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Item 7. Management’s Discussion and Analysis

2023-02-07 compared with 2022-02-07 · 333 added, 323 removed, 353 unchanged (65% of the section changed)

1 unchanged sentence

YEAR IN REVIEW

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

While the pandemic has continued to negatively impact results, the Company saw steady improvement as the year progressed, with intermittent periods of decelerated demand that coincided with COVID-19 surges.

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

The Company recorded GAAP and non-GAAP results for 2021 and 2020 as noted in the following tables.

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

The Omicron variant of COVID-19 both impacted travel demand and created staffing challenges for the Company, particularly during January and February 2022.

However, strong travel demand, especially associated with leisure travel, accelerated during March 2022 and continued through the remainder of the year, producing record operating revenues of $23.8 billion for 2022.

Managed business revenues improved during 2022, but remained below 2019 levels, including approximately 20 percent below fourth quarter 2019 levels in fourth quarter 2022.

In late December 2022, the Company experienced wide-scale operational disruptions as extreme winter weather across a significant portion of the United States impacted its operational plan and flight schedules.

Subsequent to Winter Storm Elliott, the Company was challenged in its efforts to realign flight crews, flight schedules, and fleet for a period of several days during this peak demand travel period.

The Company returned to a normal operating schedule on December 30, 2022.

However, this disruption and subsequent recovery efforts resulted in the cancellation of more than 16,700 flights during the period from December 21 to December 31, 2022.

The Company estimates the financial impact of this disruption was approximately $800 million on a pre-tax basis, and resulted in the Company reporting a net loss of $220 million for fourth quarter 2022.

A significant portion of this impact was due to the loss of Operating revenue associated with the flight cancellations that is estimated to be approximately $410 million.

The remaining impact primarily related to a net increase of approximately $390 million in operating expenses, primarily due to travel expense reimbursements to Customers, the estimated value of Rapid Rewards points offered as a gesture of goodwill to Customers that are expected to be redeemed, and premium pay and additional compensation for Employees, which were partially offset by lower fuel and oil and profitsharing expenses.

Following the disruption, the Company has put mitigation elements in place to reduce the risk of future operational disruptions that could impede the travel plans of its Customers.

These elements, along with efforts that remain in progress, currently include:

• Creating an early indicator dashboard that closely monitors operational health and signals an alert if the Company approaches predefined operational thresholds,

• Establishing supplemental staffing that can quickly mobilize to support Crew recovery efforts,

• Enhancing its Crew engagement technology to better communicate with large numbers of Crew Members during frequent schedule changes, and

• Updating and upgrading the Company’s Crew recovery system to not only solve current and future schedules, but also provide the ability to optimize established schedules as they are being revised during irregular operations.

Going forward, the Company is also taking additional steps to understand and review the disruption, which will determine the Company's future actions.

The Company has engaged Oliver Wyman, a third-party global aviation consulting firm, to complete an assessment of the event and make recommendations of additional mitigation steps for consideration.

In addition, the Company’s Board of Directors has established an Operations Review Committee that is working with the Company's Management to help oversee the Company's response.

The Company will continue to provide further information regarding these ongoing efforts in future periods.

The Company recorded 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 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.

(in millions, except per share amounts) December 31,

GAAP 2021 2020 Percent Change

(in millions, except per share amounts) Year ended December 31,

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

Operating income $ 1,017 $ 1,721 (40.9) $ 2,957 (65.6)

Net income $ 539 $ 977 (44.8) $ 2,300 (76.6)

Net income per share, diluted $ 0.87 $ 1.61 (45.7) $ 4.27 (79.5)

Operating income (loss) $ 1,120 $ (1,281) n.m.

$ 2,957 (62.1)

Net income (loss) $ 723 $ (1,271) n.m.

$ 2,300 (68.6)

Net income (loss) per share, diluted $ 1.16 $ (2.15) n.m.

Operating loss $ (1,281) $ (5,032) (74.5)

Net loss $ (1,271) $ (3,512) (63.8)

Net loss per share, diluted $ (2.15) $ (6.22) (65.4)

The significant improvement in both GAAP Net income (loss) and Operating income (loss), year-over-year, was primarily due to the rebound in domestic leisure demand and bookings in 2021 as impacts from the COVID-19 pandemic eased.

This resulted in a 74.5 percent increase in Operating revenues in 2021 versus 2020, although 2021 Operating revenues were still well below 2019 levels.

Further, the Company received $2.7 billion in grant allocations of payroll funding support ("Payroll Support") from the United States Department of Treasury ("Treasury") in 2021, compared with $2.3 billion received in 2020, which the Company utilized in both years to offset a portion of salaries, wages, and benefits.

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

On a quarterly basis, demand for air travel improved each period of 2021.

Although the Company's GAAP financial results benefited from the impact of Payroll Support recognized during the first three quarters of the year, the Company was able to generate a profit during fourth quarter 2021 despite having no further allocation of Payroll Support.

$ 4.27 (72.8)

The comparison of the Company's financial results, as shown above on a GAAP basis for the year ended December 31, 2022, versus the year ended December 31, 2021, were impacted by the Company's receipt of $2.7 billion in grant allocations of payroll funding support ("Payroll Support") from the United States Department of the Treasury ("Treasury") in 2021 that significantly benefited 2021 results.

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

Operating revenues for year ended December 31, 2022, increased 50.8 percent versus 2021 and operating revenues for the year ended December 31, 2022, exceeded the comparative 2019 pre-pandemic levels and was a Company annual record primarily due to strong leisure demand and higher yields.

Operating expenses for the year ended December 31, 2022, exceeded the comparative pre-pandemic 2019 levels primarily due to higher salaries, wages, and benefits expense and fuel prices.

On a non-GAAP basis, the Company's financial results improved significantly for the year ended December 31, 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.

Operating Statistics

The Company provides the operating data below for the three years ended December 31, 2021, because these statistics are commonly used in the airline industry and, therefore, allow readers to compare the Company’s performance against its results for prior periods, as well as against the performance of the Company’s peers.

The Company provides the operating data below for the years ended December 31, 2022, 2021, and 2019 because these statistics are commonly used in the airline industry and, therefore, allow readers to compare the Company’s performance against its results for prior periods, as well as against the performance of the Company’s peers.

For the year ended December 31, 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 twelve months ended December 31, 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 although the effect in 2022 was primarily in first quarter.

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

Year ended December 31,

2021 2020 2021 Change to 2020 2019 2020 Change to 2019 2021 Change to 2019 (l)

2022 2021 2022 Change to 2021 2019 2022 Change to 2019

Operating Data:

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Fuel consumed, in gallons (millions) 1,922 1,668 15.2 % 2,077 (7.5) %

Active fulltime equivalent Employees (j) 55,093 56,537 (2.6) % 60,767 (7.0) % (9.3) %

Active full-time equivalent Employees (j) 66,656 55,093 21.0 % 60,767 9.7 %

Aircraft at end of period (k) 770 728 5.8 % 747 3.1 %

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

(j) Included less than 250 and 10,421 Employees participating in the Extended Emergency Time Off program as of December 31, 2021 and 2020, respectively.

(j) Included less than 250 Employees on Extended Emergency Time Off program as of December 31, 2021.

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

(k) Included six Boeing 737 Next Generation aircraft in temporary storage and 60 in long-term storage as of December 31, 2021 and 2020, respectively.

Also included 32 and 34 Boeing MAX 737 in long-term storage as of December 31, 2020 and 2019, respectively.

(k) Included four and six Boeing 737-700 ("700") Next Generation aircraft in temporary storage as of December 31, 2022 and December 31, 2021, respectively.

Also included 34 Boeing 737 MAX aircraft in long-term storage as of December 31, 2019.

See Note 17 to the Consolidated Financial Statements for further information.

(l) The Company believes certain comparisons with 2019 are more relevant measures of performance than year-over-year comparisons due to the significant impacts in 2020 due to the pandemic.

The following tables present selected financial guidance for first quarter and full year 2023:

1Q 2022 Estimation Previous estimation

Operating revenue compared with 2019 (a) Down 10% to 15% (e)

Load factor 75% to 80% (e)

ASMs compared with 2019 Down ~9% (e)

Economic fuel costs per gallon $2.25 to $2.35 (e)

Fuel hedging premium expense per gallon $0.06 (e)

Fuel hedging cash settlement gains per gallon $0.35 (e)

ASMs per gallon (fuel efficiency) Nominally in line with 4Q21 (e)

CASM-X (b) compared with 2019 Up 20% to 24% (e)

Debt repayments (millions) ~$60 (e)

Interest expense (millions) ~$90 (e)

Aircraft (c) 725 (e)

2022 Estimation Previous estimation

ASMs compared with 2019 Down ~4% (e)

Economic fuel costs per gallon $2.25 to $2.35 (e)

Fuel hedging premium expense per gallon $0.05 (e)

Fuel hedging cash settlement gains per gallon $0.28 (e)

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

Debt repayments (millions) ~$455 (e)

Interest expense (millions) ~$360 (e)

Aircraft (c) 814 (e)

Effective tax rate 23% to 25% (e)

Capital spending (billions) (d) ~$5.0 (e)

(a) The Company believes that operating revenues compared with 2019 is a more relevant measure of performance than a year-over-year comparison due to the significant impacts in 2021 due to the pandemic.

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

net of 6 and 28 re tirements planned in first quarter 2022 and full year 2022, respectively.

Two aircraft originally planned for delivery in first quarter 2022 have shifted into the Company's second quarter 2022 planned delivery schedule.

Reflects 12 options exercised through February 3, 2022, five and seven for delivery in first quarter and second quarter 2022, respectively, and the assumption that the Company exercises all 30 remaining 2022 options.

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

(d) Represents current contractual payments to Boeing for firm aircraft and the assumptions that the Company exercises a ll 30 r emaining 2022 options, in addition to ~$900 million non-aircraft capital spending.

Excluding any further option exercises in 2022, the Company's 2022 capital spending would be ~$3.4 billion, also including ~$900 million in non-aircraft capital spending

(e) Remains unchanged from previously reported estimation.

Following strong travel demand during the fourth quarter 2021 holiday period, the Company is experiencing a revenue headwind in first quarter 2022 due to a softness in bookings and an increase in trip cancellations associated with the Omicron variant.

January and February are seasonally weaker time periods for leisure travel demand, but further softness in leisure bookings related to the Omicron variant, combined with lower than expected business

travel demand, is estimated to reduce operating revenues in January and February 2022 by $330 million, combined.

The Company canceled more than 5,600 flights in January 2022, with the majority attributable to available staffing challenges as a result of the Omicron variant, as well as weather-related cancellations, driving an estimated $50 million negative impact to January 2022 operating revenues.

First quarter 2022 managed business revenues are expected to be down 45 percent to 55 percent versus first quarter 2019 levels.

The Company remains optimistic about the return of business travel demand in 2022 based on the momentum experienced in fourth quarter 2021 before the impact of the Omicron variant.

The Company is also encouraged by recent improvements in booking trends, especially for March 2022, and current revenue trends for spring break travel appear to be in line with typical seasonal expectations.

Based on current cost trends and reduced capacity plans, first quarter 2022 operating expenses, excluding fuel and oil expense, special items, and profitsharing, are expected to increase in the range of 20 percent to 24 percent on a unit basis as compared with first quarter 2019.

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

1Q 2023 Estimation

Operating revenue, year-over-year Up 20% to 24%

ASMs, year-over-year (a) Up ~10%

Economic fuel costs per gallon (b) (c) $3.25 to $3.35

Fuel hedging premium expense per gallon $0.06

Fuel hedging cash settlement gains per gallon $0.16

ASMs per gallon (fuel efficiency) 78 to 80

CASM-X, year-over-year (d) (e) Up 2% to 4%

Scheduled debt repayments (millions) (f) ~$60

Interest expense (millions) ~$65

2023 Estimation

ASMs, year-over-year (a) Up 16% to 17%

Economic fuel costs per gallon (b) (c) $2.90 to $3.00

Fuel hedging premium expense per gallon $0.06

Fuel hedging cash settlement gains per gallon $0.14

CASM-X, year-over-year (d) (e) Down 6% to 8%

Scheduled debt repayments (millions) ~$85

Interest expense (millions) ~$250

Aircraft (g) 843

Effective tax rate 23% to 24%

Capital spending (billions) (h) $4.0 to $4.5

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

The Company's flight schedule is currently published for sale through August 14, 2023.

The Company continues to expect second quarter 2023 capacity to increase approximately 14 percent, year-over-year.

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

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

(c) Based on the Company's existing fuel derivative contracts and market prices as of January 20, 2023, first quarter and full year 2023 economic fuel costs per gallon are estimated to be in the range of $3.25 to $3.35 and $2.90 to $3.00, respectively, compared with the Company's previous estimations in the range of $3.00 to $3.10 and $2.85 to $2.95, 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, 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.

The Company continues to experience cost pressure due to inflation in labor rates and airport costs, as well as unit cost headwinds from operating at suboptimal productivity levels.

Additionally, the Company has temporarily extended incentive pay to its Operations Employees through early February 2022, which is expected to result in an additional $150 million of salaries, wages, and benefits expense in first quarter 2022, compared to the $100 million in incentive pay earned by Employees during fourth quarter 2021.

Furthermore, the Company is reducing its first quarter 2022 capacity to provide additional stability during this challenging environment.

With the Omicron variant and weather impacting the Company's results, the Company expects losses in January and February and a return to profitability in March 2022.

Based on the Company's current plan, while the Company no longer expects to be profitable in first quarter, the Company expects to be profitable for the remaining three quarters of this year, and for full year 2022.

See Note Regarding Use of Non-GAAP Financial Measures.

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

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

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

(f) The Company expects to retire approximately $50 million in principal related to a lease buyout transaction in first quarter 2023, shifting this payment forward from the previous monthly payments scheduled throughout the remainder of 2023 and beyond.

Combined with the retirement of $191 million in principal related to a lease buyout transaction in fourth quarter 2022, the Company's full year 2023 scheduled debt repayments remained roughly the same as its previous guidance.

(g) Aircraft on property, end of period.

The Company ended 2022 with 770 Boeing 737 aircraft.

The Company continues to estimate approximately 100 Boeing 737 MAX ("MAX") aircraft deliveries in 2023, including 30 Boeing 737-8 ("-8") aircraft deliveries expected in first quarter 2023.

The Company continues to expect to retire 27 Boeing -700 aircraft in 2023, including

5 -700 retirements in first quarter 2023.

As a result of receiving two additional -8 deliveries in fourth quarter 2022, as compared with the Company's previous estimation, the Company now expects to end 2023 with 843 aircraft, compared with its previous guidance of 841 aircraft.

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

See Note 5 to the Consolidated Financial Statements for further information on the Company's aircraft commitments with Boeing.

(h) Represents the Company's current estimate which continues to assume approximately 100 Boeing MAX aircraft deliveries and $1.2 billion in non-aircraft capital spending in 2023.

Thus far in January 2023, the Company has experienced an increase in flight cancellations and a deceleration in bookings, primarily for January and February 2023 travel, which are assumed to be associated with the operational disruptions in December 2022.

As a result, the Company currently estimates a negative revenue impact in the range of $300 million to $350 million in first quarter 2023.

Encouragingly, booking trends have improved sequentially this month, including notable strength in Rapid Rewards® redemptions.

Currently, March 2023 leisure booking and yield trends appear strong, and are trending in line with the Company's expectations at the time of its Investor Day in early December 2022.

The recent improvements in close-in booking trends are encouraging, and the Company currently expects March 2023 managed business revenues to be roughly restored to March 2019 levels.

The Company continues to experience year-over-year inflationary and other cost pressures in first quarter 2023, in particular from higher labor rates and accruals for all Employee work groups, as well as higher rate estimates for benefits and airport costs.

The Company currently expects its first quarter 2023 CASM-X to increase in the range of 2 percent to 4 percent, year-over-year—approximately two points higher than its previous guidance of flat to up 2 percent, year-over year.

Half of the two-point increase is attributable to a continuation of premium pay in January 2023 related to the December 2022 operational disruptions, and the remainder of the increase is primarily due to an increase in labor accruals for the Company's open labor contracts.

The Company currently expects its full year 2023 CASM-X to decrease in the range of 6 percent to 8 percent, year-over-year—approximately five points lower than its previous guidance to decrease in the range of 1 percent to 3 percent, year-over-year.

The vast majority of the five-point decrease in 2023 is due to the year-over-year impact from lower fourth quarter 2022 available seat miles and higher fourth quarter 2022 operating expenses than expected—both attributable to the December 2022 operational disruptions—offset slightly by an increase in 2023 labor accruals for the Company’s open labor contracts.

The Company plans to hire more than 7,000 new Employees, net of attrition, in 2023, a nearly 40 percent decrease from 2022 net hiring levels.

COVID-19 Pandemic Impacts

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

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

As detailed in Note 2 to the 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 has 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 fourth quarter 2021 results do not reflect the benefit of this Payroll Support, and its future period results 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.

As detailed in Notes 2 and 7 to the 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 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.

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

During 2021, approximately 11,400 Employees returned from the Extended ETO program and less than 250 Employees remained on Extended ETO leave as of December 31, 2021.

In accordance with applicable accounting guidance, the

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

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

The Company realized approximately $1.1 billion of full year 2021 cost savings from the Voluntary Separation Program and Extended ETO compared with full year 2019, and expects no material cost savings from these programs in 2022 and beyond.

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

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

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

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

However, in addition to recalling nearly all of the Employees that participated in Extended ETO, the Company met its 2021 hiring goals and is planning to add at least 8,000 additional Employees during 2022 as it strives to provide sufficient staffing to support its anticipated flight schedule plans for 2022 and beyond.

The Company is making additional investments to attract and retain talent, including the recent decision to further raise the Company's starting hourly pay rates from $15 per hour to $17 per hour for (i) Southwest Ramp, Operations, Provisioning, and Freight Agents, (ii) Southwest Customer Service Agents, Customer Representatives, and Source of Support Representatives, (iii) Southwest Flight Simulator Technicians, and (iv) Southwest Aircraft Appearance Technicians.

The Company is currently in discussions with its workgroups to enact this increase in pay rates.

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

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

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

The deadline was later extended to January 4, 2022.

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

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

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

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

For the year ended December 31, 2022, the Company hired more than 11,500 Employees, net of attrition, and had returned to overall pre-pandemic staffing levels in May 2022.

Thus, the Company's number of active full-time equivalents Employees increased by 21.0 percent from December 31, 2021 to December 31, 2022, while the year-over-year increase in capacity or ASMs was 12.5 percent.

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.

During fourth quarter 2021, the Company exercised 22 Boeing 737 MAX 7 ("-7") options for delivery in 2023, and through February 3, 2022, the Company has exercised another 24 Boeing options- 12 -8 options for delivery in 2022, and 12 -7 options for delivery in 2023.

The Company's order book with Boeing as of December 31, 2021, consists of a total of 394 MAX firm orders (264 -7 aircraft and 130 Boeing 737 MAX-8 ("-8") aircraft) and 238 MAX options (-7s or -8s) for years 2022 through 2031.

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 452 Boeing 737-700 ("-700") aircraft over the next 10 to 15 years to support the modernization of its fleet, a key cost initiative and component of its environmental sustainability efforts.

The Company has entered into supplemental agreements in 2022 with The Boeing Company ("Boeing") to increase aircraft orders and accelerate certain options with the goals 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 5 to the 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 426 -700 aircraft over the next 10 to 15 years to support the modernization of the Company's fleet, a key component of the Company's environmental sustainability efforts.

The Company's order book with Boeing as of December 31, 2022, consists of a total of 417 MAX firm orders ( 182 -7 aircraft and 235 -8 aircraft) for the years 2023 through 2030 and 147 MAX options (-7s or -8s) for years 2024 through 2027.

Given Boeing's supply chain challenges and the current status of the -7 certification, aircraft delivery delays are currently expected to extend into 2024.

The Company ended 2022 with 770 Boeing 737 aircraft, including 137 -8 aircraft.

During 2021, the Company retired 8 owned -700 aircraft, which were accelerated from 2022 into fourth quarter 2021, and returned 10 leased -700 aircraft, of which one occurred during fourth quarter 2021.

In addition, the Company took delivery of 28 -8 aircraft during 2021.

As of December 31, 2021, six -700 aircraft remained in temporary storage due to fourth quarter 2021 and first quarter 2022 capacity remaining below respective 2019 levels.

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

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

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

These additional service points on the Company's route map are opportunities it can provide Customers now, all while better

positioning the Company for a travel demand rebound.

During 2021, the Company began service to new destinations including:

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

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

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

• Fresno Yosemite International Airport - April 25, 2021

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

• Myrtle Beach International Airport - May 23, 2021

• Bozeman Yellowstone International Airport - May 27, 2021

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

• Eugene Airport in Oregon - August 29, 2021

• Bellingham International Airport in Washington - November 7, 2021

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

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

The Company has since resumed service to 13 of its 14 international destinations.

The Company’s operations to the Cayman Islands are temporarily suspended due to impacts from the COVID-19 pandemic, but with the easing of government restrictions and the continued increase in demand for beach and leisure destinations, the Company intends to resume service to the Cayman Islands in 2022.

In 2021, the Company announced goals to (i) achieve carbon neutrality by 2050, (ii) maintain carbon neutral growth (to 2019 levels) through the end of the decade, and (iii) reduce carbon emissions intensity per available seat mile (including scope 1 and scope 2 emissions) by at least 20 percent by 2030.

The Company also announced a series of actions and initiatives designed to assist the Company in achieving these goals, including agreements with various third parties intended to facilitate the development, production, and usage of commercialized sustainable aviation fuel;

the launch of a carbon-offset program that allows Customers to contribute funds for the purchase of carbon offsets for Southwest;

and arrangements with nonprofit organizations seeking to address climate change and reduce carbon emissions in aviation.

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

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

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

Given the estimates, 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.

During 2022, the Company retired 26 -700 aircraft and took delivery of 68 -8 aircraft.

The Company also completed the purchase of 31 finance lease -700 aircraft and is expecting to finalize the purchase of eight additional finance lease -700 aircraft by the end of February 2023.

See Note 8 to the Consolidated Financial Statements for further detail.

The Company has published its flight schedule through August 14, 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.

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.

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 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.

Flight credits or refunds for refundable fares will be issued regardless of cancellation time.

Flight credits unexpired on, or created on or after July 28, 2022 do not expire and will show an expiration date (12/31/2040) until the Company's systems are updated.

A flight credit with an

expiration date on or before July 27, 2022, has expired in accordance with its previously stated expiration date.

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

On December 6, 2022, the Company's Board of Directors reinstated and declared a quarterly cash dividend of $0.18 per share to Shareholders of record at the close of business on January 10, 2023, on all shares then issued and outstanding, to be paid on January 31, 2023.

The Company's quarterly dividend of $0.18 per share, or $0.72 per share annualized, is equivalent to its dividend prior to the pandemic.

In 2021, the Company announced near- and long-term environmental sustainability goals, in addition to a series of actions and initiatives designed to assist the Company in achieving these goals.

The Company continually monitors developments related to climate change and evaluates its goals and progress against these developments.

The Company expects its path toward achievement of these goals will depend on, among other things (i) increased use of sustainable aviation fuel (“SAF”), which is not presently available at scale or at prices competitive to jet fuel;

(ii) improved fuel efficiency from fleet renewal or planned fuel efficiency initiatives;

(iii) operational initiatives;

and (iv) technological innovation.

During 2022, the Company joined the Vision 2045 campaign, a collaboration among multiple organizations and companies to share films and resources that aim to inspire businesses and people to take action toward a more sustainable future.

In addition, during 2022, the Company invested in SAFFiRE Renewables, LLC (“SAFFiRE”), a company formed by D3MAX, LLC, as part of a Department of Energy (“DOE”)-backed project to develop and produce scalable, SAF.

Funded with a DOE grant matched by the Company's investment, SAFFiRE intends to utilize technology developed by the DOE's National Renewable Energy Laboratory to convert corn stover, a widely available waste feedstock in the United States, into renewable ethanol that then would be upgraded into SAF.

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, 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-K.

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 certain of 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, the DEI Report, and other voluntary disclosures, the materiality of these disclosures is inherently difficult to assess.

2022 Compared with 2021

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On a unit basis, Passenger revenues increased 35.3 percent, year-over-year.

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

Freight revenues for 2021 increased by $26 million, or 16.1 percent, compared with 2020, primarily due to increased demand for consumer goods.

The increase in Passenger revenues on both a dollar and unit basis was primarily due to the 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 2022, compared with the severe decline in demand and bookings resulting from the COVID-19 pandemic for the majority of 2021.

For 2022, the year-over-year RASM increase was primarily driven by an increase in yield of 27.3 percent coupled with an increase in Load factor of 4.9 points.

Freight revenues for 2022 decreased by $10 million, or 5.3 percent, compared with 2021, primarily due to capacity challenges driven by an increase in Passenger demand resulting in reduced space for cargo shipments.

Other revenues for 2022 increased by $692 million, or 45.0 percent, compared with 2021.

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

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

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 with Chase Bank USA, N.A.

("Chase") secured in December 2021.

The remaining increase in Other revenues was 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 2021 increased by $1.2 billion, or 9.4 percent, compared with 2020, while capacity increased 27.6 percent over the same period.

Operating expenses for 2022 increased by $8.7 billion, or 62.0 percent, compared with 2021, while capacity increased 12.5 percent over the same prior year period.

Approximately 30 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 2021, compared with no support received in 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.

However, the Company's Operating expenses are largely fixed once flight schedules are published, and ASM reductions as a result of flight schedule adjustments have a negative impact on Operating expenses per ASM.

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

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Salaries, wages, and benefits 6.31 ¢ 5.87 ¢ 0.44 ¢ 7.5 %

Payroll support and voluntary Employee programs, net (2.24) (0.94) (1.30) 138.3

Payroll support and voluntary Employee programs, net — (2.24) 2.24 n.m.

Fuel and oil 4.03 2.51 1.52 60.6

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Total 15.36 ¢ 10.66 ¢ 4.70 ¢ 44.1 %

Operating expenses per ASM for 2021 decreased by 14.2 percent, compared with 2020.

The year-over-year unit cost decrease in 2021 was enhanced by the increase in Payroll Support funding as such allocations are accounted for as a direct reduction to the Company's operating expenses.

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

See Note 8 to the Consolidated Financial Statements for further information.

Operating expenses per ASM for 2021, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), decreased 13.3 percent, year-over-year.

Operating expenses per ASM for 2022 increased by 44.1 percent, compared with 2021.

Approximately, 50 percent of the year-over-year unit cost increase was driven by Payroll Support received in 2021, including from the Consolidated Appropriations Act, 2021 and the American Rescue Plan Act of 2021.

Approximately, 30 percent of the increase was due to an increase in fuel expense.

Operating expenses per ASM for 2022, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased, year-over-year primarily due to an increase in Other Operating Expense due to Winter Storm Elliott and the operation disruption.

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 2021 increased by $932 million, or 13.7 percent, compared with 2020.

On a per ASM basis, Salaries, wages, and benefits expense for 2021 decreased 10.8 percent, compared with 2020.

On a dollar basis, approximately 55 percent of the increase was due to higher salaries and wages due to significantly more trips, step increases for certain workgroups, recalls from Extended ETO (which led to higher salaries), incentive pay offered to certain workgroups, and increased overtime hours across the network.

The largest portion of the remainder of the increase was due to the $230 million profitsharing expense accrual in 2021, compared with no profitsharing expense accrual in 2020.

Salaries, wages, and benefits expense for 2022 increased by $1.6 billion, or 21.1 percent, compared with 2021.

On a per ASM basis, Salaries, wages, and benefits expense for 2022 increased 7.5 percent, compared with 2021.

On a dollar basis, approximately 40 percent of the increase was driven by an increase in capacity and number of trips flown, approximately 30 percent of the increase was due to step/pay rate increases for certain workgroups, which included open labor contract accruals, and approximately 15 percent of the increase was a result of incentive, gratitude, and premium pay offered to the Company's Operations Employees in an effort to address available staffing challenges related to the Omicron variant in first quarter 2022 and challenges related to the operational disruption in December 2022.

The following table sets forth the Company’s unionized Employee groups with amendable contracts that are currently in negotiations on collective-bargaining agreements:

Employee Group Approximate Number of Employees Representatives Amendable Date

Employee Group Approximate Number of Full-time Equivalent Employees Representatives Amendable Date

Southwest Pilots 9,342 Southwest Airlines Pilots' Association ("SWAPA") September 2020

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Southwest Ramp, Operations, Provisioning, Freight Agents 15,260 Transportation Workers of America, AFL-CIO, Local 555 ("TWU 555") February 2021

Southwest Customer Service Agents, Customer Representatives, and Source of Support Representatives 6,100 International Association of Machinists and Aerospace Workers, AFL-CIO ("IAM 142") December 2018

Southwest Aircraft Appearance Technicians 170 AMFA November 2020

Southwest Dispatchers 400 Transportation Workers of America, AFL-CIO, Local 550 ("TWU 550") June 2019

Southwest Flight Crew Training Instructors 130 Transportation Workers of America, AFL-CIO, Local 557 ("TWU 557") January 2022

Southwest Meteorologists 12 TWU 550 June 2019

During August 2021, the Company reached a tentative collective-bargaining agreement with IAM 142, which represents the Company's approximately 6,100 Employees in the Customer Service Agents, Customer Representatives, and Source of Support Representatives workgroup.

However, the IAM 142 membership voted not to ratify the agreement.

The Company will continue to engage in discussions on a new agreement with IAM 142.

Payroll support and voluntary Employee programs, net (a reduction to expense) for 2021 was an increase of $2.0 billion, or 206.1 percent, compared with 2020.

On a per ASM basis, Payroll support and voluntary Employee programs, net for 2021 increased by 138.3 percent.

On both a dollar and per ASM basis, the changes were due to the components of this line item as noted below:

• The $745 million accrual for charges related to the Voluntary Separation Program in 2020;

• The $140 million net reduction in the Extended ETO liability in 2021, compared with the $625 million accrual for charges related to the Extended ETO liability in 2020;

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

• The $117 million in Employee Retention Tax Credits recorded in 2021 for continuing to pay Employees' salaries during the time they were not working, as allowed under the CARES Act, and subsequent legislation.

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 December 15, 2022, the Company's more than 8,000 Customer Service Agents, Customer Representatives, and Source of Support Representatives, represented by the International Association of Machinists and Aerospace Workers, AFL-CIO ("IAM"), ratified a new five-year collective-bargaining agreement with the Company.

The newly ratified agreement becomes amendable in December 2027.

On December 30, 2022, the Company's more than 200 Flight Instructors, represented by the Transport Workers Union ("TWU"), ratified a new four-year collective bargaining agreement with the Company.

The newly ratified agreement becomes amendable in January 2027.

On January 31, 2023, the Company's 50 Facilities Maintenance Technicians, represented by AMFA, ratified a new four-year collective bargaining agreement with the Company.

The newly ratified agreement becomes amendable in November 2027.

On February 4, 2023, the Company's more than 400 Dispatchers, represented by the TWU, ratified a new four-year collective bargaining agreement with the Company.

The newly ratified agreement becomes amendable in June 2027.

Payroll support and voluntary Employee programs, net had no amounts for 2022, and was a reduction to expense in 2021 and consisted primarily of the following items :

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

• $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;

• $117 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 Consolidated Financial Statements for further information.

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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 fourth quarter 2021 available seat miles per gallon ("fuel efficiency") declined 4.2 percent, year-over-year, due to the removal from storage and return to service of more of the Company's least fuel-efficient aircraft, the -700, to support sequentially increasing flight schedules.

When compared with fourth quarter 2019, fuel efficiency improved 3.8 percent in fourth quarter 2021 due to the March 2021 return to service of the Company's most fuel-efficient aircraft, the MAX.

The Company's 2022 available seat miles per gallon ("fuel efficiency") declined 2.4 percent, year-over-year, due to increased load factors and the removal from storage and increased usage of certain of the Company's least fuel-efficient aircraft, the -700, to support sequentially increasing flight schedules.

When compared with 2019, fuel efficiency increased by 2.1 percent due to the March 2021 return to service of the Company's most fuel-efficient aircraft, the MAX.

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.

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As of January 20, 2023, on an economic basis, the Company had derivative contracts in place related to expected future fuel consumption as follows:

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

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

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

See Note 11 to the Consolidated Financial Statements for further information.

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

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

Based on the Company's available seat mile plans for full year 2022, its maximum percent of estimated fuel consumption covered by fuel derivative contracts is 64 percent.

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

Based on 2019 fuel gallons consumed, the Company's maximum percent of fuel consumption covered by fuel derivative contracts is 37 percent in 2023 and 17 percent in 2024.

Period Maximum fuel hedged percentage (a)(b)

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

The Company is currently 56 percent hedged in first quarter 2023, 51 percent hedged in second quarter 2023, and 47 percent hedged in second half 2023.

(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.

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

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

8 unchanged sentences

Assuming no changes to the Company's current fuel derivative portfolio, but including all previous hedge activity for fuel derivatives that have not yet settled, and considering only the expected net cash receipts related to hedges that will settle, the Company is providing the below sensitivity table for first quarter 2023 and full year 2023 jet fuel prices at different crude oil assumptions as of January 20, 2023, and for expected premium costs associated with settling contracts each period, respectively.

Estimated economic fuel price per gallon, including taxes and fuel hedging premiums (e)

Estimated economic fuel price per gallon, including taxes and fuel hedging premiums (b)

Average Brent Crude Oil

price per barrel First Quarter 2022 (c)

Full Year 2022 (d)

$60 $1.80 - $1.90 $1.85 - $1.95

$70 $2.00 - $2.10 $2.05 - $2.15

Current Market (a) $2.25 - $2.35 $2.25 - $2.35

$90 $2.35 - $2.45 $2.40 - $2.50

$100 $2.45 - $2.55 $2.55 - $2.65

Estimated fuel hedging premium expense per gallon (b) $0.06 $0.05

Estimated premium costs (b) $26 million $96 million

price per barrel First Quarter 2023

Full Year 2023

$60 $2.45 to $2.55 $2.20 to $2.30

$70 $2.80 to $2.90 $2.50 to $2.60

$80 $3.10 to $3.20 $2.80 to $2.90

Current Market (a) $3.25 to $3.35 $2.90 to $3.00

$90 $3.40 to $3.50 $3.05 to $3.15

$100 $3.65 to $3.75 $3.35 to $3.45

$110 $3.90 to $4.00 $3.60 to $3.70

Fair market value $80 million $363 million

Estimated premium costs $30 million $121 million

(a) Brent crude oil average market prices as of January 20, 2023, were approximately $87 and $85 per barrel for first quarter 2023 and full year 2023, respectively.

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

(c) Based on the Company's existing fuel derivative contracts and market prices as of January 20, 2022, first quarter 2022 economic fuel costs are estimated to be in the $2.25 to $2.35 per gallon range, including fuel hedging premium expense of approximately $26 million, or $0.06 per gallon, and $0.35 per gallon in favorable cash settlements from fuel derivative contracts.

See Note Regarding Use of Non-GAAP Financial Measures.

(d) Based on the Company's existing fuel derivative contracts and market prices as of January 20, 2022, full year 2022 economic fuel costs are estimated to be in the $2.25 to $2.35 per gallon range, including fuel hedging premium expense of approximately $96 million, or $0.05 per gallon, and $0.28 per gallon in favorable cash settlements from fuel derivative contracts.

See Note Regarding Use of Non-GAAP Financial Measures.

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

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

however, the economic fuel price per gallon sensitivities provided, assume the relationship between Brent crude oil and refined products based on market prices as of January 20, 2023.

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.

See Note Regarding Use of Non-GAAP Financial Measures.

Maintenance materials and repairs expense for 2021 increased by $104 million, or 13.9 percent, compared with 2020.

Maintenance materials and repairs expense for 2022 decreased by $2 million, or 0.2 percent, compared with 2021.

On a per ASM basis, Maintenance materials and repairs expense decreased 10.8 percent, compared with 2021.

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

The majority of the remainder of the increase was due to higher engine maintenance expense due to the increase in flight hours.

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

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

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 airframe check volume due to deferring costs and reduced operations in 2021 due to the COVID-19 pandemic.

Landing fees and airport rentals expense for 2022 increased by $52 million, or 3.6 percent, compared with 2021.

On a per ASM basis, Landing fees and airport rentals expense decreased 7.3 percent, compared with 2021.

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

On a dollar basis, approximately 50 percent of the increase was due to an increase in landing fees from the increased number of trips flown and approximately 50 percent was due to an increase in space rental rates and usage at various stations throughout the network, partially offset by higher settlements received from various airports in 2022.

Depreciation and amortization expense for 2022 increased by $79 million, or 6.2 percent, compared with 2021.

On a per ASM basis, Depreciation and amortization expense decreased 20.7 percent, compared with 2020.

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

Other operating expenses for 2021 increased by $468 million, or 24.3 percent, compared with 2020.

On a per ASM basis, Depreciation and amortization expense decreased by 5.2 percent, compared with 2021.

On a dollar basis, approximately 50 percent of the increase was due to several technology assets being placed into service since 2021, 35 percent of the increase was primarily due to the purchase of 68 -8 aircraft since 2021, and the remainder

was due to decreasing the airframe salvage value for the entire owned -700 fleet and accelerating the depreciation for certain -700 aircraft planned for early retirement in 2023.

Other operating expenses for 2022 increased by $1.3 billion, or 56.0 percent, compared with 2021.

Included within this line item was aircraft rentals expenses in the amount of $195 million and $205 million for 2022 and 2021, respectively.

On a per ASM basis, Other operating expenses decreased 3.2 percent, compared with 2020.

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

Excluding the impact of this 2020 sale-leaseback gain, the increase in Other operating expenses on a dollar basis was primarily due to higher revenue related expenses, including credit card processing charges.

See Note 8 to the Consolidated Financial Statements for more information.

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

Interest expense for 2021 increased by $118 million, or 33.8 percent, compared with 2020, primarily due to higher debt balances.

See Note 7 to the Consolidated Financial Statements for more information.

Capitalized interest for 2021 increased by $1 million, or 2.9 percent, compared with 2020, primarily due to Boeing resuming production of the Company's undelivered MAX aircraft.

Interest income for 2021 decreased by $19 million, or 59.4 percent, compared with 2020, due to lower interest rates.

On a per ASM basis, Other operating expenses increased 38.7 percent, compared with 2021.

On a dollar and per ASM basis, approximately 40 percent of the increase was driven by costs associated with the December 2022 operational disruption, including estimated travel expense reimbursements being provided to impacted Customers and the estimated value of Rapid Rewards points offered as a gesture of goodwill to Customers that are expected to be redeemed.

Approximately 20 percent of the increase was due to higher revenue related expenses (including credit card processing charges) associated with the significant increase in Passenger revenues versus 2021.

The majority of the remainder of the year-over-year increases on a dollar and per ASM basis was due to various flight-driven expenses.

Other expenses (income)

Interest expense for 2022 decreased by $127 million, or 27 percent, compared with 2021.

Approximately 60 percent of the decrease was due to elimination of the debt discount due to the adoption of ASU 2020-06, and 40 percent of the decrease was due to various debt repurchases throughout 2022, resulting in less fixed interest expense.

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

Capitalized interest for 2022 increased by $3 million, or 8.3 percent, compared with 2021, primarily due to an increase in average progress payment balances for scheduled future aircraft deliveries .

Interest income for 2022 increased by $204 million, compared with 2021, due to higher interest rates.

Loss on extinguishment of debt for 2022 increased by $165 million, compared with 2021, primarily due to repurchases of $486 million face value of the Company's 1.25% Convertible Notes due 2025 (the "Convertible Notes") during 2022.

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

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

5 unchanged sentences

Premium cost of fuel contracts not designated as hedges (28) 43

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

Mark-to-market gain on deferred compensation plan investment (33) —

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

Mark-to-market impact on deferred compensation plan investment 74 (33)

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

Loss on partial extinguishment of convertible notes 28 —

Post-retirement curtailment charge — 53

The Company's annual 2022 effective tax rate was 25.9 percent, compared with 26.3 percent in 2021.

The higher tax rate for 2020 was primarily due to the net loss incurred during 2020, resulting in a tax benefit and refund of previously paid taxes, when the Company was subject to a higher federal statutory tax rate, as was allowed under the CARES act.

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 partial tax deduction for losses incurred on repurchases of the Convertible Notes.

2021 Compared with 2020

7 unchanged sentences

Fuel and oil expense, as reported $ 5,975 $ 3,310

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) 8 25

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a) (40) 8

Add (Deduct):

Premium cost of fuel contracts not designated as hedges (28) 43

2 unchanged sentences

Payroll support and voluntary Employee programs, net — 2,960

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) 8 25

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a) (40) 8

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — 3

Add (Deduct):

Premium cost of fuel contracts not designated as hedges (28) 43

Gain from aircraft sale-leaseback transactions — 222

Impairment of long-lived assets (35) (12)

4 unchanged sentences

Operating expenses, excluding Fuel and oil expense, special items, and profitsharing $ 16,660 $ 13,480 23.6 %

Operating income (loss), as reported $ 1,721 $ (3,816)

Operating income, as reported $ 1,017 $ 1,721

Payroll support and voluntary Employee programs, net — (2,960)

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (8) (25)

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a) 40 (8)

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — (3)

Add (Deduct):

Premium cost of fuel contracts not designated as hedges 28 (43)

Gain from aircraft sale-leaseback transactions — (222)

Impairment of long-lived assets 35 12

Operating loss, excluding special items $ (1,281) $ (5,032) (74.5) %

Operating income (loss), excluding special items $ 1,120 $ (1,281) n.m.

Other (gains) losses, net, as reported $ 12 $ (50)

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current and future periods 41 7

Add (Deduct):

Premium cost of fuel contracts not designated as hedges 28 (43)

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

Loss on partial extinguishment of convertible notes (28) —

Post-retirement curtailment charge — (53)

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

Other (gains) losses, net, excluding special items $ 77 $ (86) n.m.

1 unchanged sentence

2022 2021 Change

Income (loss) before income taxes, as reported $ 1,325 $ (4,256)

Income before income taxes, as reported $ 728 $ 1,325

Payroll support and voluntary Employee programs, net — (2,960)

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (8) (25)

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a) 40 (8)

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — (3)

Gain from aircraft sale-leaseback transactions — (222)

Impairment of long-lived assets 35 12

Mark-to-market impact from fuel contracts settling in current and future periods (41) (7)

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

Loss on extinguishment of debt 193 28

Income (loss) before income taxes, excluding special items $ 959 $ (1,613) n.m.

Provision for income taxes, as reported $ 189 $ 348

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current and future periods (a) (7) 40

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

Loss on partial extinguishment of convertible notes 28 —

Post-retirement curtailment charge — 53

Loss before income taxes, excluding special items $ (1,613) $ (5,317) (69.7) %

Provision (benefit) for income taxes, as reported $ 348 $ (1,182)

Net income (loss) tax impact of fuel and special items (b) 47 (690)

GAAP to Non-GAAP tax rate difference (c) — (247)

Benefit for income taxes, net, excluding special items $ (342) $ (1,805) (81.1) %

Net income (loss), as reported $ 977 $ (3,074)

Provision (benefit) for income taxes, net, excluding special items $ 236 $ (342) n.m.

Net income, as reported $ 539 $ 977

Payroll support and voluntary Employee programs, net — (2,960)

Fuel hedge contracts settling in the current period, but for which losses were reclassified from AOCI (a) (8) (25)

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which losses (gains) were reclassified from AOCI (a) 40 (8)

Interest rate swap agreements terminated in a prior period, but for which losses were reclassified from AOCI (a) — (3)

Gain from aircraft sale-leaseback transactions — (222)

Impairment of long-lived assets 35 12

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current and future periods (a) (41) (7)

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

Loss on partial extinguishment of convertible notes 28 —

Post-retirement curtailment charge — 53

Loss on extinguishment of debt 193 28

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

Add (Deduct):

Net income (loss) tax impact of special items (b) (47) 690

GAAP to Non-GAAP tax rate difference (c) — 247

Net loss, excluding special items $ (1,271) $ (3,512) (63.8) %

Net income (loss) per share, diluted, as reported $ 1.61 $ (5.44)

Net income (loss), excluding special items $ 723 $ (1,271) n.m.

Net income per share, diluted, as reported $ 0.87 $ 1.61

Add (Deduct):

Impact of special items 0.36 (4.80)

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

Add (Deduct):

Net income (loss) tax impact of special items (b) (0.07) 1.12

GAAP to Non-GAAP tax rate difference (c) — 0.43

GAAP to Non-GAAP diluted weighted average shares difference (d) (0.06) —

Net loss per share, diluted, excluding special items $ (2.15) $ (6.22) (65.4) %

Year ended December 31, Percent

2021 2020 Change

GAAP to Non-GAAP diluted weighted average shares difference (c) — $ (0.06)

Net income (loss) per share, diluted, excluding special items $ 1.16 $ (2.15) n.m.

Operating expenses per ASM (cents) 15.36 ¢ 10.66 ¢

Add (Deduct):

Impact of special items (0.03) 2.23

4 unchanged sentences

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

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

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

(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 year ended December 31, 2021.

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

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Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing;

Operating loss, non-GAAP;

Operating income (loss), non-GAAP;

Other (gains) losses, net, non-GAAP;

Loss before income taxes, non-GAAP;

Benefit for income taxes, net, non-GAAP;

Net loss, non-GAAP;

Net loss per share, diluted, non-GAAP;

Income (loss) before income taxes, non-GAAP;

Provision (benefit) for income taxes, net, non-GAAP;

Net income (loss), non-GAAP;

Net income (loss) per share, diluted, non-GAAP;

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

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

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

A noncash impairment charge related to 20 Boeing 737-700 aircraft that were retired during 2020 and 8 Boeing 737-700 aircraft that were retired in 2021;

Unrealized losses related to 12 forward-starting interest rate swap agreements.

During 2020, the interest rate swap agreements, which were related to 12 -8 aircraft leases (with deliveries originally scheduled between June 2020 and September 2020), were de-designated as hedges due to the scheduled delivery range no longer being probable, resulting in the mark-to-market changes being recorded to earnings;

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

A post-retirement curtailment charge related to Employees who accepted Voluntary Separation Program 2020 and elected to participate in the Company's retiree medical benefits plan.

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

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

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.

4 unchanged sentences

Operating expenses, non-GAAP excluding Fuel and oil expense and profitsharing;

Operating loss, non-GAAP;

Operating income (loss), non-GAAP;

Other (gains) losses, net, non-GAAP;

Loss before income taxes, non-GAAP;

Benefit for income taxes, net, non-GAAP;

Net loss, non-GAAP;

Net loss per share, diluted, non-GAAP;

Income (loss) before income taxes, non-GAAP;

Provision (benefit) for income taxes, net, non-GAAP;

Net income (loss), non-GAAP;

Net income (loss) per share, diluted, non-GAAP;

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

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The enormous impact of the COVID-19 pandemic on the U.S.

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

travel industry created an urgent liquidity crisis, especially during 2020, for the entire airline industry, including the Company.

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

See Note 2 and Note 11 to the Consolidated Financial Statements for further information regarding the impact of the COVID-19 pandemic, as well as the transactions completed and assistance obtained under Payroll Support programs.

Net cash provided by operating activities for 2021 was $2.3 billion, and net cash used in operating activities for 2020 was $1.1 billion.

Operating cash inflows are historically primarily derived from ticket sales associated with providing air transportation to Customers.

Net cash provided by operating activities for 2022 was $3.8 billion, and net cash provided by operating activities for 2021 was $2.3 billion.

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

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

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

Operating cash flows for 2021 included $2.7 billion in Payroll Support program grant proceeds received.

The net increase in operating cash flows was also a result of a $591 million increase in Air traffic liability driven by increased ticket sales related to an increase in leisure travel demand.

The operating cash flows for 2020 were affected primarily by (i) the initial, most significant, impacts of the COVID-19 pandemic, which resulted in a significant drop in travel demand, sales, and revenues, leading to the Company's Net loss (as adjusted for noncash items), and (ii) the Company's funding of its $667 million 2019 profitsharing distribution to Employees in 2020.

In 2020, these net decreases in cash from operating activities were partially offset by a $1.6 billion increase in Air traffic liability and by $2.4 billion in Payroll Support program grant proceeds received.

The increase in Air traffic liability was due to ticket sales in early 2020 for future travel that have not been flown as a result of the significant number of Customer trip cancellations associated with the COVID-19 pandemic, and growth in Rapid Rewards points earned due to multiple loyalty credit card promotions throughout 2020.

The operating cash flows for 2022 were largely impacted by the Company's net income (as adjusted for noncash items), a $525 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, a $472 million cash tax refund from the Internal Revenue Service associated with the 2020 tax year, and a $139 million cash excise tax refund for excise taxes remitted to taxing authorities for which the subsequent flights were canceled by Customers, resulting in amounts due back to the Company.

Cash flows associated with entering into new fuel derivatives, which are classified as Other, net, operating cash flows, were net outflows of $81 million in 2022 and $34 million in 2021.

See Note 11 to the Consolidated Financial Statements for further information.

Operating cash flows for 2021 included $2.7 billion in Payroll Support program grant proceeds received and $591 million increase in Air traffic liability driven by increased ticket sales related to an 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 has also used Net cash provided by operating activities to fund stock repurchases and pay dividends;

however these shareholder return activities have been suspended due to restrictions associated with the payroll assistance under the Payroll Support programs and the Company's $1.0 billion amended and restated revolving credit facility (the "Amended A&R Credit Agreement").

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

Net cash used in investing activities for 2021 and 2020 was $1.3 billion and $16 million, respectively.

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.

On December 6, 2022, the Company reinstated and declared a quarterly cash dividend of $0.18 per share to Shareholders of record at the close of business on January 10, 2023, on all shares then issued and outstanding, to be paid on January 31, 2023.

See Note 2 to the Consolidated Financial Statements for further information on restrictions associated with the Payroll Support Programs.

Net cash used in investing activities for 2022 was $3.7 billion, and net cash used in investing activities for 2021 was $1.3 billion.

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

During 2020, the Company also raised $815 million from the sale-leaseback of 20 aircraft (see Note 8 to the Consolidated Financial Statements for more details on the sale-leaseback transactions) and received $428 million of Supplier proceeds, which the Company considers an offset to its aircraft capital expenditures.

Capital expenditures were $3.9 billion, compared with $505 million in the same prior year period.

Capital expenditures increased, year-over-year, largely due to a substantial increase in progress and delivery payments made for current period and future aircraft deliveries during 2022, compared to the same prior year period, when progress payments were not made through November 2021 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.

See Note 17 to the Consolidated Financial Statements for further information.

During 2021, Capital expenditures were $505 million, compared with $515 million in the same prior year period.

The Company continues to estimate its 2022 capital spending to be approximately $5.0 billion, including approximately $900 million in non-aircraft capital spending.

This includes 12 2022 -8 options exercised through February 3, 2022, and assumes the Company exercises all 30 remaining 2022 options.

Fleet and other capital investment plans are expected to evolve as the Company continues to manage through the pandemic, and the Company intends to continue evaluating the exercise of its remaining 30 MAX options for 2022 as decision deadlines occur.

Net cash provided by financing activities for 2021 and 2020 was $359 million and $9.7 billion, respectively.

During 2021, the Company borrowed $1.1 billion under Payroll Support programs.

Capital expenditures during 2022 also included approximately $174 million associated with the Company's purchase of 31 finance leased aircraft from the lessor.

See Note 8 to the Consolidated Financial Statements for further information.

The Company repaid $905 million in debt and finance lease obligations, including the extinguishment of $203 million in principal of its convertible notes for cash payments totaling $293 million during 2021.

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

An additional $2.3 billion was raised from a

public offering of 80.5 million shares of common stock.

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

The Company also repurchased $451 million of its outstanding common stock and paid $188 million in cash dividends to Shareholders in 2020 prior to restrictions associated with the payroll assistance under the Payroll Support programs.

Additionally, the Company repaid $839 million in other debt and finance lease obligations during 2020.

The Company estimates its 2023 capital spending to be in the range of $4.0 billion to $4.5 billion, which assumes approximately 100 MAX aircraft deliveries in 2023.

The Company's 2023 capital spending guidance continues to include approximately $1.2 billion in non-aircraft capital spending.

Including both capital spending and operating expense budgets, the Company currently expects to spend approximately $1.3 billion in 2023 on technology investments, upgrades, and system maintenance.

Net cash used in financing activities for 2022 was $3.0 billion, and net cash provided by financing activities for 2021 was $359 million, respectively.

During 2022, the Company repaid $3.1 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.

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.

Also, see investing activities section above and Note 8 to the Consolidated Financial Statements for further information on the Company's purchase of finance leased aircraft, which resulted in a $191 million elimination of the Company's remaining finance lease obligations for these aircraft.

During 2021, the Company's financing activities included borrowing $1.1 billion under Payroll Support programs.

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

The Company also repaid $905 million in debt and finance lease obligations, including the extinguishment of $203 million in principal of its Convertible Notes for cash payments totaling $293 million during 2021.

A discussion of the Company's most significant drivers impacting cash flow for 2020 are included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021, under Part II Item 7, Liquidity and Capital Resources.

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

The Company has access to $1.0 billion under its Amended A&R Credit Agreement.

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

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

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

The facility contains a financial covenant to maintain total liquidity, as defined in the 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 December 31, 2021.

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

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

Although not the case at December 31, 2021 due to the Company's significant financing activities in 2020 and 2021, the Company has historically carried a working capital deficit, in which its current liabilities exceed its current assets.

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

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

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

This is common within the airline industry and is primarily due to the nature of the Air traffic liability account, which is related to advance ticket sales, unused 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 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 $12.3 billion as of December 31, 2022, and anticipated future internally generated funds from operations.

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

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

22 unchanged sentences

Based on the Company’s scheduled future aircraft deliveries from Boeing and existing tax laws in effect, the Company will continue to accelerate the cash income tax benefits related to aircraft purchases.

However, due to the Company's net taxable loss incurred in 2020, and a provision within the CARES Act that allows entities to carry back such 2020 losses to prior periods of up to five years, and claim refunds of federal taxes paid, the Company expects to receive a significant cash tax refund of $472 million associated with this taxable loss from the Internal Revenue Service in the first six months of 2022.

Due to the Company's net taxable loss incurred in 2020, and a provision within the CARES Act that allowed entities to carry back such 2020 losses to prior periods of up to five years, and claim refunds of federal taxes paid, the Company received a significant cash tax refund of $472 million associated with this taxable loss from the Internal Revenue Service during second quarter 2022.

The Company was in a net taxable loss position in 2022 and has federal and state operating loss carryforwards, $275 million and $43 million (tax-effected), respectively, to reduce taxable income in future periods.

See Note 15 to the Consolidated Financial Statements for further information.

The Company has paid in the past, and will continue to pay in the future, significant cash taxes to the various taxing jurisdictions where it operates.

The Company has paid in the past, and will continue to pay in the future, cash taxes to the various taxing jurisdictions where it operates.

The Company expects to be able to continue to meet such obligations utilizing cash and investments on hand, as well as cash generated from its ongoing operations.

10 unchanged sentences

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, funds that are past flight date and remain unused, but are expected to be used in the future, and the Company’s liability for loyalty benefits that are expected to be redeemed in the future.

Air traffic liability primarily represents tickets sold for future travel dates, flight 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.

See Note 1 to the Consolidated Financial Statements for information about the Company's revenue recognition policies.

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

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

The majority of the Company's tickets sold are nonrefundable, although the funds remain reusable, for a period of time, in the form of a flight credit that can be applied towards the purchase of future travel.

Flight credits are typically created when a Customer cancels or modifies an existing flight itinerary.

These unused flight credits are the primary source of breakage.

Breakage estimates are based on historical experience over many years, and the Company has consistently applied this accounting method to estimate revenue from unused tickets at the date of scheduled travel.

Fully refundable tickets rarely expire 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 has extended the expiration date to September 7, 2022.

For air travel on Southwest, the amount of tickets (which includes flight credits--also referred to as partial 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.

Due to the significant increase in time allowed by the Company for these Customers to redeem such credits for future travel, the percentage of the extended credits that will ultimately expire unused is currently expected to be lower than the Company’s historical experience with flight credits that were not extended (“normal” flight credits), and this lack of historical experience also impacts the Company's ability to estimate ultimate expirations.

Therefore, as a result of the significant volume of these extended credits and the Company's lack of historical experience associated with such extended travel credits, recognition of expected breakage will likely create volatility in certain Passenger revenue metrics through September 2022.

For the year ended December 31, 2021, holding other factors constant, a 10 percent change in the Company’s estimate of the amount of these extended credits that will expire unused would have resulted in an immaterial change in Passenger revenues recognized.

Also as a result of changes in observed Customer travel habits and behaviors during 2021, the Company has increased its estimates of “normal” Customer flight credits that are expected to expire unused.

Although very little of these funds have yet to reach their expiration dates, Customer redemptions of these "normal" credits have been at a slower rate than the Company’s historical data would suggest for similar credits in periods prior to the COVID-19 pandemic.

Based on historical Customer behavior, holding other factors constant, a 10 percent change in the

Company’s estimate of the amount of "normal" tickets and/or flight credits that will expire unused would have resulted in a $59 million, or less than one percent, change in Passenger revenues recognized for the year ended December 31, 2021.

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.

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

As a result of changes in observed Customer travel habits and behaviors during 2021 and 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.

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 due to the fact that such flight credits no longer have an expiration date.

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

1 unchanged sentence

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 funds policies, seat availability, and economic factors.

fare increases, fare sales, changes to the Company's ticketing policies, changes to the Company’s refund, exchange and unused flight 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.

Given the unprecedented amount of 2020 Customer flight cancellations and the amount of travel funds available to Customers for use through September 2022, the Company expects additional variability in the amount of breakage recorded in future periods, especially as a percentage of revenues, as the estimates of the portion of sold tickets that will expire unused may differ from historical experience and the Company's overall revenues remain below pre-COVID-19 pandemic levels.

Fair Value Measurements and Financial Derivative Instruments

17 unchanged sentences

The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds.

Due to the fact that certain inputs used in determining the estimated fair value of its

option contracts are considered unobservable (primarily implied volatility), the Company has categorized these option contracts as Level 3.

Due to the fact that certain inputs used in determining the estimated fair value of its option contracts are considered unobservable (primarily implied volatility), the Company has categorized these option contracts as Level 3.

Although implied volatility is not directly observable, it is derived primarily from changes in market prices, which are observable.

1 unchanged sentence

Fair values for financial derivative instruments are estimated prior to the time that the financial derivative instruments settle.

However, once settlement of the financial derivative instruments occurs and the hedged jet fuel is purchased and consumed, all values and prices are known and are recognized in the financial statements.

However, once settlement of the financial derivative instruments occurs and the hedged jet fuel is

purchased and consumed, all values and prices are known and are recognized in the financial statements.

Although the Company continues to use a prospective assessment to determine that commodities continue to qualify for hedge accounting in specific locations where the Company hedges, there are no assurances that these commodities will continue to qualify in the future.

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The Company also sells points and related services to business partners participating in the loyalty program.

Liabilities are recorded for the relative standalone selling price of the Rapid Rewards points which are

awarded each period.

Liabilities are recorded for the relative standalone selling price of the Rapid Rewards points which are awarded each period.

The liabilities recorded represent the total number of points expected to be redeemed by Members, regardless of whether the Members may have enough to qualify for a full travel award.

1 unchanged sentence

In order to determine the value of each loyalty point, certain assumptions must be made at the time of measurement, which include an allocation of passenger revenue between the flight and loyalty points earned by passengers, and the fair value of Rapid Rewards points, which are generally based on their redemption value to the Customer.

See Note 6 to the Consolidated Financial Statements for further information on determining the estimated fair value of each loyalty point.

Note 6 to the Consolidated Financial Statements for further information on determining the estimated fair value of each loyalty point.

The majority of the points sold to business partners are through the Southwest co-branded credit card agreement ("Agreement") with Chase Bank USA, N.A.

Consideration received as part of this Agreement is subject to Accounting Standards Codification 606, Revenue From Contracts With Customers.

Consideration received as part of this Agreement is subject to ASC 606.

The most recent instance in which the Agreement was amended was in fourth quarter 2021.

The Agreement has the following multiple elements:

18 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis