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Item 2. Management’s Discussion and Analysis

2023-07-28 compared with 2023-04-28 · 319 added, 205 removed, 271 unchanged (66% of the section changed)

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

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

Relevant comparative operating statistics for the three and six months ended June 30, 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.

Three months ended March 31,

Three months ended June 30,

2023 2022 Change

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803 730 10.0 %

Six months ended June 30,

2023 2022 Change

Revenue passengers carried (000s) 65,947 59,253 11.3 %

Enplaned passengers (000s) 82,452 73,289 12.5 %

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

65,052 59,006 10.2 %

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

80,641 71,706 12.5 %

Load factor (c)

80.7 % 82.3 % (1.6) pts.

Average length of passenger haul (miles) 986 996 (1.0) %

Average aircraft stage length (miles) 722 745 (3.1) %

Trips flown 699,210 614,599 13.8 %

Seats flown (000s) (d)

110,622 95,305 16.1 %

Seats per trip (e)

158.2 155.1 2.0 %

Average passenger fare $ 174.60 $ 173.06 0.9 %

Passenger revenue yield per RPM (cents) (f)

17.70 17.38 1.8 %

Operating revenues per ASM (cents) (g)

15.80 15.93 (0.8) %

Passenger revenue per ASM (cents) (h)

14.28 14.30 (0.1) %

Operating expenses per ASM (cents) (i)

15.17 14.52 4.5 %

Operating expenses per ASM, excluding fuel (cents) 11.51 10.84 6.2 %

Operating expenses per ASM, excluding fuel and profitsharing (cents) 11.36 10.68 6.4 %

Fuel costs per gallon, including fuel tax $ 2.88 $ 2.86 0.7 %

Fuel costs per gallon, including fuel tax, economic $ 2.88 $ 2.86 0.7 %

Fuel consumed, in gallons (millions) 1,021 923 10.6 %

Active fulltime equivalent Employees 71,299 62,289 14.5 %

Aircraft at end of period (j)

803 730 10.0 %

(a) A revenue passenger mile is one paying passenger flown one mile.

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

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

(j) Included three and four Boeing 737 Next Generation aircraft in storage as of June 30, 2023 and June 30, 2022, respectively.

Financial Overview

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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.

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

There were no material impacts to operating revenues or expenses for the three months ended June 30, 2023, as a result of this disruption.

To boost operational resiliency in key areas across the Company and to mitigate the risk of a recurrence, the Company developed a three-part tactical action plan focused on improving winter operations, accelerating operational-related investments, and enhancing cross-team collaboration.

The Company's action plan was released in March 2023.

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

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.

The Company recorded second quarter and year-to-date 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 tables.

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 March 31,

Three months ended June 30,

(in millions, except per share amounts)

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").

Operating income $ 795 $ 1,158 (31.3) %

Net income $ 683 $ 760 (10.1) %

Net income per share, diluted $ 1.08 $ 1.20 (10.1) %

Operating income $ 807 $ 1,173 (31.2)

Net income $ 693 $ 825 (16.0)

Net income per share, diluted $ 1.09 $ 1.30 (16.2)

The Company's financial results for the three months ended June 30, 2023, on a GAAP and non-GAAP basis, decreased compared to the same prior year period primarily due to higher salaries, wages, and benefits expense.

Additionally, the same prior year period included approximately $300 million of additional breakage revenue driven by higher than normal flight credits issued during the pandemic that were set to expire unused, prior to the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits.

The percentage of breakage revenue normalized to historical levels beginning in third quarter 2022.

Six months ended June 30,

(in millions, except per share amounts)

GAAP 2023 2022 2023 Change to 2022

Operating income $ 511 $ 1,007 (49.3) %

Net income $ 524 $ 482 8.7 %

Net income (loss) per share, diluted $ 0.84 $ 0.77 9.8 %

Operating income $ 523 $ 1,038 (49.6) %

Net income $ 530 $ 633 (16.3) %

Net income per share, diluted $ 0.85 $ 1.00 (15.0) %

The Company's financial results, as shown above on a GAAP and non-GAAP basis, for the six months ended June 30, 2023 included a negative financial impact of approximately $380 million on a pre-tax basis related to the December 2022 operational disruption.

The same prior year period included additional breakage revenue driven by higher than normal flight credits issued during the pandemic that were set to expire unused, prior to the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits.

The percentage of breakage revenue normalized to historical levels beginning in third quarter 2022.

This additional revenue for the six months ended June 30, 2022 was partially offset by the effects of the Omicron variant of COVID-19, which reduced travel demand, particularly during January and February 2022.

Operating income for the first six months ended June 30, 2023 also decreased compared to the same prior year period primarily due to higher salaries, wages, and benefits expense, partially offset by higher interest income.

On a GAAP basis, the Company's results for the six months ended June 30, 2022 also included a $116 million loss on extinguishment of debt due to the repurchase of a portion 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.

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

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

3Q 2023 Estimation

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ASMs per gallon (fuel efficiency) 79 to 80

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

CASM-X (c)(e), year-over-year (f) Up 3.5% to 6.5%

Scheduled debt repayments (millions) ~$8

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Fuel hedging cash settlement gains per gallon $0.09

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

CASM-X (c)(e), year-over-year (f) Down 1% to 2%

Scheduled debt repayments (millions) ~$83

2 unchanged sentences

Effective tax rate 23% to 24%

Capital spending (billions) (h) ~$3.5

Capital spending (billions) ~$3.5

(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 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.

The Company's flight schedule is currently published for sale through March 6, 2024.

The Company continues to expect fourth quarter 2023 capacity to increase in the range of 20 percent to 22 percent, year-over-year, and currently expects first quarter 2024 capacity to increase in the range of 14 percent to 16 percent, year-over-year, of which nearly 90 percent is from the carryover effect of capacity growth in 2023.

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.

(d) Based on the Company's existing fuel derivative contracts and market prices as of July 19, 2023, third quarter, fourth quarter, and full year 2023 economic fuel costs per gallon are estimated to be in the range of $2.55 to $2.65, $2.50 to $2.60, and $2.70 to $2.80, respectively.

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

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(g) Aircraft on property, end of period.

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 Company continues to plan for approximately 70 Boeing 737-8 ("-8") aircraft deliveries and 26 Boeing 737-700 ("-700") aircraft retirements in 2023, ending the year with 814 aircraft.

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

The FAA will ultimately determine the timing of the -7 certification and entry into service, and 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.

Thus far, the Company has experienced strong leisure demand and yields for July travel.

Based on current booking and revenue trends, the Company anticipates a third quarter 2023 RASM decline of 3 percent to 7 percent, year-over-year, driven by challenging comparisons from the pent-up travel demand surge in 2022, and higher than seasonally-normal growth, as the Company works to close out the restoration of the network and normalizes the utilization of the fleet.

The Company expects third quarter 2023 CASM-X to increase in the range of 3.5 percent to 6.5 percent, year-over-year, primarily due to continued inflationary cost pressures, including higher labor rates for all Employee workgroups and increased market wage rate accruals.

Overall, nominal cost trends are expected to remain fairly consistent sequentially from second quarter 2023.

The Company currently expects its full year 2023 CASM-X to decrease in the range of 1 percent to 2 percent, year-over-year.

Company Overview

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.

For the six months ended June 30, 2023, the Company hired approximately 4,400 Employees, net of attrition.

The Company's number of active full-time equivalent Employees increased by 14.4 percent from June 30, 2022 to June 30, 2023, primarily to support the Company's restoration of its flight schedule after emerging from the pandemic, as well as the year-over-year growth in capacity.

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.

On April 30, 2023, the Company's 12 Meteorologists, represented by the Transportation Workers Union Local 550 (“TWU 550”), ratified a new five-year collective bargaining agreement with the Company.

The newly ratified agreement becomes amendable in May 2028.

On July 27, 2023, the Company's 2,865 Mechanics & Related Employees, represented by the Aircraft Mechanics Fraternal Association ("AMFA"), voted to ratify a four-year contract extension with the Company.

The newly ratified agreement becomes amendable in August 2027.

The Company ended second quarter 2023 with 803 Boeing 737 aircraft, including 188 -8 aircraft.

During second quarter 2023, the Company retired 11 -700 aircraft and took delivery of 21 -8 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.

As a result, the Company continues to expect 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

See Note 9 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 408 -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.

The Company's order book with Boeing as of June 30, 2023, consists of a total of 462 MAX firm orders (192 -7 aircraft and 270 -8 aircraft) for the years 2023 through 2030 and 102 MAX options (-7s or -8s) for the years 2025 through 2027.

The Company is working to reflow its order book with Boeing in a way that provides orderly and measured growth in 2024 and beyond.

The Company has published its flight schedule for sale through March 6, 2024.

Although the Company's network is largely restored, it is not yet optimized.

The Company is working to align its network, fleet plans, and staffing to better reflect the current business environment.

While business revenues continue to recover, they are not back to pre-pandemic levels—therefore, the Company is revamping its 2024 flight schedules to reflect post-pandemic changes to Customer travel patterns.

The Company estimates these meaningful network optimization efforts and the continued maturation of its development markets will contribute roughly $500 million in incremental year-over-year pre-tax profits in 2024, which the Company believes will support another year of margin expansion.

As part of its commitment to corporate sustainability, the Company published 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 published 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 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.

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 March 31, 2023 and March 31, 2022

Comparison of three months ended June 30, 2023 and June 30, 2022

Operating Revenues

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.

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.

Total operating revenues for second quarter 2023 increased by $309 million, or 4.6 percent, year-over-year, to achieve an all-time quarterly Company record of $7.0 billion.

The Company's Rapid Rewards® loyalty program also continues to be a point of strength, with record second quarter new Member additions, a record level of Member engagement, and record second quarter spend on the Company's co-branded Chase® Visa credit card.

Second quarter 2023 RASM was 16.53 cents, a decrease of 8.3 percent, compared with second quarter 2022.

This year-over-year RASM decrease was primarily driven by a decrease in yield of 4.0 percent coupled with a decrease in Load factor of 3.7 points.

The decrease in yield was primarily due to both the Company's and other domestic carriers' significant year-over-year capacity growth coming out of the pandemic to meet demand, and the Company's additional breakage revenue in second quarter 2022.

The higher breakage in second quarter 2022 was driven by higher than normal flight credits issued during the pandemic that were set to expire unused, prior to the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits.

The percentage of breakage revenue normalized to historical levels beginning in third quarter 2022.

Passenger revenues for second quarter 2023 increased by $290 million, or 4.7 percent, year-over-year.

Holding other factors constant, the increase was primarily due to a 14.1 percent increase in capacity and an improvement in leisure and business demand in second quarter 2023.

On a unit basis, Passenger revenues decreased 8.2 percent, year-over-year.

The decrease was largely driven by a 4.0 percent decrease in Passenger revenue yield as a result of the significant year-over-year capacity increases by the Company and other domestic carriers, as well as higher breakage amounts recorded in second quarter 2022, prior to the Company's policy change regarding the expiration of flight credits.

Other revenues for second quarter 2023 increased by $19 million, or 3.4 percent, compared with second quarter 2022.

On a dollar basis, the increase was primarily due to additional marketing revenue from Chase Bank USA, N.A ("Chase"), driven by improved retail spend on the Company's co-brand credit card.

Operating Expenses

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.

Operating expenses for second quarter 2023 increased by $672 million, or 12.1 percent, compared with second quarter 2022, while capacity increased 14.1 percent over the same prior year period.

The vast majority of the dollar increase was due to higher Salaries, wages, and benefits, partially offset by a year-over-year decrease in Fuel and oil expense.

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 quarter of 2023 and 2022, followed by explanations of these changes on a dollar basis.

The following table presents the Company's Operating expenses per ASM for the second 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

Three months ended June 30, Per ASM

change Percent

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Total 14.66 ¢ 14.92 ¢ (0.26) ¢ (1.7) %

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.

Operating expenses per ASM for second quarter 2023 decreased by 1.7 percent, compared with second quarter 2022, primarily due to a significant decrease in the Company's fuel cost per gallon.

Operating expenses per ASM for second quarter 2023, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 7.5 percent, compared with second quarter 2022, primarily due to general inflationary cost pressures, in particular higher labor rates for all Employee workgroups, including market wage rate accruals for open collective bargaining agreements, as well as the timing of planned maintenance expenses for the Company's Boeing 737-800 fleet.

Salaries, wages, and benefits expense for second quarter 2023 increased by $566 million, or 25.5 percent, compared with second quarter 2022.

On a per ASM basis, second quarter 2023 Salaries, wages, and benefits expense increased 10.1 percent, compared with second quarter 2022.

On a dollar basis, approximately 50 percent of the increase was due to step/pay rate increases for certain workgroups, including market wage rate accruals for open collective bargaining agreements, and approximately 25 percent of the increase was driven by an increase in capacity and/or number of trips flown.

Fuel and oil expense for second quarter 2023 decreased by $233 million, or 14.2 percent, compared with second quarter 2022.

On a per ASM basis, second quarter 2023 Fuel and oil expense decreased 24.9 percent.

On a dollar basis, the decrease was primarily attributable to a decrease in the Company's average economic jet fuel cost per gallon, partially offset by an increase in fuel gallons consumed.

The Company's second quarter 2023 average economic jet fuel price of $2.60 per gallon is net of approximately $45 million in cash settlements from hedging activities.

On a per ASM basis, the majority of the change was also due to lower 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 March 31,

Three months ended June 30,

Economic fuel costs per gallon $ 2.60 $ 3.36

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 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 second quarter 2023 available seat miles per gallon ("fuel efficiency") increased 3.3 percent, year-over-year, due to the Company operating more of its most fuel-efficient MAX aircraft within its fleet.

The continued deliveries of MAX aircraft are expected to 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 protection against spikes in energy prices.

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.

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

Estimated economic fuel price per gallon,

1 unchanged sentence

Average Brent Crude Oil

price per barrel 2Q 2023 2023

$60 $1.85 - $1.95 $2.20 - $2.30

price per barrel 3Q 2023 4Q 2023

$60 $2.00 - $2.10 $2.00 - $2.10

6 unchanged sentences

Estimated premium costs $30 million $30 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 .

(a) Brent crude oil average market prices as of July 19, 2023, was $79 per barrel for each of third quarter and fourth quarter 2023.

(b) Based on the Company's existing fuel derivative contracts and market prices as of July 19, 2023, third quarter, fourth quarter, and full year 2023 economic fuel costs per gallon are estimated to be in the range of $2.55 to $2.65, $2.50 to $2.60, and $2.70 to $2.80, respectively.

3 unchanged sentences

Period Maximum fuel hedged percentage (a)(b)

2026 Less than 10%

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

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

The Company is currently 49 percent hedged for third quarter 2023 and 47 percent hedged for fourth quarter 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 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)

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 as of June 30, 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 June 30, 2023

Amount of gains (losses) deferred in AOCI at June 30, 2023 (net of tax)

Remainder of 2023 $ 73 $ 15

2024 109 (38)

2025 113 (27)

2026 $ 21 $ —

Total $ 316 $ (50)

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.

Maintenance materials and repairs expense for second quarter 2023 increased by $61 million, or 29.0 percent, compared with second quarter 2022.

On a per ASM basis, Maintenance materials and repairs expense increased 14.3 percent, compared with second 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.

The majority of these increases are associated with the Company’s 737-800 fleet, as -800 aircraft emerge from their maintenance “honeymoon” period, during which the aircraft have required significantly lower levels of maintenance while in the early phases of their useful lives.

Landing fees and airport rentals expense for second quarter 2023 increased by $71 million, or 18.3 percent, compared with second quarter 2022.

On a per ASM basis, Landing fees and airport rentals expense increased 3.8 percent, compared with second quarter 2022.

On a dollar basis, approximately 50 percent of the increase was attributable to higher landing fees, primarily driven by the increase in trips flown and higher rates charged by airports.

The remainder of the increase was largely due to higher rental expense throughout the network, associated with both higher rates and additional space leased at airports.

Depreciation and amortization expense for second quarter 2023 increased by $42 million, or 12.9 percent, compared with second quarter 2022.

On a per ASM basis, Depreciation and amortization expense decreased by 1.1 percent, compared with second quarter 2022.

On a dollar basis, approximately 70 percent of the increase was primarily due to the acquisition of 107 -8 aircraft since second 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 in third quarter 2022.

This change in estimate was not material to second quarter 2023, nor is it expected to have a material impact on future periods.

Other operating expenses for second quarter 2023 increased by $165 million, or 20.9 percent, compared with second quarter 2022.

Included within this line item was aircraft rentals expense in the amounts of $49 million for each of the three-month periods ended June 30, 2023 and 2022.

On a per ASM basis, Other operating expenses increased 5.7 percent, compared with second quarter 2022.

On a dollar basis, approximately 20 percent of the increase was due to higher professional fees driven by an increase in technology spending, approximately 15 percent of the increase was due to higher personnel expenses driven by an increase in Crew overnights associated with the increase in capacity and inflationary pressure, and approximately 15 percent of the increase was due to higher advertising expenses.

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

Other expenses (income)

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,

Interest expense for second quarter 2023 decreased by $28 million, or 30.1 percent, compared with second quarter 2022, primarily due to various debt repurchases since second quarter 2022.

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

Capitalized interest for second quarter 2023 decreased by $6 million, or 54.5 percent, compared with second quarter 2022, primarily due to a significant amount of assets being placed into service since second quarter 2022, most notably the delivery of 21 -8 aircraft in second quarter 2023.

Interest income for second quarter 2023 increased by $116 million, compared with second quarter 2022, primarily due to higher interest rates earned on the Company's cash and short-term investments.

Loss on extinguishment of debt for second quarter 2023 decreased by $43 million compared with second quarter 2022, primarily due to the partial extinguishment of the Company's Convertible Notes in second quarter 2022, compared to none in second quarter 2023.

The following table displays the components of Other (gains) losses, net, for the three months ended June 30, 2023 and 2022:

Three months ended June 30,

(in millions) 2023 2022

2 unchanged sentences

Mark-to-market impact on deferred compensation plan investments (16) 39

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

The Company's effective tax rate was 22.9 percent in second quarter 2023, compared with 26.6 percent in second 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.

Comparison of six months ended June 30, 2023 and June 30, 2022

Operating Revenues

Passenger revenues for the six months ended June 30, 2023, increased by $1.3 billion, or 12.3 percent, compared with the first six months of 2022.

On a unit basis, Passenger revenues decreased 0.1 percent, year-over-year.

The dollar increase was primarily due to a 12.5 percent increase in capacity and improvement in leisure and business travel demand for the six months ended June 30, 2023 versus 2022.

For the six months ended June 30, 2023, the year-over-year Passenger revenue yield per ASM decrease was due to additional breakage revenue in the six months ended June 30, 2022, primarily driven by higher than normal flight credits issued during the pandemic that were set to expire unused, prior to the Company's July 2022 policy change to eliminate expiration dates on qualifying flight credits.

The percentage of breakage revenue normalized to historical levels beginning in third quarter 2022.

Other revenues for the six months ended June 30, 2023, increased by $63 million, or 5.8 percent, year-over-year.

On a dollar basis, the increase was primarily due to additional marketing revenue from Chase, driven by improved retail spend on the Company's co-brand credit card.

Operating Expenses

Operating expenses for the six months ended June 30, 2023, increased by $1.8 billion, or 17.4 percent, compared with the first six months of 2022, while capacity increased 12.5 percent over the same prior year period.

Approximately 45 percent of the increase was due to higher Salaries, wages, and benefits expense and approximately 17 percent of the increase was due to higher Fuel and oil expense.

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

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

Six months ended June 30, Per ASM Percent

(in cents, except for percentages) 2023 2022 change change

Salaries, wages, and benefits 6.53 ¢ 6.20 ¢ 0.33 ¢ 5.3 %

Fuel and oil 3.66 3.68 (0.02) (0.5)

Maintenance materials and repairs 0.63 0.59 0.04 6.8

Landing fees and airport rentals 1.08 1.02 0.06 5.9

Depreciation and amortization 0.91 0.90 0.01 1.1

Other operating expenses 2.36 2.13 0.23 10.8

Total 15.17 ¢ 14.52 ¢ 0.65 ¢ 4.5 %

Operating expenses per ASM for the first six months of 2023 increased by 4.5 percent, compared with the first six months of 2022.

The majority of the year-over-year unit cost increase was driven by higher Salaries, wages, and benefits expense.

Operating expenses per ASM for the first six months of 2023, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 6.8 percent, year-over-year.

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

Salaries, wages, and benefits expense for the first six months of 2023 increased by $814 million, or 18.3 percent, compared with the first six months of 2022.

On a per ASM basis, Salaries, wages, and benefits expense for the first six months of 2023 increased 5.3 percent, compared with the first six months of 2022.

On a dollar basis, approximately 50 percent of the increase was due to step/pay rate increases for certain workgroups, including market wage rate accruals for open collective bargaining agreements, and approximately 35 percent of the increase was driven by an increase in capacity and/or number of trips flown.

Fuel and oil expense for the first six months of 2023 increased by $310 million, or 11.7 percent, compared with the first six months of 2022.

On a per ASM basis, Fuel and oil expense for the first six months of 2023 decreased 0.5 percent.

On a dollar basis, the increase was primarily attributable to an increase in fuel gallons consumed.

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

Six months ended June 30,

Economic fuel costs per gallon $ 2.88 $ 2.86

Fuel hedging premium expense (in millions) $ 61 $ 53

Fuel hedging premium expense per gallon $ 0.06 $ 0.06

Fuel hedging cash settlement gains per gallon $ 0.11 $ 0.61

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

Maintenance materials and repairs expense for the first six months of 2023 increased by $91 million, or 21.7 percent, compared with the first six months of 2022.

On a per ASM basis, Maintenance materials and repairs expense increased 6.8 percent, compared with the first six months of 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 the first six months of 2023 increased by $134 million, or 18.3 percent, compared with the first six months of 2022.

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

On a dollar basis, approximately 55 percent of the increase was attributable to higher landing fees, primarily driven by the increase in trips flown and higher rates charged by airports.

The remainder of the increase was largely due to higher rental expense throughout the network, associated with both higher rates and additional space leased at airports.

Depreciation and amortization expense for the first six months of 2023 increased by $82 million, or 12.6 percent, compared with the first six months of 2022.

On a per ASM basis, Depreciation and amortization expense increased 1.1 percent, compared with the first six months of 2022.

On a dollar basis, approximately 70 percent of the increase was due to the acquisition of 107 -8 aircraft since second quarter 2022, and approximately 20 percent of the increase was due to decreasing the airframe salvage value for the entire -700 fleet, which was a change in estimate made in third quarter 2022.

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

Other operating expenses for the first six months of 2023 increased by $386 million, or 25.3 percent, compared with the first six months of 2022.

Included within this line item was aircraft rentals expense in the amount of $99 million and $98 million for the six months ended June 30, 2023 and 2022, respectively.

On a per ASM basis, Other operating expenses increased 10.8 percent, compared with the first six months of 2022.

On a dollar and per ASM basis, approximately 25 percent of the increase was due to higher interrupted trip expense driven by costs associated with the Company's December 2022 operational disruption, approximately 15 percent of the increase was due to higher personnel expenses, and approximately 15 percent of the increase was due to higher professional fees driven by an increase in technology projects.

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

Other expenses (income)

Interest expense for the first six months of 2023 decreased by $56 million, or 30.1 percent, compared with the first six months of 2022, primarily due to various debt repurchases since second quarter 2022.

Capitalized interest for the first six months of 2023 decreased by $9 million, or 45.0 percent, compared with the first six months of 2022, primarily due to a significant amount of assets being placed into service, most notably 107 MAX aircraft being delivered since the first six months of 2022.

Interest income for the first six months of 2023 increased by $238 million, compared with the first six months of 2022, primarily due to higher interest rates earned on the Company's cash and short-term investments.

Loss on extinguishment of debt for the first six months of 2023 decreased by $116 million, compared with the first six months of 2022, primarily due to the partial extinguishment of the Company's Convertible Notes in the first six months of 2022, compared with none in the first six months of 2023.

The following table displays the components of Other (gains) losses, net, for the six months ended June 30, 2023 and 2022:

Six months ended June 30,

(in millions) 2023 2022

Mark-to-market impact from fuel contracts settling in current and future periods $ 6 $ 15

Unrealized mark-to-market adjustment on available for sale securities (4) 7

Mark-to-market impact on deferred compensation plan investment (26) 72

The Company's effective tax rate was approximately 23.2 percent for the first six months of 2023, compared with 26.9 percent for the first six months of 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.

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 March 31, Percent

2023 2022 Change

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

2023 2022 Change 2023 2022 Change

Fuel and oil expense, unhedged $ 1,418 $ 1,942 $ 2,992 $ 3,148

4 unchanged sentences

Impairment of long-lived assets — (15) — (31)

Litigation settlement (12) — (12) —

Total operating expenses, excluding special items $ 6,230 $ 5,555 12.2 $ 12,220 $ 10,384 17.7

3 unchanged sentences

Operating expenses, excluding Fuel and oil expense, special items, and profitsharing $ 4,706 $ 3,838 22.6 $ 9,149 $ 7,626 20.0

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

Operating income, as reported $ 795 $ 1,158 $ 511 $ 1,007

Impairment of long-lived assets — 15 — 31

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

Litigation settlement 12 — 12 —

Operating income, excluding special items $ 807 $ 1,173 (31.2) $ 523 $ 1,038 (49.6)

Other (gains) losses, net, as reported $ (7) $ 25 $ (21) $ 96

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current and future periods (a) (6) 20 (6) (15)

2 unchanged sentences

Other (gains) losses, net, excluding special items $ (13) $ 41 n.m.

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

$ (23) $ 74 n.m.

Income before income taxes, as reported $ 886 $ 1,036 $ 682 $ 660

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current and future periods (a) 6 (20) 6 15

3 unchanged sentences

Loss on extinguishment of debt — 43 — 116

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)

Litigation settlement $ 12 — $ 12 —

Income before income taxes, excluding special items $ 904 $ 1,078 (16.1) $ 696 $ 829 (16.0)

Provision for income taxes, as reported $ 203 $ 276 $ 158 $ 178

Add (Deduct):

Net income tax impact of fuel and special items (b) 8 (23) 8 18

Provision for income taxes, net, excluding special items $ 211 $ 253 (16.6) $ 166 $ 196 (15.3)

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

2023 2022 Change 2023 2022 Change

Net income, as reported $ 683 $ 760 $ 524 $ 482

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current and future periods (a) 6 (20) 6 15

2 unchanged sentences

Unrealized mark-to-market adjustment on available for sale securities — 4 (4) 7

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

Add (Deduct):

Net income tax impact of special items (b) (8) 23 (8) (18)

Impairment of long-lived assets — 15 — 31

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)

Litigation settlement 12 — 12 —

Net income, excluding special items $ 693 $ 825 (16.0) $ 530 $ 633 (16.3)

Net income per share, diluted, as reported $ 1.08 $ 1.20 $ 0.84 $ 0.77

Impact of special items 0.01 0.08 0.01 0.24

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)

Add (Deduct):

Net impact of net income above from fuel contracts divided by dilutive shares 0.01 (0.03) 0.01 0.02

Add (Deduct):

Net income tax impact of special items (b) (0.01) 0.05 (0.01) (0.03)

Net income per share, diluted, excluding special items $ 1.09 $ 1.30 (16.2) $ 0.85 $ 1.00 (15.0)

Operating expenses per ASM (cents) 14.66 ¢ 14.92 ¢ 15.17 ¢ 14.52 ¢

14 unchanged sentences

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

Operating loss, non-GAAP;

Operating income, non-GAAP;

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

Loss before income taxes, non-GAAP;

Benefit for income taxes, net, non-GAAP;

Net loss, non-GAAP;

Net loss per share, diluted, non-GAAP;

Income before income taxes, non-GAAP;

Provision for income taxes, net, non-GAAP;

Net income, non-GAAP;

Net income per share, diluted, non-GAAP;

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

14 unchanged sentences

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.

Consolidated Statement of Comprehensive Income, 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;

A charge associated with a tentative litigation settlement regarding certain California state meal-and-rest-break regulations for flight attendants.

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

4 unchanged sentences

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

Operating loss, non-GAAP;

Operating income, non-GAAP;

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

Loss before income taxes, non-GAAP;

Benefit for income taxes, net, non-GAAP;

Net loss, non-GAAP;

Net loss per share, diluted, non-GAAP;

Income before income taxes, non-GAAP;

Provision for income taxes, net, non-GAAP;

Net income, non-GAAP;

Net income per share, diluted, non-GAAP;

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

Liquidity and Capital Resources

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.

Net cash provided by operating activities was $1.4 billion for the three months ended June 30, 2023, compared with $1.9 billion provided by operating activities in the same prior year period.

Net cash provided by operating activities was $2.1 billion for the six months ended June 30, 2023, compared with $3.0 billion provided by operating activities in the same prior year period .

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

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

The operating cash flows for the 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.

The operating cash flows for the six months ended June 30, 2023, were largely impacted by the Company's net income (as adjusted for noncash item s), an $809 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, an increase of $140 million in excise tax liabilities due to an increase in sales related to an increase in travel demand, partially offset by a $243 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, and a $215 million decrease due to the payment of Customer reimbursement expenses in first quarter 2023 related to the December 2022 operational disruption.

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

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.

Net cash used in investing activities totaled $627 million during the three months ended June 30, 2023, compared with $1.6 billion used in investing activities in the same prior year period.

Net cash used in investing activities for the six months ended June 30, 2023 was $2.2 billion, compared with $1.7 billion used in investing activities in the same prior year period.

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

During the three months ended March 31, 2023, Capital expenditures were $1.0 billion, compared with $510 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 three months ended March 31, 2023, compared to 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.

During the six months ended June 30, 2023, Capital expenditures were $2.0 billion, compared with $1.5 billion in the same prior year period.

Capital expenditures increased, year-over-year, largely due to an increase in progress and delivery payments made for current period and future aircraft deliveries during the six months ended June 30, 2023, compared to the same prior year period.

Based on anticipated aircraft delivery delays from Boeing, the Company continues to plan for approximately 70 -8 aircraft deliveries and 26 -700 aircraft retirements in 2023.

The Company continues to estimate its 2023 capital spending to be approximately $3.5 billion.

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

The Company also estimates its total annual capital spending to be approximately $4 billion, on average, for the five years 2023 through 2027.

Net cash provided by financing activities was $10 million during the three months ended June 30, 2023, compared with $215 million used in financing activities for the same prior year period.

Net cash used in financing activities was $253 million during the six months ended June 30, 2023, compared with $530 million used in financing activities for the same prior year period.

The Company paid $214 million in cash dividends to Shareholders and repaid $67 million in finance lease obligations during the six months ended June 30, 2023.

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

The Company's 2023 total scheduled debt repayments are expected to be $83 million.

During the six months ended June 30, 2022, the Company repaid $555 million in debt and finance lease obligations, including the early extinguishment of $302 million in principal of its Convertible Notes for a cash payment of $409 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.

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

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

There were no amounts outstanding under the Amended A&R Credit Agreement as of June 30, 2023.

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

Although not the case at June 30, 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 $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.

The Company believes it has various options available to meet its capital and operating commitments, including unrestricted cash and short-term investments of $12.2 billion as of June 30, 2023, and anticipated future internally generated funds from operations.

The Company continues to have a large base of unencumbered assets with a net book value of more than $14.0 billion, including aircraft valued in excess of $11.5 billion and more than $2.5 billion in non-aircraft assets such as spare engines, ground equipment, and real estate.

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

As of June 30, 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 March 31, 2023:

The following table details information on the aircraft in the Company's fleet as of June 30, 2023:

Age (Yrs) Number

of Aircraft Number

737-700 143 18 419 379 40

737-700 143 18 408 (a) 370 38

737-800 175 8 207 190 17

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Totals 12 803 719 84

(a) Included three Boeing 737 Next Generation aircraft in storage as of June 30, 2023.

Critical Accounting Policies and Estimates

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

• the Company’s 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 expectations with respect to steps taken to boost operational resiliency and to mitigate the risk of an operational disruption recurrence, including with respect to expected benefits;

• the Company’s financial guidance for third 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 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 regarding passenger demand, revenue trends, and bookings, including with respect to managed business revenues;

• the Company’s labor plans and expectations;

• the Company’s fleet and network-related goals, including without limitation with respect to better optimizing its network, growth opportunities and frequencies, alignment of fleet and staffing with the business environment, 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 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, 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;

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 Company's dependence on its workforce, including its ability to employ sufficient numbers of qualified Employees to effectively and efficiently maintain its operations;

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

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• 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;

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis