What changed in this filing

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Item 1. Financial Statements

2022-08-02 compared with 2022-05-02 · 306 added, 173 removed, 659 unchanged (42% of the section changed)

3 unchanged sentences

(in millions)

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Current assets:

40 unchanged sentences

Southwest Airlines Co.

Condensed Consolidated Statement of Comprehensive Income (Loss)

Condensed Consolidated Statement of Comprehensive Income

(in millions, except per share amounts)

Three months ended March 31,

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

2022 2021 2022 2021

OPERATING REVENUES:

12 unchanged sentences

Total operating expenses, net 5,570 3,414 10,415 5,267

OPERATING INCOME (LOSS) ( 151 ) 199

OPERATING INCOME 1,158 594 1,007 793

OTHER EXPENSES (INCOME):

4 unchanged sentences

Total other expenses (income) 122 92 347 145

INCOME (LOSS) BEFORE INCOME TAXES ( 376 ) 146

PROVISION (BENEFIT) FOR INCOME TAXES ( 98 ) 30

NET INCOME (LOSS) $ ( 278 ) $ 116

NET INCOME (LOSS) PER SHARE, BASIC $ ( 0.47 ) $ 0.20

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

INCOME BEFORE INCOME TAXES 1,036 502 660 648

PROVISION FOR INCOME TAXES 276 154 178 185

NET INCOME $ 760 $ 348 $ 482 $ 463

NET INCOME PER SHARE, BASIC $ 1.29 $ 0.59 $ 0.83 $ 0.78

NET INCOME PER SHARE, DILUTED $ 1.20 $ 0.57 $ 0.77 $ 0.76

COMPREHENSIVE INCOME $ 674 $ 544 $ 899 $ 723

12 unchanged sentences

Share-based compensation — 16 — — — 16

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

Comprehensive income — — ( 278 ) 503 — 225

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

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

Share-based compensation — 16 — — — 16

Comprehensive income (loss) — — 760 ( 86 ) — 674

Balance at June 30, 2022 $ 888 $ 3,966 $ 16,311 $ 805 $ ( 10,850 ) $ 11,120

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

7 unchanged sentences

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

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

Share-based compensation — 16 — — — 16

Stock warrants — 22 — — — 22

Comprehensive income (loss) — — 348 196 — 544

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

See accompanying notes.

2 unchanged sentences

(in millions)

Three months ended

Three months ended Six months ended

June 30, June 30,

2022 2021 2022 2021

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) $ ( 278 ) $ 116

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

Net income $ 760 $ 348 $ 482 $ 463

Adjustments to reconcile net income to cash provided by operating activities:

Depreciation and amortization 325 315 649 627

10 unchanged sentences

Other liabilities ( 103 ) ( 64 ) ( 209 ) ( 186 )

Cash collateral received from derivative counterparties 385 38

Cash collateral received from (provided to) derivative counterparties ( 101 ) 48 284 86

Other, net 37 17 69 32

31 unchanged sentences

Financial Derivative Instruments

Comprehensive Income (Loss)

Net Income (Loss) Per Share

Comprehensive Income

Net Income Per Share

Fair Value Measurements

11 unchanged sentences

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

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

The unaudited Condensed Consolidated Financial Statements for the interim periods ended June 30, 2022 and 2021 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods.

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

6 unchanged sentences

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

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

Operating results for the three and six months ended June 30, 2022, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2022.

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

7 unchanged sentences

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

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

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

3 unchanged sentences

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

As consideration for each of these Payroll Support programs, the Company issued a promissory note in favor of Treasury and entered into a warrant agreement with Treasury.

As consideration for its receipt of funding under each of these Payroll Support programs, the Company issued a promissory note in favor of Treasury (classified as a component of Long term debt less current maturities in the unaudited Condensed Consolidated Balance Sheet) and entered into a warrant agreement with Treasury (classified as a component of Stockholders' equity in the unaudited Condensed Consolidated Balance Sheet).

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

10 unchanged sentences

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

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

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

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

All grant portions of the Payroll Support programs received had been allocated and classified as a contra-expense line item in the Company's financial statements by the end of 2021, including approximately $ 724 million and $ 1.9 billion for the three and six months ended June 30, 2021, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income.

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

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

Company in exchange for severance, medical/dental coverage for a specified period of time, and travel privileges based on years of service.

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

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

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

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

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

1 unchanged sentence

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

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

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

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

Both the initial charge and the partial reversal were classified within Payroll support and voluntary Employee programs, net, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

For both the Voluntary Separation Program and Extended ETO programs combined, approximately $ 60 million of the liability balances were relieved during the first six months of 2022 through payments to Employees, leaving a balance of $ 269 million as of June 30, 2022.

The liability associated with the Extended ETO program was fully relieved at March 31, 2022.

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

Therefore, a portion of the accruals previously recorded were reversed, resulting in a net $ 130 million credit to expense during the first six months of 2021.

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

As of March 31, 2022, four aircraft remained in storage, and given the expectation that this storage was temporary in nature, the Company has continued to record depreciation expense associated with them.

As of June 30, 2022, four Boeing 737-700 aircraft remained in storage, all of which were retired from the Company's fleet in July 2022.

NEW ACCOUNTING PRONOUNCEMENTS

6 unchanged sentences

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

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

The Company had no material LIBOR-related contract modifications during the three months ended March 31, 2022.

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

The Company had no material LIBOR-related contract modifications during the six months ended June 30, 2022.

On August 5, 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

6 unchanged sentences

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

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

For the three and six months ended June 30, 2022, the impacts of adopting this new standard were decreases to the Company's Net income in the amounts of $ 21 million, or $ 0.20 per diluted share, and $ 57 million, or $ 0.21 per diluted share, respectively, as a result of higher losses recognized on the Company’s extinguishment transactions following the elimination of the equity component of the Convertible Notes, partially offset by the elimination of the non-cash interest expense associated with the prior debt discount amortization.

Notes to Condensed Consolidated Financial Statements

20 unchanged sentences

Notes to Condensed Consolidated Financial Statements

As of March 31, 2022, the Company had fuel derivative instruments in place to provide coverage at varying price levels.

As of June 30, 2022, the Company had fuel derivative instruments in place to provide coverage at varying price levels.

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

Maximum fuel hedged as of

March 31, 2022 Derivative underlying commodity type as of

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

Remainder of 2022 915 WTI crude oil and Brent crude oil

2023 769 WTI crude oil and Brent crude oil

June 30, 2022 Derivative underlying commodity type as of

Period (by year) (gallons in millions) (a) June 30, 2022

Remainder of 2022 610 WTI crude oil, Brent crude oil, and Heating oil

2023 769 WTI crude oil and Brent crude oil

2024 358 WTI crude oil

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

1 unchanged sentence

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

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

If a derivative initially does not qualify or ceases to qualify for hedge accounting, any change in the fair value of the derivative instrument since the last reporting period would be recorded in Other (gains) losses, net, in the unaudited Condensed Consolidated Statement of Comprehensive Income in the period of the change;

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

1 unchanged sentence

significant fluctuation in energy prices, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging.

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

Certain types of derivative instruments do not qualify for hedge accounting, including those that result in a net sold position (sold gallons exceeding purchased gallons).

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

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

25 unchanged sentences

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

Balance Sheet March 31, December 31,

Balance Sheet June 30, December 31,

(in millions) location 2022 2021

7 unchanged sentences

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

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

As of June 30, 2022, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

Notes to Condensed Consolidated Financial Statements

5 unchanged sentences

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

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

8 unchanged sentences

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

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

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

8 unchanged sentences

Notes to Condensed Consolidated Financial Statements

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2022 and 2021:

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2022 and 2021:

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

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

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

Three months ended June 30, 2022 Three months ended June 30, 2021

(in millions) Fuel and oil Other operating expenses Fuel and oil Other operating expenses

Total $ ( 306 ) $ 2 $ 12 $ 1

4 unchanged sentences

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

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

Six months ended June 30, 2022 Six months ended June 30, 2021

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

Total $ ( 508 ) $ — $ 3 $ 28 $ 6 $ 2

(Gain) loss on cash flow hedging relationships

Commodity contracts:

Amount of (gain) loss reclassified from AOCI into income ( 508 ) — — 28 6 —

Interest contracts:

Amount of loss reclassified from AOCI into income — — 3 — — 2

Derivatives designated and qualified in cash flow hedging relationships

Gain recognized in AOCI on derivatives, net of tax

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

Three months ended

3 unchanged sentences

Total $ ( 147 ) $ ( 186 )

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Derivatives designated and qualified in cash flow hedging relationships

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

Six months ended

(in millions) 2022 2021

Fuel derivative contracts $ ( 792 ) $ ( 275 )

Interest rate derivatives ( 12 ) ( 4 )

Total $ ( 804 ) $ ( 279 )

Derivatives not designated as hedges

(Gain) loss recognized in income on derivatives

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

Three months ended Location of gain recognized in income on derivatives

(in millions) 2022 2021

Fuel derivative contracts $ ( 20 ) $ ( 12 ) Other (gains) losses, net

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

Derivatives not designated as hedges

(Gain) loss recognized in income on derivatives

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

(in millions) 2022 2021

Fuel derivative contracts $ 15 $ ( 16 ) Other (gains) losses, net

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three and six months ended June 30, 2022 and 2021.

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

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

The following

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

Premium expense recognized in income on derivatives

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

(in millions) 2022 2021

Fuel derivative contracts designated as hedges $ 26 $ 14 Fuel and oil

Fuel derivative contracts not designated as hedges — 10 Other (gains) losses, net

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

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

Premium expense recognized in income on derivatives

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

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

(in millions) 2022 2021

2 unchanged sentences

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

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

Included in the Company’s cumulative unrealized gains from fuel hedges as of June 30, 2022, recorded in AOCI, were approximately $ 545 million in net unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to June 30, 2022.

Interest Rate Swaps

8 unchanged sentences

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

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

At June 30, 2022, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating.

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

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

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

The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of June 30, 2022, at which such postings are triggered:

Notes to Condensed Consolidated Financial Statements

21 unchanged sentences

Notes to Condensed Consolidated Financial Statements

COMPREHENSIVE INCOME (LOSS)

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

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

Three months ended March 31,

COMPREHENSIVE INCOME

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

The differences between Net income and Comprehensive income for the three and six months ended June 30, 2022 and 2021 were as follows:

Three months ended June 30,

(in millions) 2022 2021

NET INCOME (LOSS) $ ( 278 ) $ 116

NET INCOME $ 760 $ 348

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

deferred taxes of ($ 29 ) and $ 61

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

deferred taxes of $ 3 and ($ 1 )

Total other comprehensive income (loss) $ ( 86 ) $ 196

COMPREHENSIVE INCOME $ 674 $ 544

Six months ended June 30,

(in millions) 2022 2021

NET INCOME $ 482 $ 463

Unrealized gain on fuel derivative instruments, net of

5 unchanged sentences

COMPREHENSIVE INCOME $ 899 $ 723

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

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three and six months ended June 30, 2022:

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

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

Changes in fair value 182 10 — ( 45 ) 147

Reclassification to earnings ( 306 ) 2 — (a) 71 ( 233 )

Balance at June 30, 2022 $ 1,017 $ ( 38 ) $ 66 $ ( 240 ) $ 805

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

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

Changes in fair value 1,033 16 — ( 245 ) 804

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

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

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

Three months ended March 31, 2022

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

Reclassification to earnings ( 508 ) 3 — (a) 118 ( 387 )

Balance at June 30, 2022 $ 1,017 $ ( 38 ) $ 66 $ ( 240 ) $ 805

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

The following table illustrates the significant amounts reclassified out of each component of AOCI for the three and six months ended June 30, 2022:

Three months ended June 30, 2022

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

AOCI components

1 unchanged sentence

$ ( 235 ) Net of tax

Unrealized loss on interest rate derivative instruments $ 2 Interest expense

Unrealized loss on interest rate derivative instruments $ 2 Other operating expenses

$ 2 Net of tax

Total reclassifications for the period $ ( 233 ) Net of tax

Six months ended June 30, 2022

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

AOCI components

Unrealized gain on fuel derivative instruments $ ( 508 ) Fuel and oil expense

( 119 ) Less:

$ ( 389 ) Net of tax

Unrealized loss on interest rate derivative instruments $ 3 Other operating expenses

$ 2 Net of tax

Total reclassifications for the period $ ( 387 ) Net of tax

Passenger Revenues

2 unchanged sentences

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

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

Three months ended March 31,

The following table provides the components of Passenger revenue recognized for the three and six months ended June 30, 2022 and 2021:

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

(in millions) 2022 2021 2022 2021

3 unchanged sentences

Total passenger revenues $ 6,119 $ 3,569 $ 10,254 $ 5,282

As of March 31, 2022, and December 31, 2021, the components of Air traffic liability, including contract liabilities based on tickets sold and unused flight credits available to the Customer, both of which are net of recorded breakage, and loyalty points available for redemption, within the unaudited Condensed Consolidated Balance Sheet were as follows:

As of June 30, 2022, and December 31, 2021, the components of Air traffic liability, including contract liabilities based on tickets sold and unused flight credits available to the Customer, both of which are net of recorded breakage, and loyalty points available for redemption, within the unaudited Condensed Consolidated Balance Sheet were as follows:

Balance as of

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

(in millions) June 30, 2022 December 31, 2021

Air traffic liability - passenger travel and ancillary passenger services $ 3,634 $ 2,936

3 unchanged sentences

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

Rollforwards of the Company's Air traffic liability - loyalty program for the three months ended March 31, 2022 and 2021 were as follows (in millions):

Three months ended March 31,

Rollforwards of the Company's Air traffic liability - loyalty program for the three and six months ended June 30, 2022 and 2021 were as follows (in millions):

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

2022 2021 2022 2021

Air traffic liability - loyalty program - beginning balance $ 4,884 $ 4,623 $ 4,789 $ 4,447

4 unchanged sentences

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

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

Rollforwards of the amounts included in Air traffic liability as of June 30, 2022 and 2021 were as follows (in millions):

Air traffic liability

3 unchanged sentences

Revenue from current period sales ( 7,264 )

Balance at March 31, 2022 $ 8,610

Balance at June 30, 2022 $ 8,518

Air traffic liability

3 unchanged sentences

Revenue from current period sales ( 3,705 )

Balance at March 31, 2021 $ 7,732

Balance at June 30, 2021 $ 8,679

During 2020 and in parts of 2021, the Company experienced a significantly higher number of Customer-driven flight cancellations as a result of the COVID-19 pandemic.

See Note 2 for further information.

As a result, the amount of Customer travel funds held in Air traffic liability that are estimated to be redeemed for future travel as of March 31, 2022, remains much higher than historical levels.

The amount of such Customer funds represents approximately 9 percent and 16 percent of the total Air traffic liability balance at March 31, 2022, and December 31, 2021, respectively, compared to approximately 2 percent of the Air traffic liability balance as of December 31, 2019.

As a result, the amount of Customer flight credits held in Air traffic liability that are estimated to be redeemed for future travel as of June 30, 2022, remains much higher than historical levels.

The amount of such Customer funds represents approximately 5 percent and 16 percent of the total Air traffic liability balance at June 30, 2022, and December 31, 2021, respectively, compared to approximately 2 percent of the Air traffic liability balance as of December 31, 2019.

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

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

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

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

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

At June 30, 2022, $ 1.1 billion of extended Customer flight credits with a September 7, 2022 expiration date remained in Air traffic liability, although the Company has estimated that a portion of those will not be redeemed.

As a result, recognition of these flight credits as flown revenue, refunds, or breakage revenue has created more volatility over the life of these funds compared to periods in which these extended funds did not exist.

On July 28, 2022, the Company announced that all existing Customer flight credits as of that date, as well as any future flight credits issued, will no longer expire and will thus remain redeemable by Customers.

This announcement is considered a contract modification under applicable accounting guidance and the Company will account for such change prospectively beginning in third quarter 2022.

The Company’s balance of existing Customer flight credits as of the modification date was approximately $ 1.9 billion, including the extended funds that had been set to expire on September 7, 2022.

As the Company continues to believe that a portion of Customer flight credits will not be redeemed, it expects to continue to estimate and record breakage associated with such amounts, although the amount of breakage realized on a prospective basis is expected be lower and more stable than it has been during the pandemic.

Flight credits result from canceling reservations and previously were valid for no longer than one year from the date of original purchase.

Flight credits for non-refundable fares will be issued as long as the flight is cancelled more than 10 minutes prior to the scheduled departure.

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

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

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

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

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

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

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

within Other operating revenues.

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

For the three months ended June 30, 2022 and 2021, the Company recognized $ 522 million and $ 352 million, respectively.

For the six months ended June 30, 2022 and 2021, the Company recognized $ 1.0 billion and $ 632 million, respectively.

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

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

NET INCOME (LOSS) PER SHARE

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

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

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

Three months ended March 31,

Net income (loss) $ ( 278 ) $ 116

NET INCOME PER SHARE

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

For the three and six months ended June 30, 2022, an immaterial number of shares related to the Company's restricted stock units and stock warrants were excluded from the denominator because inclusion of such shares would be antidilutive.

For the three and six months ended June 30, 2021, an immaterial number of shares

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

related to the Company's restricted stock units were excluded from the denominator because inclusion of such shares would be antidilutive.

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

2022 2021 2022 2021

Net income $ 760 $ 348 $ 482 $ 463

Interest expense 4 (a) — 8 (a) —

Net income attributable to common stockholders 764 348 490 463

Weighted-average shares outstanding, basic 593 591 593 591

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

Dilutive effects of Convertible Notes 41 (a) 22 (b) 46 (a) 19 (b)

Dilutive effect of stock warrants — 1 — 1

1 unchanged sentence

Adjusted weighted-average shares outstanding, diluted 635 615 640 612

NET INCOME (LOSS) PER SHARE:

NET INCOME PER SHARE:

Basic $ 1.29 $ 0.59 $ 0.83 $ 0.78

1 unchanged sentence

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

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

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

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

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

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

For the three and six months ended June 30, 2022, all shares issuable on conversion were included in the denominator.

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

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

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

For the three and six months ended June 30, 2021, the average market price of the Company's common stock exceeded the conversion price per share of $ 38.48 and as such, the common shares underlying the Convertible Notes were included in the diluted calculation.

FAIR VALUE MEASUREMENTS

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

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

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

As of June 30, 2022, the Company held certain items that are required to be measured at fair value on a recurring basis.

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

The majority of the Company’s short-term investments consist of instruments classified as Level 1.

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

Fuel derivative instruments currently consist solely of option contracts, whereas interest rate derivatives consist solely of swap agreements.

Fuel derivative instruments currently consist solely of option contracts, whereas

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

interest rate derivatives consist solely of swap agreements.

See Note 4 for further information on the Company’s derivative instruments and hedging activities.

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

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

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

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

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2022, and December 31, 2021:

Fair value measurements at reporting date using:

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

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

Description June 30, 2022 (Level 1) (Level 2) (Level 3)

Assets (in millions)

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Commercial paper 270 — 270 —

Time deposits 350 — 350 —

Short-term investments:

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Option contracts (b) $ ( 167 ) $ — $ — $ ( 167 )

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

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

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

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

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

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

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

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

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

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

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

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2022, or the year ended December 31, 2021.

The following tables present the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2022:

Fair value measurements using significant unobservable inputs (Level 3)

(in millions) Fuel derivatives

Balance at March 31, 2022 $ 1,273

Total gains for the period

Included in earnings 20 (a)

Included in other comprehensive income 182

Sales ( 16 ) (b)

Settlements ( 332 )

Balance at June 30, 2022 $ 1,127

The amount of total gains for the period

included in earnings attributable to the

change in unrealized gains or losses relating

to assets still held at June 30, 2022

The amount of total gains for the period

included in other comprehensive income attributable to the

change in unrealized gains or losses relating

to assets still held at June 30, 2022

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

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

Fair value measurements using significant unobservable inputs (Level 3)

(in millions) Fuel derivatives

Balance at December 31, 2021 $ 696

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Settlements ( 561 )

Balance at March 31, 2022 $ 1,273

Balance at June 30, 2022 $ 1,127

The amount of total losses for the period

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change in unrealized gains or losses relating

to assets still held at March 31, 2022

to assets still held at June 30, 2022 $ ( 15 ) (a)

The amount of total gains for the period

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change in unrealized gains or losses relating

to assets still held at March 31, 2022

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

to assets still held at June 30, 2022 $ 672

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

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

The following table presents a range and weighted average of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 at March 31, 2022:

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Quantitative information about Level 3 fair value measurements

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

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

Third quarter 2022 47 - 67 %

Fuel derivatives Option model Implied volatility Third quarter 2022 28 - 68 %

Fourth quarter 2022 44 - 65 %

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

The carrying amounts and estimated fair values of the Company’s short-term and long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, at March 31, 2022, are presented in the table below.

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

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All privately held debt agreements are categorized as Level 3.

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

determine the fair value of these agreements are unobservable.

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

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

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526 470 Level 3

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

SUPPLEMENTAL FINANCIAL INFORMATION

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

(in millions) June 30, 2022 December 31, 2021

Trade receivables $ 59 $ 58

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Business partners and other suppliers 541 432

Taxes receivable 698 699

Taxes receivable (a) 219 699

Fuel hedging and receivables 125 8

Accounts and other receivables $ 1,389 $ 1,357

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

(in millions) June 30, 2022 December 31, 2021

Derivative contracts $ 221 $ 192

2 unchanged sentences

Other assets $ 847 $ 882

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

(in millions) June 30, 2022 December 31, 2021

Accounts payable trade $ 395 $ 156

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Accounts payable $ 1,908 $ 1,282

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

(in millions) June 30, 2022 December 31, 2021

Voluntary Separation Program $ 79 $ 92

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Interest 96 46

Deferred supplier payments (a) — 80

Deferred supplier payments (b) — 80

Other 351 335

Accrued liabilities $ 1,587 $ 1,624

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

(in millions) June 30, 2022 December 31, 2021

Voluntary Separation Program $ 190 $ 233

3 unchanged sentences

Other noncurrent liabilities $ 1,096 $ 1,224

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

The refund was received by the Company during second quarter 2022.

These amounts as of June 30, 2022 and December 31, 2021 also include excise taxes remitted to taxing authorities for which the subsequent flights were canceled by Customers, resulting in amounts due back to the Company.

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

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

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

All of the outstanding Series 2010 bonds, in the principal amount of $ 310 million, were redeemed by LFAMC on September 28, 2021 (Redemption Date).

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

As of June 30, 2022, $ 79 million of principal remained outstanding associated with the Series 2012 bonds.

The net present value of the future principal and interest payments associated with the Series 2012 bonds was $ 88 million as of June 30, 2022, and was reflected as part of the Company's operating lease right-of-use assets and lease obligations in the unaudited Condensed Consolidated Balance Sheet.

Contractual Obligations and Contingent Liabilities and Commitments

During second quarter 2022, the Company entered into supplemental agreements with The Boeing Company ("Boeing") to replace the majority of its 2022 Boeing 737-7 ("-7") firm orders with Boeing 737-8 ("-8") firm orders, among other adjustments to its near-term contractual order book.

The Company also exercised 20 -8 options for delivery in 2022, exercised four -7 options for delivery in 2023, exercised three -8 options for delivery in 2023, and accelerated and exercised 17 2023 -8 options for delivery in 2022.

While the Company is contractually scheduled to receive 114 MAX deliveries, including options, this year, a portion of its deliveries are expected to shift into 2023 due to Boeing's supply chain challenges and the current

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

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

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

Contractual Obligations and Contingent Liabilities and Commitments

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

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

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

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

status of the -7 certification.

Based on recent discussions with Boeing regarding the pace of expected deliveries for the remainder of this year, the Company is currently estimating it will receive a total of 66 -8 aircraft deliveries and no -7 deliveries in 2022.

The Company retains significant flexibility to manage its fleet size, including opportunities to accelerate fleet modernization efforts if growth opportunities do not materialize.

Given the current supply chain and aircraft delivery delays, the Company will continue working with Boeing on the Company's contractual order book with focus on 2022 and 2023.

Additional information regarding the Company's contractual order book is included in the following table as of June 30, 2022:

The Boeing Company

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

2022 72 15 27 114

2022 14 95 5 114 (c)

2023 86 — 4 90

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

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

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

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

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

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

(c) Includes 12 -8 deliveries received through June 30, 2022, 23 expected -8 deliveries in third quarter 2022, and 31 expected -8 deliveries in fourth quarter 2022, for a total of 66 -8 deliveries in 2022.

Furthermore, given the current ongoing status of the -7 certification and pace of expected deliveries for the remainder of this year, it is the Company's assumption that it will receive no -7 aircraft deliveries in 2022, and has the ability to convert -7s to -8s as noted in footnote (b).

Based on the Company's existing agreement with Boeing, capital commitments associated with its firm orders as of June 30, 2022, were:

$ 2.4 billion remaining in 2022, $ 2.2 billion in 2023, $ 910 million in 2024, $ 845 million in 2025, $ 984 million in 2026, $ 1.0 billion in 2027, and $ 6.3 billion thereafter.

In addition, subsequent to June 30, 2022, and through August 1, 2022, due to the current status of the -7 certification, the Company converted 48 2023 -7 firm orders to -8 firm orders in 2023.

These conversions did not result in a significant change to the Company's commitments as of June 30, 2022.

Contingencies

The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business and records a liability for such claims when it is probable that a loss will be incurred and the amount is reasonably estimable.

In recent years, the airline industry has experienced an increase in litigation asserting the application of state and local employment laws, particularly in California.

On June 30, 2022, the U.S.

Supreme Court denied review of the Ninth Circuit’s ruling in Bernstein v.

Virgin America, Inc.

, which held that federal law did not preempt the California state meal-and-rest-break regulations for flight attendants at issue.

The Company is a defendant in multiple proceedings asserting wage and hour claims with respect to certain employees who work in, or are based in, California.

The Bernstein decision may adversely affect the Company’s defenses in some or all of those proceedings and may give rise to additional litigation in these or other areas previously believed to be preempted by federal law.

The Company is currently not able to estimate a range of possible loss.

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

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

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

Contingencies

The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business, including, but not limited to, examinations by the Internal Revenue Service ("IRS").

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

FINANCING ACTIVITIES

3 unchanged sentences

Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2025, in the event certain conditions are met, as stated in the offering documents.

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

As of June 30, 2022, the conditions were not met that would allow holders to exercise their conversion option.

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

4 unchanged sentences

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

2 unchanged sentences

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

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

(in millions) June 30, 2022 December 31, 2021

Equity component:

7 unchanged sentences

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

Three months ended March 31,

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

(in millions) 2022 2021 2022 2021

3 unchanged sentences

Total interest expense $ 9 $ 28 $ 19 $ 56

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

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

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

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

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

Table of Conten ts

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

The Company had no changes to conversion terms, contingencies, or exercise prices during the six months ended June 30, 2022.

The effective interest rate associated with the Convertible Notes was approximately 1.9 percent for the three and six months ended June 30, 2022.

During the three and six months ended June 30, 2022, the Company paid $ 231 million and $ 555 million, respectively, in debt and finance lease obligations, which included scheduled debt and lease payments, extinguishment of Convertible Notes, and the early prepayment of debt.

The following tables present the impact of the partial extinguishment of the Company's Convertible Notes and early prepayment of debt within the unaudited Condensed Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2022:

Three months ended June 30, 2022

(in millions) Cash payment Principal repayment Loss on extinguishment (a) Non-cash amortization of debt discount and (issuance) costs

1.25 % Convertible Notes due 2025

$ 178 $ 138 $ 42 $ ( 2 )

5.125 % Notes due 2027

$ 27 $ 26 $ 1 $ —

4.75 % Notes due 2023

5.25 % Notes due 2025

Total $ 209 $ 168 $ 43 $ ( 2 )

Six months ended June 30, 2022

(in millions) Cash payment Principal repayment Loss on extinguishment (a) Non-cash amortization of debt discount and (issuance) costs

1.25 % Convertible Notes due 2025

$ 409 $ 302 $ 112 $ ( 5 )

5.125 % Notes due 2027

$ 61 $ 56 $ 4 $ 1

4.75 % Notes due 2023

5.25 % Notes due 2025

Total $ 474 $ 362 $ 116 $ ( 4 )

(a) Reflected in Other (gains) losses, net.

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

In July 2022, this facility was amended to extend the expiration date to August 2025, and to change the benchmark rate from the London Interbank Offered Rate to the Secured Overnight Financing Rate ("SOFR").

There were no amounts outstanding under the Amended A&R Credit Agreement as of June 30, 2022.

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

What changed 10-Q

Item 1. Financial Statements