of the CARES Act allowing entities to carry back 2020 losses to prior periods of up to five years, and claim refunds of federal taxes paid.

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

See Note 15 for further information.

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

The Company currently expects the majority of this amount to be reclassified to deferred revenue in Air Traffic liability--loyalty during the first half of 2021.

For further information on supplier receivables, see Note 17.

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

This resulted in a reduction in cash receipts from Chase during 2021, which were classified within Accounts and other receivables in the Consolidated Statement of Cash Flows.

See Note 17 for further information.

For further information on fuel derivative and interest rate derivative contracts, see Note 11.

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

airlines to ground all Boeing MAX aircraft.

airlines to ground all MAX aircraft.

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

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

airlines to return the Boeing 737 MAX to service.

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

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

billion related to "estimated potential concessions and other considerations to customers related to the 737 MAX grounding."

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

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

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

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

airlines to return the

Notes to Consolidated Financial Statements

MAX to service.

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

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

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

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

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

A total of $ 428 million in proceeds received in cash from Boeing are reflected within Investing Activities in the Consolidated Statement of Cash Flows for the year ended December 31, 2020.

The Company is currently working to meet the FAA's official requirements to enable airlines to return the Boeing 737 MAX to service 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.

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

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

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

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

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

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

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

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

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

No material financial impacts of the agreement were realized in the Company’s earnings for the year ended December 31, 2021.

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 4, 2022 expressed an unqualified opinion thereon.

Adoption of New Accounting Standards

As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for its leases in 2019 due to the modified retrospective adoption of ASU 2016-02, Leases (Topic 842) .

Basis for Opinion

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The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Southwest Rapid Rewards loyalty program spoilage

Description of the Matter As explained in Notes 1 and 6 to the consolidated financial statements, the Company recognizes revenue associated with award flights taken by Southwest Rapid Rewards loyalty program members upon the redemption of loyalty points.

The Company estimates the portion of loyalty points that will not be redeemed (spoilage) in estimating the revenue to recognize each period.

The Company uses a predictive statistical model that considers the member’s past behavior, as well as several other attributes related to the member’s account that management believes are indicative of the likelihood of future point redemption, to estimate the amount of spoilage.

These other attributes include, but are not limited to, tenure with the program, loyalty points accrued in the program, and points redeemed in the program.

Auditing the Company’s estimate of spoilage for loyalty points requires significant judgment due to the complexity of the predictive statistical model and the subjectivity related to the assumptions that are used by management to estimate the likelihood of a member’s future point redemption.

Additionally, due to the magnitude of the Company’s liability for loyalty benefits, changes in customer behavior and/or expected future redemption patterns could result in significant variations in the pattern of passenger revenue recognition.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s determination of the spoilage estimate, including the statistical model, significant underlying assumptions selected by management and the data inputs used in the statistical model.

To test the Company’s use of the predictive statistical model, we involved our internal specialists to assist in our evaluation of the Company’s methodology and the appropriateness of the predictive attributes described above.

Our internal specialists also performed corroborative calculations of the resulting estimated spoilage rates.

Additionally, we tested the completeness and accuracy of the data used in the predictive statistical model.

Notes to Consolidated Financial Statements

Valuation of financial derivative instruments

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Additionally, we compared the Company’s fuel option contract valuations to the counterparty valuations, which were independently obtained as part of our audit procedures.

Air traffic liability breakage

Description of the Matter As explained in Notes 1 and 6, tickets sold, but not yet used, are initially deferred as Air traffic liability, and are recognized in passenger revenue when transportation is provided.

The Company estimates the amount of tickets that expire unused and recognizes such amounts in Passenger revenue once the scheduled flight date passes in proportion to the pattern of flights taken by the customers.

During 2020, the Company experienced a significantly higher number of customer-driven flight cancellations related to the COVID-19 pandemic, and extended the expiration date for certain travel funds to September 7, 2022.

At December 31, 2021, $1.3 billion of these extended funds remained available for customers to use on future travel.

Auditing the Company’s breakage estimates on these extended funds requires judgment, as the Company has limited historical data available to predict both the amount of these funds estimated to expire and the expected pattern of flights to be taken by customers holding extended travel funds, since historically travel funds expired within 12 months of the original date of sale.

In making its estimates, the Company considers historical customer travel behavior, as well as assumptions about customers’ future travel behavior, which can be impacted by many factors including ticketing and other policies, fares, seat availability, and other economic factors.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s determination of the breakage estimate, including controls over management’s review of the estimation of breakage and the completeness and accuracy of the historical data analyzed as part of the breakage estimate.

We evaluated management’s assumptions used in the breakage calculation by comparing current and historical actual expirations to the Company’s estimates.

Additionally, among other procedures, we assessed the reasonableness of other assumptions made by the Company as part of the breakage estimate, including the consideration of the constraint on variable consideration on cumulative revenue recognized.

/s/ Ernst & Young LLP

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February 4, 2022

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

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and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Notes to Consolidated Financial Statements

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

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February 4, 2022

QUARTERLY FINANCIAL DATA

Three months ended

(in millions except per share amounts) March 31 June 30 Sept.

Operating revenues $ 4,234 $ 1,008 $ 1,793 $ 2,013

Operating income (loss) ( 110 ) ( 1,127 ) ( 1,411 ) ( 1,169 )

Income (loss) before income taxes ( 144 ) ( 1,239 ) ( 1,542 ) ( 1,331 )

Net income (loss) ( 94 ) ( 915 ) ( 1,157 ) ( 908 )

Net income (loss) per share, basic ( 0.18 ) ( 1.63 ) ( 1.96 ) ( 1.54 )

Net income (loss) per share, diluted ( 0.18 ) ( 1.63 ) ( 1.96 ) ( 1.54 )

March 31 June 30 Sept.

Operating revenues $ 5,149 $ 5,909 $ 5,639 $ 5,729

Operating income 505 968 819 665

Income before income taxes 504 968 819 666

Net income 387 741 659 514 (a)

Net income per share, basic 0.70 1.37 1.24 0.98 (a)

Net income per share, diluted 0.70 1.37 1.23 0.98 (a)

(a) In addition to the ongoing impact of the Boeing 737 MAX aircraft ("MAX") grounding that impacted all four quarters of 2019, fourth quarter 2019 also included the impact of the pre-tax $ 124 million discretionary, special profitsharing award accrual authorized by the Company's Board of Directors during fourth quarter 2019 for compensation received from Boeing related to the Company's estimated 2019 financial damages related to the grounding of the Boeing 737 MAX.

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

The impact of this accrual resulted in a decrease to Net income of approximately $ 97 million and reduced Basic and Diluted net income per share by approximately $ .18 for the fourth quarter 2019.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data