What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-02 compared with 2021-10-26 · 317 added, 427 removed, 245 unchanged (75% of the section changed)

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

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

Relevant comparative operating statistics for the three months ended March 31, 2022, 2021, and 2019 are included below.

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

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

The Company believes a comparison of its first quarter 2022 operating statistics to first quarter 2019 (pre-pandemic) is relevant and useful as the Company continues to recover from the pandemic.

In the first three months of 2021 and 2022, most of these operating statistics were significantly impacted by the COVID-19 pandemic and decisions the Company made as a result of the pandemic.

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

Three months ended September 30,

2021 2020 Change

Three months ended March 31,

2022 2021 2022 Change to 2021 2019 2022 Change to 2019

Revenue passengers carried (000s) 26,029 14,225 83.0 % 31,296 (16.8) %

6 unchanged sentences

77.0 % 64.3 % 12.7 pts.

Average length of passenger haul (miles) 1,068 1,023 4.4 %

Average aircraft stage length (miles) 808 736 9.8 %

Trips flown 305,758 231,105 32.3 %

Seats flown (000s) (d)

47,471 35,491 33.8 %

Seats per trip (e)

155.3 153.6 1.1 %

Average passenger fare $ 144.24 $ 125.07 15.3 %

Passenger revenue yield per RPM (cents) (f)

13.51 12.23 10.5 %

Operating revenues per ASM (cents) (g)

12.07 6.78 78.0 %

Passenger revenue per ASM (cents) (h)

10.91 5.49 98.7 %

Operating expenses per ASM (cents) (i)

10.18 12.11 (15.9) %

Operating expenses per ASM, excluding fuel (cents) 7.63 10.67 (28.5) %

Operating expenses per ASM, excluding fuel and profitsharing (cents) 7.43 10.67 (30.4) %

Fuel costs per gallon, including fuel tax $ 2.01 $ 1.18 70.3 %

Fuel costs per gallon, including fuel tax, economic $ 2.04 $ 1.23 65.9 %

Fuel consumed, in gallons (millions) 491 320 53.4 %

Active fulltime equivalent Employees (j)

53,984 57,931 (6.8) %

Aircraft at end of period (k)

737 734 0.4 %

Nine months ended September 30,

2021 2020 Change

Revenue passengers carried (000s) 69,686 41,622 67.4 %

Enplaned passengers (000s) 87,247 51,833 68.3 %

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

73,850 41,437 78.2 %

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

95,316 79,701 19.6 %

Load factor (c)

81.0 % (4.0) pts.

35 unchanged sentences

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

Table of Conten ts

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

2 unchanged sentences

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

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

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

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

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

(j) Included 8,164 Employees on Extended Emergency Time Off as of March 31, 2021.

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

(k) Included four Boeing 737 Next Generation aircraft in temporary storage as of March 31, 2022.

Also included seven Boeing 737 MAX ("MAX") and 59 Boeing 737 Next Generation aircraft in temporary storage as of March 31, 2021.

Table of Conten ts

Financial Overview

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

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

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

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

Since late February 2020, the Company has experienced negative impacts associated with the COVID-19 pandemic;

however, the Company saw steady improvement throughout much of 2021 and 2022, with intermittent periods of decelerated demand that coincided with COVID-19 variant surges.

The Company's financial results in both years, on both an accounting principles generally accepted in the United States ("GAAP") and Non-GAAP basis, were significantly impacted by the pandemic and the resulting effect on demand and passenger bookings.

The Company recorded first quarter GAAP and non-GAAP results for 2022, 2021, and 2019 as noted in the following tables.

The Company believes comparisons of certain financial results to 2019 continue to be relevant given the significant impacts in 2020 and 2021 resulting from the pandemic.

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

Three months ended Nine months ended

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

GAAP 2021 2020 Percent Change 2021 2020 Percent Change

Three months ended March 31,

(in millions, except per share amounts)

GAAP 2022 2021 2022 Change to 2021 2019 2022 Change to 2019

Operating income (loss) $ (151) $ 199 n.m.

$ 1,526 $ (2,648) n.m.

Net income (loss) $ (278) $ 116 n.m.

$ 909 $ (2,166) n.m.

Net income (loss) per share, diluted $ (0.47) $ 0.19 n.m.

$ 1.49 $ (3.89) n.m.

Operating loss $ (59) $ (1,577) (96.3) $ (1,490) $ (3,841) (61.2)

Net loss $ (135) $ (1,173) (88.5) $ (1,356) $ (2,751) (50.7)

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

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

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

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

Operating income (loss) $ (135) $ (1,269) (89.4) $ 505 n.m.

Net income (loss) $ (191) $ (1,015) (81.2) $ 387 n.m.

Net income (loss) per share, diluted $ (0.32) $ (1.72) (81.2) $ 0.70 n.m.

The Company's GAAP financial results were comparatively worse in first quarter 2022 versus first quarter 2021, primarily due to $1.2 billion in grant allocations of payroll funding support ("Payroll Support") from the United States Department of the Treasury ("Treasury") in 2021 utilized to fund a portion of salaries, wages, and benefits.

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

On a non-GAAP basis, the Company's Operating loss and Net loss improved significantly in first quarter 2022 versus the same prior year period due to the significant recovery in travel demand, which was aided by a reduction in COVID-19 cases and hospitalizations, a significant increase in vaccinations, and a decline in travel-related restrictions across the United States.

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

These impacts combined resulted in a 128.8 percent increase in Operating revenues for the three months ended March 31, 2022, versus the same prior year period.

Operating revenues for first quarter 2022 continued to fall below first quarter 2019 pre-pandemic levels primarily due to lower capacity and load factors in first quarter 2022;

however, Operating expenses exceeded first quarter 2019 pre-pandemic levels primarily due to higher salaries, wages and benefits and fuel prices in first quarter 2022.

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

Table of Conten ts

2Q 2022 Estimation

Operating revenue compared with 2019 (a) Up 8% to 12%

Load factor ~85%

ASMs compared with 2019 Down ~7%

Economic fuel costs per gallon (b)(c) $3.05 to $3.15

Fuel hedging premium expense per gallon $0.05

Fuel hedging cash settlement gains per gallon $0.61

ASMs per gallon (fuel efficiency) 76 to 78

CASM-X (d) compared with 2019 (e) Up 14% to 18%

Debt repayments (millions) ~$20

Interest expense (millions) ~$90

2022 Estimation

ASMs compared with 2019 (f) Down ~4%

Economic fuel costs per gallon (b)(c) $2.75 to $2.85

Fuel hedging premium expense per gallon $0.04

Fuel hedging cash settlement gains per gallon $0.54

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

Debt repayments (millions) ~$650

Interest expense (millions) ~$360

Aircraft (g) 814

Effective tax rate (h) 24% to 26%

Capital spending (billions) (i) ~$5.0

(a) The Company believes that operating revenues compared with 2019 is a relevant measure of performance due to the significant impacts in 2020 and 2021 from the pandemic.

(b) See Note Regarding Use of Non-GAAP Financial Measures for additional information on special items.

In addition, information regarding special items and economic results is included in the accompanying table Reconciliation of Reported Amounts to Non-GAAP Items (also referred to as "excluding special items").

(c) Based on the Company's existing fuel derivative contracts and market prices as of April 21, 2022, second quarter, second half, and full year 2022 economic fuel costs per gallon are estimated to be in the range of $3.05 to $3.15, $2.75 to $2.85, and $2.75 to $2.85, respectively.

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

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

See Note Regarding Use of Non-GAAP Financial Measures.

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

(e) Projections do not reflect the potential impact of fuel and oil expense, special items, and profitsharing because the Company cannot reliably predict or estimate those items or expenses or their impact to its financial statements in future periods, especially considering the significant volatility of the fuel and oil expense line item.

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

(f) While the Company's flight schedule remains published for sale through November 5, 2022, the Company recently adjusted its published flight schedules for June through August 2022 to provide additional buffer to the operation in light of continued available staffing ch allenges headed into the busy summer travel season.

The Company will continue to monitor staffing trends, along with booking and cancellation trends, and adjust capacity, as needed.

As such, the Company's actual flown capacity may differ from currently published flight schedules or current guidance.

(g) Aircraft on property, end of period;

net of 22 r etirements planned in the remaining three quarters of 2022 .

Reflects all exercised activity as of April 28, 2022 and the assumption that the Company exercises all 12 remaining 2022 options.

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

(h) The Company's estimated effective tax rate is impacted by the extinguishment of $164 million in principal of its 1.25% Convertible Senior Notes due 2025 (the “Convertible Notes”) for a cash payment of $230 million, which occurred in first quarter 2022.

The loss on partial extinguishment of Convertible Notes is largely disallowed as a deduction for tax purposes.

Table of Conten ts

(i) Represents current contractual payments to Boeing for firm aircraft and the assumptions that the Company exercises all 12 remaining 2022 options, in addition to ~$900 million non-aircraft capital spending.

Excluding any further option exercises, the Company's 2022 capital spending would be ~$4.2 billion, also including ~$900 million in non-aircraft capital spending.

COVID-19 Pandemic Impacts

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

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

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

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

Such impact ended in third quarter 2021, and the Company's first quarter 2022 results did not reflect the benefit of this Payroll Support, and its future periods are not expected to benefit from such Payroll Support.

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

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

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

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

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

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

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

All Employees that elected to participate in the Extended ETO program have since returned or been recalled to work, or have chosen to permanently separate from the Company, and no Employees remained on Extended ETO as of March 31, 2022.

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

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

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

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

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

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

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

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

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

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

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

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

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

However, in addition to recalling all of the Employees that participated in Extended ETO, the Company met its 2021 hiring goals and is planning to add more than 10,000 additional Employees during 2022 as it strives to provide sufficient staffing to support its anticipated flight schedule plans for 2022 and beyond.

For the three months ended March 31, 2022, the Company met its hiring goals, adding 3,300 Employees, net of attrition.

The Company is making additional investments to attract and retain talent, including the decision to further raise the Company's starting hourly pay rates from $15 per hour to $17 per hour for certain of its workgroups, subject, in each case, to acceptance of such change by the applicable union.

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

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

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

The deadline was later extended to January 4, 2022.

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

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

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

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

Company Overview

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

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

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

The Company continues to expect that more than half of the MAX aircraft in its firm order book will replace a significant amount of its 446 Boeing 737-700 ("-700") aircraft over the next 10 to 15 years to support the modernization of the Company's fleet, a key component of its environmental sustainability efforts.

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

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

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

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

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

The Company expects to end 2021 with 728 total aircraft.

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

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

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

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

During 2021, the Company has begun service to new destinations including:

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

• Colorado Springs Municipal Airport and Savannah/Hilton Head International Airport - March 11, 2021

• Houston's George Bush Intercontinental Airport and Santa Barbara Airport - April 12, 2021

• Fresno Yosemite International Airport - April 25, 2021

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

• Myrtle Beach International Airport - May 23, 2021

• Bozeman Yellowstone International Airport - May 27, 2021

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

• Eugene Airport in Oregon - August 29, 2021

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

• Bellingham International Airport in Washington - November 7, 2021

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

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

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

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

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

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

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

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

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

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

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

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

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

Business revenues continue to lag leisure revenue trends;

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

bookings, thus far, in October 2021.

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

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

October 2021 Estimated

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

Previous estimation (b) (b)

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

Previous estimation (b) (b)

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

(b) Remains unchanged from the previously provided estimation.

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

The following table presents capacity estimates for fourth quarter 2021:

October 2021 Estimated

November 2021 Estimated

December 2021 Estimated

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

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

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

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

(a) Remains unchanged from the previously provided estimation.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Table of Conten ts

The Company ended first quarter 2022 with 722 Boeing 737 aircraft, compared with the Company's previous guidance of 725 aircraft, due to three scheduled aircraft deliveries planned in first quarter 2022 shifting to later in 2022.

As expected, the Company retired five owned -700 aircraft, and returned one leased -700 aircraft during first quarter 2022.

As of March 31, 2022, four -700 aircraft remained in temporary storage due to first quarter and second quarter 2022 capacity remaining below respective 2019 levels.

The Company continues to expect to retire a total of 28 -700 aircraft in 2022.

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

During 2022, the Company is focusing on restoring its network, primarily in cities with a very strong Customer base by adding city pair frequencies and connecting new service with existing points-of-strength to increase Customer depth.

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

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

On March 24, 2022, the Company announced a new fare product, Wanna Get Away Plus™, expected to be available to Customers in second quarter 2022.

Wanna Get Away Plus is expected to provide Customers with more flexibility, choice, and rewards for a modest buy-up from the Company's Wanna Get Away® fare product.

In addition to all of the usual day of travel benefits and booking flexibility offered to Customers across all of the Company's fares, Wanna Get Away Plus provides additional benefits as compared to the Wanna Get Away fare product, including:

• Transferable flight credit(s), a new benefit that generally enables Customers to make a one-time transfer of eligible unused flight credit to a new traveler for future use;

• More flexibility through same-day confirmed change/same-day standby;

• More earning power in the Company's Rapid Rewards® loyalty program, with 8X points awarded on flights instead of the 6X points awarded on Wanna Get Away fares.

On February 8, 2022, the Company reached a tentative collective-bargaining agreement with the Transport Workers Union Local 550 ("TWU 550"), which represents the Company's approximately 400 Employees in the Dispatchers workgroup.

However, during March 2022, the TWU 550 membership voted not to ratify the agreement.

The Company will continue to engage in discussions on a new agreement with TWU 550.

On March 28, 2022, the Company reached a tentative collective-bargaining agreement with the International Association of Machinists and Aerospace Workers, AFL-CIO ("IAM"), which represents the Company's approximately 6,000 Customer Service Agents, Customer Representatives, and Source of Support Representatives.

The ratification vote is scheduled to conclude on May 6, 2022.

If the tentative agreement is ratified, it will become amendable May 6, 2026.

As part of its commitment to corporate sustainability, on April 22, 2022, the Company published its 2021 One Report describing the Company's sustainability strategies, which include the Company’s fuel conservation and emissions reduction initiatives and other efforts to reduce greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling.

The Company also published its first ever Diversity, Equity, and Inclusion ("DEI") Report.

A companion piece to the One Report, the DEI Report takes a deeper dive into the Company's DEI goals, commitments, and initiatives and highlights the path forward.

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

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

Given the estimates,

Table of Conten ts

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

Material Changes in Results of Operations

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

Comparison of three months ended March 31, 2022 and March 31, 2021

Operating Revenues

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

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

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

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

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

Total operating revenues for first quarter 2022 increased by $2.6 billion, or 128.8 percent, year-over-year, to $4.7 billion.

First quarter 2022 operating revenues per ASM (RASM) were 13.65 cents, an increase of 54.1 percent, compared with first quarter 2021.

The dollar increase was driven primarily by the improvements in leisure Passenger demand and bookings in first quarter 2022 versus the severe impacts to demand and bookings from the COVID-19 pandemic in first quarter 2021.

In addition, demand strengthened considerably throughout the quarter, and the Company's operating revenues for March 2022 were strong and above March 2019 levels, which represented the first monthly operating revenue increase relative to respective 2019 levels since the pandemic began.

For first quarter 2022, the year-over-year RASM increase was primarily driven by a 35.7 percent improvement in yield and an increase in Load factor of 12.7 points.

Passenger revenues for first quarter 2022 increased by $2.4 billion, or 141.5 percent, year-over-year.

On a unit basis, Passenger revenues increased 35.7 percent, year-over-year.

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

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

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

The year-over-year increase in Passenger revenues on both a dollar and unit basis was primarily due to easing of negative impacts associated with the COVID-19 pandemic, which resulted in improvements in Passenger demand and bookings, the majority of which were for leisure oriented travel.

These increases were achieved despite $430 million of headwinds experienced during first quarter 2022.

Approximately $380 million of the operating revenue headwinds related to softness in bookings and increased passenger cancellations in January and February 2022 associated with the Omicron variant, which is higher than the Company's previous estimate of $330 million.

In addition, the Company's flight cancellations in January 2022 due to available staffing challenges — exacerbated by weather — resulted in a $50 million negative impact to operating revenues, as previously estimated.

The Company's first quarter 2022 revenue performance from its loyalty program was strong and included incremental revenue from its new co-brand credit card agreement, as expected.

First quarter 2022 managed business revenues decreased 55 percent, compared with first quarter 2019.

March 2022 managed business revenues decreased 36 percent compared with March 2019, outperforming the Company's previous guidance of down approximately 40 percent, driven by an increase in business passengers and yields and boosted by its participation in Global Distribution System platforms.

The Company currently expects April 2022 managed business revenues to decrease approximately 30 percent, compared with April 2019, and currently expects continued sequential improvement in May and June 2022, compared with their respective 2019 levels

Other revenues for first quarter 2022 increased by $220 million, or 74.1 percent, compared with first quarter 2021.

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

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

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

Additionally, the Company received incremental revenue from its new co-brand credit card agreement secured in December 2021.

Operating Expenses

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

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

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

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

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

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

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

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

Operating expenses for first quarter 2022 increased by $3.0 billion, or 161.5 percent, compared with first quarter 2021, while capacity increased 48.6 percent over the same prior year period.

Approximately 50 percent of the operating expense increase was due to $1.2 billion in Payroll Support allocated to offset a portion of salaries, wages and benefits in first quarter 2021 compared with no support received in first quarter 2022, 20 percent of the increase was due to higher Salaries, wages, and benefits, and 20 percent of the increase was due to higher Fuel and oil expense.

Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been

Table of Conten ts

largely driven by changes in capacity, or ASMs.

The following table presents the Company's Operating expenses per ASM for the first quarter of 2022 and 2021, followed by explanations of these changes on a dollar basis.

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

Three months ended September 30, Per ASM

Three months ended March 31, Per ASM

change Percent

8 unchanged sentences

Total 14.09 ¢ 8.00 ¢ 6.09 ¢ 76.1 %

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

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

Based on current cost trends, the Company expects second quarter 2022 operating expenses per ASM, excluding fuel and oil expense, profitsharing, and special items to increase in the range of 14 percent to 18 percent compared with second quarter 2019, due to labor rate inflation across all workgroups;

inflation in airport costs;

and headwinds from operating at suboptimal productivity levels.

The Company continues to experience higher unit cost inflation as it continues to navigate the pandemic recovery and capacity levels remain muted due to available staffing challenges.

The Company's second quarter 2022 published flight schedules include increased short-haul trips in business markets to support the anticipated increase in business travel, relative to its first quarter 2022 flight schedules.

Compared with respective 2019 levels, the increase in short-haul trips is expected to drive a sequential 5-point decrease in average stage length from first quarter 2022 to second quarter 2022, adding further pressure to second quarter 2022 operating expenses per ASM, excluding fuel and oil expense, profitsharing, and special items.

Based on current second half 2022 capacity plans, the Company currently expects operating expenses per ASM, excluding fuel and oil expense, profitsharing, and special items trends to ease sequentially from first half 2022 to second half 2022, but remain elevated above its longer-term expected run rate as the Company scales and better optimizes its network and operations.

Operating expenses per ASM for first quarter 2022 increased by 76.1 percent, compared with first quarter 2021, primarily due to first quarter 2021 including Payroll Support from the Consolidated Appropriations Act, 2021.

Operating expenses per ASM for first quarter 2022, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), decreased 9.2 percent, compared with first quarter 2021 primarily due to a significant increase in capacity.

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

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

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

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

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

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

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

Salaries, wages, and benefits expense for first quarter 2022 increased by $658 million, or 41.9 percent, compared with first quarter 2021.

On a per ASM basis, first quarter 2022 Salaries, wages, and benefits expense decreased 4.6 percent, compared with first quarter 2021.

On a dollar basis, the increase was primarily driven by higher salaries and wages due to significantly more trips, step/pay rate increases for certain workgroups, and $127 million of additional salaries, wages, and benefits expense as a result of incentive pay offered to the Company's Operations Employees through early February 2022 in an effort to address available staffing challenges related to the Omicron variant.

Payroll support and voluntary Employee programs, net (a reduction to expense) had no amounts for first quarter 2022.

First quarter 2021 consisted of the following items:

Table of Conten ts

• $1.2 billion of Payroll Support proceeds allocated (credit to expense);

• $116 million credit to expense associated with the Employee Retention Tax Credit for continuing to pay Employees' salaries during the time they were not working, as allowed under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), and subsequent legislation;

• A $115 million net reduction in the Extended ETO liability relating to certain Employees being recalled prior to their previously elected return dates.

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

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

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

Fuel and oil expense for first quarter 2022 increased by $535 million, or 114.1 percent, compared with first quarter 2021.

On a per ASM basis, first quarter 2022 Fuel and oil expense increased 44.6 percent.

On a dollar basis, approximately 55 percent of the increase was attributable to an increase in jet fuel prices, and the remainder of the increase was due to an increase in fuel gallons consumed.

The Company's first quarter 2022 average economic jet fuel price of $2.30 per gallon is net of approximately $229 million in gains from hedging activities.

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

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

Three months ended September 30,

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

Three months ended March 31,

Economic fuel costs per gallon $ 2.30 $ 1.70

1 unchanged sentence

Fuel hedging premium expense per gallon $ 0.06 $ 0.09

Fuel hedging cash settlement gains per gallon $ 0.04 $ —

Fuel hedging cash settlement gain per gallon $ 0.52 $ 0.01

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

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

When compared with third quarter

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

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

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

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

Remainder of 2021 321

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

The maximum gallons provided are not indicative of the Company's hedge coverage at every price, but represent the highest level of coverage at a single price.

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

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

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

Based on the Company's available seat mile plans for annual 2021, its maximum percent of estimated fuel consumption covered by fuel derivative contracts is 77 percent.

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

Based on 2019 fuel gallons consumed, the Company's maximum percent of fuel consumption covered by fuel derivative contracts is 59 percent in 2022, 37 percent in 2023, and 17 percent beyond 2023.

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

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

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

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

Remainder of 2021 $ 55 $ 15

Total $ 681 $ 339

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

The Company's first quarter 2022 available seat miles per gallon ("fuel efficiency") declined 2.6 percent, year-over-year, due to the Company's return to service of more of its least fuel-efficient aircraft, the -700.

When compared with first quarter 2019, fuel efficiency improved 2.6 percent in first quarter 2022 due to more 737 MAX aircraft, the Company's most fuel-efficient aircraft, in the fleet.

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

The Company expects second quarter 2022 fuel efficiency to be in the range of 76 to 78 ASMs per gallon, on a nominal basis.

The Company's fuel hedge is providing excellent protection against rising energy prices and significantly offset the market price increase in jet fuel in first quarter 2022.

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

however, the economic fuel price per gallon sensitivities provided in the table below assume the relationship between Brent crude oil and refined products based on market prices as of April 21, 2022.

Table of Conten ts

Estimated economic fuel price per gallon,

including taxes and fuel hedging premiums (d)

including taxes and fuel hedging premiums

Average Brent Crude Oil

price per barrel Fourth Quarter 2021 (c)

price per barrel 2Q 2022 (b) 2H 2022 (b)

$80 $2.50 - $2.60 $2.40 - $2.50

3 unchanged sentences

$120 $3.25 - $3.35 $3.15 - $3.25

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

Estimated premium costs (b) $25 million

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

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

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

See Note Regarding Use of Non-GAAP Financial Measures.

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

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

$130 $3.45 - $3.55 $3.45 - $3.55

Fair market value $295 million $468 million

Estimated premium costs $26 million $26 million

(a) Brent crude oil average market prices as of April 21, 2022, were approximat ely $107 and $102 per barrel for second quarter 2022 and second half 2022, respectively.

(b) Based on the Company's existing fuel derivative contracts and market prices as of April 21, 2022, second quarter, second half, and full year 2022 economic fuel costs per gallon are estimated to be in the range of $3.05 to $3.15, $2.75 to $2.85, and $2.75 to $2.85, respectively.

1 unchanged sentence

See Note Regarding Use of Non-GAAP Financial Measures.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Three months ended September 30,

(in millions) 2021 2020

Mark-to-market impact from fuel contracts settling in current and future periods $ 3 $ 23

Premium cost of fuel contracts not designated as hedges 11 11

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

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

Loss on partial extinguishment of convertible notes 12 —

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

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

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

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

Operating Revenues

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

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

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

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

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

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

Operating Expenses

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

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

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

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

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

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

Nine months ended September 30, Per ASM Percent

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

Salaries, wages, and benefits 5.78 ¢ 6.58 ¢ (0.80) ¢ (12.2) %

Payroll support and voluntary Employee programs, net (3.11) (1.17) (1.94) 165.8

Fuel and oil 2.38 1.89 0.49 25.9

Maintenance materials and repairs 0.68 0.75 (0.07) (9.3)

Landing fees and airport rentals 1.15 1.16 (0.01) (0.9)

Depreciation and amortization 1.00 1.18 (0.18) (15.3)

Other operating expenses 1.79 1.76 0.03 1.7

In addition, the Company is providing its maximum percent of estimated fuel consumption covered by fuel derivative contracts in the following table:

Period Maximum fuel hedged percentage (c)

(a) Based on the Company's available seat mile plans for full year 2022.

The Company is currently 63 percent hedged for second quarter 2022 and 60 percent hedged for second half 2022.

(b) Due to uncertainty regarding available seat mile plans in future years, the Company believes that providing the maximum percent of fuel consumption covered by derivative contracts in 2023 and 2024 relative to 2019 fuel gallons consumed is a more relevant measure for future coverage.

(c) The Company's maximum fuel hedged percentage is calculated using the maximum number of gallons that are covered by derivative contracts divided by the Company's estimate of total fuel gallons to be consumed for each respective period.

The Company's maximum number of gallons that are covered by derivative contracts may be at different strike prices and at strike prices materially higher than the current market prices.

The volume of gallons covered by derivative contracts that ultimately get exercised in any given period may vary significantly from the volumes used to calculate the Company's maximum fuel hedged percentages, as market prices and the Company's fuel consumption fluctuate.

Table of Conten ts

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

The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties—see Note 4 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI at March 31, 2022, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

Year Fair value of fuel derivative contracts at March 31, 2022

Amount of gains deferred in AOCI at March 31, 2022 (net of tax)

Remainder of 2022 $ 682 $ 494

Total $ 1,273 $ 873

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

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

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

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

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

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

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

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

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

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

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

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

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

The primary components of this line item included:

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

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

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

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

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

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

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

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

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

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

Nine months ended September 30,

Economic fuel costs per gallon $ 1.92 $ 1.56

Fuel hedging premium expense (in millions) $ 75 $ 73

Fuel hedging premium expense per gallon $ 0.06 $ 0.07

Fuel hedging cash settlement gains per gallon $ 0.02 $ —

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

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

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

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

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

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

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

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

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

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

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

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

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

Maintenance materials and repairs expense for first quarter 2022 increased by $38 million, or 22.0 percent, compared with first quarter 2021.

On a per ASM basis, Maintenance materials and repairs expense decreased 18.7 percent, compared with first quarter 2021.

On a dollar basis, approximately 60 percent of the increase was due to the timing of regular airframe maintenance checks as some costs had previously been deferred while a portion of the fleet was placed into temporary storage during the COVID-19 pandemic.

There were multiple other increases on a dollar basis, primarily related to an increase in various repairs as a result of deferring costs and reduced operations in first quarter 2021 due to the COVID-19 pandemic.

These increases were partially offset by a decrease in engines and components expense due to the "power-by-the-hour" contract for the -700 engines expiring at the end of 2021, in which expense was incurred based primarily upon engine hours flown.

At January 1, 2022, a time and materials contract commenced, pursuant to which -700 engine expense is based on actual repairs.

Landing fees and airport rentals expense for first quarter 2022 increased by $33 million, or 10.5 percent, compared with first quarter 2021.

On a per ASM basis, Landing fees and airport rentals expense decreased 25.2 percent, compared with first quarter 2021.

On a dollar basis, approximately 75 percent of the increase was due to an increase in landing fees from the increased number of trips flown.

Depreciation and amortization expense for first quarter 2022 increased by $12 million, or 3.8 percent, compared with first quarter 2021.

On a per ASM basis, Depreciation and amortization expense decreased by 30.4 percent, compared with first quarter 2021.

On a dollar basis, the increase was primarily associated with higher depreciation expense associated with owned aircraft and engines, including the 28 -700s planned for retirement in 2022.

Other operating expenses for first quarter 2022 increased by $268 million, or 57.9 percent, compared with first quarter 2021.

Included within this line item was aircraft rentals expense in the amounts of $48 million and $51 million for the three-month periods ended March 31, 2022 and 2021, respectively.

On a per ASM basis, Other operating expenses increased 7.0 percent, compared with first quarter 2021.

On a dollar basis, 25 percent of the increase was due to higher revenue related expenses (including credit card processing charges) and 15 percent of the increase was due to higher insurance and taxes.

The majority of the remainder was due to various flight-driven expenses.

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

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

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

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

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

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

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

Nine months ended September 30,

Interest expense for first quarter 2022 decreased by $21 million, or 18.4 percent, compared with first quarter 2021, primarily due to elimination of the debt discount due to the adoption of ASU 2020-06.

See Note 3 to the unaudited Condensed Consolidated Financial Statements for further information.

Table of Conten ts

Capitalized interest for first quarter 2022 decreased by $2 million, or 18.2 percent, compared with first quarter 2021, primarily due to several large technology and facilities projects that were completed and placed into service since first quarter 2021.

Interest income for first quarter 2022 increased by $1 million, or 50.0 percent, compared with first quarter 2021, primarily due to higher interest rates.

The following table displays the components of Other (gains) losses, net, for the three months ended March 31, 2022 and 2021:

Three months ended March 31,

(in millions) 2022 2021

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Premium cost of fuel contracts not designated as hedges — 11

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

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

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

Loss on partial extinguishment of convertible notes 12 —

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

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

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

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

Mark-to-market impact on deferred compensation plan investments 33 —

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

Loss on partial extinguishment of convertible and unsecured notes 72 —

The Company's effective tax rate was approximately 26.1 percent in first quarter 2022, compared with 20.6 percent in first quarter 2021.

The higher tax rate for first quarter 2022 was primarily due to losses on the Company's convertible debt repurchases, which are largely disallowed as a deduction for tax purposes.

The Company currently estimates its annual 2022 effective tax rate to be approximately 24 percent to 26 percent.

Table of Conten ts

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

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

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

2021 2020 Change 2021 2020 Change

Three months ended March 31, Percent

2022 2021 Change

Fuel and oil expense, unhedged $ 1,207 $ 464

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Payroll support and voluntary Employee programs, net

776 149 2,963 933

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

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Premium cost of fuel contracts not designated as hedges — 11

Gain from aircraft sale-leaseback transactions — — — 222

Impairment of long-lived assets (16) $ —

Total operating expenses, excluding special items $ 4,829 $ 3,321 45.4

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

Gain from aircraft sale-leaseback transactions — — — (222)

Impairment of long-lived assets 16 —

Operating loss, excluding special items $ (135) $ (1,269) (89.4)

Other (gains) losses, net, as reported $ 144 $ (48)

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current and future periods (a) (34) (1)

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

Add (Deduct):

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

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

Unrealized mark-to-market adjustment on available for sale investments (5) —

Loss on partial extinguishment of convertible and unsecured notes (72) —

Other (gains) losses, net, excluding special items $ 33 $ (60) n.m.

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

2021 2020 Change 2021 2020 Change

Income (loss) before income taxes, as reported $ (376) $ 146

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Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — (1)

Gain from aircraft sale-leaseback transactions — — — (222)

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current and future periods (a) 34 1

Add (Deduct):

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

Loss on partial extinguishment of convertible notes 12 — 12 —

Impairment of long-lived assets 16 —

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

Table of Conten ts

Three months ended March 31, Percent

2022 2021 Change

Loss on partial extinguishment of convertible and unsecured notes 72 —

Loss before income taxes, excluding special items $ (249) $ (1,310) (81.0)

Provision (benefit) for income taxes, as reported $ (98) $ 30

Add (Deduct):

Net income (loss) tax impact of fuel and special items (b) 40 (325)

GAAP to Non-GAAP tax rate difference (c) — (76) — (168)

Benefit for income taxes, net, excluding special items $ (58) $ (295) (80.3)

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Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — (1)

Gain from aircraft sale-leaseback transactions — — — (222)

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current and future periods (a) 34 1

Loss on partial extinguishment of convertible and unsecured notes 72 —

Impairment of long-lived assets 16 —

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

Add (Deduct):

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

Loss on partial extinguishment of convertible notes 12 — 12 —

Net income (loss) tax impact of special items (b) (40) 325

GAAP to Non-GAAP tax rate difference (c) — 76 — 168

Net loss, excluding special items $ (191) $ (1,015) (81.2)

Net income (loss) per share, diluted, as reported $ (0.47) $ 0.19

Add (Deduct):

Impact of special items 0.16 (2.38)

Add (Deduct):

Net impact of net income (loss) above from fuel contracts divided by dilutive shares 0.06 (0.01)

Add (Deduct):

Net income (loss) tax impact of special items (b) (0.07) 0.53

GAAP to Non-GAAP tax rate difference (c) — 0.13 — 0.30

GAAP to Non-GAAP diluted weighted average shares difference (d) (0.01) — (0.07) —

GAAP to Non-GAAP diluted weighted average shares difference (c) — (0.05)

Net loss per share, diluted, excluding special items $ (0.32) $ (1.72) (81.4)

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

2021 2020 Change 2021 2020 Change

Operating expenses per ASM (cents) 14.09 ¢ 8.00 ¢

Add (Deduct):

Impact of special items (0.04) 6.25

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

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

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

(c) Adjustment related to GAAP and Non-GAAP diluted weighted average shares difference, due to the Company being in a Net income position on a GAAP basis versus a Net loss position on a Non-GAAP basis for the quarter ended March 31, 2021.

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

Table of Conten ts

Note Regarding Use of Non-GAAP Financial Measures

The Company's unaudited Condensed Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP").

The Company's unaudited Condensed Consolidated Financial Statements are prepared in accordance with GAAP.

These GAAP financial statements may include (i) unrealized noncash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges and benefits the Company believes are unusual and/or infrequent in nature and thus may make comparisons to its prior or future performance difficult.

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Any net premium costs paid related to option contracts that are designated as hedges are reflected as a component of Fuel and oil expense, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement.

The Company believes these economic results provide further insight into the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, noncash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense.

The Company believes these economic results provide further insight into the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude any unrealized, noncash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense.

This enables the Company's management, as well as investors and analysts, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense.

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

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

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

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

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

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

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

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

Adjustments for prior period losses reclassified from AOCI associated with forward-starting interest rate swap agreements that were terminated in prior periods related to 12 Boeing 737-8 ("-8") aircraft leases;

Table of Conten ts

Noncash impairment charges, primarily associated with adjustments to the salvage values for previously retired airframes;

Unrealized mark-to-market adjustment associated with certain available for sale investments;

Losses associated with the partial extinguishment of the Company's Convertible Notes and early prepayment of debt.

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

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

Table of Conten ts

Liquidity and Capital Resources

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

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

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

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

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

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

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

Net cash provided by operating activities was $1.1 billion for the three months ended March 31, 2022, compared with $645 million provided by operating activities in the same prior year period.

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

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

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

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

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

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

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

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

The operating cash flows for the three months ended March 31, 2022 included an $885 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, and included a $385 million increase in cash collateral received from derivative counterparties due to an increase in the fuel hedge portfolio, driven by increases in the forward curve year-to-date.

The operating cash flows for the three months ended March 31, 2021, included $1.2 billion in Payroll Support grant proceeds received, and were also driven by an increase in Air Traffic Liability of $599 million as a result of increased ticket sales from the increase in travel demand.

These increases were partially offset by amounts paid out under the Company's Voluntary Separation Program and Extended ETO plans during the three months ended March 31, 2021, which totaled approximately $188 million.

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

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

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

however, these Shareholder return activities have been suspended due to restrictions associated with Payroll Support.

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

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

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

Net cash used in investing activities totaled $139 million during the three months ended March 31, 2022, compared with $201 million used in investing activities in the same prior year period.

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

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

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

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

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

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

As a result of previously agreed upon delivery credits provided by Boeing to the Company due to the settlement of 2020 estimated damages relating to the FAA grounding of the 737 MAX aircraft and progress payments made to date on undelivered aircraft, the Company currently estimates relatively minimal aircraft capital expenditures in 2021.

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

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

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

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

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

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

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

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

During the three months ended March 31, 2022, Capital expenditures were $510 million, compared with $95 million in the same prior year period.

Capital expenditures increased, year-over-year, largely due to an increase in progress payments made on future aircraft deliveries during the three months ended March 31, 2022, compared to the same prior year period, when progress payments were not made due to delivery credits provided by Boeing to the Company resulting from the settlement of 2020 estimated damages relating to the FAA grounding of the MAX aircraft.

The Company continues to estimate its 2022 capital spending to be approximately $5.0 billion, which assumes the exercise of its 12 remaining 2022 Boeing aircraft order book options and remains unchanged despite the shift of -7 firm orders to -8 firm orders as the Company contemplated various scenarios in its 2022 plan.

The Company’s 2022 capital spending guidance continues to include approximately $900 million in non-aircraft capital spending.

Net cash used in financing activities was $314 million during the three months ended March 31, 2022, compared with $464 million provided by financing activities for the same prior year period.

The Company repaid $323 million in debt and finance lease obligations, including the extinguishment of $164 million in principal of its Convertible Notes for a cash payment of $230 million during the three months ended March 31, 2022, and is scheduled to repay approximately $21 million in debt and finance lease obligations during second quarter 2022.

During the three months ended March 31, 2021, the Company borrowed $488 million of loan proceeds under the PSP2 Payroll Support Program.

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

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

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

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

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

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

The Company repaid $67 million in debt and finance lease obligations during the three months ended March 31, 2021.

Table of Conten ts

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

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

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

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

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

The Company has access to $1.0 billion under its amended and restated revolving credit facility (the "Amended A&R Credit Agreement").

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

Interest on the facility is based on the Company's credit ratings at the time of borrowing.

At the Company's current ratings, the interest cost would be LIBOR plus a spread of 200 basis points.

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

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

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

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

At the Company's current ratings, the interest cost would be the London Interbank Offered Rate ("LIBOR") plus a spread of 200 basis points.

The facility contains a financial covenant to maintain total liquidity, as defined in the Amended A&R Credit Agreement, of $1.5 billion at all times under the Amended A&R Credit Agreement;

the Company was compliant with this requirement as of March 31, 2022.

There were no amounts outstanding under the Amended A&R Credit Agreement as of March 31, 2022.

Although not the case at March 31, 2022 due to the Company's significant financing activities throughout the early stages of the pandemic, the Company has historically carried a working capital deficit, in which its current liabilities exceed its current assets.

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

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

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

The Company believes it has various options available to meet its capital and operating commitments, including unrestricted cash and short-term investments of $15.7 billion as of March 31, 2022, and anticipated future internally generated funds from operations.

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

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

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

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

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

As of March 31, 2022, the Company's total firm and option order book was 632 aircraft.

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

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

The following table details information on the aircraft in the Company's fleet as of March 31, 2022:

Age (Yrs) Number

4 unchanged sentences

Totals 13 722 594 128

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

(a) Included 4 Boeing 737 Next Generation aircraft in temporary storage as of March 31, 2022.

Critical Accounting Policies and Estimates

For information regarding the Company’s Critical Accounting Policies and Estimates, see the "Critical Accounting Policies and Estimates" section of "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Table of Conten ts

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

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

• the Company’s network plans;

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

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

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

• the Company’s financial guidance for second quarter and full year 2022 and factors that could impact actual results;

• the Company’s plans related to capacity decisions;

• the Company’s fleet plans and expectations, including underlying assumptions and dependencies, and the Company’s related goals with respect to improvement of potential growth opportunities, restoration of its network, reduction of operating costs, and further fleet modernization with less carbon-intensive aircraft;

• the Company’s hiring plans and expectations;

• the Company’s expectations related to its new fare product, Wanna Get Away Plus™;

• the Company's expectations with respect to Customer demand, including with respect to business travel;

• the Company’s expectations related to fuel efficiency;

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

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

• the Company’s expectations with respect to capital expenditures, in particular with respect to aircraft capital expenditures;

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

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

• the Company’s expectations with respect to its ability to meet its ongoing capital and operating commitments, including underlying assumptions and factors that could impact this ability;

• the Company's assessment of market risks;

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

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

(iii) the impact of government mandates, directives, orders, regulations, and other governmental actions related to COVID-19 on the Company’s business plans and its ability to retain key Employees;

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

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

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

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

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

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

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

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

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

• the Company's dependence on Boeing with respect to the Company's fleet, fuel, and other operational strategies and goals;

Table of Conten ts

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

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

• the impact of fears or actual acts of terrorism or war, political instability, cyber-attacks, and other factors beyond the Company’s control on the Company’s plans, financial results, operations, and ability to adequately insure against risks;

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

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

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

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

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

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

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

• the Company's dependence on Boeing and the FAA with respect to certification of the -7 aircraft;

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

The Company undertakes no obligation to update publicly or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

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 2. Management’s Discussion and Analysis