What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-06 compared with 2023-02-07 · 376 added, 451 removed, 1116 unchanged (43% of the section changed)

51 unchanged sentences

Southwest Airlines Co.

Consolidated Statement of Income (Loss)

Consolidated Statement of Income

(in millions, except per share amounts)

15 unchanged sentences

Total operating expenses, net 25,867 22,797 14,069

OPERATING INCOME (LOSS) 1,017 1,721 ( 3,816 )

OPERATING INCOME 224 1,017 1,721

OTHER EXPENSES (INCOME):

5 unchanged sentences

Total other expenses (income) ( 409 ) 289 396

INCOME (LOSS) BEFORE INCOME TAXES 728 1,325 ( 4,256 )

PROVISION (BENEFIT) FOR INCOME TAXES 189 348 ( 1,182 )

NET INCOME (LOSS) $ 539 $ 977 $ ( 3,074 )

NET INCOME (LOSS) PER SHARE, BASIC $ 0.91 $ 1.65 $ ( 5.44 )

NET INCOME (LOSS) PER SHARE, DILUTED $ 0.87 $ 1.61 $ ( 5.44 )

INCOME BEFORE INCOME TAXES 633 728 1,325

PROVISION FOR INCOME TAXES 168 189 348

NET INCOME $ 465 $ 539 $ 977

NET INCOME PER SHARE, BASIC $ 0.78 $ 0.91 $ 1.65

NET INCOME PER SHARE, DILUTED $ 0.76 $ 0.87 $ 1.61

See accompanying notes.

Southwest Airlines Co.

Consolidated Statement of Comprehensive Income (Loss)

Consolidated Statement of Comprehensive Income

(in millions)

1 unchanged sentence

2023 2022 2021

NET INCOME (LOSS) $ 539 $ 977 $ ( 3,074 )

NET INCOME $ 465 539 $ 977

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

1 unchanged sentence

( 337 ) ( 143 ) 469

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

Unrealized gain on interest rate derivative instruments, net of

deferred taxes of $ 4 , $ 6 , and $ 2

2 unchanged sentences

Other, net of deferred taxes of $ 4 , $ — , and ($ 13 )

( 4 ) — ( 47 )

OTHER COMPREHENSIVE INCOME (LOSS) $ ( 344 ) $ ( 44 ) $ 513

COMPREHENSIVE INCOME (LOSS) $ 495 $ 1,490 $ ( 3,118 )

COMPREHENSIVE INCOME $ 121 $ 495 $ 1,490

See accompanying notes.

9 unchanged sentences

Balance at December 31, 2020 $ 888 $ 4,191 $ 14,777 $ ( 105 ) $ ( 10,875 ) $ 8,876

Repurchase of common stock — — — — ( 451 ) ( 451 )

Issuance of common stock, net of issuance costs 80 2,144 — — — 2,224

Issuance of common and treasury stock pursuant to Employee stock plans — 17 — — 17 34

Share-based compensation — 17 — — — 17

Cash dividends, $ 0.18 per share

— — ( 94 ) — — ( 94 )

Stock warrants — 40 — — — 40

Equity feature of convertible notes, net of issuance costs — 392 — — — 392

Comprehensive loss — — ( 3,074 ) ( 44 ) — ( 3,118 )

Balance at December 31, 2020 $ 888 $ 4,191 $ 14,777 $ ( 105 ) $ ( 10,875 ) $ 8,876

Cumulative effect of adopting Accounting Standards Update No.

7 unchanged sentences

Cumulative effect of adopting Accounting Standards Update No.

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

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

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

2 unchanged sentences

— — ( 107 ) — — ( 107 )

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

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

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

Issuance of common and treasury stock pursuant to Employee stock plans — 30 — — 20 50

Share-based compensation — 86 — — — 86

Cash dividends, $ 0.18 per share

— — ( 429 ) — — ( 429 )

Comprehensive income (loss) $ — $ — $ 465 $ ( 344 ) $ — $ 121

Balance at December 31, 2023 $ 888 $ 4,153 $ 16,297 $ — $ ( 10,823 ) $ 10,515

See accompanying notes.

5 unchanged sentences

CASH FLOWS FROM OPERATING ACTIVITIES:

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

Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:

Net income $ 465 $ 539 $ 977

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

Depreciation and amortization 1,522 1,351 1,272

1 unchanged sentence

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

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

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

Deferred income taxes 159 228 ( 21 )

Gain on sale-leaseback transactions — — ( 222 )

Loss on extinguishment of debt — 193 28

7 unchanged sentences

Other, net ( 171 ) 28 28

Net cash provided by (used in) operating activities 3,790 2,322 ( 1,127 )

Net cash provided by operating activities 3,164 3,790 2,322

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures ( 3,520 ) ( 3,924 ) ( 505 )

Supplier proceeds — — 428

Proceeds from sale-leaseback transactions — — 815

Assets constructed for others ( 33 ) ( 22 ) ( 6 )

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CASH FLOWS FROM FINANCING ACTIVITIES:

Issuance of common stock — — 2,294

Proceeds from issuance of long-term debt — — 5,622

Proceeds from term loan credit facility — — 3,683

Proceeds from revolving credit facility — — 1,000

Proceeds from convertible notes — — 2,300

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

Proceeds from Employee stock plans 48 45 51

Repurchase of common stock — — ( 451 )

Payments of long-term debt and finance lease obligations ( 85 ) ( 2,437 ) ( 612 )

Payments of term loan credit facility — — ( 3,683 )

Payments of revolving credit facility — — ( 1,000 )

Payments of cash dividends ( 428 ) — —

Payments of terminated interest rate derivative instruments — — ( 59 )

Proceeds of terminated interest rate derivative instruments 23 — —

Payments for repurchases and conversions of convertible debt — ( 648 ) ( 293 )

Capitalized financing items — — ( 134 )

Other, net 6 8 77

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Income taxes $ 18 $ 20 $ 445

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:

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

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:

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

Right-of-use assets acquired under operating leases $ 82 $ 58 $ 327

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Worldwide Pandemic

New Accounting Pronouncements

Net Income (Loss) Per Share

New Accounting Pronouncements and Accounting Changes

Net Income Per Share

Commitments and Contingencies

2 unchanged sentences

Fair Value Measurements

Accumulated Other Comprehensive Income (Loss)

Accumulated Other Comprehensive Income

Employee Retirement Plans

Supplemental Financial Information

Boeing 73 7 MAX Grounding and Return to Service

Supplemental Financial Informatio n

Report of Independent Registered Public Accounting Firm

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

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

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

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

These estimated items included reimbursements to Customers impacted by the cancellations for costs they incurred, the estimated value of Rapid Rewards points offered as a gesture of goodwill to Customers that are expected to be redeemed, and premium pay and additional compensation for Employees directly or indirectly impacted by the cancellations and recovery efforts.

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

These canceled flights resulted in a significant reduction in Passenger revenues during this period and also created a deceleration in bookings, primarily isolated to January and February 2023.

In addition, the Company incurred significant costs associated with this event and recorded these expenses during December 2022 and first quarter 2023, totaling approximately $ 390 million and $ 55 million, respectively, which are included in the accompanying Consolidated Statement of Income.

These estimated items included reimbursements to Customers impacted by the cancellations for costs they incurred, the estimated value of Rapid Rewards points offered as a gesture of goodwill to Customers that are expected to be redeemed, and additional premium pay and additional compensation for Employees directly or indirectly impacted by the cancellations and recovery efforts.

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

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

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

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

Based on the Company's wide-scale operational disruption, the Company could be subject to fines and/or penalties resulting from investigations by government agencies as well as litigation from Customers and Shareholders.

On October 27, 2023, the Department of Transportation (the "DOT") notified the Company that it had determined the Company 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.

Cash and Cash Equivalents

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Cash and cash equivalents are stated at cost, which approximates fair value.

As of December 31, 2022 and 2021, $ 106 million and $ 175 million, respectively, in cash collateral deposits were held by the Company from its fuel hedge counterparties, and no cash collateral deposits were held by or provided by the Company to its interest rate hedge counterparties for either period.

As of December 31, 2023 and 2022, $ 50 million and $ 106 million, respectively, in cash collateral deposits were held by the Company from its fuel hedge counterparties.

As of December 31, 2023, the Company had no outstanding interest rate swap agreements and therefore no cash collateral deposits were provided by or held by the Company from interest rate hedge counterparties.

Additionally, as of December 31, 2022, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

Cash collateral amounts provided or held associated with fuel and interest rate derivative instruments are not restricted in any way and earn interest income at an agreed upon rate that approximates the rates earned on short-term securities issued by the U.S.

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See Note 11 for further information on these collateral deposits and fuel derivative instruments.

Notes to Consolidated Financial Statements

Short-term and Noncurrent Investments

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Government and certificates of deposit issued by domestic banks.

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

Notes to Consolidated Financial Statements

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

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

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

Unrealized gains and losses, net of tax, if any, are recognized in Accumulated other comprehensive income (loss) ("AOCI") in the accompanying Consolidated Balance Sheet.

Realized net gains and losses on specific investments, if any, are reflected in Interest income in the accompanying Consolidated Statement of Income (Loss).

Realized net gains and losses on specific investments, if any, are reflected in Interest income in the accompanying Consolidated Statement of Income.

Both unrealized and realized gains and/or losses associated with investments were immaterial for all years presented.

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See Note 16 for further information.

The allowance for doubtful accounts was immaterial at December 31, 2022 and 2021.

The allowance for doubtful accounts was immaterial as of December 31, 2023 and 2022.

In addition, the provision for doubtful accounts and write-offs for 2023, 2022, and 2021 were each immaterial.

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These items are generally charged to expense when issued for use.

The reserve for obsolescence was immaterial at December 31, 2022, and 2021.

The reserve for obsolescence was immaterial as of December 31, 2023, and 2022.

In addition, the Company’s provision for obsolescence and write-offs for 2023, 2022, and 2021 were each immaterial.

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

Factors that would indicate potential impairment include, but are not limited to, significant decreases in the market value of the long-lived asset group, a significant change in the long-lived asset group’s physical condition, and operating or cash flow losses associated with the use of the long-lived asset group.

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

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

Factors that would indicate potential impairment include, but are not

Notes to Consolidated Financial Statements

limited to, significant decreases in the market value of the long-lived asset group, a significant change in the long-lived asset group’s physical condition, and operating or cash flow losses associated with the use of the long-lived asset group.

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

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

There were no material impairments in 2023 associated with the accelerated retirement of the Company's aircraft.

However, the Company identified certain -700 aircraft that were retired early in 2023 or are planned for early retirement in 2024.

This change in retirement dates, and the corresponding impact to depreciation expense, is considered a change in estimate and resulted in the following impact to expense in 2023:

(in millions, except per share amounts) December 31, 2023

Depreciation and amortization expense $ 28

Net income * ( 17 )

Net income per basic share ( 0.03 )

Net income per diluted share ( 0.03 )

* net of profitsharing benefit and income taxes

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

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

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

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

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

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Aircraft and Engine Maintenance

The cost of scheduled inspections and repairs and routine maintenance costs for all aircraft and engines are charged to Maintenance materials and repairs expense within the accompanying Consolidated Statement of Income (Loss) as incurred.

The Company has maintenance agreements related to certain aircraft engines with external service providers, including agreements that effectively transfer the risk of performance of such work to the service provider.

Under the agreements where the risk of performance is deemed transferred to the counterparty, the appropriate expense is recorded commensurate with the period in which the corresponding level of service is provided.

For its engine maintenance contracts that do not transfer risk to the service provider, the Company records expense on a time and materials basis when an engine repair event takes place.

For its engine

Notes to Consolidated Financial Statements

maintenance contracts that do not transfer risk to the service provider, the Company records expense on a time and materials basis when an engine repair event takes place.

Modifications that significantly enhance the operating performance or extend the useful lives of aircraft or engines are capitalized and amortized over the remaining life of the asset.

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

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

Notes to Consolidated Financial Statements

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

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

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

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

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

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

Notes to Consolidated Financial Statements

of the COVID-19 pandemic.

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

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

On July 28, 2022, the Company modified its policy and announced that all unexpired flight credits as of that date, including flight credits previously extended as a result of the COVID-19 pandemic, will no longer have an expiration date and thus will be able to be redeemed by Customers indefinitely.

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

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Assumptions about the Customers' future travel behavior can be impacted by several factors including, but not limited to:

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

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

fare increases;

changes to the Company's ticketing policies;

changes to the Company’s refund, exchange, and unused flight credit policies;

seat availability;

and economic factors.

See Note 6 for further information.

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The remainder of the Company's Operating revenues, approximately $ 25.0 billion, approximately $ 23.0 billion, and approximately $ 15.3 billion in 2023, 2022, and 2021, respectively, were attributable to domestic operations.

Notes to Consolidated Financial Statements

Loyalty Program

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Advertising costs are charged to expense as incurred.

Advertising and promotions expense for the years ended December 31, 2022, 2021, and 2020 was $ 224 million, $ 185 million, and $ 156 million, respectively, and is included as a component of Other operating expense in the accompanying Consolidated Statement of Income (Loss).

Advertising and promotions expense for the years ended December 31, 2023, 2022, and 2021 was $ 266 million, $ 224 million, and $ 185 million, respectively, and is included as a component of Other operating expense in the accompanying Consolidated Statement of Income.

Share-based Employee Compensation

3 unchanged sentences

Financial Derivative Instruments

Notes to Consolidated Financial Statements

The Company accounts for financial derivative instruments at fair value and applies hedge accounting rules where appropriate.

The Company utilizes various derivative instruments, including jet fuel, crude oil, unleaded gasoline, and heating oil-based derivatives, to attempt to reduce the risk of its exposure to jet fuel price increases.

The Company utilizes various derivative instruments, including jet fuel, crude oil, unleaded gasoline, and heating oil-based derivatives, in an attempt to reduce the risk of its exposure to jet fuel price increases.

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

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

At times, the Company can have interest rate swap agreements, the primary objective of which is to hedge forecasted debt issuances.

These interest rate hedges are appropriately designated as cash flow hedges.

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Software Capitalization

Notes to Consolidated Financial Statements

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

1 unchanged sentence

Costs incurred during the preliminary project or the post-implementation/operation stages of the project are expensed as incurred.

Capitalized computer software, included as a component of Ground property and equipment in the accompanying Consolidated Balance Sheet, net of accumulated depreciation, was $ 928 million and $ 886 million at December 31, 2022, and 2021, respectively.

Computer software depreciation expense was $ 232 million, $ 213 million, and $ 203 million for the years ended December 31, 2022, 2021, and 2020, respectively, and is included as a component of Depreciation and amortization expense in the accompanying Consolidated Statement of Income (Loss).

The Company evaluates internal use software for impairment on a quarterly basis;

if it is determined the value of an asset was not recoverable or it qualifies for impairment, a charge will be recorded to write down the software to the lower of its carrying value or fair value.

Capitalized computer software, included as a component of Ground property and equipment in the accompanying Consolidated Balance Sheet, net of accumulated depreciation, was $ 1 billion and $ 928 million as of December 31, 2023, and 2022, respectively.

Computer software depreciation expense was $ 246 million, $ 232 million, and $ 213 million for the years ended December 31, 2023, 2022, and 2021, respectively, and is included as a component of Depreciation and amortization expense in the accompanying Consolidated Statement of Income.

The Company evaluates internal use software for impairment on a quarterly basis, and if it is determined the value of an asset was not recoverable or it qualifies for impairment, a charge will be recorded to write down the software to the lower of its carrying value or fair value.

The Company had no significant impairments during 2023, 2022, or 2021.

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

Notes to Consolidated Financial Statements

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

Penalties are recorded in Other (gains) losses, net, and interest paid or received is recorded in Interest expense or Interest income, respectively, in the accompanying Consolidated Statement of Income (Loss).

There were no material amounts recorded for penalties and interest related to uncertain tax positions for all years presented.

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

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

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

A portion of the Company's unionized Employees, including its Pilots, Flight Attendants, and Ramp Agents, which had contracts that became amendable on or before December 31, 2023, were in discussions on labor agreements as of December 31, 2023.

Those unionized Employee groups in discussions represented approximately 65 percent of the Company’s Employees as of December 31, 2023.

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

The newly ratified agreement becomes amendable in January 2029.

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

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

Notes to Consolidated Financial Statements

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

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The Boeing 737 MAX aircraft ("MAX") are crucial to the Company’s growth plans and fleet modernization initiatives.

On March 13, 2019, the FAA issued an emergency order for all U.S.

airlines to ground the MAX aircraft, including the 34 MAX aircraft in the Company's fleet.

On November 18, 2020, the FAA rescinded the emergency order and issued official requirements to enable U.S.

airlines to return the MAX to service.

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

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

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

Boeing has in the past experienced, and may continue to experience, delays in fulfilling its commitments with regards to delivery of the Boeing 737-8 ("-8") to the Company as a result of supply chain constraints.

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

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

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

If the MAX aircraft were to again become unavailable for the Company’s flight operations, the Company’s growth would be restricted unless and until it could procure and operate other types of aircraft from Boeing or another manufacturer, seller, or lessor, and the Company’s operations would be materially adversely affected.

If the MAX aircraft were to become unavailable for the Company’s flight operations, the Company’s growth would be restricted unless and until it could procure and operate other types of aircraft from Boeing or another manufacturer, seller, or lessor, and the Company’s operations would be materially adversely affected.

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

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The Company could also be materially adversely affected if the pricing or operational attributes of its aircraft were to become less competitive.

See Note 17 for further information.

The Company is also dependent on sole or limited suppliers for aircraft engines and certain other aircraft parts and services and would, therefore, also be materially adversely impacted in the event of the unavailability of, inadequate support for, or a mechanical or regulatory issue associated with, engines and other parts.

The Company is also dependent on sole or limited suppliers for aircraft engines and certain other aircraft parts and services.

Therefore, it would also be materially adversely impacted in the event of the unavailability of engines,

Notes to Consolidated Financial Statements

parts and certain repair services, the inability to find adequate support at commercially reasonable terms, or mechanical or regulatory issues associated with such engines or other parts or services.

The Company has historically entered into agreements with some of its co-brand, payment, and loyalty partners that contain exclusivity aspects which place certain confidential restrictions on the Company from entering into certain arrangements with other payment and loyalty partners.

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

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

Notes to Consolidated Financial Statements

variants of COVID-19.

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

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

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

Although there were no material noticeable impacts to revenues and bookings during 2023 associated with COVID-19, the Company continues to monitor demand for air travel and proactively adjust its published flight schedules and capacity in response to passenger travel patterns.

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

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

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

(dollars in millions, shares in thousands) Grant Promissory Note Warrants Total Payroll Support Proceeds Warrants (shares) as of December 31, 2023 Warrant Strike Price as of December 31, 2023 Promissory Note Maturity Date

PSP1 $ 2,337 $ 976 $ 40 $ 3,354 2,753 $ 35.45 /share

5 unchanged sentences

Total $ 5,040 $ 2,068 $ 85 $ 7,193 4,935

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

Notes to Consolidated Financial Statements

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

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

As of December 31, 2021, all grant portions of the Payroll Support programs received had been allocated and classified as a contra-expense line item in the Consolidated Statement of Income (Loss).

As of December 31, 2022, all grant portions of the Payroll Support programs received had been allocated and classified as a contra-expense line item in the Consolidated Statement of Income.

Although there is no directly applicable U.S.

GAAP guidance related to such government assistance received, the Company analogized its facts and circumstances, and has utilized the accounting principles within International Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance, with respect to the Payroll Support funds received.

GAAP guidance related to such government assistance received, the Company analogized its facts and circumstances, and utilized the accounting principles within International Accounting Standards 20, Accounting for Government Grants and Disclosure of Government Assistance, with respect to the Payroll Support funds received.

The Company has an option to prepay the promissory notes at any time without premium or penalty.

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

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

Notes to Consolidated Financial Statements

based on years of service.

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

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

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

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

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

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

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

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

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

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

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

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

NEW ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES

On November 17, 2021, the Financial Accounting Standards Board (the "FASB") issued ASU 2021-10, Government Assistance (Topic 832):

On December 14, 2023, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures.

This standard increases transparency and decision usefulness of income tax disclosures for investors by requiring information to better assess how an entity's operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows.

This standard requires entities to provide enhanced disclosures related to the income tax rate reconciliation and income taxes paid.

This standard is effective for all entities that are subject to Topic 740, Income Taxes for annual periods beginning after December 15, 2024, but early adoption is permitted.

The Company is evaluating this new standard but does not expect it to have a significant impact on its financial statement presentation or results.

See Note 15 for further information on the Company's income taxes.

On November 27, 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures.

This standard improves reportable segment disclosures by adding and enhancing interim disclosure requirements, clarifying circumstances in which entities can disclose multiple segment measures of profit or loss, providing new segment disclosure requirements for entities with a single reportable segment, and adding other disclosure requirements.

This standard is effective for all entities that are subject to Topic 280, Segment Reporting for annual periods beginning after December 15, 2023, but early adoption is permitted.

The Company is evaluating this new standard but does not expect it to have a significant impact on its financial statement presentation or results.

On November 17, 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832):

Disclosures by Business Entities about Government Assistance.

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

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

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

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

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

This standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call

Notes to Consolidated Financial Statements

options (such as warrants) that remain equity classified after modification or exchange.

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

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

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

These amendments do not apply to any

Notes to Consolidated Financial Statements

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

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

These amendments do not apply to any contract modifications made after December 31, 2024, any new hedging relationships entered into after December 31, 2024, or to existing hedging relationships evaluated for effectiveness existing as of December 31, 2024, that apply certain optional practical expedients.

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

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

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

NET INCOME (LOSS) PER SHARE

NET INCOME PER SHARE

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

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

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

An immaterial number of shares related to the Company's restricted stock units and stock warrants were excluded from the denominator for the fiscal years ended December 31, 2023, 2022, and 2021 because inclusion of such shares would

Notes to Consolidated Financial Statements

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

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

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

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

be antidilutive.

Year ended December 31,

2023 2022 2021

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

Net income $ 465 $ 539 $ 977

Interest expense (a) 19 22 —

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Adjusted weighted-average shares outstanding, diluted 640 642 609

NET INCOME (LOSS) PER SHARE:

NET INCOME PER SHARE:

Basic $ 0.78 $ 0.91 $ 1.65

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For the year ended December 31, 2023, all shares issuable on conversion were included in the denominator.

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

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

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

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

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

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

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

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

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

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

During the year ended December 31, 2023, the Company entered into supplemental agreements with The Boeing Company ("Boeing") relating to its contractual order book for -7 and -8 aircraft.

The revised agreement, which extends the order book to 2031, supports the Company's growth and fleet modernization plans, while also providing significant flexibility to manage its fleet size, including opportunities to accelerate fleet modernization efforts if growth opportunities do not materialize.

The Company received 86 -8 aircraft deliveries from Boeing in 2023 and retired 39 -700 aircraft.

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

Boeing continues to experience delays in fulfilling its commitments with regards to delivery of certain MAX aircraft to the Company, as a result of both supply chain constraints as well as achieving FAA certification of one of its new aircraft types, the -7, for which Southwest expects to be the launch customer.

During fourth quarter 2023, the Company exercised eight -7 options for delivery in 2025, accelerated one 2024 -8 firm order into 2023, converted and shifted three 2025 -7 firm orders to three 2024 -8 firm orders, and shifted an additional three 2025 -8 firm orders into 2024.

Therefore, as of December 31, 2023, the Company had the following firm orders and options for future periods:

Notes to Consolidated Financial Statements

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

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

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

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

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

The Boeing Company

-7 Firm Orders -8 Firm Orders -7 or -8 Options Total

2024 27 58 — 85 (c)

2025 59 — 15 74

2026 59 — 26 85

2027 19 46 25 90

2028 15 50 25 90

2029 38 34 18 90

2030 45 — 45 90

2031 45 — 45 90

307 (a) 188 (b) 199 694

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

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

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

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

$ 2.2 billion in 2024, $ 1.7 billion in 2025, $ 1.9 billion in 2026, $ 2.6 billion in 2027, $ 2.9 billion in 2028, and $ 5.3 billion thereafter.

Los Angeles International Airport

In April 2023, the Company executed a lease agreement with Los Angeles World Airports ("LAWA"), which owns and operates Los Angeles International Airport ("LAX"), for the ground lease and construction of a new concourse.

In this agreement, the Company will manage the development, design, financing, and construction of nine new gates, along with additional features, at LAX.

Construction of the concourse is estimated to be complete in late 2028 or early 2029 at a cost not to exceed $ 2.3 billion.

Funding for this project will flow through a credit facility and the outstanding loans are expected to be paid off directly by LAWA to the credit facility at project completion, thus reimbursing the Company on all costs drawn on the credit facility.

As of December 31, 2023, the credit facility has yet to be put into place and is expected to be established closer to the beginning of construction, which is anticipated to occur in 2025.

The Company is expected to be reimbursed by the credit facility on prior payments made once in place.

Based on this agreement, the Company has determined that it does have control over the assets during this project for accounting purposes.

As a result, the costs incurred to fund this project thus far, which totaled $ 62 million as of December 31, 2023, are included within Assets constructed for others on the accompanying Consolidated Balance Sheet.

Hobby Airport

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

In March 2022, the Company executed a Memorandum of Agreement ("MOA") with the City of Houston, Texas (the "City") which owns William P.

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

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

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

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

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

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

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

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

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

Los Angeles International Airport

In October 2017, the Company executed a lease agreement with Los Angeles World Airports ("LAWA") (the "T1.5 Lease").

Under the T1.5 Lease, the Company oversaw and managed the design, development, financing, construction, and commissioning of a passenger processing facility between Terminals 1 and 2 (the "Terminal 1.5 Project").

The Terminal 1.5 Project included ticketing, baggage claim, passenger screening, and a bus gate.

Construction on the Terminal 1.5 Project began during third quarter 2017 and was substantially completed at December 31, 2020.

The project final cost was approximately $ 410 million.

During second quarter 2021, LAWA repaid the outstanding loan and purchased the remaining completed assets for accounting purposes, at which time the Terminal 1.5 Project right-of-use asset and lease liability of $ 365 million on the balance sheet were de-recognized in accordance with applicable accounting guidance.

This repayment was also reported as a supplemental noncash transaction on the Consolidated Statement of Cash Flows, net of Assets constructed for others additions during the period.

Under the MOA, the Company will manage the development, design, and construction of seven new gates in Hobby's West Concourse.

The project is currently estimated to be completed in 2026 at a cost of at least $ 470 million.

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

Notes to Consolidated Financial Statements

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

Based on the MOA, as well as a terminal lease amendment expected to be finalized prior to the beginning of significant construction, the Company has determined that it does not control the assets during the construction period for accounting purposes, and thus will record the amounts funded for the project as a receivable until reimbursed by the City, and the balance is derecognized.

There were no material amounts recorded in the accompanying Consolidated Balance Sheet as of December 31, 2023.

Dallas Love Field

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

Pursuant to a Program Development Agreement

Notes to Consolidated Financial Statements

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

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

Major construction was effectively completed in 2014.

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

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

On June 30, 2022, the U.S.

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

Virgin America, Inc.

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

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

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

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

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

See Note 1 for further information.

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

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

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

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

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

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

Passenger Revenues

Notes to Consolidated Financial Statements

The Company’s contracts with its Customers primarily consist of its tickets sold, which are initially deferred as Air traffic liability.

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The following table provides the components of Passenger revenue recognized for the years ended December 31, 2023, 2022, and 2021:

Notes to Consolidated Financial Statements

Year ended December 31,

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Changes to breakage estimates impact revenue recognition prospectively.

Due to the size of the Company’s liability for loyalty benefits, changes in Customer behavior and/or expected future redemption patterns could result in significant variations in Passenger revenue.

Due to the size of the Company’s liability for loyalty benefits,

Notes to Consolidated Financial Statements

changes in Customer behavior and/or expected future redemption patterns could result in significant variations in Passenger revenue.

The Company allocates consideration received to performance obligations based on the relative fair value of those obligations.

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

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

Notes to Consolidated Financial Statements

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

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

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

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Rollforwards of the Company's Air traffic liability - loyalty program for the years ended December 31, 2023 and 2022 were as follows (in millions):

Notes to Consolidated Financial Statements

Year ended December 31,

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Air traffic liability - loyalty program - ending balance $ 4,916 $ 5,189

Notes to Consolidated Financial Statements

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

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Balance at December 31, 2022 $ 8,250

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

See Note 2 for further information.

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

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

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

Prior to this change, flight credits would expire twelve months from the original fare purchase date.

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

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

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

The Company’s balance of existing Customer flight credits as of the modification date was approximately $ 1.9 billion, including a portion of the extended flight credits issued during the early portion of the COVID-19 pandemic, that had been set to expire on September 7, 2022.

See Note 2 for further information.

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

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

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

The amount of Customer flight credits represents approximately 8 percent and 9 percent of the total Air traffic liability balance as of December 31, 2023, and December 31, 2022, respectively, compared to approximately 2 percent of the Air traffic liability balance as of December 31, 2019.

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

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

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

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

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

Notes to Consolidated Financial Statements

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

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

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

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

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

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

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

Pass Through Certificates due 2022 - 6.24 %

5.25 % Notes due 2025

4.75 % Notes due 2023

$ 1,302 $ 1,302

1.25 % Convertible Notes due 2025

3.00 % Notes due 2026

7.375 % Debentures due 2027

3.45 % Notes due 2027

5.125 % Notes due 2027

7.375 % Debentures due 2027

2.625 % Notes due 2030

1.000 % Payroll Support Program Loan due April 2030 (See Note 2)

1.000 % Payroll Support Program Loan due January 2031 (See Note 2)

1.000 % Payroll Support Program Loan due April 2031 (See Note 2)

1.000 % Payroll Support Program Loan due 2030 (See Note 2)

1.000 % Payroll Support Program Loan due 2031 (See Note 2)

Finance leases 104 189

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

A portion of the proceeds from the $ 1.3 billion 2027

Notes to Consolidated Financial Statements

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

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

Notes to Consolidated Financial Statements

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

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

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

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

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

The notes bore interest at 4.750 %.

Interest was payable semi-annually in arrears.

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

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

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

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

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

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The Company intends to settle conversions by paying cash up to the principal amount of the Convertible Notes, with any excess conversion value settled in cash or shares of common stock.

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

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

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

However, based on the Company's most recent cash dividends declared in November 2023, the bond conversion rate changed, and was 26.7188 as of December 31, 2023.

As of December 31, 2023, the if-converted value of the Convertible Notes was less than the principal amount by $ 368 million, using the Company's closing stock price.

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

Notes to Consolidated Financial Statements

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

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

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

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

Equity component:

Carrying amount of Convertible Notes $ — $ 311

Carrying amount of issuance costs — ( 11 )

Net carrying amount $ — $ 300

Liability component:

Principal amount $ 1,611 $ 2,097

Unamortized debt discount — ( 255 )

Net carrying amount $ 1,611 $ 1,842

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

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

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

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

Non-cash amortization of debt issuance costs $ 10 $ 12

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

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

The Company had no changes to contingencies for the year ended December 31, 2023.

The effective interest rate associated with the Convertible Notes was approximately 1.9 percent for the year ended December 31, 2023.

Notes to Consolidated Financial Statements

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

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

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

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

No such instances of partial extinguishment or early prepayment of debt occurred for the year ended December 31, 2023.

Additionally, there were no Convertible Note conversions exercised or settled during 2022 or 2023.

Year ended December 31, 2022

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

Year ended December 31, 2021

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

1.25 % Convertible Notes due 2025

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

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

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

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

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

The 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 (i) extend the maturity to August 4, 2028, (ii) release all aircraft and other assets constituting collateral securing the loans made under the Amended Credit Agreement, (iii) delete all provisions and terminate all agreements, in each case, relating to the grant of such collateral, (iv) eliminate the role of “Collateral Agent” under the Amended Credit Agreement after giving effect to the amendment, terminations, and releases, (v) eliminate the minimum liquidity covenant, (vi) add a Coverage Ratio financial covenant, (vii) amend the Collateral Coverage Test covenant requiring that a pool of lien-free specified aircraft and related assets have a minimum aggregate appraised value, and add certain covenants with respect to such pool of assets, (viii) amend the pricing and fees, (ix) increase certain materiality thresholds, (x) grant longer grace periods for certain defaults, and (xi) update and amend certain other provisions.

For the twelve months ended December 31, 2023 and 2022 there were no amounts outstanding under the Amended Credit Agreement.

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

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

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

The Amended A&R Credit Agreement is secured by a pool of 83 aircraft and related assets, each with a minimum appraised value ratio requirement.

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

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

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

Notes to Consolidated Financial Statements

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

The facility contains a financial covenant requiring a minimum coverage ratio of adjusted pre-tax income to fixed obligations, as defined.

As of December 31, 2023, the Company was in compliance with this covenant and all other covenants in the Amended Credit Agreement.

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

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

The notes bore interest at 2.75 percent.

Interest was payable semi-annually in arrears.

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

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

The notes bear interest at 3.45 percent.

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Interest is payable semi-annually in arrears.

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

A separate trust was established for each class of certificates.

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

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

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

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

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

Interest is payable semi-annually.

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

The debentures may be redeemed, at the option of the Company, in whole at any time or in part from time to time, at a redemption price equal to the greater of the principal amount

Notes to Consolidated Financial Statements

of the debentures plus accrued interest at the date of redemption or the sum of the present values of the remaining scheduled payments of principal and interest thereon, discounted to the date of redemption at the comparable treasury rate plus 20 basis points, plus accrued interest at the date of redemption.

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

Although the letters of credit are an off-balance sheet item, the majority of the obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet.

Outstanding letters of credit totaled $ 162 million at December 31, 2022.

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

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

Outstanding letters of credit totaled $ 110 million as of December 31, 2023.

The Company had no assets pledged as collateral for its borrowings as of December 31, 2023.

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

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

As of December 31, 2023, aggregate annual principal maturities of debt and finance leases (not including amounts associated with interest on finance leases) are as follows:

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Total $ 8,012

Notes to Consolidated Financial Statements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Company completed the purchase of 31 of these aircraft during fourth quarter 2022, and the remaining eight aircraft during first quarter 2023.

The Company paid the lessor $ 365 million and $ 88 million in fourth quarter 2022 and first quarter 2023, respectively, as part of this transaction, of which $ 191 million and $ 50 million were recorded as the elimination of the Company’s remaining finance lease obligation for the aircraft, and which was also reflected within Payments of long-term debt and finance lease obligations in the accompanying Consolidated Statement of Cash Flows.

The remaining $ 174 million and $ 38 million was the net purchase price of the aircraft and is included as part of the Company’s Capital expenditures for fourth quarter 2022 and first quarter 2023, respectively.

In second and third quarter 2023, the Company also entered into additional transactions with third parties to purchase four -700 aircraft, all of which were already in the Company's fleet under finance lease terms.

The Company paid the lessors $ 44 million in 2023, of which $ 3 million was recorded as the elimination of the Company's remaining finance lease obligation for the aircraft, and which was also reflected within Payments of

Notes to Consolidated Financial Statements

long-term debt and finance lease obligations in the accompanying Consolidated Statement of Cash Flows.

The remaining $ 41 million was the net purchase price of the aircraft and is included as part of the Company's Capital expenditures for 2023.

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

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

As of December 31, 2023, the Company has 24 finance leased aircraft remaining.

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

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

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

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

Notes to Consolidated Financial Statements

Certain leases can be renewed from six months to one year .

Lease-related assets and liabilities recorded on the Consolidated Balance Sheet were as follows:

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Total lease liabilities $ 1,297 $ 1,532

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

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

(in millions) Year ended December 31, 2023 Year ended December 31, 2022 Year ended December 31, 2021

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

Notes to Consolidated Financial Statements

( in millions )

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Operating leases 82 58 327

Notes to Consolidated Financial Statements

As of December 31, 2023, maturities of lease liabilities were as follows:

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Weighted average discount rate

Operating leases (a) 3.6 % 3.5 %

Operating leases 4.0 % 3.6 %

Finance leases 3.9 % 3.9 %

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

On May 1, 2020, the Company completed the public offering of 80.5 million shares of $ 1.00 par value common stock of the Company, which included the full exercise of the underwriters’ option to purchase an additional 10.5 million shares of common stock, at a public offering price of $ 28.50 per share.

As discussed further in Note 2, in connection with funding that the Company has received under the PSP1 Payroll Support Program, PSP2 Payroll Support Program, and PSP3 Payroll Support Program, the Company issued Warrants to acquire up to 4.8 million shares of the Company's common stock to Treasury.

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

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

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

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

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

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

Share-based Compensation

As of December 31, 2023, the Company had 75 million shares of common stock reserved for issuance pursuant to Employee equity plans (of which 30 million shares had not been granted) through various share-based compensation arrangements.

Additionally, as part of the consideration for its receipt of funding under the Payroll Support programs, the Company entered into warrant agreements with Treasury.

Warrants will be settled through net share settlement or net cash settlement, at the Company's option.

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

See Notes 2 and 10 to the Consolidated Financial Statements for information regarding the Company's warrant agreements and equity plans, respectively.

Notes to Consolidated Financial Statements

Share-based Compensation

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

The Consolidated Statement of Income (Loss) for the years ended December 31, 2022, 2021, and 2020, reflects share-based compensation expense of $ 84 million, $ 58 million, and $ 17 million, respectively.

The Consolidated Statement of Income for the years ended December 31, 2023, 2022, and 2021, reflects share-based compensation expense of $ 86 million, $ 84 million, and $ 58 million, respectively.

The total tax impact recognized in earnings from share-based compensation arrangements for the years ended December 31, 2023, 2022, and 2021, was not material.

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

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

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

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

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

Vesting is also subject generally to the individual's continued employment or service.

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

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

Based on cumulative EBITDA for the years 2022 and 2023, the number of PBRSUs expected to vest for the 2021 grants is equal to approximately 276 percent of the PBRSUs granted.

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

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Notes to Consolidated Financial Statements

Under the 2023 grants, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's Adjusted ROIC performance, as defined, and ranges from zero PBRSUs to 200 percent of granted PBRSUs, only after a minimum performance level has been achieved.

Adjusted ROIC for the Performance Period is the average of the ROIC, using an assumed federal tax rate of 24 percent, over the three full fiscal years within the Performance Period (2023, 2024, and 2025), and vesting is also subject generally to the individual’s continued employment or service.

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

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

With respect to PBRSUs granted in 2021, 2022, and 2023, provided that the individual's service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” such individual’s PBRSUs will remain outstanding as if the individual’s service has not terminated and will otherwise be settleable in accordance with the notice of grant and applicable terms and conditions;

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(b) Includes 700 thousand PBRSUs

In addition, the Company granted approximately 42 thousand shares of unrestricted stock at a weighted average grant price of $ 44.23 in 2022, approximately 27 thousand shares at a weighted average grant price of $ 60.39 in 2021, and approximately 54 thousand shares at a weighted average grant price of $ 29.60 in 2020, to members of its Board of Directors.

In addition, the Company granted approximately 73 thousand shares of unrestricted stock at a weighted average grant price of $ 30.12 in 2023, approximately 42 thousand shares at a weighted average grant price of $ 44.23 in

Notes to Consolidated Financial Statements

2022, and approximately 27 thousand shares at a weighted average grant price of $ 60.39 in 2021, to members of its Board of Directors.

A remaining balance of up to 13 million shares of the Company’s common stock may be issued pursuant to grants under the 2007 Equity Plan.

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Common stock purchases are paid for through periodic payroll deductions.

Notes to Consolidated Financial Statements

The following table provides information about the Company’s ESPP activity during 2023, 2022, and 2021:

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

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

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

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

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The level at which the Company is economically hedged for a particular period is also dependent on current market prices for that period, as well as the types of derivative instruments held and the strike prices of those instruments.

For example, the Company may enter into "out-of-the-money" option contracts (including "catastrophic" protection), which may not generate intrinsic gains at settlement if market prices do not rise above the option strike price.

For example, the Company may enter into "out-of-the-money" option contracts (including "catastrophic" protection, which the Company defines as prices significantly higher than historical average levels), which may not generate intrinsic gains at settlement if market prices do not rise above the option strike price.

Therefore, even though the Company may have an economic hedge in place for a particular period, that hedge may not produce any hedging gains at settlement and may even produce hedging losses depending on market prices, the types of instruments held, and the strike prices of those instruments.

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2024 1,265 WTI crude oil and Brent crude oil

2024 748 WTI crude oil and Brent crude oil

2025 1,033 Brent crude oil

2026 358 Brent crude oil

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

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

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

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

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

Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de-designated as hedges are concurrently marked to market through earnings.

Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de-designated as hedges are concurrently marked to market through the Consolidated Statement of Income.

However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs.

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

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

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

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

The Company did not have any such situations where a derivative ceased to qualify for hedge accounting during 2022 and 2023.

Accounting pronouncements pertaining to derivative instruments and hedging are complex with stringent requirements, including the documentation of a Company hedging strategy, statistical analysis to qualify a commodity for hedge accounting both on a historical and a prospective basis, and strict contemporaneous documentation that is required at the time each hedge is designated by the Company.

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

Notes to Consolidated Financial Statements

Asset derivatives Liability derivatives

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Interest rate derivative contracts Other assets — 14 — —

Interest rate derivative contracts Other noncurrent liabilities — — — 4

Total derivatives designated as hedges $ 223 $ 526 $ — $ —

Notes to Consolidated Financial Statements

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

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

As of December 31, 2022, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

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

Notes to Consolidated Financial Statements

As of December 31, 2023, the Company had no outstanding interest rate swap agreements and therefore no cash collateral deposits provided or held.

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

Offsetting of derivative assets

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

Notes to Consolidated Financial Statements

Offsetting of derivative liabilities

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Fuel derivative contracts Other assets $ 35 $ ( 35 ) $ — (a) $ — $ — $ — (a)

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

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

Notes to Consolidated Financial Statements

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

The following tables present the impact of derivative instruments and their location within the Consolidated Statement of Income for the years ended December 31, 2023 and 2022:

Location and amount recognized in income on cash flow hedging relationships

Year ended December 31, 2023 Year ended December 31, 2022

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

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

Total $ ( 128 ) $ 7 $ ( 832 ) $ 7

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Commodity contracts:

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

Amount of gain reclassified from AOCI into income ( 128 ) — ( 832 ) —

Interest contracts:

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Total $ 231 $ ( 508 )

Notes to Consolidated Financial Statements

Derivatives not designated as hedges

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

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

Notes to Consolidated Financial Statements

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

Premium (benefit) expense recognized in income on derivatives

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

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

Included in the Company’s cumulative unrealized gains from fuel hedges as of December 31, 2023, recorded in AOCI, were approximately $ 55 million in unrealized losses, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to December 31, 2023.

Interest Rate Swaps

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

The Company is at times party to certain interest rate swap agreements that are accounted for as cash flow hedges, but had none in place as of December 31, 2023.

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

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

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

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

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

During the periods presented, all of the Company's interest rate swap agreements have qualified for the "shortcut" or "critical terms match" methods of accounting for hedges, which dictate that the hedges were assumed to be perfectly effective at origination, and, thus, there was no ineffectiveness to be recorded in the Consolidated Statement of Income.

During fourth quarter 2023, the Company terminated $ 150 million notional value of forward-starting interest rate swap agreements.

These swap agreements had been classified as cash flow hedges, and all fair market value changes were recorded to AOCI prior to their termination.

The effect of this termination is that the value of the swaps originally recorded in AOCI, a gain of $ 23 million, will be amortized to Interest expense over the life of the debt, which will be within the years 2024-2027.

Credit Risk and Collateral

Notes to Consolidated Financial Statements

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

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

At December 31, 2022, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating.

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

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

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

Notes to Consolidated Financial Statements

Counterparty (CP)

(in millions) A B C D E F G Other (a) Total

(in millions) A B C D E F G H Total

Fair value of fuel derivatives $ 53 $ 21 $ 36 $ 10 $ 39 $ 15 $ 31 $ 18 $ 223

Cash collateral held from CP 50 — — — — — — — 50

Letters of credit (LC) — — — — — — — —

Option to substitute LC for cash N/A N/A (b)

Option to substitute LC for cash N/A N/A (a)

If credit rating is investment

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Cash is provided to CP >( 100 )

Cash is received from CP > 0 (c)

Cash is received from CP > 0 (b)

If credit rating is non-investment

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level at which:

Cash is received from CP (d)

(a) Individual counterparties with fair value of fuel derivatives <$ 16 million.

(b) The Company has the option to substitute letters of credit for 100 percent of cash collateral requirement.

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

Cash is received from CP (c)

(a) The Company has the option to substitute letters of credit for 100 percent of cash collateral requirement.

(b) Thresholds may vary based on changes in credit ratings within investment grade.

Notes to Consolidated Financial Statements

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As of December 31, 2023, the Company held certain items that are required to be measured at fair value on a recurring basis.

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

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

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

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

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

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

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

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

Notes to Consolidated Financial Statements

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

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

Fair value measurements at reporting date using:

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Certificates of deposit 203 — 203 —

Time deposits 450 — 450 —

Fuel derivatives:

Option contracts (b) 223 — — 223

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

Equity Securities 280 280 — —

Total assets $ 11,977 $ 11,295 $ 459 $ 223

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

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

(b) In the Consolidated Balance Sheet amounts are presented as an asset.

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Commercial paper 179 — 179 —

Certificates of deposit 23 — 23 —

Time deposits 250 — 250 —

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Treasury bills 2,226 2,226 — —

Certificates of deposit 124 — 124 —

Time deposits 450 — 450 —

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Option contracts (b) 512 — — 512

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

Equity Securities 235 235 — —

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

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

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

Notes to Consolidated Financial Statements

(b) In the Consolidated Balance Sheet amounts are presented as an asset.

Notes to Consolidated Financial Statements

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2023 or 2022.

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(in millions) Fuel derivatives

Balance at December 31, 2021 $ 696

Total gains for the period

Balance as of December 31, 2022 $ 512

Total gains (losses) for the period

Included in earnings 17 (a)

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Settlements ( 267 )

Balance at December 31, 2022 $ 512

The amount of total gains for the period included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held at December 31, 2022 $ 122

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

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

Balance as of December 31, 2023 $ 223

The amount of total losses for the period included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held as of December 31, 2023 $ 209

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

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

Fair value measurements using significant unobservable inputs (Level 3)

(in millions) Fuel derivatives

Balance at December 31, 2020 $ 134

Balance as of December 31, 2021 $ 696

Total gains for the period

Included in earnings 41 (a)

Included in other comprehensive loss 609

Included in other comprehensive income 645

Purchases 79 (b)

Settlements ( 949 )

Balance at December 31, 2021 $ 696

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

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

Balance as of December 31, 2022 $ 512

The amount of total gains for the period included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held as of December 31, 2022 $ 122

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

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

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

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

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

Quantitative information about Level 3 fair value measurements

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2025 26 - 28 %

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

2026 26 - 27 %

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

Notes to Consolidated Financial Statements

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

The carrying amounts and estimated fair values of the Company’s short-term and long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, as of December 31, 2023, are presented in the table below.

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

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

5.25 % Notes due 2025

1,302 1,303 Level 2

1.25 % Convertible Notes due 2025

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300 285 Level 2

3.00 % Notes due 2026

7.375 % Debentures due 2027

111 117 Level 2

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1,727 1,737 Level 2

7.375 % Debentures due 2027

114 120 Level 2

2.625 % Notes due 2030

500 438 Level 2

1.000 % Payroll Support Program Loan due April 2030

1.000 % Payroll Support Program Loan due 2030 (a)

976 932 Level 3

1.000 % Payroll Support Program Loan due January 2031

1.000 % Payroll Support Program Loan due 2031 (a)

566 522 Level 3

1.000 % Payroll Support Program Loan due April 2031

1.000 % Payroll Support Program Loan due 2031 (a)

526 481 Level 3

(a) The interest rate will change to Secured Overnight Financing Rate plus two percent on the fifth anniversary of the loans.

Notes to Consolidated Financial Statements

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

ACCUMULATED OTHER COMPREHENSIVE INCOME

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

A rollforward of the amounts included in AOCI, net of taxes, is shown below for 2023 and 2022:

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

comprehensive income (loss)

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

comprehensive income

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

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

Changes in fair value 645 18 106 ( 179 ) 590

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Year ended December 31, 2023

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

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

AOCI components

Unrealized (gain) on fuel derivative instruments $ ( 128 ) Fuel and oil expense

— Other (gains) losses, net

( 195 ) Less:

$ ( 99 ) Net of tax

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Unrealized (gain) on defined benefit plan $ ( 10 ) Other (gains) losses, net

$ ( 3 ) Less:

$ ( 7 ) Net of tax

Other $ — Other

$ ( 4 ) Net of tax

Total reclassifications for the period $ ( 104 ) Net of tax

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Defined Contribution Plans

Southwest has defined contribution plans covering substantially all of its Employees.

The Company has defined contribution plans covering substantially all of its Employees.

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

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In addition, the Southwest Airlines Co.

ProfitSharing Plan (ProfitSharing Plan) is a defined contribution plan to which the Company may contribute a percentage of its eligible pre-tax profits, as defined, on an annual basis.

ProfitSharing Plan (the "ProfitSharing Plan") is a defined contribution plan to which the Company may contribute a percentage of its eligible pre-tax profits, as defined, on an annual basis.

No Employee contributions to the ProfitSharing Plan are allowed.

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Benefits paid ( 9 ) ( 11 )

Actuarial gain ( 106 ) ( 109 )

Actuarial (gain) loss 11 ( 106 )

APBO at end of period $ 269 $ 241

During 2022, the Company recorded a $ 106 million actuarial gain as a decrease to the APBO with an offset to AOCI.

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

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

During 2023, the Company recorded an $ 11 million actuarial loss as an increase to the APBO with an offset to AOCI.

This 2023 actuarial loss is reflected above and resulted from changes in certain key assumptions used to determine the Company’s year-end obligation.

The assumption change that resulted in the largest portion of the actuarial loss was a decrease in the discount rate used.

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

Estimated future benefit payments expected to be paid are $ 15 million in 2024, $ 18 million in 2025, $ 19 million in 2026, $ 20 million in 2027, $ 21 million in 2028, and $ 127 million for the next five years thereafter.

The following table reconciles the funded status of the plans to the accrued postretirement benefit cost recognized in Other non-current liabilities on the Company’s Consolidated Balance Sheet at December 31, 2022 and 2021.

The following table reconciles the funded status of the plans to the accrued postretirement benefit cost recognized in Other noncurrent liabilities on the Company’s Consolidated Balance Sheet as of December 31, 2023 and 2022.

(in millions) 2023 2022

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Interest cost 12 9 10

Amortization of prior service cost $ — — 1

Amortization of net gain ( 10 ) ( 2 ) —

Curtailment — — 53

Special termination benefits — — 2

Net periodic postretirement benefit cost $ 16 $ 26 $ 35

Service cost and Special termination benefits are recognized within Salaries, wages, and benefits expense, and all other costs are recognized in Other (gains) losses, net in the Consolidated Statement of Income (Loss).

Service cost is recognized within Salaries, wages, and benefits expense, and all other costs are recognized in Other (gains) losses, net in the Consolidated Statement of Income.

Unrecognized prior service cost is expensed using a straight-line amortization of the cost over the average future service of Employees expected to receive benefits under the plans.

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The selection of a discount rate is made annually and is selected by the Company based upon comparison of the expected future cash flows associated with the Company’s future payments under its consolidated postretirement obligations to a yield curve created using high quality bonds that closely match those expected future cash flows.

This rate increased during 2022 due to market conditions.

This rate decreased during 2023 due to market conditions.

The assumed healthcare trend rate is also reviewed at least annually and is determined based upon both historical experience with the Company’s healthcare benefits paid and expectations of how those trends may or may not change in future years.

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Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

The components of deferred tax assets and liabilities at December 31, 2022 and 2021, are as follows:

The components of deferred tax assets and liabilities as of December 31, 2023 and 2022, are as follows:

(in millions) 2023 2022

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Operating lease right-of-use assets 276 311

Other 154 188

Total deferred tax liabilities 4,220 3,982

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Accrued employee benefits 757 424

Rapid rewards loyalty liability 616 636

Loyalty program and flight credit liability 599 659

Operating lease liabilities 279 313

Customer flight credits 43 305

Net operating losses and tax credits (a) 309 310

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Net deferred tax liability $ 2,044 $ 1,985

(a) At December 31, 2022 and 2021, the Company had approximately $ 43 million and $ 44 million, respectively, of state net operating loss carryforwards (tax effected) to reduce future state taxable income.

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

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

The federal net operating loss can be carried forward indefinitely.

(a) As of December 31, 2023 and 2022, the Company had approximately $ 36 million and $ 43 million, respectively, of state net operating loss carryforwards (tax effected) to reduce future state taxable income.

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

As of December 31, 2023 and 2022, the Company had $ 268 million and $ 275 million, respectively, of federal net operating loss carryforwards (tax effected) that may be carried forward indefinitely.

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

(in millions) 2023 2022 2021

Federal (a) $ ( 36 ) $ 337 $ ( 273 )

Federal $ ( 10 ) $ ( 36 ) $ 337

State 19 ( 3 ) 33

Change in federal statutory rate (b) — ( 2 ) ( 188 )

Change in federal statutory rate — — ( 2 )

Total current 9 ( 39 ) 368

Federal (a) 208 ( 43 ) ( 589 )

Federal 140 208 ( 43 )

State 19 20 23

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Income tax provision (benefit) $ 168 $ 189 $ 348

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

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

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

Notes to Consolidated Financial Statements

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State income taxes, net of federal benefit 30 12 45

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

Change in federal statutory tax rate — — ( 2 )

Convertible debt repurchases — 31 21

DOT settlement 22 — —

Federal tax credits ( 19 ) ( 13 ) ( 2 )

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Total income tax provision (benefit) $ 168 $ 189 $ 348

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

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

The only periods subject to examination for the Company’s federal tax return are tax years 2020-2023.

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

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Business partners and other suppliers 501 478

Taxes receivable (a) 133 699

Taxes receivable 35 133

Fuel hedging and receivables 12 34

Other 302 193

Accounts and other receivables $ 1,154 $ 1,040

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Intangible assets, net 296 296

Other 385 395

Equity Securities 280 235

Prepaid Maintenance 258 119

Other assets $ 964 $ 855

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Dividends payable 107 107

Customer reimbursements and refunds (b) 311 —

Customer reimbursements and refunds (a) 8 311

Accrued third party services 269 196

Other payable 210 162

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

Voluntary Separation Program 72 92

Voluntary Separation Program (c) 65 72

Profitsharing and savings plans 141 167

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Interest 34 45

Deferred supplier payments (c) — 80

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

Bonus and incentive pay (b) 2,022 563

Other 469 250

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

Voluntary Separation Program 147 233

Voluntary Separation Program (c) 61 147

Postretirement obligation 269 241

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Other noncurrent liabilities $ 981 $ 969

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

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

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

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

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

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

See Note 1 for further information.

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

See Note 17 for further information.

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

(a) As of December 31, 2022, included customer reimbursement expenses due to the Company's December 2022 operational disruption and refund submissions that had yet to be processed.

As of December 31, 2023, amounts primarily consist of normal current activity.

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

Also includes non-contract incentive pay.

Included in Salaries, wages and benefits expense for the year ended December 31, 2023, are incremental expenses of $ 180 million for changes in estimate related to the contract ratification bonus for the Company’s Flight Attendants, and $ 354 million related to the contract ratification bonus for the Company's Pilots.

The cumulative $ 534 million is included in the balance as of December 31, 2023.

The Company began accruing for these open labor contracts on April 1, 2022.

The incremental $ 180 million expense related to the contract ratification bonuses for Flight Attendants extends the timeframe covered by the ratification bonus to the date the contract became amendable on November 1, 2018.

The incremental $ 354 million expense related to the contract ratification bonuses for Pilots is primarily to increase pay rates for all periods to the date the contract became amendable, which was September 1, 2020.

These bonuses for both Flight Attendants and Pilots serve to compensate for missed wage increases over these time periods.

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

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

For both the Voluntary Separation Program and Extended ETO programs combined, approximately $ 93 million and $ 109 million of the liability balances were relieved during 2023 and 2022, respectively, through payments to Employees.

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

Therefore, a portion of the accruals previously recorded were reversed, resulting in a net $ 140 million credit to expense during 2021, and the entire liability was fully relieved at March 31, 2022.

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

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

Notes to Consolidated Financial Statements

Other Operating Expenses

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

BOEING 737 MAX AIRCRAFT GROUNDING AND RETURN TO SERVICE

On March 13, 2019, the FAA issued an emergency order for all U.S.

airlines to ground all MAX aircraft.

The Company immediately complied with the order and grounded all 34 MAX aircraft in its fleet.

On November 18, 2020, the FAA rescinded the emergency order and issued official requirements to enable U.S.

airlines to return the

Notes to Consolidated Financial Statements

MAX to service.

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

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

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

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

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

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

No material financial impacts of the agreement were realized in the Company’s earnings during the years ended December 31, 2020, 2021, or 2022.

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

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

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

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

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

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

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We have audited the accompanying consolidated balance sheets of Southwest Airlines Co.

(the Company) as of December 31, 2022 and 2021, the related consolidated statements of income (loss), comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”).

(the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S.

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We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

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

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

Notes to Consolidated Financial Statements

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

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

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

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

Notes to Consolidated Financial Statements

audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation of fuel derivative instruments

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

Loyalty Program - Valuation of co-brand marketing component

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

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

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

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

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

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

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

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

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

/s/ Ernst & Young LLP

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We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Southwest Airlines Co.

as of December 31, 2022 and 2021, the related consolidated statements of income (loss), comprehensive income (loss), stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”) of the Company and our report dated February 6, 2023 expressed an unqualified opinion thereon.

as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”) of the Company and our report dated February 6, 2024 expressed an unqualified opinion thereon.

Basis for Opinion

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data