What changed in this filing

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Item 1. Financial Statements

2022-10-31 compared with 2022-08-02 · 169 added, 151 removed, 814 unchanged (28% of the section changed)

3 unchanged sentences

(in millions)

June 30, 2022 December 31, 2021

September 30, 2022 December 31, 2021

Current assets:

42 unchanged sentences

(in millions, except per share amounts)

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

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

2022 2021 2022 2021

18 unchanged sentences

Interest income ( 70 ) ( 2 ) ( 101 ) ( 6 )

Loss on extinguishment of debt 76 12 192 12

Other (gains) losses, net ( 39 ) 17 57 ( 44 )

25 unchanged sentences

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

Issuance of common and treasury stock pursuant to Employee stock plans — 9 — — 4 13

Share-based compensation — 14 — — — 14

Comprehensive income — — 277 ( 500 ) — ( 223 )

Balance at September 30, 2022 $ 888 $ 3,989 $ 16,588 $ 305 $ ( 10,846 ) $ 10,924

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

12 unchanged sentences

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

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

Share-based compensation — 14 — — — 14

Equity feature of Convertible Notes, net of issuance costs — ( 42 ) — — — ( 42 )

Comprehensive income — — 446 131 — 577

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

See accompanying notes.

2 unchanged sentences

(in millions)

Three months ended Six months ended

June 30, June 30,

Three months ended Nine months ended

September 30, September 30,

2022 2021 2022 2021

7 unchanged sentences

Deferred income taxes 76 67 250 42

Loss on partial extinguishment of convertible and unsecured notes 43 — 116 —

Loss on extinguishment of debt 76 12 192 12

Changes in certain assets and liabilities:

6 unchanged sentences

Other, net ( 25 ) ( 20 ) 44 12

Net cash provided by operating activities 1,906 2,005 2,977 2,650

Net cash provided by (used in) operating activities 234 ( 575 ) 3,211 2,075

CASH FLOWS FROM INVESTING ACTIVITIES:

22 unchanged sentences

Assets constructed for others $ — $ — $ — $ 309

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

See accompanying notes.

20 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 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.

The unaudited Condensed Consolidated Financial Statements for the interim periods ended September 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 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.

Operating results for the three and nine months ended September 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.

Certain prior period amounts have been reclassified to conform to the current presentation.

In the unaudited Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2021, the Company has reclassified $ 12 million, in both periods, from Other (gains) losses, net to Loss on extinguishment of debt.

Notes to Condensed Consolidated Financial Statements

7 unchanged sentences

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 and throughout second quarter 2022 as COVID-19 cases significantly trended downward and bookings for summer travel accelerated.

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

Strong revenue trends, especially for leisure travel, continued throughout third quarter 2022.

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

12 unchanged sentences

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

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

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

and limits on executive compensation until April 1, 2023.

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

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.

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 $ 763 million and $ 2.7 billion for the three and nine months ended September 30, 2021, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income.

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

10 unchanged sentences

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 $ 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.

For both the Voluntary Separation Program and Extended ETO programs combined, approximately $ 86 million of the liability balances were relieved during the first nine months of 2022 through payments to Employees, leaving a balance of $ 242 million as of September 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.

During the first nine 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 $ 140 million credit to expense during the first nine months of 2021.

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

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

As of September 30, 2022, no Boeing aircraft remained in short or long-term storage.

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

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.

is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued.

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.

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.

For the three and nine months ended September 30, 2022, the impacts of adopting this new standard were decreases to the Company's Net income in the amounts of $ 36 million, or $ 0.08 per diluted share, and $ 94 million, or $ 0.22 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

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Notes to Condensed Consolidated Financial Statements

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

As of September 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

June 30, 2022 Derivative underlying commodity type as of

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

September 30, 2022 Derivative underlying commodity type as of

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

Remainder of 2022 305 WTI crude oil, Brent crude oil, and Heating oil

10 unchanged sentences

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.

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

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

24 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 June 30, December 31,

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

As of September 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)

June 30, 2022 December 31, 2021

September 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)

June 30, 2022 December 31, 2021

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

Three months ended September 30, 2022 Three months ended September 30, 2021

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

6 unchanged sentences

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

Nine months ended September 30, 2022 Nine months ended September 30, 2021

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

8 unchanged sentences

Three months ended

September 30,

(in millions) 2022 2021

7 unchanged sentences

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

Six months ended

Nine months ended

September 30,

(in millions) 2022 2021

5 unchanged sentences

Three months ended Location of gain recognized in income on derivatives

September 30,

(in millions) 2022 2021

2 unchanged sentences

(Gain) loss recognized in income on derivatives

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

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

September 30,

(in millions) 2022 2021

Fuel derivative contracts $ ( 23 ) $ ( 13 ) 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.

The Company also recorded expense (benefit) associated with premiums paid for fuel derivative contracts that settled/expired during the three and nine months ended September 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 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

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

Premium (benefit) expense recognized in income on derivatives

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

September 30,

(in millions) 2022 2021

4 unchanged sentences

Notes to Condensed Consolidated Financial Statements

Premium expense recognized in income on derivatives

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

Premium (benefit) expense recognized in income on derivatives

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

September 30,

(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 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.

Included in the Company’s cumulative unrealized gains from fuel hedges as of September 30, 2022, recorded in AOCI, were approximately $ 194 million in net unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to September 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 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.

At September 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 June 30, 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 September 30, 2022, at which such postings are triggered:

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

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,

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 and Comprehensive income (loss) for the three and nine months ended September 30, 2022 and 2021 were as follows:

Three months ended September 30,

(in millions) 2022 2021

2 unchanged sentences

deferred taxes of ($ 153 ) and $ 39

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

Unrealized gain on interest rate derivative instruments, net of

deferred taxes of $ — and $ 1

Total other comprehensive income (loss) $ ( 500 ) $ 131

COMPREHENSIVE INCOME $ 674 $ 544

Six months ended June 30,

COMPREHENSIVE INCOME (LOSS) $ ( 223 ) $ 577

Nine months ended September 30,

(in millions) 2022 2021

NET INCOME $ 759 $ 909

Unrealized gain on fuel derivative instruments, net of

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

deferred taxes of ($ 31 ) and $ 131

2 unchanged sentences

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

Total other comprehensive income $ 417 $ 260

Total other comprehensive income (loss) $ ( 83 ) $ 391

COMPREHENSIVE INCOME $ 676 $ 1,300

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

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

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

Changes in fair value ( 462 ) 2 — 108 ( 352 )

Reclassification to earnings ( 195 ) 2 — (a) 45 ( 148 )

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

Balance at September 30, 2022 $ 360 $ ( 34 ) $ 66 $ ( 87 ) $ 305

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

2 unchanged sentences

Reclassification to earnings ( 703 ) 5 — (a) 163 ( 535 )

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

Balance at September 30, 2022 $ 360 $ ( 34 ) $ 66 $ ( 87 ) $ 305

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

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

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

Three months ended September 30, 2022

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

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Total reclassifications for the period $ ( 148 ) Net of tax

Six months ended June 30, 2022

Nine months ended September 30, 2022

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

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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 and six months ended June 30, 2022 and 2021:

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

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

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

(in millions) 2022 2021 2022 2021

3 unchanged sentences

Total passenger revenues $ 5,613 $ 4,227 $ 15,867 $ 9,508

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:

As of September 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) June 30, 2022 December 31, 2021

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

Air traffic liability - passenger travel and ancillary passenger services $ 3,540 $ 2,936

1 unchanged sentence

Total Air traffic liability $ 8,425 $ 7,725

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

The balance in Air traffic liability - passenger travel and ancillary passenger services also includes flight credits not currently associated with a ticket that can be applied by Customers towards the purchase of future travel.

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

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

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

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

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

2022 2021 2022 2021

5 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 June 30, 2022 and 2021 were as follows (in millions):

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

Air traffic liability

3 unchanged sentences

Revenue from current period sales ( 12,180 )

Balance at June 30, 2022 $ 8,518

Balance at September 30, 2022 $ 8,425

Air traffic liability

3 unchanged sentences

Revenue from current period sales ( 7,199 )

Balance at June 30, 2021 $ 8,679

Balance at September 30, 2021 $ 8,236

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 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.

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

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

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.

This announcement is considered a contract modification under applicable accounting guidance and the Company accounted for such change prospectively 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 flight credits that had been set to expire on September 7, 2022.

As the Company continues to believe that a portion of Customer flight credits issued after July 28, 2022, will not be redeemed, it has estimated and recorded in third quarter 2022, and expects to continue to estimate and record, breakage associated with such amounts.

The amount of breakage realized on a prospective basis, however, is expected to be lower and more stable than it has been during the pandemic.

The amount of Customer flight credits represents approximately 6 percent and 16 percent of the total Air traffic liability balance at September 30, 2022, and December 31, 2021, respectively, compared to approximately 2 percent of the Air traffic liability balance as of December 31, 2019.

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.

8 unchanged sentences

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 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.

For the three months ended September 30, 2022 and 2021, the Company recognized $ 521 million and $ 355 million, respectively.

For the nine months ended September 30, 2022 and 2021, the Company recognized $ 1.5 billion and $ 987 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.

5 unchanged sentences

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

For the three and nine months ended September 30, 2022 and 2021, an immaterial number of shares

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

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,

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

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

2022 2021 2022 2021

11 unchanged sentences

(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 per share.

The standard requires the Company to apply the if-converted method for purposes of diluted net income per share, which requires the Company to assume that all Convertible Notes were converted and outstanding for the entire period.

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.

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

For the three and nine months ended September 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 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.

For the three and nine months ended September 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 June 30, 2022, the Company held certain items that are required to be measured at fair value on a recurring basis.

As of September 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.

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

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

Fuel derivative instruments currently consist solely of option contracts, whereas

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

interest rate derivatives consist solely of swap agreements.

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.

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

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

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

Assets (in millions)

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Commercial paper 315 — 315 —

Certificates of deposit 15 — 15 —

Time deposits 25 — 25 —

Short-term investments:

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Notes to Condensed Consolidated Financial Statements

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the 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:

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

Balance at June 30, 2022 $ 1,127

Total gains (losses) for the period

Included in earnings 38 (a)

Included in other comprehensive income ( 462 )

Sales ( 16 ) (b)

Purchases 52 (b)

Settlements ( 219 )

Balance at June 30, 2022 $ 1,127

Balance at September 30, 2022 $ 536

The amount of total gains for the period

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change in unrealized gains or losses relating

to assets still held at June 30, 2022

The amount of total gains for the period

to assets still held at September 30, 2022

The amount of total losses 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

to assets still held at September 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.

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

Fair value measurements using significant unobservable inputs (Level 3)

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Balance at December 31, 2021 $ 696

Total gains (losses) for the period

Total gains for the period

Included in earnings 23 (a)

Included in other comprehensive income 571

Sales ( 26 ) (b)

Purchases 25 (b)

Settlements ( 779 )

Balance at June 30, 2022 $ 1,127

The amount of total losses for the period

Balance at September 30, 2022 $ 536

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 $ ( 15 ) (a)

to assets still held at September 30, 2022

The amount of total gains for the period

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change in unrealized gains or losses relating

to assets still held at June 30, 2022 $ 672

to assets still held at September 30, 2022

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

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

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Notes to Condensed Consolidated Financial Statements

The following table presents a range and weighted average of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 at June 30, 2022:

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 Third quarter 2022 28 - 68 %

Fourth quarter 2022 44 - 65 %

Fuel derivatives Option model Implied volatility Fourth quarter 2022 33 - 59 %

2023 42 - 56 %

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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 June 30, 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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$ 300 $ 300 Level 2

Pass Through Certificates due August 2022 - 6.19 %

33 33 Level 2

4.75 % Notes due 2023

1,247 1,259 Level 2

1.25 % Convertible Notes due 2025

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SUPPLEMENTAL FINANCIAL INFORMATION

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

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

Trade receivables $ 85 $ 58

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Accounts and other receivables $ 1,316 $ 1,357

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

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

Derivative contracts $ 144 $ 192

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Other assets $ 772 $ 882

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

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

Accounts payable trade $ 279 $ 156

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Accounts payable $ 1,553 $ 1,282

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

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

Voluntary Separation Program $ 74 $ 92

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Deferred supplier payments (b) — 80

Bonus and incentive pay (c) 330 150

Other 240 185

Accrued liabilities $ 1,881 $ 1,624

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

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

Voluntary Separation Program $ 168 $ 233

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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.

These amounts as of September 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 were subsequently relieved via future payments to supplier.

(c) Includes anticipated contract labor ratification bonuses and/or accruals, and non-contract bonuses and incentive pay.

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

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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.

As of September 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 September 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

During third quarter 2022, the Company entered into a supplemental agreement with The Boeing Company ("Boeing") to replace the majority of its 2023 Boeing 737 MAX 7 ("-7") firm orders with Boeing 737 MAX 8 ("-8") firm orders, among other adjustments to its near-term contractual order book.

The Company also exercised five -8 options for delivery in 2022 and four -7 options for delivery in 2023.

While the Company remains contractually scheduled to receive 114 MAX deliveries this year, the Company

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

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.

continues to expect a portion of its deliveries to shift out of 2022 due to Boeing's supply chain challenges and the current status of the -7 certification, which has not yet been achieved but is expected in 2022 or 2023.

Based on recent discussions with Boeing regarding the pace of expected deliveries for the remainder of this year, the Company continues to estimate it will receive a total of 66 -8 aircraft deliveries in 2022, including 31 -8 deliveries in fourth quarter 2022, 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:

Given the current supply chain and aircraft delivery delays, the Company will continue working with Boeing to solidify future delivery dates.

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

The Boeing Company

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196 (a) 278 (b) 158 632

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

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

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

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

(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.

(c) Includes 35 -8 deliveries received through September 30, 2022, and 31 expected -8 deliveries in fourth quarter 2022, for a total of 66 -8 deliveries 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 out of 2022 due to Boeing's supply chain challenges and the current status of the -7 certification.

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:

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

$ 1.9 billion remaining in 2022, $ 2.3 billion in 2023, $ 932 million in 2024, $ 853 million in 2025, $ 999 million in 2026, $ 1.1 billion in 2027, and $ 6.4 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

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

As of September 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.

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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) June 30, 2022 December 31, 2021

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

Equity component:

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Notes to Condensed Consolidated Financial Statements

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

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

(in millions) 2022 2021 2022 2021

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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

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

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

During the three and nine months ended September 30, 2022, the Company paid $ 1.9 billion and $ 2.5 billion, respectively, in debt and finance lease obligations, which included scheduled debt and lease payments, partial 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 (excluding payments on finance leases), including $ 1.3 billion in prepayments for all of the Company's outstanding 4.75 % Notes due 2023, within the unaudited Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2022:

Three months ended September 30, 2022

(in millions) Cash paid for debt and interest Principal repayment Loss on extinguishment Non-cash amortization of debt discount and (issuance) costs Accrued Interest

1.25 % Convertible Notes due 2025

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4.75 % Notes due 2023

1,274 1,247 8 — 19

5.25 % Notes due 2025

227 217 6 — 4

Total $ 1,890 $ 1,791 $ 76 $ ( 2 ) $ 25

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

Nine months ended September 30, 2022

(in millions) Cash paid for debt and interest Principal repayment Loss on extinguishment Non-cash amortization of debt discount and (issuance) costs Accrued Interest

1.25 % Convertible Notes due 2025

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4.75 % Notes due 2023

1,278 1,250 9 — 19

5.25 % Notes due 2025

228 218 6 — 4

Total $ 2,364 $ 2,153 $ 192 $ ( 7 ) $ 26

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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.

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

There were no amounts outstanding under the Amended A&R Credit Agreement as of September 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