SOUTHWEST AIRLINES CO 10-Q

Item 1. Financial Statements Southwest Airlines Co. Condensed Consolidated Balance Sheet (in millions) (unaudited) September 30, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 8,503 $ 9,288 Short-term investments 879 2,186 Accounts and other receivables 1,177 1,154 Inventories of parts and supplies, at cost 770 807 Prepaid expenses and other current assets 601 520 Total current assets 11,930 13,955 Property and equipment, at cost: Flight equipment 26,394 26,060 Ground property and equipment 7,955 7,460 Deposits on flight equipment purchase contracts 428 236 Assets constructed for others 87 62 34,864 33,818 Less allowance for depreciation and amortization 15,091 14,443 19,773 19,375 Goodwill 970 970 Operating lease right-of-use assets 1,101 1,223 Other assets 1,073 964 $ 34,847 $ 36,487 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,518 $ 1,862 Accrued liabilities 2,096 3,606 Current operating lease liabilities 202 208 Air traffic liability 6,743 6,551 Current maturities of long-term debt 2,930 29 Total current liabilities 13,489 12,256 Long-term debt less current maturities 5,075 7,978 Air traffic liability - noncurrent 1,957 1,728 Deferred income taxes 2,094 2,044 Noncurrent operating lease liabilities 888 985 Other noncurrent liabilities 933 981 Stockholders' equity: Common stock 888 888 Capital in excess of par value 4,180 4,153 Retained earnings 16,178 16,297 Accumulated other comprehensive income ( 37 ) — Treasury stock, at cost ( 10,798 ) ( 10,823 ) Total stockholders' equity 10,411 10,515 $ 34,847 $ 36,487 See accompanying notes. 3 Table of Contents Southwest Airlines Co. Condensed Consolidated Statement of Comprehensive Income (in millions, except per share amounts) (unaudited) Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 OPERATING REVENUES: Passenger $ 6,250 $ 5,912 $ 18,673 $ 17,426 Freight 43 44 131 131 Other 577 569 1,749 1,711 Total operating revenues 6,870 6,525 20,553 19,268 OPERATING EXPENSES: Salaries, wages, and benefits 3,070 2,728 9,010 7,991 Fuel and oil 1,417 1,564 4,548 4,514 Maintenance materials and repairs 335 326 1,046 836 Landing fees and airport rentals 493 457 1,468 1,324 Depreciation and amortization 438 375 1,250 1,107 Other operating expenses 1,079 958 3,188 2,868 Total operating expenses 6,832 6,408 20,510 18,640 OPERATING INCOME 38 117 43 628 OTHER EXPENSES (INCOME): Interest expense 63 63 191 193 Capitalized interest ( 9 ) ( 4 ) ( 24 ) ( 15 ) Interest income ( 121 ) ( 156 ) ( 392 ) ( 425 ) Other (gains) losses, net 16 ( 23 ) ( 1 ) ( 44 ) Total other income ( 51 ) ( 120 ) ( 226 ) ( 291 ) INCOME BEFORE INCOME TAXES 89 237 269 919 PROVISION FOR INCOME TAXES 22 44 65 202 NET INCOME $ 67 $ 193 $ 204 $ 717 NET INCOME PER SHARE, BASIC $ 0.11 $ 0.32 $ 0.34 $ 1.20 NET INCOME PER SHARE, DILUTED $ 0.11 $ 0.31 $ 0.34 $ 1.15 COMPREHENSIVE INCOME $ 19 $ 336 $ 167 $ 574 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 599 596 598 595 Diluted 601 640 643 639 See accompanying notes. 4 Table of Contents Southwest Airlines Co. Condensed Consolidated Statement of Stockholders' Equity (in millions, except per share amounts) (unaudited) Common Stock Capital in excess of par value Retained earnings Accumulated other comprehensive income (loss) Treasury stock Total Balance at December 31, 2023 $ 888 $ 4,153 $ 16,297 $ — $ ( 10,823 ) $ 10,515 Issuance of common and treasury stock pursuant to Employee stock plans — ( 25 ) — — 15 ( 10 ) Share-based compensation — 10 — — — 10 Cash dividends, $ 0.18 per share — — ( 107 ) — — ( 107 ) Comprehensive income (loss) — — ( 231 ) 19 — ( 212 ) Balance at March 31, 2024 $ 888 $ 4,138 $ 15,959 $ 19 $ ( 10,808 ) $ 10,196 Issuance of common and treasury stock pursuant to Employee stock plans — 12 — — 5 17 Share-based compensation — 7 — — — 7 Cash dividends, $ 0.18 per share — — ( 108 ) — — ( 108 ) Stock warrants repurchase — ( 6 ) — — — ( 6 ) Comprehensive income (loss) — — 367 ( 8 ) — 359 Balance at June 30, 2024 $ 888 $ 4,151 $ 16,218 $ 11 $ ( 10,803 ) $ 10,465 Issuance of common and treasury stock pursuant to Employee stock plans — 10 — — 5 15 Share-based compensation — 19 — — — 19 Cash dividends, $ 0.18 per share — — ( 107 ) — — ( 107 ) Comprehensive income (loss) — — 67 ( 48 ) — 19 Balance at September 30, 2024 $ 888 $ 4,180 $ 16,178 $ ( 37 ) $ ( 10,798 ) $ 10,411 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 Issuance of common and treasury stock pursuant to Employee stock plans — 1 — — 7 8 Share-based compensation — 20 — — — 20 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 — 11 — — 5 16 Share-based compensation — 34 — — — 34 Cash dividends, $ 0.18 per share — — ( 107 ) — — ( 107 ) Comprehensive income (loss) — — 683 ( 139 ) — 544 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 See accompanying notes. 5 Table of Contents Southwest Airlines Co. Condensed Consolidated Statement of Cash Flows (in millions) (unaudited) Three months ended Nine months ended September 30, September 30, 2024 2023 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 67 $ 193 $ 204 $ 717 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 438 375 1,250 1,107 Unrealized mark-to-market adjustment on available for sale securities — — — ( 4 ) Unrealized/realized gain (loss) on fuel derivative instruments 15 ( 21 ) 17 ( 14 ) Deferred income taxes 19 57 62 214 Changes in certain assets and liabilities: Accounts and other receivables 193 ( 216 ) ( 80 ) ( 405 ) Other assets ( 13 ) ( 35 ) 4 74 Accounts payable and accrued liabilities ( 196 ) 352 ( 1,668 ) 645 Air traffic liability ( 377 ) ( 59 ) 421 750 Other liabilities ( 18 ) ( 89 ) ( 136 ) ( 180 ) Cash collateral received from (provided to) derivative counterparties ( 8 ) 40 ( 28 ) ( 6 ) Other, net ( 7 ) 19 ( 60 ) ( 159 ) Net cash provided by (used in) operating activities 113 616 ( 14 ) 2,739 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 517 ) ( 842 ) ( 1,594 ) ( 2,812 ) Assets constructed for others ( 10 ) ( 8 ) ( 26 ) ( 23 ) Purchases of short-term investments ( 636 ) ( 1,620 ) ( 3,845 ) ( 5,347 ) Proceeds from sales of short-term and other investments 1,621 2,406 5,160 5,914 Other, net — — ( 29 ) — Net cash provided by (used in) investing activities 458 ( 64 ) ( 334 ) ( 2,268 ) CASH FLOWS FROM FINANCING ACTIVITIES: Payroll Support Program stock warrants repurchase — — ( 6 ) — Proceeds from Employee stock plans 15 13 46 36 Payments of long-term debt and finance lease obligations ( 11 ) ( 11 ) ( 27 ) ( 78 ) Payments of cash dividends ( 216 ) ( 214 ) ( 431 ) ( 428 ) Other, net 2 ( 1 ) ( 19 ) 4 Net cash used in financing activities ( 210 ) ( 213 ) ( 437 ) ( 466 ) NET CHANGE IN CASH AND CASH EQUIVALENTS 361 339 ( 785 ) 5 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 8,142 9,158 9,288 9,492 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,503 $ 9,497 $ 8,503 $ 9,497 CASH PAYMENTS FOR: Interest, net of amount capitalized $ 14 $ 19 $ 124 $ 134 Income taxes $ — $ 1 $ 7 $ 9 SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS: Right-of-use assets acquired or modified under operating leases $ 23 $ 9 $ 42 $ 78 Flight and ground equipment acquired or modified under finance leases $ 17 $ — $ 16 $ — See accompanying notes. 6 Table of Contents Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 1. Basis of Presentation 2. New Accounting Pronouncements 3. Financial Derivative Instruments 4. Comprehensive Income 5. Revenue 6. Net Income Per Share 7. Fair Value Measurements 8. Supplemental Financial Information 9. Commitments and Contingencies 10. Financing Activities 11. Shareholder Rights Plan 7 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 1. BASIS OF PRESENTATION Southwest Airlines Co. (the "Company" or "Southwest") operates Southwest Airlines, a major passenger airline that provides scheduled air transportation in the United States and near-international markets. The unaudited Condensed Consolidated Financial Statements include accounts of the Company and its wholly owned subsidiaries. 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, 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. Financial results for the Company and airlines in general can be seasonal in nature. 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, 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 fuel hedging program. Operating results for the three and nine months ended September 30, 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. 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 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. 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. During second quarter 2024, the Company identified certain Boeing 737-700 ("-700") aircraft that are planned for early retirement in 2025. These accelerated retirement dates, and the corresponding impact to depreciation expense, are considered a change in estimate and resulted in the following impact to Depreciation and amortization expense for the three and nine months ended September 30, 2024: 8 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) Three months ended Nine months ended (in millions, except per share amounts) September 30, 2024 September 30, 2024 Depreciation and amortization expense $ 30 $ 39 Net income * $ ( 19 ) $ ( 25 ) Net income per basic share $ ( 0.03 ) $ ( 0.04 ) Net income per diluted share $ ( 0.03 ) $ ( 0.04 ) * net of profitsharing benefit and income taxes 2. NEW ACCOUNTING PRONOUNCEMENTS 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 has evaluated this new standard and does not expect it to have a significant impact on its financial statement disclosures. The Company will adopt this standard as of January 1, 2025. 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, and interim periods within fiscal years beginning after December 15, 2024, but early adoption is permitted. This standard is applicable to the Company due to the single reportable segment requirement. The Company plans on including all required disclosures within its Form 10-K for the year ended December 31, 2024. 3. FINANCIAL DERIVATIVE INSTRUMENTS Fuel Contracts Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices. Furthermore, jet fuel typically represents one of the largest operating expenses for airlines. The Company endeavors to acquire jet fuel at the lowest possible net 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 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. For the purpose of evaluating its net cash spend for jet fuel and for forecasting its future estimated jet fuel expense, the Company evaluates its hedge volumes strictly from an "economic" standpoint and, thus, does not consider whether the hedges have qualified or will qualify for hedge accounting. The Company defines its "economic" hedge as the net volume of fuel derivative contracts held, including the impact of positions that have been offset through sold positions, regardless of whether those contracts qualify for hedge accounting. 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 9 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 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 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. As of September 30, 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 hedged on an economic basis: Maximum fuel hedged as of September 30, 2024 Derivative underlying commodity type as of Period (by year) (gallons in millions) (a) September 30, 2024 Remainder of 2024 316 West Texas Intermediate ("WTI") crude oil, Brent crude oil, and Heating oil 2025 1,033 Brent crude oil 2026 945 Brent crude oil 2027 101 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 fluctuate and if the Company's published flight schedule or capacity plans change. 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 are recorded in Accumulated other comprehensive income ("AOCI") until the underlying jet fuel is consumed. See Note 4. When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel hedging portfolio, any subsequent changes in fair value of those positions are marked to market through the unaudited Condensed Consolidated Statement of Comprehensive Income. 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 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 the unaudited Condensed Consolidated Statement of Comprehensive Income. During third quarter 2024, the routine statistical analysis performed by the Company to determine which commodities qualify for special hedge accounting treatment on a prospective basis indicated that WTI crude oil-based derivatives no longer qualify for hedge accounting. This change is primarily due to the fact that the correlation between WTI crude oil prices and jet fuel prices during recent periods has not been as strong as in the past, and therefore the Company can no longer demonstrate that derivatives based on WTI crude oil prices will result in effective hedges on a prospective basis. As such, all WTI-based instruments have been de-designated from their hedging relationships and the change in fair value of all of the Company's derivatives based in WTI have been recorded to Other (gains) losses for third quarter 2024, and will also be marked to market in the same manner in fourth quarter 2024. The Company currently has no WTI crude oil based derivatives that settle beyond December 31, 2024. The change in fair value of the Company's WTI derivative contracts during third quarter 2024 was a decrease of $ 23 million, which resulted in a corresponding loss in the Condensed Consolidated Statement of Comprehensive Income. Any amounts previously recorded to AOCI will remain there until such time as the original forecasted transaction occurs in accordance with hedge accounting requirements. 10 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 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: Asset derivatives Liability derivatives Balance Sheet Fair value at Fair value at Fair value at Fair value at (in millions) location 9/30/2024 12/31/2023 9/30/2024 12/31/2023 Derivatives designated as hedges (a) Fuel derivative contracts (gross) Prepaid expenses and other current assets $ 17 $ 86 $ — $ — Fuel derivative contracts (gross) Other assets 110 137 — — Total derivatives designated as hedges $ 127 $ 223 $ — $ — Derivatives not designated as hedges (a) Fuel derivative contracts (gross) Prepaid expenses and other current assets $ 7 $ — $ 2 $ — Total derivatives $ 134 $ 223 $ 2 $ — (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. See discussion of credit risk and collateral following in this Note. 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, (in millions) location 2024 2023 Cash collateral deposits held from counterparties for fuel contracts - current Offset against Prepaid expenses and other current assets $ 4 $ 15 Cash collateral deposits held from counterparties for fuel contracts - noncurrent Offset against Other assets 18 35 Receivable from third parties for fuel contracts Accounts and other receivables 1 12 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 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 the Company's 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. 11 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 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 (in millions) (i) (ii) (iii) = (i) + (ii) (i) (ii) (iii) = (i) + (ii) September 30, 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 Fuel derivative contracts Prepaid expenses and other current assets $ 24 $ ( 6 ) $ 18 $ 86 $ ( 15 ) $ 71 Fuel derivative contracts Other assets $ 110 $ ( 18 ) $ 92 (a) $ 137 $ ( 35 ) $ 102 (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. Offsetting of derivative liabilities (in millions) (i) (ii) (iii) = (i) + (ii) (i) (ii) (iii) = (i) + (ii) September 30, 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 $ 6 $ ( 6 ) $ — $ 15 $ ( 15 ) $ — Fuel derivative contracts Other assets $ 18 $ ( 18 ) $ — (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. 12 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2024 and 2023: Location and amount recognized in income on cash flow hedging relationships Three months ended September 30, 2024 Three months ended September 30, 2023 (in millions) Fuel and oil Other operating expenses Fuel and oil Other operating expenses Total $ 15 $ 2 $ ( 52 ) $ 2 (Gain) loss on cash flow hedging relationships Commodity contracts: Amount of (gain) loss reclassified from AOCI into income 15 — ( 52 ) — Other: Amount of loss reclassified from AOCI into income — 2 — 2 Location and amount recognized in income on cash flow hedging relationships Nine months ended September 30, 2024 Nine months ended September 30, 2023 (in millions) Fuel and oil Other operating expenses Fuel and oil Other operating expenses Total $ 54 $ 6 $ ( 93 ) $ 5 (Gain) loss on cash flow hedging relationships Commodity contracts: Amount of (gain) loss reclassified from AOCI into income 54 — ( 93 ) — Other: Amount of loss reclassified from AOCI into income — 6 — 5 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) 2024 2023 Fuel derivative contracts $ 61 $ ( 175 ) Other — ( 7 ) Total $ 61 $ ( 182 ) 13 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) Derivatives designated and qualified in cash flow hedging relationships (Gain) loss recognized in AOCI on derivatives, net of tax Nine months ended September 30, (in millions) 2024 2023 Fuel derivative contracts $ 83 $ 78 Other — ( 7 ) Total $ 83 $ 71 Derivatives not designated as hedges (Gain) loss recognized in income on derivatives Three months ended Location of (gain) loss recognized in income on derivatives September 30, (in millions) 2024 2023 Fuel derivative contracts $ 29 $ ( 33 ) 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) 2024 2023 Fuel derivative contracts $ 31 $ ( 26 ) Other (gains) losses, net The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three and nine months ended September 30, 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) 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 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 September 30, (in millions) 2024 2023 Fuel derivative contracts designated as hedges $ 34 $ 30 Fuel and oil Fuel derivative contracts not designated as hedges 5 — Other (gains) losses, net 14 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) Premium expense recognized in income on derivatives Nine months ended Location of premium expense recognized in income on derivatives September 30, (in millions) 2024 2023 Fuel derivative contracts designated as hedges $ 114 $ 91 Fuel and oil Fuel derivative contracts not designated as hedges 5 — 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 September 30, 2024, recorded in AOCI, were approximately $ 85 million in unrealized losses, net of taxes, which are expected to be realized in the unaudited Condensed Consolidated Statement of Comprehensive Income during the twelve months subsequent to September 30, 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 September 30, 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 nine months ended September 30, 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 Income. All interest rate swap agreements were terminated prior to December 31, 2023. Credit Risk and Collateral Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company as of the reporting date. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past. 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, 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, 2024, at which such postings are triggered: 15 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) Counterparty (CP) (in millions) A B C D E F G H I Total Fair value of fuel derivatives $ 27 $ 15 $ 22 $ 11 $ 20 $ 8 $ 15 $ 10 $ 4 $ 132 Cash collateral held from CP 22 — — — — — — — — 22 Option to substitute LC for cash N/A N/A (a) (a) (a) N/A (a) N/A (a) If credit rating is investment grade, fair value of fuel derivative level at which: Cash is provided to CP >( 100 ) >( 50 ) >( 75 ) >( 125 ) >( 40 ) >( 65 ) >( 100 ) >( 100 ) (b) (d) Cash is received from CP > 0 (b) > 150 (b) > 250 (b) > 125 (b) > 100 (b) > 70 (b) > 100 (b) > 100 (b) (b) (d) If credit rating is non-investment grade, fair value of fuel derivative level at which: Cash is received from CP (c) (c) (c) (c) (c) (c) (c) (c) (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. (c) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts. (d) Cash collateral is not required based on the current credit rating. 16 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 4. 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. The differences between Net income and Comprehensive income for the three and nine months ended September 30, 2024 and 2023 were as follows: Three months ended September 30, (in millions) 2024 2023 NET INCOME $ 67 $ 193 Unrealized gain (loss) on fuel derivative instruments, net of deferred taxes of ($ 14 ) and $ 41 ( 50 ) 135 Other, net of deferred taxes of $ — and $ 2 2 8 Total other comprehensive income (loss) $ ( 48 ) $ 143 COMPREHENSIVE INCOME $ 19 $ 336 Nine months ended September 30, (in millions) 2024 2023 NET INCOME $ 204 $ 717 Unrealized loss on fuel derivative instruments, net of deferred taxes of ($ 12 ) and ($ 45 ) ( 42 ) ( 150 ) Other, net of deferred taxes of $ 1 and $ 6 5 7 Total other comprehensive loss $ ( 37 ) $ ( 143 ) COMPREHENSIVE INCOME $ 167 $ 574 A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three and nine months ended September 30, 2024: (in millions) Fuel derivatives Defined benefit plan items Other Deferred tax impact Accumulated other comprehensive income (loss) Balance at June 30, 2024 $ ( 125 ) $ 149 $ ( 11 ) $ ( 2 ) $ 11 Changes in fair value ( 79 ) — — 18 ( 61 ) Reclassification to earnings 15 — 2 ( 4 ) 13 Balance at September 30, 2024 $ ( 189 ) $ 149 $ ( 9 ) $ 12 $ ( 37 ) (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 $ — Changes in fair value ( 108 ) — — 25 ( 83 ) Reclassification to earnings 54 — 6 ( 14 ) 46 Balance at September 30, 2024 $ ( 189 ) $ 149 $ ( 9 ) $ 12 $ ( 37 ) 17 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) The following tables illustrate the significant amounts reclassified out of each component of AOCI for the three and nine months ended September 30, 2024: Three months ended September 30, 2024 (in millions) Amounts reclassified from AOCI Affected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income AOCI components Unrealized loss on fuel derivative instruments $ 15 Fuel and oil expense 4 Less: Tax expense $ 11 Net of tax Other $ 2 Other operating expenses — Less: Tax expense $ 2 Net of tax Total reclassifications for the period $ 13 Net of tax Nine months ended September 30, 2024 (in millions) Amounts reclassified from AOCI Affected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income AOCI components Unrealized loss on fuel derivative instruments $ 54 Fuel and oil expense 13 Less: Tax expense $ 41 Net of tax Other $ 6 Other operating expenses 1 Less: Tax expense $ 5 Net of tax Total reclassifications for the period $ 46 Net of tax 5. REVENUE 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, 2024 and 2023: Three months ended September 30, Nine months ended September 30, (in millions) 2024 2023 2024 2023 Passenger non-loyalty $ 5,092 $ 4,758 $ 15,316 $ 14,023 Passenger loyalty - air transportation 896 916 2,589 2,730 Passenger ancillary sold separately 262 238 768 673 Total passenger revenues $ 6,250 $ 5,912 $ 18,673 $ 17,426 18 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) As of September 30, 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, 2024 December 31, 2023 Air traffic liability - passenger travel and ancillary passenger services $ 3,814 $ 3,363 Air traffic liability - loyalty program 4,886 4,916 Total Air traffic liability $ 8,700 $ 8,279 The balance in Air traffic liability - passenger travel and ancillary passenger services also includes flight credits not currently associated with a ticket that can be applied by Customers towards the purchase of future travel. These flight credits are typically created as a result of a prior ticket cancellation or exchange, and are recorded net of associated breakage. Rollforwards of the Company's Air traffic liability - loyalty program for the three and nine months ended September 30, 2024 and 2023 were as follows: Three months ended September 30, Nine months ended September 30, (in millions) 2024 2023 2024 2023 Air traffic liability - loyalty program - beginning balance $ 4,962 $ 5,079 4,916 $ 5,189 Amounts deferred associated with points awarded 851 859 2,645 2,609 Revenue recognized from points redeemed - Passenger ( 896 ) ( 916 ) ( 2,589 ) ( 2,730 ) Revenue recognized from points redeemed - Other ( 31 ) ( 26 ) ( 86 ) ( 72 ) Air traffic liability - loyalty program - ending balance $ 4,886 $ 4,996 $ 4,886 $ 4,996 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, 2024 and 2023 were as follows: Nine months ended September 30, (in millions) 2024 2023 Air traffic liability - beginning balance $ 8,279 $ 8,250 Current period sales (a) 19,181 18,249 Revenue from amounts included in contract liability opening balances ( 4,593 ) ( 5,263 ) Revenue from current period sales ( 14,167 ) ( 12,236 ) Air traffic liability - ending balance $ 8,700 $ 9,000 (a) Current period sales include 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. Customer flight credits represent approximately 6 percent and 8 percent of the total Air traffic liability balance as of September 30, 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 September 30, 2024 and 2023, the Company recognized $ 538 million and $ 526 million of such revenue, respectively. For each of the nine month periods ended September 30, 2024 and 2023, the Company recognized $ 1.6 billion. 19 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 6. 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. The Company paid approximately $ 6 million during June 2024 to repurchase and cancel its outstanding stock warrants, previously issued in connection with the Payroll Support Program. Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 NUMERATOR: Net income $ 67 $ 193 $ 204 $ 717 Add: Interest expense — (a) 5 15 15 Net income attributable to common stockholders $ 67 $ 198 $ 219 $ 732 DENOMINATOR: Weighted-average shares outstanding, basic 599 596 598 595 Dilutive effects of Convertible Notes — 42 43 42 Dilutive effect of restricted stock units 2 2 2 2 Adjusted weighted-average shares outstanding, diluted 601 640 643 639 NET INCOME PER SHARE: Basic $ 0.11 $ 0.32 $ 0.34 $ 1.20 Diluted $ 0.11 $ 0.31 $ 0.34 $ 1.15 Antidilutive amounts excluded from calculations: Convertible debt 44 — — — Restricted stock units — 1 1 1 (a) For the three months ended September 30, 2024, Interest expense is not added back to the numerator due to the Convertible Notes being anti-dilutive. 7. FAIR VALUE MEASUREMENTS Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; 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, 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 20 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 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. Equity securities primarily consist of investments with readily determinable market values associated with the Company’s excess benefit plan. 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 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 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. Volatility information is obtained from external sources but is analyzed by the Company for reasonableness and compared to similar information received from other external sources. The fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives that have not yet settled. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. To validate the reasonableness of the Company’s option pricing model, on a monthly basis, the Company compares its option valuations to third party valuations. If any significant differences were to be noted, they would be researched in order to determine the reason. However, historically, no significant differences have been noted. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds. Included in Other available-for-sale securities are the Company’s investments associated with its deferred compensation plans, which consist of mutual funds that are publicly traded and for which market prices are readily available. These plans are non-qualified deferred compensation plans designed to hold contributions in excess of limits established by the Internal Revenue Code of 1986, as amended. The distribution timing and payment amounts under these plans are made based on the participant’s distribution election and plan balance. 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, net line, respectively, of the unaudited Condensed Consolidated Statement of Comprehensive Income. 21 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis as of September 30, 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, 2024 (Level 1) (Level 2) (Level 3) Assets (in millions) Cash equivalents: Cash equivalents (a) $ 8,111 $ 8,111 $ — $ — Commercial paper 90 — 90 — Certificates of deposit 2 — 2 — Time deposits 300 — 300 — Short-term investments: Treasury bills 690 690 — — Certificates of deposit 189 — 189 — Fuel derivatives: Option contracts (b) 134 — — 134 Equity Securities 354 354 — — Total assets $ 9,870 $ 9,155 $ 581 $ 134 Liabilities Fuel derivatives: Option contracts (b) $ ( 2 ) $ — $ — $ ( 2 ) (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 a net asset. See Note 3. Fair value measurements at reporting date using: Quoted prices in active markets for identical assets Significant other observable inputs Significant unobservable inputs Description December 31, 2023 (Level 1) (Level 2) (Level 3) Assets (in millions) Cash equivalents: Cash equivalents (a) $ 9,032 $ 9,032 $ — $ — Commercial paper 135 — 135 — Certificates of deposit 21 — 21 — Time deposits 100 — 100 — Short-term investments: Treasury bills 1,983 1,983 — — Certificates of deposit 203 — 203 — Fuel derivatives: Option contracts (b) 223 — — 223 Equity Securities 280 280 — — Total assets $ 11,977 $ 11,295 $ 459 $ 223 (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. See Note 3. 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, 2024, or the year ended December 31, 2023. The following tables present the 22 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 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, 2024: Fair value measurements using significant unobservable inputs (Level 3) (in millions) Fuel derivatives Balance as of June 30, 2024 $ 220 Total loss for the period Included in earnings ( 29 ) (a) Included in other comprehensive income ( 79 ) Purchases 31 (b) Settlements ( 11 ) Balance as of September 30, 2024 $ 132 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 as of September 30, 2024 $ 17 (a) 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 September 30, 2024 $ 79 (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. Fair value measurements using significant unobservable inputs (Level 3) (in millions) Fuel derivatives Balance as of December 31, 2023 $ 223 Total loss for the period Included in earnings ( 31 ) (a) Included in other comprehensive income ( 108 ) Purchases 97 (b) Settlements ( 49 ) Balance as of September 30, 2024 $ 132 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, 2024 $ 17 (a) 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 at September 30, 2024 $ 114 (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 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 as of September 30, 2024: 23 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 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 2024 17 - 44 % 33 % 2025 24 - 30 % 25 % 2026 22 - 27 % 24 % 2027 21 - 24 % 23 % (a) Implied volatility weighted by the notional amount (barrels of underlying commodity) that will settle in respective period. The carrying amounts and estimated fair values of the Company’s outstanding debt (including current maturities), as well as the applicable fair value hierarchy tier, as of September 30, 2024, are presented in the table below. The fair values of the Company’s publicly held debt 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 agreements as Level 2. All privately held debt agreements are categorized as Level 3. The Company has determined the estimated fair value of this debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes indicative pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items. (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 1,611 1,626 Level 2 3.00 % Notes due 2026 300 291 Level 2 7.375 % Debentures due 2027 108 115 Level 2 3.45 % Notes due 2027 300 291 Level 2 5.125 % Notes due 2027 1,727 1,759 Level 2 2.625 % due 2030 500 453 Level 2 1.000 % Payroll Support Program Loan due 2030 (a) 976 969 Level 3 1.000 % Payroll Support Program Loan due 2031 (a) 566 546 Level 3 1.000 % Payroll Support Program Loan due 2031 (a) 526 500 Level 3 (a) The interest rate will change to Secured Overnight Financing Rate plus two percent on the fifth anniversary of the loans. The fifth anniversary for the first tranche occurs in April 2025. 24 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 8. SUPPLEMENTAL FINANCIAL INFORMATION (in millions) September 30, 2024 December 31, 2023 Trade receivables $ 50 $ 104 Credit card receivables 168 200 Business partners and other suppliers 632 501 Taxes receivable 10 35 Fuel hedging and receivables 1 12 Reinsurance receivable 203 145 Other 113 157 Accounts and other receivables $ 1,177 $ 1,154 (in millions) September 30, 2024 December 31, 2023 Derivative contracts $ 92 $ 102 Intangible assets, net 300 296 Equity securities 354 280 Prepaid maintenance 271 258 Other 56 28 Other assets $ 1,073 $ 964 (in millions) September 30, 2024 December 31, 2023 Accounts payable trade $ 389 $ 265 Salaries, withholdings and payroll taxes 437 400 Ticket taxes and fees 278 302 Aircraft maintenance payable 31 140 Fuel payable 55 161 Dividends payable — 107 Third party services 123 269 Other payable 205 218 Accounts payable $ 1,518 $ 1,862 (in millions) September 30, 2024 December 31, 2023 Voluntary Separation Program $ 65 $ 65 Profitsharing and savings plans 72 141 Vacation pay 619 516 Health 171 163 Workers compensation 162 133 Property and income taxes 73 63 Interest 72 34 Bonus and incentive pay (a) 180 2,022 Reinsurance payable 265 190 Aircraft maintenance 122 26 Other 295 253 Accrued liabilities $ 2,096 $ 3,606 25 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) (in millions) September 30, 2024 December 31, 2023 Voluntary Separation Program $ 7 $ 61 Postretirement obligation 280 269 Other deferred compensation 412 358 Other 234 293 Other noncurrent liabilities $ 933 $ 981 (a) Balance as of December 31, 2023 primarily consists of contract labor ratification bonuses and/or accruals. Also includes non-contract incentive pay. Approximately $ 1.9 billion was paid in the nine months ended September 30, 2024 to Pilots, Flight Attendants, and Ramp, Operations, Provisioning, and Cargo Agents as bonuses upon the ratification of the labor contract agreements with the Southwest Airlines Pilots Association ("SWAPA"), Transport Workers of America Union Local 556 ("TWU 556"), and the Transport Workers Union Local 555 ("TWU 555"), respectively. For further information on derivative instruments, see Note 3. Other Operating Expenses Other operating expenses consist of aircraft rentals, distribution costs, advertising expenses, personnel expenses, professional fees, certain technology-related costs, and other operating costs, none of which individually exceeded 10 percent of Total operating expenses. 9. COMMITMENTS AND CONTINGENCIES Commitments 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 and optionality to manage its fleet gauge and size, including opportunities to accelerate fleet modernization efforts if growth opportunities do not materialize. The Company received nine -8 aircraft deliveries from Boeing in third quarter 2024 and retired 14 -700 aircraft and one 737-800 ("-800") 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, delays in achieving FAA certification of one of its new aircraft types, the -7, for which Southwest expects to be the launch customer, and a work stoppage that began in September 2024. During 2024, as a result of Boeing's delivery delays, the Company conservatively re-planned its capacity and delivery expectations for the remainder of this year and for 2025. The Company will continue to closely monitor the ongoing aircraft delivery delays with Boeing and adjust expectations as needed. In July 2024, the Company exercised two -7 options for delivery in 2025 and converted two 2025 -7 firm orders into 2025 -8 firm orders. In September 2024, the Company exercised four -7 options for delivery in 2025. As of September 30, 2024, the Company had the following firm orders and options for future periods: 26 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) The Boeing Company -7 Firm Orders -8 Firm Orders -7 or -8 Options Total 2024 27 58 — 85 (c) 2025 44 21 8 73 2026 59 — 27 86 2027 19 46 25 90 2028 15 50 25 90 2029 38 34 18 90 2030 45 — 45 90 2031 45 — 45 90 292 (a) 209 (b) 193 694 (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. (c) Includes 19 -8 deliveries received year-to-date through September 30, 2024, and one additional -8 delivery received in October 2024. Given the Company's continued discussions with Boeing and expected aircraft delivery delays, the Company continues to plan for 20 -8 aircraft deliveries in 2024. Based on the Company's current agreement with Boeing, capital commitments associated with firm orders as of September 30, 2024, were: $ 1.6 billion remaining in 2024, $ 1.8 billion in 2025, $ 1.8 billion in 2026, $ 2.6 billion in 2027, $ 2.9 billion in 2028, $ 2.5 billion in 2029, and $ 2.7 billion thereafter. Subsequent to September 30, 2024 and through October 24, 2024, the Company exercised five -7 options for delivery in 2025, one -7 option for delivery in 2026, and converted nine 2025 -7 firm orders into 2025 -8 firm orders, resulting in the Company's 2025 and 2026 capital commitments increasing to $ 2.0 billion and $ 1.9 billion, respectively. 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. 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. 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 filing a motion for decertification with a hearing set for January 30, 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. 27 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 10. FINANCING ACTIVITIES On May 1, 2020, the Company completed the public offering of $ 2.3 billion aggregate principal amount of Convertible Senior Notes (the "Convertible Notes"). The Convertible Notes bear interest at a rate of 1.25 % and will mature on May 1, 2025. 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 September 30, 2024, but are classified within Current maturities of long-term debt in the accompanying unaudited Condensed Consolidated Balance Sheet due to their maturity on May 1, 2025. 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 July 2024, the bond conversion rate changed, and was 27.1951 as of September 30, 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 September 30, 2024, and December 31, 2023. There were no Convertible Note conversions exercised or settled or partial extinguishments of debt during the nine months ended September 30, 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, (in millions) 2024 2023 2024 2023 Non-cash amortization of debt issuance costs $ 3 $ 3 $ 8 $ 8 Contractual coupon interest 5 5 15 15 Total interest expense $ 8 $ 8 $ 23 $ 23 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 with regards to the Convertible Notes during the nine months ended September 30, 2024. The effective interest rate associated with the Convertible Notes was approximately 1.9 percent for the three and nine months ended September 30, 2024. In second quarter 2024, the Company repurchased and terminated the Company's outstanding stock warrants that were previously issued in connection with the Payroll Support Program. The total value of the repurchase was approximately $ 6 million. 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 nine months ended September 30, 2024 and 2023, there were no amounts outstanding under the Amended Credit Agreement. 28 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 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 nine months ended September 30, 2023. As of September 30, 2024, the Company has 19 finance leased aircraft remaining. There was no gain or loss recorded as a result of these transactions. 29 Notes to Condensed Consolidated Financial Statements Southwest Airlines Co. Notes to Condensed Consolidated Financial Statements (unaudited) 11. SHAREHOLDER RIGHTS PLAN On July 2, 2024, the Company's Board of Directors (the “Board”) adopted a shareholder rights plan and declared a dividend of one right (a “Right”) in respect of each of the Company’s issued and outstanding shares of common stock, par value $ 1.00 per share (“Common Stock”), payable to the shareholders of record at the close of business on July 15, 2024. Each Right initially entitled the registered holder, subject to the terms of the Rights Agreement (as defined below), to purchase from the Company one ten-thousandth (a “Unit”) of a share of Common Stock, at a price equal to the quotient of $170.00 divided by ten thousand for each Unit of a share of Common Stock, subject to certain adjustments (as adjusted from time to time, the “Exercise Price”). The terms of the Rights were set forth in the Rights Agreement, dated as of July 2, 2024 (as it may have been amended from time to time, the “Rights Agreement”), by and between the Company and Equiniti Trust Company, LLC, as rights agent (or any successor rights agent, the “Rights Agent”). The adoption of the Rights Agreement was intended to deter the acquisition of actual, de facto, or negative control of the Company by any person or group without appropriately compensating its Shareholders for that control. In general terms, the Rights Agreement imposed significant dilution upon any person or group (other than the Company or certain related persons) that was or became the beneficial owner of 12.5 percent (the “Triggering Percentage”) or more of the Company’s outstanding Common Stock without the prior approval of the Board. A person or group that became the beneficial owner of the Triggering Percentage or more was called an “Acquiring Person.” Any Rights held by an Acquiring Person would have become null and void and not exercisable. Shareholders that beneficially owned the Triggering Percentage or more of the Company’s outstanding Common Stock on the date the plan was adopted, were not considered Acquiring Persons; however, such Shareholders generally could not have acquired, or obtained the right to acquire, beneficial ownership of one or more additional shares of the Company’s outstanding Common Stock. The term “beneficial ownership” was defined in the Rights Agreement and included, among other things, certain securities that may have been exercised or converted into shares of Common Stock and certain derivative arrangements. The Rights were set to expire prior to the earliest of (i) the close of business on July 1, 2025; (ii) the time at which the Rights were redeemed pursuant to the Rights Agreement; (iii) the time at which the Rights were exchanged pursuant to the Rights Agreement; and (iv) upon the occurrence of certain transactions. This description of the Rights Agreement herein does not purport to be complete and is qualified in its entirety by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed with the SEC on July 3, 2024. On October 23, 2024 (the “Cooperation Agreement Effective Date”), the Company entered into a Cooperation Agreement (“Cooperation Agreement”) by and among Elliott Investment Management L.P., a Delaware limited partnership, Elliott Associates, L.P., a Delaware limited partnership, Elliott International, L.P., a Cayman Islands limited partnership, and The Liverpool Limited Partnership, a Bermuda limited partnership. Pursuant to the Cooperation Agreement, the Company agreed to terminate the Rights Agreement no later than two business days after the Cooperation Agreement Effective Date. On October 25, 2024, the Company and the Rights Agent entered into the Amendment to the Rights Agreement (the “Amendment to the Rights Agreement”), which amended the Rights Agreement. The Amendment to the Rights Agreement terminated the Rights Agreement by advancing the expiration time of the Rights to 5:00 P.M., New York City time, on October 25, 2024. At the time of the termination of the Rights Agreement, all of the Rights, which were previously distributed to holders of the Company’s Common Stock pursuant to the Rights Agreement, expired. 30 Table of Contents