What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-02-07 compared with 2022-02-07 · 399 added, 413 removed, 1168 unchanged (41% of the section changed)

34 unchanged sentences

Deferred income taxes 1,985 1,770

Construction obligation — 309

Noncurrent operating lease liabilities 1,118 1,315

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Retained earnings 16,261 15,774

Accumulated other comprehensive income (loss) 388 ( 105 )

Accumulated other comprehensive income 344 388

Treasury stock, at cost:

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Interest income ( 217 ) ( 13 ) ( 32 )

Loss on extinguishment of debt 193 28 —

Other (gains) losses, net 12 ( 50 ) 158

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deferred taxes of ($ 44 ), $ 142 , and $ 2

( 143 ) 469 4

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

deferred taxes of $ 6 , $ 2 , and ($ 8 )

7 ( 25 ) ( 25 )

Unrealized gain (loss) on defined benefit plan items, net of deferred

taxes of $ 24 , $ 25 , and ($ 15 )

84 ( 48 ) ( 29 )

Other, net of deferred taxes of $ — , ($ 13 ), and $ 7

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income (loss) Treasury

Balance at December 31, 2018 (as reported) $ 808 $ 1,510 $ 15,967 $ 20 $ ( 8,452 ) $ 9,853

Cumulative effect of adopting Accounting Standards Update No.

2016-02, Leases, codified in Accounting Standards Codification 842

— — 55 — — 55

Balance after adjustment for the new accounting standard $ 808 $ 1,510 $ 16,022 $ 20 $ ( 8,452 ) $ 9,908

Repurchase of common stock — — — — ( 2,000 ) ( 2,000 )

Issuance of common and treasury stock pursuant to Employee stock plans — 16 — — 11 27

Share-based compensation — 55 — — — 55

Cash dividends, $ 0.700 per share

— — ( 377 ) — — ( 377 )

Comprehensive income — — 2,300 ( 81 ) — 2,219

Balance at December 31, 2019 $ 808 $ 1,581 $ 17,945 $ ( 61 ) $ ( 10,441 ) $ 9,832

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Balance at December 31, 2021 $ 888 $ 4,224 $ 15,774 $ 388 $ ( 10,860 ) $ 10,414

Cumulative effect of adopting Accounting Standards Update No.

2020-06, Debt (See Note 3) $ — $ ( 300 ) $ 55 $ — $ — $ ( 245 )

Issuance of common and treasury stock pursuant to Employee stock plans $ — $ 29 $ — $ — $ 17 $ 46

Share-based compensation $ — $ 84 $ — $ — $ — $ 84

Cash dividends, $ 0.18 per share

$ — $ — $ ( 107 ) $ — $ — $ ( 107 )

Comprehensive income $ — $ — $ 539 $ ( 44 ) $ — $ 495

Balance at December 31, 2022 $ 888 $ 4,037 $ 16,261 $ 344 $ ( 10,843 ) $ 10,687

See accompanying notes.

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Impairment of long-lived assets 35 12 32

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

Unrealized/realized (gain) loss on fuel derivative instruments ( 2 ) ( 15 ) 15

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Gain on sale-leaseback transactions — — ( 222 )

Loss on partial extinguishment of convertible notes 28 — —

Loss on extinguishment of debt 193 28 —

Changes in certain assets and liabilities:

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Other liabilities ( 334 ) ( 103 ) ( 306 )

Cash collateral received from derivative counterparties 141 9 25

Cash collateral received from (provided to) derivative counterparties ( 69 ) 141 9

Other, net 28 28 ( 95 )

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SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:

Adoption of Accounting Standards Update 2020-06, Debt (See Note 3) $ 245 $ — $ —

Right-of-use assets acquired under operating leases $ 58 $ 327 $ 915

Flight equipment acquired against supplier credit memo $ — $ 569 $ —

Assets constructed for others $ — $ 309 $ 145

Supplier receivables $ — $ — $ 428

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

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Supplemental Financial Information

Boeing 737 MAX Grounding and Return to Ser vice

Boeing 73 7 MAX Grounding and Return to Service

Report of Independent Registered Public Accounting Firm

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(the "Company" or "Southwest") operates Southwest Airlines, a major domestic airline.

The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries, which include AirTran Holdings, LLC, the successor to AirTran Holdings, Inc., the former parent company of AirTran Airways, Inc., and Triple Crown Assurance Co., an insurance captive.

The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries.

The accompanying Consolidated Financial Statements include the results of operations and cash flows for all periods presented and all significant inter-entity balances and transactions have been eliminated.

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Actual results could differ from these estimates.

In late December 2022, Winter Storm Elliott impacted a significant portion of the United States, leading to wide-scale operational disruptions for the Company.

In attempting to recover from this weather event, the Company was challenged in its efforts to realign flight crews, flight schedules, and fleet for a period of days during this peak demand travel period.

As a result, the Company canceled a significant number of flights between December 21 and December 29, before ultimately restoring its full flight schedule on December 30, 2022.

These canceled flights resulted in a significant reduction in Passenger revenues during this period.

In addition, the Company incurred significant costs associated with this event and has recorded these expenses during December 2022, which are included in the accompanying Consolidated Statement of Income, totaling approximately $ 390 million, net.

These estimated items included reimbursements to Customers impacted by the cancellations for costs they incurred, 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 directly or indirectly impacted by the cancellations and recovery efforts.

The financial impacts of the event to the Company also included lower fuel and oil and profitsharing expenses.

As a result of this event, the Company recorded a net loss for fourth quarter 2022 in the amount of $ 220 million.

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

In the Consolidated Statement of Income (Loss) for the year ended December 31, 2021, the Company has reclassified $ 28 million, respectively, from Other (gains) losses, net to Loss on extinguishment of debt.

Cash and Cash Equivalents

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Government and certificates of deposit issued by domestic banks.

All of these investments are classified as available-for-sale securities and are stated at fair value, which approximates cost.

All of these investments are classified as available-for-sale

Notes to Consolidated Financial Statements

securities and are stated at fair value, which approximates cost.

For all short-term investments, at each reset period or upon reinvestment, the Company accounts for the transaction as Proceeds from sales of short-term and other investments for the security relinquished, and Purchases of short-term investments for the security purchased, in the accompanying Consolidated Statement of Cash Flows.

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Accounts and other receivables are initially recorded at cost and are evaluated for collectability in every period.

Notes to Consolidated Financial Statements

the Company’s loyalty program, and tax receivables from overpayment or net operating losses that are allowed to be carried back to prior periods to claim refunds against prior taxes paid.

They primarily consist of the amounts due from the Company's business partners and other suppliers, amounts due from credit card companies associated with sales of tickets for future travel, amounts due from business partners in the Company’s loyalty program, and tax receivables from overpayment or net operating losses that are allowed to be carried back to prior periods to claim refunds against prior taxes paid.

See Note 16 for further information.

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Depreciation is provided by the straight-line method to estimated residual values over periods of approximately 25 years for flight equipment, and 5 to 30 years for ground property and equipment.

Residual values estimated for aircraft are approximately 15 percent, and generally range from 0 to 10 percent for ground property and equipment.

As of December 31, 2022, residual values estimated for aircraft range from 13 percent to 18 percent, and generally range from 0 to 10 percent for ground property and equipment.

Assets constructed for others consists of airport improvement projects in which the Company is considered to have control of the asset during the construction period.

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See Note 5 for further information.

Leasehold improvements are amortized as a component of depreciation expense over the estimated useful life of the asset or the remaining term of the underlying lease, whichever is less.

In certain situations, the term of the lease may include periods covered by renewal options, if renewal is reasonably certain.

The Company evaluates its long-lived assets used in operations for impairment when events and circumstances indicate that the undiscounted cash flows to be generated by that asset group are less than the carrying amounts of the asset group and may not be recoverable.

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If an asset group is deemed to be impaired, an impairment loss is recorded for the excess of the asset group's book value in relation to its estimated fair value.

During 2021 and 2020, the Company recorded impairment charges of $ 12 million and $ 32 million, respectively, associated with the accelerated retirement of 8 and 20 of its 737-700 aircraft.

During 2022, 2021, and 2020, the Company recorded impairment charges of $ 28 million, $ 12 million, and $ 32 million, respectively, associated with the accelerated retirement of 10 , 8 , and 20 of its 737-700 aircraft.

Notes to Consolidated Financial Statements

The Company determines if an arrangement is a lease at inception.

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The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments, since the Company does not know the actual implicit rates in its leases.

The Company gives consideration to its recent debt issuances as well as

Notes to Consolidated Financial Statements

publicly available data for instruments with similar characteristics when calculating its incremental borrowing rate.

The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rate.

Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

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Under a quantitative approach, the fair value of the Company's indefinite-lived intangible asset or reporting unit is calculated based on key market participant assumptions.

If the indefinite-lived intangible assets' carrying value exceeds the fair value calculated using the quantitative approach, an impairment charge is recorded for the difference in fair value and carrying value.

If the indefinite-lived intangible assets' carrying value exceeds the fair value

Notes to Consolidated Financial Statements

calculated using the quantitative approach, an impairment charge is recorded for the difference in fair value and carrying value.

If the reporting unit carrying value exceeds the reporting unit fair value calculated using the quantitative approach, an impairment charge is recorded for the difference between fair value and carrying value, limited to the amount of goodwill in the reporting unit.

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Revenue Recognition

Tickets sold are initially deferred as Air traffic liability.

Passenger revenue is recognized and Air traffic liability is reduced when transportation is provided.

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.

The majority of the Company’s tickets

Notes to Consolidated Financial Statements

sold are nonrefundable.

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

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

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

The majority of the Company’s tickets sold are nonrefundable.

Southwest has a No-Show policy that applies to fares that are not canceled or changed by a Customer at least ten minutes prior to a flight's scheduled departure.

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Refundable tickets that are sold but not flown on the travel date can also be applied to future travel.

A small percentage of tickets (or partial tickets) expire unused.

The Company estimates the amount of tickets that expire unused and recognizes such amounts in Passenger revenue in proportion to the pattern of flights taken by the Customers, once the flight date has lapsed.

Based on the Company's revenue recognition policy, revenue is recorded at the flight date for a Customer who does not change his/her itinerary and loses his/her funds as the Company has then fulfilled its performance obligation.

A small percentage of tickets (or partial tickets) will go unused, which is sometimes referred to as breakage.

The Company estimates the amount of tickets that will go unused and recognizes such amounts in Passenger revenue in proportion to the pattern of flights taken by the Customers, once the flight date has lapsed.

Based on the Company's revenue recognition policy, revenue is recorded at the flight date for a Customer who does not change his/her itinerary or does not cancel in accordance with the No-Show policy as the Company has then fulfilled its performance obligation.

Amounts collected from passengers for ancillary services are also recognized when the service is provided, which is typically the flight date.

Initial breakage estimates for both tickets and funds available for future use are routinely adjusted and ultimately finalized once the tickets expire, which is typically twelve months after the original purchase date.

However, during 2020, the Company extended the expiration dates for a significant amount of tickets and funds beyond its normal twelve months.

Initial breakage estimates for both tickets and flight credits available for future use are routinely adjusted based on the likelihood that the ticket or flight credit will be used or refunded back to the Customer.

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

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

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.

Breakage estimates are based on the Company's Customers' historical travel behavior as well as assumptions about the Customers' future travel behavior.

Assumptions about the Customers' future travel 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.

Given the unprecedented amount of 2020 and 2021 Customer flight cancellations and the amount of flight credits provided, the Company expects additional variability in the amount of breakage revenue recorded in future periods, as the estimates of the portion of sold tickets that will expire unused may differ from historical experience.

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.

As a result of the Company's policy change for flight credits in 2022, as well as changes in Customer behavior during 2020 and 2021, the amount of breakage realized on a prospective basis is expected to be lower and more stable than it has been during the pandemic.

See Note 6 for further information.

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The remainder of the Company's Operating revenues, approximately $ 23.0 billion, approximately $ 15.3 billion, and approximately $ 8.9 billion in 2022, 2021, and 2020, respectively, were attributable to domestic operations.

Notes to Consolidated Financial Statements

Loyalty Program

The Company records a liability for the relative fair value of providing free travel under its loyalty program for all points earned from flight activity or sold to companies participating in the Company’s Rapid Rewards loyalty program as business partners that are expected to be redeemed for future travel.

The Company records a liability for the relative fair value of providing free travel under its loyalty program for all points earned from flight activity or sold to business partners participating in the Company’s Rapid Rewards loyalty program.

The loyalty liability represents performance obligations that will be satisfied when a Rapid Rewards loyalty member redeems points for travel or other goods and services.

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See Note 6 for further information.

Notes to Consolidated Financial Statements

Advertising costs are charged to expense as incurred.

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These instruments are accounted for as cash flow hedges upon proper qualification.

The Company also has interest rate swap agreements to convert certain floating-rate debt to a fixed-rate.

The Company has forward-starting interest rate swap agreements, the primary objective of which is to hedge forecasted debt issuances.

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Software Capitalization

Notes to Consolidated Financial Statements

The Company capitalizes certain internal and external costs related to the acquisition and development of internal use software during the application development stages of projects.

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The Company uses a combination of insurance and self-insurance mechanisms, including a wholly-owned captive insurance entity and participation in a reinsurance treaty, to provide for the potential liabilities associated with certain risks, including workers’ compensation, healthcare benefits, general liability, and aviation liability.

Notes to Consolidated Financial Statements

Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part, by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.

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The Company also evaluates the need for a valuation allowance to reduce deferred tax assets to estimated recoverable amounts.

The Company uses the portfolio approach for releasing income tax effects associated with amounts reclassified out of Accumulated other comprehensive income (loss).

The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of Income (loss) before income taxes.

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Concentration Risk

Approximately 82 percent of the Company’s full-time equivalent Employees are unionized and are covered by collective-bargaining agreements.

A portion of the Company's unionized Employees, including its Pilots, Flight Attendants, Customer Service Agents, Ramp Agents, Dispatchers, Aircraft Appearance Technicians, and Meteorologists, which had contracts that became amendable on or before December 31, 2021, are in discussions on labor agreements.

Those unionized Employee groups in discussions represent approximately 77 percent of the Company’s full-time equivalent Employees as of December 31, 2021.

Approximately 83 percent of the Company’s Employees are unionized and are covered by collective-bargaining agreements.

A portion of the Company's unionized Employees, including its Pilots, Flight Attendants, Ramp Agents, Dispatchers, Facilities Maintenance Technicians, and Meteorologists, which had contracts that became amendable on or before December 31, 2022, were in discussions on labor agreements as of December 31, 2022.

Those unionized Employee groups in discussions represent approximately 65 percent of the Company’s Employees as of December 31, 2022.

The Company attempts to minimize its concentration risk with regards to its cash, cash equivalents, and its investment portfolio.

This is accomplished by diversifying and limiting amounts among different counterparties, the type of investment, and the amount invested in any individual security or money market fund.

Notes to Consolidated Financial Statements

To manage risk associated with financial derivative instruments held, the Company selects and will periodically review counterparties based on credit ratings, limits its exposure to a single counterparty, and monitors the market position of the program and its relative market position with each counterparty.

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The Company returned the MAX to revenue service on March 11, 2021, after the Company met all FAA requirements and its Pilots completed updated, MAX-related training.

The Boeing 737 MAX aircraft are crucial to the Company's growth plans and fleet modernization initiatives.

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

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

Boeing no longer manufactures versions of the 737 other than the MAX family of aircraft.

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In particular, if the Company’s growth were to be dependent upon the introduction of a new aircraft make and model to the Company’s fleet, the Company would need to, among other things, (i) develop and implement new maintenance, operating, and training programs, (ii) secure extensive regulatory approvals, and (iii) implement new technologies.

The requirements associated with

Notes to Consolidated Financial Statements

operating a new aircraft make and model could take an extended period of time to fulfill and would likely impose substantial costs on the Company.

The requirements associated with operating a new aircraft make and model could take an extended period of time to fulfill and would likely impose substantial costs on the Company.

A shift away from a single fleet type could also add complexity to the Company’s operations, present operational and compliance risks, and materially increase the Company's costs.

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economic landscape, outlook, and in particular the travel industry, was swift and unexpected.

The Company saw a negative impact on bookings for future travel throughout 2020.

The Company proactively canceled a significant portion of its scheduled flights in March 2020 and continued adjusting capacity throughout 2020, as the Company grounded a significant portion of its fleet and operated a significantly reduced portion of its previously scheduled capacity.

The Company continued to experience negative impacts to passenger demand and bookings early in 2021 due to the pandemic, in particular with respect to business travel, although as a result of declining reported COVID-19 cases throughout the United States, easing travel restrictions, lifting of business restrictions, and an increase in the number of individuals vaccinated, domestic leisure travel demand and bookings improved during second quarter 2021.

In third quarter 2021, the Company experienced softness in bookings and elevated trip cancellations, especially close-in, as a result of the rise in COVID-19 cases associated with the Delta variant.

In fourth quarter 2021, the Company experienced increased leisure travel bookings due to holiday demand, despite the surge in COVID-19 cases associated with the Omicron variant.

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

Notes to Consolidated Financial Statements

variants of COVID-19.

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

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

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

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

the "PSP1 Payroll Support Program" in April 2020 under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act");

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

As consideration for each of these Payroll Support programs, the Company issued a promissory note in favor of Treasury and entered into a warrant agreement with Treasury, pursuant to which the Company agreed to issue warrants to purchase common stock of the Company to Treasury, subject to adjustment pursuant to the terms of the warrants.

Under each of the three Payroll Support programs, funds were received in multiple disbursements.

Upon each initial disbursement of Payroll Support under each of the three Payroll Support programs, the Company provided a promissory note and issued warrants to Treasury.

Upon each subsequent disbursement of Payroll Support under each of the three Payroll Support programs, (i) the principal amount of the applicable promissory

Notes to Consolidated Financial Statements

note was increased and (ii) the Company issued additional warrants to Treasury.

The following table provides the details from each of these programs:

(in millions, except shares in thousands) Grant Promissory Note Warrants Total Payroll Support Proceeds Warrants (shares)

PSP1 Payroll Support Program

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

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

(dollars in millions, shares in thousands) Grant Promissory Note Warrants Total Payroll Support Proceeds Warrants (shares) Warrant Strike Price as of December 31, 2022 Promissory Note Maturity Date

PSP1 $ 2,337 $ 976 $ 40 $ 3,354 2,676 $ 36.47 /share

April 19, 2030

May 29, 2020 448 196 8 652 536

June 30, 2020 448 196 9 652 536

July 30, 2020 225 97 3 326 268

September 30, 2020 64 28 2 94 78

$ 2,337 $ 976 $ 40 $ 3,354 2,676

PSP2 Payroll Support Program

PSP2 $ 1,393 $ 566 $ 27 $ 1,987 1,223 $ 46.28 /share

January 15, 2031

March 5, 2021 591 259 14 864 560

April 23, 2021 177 78 4 259 168

$ 1,393 $ 566 $ 27 $ 1,987 1,223

PSP3 Payroll Support Program

PSP3 $ 1,310 $ 526 $ 18 $ 1,852 899 $ 58.51 /share

April 23, 2031

June 3, 2021 640 278 9 926 475

$ 1,310 $ 526 $ 18 $ 1,852 899

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

The promissory note under the PSP1 Payroll Support Program ("PSP1 Note") matures in full on April 19, 2030, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity.

Amounts outstanding under the PSP1 Note bear interest at a rate of 1.00 percent before April 20, 2025, and afterwards, at a rate equal to the Secured Overnight Financing Rate ("SOFR") or other benchmark replacement rate consistent with customary market conventions plus a margin of 2.00 percent.

The PSP1 Note contains customary representations and warranties and events of default.

Each warrant issued pursuant to the PSP1 Payroll Support Program is exercisable at a strike price of $ 36.47 per share of common stock and will expire on the fifth anniversary of the issue date of such warrant.

The promissory note under the PSP2 Payroll Support Program ("PSP2 Note") matures in full on January 15, 2031, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity.

Amounts outstanding under the PSP2 Note bear interest at a rate of 1.00 percent before January 15, 2026, and, afterwards, at a rate equal to the SOFR or other benchmark replacement rate consistent with customary market conventions plus a margin of 2.00 percent.

The PSP2 Note contains customary representations and warranties and events of default.

Each warrant issued pursuant to the PSP2 Payroll Support Program is exercisable at a strike price of $ 46.28 per share of common stock and will expire on the fifth anniversary of the issue date of such warrant.

The promissory note under the PSP3 Payroll Support Program ("PSP3 Note") matures in full on April 23, 2031, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity.

Amounts outstanding under the PSP3 Note bear interest at a rate of 1.00 percent before April 23, 2026, and afterwards, at a rate equal to the SOFR or other benchmark replacement rate consistent with customary market conventions plus a margin of 2.00 percent.

The PSP3 Note contains customary representations and warranties and events of default.

Each warrant issued pursuant to the PSP3 Payroll Support

Notes to Consolidated Financial Statements

Program is exercisable at a strike price of $ 58.51 per share of common stock and will expire on the fifth anniversary of the issue date of such warrant.

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

and limits on executive compensation until April 1, 2023.

In connection with the receipt of Payroll Support, the Company has been subject to certain restrictions, including the elimination of share repurchases and dividends through September 30, 2022 and limits on executive compensation until April 1, 2023.

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

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The warrants do not have voting rights and include adjustments for below market issuances, payment of dividends, and other customary anti-dilution provisions.

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

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

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

Notes to Consolidated Financial Statements

based on years of service.

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

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

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

The Company expects all remaining Employees on Extended ETO to be recalled in first quarter 2022.

Contract employees who elected to take Extended ETO for periods between 12 and 18 months and had 10 or more years of service were given the opportunity to convert to the Voluntary Separation Program beginning on September 1, 2020, until up to 90 days before the end of their respective Extended ETO term.

Approximately 360 Employees elected this conversion option during 2021.

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

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

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

For both the Voluntary Separation Program and Extended ETO programs combined, approximately $ 446 million of the liability balances were relieved during 2021 through payments to Employees, leaving a balance of $ 328 million as of December 31, 2021.

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

For both the Voluntary Separation Program and Extended ETO programs combined, approximately $ 109 million and $ 446 million of the liability balances were relieved during 2022 and 2021, respectively, through payments to Employees, leaving a balance of $ 219 million and $ 328 million as of December 31, 2022 and December 31, 2021.

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

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

Therefore, a portion of the accruals previously recorded were reversed, resulting in a net $ 140 million credit to expense during 2021.

Both the initial charge and the partial reversal were classified within Payroll support and voluntary Employee programs, net, in the accompanying Consolidated Statement of Income (Loss), and are in addition to the allocation of the PSP2 Payroll Support Program and PSP3 Payroll Support Program funds utilized to fund salaries, wages, and benefits, which totaled $ 2.7 billion for the year ended December 31, 2021.

Notes to Consolidated Financial Statements

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

As of December 31, 2021, six aircraft remained in storage, and given the expectation that this storage was temporary in nature, the Company has continued to record depreciation expense associated with them.

NEW ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES

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The new standard increases transparency of government assistance by focusing on the types of assistance given, an entity's accounting for the assistance, and the effect of the assistance on the entity's financial statements to allow for more comparable information for investors and other financial statement users.

This standard is effective for all entities under the scope for financial statements issued for annual periods beginning after December 15, 2021, but early adoption is permitted.

This standard was effective for all entities under the scope for financial statements issued for annual periods beginning after December 15, 2021, but early adoption was permitted.

The Company adopted the standard early as of December 31, 2021.

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This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange.

This standard is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

Under this standard, issuers should apply the new standard prospectively to modifications or exchanges occurring after the effective date of the new standard.

Early adoption is permitted, including adoption in an interim period.

If an issuer elects to early adopt the new standard in an interim period, the guidance should be applied as of the beginning of the fiscal year that includes that interim period.

The Company is evaluating this new standard, but does not expect it to have a material impact on the Company's financial statements or disclosures.

On January 7, 2021, the FASB issued ASU No.

2021-01, Reference Rate Reform (Topic 848).

This standard was effective for fiscal years beginning after December 15, 2021, and the standard was adopted and applied prospectively by the Company as of January 1, 2022, but the adoption and application did not have a significant impact on the Company's financial statements and disclosures, including interim periods.

On January 7, 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848).

This new standard provides optional temporary guidance for entities transitioning away from London Interbank Offered Rate ("LIBOR") to new reference interest rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions with Topic 848.

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

These amendments do not apply to any

Notes to Consolidated Financial Statements

contract modifications made after December 31, 2024, any new hedging relationships entered into after December 31, 2024, or to existing hedging relationships evaluated for effectiveness existing as of December 31, 2024, that apply certain optional practical expedients.

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

The Company had no material LIBOR-related contract modifications during the year ended December 31, 2021.

On August 5, 2020, the FASB issued ASU No.

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

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

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

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

This new standard reduces the number of accounting models for convertible debt instruments and convertible preferred stock, makes targeted improvements to the disclosures for convertible instruments and earnings-per-share (EPS) guidance, and amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions.

This standard is effective for fiscal years beginning after December 15, 2021 and the Company will adopt this standard as of January 1, 2022, utilizing the modified retrospective method.

Under the modified approach, the Company will apply the guidance to all financial instruments that are outstanding as of the

Notes to Consolidated Financial Statements

beginning of the year of adoption with the cumulative effect recognized as an adjustment to the opening balance of retained earnings.

Upon adoption, the Company will reclassify the remaining equity component, estimated at $ 300 million, from Additional paid-in capital to Long-term debt associated with its convertible notes, and no longer record amortization of the debt discount to Interest expense.

The cumulative effect from amortization of the debt discount that has been recorded to Interest expense, offset by reductions to Capital in excess of par value related to the requisition of the equity component through repurchases, will result in an estimated $ 56 million adjustment to the opening balance of retained earnings upon adoption.

The computation of diluted net income (loss) per share will be affected in the numerator as the Company will no longer record the debt discount amortization in Interest expense and may have to add back Interest expense to the numerator.

The denominator could also be affected as the Company will be required to use the if-converted method to calculate diluted shares, which assumes all shares to have been converted at the beginning of the period.

This new standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock, made targeted improvements to the disclosures for convertible instruments and earnings-per-share ("EPS") guidance, and amended the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions.

This standard was effective for fiscal years beginning after December 15, 2021, and the Company adopted this standard as of January 1, 2022, utilizing the modified retrospective method.

Under the modified approach, the Company applied guidance to all financial instruments that were outstanding as of the beginning of the year of adoption with the cumulative effect recognized as an adjustment to the opening balance of retained earnings.

Upon adoption, the Company reclassified the remaining equity component of $ 300 million, from Additional paid-in capital to Long-term debt associated with its 1.25 % Convertible Senior Notes due 2025 (the "Convertible Notes"), and no longer records amortization of the debt discount to Interest expense.

The cumulative effect from prior period amortization of the debt discount that has been recorded to Interest expense, offset by reductions to Capital in excess of par value related to the requisition of the equity component through previous repurchases, resulted in a $ 55 million adjustment to the opening balance of Retained earnings upon adoption.

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

For the year ended December 31, 2022, the impact of adopting this new standard was a decrease to the Company's Net Income in the amount of $ 80 million, or $ 0.16 per diluted share, as a result of higher losses recognized on the Company's extinguishment transactions following the elimination of the equity component of the Convertible Notes, partially offset by the elimination of the non-cash interest expense associated with the prior debt discount amortization.

NET INCOME (LOSS) PER SHARE

Notes to Consolidated Financial Statements

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

An immaterial number of shares related to the Company's restricted stock units, stock warrants, and convertible notes were excluded from the denominator for the fiscal year ended December 31, 2020, because inclusion of such shares would be antidilutive.

Basic net income (loss) per share is calculated by dividing net income (loss) by the weighted average of shares outstanding during the period.

Diluted net income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

An immaterial number of shares related to the Company's restricted stock units, stock warrants, and convertible notes were excluded from the denominator for the fiscal years ended December 31, 2022, 2021, and 2020 because inclusion of such shares would be antidilutive.

Year ended December 31,

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Net income (loss) $ 539 $ 977 $ ( 3,074 )

Interest expense (a) 22 — —

Net income attributable to common stockholders $ 561 $ 977 $ ( 3,074 )

Weighted-average shares outstanding, basic 593 592 565

Dilutive effects of convertible notes (a) 15 — —

Dilutive effects of convertible notes (a) (b) 47 15 —

Dilutive effects of stock warrants — 1 —

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Diluted $ 0.87 $ 1.61 $ ( 5.44 )

(a) Because the Company intends to settle conversions by paying cash up to the principal amount of the convertible notes, with any excess conversion value settled in cash or shares of common stock, the convertible notes are being accounted for using the treasury stock method for the purposes of Net income (loss) per share.

Using this method, the denominator will be affected when the average share price of the Company's common stock for a given period is greater than the conversion price of approximately $ 38.48 per share, and the Company reports Net income for the given period.

For the year ended December 31, 2021, the average market price of the Company's common stock exceeded this conversion price per share and as such, the common shares underlying the convertible notes were included in the diluted calculation.

See Note 7 for further information on the convertible notes.

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

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

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

For the year ended December 31, 2022, all shares issuable on conversion were included in the denominator.

See Notes 3 and 7 for further information regarding the new standard and the Convertible Notes.

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

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

COMMITMENTS AND CONTINGENCIES

The Company has contractual obligations and commitments primarily with regard to future purchases of aircraft, repayment of debt (see Note 7), and lease arrangements (see Note 8).

During the year ended December 31, 2021, the Company leased nine new Boeing 737 MAX 8 ("-8") aircraft.

The Company had firm orders in place with Boeing

Notes to Consolidated Financial Statements

for 130 -8 aircraft and 264 737 MAX 7 ("-7") aircraft, as well as options for 238 -8 aircraft, as of December 31, 2021.

During the year ended December 31, 2022, the Company entered into supplemental agreements with The Boeing Company ("Boeing") to replace the majority of its 2023 -7 firm orders with Boeing 737-8 ("-8") firm orders, among other adjustments to its near-term contractual order book.

The Company also had firm orders in place with Boeing for 235 -8 aircraft and 182 -7 aircraft, as well as options for 147 -7 or -8 aircraft, as of December 31, 2022.

See Note 17 for further information on the Company's MAX aircraft.

Boeing continues to experience delays in fulfilling its commitments with regards to delivery of MAX aircraft to the Company, as a result of both supply chain constraints as well as achieving FAA certification of one of its new

Notes to Consolidated Financial Statements

aircraft types, the -7, for which Southwest expects to be the launch customer.

Therefore, for purposes of the Company’s aircraft order commitments with Boeing, it has assumed that any aircraft that were contractually due but remain undelivered as of December 31, 2022, have been rolled into the Company’s 2023 commitments, until such time as the Company and Boeing either revise the aircraft order book or Boeing is able to catch up on its commitments.

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

$ 1.8 billion in 2022, $ 1.6 billion in 2023, $ 1.1 billion in 2024, $ 837 million in 2025, $ 961 million in 2026, and $ 6.9 billion thereafter.

In addition, subsequent to December 31, 2021, and through February 3, 2022, the Company has exercised 12 -8 options for delivery in 2022 and 12 -7 options for delivery in 2023, resulting in additional capital commitments associated with firm orders of $ 474 million and $ 254 million in 2022 and 2023, respectively.

$ 3.2 billion in 2023 (of which approximately $ 2.3 billion primarily relates to the existing scheduled 90 MAX aircraft to be delivered in 2023 and $ 956 million relates to 46 MAX aircraft that were contractually committed for 2022, but were not received), $ 1.2 billion in 2024, $ 953 million in 2025, $ 1.4 billion in 2026, $ 1.1 billion in 2027, and $ 5.8 billion thereafter.

In addition, subsequent to December 31, 2022, and through February 2, 2023, the Company has exercised 10 -7 options for delivery in 2024, resulting in the Company's 2024 capital commitments increasing to $ 1.4 billion.

Hobby Airport

In March 2022, the Company finalized an agreement with the City of Houston, Texas (the "City") which owns William P.

Hobby Airport ("Hobby") that is managed and operated by the City's Houston Airport System.

Under the agreement, the Company will develop, design, and construct seven new gates in Hobby's West Concourse.

Six gates will be for domestic use, with the remaining gate used for international travel, and the gates will include passenger hold rooms, passenger loading bridges, aircraft parking positions, increased baggage handling capacity, and other enabling network items.

The project is estimated to be completed in 2025 at a total cost of $ 250 million.

The Company will provide initial funding for the majority of the project, but is expected to be reimbursed for such funding from the City on a monthly basis and therefore would not significantly impact the Company’s liquidity.

The City plans to fund these reimbursements utilizing rates and charges collected from current and future Hobby occupants, including the Company.

After the project is complete, the Company will have the right to lease six of the additional gates in the West Concourse on a preferential basis in accordance with the terms and conditions for the use of preferential use gates, and use one gate in the West Concourse on a common-use basis.

The Company currently believes that due to its control over the associated assets during the construction period, as well as its agreed upon role in overseeing and managing this project, it will be considered the owner of this project for accounting purposes.

Amounts expended in 2022 and expected to be expended in 2023 associated with this project are not material.

Los Angeles International Airport

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During 2008, the City of Dallas approved the Love Field Modernization Project ("LFMP"), a project to reconstruct Dallas Love Field with modern, convenient air travel facilities.

Pursuant to a Program Development Agreement with the City of Dallas and the Love Field Airport Modernization Corporation (or the "LFAMC," a Texas non-profit "local government corporation" established by the City of Dallas to act on the City of Dallas' behalf to facilitate the development of the LFMP), the Company managed this project.

Pursuant to a Program Development Agreement

Notes to Consolidated Financial Statements

with the City of Dallas and the Love Field Airport Modernization Corporation (or the "LFAMC," a Texas non-profit "local government corporation" established by the City of Dallas to act on the City of Dallas' behalf to facilitate the development of the LFMP), the Company managed this project.

Major construction was effectively completed in 2014.

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Although the City of Dallas received commitments from various sources that helped to fund portions of the LFMP project, including the FAA, the Transportation Security Administration, and the City of Dallas' Aviation Fund, the majority of the funds used were from the issuance of bonds.

The Company guaranteed principal and interest payments on bonds issued by LFAMC (the "Series 2010" bonds and the "Series 2012" bonds).

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

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

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

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

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

This remeasurement resulted in a reduction of the Company's right-of-use asset and lease liability in the amount of $ 343 million, which has been reflected in the Consolidated Balance Sheet as of December 31, 2021.

The Company guaranteed principal and interest payments on bonds issued by the LFAMC, of which only the "Series 2012" bonds remain outstanding.

Given the Company’s guarantee associated with the Series 2012 bonds, the remaining debt service amount is considered a minimum lease payment under ASC Topic 842, Leases, and therefore remains a lease liability with a corresponding right-of-use asset within the Company’s Consolidated Balance Sheet.

As of December 31, 2022, $ 70 million of principal remained outstanding associated with the Series 2012 bonds.

The net present values of the future principal and interest payments associated with the bonds were $ 89 million and

Notes to Consolidated Financial Statements

$ 433 million as of December 31, 2021 and 2020, respectively, and were reflected as part of the Company's operating lease right–of–use assets and lease obligations in the Consolidated Balance Sheet.

The net present values of the future principal and interest payments associated with the bonds were $ 77 million and $ 89 million as of December 31, 2022 and 2021, respectively, and were reflected as part of the Company's operating lease right–of–use assets and lease obligations in the Consolidated Balance Sheet.

Contingencies

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

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

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

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

On June 30, 2022, the U.S.

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

Virgin America, Inc.

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

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

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

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

Based on the wide-scale operational disruptions for the Company that led to the cancelation of a significant number of flights between December 21 and December 29, 2022, the Company could be subject to fines and/or penalties resulting from investigations by the Department of Transportation or other government agencies as well as litigation from Customers and Shareholders.

See Note 1 for further information.

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

Passenger Revenues

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The following table provides the components of Passenger revenue recognized for the years ended December 31, 2022, 2021, and 2020:

Notes to Consolidated Financial Statements

Year ended December 31,

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The Company’s booking site allows a Customer to toggle between fares utilizing either cash or point redemptions, which provides the Customer with an approximation of the equivalent value of their points.

The value can differ, however, based on demand, the amount of time prior to the

Notes to Consolidated Financial Statements

flight, and other factors.

The value can differ, however, based on demand, the amount of time prior to the flight, and other factors.

The mix of fare classes during the period measured represents a constraint, which could result in the assumptions above changing at the measurement date, as fare classes can have different coefficients used to determine the total loyalty points needed to purchase an award ticket.

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In fourth quarter 2021, Chase and the Company executed a multi-year extension of the Agreement, extending the decades-long relationship between the parties.

The Company estimated the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to each of the two performance obligations identified in the Agreement, which have been characterized as a transportation component and a marketing component.

The Company estimated the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to

Notes to Consolidated Financial Statements

each of the two performance obligations identified in the Agreement, which have been characterized as a transportation component and a marketing component.

The allocations utilized are reviewed to determine if adjustment is necessary any time there is a modification to the Agreement.

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

Notes to Consolidated Financial Statements

Balance as of

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Total Air traffic liability $ 8,250 $ 7,725

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

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

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

These flight credits are typically created as a result of a prior ticket cancellation or exchange, and are reflected net of associated breakage.

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

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Revenue recognized from points redeemed - Other ( 78 ) ( 45 )

Unused funds converted to loyalty points — 167

Air traffic liability - loyalty program - ending balance $ 5,189 $ 4,789

Notes to Consolidated Financial Statements

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

12 unchanged sentences

Balance at December 31, 2021 $ 7,725

During 2020 and in parts of 2021, the Company experienced a significantly higher number of Customer-driven flight cancellations as a result of the COVID-19 pandemic, including those associated with the Delta variant of the virus.

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

See Note 2 for further information.

As a result, the amount of Customer travel funds held in Air traffic liability that are estimated to be redeemed for future travel as of December 31, 2021, remains much higher than historical levels.

The amount of such Customer funds represents approximately 16 percent and 28 percent of the total Air traffic liability balance, net of breakage, at December 31, 2021, and December 31, 2020, respectively, compared to approximately 2 percent of the Air traffic liability balance as of December 31, 2019.

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

For all Customer travel funds created or that would have otherwise expired

Notes to Consolidated Financial Statements

between March 1 and September 7, 2020 associated with flight cancellations, the Company extended the expiration date to September 7, 2022.

At December 31 2021, $ 1.3 billion of extended Customer travel funds remain in Air traffic liability with a September 7, 2022 expiration date, although the Company has estimated that a portion of those will not be redeemed.

The Company has limited data available to predict the occurrence or timing of performance obligation satisfaction on these funds due to certain constraints including, but not limited to, consumer confidence, economic health, vaccines, and uncertainty regarding customer travel fund redemption patterns for funds that exist longer than 12 months as this is unprecedented in Company history.

As a result, recognition of these travel funds as flown revenue, refunds, or breakage revenue will likely be more volatile from period to period compared to what previous Customer behavior may indicate, as cumulative revenue recognized is constrained to amounts that are not probable of being reversed.

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

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

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

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

This announcement was considered a contract modification under applicable accounting guidance and the Company accounted for such change prospectively in third quarter 2022.

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

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

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

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

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

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Based on historical experience as well as current forecasted redemptions, the Company expects the majority of loyalty points to be redeemed within approximately two years of the date the points are issued.

Despite the Company's policy change with regards to flight credits, it currently does not expect the amount of flight credits that will be redeemed beyond twelve months to be material as of the financial statement date.

Notes to Consolidated Financial Statements

All performance obligations related to freight services sold are completed within twelve months or less;

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

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

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

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

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

however, some of these ticket taxes were suspended during 2020 as allowed by the CARES Act.

These taxes and fees include foreign and U.S.

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

Notes to Consolidated Financial Statements

FINANCING ACTIVITIES

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

2.75 % Notes due 2022

Pass Through Certificates due 2022 - 6.24 %

2.75 % Notes due 2022

4.75 % Notes due 2023

1.25 % Convertible Notes due 2025

5.25 % Notes due 2025

Term Loan Agreement payable through 2025 — 119

3.00 % Notes due 2026

Term Loan Agreement payable through 2026 — 159

3.45 % Notes due 2027

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7.375 % Debentures due 2027

Term Loan Agreement payable through 2028 — 184

2.625 % Notes due 2030

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$ 8,046 $ 10,274

During 2020, the Company entered into agreements with a financing institution to borrow $ 125 million ($ 121 million, net of fees) secured by four Boeing 737-800 aircraft.

These borrowings, which were recorded as a financing transaction in the Company's Consolidated Statement of Cash Flows, and as debt in the accompanying Consolidated Balance Sheet, bore interest at a rate equal to the 3 month LIBOR plus 1.4 percent, and were payable in quarterly installments through September 29, 2025.

The Company prepaid the loans in full on December 29, 2021, utilizing available cash on hand.

During 2020, the Company issued $ 2.0 billion of unsecured notes due 2027, of which $ 1.3 billion was issued June 8, 2020 (the “$ 1.3 billion 2027 Notes”) and $ 700 million was issued July 31, 2020 (the “$ 700 million 2027 Notes”).

The notes bear interest at 5.125 %.

Interest is payable semi-annually in arrears on June 15 and December 15, beginning December 15, 2020.

Interest is payable semi-annually in arrears.

The $ 700 million 2027 Notes were offered as an additional issuance of the Company’s $ 1.3 billion 2027 Notes issued on June 8, 2020.

The $ 700 million 2027 Notes were issued at a premium and this premium has been included within Capitalized financing items in the Consolidated Statement of Cash Flows.

A portion of the proceeds from the $ 1.3 billion 2027 Notes was used to repay a portion of the outstanding Amended and Restated 364 -Day Credit Agreement balance.

See below for more information regarding the Amended and Restated 364 -Day Credit Agreement.

During 2020, the Company, through special purpose entities, entered into agreements with a financing institution and trusts to borrow $ 197 million ($ 190 million, net of fees) secured by six Boeing 737-800 aircraft.

The special purpose entities were determined to be variable interest entities for which the Company was the primary beneficiary, and therefore were consolidated in the accompanying Consolidated Financial Statements as of December 31, 2020.

The Company prepaid the loans in full on December 31, 2021, utilizing available cash on hand.

A portion of the proceeds from the $ 1.3 billion 2027

Notes to Consolidated Financial Statements

Notes was used to repay a portion of the then outstanding Amended and Restated 364 -Day Credit Agreement balance.

The Company made early prepayments on the notes of $ 272 million throughout 2022, utilizing available cash on hand.

During 2020, the Company issued $ 1.55 billion of unsecured notes due 2025, of which $ 1.25 billion was issued May 4, 2020 (the “$ 1.25 billion 2025 Notes”) and $ 300 million was issued July 31, 2020 (the “$ 300 million 2025 Notes”).

The notes bear interest at 5.250 %.

Interest is payable semi-annually in arrears on May 4 and November 4, beginning November 4, 2020.

Interest is payable semi-annually in arrears.

The $ 300 million 2025 Notes were offered as an additional issuance of the Company’s $ 1.25 billion 2025 Notes issued on May 4, 2020.

The $ 300 million 2025 Notes were issued at a premium and this premium has been included within Capitalized financing items in the Consolidated Statement of Cash Flows.

The proceeds from the $ 1.25 billion 2025 Notes were used to repay a portion of the outstanding Amended and Restated 364 -Day Credit Agreement balance.

The proceeds from the $ 1.25 billion 2025 Notes were used to repay a portion of the then outstanding Amended and Restated 364 -Day Credit Agreement balance.

The Company made early prepayments on the notes of $ 248 million throughout 2022, utilizing available cash on hand.

During 2020, the Company issued $ 1.25 billion of unsecured notes due 2023, of which $ 750 million was issued May 4, 2020 (the “$ 750 million 2023 Notes”) and $ 500 million was issued June 8, 2020 (the “$ 500 million 2023 Notes”).

The notes bear interest at 4.750 %.

Interest is payable semi-annually in arrears on May 4 and November 4, beginning November 4, 2020.

The notes bore interest at 4.750 %.

Interest was payable semi-annually in arrears.

The $ 500 million 2023 Notes were offered as an additional issuance of the Company's $ 750 million 2023 Notes issued on May 4, 2020.

The $ 500 million 2023 Notes were issued at a premium and this premium has been included within Capitalized financing items in the Consolidated Statement of Cash Flows.

The proceeds from the $ 750 million 2023 Notes and a portion of the proceeds of the $ 500 million 2023 Notes were used to repay a portion of the outstanding Amended and Restated 364 -Day Credit Agreement balance.

On May 1, 2020, the Company completed the public offering of $ 2.3 billion aggregate principal amount of 1.250 % Convertible Senior Notes due 2025 (the “Convertible Notes”).

The proceeds from the $ 750 million 2023 Notes and a portion of the proceeds of the $ 500 million 2023 Notes were used to repay a portion of the then outstanding Amended and Restated 364 -Day Credit Agreement balance.

The Company prepaid the notes in full on August 31, 2022, utilizing available cash on hand.

On May 1, 2020, the Company completed the public offering of $ 2.3 billion aggregate principal amount of Convertible Senior Notes (the “Convertible Notes”).

The Convertible Notes bear interest at a rate of 1.25 % and will mature on May 1, 2025.

Interest on the notes is payable semi-annually in arrears on May 1 and November 1, beginning November 1, 2020.

Interest on the notes is payable semi-annually in arrears.

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

The Convertible Notes did not meet the criteria to be converted as of the date of the financial statements, and thus are classified as Long-term debt in the accompanying Consolidated Balance Sheet as of December 31, 2022.

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

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The initial conversion rate is 25.9909 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $ 38.48 per share of common stock).

However, based on the Company's cash dividend to be paid in January 2023, the bond conversion rate will change to 26.1250 on January 9, 2023.

As of December 31, 2022, the if-converted value of the Convertible Notes was less than the principal amount by $ 201 million, using the Company's closing stock price.

Upon issuance, the Company bifurcated the Convertible Notes for accounting purposes between a liability component and an equity component utilizing applicable guidance.

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

During the year ended December 31, 2021, the Company repurchased $ 203 million in principal of the Convertible Notes for $ 293 million in cash.

The Company accounted for these repurchases as a partial debt extinguishment, which resulted in (i) a loss of $ 28 million reflected in Other (gains) losses, net, in the accompanying Consolidated Statement of Income (Loss) for the year ended December 31, 2021, (ii) a $ 30 million reduction in remaining unamortized debt discount and issuance costs, and (iii) a $ 92 million reduction to Capital in excess of par value related to the reacquisition of the equity component in the accompanying Consolidated Balance Sheet.

Additionally, an immaterial number of conversions were exercised and settled during 2021.

The following table details the equity and liability component recognized related to the Convertible Notes as of December 31, 2021 and 2020:

Notes to Consolidated Financial Statements

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

See Note 3 for further information.

Upon adoption, the Company reclassified the remaining equity component, of $ 300 million, from Additional paid-in capital to Long-term debt associated with its Convertible Notes, and no longer records amortization of the debt discount to Interest expense.

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

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

Carrying amount of equity component $ 311 $ 403

Equity component:

Carrying amount of Convertible Notes $ — $ 311

Carrying amount of issuance costs — ( 11 )

Net carrying amount $ — $ 300

Liability component:

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Net carrying amount $ 1,611 $ 1,842

The effective interest rate on the liability component was approximately 5.2 percent for the year ended December 31, 2021.

The Company recognized $ 110 million of interest expense associated with the Convertible Notes during the year ended December 31, 2021, including $ 73 million of non-cash amortization of the debt

Notes to Consolidated Financial Statements

discount, $ 9 million of non-cash amortization of debt issuance costs, and $ 28 million of contractual coupon interest.

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

Upon adoption of ASU 2020-06 as of January 1, 2022, the debt discount amortization will cease to be recorded to Interest expense.

See Note 3 for further information.

As of December 31, 2021, the if-converted value of the Convertible Notes exceeded the principal amount by $ 238 million, using the closing stock price on December 31, 2021.

On March 12, 2020, the Company entered into a $ 1.0 billion 364 -day term loan credit facility agreement (the “ 364 -Day Credit Agreement”) with a syndicate of lenders identified in the 364 -Day Credit Agreement.

The 364 -Day Credit Agreement was drawn in full on the closing date.

On March 30, 2020, the Company amended and restated the 364 -Day Credit Agreement (the “Amended and Restated 364 -Day Credit Agreement”) with a syndicate of lenders identified in the Amended and Restated 364 -Day Credit Agreement to add additional term loan commitments of approximately $ 2.3 billion, add an uncommitted accordion increase provision to permit additional term loans in an aggregate amount not to exceed approximately $ 417 million, amend the pricing, amend certain covenants, add certain covenants, and provide for the grant of a security interest in certain aircraft and related assets.

The Company drew approximately $ 2.3 billion under the Amended and Restated 364 -Day Credit Agreement on April 1, 2020.

On April 24, 2020, the Company drew an additional $ 350 million under the $ 417 million accordion feature.

The Amended and Restated 364 -Day Credit Agreement was originally set to mature in full on March 29, 2021.

The outstanding Amended and Restated 364 -Day Credit Agreement balance was repaid in full in second quarter 2020, and the agreement was terminated.

Concurrently with entering into the Amended and Restated 364 -Day Credit Agreement on March 30, 2020, the Company also amended its existing $ 1.0 billion revolving credit facility (the “Amended and Restated Revolving Credit Agreement”) to (i) amend the pricing and fees, (ii) amend certain covenants and provisions, (iii) add certain covenants, and (iv) provide for the grant of a security interest in certain aircraft and related assets.

In second quarter 2020, the Company repaid in full the $ 1.0 billion drawn on the Amended and Restated Revolving Credit Agreement.

On November 23, 2020, the Company amended the Amended and Restated Revolving Credit Agreement to (i) amend the pricing and fees, (ii) amend certain covenants and provisions, (iii) remove a financial covenant, and (iv) amend an exhibit for conforming changes to the compliance certificate (the "Second Amendment").

On July 28, 2021, the Company amended the Amended and Restated Revolving Credit Agreement, as amended by the Second Amendment, to (i) extend the maturity to August 3, 2023;

(ii) add a covenant to prohibit the Company from purchasing any equity security of the Company listed on a national securities exchange and payment of dividends or other capital distributions with respect to the common stock of the Company during the period from July 28, 2021, through September 30, 2022;

(iii) update certain provisions regarding a successor interest rate to LIBOR and certain other market changes;

and (iv) amend certain other covenants and provisions (the “Third Amendment,” and the Amended and Restated Revolving Credit Agreement as amended by the Second Amendment and the Third Amendment, the "Amended A&R Credit Agreement").

The amount of the loan commitments and the collateral under the Amended and Restated Revolving Credit Agreement remain unchanged by the Second Amendment and the Third Amendment.

As of December 31, 2021, there were no amounts outstanding under the Amended A&R Credit Agreement.

Generally, amounts outstanding under the Amended A&R Credit Agreement bear interest at interest rates based on either the LIBOR rate (selected by the Company for designated interest periods) or the “alternate base rate” (being the highest of (1) the Wall Street Journal prime rate, (2) one-month adjusted LIBOR (one-month LIBOR plus a statutory reserve rate) plus 1 percent, and (3) the New York Fed Bank Rate, plus 0.5 percent).

The underlying LIBOR rate is subject to a floor of 1 percent per annum and the “alternate base rate” is subject to a floor of 1 percent per annum.

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

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

Non-cash amortization of the debt discount $ — $ 73

Non-cash amortization of debt issuance costs 12 9

Contractual coupon interest 22 28

Total interest expense $ 34 $ 110

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

The Company had no changes to conversion terms, contingencies, or exercise prices for the year ended December 31, 2022.

The effective interest rate associated with the Convertible Notes was approximately 1.9 percent for the year ended December 31, 2022.

Notes to Consolidated Financial Statements

During the years ended December 31, 2022 and 2021, the Company paid $ 3.1 billion and $ 905 million, respectively, in debt and finance lease obligations, which included scheduled debt and lease payments, partial extinguishment of Convertible Notes, and the early prepayment of debt.

Additionally, an immaterial number of Convertible Note conversions were exercised and settled during 2021, compared with no conversions settled in 2022.

The following tables present the details of the partial extinguishment of the Company's Convertible Notes and early prepayment of debt (excluding payments on finance leases) for the years ended December 31, 2022 and 2021.

Year ended December 31, 2022

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

1.25 % Convertible Notes due 2025

$ 649 $ 486 $ 171 $ ( 9 ) $ 1

5.125 % Notes due 2027

285 272 7 2 4

4.75 % Notes due 2023

1,278 1,250 9 — 19

5.25 % Notes due 2025

258 248 6 — 4

Total $ 2,470 $ 2,256 $ 193 $ ( 7 ) $ 28

Year ended December 31, 2021

(in millions) Cash paid for debt and interest Principal repayment Loss on extinguishment Non-cash amortization of debt discount and (issuance) costs Reduction to Capital in excess of par value

1.25 % Convertible Notes due 2025

$ 293 $ 203 $ 28 $ ( 30 ) $ 92

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

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

For the twelve months ended December 31, 2022 and 2021 there were no amounts outstanding under the Amended A&R Credit Agreement.

Generally, amounts outstanding under the Amended A&R Credit Agreement bear interest at interest rates based on either the SOFR rate (selected by the Company for designated interest periods) or the “alternate base rate” (being the highest of (1) the Wall Street Journal prime rate, (2) one-month adjusted SOFR (one-month SOFR plus 0.1 percent) plus 1 percent, and (3) the Federal Reserve Bank of New York Rate, plus 0.5 percent).

The underlying SOFR rate is subject to a floor of 1 percent per annum and the “alternate base rate” is subject to a floor of 1 percent per annum.

The Amended A&R Credit Agreement contains customary representations and warranties, covenants, and events of default.

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Under the Amended A&R Credit Agreement, the Company is required to maintain a minimum level of liquidity of $ 1.5 billion (defined as the sum of (i) the aggregate amount available to be borrowed under the Amended A&R Credit Agreement plus (ii) the aggregate amount of unrestricted cash and cash equivalents of the Company plus (iii) the aggregate amount of short-term investments of the Company).

As of December 31, 2021, the Company was in compliance with this covenant and all other covenants in the Amended A&R Credit Agreement.

The Amended A&R Credit Agreement is a series of short-term borrowings;

at the end of each borrowing the Company must elect to roll the facility over into the next borrowing or pay down the facility.

For the twelve months ended December 31, 2022 and 2021, the Company was in compliance with this covenant and all other covenants in the Amended A&R Credit Agreement.

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

Notes to Consolidated Financial Statements

During February 2020, the Company issued $ 500 million senior unsecured notes due 2030.

The notes bear interest at 2.625 percent.

Interest is payable semi-annually in arrears on February 10 and August 10, beginning in 2020.

Interest is payable semi-annually in arrears.

During November 2017, the Company issued $ 300 million senior unsecured notes due 2022.

The notes bear interest at 2.75 percent.

Interest is payable semi-annually in arrears on May 16 and November 16.

The notes bore interest at 2.75 percent.

Interest was payable semi-annually in arrears.

The Company paid the loans in full on November 14, 2022, utilizing available cash on hand.

Also during November 2017, the Company issued $ 300 million senior unsecured notes due 2027.

The notes bear interest at 3.45 percent.

Interest is payable semi-annually in arrears on May 16 and November 16.

Interest is payable semi-annually in arrears.

During November 2016, the Company issued $ 300 million senior unsecured notes due 2026.

The notes bear interest at 3.00 percent.

Interest is payable semi-annually in arrears on May 15 and November 15.

During October 2016, the Company entered into a term loan agreement providing for loans to the Company aggregating up to $ 215 million, to be secured by mortgages on seven of the Company's 737-800 aircraft.

The Company borrowed the full $ 215 million and secured this loan with the requisite seven aircraft mortgages.

The loan was set to mature on October 31, 2026, and was repayable via semi-annual installments of principal that began on April 30, 2018.

The loan bore interest at the LIBO Rate (as defined in the term loan agreement) plus 1.10 percent, and interest was payable semi-annually in installments.

The Company prepaid the loan in full on November 1, 2021, utilizing available cash on hand.

Interest is payable semi-annually in arrears.

On October 3, 2007, grantor trusts established by the Company issued $ 500 million Pass Through Certificates consisting of $ 412 million 6.15 percent Series A certificates and $ 88 million 6.65 percent Series B certificates.

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The trusts used the proceeds from the sale of certificates to acquire equipment notes in the same amounts, which were issued by the Company on a full recourse basis.

Payments on the equipment notes held in each trust are passed through to the holders of certificates of such trust.

The equipment notes were issued for each of 16 Boeing 737-700 aircraft owned by the Company and are secured by a mortgage on each aircraft.

Beginning February 1, 2008, principal and interest payments on the equipment notes held for both series of certificates became due semi-annually until the balance of the certificates mature on August 1, 2022.

Prior to their issuance, the Company also entered into swap agreements to hedge the variability in interest rates on the Pass Through Certificates.

The swap agreements were accounted for as cash flow hedges, and resulted in a payment by the Company of $ 20 million upon issuance of the Pass Through Certificates.

The effective portion of the hedge is being amortized to interest expense concurrent with the amortization of the debt and is reflected in the above table as a reduction in the debt balance.

The ineffectiveness of the hedge transaction was immaterial.

Payments on the equipment notes held in each trust were passed through to the holders of certificates of such trust.

The equipment notes were issued for each of 16 Boeing 737-700 ("-700") aircraft owned by the Company and were secured by a mortgage on each aircraft.

The equipment notes matured and were paid in full on August 1, 2022, utilizing available cash on hand.

On February 28, 1997, the Company issued $ 100 million of senior unsecured 7.375 percent debentures due March 1, 2027.

Interest is payable semi-annually on March 1 and September 1.

Interest is payable semi-annually.

The debentures may be redeemed, at the option of the Company, in whole at any time or in part from time to time, at a redemption price equal to the greater of the principal amount of the debentures plus accrued interest at the date of redemption or the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the date of redemption at the comparable treasury rate plus 20 basis points, plus accrued interest at the date of redemption.

Notes to Consolidated Financial Statements

The Company is required to provide standby letters of credit to support certain obligations that arise in the ordinary course of business.

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The net book value of the assets pledged as collateral for the Company’s secured borrowings, primarily aircraft, was $ 2.0 billion at December 31, 2022.

As of December 31, 2021, aggregate annual principal maturities of debt and finance leases (not including amounts associated with interest on finance leases) for the five-year period ending December 31, 2026, and thereafter, were $ 453 million in 2022, $ 1.3 billion in 2023, $ 81 million in 2024, $ 3.7 billion in 2025, $ 350 million in 2026, and $ 5.1 billion thereafter.

This included aircraft with net book values of approximately $ 296 million, in which the associated debt had been repaid as of December 31, 2022, but for which the liens have been or will be formally removed in 2023.

As of December 31, 2022, aggregate annual principal maturities of debt and finance leases (not including amounts associated with interest on finance leases) are as follows:

(in millions)

Thereafter 2,602

Total $ 8,097

Notes to Consolidated Financial Statements

The Company enters into leases for aircraft, property, and other types of equipment in the normal course of business.

The accounting for these leases follows the requirements of ASC 842, Leases.

As of December 31, 2021, the Company held aircraft leases with remaining terms ranging from one month to 12 years.

As allowed under ASC 842, Leases, the Company has elected a practical expedient to exclude from recognition lease assets and lease liabilities associated with leases that have an initial term of twelve months or less.

Such expense was not material for the twelve months ended December 31, 2022, 2021, and 2020.

As of December 31, 2022, the Company held aircraft leases with remaining terms extending up to 11 years.

The aircraft leases generally can be renewed for three months to three years at rates based on the fair market value at the end of the lease term.

Residual value guarantees included in the Company's lease agreements are not material.

On July 9, 2012, the Company signed an agreement with Delta Air Lines, Inc.

and Boeing Capital Corp.

to lease or sublease 88 AirTran Airways, Inc.

Boeing 717-200 aircraft ("B717s") to Delta at agreed-upon lease rates.

The Company's future sublease income associated with the 14 remaining B717s on operating lease as of December 31, 2021, was as follows:

$ 17 million in 2022, $ 7 million in 2023, and $ 1 million in 2024.

There are no contingent payments and no significant residual value conditions associated with the transaction.

In second quarter 2020, the Company entered into transactions with third parties, involving ten of the Company’s Boeing 737-800 aircraft and ten of the Company's Boeing 737 MAX 8 aircraft that qualified as sale-leaseback arrangements under applicable accounting guidance.

In second quarter 2020, the Company entered into transactions with third parties, involving ten of the Company’s Boeing 737-800 aircraft and ten of the Company's -8 aircraft that qualified as sale-leaseback arrangements under applicable accounting guidance.

The Company sold the ten 737-800 aircraft to a third party for $ 405 million, then immediately leased the aircraft back for approximately ten years .

The Company sold the ten 737 MAX 8 aircraft to a third party for $ 410 million, then immediately leased the aircraft back for approximately 13 years.

The Company sold the ten 737-8 aircraft to a third party for $ 410 million, then immediately leased the aircraft back for approximately 13 years.

As such, the aircraft were de-recognized from Property and equipment at their remaining net book values.

All of the leases from the sale-leasebacks are accounted for as operating leases, and thus are now reflected as part of the Company’s Operating lease right-of-use assets and operating lease liabilities in the accompanying Consolidated Balance Sheet.

For 2020, the 737-800 and 737 MAX 8 sale-leaseback transactions resulted in a recognized gain of $ 153 million and $ 69 million, respectively, reflected within Other operating expenses, net in the accompanying Consolidated Statement of Income (Loss).

For 2020, the 737-800 and 737-8 sale-leaseback transactions resulted in a recognized gain of $ 153 million and $ 69 million, respectively, reflected within Other operating expenses, net in the accompanying Consolidated Statement of Income (Loss).

On December 5, 2022, the Company signed an aircraft sale agreement with AerCap Ireland Limited (“AerCap”) to purchase 39 -700 aircraft, all of which were already in the Company's fleet under finance lease terms.

As each aircraft purchase is finalized, the Company relieves its related lease liability and will continue to recognize the cost of the aircraft within Property a nd equipment section in the Consolidated Balance Sheet.

As of December 31, 2022, the Company completed the purchase of 31 aircraft, with the remaining eight aircraft expected to be finalized by the end of February 2023.

The Company paid the lessor $ 365 million as part of this transaction, of which $ 191 million was recorded as the elimination of the Company’s remaining finance lease obligation for the aircraft, and which was also reflected within Payments of long-term debt and finance lease obligations in the accompanying Consolidated Statement of Cash Flows.

The remaining $ 174 million was the net purchase price of the aircraft and is included as part of the Company’s Capital expenditures for 2022.

Upon completion of this purchase, the Company will have 28 finance leased aircraft remaining.

There was no gain or loss recorded as a result of these transactions.

At each airport where the Company conducts flight operations, the Company has lease agreements, generally with a governmental unit or authority, for the use of airport terminals, airfields, office space, cargo warehouses, gates, and/or maintenance facilities.

These leases are classified as operating lease agreements and have lease terms remaining ranging from one month to 39 years.

Certain leases can be renewed from 1 year to ten years .

These leases are classified as operating lease agreements and have remaining lease terms extending up to 38 years.

Certain leases can be renewed from one year to 11 years.

The majority of the airport terminal leases contain certain provisions for periodic adjustments to rates that depend upon airport operating costs or use of the facilities, and are reset at least annually.

Due to the nature and variability of the rates, the majority of these leases are not recorded on the Consolidated Balance Sheet.

The Company also leases certain technology assets, fuel storage tanks, and various other equipment that qualify as leases under the applicable accounting guidance.

The remaining lease terms range from three months to five years .

Because of the variable nature of these rates, these leases are not recorded as a right-of-use asset or a lease liability on the Consolidated Balance Sheet.

The Company also leases certain technology assets, fuel storage tanks, and various other equipment that qualify as leases under the applicable accounting guidance with lease terms extending up to four years .

Certain leases can be renewed from six months to three years .

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The components of lease costs, included in the Consolidated Statement of Income (Loss), were as follows:

(in millions) Statement of Comprehensive Income (Loss) location Year ended December 31, 2021 Year ended December 31, 2020 Year ended December 31, 2019

Operating lease cost - aircraft (a) Other operating expenses $ 204 $ 216 $ 182

Operating lease cost - other Landing fees and airport rentals, and Other operating expenses 81 89 89

Short-term lease cost Other operating expenses 1 1 4

Variable lease cost Landing fees and airport rentals, and Other operating expenses 1,406 1,260 1,377

Finance lease cost:

Amortization of lease liabilities Depreciation and amortization 112 113 116

Interest on lease liabilities Interest expense 19 22 26

Total net finance lease cost $ 131 $ 135 $ 142

(in millions) Year ended December 31, 2022 Year ended December 31, 2021 Year ended December 31, 2020

Operating lease cost - aircraft (a) $ 188 $ 204 $ 216

Operating lease cost - other 84 81 89

Short-term lease cost 2 1 1

Variable lease cost 1,447 1,406 1,260

Amortization of finance lease liabilities 106 112 113

Interest on finance lease liabilities 15 19 22

Total net lease cost $ 1,842 $ 1,823 $ 1,701

(a) Net of sublease income of $ 17 million, $ 41 million, and $ 78 million for the years ended December 31, 2022, 2021, and 2020.

Supplemental cash flow information related to leases, included in the Consolidated Statement of Cash Flows, was as follows:

Notes to Consolidated Financial Statements

( in millions )

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Operating leases 58 327 915

Finance leases — — 1

Notes to Consolidated Financial Statements

As of December 31, 2022, maturities of lease liabilities were as follows:

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Finance leases 3.9 % 3.8 %

(a) Upon adoption of ASU No.

2016-02, Leases, codified in ASC 842, the incremental borrowing rate used for existing leases was established as of January 1, 2019.

The Company has one class of capital stock, its common stock.

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Holders of shares of common stock are entitled to receive dividends when and if declared by the Board of Directors and are entitled to one vote per share on all matters submitted to a vote of the Shareholders.

In connection with the receipt of Payroll Support, the Company is prohibited from paying dividends with respect to its common stock through September 30, 2022.

In connection with the receipt of Payroll Support, the Company was prohibited from paying dividends with respect to its common stock through September 30, 2022.

See Note 2 for further information on the Payroll Support programs.

At December 31,

Notes to Consolidated Financial Statements

2021, the Company had 60 million shares of common stock reserved for issuance pursuant to Employee equity plans (of which 22 million shares had not been granted) through various share-based compensation arrangements.

On December 6, 2022, the Company announced that the Board reinstated and declared a quarterly cash dividend of $ .18 per share to Shareholders of record at the close of business on January 10, 2023, on all shares then issued and outstanding.

At December 31, 2022, the Company had 75 million shares of common stock reserved for issuance pursuant to Employee equity plans (of which 34 million shares had not been granted) through various share-based compensation arrangements.

See Note 10 to the Consolidated Financial Statements for information regarding the Company's equity plans.

Share-based Compensation

Notes to Consolidated Financial Statements

The Company accounts for share-based compensation utilizing fair value, which is determined on the date of grant for all instruments.

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Restricted Stock Units and Stock Grants

Under the Company’s Amended and Restated 2007 Equity Incentive Plan ("2007 Equity Plan"), which has been approved by Shareholders, the Company granted restricted stock units ("RSUs") and performance-based restricted stock units ("PBRSUs") to certain Employees during 2021, 2020, and 2019.

Under the Company’s Amended and Restated 2007 Equity Incentive Plan ("2007 Equity Plan"), which was approved by Shareholders, the Company granted restricted stock units ("RSUs") and performance-based restricted stock units ("PBRSUs") to certain Employees during 2022, 2021, and 2020.

The RSUs are scheduled to vest with respect to one-third of the shares covered thereby annually.

Other than in connection with death or disability, vesting is subject to the individual’s continued service as an Employee, Board member, or advisor through the vesting date.

However, with respect to the RSUs granted in 2021, provided that the individual's service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” any outstanding unvested RSUs will remain outstanding as if the individual’s service has not terminated and will continue to vest in accordance with the schedule set forth in the notice of the grant.

However, with respect to the RSUs granted in 2021 and 2022, provided that the individual's service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” any outstanding unvested RSUs will remain outstanding as if the individual’s service has not terminated and will continue to vest in accordance with the schedule set forth in the notice of the grant.

An individual's termination of service will be considered a "qualified retirement" if (a) the individual has completed at least 10 years of continuous service;

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and (c) the individual has not been terminated for cause.

Under the 2020 grants, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's return on invested capital, after tax (“ROIC”) performance and ranges from zero PBRSUs to 200 percent of granted PBRSUs.

ROIC for the Performance Period was the average of the ROIC over the three full fiscal years within the Performance Period (2020, 2021, and 2022), and vesting is also subject generally to the individual’s continued employment or service.

Based on actual ROIC for the Performance Period, the number of PBRSUs expected to vest for the 2020 grants was zero .

With respect to PBRSUs granted in 2021, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's cumulative Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for the years 2022 and 2023 and ranges from 10 percent of granted PBRSUs to 300 percent of granted PBRSUs, only after a minimum performance level has been achieved.

However, in the event the Company's pre-tax return on invested capital exceeds the median (i.e., 50th percentile) return on invested capital of certain of the Company's peer group of domestic mainline carriers subject to the Securities and Exchange Commission's reporting requirements, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 50 percent.

With respect to PBRSUs granted in 2021, provided that the individual's service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” such individual’s PBRSUs will remain outstanding as if the individual’s service has not terminated and will otherwise be settleable in accordance with the notice of grant and applicable terms and conditions;

however, the number of shares received upon settlement will be prorated based on the individual’s number of days of service between the date of grant and the end of the performance period.

Under the 2019 and 2020 grants, PBRSUs granted are subject to the Company’s performance with respect to a three-year simple average of return on invested capital, after taxes and excluding special items, for the defined performance period and are also subject generally to the individual’s continued employment or service.

Under the 2019 and 2020 grants, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's return on invested capital performance and ranges from zero PBRSUs to 200 percent of granted

However, in the event the Company's pre-tax average return on invested capital for 2021 and 2022 exceeds the median (i.e., 50th percentile) average return on invested capital of certain of the Company's peer group of domestic mainline carriers subject to the Securities and Exchange Commission's reporting requirements, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 50 percent.

Under the 2022 grants, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's Adjusted ROIC performance, as defined, and ranges from zero PBRSUs to 300 percent of granted PBRSUs.

Adjusted ROIC for the Performance Period is the average of the ROIC over the three full fiscal years within the Performance Period (2022, 2023, and 2024), and vesting is also subject generally to the individual’s continued employment or service.

However, in the event the Company's average Adjusted ROIC is greater than zero and exceeds the median (i.e., 50th percentile) return on invested capital of certain of the Company's peer group of domestic mainline carriers subject to the Securities and Exchange Commission's reporting requirements, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 50 percent.

If the Company's relative Adjusted ROIC ranks highest compared to the Company's Peer Group, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 100 percent.

Notes to Consolidated Financial Statements

Forfeiture rates are estimated at the time of grant based on historical actuals for similar grants, and are trued-up to actuals over the vesting period.

The Company recognizes all expense on a straight-line basis over the vesting period, with any changes in expense due to the number of PBRSUs expected to vest being modified on a prospective basis.

With respect to PBRSUs granted in 2021 and 2022, provided that the individual's service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” such individual’s PBRSUs will remain outstanding as if the individual’s service has not terminated and will otherwise be settleable in accordance with the notice of grant and applicable terms and conditions;

however, the number of shares received upon settlement will be prorated based on the individual’s number of days of service between the date of grant and the end of the performance period.

For all RSU and PBRSU grants, forfeiture rates are estimated at the time of grant based on historical actuals for similar grants, and are trued-up to actuals over the vesting period.

For all RSU and PBRSU grants, the Company recognizes all expense on a straight-line basis over the vesting period, as adjusted for qualified retirement provisions, with any changes in expense due to the number of RSUs and PBRSUs expected to vest being modified on a prospective basis.

Aggregated information regarding the Company’s RSUs and PBRSUs is summarized below:

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Surrendered ( 74 ) 51.36

Outstanding December 31, 2020, Unvested 1,962 57.81

Outstanding December 31, 2021 2,561 51.81

Granted 1,041 (c) 44.88

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Surrendered ( 100 ) 48.59

Outstanding December 31, 2021, Unvested 2,561 51.81

Outstanding December 31, 2022 2,943 47.97

(a) Includes 519 thousand PBRSUs

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2024 748 WTI crude oil and Brent crude oil

2024 358 WTI crude oil

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

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

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

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

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

Factors that have and may continue to lead to the loss of hedge accounting include:

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

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

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

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

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

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

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

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

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During 2020 and 2021, as a result of the drastic drop in demand for air travel due to the COVID-19 pandemic, the Company's forecast for 2020 and 2021 fuel purchases and consumption was significantly reduced, causing the Company to be in an estimated "over-hedged" position for second, third, and fourth quarter 2020, and full year 2021.

Therefore, the Company de-designated a portion of its fuel hedges related to these periods, and has reclassified approximately $ 39 million and $ 6 million in losses from AOCI into Other (gains) losses, net, during 2020 and 2021, respectively.

Therefore, the Company de-designated a portion of its fuel hedges related to these periods, and reclassified approximately $ 39 million and $ 6 million in losses from AOCI into Other (gains) losses, net, during 2020 and 2021, respectively.

The Company did not have any such situations occur during 2022 .

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Fuel derivative contracts (gross) Other assets 160 287 — —

Interest rate derivative contracts Other assets 14 — — —

Interest rate derivative contracts Other noncurrent liabilities — — — 4

Total derivatives designated as hedges $ 526 $ 696 $ — $ 4

Derivatives not designated as hedges (a)

Fuel derivative contracts (gross) Prepaid expenses and other current assets $ — $ 4 $ — $ —

Total derivatives $ 696 $ 134 $ 4 $ 6

(a) Represents the position of each trade before consideration of offsetting positions with each counterparty and does not include the impact of cash collateral deposits provided to or received from counterparties.

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

Fuel derivative contracts Prepaid expenses and other current assets $ 409 $ ( 80 ) $ 329 $ 13 $ ( 3 ) $ 10

Fuel derivative contracts Prepaid expenses and other current assets $ 352 $ ( 106 ) (b) $ 246 $ 409 $ ( 80 ) $ 329

Fuel derivative contracts Other assets $ 160 $ — $ 160 (a) $ 287 $ ( 95 ) $ 192 (a)

Interest rate derivative contracts Other assets $ 14 $ — $ 14 (a) $ — $ — $ — (a)

(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the Consolidated Balance Sheet in Note 16.

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

Fuel derivative contracts Prepaid expenses and other current assets $ 80 $ ( 80 ) $ — $ 3 $ ( 3 ) $ —

Fuel derivative contracts Prepaid expenses and other current assets $ 106 $ ( 106 ) (b) $ — $ 80 $ ( 80 ) $ —

Fuel derivative contracts Other assets $ — $ — $ — (a) $ 95 $ ( 95 ) $ — (a)

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The following tables present the impact of derivative instruments and their location within the Consolidated Statement of Income (Loss) for the years ended December 31, 2022 and 2021:

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

Location and amount recognized in income on cash flow hedging relationships

Year ended December 31, 2022 Year ended December 31, 2021

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

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

Total $ ( 832 ) $ 7 $ 4 $ 6 $ 6

Loss on cash flow hedging relationships

(Gain) loss on cash flow hedging relationships

Commodity contracts:

Amount of loss reclassified from AOCI into income 4 6 — 70 39 —

Amount of (gain) loss reclassified from AOCI into income ( 832 ) — 4 6 —

Interest contracts:

Amount of loss reclassified from AOCI into income — 7 — — 6

Impact of fair value hedging relationships:

Interest contracts:

Hedged items — — — — — 11

Derivatives designated as hedging instruments — — — — — ( 6 )

Derivatives designated and qualified in cash flow hedging relationships

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Fuel derivative contracts $ ( 41 ) $ ( 13 ) Other (gains) losses, net

Interest rate derivatives — 28 Other (gains) losses, net

Total $ ( 13 ) $ 29

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during 2021, 2020, and 2019.

The Company also recorded expense (benefit) associated with premiums paid (received) for fuel derivative contracts that settled/expired during 2022, 2021, and 2020.

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

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

The following table presents the impact

The following table presents the impact of premiums paid or received for fuel derivative contracts and their location within the Consolidated Statement of Income (Loss) during the period the contract settles:

Notes to Consolidated Financial Statements

of premiums paid for fuel derivative contracts and their location within the Consolidated Statement of Income (Loss) during the period the contract settles:

Premium expense recognized in income on derivatives

Year ended December 31, Location of premium expense recognized in income on derivatives

Premium (benefit) expense recognized in income on derivatives

Year ended December 31, Location of premium (benefit) expense recognized in income on derivatives

(in millions) 2022 2021 2020

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

Included in the Company’s cumulative net unrealized gains from fuel hedges as of December 31, 2021, recorded in AOCI, were approximately $ 234 million in unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to December 31, 2021.

Included in the Company’s cumulative unrealized gains from fuel hedges as of December 31, 2022, recorded in AOCI, were approximately $ 179 million in unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to December 31, 2022.

Interest Rate Swaps

The Company is party to certain interest rate swap agreements that are accounted for as cash flow hedges, and has in the past held interest rate swap agreements that have qualified as fair value hedges, as defined in the applicable accounting guidance for derivative instruments and hedging.

The Company is party to certain interest rate swap agreements that are accounted for as cash flow hedges.

The Company did not have any interest rate swap agreements designated as fair value hedges, as defined, during the periods presented.

Several of the Company's interest rate swap agreements qualify for the "shortcut" or "critical terms match" methods of accounting for hedges, which dictate that the hedges were assumed to be perfectly effective at origination, and, thus, there was no ineffectiveness to be recorded in earnings.

During 2019, the Company had entered into forward-starting interest rate swap agreements related to a series of 12 -8 aircraft leases for aircraft originally scheduled to be received between July 2019 and February 2020.

These lease contracts exposed the Company to interest rate risk as the rental payments were subject to adjustment and would become fixed based on the 9-year swap rate at the time of delivery.

As a result of the grounding of the MAX aircraft, those deliveries were significantly delayed.

These original agreements were subsequently terminated in third quarter 2019, and the Company entered into new interest rate swap agreements based on revised expected aircraft delivery dates.

As the revised delivery dates were also not met, these subsequent agreements were subsequently de-designated as hedges and the agreements terminated.

All of the associated aircraft had been delivered to the Company as of September 30, 2021.

As a result of the discontinued hedges, the Company had cumulative losses "frozen" in AOCI as of December 31, 2021, of $ 57 million, which will be recognized in earnings over the 9 -year lease terms of each aircraft.

For the Company’s interest rate swap agreements that do not qualify for the "shortcut" or "critical terms match" methods of accounting, ineffectiveness is assessed at each reporting period.

If hedge accounting is achieved, all periodic changes in fair value of the interest rate swaps are recorded in AOCI.

The fair values of the interest rate swap agreements, which are adjusted regularly, have been aggregated by counterparty for classification in the Consolidated Balance Sheet.

Agreements totaling a liability of $ 4 million are cash flow hedges and are classified as components of Other noncurrent liabilities.

The corresponding offsetting adjustment related to the liability associated with the Company’s cash flow hedges is to AOCI.

Agreements totaling an asset of $ 14 million are cash flow hedges and are classified as components of Other assets.

The corresponding offsetting adjustment related to the asset associated with the Company’s cash flow hedges is to AOCI.

Credit Risk and Collateral

Notes to Consolidated Financial Statements

Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company at the reporting date.

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

Notes to Consolidated Financial Statements

Counterparty (CP)

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

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

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

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

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Commercial paper 179 — 179 —

Certificates of deposit 23 — 23 —

Time deposits 250 — 250 —

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Treasury bills 2,226 2,226 — —

Certificates of deposit 124 — 124 —

Time deposits 450 — 450 —

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Option contracts (b) 512 — — 512

Interest rate derivatives (see Note 11) 14 — 14 —

Equity Securities 235 235 — —

Total assets $ 13,053 $ 11,501 $ 1,040 $ 512

Interest rate derivatives (see Note 11) $ ( 4 ) $ — $ ( 4 ) $ —

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

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Commercial paper 90 — 90 —

Certificates of deposit 10 — 10 —

Time deposits 50 — 50 —

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Treasury bills 2,399 2,399 — —

Certificates of deposit 46 — 46 —

Time deposits 625 — 625 —

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Purchases 79 (b)

Sales ( 7 ) (b)

Settlements ( 949 )

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Balance at December 31, 2020 $ 134

Total losses for the period

Total gains for the period

Included in earnings 7 (a)

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Purchases 34 (b)

Settlements ( 88 )

Balance at December 31, 2021 $ 696

The amount of total losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2020 $ ( 15 ) (a)

The amount of total losses for the period included in other comprehensive loss attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2020 $ ( 41 )

The amount of total gains for the period included in other comprehensive loss attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2021 $ 541

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

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

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

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

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

Notes to Consolidated Financial Statements

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

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2024 34 - 45 %

2024 26 - 33 %

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

Notes to Consolidated Financial Statements

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

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(in millions) Carrying value Estimated fair value Fair value level hierarchy

2.75 % Notes due 2022

$ 300 $ 305 Level 2

Pass Through Certificates due 2022 - 6.24 %

71 73 Level 2

4.75 % Notes due 2023

1,250 1,311 Level 2

1.25 % Convertible Notes due 2025

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Balance at December 31, 2020 $ ( 119 ) $ ( 66 ) $ ( 43 ) $ 91 $ 32 $ ( 105 )

Cumulative effect of adopting ASU 2016-01 as of January 1, 2018 — — — ( 31 ) 11 ( 20 )

Changes in fair value 601 3 109 — ( 166 ) 547

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

Cumulative effect of adopting ASU 2016-01 as of January 1, 2018 — — — ( 31 ) 11 ( 20 )

Changes in fair value 645 18 106 — ( 179 ) 590

Reclassification to earnings 10 6 — ( 60 ) (a) 10 ( 34 )

Reclassification to earnings ( 832 ) 7 ( 2 ) — 193 ( 634 )

Balance at December 31, 2022 $ 305 $ ( 32 ) $ 170 $ — $ ( 99 ) $ 344

(a) Investment gains related to prior periods that were reclassified from AOCI into Other (gains) losses, net.

The following table illustrates the significant amounts reclassified out of each component of AOCI for the year ended December 31, 2022:

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AOCI components

Unrealized loss on fuel derivative instruments $ 4 Fuel and oil expense

Unrealized (gain) on fuel derivative instruments $ ( 832 ) Fuel and oil expense

— Other (gains) losses, net

( 195 ) Less:

$ ( 637 ) Net of tax

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$ 5 Net of tax

Unrealized gain on deferred compensation plan investment $ ( 60 ) Other (gains) losses, net

Unrealized (gain) on defined benefit plan $ ( 2 ) Other (gains) losses, net

$ ( 2 ) Net of tax

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Contributions under all defined contribution plans are primarily based on Employee compensation and performance of the Company.

The Company sponsors Employee savings plans under section 401(k) of the Internal Revenue Code of 1986, as amended.

The Southwest Airlines Co.

401(k) Plan includes Company matching contributions and the Southwest

The Company sponsors Employee savings plans under section 401(k) of the Internal Revenue Code of 1986, as

Notes to Consolidated Financial Statements

Airlines Pilots Retirement Saving Plan has non-elective Company contributions.

The Southwest Airlines Co.

401(k) Plan includes Company matching contributions and the Southwest Airlines Pilots Retirement Saving Plan has non-elective Company contributions.

In addition, the Southwest Airlines Co.

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No Employee contributions to the ProfitSharing Plan are allowed.

Amounts associated with the Company's defined contribution plans expensed in 2021, 2020, and 2019, reflected as a component of Salaries, wages, and benefits, were $ 749 million, $ 561 million, and $ 1.2 billion, respectively.

Amounts associated with the Company's defined contribution plans expensed in 2022, 2021, and 2020, reflected as a component of Salaries, wages, and benefits, were $ 793 million, $ 749 million, and $ 561 million, respectively.

Postretirement Benefit Plans

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Benefits paid ( 11 ) ( 24 )

Actuarial (gain)/loss ( 109 ) 63

Curtailment — 53

Special termination benefits — 2

Actuarial gain ( 106 ) ( 109 )

APBO at end of period $ 241 $ 330

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This 2022 actuarial gain is reflected above and resulted from changes in certain key assumptions used to determine the Company’s year-end obligation.

The assumption changes that resulted in the largest portion of the actuarial gain were the expected participation and retirement rates in the Plan for future qualifying retirees, which reflect lower expectations as to utilization of benefits based on recent history, combined with census data and other demographic changes.

The assumption change that resulted in the largest portion of the actuarial gain was an increase in the discount rate used.

All plans are unfunded, and benefits are paid as they become due.

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Funded status $ ( 241 ) $ ( 330 )

Unrecognized net actuarial (gain) loss ( 69 ) 40

Unrecognized net actuarial gain ( 173 ) ( 69 )

Unrecognized prior service cost 3 3

Accumulated other comprehensive income (loss) 66 ( 43 )

Accumulated other comprehensive income 170 66

Consolidated Balance Sheet liability $ ( 241 ) $ ( 330 )

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Operating lease right-of-use assets 311 356

Other 154 188

Total deferred tax liabilities 3,982 3,616

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Operating lease liabilities 313 371

Customer travel credits 305 117

Construction obligation — 72

Customer flight credits 43 305

Net operating losses and tax credits (a) 310 36

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These state net operating loss carryforwards will expire in years 2025 - 2041 if unused.

At December 31, 2022, the Company had $ 275 million (tax effected) of federal net operating loss carryforwards that were generated in 2022.

The federal net operating loss can be carried forward indefinitely.

The provision (benefit) for income taxes is composed of the following:

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State 20 23 ( 127 )

State net operating losses 21 ( 51 ) —

Change in federal statutory tax rate (c) — — ( 31 )

Total deferred 228 ( 20 ) ( 716 )

$ 348 $ ( 1,182 ) $ 657

Income tax provision (benefit) $ 189 $ 348 $ ( 1,182 )

(a) The CARES Act allows entities to carry back 2020 losses to prior periods of up to five years, and claim refunds of federal taxes paid.

The Company has filed the refund claim with the IRS, and expects a refund of $ 472 million in the first six months of 2022.

The Company filed the refund claim with the IRS, and received a refund of $ 472 million during second quarter 2022.

(b) The benefit is representative of the excess refund generated as the result of carrying the 2020 losses back to a period when the federal statutory tax rate was 35 percent as opposed to the current tax rate of 21 percent.

federal corporate tax rate from the previous rate of 35 percent to 21 percent.

Notes to Consolidated Financial Statements

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State income taxes, net of federal benefit 12 45 ( 115 )

Change in federal statutory tax rate ( 2 ) ( 188 ) (a) ( 31 ) (b)

Change in federal statutory tax rate — ( 2 ) (a) ( 188 ) (a)

Convertible debt repurchases 31 21 10

Federal tax credits ( 13 ) ( 2 ) ( 1 )

Other, net 6 8 6

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(a) The benefit is representative of the excess refund generated as the result of carrying the 2020 losses back to a period when the federal statutory tax rate was 35 percent as opposed to the current tax rate of 21 percent.

(b) The Tax Cuts and Jobs Act was enacted in December 2017, which reduced the U.S.

federal corporate tax rate from the previous rate of 35 percent to 21 percent.

The only periods subject to examination for the Company’s federal tax return are the 2020 and 2021 tax years.

The only periods subject to examination for the Company’s federal tax return are 2020, 2021 and 2022 tax years.

The Company is also subject to various examinations from state and local income tax jurisdictions in the ordinary course of business.

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Taxes receivable (a) 133 699

Accounts and other receivables (b) $ 1,357 $ 1,130

Fuel hedging and receivables 34 8

Accounts and other receivables $ 1,040 $ 1,357

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

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Accounts payable trade $ 277 $ 156

Salaries payable 287 201

Taxes payable excluding income taxes 200 49

Salaries, withholdings and payroll taxes 456 368

Ticket taxes and fees 242 236

Aircraft maintenance payable 65 42

Fuel payable 188 170

Dividends payable 107 —

Customer reimbursements and refunds (b) 311 —

Other payable 358 310

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

Extended Emergency Time Off $ 3 $ 393

Voluntary Separation Program 72 92

Profitsharing and savings plans 167 262

Vendor prepayment (b) — 600

Vacation pay 484 451

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Deferred supplier payments (c) — 80

Contract labor and non-contract incentive accruals (d) 563 150

Other 250 185

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

Extended Emergency Time Off $ — $ 57

Voluntary Separation Program 147 233

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Other deferred compensation 331 369

Other 250 292

Other noncurrent liabilities $ 969 $ 1,224

(a) This amount includes approximately $ 472 million and $ 470 million, as of December 31, 2021 and 2020, respectively, associated with a significant cash tax refund expected as a result of the CARES Act allowing entities to carry back 2020 losses to prior periods of up to five years, and claim refunds of federal taxes paid.

These amounts also includes excise taxes remitted to taxing authorities for which the subsequent flights were canceled by Customers, resulting in amounts due back to the Company.

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

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

This amount as of December 31, 2021, also includes excise taxes remitted to taxing authorities for which the subsequent flights were canceled by Customers, resulting in a refund due back to the Company.

The excise tax refund of approximately $ 139 million was received during fourth quarter 2022.

(b) This amount includes customer reimbursement expenses due to the December 2022 operational disruption and refund submissions that had yet to be processed at year-end due to the volume of refund requests as a result of the operational disruption in December.

The requests are expected to be processed in first quarter 2023.

See Note 1 for further information.

(b) In fourth quarter 2020, the Company received a $ 600 million prepayment from Chase for Rapid Rewards points that were subsequently issued to Members during the first half of 2021, based on cardholder activity on the Visa credit card associated with its loyalty program.

This resulted in a reduction in cash receipts from Chase during 2021, which were classified within Accounts and other receivables in the Consolidated Statement of Cash Flows.

(c) Represents amounts owed at December 31, 2021, for aircraft deliveries received that were subsequently relieved via future payments to supplier.

See Note 17 for further information.

(d) Primarily consists of anticipated contract labor ratification bonuses and/or accruals.

Also includes non-contract incentive pay.

For further information on fuel derivative and interest rate derivative contracts, see Note 11.

Other Operating Expenses

Other operating expenses consist of aircraft rentals, distribution costs, advertising expenses, personnel expenses, professional fees, and other operating costs, none of which individually exceed 10 percent of Operating expenses.

BOEING 737 MAX AIRCRAFT GROUNDING AND RETURN TO SERVICE

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The Company returned the MAX to revenue service on March 11, 2021, after the Company met all FAA requirements and Pilots received updated, MAX-related training.

The most significant financial impacts of the grounding resulting from the FAA's emergency order were the lost revenues, operating income, and operating cash flows, and delayed capital expenditures, directly associated with the Company's grounded MAX fleet and other new aircraft that were not able to be delivered.

The most significant financial impacts of the grounding resulting from the FAA's emergency order were the lost revenues, operating income, operating cash flows, and delayed capital expenditures, directly associated with the Company's grounded MAX fleet and other new aircraft that were not able to be delivered.

During 2019, the Company entered into a Memorandum of Understanding with Boeing to compensate Southwest for estimated financial damages incurred during 2019 related to the grounding of the MAX.

The terms of the agreement are confidential, but were intended to provide for a substantial portion of the Company’s financial damages associated with both the 34 MAX aircraft that were grounded as of March 13, 2019, as well as the 41 additional MAX aircraft the Company was scheduled to receive ( 28 owned MAX from Boeing and 13 leased MAX from third parties) from March 13, 2019 through December 31, 2019.

In accordance with applicable accounting principles, the Company will account for substantially all of the proceeds received from Boeing as a reduction in cost basis spread across both the existing 31 owned MAX in the Company’s fleet at the time, and the Company’s future firm aircraft deliveries as of the date of the agreement.

The Company will account for substantially all of the proceeds received from Boeing as a reduction in cost basis spread across both the existing 31 owned MAX in the Company’s fleet at the time, and the Company’s future firm aircraft deliveries as of the date of the agreement.

A total of $ 428 million in proceeds received in cash from Boeing are reflected within Investing Activities in the Consolidated Statement of Cash Flows for the year ended December 31, 2020.

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During December 2020, the Company entered into an agreement with Boeing to compensate the Company for estimated financial damages incurred during 2020 related to the grounding of the MAX.

The terms of the agreement are confidential, but the compensation is in the form of credit memos taken against future payments due to Boeing as aircraft have been and are delivered in accordance with the amended delivery schedule, or as future progress payments are due.

In accordance with applicable accounting principles, the Company has accounted for substantially all of the compensation received from Boeing as a reduction in cost basis spread across both the existing owned MAX in the Company’s fleet, and the Company’s future firm aircraft deliveries from Boeing as of the date of the agreement.

The terms of the agreement are confidential, but the compensation was in the form of credit memos taken against future payments due to Boeing as aircraft were delivered in accordance with the amended delivery schedule, or as future progress payments were due.

The Company accounted for substantially all of the compensation received from Boeing as a reduction in cost basis spread across both the existing owned MAX in the Company’s fleet, and the Company’s future firm aircraft deliveries from Boeing as of the date of the agreement.

During fourth quarter 2021, the Company fully utilized the credits from Boeing, and no credits remained as of December 31, 2021.

No material financial impacts of the agreement were realized in the Company’s earnings for the year ended December 31, 2022.

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 6, 2023 expressed an unqualified opinion thereon.

Adoption of ASU No.

As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for convertible debt instruments in 2022 due to the adoption of ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.

Basis for Opinion

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(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters

Notes to Consolidated Financial Statements

Valuation of financial derivative instruments

Description of the Matter As explained in Notes 1, 11, and 12 to the financial statements, the Company’s fuel derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange and require the Company to estimate their fair values.

The fair value of fuel option contracts are determined using option pricing models with inputs about commodity prices, strike prices, risk-free interest rates, term to expiration and volatility.

below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Notes to Consolidated Financial Statements

Valuation of fuel derivative instruments

Description of the Matter As described in Notes 1, 11, and 12 to the consolidated financial statements, the Company’s fuel derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange and require the Company to estimate their fair values.

The fair value of fuel option contracts is determined using option pricing models with inputs such as commodity prices, strike prices, risk-free interest rates, term to expiration and volatility.

Because certain inputs used to determine the fair value of option contracts are unobservable (principally implied volatility), the Company has categorized these option contracts as Level 3 fair value measures.

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Auditing the fair value measurement of fuel option contracts is complex and requires significant judgment in order to evaluate the application of the option pricing model and evaluating the reasonableness of the unobservable input of implied volatility used in the fair value measurement of the Company’s fuel option contracts.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to calculate the fair value of fuel option derivative contracts, including controls that related to the volatility input.

We involved internal valuation specialists to assist in the testing of the significant inputs in the option pricing model by comparing the market data inputs, including volatility, to external sources.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to calculate the fair value of fuel option contracts, including controls that related to the volatility input.

To test the valuation of fuel derivative instruments, our audit procedures included, among others, involving internal valuation specialists to assist in the testing of the significant inputs into the option pricing model by comparing the market data inputs, including volatility, to external sources.

With the support of our specialists, we also tested the application of and the computational accuracy of the option pricing model by performing independent corroborative calculations.

Additionally, we compared the Company’s fuel option contract valuations to the counterparty valuations, which were independently obtained as part of our audit procedures.

Air traffic liability breakage

Description of the Matter As explained in Notes 1 and 6, tickets sold, but not yet used, are initially deferred as Air traffic liability, and are recognized in passenger revenue when transportation is provided.

The Company estimates the amount of tickets that expire unused and recognizes such amounts in Passenger revenue once the scheduled flight date passes in proportion to the pattern of flights taken by the customers.

During 2020, the Company experienced a significantly higher number of customer-driven flight cancellations related to the COVID-19 pandemic, and extended the expiration date for certain travel funds to September 7, 2022.

At December 31, 2021, $1.3 billion of these extended funds remained available for customers to use on future travel.

Auditing the Company’s breakage estimates on these extended funds requires judgment, as the Company has limited historical data available to predict both the amount of these funds estimated to expire and the expected pattern of flights to be taken by customers holding extended travel funds, since historically travel funds expired within 12 months of the original date of sale.

In making its estimates, the Company considers historical customer travel behavior, as well as assumptions about customers’ future travel behavior, which can be impacted by many factors including ticketing and other policies, fares, seat availability, and other economic factors.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over management’s determination of the breakage estimate, including controls over management’s review of the estimation of breakage and the completeness and accuracy of the historical data analyzed as part of the breakage estimate.

We evaluated management’s assumptions used in the breakage calculation by comparing current and historical actual expirations to the Company’s estimates.

Additionally, among other procedures, we assessed the reasonableness of other assumptions made by the Company as part of the breakage estimate, including the consideration of the constraint on variable consideration on cumulative revenue recognized.

Loyalty Program - Valuation of co-brand marketing component

Description of the Matter As described in Note 6 to the consolidated financial statements, the Company executed an amended co-branded credit card agreement (“Agreement”) with Chase Bank USA, N.A.

(“Chase”), through which the Company primarily sells loyalty points and the use of its brand and access to its Rapid Rewards Member lists to Chase.

The Company estimated the selling prices and volumes of the contract deliverables over the term of the Agreement to determine the allocation of proceeds to the Southwest Airlines brand and access to Rapid Rewards Member lists (collectively, the “marketing component”).

The Company estimated the standalone selling price of each of the performance obligations and projected cash flows over the term of the Agreement to determine the allocation of proceeds to each of the performance obligations, including the marketing component.

Auditing the valuation of the marketing component of the co-brand agreement with Chase was complex and highly judgmental due to the absence of observable standalone selling prices.

A change in the estimated selling price of the marketing component could have a material impact on the timing of revenue recognition.

How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s determination of the estimated standalone selling price of the marketing component and the completeness and accuracy of the data underlying the estimate.

To test the estimated selling price of the marketing component, our audit procedures included, among others, involving a valuation specialist to assist in testing the methodology used to develop the estimated standalone selling price of the marketing component and assessing the reasonableness of certain inputs used to develop the estimate.

Additionally, we assessed the sensitivity of the Company’s recognized revenue to changes in the inputs used to estimate the standalone selling price of the marketing component.

/s/ Ernst & Young LLP

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What changed 10-K

Item 8. Financial Statements and Supplementary Data