What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-06 compared with 2023-02-07 · 310 added, 316 removed, 370 unchanged (63% of the section changed)

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YEAR IN REVIEW

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Company had record full year 2023 revenue performance, producing operating revenues of $26.1 billion, due to healthy leisure demand and continued yield strength combined with record ancillary revenue, loyalty program revenue, and passengers carried.

The Company’s 2022 results were somewhat impacted by the COVID-19 pandemic, as the Omicron variant of COVID-19 both impacted travel demand and created staffing challenges for the Company, particularly during January and February 2022.

However, strong travel demand, especially associated with leisure travel, accelerated during March 2022 and continued through 2023.

In 2023, the Company was able to focus on completing a comprehensive winter action plan, restoring its network and operational stability, reaching full utilization of its fleet, and delivering on significant new capabilities for its Customers.

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

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

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 fourth quarter 2022, the Company estimated the financial impact of this disruption was approximately $800 million on a pre-tax basis.

A significant portion of this impact in fourth quarter 2022 was due to the loss of Operating revenue associated with the flight cancellations that was estimated to be approximately $410 million, and the remaining impact primarily related to a net increase of approximately $390 million in operating expenses, primarily due to travel expense reimbursements to Customers, the estimated value of Rapid Rewards points offered as a gesture of goodwill to Customers that were expected to be redeemed, and premium pay and additional compensation for Employees, which were partially offset by lower fuel and oil and profitsharing expenses.

For first quarter 2023, these events also created a deceleration in bookings, largely isolated to January and February 2023, as well as additional expenses primarily in the form of reimbursing Customers for costs incurred as a result of the flight cancellations.

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

On October 27, 2023, the Department of Transportation ("DOT") notified the Company that it determined the Company had failed to provide adequate customer service assistance, prompt flight status notifications, and proper and prompt refunds and that the assessment of a civil penalty was warranted.

During fourth quarter 2023, the Company accrued an expense of $107 million associated with a settlement reached with the DOT in December 2023 based on their investigation into the disruption, which includes a cash penalty and incorporates a future commitment for Southwest Customer care with a new Customer compensation policy.

An additional $33 million penalty was also assessed by the DOT, but was able to be credited against the substantial value the Company had already provided to its Customers impacted by the disruption, and therefore did not result in further impact to the Company's financial results for 2023.

Other than the fourth quarter 2023 charge associated with the DOT settlement, there were no material impacts to operating revenues or expenses as a result of this disruption beyond first quarter 2023.

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 and key winter operations steps were completed as of October 2023, as planned.

The Company recorded 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.

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

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

GAAP 2023 2022 Change

Operating income $ 224 $ 1,017 (78.0)

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Net income per share, diluted $ 0.76 $ 0.87 (12.6)

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

$ 2,957 (62.1)

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

$ 2,300 (68.6)

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

$ 4.27 (72.8)

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

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

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

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

On a non-GAAP basis, the Company's financial results improved significantly for the year ended December 31, 2022, versus the same prior year period due to the significant recovery in travel demand, which was aided by a reduction in COVID-19 cases and hospitalizations, an increase in vaccinations, and a decline in travel-related restrictions across the United States.

Operating income $ 893 $ 1,120 (20.3)

Net income $ 980 $ 723 35.5

Net income per share, diluted $ 1.56 $ 1.16 34.5

The Company's financial results, as shown above on a GAAP and non-GAAP basis for the year ended December 31, 2023 versus the year ended December 31, 2022, were affected by higher salaries, wages, and benefits expense and maintenance materials and repairs expense.

On a GAAP basis, the Company's results for the year ended December 31, 2023 included incremental expense of $180 million for changes in estimate related to the contract ratification bonus for the Company's Flight Attendants as part of a tentative agreement reached in October 2023 and an incremental expense of $354 million for changes in estimate related to the contract ratification bonus for the Company's Pilots as part of a tentative agreement reached in December 2023, both of which were treated as special items and excluded from the Company's presentation of non-GAAP results.

Additionally, due to the December 2022 operational disruption, as described above, the financial results on a GAAP and non-GAAP basis for the year ended December 31, 2023 included a negative financial impact of approximately $380 million on a pre-tax basis in first quarter 2023 and, on a GAAP basis, a $107 million charge on a pre-tax basis for the DOT settlement in fourth quarter 2023.

The expense related to the tentative agreement with Pilots combined with the charge related to the settlement with the DOT resulted in the Company reporting a net loss of $252 million on a GAAP basis for fourth quarter 2023.

Furthermore, on a GAAP and non-GAAP basis, the financial results for the year ended December 31, 2022 included a negative financial impact of approximately $800 million on a pre-tax basis in fourth quarter 2022 related to the December 2022 operational disruption and, on a GAAP basis, the financial results for the year ended December 31, 2022 included a $193 million pre-tax loss on extinguishment of debt primarily due to the repurchase of a portion of the Company's May 1, 2020 public offering of $2.3 billion aggregate principal amount of 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.

Operating Statistics

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

For the year ended December 31, 2022, the Company believes a comparison of its 2022 to 2019 (pre-pandemic) operating statistics is relevant and useful as the Company continues to recover from the pandemic.

For the twelve months ended December 31, 2022 and 2021, most of these operating statistics were significantly impacted by the COVID-19 pandemic and decisions the Company made as a result of the pandemic although the effect in 2022 was primarily in first quarter.

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

The Company provides the operating data below for the years ended December 31, 2023 and 2022 because these statistics are commonly used in the airline industry and, therefore, 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.

Year ended December 31,

2022 2021 2022 Change to 2021 2019 2022 Change to 2019

2023 2022 Change

Operating Data:

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80.0 % 83.4 % (3.4) pts.

83.5 % (5.0) pts.

Average length of passenger haul (miles) 993 978 1.5 %

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17.35 17.29 0.3 %

Operating revenues per ASM (cents) (g)(j)

Operating revenues per ASM (cents) (g)

15.32 16.04 (4.5) %

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Fuel consumed, in gallons (millions) 2,143 1,922 11.5 %

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

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

Active full-time equivalent Employees 74,806 66,656 12.2 %

Aircraft at end of period (j)

817 770 6.1 %

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

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

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

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

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

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

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

(j) Included four Boeing 737-700 ("700") Next Generation aircraft in temporary storage as of December 31, 2022.

The following tables present selected financial guidance for first quarter and full year 2024:

1Q 2024 Estimation

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

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

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

RASM (a), year-over-year Up 2.5% to 4.5%

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

Economic fuel costs per gallon (c) (d) $2.70 to $2.80

Fuel hedging premium expense per gallon $0.08

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ASMs per gallon (fuel efficiency) 79 to 81

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

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

CASM-X (e), year-over-year (c) (f) Up 5% to 6%

Scheduled debt repayments (millions) ~$7

Interest expense (millions) ~$62

2024 Estimation

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

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

ASMs (b), year-over-year Up ~6%

Economic fuel costs per gallon (c) (d) $2.55 to $2.65

Fuel hedging premium expense per gallon $0.07

Fuel hedging cash settlement gains per gallon $0.01

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

CASM-X (e), year-over-year (c) (f) Up 5.5% to 7%

Scheduled debt repayments (millions) ~$29

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Effective tax rate 23% to 24%

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

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

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

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

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

Capital spending (billions) $3.5 to $4.0

(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 October 2, 2024.

The Company currently expects second quarter 2024 capacity to increase in the range of 8 percent to 10 percent, year-over-year, and third quarter 2024 capacity to increase in the range of 3 percent to 5 percent, year-over-year.

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

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

(d) Based on the Company's existing fuel derivative contracts and market prices as of January 17, 2024, first quarter and full year 2024 economic fuel costs per gallon are estimated to be in the range of $2.70 to $2.80 and $2.55 to $2.65, 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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See Note Regarding Use of Non-GAAP Financial Measures.

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

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

(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.

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

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

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

(g) Aircraft on property, end of period.

The Company ended 2022 with 770 Boeing 737 aircraft.

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

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

5 -700 retirements in first quarter 2023.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

COVID-19 Pandemic Impacts

As detailed in Notes 2 and 7 to the Consolidated Financial Statements, in connection with the major negative impact of COVID-19 on air carriers, the Company received significant financial assistance from Treasury in the form of Payroll Support, and this assistance had a significant impact on the Company's reported GAAP financial results in 2021.

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

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

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

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

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

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

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

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

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

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

The Company currently plans for approximately 79 Boeing 737 MAX ("MAX") aircraft deliveries and 49 aircraft retirements in 2024, including 45 Boeing 737-700s ("-700") and four Boeing 737-800s ("-800").

The delivery schedule for the 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 offers no assurances that current estimations and timelines will be met.

The Company expects first quarter 2024 RASM to increase in the range of 2.5 percent to 4.5 percent, year-over-year.

This increase includes an approximate five point tailwind due to the negative revenue impact incurred in first quarter 2023 associated with the December 2022 operational disruption.

Sequentially, the performance represents a healthy improvement driven primarily by network optimization, market share contributions from the Company's Global Distribution System initiative, growth in the Rapid Rewards loyalty program, and continued strength in overall demand.

The network optimization is materially complete with the March 2024 schedule, at which point the Company expects a return to profitability.

The Company currently expects its first quarter 2024 CASM-X to increase in the range of 5 percent to 6 percent, year-over-year.

Approximately two to three points of the increase are driven by higher 2024 market wage rate accruals for Employee workgroups with open agreements and for overall 2024 labor cost increases, including the wage rate increases and agreed-upon work rule changes associated with the recently ratified Pilot contract.

The majority of the remaining increase is driven by year-over-year pressure from maintenance expenses.

Furthermore, the Company currently expects similar cost pressures throughout the year, driving 2024 CASM-X to increase approximately 5.5 percent to 7 percent, year-over-year.

Specifically, the Company expects approximately four to five points of the increase to be driven by higher year-over-year labor costs, and the balance of the increase is driven primarily by higher year-over-year maintenance expenses.

Progressing through the year, the Company's focus will be on regaining efficiencies to counter inflationary cost pressures.

To this end, the Company plans to end the year with headcount in the range of flat to down on a year-over-year basis.

The Company's 2024 plan leverages a set of initiatives, which most importantly, includes better aligning the route network to new demand patterns.

The Company expects these initiatives to contribute roughly $1.5 billion in incremental year-over-year pre-tax profits.

As a result, the Company expects double-digit year-over-year operating revenue growth and year-over-year operating margin expansion.

The Company believes its 2024 plan provides a line of sight to improve profitability year-over-year, earn its cost of capital this year, and provide significant progress toward its long-term goal to exceed its cost of capital.

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 goals of improving potential growth opportunities and frequencies to better align with the pre-pandemic operational route network, lowering operating costs, and further modernizing its fleet with less carbon-intensive aircraft.

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

The Company expects that more than half of the MAX aircraft in its firm order book will replace a significant amount of its 426 -700 aircraft over the next 10 to 15 years to support the modernization of the Company's fleet, a key component of the Company's environmental sustainability efforts.

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

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

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

The Company ended 2023 with 817 Boeing 737 aircraft, including 223 Boeing 737-8 ("-8") aircraft.

During 2023, the Company retired 39 -700 aircraft and took delivery of 86 -8 aircraft.

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

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

The Company has published its flight schedule through August 14, 2023 .

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

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

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

On March 24, 2022, the Company announced a new fare product, Wanna Get Away Plus™, which became available to Customers in May 2022.

Wanna Get Away Plus provides Customers with more flexibility, choice, and rewards for a modest buy-up from the Company's Wanna Get Away® fare product.

In addition to all of the usual day of travel benefits and booking flexibility offered to Customers across all of the Company's fares, Wanna Get Away Plus provides additional benefits as compared with the Wanna Get Away fare product, including:

• Transferable flight credit(s), a new benefit that generally enables Customers to make a one-time transfer of eligible unused flight credit(s) to a new traveler for future use;

• More flexibility through same-day confirmed change/same-day standby;

• More earning power in the Company's Rapid Rewards® loyalty program, with 8X points awarded on flights instead of the 6X points awarded on Wanna Get Away fares.

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

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

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

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

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

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

A flight credit with an

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

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

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

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

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

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

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

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

(iii) operational initiatives;

and (iv) technological innovation.

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

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

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

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

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

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

On October 25, 2023, the Company secured an order book with Boeing that is expected to help modernize the Company's fleet with less carbon-intensive aircraft and enable the Company's long-term plan for orderly and measured growth.

The Company's order book with Boeing as of January 25, 2024, consists of a total of 495 MAX firm orders (307 -7 aircraft and 188 -8 aircraft) for the years 2024 through 2031 and 199 MAX options (-7s or -8s) for the years 2025 through 2031.

The Company is currently planning for approximately 79 MAX aircraft deliveries in 2024, which differs from its contractual order book due to Boeing's continued supply chain challenges and the current status of the -7 certification.

The Company plans to retire approximately 49 aircraft, including 45 -700s and four -800s, ending 2024 with roughly 847 aircraft in its fleet.

The timing of future deliveries could be affected by any potential or prolonged delays in the manufacturing process or with the -7 certification.

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

The Company has published its flight schedule through October 2, 2024.

The Company continues to focus on operational excellence and reliability, regaining efficiencies, increasing productivity, and returning margins back to historical levels.

For the year ended December 31, 2023, the Company added approximately 8,100 Employees, net of attrition.

The Company's number of active full-time equivalent Employees increased by 12.2 percent from December 31, 2022 to December 31, 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 its fleet.

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.

During third quarter 2023, the Company announced two new benefits as part of an ongoing commitment to provide Customers with more choices, more flexibility, and more value when they fly Southwest.

Customers traveling on Wanna Get Away fares now are able to make same-day standby changes and add standby listings online or on the Southwest app.

Previously, only Rapid Rewards Tier Members and Customers traveling on Business Select, Anytime, and Wanna Get Away Plus fares had flexibility to list on a different flight free of charge on their day of scheduled travel.

This new offering expands the same-day standby benefit to all Southwest Customers.

The Company also began offering free Inflight Internet for Customers who purchase a Business Select fare.

During October 2023, the Company announced enhancements to its Rapid Rewards loyalty program to reward loyal Members by making it easier for Customers to earn tier status, awarding A-List Preferred Members with up to two complimentary premium drinks, and, starting in spring of 2024, allowing Customers to pay for flights by using a combination of cash and Rapid Rewards points, starting with as few as 1,000 points.

The Company's Board of Directors (the "Board") reinstated and declared a quarterly cash dividend of $0.18 per share on December 6, 2022, which was paid in first quarter 2023, and has continued to pay quarterly dividends through 2023.

The Company previously suspended the payment of dividends in second quarter 2020 through September 30, 2022, pursuant to payroll funding support agreements with the U.S.

Department of the Treasury ("Treasury").

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

During 2023, the Company returned $429 million to Shareholders in dividend payments.

On November 2, 2023, the Company announced an offtake agreement with USA BioEnergy, LLC, for up to 680 million gallons of neat sustainable aviation fuel ("SAF").

The Company plans to begin purchasing SAF from USA BioEnergy's facility near Bon Wier, Texas, as early as 2028.

Additionally, as part of the offtake agreement, the Company and USA BioEnergy have established a long-term strategic relationship offering the Company the opportunity to purchase up to another projected 180 million gallons of SAF per year from future planned production facilities.

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-K.

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Passenger revenues for 2023 increased by $2.2 billion, or 10.4 percent, compared with 2022.

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

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

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

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

On a unit basis, Passenger revenues decreased 3.7 percent, year-over-year.

The dollar increase was primarily due to a 14.7 percent increase in capacity, combined with healthy leisure demand and continued yield strength for 2023 versus 2022.

For 2023, the year-over-year Passenger revenue yield per ASM decrease was primarily driven by a 3.4 point decrease in Load factor as the capacity growth of 14.7 percent outpaced the growth in Revenue passenger miles of 10.0 percent.

Other revenues for 2023 increased by $50 million, or 2.2 percent, compared with 2022.

On a dollar basis, approximately 55 percent of the increase was associated with additional revenues generated from the Company's new co-brand credit card agreement with Chase Bank USA, N.A.

("Chase") secured in December 2021.

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

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

Operating Expenses

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

Approximately 30 percent of the operating expense increase was due to $2.7 billion in Payroll Support allocated to offset a portion of salaries, wages, and benefits in 2021, compared with no support received in 2022.

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

Operating expenses for 2023 increased by $3.1 billion, or 13.5 percent, compared with 2022, and capacity increased 14.7 percent over the same prior year period.

Approximately 60 percent of the operating expenses increase was due to higher Salaries, wages, and benefits expense (inclusive of accruals related to anticipated pay raises associated with open collective bargaining agreements) and approximately 10 percent was due to higher Maintenance, materials, and repairs 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 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.

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

Year ended December 31, Per ASM Percent

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Salaries, wages, and benefits 6.55 ¢ 6.31 ¢ 0.24 ¢ 3.8 %

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

Fuel and oil 3.65 4.03 (0.38) (9.4)

4 unchanged sentences

Total 15.19 ¢ 15.36 ¢ (0.17) ¢ (1.1) %

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

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

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

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

Operating expenses per ASM for 2023 decreased by 1.1 percent, compared with 2022.

The majority of the year-over-year unit cost decrease was driven by a decrease in the Company's fuel cost per gallon, partially offset by higher salaries, wages, and benefits expense.

Operating expenses per ASM for 2023, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), decreased 1.2 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.

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On a per ASM basis, Salaries, wages, and benefits expense for 2023 increased 3.8 percent, compared with 2022.

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

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

On a dollar basis, approximately 45 percent of the increase was due to step/pay rate increases for certain workgroups, including market wage rate accruals for open collective bargaining agreements (inclusive of $180 million and $354 million on a GAAP basis in additional compensation related to past services negotiated as part of the tentative agreements reached with the Transport Workers Union 556 ("TWU 556") and SWAPA, respectively) and approximately 20 percent of the increase was driven by an increase in capacity and trips flown.

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 measures.

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

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

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

Southwest Flight Attendants 18,105 Transportation Workers of America, AFL-CIO, Local 556 ("TWU 556") November 2018

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

Southwest Meteorologists 12 TWU 550 June 2019

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

The newly ratified agreement becomes amenable in July 2027.

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

The newly ratified agreement becomes amendable in December 2027.

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

The newly ratified agreement becomes amendable in January 2027.

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

Southwest Flight Attendants 19,883 TWU 556 November 2018

Southwest Ramp, Operations, Provisioning, Freight Agents 17,892 Transport Workers Union Local 555 (“TWU 555”)

February 2021

Southwest Flight Simulator Technicians 54 International Brotherhood of Teamsters (“IBT”)

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 TWU, ratified a new four-year collective bargaining agreement with the Company.

On February 4, 2023, the Company's more than 470 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.

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

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

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

• $117 million credit to expense associated with the Employee Retention Tax Credit for continuing to pay Employees' salaries during the time they were not working, as allowed under the CARES Act, and subsequent legislation.

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

Fuel and oil expense for 2022 increased by $2.7 billion, or 80.5 percent, compared with 2021.

On a per ASM basis, Fuel and oil expense for 2022 increased 60.6 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.

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:

On April 30, 2023, the Company's 12 Meteorologists, represented by 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 AMFA, voted to ratify a four-year contract extension with the Company.

The newly ratified agreement becomes amendable in August 2027.

On August 15, 2023, the Company reached a tentative collective-bargaining agreement with TWU 555, which represents the Company's nearly 18,000 Ramp, Operations, Provisioning, and Freight Agents.

However, during September 2023, TWU 555 membership voted not to ratify the agreement.

The Company will continue to engage in discussions on a new agreement with TWU 555.

On October 6, 2023, the Company's more than 480 Material Specialists, represented by IBT, voted to ratify a three-year contract extension with the Company.

The newly ratified agreement becomes amendable in October 2026.

On October 25, 2023, the Company reached a tentative collective-bargaining agreement with TWU 556, which represents the Company's nearly 20,000 Flight Attendants.

However, during December 2023, TWU 556 membership voted not to ratify the agreement.

The Company will continue to engage in discussions on a new agreement with TWU 556.

On January 22, 2024, the Company's nearly 11,000 Pilots, represented by SWAPA, voted to ratify a five-year contract extension with the Company.

The newly ratified agreement becomes amendable in January 2029.

Fuel and oil expense for 2023 increased by $242 million, or 4.1 percent, compared with 2022.

On a per ASM basis, Fuel and oil expense for 2023 decreased 9.4 percent.

On a dollar basis, the increase was primarily attributable to an increase in fuel gallons consumed, partially offset by a decrease in jet fuel prices per gallon.

On a per ASM basis, the decrease was primarily due to lower 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:

Year ended December 31,

(per gallon) 2022 2021

Economic fuel costs per gallon $ 2.89 $ 3.07

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

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

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

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

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

The Company's 2023 available seat miles per gallon ("fuel efficiency") improved 2.8 percent, year-over-year, due to lower load factors and more -8 aircraft, the Company's most fuel-efficient aircraft, as a percentage of 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.

In addition, the Company is providing its maximum percentage of estimated fuel consumption covered by fuel derivative contracts in the following table:

Period Maximum fuel hedged percentage (a)(b)

4 unchanged sentences

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

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

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 11 to the Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI at December 31, 2022, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

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 11 to the Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI as of December 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

5 unchanged sentences

Total $ 223 $ 102

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

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.

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 January 17, 2024.

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

4 unchanged sentences

$70 $2.50 to $2.60 $2.40 to $2.50

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

Current market (a) $2.70 to $2.80 $2.55 to $2.65

2 unchanged sentences

$100 $3.35 to $3.45 $3.25 to $3.35

Fair market value $80 million $363 million

Fair market value of

fuel derivative contracts settling in period $12 million $86 million

Estimated premium costs $39 million $158 million

(a) Brent crude oil average market prices as of January 17, 2024, were approximately $77 and $76 per barrel for first quarter 2024 and full year 2024, respectively.

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

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

(b) Based on the Company's existing fuel derivative contracts and market prices as of January 17, 2024, first quarter and full year 2024 economic fuel costs per gallon are estimated to be in the range of $2.70 to $2.80 and $2.55 to $2.65, respectively.

1 unchanged sentence

See Note Regarding Use of Non-GAAP Financial Measures.

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

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

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

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

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

Maintenance materials and repairs expense for 2023 increased by $336 million, or 39.4 percent, compared with 2022.

On a per ASM basis, Maintenance materials and repairs expense increased 20.7 percent, compared with 2022.

On a dollar and per ASM basis, approximately 70 percent of the increase was due to an increase in engine shop visits and the remainder of the increase was due to various other engine repairs.

The number of engines inducted for planned performance restoration shop visits for the Company’s -700 fleet increased as a result of utilization.

Planned shop visits for the -800 fleet increased as the -800 aircraft emerged from their maintenance “honeymoon” period during which the engines have required significantly lower levels of maintenance while in the early phases of their useful lives.

Landing fees and airport rentals expense for 2023 increased by $281 million, or 18.6 percent, compared with 2022.

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

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

On a per ASM basis, Landing fees and airport rentals expense increased 2.9 percent, compared with 2022.

On a dollar basis, approximately 45 percent of the increase was largely due to higher airport rental expense throughout the network, associated with both higher rates and additional space leased at airports, and approximately 40 percent of the increase was attributable to higher landing fees, primarily driven both by the increase in trips flown and higher rates charged by airports.

Depreciation and amortization expense for 2023 increased by $171 million, or 12.7 percent, compared with 2022.

On a per ASM basis, Depreciation and amortization expense decreased by 2.2 percent, compared with 2022.

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

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

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

On a dollar basis, approximately 65 percent of the increase was primarily due to the acquisition of 86 -8 aircraft since 2022.

The majority of the remainder was due to accelerating the depreciation for certain -700 aircraft planned for early retirement in 2023 and 2024.

Other operating expenses for 2023 increased by $264 million, or 7.1 percent, compared with 2022.

Included within this line item was aircraft rentals expenses in the amount of $198 million and $195 million for 2023 and 2022, respectively.

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

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

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

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

On a per ASM basis, Other operating expenses decreased 6.4 percent, compared with 2022.

On a dollar basis, the increase was due to (i) higher professional fees, driven by an increase in technology projects, (ii) higher personnel expenses, driven by an increase in Crew lodging expenses associated with the increase in capacity and inflationary pressure, and (iii) an increase driven by recording the $107 million DOT settlement in December

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

These increases were partially offset by a decrease in costs associated with the Company's December 2022 Operational Disruption, the majority of which were accrued in 2022.

Other expenses (income)

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

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

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

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

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

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

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

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

Interest expense for 2023 decreased by $81 million, or 23.8 percent, compared with 2022, primarily due to various debt repurchases in 2022.

Capitalized interest for 2023 decreased by $16 million, or 41.0 percent, compared with 2022, primarily due to a significant amount of assets being placed into service, most notably 86 -8 aircraft being delivered since 2022.

Interest income for 2023 increased by $366 million, compared with 2022, primarily due to higher interest rates earned on the Company's cash and short-term investments.

Loss on extinguishment of debt for 2023 decreased by $193 million, compared with 2022, primarily due to the partial extinguishment of the Company's Convertible Notes in 2022, compared with none in 2023.

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

See Note 11 to the Consolidated Financial Statements for further information on the Company's hedging activities.

6 unchanged sentences

Mark-to-market impact on deferred compensation plan investment (39) 74

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

The Company's annual 2023 effective tax rate was 26.5 percent, compared with 25.9 percent in 2022.

The year-over-year decline in the tax rate is due to higher state taxes in 2021 and tax planning benefits recognized in 2022 related to federal tax credits and a partial tax deduction for losses incurred on repurchases of the Convertible Notes.

The year-over-year increase in the tax rate is primarily due to the DOT settlement, which is treated as a disallowed tax deduction in 2023, and higher state taxes.

The rate increases were partially offset by the absence of repurchases of the Convertible Notes which resulted in disallowed tax deductions and a higher tax rate in 2022.

2022 Compared with 2021

7 unchanged sentences

Fuel and oil expense, as reported $ 6,217 $ 5,975

Add (Deduct):

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

Add (Deduct):

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

Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (c) (16) (40)

Premium benefit of fuel contracts not designated as hedges — (28)

Fuel and oil expense, excluding special items (economic) $ 6,201 $ 5,907 5.0 %

Total operating expenses, net, as reported $ 22,797 $ 14,069

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

Add (Deduct):

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

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

Add (Deduct):

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

Total operating expenses, as reported $ 25,867 $ 22,797

TWU 556 Labor contract adjustment (a) (180) —

SWAPA Labor contract adjustment (b) (354) —

Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (c) (16) (40)

Premium benefit of fuel contracts not designated as hedges — (28)

Impairment of long-lived assets — (35)

DOT settlement (107) —

Litigation settlement (12) —

Total operating expenses, excluding special items $ 25,198 $ 22,694 11.0 %

4 unchanged sentences

Operating income, as reported $ 224 $ 1,017

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

Add (Deduct):

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

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

Add (Deduct):

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

TWU 556 contract adjustment (a) 180 —

SWAPA contract adjustment (b) 354 —

Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (c) 16 40

Premium benefit of fuel contracts not designated as hedges — 28

Impairment of long-lived assets — 35

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

DOT settlement 107 —

Litigation settlement 12 —

Operating income, excluding special items $ 893 $ 1,120 (20.3) %

Other (gains) losses, net, as reported $ (62) $ 12

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

Mark-to-market impact from fuel contracts settling in current periods (c) 17 41

Premium benefit of fuel contracts not designated as hedges — 28

Add (Deduct):

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

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

Other (gains) losses, net, excluding special items $ (41) $ 77 n.m.

Year ended December 31, Percent

2022 2021 Change

Income before income taxes, as reported $ 633 $ 728

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

Add (Deduct):

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

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

TWU 556 contract adjustment (a) 180 —

SWAPA contract adjustment (b) 354 —

Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (c) 16 40

Mark-to-market impact from fuel contracts settling in current periods (c) (17) (41)

Impairment of long-lived assets — 35

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

Add (Deduct):

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

Loss on extinguishment of debt — 193

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

DOT settlement 107 —

Litigation settlement 12 —

Income before income taxes, excluding special items $ 1,281 $ 959 33.6 %

Provision for income taxes, as reported $ 168 $ 189

Add (Deduct):

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

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

Net income tax impact of fuel and special items (d) 133 47

Provision for income taxes, net, excluding special items $ 301 $ 236 27.5 %

Net income, as reported $ 465 $ 539

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

Add (Deduct):

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

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

TWU 556 contract adjustment (a) 180 —

SWAPA contract adjustment (b) 354 —

Fuel hedge contracts settling in the current period, but for which gains were reclassified from AOCI (c) 16 40

Mark-to-market impact from fuel contracts settling in current periods (c) (17) (41)

Impairment of long-lived assets — 35

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

Loss on extinguishment of debt — 193

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

Add (Deduct):

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

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

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

DOT settlement 107 —

Litigation settlement 12 —

Net income tax impact of special items (d) (133) (47)

Net income, excluding special items $ 980 $ 723 35.5 %

Net income per share, diluted, as reported $ 0.76 $ 0.87

Add (Deduct):

Impact of special items 1.01 0.36

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

Add (Deduct):

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

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

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

Net income tax impact of special items (d) (0.21) (0.07)

Net income per share, diluted, excluding special items $ 1.56 $ 1.16 34.5 %

Operating expenses per ASM (cents) 15.19 ¢ 15.36 ¢

Add (Deduct):

Impact of special items (7.82) (0.03)

Add (Deduct):

Fuel and oil expense divided by ASMs 3.65 (4.03)

Add (Deduct):

Profitsharing expense divided by ASMs 0.07 (0.08)

Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents) 11.09 ¢ 11.22 ¢ (1.2) %

(a) See Note 11 to Consolidated Financial Statements for further information.

(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 year ended December 31, 2021.

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

(a) Represents changes in estimate related to the contract ratification bonus for the Company’s Flight Attendants as part of the tentative agreement reached in October 2023 with TWU 556.

The Company began accruing for all of its open labor contracts on April 1, 2022, and this incremental $180 million expense extends the timeframe covered by the ratification bonus to the date the Flight Attendant contract became amendable on November 1, 2018, to compensate for missed wage increases over that time period.

The Company’s consolidated financial statements for the year ended December 31, 2023 include market rate wage accrual for all workgroups with open collective bargaining agreements.

See the Note Regarding Use of Non-GAAP Financial Measures for further information.

(b) Represents changes in estimate related to the contract ratification bonus for the Company’s Pilots as part of the tentative agreement reached in December 2023 with SWAPA.

The Company began accruing for all of its open labor contracts on April 1, 2022, and this incremental $354 million expense represents an increase in retroactive pay associated with wage rates for purposes of calculating the ratification bonus agreed to for Pilots for periods prior to 2023.

See the Note Regarding Use of Non-GAAP Financial Measures for further information.

(d) 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.

Non-GAAP Return on Invested Capital (ROIC) (in millions) (unaudited)

December 31, 2023

Operating income, as reported $ 224

TWU 556 contract adjustment 180

SWAPA contract adjustment 354

Net impact from fuel contracts 16

DOT settlement 107

Litigation settlement 12

Operating income, non-GAAP 893

Net adjustment for aircraft leases (a) 128

Adjusted operating income, non-GAAP (A) $ 1,021

Non-GAAP tax rate (B) 23.5 % (d)

Net operating profit after-tax (A* (1-B) = C) $ 781

Debt, including finance leases (b) $ 8,033

Equity (b) 10,669

Net present value of aircraft operating leases (b) 1,029

Average invested capital $ 19,731

Equity adjustment (c) (168)

Adjusted average invested capital (D) $ 19,563

Non-GAAP ROIC, pre-tax (A/D) 5.2 %

Non-GAAP ROIC, after-tax (C/D) 4.0 %

(a) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of eliminating aircraft rent expense and replacing with estimated depreciation expense for those same aircraft).

The Company makes this adjustment to enhance comparability to other entities that have different capital structures by utilizing alternative financing decisions.

(b) Calculated as an average of the five most recent quarter end balances or remaining obligations.

The Net present value of aircraft operating leases represents the assumption that all aircraft in the Company’s fleet are owned, as it reflects the remaining contractual commitments discounted at the Company's estimated incremental borrowing rate as of the time each individual lease was signed.

(c) The Equity adjustment in the denominator adjusts for the cumulative impacts, in Accumulated other comprehensive income and Retained earnings, of gains and/or losses that will settle in future periods, including those associated with the Company's fuel hedges.

The current period impact of these gains and/or losses is reflected in the Net impact from fuel contracts in the numerator.

(d) The GAAP full year tax rate as of December 31, 2023, was 26.5 percent, and the full year Non-GAAP tax rate was 23.5 percent.

See Note Regarding Use of Non-GAAP Financial Measures for additional information.

Note Regarding Use of Non-GAAP Financial Measures

The Company's Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP").

The Company's Consolidated Financial Statements are prepared in accordance with GAAP.

These GAAP financial statements may include (i) unrealized noncash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges and benefits the Company believes are unusual and/or infrequent in nature and thus may make comparisons to its prior or future performance difficult.

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

Operating income (loss), non-GAAP;

Operating income, 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;

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).

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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;

Incremental expense associated with the recently ratified Pilot contract and ongoing labor contract negotiations with TWU 556 which represents the Company's Flight Attendants.

The change in estimate recognized in 2023 relates to additional compensation for services performed by Employees outside of the applicable fiscal period;

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

A charge associated with a settlement reached with the DOT as a result of the Company's December 2022 operational disruption;

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

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

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

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

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

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

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.

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

Operating income (loss), non-GAAP;

Operating income, 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;

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).

The Company has also provided its calculation of return on invested capital, which is a measure of financial performance used by management to evaluate its investment returns on capital.

Return on invested capital is not a substitute for financial results as reported in accordance with GAAP and should not be utilized in place of such GAAP results.

Although return on invested capital is not a measure defined by GAAP, it is calculated by the Company, in part, using non-GAAP financial measures.

Those non-GAAP financial measures are utilized for the same reasons as those noted above for Net income, non-GAAP and Operating income, non-GAAP.

The comparable GAAP measures include charges or benefits that are deemed "special items" that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends, and the Company’s profitability targets and estimates, both internally and externally, are based on non-GAAP results since "special items" cannot be reliably predicted or estimated.

The Company believes non-GAAP return on invested capital is a meaningful measure because it quantifies the Company's effectiveness in generating returns relative to the capital it has invested in its business.

Although return on invested capital is commonly used as a measure of capital efficiency, definitions of return on invested capital differ;

therefore, the Company is providing an explanation of its calculation for non-GAAP return on invested capital in the accompanying reconciliation in order to allow investors to compare and contrast its calculation to the calculations provided by other companies.

Liquidity and Capital Resources

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

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

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

See Note 2 and Note 7 to the Consolidated Financial Statements for further information regarding the impact of the COVID-19 pandemic, as well as the transactions completed and financial assistance obtained from Treasury under payroll support programs.

Net cash provided by operating activities for 2023 was $3.2 billion, and net cash provided by operating activities for 2022 was $3.8 billion.

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

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

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

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

Operating cash flows for 2021 included $2.7 billion in Payroll Support program grant proceeds received and $591 million increase in Air traffic liability driven by increased ticket sales related to an increase in leisure travel demand.

The operating cash flows for 2023 were largely impacted by the Company's net income (as adjusted for noncash items), a $29 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, partially offset by a $273 million decrease related to the purchase of fuel derivative instruments, which is included within Other, net operating cash flows in the accompanying Consolidated Statement of Cash Flows (see Note 11 to the Consolidated Financial Statements for further information), and a $215 million decrease due to the payment of Customer reimbursement expenses in first quarter 2023 related to the December 2022 operational disruption.

Operating cash flows for 2022 included a $525 million increase in Air traffic liability driven by increased ticket sales related to an increase in leisure travel demand, a $472 million cash tax refund associated with the 2020 tax year, and a $139 million cash excise tax refund, partially offset by an $81 million decrease related to the purchase of fuel derivative instruments.

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

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

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

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

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

The Board reinstated and declared a quarterly cash dividend of $0.18 per share on December 6, 2022, and has continued to pay quarterly dividends through 2023.

The Company has suspended share repurchase activity until further notice.

Net cash used in investing activities for 2023 was $2.9 billion, and net cash used in investing activities for 2022 was $3.7 billion.

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

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

Capital expenditures increased, year-over-year, largely due to a substantial increase in progress and delivery payments made for current period and future aircraft deliveries during 2022, compared to the same prior year period, when progress payments were not made through November 2021 due to delivery credits provided by Boeing to the Company resulting from the settlement of 2020 estimated damages relating to the FAA grounding of the MAX aircraft.

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

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

Capital expenditures were $3.5 billion for 2023, compared with $3.9 billion in the same prior year period, and decreased largely due to a decrease in progress and delivery payments made for current period and future aircraft deliveries during 2023.

Capital expenditures during 2023 also included approximately $79 million associated with the Company's purchase of finance leased aircraft, compared to approximately $174 million associated with finance leased aircraft purchased during 2022.

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

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

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

The Company estimates its 2024 capital spending to be in the range of $3.5 billion to $4.0 billion, which includes approximately $2.2 billion in aircraft capital spending, assuming approximately 79 MAX aircraft deliveries in 2024, and $1.6 billion in non-aircraft capital spending.

Including both capital spending and operating expense budgets, the Company currently expects to spend approximately $1.7 billion in 2024 on technology investments, upgrades, and system maintenance.

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

During 2022, the Company repaid $3.1 billion in debt and finance lease obligations, including a $1.3 billion prepayment for all of its outstanding 4.75% Notes due 2023 and the extinguishment of $486 million in principal of its Convertible Notes for cash payments totaling $648 million.

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

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

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

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

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

The Company currently estimates its average annual capital spending to be approximately $4 billion through 2027 and will continue to evaluate this level of capital spending based on the Company's performance compared with its long-term financial goals.

Net cash used in financing activities for 2023 was $436 million, and net cash used in financing activities for 2022 was $3.0 billion.

The Company paid $428 million in cash dividends to Shareholders and repaid $85 million in finance lease obligations during the year ended December 31, 2023.

The Company may engage in early debt repurchases from time to time at its discretion;

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

During 2022, the Company's financing activities included repaying $3.1 billion in debt and finance lease obligations, including the prepayment of $1.3 billion 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.

See Note 8 to the Consolidated Financial Statements for further information on the Company's purchase of finance leased aircraft, which resulted in the elimination of the Company’s remaining financial lease obligations for these aircraft of $191 million and $53 million in 2022 and 2023, respectively.

A discussion of the Company's most significant drivers impacting cash flow for 2021 are included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, under Part II Item 7, Liquidity and Capital Resources.

1 unchanged sentence

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

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

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

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

In August 2023, this facility was amended to, among other things, (i) extend the expiration date to August 2028, (ii) release all aircraft and other assets constituting collateral securing loans under the facility, (iii) eliminate the minimum liquidity covenant, (iv) add a Coverage Ratio financial covenant, and (v) amend the covenant requiring that a pool of lien-free specified aircraft and related assets have a minimum aggregate appraised value.

There were no amounts outstanding under the Amended Credit Agreement as of December 31, 2023.

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

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The Company believes it has various options available to meet its capital and operating commitments, including unrestricted cash and short-term investments of $11.5 billion as of December 31, 2023, and anticipated future internally generated funds from operations.

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

The Company continues to have a large base of unencumbered assets with a net book value of approximately $17.3 billion , including $14.5 billion in aircraft value and $2.8 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).

The following discussion includes various short-term and long-term material cash requirements from known contractual and other obligations, but does not include amounts that are contingent on events or other factors that are uncertain or unknown at this time.

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Accordingly, the actual results may vary materially from the amounts discussed herein.

As detailed in Notes 2 and 7 to the Consolidated Financial Statements, in connection with the major negative impact of COVID-19 on air carriers, the Company received significant financial assistance from Treasury in the form of payroll support, and this assistance had a significant impact on the Company's reported GAAP financial results in 2021.

Such impact ended in third quarter 2021, and the Company's 2022 and 2023 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.

See Note 7 to the Consolidated Financial Statements for further detail on the Company's debt and the timing of expected and future principal payments.

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While many of these expenses are variable in nature, some of the expenditures can be somewhat fixed in the short-term due to the lead-time involved in publishing the Company's flight schedule in advance and providing for resources to be available to operate those schedules.

As a result of the Company's Pilots ratifying a new labor contract in January 2024, the Company is scheduled to pay out contract ratification bonuses to its Pilots in first quarter 2024 totaling approximately $1.35 billion, which includes a contractual $1.28 billion in wages and Non-elective retirement contributions, plus the applicable payroll taxes on such amounts.

The Company has a large net deferred tax liability on its Consolidated Balance Sheet.

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

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

The Company has federal and state operating loss carryforwards, $268 million and $36 million (tax-effected), respectively, to reduce

taxable income in future periods.

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

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Although the Company continues to believe a portion of Customer flight credits will go unused following the Company's change in policy, including a portion of flight credits issued after July 28, 2022, the Company expects its prospective breakage rate associated with such flight credits to be at or slightly lower than historical pre-pandemic levels due to the fact that such flight credits no longer have an expiration date.

Although the Company's estimated breakage rate was consistent throughout 2023, a one percentage point change in the amount of breakage, as a factor of total flight credits issued, would have resulted in a change of Passenger

revenues of approximately $26 million.

The Company also does not currently anticipate any changes to its estimated breakage rate for 2024.

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

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The Company utilizes unobservable (Level 3) inputs in determining the fair value of certain assets and liabilities.

At December 31, 2022, these consisted of its fuel derivative option contracts, which were an asset of $512 million.

As of December 31, 2023, these consisted of its fuel derivative option contracts, which were an asset of $223 million.

The Company utilizes financial derivative instruments primarily to manage its risk associated with changing jet fuel prices.

1 unchanged sentence

All derivatives are required to be reflected at fair value and recorded on the Consolidated Balance Sheet.

At December 31, 2022, the Company was a party to over 125 separate financial derivative instruments related to its fuel hedging program for future periods.

As of December 31, 2023, the Company was a party to over 200 separate financial derivative instruments related to its fuel hedging program for future periods.

Changes in the fair values of these instruments can vary dramatically based on changes in the underlying commodity prices.

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

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

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

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

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

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

At December 31, 2022, the loyalty liabilities were approximately $5.2 billion, including $3.0 billion classified within Air traffic liability and $2.2 billion classified as Air traffic liability – noncurrent.

As of December 31, 2023, the loyalty liabilities were approximately $4.9 billion, including $3.2 billion classified within Air traffic liability and $1.7 billion classified as Air traffic liability – noncurrent.

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

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

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

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

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For the year ended December 31, 2023, based on actual redemptions of points sold to business partners and earned through flights, a hypothetical one percentage point change in the estimated breakage rate would have resulted in a change to Passenger revenue of approximately $235 million (an increase in breakage would have resulted in an increase in revenue and a decrease in breakage would have resulted in a decrease in revenue).

Given that Member behavior will continue to develop as the program matures, the Company expects the current estimates may change in future periods.

Given that Member behavior may fluctuate over time, the Company expects the current estimates may change in future periods.

However, the Company believes its current estimates are reasonable given current facts and circumstances.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis