What changed in this filing

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Item 1. Financial Statements

2023-04-28 compared with 2022-10-31 · 238 added, 484 removed, 499 unchanged (59% of the section changed)

3 unchanged sentences

(in millions)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Current assets:

40 unchanged sentences

Southwest Airlines Co.

Condensed Consolidated Statement of Comprehensive Income

Condensed Consolidated Statement of Comprehensive Income (Loss)

(in millions, except per share amounts)

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

2022 2021 2022 2021

Three months ended March 31,

OPERATING REVENUES:

5 unchanged sentences

Salaries, wages, and benefits 2,478 2,229

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

Fuel and oil 1,547 1,004

4 unchanged sentences

Total operating expenses, net 5,990 4,845

OPERATING INCOME 395 733 1,402 1,526

OPERATING LOSS ( 284 ) ( 151 )

OTHER EXPENSES (INCOME):

5 unchanged sentences

Total other expenses (income) ( 79 ) 225

INCOME BEFORE INCOME TAXES 353 600 1,013 1,248

PROVISION FOR INCOME TAXES 76 154 254 339

NET INCOME $ 277 $ 446 $ 759 $ 909

NET INCOME PER SHARE, BASIC $ 0.47 $ 0.75 $ 1.28 $ 1.54

NET INCOME PER SHARE, DILUTED $ 0.44 $ 0.73 $ 1.21 $ 1.49

COMPREHENSIVE INCOME $ ( 223 ) $ 577 $ 676 $ 1,300

LOSS BEFORE INCOME TAXES ( 205 ) ( 376 )

BENEFIT FOR INCOME TAXES ( 46 ) ( 98 )

NET LOSS $ ( 159 ) $ ( 278 )

NET LOSS PER SHARE, BASIC $ ( 0.27 ) $ ( 0.47 )

NET LOSS PER SHARE, DILUTED $ ( 0.27 ) $ ( 0.47 )

COMPREHENSIVE INCOME (LOSS) $ ( 306 ) $ 225

WEIGHTED AVERAGE SHARES OUTSTANDING

7 unchanged sentences

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

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 — 1 — — 7 8

Share-based compensation — 20 — — — 20

Comprehensive income — — ( 278 ) 503 — 225

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

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

Share-based compensation — 16 — — — 16

Cash dividends, $ 0.18 per share

— — ( 107 ) — — ( 107 )

Comprehensive income (loss) — — ( 159 ) ( 147 ) — ( 306 )

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

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

Share-based compensation — 14 — — — 14

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

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

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

Balance at March 31, 2023 $ 888 $ 4,058 $ 15,995 $ 197 $ ( 10,836 ) $ 10,302

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

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

Cumulative effect of adopting Accounting Standards Update No.

2016-01, Financial Instruments — — 19 ( 19 ) — —

Issuance of common and treasury stock pursuant to Employee stock plans — ( 8 ) — — 8 —

Share-based compensation — 14 — — — 14

Stock warrants — 23 — — — 23

Comprehensive income — — 116 64 — 180

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

2020-06, Debt — ( 300 ) 55 — — ( 245 )

Issuance of common and treasury stock pursuant to Employee stock plans — — — — 7 7

Share-based compensation — 16 — — — 16

Stock warrants — 22 — — — 22

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

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

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

Share-based compensation — 14 — — — 14

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

Comprehensive income — — 446 131 — 577

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

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

See accompanying notes.

2 unchanged sentences

(in millions)

Three months ended Nine months ended

September 30, September 30,

2022 2021 2022 2021

Three months ended

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 277 $ 446 $ 759 $ 909

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

Net loss $ ( 159 ) $ ( 278 )

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

Depreciation and amortization 365 324

12 unchanged sentences

Other, net ( 60 ) 31

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

Net cash provided by operating activities 706 1,071

CASH FLOWS FROM INVESTING ACTIVITIES:

5 unchanged sentences

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from Payroll Support Program loan and warrants — — — 1,136

Proceeds from Employee stock plans 9 6

Payments of long-term debt and finance lease obligations ( 59 ) ( 93 )

Payments of cash dividends ( 214 ) —

Payments for repurchases and conversions of convertible debt — ( 230 )

Other, net 2 3

Net cash provided by (used in) financing activities ( 1,905 ) ( 157 ) ( 2,435 ) 923

Net cash used in financing activities ( 262 ) ( 314 )

NET CHANGE IN CASH AND CASH EQUIVALENTS ( 1,133 ) 618

5 unchanged sentences

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:

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

Adoption of Accounting Standards Update 2020-06, Debt $ — $ 245

Right-of-use assets acquired under operating leases $ 47 $ 24

Flight equipment acquired against supplier credit memo $ — $ — $ — $ 512

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

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

See accompanying notes.

2 unchanged sentences

Basis of Presentation

Worldwide Pandemic

New Accounting Pronouncements

Financial Derivative Instruments

Comprehensive Income

Net Income Per Share

Comprehensive Income (Loss)

Net Loss Per Share

Fair Value Measurements

9 unchanged sentences

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

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

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

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

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

For first quarter 2023, these events also created a deceleration in bookings, primarily isolated to January and February 2023, as well as increased expenses of approximately $ 55 million, which are included in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2023.

These expenses included reimbursements to Customers impacted by the cancellations for costs they incurred in excess of the amounts accrued as of December 31, 2022, adjustments to the estimated value of Rapid Rewards points offered as a gesture of goodwill to Customers as a result of changes in the estimates of the points expected to be redeemed, and additional 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 the elimination of profitsharing expenses for the quarter.

The continuing effects of this event significantly contributed to the Company recording a net loss for first quarter 2023 in the amount of $ 159 million.

The accompanying unaudited Condensed Consolidated Financial Statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

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

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

The unaudited Condensed Consolidated Financial Statements for the interim periods ended March 31, 2023 and 2022 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods.

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

1 unchanged sentence

In many years, the Company's revenues, as well as its Operating income and Net income, have been better in its second and third fiscal quarters than in its first and fourth fiscal quarters.

However, beginning in early 2020, as a result of the COVID-19 pandemic, the Company's results have not always been in line with such historical trends.

See Note 2 for further information.

Air travel is also significantly impacted by general economic conditions, the amount of disposable income available to consumers and changes in consumer behavior, unemployment levels, corporate travel budgets, global pandemics such as COVID-19, extreme or severe weather and natural disasters, fears of terrorism or war, governmental actions, and other factors beyond the Company's control.

1 unchanged sentence

See Note 3 for further information on fuel and the Company's hedging program.

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

Operating results for the three months ended March 31, 2023, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2023.

For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

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

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

WORLDWIDE PANDEMIC

As a result of the rapid spread of the novel coronavirus, COVID-19, throughout the world, including into the United States, on March 11, 2020, the World Health Organization classified the virus as a pandemic.

The speed with which the effects of the COVID-19 pandemic changed the U.S.

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

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

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

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

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

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

the "PSP2 Payroll Support Program” in January 2021 under the Consolidated Appropriations Act, 2021;

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

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

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

(dollars in millions, shares in thousands) Grant Promissory Note Warrants Total Payroll Support Proceeds Warrants (shares) Warrant strike price Promissory Note Maturity Date

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

April 19, 2030

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

January 15, 2031

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

April 23, 2031

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

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

and limits on executive compensation until April 1, 2023.

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

All grant portions of the Payroll Support programs received had been allocated and classified as a contra-expense line item in the Company's financial statements by the end of 2021, including approximately $ 763 million and $ 2.7 billion for the three and nine months ended September 30, 2021, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income.

On June 1, 2020, the Company announced Voluntary Separation Program 2020 ("Voluntary Separation Program"), a voluntary separation program that allowed eligible Employees the opportunity to voluntarily separate from the

In the unaudited Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2022, the Company has reclassified $ 72 million from Other (gains) losses, net to Loss on extinguishment of debt.

NEW ACCOUNTING PRONOUNCEMENTS

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

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

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

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 of up to five years , all subject to early recalls.

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

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.

In accordance with the accounting guidance in Accounting Standards Codification ("ASC") Topic 712 (Compensation — Nonretirement Postemployment Benefits), the Company accrued charges related to the special termination benefits described above upon Employees accepting Voluntary Separation Program or Extended ETO offers.

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 $ 86 million of the liability balances were relieved during the first nine months of 2022 through payments to Employees, leaving a balance of $ 242 million as of September 30, 2022.

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

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

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

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

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

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

NEW ACCOUNTING PRONOUNCEMENTS

On May 3, 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):

Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options.

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, 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).

1 unchanged sentence

These amendments do not apply to any 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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

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

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

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 is 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 three and nine months ended September 30, 2022, the impacts of adopting this new standard were decreases to the Company's Net income in the amounts of $ 36 million, or $ 0.08 per diluted share, and $ 94 million, or $ 0.22 per diluted share, respectively, as a result of higher losses recognized on the Company’s extinguishment transactions following the elimination of the equity component of the Convertible Notes, partially offset by the elimination of the non-cash interest expense associated with the prior debt discount amortization.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

The Company had no material LIBOR-related contract modifications during the three months ended March 31, 2023.

FINANCIAL DERIVATIVE INSTRUMENTS

3 unchanged sentences

The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through its fuel hedging program.

Although the Company may periodically enter into jet fuel derivatives for short-term timeframes, because jet fuel is not widely traded on an organized futures exchange, there are limited opportunities to hedge directly in jet fuel for time horizons longer than approximately 24 months into the future.

However, the Company has found that financial derivative instruments in other commodities, such as West Texas Intermediate ("WTI") crude oil, Brent crude oil, and refined products, such as heating oil and unleaded gasoline, can be useful in decreasing its exposure to jet fuel price volatility.

The Company does not purchase or hold any financial derivative instruments for trading or speculative purposes.

The Company has used financial derivative instruments for both short-term and long-term timeframes, and primarily uses a mixture of purchased call options, collar structures (which include both a purchased call option and a sold put option), call spreads (which include a purchased call option and a sold call option), put spreads (which include a purchased put option and a sold put option), and fixed price swap agreements in its portfolio.

Although the use of collar structures and swap agreements can reduce the overall cost of hedging, these instruments carry more risk than purchased call options in that the Company could end up in a liability position when the collar structure or swap agreement settles.

With the use of purchased call options and call spreads, the Company cannot be in a liability position at settlement, but does not have coverage once market prices fall below the strike price of the purchased call option.

The Company does not purchase or hold any financial derivative instruments for trading or speculative purposes.

For the purpose of evaluating its net cash spend for jet fuel and for forecasting its future estimated jet fuel expense, the Company evaluates its hedge volumes strictly from an "economic" standpoint and thus does not consider whether the hedges have qualified or will qualify for hedge accounting.

6 unchanged sentences

Notes to Condensed Consolidated Financial Statements

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

As of March 31, 2023, the Company had fuel derivative instruments in place to provide coverage at varying price levels.

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

Maximum fuel hedged as of

September 30, 2022 Derivative underlying commodity type as of

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

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

March 31, 2023 Derivative underlying commodity type as of

Period (by year) (gallons in millions) (a) March 31, 2023

Remainder of 2023 813 West Texas Intermediate ("WTI") crude oil and Brent crude oil

2024 1,265 WTI crude oil and Brent crude oil

2024 358 WTI crude oil

2025 227 Brent 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 Accumulated other comprehensive income ("AOCI") until the underlying jet fuel is consumed.

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

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

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.

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.

2 unchanged sentences

In a situation where it becomes probable that a fuel hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings.

During 2021, as a result of the drop in demand for air travel compared with 2019 due to the pandemic, the Company was in an estimated "over-hedged" position and was required to de-designate a portion of its fuel hedges for hedge accounting purposes.

However, the impact of such de-designations was not material to 2021 financial results.

The Company did not have any such situations where a derivative ceased to qualify for hedge accounting during 2022, or during the three months ended March 31, 2023.

All cash flows associated with purchasing and selling fuel derivatives are classified as Other operating cash flows in the unaudited Condensed Consolidated Statement of Cash Flows.

The following table presents the location of all assets and liabilities associated with the Company’s derivative instruments within the unaudited Condensed Consolidated Balance Sheet:

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Asset derivatives Liability derivatives

Balance Sheet Fair value at Fair value at Fair value at Fair value at

Asset derivatives

Balance Sheet Fair value at Fair value at

(in millions) location 3/31/2023 12/31/2022

3 unchanged sentences

Interest rate derivative contracts Other assets 13 14

Interest rate derivative contracts Other noncurrent liabilities — — — 4

Total derivatives designated as hedges $ 408 $ 526

Derivatives not designated as hedges (a)

Fuel derivative contracts (gross) Prepaid expenses and other current assets $ 26 $ — $ 29 $ —

Total derivatives $ 579 $ 696 $ 29 $ 4

(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.

See discussion of credit risk and collateral following in this Note.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

Balance Sheet September 30, December 31,

Balance Sheet March 31, December 31,

(in millions) location 2023 2022

7 unchanged sentences

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

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

As of March 31, 2023, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

The Company has the following recognized financial assets and financial liabilities resulting from those transactions that meet the scope of the disclosure requirements as necessitated by applicable accounting guidance for balance sheet offsetting:

2 unchanged sentences

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

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 $ 397 $ ( 125 ) (b)

$ 272 $ 409 $ ( 80 ) $ 329

Fuel derivative contracts Prepaid expenses and other current assets $ 228 $ ( 65 ) $ 163 $ 352 $ ( 106 ) $ 246

Fuel derivative contracts Other assets $ 167 $ ( 11 ) $ 156 (a) $ 160 $ — $ 160 (a)

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(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 8.

(b) Includes the current portion of cash collateral deposits held from counterparties and derivative liability associated with fuel contracts.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Offsetting of derivative liabilities

1 unchanged sentence

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

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

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 $ 125 $ ( 125 ) (b)

$ — $ 80 $ ( 80 ) $ —

Fuel derivative contracts Other assets $ 38 $ ( 38 ) $ — (a) $ 95 $ ( 95 ) $ — (a)

Interest rate derivative contracts Other noncurrent liabilities $ — $ — $ — $ 4 $ — $ 4

(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 9.

(b) Includes the current portion of cash collateral deposits held from counterparties and derivative liability associated with fuel contracts.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

Fuel derivative contracts Prepaid expenses and other current assets $ 65 $ ( 65 ) $ — $ 106 $ ( 106 ) $ —

Fuel derivative contracts Other assets $ 11 $ ( 11 ) $ — $ — $ — $ —

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2023 and 2022:

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

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

Three months ended March 31, 2023 Three months ended March 31, 2022

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

2 unchanged sentences

Commodity contracts:

Amount of (gain) loss reclassified from AOCI into income ( 195 ) — 2 —

Interest contracts:

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

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

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

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

Total $ ( 703 ) $ — $ 5 $ 30 $ 6 $ 4

(Gain) loss on cash flow hedging relationships

Commodity contracts:

Amount of (gain) loss reclassified from AOCI into income ( 703 ) — — 30 6 —

Amount of (gain) reclassified from AOCI into income ( 28 ) — ( 203 ) —

Interest contracts:

3 unchanged sentences

Three months ended

September 30,

(in millions) 2023 2022

5 unchanged sentences

Notes to Condensed Consolidated Financial Statements

Derivatives designated and qualified in cash flow hedging relationships

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

Nine months ended

September 30,

(in millions) 2022 2021

Fuel derivative contracts $ ( 438 ) $ ( 402 )

Interest rate derivatives ( 14 ) ( 5 )

Total $ ( 452 ) $ ( 407 )

Derivatives not designated as hedges

(Gain) loss recognized in income on derivatives

Three months ended Location of gain recognized in income on derivatives

September 30,

(in millions) 2022 2021

Fuel derivative contracts $ ( 38 ) $ 3 Other (gains) losses, net

Derivatives not designated as hedges

(Gain) loss recognized in income on derivatives

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

September 30,

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

(in millions) 2023 2022

Fuel derivative contracts $ — $ 34 Other (gains) losses, net

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

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three months ended March 31, 2023 and 2022.

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

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

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

Premium (benefit) expense recognized in income on derivatives

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

September 30,

(in millions) 2022 2021

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

Fuel derivative contracts not designated as hedges ( 14 ) 11 Other (gains) losses, net

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Premium (benefit) expense recognized in income on derivatives

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

September 30,

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

Premium expense recognized in income on derivatives

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

(in millions) 2023 2022

Fuel derivative contracts designated as hedges $ 30 $ 26 Fuel and oil

Fuel derivative contracts not designated as hedges ( 14 ) 32 Other (gains) losses, net

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

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

Included in the Company’s cumulative unrealized gains from fuel hedges as of March 31, 2023, recorded in AOCI, were approximately $ 75 million in unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to March 31, 2023.

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.

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.

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 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.

All 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.

Credit Risk and Collateral

3 unchanged sentences

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

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

At March 31, 2023, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating.

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

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

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

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of March 31, 2023, at which such postings are triggered:

Counterparty (CP)

15 unchanged sentences

(d) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

COMPREHENSIVE INCOME (LOSS)

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

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

Three months ended September 30,

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

The differences between Net loss and Comprehensive income (loss) for the three months ended March 31, 2023 and 2022 were as follows:

Three months ended March 31,

(in millions) 2023 2022

NET INCOME $ 277 $ 446

NET LOSS $ ( 159 ) $ ( 278 )

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

4 unchanged sentences

COMPREHENSIVE INCOME (LOSS) $ ( 306 ) $ 225

Nine months ended September 30,

(in millions) 2022 2021

NET INCOME $ 759 $ 909

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

deferred taxes of ($ 31 ) and $ 131

Unrealized gain on interest rate derivative instruments, net of

deferred taxes of $ 5 and $ 2

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

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

COMPREHENSIVE INCOME $ 676 $ 1,300

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

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

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

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

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

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

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

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

Changes in fair value 571 18 — ( 137 ) 452

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

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

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

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

Three months ended September 30, 2022

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

AOCI components

Unrealized (gain) on fuel derivative instruments $ ( 195 ) Fuel and oil expense

$ ( 150 ) Net of tax

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

$ 2 Net of tax

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

Nine months ended September 30, 2022

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

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three months ended March 31, 2023:

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

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

Changes in fair value ( 163 ) ( 2 ) — 38 ( 127 )

Reclassification to earnings ( 28 ) 2 — (a) 6 ( 20 )

Balance at March 31, 2023 $ 114 $ ( 32 ) $ 170 $ ( 55 ) $ 197

The following table illustrates the significant amounts reclassified out of each component of AOCI for the three months ended March 31, 2023:

Three months ended March 31, 2023

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

AOCI components

Unrealized (gain) on fuel derivative instruments $ ( 28 ) Fuel and oil expense

( 164 ) Less:

$ ( 22 ) Net of tax

6 unchanged sentences

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

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

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

The following table provides the components of Passenger revenue recognized for the three months ended March 31, 2023 and 2022:

Three months ended March 31,

(in millions) 2023 2022

3 unchanged sentences

Total passenger revenues $ 5,105 $ 4,135

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

As of March 31, 2023, and December 31, 2022, the components of Air traffic liability, including contract liabilities based on tickets sold and unused flight credits available to the Customer, both of which are net of recorded breakage, and loyalty points available for redemption, within the unaudited Condensed Consolidated Balance Sheet were as follows:

Balance as of

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

(in millions) March 31, 2023 December 31, 2022

Air traffic liability - passenger travel and ancillary passenger services $ 4,007 $ 3,061

2 unchanged sentences

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

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

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

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

2022 2021 2022 2021

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 three months ended March 31, 2023 and 2022 were as follows (in millions):

Three months ended March 31,

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

4 unchanged sentences

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

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

Rollforwards of the amounts included in Air traffic liability as of March 31, 2023 and 2022 were as follows (in millions):

Air traffic liability

3 unchanged sentences

Revenue from current period sales ( 2,557 )

Balance at September 30, 2022 $ 8,425

Balance at March 31, 2023 $ 9,197

Air traffic liability

3 unchanged sentences

Revenue from current period sales ( 2,272 )

Balance at September 30, 2021 $ 8,236

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

See Note 2 for further information.

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

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

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

Balance at March 31, 2022 $ 8,610

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

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

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

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

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

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

The performance obligations classified as a current liability related to the Company’s loyalty program were estimated based on expected redemptions utilizing historical redemption patterns, and forecasted flight availability and fares.

The entire balance classified as Air traffic liability—noncurrent relates to loyalty points that were estimated to be redeemed in periods beyond the twelve months following the representative balance sheet date.

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.

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-brand Chase ® Visa credit card, but also include commissions and advertising associated with Southwest.com ® .

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

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

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

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

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

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

These taxes and fees include foreign and U.S.

federal transportation taxes, federal security charges, and airport passenger facility charges.

These items are collected from Customers at the time they purchase their tickets, are excluded from the contract transaction price, and are therefore not included in Passenger revenue.

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

NET INCOME PER SHARE

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

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

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

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

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

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

2022 2021 2022 2021

Net income $ 277 $ 446 $ 759 $ 909

Interest expense 5 (a) — 17 (a) —

Net income attributable to common stockholders 282 446 776 909

Weighted-average shares outstanding, basic 593 592 593 591

Dilutive effects of Convertible Notes 45 (a) 14 (b) 49 (a) 17 (b)

Dilutive effect of stock warrants — 1 — 1

Dilutive effect of restricted stock units 1 — 1 1

Adjusted weighted-average shares outstanding, diluted 639 607 643 610

NET INCOME PER SHARE:

Customer flight credits represents approximately 7 percent and 9 percent of the total Air traffic liability balance at March 31, 2023, and December 31, 2022, respectively.

For the three months ended March 31, 2023 and 2022, the Company recognized $ 521 million and $ 486 million, respectively.

NET LOSS PER SHARE

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

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.

Three months ended March 31,

Net loss $ ( 159 ) $ ( 278 )

Interest expense — —

Net loss attributable to common stockholders ( 159 ) ( 278 )

Weighted-average shares outstanding, basic and diluted 594 592

NET LOSS PER SHARE:

Basic $ ( 0.27 ) $ ( 0.47 )

Diluted $ ( 0.27 ) $ ( 0.47 )

(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 three and nine months ended September 30, 2022, all shares issuable on conversion were included in the denominator.

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

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

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

Antidilutive amounts excluded from calculations:

Convertible debt 42 47

Restricted stock units 3 —

Stock warrants 1 —

FAIR VALUE MEASUREMENTS

4 unchanged sentences

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

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

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

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

However, the Company has certificates of deposit, commercial paper, and time deposits that are classified as Level 2, due to the fact that the fair value for these instruments is determined utilizing observable inputs in non-active markets.

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

As of March 31, 2023, 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), interest rate derivative

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

contracts, fuel derivative contracts, and available-for-sale securities.

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

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

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

18 unchanged sentences

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

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

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

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

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2023, and December 31, 2022:

Fair value measurements at reporting date using:

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

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

Description March 31, 2023 (Level 1) (Level 2) (Level 3)

Assets (in millions)

13 unchanged sentences

Total assets $ 12,318 $ 10,849 $ 1,074 $ 395

Fuel derivatives:

Option contracts (b) $ ( 29 ) $ — $ — $ ( 29 )

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

7 unchanged sentences

Commercial paper 179 — 179 —

Certificates of deposit 23 — 23 —

Time deposits 250 — 250 —

1 unchanged sentence

Treasury bills 2,226 2,226 — —

Certificates of deposit 124 — 124 —

Time deposits 450 — 450 —

1 unchanged sentence

Option contracts (b) 512 — — 512

Interest rate derivatives (see Note 3) 14 — 14 —

Equity Securities 235 235 — —

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

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

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

3 unchanged sentences

Notes to Condensed Consolidated Financial Statements

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

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

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2023, or the year ended December 31, 2022.

The following table presents the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2023:

Fair value measurements using significant unobservable inputs (Level 3)

(in millions) Fuel derivatives

Balance at June 30, 2022 $ 1,127

Balance at December 31, 2022 $ 512

Total gains (losses) for the period

Included in earnings 38 (a)

Included in other comprehensive income ( 163 )

Purchases 52 (b)

Purchases 104 (a)

Settlements ( 58 )

Balance at September 30, 2022 $ 536

The amount of total gains for the period

included in earnings attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, 2022

Balance at March 31, 2023 $ 395

The amount of total losses for the period

1 unchanged sentence

change in unrealized gains or losses relating

to assets still held at September 30, 2022

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

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

Fair value measurements using significant unobservable inputs (Level 3)

(in millions) Fuel derivatives

Balance at December 31, 2021 $ 696

Total gains for the period

Included in earnings 23 (a)

Included in other comprehensive income 571

Purchases 25 (b)

Settlements ( 779 )

Balance at September 30, 2022 $ 536

The amount of total gains for the period

included in earnings attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, 2022

The amount of total gains for the period

included in other comprehensive income attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, 2022

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

to assets still held at March 31, 2023

(a) 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.

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 Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

Quantitative information about Level 3 fair value measurements

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

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

Fuel derivatives Option model Implied volatility Second quarter 2023 26 - 42 %

Third quarter 2023 32 - 43 %

Fourth quarter 2023 34 - 42 %

2024 31 - 42 %

1 unchanged sentence

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

The carrying amounts and estimated fair values of the Company’s short-term and long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, at September 30, 2022, are presented in the table below.

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

3 unchanged sentences

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

2.75 % Notes due November 2022

$ 300 $ 300 Level 2

1.25 % Convertible Notes due 2025

12 unchanged sentences

500 427 Level 2

1.000 % PSP1 due 2030

1.000 % PSP1 Loan due 2030

976 866 Level 3

1.000 % PSP2 due 2031

1.000 % PSP2 Loan due 2031

566 487 Level 3

1.000 % PSP3 due 2031

1.000 % PSP3 Loan due 2031

526 448 Level 3

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

SUPPLEMENTAL FINANCIAL INFORMATION

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

(in millions) March 31, 2023 December 31, 2022

Trade receivables $ 64 $ 117

1 unchanged sentence

Business partners and other suppliers 545 478

Taxes receivable (a) 233 699

Taxes receivable 129 133

Fuel hedging and receivables 15 34

Other 312 193

Accounts and other receivables $ 1,250 $ 1,040

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

(in millions) March 31, 2023 December 31, 2022

Derivative contracts $ 169 $ 174

Intangible assets, net 295 296

Equity securities 236 261

Other 198 124

Other assets $ 898 $ 855

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

(in millions) March 31, 2023 December 31, 2022

Accounts payable trade $ 272 $ 277

Salaries payable 250 287

Taxes payable excluding income taxes 212 200

Salaries, withholdings and payroll taxes 368 456

Ticket taxes and fees 434 242

Aircraft maintenance payable 91 65

Fuel payable 113 188

Dividends payable — 107

Customer reimbursements and refunds (a) 17 311

Accrued third party services 240 196

Other payable 194 162

Accounts payable $ 1,729 $ 2,004

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(in millions) March 31, 2023 December 31, 2022

Voluntary Separation Program $ 69 $ 72

5 unchanged sentences

Interest 164 45

Deferred supplier payments (b) — 80

Bonus and incentive pay (c) 330 150

Bonus and incentive pay (b) 626 563

Other 224 250

Accrued liabilities $ 2,118 $ 2,043

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

(in millions) March 31, 2023 December 31, 2022

Voluntary Separation Program $ 125 $ 147

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Other noncurrent liabilities $ 936 $ 969

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

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

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

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

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

(a) This amount includes customer reimbursement expenses due to the Company's December 2022 operational disruption and refund submissions that had yet to be processed.

(b) 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 3.

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 exceeded 10 percent of Operating expenses.

COMMITMENTS AND CONTINGENCIES

Dallas Love Field

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.

Major construction was effectively completed in 2014.

During second quarter 2017, the City of Dallas approved using the remaining bond funds for additional terminal construction projects, which were effectively completed in 2018.

Although the City of Dallas received commitments from various sources that helped to fund portions of the LFMP project, including the Federal Aviation Administration ("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 the 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 unaudited Condensed Consolidated Balance Sheet.

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

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

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

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

Contractual Obligations and Contingent Liabilities and Commitments

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

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

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

Hobby Airport

In March 2022, the Company executed a Memorandum of Agreement ("MOA") 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 MOA, the Company will manage the development, design, and construction of seven new gates in Hobby's West Concourse.

The project is currently estimated to be completed in 2025 or 2026 at a cost of at least $ 250 million, based on initial projections.

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 should 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.

Based on the MOA, as well as a terminal lease amendment expected to be finalized prior to the beginning of significant construction, the Company has determined that it does not control the assets during the construction

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

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

Based on recent discussions with Boeing regarding the pace of expected deliveries for the remainder of this year, the Company continues to estimate it will receive a total of 66 -8 aircraft deliveries in 2022, including 31 -8 deliveries in fourth quarter 2022, and no -7 deliveries in 2022.

period for accounting purposes, and thus will record the amounts funded for the project as a receivable until reimbursed by the City, and the balance is derecognized.

Contractual Obligations and Contingent Liabilities and Commitments

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

During first quarter 2023, the Company exercised 15 -7 options for delivery in 2024 and converted 11 2024 -7 firm orders to -8 firm orders.

The delivery schedule below reflects commitments, although the timing of future deliveries is uncertain.

For purposes of the delivery schedule below, the Company has included the remaining 46 of its 2022 contractual undelivered aircraft within its 2023 commitments, and has not made any further adjustments to this schedule based on current estimations.

The Company now expects it will receive approximately 70 -8 aircraft deliveries in 2023.

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

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

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

Additional information regarding the Company's order book is included in the following table as of March 31, 2023:

The Boeing Company

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2030 — 55 — 55

2030 15 45 — 60

2031 — 10 — 10

186 (a) 246 (b) 132 564

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

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

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

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

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

(c) Includes 35 -8 deliveries received through September 30, 2022, and 31 expected -8 deliveries in fourth quarter 2022, for a total of 66 -8 deliveries in 2022.

While the Company is contractually scheduled to receive 114 MAX deliveries, including options, this year, a portion of its deliveries are expected to shift out of 2022 due to Boeing's supply chain challenges and the current status of the -7 certification.

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

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

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

Contingencies

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

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

On June 30, 2022, the U.S.

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

Virgin America, Inc.

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

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

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

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

In addition, the Company has included the remaining 46 of its 2022 contractual undelivered aircraft ( 14 -7s and 32 -8s) within its 2023 commitments.

Due to Boeing's supply chain challenges and the current status of the -7 certification, the Company currently estimates approximately 70 -8 aircraft deliveries in 2023.

The 2023 detail is as follows:

The Boeing Company

Firm Orders -8

Firm Orders Total

2022 Contractual Deliveries Remaining 14 32 46

2023 Contractual Deliveries 17 73 90

2023 Total 31 105 136

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 awaiting achievement of the FAA's certification of the -7, for which Southwest expects to be the launch customer.

Therefore, for purposes of the Company’s aircraft

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

order commitments with Boeing, the Company 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 revise the aircraft order book.

Based on the Company's existing agreement with Boeing, capital commitments associated with its firm orders as of March 31, 2023, were:

$ 1.6 billion in 2023 (of which approximately $ 956 million relates to 46 MAX aircraft that were contractually committed for 2022 but were not received), $ 1.5 billion in 2024, $ 993 million in 2025, $ 1.4 billion in 2026, $ 1.1 billion in 2027, $ 1.3 billion in 2028, and $ 4.5 billion thereafter.

Subsequent to March 31, 2023 and through April 27, 2023, the Company has exercised 11 -7 options for delivery in 2024, and converted eight 2024 -7 firm orders to -8 firm orders, resulting in the Company's 2024 capital commitments increasing to $ 1.7 billion.

Contingencies

Based on the wide-scale operational disruption for the Company, which 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.

The Company could also face monetary damages or other costs resulting from litigation initiated by Customers and/or Shareholders.

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

The Company is a defendant in class action litigation asserting it has not provided paid short-term military leave to certain employees, in violation of the federal Uniformed Services Employment and Reemployment Rights Act (“USERRA”).

The United States District Court for the Northern District of California previously issued an order to effectively stay the action, pending an appeal from an order by the United States District Court for the Eastern District of Washington granting summary judgment in favor of an airline in a separate case involving substantially the same claims at issue in this action.

On February 1, 2023, the Ninth Circuit reversed the district court’s grant of summary judgment and remanded the separate airline case to the District Court.

The Ninth Circuit’s decision may adversely affect the Company’s defenses in the USERRA proceeding and may give rise to additional litigation in this or other areas.

The Company is currently not able to estimate a range of possible loss with regards to the litigation to which it is a defendant.

FINANCING ACTIVITIES

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

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.

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

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 unaudited Condensed Consolidated Balance Sheet as of March 31, 2023.

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.

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 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).

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

The liability component was determined by estimating the fair value of a hypothetical issuance of an identical offering excluding the conversion feature of the Convertible Notes.

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.

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) September 30, 2022 December 31, 2021

Equity component:

Carrying amount of Convertible Notes $ — $ 311

Carrying amount of issuance costs — ( 11 )

Net carrying amount $ — $ 300

Liability component:

Principal amount $ 1,611 $ 2,097

Unamortized debt discount — ( 255 )

Net carrying amount $ 1,611 $ 1,842

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

The initial conversion rate was 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 dividends paid in January 2023 and March 2023, the bond conversion rate changed to 26.1250 on January 9, 2023,

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

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

and changed to 26.2650 on March 7, 2023.

The net carrying amount and principal amount of the Convertible Notes was $ 1.6 billion as of March 31, 2023 and December 31, 2022.

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

Three months ended March 31,

(in millions) 2023 2022

Non-cash amortization of the debt discount $ — $ 19 $ — $ 55

Non-cash amortization of debt issuance costs 3 3

2 unchanged sentences

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

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

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

During the three and nine months ended September 30, 2022, the Company paid $ 1.9 billion and $ 2.5 billion, respectively, in debt and finance lease obligations, which included scheduled debt and lease payments, partial extinguishment of Convertible Notes, and the early prepayment of debt.

The following tables present the impact of the partial extinguishment of the Company's Convertible Notes and early prepayment of debt (excluding payments on finance leases), including $ 1.3 billion in prepayments for all of the Company's outstanding 4.75 % Notes due 2023, within the unaudited Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2022:

Three months ended September 30, 2022

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

1.25 % Convertible Notes due 2025

$ 240 $ 184 $ 59 $ ( 3 ) $ —

5.125 % Notes due 2027

149 143 3 1 2

4.75 % Notes due 2023

1,274 1,247 8 — 19

5.25 % Notes due 2025

227 217 6 — 4

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

Nine months ended September 30, 2022

The Company had no changes to contingencies during the three months ended March 31, 2023.

The effective interest rate associated with the Convertible Notes was approximately 1.9 percent for the three months ended March 31, 2023.

The following table presents the impact of the partial extinguishment of the Company's Convertible Notes and early prepayment of debt (excluding payments on finance leases) for the three months ended March 31, 2022.

No such instances of partial extinguishment or early prepayment of debt occurred for the three months ended March 31, 2023.

Three months ended March 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

2 unchanged sentences

5.125 % Notes due 2027

209 199 6 2 2

4.75 % Notes due 2023

1,278 1,250 9 — 19

5.25 % Notes due 2025

228 218 6 — 4

Total $ 264 $ 194 $ 72 $ ( 3 ) $ 1

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

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

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

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

For the three months ended March 31, 2023 and 2022, there were no amounts outstanding under the Amended A&R Credit Agreement.

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 was purchased, the Company relieved its related lease liability but continues to recognize the cost of the aircraft within Property and equipment in the unaudited Condensed Consolidated Balance Sheet.

As of March 31, 2023, the Company had completed the purchase of all 39 aircraft, including the 31 aircraft purchased in 2022.

The Company paid the lessor $ 88 million as part of this transaction for the remaining eight aircraft in first quarter 2023, of which $ 50 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 unaudited Condensed Consolidated Statement of Cash Flows.

The remaining $ 38 million was the net purchase price of the aircraft and is included as part of the Company’s Capital expenditures for the three months ended March 31, 2023.

The Company has 28 finance leased aircraft remaining.

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

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

What changed 10-Q

Item 1. Financial Statements