What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-28 compared with 2022-10-31 · 248 added, 499 removed, 228 unchanged (77% of the section changed)

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

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

Relevant comparative operating statistics for the three months ended March 31, 2023 and 2022 are included below.

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

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

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

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

Three months ended September 30,

2022 2021 2022 Change to 2021 2019 2022 Change to 2019

Revenue passengers carried (000s) 34,434 29,303 17.5 % 33,538 2.7 %

Enplaned passengers (000s) 43,157 36,534 18.1 % 41,098 5.0 %

Revenue passenger miles (RPMs) (in millions) (a)

33,534 31,285 7.2 % 32,889 2.0 %

Available seat miles (ASMs) (in millions) (b)

39,272 38,756 1.3 % 39,379 (0.3) %

Load factor (c)

85.4 % 80.7 % 4.7 pts.

83.5 % 1.9 pts.

Average length of passenger haul (miles) 974 1,068 (8.8) % 981 (0.7) %

Average aircraft stage length (miles) 711 808 (12.0) % 737 (3.5) %

Trips flown 351,218 306,173 14.7 % 348,237 0.9 %

Seats flown (000s) (d)

54,609 47,544 14.9 % 52,441 4.1 %

Seats per trip (e)

155.5 155.3 0.1 % 150.6 3.3 %

Average passenger fare $ 163.01 $ 144.24 13.0 % $ 155.95 4.5 %

Passenger revenue yield per RPM (cents) (f)

16.74 13.51 23.9 % 15.90 5.3 %

Operating revenues per ASM (cents) (g)

15.84 12.07 31.2 % 14.32 10.6 %

Passenger revenue per ASM (cents) (h)

14.29 10.91 31.0 % 13.28 7.6 %

Operating expenses per ASM (cents) (i)

14.83 10.18 45.7 % 12.24 21.2 %

Operating expenses per ASM, excluding fuel (cents) 10.38 7.63 36.0 % 9.47 9.6 %

Operating expenses per ASM, excluding fuel and profitsharing (cents) 10.23 7.43 37.7 % 9.11 12.3 %

Fuel costs per gallon, including fuel tax $ 3.39 $ 2.01 68.7 % $ 2.07 63.8 %

Fuel costs per gallon, including fuel tax, economic $ 3.34 $ 2.04 63.7 % $ 2.07 61.4 %

Fuel consumed, in gallons (millions) 515 491 4.9 % 524 (1.7) %

Active fulltime equivalent Employees (j)

64,123 53,984 18.8 % 60,590 5.8 %

Aircraft at end of period (k)

742 737 0.7 % 752 (1.3) %

Nine months ended September 30,

2022 2021 2022 Change to 2021 2019 2022 Change to 2019

Three months ended March 31,

2023 2022 Change

Revenue passengers carried (000s) 30,231 26,029 16.1 %

6 unchanged sentences

77.6 % 77.0 % 0.6 pts.

83.7 % (0.3) pts.

Average length of passenger haul (miles) 977 1,017 (3.9) %

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Fuel consumed, in gallons (millions) 483 436 10.8 %

Active fulltime equivalent Employees (j)

64,123 53,984 18.8 % 60,590 5.8 %

Aircraft at end of period (k)

Active fulltime equivalent Employees 69,868 58,865 18.7 %

Aircraft at end of period (j)

793 722 9.8 %

14 unchanged sentences

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

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

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

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

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

(j) Included four Boeing 737 Next Generation aircraft in storage as of March 31, 2023 and March 31, 2022.

Financial Overview

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

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

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

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

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

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

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 primarily in the form of reimbursing Customers for costs incurred as a result of the flight cancellations.

The Company estimates the financial impact of this disruption on the first quarter 2023 results was approximately $380 million on a pre-tax basis.

During and immediately following the disruption, the Company took measures to mitigate the risk of a recurrence, including:

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

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

• Updating and upgrading the Company's Crew optimization software;

• Implementing organizational changes designed to improve coordination and communication between the Company's operating teams.

In addition, the Company conducted a thorough internal review, working with its Board of Directors, and engaged aviation consultancy Oliver Wyman for a third-party assessment.

As a result of the Company's review and Oliver Wyman's assessment, the Company has developed a three-part tactical action plan to boost operational resiliency in key areas across the Company:

• Improve Winter Operations:

The Company plans to reinforce airport infrastructure, increase available equipment, and bolster overall winter preparedness at key airports where there is potential for severe winter weather in order to help its Employees function more effectively in severe weather.

Additionally, the Company plans to (i) increase available equipment to manage the effects of winter weather such as deicing trucks, pads, and ground equipment;

(ii) increase storage capacity of deicing fluid at key airports;

(iii) add engine covers and heaters to protect aircraft and ground equipment in very low temperatures;

(iv) implement new tools that provide Pilots additional real-time insight into the amount of time they have to depart after an aircraft has been deiced;

and (v) add staff at airports where extreme cold requires rotating Ground Operations Employees working outside.

• Accelerate Operational Investments:

The Company is currently budgeted to spend more than $1.3 billion on investments, upgrades, and maintenance of information technology systems in 2023 and is reprioritizing its timeline for upgrading tools and technology to assist the Company recover its operations faster during extreme winter weather.

• Enhance Cross-Team Collaboration:

The Company is enhancing collaboration across Teams and improving the tools and procedures to streamline communication and decision-making, and has already consolidated the Team that designs the flight schedule with the Team overseeing the day-to-day operations into one Department.

No assurance can be given that these efforts to boost operational resiliency in key areas across the Company will be successful.

See "Risk Factors – The airline industry is made up of inherently complex systems, and is affected by many conditions that are beyond its control, which can impact the Company's business strategies and results of operations" included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

The Company recorded first quarter results for 2023 and 2022 on an accounting principles generally accepted in the United States ("GAAP") and non-GAAP basis, as noted in the following table.

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

Three months ended September 30,

(in millions, except per share amounts)

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

Operating income $ 395 $ 733 (46.1) % $ 819 (51.8) %

Net income $ 277 $ 446 (37.9) % $ 659 (58.0) %

Net income per share, diluted $ 0.44 $ 0.73 (39.4) % $ 1.23 (64.0) %

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

$ 819 (48.1) %

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

$ 659 (52.0) %

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

$ 1.23 (59.0) %

Nine months ended September 30,

Three months ended March 31,

(in millions, except per share amounts)

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

Operating income $ 1,402 $ 1,526 (8.1) % $ 2,292 (38.8) %

Net income $ 759 $ 909 (16.5) % $ 1,787 (57.5) %

Net income per share, diluted $ 1.21 $ 1.49 (18.9) % $ 3.29 (63.3) %

Operating income (loss) $ 1,463 $ (1,490) n.m.

$ 2,292 (36.2) %

Net income (loss) $ 950 $ (1,356) n.m.

$ 1,787 (46.8) %

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

$ 3.29 (54.2) %

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

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

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

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

GAAP 2023 2022 2023 Change to 2022

Operating loss $ ( 284 ) $ ( 151 ) 88.1 %

Net loss $ ( 159 ) $ ( 278 ) (42.8) %

Net loss per share, diluted $ ( 0.27 ) $ ( 0.47 ) (42.6) %

Operating loss $ (284) $ (135) 110.4

Net loss $ (163) $ (191) (14.7)

Net loss per share, diluted $ (0.27) $ (0.32) (15.6)

The comparison of the Company's financial results, as shown above on a GAAP and non-GAAP basis for the three months ended March 31, 2023, versus the three months ended March 31, 2022, reflect the effects of the Omicron variant of COVID-19, which reduced travel demand and created staffing challenges for the Company, particularly during January and February 2022, as well as the previously mentioned Winter Storm Elliott and the Company's December 2022 operational disruption.

On a GAAP basis, the Company's results for the three months ended March 31, 2022 also included a $ 72 million loss on extinguishment of debt due to the repurchase of the Company's Convertible Senior Notes (the "Convertible Notes").

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

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

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

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

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

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

2Q 2023 Estimation

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

ASMs compared with 2019 (b) Down ~2%

RASM (a), year-over-year Down 8% to 11%

ASMs (b), year-over-year Up ~14%

Economic fuel costs per gallon (c)(d) $2.45 to $2.55

2 unchanged sentences

ASMs per gallon (fuel efficiency) 78 to 80

CASM-X (e) compared with 2019 (f) Up 14% to 18%

CASM-X (e), year-over-year (f) Up 5% to 8%

Scheduled debt repayments (millions) ~$10

1 unchanged sentence

2023 Estimation

ASMs compared with 2019 (b) Down ~4.5%

ASMs (b), year-over-year Up 14% to 15%

Economic fuel costs per gallon (c)(d) $2.60 to $2.70

1 unchanged sentence

Fuel hedging cash settlement gains per gallon $0.10

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

Scheduled debt repayments (billions) ~$2.6

CASM-X (e), year-over-year (f) Down 2% to 4%

Scheduled debt repayments (millions) ~$85

Interest expense (millions) ~$250

2 unchanged sentences

Capital spending (billions) (h) ~$3.5

(a) The Company believes that operating revenues compared with 2019 is a relevant measure of performance due to the significant impacts in 2020 and 2021 from the pandemic.

(a) Operating revenue per available seat mile (RASM, or unit revenues).

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

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

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

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

The Company's flight schedule is currently published for sale through November 4, 2023.

The Company currently expects third quarter 2023 capacity to increase in the range of 11 percent to 13 percent, and fourth quarter 2023 capacity to increase in the range of 20 percent to 22 percent, both year-over-year.

Included in the Company's updated capacity guidance is a decrease in previously planned year-over-year capacity as a result of delivery delays at Boeing, planned in the post-summer time period from September through December 2023.

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

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

Economic fuel cost projections do not reflect the potential impact of special items because the Company cannot reliably predict or estimate the hedge accounting impact associated with the volatility of the energy markets, the impact of COVID-19 cases on air travel

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

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

(d) Based on the Company's existing fuel derivative contracts and market prices as of April 19, 2023, second quarter and full year 2023 economic fuel costs per gallon are estimated to be in the range of $2.45 to $2.55 and $2.60 to $2.70, respectively.

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

See Note Regarding Use of Non-GAAP Financial Measures.

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

(e) Operating expenses per available seat mile, excluding fuel and oil expense, special items, and profitsharing (CASM-X).

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

1 unchanged sentence

(g) Aircraft on property, end of period.

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

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

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

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

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

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

Furthermore, given the current ongoing status of the -7 certification and pace of expected deliveries for the remainder of this year, it is the Company's assumption that it will receive no -7 aircraft deliveries in 2022, and that the remaining 48 MAX aircraft reflected in its 2022 contractual order book will shift out of 2022.

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

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

COVID-19 Pandemic Impacts

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

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

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

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

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

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

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

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

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

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

Due to delivery delays, the Company now estimates approximately 70 Boeing 737 MAX 8 ("-8") aircraft deliveries in 2023, compared with its previous guidance of approximately 90 -8 aircraft deliveries.

The Company now expects to retire 26 Boeing 737-700 ("-700") aircraft in 2023, compared with its previous guidance to retire 27 -700 aircraft.

As a result, the Company now expects to end 2023 with 814 aircraft.

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

The FAA will ultimately determine the timing of the -7 certification and entry into service, and Boeing may continue to experience supply chain challenges, so the Company therefore offers no assurances that current estimations and timelines are correct.

(h) The Company now estimates its 2023 capital spending to be approximately $3.5 billion, which assumes approximately 70 -8 aircraft deliveries, compared with its previous 2023 capital spending estimate of approximately $4.0 billion, which assumed approximately 90 -8 aircraft deliveries.

The Company now estimates its full year 2023 aircraft spending to be approximately $2.3 billion, compared with its previous guidance of approximately $2.8 billion, and continues to estimate its full year 2023 non-aircraft capital spending to be approximately $1.2 billion.

The Company's second quarter 2023 RASM guidance includes a headwind of approximately four and a half points, year-over-year.

This headwind is driven by approximately $300 million of additional breakage revenue in second quarter 2022—a higher-than-normal amount related to flight credits issued during the pandemic that were set to expire unused—and the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits, which resulted in the percentage of breakage revenue normalizing to historical levels beginning in third quarter 2022.

Flight credits that never expire, along with Rapid Rewards points that never expire, are industry-leading, Customer-friendly policies.

The current booking curve appears to have returned close to pre-pandemic norms, and leisure demand and yields continue to be strong heading into the busy summer travel season.

While March 2023 managed business revenues largely recovered to March 2019 levels, the Company expects corporate revenue trends to continue to be choppy as Customer travel patterns evolve post-pandemic.

However, the Company continues to expect further sequential recovery in managed business revenues in second quarter 2023 compared with first quarter 2023, driven by anticipated growth in corporate accounts and passengers.

The Company recently selected the Amadeus Network Revenue Management product as its new revenue management system provider—slightly ahead of the mid-2023 implementation timing outlined at the Company's 2022 Investor Day.

The Company was pleased with initial observations during the production pilot and is excited about the potential for incremental revenue, driven primarily by improved science in forecasting and network optimization.

The Amadeus product is now fully implemented and is currently managing all bookings and departure dates.

The Company expects second quarter 2023 CASM-X to increase in the range of 5 percent to 8 percent, year-over-year.

In addition to general inflationary cost pressures, the year-over-year increase is primarily due to higher labor rates, including market wage rate accruals, for all Employee work groups, as well as the timing of planned maintenance expenses for the Company's Boeing 737-800 ("-800") fleet.

The Company currently expects its full year 2023 CASM-X to decrease in the range of 2 percent to 4 percent, year-over-year.

Company Overview

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

See Note 10 to the unaudited Condensed Consolidated

Financial Statements for further information.

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

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

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

While the Company remains contractually scheduled to receive 114 MAX deliveries this year, the Company continues to expect a portion of its deliveries to shift out of 2022 due to Boeing's supply chain challenges and the current status of the -7 certification, and that aircraft delivery delays are currently expected to extend into 2024.

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

The Company now expects to retire 26 -700 aircraft in 2022, including 5 -700 retirements in fourth quarter 2022.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The newly ratified agreement becomes amenable in July 2027.

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

The ratification vote is scheduled to conclude in December 2022.

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

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

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

A companion piece

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

For the three months ended March 31, 2023, the Company hired approximately 2,900 Employees, net of attrition.

The Company's number of active full-time equivalent Employees increased by 18.7 percent from March 31, 2022 to March 31, 2023, while the year-over-year increase in capacity or ASMs was 10.7 percent.

The Company has made additional investments to attract and retain talent, including raising the Company's starting hourly pay rates for certain of its workgroups, subject, in each case, to acceptance of such change by the applicable union.

On January 31, 2023, the Company's 50 Facilities Maintenance Technicians, represented by the Aircraft Mechanics Fraternal Association ("AMFA"), ratified a new four-year collective bargaining agreement with the Company.

The newly ratified agreement becomes amendable in November 2027.

On February 4, 2023, the Company's more than 400 Dispatchers, represented by the Transportation Workers of America, AFL-CIO, Local 550 ("TWU 550"), ratified a new four-year collective bargaining agreement with the Company.

The newly ratified agreement becomes amendable in June 2027.

On April 19, 2023, the Company reached a tentative collective-bargaining agreement with TWU 550, which represents the Company's 12 Meteorologists.

The ratification vote is scheduled to conclude by April 30, 2023.

If the tentative agreement is ratified, it will become amendable in June 2028.

The Company ended first quarter 2023 with 793 Boeing 737 aircraft, including 167 -8 aircraft.

During first quarter 2023, the Company retired seven -700 aircraft, took delivery of 30 -8 aircraft, and completed the purchase of eight finance lease -700 aircraft.

While the Company was contractually scheduled to receive 114 MAX deliveries in 2022, a portion of these deliveries shifted out of 2022 due to Boeing's supply chain challenges and the current status of the -7 certification, and aircraft delivery delays extended into 2023.

As a result, the Company now expects to end 2023 with 814 aircraft.

For information about potential impacts resulting from prolonged delays related to the 737 MAX family of aircraft, see "Risk Factors – Operational Risks" included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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

See Note 9 to the unaudited Condensed Consolidated Financial Statements for further

The Company expects that more than half of the MAX aircraft in its firm order book will replace a significant amount of its 419 -700 aircraft over the next 10 to 15 years to support the modernization of the Company's fleet, a key component of its environmental sustainability efforts.

The Company's order book with Boeing as of March 31, 2023 consists of a total of 432 MAX firm orders ( 186 -7 aircraft and 246 -8 aircraft) for the years 2023 through 2030 and 132 MAX options (-7s or -8s) for the years 2024 through 2027.

Additionally in April 2023, the Company exercised 11 -7 options for delivery in 2024.

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

The Company has published its flight schedule through November 4, 2023.

However, the Company is expected to publish updated flight schedules for post-summer 2023 in light of the recently announced aircraft delivery delays from Boeing.

Despite the delays, the Company continues to expect its network to be roughly restored to pre-pandemic levels by the end of this year.

The Company remains focused on maturing new markets that launched during the pandemic and shifting capacity growth to restoring core markets.

As part of its commitment to corporate sustainability, the Company is expected to publish its 2022 One Report describing the Company's sustainability strategies on May 3, 2023, which include the Company’s fuel conservation and emissions mitigation initiatives and other efforts to minimize greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling.

The Company also is expected to publish its Diversity, Equity, and Inclusion ("DEI") Report on May 3, 2023.

A companion piece to the One Report, the DEI Report takes a deeper dive into the Company's DEI goals and initiatives and highlights the Company's DEI plans for the future.

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

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

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

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

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

Material Changes in Results of Operations

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

Comparison of three months ended March 31, 2023 and March 31, 2022

Operating Revenues

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

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

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

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

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

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

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

Total operating revenues for first quarter 2023 increased by $1.0 billion, or 21.6 percent, year-over-year, to achieve a first quarter record of $5.7 billion.

First quarter 2023 operating revenues per ASM (RASM) were 14.99 cents, an increase of 9.8 percent, compared with first quarter 2022.

The dollar increase was primarily due to an improvement in leisure and business travel demand in first quarter 2023 versus first quarter 2022.

For first quarter 2023, the year-over-year RASM increase was primarily driven by an increase in yield of 10.6 percent coupled with an increase in Load factor of 0.6 points.

Passenger revenues for first quarter 2023 increased by $970 million, or 23.5 percent, year-over-year.

On a unit basis, Passenger revenues increased 11.5 percent, year-over-year.

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

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

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

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

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

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

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

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

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

Other revenues for first quarter 2023 increased by $43 million, or 8.3 percent, compared with first quarter 2022.

On a dollar basis, approximately 45 percent of the increase was due to revenue from Chase Bank USA, N.A ("Chase"), as the rebound in travel demand also resulted in higher spend on the Company's co-brand credit card, and approximately 35 percent of the increase was due to higher rates earned with business partners in first quarter 2023.

Operating Expenses

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

Approximately 40 percent of the

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

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

Operating expenses for first quarter 2023 increased by $1.1 billion, or 23.6 percent, compared with first quarter 2022, while capacity increased 10.7 percent over the same prior year period.

Approximately 47.4 percent of the dollar increase was due to higher Fuel and oil expense and 21.7 percent of the increase was due to higher Salaries, wages, and benefits.

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

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

Three months ended September 30, Per ASM

The following table presents the Company's Operating expenses per ASM for the first quarter of 2023 and 2022, followed by explanations of these changes on a dollar basis.

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

Three months ended March 31, Per ASM

change Percent

1 unchanged sentence

Salaries, wages, and benefits 6.51 ¢ 6.48 ¢ 0.03 ¢ 0.5 %

Payroll support and voluntary Employee programs, net — (2.00) 2.00 n.m.

Fuel and oil 4.07 2.92 1.15 39.4

4 unchanged sentences

Total 15.74 ¢ 14.09 ¢ 1.65 ¢ 11.7 %

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Operating expenses per ASM for first quarter 2023 increased by 11.7 percent, compared with first quarter 2022, primarily due to a significant increase in the Company's fuel cost per gallon, and higher Salaries, wages, and benefits.

Operating expenses per ASM for first quarter 2023, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 5.9 percent, compared with first quarter 2022 primarily due to continued inflationary cost pressures, in particular with higher labor rates, including market wage rate accruals, for all Employee work groups, increased technology spending, and higher rates for airport and benefits costs.

The remainder of the increase was driven primarily by operational disruption-related expenses, including travel expense reimbursements to Customers and an increase in the expected redemption rate of Rapid Rewards points offered as a gesture of goodwill to Customers.

Salaries, wages, and benefits expense for first quarter 2023 increased by $249 million, or 11.2 percent, compared with first quarter 2022.

On a per ASM basis, first quarter 2023 Salaries, wages, and benefits expense increased 0.5 percent, compared with first quarter 2022.

On a dollar basis, approximately 65 percent of the increase was driven by an increase in capacity and number of trips flown, and 20 percent of the increase was due to step/pay rate increases for certain workgroups, which included open labor contract accruals.

Fuel and oil expense for first quarter 2023 increased by $543 million, or 54.1 percent, compared with first quarter 2022.

On a per ASM basis, first quarter 2023 Fuel and oil expense increased 39.4 percent.

On a dollar basis, approximately 80 percent of the increase was attributable to an increase in the Company's average economic jet fuel cost per gallon, and the remainder of the increase was due to an increase in fuel gallons consumed.

The Company's first quarter 2023 average economic jet fuel price of $3.19 per gallon is net of approximately $58 million in cash settlements from hedging activities.

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

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

Three months ended September 30,

Three months ended March 31,

Economic fuel costs per gallon $ 3.19 $ 2.30

3 unchanged sentences

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

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

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

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

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

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

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

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

The Company's first quarter 2023 available seat miles per gallon ("fuel efficiency") decreased 0.1 percent, year-over-year, due to network restoration, which includes bringing back additional short-haul flights, adding pressure to fuel efficiency.

However, continued deliveries of the Company's most fuel-efficient aircraft, the MAX, are expected to offset this pressure and remain critical to the Company's efforts to modernize its fleet, reduce carbon emissions intensity, and achieve its near-term environmental sustainability goals.

The Company's multi-year fuel hedging program continues to provide insurance against spikes in energy prices and significantly offset the market price increase, year-over-year, in jet fuel in first quarter 2023.

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

The economic fuel price per gallon sensitivities provided in the table below assume the relationship between Brent crude oil and refined products based on market prices as of April 19, 2023.

Estimated economic fuel price per gallon,

4 unchanged sentences

$70 $2.15 - $2.25 $2.40 - $2.50

$80 $2.35 - $2.45 $2.60 - $2.70

Current Market (a) $2.45 - $2.55 $2.60 - $2.70

2 unchanged sentences

$110 $3.00 - $3.10 $3.05 - $3.15

Fair market value $189 million

Estimated premium costs $13 million

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

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

Fair market value $70 million $262 million

Estimated premium costs $30 million $121 million

(a) Brent crude oil average market prices as of April 19, 2023, were $83 and $82 per barrel for second quarter and full year 2023, respectively.

(b) Based on the Company's existing fuel derivative contracts and market prices as of April 19, 2023, second quarter and full year 2023 economic fuel costs per gallon are estimated to be in the range o f $2.45 to $2.55 and $2.60 to $2.70, respectively .

3 unchanged sentences

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

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

The Company is currently 51 percent hedged for second quarter 2023 and 48 percent hedged for second half 2023.

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

2 unchanged sentences

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

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

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

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

The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties—see Note 3 to the unaudited Condensed Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI at March 31, 2023, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

Year Fair value of fuel derivative contracts at March 31, 2023

Amount of gains (losses) deferred in AOCI at March 31, 2023 (net of tax)

Remainder of 2023 $ 187 $ 74

Total $ 395 $ 87

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other expenses (income)

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

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

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

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

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

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

Three months ended September 30,

(in millions) 2022 2021

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

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

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

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

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

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

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

Operating Revenues

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

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

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

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

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

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

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

Operating Expenses

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

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

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

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

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

Nine months ended September 30, Per ASM Percent

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

Salaries, wages, and benefits 6.11 ¢ 5.78 ¢ 0.33 ¢ 5.7 %

Payroll support and voluntary Employee programs, net — (3.11) 3.11 n.m.

Fuel and oil 3.95 2.38 1.57 66.0

Maintenance materials and repairs 0.56 0.68 (0.12) (17.6)

Landing fees and airport rentals 1.02 1.15 (0.13) (11.3)

Depreciation and amortization 0.89 1.00 (0.11) (11.0)

Other operating expenses 2.10 1.79 0.31 17.3

Total 14.63 ¢ 9.67 ¢ 4.96 ¢ 51.3 %

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On a per ASM basis, the increase was primarily due to higher jet fuel prices.

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

Nine months ended September 30,

Economic fuel costs per gallon $ 3.03 $ 1.92

Fuel hedging premium expense (in millions) $ 65 $ 75

Fuel hedging premium expense per gallon $ 0.05 $ 0.06

Fuel hedging cash settlement gains per gallon $ 0.54 $ 0.02

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Maintenance materials and repairs expense for first quarter 2023 increased by $29 million, or 13.7 percent, compared with first quarter 2022.

On a per ASM basis, Maintenance materials and repairs expense increased 3.3 percent, compared with first quarter 2022.

On a dollar and per ASM basis, the increase was primarily due to an increase in engine shop visits and various other engine repairs.

Landing fees and airport rentals expense for first quarter 2023 increased by $62 million, or 17.9 percent, compared with first quarter 2022.

On a per ASM basis, Landing fees and airport rentals expense increased 5.9 percent, compared with first quarter 2022.

On a dollar and per ASM basis, the increase was primarily due to higher rental and landing fee rates throughout the network, partially offset by higher settlements received from various airports in first quarter 2023.

Depreciation and amortization expense for first quarter 2023 increased by $41 million, or 12.7 percent, compared with first quarter 2022.

On a per ASM basis, Depreciation and amortization expense increased by 2.1 percent, compared with first quarter 2022.

On a dollar and per ASM basis, approximately 70 percent of the increase was primarily due to the acquisition of 98 -8 aircraft since first quarter 2022, and the remaining increase was primarily due to decreasing the airframe salvage value for the entire -700 fleet, which was a change in estimate made near the end of third quarter 2022.

This change in estimate was not material to first quarter 2023, nor is it expected to be material to future periods.

Other operating expenses for first quarter 2023 increased by $221 million, or 30.2 percent, compared with first quarter 2022.

Included within this line item was aircraft rentals expense in the amounts of $50 million and $48 million for the three-month periods ended March 31, 2023 and 2022, respectively.

On a per ASM basis, Other

operating expenses increased 17.4 percent, compared with first quarter 2022.

On a dollar and per ASM basis, approximately 40 percent of the increase was due to higher interrupted trip expense driven by costs associated with the December 2022 operational disruption, approximately 15 percent was due to higher personnel expenses driven by an increase in Crew overnights associated with the increase in capacity, approximately 10 percent of the increase was due to higher professional fees driven by an increase in technology spending, and the majority of the remainder of the year-over-year increase was due to various flight-driven expenses.

Other expenses (income)

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

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

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

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

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

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

Nine months ended September 30,

Interest expense for first quarter 2023 decreased by $27 million, or 29.0 percent, compared with first quarter 2022, primarily due to various debt repurchases since first quarter 2022.

Interest income for first quarter 2023 increased by $122 million, compared with first quarter 2022, primarily due to higher interest rates earned on the Company's cash and short-term investments.

Loss on extinguishment of debt for first quarter 2023 decreased by $72 million compared with first quarter 2022, primarily due to the partial extinguishment of the Company's Convertible Notes in first quarter 2022, compared to none in first quarter 2023.

The following table displays the components of Other (gains) losses, net, for the three months ended March 31, 2023 and 2022:

Three months ended March 31,

(in millions) 2023 2022

Mark-to-market impact from fuel contracts settling in current and future periods $ — $ 34

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

Unrealized mark-to-market adjustment on available for sale securities (4) 5

Mark-to-market impact on deferred compensation plan investment 84 (17)

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

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

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

Mark-to-market impact on deferred compensation plan investments (10) 33

The Company's effective tax rate was 22.0 percent in first quarter 2023, compared with 26.1 percent in first quarter 2022.

The year-over-year decline in the tax rate was primarily due to the absence of losses on convertible debt repurchases, which were largely disallowed as a tax deduction in 2022.

The Company currently estimates its annual 2023 effective tax rate to be in the range of 23 percent to 24 percent.

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

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

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

2022 2021 Change 2022 2021 Change

Three months ended March 31, Percent

2023 2022 Change

Fuel and oil expense, unhedged $ 1,575 $ 1,207

1 unchanged sentence

Fuel hedge gains included in Fuel and oil expense, net (58) (229)

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

Add (Deduct):

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

Add (Deduct):

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

Fuel and oil expense, excluding special items (economic) $ 1,724 $ 1,006 71.4 $ 4,364 $ 2,312 88.8

Fuel and oil expense, as reported (economic) $ 1,547 $ 1,004 54.1

Total operating expenses, net, as reported $ 5,990 $ 4,845

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

Add (Deduct):

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

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

Add (Deduct):

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

Impairment of long-lived assets — $ (16)

Total operating expenses, excluding special items $ 5,990 $ 4,829 24.0

Fuel and oil expense, excluding special items (economic) (1,724) (1,006) (4,364) (2,312)

Fuel and oil expense, as reported (economic) (1,547) (1,004)

Operating expenses, excluding Fuel and oil expense and special items $ 4,443 $ 3,825 16.2

1 unchanged sentence

Operating expenses, excluding Fuel and oil expense, special items, and profitsharing $ 4,443 $ 3,788 17.3

Operating income, as reported $ 395 $ 733 $ 1,402 $ 1,526

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

Add (Deduct):

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

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

Add (Deduct):

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

Operating loss, as reported $ (284) $ (151)

Impairment of long-lived assets — 16

Operating income (loss), excluding special items $ 425 $ (59) n.m.

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

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

2022 2021 Change 2022 2021 Change

Operating loss, excluding special items $ (284) $ (135) 110.4

Other (gains) losses, net, as reported $ (14) $ 72

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current and future periods (a) — (34)

Add (Deduct):

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

Unrealized mark-to-market adjustment on available for sale securities 4 (5)

Other (gains) losses, net, excluding special items $ (10) $ 33 n.m.

$ 87 $ (70) n.m.

Income before income taxes, as reported $ 353 $ 600 $ 1,013 $ 1,248

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

Add (Deduct):

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

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

Add (Deduct):

Loss before income taxes, as reported $ (205) $ (376)

Mark-to-market impact from fuel contracts settling in current and future periods (a) — 34

Impairment of long-lived assets — 16

Add (Deduct):

Unrealized mark-to-market adjustment on available for sale securities (4) 5

Loss on extinguishment of debt — 72

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

$ 1,236 $ (1,730) n.m.

Provision for income taxes, as reported $ 76 $ 154 $ 254 $ 339

Add (Deduct):

Net income (loss) tax impact of fuel and special items (b) 15 (185) 32 (713)

Provision (benefit) for income taxes, net, excluding special items $ 91 $ (31) n.m.

$ 286 $ (374) n.m.

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

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

Add (Deduct):

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

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

Add (Deduct):

Loss before income taxes, excluding special items $ (209) $ (249) (16.1)

Benefit for income taxes, as reported $ (46) $ (98)

Net loss tax impact of fuel and special items (b) — 40

Benefit for income taxes, net, excluding special items $ (46) $ (58) (20.7)

Net loss, as reported $ (159) $ (278)

Mark-to-market impact from fuel contracts settling in current and future periods (a) — 34

Loss on extinguishment of debt — 72

Impairment of long-lived assets 4 — 35 —

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

Add (Deduct):

Net income (loss) tax impact of special items (b) (15) 185 (32) 713

Net income (loss), excluding special items $ 316 $ (135) n.m.

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

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

2022 2021 Change 2022 2021 Change

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

Add (Deduct):

Unrealized mark-to-market adjustment on available for sale securities (4) 5

Net loss tax impact of special items (b) — (40)

Impairment of long-lived assets — 16

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

Net loss, excluding special items $ (163) $ (191) (14.7)

Three months ended March 31, Percent

2023 2022 Change

Net loss per share, diluted, as reported $ (0.27) $ (0.47)

Impact of special items — 0.16

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

Add (Deduct):

Net income (loss) tax impact of special items (b) (0.02) 0.30 (0.06) 1.17

GAAP to Non-GAAP diluted weighted average shares difference (c) — (0.01) — (0.07)

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

$ 1.51 $ (2.29) n.m.

Net impact of net loss above from fuel contracts divided by dilutive shares — 0.06

Net loss tax impact of special items (b) — (0.07)

Net loss per share, diluted, excluding special items $ (0.27) $ (0.32) (15.6)

Operating expenses per ASM (cents) 15.74 ¢ 14.09 ¢

Add (Deduct):

Impact of special items — (0.04)

4 unchanged sentences

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

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

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

Note Regarding Use of Non-GAAP Financial Measures

7 unchanged sentences

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

Operating income (loss), non-GAAP;

Operating loss, non-GAAP;

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

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

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

Net income (loss), non-GAAP;

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

Loss before income taxes, non-GAAP;

Benefit for income taxes, net, non-GAAP;

Net loss, non-GAAP;

Net loss per share, diluted, non-GAAP;

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

2 unchanged sentences

Any net premium costs paid related to option contracts that are designated as hedges are reflected as a component of Fuel and oil expense, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement.

The Company believes these economic results provide further insight into the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude any unrealized, noncash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense.

The Company believes these economic results provide further insight into the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, noncash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense.

This enables the Company's management, as well as investors and analysts, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense.

5 unchanged sentences

For the periods presented, in addition to the items discussed above, special items include:

Proceeds related to the Payroll Support programs, which were used to pay a portion of Employee salaries, wages, and benefits;

Charges and adjustments to previously accrued amounts related to the Company's extended leave programs;

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

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

1 unchanged sentence

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

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

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

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

These losses are also now presented as a separate line item in the unaudited Condensed

Consolidated Statement of Comprehensive Income (Loss), rather than its prior presentation where it was included as a component of Other (gains) losses, net.

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

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

4 unchanged sentences

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

Operating income (loss), non-GAAP;

Operating loss, non-GAAP;

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

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

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

Net income (loss), non-GAAP;

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

Loss before income taxes, non-GAAP;

Benefit for income taxes, net, non-GAAP;

Net loss, non-GAAP;

Net loss per share, diluted, non-GAAP;

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

Liquidity and Capital Resources

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

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

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

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

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

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

Net cash provided by operating activities for the three months ended March 31, 2023 was $706 million, and net cash provided by operating activities for the three months ended March 31, 2022 was $1.1 billion.

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

1 unchanged sentence

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

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

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

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

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

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

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

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

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

The operating cash flows for the three months ended March 31, 2023, were largely impacted by the Company's net income (as adjusted for noncash items), a $947 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, a $215 million decrease due to the payment of Customer reimbursement expenses related to the December 2022 operational disruption, a $127 million decrease due to the funding of the Company's ProfitSharing Plan contribution for 2022, and a $106 million decrease related to the purchase of fuel derivative instruments, which is included within Other, net operating cash flows in the accompanying unaudited Condensed Consolidated Statement of Cash Flows.

The operating cash flows for the three months ended March 31, 2022 included an $885 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, and included a $385 million increase in cash collateral received from derivative counterparties due to an increase in the value of the Company's fuel hedge portfolio, driven by increases in the forward curve year-to-date.

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

Net cash used in investing activities for the three months ended March 31, 2023 was $1.6 billion, and net cash used in investing activities for the three months ended March 31, 2022 was $139 million.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

During the three months ended March 31, 2023, Capital expenditures were $1.0 billion, compared with $510 million in the same prior year period.

Based on anticipated aircraft delivery delays from Boeing, the Company now expects it will receive approximately 70 -8 aircraft deliveries in 2023.

Due to these recent changes to expected 2023 aircraft deliveries, the Company now estimates its 2023 capital spending to be approximately $3.5 billion.

This assumes approximately $2.3 billion in aircraft capital spending, and continues to assume approximately $1.2 billion in non-aircraft capital spending, which includes tens of millions in operational disruption-related investments.

Net cash used in financing activities for the three months ended March 31, 2023 was $262 million, and net cash used in financing activities for the three months ended March 31, 2022 was $314 million.

The Company paid $214 million in cash dividends to Shareholders and repaid $59 million in finance lease obligations during first quarter 2023.

The Company may engage in early debt repurchases from time to time and some of these early future repurchases are not included in the Company's current maturities of long-term debt.

The Company's 2023 total debt repayments are expected to be $85 million.

During the three months ended March 31, 2022, the Company repaid $323 million in debt and finance lease obligations, including the early extinguishment of $164 million in principal of its Convertible Notes for a cash payment of $230 million.

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

1 unchanged sentence

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

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

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

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

At the Company's current ratings, the interest cost would be SOFR plus a credit spread adjustment of 10 basis points plus 200 basis points.

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

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

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

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

There were no amounts outstanding under the Amended A&R Credit Agreement as of March 31, 2023.

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

Although not the case at March 31, 2023 due to the Company's significant financing activities throughout the early stages of the pandemic, the Company has historically carried a working capital deficit, in which its current liabilities

exceed its current assets.

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

See Note 5 to the unaudited Condensed Consolidated Financial Statements for further information.

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

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

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

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

The Company believes it has various options available to meet its capital and operating commitments, including unrestricted cash and short-term investments of $11.7 billion as of March 31, 2023, and anticipated future internally generated funds from operations.

In addition, the Company continues to maintain a large base of unencumbered assets and investment-grade credit ratings by all three major credit agencies (Moody's, S&P Global, and Fitch).

As of March 31, 2023, the Company's total firm and option order book with Boeing was 564 aircraft.

See Note 9 to the unaudited Condensed Consolidated Financial Statements for further information.

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

The following table details information on the aircraft in the Company's fleet as of March 31, 2023:

Age (Yrs) Number

7 unchanged sentences

Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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

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

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

Revenue Recognition

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

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

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

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

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

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

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

Unused flight credits are the primary source of breakage.

Breakage estimates are based on historical experience over many years.

Fully refundable tickets rarely go unused.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cautionary Statement Regarding Forward-Looking Statements

This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act").

Forward-looking statements are based on, and include statements about, the Company's estimates, expectations, beliefs, intentions, and strategies for the future, and the assumptions underlying these forward-looking statements.

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

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

• the Company’s expectations with respect to steps taken to mitigate the risk of an operational disruption recurrence;

• the Company’s expectations associated with its tactical action plan to boost operational resiliency, including with respect to expected benefits and planned expenditures;

• the Company’s financial guidance for second quarter and full year 2023 and factors that could impact the Company’s financial results;

• the Company’s capacity guidance;

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

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

• the Company’s expectations regarding passenger demand, revenue trends, and bookings, including with respect to managed business revenues and the potential benefits of a new revenue management system;

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

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

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

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

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Factors that could cause these differences include, among others:

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

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

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

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

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

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

• the impact of fuel price changes, fuel price volatility, volatility of commodities used by the Company for hedging jet fuel, and any changes to the Company’s fuel hedging strategies and positions on the Company's business plans and results of operations;

• the Company's ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives;

• the Company's dependence on other third parties, in particular with respect to its technology plans, its tactical action plans and expectations related to operational resiliency, its fuel supply, Global Distribution Systems, and the impact on the Company's operations and results of operations of any third party delays or non-performance;

• the Company's ability to obtain and maintain adequate infrastructure and equipment to support its operations and initiatives;

• the emergence of additional costs or effects associated with the December 2022 operational disruption, including litigation, government investigation and actions, and internal actions;

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

• any further negative developments related to the COVID-19 pandemic, including, for example, with respect to (i) the duration, spread, severity, or any recurrence of the COVID-19 pandemic or any new variant strains of the underlying virus;

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

(iii) the impact

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

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

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

and (v) the impact of the COVID-19 pandemic on the Company's access to capital;

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

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

• the Company's ability to timely and effectively implement, transition, and maintain the necessary information technology systems and infrastructure to support its operations and initiatives;

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

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

• other factors as set forth in the Company's filings with the Securities and Exchange Commission (the "SEC"), including the detailed factors discussed under the heading “Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

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

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What changed 10-Q

Item 2. Management’s Discussion and Analysis