What changed in this filing

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Item 1. Financial Statements

2022-05-02 compared with 2021-10-26 · 274 added, 450 removed, 558 unchanged (56% of the section changed)

3 unchanged sentences

(in millions)

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

Current assets:

28 unchanged sentences

Deferred income taxes 1,826 1,770

Construction obligation — 309

Noncurrent operating lease liabilities 1,277 1,315

4 unchanged sentences

Retained earnings 15,551 15,774

Accumulated other comprehensive income (loss) 267 ( 105 )

Accumulated other comprehensive income 891 388

Treasury stock, at cost ( 10,853 ) ( 10,860 )

5 unchanged sentences

(in millions, except per share amounts)

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

2021 2020 2021 2020

Three months ended March 31,

OPERATING REVENUES:

24 unchanged sentences

NET INCOME (LOSS) PER SHARE, DILUTED $ ( 0.47 ) $ 0.19

COMPREHENSIVE INCOME (LOSS) $ 577 $ ( 1,129 ) $ 1,300 $ ( 2,207 )

COMPREHENSIVE INCOME $ 225 $ 180

WEIGHTED AVERAGE SHARES OUTSTANDING

5 unchanged sentences

(in millions, except per share amounts)

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

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

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

Cumulative effect of adopting Accounting Standards Update No.

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

2020-06, Debt (See Note 3) — ( 300 ) 55 — — ( 245 )

Issuance of common and treasury stock pursuant to Employee stock plans — — — — 7 7

Share-based compensation — 16 — — — 16

Stock warrants — 23 — — — 23

Comprehensive income — — 116 64 — 180

Comprehensive income (loss) — — ( 278 ) 503 — 225

Balance at March 31, 2022 $ 888 $ 3,940 $ 15,551 $ 891 $ ( 10,853 ) $ 10,417

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

Share-based compensation — 16 — — — 16

Stock warrants — 22 — — — 22

Comprehensive income — — 348 196 — 544

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

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

Share-based compensation — 14 — — — 14

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

Comprehensive income — — 446 131 — 577

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

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

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

Repurchase of common stock — — — — ( 451 ) ( 451 )

Issuance of common and treasury stock pursuant to Employee stock plans — ( 8 ) — — 6 ( 2 )

Share-based compensation — 9 — — — 9

Cash dividends, $ 0.180 per share

— — ( 94 ) — — ( 94 )

Comprehensive loss — — ( 94 ) ( 125 ) — ( 219 )

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

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

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

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

Stock warrants — 35 — — — 35

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

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

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

Cumulative effect of adopting Accounting Standards Update No.

2016-01, Financial Instruments — — 19 ( 19 ) — —

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

1 unchanged sentence

Stock warrants — 23 — — — 23

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

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

Comprehensive income — — 116 64 — 180

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

See accompanying notes.

2 unchanged sentences

(in millions)

Three months ended Nine months ended

September 30, September 30,

2021 2020 2021 2020

Three months ended

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) $ ( 278 ) $ 116

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

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

Depreciation and amortization 324 312

Impairment of long-lived assets 16 —

Unrealized mark-to-market adjustment on available for sale securities 5 —

Unrealized/realized (gain) loss on fuel derivative instruments 34 ( 7 )

Deferred income taxes ( 97 ) 5

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

Loss on partial extinguishment of convertible notes 12 — 12 —

Loss on partial extinguishment of convertible and unsecured notes 72 —

Changes in certain assets and liabilities:

4 unchanged sentences

Other liabilities ( 105 ) ( 122 )

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

Cash collateral received from derivative counterparties 385 38

Other, net 31 15

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

Net cash provided by operating activities 1,071 645

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures ( 510 ) ( 95 )

Supplier proceeds — — — 428

Assets constructed for others ( 4 ) —

Proceeds from sale-leaseback transactions — — — 815

Purchases of short-term investments ( 925 ) ( 1,324 )

2 unchanged sentences

CASH FLOWS FROM FINANCING ACTIVITIES:

Issuance of common stock — — — 2,294

Proceeds from issuance of long-term debt — 1,125 — 5,622

Proceeds from term loan credit facility — — — 3,683

Proceeds from revolving credit facility — — — 1,000

Proceeds from convertible notes — — — 2,300

Proceeds from Payroll Support Program loan and warrants — 511

Proceeds from Employee stock plans 6 13

Repurchase of common stock — — — ( 451 )

Payments of long-term debt and finance lease obligations ( 93 ) ( 67 )

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

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

Payments of cash dividends — — — ( 188 )

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

Payments for repurchases and conversions of convertible debt ( 230 ) —

Capitalized financing items — 44 — ( 133 )

Other, net 3 7

3 unchanged sentences

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,098 $ 11,971

Three months ended Nine months ended

September 30, September 30,

2021 2020 2021 2020

CASH PAYMENTS FOR:

2 unchanged sentences

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:

Adoption of Accounting Standards Update 2020-06, Debt (See Note 3) $ 245 $ —

Right-of-use assets acquired under operating leases $ 24 $ 218

1 unchanged sentence

Assets constructed for others $ — $ 32

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

See accompanying notes.

5 unchanged sentences

Financial Derivative Instruments

Comprehensive Inco me (Loss)

Comprehensive Income (Loss)

Net Income (Loss) Per Share

2 unchanged sentences

Commitments and Contingencies

Financing Activities

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

6 unchanged sentences

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

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

The unaudited Condensed Consolidated Financial Statements for the interim periods ended March 31, 2022 and 2021 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods.

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

6 unchanged sentences

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

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

Operating results for the three months ended March 31, 2022, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2022.

For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.

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

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

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

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

4 unchanged sentences

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.

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 Company experienced significant disruptions in travel and reduced bookings throughout the remainder of 2020 and for the entirety of 2021 as a result of the pandemic and subsequent variants of COVID-19.

Following a significant negative impact to revenues and bookings in January and February 2022, which included increased trip cancellations and staffing challenges associated with the Omicron variant, the Company saw improvements in revenue trends in March 2022 as COVID-19 cases significantly trended downward.

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

Since the start of the pandemic, the Company entered into definitive documentation with the United States Department of the 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");

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

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

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

PSP1 Payroll Support Program

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.

The following table provides the details from the PSP1, PSP2 and PSP3 Payroll Support programs:

(dollars in millions, shares in thousands) Grant Promissory Note Warrants Total Payroll Support Proceeds Warrants (shares) Warrant strike price Promissory Note Maturity Date

PSP1 $ 2,337 $ 976 $ 40 $ 3,354 2,676 $ 36.47 /share

April 19, 2030

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

PSP2 $ 1,393 $ 566 $ 27 $ 1,987 1,223 $ 46.28 /share

January 15, 2031

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

PSP3 $ 1,310 $ 526 $ 18 $ 1,852 899 $ 58.51 /share

April 23, 2031

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

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

1 unchanged sentence

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

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

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

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

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

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

All grant portions of the Payroll Support programs received had been allocated and classified as a contra-expense line item in the Company's financial statements by the end of 2021, including approximately $ 1.2 billion for the three months ended March 31, 2021 in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

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.

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

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

The Company had no Employees remaining on Extended ETO as of March 31, 2022.

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.

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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 $ 405 million of the liability balances were relieved during the first nine months of 2021 through payments to Employees, leaving a balance of $ 369 million as of September 30, 2021.

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

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

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

For both the Voluntary Separation Program and Extended ETO programs combined, approximately $ 32 million of the liability balances were relieved during the first three months of 2022 through payments to Employees, leaving a balance of $ 296 million as of March 31, 2022, all of which relates to the Voluntary Separation Program.

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

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

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

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

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

As of March 31, 2022, four 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

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

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 standard is effective for fiscal years beginning after December 15, 2021, and the standard was adopted and applied prospectively by the Company as of January 1, 2022, but the adoption and application did not have a significant impact on the Company's financial statements and disclosures, including interim periods.

On January 7, 2021, the FASB issued ASU 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 is 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 is currently evaluating its contracts that reference LIBOR and the potential impacts of applying the optional temporary guidance under this standard.

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

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

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):

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 three months ended March 31, 2022.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

On August 5, 2020, the FASB issued ASU 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.

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

Upon adoption, the Company will reclassify the remaining equity component 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 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.

This new standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock, made targeted improvements to the disclosures for convertible instruments and earnings-per-share ("EPS") guidance, and amended 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 adopted this standard as of January 1, 2022, utilizing the modified retrospective method.

Under the modified approach, the Company applied guidance to all financial instruments that were outstanding as of the 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 reclassified the remaining equity component of $ 300 million, from Additional paid-in capital to Long-term debt associated with its 1.25 % Convertible Senior Notes due 2025 (the “Convertible Notes”), and no longer records amortization of the debt discount to Interest expense.

The cumulative effect from prior period 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 previous repurchases, resulted in a $ 55 million adjustment to the opening balance of Retained earnings upon adoption.

The new standard requires the use of the if-converted method to calculate diluted EPS, which is generally more dilutive, rather than the treasury stock method as was the Company's policy pre-adoption.

The first quarter 2022 impact of adopting this new standard was an increase to the Company's Net loss in the amount of $ 36 million, or $ 0.06 per diluted share, as a result of higher losses recognized on the Company’s extinguishment transactions following the elimination of the equity component of the Convertible Notes, partially offset by the elimination of the non-cash interest expense associated with the prior debt discount amortization.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

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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.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

As of March 31, 2022, 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:

Maximum fuel hedged as of

September 30, 2021 Derivative underlying commodity type as of

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

March 31, 2022 Derivative underlying commodity type as of

Period (by year) (gallons in millions) (a) March 31, 2022

Remainder of 2022 915 WTI crude oil and Brent crude oil

1 unchanged sentence

2024 358 WTI crude oil and Brent 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.

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

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.

Qualification is re-evaluated quarterly, and all periodic changes in fair value of the derivatives designated as hedges are recorded in Accumulated other comprehensive income ("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 unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) in the period of the change;

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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 2021, as a result of the drop in demand for air travel compared with 2019 due to the pandemic, the Company was in an estimated "over-hedged" position and was required to de-designate a portion of its fuel hedges for hedge accounting purposes.

However, the impact of such de-designations was not material to 2021 financial results.

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

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

15 unchanged sentences

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

Balance Sheet September 30, December 31,

Balance Sheet March 31, December 31,

(in millions) location 2022 2021

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

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

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

As of March 31, 2022, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Offsetting of derivative assets

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

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

Fuel derivative contracts Prepaid expenses and other current assets $ 338 $ ( 69 ) $ 269 $ 13 $ ( 3 ) $ 10

Fuel derivative contracts Prepaid expenses and other current assets $ 849 $ ( 456 ) (b)

$ 393 $ 409 $ ( 80 ) $ 329

Fuel derivative contracts Other assets $ 470 $ ( 150 ) $ 320 (a) $ 287 $ ( 95 ) $ 192 (a)

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(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 9.

(b) Includes the current portion of cash collateral deposits held from counterparties and derivative liability associated with fuel contracts.

Offsetting of derivative liabilities

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

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

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

Fuel derivative contracts Prepaid expenses and other current assets $ 69 $ ( 69 ) $ — $ 3 $ ( 3 ) $ —

Fuel derivative contracts Prepaid expenses and other current assets $ 456 $ ( 456 ) (b)

$ — $ 80 $ ( 80 ) $ —

Fuel derivative contracts Other assets $ 150 $ ( 150 ) $ — (a) $ 95 $ ( 95 ) $ — (a)

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(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 9.

(b) Includes the current portion of cash collateral deposits held from counterparties and derivative liability associated with fuel contracts.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and nine months ended September 30, 2021 and 2020:

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

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

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

Total $ 2 $ — $ 1 $ 18 $ 22 $ 2

Loss on cash flow hedging relationships:

Commodity contracts:

Amount of loss reclassified from AOCI into income 2 — — 18 22 —

Interest contracts:

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

Impact of fair value hedging relationships:

Interest contracts:

Hedged items — — — — — 4

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

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

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

Three months ended March 31, 2022 Three months ended March 31, 2021

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

Total $ ( 203 ) $ — $ 2 $ 16 $ 6 $ 1

Loss on cash flow hedging relationships:

(Gain) loss on cash flow hedging relationships:

Commodity contracts:

Amount of loss reclassified from AOCI into income 30 6 — 54 38 —

Amount of (gain) loss reclassified from AOCI into income ( 203 ) — — 16 6 —

Interest contracts:

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

Impact of fair value hedging relationships:

Interest contracts:

Hedged items — — — — — 11

Derivatives designated as hedging instruments — — — — — ( 6 )

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Derivatives designated and qualified in cash flow hedging relationships

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

Gain recognized in AOCI on derivatives, net of tax

Three months ended

September 30,

(in millions) 2022 2021

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Total $ 658 $ 93

Derivatives designated and qualified in cash flow hedging relationships

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

Nine months ended

September 30,

(in millions) 2021 2020

Fuel derivative contracts $ ( 402 ) $ 91

Interest rate derivatives ( 5 ) 30

Total $ ( 407 ) $ 121

Derivatives not designated as hedges

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

September 30,

(in millions) 2022 2021

Fuel derivative contracts $ 34 $ ( 5 ) Other (gains) losses, net

Interest rate derivatives — ( 1 ) Other (gains) losses, net

Total $ 3 $ —

Derivatives not designated as hedges

(Gain) loss recognized in income on derivatives

Nine months ended

Location of (gain) loss recognized in income on derivatives

September 30,

(in millions) 2021 2020

Fuel derivative contracts $ ( 13 ) $ 2 Other (gains) losses, net

Interest rate derivatives — 28 Other (gains) losses, net

Total $ ( 13 ) $ 30

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

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three months ended March 31, 2022 and 2021.

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

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

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

The following

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

Premium expense recognized in income on derivatives

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

September 30,

(in millions) 2022 2021

1 unchanged sentence

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

Premium expense recognized in income on derivatives

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

September 30,

(in millions) 2021 2020

Fuel derivative contracts designated as hedges $ 43 $ 51 Fuel and oil

Fuel derivative contracts not designated as hedges 32 22 Other (gains) losses, net

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

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

Included in the Company’s cumulative unrealized gains from fuel hedges as of March 31, 2022, recorded in AOCI, were approximately $ 578 million in unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to March 31, 2022.

Interest Rate Swaps

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

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

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

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

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

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

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

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

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

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.

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.

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

However, the Company has not

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

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

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

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

At March 31, 2022, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating.

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

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

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

The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of March 31, 2022, at which such postings are triggered:

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Counterparty (CP)

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

2 unchanged sentences

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

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

Three months ended September 30,

The differences between Net income (loss) and Comprehensive income (loss) for the three months ended March 31, 2022 and 2021 were as follows:

Three months ended March 31,

(in millions) 2022 2021

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Total other comprehensive income $ 503 $ 64

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

Nine months ended September 30,

(in millions) 2021 2020

NET INCOME (LOSS) $ 909 $ ( 2,166 )

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

deferred taxes of $ 131 and ($ 6 )

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

deferred taxes of $ 2 and ($ 9 )

Other, net of deferred taxes of ($ 13 ) and $ 2

Total other comprehensive income (loss) $ 391 $ ( 41 )

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

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

COMPREHENSIVE INCOME $ 225 $ 180

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three months ended March 31, 2022:

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

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

Changes in fair value 166 2 — ( 39 ) 129

Reclassification to earnings 2 1 — ( 1 ) 2

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

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

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

Cumulative effect of adopting ASU 2016-01 as of January 1, 2018 (See Note 1) — — — ( 31 ) 12 ( 19 )

Changes in fair value 852 5 — ( 199 ) 658

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

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

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

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

Three months ended September 30, 2021

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

AOCI components

Unrealized loss on fuel derivative instruments $ 2 Fuel and oil expense

$ 1 Net of tax

Unrealized loss on interest rate derivative instruments $ 1 Other operating expenses

$ 1 Net of tax

Total reclassifications for the period $ 2 Net of tax

Nine months ended September 30, 2021

Reclassification to earnings ( 203 ) 2 — 46 ( 155 )

Balance at March 31, 2022 $ 1,141 $ ( 50 ) $ 66 $ ( 266 ) $ 891

The following table illustrates the significant amounts reclassified out of each component of AOCI for the three months ended March 31, 2022:

Three months ended March 31, 2022

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

AOCI components

Unrealized loss on fuel derivative instruments $ 30 Fuel and oil expense

6 Other (gains) losses, net

Unrealized gain on fuel derivative instruments $ ( 203 ) Fuel and oil expense

$ ( 156 ) Net of tax

1 unchanged sentence

$ 1 Net of tax

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

$ ( 47 ) Net of tax

Total reclassifications for the period $ ( 155 ) Net of tax

Passenger Revenues

The Company’s contracts with its Customers primarily consist of its tickets sold, which are initially deferred as Air traffic liability.

Passenger revenue associated with tickets is recognized when the performance obligation to the Customer is satisfied, which is primarily when travel is provided.

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

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

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

The following table provides the components of Passenger revenue recognized for the three months ended March 31, 2022 and 2021:

Three months ended March 31,

(in millions) 2022 2021

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Total passenger revenues $ 4,135 $ 1,712

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

As of March 31, 2022, and December 31, 2021, 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 unaudited Condensed Consolidated Balance Sheet were as follows:

Balance as of

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

(in millions) March 31, 2022 December 31, 2021

Air traffic liability - passenger travel and ancillary passenger services $ 3,726 $ 2,936

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Total Air traffic liability $ 8,610 $ 7,725

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.

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

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

2021 2020 2021 2020

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 three months ended March 31, 2022 and 2021 were as follows (in millions):

Three months ended March 31,

Air traffic liability - loyalty program - beginning balance $ 4,789 $ 4,447

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Revenue recognized from points redeemed - Other ( 17 ) ( 12 )

Unused funds converted to loyalty points — 105 — 105

Air traffic liability - loyalty program - ending balance $ 4,884 $ 4,623

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

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

Rollforwards of the amounts included in Air traffic liability as of March 31, 2022 and 2021 were as follows (in millions):

Air traffic liability

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Revenue from current period sales ( 2,272 )

Balance at September 30, 2021 $ 8,236

Balance at March 31, 2022 $ 8,610

Air traffic liability

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Revenue from current period sales ( 982 )

Balance at September 30, 2020 $ 7,094

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

Balance at March 31, 2021 $ 7,732

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.

See Note 2 for further information.

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

The amount of such Customer funds represents approximately 17 percent and 28 percent of the total Air traffic liability balance at September 30, 2021, and December 31, 2020, respectively, compared to approximately two percent of the Air traffic liability balance as of December 31, 2019.

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 March 31, 2022, remains much higher than historical levels.

The amount of such Customer funds represents approximately 9 percent and 16 percent of the total Air traffic liability balance at March 31, 2022, and December 31, 2021, 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 significantly relaxed its previous policies with regards to the time period within which these funds can be redeemed, which is typically twelve months from the original date of purchase.

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

At September 30, 2021, $ 1.4 billion of Customer travel funds remain in Air traffic liability with a September 7, 2022 expiration date, although the Company has estimated that a portion of those will not be redeemed.

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

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

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

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

fare increases;

changes to the Company's ticketing policies;

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

seat availability;

and economic factors.

At March 31, 2022, $ 1.2 billion of extended Customer travel funds with a September 7, 2022 expiration date remain in Air traffic liability, although the Company has estimated that a portion of those will not be redeemed.

As a result, recognition of these travel funds as flown revenue, refunds, or breakage revenue will likely be more volatile over the remaining life of these funds and may not be comparable to historical trends.

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.

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

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

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

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

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

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

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

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

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

therefore, the Company has elected to not disclose the amount of the remaining transaction price and its expected timing of recognition for freight shipments.

Other revenues primarily consist of marketing royalties associated with the Company’s co-branded Chase ® Visa credit card, but also include commissions and advertising associated with Southwest.com ® .

All amounts classified as Other revenues are paid monthly, coinciding with the Company fulfilling its deliverables;

therefore, the Company has elected to not disclose the amount of the remaining transaction price and its expected timing of recognition for such services provided.

within Other operating revenues.

For the three months ended March 31, 2022 and 2021, the Company recognized $ 486 million and $ 280 million, respectively.

The Company is also required to collect certain taxes and fees from Customers on behalf of government agencies and remit these back to the applicable governmental entity on a periodic basis.

These taxes and fees include foreign and U.S.

federal transportation taxes, federal security charges, and airport passenger facility charges.

These items are collected from Customers at the time they purchase their tickets, are excluded from the contract transaction price, and are therefore not included in Passenger revenue.

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

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).

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

2021 2020 2021 2020

For the three months ended March 31, 2022, 47 million shares related to the Convertible Notes and an immaterial number of shares related to the Company's restricted stock units and stock warrants were excluded from the denominator because inclusion of such shares would be antidilutive.

An immaterial number of shares related to the Company's restricted stock units were excluded from the denominator for the three months ended March 31, 2021, because inclusion of such shares would be antidilutive.

Three months ended March 31,

Net income (loss) $ ( 278 ) $ 116

Weighted-average shares outstanding, basic 592 591

Dilutive effects of convertible notes (a) 14 — 17 —

Dilutive effects of Convertible Notes — (a) 16 (b)

Dilutive effect of stock warrants — 1

4 unchanged sentences

Diluted $ ( 0.47 ) $ 0.19

Antidilutive amounts excluded from calculations:

Convertible debt (a) — 5 — 2

Restricted stock units — 1 — 1

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

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

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

See Note 8 for further information on the convertible notes.

(a) As of January 1, 2022, the Company adopted ASU 2020-06 using the modified retrospective method.

The standard requires the Company to apply the if-converted method for purposes of Net income (loss) per share.

Using this method, the numerator is affected by adding back interest expense and the denominator is affected by including the effect of potential share settlement, if the effect is more dilutive, regardless of the type of settlement.

As a result, the Company will include all shares issuable upon conversion in the denominator if the Company has Net income for the period.

For the three months ended March 31, 2022, the Company incurred a Net loss, thus all shares are considered antidilutive and have been excluded from the denominator.

See Notes 3 and 11 for further information regarding the new standard and the Convertible Notes.

(b) Prior to the adoption of ASU 2020-06, the Convertible Notes were accounted for using the treasury stock method for the purposes of Net income (loss) per share.

For the three months ended March 31, 2021, the average market price of the Company's common stock exceeded the conversion price per share of $ 38.48 and as such, the common shares underlying the Convertible Notes were included in the diluted calculation.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

6 unchanged sentences

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

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

As of March 31, 2022, the Company held certain items that are required to be measured at fair value on a recurring basis.

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

1 unchanged sentence

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 in equity securities with readily determinable market values 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.

19 unchanged sentences

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 unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2022, and December 31, 2021:

Fair value measurements at reporting date using:

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

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

Description March 31, 2022 (Level 1) (Level 2) (Level 3)

Assets (in millions)

5 unchanged sentences

Treasury bills 2,292 2,292 — —

Certificates of deposit 25 — 25 —

Time deposits 325 — 325 —

2 unchanged sentences

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

Other available-for-sale securities 260 260 — —

Equity Securities 261 261 — —

Total assets $ 17,323 $ 15,031 $ 973 $ 1,319

Fuel derivatives:

Option contracts (b) $ ( 46 ) $ — $ — $ ( 46 )

Interest rate derivatives (see Note 4) ( 1 ) — ( 1 ) —

Total liabilities $ ( 47 ) $ — $ ( 1 ) $ ( 46 )

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

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

(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as a net asset.

Fair value measurements at reporting date using:

5 unchanged sentences

Commercial paper 90 — 90 —

Certificates of deposit 10 — 10 —

Time deposits 50 — 50 —

1 unchanged sentence

Treasury bills 2,399 2,399 — —

Certificates of deposit 46 — 46 —

Time deposits 625 — 625 —

1 unchanged sentence

Option contracts (b) 696 — — 696

Other available-for-sale securities 259 259 — —

Equity Securities 288 288 — —

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

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

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

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

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

Fair value measurements using significant unobservable inputs (Level 3)

(in millions) Fuel derivatives

Balance at June 30, 2021 $ 502

Total gains (losses) for the period

Included in earnings ( 3 ) (a)

Included in other comprehensive income 166

Purchases 41 (b)

Sales ( 7 ) (b)

Settlements ( 18 )

Balance at September 30, 2021 $ 681

The amount of total gains for the period

included in earnings attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, 2021

The amount of total gains for the period

included in other comprehensive income attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, 2021

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

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

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

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

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2022, or the year ended December 31, 2021.

The following table presents the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2022:

Fair value measurements using significant unobservable inputs (Level 3)

1 unchanged sentence

Balance at December 31, 2021 $ 696

Total gains for the period

Total gains (losses) for the period

Included in earnings ( 34 ) (a)

Included in other comprehensive income 852

Purchases 41 (b)

Sales ( 12 ) (b)

Settlements ( 229 )

Balance at September 30, 2021 $ 681

The amount of total gains for the period

Balance at March 31, 2022 $ 1,273

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 September 30, 2021

to assets still held at March 31, 2022

The amount of total gains for the period

1 unchanged sentence

change in unrealized gains or losses relating

to assets still held at September 30, 2021

to assets still held at March 31, 2022

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

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(b) The 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.

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

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

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

Quantitative information about Level 3 fair value measurements

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

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

2022 30 - 43 %

Fuel derivatives Option model Implied volatility Second quarter 2022 47 - 73 %

Third quarter 2022 47 - 67 %

Fourth quarter 2022 42 - 59 %

2023 32 - 51 %

1 unchanged sentence

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

The carrying amounts and estimated fair values of the Company’s short-term and long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, at September 30, 2021, are presented in the table below.

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

1 unchanged sentence

All privately held debt agreements are categorized as Level 3.

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

The Company has determined the estimated fair value of this debt to be Level 3, as certain inputs used to

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

determine the fair value of these agreements are unobservable.

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

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

2.75 % Notes due 2022

2.75 % Notes due November 2022

$ 300 $ 301 Level 2

Pass Through Certificates due 2022 - 6.24 %

Pass Through Certificates due August 2022 - 6.19 %

33 33 Level 2

5 unchanged sentences

1,550 1,627 Level 2

Term Loan Agreement payable through 2025 - 1.53 %

100 100 Level 3

3.00 % Notes due 2026

300 295 Level 2

Term Loan Agreement payable through 2026 - 1.31 %

149 147 Level 3

3.45 % Notes due 2027

4 unchanged sentences

116 131 Level 2

Term Loan Agreement payable through 2028 - 1.53 %

165 165 Level 3

2.625 % Notes due 2030

500 459 Level 2

1.000 % Payroll Support Program Loan due April 2030

1.000 % PSP1 due 2030

976 919 Level 3

1.000 % Payroll Support Program Loan due January 2031

1.000 % PSP2 due 2031

566 523 Level 3

1.000 % Payroll Support Program Loan due April 2031

1.000 % PSP3 due 2031

526 483 Level 3

Convertible Notes

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”).

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 to

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

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).

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

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

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

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

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

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

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

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

Carrying amount of equity component $ 361 $ 403

Liability component:

Principal amount $ 2,221 $ 2,300

Unamortized debt discount ( 289 ) ( 355 )

Net carrying amount $ 1,932 $ 1,945

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

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

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

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

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

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

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

SUPPLEMENTAL FINANCIAL INFORMATION

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

(in millions) March 31, 2022 December 31, 2021

Trade receivables $ 70 $ 58

1 unchanged sentence

Business partners and other suppliers 497 432

Taxes receivable (a) 710 740

Taxes receivable 698 699

Fuel hedging and receivables 111 8

Accounts and other receivables $ 1,692 $ 1,357

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

(in millions) March 31, 2022 December 31, 2021

Derivative contracts $ 323 $ 192

2 unchanged sentences

Other assets $ 978 $ 882

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

(in millions) March 31, 2022 December 31, 2021

Accounts payable trade $ 320 $ 156

5 unchanged sentences

Accounts payable $ 1,648 $ 1,282

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

Extended Emergency Time Off $ 17 $ 393

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(in millions) March 31, 2022 December 31, 2021

Voluntary Separation Program $ 85 $ 92

Profitsharing and savings plans 65 262

Vendor prepayment (b) — 600

Vacation pay 456 451

3 unchanged sentences

Interest 107 46

Deferred supplier payments (c) 142 —

Deferred supplier payments (a) — 80

Other 295 335

Accrued liabilities $ 1,360 $ 1,624

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

Extended Emergency Time Off $ — $ 57

(in millions) March 31, 2022 December 31, 2021

Voluntary Separation Program $ 211 $ 233

1 unchanged sentence

Other deferred compensation 334 369

Other 282 292

Other noncurrent liabilities $ 1,160 $ 1,224

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(a) Includes approximately $ 472 million and $ 470 million, as of September 30, 2021 and December 31, 2020, respectively, associated with a significant cash tax refund expected as a result of the CARES Act allowing entities to carry back 2020 losses to prior periods of up to five years and claim refunds of federal taxes paid.

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

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

See Note 11 for further information.

(a) Represents amounts owed at December 31, 2021 for aircraft deliveries received that will be relieved via future payments to supplier.

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

2 unchanged sentences

COMMITMENTS AND CONTINGENCIES

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 Terminals 1 and 2 (the "Terminal 1.5 Project").

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.

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 unaudited Condensed Consolidated Statement of Cash Flows, net of Assets constructed for others additions during the period.

Dallas Love Field

4 unchanged sentences

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

The Company guaranteed principal and interest payments for Series 2010 and 2012 bonds issued by the LFAMC.

The Company guaranteed principal and interest payments on bonds issued by the 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 unaudited Condensed Consolidated Balance Sheet.

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

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

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 unaudited Condensed Consolidated Balance Sheet as of September 30, 2021.

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

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

The net present value of the future principal and interest payments associated with the bonds was $ 100 million as of September 30, 2021, and was reflected as part of the Company's operating lease right–of–use assets and lease obligations in the unaudited Condensed Consolidated Balance Sheet.

This remeasurement resulted in a reduction of the Company's right-of-use asset and lease liability in the amount of $ 343 million.

As of March 31, 2022, $ 79 million of principal remained outstanding associated with the Series 2012 bonds.

The net present value of the future principal and interest payments associated with the Series 2012 bonds was $ 89 million as of March 31, 2022, and was reflected as part of the Company's operating lease right-of-use assets and lease obligations in the unaudited Condensed Consolidated Balance Sheet.

Contractual Obligations and Contingent Liabilities and Commitments

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

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

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

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

Based on growth opportunities and ongoing fleet modernization plans for more fuel efficient aircraft, during first quarter 2022, the Company exercised 15 Boeing 737-8 ("-8") options for delivery in 2022 and 12 Boeing 737-7 ("-7") options for delivery in 2023.

Fleet and capacity plans will continue to evolve as the Company manages through the COVID-19 recovery period, and it will continue to evaluate its remaining Boeing 737 MAX ("MAX") options for 2022.

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

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

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

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

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Additional information regarding the Company's delivery schedule is included in the following table as of March 31, 2022:

The Boeing Company

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

2021 — 19 — 9 28 (a)

2022 72 — 42 — 114 (b)

2023 30 — 60 — 90 (c)

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

2022 72 15 27 114

6 unchanged sentences

2029 20 30 — 50

242 149 (d) 260 9 (e) 660

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

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

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

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

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

$ 33 million for 2021, $ 1.7 billion in 2022, $ 1.2 billion in 2023, $ 1.1 billion in 2024, $ 837 million in 2025, $ 961 million in 2026, and $ 7.0 billion thereafter.

2030 15 45 — 60

2031 — 10 — 10

276 (a) 145 (b) 211 632

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

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

The Company entered into an agreement with Boeing in April 2022 to replace the majority of its -7 firm orders with -8 firm orders in the short-term, among other adjustments to its near-term order book.

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

Based on the Company's existing agreement with Boeing, capital commitments associated with its firm orders as of March 31, 2022, were:

$ 2.1 billion remaining in 2022, $ 1.9 billion in 2023, $ 1.0 billion in 2024, $ 839 million in 2025, $ 975 million in 2026, $ 1.0 billion in 2027, and $ 6.0 billion thereafter.

In addition, subsequent to March 31, 2022, and through May 2, 2022, due to the current status of the -7 certification, the Company converted 40 2022 -7 firm orders into 2022 -8 orders, moved one 2022 -7 firm order into 2023, and accelerated one 2023 -8 option into

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

In April 2022, the Company also exercised 16 -8 options for delivery in 2022, exercised 2 -7 options for delivery in 2023, accelerated and exercised 10 2023 -8 options into 2022, and shifted 10 2022 MAX firm orders into 2023.

Combined, the Company's aircraft order book activity subsequent to March 31, 2022, has resulted in additional capital commitments associated with firm orders of $ 689 million and $ 188 million in 2022 and 2023, respectively.

Contingencies

1 unchanged sentence

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

FINANCING ACTIVITIES

On May 1, 2020, the Company completed the public offering of $ 2.3 billion aggregate principal amount of 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.

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, in the event certain conditions are met, as stated in the offering documents.

As of March 31, 2022, the conditions were not met to convert.

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 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.

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

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

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

The Company adopted ASU 2020-06, as of January 1, 2022, utilizing the modified retrospective method approach.

See Note 3 for further information.

Upon adoption, the Company reclassified the remaining equity component, of $ 300 million, from Additional paid-in capital to Long-term debt associated with its Convertible Notes, and no longer records amortization of the debt discount to Interest expense.

The following table details the equity and liability component recognized related to the Convertible Notes, prior to and following the adoption of ASU 2020-06:

(in millions) March 31, 2022 December 31, 2021

Equity component:

Carrying amount of Convertible Notes $ — $ 311

Carrying amount of issuance costs — ( 11 )

Net carrying amount $ — $ 300

Liability component:

Principal amount $ 1,933 $ 2,097

Unamortized debt discount — ( 255 )

Net carrying amount $ 1,933 $ 1,842

The Company recognized interest expense associated with the Convertible Notes as follows:

Three months ended March 31,

(in millions) 2022 2021

Non-cash amortization of the debt discount $ — $ 19

Non-cash amortization of debt issuance costs 3 2

Contractual coupon interest 6 7

Total interest expense $ 9 $ 28

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.

The Company had no changes to conversion terms, contingencies, or exercise prices during the three months ended March 31, 2022.

During the three months ended March 31, 2022, the Company paid $ 323 million in debt and finance lease obligations, including the extinguishment of $ 164 million in principal of the Convertible Notes for $ 230 million in cash.

The Company accounted for these repurchases as a partial debt extinguishment, which resulted in (i) a loss of $ 69 million reflected in Other (gains) losses, net, and (ii) a $ 3 million reduction in remaining unamortized debt issuance costs in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2022.

In addition the Company recorded the extinguishment of $ 30 million in principal of its 5.125 % Notes due 2027 for a cash payment of $ 34 million, which resulted in a loss of $ 3 million reflected in Other (gains) losses, net, during the three months ended March 31, 2022 .

Table of Conten ts

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

What changed 10-Q

Item 1. Financial Statements