What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2025-02-07 compared with 2024-02-06 · 389 added, 261 removed, 419 unchanged (61% of the section changed)

1 unchanged sentence

YEAR IN REVIEW

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

operational-related investments, and enhancing cross-team collaboration.

The Company's action plan was released in March 2023 and key winter operations steps were completed as of October 2023, as planned.

The Company had a record full year 2024 revenue performance, producing operating revenues of $27.5 billion, due to continued demand strength and the benefits from the execution of tactical actions related to initiatives announced by the Company in 2024 designed to elevate the Customer Experience on its flights, improve financial performance, and drive Shareholder value.

Additional drivers included record ancillary revenue and passengers carried.

During 2024, the Company continued to return value to its Shareholders.

The Company returned $680 million to Shareholders through $430 million in dividend payments and $250 million through an accelerated share repurchase program entered into by the Company with a third party financial institution in fourth quarter 2024.

The Company subsequently received 6.8 million shares of common stock in October 2024, representing an estimated 80 percent of the shares to be purchased by the Company under the Fourth Quarter 2024 ASR Program, and an additional one million shares in January 2025 in final settlement of the Fourth Quarter 2024 ASR Program.

The number of shares that the Company ultimately repurchased under the Fourth Quarter 2024 ASR Program was determined based generally on a discount to the volume-weighted average price per share of the Company's common stock during a

calculation period completed in January 2025.

See "Liquidity and Capital Resources" below for further information on the Company's 2024 share repurchases.

The Company has $2.25 billion remaining under its September 2024 $2.5 billion share repurchase authorization.

On December 5, 2024, the Company announced its intention to launch a $750 million accelerated share repurchase program in first quarter 2025.

See Part II, Item 5 for further information on the Company's share repurchase authorizations.

The Company recorded results for 2024 and 2023, on an accounting principles generally accepted in the United States ("GAAP") and non-GAAP basis, as noted in the following tables.

8 unchanged sentences

Net income per share, diluted $ 0.96 $ 1.56 (38.5)

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

The Company's financial results, as shown above on a GAAP and non-GAAP basis for the year ended December 31, 2024 versus the year ended December 31, 2023, were affected by higher salaries, wages, and benefits expense, partially offset by lower Fuel and oil expense, primarily driven by lower jet fuel prices.

On a GAAP basis, the Company’s results for the year ended December 31, 2024, included a reversal of $116 million of breakage revenue recorded in prior years related to a portion of flight credits issued to Customers during 2022 and prior that have either been redeemed or are expected to be redeemed in future periods.

The majority of these flight credits were issued during the COVID-19 pandemic as the Company was making significant changes to its flight schedules based on fluctuating demand.

This adjustment was treated as a special item and excluded from the Company's presentation of non-GAAP results.

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

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

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

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

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

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

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.

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

Other than a fourth quarter 2023 charge associated with a DOT settlement of $107 million, there were no material impacts to operating

revenues or expenses as a result of this disruption beyond first quarter 2023.

See Note 1 to the Condensed Consolidated Financial Statements for further information.

Operating Statistics

18 unchanged sentences

159.4 158.6 0.5 %

Average passenger fare $ 172.18 $ 169.12 1.8 %

Passenger revenue yield per RPM (cents) (f)

Average passenger fare (k)

$ 178.40 $ 172.18 3.6 %

Operating revenues per ASM (cents) (g)

Passenger revenue yield per RPM (cents) (f)(k)

17.53 17.35 1.0 %

Passenger revenue per ASM (cents) (h)

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

15.51 15.32 1.2 %

Passenger revenue per ASM (cents) (h)(k)

14.09 13.88 1.5 %

Operating expenses per ASM (cents) (i)

22 unchanged sentences

(i) Calculated as operating expenses divided by available seat miles.

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

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

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

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

(j) Included three Boeing 737 Next Generation aircraft in temporary storage as of December 31, 2024.

(k) The 2024 Passenger and Operating revenue metrics include the impact of the $116 million breakage revenue adjustment recorded as a change in estimate and reduction in Passenger revenue during fourth quarter 2024.

See Note 1 to the Consolidated Financial Statements for further information.

The following tables provide selected financial guidance for first quarter 2025, as well as select full year 2025 guidance and 2027 targets, as applicable:

1Q 2025 Estimation

RASM (a), year-over-year Up 5% to 7%

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

ASMs (b), year-over-year Down 2% to 3%

Economic fuel costs per gallon (c) (d) $2.50 to $2.60

5 unchanged sentences

Interest expense (millions) ~$45

2024 Estimation

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

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

Fuel hedging premium expense per gallon $0.07

Fuel hedging cash settlement gains per gallon $0.01

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

Scheduled debt repayments (millions) ~$29

Interest expense (millions) ~$249

Aircraft (g) 847

Effective tax rate 23% to 24%

Capital spending (billions) $3.5 to $4.0

2025 Estimation 2027 Targets

Operating margin, excluding special items (c) (g) 3% to 5% ≥ 10%

Return on invested capital ("ROIC") after-tax (h) (i)

5% to 8% ≥ 15%

ASMs (b), year-over-year Up 1% to 2% Up 1% to 2%

(a) Operating revenue per available seat mile ("RASM" or "unit revenues").

(b) Available seat miles ("ASMs" or "capacity").

The Company's flight schedule is currently published for sale through October 2, 2024.

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

The Company currently expects second quarter 2025 capacity to increase in the range of 1 percent to 2 percent, year-over-year.

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

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

(d) Based on the Company's existing fuel derivative contracts and market prices as of January 21, 2025, first quarter 2025 economic fuel costs per gallon are estimated to be in the range of $2.50 to $2.60.

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

4 unchanged sentences

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

(g) Aircraft on property, end of period.

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

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

The FAA will ultimately determine the timing of the -7 certification and entry into service, and Boeing may continue to experience supply chain challenges, so the Company offers no assurances that current estimations and timelines will be met.

(g) Operating margin, excluding special items, is calculated as operating income, excluding special items, divided by operating revenues, excluding special items.

Projections and targets do not reflect the potential impact of special items because the Company cannot reliably predict or estimate those items or expenses or their impact to its financial statements in future periods.

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

(h) See Note Regarding Use of Non-GAAP Financial Measures for additional information on ROIC.

In addition, information regarding ROIC and economic results is included in the accompanying table Non-GAAP Return on Invested Capital (ROIC).

(i) The Company estimates its full year 2025 effective tax rate to be in the range of 22 percent to 24 percent.

The Company expects first quarter 2025 RASM to increase in the range of 5 percent to 7 percent, year-over-year.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The expected year-over-year improvement is driven primarily by a focus on capacity rationalization and the Company's continued focus on the execution of its tactical initiatives.

The Company also anticipates continued strength in the demand environment.

The Company currently expects its first quarter 2025 CASM-X to increase in the range of 7 percent to 9 percent, year-over-year, driven primarily by the continuation of inflationary pressures, including those associated with labor contracts ratified in 2024, and from capacity moderation efforts.

Year-over-year unit cost trends are expected to improve throughout the year as labor comparisons ease, efficiency initiatives generate modest capacity growth, and cost plan benefits are aggressively pursued.

Based on its current plan, the Company expects to exit 2025 with year-over-year CASM-X growth in the low-single digits.

Improving cost performance is a key focus.

The Company is urgently working to accelerate and exceed the $500 million cost initiative announced at its 2024 Investor Day to help mitigate cost inflation by minimizing hiring, optimizing scheduling efficiency, capitalizing on supply chain opportunities, and aggressively improving corporate overhead.

Company Overview

As part of the Company's ongoing modernization efforts, during 2024, the Company announced several new initiatives designed to elevate the Customer Experience on its flights, improve financial performance, and drive Shareholder value.

As part of its ongoing focus on product evolution, the Company is moving forward with plans to assign seats, offer premium seating options, redesign the boarding model, and introduce redeye (i.e., overnight) flying.

The Company has been known for its open seating model for more than 50 years, which was unique in the airline industry and has been popular with Southwest Customers for decades.

Open seating served the Company well as a primarily short-haul carrier.

The open seating design, combined with historically lower load factors, contributed to the efficiency of turning aircraft quickly.

The Company’s low-cost model enabled low fares and, combined with great Customer Service, allowed the Company to grow across the country and eventually become the nation’s largest domestic carrier.

However, as the domestic travel market has matured and structural changes have reduced the demand for short-haul travel, especially post-pandemic, the Company has increased its proportion of longer-haul flights.

The importance of having an assigned seat grows among Customers as the length of flight gets longer.

In addition, Customer travel frequency and preferences have evolved—for both frequent flyers, as well as those of more infrequent travelers who are not accustomed to the open seating policy currently utilized by the Company—especially as Southwest has opened several new markets and expanded its route network during the past few years.

The Company has continually monitored Customer feedback regarding seating preferences for decades, and Customer travel patterns and preferences have evolved and a seat assignment is generally preferred.

Recent research conducted by the Company indicates that a vast majority of both existing Southwest Customers and potential Customers prefer an assigned seat, which supports the Company’s decision to now evolve its boarding and seating processes.

In addition to assigning seats, the Company plans to offer a premium, extended legroom portion of the cabin that research shows many Customers also prefer.

The Company expects to offer extended legroom, in-line with that offered by industry peers on narrowbody aircraft.

The decision to update the seating and boarding model is part of the Company's continued modernization and Customer Experience transformation.

Following a Customer study regarding the inflight experience, the Company has continued to enhance its onboard offerings during the past two years with both completed and ongoing

improvements being made, such as faster WiFi, in-seat power, and larger overhead bins.

Work is well underway on a refreshed cabin design, including new, more comfortable RECARO seats.

The move to assigned and premium seating will be a significant undertaking by the Company.

In addition to incorporating new technologies and procedures for a seamless transition, the new cabin layout will require approvals from the FAA.

The Company currently expects to make assigned seat and extended legroom bookings available in the second half of 2025, with related flights occurring in the first half of 2026.

The Company also announced it is adding 24-hour operation capabilities with the introduction of redeye flights.

Booking of redeye flying on initial routes became available starting July 25, 2024 through Southwest.com, with the first redeye flights scheduled on February 13, 2025 in five initial nonstop markets:

Las Vegas to Baltimore and Orlando;

Los Angeles to Baltimore and Nashville;

and Phoenix to Baltimore.

These and other initiatives are designed to improve the Company’s financial performance and metrics, including return on invested capital and operating margins, over the next three years.

The Company plans to continue to focus on the following tactical initiatives:

Continual network optimization and maturation;

Marketing and distribution evolution;

and Revenue management maturation.

Continual network optimization and maturation includes (i) reduced short-haul flying and redistributing resources to long-haul flying in profitable markets, (ii) reduced flying on weekdays with lower travel demand, (iii) restructured service and network connectivity in stations with lower demand, and (iv) taking a cross-functional, methodical approach to market maturation efforts.

Marketing and distribution evolution includes (i) a new advertising campaign to highlight the unique, flexible value Southwest offers and target a new generation of travelers, (ii) partnerships with flight search engines, including Google Flights, Kayak, and Skyscanner intended to increase visibility and drive traffic for bookings to Southwest.com, and (iii) creating the option for Customers to use a combination of cash and Rapid Rewards® points to pay for travel, providing more ways to take advantage of the Company's loyalty program.

Revenue management maturation efforts include (i) refinements to the Company's revenue management system, designed to achieve better, more customized results based on the Company's primarily domestic network, (ii) additional staffing to the Company's Revenue Management team to support focusing on driving results, and (iii) recalibrating probability curves, which are expected to improve yields by capturing more demand at higher fares.

The Company has also summarized recently announced strategic initiatives into three broad categories:

Monetize the Company's value proposition;

Increase efficiency and lower costs;

and Optimize capital allocation.

Monetize the Customer value proposition

In addition to the assigned seating and extended legroom changes discussed above, the Company also plans to offer an in-house vacation package product to Customers beginning in 2025 called “Getaways by Southwest”, versus the outsourced product it has historically offered.

This new vacation booking platform is expected to be designed to allow the Company to appeal directly to its significant existing Customer base with an enhanced offering that includes both lodging and excursions, which is expected to drive growth with leisure travelers and grow higher-margin revenues with a relatively low capital and headcount investment.

The Company also announced it will pursue partnerships with other airlines in order to further expand the reach of the Company’s network and connect Customers with more global destinations to generate additional demand.

The Company launched its first such partnership in first quarter 2025 with transatlantic connectivity with Icelandair and plans to add at least one more partner during 2025.

Increase efficiency and lower costs

In addition to the aforementioned introduction of redeye flights, which is designed to maximize or increase asset utilization, another one of the Company's efficiency initiatives includes investments that will decrease the amount of time it takes to turn an aircraft (unload Passengers from an arriving flight and load Passengers on the same aircraft for its subsequent flight).

Examples of such investments include moving to a fully digital (i.e., paperless) process, improved communication tools for Employees, and better visual and real-time information to assist both Customers and Employees.

These efforts are rolling out and are expected to be fully implemented in November 2025.

These initiatives are expected to result in a lowering of unit costs, as the Company is expected to be able to generate either the same number of ASMs with fewer aircraft, or produce more ASMs utilizing the same number of aircraft in its

fleet, respectively.

The Company also continues to invest in various technologies and digital products designed to improve the Customer travel experience.

In addition, the Company is targeting other cost initiatives that are expected to result in savings, including minimizing hiring in order to right-size staffing to current operations and match the Company’s lower expected growth rates in the near term, capitalizing on identified supply chain opportunities, and improving its corporate efficiency through automation and better allocation of resources.

These and other initiatives are currently expected to deliver more than $500 million in annual cost savings by 2027.

Optimize capital allocation

In addition, the Company intends to focus on prudent capital deployment by minimizing fleet capital expenditures, continuing to invest in infrastructure, managing debt levels, and providing returns to Shareholders through dividends and share repurchases.

The Company continues to have favorable pricing in its order book with Boeing for new 737 MAX aircraft that allows additional flexibility in being able to replace certain aircraft in its existing fleet, given current market conditions, with more fuel efficient and less-maintenance intensive models over the near term.

The Company has pursued, and plans to continue to pursue, opportunities to take advantage of current market conditions through the sale and/or sale-leaseback of certain aircraft, with the intention of replacing most, if not all, of such aircraft with new MAX aircraft from Boeing by the end of 2031, assuming that Boeing is able to meet aircraft delivery expectations.

As a result of these efforts, the Company’s expected net fleet capital expenditures during the near term are expected to moderate significantly from recent levels, with the added benefit of further accelerating the modernization of its fleet.

The Company also intends to preserve the strength of its balance sheet with manageable debt maturities, with the goal of retaining investment-grade ratings.

Finally, the Company intends to return value back to its Shareholders through dividends and share repurchases and will continually review its return of capital program based in large part upon the Company's free cash flow and leverage, and fleet monetization strategy, taking into account potential impacts to its investment grade ratings.

Through these initiatives, the Company expects to return to historical levels of financial performance in which its return on invested capital exceeds its weighted-average cost of capital.

The targets the Company has set through 2027 include the following:

• Annual capacity growth in the range of one to two percent, year-over-year, beginning in 2025

• Annual Operating margins of at least 10 percent, in 2027

• Free cash flow exceeding $1 billion per year in 2027

• Return on invested capital, after-tax, of at least 15 percent in 2027

• Financial leverage in the low to mid 30’s percent range in 2027

• Continue to maintain an investment-grade credit rating

The Company's Board of Directors (“the Board”) received a letter dated June 10, 2024, from Elliott Investment Management L.P.

("Elliott") stating that Elliott had made an investment of approximately $1.9 billion in the Company, representing an approximately 11 percent economic interest in the Company, and advocating for changes to the Company's management, the Board, and the Company's corporate strategy.

On October 23, 2024 (the "Effective Date"), the Company entered into a Cooperation Agreement (the "Cooperation Agreement") with Elliott, Elliott Associates, L.P., Elliott International, L.P., and The Liverpool Limited Partnership.

Pursuant to the Cooperation Agreement, the Company agreed to, among other things, (i) appoint David Cush, Sarah Feinberg, David Grissen, Gregg Saretsky and Patricia Watson (collectively, the “Cooperation Agreement Directors”) to the Board, effective 11:59 p.m.

Central Time on November 1, 2024, each with an initial term expiring at the 2025 Annual Meeting;

(ii) announce that two incumbent Directors as of the Effective Date will not stand for re-election to the Board at the 2025 Annual Meeting;

and (iii) include the Cooperation Agreement Directors, together with the other persons recommended by the Board, in the Company’s slate of nominees for election as a Director at the 2025 Annual Meeting.

On July 7, 2024, the Board appointed Rakesh Gangwal to the Board, and on September 26, 2024, the Company announced the addition of Robert L.

Fornaro to the Board.

Pursuant to the Cooperation Agreement, effective 11:59 p.m.

Central Time on November 1, 2024, Gary C.

Kelly, Executive Chairman of the Board, David W.

Veronica Biggins, Roy Blunt, William H.

Cunningham, Thomas W.

Gilligan, and Jill A.

Soltau each resigned from the Board.

None of the departures were due to any disagreement with the Company on any matter relating to the Company’s operations, policies, or practices.

Additionally, the Board appointed Pierre Breber as a member of the Board, effective 11:59 p.m.

Central Time on November 1, 2024, with an initial term expiring at the 2025 Annual Meeting.

On November 4, 2024, the Company announced the appointment of Rakesh Gangwal as independent Chair of the Board and named new Board Committee Chairs.

The Cooperation Agreement includes certain voting commitments, customary standstill restrictions, and mutual non-disparagement provisions that remain in place until the earlier of (x) the date that is 30 days prior to the notice deadline under the Company's Fourth Amended and Restated Bylaws for the nomination of non-proxy access Director candidates for election to the Board at the Company's 2026 Annual Meeting of Shareholders and (y) February 14, 2026 (such period, the "Cooperation Period").

The foregoing description of the Cooperation Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Cooperation Agreement, which is filed as Exhibit 10.31 to this Form 10-K.

Because of this activist activity, the Company has incurred increased professional advisory fees and other costs related to Shareholder activism matters.

Additionally, in order to provide the Board with time to make informed decisions in the best interests of the Company and its Shareholders, on July 2, 2024, the Board adopted a shareholder rights plan (the "Rights Agreement") and declared a dividend of one right in respect of each of the Company’s issued and outstanding shares of common stock (the “Rights”), which would have caused substantial dilution to any person or group acquiring 12.5 percent or more of the Company’s outstanding common stock without the prior approval of the Board.

The Rights Agreement was designed 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.

On October 25, 2024, pursuant to the Cooperation Agreement, the Company and Equiniti Trust Company, LLC entered into the Amendment to the Rights Agreement, which amended and 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.

In January 2025, the Company reached an amended co-brand agreement with Chase Bank USA, N.A.

The amendment includes enhanced Cardmember benefits associated with the Company's assigned and premium seating initiative and supports the multi-year financial targets announced at the Company's Investor Day in September 2024.

During 2024, as a result of Boeing's ongoing delivery delays, the Company conservatively re-planned its capacity and delivery expectations for both 2024 and 2025.

The Company will continue to closely monitor the ongoing aircraft delivery delays with Boeing and adjust expectations as needed.

The Company ended 2024 with 803 Boeing 737 aircraft, including 245 Boeing 737-8 ("-8") aircraft.

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

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

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

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

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

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

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

During 2024, the Company retired 34 Boeing 737-700 ("-700") aircraft and two Boeing 737-800 ("-800") aircraft and took delivery of 22 -8 aircraft.

The Company also completed the sale-leaseback of 35 -800 aircraft in December 2024, and completed the sale-leaseback of an additional -800 aircraft in late January 2025.

The Company's order book with Boeing as of January 30, 2025, consists of a total of 496 MAX firm orders (300 Boeing 737-7 ("-7") aircraft and 196 -8 aircraft) for the years 2025 through 2031, including 63 MAX aircraft that were contractually committed for 2024, but were not received, and 176 MAX options (-7s or -8s) for the years 2026 through 2031.

The Company is currently using a planning assumption of 38 -8 aircraft deliveries in 2025, which differs from its contractual order book, as Boeing continues to ramp up production and works to certify the -7.

This planning assumption supports the Company's plans to retire approximately 51 aircraft in 2025, including 49 -700s and two -800s, ending 2025 with roughly 790 aircraft in its fleet.

Based on recent discussions, the Company is optimistic that Boeing can exceed 38 aircraft deliveries in 2025, and plans to use any additional aircraft deliveries to support its fleet monetization and capital allocation strategies.

The Company's aircraft delivery and retirement expectations for 2025 and beyond are fluid and subject to Boeing's production capability.

The Company has published its flight schedule through October 1, 2025.

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

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

The Company's number of active full-time equivalent Employees increased by 12.2 percent from December 31, 2022 to December 31, 2023, primarily to support the Company's restoration of its flight schedule after emerging from the pandemic, as well as the year-over-year growth in its fleet.

The Company has made additional investments to attract

and retain talent, including raising the Company's starting hourly pay rates for certain of its workgroups, subject, in each case, to acceptance of such change by the applicable union.

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

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

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

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

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

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

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

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

Department of the Treasury ("Treasury").

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

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

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

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

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

As part of its commitment to corporate sustainability, the Company published its 2022 One Report describing the Company's sustainability strategies on May 3, 2023, which include the Company’s fuel conservation and emissions mitigation initiatives and other efforts to minimize greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling.

The Company also published its Diversity, Equity, and Inclusion ("DEI") Report on May 3, 2023.

A companion piece to the One Report, the DEI Report takes a deeper dive into the Company's DEI goals and initiatives and highlights the Company's DEI plans for the future.

Information contained in the Southwest One Report and/or the DEI Report is not incorporated by reference into, and does not constitute a part of, this Form 10-K.

While the Company believes that the disclosures contained in the Southwest One Report, the DEI Report, and other voluntary disclosures regarding environmental, social, and governance (“ESG”) matters are responsive to various areas of investor interest, the Company believes that certain of these disclosures do not currently address matters that are material in the near term to the Company’s operations, strategy, financial condition, or financial results, although this view may change in the future based on new information that could materially alter the estimates, assumptions, or timelines used to create these disclosures.

Given the estimates, assumptions, and timelines used to create the Southwest One Report, the DEI Report, and other voluntary disclosures, the materiality of these disclosures is inherently difficult to assess.

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

For the year ended December 31, 2024, the Company ended with approximately 72,450 full-time equivalent Employees, which was a reduction of 2,356 full-time equivalent Employees versus year-end 2023.

The Company's number of active full-time equivalent Employees decreased primarily through controlled hiring, attrition, and offering voluntary time off programs in order to right-size staffing to current operations and achieve labor cost stability.

As part of its commitment to corporate sustainability, the Company published its 2023 One Report on May 8, 2024.

The report describes the Company's sustainability strategies, which include the Company’s fuel conservation and emissions mitigation initiatives and other efforts to minimize greenhouse gas emissions and address other environmental matters such as energy and water conservation, waste minimization, and recycling.

Information contained in the Southwest One Report as published from time to time is not incorporated by reference into, and does not constitute a part of, this Form 10-K.

While the Company believes that the disclosures contained in the Southwest One Report and other voluntary disclosures regarding environmental, social, and governance (“ESG”) matters are responsive to various areas of investor interest, the Company believes that certain of these disclosures address matters that are currently not material to the Company’s near-term operations, strategy, financial condition, or financial results, although this view may change in the future based on new information that could materially alter the estimates, assumptions, or timelines used to create these disclosures.

Given the estimates, assumptions, and timelines used to create the Southwest One Report and other voluntary disclosures, the materiality of these disclosures is inherently difficult to assess.

2024 Compared with 2023

The selected financial data presented below is derived from the Company's Consolidated Statement of Income and should be read in conjunction with those financial statements and the related notes thereto.

Year ended December 31, Increase (Decrease) Percent change

(in millions) 2024 2023

Passenger $ 24,980 $ 23,637 $ 1,343 5.7

Freight 175 175 — —

Other 2,328 2,279 49 2.2

Total operating revenues $ 27,483 $ 26,091 $ 1,392 5.3

Salaries, wages, and benefits $ 12,240 $ 11,152 $ 1,088 9.8

Fuel and oil 5,812 6,217 (405) (6.5)

Maintenance materials and repairs 1,353 1,188 165 13.9

Landing fees and airport rentals 1,962 1,789 173 9.7

Depreciation and amortization 1,657 1,522 135 8.9

Other operating expenses 4,138 3,999 139 3.5

Total operating expenses $ 27,162 $ 25,867 $ 1,295 5.0

Operating Revenues

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

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

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

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

Passenger revenues for 2024 increased by $1.3 billion, or 5.7 percent, compared with 2023, to achieve an all-time full year Company record of $25.0 billion.

On a unit basis, Passenger revenues increased 1.5 percent, year-over-year.

The dollar increase was primarily due to a 4.1 percent increase in capacity and continued demand strength, combined with strong operational performance and completion factor throughout 2024 versus 2023.

For 2024, the year-over-year Passenger revenue yield per ASM increase was primarily driven by strong domestic demand and the realization of benefits from the Company’s execution of tactical actions, such as improving network optimization and capacity rationalization, marketing and distribution evolution, and continued efforts to advance revenue management techniques, particularly during the second half of the year.

Other revenues for 2024 increased by $49 million, or 2.2 percent, compared with 2023.

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

On a dollar basis, the increase was primarily driven by improved retail spend on the Company's co-brand credit cards.

Operating Expenses

Operating expenses for 2024 increased by $1.3 billion, or 5.0 percent, compared with 2023, and capacity increased 4.1 percent over the same prior year period.

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

A majority of the operating expenses increase was due to higher Salaries, wages, and benefits expense, partially offset by lower Fuel and oil expense.

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

The following table presents the Company's Operating expenses per ASM for 2024 and 2023, followed by explanations of these changes on a dollar basis.

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

Year ended December 31, Per ASM Percent

7 unchanged sentences

Total 15.32 ¢ 15.19 ¢ 0.13 ¢ 0.9 %

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

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

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

Operating expenses per ASM for 2024 increased by 0.9 percent, compared with 2023.

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

This was despite the prior year including incremental expense of $180 million in 2023 for changes in estimate related to the contract ratification bonus for the Company's Flight Attendants as part of a tentative agreement reached in October 2023 and an incremental expense of $354 million in 2023 for changes in estimate related to the contract ratification bonus for the Company's Pilots as part of a tentative agreement reached in December 2023.

This increase was mostly offset by the decrease in the Company's fuel cost per gallon.

Operating expenses per ASM for 2024, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 7.8 percent, year-over-year.

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

1 unchanged sentence

On a per ASM basis, Salaries, wages, and benefits expense for 2024 increased 5.5 percent, compared with 2023.

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

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

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

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

Southwest Flight Attendants 19,883 TWU 556 November 2018

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

February 2021

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

On January 31, 2023, the Company's 50 Facilities Maintenance Technicians, represented by the Aircraft Mechanics Fraternal Association ("AMFA"), ratified a new four-year collective bargaining agreement with the Company.

The newly ratified agreement becomes amendable in November 2027.

On February 4, 2023, the Company's more than 470 Dispatchers, represented by the Transportation Workers of America, AFL-CIO, Local 550 ("TWU 550"), ratified a new four-year collective bargaining agreement with the Company.

The newly ratified agreement becomes amendable in June 2027.

On April 30, 2023, the Company's 12 Meteorologists, represented by TWU 550, ratified a new five-year collective bargaining agreement with the Company.

The newly ratified agreement becomes amendable in May 2028.

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

The newly ratified agreement becomes amendable in August 2027.

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

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

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

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

The newly ratified agreement becomes amendable in October 2026.

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

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

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

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

On a dollar basis, the majority of the increase was due to net step/pay rate increases for certain workgroups (including the ratified labor contracts with the Company's Pilots, Flight Attendants, and Ramp, Operations, Provisioning, and Cargo Agents), and the remainder of the increase was primarily due to various other benefits, including health care coverage and other benefits associated with higher pay rates.

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

The newly ratified agreement becomes amendable in January 2029.

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

On March 21, 2024, the Company's nearly 18,000 Ramp, Operations, Provisioning, and Cargo Agents, represented by the Transport Workers Union Local 555 ("TWU 555"), voted to ratify a five-year contract extension with the Company.

The newly ratified agreement becomes amendable in March 2029.

On April 24, 2024, the Company's nearly 20,000 Flight Attendants, represented by the Transport Workers of America Union Local 556 ("TWU 556"), voted to ratify a four-year contract extension with the Company.

The newly ratified agreement becomes amendable in May 2028.

On September 16, 2024, the Company announced its more than 50 Flight Simulator Technicians, represented by the International Brotherhood of Teamsters, had voted to ratify a four-year contract extension with the Company.

The newly ratified agreement becomes amendable in September 2028.

With this result, as of December 2024, all the Company's collective bargaining labor contracts subject to Section 6 of the Railway Labor Act are closed until October 2026 when the next labor contract becomes amendable.

Since October 2022, each of the 12 union-represented workgroups, which collectively represent approximately 82 percent of the Company's Employees, have ratified new contracts.

Fuel and oil expense for 2024 decreased by $405 million, or 6.5 percent, compared with 2023.

On a per ASM basis, Fuel and oil expense for 2024 decreased 10.4 percent.

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

On a per ASM basis, the decrease was primarily due to lower jet fuel prices.

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

The Company's 2024 average economic fuel cost of $2.66 per gallon is net of approximately $53 million in cash settlements from hedging

activities compared with an average economic fuel cost of $2.89 per gallon, which was net of approximately $267 million in cash settlements from hedging activities in 2023.

On a per ASM basis, the majority of the change was due to lower jet fuel prices.

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

2 unchanged sentences

Fuel hedging premium expense (in millions) $ 157 $ 121

Fuel hedging cash settlement gain (in millions) $ 53 $ 267

Fuel hedging premium expense per gallon $ 0.07 $ 0.06

1 unchanged sentence

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

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

The Company's 2024 available seat miles per gallon ("fuel efficiency") improved 1.6 percent, year-over-year, due to operating more -8 aircraft, the Company's most fuel-efficient aircraft, as a percentage of its fleet.

The continued deliveries of MAX aircraft are expected to remain critical to the Company's efforts to modernize its fleet, reduce carbon emissions intensity, and achieve its near-term environmental sustainability goals.

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

As of December 31, 2024, the Company has fuel derivative contracts in place through 2027.

Based on the current geopolitical and market dynamics, higher premium costs over time, and aggressive cost reductions underway, the Company does not intend to add new hedging positions to its current hedge book.

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

Period Maximum fuel hedged percentage (a)(b)

8 unchanged sentences

derivative contracts

at December 31, 2023 Amount of gains deferred

at December 31, 2024 Amount of gains (losses) deferred

in AOCI at December 31,

2 unchanged sentences

Total $ 130 $ (148)

The Company's multi-year fuel hedging program continues to provide protection against spikes in energy prices.

The Company's current fuel derivative contracts contain a combination of instruments based in West Texas Intermediate and Brent crude oil.

The Company's current fuel derivative contracts contain instruments based in Brent crude oil.

The economic fuel price per gallon sensitivities provided in the table below assume the relationship between Brent crude oil and refined products based on market prices as of January 21, 2025.

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

Estimated economic fuel price per gallon,

including taxes and fuel hedging premiums (b)

Average Brent Crude Oil

10 unchanged sentences

Estimated premium costs $37 million $148 million

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

(a) Brent crude oil average market prices as of January 21, 2025, were $78 and $76 per barrel for first quarter and full year 2025, respectively.

(b) Based on the Company's existing fuel derivative contracts and market prices as of January 21, 2025, first quarter and full year 2025 economic fuel costs per gallon are estimated to be in the range of $2.50 to $2.60 and $2.45 to $2.55, respectively.

4 unchanged sentences

On a per ASM basis, Maintenance materials and repairs expense increased 8.6 percent, compared with 2023.

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

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

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

On a dollar and per ASM basis, approximately 50 percent of the increase was primarily due to increases in engine shop visits and other engine expenses for the Company's -700 and -800 fleet, approximately 20 percent of the increase was driven by airframe repairs due to a higher average cost per event and the timing of regular maintenance events, and approximately 15 percent of the increase was due to bulk purchases of materials for the Company's seat refurbishment efforts on its entire fleet.

Landing fees and airport rentals expense for 2024 increased by $173 million, or 9.7 percent, compared with 2023.

On a per ASM basis, Landing fees and airport rentals expense increased 5.7 percent, compared with 2023.

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

On a dollar and per ASM basis, the increase was primarily attributable to an increase in airport rental expense and higher landing fees throughout the network driven by higher rates charged by airports, partially offset by more favorable settlements and credits from various airports received in 2024.

Depreciation and amortization expense for 2024 increased by $135 million, or 8.9 percent, compared with 2023.

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

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

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

On a per ASM basis, Depreciation and amortization expense increased by 4.5 percent, compared with 2023.

On a dollar and per ASM basis, approximately 55 percent of the increase was primarily due to the acquisition of 22 -8 aircraft

since fourth quarter 2023 and approximately 45 percent of the increase was due to accelerating the depreciation for certain -700 aircraft planned for early retirement in 2024 and 2025.

See Note 1 for further information on early retirement dates and the corresponding impact to depreciation expense.

Other operating expenses for 2024 increased by $139 million, or 3.5 percent, compared with 2023.

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

Included within this line item was aircraft rentals expense in the amount of $220 million and $198 million for 2024 and 2023, respectively.

On a per ASM basis, Other operating expenses decreased 0.4 percent, compared with 2023.

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

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

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

Other expenses (income)

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

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

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

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

On a dollar basis, the increase was due to (i) approximately $80 million in higher advertising expense, (ii) approximately $60 million in higher maintenance agreement expense driven by expanded cloud-based services, (iii) approximately $57 million in higher professional fees, primarily driven by an increase in spend on technology enhancements and replacement projects, and (iv) approximately $47 million in higher per diem rates paid to Flight crews, primarily driven by the new Pilot and Flight Attendant ratified agreements.

These increases were partially offset due to (i) recording the $107 million DOT settlement in December 2023 and (ii) a $92 million gain on a sale-leaseback transaction involving 35 -800 aircraft during 2024.

See Note 7 for further information.

Non-Operating Expenses (Income)

Interest expense for 2024 decreased by $10 million, or 3.9 percent, compared with 2023, primarily due to prepaying the 5.25% senior unsecured notes due May 2025 in December 2024.

Capitalized interest for 2024 increased by $12 million, or 52.2 percent, compared with 2023, primarily due to an increase in various technology projects, facilities projects, and aircraft under construction.

Interest income for 2024 decreased by $86 million, or 14.8 percent compared with 2023, primarily due to lower cash and investment balances and a lower interest rate in the total investment portfolio.

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

3 unchanged sentences

(in millions) 2024 2023

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

Mark-to-market impact from fuel contracts settling in current period $ 34 $ (17)

Premium cost of fuel contracts not designated as hedges 9 —

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

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

Mark-to-market impact on deferred compensation plan investments (36) (39)

Other (3) (2)

The Company's annual 2024 effective tax rate was 22.2 percent, compared with 26.5 percent in 2023.

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

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

The year-over-year decrease in the tax rate is primarily due to the DOT settlement, which was treated as a disallowed tax deduction in 2023.

2023 Compared with 2022

7 unchanged sentences

Fuel and oil expense, as reported $ 5,812 $ 6,217

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

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

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which (gains) losses were reclassified from AOCI (a) 34 (16)

Premium cost of fuel contracts not designated as hedges 9 —

Fuel and oil expense, excluding special items (economic) $ 5,855 $ 6,201 (5.6) %

Total operating expenses, as reported $ 27,162 $ 25,867

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

SWAPA Labor contract adjustment (b) (354) —

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

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

Impairment of long-lived assets — (35)

Voluntary Employee programs (5) —

Labor contract adjustment (b) (9) (180)

SWAPA Labor contract adjustment (c) — (354)

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which (gains) losses were reclassified from AOCI (a) 34 (16)

Premium cost of fuel contracts not designated as hedges 9 —

DOT settlement — (107)

Litigation settlement (12) —

Litigation settlements (7) (12)

Professional advisory fees (37) —

Transformation costs (5) —

Total operating expenses, excluding special items $ 27,142 $ 25,198 7.7 %

4 unchanged sentences

Operating income, as reported $ 321 $ 224

TWU 556 contract adjustment (a) 180 —

SWAPA contract adjustment (b) 354 —

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

Premium benefit of fuel contracts not designated as hedges — 28

Impairment of long-lived assets — 35

Breakage revenue adjustment (d) 116 —

Voluntary Employee programs 5 —

Labor contract adjustment (b) 9 180

SWAPA contract adjustment (c) — 354

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which (gains) losses were reclassified from AOCI (a) (34) 16

Premium cost of fuel contracts not designated as hedges (9) —

DOT settlement — 107

Litigation settlement 12 —

Litigation settlements 7 12

Professional advisory fees 37 —

Transformation costs 5 —

Operating income, excluding special items $ 457 $ 893 (48.8) %

Other (gains) losses, net, as reported $ 4 $ (62)

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

Premium benefit of fuel contracts not designated as hedges — 28

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current periods (a) (34) 17

Premium cost of fuel contracts not designated as hedges (9) —

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

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

Other gains, net, excluding special items $ (39) $ (41) (4.9) %

Income before income taxes, as reported $ 598 $ 633

TWU 556 contract adjustment (a) 180 —

SWAPA contract adjustment (b) 354 —

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

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

Impairment of long-lived assets — 35

Breakage revenue adjustment (d) 116 —

Voluntary Employee programs 5 —

Labor contract adjustment (b) 9 180

SWAPA contract adjustment (c) — 354

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which (gains) losses were reclassified from AOCI (a) (34) 16

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current periods (a) 34 (17)

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

Loss on extinguishment of debt — 193

DOT settlement — 107

Litigation settlement 12 —

Litigation settlements 7 12

Professional advisory fees 37 —

Transformation costs 5 —

Income before income taxes, excluding special items $ 777 $ 1,281 (39.3) %

Provision for income taxes, as reported $ 133 $ 168

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

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

Provision for income taxes, net, excluding special items $ 180 $ 301 (40.2) %

Net income, as reported $ 465 $ 465

TWU 556 contract adjustment (a) 180 —

SWAPA contract adjustment (b) 354 —

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

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

Impairment of long-lived assets — 35

Loss on extinguishment of debt — 193

Breakage revenue adjustment (d) 116 —

Voluntary Employee programs 5 —

Labor contract adjustment (b) 9 180

SWAPA contract adjustment (c) — 354

Add (Deduct):

Fuel hedge contracts settling in the current period, but for which (gains) losses were reclassified from AOCI (a) (34) 16

Add (Deduct):

Mark-to-market impact from fuel contracts settling in current periods (a) 34 (17)

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

DOT settlement — 107

Litigation settlement 12 —

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

Litigation settlements 7 12

Professional advisory fees 37 —

Transformation costs 5 —

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

Net income, excluding special items $ 597 $ 980 (39.1) %

1 unchanged sentence

Impact of special items 0.27 1.01

Add (Deduct):

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

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

Net income per share, diluted, excluding special items $ 0.96 $ 1.56 (38.5) %

Operating expenses per ASM (cents) 15.19 ¢ 15.36 ¢

Operating expenses per ASM (cents), as reported 15.32 ¢ 15.19 ¢

Impact of special items (0.04) (0.38)

Add (Deduct):

Fuel and oil expense divided by ASMs (3.27) (3.65)

Add (Deduct):

Profitsharing expense divided by ASMs (0.06) (0.07)

Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents) 11.95 ¢ 11.09 ¢ 7.8 %

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

(a) See Note 10 to Consolidated Financial Statements for further information.

(b) 2024 amounts represent changes in estimate related to the contract ratification bonuses for the Company's Ramp, Operations, Provisioning, & Cargo Agents as part of the tentative agreement ratified in March 2024 with TWU 555.

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

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

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

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

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

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

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

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

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

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

(d) Tax amounts for each individual special item are calculated at the Company's effective rate for the applicable period and totaled in this line item.

(d) Represents a change in breakage revenue estimate related to flight credits the Company issued to Passengers during 2022 and prior.

On July 28, 2022, the Company modified its policy and announced that all unexpired flight credits as of that date, including a significant volume of such credits issued to impacted Customers during the COVID-19 pandemic as the Company was making significant changes to its schedules based on fluctuating demand, will no longer have an expiration date and thus will be able to be redeemed by Customers indefinitely.

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

At that time, based on historical Customer behavior, the Company estimated that redemptions of these flight credits would have been reduced to an immaterial amount during 2024 and recognized breakage revenue in prior periods for these flight credits accordingly;

however, based on actual Customer redemptions throughout 2024, as well as currently projected redemptions beyond 2024, the Company determined a reversal of a portion of this prior breakage revenue was warranted in the current period.

This adjustment is not reflective of base business revenue trends in fourth quarter 2024 or beyond.

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

(e) Tax amounts for each individual special item are calculated at the Company's effective rate for the applicable period and totaled in this line item.

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

December 31, 2023

Year Ended Year Ended

December 31, 2024 December 31, 2023

Operating income, as reported $ 321 $ 224

Breakage revenue adjustment 116 —

Voluntary Employee programs 5 —

TWU 555 contract adjustment 9 —

TWU 556 contract adjustment — 180

SWAPA contract adjustment — 354

Net impact from fuel contracts (34) 16

Premium benefit of fuel contracts not designated as hedges (9)

Professional advisory fees 37 —

Transformation costs 5 —

DOT settlement — 107

Litigation settlement 12

Litigation settlements 7 12

Operating income, non-GAAP 457 893

1 unchanged sentence

Adjusted operating income, non-GAAP (A) $ 591 $ 1,021

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

Non-GAAP tax rate (B) 23.1 % (d) 23.5 % (e)

Net operating profit after-tax (A* (1-B) = C) $ 454 $ 781

11 unchanged sentences

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

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

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

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

1 unchanged sentence

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

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

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

Note Regarding Use of Non-GAAP Financial Measures

8 unchanged sentences

Operating income, non-GAAP;

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

Other gains, net, non-GAAP;

Income before income taxes, non-GAAP;

Income tax rate, non-GAAP;

Provision for income taxes, net, non-GAAP;

13 unchanged sentences

For the periods presented, in addition to the items discussed above, special items include:

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

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

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

Reversal of breakage revenue recorded in prior years related to a portion of flight credits issued to Customers during 2022 and prior that have either been redeemed or are expected to be redeemed in future periods.

The majority of these flight credits were issued during the COVID-19 pandemic as the Company was making significant changes to its flight schedules based on fluctuating demand, which made it difficult to estimate future redemption patterns when compared against historical Customer behavior;

Incremental expense associated with a voluntary separation program that allowed eligible Employees the opportunity to voluntarily separate from the Company in exchange for severance, medical/dental coverage for a specified period of time, and travel privileges based on years of service;

Incremental expense associated with contract ratification bonuses for various workgroups related to additional compensation for services performed by Employees outside the applicable fiscal period;

Expenses associated with incremental professional advisory fees related to activist investor activities, which were not budgeted by the Company, are not associated with the ongoing operation of the airline, and are difficult to predict in future periods;

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

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

Charges associated with tentative litigation settlements regarding certain California state meal-and-rest-break regulations for flight attendants and an arbitration award in favor of the Company's Pilots relating to a collective-bargaining matter;

Expenses associated with professional advisory fees related to the Company's implementation of its comprehensive three-year "Southwest.

Even Better." transformational plan;

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

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

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

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

5 unchanged sentences

Operating income, non-GAAP;

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

Other gains, net, non-GAAP;

Income before income taxes, non-GAAP;

Income tax rate, non-GAAP;

Provision for income taxes, net, non-GAAP;

11 unchanged sentences

Liquidity and Capital Resources

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

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

However, due to the Company's pre-pandemic low balance sheet leverage, large base of unencumbered assets, and investment-grade credit ratings, the Company was able to quickly access additional liquidity during 2020, as Customer cancellations and ticket refunds spiked and sales and revenues dropped while the Company continued to experience significant fixed operating expenses.

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

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

Net cash provided by operating activities for 2024 was $462 million, and net cash provided by operating activities for 2023 was $3.2 billion.

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

1 unchanged sentence

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

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

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

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

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

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

The Company has suspended share repurchase activity until further notice.

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

The operating cash flows for 2024 were largely impacted by the Company's net income (as adjusted for noncash items, primarily Depreciation and amortization and the gain on the sale-leaseback transaction), the approximately $1.9 billion paid to Pilots, Flight Attendants, and Ramp, Operations, Provisioning, and Cargo Agents as bonuses upon the ratification of the labor contract agreements with SWAPA, TWU 556, and TWU 555, respectively, and a $123 million decrease related to the purchase of fuel derivative instruments, which is included within Other, net operating cash flows in the accompanying Consolidated Statement of Cash Flows (see Note 10 to the Consolidated Financial Statements for further information).

Operating cash flows for 2023 included a $29 million increase in Air traffic liability driven by higher ticket sales related to an increase in travel demand, partially offset by a $273 million decrease related to the purchase of fuel derivative instruments, which is included within Other, net operating cash flows in the accompanying Consolidated Statement of Cash Flows, and a $215 million decrease due to the payment of Customer reimbursement expenses in first quarter 2023 related to the December 2022 operational disruption.

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

Net cash used in investing activities for 2024 was $261 million, and net cash used in investing activities for 2023 was $2.9 billion.

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

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

The Company also raised $871 million in 2024 from the sale-leaseback of 35 aircraft (see Note 7 to the Consolidated Financial Statements for more details on the sale-leaseback transactions).

Capital expenditures were $2.1 billion for 2024, compared with $3.5 billion in the same prior year period, and decreased largely due to decreases in progress and delivery payments for aircraft received in 2024, as well as contractual progress payments made in 2024 associated with future aircraft deliveries.

Capital expenditures during 2024 also included approximately $22 million associated with the Company's purchase of finance leased aircraft, compared to approximately $174 million associated with finance leased aircraft purchased during 2023.

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

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

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

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

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

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

The Company estimates its 2025 capital spending to be in the range of $2.5 billion to $3.0 billion, which includes approximately $1.2 billion in aircraft capital spending, based on the planning assumption of 38 -8 aircraft deliveries in 2025, and $1.6 billion in non-aircraft capital spending, but does not include the impact of potential future fleet sales or sale-leaseback transactions.

The Company's opportunities to lower net capital spending from its fleet monetization strategy are dependent on aircraft market conditions and Boeing's ability to deliver aircraft pursuant to the Company's contractual order book.

Net cash used in financing activities for 2024 was $2.0 billion, and net cash used in financing activities for 2023 was $436 million.

The Company paid $430 million in cash dividends to Shareholders and repaid $1.3 billion in debt and finance lease obligations, primarily as a prepayment for all of its outstanding 5.25% Notes due 2025 during the year ended December 31, 2024.

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

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

During 2022, the Company's financing activities included repaying $3.1 billion in debt and finance lease obligations, including the prepayment of $1.3 billion for all of its outstanding 4.75% Notes due 2023, and the extinguishment of $486 million in principal of its Convertible Notes for cash

payments totaling $648 million.

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

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

The Company's purchase of finance leased aircraft in 2023 resulted in the elimination of the Company's remaining financial lease obligations for these aircraft of $191 million.

On May 15, 2019, the Company’s Board authorized the repurchase of up to $2.0 billion of the Company’s common stock, of which approximately $899 million remained as of September 2024.

On September 25, 2024, the Board terminated and replaced this previous share repurchase authorization with a new $2.5 billion share repurchase authorization of the Company’s common stock.

Subject to certain conditions, repurchases may be made in accordance with applicable securities laws in open market or private, including accelerated, repurchase transactions from time to time, depending on market conditions.

The Company repurchased $250 million of its outstanding

common stock through an accelerated share repurchase program entered into in fourth quarter 2024 under this new authorization, which also impacted net cash used in financing activities.

The repurchases of common stock amounts in the Consolidated Statement of Cash Flows may differ from the Consolidated Statement of Stockholder's Equity due to excise taxes incurred on share repurchases, net of issuances, payable in April 2025.

On December 5, 2024, the Company announced its intention to launch an additional $750 million accelerated share repurchase program in first quarter 2025.

A discussion of the Company's most significant drivers impacting cash flow for 2022 are included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2023, under Part II Item 7, Liquidity and Capital Resources.

1 unchanged sentence

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

Additional detail regarding the Company's available liquidity is provided in the table below.

( in millions )

December 31, 2024 December 31, 2023

Cash and cash equivalents $ 7,509 $ 9,288

Short-term investments 1,216 2,186

Undrawn facilities 1,000 1,000

Total available liquidity 9,725 $ 12,474

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

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

There were no amounts outstanding under the Amended Credit Agreement as of December 31, 2024.

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

Although not the case at December 31, 2023 due to the Company's significant financing activities throughout the early stages of the pandemic, the Company has historically carried a working capital deficit, in which its current liabilities exceed its current assets.

As of December 31, 2024, the Company carried a working capital deficit of approximately $1 billion, in which its current liabilities exceed its current assets.

This is common within the airline industry and is primarily due to the nature of the Air traffic liability account, which is related to advance ticket sales, unused flight credits available to Customers, and loyalty deferred revenue, which are performance obligations for future Customer flights, do not require future settlement in cash, and are mostly nonrefundable.

1 unchanged sentence

The Company believes it has various options available to meet its capital and operating commitments, including unrestricted cash and short-term investments of $8.7 billion as of December 31, 2024, and anticipated future internally generated funds from operations.

The Company continues to have a large base of unencumbered assets with a net book value of approximately $17.3 billion , including $14.5 billion in aircraft value and $2.8 billion in non-aircraft assets such as spare engines, ground equipment, and real estate.

The Company continues to have a large base of unencumbered assets with a net book value of approximately $16 billion , including approximately $13 billion in aircraft value and approximately $3 billion in non-aircraft assets such as spare engines, ground equipment, and real estate.

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

As of December 31, 2024, the Company had the following corporate credit ratings:

Moody's S&P Global Fitch

Southwest Airlines Co.

Baa1 BBB BBB+

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

2 unchanged sentences

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

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

As detailed in Note 6 to the Consolidated Financial Statements, in connection with the major negative impact of COVID-19 on air carriers, the Company received significant financial assistance from Treasury in the form of payroll support, and this assistance had a significant impact on the Company's reported GAAP financial results.

Such impact ended in third quarter 2021, and the Company's 2022, 2023, and 2024 results do not reflect the benefit of this payroll support, and its future periods are not expected to benefit from such payroll support.

3 unchanged sentences

As of December 31, 2024, future interest payments associated with its fixed rate debt (excluding interest associated with finance leases) were $138 million in 2025, $128 million in 2026, $71 million in 2027, $13 million in 2028, $13 million in 2029, and $7 million thereafter.

The Company's Convertible Notes did not meet the criteria to be converted by holders as of the date of the financial statements, and thus are classified as Long-term debt in the accompanying Consolidated Balance Sheet as of December 31, 2023.

If the provisions were met to allow holders to exercise their conversion option on these instruments, all of the remaining Convertible Notes would be reclassified as a current obligation.

The Company's Convertible Notes of $1.6 billion did not meet the criteria to be converted by holders as of the date of the financial statements, but are classified within Current maturities of long-term debt in the accompanying Consolidated Balance Sheet as of December 31, 2024, due to their maturation date of May 1, 2025.

Upon conversion, the Company will settle conversions in cash.

Also, the Company has engaged in transactions with certain convertible debt holders to purchase their instruments in private transactions from time to time in cash, and may continue to do so in future periods.

8 unchanged sentences

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

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

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

1 unchanged sentence

Since the Company purchases the majority of the aircraft it acquires, it has been able to utilize accelerated depreciation methods (including bonus depreciation) available under the Internal Revenue Code of 1986, as amended, in 2024 and in previous years, which has enabled the Company to accelerate cash tax benefits of depreciation.

Based on the Company’s scheduled future aircraft deliveries from Boeing and existing tax laws in effect, the Company will continue to accelerate the cash income tax benefits related to aircraft purchases.

Based on the Company’s scheduled future

aircraft deliveries from Boeing and existing tax laws in effect, the Company will continue to accelerate the cash income tax benefits related to aircraft purchases.

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

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

taxable income in future periods.

The Company has federal and state operating loss carryforwards, $253 million and $56 million (tax-effected), respectively, to reduce taxable income in future periods.

See Note 14 to the Consolidated Financial Statements for further information.

23 unchanged sentences

See Note 5 to the Consolidated Financial Statements for further information regarding these extended flight credits.

Since the Company did not have historical data to enable it to accurately estimate the pattern of usage of these extended credits, these credits have been classified as a current liability throughout their history.

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

1 unchanged sentence

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

As a result of changes in observed Customer travel habits and behaviors during 2021 and 2022, the Company increased its estimates of “normal” Customer flight credits that are expected to go unused, as Customer redemptions of these "normal" credits had been at a slower rate than the Company’s historical data for similar credits in periods prior to the COVID-19 pandemic.

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

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

revenues of approximately $26 million.

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

As a result of changes in observed Customer travel habits and behaviors during 2021 and 2022, the Company increased its estimates of “normal” Customer flight credits that were expected to go unused, as Customer redemptions of these "normal" credits had been at a slower rate than the Company’s historical data for similar credits in periods prior to the COVID-19 pandemic.

At the time of the Company's policy change, based on historical Customer behavior, the Company estimated that redemptions of these pre-policy change issued flight credits would have been reduced to an immaterial amount during 2024 and recognized breakage revenue in prior periods for these flight credits accordingly;

See Note 1 to the Consolidated Financial Statements for further information regarding this adjustment.

Although the Company continues to believe a portion of Customer flight credits will go unused following the Company's change in policy, including a portion of flight

credits issued after July 28, 2022, the Company's prospective long term breakage rate associated with such flight credits has been and is expected to continue to be lower and more stable than it had been previously.

Although the Company's estimated breakage rate was consistent throughout 2024, a one percentage point change in the amount of breakage, as a factor of total flight credits issued, would have resulted in a change of Passenger revenues of approximately $25 million.

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

Assumptions about Customer behavior are reviewed frequently and corresponding adjustments are made to breakage estimates, as needed, when observed behaviors differ from historical experience.

Assumptions about Customer behavior are reviewed frequently and corresponding adjustments are made to breakage estimates, as needed, when observed behaviors differ from historical experience or expectations.

Assumptions about Customer behavior can be impacted by several factors including, but not limited to:

13 unchanged sentences

Market price changes can be driven by factors such as supply and demand, inventory levels, weather events, refinery capacity, political agendas, the value of the U.S.

dollar, geopolitical events, the extent of the COVID-19 pandemic, and general economic conditions, among other items.

dollar, geopolitical events, pandemics, and general economic conditions, among other items.

Historically, the financial derivative instruments utilized by the Company primarily are a combination of collars, purchased call options, call spreads, put spreads, and fixed price swap agreements.

7 unchanged sentences

Although implied volatility is not directly observable, it is derived primarily from changes in market prices, which are observable.

Based on the Company’s portfolio of option contracts as of December 31, 2023, a 10 percent change in implied volatility, holding all other factors constant, would have resulted in a change in the fair value of this portfolio of less than $34 million.

Based on the Company’s portfolio of option contracts as of

December 31, 2024, a 10 percent change in implied volatility, holding all other factors constant, would have resulted in a change in the fair value of this portfolio of less than $100 million.

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

3 unchanged sentences

Increased volatility in these commodity markets for an extended period of time, especially if such volatility were to worsen, could cause the Company to lose hedge accounting altogether for the commodities used in its fuel hedging program.

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 West Texas Intermediate ("WTI") crude oil-based derivatives no longer qualified for hedge accounting.

This change was primarily due to the fact that the correlation between WTI crude oil prices and jet fuel prices during recent periods had not been as strong as in the past, and therefore the Company could no longer demonstrate that derivatives based on WTI crude oil prices would result in effective hedges on a prospective basis.

As such, all WTI-based instruments were de-designated from their hedging relationships and the change in fair value of all of the Company's derivatives based in WTI was recorded to Other (gains) losses for third quarter and fourth quarter 2024.

All WTI crude oil based derivatives in the Company's portfolio have settled as of December 31, 2024.

The change in fair value of the Company's WTI derivative contracts during the second half 2024 was a decrease of $37 million which resulted in a corresponding loss in the Consolidated Statement of Income.

Any amounts previously recorded to AOCI remained there until the original forecasted transaction occurred in accordance with hedge accounting requirements.

Further, should the anticipated fuel purchases covered by the Company's fuel hedges no longer be probable of occurring, the Company would discontinue hedge accounting.

9 unchanged sentences

Loyalty account balances include points earned through flights taken, points sold to Customers, or points earned through business partners participating in the loyalty program.

Under the Southwest Rapid Rewards loyalty program, Members earn points for every dollar spent on Southwest base fares.

Under the Southwest Rapid Rewards loyalty program, Members earn points for every dollar spent on eligible Southwest fare purchases.

The amount of points earned under the program is based on the fare amount and fare type, with higher fare types (e.g., Business Select) earning more points than lower fare types (e.g., Wanna Get Away).

1 unchanged sentence

Likewise, the amount of points required to be redeemed for a flight can differ based on the fare type purchased.

Under the program, (i) Members are able to redeem their points for every available seat, every day, on every flight, with no blackout dates;

Under the program, (i) Members are able to

redeem their points for every available seat, every day, on every flight, with no blackout dates;

and (ii) points do not expire.

8 unchanged sentences

See Note 5 to the Consolidated Financial Statements for further information on determining the estimated fair value of each loyalty point.

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

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

Consideration received as part of this Agreement is subject to ASC 606.

The most recent instance in which the Agreement was amended was in fourth quarter 2021.

The Agreement has the following multiple elements:

For periods presented in the Consolidated Financial Statements, the most recent instance in which the Agreement was amended was in fourth quarter 2021.

In January 2025, the Company reached an amended co-brand agreement with Chase.

Agreements with Chase have the following multiple elements:

travel points to be awarded, use of the Southwest Airlines’ brand and access to Rapid Rewards Member lists, advertising elements, and the Company’s resource team.

12 unchanged sentences

The Company updates this model at least annually, and applies the new breakage rates effective October 1st each year, or more frequently if required by changes in the business.

Changes in the breakage rates applied annually in recent years have not had a material impact on Passenger revenues.

Changes in the breakage rates applied annually in recent years have not had a material impact on Passenger

For the year ended December 31, 2024, based on actual redemptions of points sold to business partners and earned through flights, a hypothetical one percentage point change in the estimated breakage rate would have resulted in a change to Passenger revenue of approximately $252 million (an increase in breakage would have resulted in an increase in revenue and a decrease in breakage would have resulted in a decrease in revenue).

2 unchanged sentences

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

What changed 10-K

Item 7. Management’s Discussion and Analysis