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Item 2. Management’s Discussion and Analysis

2022-10-31 compared with 2022-08-02 · 296 added, 263 removed, 431 unchanged (56% of the section changed)

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

Relevant comparative operating statistics for the three and six months ended June 30, 2022, 2021, and 2019 are included below.

Relevant comparative operating statistics for the three and nine months ended September 30, 2022, 2021, and 2019 are included below.

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

For the three and six months ended June 30, 2022, the Company believes a comparison of its 2022 to 2019 (pre-pandemic) operating statistics is relevant and useful as the Company continues to recover from the pandemic.

For the three and six months ended June 30, 2021, and 2022, most of these operating statistics were significantly impacted by the COVID-19 pandemic and decisions the Company made as a result of the pandemic.

For the three and nine months ended September 30, 2022, the Company believes a comparison of its 2022 to 2019 (pre-pandemic) operating statistics is relevant and useful as the Company continues to recover from the pandemic.

For the three and nine months ended September 30, 2022 and 2021, most of these operating statistics were significantly impacted by the COVID-19 pandemic and decisions the Company made as a result of the pandemic.

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

Three months ended June 30,

Three months ended September 30,

2022 2021 2022 Change to 2021 2019 2022 Change to 2019

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742 737 0.7 % 752 (1.3) %

Six months ended June 30,

Nine months ended September 30,

2022 2021 2022 Change to 2021 2019 2022 Change to 2019

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

(j) Included 1,446 Employees on Extended Emergency Time Off as of June 30, 2021.

(j) Included less than 500 Employees on Extended Emergency Time Off as of September 30, 2021.

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

(k) Included four and 39 Boeing 737 Next Generation aircraft in storage as of June 30, 2022 and June 30, 2021, respectively.

Included 34 Boeing 737 MAX ("MAX") aircraft in long term storage as of June 30, 2019.

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

Also included 34 Boeing 737 MAX ("MAX") aircraft in long term storage as of September 30, 2019.

Financial Overview

The Company's financial results in 2021 were impacted and in 2022 have continued to be impacted, by the effects of the COVID-19 pandemic, which began in early 2020, on both an accounting principles generally accepted in the United States ("GAAP") and Non-GAAP basis.

Although demand for leisure travel surged in second quarter 2022 and second quarter 2022 Operating revenues exceeded second quarter 2019 Operating revenues, both capacity (or ASMs) and business travel remained below comparable 2019 levels primarily due to available staffing constraints, in particular Pilots.

In addition, GAAP results for the three and six months ended June 30, 2021, included impacts associated with payroll funding support ("Payroll Support") programs with the United States Department of the Treasury ("Treasury"), as referenced in Note 2 to the unaudited Condensed Consolidated Financial Statements.

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

The Company believes comparisons of current year financial results to 2019 continue to be relevant given the significant impacts resulting from the pandemic.

The Company's financial results in 2021 and thus far in 2022, on both an accounting principles generally accepted in the United States ("GAAP") basis and non-GAAP basis, were impacted by the effects of the COVID-19 pandemic, which began in early 2020.

The strong travel demand that began in March 2022 continued through third quarter 2022, producing operating revenues of $6.2 billion, a Company third quarter record.

Leisure revenue trends were elevated compared with 2019 levels, while managed business revenues were down 28 percent compared with third quarter 2019.

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

GAAP results for the three and nine months ended September 30, 2021, included impacts associated with payroll funding support ("Payroll Support") programs with the United States Department of the Treasury ("Treasury"), as referenced in Note 2 to the unaudited Condensed Consolidated Financial Statements.

The Company believes comparisons of current year financial results to 2019 are relevant and show how the Company has continued to recover from the pandemic.

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

Three months ended June 30,

Three months ended September 30,

(in millions, except per share amounts)

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Operating income (loss) $ 425 $ (59) n.m.

$ 819 (48.1) %

Net income (loss) $ 316 $ (135) n.m.

Net income per share, diluted $ 1.30 $ (0.35) n.m.

$ 659 (52.0) %

Six months ended June 30,

Net income (loss) per share, diluted $ 0.50 $ (0.23) n.m.

$ 1.23 (59.0) %

Nine months ended September 30,

(in millions, except per share amounts)

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$ 1,787 (46.8) %

Net income per share, diluted $ 1.00 $ (2.07) n.m.

Net income (loss) per share, diluted $ 1.51 $ (2.29) n.m.

$ 3.29 (54.2) %

The Company's financial results for the three and six months ended June 30, 2022, exceeded the comparative 2021 financial results despite $724 million and $1.9 billion in grant allocations of Payroll Support from Treasury during the three and six months ended June 30, 2021, respectively, utilized to fund a portion of salaries, wages, and benefits.

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

On a non-GAAP basis, the Company's Operating income (loss) and Net income (loss) improved significantly in the three and six months ended June 30, 2022, versus the same prior year period due to the

The comparison of the Company's financial results, as shown above on a GAAP basis for the three and nine months ended September 30, 2022 versus the three and nine months ended September 30, 2021, were impacted by the Payroll Support that significantly benefited 2021 results.

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

On a non-GAAP basis, the Company's financial results improved significantly for the three and nine months ended September 30, 2022, versus the same prior year period due to the

significant recovery in travel demand, which was aided by a reduction in COVID-19 cases and hospitalizations, an increase in vaccinations, and a decline in travel-related restrictions across the United States.

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

These impacts combined resulted in a 67.9 percent and 88.5 percent increase in Operating revenues for the three and six months ended June 30, 2022, respectively, versus the same prior year periods.

Operating revenues for the three and six months ended June 30, 2022, exceeded the comparative 2019 pre-pandemic levels primarily due to higher yields, despite the slight decrease in capacity.

Operating expenses for the three and six months ended June 30, 2022, exceeded the comparative pre-pandemic 2019 levels primarily due to higher salaries, wages, and benefits and fuel prices.

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

These impacts combined resulted in a 32.9 percent and 64.3 percent increase in Operating revenues for the three and nine months ended September 30, 2022, respectively, versus the same prior year periods.

Operating revenues for the three and nine months ended September 30, 2022, exceeded the comparative 2019 pre-pandemic levels primarily due to higher yields.

Operating expenses for the three and nine months ended September 30, 2022, exceeded the comparative pre-pandemic 2019 levels primarily due to higher salaries, wages, and benefits and fuel prices.

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

4Q 2022 Estimation

Operating revenue compared with 2019 (a) Up 13% to 17%

ASMs compared with 2019 (b) ~Flat

ASMs compared with 2019 (b) Down ~2%

Economic fuel costs per gallon (c)(d) $3.15 to $3.25

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Interest expense (millions) ~$70

Aircraft (g) 741

2022 Estimation

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CASM-X (e) compared with 2019 (f) Up 14% to 15%

Scheduled debt repayments (millions) ~$820

Scheduled debt repayments (billions) ~$2.6

Interest expense (millions) ~$340

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(b) Available seat miles (ASMs, or capacity).

The Company's flight schedule is currently published for sale through March 8, 2023.

The Company currently expects fourth quarter 2022 capacity to be down in the range of 1 percent to 2 percent compared with fourth quarter 2019, and first quarter 2023 capacity to be up approximately 10 percent, compared with first quarter 2022.

The Company's flight schedule is currently published for sale through July 10, 2023.

The Company's fourth quarter 2022 guidance declined slightly from its previous estimation of down one percent to two percent, compared with fourth quarter 2019, primarily due to flight cancellations from the impact of Hurricane Ian.

The Company continues to expect first quarter 2023 capacity to be up approximately 10 percent, compared with first quarter 2022, and currently expects second quarter 2023 capacity to be up approximately 14 percent, compared with second quarter 2022.

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

(d) Based on the Company's existing fuel derivative contracts and market prices as of July 21, 2022, third quarter, fourth quarter, and full year 2022 economic fuel costs per gallon are estimated to be in the range of $3.25 to $3.35, $3.00 to $3.10, and $2.95 to $3.05, respectively.

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

Accordingly, the

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

(d) Based on the Company's existing fuel derivative contracts and market prices as of October 19, 2022, fourth quarter and full year 2022 economic fuel costs per gallon are estimated to be in the range of $3.15 to $3.25 and $3.05 to $3.15, respectively, compared with the Company's previous estimations in the range of $3.00 to $3.10 and $2.95 to $3.05, respectively.

demand, or the impact to its financial statements in future periods.

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

See Note Regarding Use of Non-GAAP Financial Measures.

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(g) Aircraft on property, end of period.

The Company ended second quarter 2022 with 730 Boeing 737 aircraft.

During third quarter 2022, the Company expects to take delivery of 23 Boeing 737 MAX 8 (-8) aircraft and retire 12 Boeing 737-700 (-700) aircraft to end the quarter with 741 aircraft.

During fourth quarter 2022, the Company expects to take delivery of 31 -8 aircraft and retire seven -700 aircraft to end the year with 765 aircraft.

The Company ended third quarter 2022 with 742 Boeing 737 aircraft.

During fourth quarter 2022, the Company continues to expect 31 Boeing 737 MAX 8 (-8) aircraft deliveries.

The Company now expects to retire 26 Boeing 737-700 (-700) aircraft in 2022, including 5 -700 retirements in fourth quarter 2022, compared with its previous guidance of 29 -700 retirements this year.

As a result, the Company now expects to end the year with 768 aircraft, compared with its previous guidance of 765 aircraft.

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

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

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 that the remaining 48 Boeing 737 MAX (MAX) aircraft reflected in its 2022 contractual order book will shift into 2023.

(h) Represents the Company's current expectation which assumes the exercise of its five remaining 2022 MAX aircraft delivery options, and a total of 66 -8 aircraft deliveries in 2022, compared with the Company's previous estimation which assumed the delivery of 114 MAX aircraft 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 that the remaining 48 MAX aircraft reflected in its 2022 contractual order book will shift out of 2022.

(h) Represents the Company's current expectation, which assumes a total of 66 -8 aircraft deliveries in 2022.

The Company continues to estimate $900 million in non-aircraft capital spending in 2022.

COVID-19 Pandemic Impacts

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

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

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

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

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

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

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

The Company met its 2021 hiring goals and plans to add over 10,000 Employees, net of attrition, in 2022.

The Company continues to strive to provide sufficient and optimized staffing to support its anticipated flight schedule plans for 2022 and beyond.

For the three and six months ended June 30, 2022, the Company hired approximately 4,000 and 7,300 Employees, respectively, net of attrition, and returned to overall pre-pandemic staffing levels in May 2022.

For the three and nine months ended September 30, 2022, the Company hired approximately 1,800 and 9,000 Employees, respectively, net of attrition.

The Company has been making additional investments to attract and retain talent, including the decision in fourth quarter 2021 to further raise the Company's starting hourly pay rates from $15 per hour to $17 per hour for certain of its workgroups, subject, in each case, to acceptance of such change by the applicable union.

Company Overview

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

intensive aircraft.

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

The Company continues to expect that more than half of the MAX aircraft in its firm order book will replace a significant amount of its 442 Boeing 737-700 ("-700") aircraft over the next 10 to 15 years to support the modernization of the Company's fleet, a key component of its environmental sustainability efforts.

For first half 2022, the Company was scheduled to receive 28 -8 aircraft, of which only 12 were received, all during second quarter 2022.

The Company ended second quarter 2022 with 730 aircraft, which reflects four owned -700 retirements.

In addition, the Company had four -700 aircraft in storage as of June 30, 2022, all of which were subsequently retired from the Company's fleet in July 2022.

The Company is experiencing delays in aircraft deliveries from Boeing and now estimates 2022 deliveries to be 66 versus the previously expected 114.

The Company is currently assuming 23 and 31 -8 aircraft deliveries in third quarter and fourth quarter 2022, respectively.

The Company plans to retire 12 and seven -700 aircraft in third quarter and fourth quarter 2022, respectively.

As a result, the Company expects to end third quarter with 741 aircraft and end 2022 with 765 aircraft, compared with its previous guidance of 814 aircraft.

The Company now expects to retire 29 -700 aircraft in 2022, compared with its previous guidance of 28 -700 retirements this year.

The Company has published its flight schedule through March 8, 2023.

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

On March 24, 2022, the Company announced a new fare product, Wanna Get Away Plus™, which became available to Customers in May 2022.

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

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

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

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

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

The Company has entered into supplemental agreements in 2022 with The Boeing Company ("Boeing") to increase aircraft orders and accelerate certain options with the goal of improving potential growth opportunities and frequencies to better align with the pre-pandemic operational route network, lowering operating costs, and further modernizing its fleet with less carbon-intensive aircraft.

See Note 10 to the unaudited Condensed Consolidated

Financial Statements for further information.

The Company expects that more than half of the MAX aircraft in its firm order book will replace a significant amount of its 431 Boeing 737-700 ("-700") aircraft over the next 10 to 15 years to support the modernization of the Company's fleet, a key component of its environmental sustainability efforts.

The Company received 23 -8 aircraft during third quarter 2022, as expected, for a year-to-date total of 35 -8 aircraft deliveries received as of September 30, 2022.

The Company ended third quarter 2022 with 742 aircraft, which reflects 11 -700 aircraft retirements during the quarter.

While the Company remains contractually scheduled to receive 114 MAX deliveries this year, the Company 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, and that aircraft delivery delays are currently expected to extend into 2024.

Based on continued 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 now expects to retire 26 -700 aircraft in 2022, including 5 -700 retirements in fourth quarter 2022.

As a result, the Company now expects to end the year with 768 aircraft.

For information about potential impacts resulting from prolonged delays in the FAA issuing required certifications or approvals for the -7, see "Risk Factors – Operational Risks" included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Additionally in October 2022, the Company converted 17 2023 -7 firm orders to -8 firm orders, exercised three -7 options for delivery in 2024, accelerated 15 -7 firm orders from 2030 into 2026, and accelerated 10 -8 firm orders from 2031 into 2030.

The Company has published its flight schedule through July 10, 2023.

The Company is expected to be limited by Pilot staffing constraints for the majority of 2023;

therefore, it is not expected that aircraft delivery delays would result in required changes to the Company's published flight schedules.

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

In July 2022, the Company announced that flight credits will no longer expire.

The Company expects that this policy change, combined with its other attractive brand attributes, will contribute to an increase in Customer loyalty.

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

Flight credits resulting from canceling reservations 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 reservation is cancelled more than 10 minutes prior to the scheduled departure.

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A flight credit with an expiration date on or before July 27, 2022, has expired in accordance with its existing expiration date.

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

However, during May 2022, the IAM membership voted not to ratify the agreement.

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

On June 3, 2022, the Company reached a tentative collective-bargaining agreement with the Aircraft Mechanics Fraternal Association ("AMFA"), which represents the Company's nearly 170 Aircraft Appearance Technicians.

However, the AMFA membership voted not to ratify the agreement.

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

On October 11, 2022, the Company's nearly 170 Aircraft Appearance Technicians, represented by the Aircraft Mechanics Fraternal Association ("AMFA"), ratified a new five-year collective-bargaining agreement with the Company.

The newly ratified agreement becomes amenable in July 2027.

On October 26, 2022, the Company reached a tentative collective-bargaining agreement with the International Association of Machinists and Aerospace Workers, AFL-CIO ("IAM"), which represents the Company's more than 8,000 Customer Service Agents, Customer Representatives, and Source of Support Representatives.

The ratification vote is scheduled to conclude in December 2022.

If the tentative agreement is ratified, it will become amendable in December 2027.

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

The Company also published its first ever Diversity, Equity, and Inclusion ("DEI") Report on April 22, 2022.

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

A companion piece

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

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

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

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

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

Material Changes in Results of Operations

Comparison of three months ended June 30, 2022 and June 30, 2021

Comparison of three months ended September 30, 2022 and September 30, 2021

Operating Revenues

Total operating revenues for second quarter 2022 increased by $2.7 billion, or 67.9 percent, year-over-year, to a quarterly record of $6.7 billion.

Second quarter 2022 operating revenues per ASM (RASM) were 18.03 cents, an increase of 50.4 percent, compared with second quarter 2021.

The dollar increase was primarily due to the significant improvement in travel demand in second quarter 2022 versus the impacts to demand and bookings from the COVID-19 pandemic in second quarter 2021.

For second quarter 2022, the year-over-year RASM increase was primarily driven by a 45.9 percent improvement in yield and an increase in Load factor of 4.2 points.

The Company's policy change to eliminate expiration dates on qualifying flight credits, in particular those that were set to expire on September 7, 2022, results in a shift in the timing of revenue recognition.

As a result, the breakage benefit to second quarter 2022 Operating revenues associated with flight credits that were set to expire on September 7, 2022 will not recur in third quarter creating a one-time sequential operating revenue growth headwind from second quarter 2022 to third quarter 2022 in the range of $250 million to $300 million, or five points, compared with their respective 2019 levels.

The Company does not anticipate a material impact from this policy change beyond third quarter 2022, and estimates that breakage as a percentage of revenue will normalize to pre-pandemic levels.

The Company expects that this policy change, combined with its other attractive brand attributes, will contribute to an increase in Customer loyalty and new Customers.

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

Passenger revenues for second quarter 2022 increased by $2.6 billion, or 71.4 percent, year-over-year.

Total operating revenues for third quarter 2022 increased by $1.5 billion, or 32.9 percent, year-over-year, to $6.2 billion.

Third quarter 2022 operating revenues per ASM (RASM) were 15.84 cents, an increase of 31.2 percent, compared with third quarter 2021.

The dollar increase was primarily due to the improvement in leisure travel demand in third quarter 2022 versus the impacts to demand and bookings from the COVID-19 pandemic in third quarter 2021.

For third quarter 2022, the year-over-year RASM increase was primarily driven by an increase in yield of 23.9 percent coupled with an increase in Load factor of 4.7 points.

Also, as anticipated, the Company's third quarter 2022 operating revenues included a five point sequential operating revenue growth headwind from second quarter to third quarter 2022 unit revenues, compared with their respective 2019 levels, due to a shift in the timing of recognition of breakage revenue associated with the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits.

See Note 6 to the unaudited condensed Consolidated Financial Statements for additional information.

Passenger revenues for third quarter 2022 increased by $1.4 billion, or 32.8 percent, year-over-year.

On a unit basis, Passenger revenues increased 31.0 percent, year-over-year.

The year-over-year increase in Passenger revenues on both a dollar and unit basis was primarily due to improvements in Passenger demand and bookings, the majority of which were for leisure oriented travel.

The Company's revenue performance in second quarter 2022 was a quarterly record primarily due to a surge in leisure demand, especially in June, which resulted in strong passenger bookings, yields, and load factors.

In addition, the Company's second quarter 2022 loyalty program revenue represented a quarterly record.

June 2022 managed business revenues were down 19 percent, a sequential improvement compared with April and May 2022 managed business revenues, which were down 31 percent and 23 percent, respectively, all compared with their respective 2019 levels.

While second quarter 2022 managed business revenues remained below 2019 levels, the Company was encouraged by the sequential improvement during the quarter, as well as managed business average fares that exceeded 2019 levels.

Based on bookings thus far, the Company's third quarter 2022 managed business revenues are currently estimated to be down in the range of 17

percent to 21 percent, compared with third quarter 2019.

June 2022 is estimated to represent a monthly peak for 2022 operating revenues based on first half 2022 results and current expectations for second half 2022.

Freight revenues for second quarter 2022 decreased by $3 million, or 6.0 percent, compared with the second quarter 2021, primarily due to capacity challenges driven by an increase in Passenger demand resulting in reduced space for cargo shipments.

Other revenues for second quarter 2022 increased by $173 million, or 44.5 percent, compared with second quarter 2021.

On a dollar basis, approximately 59.5 percent of the increase was due to incremental revenue from the Company's new co-brand credit card agreement secured in December 2021.

The remaining increase is primarily due to revenue from business partners, and improved retail spend on the Company's co-brand credit card with Chase Bank USA, N.A ("Chase").

The year-over-year increase in Passenger revenues on both a dollar and unit basis was primarily due to improvements in both leisure and business demand and bookings.

The Company's revenue performance in third quarter 2022 was strong, despite a negative impact of approximately $18 million due to the flight disruptions caused by Hurricane Ian in late September 2022.

This negative impact in third quarter 2022 was more than offset by improving leisure demand and close-in bookings in September 2022.

In addition, the Company's third quarter 2022 operating revenues benefited from its loyalty program, including elevated point redemptions for flights and incremental revenue from its co-brand credit card agreement, as well as increased Upgraded Boarding take-rates following the new digital self-service launch in August 2022.

While third quarter 2022 managed business revenues remained below 2019 levels, and softened in July and August compared with June 2022, the Company experienced sequential improvement from August to September, with September 2022 managed business revenues down 25 percent compared with September 2019 levels.

Based on current trends, fourth quarter 2022 managed business revenues are estimated to be down in the range of 20 percent to 25 percent, compared with fourth quarter 2019.

Other revenues for third quarter 2022 increased by $158 million, or 39.0 percent, compared with third quarter 2021.

On a dollar basis, approximately 65 percent of the increase was due the Company's co-brand credit card agreement secured in December 2021.

The remaining increase was primarily due to revenue from business partners and improved retail spend on the Company's co-brand credit card with Chase Bank USA, N.A ("Chase").

Operating Expenses

Operating expenses for second quarter 2022 increased by $2.2 billion, or 63.2 percent, compared with second quarter 2021, while capacity increased 11.7 percent over the same prior year period.

Approximately 34 percent of the operating expense increase was due to $724 million in Payroll Support allocated to offset a portion of salaries, wages, and benefits in second quarter 2021, compared with no support received in second quarter 2022.

In addition, approximately 39 percent of the increase was due to higher Fuel and oil expense and 18 percent of the increase was due to higher Salaries, wages, and benefits.

Operating expenses for third quarter 2022 increased by $1.9 billion, or 47.6 percent, compared with third quarter 2021, while capacity increased 1.3 percent over the same prior year period.

Approximately 40 percent of the

operating expense increase was due to $763 million in Payroll Support allocated to offset a portion of salaries, wages, and benefits in third quarter 2021, compared with no support received in third quarter 2022.

In addition, 40 percent of the dollar increase was due to higher Fuel and oil expense and 10 percent of the increase was due to higher Salaries, wages, and benefits.

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

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

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

Three months ended June 30, Per ASM

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

Three months ended September 30, Per ASM

change Percent

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Total 14.83 ¢ 10.18 ¢ 4.65 ¢ 45.7 %

Operating expenses per ASM for second quarter 2022 increased by 46.0 percent, compared with second quarter 2021, primarily due to second quarter 2021 including Payroll Support from the Consolidated Appropriations Act, 2021, and American Rescue Plan Act of 2021.

Operating expenses per ASM for second quarter 2022, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 5.1 percent, compared with second quarter 2021 primarily due to higher salaries and wages due to significantly more trips and step/pay rate increases for certain workgroups.

Operating expenses per ASM for third quarter 2022 increased by 45.7 percent, compared with third quarter 2021, primarily due to Payroll Support allocated in third quarter 2021 in addition to a significant increase in the Company's fuel cost per gallon, and higher Salaries, wages, and benefits.

Operating expenses per ASM for third quarter 2022, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 8.4 percent, compared with third quarter 2021 primarily due to higher salaries and wages arising from a 14.7 percent increase in trips flown and step/pay rate increases for certain workgroups.

The Company also continues to operate at suboptimal productivity levels, as headcount has grown at a faster pace than capacity, especially during 2022, and which is expected to continue into 2023.

Headcount is expected to increase further in fourth quarter 2022 to support plans for network restoration in 2023, while capacity levels are expected to decline seasonally in fourth quarter 2022 compared with third quarter 2022, relative to their respective 2019 levels.

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

Salaries, wages, and benefits expense for second quarter 2022 increased by $395 million, or 21.6 percent, compared with second quarter 2021.

On a per ASM basis, second quarter 2022 Salaries, wages, and benefits expense increased 9.0 percent, compared with second quarter 2021.

On a dollar basis, the increase was primarily driven by higher salaries and wages due to significantly more trips and step/pay rate increases for certain workgroups.

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

Second quarter 2021 consisted primarily of $724 million of Payroll Support proceeds allocated (credit to expense) and a $15 million net reduction in the Extended ETO liability (reduction to expense) relating to certain Employees being recalled prior to their previously elected return dates.

Salaries, wages, and benefits expense for third quarter 2022 increased by $200 million, or 9.4 percent, compared with third quarter 2021.

On a per ASM basis, third quarter 2022 Salaries, wages, and benefits expense increased 8.0 percent, compared with third quarter 2021.

On a dollar basis, approximately 50 percent of the increase was due to step/pay rate increases for certain workgroups, which included accruals associated with open labor contracts, and the remaining increase was driven by the 14.7 percent increase in trips flown.

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

Third quarter 2021 consisted primarily of $763 million of Payroll Support proceeds allocated (credit to expense) and a $10 million net reduction in the Extended ETO liability (reduction to expense) relating to certain Employees being recalled prior to their previously elected return dates.

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

Fuel and oil expense for second quarter 2022 increased by $833 million, or 103.7 percent, compared with second quarter 2021.

On a per ASM basis, second quarter 2022 Fuel and oil expense increased 81.7 percent.

Fuel and oil expense for third quarter 2022 increased by $760 million, or 76.8 percent, compared with third quarter 2021.

On a per ASM basis, third quarter 2022 Fuel and oil expense increased 74.5 percent.

On a dollar basis, approximately 90 percent of the increase was attributable to an increase in jet fuel prices, and the remainder of the increase was due to an increase in fuel gallons consumed.

The Company's second quarter 2022 average economic jet fuel price of $3.36 per gallon is net of approximately $332 million in gains from hedging activities.

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

The Company's third quarter 2022 average economic jet fuel price of $3.34 per gallon is net of approximately $219 million in gains from hedging activities.

basis, the majority of the change was due to higher jet fuel prices.

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

Three months ended June 30,

Three months ended September 30,

Economic fuel costs per gallon $ 3.34 $ 2.04

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

The Company's second quarter 2022 available seat miles per gallon ("fuel efficiency") decreased 2.3 percent, year-over-year, and increased 2.1 percent when compared with second quarter 2019.

The year-over-year decrease was primarily driven by the Company's increased Load factor and operating more of its least fuel-efficient -700 aircraft versus the prior year.

The increase when compared with second quarter 2019 was due to operating more MAX aircraft, the Company's most fuel-efficient aircraft, as a percentage of its fleet.

The Company's third quarter 2022 available seat miles per gallon ("fuel efficiency") decreased 3.4 percent, year-over-year, but increased 1.5 percent when compared with third quarter 2019.

The year-over-year decrease was primarily driven by the Company's increased Load factor, partially offset by operating more of its most fuel-efficient -8 aircraft versus the prior year.

The increase when compared with third quarter 2019 was due to operating more MAX aircraft, the Company's most fuel-efficient aircraft, as a percentage of its fleet.

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

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

The Company's multi-year fuel hedging program continues to provide insurance against spikes in energy prices and significantly offset the market price increase in jet fuel in second quarter 2022.

The Company's current fuel derivative contracts contain a combination of instruments based in West Texas Intermediate ("WTI"), Brent crude oil, and refined products, such as heating oil.

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

The Company's multi-year fuel hedging program continues to provide insurance against spikes in energy prices and significantly offset the market price increase in jet fuel in third quarter 2022.

The Company's current fuel derivative contracts contain a combination of instruments based in West Texas Intermediate, Brent crude oil, and refined products, such as heating oil.

The economic fuel price per gallon sensitivities provided in the table below assume the relationship between Brent crude oil and refined products based on market prices as of October 19, 2022.

Estimated economic fuel price per gallon,

including taxes and fuel hedging premiums

including taxes and fuel hedging premiums (b)

Average Brent Crude Oil

price per barrel 3Q 2022 (b) 4Q 2022 (b)

price per barrel 4Q 2022

$70 $2.65 - $2.75

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$120 $3.90 - $4.00

Fair market value of fuel derivative instruments $235 million $195 million

Estimated premium costs $13 million $13 million

(a) Brent crude oil average market prices as of July 21, 2022, were $100 and $94 per barrel for third quarter 2022 and fourth quarter 2022, respectively.

(b) Based on the Company's existing fuel derivative contracts and market prices as of July 21, 2022, third quarter, fourth quarter, and full year 2022 economic fuel costs per gallon are estimated to be in the range o f $3.25 to $3.35, $3.00 to $3.10, and $2.95 to $3.05, respectively .

Fair market value $189 million

Estimated premium costs $13 million

(a) Brent crude oil average market prices as of October 19, 2022, was $91 per barrel for fourth quarter 2022.

(b) Based on the Company's existing fuel derivative contracts and market prices as of October 19, 2022, fourth quarter and full year 2022 economic fuel costs per gallon are estimated to be in the range o f $3.15 to $3.25 and $3.05 to $3.15, respectively, compared with the Company's previous estimations in the range of $3.00 to $3.10 and $2.95 to $3.05, respectively .

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

Period Maximum fuel hedged percentage (c)

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

The Company is currently 59 percent hedged for third quarter 2022 and 62 percent hedged for fourth quarter 2022.

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

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

Period Maximum fuel hedged percentage (a)(b)

(a) Based on the Company's current available seat mile plans.

The Company is currently 61 percent hedged for fourth quarter 2022.

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

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

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

The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties—see Note 4 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI at June 30, 2022, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

Year Fair value of fuel derivative contracts at June 30, 2022

Amount of gains deferred in AOCI at June 30, 2022 (net of tax)

The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties—see Note 4 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI at September 30, 2022, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

Year Fair value of fuel derivative contracts at September 30, 2022

Amount of gains deferred in AOCI at September 30, 2022 (net of tax)

Remainder of 2022 $ 128 $ 80

Total $ 536 $ 280

Maintenance materials and repairs expense for second quarter 2022 decreased by $12 million, or 5.4 percent, compared with second quarter 2021.

On a per ASM basis, Maintenance materials and repairs expense decreased 15.2 percent, compared with second quarter 2021.

On a dollar basis, the decrease was primarily due to a decrease in engines and components expense driven by the "power-by-the-hour" contract for the -700 engines expiring at the end of 2021, in which expense was incurred based primarily upon engine hours flown.

Maintenance materials and repairs expense for third quarter 2022 decreased by $46 million, or 18.4 percent, compared with third quarter 2021.

On a per ASM basis, Maintenance materials and repairs expense decreased 20.0 percent, compared with third quarter 2021.

On a dollar and per ASM basis, the decrease was primarily due to a decrease in engines and components expense driven by the "power-by-the-hour" contract for the Company's -700 engines that expired at the end of 2021, in which expense was incurred based primarily upon engine hours flown.

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

This decrease was partially offset by the timing of regular airframe maintenance checks as some costs had previously been deferred while a portion of the fleet was placed into temporary storage during the COVID-19 pandemic.

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

Landing fees and airport rentals expense for second quarter 2022 decreased by $15 million, or 3.7 percent, compared with second quarter 2021.

On a per ASM basis, Landing fees and airport rentals expense decreased 14.0 percent, compared with second quarter 2021.

Despite the year-over-year increase in trips flown, on both a dollar and per ASM basis, Landing fees and airport rentals expense decreased slightly due to higher settlements and credits from various airports received in second quarter 2022.

Depreciation and amortization expense for second quarter 2022 increased by $10 million, or 3.2 percent, compared with second quarter 2021.

On a per ASM basis, Depreciation and amortization expense decreased by 7.4 percent, compared with second quarter 2021.

On a dollar basis, the increase was primarily due to higher depreciation expense associated with owned aircraft and engines, including certain -700 aircraft planned for accelerated retirement dates in 2022.

Other operating expenses for second quarter 2022 increased by $205 million, or 35.0 percent, compared with second quarter 2021.

Included within this line item was aircraft rentals expense in the amounts of $49 million and $52 million for the three-month periods ended June 30, 2022 and 2021, respectively.

On a per ASM basis, Other operating expenses increased 20.5 percent, compared with second quarter 2021.

On a dollar basis, approximately 35 percent of the increase was due to higher revenue related expenses (including credit card processing charges) and approximately 20 percent of the increase was due to higher personnel expenses.

This decrease was partially offset by an increase in the cost of various airframe and engine repairs as a result of maintenance vendor price escalation, and an increase in heavy check volume due to deferring costs and reduced operations in third quarter 2021 due to the COVID-19 pandemic.

Landing fees and airport rentals expense for third quarter 2022 increased by $19 million, or 5.1 percent, compared with third quarter 2021.

On a per ASM basis, Landing fees and airport rentals expense increased 4.1 percent, compared with third quarter 2021.

On a dollar and per ASM basis, approximately 80 percent of the increase was due to a 14.7 percent increase in trips flown.

Depreciation and amortization expense for third quarter 2022 increased by $13 million, or 4.0 percent, compared with third quarter 2021.

On a per ASM basis, Depreciation and amortization expense increased by 2.4 percent, compared with third quarter 2021.

On a dollar and per ASM basis, approximately 50 percent of the increase was due to the acquisition of 35 -8 aircraft since third quarter 2021, 25 percent was due to accelerating the depreciation for 2022 -700 retirements, and 25 percent was due to decreasing the airframe salvage value for the entire -700 fleet,

which was a change in estimate made near the end of third quarter 2022.

This change in estimate was not material to third quarter 2022, nor is it material to future periods.

Other operating expenses for third quarter 2022 increased by $157 million, or 23.7 percent, compared with third quarter 2021.

Included within this line item was aircraft rentals expense in the amounts of $49 million and $53 million for the three-month periods ended September 30, 2022 and 2021, respectively.

On a per ASM basis, Other operating expenses increased 22.4 percent, compared with third quarter 2021.

On a dollar and per ASM basis, approximately 30 percent of the increase was due to higher revenue related expenses (including credit card processing charges) and approximately 20 percent of the increase was due to higher personnel expenses.

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

The Company expects cost inflation in third quarter 2022, in particular with higher rates for labor, benefits, and airports.

The Company also expects cost headwinds from operating at suboptimal productivity levels as headcount is expected to increase in third quarter 2022 while capacity levels are expected to remain relatively in line with third quarter 2019.

The Company has increased short-haul trips in second half 2022 in an effort to restore its route network and support the reliability of its operational performance, which results in a decrease to average stage

length, and adds further unit cost headwinds.

As a result of its successful hiring efforts and much improved operational reliability, the Company plans to begin moderating hiring where opportunities exist and intensify its focus on returning to historical efficiency levels.

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

Interest expense for second quarter 2022 decreased by $23 million, or 19.8 percent, compared with second quarter 2021, primarily due to elimination of the debt discount as a result of the Company's adoption of ASU 2020-06.

The Company continues to experience inflationary cost pressures in fourth quarter 2022, in particular with higher rates for labor, benefits, and airports.

Fourth quarter 2022 costs are also pressured by the shifting of favorable airport settlements into third quarter 2022, as well as increased cost headwinds due to operating at suboptimal productivity levels.

The Company continues to estimate full year 2023 CASM-X to decrease compared with full year 2022, which includes estimated wage rate accruals for all workgroups beginning April 1, 2022 and forward.

Fleet utilization is expected to be limited by Pilot staffing constraints for the majority of 2023, resulting in continued cost headwinds due to operating at suboptimal productivity levels until the Company is able to optimize staffing with its fleet—which is foundational to the plan to improve operating leverage.

Due to operating at suboptimal productivity levels and ongoing inflationary cost pressures, first half 2023 CASM-X is currently expected to be in the range of flat to up 2 percent compared with first half 2022.

The Company currently expects year-over-year capacity growth rate in second half 2023 to accelerate relative to year-over-year capacity growth rate in first half 2023.

As such, second half 2023 CASM-X is currently expected to decrease in the low-to-mid single digit range compared with second half 2022.

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

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

Other expenses (income)

Interest expense for third quarter 2022 decreased by $29 million, or 25.2 percent, compared with third quarter 2021, primarily due to elimination of the debt discount as a result of the Company's adoption of ASU 2020-06 and various debt repurchases throughout 2022.

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

Capitalized interest for second quarter 2022 increased by $3 million, or 37.5 percent, compared with second quarter 2021, primarily due to an increase in average progress payment balances for scheduled future aircraft deliveries.

Interest income for second quarter 2022 increased by $26 million, compared with second quarter 2021, primarily due to higher interest rates.

The following table displays the components of Other (gains) losses, net, for the three months ended June 30, 2022 and 2021:

Three months ended June 30,

Capitalized interest for third quarter 2022 increased by $2 million, or 22.2 percent, compared with third quarter 2021, primarily due to an increase in average progress payment balances for scheduled future aircraft deliveries.

Interest income for third quarter 2022 increased by $68 million, compared with third quarter 2021, primarily due to higher interest rates.

Loss on extinguishment of debt for third quarter 2022 increased by $64 million, compared with third quarter 2021, primarily due to repurchases of $184 million face value of the Company's 1.25 percent Convertible Notes due 2025 (the "Convertible Notes") in third quarter 2022.

The following table displays the components of Other (gains) losses, net, for the three months ended September 30, 2022 and 2021:

Three months ended September 30,

(in millions) 2022 2021

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Premium cost of fuel contracts not designated as hedges (14) 11

Unrealized mark-to-market adjustment on available for sale securities 4 —

Mark-to-market impact on deferred compensation plan investments 13 1

Loss on partial extinguishment of convertible and unsecured notes 43 —

The Company's effective tax rate was approximately 26.6 percent in second quarter 2022, compared with 30.7 percent in second quarter 2021.

The higher tax rate for second quarter 2021 was primarily due to higher state taxes.

The year-over-year decrease was partially offset by the losses on the Company's convertible debt repurchases, which are largely disallowed as a deduction for tax purposes.

The Company's effective tax rate was approximately 21.6 percent in third quarter 2022, compared with 25.7 percent in third quarter 2021.

The lower tax rate for third quarter 2022 was primarily due to provision-to-return adjustments related to federal tax credits and a tax deduction for convertible debt losses.

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

Comparison of six months ended June 30, 2022 and June 30, 2021

Comparison of nine months ended September 30, 2022 and September 30, 2021

Operating Revenues

Passenger revenues for the six months ended June 30, 2022, increased by $5.0 billion, or 94.1 percent, compared with the first six months of 2021.

Passenger revenues for the nine months ended September 30, 2022, increased by $6.4 billion, or 66.9 percent, compared with the first nine months of 2021.

On a unit basis, Passenger revenues increased 33.2 percent, year-over-year.

The increase in Passenger revenues on both a dollar and unit basis were primarily due to easing of negative impacts associated with the COVID-19 pandemic, which resulted in improvements in Passenger demand and bookings, the majority of which were for leisure oriented travel, in the first six months of 2022, compared with the severe impacts to demand and bookings from the COVID-19 pandemic for the majority of the first six months of 2021.

Freight revenues for the six months ended June 30, 2022, decreased by $3 million, or 3.3 percent, compared with the six months ended June 30, 2021, primarily due to capacity challenges driven by an increase in Passenger demand resulting in reduced space for cargo shipments.

Other revenues for the six months ended June 30, 2022, increased by $393 million, or 57.3 percent, year-over-year.

On a dollar basis, approximately half of the increase was associated with additional revenues generated from the Company's new co-brand credit card agreement secured in December 2021.

The remaining increase in Other revenues is primarily due to income from business partners, including Chase, as the rebound in travel demand also resulted in higher spend on the Company's co-brand credit card, as well as additional revenues earned through the Company's rental car and hotel partners.

The increase in Passenger revenues on both a dollar and unit basis was primarily due to easing of negative impacts associated with the COVID-19 pandemic, which resulted in improvements in Passenger demand and bookings, the majority of which were for leisure oriented travel, in the first nine months of 2022, compared with the severe impacts to demand and bookings from the COVID-19 pandemic for the majority of the first nine months of 2021.

For the first nine months of 2022, the year-over-year RASM increase was primarily driven by an increase in yield of 33.2 percent coupled with an increase in Load factor of 5.9 points.

Other revenues for the nine months ended September 30, 2022, increased by $551 million, or 50.5 percent, year-over-year.

On a dollar basis, approximately 55 percent of the increase was associated with additional revenues generated from the Company's new co-brand credit card agreement secured in December 2021.

The remaining increase in Other revenues is primarily due to revenue from business partners, including Chase, as the rebound in travel demand also resulted in higher spend on the Company's co-brand credit card, as well as additional revenues earned through the Company's rental car and hotel partners.

Operating Expenses

Operating expenses for the six months ended June 30, 2022, increased by $5.1 billion, or 97.7 percent, compared with the first six months of 2021, while capacity increased 26.8 percent over the same prior year period.

Approximately 37 percent of the operating expense increase was due to $1.9 billion in Payroll Support allocated to offset a portion of salaries, wages, and benefits in the first six months of 2021, compared with no support received in the first six months of 2022.

Operating expenses for the nine months ended September 30, 2022, increased by $7.0 billion, or 76.3 percent, compared with the first nine months of 2021, while capacity increased 16.4 percent over the same prior year period.

Approximately 40 percent of the operating expense increase was due to $2.7 billion in Payroll Support allocated to offset a portion of salaries, wages, and benefits in the first nine months of 2021, compared with no support received in the first nine months of 2022.

In addition, approximately 30 percent of the increase was due to higher Fuel and oil expense and approximately 20 percent of the increase was due to higher Salaries, wages, and benefits.

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

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

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

Six months ended June 30, Per ASM Percent

Nine months ended September 30, Per ASM Percent

(in cents, except for percentages) 2022 2021 change change

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Total 14.63 ¢ 9.67 ¢ 4.96 ¢ 51.3 %

Operating expenses per ASM for the first six months of 2022 increased by 56.0 percent, compared with the first six months of 2021.

The majority of the year-over-year unit cost increase was driven by the first six months of 2021 including Payroll Support from the Consolidated Appropriations Act, 2021, and the American Rescue Plan Act of 2021.

Operating expenses per ASM for the first six months of 2022, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), decreased 1.0 percent, year-over-year.

Operating expenses per ASM for the first nine months of 2022 increased by 51.3 percent, compared with the first nine months of 2021.

The majority of the year-over-year unit cost increase was driven by Payroll Support received in the first nine months of 2021, including from the Consolidated Appropriations Act, 2021 and the American Rescue Plan Act of 2021.

Operating expenses per ASM for the first nine months of 2022, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 2.7 percent, year-over-year.

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

Salaries, wages, and benefits expense for the first six months of 2022 increased by $1.1 billion, or 31.1 percent, compared with the first six months of 2021.

On a per ASM basis, Salaries, wages, and benefits expense for the first six months of 2022 increased 3.3 percent, compared with the first six months of 2021.

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

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

The first six months of 2021 consisted of the following items:

Salaries, wages, and benefits expense for the first nine months of 2022 increased by $1.3 billion, or 22.7 percent, compared with the first nine months of 2021.

On a per ASM basis, Salaries, wages, and benefits expense for the first nine months of 2022 increased 5.7 percent, compared with the first nine months of 2021.

On a dollar basis, approximately 40 percent of the increase was driven by an increase in trips, approximately 20 percent of the increase was due to step/pay rate increases for certain workgroups, which included accruals associated with open labor contracts, and approximately 10 percent of the increase was driven by $127 million of additional salaries, wages, and benefits expense as a result of incentive pay offered to the Company's Operations Employees through early February 2022 in an effort to address available staffing challenges related to the Omicron variant of COVID-19.

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

The first nine months of 2021 consisted primarily of the following items:

• $2.7 billion of Payroll Support proceeds allocated (credit to expense);

• A $130 million net reduction in the Extended ETO liability (reduction to expense) relating to certain Employees being recalled prior to their previously elected return dates;

• $140 million net reduction in the Extended ETO liability (reduction to expense) relating to certain Employees being recalled prior to their previously elected return dates;

• $120 million credit to expense associated with the Employee Retention Tax Credit for continuing to pay Employees' salaries during the time they were not working, as allowed under the CARES Act, and subsequent legislation.

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

Fuel and oil expense for the first six months of 2022 increased by $1.4 billion, or 107.5 percent, compared with the first six months of 2021.

On a per ASM basis, Fuel and oil expense for the first six months of 2022 increased 63.6 percent.

Fuel and oil expense for the first nine months of 2022 increased by $2.1 billion, or 94.2 percent, compared with the first nine months of 2021.

On a per ASM basis, Fuel and oil expense for the first nine months of 2022 increased 66.0 percent.

On a dollar basis, approximately 80 percent of the increase was attributable to an increase in jet fuel prices per gallon, and the remainder of the increase was due to an increase in fuel gallons consumed.

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

Six months ended June 30,

Nine months ended September 30,

Economic fuel costs per gallon $ 3.03 $ 1.92

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

Maintenance materials and repairs expense for the first six months of 2022 increased by $25 million, or 6.3 percent, compared with the first six months of 2021.

On a per ASM basis, Maintenance materials and repairs expense decreased 15.7 percent, compared with the first six months of 2021.

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

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

These increases were partially offset by a decrease in engines and components expense due to the "power-by-the-hour" contract for the Company's -700 engines expiring at the end of 2021.

Landing fees and airport rentals expense for the first six months of 2022 increased by $17 million, or 2.4 percent, compared with the first six months of 2021.

On a per ASM basis, Landing fees and airport rentals expense decreased 19.7 percent, compared with the first six months of 2021.

Maintenance materials and repairs expense for the first nine months of 2022 decreased by $22 million, or 3.4 percent, compared with the first nine months of 2021.

On a per ASM basis, Maintenance materials and repairs expense decreased 17.6 percent, compared with the first nine months of 2021.

On a dollar basis, the decrease was primarily due to a decrease in engines and components expense due to the "power-by-the-hour" contract for the Company's -700 engines expiring at the end of 2021.

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

Landing fees and airport rentals expense for the first nine months of 2022 increased by $36 million, or 3.3 percent, compared with the first nine months of 2021.

On a per ASM basis, Landing fees and airport rentals expense decreased 11.3 percent, compared with the first nine months of 2021.

On a dollar basis, the increase was primarily due to an increase in landing fees from the increased number of trips flown, partially offset by higher settlements and credits from various airports received in 2022.

Depreciation and amortization expense for the first six months of 2022 increased by $22 million, or 3.5 percent, compared with the first six months of 2021.

On a per ASM basis, Depreciation and amortization expense decreased 18.9 percent, compared with the first six months of 2021.

Other operating expenses for the first six months of 2022 increased by $474 million, or 45.2 percent, compared with the first six months of 2021.

Included within this line item was aircraft rentals expense in the amount of $98 million and $103 million for the six month periods ended June 30, 2022 and 2021, respectively.

On a per ASM basis, Other operating expenses increased 15.1 percent, compared with the first six months of 2021.

On a dollar basis, approximately 25 percent of the increase was due to higher revenue related expenses (including credit card processing charges) and approximately 20 percent of the increase was due to higher personnel expenses.

Depreciation and amortization expense for the first nine months of 2022 increased by $35 million, or 3.7 percent, compared with the first nine months of 2021.

On a per ASM basis, Depreciation and amortization expense decreased 11.0 percent, compared with the first nine months of 2021.

On a dollar basis, approximately 50 percent of the increase was due to higher depreciation expense associated with the Company's Next-Gen fleet of -700 owned aircraft and engines planned for accelerated retirement dates in 2022, and approximately 35 percent of the increase was due to the acquisition of 35 -8 aircraft since third quarter 2021.

Other operating expenses for the first nine months of 2022 increased by $633 million, or 37.0 percent, compared with the first nine months of 2021.

Included within this line item was aircraft rentals expense in the amount of $146 million and $155 million for the nine months ended September 30, 2022 and 2021, respectively.

On a per ASM basis, Other operating expenses increased 17.3 percent, compared with the first nine months of 2021.

On a dollar and per ASM basis, approximately 25 percent of the increase was due to higher revenue related expenses (including credit card processing charges) and approximately 20 percent of the increase was due to higher personnel expenses.

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

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

Interest expense for the first six months of 2022 decreased by $43 million, or 18.8 percent, compared with the first six months of 2021, primarily due to elimination of the debt discount due to the adoption of ASU 2020-06.

Other expenses (income)

Interest expense for the first nine months of 2022 decreased by $71 million, or 20.7 percent, compared with the first nine months of 2021, primarily due to elimination of the debt discount due to the adoption of ASU 2020-06.

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

Capitalized interest for the first six months of 2022 increased by $1 million, or 5.3 percent, compared with the first six months of 2021, primarily due to an increase in average progress payment balances for scheduled future aircraft deliveries.

Interest income for the first six months of 2022 increased by $27 million, compared with the first six months of 2021, due to higher interest rates.

The following table displays the components of Other (gains) losses, net, for the six months ended June 30, 2022 and 2021:

Six months ended June 30,

Capitalized interest for the first nine months of 2022 increased by $4 million, or 14.8 percent, compared with the first nine months of 2021, primarily due to an increase in average progress payment balances for scheduled future aircraft deliveries.

Interest income for the first nine months of 2022 increased by $95 million, compared with the first nine months of 2021, due to higher interest rates.

Loss on extinguishment of debt for the first nine months of 2022 increased by $180 million, compared with the first nine months of 2021, primarily due to repurchases of $468 million face value of the Company's Convertible Notes due 2025 during the first nine months of 2022.

The following table displays the components of Other (gains) losses, net, for the nine months ended September 30, 2022 and 2021:

Nine months ended September 30,

(in millions) 2022 2021

4 unchanged sentences

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

Loss on partial extinguishment of convertible and unsecured notes 116 —

The Company's effective tax rate was approximately 26.9 percent for the first six months of 2022, compared with 28.4 percent for the first six months of 2021.

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

The year-over-year decrease was partially offset by the losses on the Company's convertible debt repurchases, which are largely disallowed as a deduction for tax purposes.

The Company's effective tax rate was approximately 25.1 percent for the first nine months of 2022, compared with 27.1 percent for the first nine months of 2021.

The year-over-year decline in the tax rate is due to higher state taxes in 2021 and tax planning benefits recognized in 2022 related to federal tax credits and a tax deduction for convertible debt losses.

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

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

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

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

2022 2021 Change 2022 2021 Change

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Fuel and oil expense, as reported $ 1,750 $ 990 $ 4,390 $ 2,261

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) — 5 — 14

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a) (12) 5 (12) 19

Add (Deduct):

Premium cost of fuel contracts not designated as hedges (14) 11 (14) 32

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Payroll support and voluntary Employee programs, net — 776 — 2,963

— 740 — 2,187

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) — 5 — 14

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a) (12) 5 (12) 19

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — — — 2

Add (Deduct):

Premium cost of fuel contracts not designated as hedges (14) 11 (14) 32

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Payroll support and voluntary Employee programs, net — (776) — (2,963)

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) — (5) — (14)

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a) 12 (5) 12 (19)

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — — — (2)

Add (Deduct):

Premium cost of fuel contracts not designated as hedges 14 (11) 14 (32)

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$ 1,463 $ (1,490) n.m.

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

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

2022 2021 Change 2022 2021 Change

2 unchanged sentences

Mark-to-market impact from fuel contracts settling in current and future periods (a) 38 (3) 23 6

Add (Deduct):

Premium cost of fuel contracts not designated as hedges 14 (11) 14 (32)

Unrealized mark-to-market adjustment on available for sale securities — — (7) —

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

Other (gains) losses, net, excluding special items $ 13 $ 3 n.m.

2 unchanged sentences

Payroll support and voluntary Employee programs, net — (776) — (2,963)

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) — (5) — (14)

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a) 12 (5) 12 (19)

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — — — (2)

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Unrealized mark-to-market adjustment on available for sale securities — — 7 —

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

Loss on extinguishment of debt 76 12 192 12

Income (loss) before income taxes, excluding special items $ 407 $ (166) n.m.

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$ 286 $ (374) n.m.

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

2022 2021 Change 2022 2021 Change

Net income, as reported $ 277 $ 446 $ 759 $ 909

Payroll support and voluntary Employee programs, net — (776) — (2,963)

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) — (5) — (14)

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a) 12 (5) 12 (19)

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — — — (2)

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Mark-to-market impact from fuel contracts settling in current and future periods (a) (38) 3 (23) (6)

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

Loss on extinguishment of debt 76 12 192 12

Impairment of long-lived assets 4 — 35 —

4 unchanged sentences

$ 950 $ (1,356) n.m.

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

2022 2021 Change 2022 2021 Change

Net income per share, diluted, as reported $ 0.44 $ 0.73 $ 1.21 $ 1.49

1 unchanged sentence

Impact of special items 0.12 (1.25) 0.38 (4.84)

Add (Deduct):

Net impact of net income (loss) above from fuel contracts divided by dilutive shares (0.04) — (0.02) (0.04)

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

(c) Adjustment related to GAAP and Non-GAAP diluted weighted average shares difference, due to the Company being in a Net income position on a GAAP basis versus a Net loss position on a Non-GAAP basis for the three and six months ended June 30, 2021.

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

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

In third quarter 2022, management determined that presentation within its income statement would be enhanced by classification of Loss on extinguishment of debt as a separate line item, rather than its prior presentation where it was included as a component of Other (gains) losses, net.

Such losses are incurred as a result of opportunistic decisions made by the Company to prepay portions of its debt, most of which was taken on during the pandemic in order to provide liquidity during the prolonged downturn in air travel.

Due to the nature of these losses, which are difficult to accurately predict, and due to the fact that they are not representative of the Company’s day-to-day airline operating performance, the Company has included such amounts as special items and thus excluded them from certain of its non-GAAP measures in the accompanying reconciliations.

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

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

Net cash provided by operating activities was $1.9 billion for the three months ended June 30, 2022, compared with $2.0 billion provided by operating activities in the same prior year period.

Net cash provided by operating activities was $3.0 billion for the six months ended June 30, 2022, compared with $2.7 billion provided by operating activities in the same prior year period.

Net cash provided by operating activities was $234 million for the three months ended September 30, 2022, compared with $575 million used in operating activities in the same prior year period.

Net cash provided by operating activities was $3.2 billion for the nine months ended September 30, 2022, compared with $2.1 billion provided by operating activities in the same prior year period.

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

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

The operating cash flows for the six months ended June 30, 2022, were largely impacted by the Company's net income (as adjusted for noncash items), a $793 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, a $284 million increase in cash collateral received from derivative counterparties due to an increase in the fuel hedge portfolio, driven by increases in the forward curve market prices for energy commodities year-to-date, and a $472 million cash tax refund from the Internal Revenue Service associated with the 2020 tax year.

Operating cash flows for the six months ended June 30, 2021, included $2.7 billion in Payroll Support program grant proceeds, of which $1.9 billion was used to offset eligible costs through June 30, 2021, and was thus included in operating activities, as well as $45 million allocated to the value of warrants issued and thus included in financing activities.

The operating cash flows for the six months ended June 30, 2021, were also driven by an increase in Air traffic liability of $1.5 billion as a result of increased ticket sales from the increase in leisure travel demand.

The operating cash flows for the nine months ended September 30, 2022, were largely impacted by the Company's net income (as adjusted for noncash items), a $700 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, and a $472 million cash tax refund from the Internal Revenue Service associated with the 2020 tax year.

Operating cash flows for the nine months ended September 30, 2021, included $2.7 billion in Payroll Support program grant proceeds received and were also driven by an increase in Air traffic liability of $1.1 billion as a result of increased ticket sales from the increase in leisure travel demand.

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

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

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

however these shareholder return activities were suspended through September 30, 2022, due to restrictions associated with the payroll assistance under the Payroll Support programs and the Company's amended and restated revolving credit facility.

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

Net cash used in investing activities totaled $1.6 billion during the three months ended June 30, 2022, compared with $469 million used in investing activities in the same prior year period.

Net cash used in investing activities was $1.7 billion during the six months ended June 30, 2022, compared with $670 million used in investing activities in the same prior year period.

Net cash used in investing activities totaled $1.1 billion during the three months ended September 30, 2022, compared with $412 million used in investing activities in the same prior year period.

Net cash used in investing activities was $2.8 billion during the nine months ended September 30, 2022, compared with $1.1 billion used in investing activities in the same prior year period.

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

During the six months ended June 30, 2022, Capital expenditures were $1.5 billion, compared with $190 million in the same prior year period.

Capital expenditures increased, year-over-year, largely due to an increase in progress and delivery payments made for current period and future aircraft deliveries during the six months ended June 30, 2022, compared to the same prior year period, when progress payments were not made due to delivery credits provided by Boeing to the Company resulting from the settlement of 2020 estimated damages relating to the FAA grounding of the MAX aircraft.

The Company now estimates its 2022 capital spending to be approximately $4.0 billion, which assumes the exercise of its five remaining 2022 aircraft options, and a total of 66 -8 aircraft deliveries in 2022, compared with its previous 2022 capital spending guidance of approximately $5.0 billion which assumed the delivery of 114 MAX aircraft in 2022.

During the nine months ended September 30, 2022, Capital expenditures were $2.6 billion, compared with $325 million in the same prior year period.

Capital expenditures increased, year-over-year, largely due to an increase in progress and delivery payments made for current period and future aircraft deliveries during the nine months ended September 30, 2022, compared to the same prior year period, when progress payments were not made due to delivery credits provided by Boeing to the Company resulting from the settlement of 2020 estimated damages relating to the FAA grounding of the MAX aircraft.

The Company continues to estimate its 2022 capital spending to be approximately $4.0 billion, which assumes a total of 66 -8 aircraft deliveries in 2022.

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

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

Net cash used in financing activities was $215 million during the three months ended June 30, 2022, compared with $617 million provided by financing activities for the same prior year period.

Net cash used in financing activities

was $530 million during the six months ended June 30, 2022, compared with $1.1 billion provided by financing activities for the same year period.

The Company repaid $555 million in debt and finance lease obligations, including the extinguishment of $302 million in principal of its Convertible Notes for a cash payment of $409 million during the six months ended June 30, 2022, and is scheduled to repay approximately $55 million in debt and finance lease obligations during third quarter 2022.

The Company may engage in debt repurchases from time to time and future repurchases are not included in the scheduled to repay third quarter 2022 amount.

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

Net cash used in financing activities was $1.9 billion during the three months ended September 30, 2022, compared with $157 million used in financing activities for the same prior year period.

Net cash used in financing activities was $2.4 billion during the nine months ended September 30, 2022, compared with $923 million provided by financing activities for the same year period.

The Company repaid $2.5 billion in debt and finance lease obligations, including a $1.3 billion prepayment for all of its outstanding 4.75% Notes due 2023 and the extinguishment of $486 million in principal of its Convertible Notes for cash payments totaling $648 million during the nine months ended September 30, 2022.

The Company may engage in early debt repurchases from time to time and some of these early

future repurchases are not included in the Company's current maturities of long-term debt.

The Company's 2022 total debt repayments is expected to be $2.6 billion.

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

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

The Company also repaid $109 million in debt and finance lease obligations during the six months ended June 30, 2021.

The Company repaid $298 million in debt and finance lease obligations, including the extinguishment of $80 million in principal of its Convertible Notes for a cash payment of $121 million during the nine months ended September 30, 2021.

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

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

the Company was compliant with this requirement as of June 30, 2022.

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

Although not the case at June 30, 2022 due to the Company's significant financing activities throughout the early stages of the pandemic, the Company has historically carried a working capital deficit, in which its current liabilities exceed its current assets.

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

the Company was compliant with this requirement as of September 30, 2022.

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

Although not the case at September 30, 2022 due to the Company's significant financing activities throughout the early stages of the pandemic, the Company has historically carried a working capital deficit, in which its current liabilities exceed its current assets.

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

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

The Company believes it has various options available to meet its capital and operating commitments, including unrestricted cash and short-term investments of $16.4 billion as of June 30, 2022, and anticipated future internally generated funds from operations.

The Company believes it has various options available to meet its capital and operating commitments, including unrestricted cash and short-term investments of $13.7 billion as of September 30, 2022, and anticipated future internally generated funds from operations.

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

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

As of June 30, 2022, the Company's total firm and option order book was 632 aircraft.

As of September 30, 2022, the Company's total firm and option order book with Boeing was 632 aircraft.

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

The following table details information on the aircraft in the Company's fleet as of June 30, 2022:

The following table details information on the aircraft in the Company's fleet as of September 30, 2022:

Age (Yrs) Number

of Aircraft Number

737-700 143 18 442 (a) 360 82

737-700 143 18 431 351 80

737-800 175 7 207 190 17

737 -8 175 2 104 75 29

Totals 13 742 616 126

(a) Included four Boeing 737 Next Generation aircraft in storage as of June 30, 2022.

Critical Accounting Policies and Estimates

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

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 policy change required a change in the Company's process for estimating breakage associated with its revenue recognition policy.

The Company is providing an updated Revenue Recognition Critical Accounting Policy below for the three months ended September 30, 2022.

Revenue Recognition

Tickets sold for Passenger air travel are initially deferred as Air traffic liability.

Passenger revenue is recognized and Air traffic liability is reduced when the service is provided (i.e., when the flight takes place).

Air traffic liability primarily represents tickets sold for future travel dates, travel credits that are expected to be used in the future, and loyalty benefits that are expected to be redeemed in the future.

Air traffic liability typically fluctuates throughout the year based on seasonal travel patterns, fare sale activity, and activity associated with the Company’s loyalty program.

For air travel on Southwest, the amount of tickets that will go unused, referred to as breakage, is estimated and recognized in Passenger revenue once the scheduled flight date has passed, in proportion to the pattern of rights exercised by the Customer, in accordance with Accounting Standards Codification 606, Revenue From Contracts With Customers ("ASC 606").

Estimating the amount of tickets that will ultimately go unused involves some level of subjectivity and judgment.

The majority of the Company's tickets sold are nonrefundable, although flight credits created when a Customer cancels or modifies an existing flight itinerary can be applied towards the purchase of future travel.

Unused flight credits are the primary source of breakage.

Breakage estimates are based on historical experience over many years.

Fully refundable tickets rarely go unused.

As a result of the COVID-19 pandemic, for all Customer flight credits created or scheduled to expire between March 1 and September 7, 2020 associated with flight cancellations, the Company initially extended the expiration date to September 7, 2022.

See Note 6 to the Consolidated Financial Statements for further information regarding these extended flight credits.

Since the Company did not have historical data to enable it to accurately estimate the pattern of usage of these extended credits, these credits have been classified as a current liability throughout their history.

Subsequently, on July 28, 2022, the Company modified its policy and announced that all unexpired flight credits as of that date, including these extended flight credits, will no longer have an expiration date and thus will be able to be redeemed by Customers indefinitely.

This change in policy was considered a contract modification under ASC 606 and the Company accounted for such change prospectively in third quarter 2022.

On a sequential basis compared to second quarter 2022 results, this policy change to eliminate expiration dates on qualifying flight credits, in particular those that were set to expire on September 7, 2022, resulted in an estimated negative impact to third quarter breakage revenue in the range of $250 million to $300 million.

However, since the majority of this estimated breakage was associated with the extended flight credits, the estimated impacts of this flight credit policy change beyond third quarter 2022 is not expected to be material.

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

Also as a result of changes in observed Customer travel habits and behaviors during 2021 and the first six months of 2022, the Company increased its estimates of “normal” Customer flight credits that are expected to go unused, as Customer redemptions of these "normal" credits had been at a slower rate than the Company’s historical data for similar credits in periods prior to the COVID-19 pandemic.

However, although the Company continues to believe a portion of Customer flight credits will go unused following the Company's change in policy, including a portion of flight credits issued after July 28, 2022, the Company expects its prospective breakage rate associated with such flight credits to be at or slightly lower than historical pre-pandemic levels.

Observed Customer behavior that differs from historical experience can cause actual ticket breakage to differ significantly from estimates.

Assumptions about Customer behavior are reviewed frequently and corresponding adjustments are made to breakage estimates, as needed, when observed behaviors differ from historical experience.

Assumptions about Customer behavior can be impacted by several factors including, but not limited to:

fare increases, fare sales, changes to the Company's ticketing policies, changes to the Company’s refund, exchange and unused travel credit policies, seat availability, and economic factors.

The Company’s estimation techniques have been consistently applied from year to year;

however, as with any estimates, actual ticket breakage may vary from estimated amounts.

Cautionary Statement Regarding Forward-Looking Statements

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

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

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

• the Company’s capacity guidance;

• the Company’s estimated fuel costs, hedging gains, and fuel efficiency and the assumptions underlying the Company’s fuel-related expectations and estimates, including expectations related to the Company’s fuel derivative contracts;

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

• the Company’s plans and expectations for the repayment of debt, its effective tax rate, and its capital spending;

• the Company’s fleet plans, including underlying expectations and dependencies;

• the Company’s fleet and network-related goals, including without limitation with respect to growth opportunities, better optimized staffing, restoration of the Company’s network, reduction of operating costs, and further fleet modernization with less carbon-intensive aircraft;

• the Company’s cash flow expectations and capital spending guidance, in particular with respect to aircraft capital expenditures and underlying aircraft delivery expectations;

• the Company’s hiring plans and expectations;

• the Company’s fleet and network-related goals, including without limitation with respect to growth opportunities and frequencies, restoration of the Company’s network, reduction of operating costs, further fleet modernization with less carbon-intensive aircraft, and fleet utilization;

• the Company’s expectations related to its policy change with respect to the expiration of flight credits;

• the Company’s expectations with respect to managed business revenues;

• the Company’s cash flow expectations and capital spending guidance, in particular with respect to aircraft capital expenditures and underlying aircraft delivery expectations;

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

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Factors that could cause these differences include, among others:

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

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

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

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

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

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

(iii) the impact

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

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

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

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

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

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

• other factors as set forth in the Company's filings with the Securities and Exchange Commission, including the detailed factors discussed under the heading “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 and in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.

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

1 unchanged sentence

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis