What changed in this filing

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Item 1. Financial Statements

2024-04-26 compared with 2023-10-30 · 227 added, 358 removed, 467 unchanged (56% of the section changed)

3 unchanged sentences

(in millions)

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Current assets:

40 unchanged sentences

Southwest Airlines Co.

Condensed Consolidated Statement of Comprehensive Income (Loss)

Condensed Consolidated Statement of Comprehensive Loss

(in millions, except per share amounts)

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

2023 2022 2023 2022

Three months ended March 31,

OPERATING REVENUES:

11 unchanged sentences

Total operating expenses 6,722 5,990

OPERATING INCOME 117 395 628 1,402

OPERATING LOSS ( 393 ) ( 284 )

OTHER EXPENSES (INCOME):

2 unchanged sentences

Interest income ( 141 ) ( 125 )

Loss on extinguishment of debt — 76 — 192

Other (gains) losses, net ( 23 ) ( 39 ) ( 44 ) 57

Total other expenses (income) ( 120 ) 42 ( 291 ) 389

INCOME BEFORE INCOME TAXES 237 353 919 1,013

PROVISION FOR INCOME TAXES 44 76 202 254

NET INCOME $ 193 $ 277 $ 717 $ 759

NET INCOME PER SHARE, BASIC $ 0.32 $ 0.47 $ 1.20 $ 1.28

NET INCOME PER SHARE, DILUTED $ 0.31 $ 0.44 $ 1.15 $ 1.21

COMPREHENSIVE INCOME (LOSS) $ 336 $ ( 223 ) $ 574 $ 676

Other gains, net ( 12 ) ( 14 )

Total other income ( 95 ) ( 79 )

LOSS BEFORE INCOME TAXES ( 298 ) ( 205 )

BENEFIT FOR INCOME TAXES ( 67 ) ( 46 )

NET LOSS $ ( 231 ) $ ( 159 )

NET LOSS PER SHARE, BASIC $ ( 0.39 ) $ ( 0.27 )

NET LOSS PER SHARE, DILUTED $ ( 0.39 ) $ ( 0.27 )

COMPREHENSIVE LOSS $ ( 212 ) $ ( 306 )

WEIGHTED AVERAGE SHARES OUTSTANDING

11 unchanged sentences

— — ( 107 ) — — ( 107 )

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

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

Issuance of common and treasury stock pursuant to Employee stock plans — 11 — — 5 16

Share-based compensation — 34 — — — 34

Cash dividends, $ 0.18 per share

— — ( 107 ) — — ( 107 )

Comprehensive income (loss) — — ( 231 ) 19 — ( 212 )

Balance at June 30, 2023 $ 888 $ 4,103 $ 16,571 $ 58 $ ( 10,831 ) $ 10,789

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

Share-based compensation — 23 — — — 23

Cash dividends, $ 0.18 per share

— — ( 107 ) — — ( 107 )

Comprehensive income — — 193 143 — 336

Balance at September 30, 2023 $ 888 $ 4,135 $ 16,657 $ 201 $ ( 10,827 ) $ 11,054

Balance at March 31, 2024 $ 888 $ 4,138 $ 15,959 $ 19 $ ( 10,808 ) $ 10,196

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

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

Cumulative effect of adopting Accounting Standards Update No.

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

Issuance of common and treasury stock pursuant to Employee stock plans — 1 — — 7 8

Share-based compensation — 20 — — — 20

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

Cash dividends, $ 0.18 per share

— — ( 107 ) — — ( 107 )

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

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

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

Share-based compensation — 16 — — — 16

Comprehensive income (loss) — — 760 ( 86 ) — 674

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

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

Share-based compensation — 14 — — — 14

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

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

See accompanying notes.

2 unchanged sentences

(in millions)

Three months ended Nine months ended

September 30, September 30,

2023 2022 2023 2022

Three months ended

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 193 $ 277 $ 717 $ 759

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

Net loss $ ( 231 ) $ ( 159 )

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

Depreciation and amortization 408 365

Impairment of long-lived assets — 4 — 35

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

Unrealized/realized (gain) on fuel derivative instruments ( 21 ) ( 26 ) ( 14 ) ( 11 )

Unrealized/realized loss on fuel derivative instruments 1 —

Deferred income taxes ( 68 ) ( 52 )

Loss on extinguishment of debt — 76 — 192

Changes in certain assets and liabilities:

6 unchanged sentences

Other, net ( 39 ) ( 60 )

Net cash provided by operating activities 616 234 2,739 3,211

Net cash provided by (used in) operating activities ( 104 ) 706

CASH FLOWS FROM INVESTING ACTIVITIES:

3 unchanged sentences

Proceeds from sales of short-term and other investments 1,720 1,679

Other, net ( 35 ) —

Net cash used in investing activities ( 585 ) ( 1,577 )

3 unchanged sentences

Payments of cash dividends ( 215 ) ( 214 )

Payments for repurchases and conversions of convertible debt — ( 239 ) — ( 648 )

Other, net ( 24 ) 2

6 unchanged sentences

Income taxes $ 3 $ 2

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:

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

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:

Right-of-use assets acquired under operating leases $ 16 $ 47

5 unchanged sentences

Financial Derivative Instruments

Comprehensive Income (Loss)

Net Income Per Share

Comprehensive Loss

Net Loss Per Share

Fair Value Measurements

9 unchanged sentences

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

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

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

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

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

These events also created a deceleration in bookings, primarily isolated to January and February 2023, as well as increased first quarter 2023 expenses by approximately $ 55 million, which are included in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the nine months ended September 30, 2023.

These first quarter 2023 expenses included reimbursements to Customers impacted by the cancellations for costs they incurred in excess of the amounts accrued as of December 31, 2022, adjustments to the estimated value of Rapid Rewards points offered as a gesture of goodwill to Customers as a result of changes in the estimates of the points expected to be redeemed, and additional premium pay and additional compensation for Employees directly or indirectly impacted by the cancellations and recovery efforts.

There were no material impacts to operating revenues or expenses beyond first quarter 2023 as a result of this disruption.

Based on the Company's wide-scale operational disruption, the Company has been subject to inquiries and investigations by governmental agencies (including with respect to a December 2023 settlement with the Department of Transportation) and could be subject to fines and/or penalties resulting from those inquiries and investigations, as well as litigation from Customers and Shareholders.

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

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

The unaudited Condensed Consolidated Financial Statements for the interim periods ended September 30, 2023 and 2022 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods.

The unaudited Condensed Consolidated Financial Statements for the interim periods ended March 31, 2024 and 2023 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods.

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

1 unchanged sentence

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

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

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

These and other factors, such as the price of jet fuel in some periods, the nature of the Company's fuel hedging program, and the periodic volatility of commodities used by the Company for hedging jet fuel, have created, and may continue to create, significant volatility in the Company's financial results.

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

Operating results for the three and nine months ended September 30, 2023, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2023.

Operating results for the three months ended March 31, 2024, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2024.

For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.

NEW ACCOUNTING PRONOUNCEMENTS

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

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

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

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

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.

The Company had no material LIBOR-related contract modifications during the nine months ended September 30, 2023.

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.

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.

FINANCIAL DERIVATIVE INSTRUMENTS

1 unchanged sentence

Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices.

Furthermore, jet fuel and oil typically represents one of the largest operating expenses for airlines.

Furthermore, jet fuel typically represents one of the largest operating expenses for airlines.

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

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.

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

4 unchanged sentences

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.

As of September 30, 2023, the Company had fuel derivative instruments in place to provide coverage at varying price levels.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

As of March 31, 2024, the Company had fuel derivative instruments in place to provide coverage at varying price levels.

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

Maximum fuel hedged as of

September 30, 2023 Derivative underlying commodity type as of

Period (by year) (gallons in millions) (a) September 30, 2023

March 31, 2024 Derivative underlying commodity type as of

Period (by year) (gallons in millions) (a) March 31, 2024

Remainder of 2024 949 West Texas Intermediate ("WTI") crude oil, Brent crude oil, and Heating oil

2024 1,265 WTI crude oil and Brent crude oil

2025 1,033 Brent crude oil

2 unchanged sentences

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges.

Qualification is re-evaluated quarterly, and all periodic changes in fair value of the derivatives designated as hedges

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

are recorded in Accumulated other comprehensive income ("AOCI") until the underlying jet fuel is consumed.

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.

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

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 unaudited Condensed Consolidated Statement of Comprehensive Loss .

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.

The Company did not have any such situations where a derivative ceased to qualify for hedge accounting during 2022, or during the nine months ended September 30, 2023.

The Company did not have any such situations where a derivative ceased to qualify for hedge accounting during 2023, or during the three months ended March 31, 2024.

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

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

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Asset derivatives Liability derivatives

4 unchanged sentences

Fuel derivative contracts (gross) Other assets 148 137 — —

Interest rate derivative contracts Other assets 23 14 — —

Total derivatives designated as hedges $ 261 $ 223 $ — $ —

5 unchanged sentences

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

Balance Sheet September 30, December 31,

Balance Sheet March 31, December 31,

(in millions) location 2024 2023

2 unchanged sentences

Receivable from third parties for fuel contracts Accounts and other receivables 8 12

All of the Company's fuel derivative instruments and interest rate swaps are subject to agreements that follow the netting guidance in the applicable accounting standards for derivatives and hedging.

The types of derivative

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

instruments the Company has determined are subject to netting requirements in the accompanying unaudited Condensed Consolidated Balance Sheet are those in which the Company pays or receives cash for transactions with the same counterparty and in the same currency via one net payment or receipt.

All of the Company's derivative instruments are subject to agreements that follow the netting guidance in the applicable accounting standards for derivatives and hedging.

The types of derivative instruments the Company has determined are subject to netting requirements in the accompanying unaudited Condensed Consolidated Balance Sheet are those in which the Company pays or receives cash for transactions with the same counterparty and in the same currency via one net payment or receipt.

For cash collateral held by the Company or provided to counterparties, the Company nets such amounts against the fair value of the Company's derivative portfolio by each counterparty.

The Company has elected to utilize netting for both its fuel derivative instruments and interest rate swap agreements and also classifies such amounts as either current or noncurrent, based on the net fair value position with each of the Company's counterparties in the unaudited Condensed Consolidated Balance Sheet.

The Company has elected to utilize netting for its derivative instruments and also classifies such amounts as either current or noncurrent, based on the net fair value position with each of the Company's counterparties in the unaudited Condensed Consolidated Balance Sheet.

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

As of September 30, 2023, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

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:

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Offsetting of derivative assets

1 unchanged sentence

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Description Balance Sheet location Gross amounts of recognized assets Gross amounts offset in the Balance Sheet Net amounts of assets presented in the Balance Sheet Gross amounts of recognized assets Gross amounts offset in the Balance Sheet Net amounts of assets presented in the Balance Sheet

1 unchanged sentence

Fuel derivative contracts Other assets $ 148 $ ( 32 ) $ 116 (a) $ 137 $ ( 35 ) $ 102 (a)

Interest rate derivative contracts Other assets $ 23 $ — $ 23 (a) $ 14 $ — $ 14 (a)

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

2 unchanged sentences

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

Description Balance Sheet location Gross amounts of recognized liabilities Gross amounts offset in the Balance Sheet Net amounts of liabilities presented in the Balance Sheet Gross amounts of recognized liabilities Gross amounts offset in the Balance Sheet Net amounts of liabilities presented in the Balance Sheet

Fuel derivative contracts Prepaid expenses and other current assets $ 41 $ ( 41 ) $ — $ 15 $ ( 15 ) $ —

Fuel derivative contracts Other assets $ 30 $ ( 30 ) $ — $ — $ — $ —

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 and 2022:

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

Three months ended September 30, 2023 Three months ended September 30, 2022

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

Total $ ( 52 ) $ 2 $ ( 195 ) $ 2

(Gain) loss on cash flow hedging relationships

Commodity contracts:

Amount of (gain) reclassified from AOCI into income ( 52 ) — ( 195 ) —

Interest contracts:

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

Fuel derivative contracts Other assets $ 32 $ ( 32 ) $ — (a)

$ 35 $ ( 35 ) $ — (a)

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

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Loss for the three months ended March 31, 2024 and 2023:

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

Nine months ended September 30, 2023 Nine months ended September 30, 2022

Three months ended March 31, 2024 Three months ended March 31, 2023

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

2 unchanged sentences

Commodity contracts:

Amount of (gain) reclassified from AOCI into income ( 93 ) — ( 703 ) —

Interest contracts:

Amount of (gain) loss reclassified from AOCI into income 22 — ( 28 ) —

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

Derivatives designated and qualified in cash flow hedging relationships

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

Three months ended

September 30,

(in millions) 2023 2022

Fuel derivative contracts $ ( 175 ) $ 354

Interest rate derivatives ( 7 ) ( 2 )

Total $ ( 182 ) $ 352

Notes to Condensed Consolidated Financial Statements

3 unchanged sentences

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

Nine months ended

September 30,

Three months ended

(in millions) 2024 2023

Fuel derivative contracts $ ( 1 ) $ 125

Interest rate derivatives ( 7 ) ( 14 )

Total $ ( 1 ) $ 127

2 unchanged sentences

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

September 30,

(in millions) 2024 2023

Fuel derivative contracts $ 1 $ — Other (gains) losses, net

Derivatives not designated as hedges

(Gain) loss recognized in income on derivatives

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

September 30,

(in millions) 2023 2022

Fuel derivative contracts $ ( 26 ) $ ( 23 ) Other (gains) losses, net

The Company also recorded expense (benefit) associated with premiums paid for fuel derivative contracts that settled/expired during the three and nine months ended September 30, 2023 and 2022.

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three months ended March 31, 2024 and 2023.

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

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

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

Premium expense (benefit) recognized in income on derivatives

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

September 30,

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

Premium expense recognized in income on derivatives

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

(in millions) 2024 2023

Fuel derivative contracts designated as hedges $ 39 $ 30 Fuel and oil

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

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

Included in the Company’s cumulative unrealized losses from fuel hedges as of March 31, 2024, recorded in AOCI, were approximately $ 34 million in unrealized losses, net of taxes, which are expected to be realized in the unaudited Condensed Consolidated Statement of Comprehensive Loss during the twelve months subsequent to March 31, 2024.

Interest Rate Swaps

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 March 31, 2024, or as of December 31, 2023.

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

During the three months ended March 31, 2023, all of the Company's interest rate swap agreements 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 unaudited Condensed Consolidated Statement of Comprehensive Loss.

All interest rate swap agreements were terminated prior to December 31, 2023.

Notes to Condensed Consolidated Financial Statements

1 unchanged sentence

Notes to Condensed Consolidated Financial Statements

Premium expense (benefit) recognized in income on derivatives

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

September 30,

(in millions) 2023 2022

Fuel derivative contracts designated as hedges $ 91 $ 79 Fuel and oil

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

Included in the Company’s cumulative unrealized gains from fuel hedges as of September 30, 2023, recorded in AOCI, were approximately $ 77 million in unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to September 30, 2023.

Interest Rate Swaps

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

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

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

Credit Risk and Collateral

3 unchanged sentences

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

As of September 30, 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.

As of March 31, 2024, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating.

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

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

The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of September 30, 2023, at which such postings are triggered:

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of March 31, 2024, at which such postings are triggered:

Counterparty (CP)

17 unchanged sentences

Notes to Condensed Consolidated Financial Statements

COMPREHENSIVE INCOME (LOSS)

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.

The differences between Net income and Comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022 were as follows:

Three months ended September 30,

COMPREHENSIVE LOSS

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

The differences between Net loss and Comprehensive loss for the three months ended March 31, 2024 and 2023 were as follows:

Three months ended March 31,

(in millions) 2024 2023

NET INCOME $ 193 $ 277

NET LOSS $ ( 231 ) $ ( 159 )

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

deferred taxes of $ 6 and ($ 44 )

Unrealized gain on interest rate derivative instruments, net of

deferred taxes of $ 2 and $ —

Total other comprehensive income (loss) $ 143 $ ( 500 )

COMPREHENSIVE INCOME (LOSS) $ 336 $ ( 223 )

Nine months ended September 30,

(in millions) 2023 2022

NET INCOME $ 717 $ 759

Unrealized loss on fuel derivative instruments, net of

deferred taxes of ($ 45 ) and ($ 31 )

( 150 ) ( 101 )

Unrealized gain on interest rate derivative instruments, net of

deferred taxes of $ 2 and $ 5

Other, net of deferred taxes of $ — and $ —

Total other comprehensive loss $ ( 143 ) $ ( 83 )

COMPREHENSIVE INCOME $ 574 $ 676

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three and nine months ended September 30, 2023:

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

Balance at June 30, 2023 $ ( 65 ) $ ( 29 ) $ 170 $ ( 18 ) $ 58

Changes in fair value 228 8 — ( 55 ) 181

Reclassification to earnings ( 52 ) 2 — 12 ( 38 )

Balance at September 30, 2023 $ 111 $ ( 19 ) $ 170 $ ( 61 ) $ 201

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

Total other comprehensive income (loss) $ 19 $ ( 147 )

COMPREHENSIVE LOSS $ ( 212 ) $ ( 306 )

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three months ended March 31, 2024:

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

Balance at December 31, 2023 $ ( 135 ) $ 149 $ ( 15 ) $ 1 $ —

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Reclassification to earnings 22 — 2 ( 6 ) 18

Balance at September 30, 2023 $ 111 $ ( 19 ) $ 170 $ ( 61 ) $ 201

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

The following tables illustrate the significant amounts reclassified out of each component of AOCI for the three and nine months ended September 30, 2023:

Three months ended September 30, 2023

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

AOCI components

Unrealized (gain) on fuel derivative instruments $ ( 52 ) Fuel and oil expense

$ ( 40 ) Net of tax

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

$ 2 Net of tax

Total reclassifications for the period $ ( 38 ) Net of tax

Nine months ended September 30, 2023

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

Balance at March 31, 2024 $ ( 112 ) $ 149 $ ( 13 ) $ ( 5 ) $ 19

The following table illustrates the significant amounts reclassified out of each component of AOCI for the three months ended March 31, 2024:

Three months ended March 31, 2024

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

AOCI components

Unrealized (gain) on fuel derivative instruments $ ( 93 ) Fuel and oil expense

$ ( 71 ) Net of tax

Unrealized loss on interest rate derivative instruments $ 5 Other operating expenses

Unrealized loss on fuel derivative instruments $ 22 Fuel and oil expense

$ 16 Net of tax

Other — Other

Other $ 2 Other operating expenses

$ 2 Net of tax

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Passenger Revenues

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

Passenger revenue associated with tickets is recognized when the performance obligation to the Customer is satisfied, which is primarily when travel is provided.

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

The following table provides the components of Passenger revenue recognized for the three and nine months ended September 30, 2023 and 2022:

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

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

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

Passenger revenue associated with tickets is recognized when the performance obligation to the Customer is satisfied, which is primarily when travel is provided.

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

The following table provides the components of Passenger revenue recognized for the three months ended March 31, 2024 and 2023:

Three months ended March 31,

(in millions) 2024 2023

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Total passenger revenues $ 5,712 $ 5,105

As of September 30, 2023, and December 31, 2022, the components of Air traffic liability, including contract liabilities based on tickets sold and unused flight credits available to the Customer, both of which are net of recorded breakage, and loyalty points available for redemption, within the unaudited Condensed Consolidated Balance Sheet were as follows:

As of March 31, 2024, and December 31, 2023, the components of Air traffic liability, including contract liabilities based on tickets sold and unused flight credits available to the Customer, both of which are net of recorded breakage, and loyalty points available for redemption, within the unaudited Condensed Consolidated Balance Sheet were as follows:

Balance as of

(in millions) September 30, 2023 December 31, 2022

(in millions) March 31, 2024 December 31, 2023

Air traffic liability - passenger travel and ancillary passenger services $ 4,407 $ 3,363

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These flight credits are typically created as a result of a prior ticket cancellation or exchange, and are reflected net of associated breakage.

Rollforwards of the Company's "Air traffic liability - loyalty program" for the three and nine months ended September 30, 2023 and 2022 were as follows (in millions):

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

2023 2022 2023 2022

Rollforwards of the Company's Air traffic liability - loyalty program for the three months ended March 31, 2024 and 2023 were as follows:

Three months ended March 31,

(in millions) 2024 2023

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

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

Rollforwards of the amounts included in Air traffic liability as of September 30, 2023 and 2022 were as follows (in millions):

Rollforwards of the amounts included in Air traffic liability as of March 31, 2024 and 2023 were as follows:

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

Air traffic liability

Balance at December 31, 2022 $ 8,250

Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty) 18,249

Revenue from amounts included in contract liability opening balances ( 5,263 )

Revenue from current period sales ( 12,236 )

Balance at September 30, 2023 $ 9,000

Air traffic liability

Balance at December 31, 2021 $ 7,725

Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty) 16,630

Three months ended March 31,

(in millions) 2024 2023

Air traffic liability - beginning balance $ 8,279 $ 8,250

Current period sales (a) 6,850 6,072

Revenue from amounts included in contract liability opening balances ( 2,557 ) ( 2,568 )

Revenue from current period sales ( 3,178 ) ( 2,557 )

Balance at September 30, 2022 $ 8,425

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

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

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 Customer flight credits represents approximately 7 percent and 9 percent of the total Air traffic liability balance as of September 30, 2023, and December 31, 2022, respectively.

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

For the three months ended September 30, 2023 and 2022, the Company recognized $ 526 million and $ 521 million, respectively.

For the nine months ended September 30, 2023 and 2022, the Company recognized $ 1.6 billion and $ 1.5 billion, respectively.

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.

For the three and nine months ended September 30, 2023 and 2022, an immaterial number of shares related to the Company's restricted stock units and stock warrants were excluded from the denominator because inclusion of such shares would be antidilutive.

Air traffic liability - ending balance $ 9,394 $ 9,197

(a) Current period sales includes passenger travel, ancillary services, flight loyalty, and partner loyalty

Under the Company's policy, flight credits never expire.

However, as the Company believes that a portion of Customer flight credits issued will not be redeemed, it estimates and records breakage associated with such amounts.

The amount of Customer flight credits represents approximately 6 percent and 8 percent of the total Air traffic liability balance as of March 31, 2024, and December 31, 2023, respectively.

The Company recognized revenue related to the marketing, advertising, and other travel-related benefits of the revenue associated with various loyalty partner agreements including, but not limited to, its co-branded credit card agreement with Chase Bank USA, N.A, within Other operating revenues.

For the three months ended March 31, 2024 and 2023, the Company recognized $ 542 million and $ 521 million, respectively.

NET LOSS PER SHARE

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

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

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

Three months ended March 31,

Net loss attributable to common stockholders $ ( 231 ) $ ( 159 )

Weighted-average shares outstanding, basic and diluted 597 594

NET LOSS PER SHARE:

Basic $ ( 0.39 ) $ ( 0.27 )

Diluted $ ( 0.39 ) $ ( 0.27 )

Antidilutive amounts excluded from calculations:

Convertible debt 43 42

Restricted stock units 3 3

Stock warrants 2 1

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

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

2023 2022 2023 2022

Net income $ 193 $ 277 $ 717 $ 759

Interest expense 5 5 15 17

Net income attributable to common stockholders 198 282 732 776

Weighted-average shares outstanding, basic 596 593 595 593

Dilutive effects of Convertible Notes 42 45 42 (a) 49

Dilutive effect of restricted stock units 2 1 2 1

Adjusted weighted-average shares outstanding, diluted 640 639 639 643

NET INCOME PER SHARE:

Basic $ 0.32 $ 0.47 $ 1.20 $ 1.28

Diluted $ 0.31 $ 0.44 $ 1.15 $ 1.21

FAIR VALUE MEASUREMENTS

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

As of September 30, 2023, the Company held certain items that are required to be measured at fair value on a recurring basis.

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

As of March 31, 2024, 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), 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.

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

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

Fuel derivative instruments currently consist solely of option contracts, whereas interest rate derivatives consist solely of swap agreements.

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

Fuel derivative instruments currently consist solely of option contracts, whereas interest rate derivatives have historically consisted solely of swap agreements.

See Note 3 for further information on the Company’s derivative instruments and hedging activities.

The fair values of swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets.

Therefore, the Company has categorized these swap contracts as Level 2.

The Company’s Treasury Department, which reports to the Chief Financial Officer, determines the value of option contracts utilizing an option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are provided by financial institutions that trade these contracts.

The option pricing model used by the Company is an industry standard model for valuing options and is a similar model used by the broker/dealer community (i.e., the Company’s counterparties).

The inputs to this option pricing model are the option

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

strike price, underlying price, risk free rate of interest, time to expiration, and volatility.

The inputs to this option pricing model are the option strike price, underlying price, risk free rate of interest, time to expiration, and volatility.

Because certain inputs used to determine the fair value of option contracts are unobservable (principally implied volatility), the Company has categorized these option contracts as Level 3.

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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 unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2023, and December 31, 2022:

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, net line, respectively, of the unaudited Condensed Consolidated Statement of Comprehensive Loss.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2024, and December 31, 2023:

Fair value measurements at reporting date using:

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

Description September 30, 2023 (Level 1) (Level 2) (Level 3)

Description March 31, 2024 (Level 1) (Level 2) (Level 3)

Assets (in millions)

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Certificates of deposit 13 — 13 —

Time deposits 100 — 100 —

Short-term investments:

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Option contracts (b) 280 — — 280

Interest rate derivatives (see Note 3) 23 — 23 —

Equity Securities 286 286 — —

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(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as a net asset.

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

Fair value measurements at reporting date using:

10 unchanged sentences

Certificates of deposit 203 — 203 —

Time deposits 450 — 450 —

Fuel derivatives:

Option contracts (b) 223 — — 223

Interest rate derivatives (see Note 3) 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 unaudited Condensed Consolidated Balance Sheet amounts are presented as an asset.

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2023, or the year ended December 31, 2022.

The following tables present the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2023:

Fair value measurements using significant unobservable inputs (Level 3)

(in millions) Fuel derivatives

Balance at June 30, 2023 $ 316

Total gains (losses) for the period

Included in earnings 33 (a)

Included in other comprehensive income 228

Purchases 4 (b)

Settlements ( 94 )

Balance at September 30, 2023 $ 487

The amount of total gains for the period

included in earnings attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, 2023

The amount of total gains for the period

included in other comprehensive income attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, 2023

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

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2024, or the year ended December 31, 2023.

The following table presents the

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2024:

Fair value measurements using significant unobservable inputs (Level 3)

(in millions) Fuel derivatives

Balance at December 31, 2022 $ 512

Balance as of December 31, 2023 $ 223

Total gains (losses) for the period

Included in earnings 26 (a)

Included in other comprehensive income ( 100 )

Included in other comprehensive loss 1

Purchases 51 (b)

Settlements ( 18 )

Balance at September 30, 2023 $ 487

The amount of total gains for the period

Balance as of March 31, 2024 $ 257

The amount of total losses for the period

included in earnings attributable to the

change in unrealized gains or losses relating

to assets still held at September 30, 2023

to assets still held as of March 31, 2024

The amount of total losses for the period

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change in unrealized gains or losses relating

to assets still held at September 30, 2023

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

to assets still held as of March 31, 2024

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

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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 as of September 30, 2023:

Quantitative information about Level 3 fair value measurements

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

Fuel derivatives Option model Implied volatility Fourth quarter 2023 19 - 41 %

2024 26 - 38 %

Fuel derivatives Option model Implied volatility Second quarter 2024 14 - 33 %

Third quarter 2024 21 - 31 %

Fourth quarter 2024 22 - 30 %

2025 21 - 23 %

2026 21 - 22 %

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

The carrying amounts and estimated fair values of the Company’s short-term and long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, as of September 30, 2023, are presented in the table below.

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

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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526 489 Level 3

(a) The interest rate will change to Secured Overnight Financing Rate +2% on the fifth anniversary of the loans.

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

SUPPLEMENTAL FINANCIAL INFORMATION

(in millions) September 30, 2023 December 31, 2022

(in millions) March 31, 2024 December 31, 2023

Trade receivables $ 58 $ 104

3 unchanged sentences

Fuel hedging and receivables 8 12

Reinsurance receivable 251 145

Other 132 157

Accounts and other receivables $ 1,354 $ 1,154

(in millions) September 30, 2023 December 31, 2022

(in millions) March 31, 2024 December 31, 2023

Derivative contracts $ 116 $ 102

1 unchanged sentence

Equity securities 286 280

Other 255 150

Prepaid maintenance 264 258

Other assets $ 1,024 $ 964

(in millions) September 30, 2023 December 31, 2022

(in millions) March 31, 2024 December 31, 2023

Accounts payable trade $ 281 $ 265

4 unchanged sentences

Dividends payable — 107

Customer reimbursements and refunds (a) 6 311

Accrued third party services 229 269

4 unchanged sentences

Notes to Condensed Consolidated Financial Statements

(in millions) September 30, 2023 December 31, 2022

(in millions) March 31, 2024 December 31, 2023

Voluntary Separation Program $ 64 $ 65

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Interest 73 34

Bonus and incentive pay (b) 1,250 563

Bonus and incentive pay (a) 736 2,022

Reinsurance payable 300 190

Other 278 279

Accrued liabilities $ 2,400 $ 3,606

(in millions) September 30, 2023 December 31, 2022

(in millions) March 31, 2024 December 31, 2023

Voluntary Separation Program $ 40 $ 61

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Other noncurrent liabilities $ 937 $ 981

(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 September 30, 2023, amounts primarily consist of normal current activity.

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

(a) 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 three and nine months ended September 30, 2023, is incremental expense of $ 96 million and $ 180 million, respectively, for changes in estimate related to the contract ratification bonus for the Company’s Flight Attendants as part of the tentative agreement reached in October 2023 with the Transport Workers Union 556 ("TWU 556").

The cumulative $ 180 million is included in the balance as of September 30, 2023.

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

For further information on fuel derivative and interest rate derivative contracts, see Note 3.

Approximately $ 1.35 billion was paid in first quarter 2024 to Pilots as a ratification bonus upon the ratification of the labor contract agreement with the Southwest Airlines Pilots Association ("SWAPA").

For further information on derivative instruments, see Note 3.

Other Operating Expenses

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COMMITMENTS AND CONTINGENCIES

On October 25, 2023, the Company entered into a supplemental agreement with The Boeing Company ("Boeing") relating to its contractual order book for Boeing 737-7 and Boeing 737-8 aircraft.

Based on the Company's agreement with Boeing, capital commitments associated with firm orders as of October 26, 2023, were:

$ 133 million remaining in 2023, $ 2.1 billion in 2024, $ 1.7 billion in 2025, $ 1.8 billion in 2026, $ 2.6 billion in 2027, $ 2.9 billion in 2028, and $ 5.3 billion thereafter.

The Company's contractual order book with The Boeing Company ("Boeing") for 737-7 ("-7") and 737-8 ("-8") aircraft, which extends to 2031, was designed to support 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 five -8 aircraft deliveries from Boeing in first quarter 2024 and retired three 737-700 ("-700") aircraft.

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

As a result of Boeing's delivery delays, the Company has conservatively re-planned its capacity and delivery expectations for the remainder of this year and next.

The Company entered into a Supplemental Agreement with Boeing to formalize the conversion of 19 2025 -7 firm orders into -8 firm orders as of March 31, 2024.

Therefore, as of March 31, 2024, the Company had the following firm orders and options for future periods:

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

The Boeing Company

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

2024 27 58 — 85 (c)

2025 40 19 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

288 (a) 207 (b) 199 694

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

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

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

Given the Company's continued discussions with Boeing and expected aircraft delivery delays, the Company is currently planning for approximately 20 -8 aircraft deliveries in 2024.

Based on the Company's current agreement with Boeing, capital commitments associated with firm orders as of March 31, 2024, were:

$ 1.9 billion remaining in 2024, $ 1.7 billion in 2025, $ 1.8 billion in 2026, $ 2.6 billion in 2027, $ 2.9 billion in 2028, $ 2.5 billion in 2029, and $ 2.8 billion thereafter.

Contingencies

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

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

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

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

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

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

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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.

On March 22, 2024, the parties in the Company's case submitted a proposed case schedule through trial.

The Court subsequently set a trial date of July 21, 2025.

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

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Interest on the notes is payable semi-annually in arrears.

Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2025, in the event certain conditions are met, as stated in the offering documents.

The Convertible Notes did not meet the criteria to be converted as of the date of the financial statements, and thus are classified as Long-term debt in the accompanying unaudited Condensed Consolidated Balance Sheet as of September 30, 2023.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock, or a combination of cash and shares of common stock, at the Company’s election.

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

The initial conversion rate 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 August 2023, the bond conversion rate changed to 26.5559 on September 5, 2023.

The net carrying amount and principal amount of the Convertible Notes was $ 1.6 billion as of September 30, 2023 and December 31, 2022.

Notes to Condensed Consolidated Financial Statements

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Notes to Condensed Consolidated Financial Statements

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock, or a combination of cash and shares of common stock, at the Company’s election.

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

However, based on the Company's most recent cash dividends declared in January 2024, the bond conversion rate changed, and was 26.8605 as of March 31, 2024.

The Company repurchased $ 689 million in principal of its Convertible Notes during the years ended December 31, 2021 and 2022, and the net carrying amount and principal amount of the Convertible Notes was $ 1.6 billion as of March 31, 2024, and December 31, 2023.

There were no Convertible Note conversions exercised or settled or partial extinguishments of debt during the three months ended March 31, 2024 and 2023.

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

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

Three months ended March 31,

(in millions) 2024 2023

3 unchanged sentences

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

The Company had no changes to contingencies during the nine months ended September 30, 2023.

The effective interest rate associated with the Convertible Notes was approximately 1.9 percent for the three and nine months ended September 30, 2023.

The following tables present the impact of the partial extinguishment of the Company's Convertible Notes and early prepayment of debt (excluding payments on finance leases) for the three and nine months ended September 30, 2022.

No such instances of partial extinguishment or early prepayment of debt occurred for the three and nine months ended September 30, 2023.

Three months ended September 30, 2022

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

1.25 % Convertible Notes due 2025

$ 240 $ 184 $ 59 $ ( 3 ) $ —

5.125 % Notes due 2027

149 143 3 1 2

4.75 % Notes due 2023

1,274 1,247 8 — 19

5.25 % Notes due 2025

227 217 6 — 4

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

Nine months ended September 30, 2022

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

1.25 % Convertible Notes due 2025

$ 649 $ 486 $ 171 $ ( 9 ) $ 1

5.125 % Notes due 2027

209 199 6 2 2

4.75 % Notes due 2023

1,278 1,250 9 — 19

5.25 % Notes due 2025

228 218 6 — 4

Total $ 2,364 $ 2,153 $ 192 $ ( 7 ) $ 26

Notes to Condensed Consolidated Financial Statements

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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

In 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 credit facility, (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 credit facility 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 nine months ended September 30, 2023 and 2022, there were no amounts outstanding under the Amended A&R Credit Agreement.

The Company had no changes to contingencies with regards to the Convertible Notes during the three months ended March 31, 2024.

The effective interest rate associated with the Convertible Notes was approximately 1.9 percent for the three months ended March 31, 2024.

The Company has access to $ 1.0 billion under its amended and restated revolving credit facility (the "Amended Credit Agreement"), which expires in August 2028.

For the three months ended March 31, 2024 and 2023, there were no amounts outstanding under the Amended Credit Agreement.

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

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

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

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

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

As of March 31, 2024, the Company has 24 finance leased aircraft remaining.

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

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

What changed 10-Q

Item 1. Financial Statements