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Item 7. Management’s Discussion and Analysis

2026-02-05 compared with 2025-02-07 · 262 added, 488 removed, 320 unchanged (70% of the section changed)

1 unchanged sentence

YEAR IN REVIEW

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 had a record full year revenue performance in 2025, producing operating revenues of $28.1 billion, due in part to continued strong domestic travel demand, as well as the execution of transformational initiatives, which has resulted in strong financial performance and driven incremental Shareholder value.

The Company recorded results for 2025 and 2024, on an accounting principles generally accepted in the United States ("GAAP") and non-GAAP basis, as noted in the following tables.

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Net income per share, diluted $ 0.93 $ 0.96 (3.1)

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 Company's operating income, as shown above on a GAAP and non-GAAP basis for the year ended December 31, 2025, increased compared to the same prior year period primarily driven by revenue initiatives, including the Company's policy change related to certain Customers' first and second checked bags that became effective May 28, 2025.

This increase was combined with outperformance of cost reduction goals and lower year-over-year Fuel and oil expense primarily driven by lower jet fuel prices, partially offset by higher salaries, wages, and benefits expense.

Despite the negative impacts to bookings and travel associated with the government shutdown during a portion of fourth quarter 2025, the Company earned an outsized portion of its 2025 operating income during the period.

On a GAAP basis, the Company achieved in excess of 90 percent, and on a non-GAAP basis, achieved in excess of 70 percent, of its annual operating income during the fourth quarter of the year, both primarily as a result of the ramp-up of its transformational and revenue initiatives over the course of the year.

The Company's net income, as shown above on a GAAP and non-GAAP basis for the year ended December 31, 2025, decreased compared to the same prior year period primarily due to a decrease in interest income driven by a lower cash and investment balance.

Additionally, 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 either were 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 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.

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.

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 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.

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

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Operating expenses per ASM, excluding fuel (cents) 12.44 12.05 3.2 %

Operating expenses per ASM, excluding fuel and profitsharing (cents) 11.99 11.47 4.5 %

Operating expenses per ASM, excluding fuel and profit sharing (cents) 12.38 11.99 3.3 %

Fuel costs per gallon, including fuel tax $ 2.41 $ 2.64 (8.7) %

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Aircraft at end of period (j)

803 817 (1.7) %

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

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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 Down 2% to 3%

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

Fuel hedging premium expense per gallon $0.07

Fuel hedging cash settlement gains per gallon $—

ASMs per gallon (fuel efficiency) 81 to 83

CASM-X (e), year-over-year (c) (f) Up 7% to 9%

Scheduled debt repayments (millions) ~$5

Interest expense (millions) ~$45

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 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 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.

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

See Note Regarding Use of Non-GAAP Financial Measures.

(e) Operating expenses per available seat mile, excluding fuel and oil expense, special items, and profitsharing ("CASM-X").

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

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

(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.

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 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.

2025 Transformational Initiative Highlights

The Company experienced a year of meaningful transformation and execution as it implemented its transformational initiatives, which were planned and designed to attract new Customers and improve both the Company's operational and financial performance.

During 2025, the Company:

• Changed its product offering, including the implementation of bag fees for most fare products, addition of a Basic fare product, and transition to new fare products, Choice, Choice Preferred, and Choice Extra;

• Updated its flight credit policy for tickets purchased on or after May 28, 2025;

• Began selling assigned and extra legroom seating for travel beginning January 27, 2026;

• Expanded distribution channels through new partnerships with online travel agencies, Expedia and Priceline;

• Better optimized its Rapid Rewards ® program, including variable earn and burn rates;

• Amended its co-brand credit card agreement with JPMorgan Chase Bank, N.A.

(“Chase”), including new benefits and improved economics;

• Launched Getaways by Southwest™, an in-house packaged vacations product;

• Announced free Wi-Fi sponsored by T-Mobile for all Rapid Rewards Members beginning October 24, 2025;

• Added redeye flying to increase aircraft utilization and network connectivity;

• Reduced turn time to increase aircraft utilization;

• Deployed new technology boosting operational reliability, a key enabler of the Company's #1 rank in The Wall Street Journal Best U.S.

Airlines of 2025;

• Launched a partnership with Hahnair to expand its global ticketing reach;

• Announced six strategic partnerships with Icelandair, EVA Air, China Airlines, Philippine Airlines, Condor, and Turkish Airlines.

In January 2026, the Company began operating assigned and extra legroom seating for travel beginning on January 27, 2026, which required retrofitting 780 aircraft.

With assigned and extra legroom seating becoming operational, Southwest expects future earnings upside based on how booking behavior related to these initiatives unfolds.

This includes upsell revenue from close-in bookings, which are more closely affiliated with business and price-flexible Customers, as well as growth in business and leisure Customer segments driven by the more attractive new product offering.

The Company has also continued to enhance its onboard offerings, with improvements such as faster WiFi, in-seat power, and larger overhead bins, and work is well underway on a refreshed cabin design, including new, more comfortable RECARO seats.

The first Boeing 737-8 (“-8”) aircraft with an updated cabin was delivered and entered service on October 16, 2025.

Other Initiatives and Developments

The Company has also announced its intention to commence new service at multiple locations in an effort to grow its network and provide more destinations for Customers.

These locations include:

King International Airport on St.

Thomas beginning early 2026;

• McGhee Tyson Airport in Knoxville, Tennessee beginning March 5, 2026;

• Princess Juliana International Airport on St.

Maarten beginning April 7, 2026;

Schulz Sonoma County Airport in Santa Rosa, California beginning April 7, 2026;

• Ted Stevens Anchorage International Airport in Anchorage, Alaska beginning in the first half of 2026.

During 2025, the Company continued to deliver value to its Shareholders by returning $2.9 billion to Shareholders through $399 million in dividend payments and $2.6 billion through accelerated share repurchase programs entered into by the Company with third party financial institutions.

In addition, under a forward contract entered into by the Company in December 2025, the Company committed $750 million for an accelerated share repurchase program with a third party financial institution (the “January 2026 ASR Program”) under which the Company paid $750 million in January 2026 and received total delivery of 17,965,193 shares to the Company as settlement in full.

Additionally, the Company launched a $400 million accelerated share repurchase program in January 2026 (the "First Quarter 2026 ASR Program") that is scheduled to be completed by the end of April 2026.

All of the Company's share repurchases will be recorded as treasury share repurchases for purposes of calculating earnings per share.

Upon completion of the Company's January 2026 share repurchase activity, the Company will have $550 million remaining under its July 2025 $2.0 billion share repurchase authorization.

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

In December 2025, the U.S.

Department of Transportation ("DOT") amended a December 2023 order assessing a civil penalty of $140 million on the Company resulting from its December 2022 operational disruption by waiving the final cash installment that was due January 31, 2026, and issuing the Company an $11 million credit for the Company significantly improving its ontime performance and completion factor.

In February 2025, the Company implemented a reduction in workforce that provided for the reduction of approximately 1,750 Employee roles, or 15 percent of corporate positions.

As a result of the reduction in workforce, the Company incurred a one-time expense of $62 million during first quarter 2025, achieved 2025 savings of approximately $230 million, and estimates 2026 savings of approximately $310 million.

Separations were substantially complete by the end of second quarter 2025.

See Note 16 to the Consolidated Financial Statements for further information.

Fleet Information

As a result of The Boeing Company's ("Boeing") delivery delays, the Company has previously replanned its capacity and delivery expectations multiple times and will continue to closely monitor the ongoing aircraft delivery delays with Boeing and further adjust expectations as needed.

The Company ended 2025 with 803 Boeing 737 aircraft, including 300 -8 aircraft.

During 2025, the Company retired 55 aircraft (including 48 Boeing 737-700 ("-700") aircraft, and seven Boeing 737-800 ("-800") aircraft, inlcuding the sale of five -800 aircraft) and took delivery of 55 -8 aircraft.

The Company also completed the sale-leaseback of one -800 aircraft in January 2025.

The Company's order book with Boeing as of January 29, 2026, consists of a total of 467 MAX firm orders (271 Boeing 737-7 ("-7") aircraft and 196 -8 aircraft) for the years 2026 through 2031, including 27 -7 aircraft that were contractually committed for 2024, and 54 -8s that were contractually committed for 2025, but were not received, and 150 MAX options (-7s or -8s) for the years 2027 through 2031.

The Company expects 66 -8 aircraft deliveries in 2026, which differs from its contractual order book, as Boeing continues to ramp up production and works to certify the -7.

This expectation supports the Company's plans to retire approximately 60 aircraft in 2026.

The Company's aircraft delivery and retirement expectations for 2026 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 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.

As of February 5, 2026, the Company has published its flight schedule through September 30, 2026.

2025 Compared with 2024

14 unchanged sentences

Operating Revenues

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.

Passenger revenues for 2025 increased by $555 million, or 2.2 percent, compared with 2024, to achieve an all-time full year Company record of $25.5 billion.

On a unit basis, Passenger revenues increased 0.6 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.

On both a dollar basis and a per unit basis, the increase was primarily due to an increase in bag fee revenues driven by the Company's policy change, coupled with an increase in the portion of the Company's co-brand credit card benefits that are now classified within Passenger revenues as a result of the amended and restated co-brand agreement with Chase.

Other revenues for 2025 increased by $29 million, or 1.2 percent, compared with 2024.

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

On both a dollar basis and a per unit basis, the increase was primarily due to a $30 million increase in loyalty revenues due to a higher portion of revenues recognized sooner associated with the Company's co-brand agreement with Chase, as a result of the contract amendments with Chase in 2025.

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

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.

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.

Operating expenses for 2025 increased by $473 million, or 1.7 percent, compared with 2024, and capacity increased 1.6 percent over the same prior year period.

A majority of the operating expenses increase was due to higher Salaries, wages, and benefits expense, partially offset by outperforming cost reduction goals, including the Company's first quarter 2025 workforce reduction, and lower Fuel and oil expense.

The following table presents the Company's Operating expenses per ASM for 2025 and 2024, followed by explanations of these changes on a dollar basis.

8 unchanged sentences

Total 15.35 ¢ 15.32 ¢ 0.03 ¢ 0.2 %

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 2025 increased by 0.2 percent, compared with 2024, primarily driven by higher Salaries, wages, and benefits expense, offset by the decrease in the Company's fuel cost per gallon.

Operating expenses per ASM for 2025, excluding Fuel and oil expense, profitsharing, and special items (a non-GAAP financial measure), increased 3.1 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.

Salaries, wages, and benefits expense for 2024 increased by $1.1 billion, or 9.8 percent, compared with 2023.

Salaries, wages, and benefits expense for 2025 increased by $723 million, or 5.9 percent, compared with 2024.

On a per ASM basis, Salaries, wages, and benefits expense for 2025 increased 4.3 percent, compared with 2024.

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.

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.

On a dollar and per ASM basis, the majority of the increase was due to net step/pay rate increases and related benefits for the Company's workforce.

On May 16, 2025, the Company's 35 Network Operations Control Customer Planners, added to the existing Passenger Service Employees craft or class to be represented by the International Association of Machinists and Aerospace Workers (“IAM”), entered into a tentative agreement as part of the accretion process to join an existing collective-bargaining agreement.

The vote to ratify a contract amendment with the Company failed, and the Company is continuing negotiations with the IAM.

On September 3, 2025, the Company and Transport Workers of America Union Local 557 ("TWU 557"), representing the Company's approximately 216 Flight Instructors, reached a tentative agreement on a three year extension of their collective-bargaining agreement from 2027 to 2030.

The vote to ratify the extension with the Company failed, and the Company and TWU 557 are preparing to open full negotiations in 2026.

Fuel and oil expense for 2025 decreased by $572 million, or 9.8 percent, compared with 2024.

On a per ASM basis, Fuel and oil expense for 2025 decreased 11.0 percent.

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.

On a dollar and per ASM basis, the decrease was primarily attributable to a decrease in fuel prices.

The Company's 2025 average economic fuel cost was $2.41 per gallon with no cash settlements from hedging activities compared with an average economic fuel cost of $2.66 per gallon, which was net of approximately $53 million in cash settlements from hedging activities, in 2024.

During second quarter 2025, the Company terminated its remaining portfolio of fuel hedging contracts, which were scheduled to settle through 2027, to effectively close its fuel hedging portfolio and program.

However, this termination had no impact on the Company's Fuel and oil expense, as all hedge positions were out of the money and just consisted of remaining time value.

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:

1 unchanged sentence

Economic fuel costs per gallon $ 2.41 $ 2.66

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

Fuel hedging premium expense (in millions) $ 145 (a) $ 157

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

Fuel hedging premium expense per gallon $ 0.07 $ 0.06

Fuel hedging premium expense per gallon $ 0.07 (a) $ 0.07

Fuel hedging cash settlement gains per gallon $ — $ 0.03

(a) Includes amounts reclassified from Accumulated Other Comprehensive Income associated with hedges previously terminated.

See Note 10 to the Consolidated Financial Statements for further information.

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 2025 available seat miles per gallon ("fuel efficiency") improved 2.7 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.

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)

(a) Based on the Company's current available seat mile plans.

The Company is currently 51 percent hedged in first quarter 2025, 45 percent hedged in second quarter 2025, and 46 percent hedged in second half 2025.

(b) The Company's maximum fuel hedged percentage is calculated using the maximum number of gallons that are covered by derivative contracts divided by the Company's estimate of total fuel gallons to be consumed for each respective period.

The Company's maximum number of gallons that are covered by derivative contracts may be at different strike prices and at strike prices materially higher than the current market prices.

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

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

The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties - see Note 10 to the Consolidated Financial Statements for further information), as well as the deferred amounts in AOCI as of December 31, 2024, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

Year Fair value of fuel

derivative contracts

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

in AOCI at December 31,

2024 (net of tax)

2025 $ 22 $ (96)

Total $ 130 $ (148)

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)

Average Brent Crude Oil

price per barrel First Quarter 2025

Full Year 2025

$60 $2.05 to $2.15 $2.00 to $2.10

$70 $2.35 to $2.45 $2.30 to $2.40

Current market (a) $2.50 to $2.60 $2.45 to $2.55

$80 $2.65 to $2.75 $2.65 to $2.75

$90 $3.00 to $3.10 $2.95 to $3.05

$100 $3.20 to $3.30 $3.20 to $3.30

Fair market value of

fuel derivative contracts settling in period $1 million $23 million

Estimated premium costs $37 million $148 million

(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.

See Note Regarding Use of Non-GAAP Financial Measures.

Maintenance materials and repairs expense for 2024 increased by $165 million, or 13.9 percent, compared with 2023.

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 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.

The continued deliveries of MAX aircraft are expected to remain critical to the Company's efforts to modernize its fleet.

As a result of applying hedge accounting in prior periods, the Company has amounts in Accumulated other comprehensive income ("AOCI") that will be recognized in the Consolidated Statement of Comprehensive Income in the periods the originally forecasted transactions occur, including deferred losses of $115 million in 2026 and $22 million in 2027 as of December 31, 2025 (net of tax).

See Note 12 to the Consolidated Financial Statements for additional information on AOCI.

Maintenance materials and repairs expense for 2025 decreased by $126 million, or 9.3 percent, compared with 2024.

On a per ASM basis, Maintenance materials and repairs expense decreased 10.5 percent, compared with 2024.

On a dollar and per ASM basis, approximately 70 percent of the decrease was driven by fewer airframes in routine heavy check compared to 2024 as a result of the early retirement of a portion of the -700 fleet, and approximately 20 percent of the decrease was due to less routine bulk purchases of materials for the Company's seat refurbishment efforts.

Landing fees and airport rentals expense for 2025 increased by $216 million, or 11.0 percent, compared with 2024.

On a per ASM basis, Landing fees and airport rentals expense increased 9.0 percent, compared with 2024.

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 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.

On a dollar and per ASM basis, approximately 50 percent of the increase was primarily attributable to an increase in airport rental expense throughout the network driven by higher rates charged by airports for leased space, 30 percent of the increase was primarily due to higher landing fees throughout the network, primarily driven by increased usage of the heavier -8 aircraft and higher rates, and 20 percent of the increase was due to receiving fewer favorable settlements and credits from various airports in 2025.

Depreciation and amortization expense for 2025 decreased by $97 million, or 5.9 percent, compared with 2024.

On a per ASM basis, Depreciation and amortization expense decreased by 6.5 percent, compared with 2024.

On a dollar and per ASM basis, this decrease was primarily due to a $109 million decrease from accelerating depreciation of fewer -700 aircraft planned for early retirement in 2025 compared to 2024, a $41 million decrease due to the fleet transactions completed during the December 2024 and January 2025 timeframe, and a $37 million decrease due to a change in estimate for the residual values of the Company's -700 airframes and -700, -800, and -8 engines.

These decreases were partially offset by a $47 million increase from new technology assets being placed into service and a $41 million increase from the acquisition of 55 -8 aircraft during 2025.

Other operating expenses for 2025 increased by $329 million, or 8.0 percent, compared with 2024.

Included within this line item was aircraft rentals expense in the amount of $322 million and $220 million for 2025 and 2024, 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) 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.

On a per ASM basis, Other operating expenses increased 5.6 percent, compared with 2024.

On a dollar and per ASM basis, the increase was due to (i) a $102 million increase in aircraft rental expense associated with fleet transactions completed during the December 2024 and January 2025 timeframe, (ii) a $92 million gain on the sale-leaseback of 35 -800 aircraft in 2024, (iii) a $77 million increase in Employee related expenses driven by higher travel expenses due to inflation in lodging rates and utilization of rooms as a result of redeye flying in 2025, and (iv) a $64 million increase in third party software maintenance agreement expense driven by expanded cloud-based services.

See Note 7 to the Consolidated Financial Statements for further information on the sale-leaseback transaction.

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.

Interest expense for 2025 decreased by $82 million, or 32.9 percent, compared with 2024, primarily due to the Company's significant debt repayments in late 2024 and throughout 2025.

These decreases were partially offset by the issuance of the 5.25% unsecured notes and 4.375% unsecured notes in November 2025.

S ee Note 6 to the Consolidated Financial Statements for further information.

Capitalized interest for 2025 increased by $19 million, or 54.3 percent, compared with 2024, 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.

Interest income for 2025 decreased by $292 million, or 58.8 percent compared with 2024, primarily due to lower cash and investment balances and a lower interest rate in the Company's total investment portfolio.

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

5 unchanged sentences

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 investments (36) (39)

Mark-to-market impact from deferred compensation plan investments (33) (36)

Mark-to-market impact from forward contract (8) —

Other (2) (1)

The Company's annual 2025 effective tax rate was 21.7 percent, compared with 22.2 percent in 2024.

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.

The year-over-year decrease in the tax rate is primarily due to lower state deferred tax rates in 2025 and a decrease in non-deductible expenses.

The tax rate decrease was partially offset by a reduction in federal tax credits generated in 2025.

2024 Compared with 2023

4 unchanged sentences

Fuel and oil expense, unhedged $ 5,095 $ 5,750

Premium cost of fuel contracts designated as hedges 148 121

Premium cost of fuel contracts designated as hedges (a) 145 148

Fuel hedge gains included in Fuel and oil expense, net — (86)

Fuel and oil expense, as reported $ 5,240 $ 5,812

Add (Deduct):

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

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

Premium cost of fuel contracts not designated as hedges — 9

2 unchanged sentences

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)

Labor contract adjustment — (9)

Contract Termination Charge (7) —

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

Premium cost of fuel contracts not designated as hedges — 9

DOT settlement — (107)

Litigation settlements (7) (12)

Professional advisory fees (37) —

DOT settlement waiver 11 —

Impairment of long-lived assets (8) —

Litigation accruals (19) (7)

Add (Deduct):

Professional advisory fees/reimbursement 7 (37)

Transformation costs (33) (5)

Severance and related costs (c) (62) —

Total operating expenses, excluding special items $ 27,524 $ 27,142 1.4 %

1 unchanged sentence

Operating expenses, excluding Fuel and oil expense and special items $ 22,284 $ 21,287 4.7 %

Profitsharing expense (103) (110)

Operating expenses, excluding Fuel and oil expense, special items, and profitsharing $ 21,184 $ 18,887 12.2 %

Profit-sharing expense (97) (103)

Operating expenses, excluding Fuel and oil expense, special items, and profit sharing $ 22,187 $ 21,184 4.7 %

Operating income, as reported $ 428 $ 321

1 unchanged sentence

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

Labor contract adjustment — 9

Contract Termination Charge 7 —

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

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

DOT settlement — 107

Litigation settlements 7 12

Professional advisory fees 37 —

DOT settlement waiver (11) —

Impairment of long-lived assets 8 —

Litigation accruals 19 7

Add (Deduct):

Professional advisory fees/reimbursement (7) 37

Transformation costs 33 5

Severance and related costs (c) 62 —

Operating income, excluding special items $ 539 $ 457 17.9 %

Other (gains) losses, net, as reported $ (43) $ 4

Add (Deduct):

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

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

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

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

Unrealized mark-to-market adjustment on forward contract 8 —

Other gains, net, excluding special items $ (35) $ (39) (10.3) %

2 unchanged sentences

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

Labor contract adjustment — 9

Contract Termination Charge 7 —

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

Mark-to-market impact from fuel contracts settling in current periods — 34

DOT settlement waiver (11) —

Impairment of long-lived assets 8 —

Litigation accruals 19 7

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 settlements 7 12

Professional advisory fees 37 —

Professional advisory fees/reimbursement (7) 37

Transformation costs 33 5

Severance and related costs (c) 62 —

Unrealized mark-to-market adjustment on forward contract (8) —

Income before income taxes, excluding special items $ 666 $ 777 (14.3) %

5 unchanged sentences

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

Labor contract adjustment — 9

Contract termination charge 7 —

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

Mark-to-market impact from fuel contracts settling in current periods — 34

DOT settlement waiver (11) —

Impairment of long-lived assets 8 —

Litigation accruals 19 7

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 settlements 7 12

Professional advisory fees 37 —

Professional advisory fees/reimbursement (7) 37

Transformation costs 33 5

Severance and related costs (c) 62 —

Unrealized mark-to-market adjustment on forward contract (8) —

Year ended December 31, Percent

2025 2024 Change

Net income tax impact of special items (e) (32) (47)

7 unchanged sentences

Fuel and oil expense divided by ASMs (2.91) (3.27)

Profitsharing expense divided by ASMs (0.06) (0.07)

Profit-sharing expense divided by ASMs (0.06) (0.06)

Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents) 12.32 ¢ 11.95 ¢ 3.1 %

(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 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.

(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.

(a) Includes amounts reclassified from Accumulated Other Comprehensive Income associated with hedges previously terminated.

See Note 10 to the Consolidated Financial Statements for further information.

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

(c) Represents Employee severance payments and related professional fees resulting from the workforce reduction in February 2025 ($53 million in Salaries, wages, and benefits and $9 million in Other operating expenses).

See Note 16 to the Consolidated Financial Statements for further information.

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

2 unchanged sentences

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.

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

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

1 unchanged sentence

(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)

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 settlements 7 12

Operating income, non-GAAP 457 893

Net adjustment for aircraft leases (a) 134 128

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

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

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

Debt, including finance leases (b) $ 7,742 $ 8,033

Equity (b) 10,388 10,669

Net present value of aircraft operating leases (b) 933 1,029

Average invested capital $ 19,063 $ 19,731

Equity adjustment (c) 13 (168)

Adjusted average invested capital (D) $ 19,076 $ 19,563

Non-GAAP ROIC, pre-tax (A/D) 3.1 % 5.2 %

Non-GAAP ROIC, after-tax (C/D) 2.4 % 4.0 %

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

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

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

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

(c) The Equity adjustment in the denominator adjusts for the cumulative impacts, in Accumulated other comprehensive income (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.

(d) The GAAP full year tax rate as of December 31, 2024 , was 22.2 percent , and the full year Non-GAAP tax rate was 23.1 percent .

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

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

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

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

Operating income, non-GAAP;

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Income before income taxes, non-GAAP;

Income tax rate, non-GAAP;

Provision for income taxes, net, non-GAAP;

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Net income per share, diluted, non-GAAP;

and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents).

The Company's economic Fuel and oil expense results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the period of settlement.

and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profit sharing (cents).

For periods in which fuel hedge contracts are utilized, the Company's economic Fuel and oil expense results may differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the period of settlement.

Thus, Fuel and oil expense on an economic basis has historically been utilized by the Company, as well as some of the other airlines that utilize fuel hedging, as it reflects the Company’s actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts.

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As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.

Further information on (i) the Company's fuel hedging program, (ii) the requirements of accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments is included in Note 10 to the Consolidated Financial Statements.

Further information on (i) the Company's fuel hedging program, (ii) the requirements of accounting for derivative instruments, (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments, and (iv) the Company's termination of its remaining fuel hedge derivative instruments is included in Note 10 to the Consolidated Financial Statements.

The Company’s GAAP results in the applicable periods may include other charges or benefits that are also deemed "special items," that the Company believes make its results difficult to compare to prior periods, anticipated future periods, or industry trends.

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

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.

Reversal of breakage revenue previously recorded 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;

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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;

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.

A credit received from the DOT regarding a settlement reached for the Company's December 2022 operational disruption in light of the Company significantly improving its on-time performance and completion factor through the Company's investment in its Network Operations Control;

Expenses and/or reimbursements for 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;

Charges associated with tentative litigation settlements regarding paid short-term military leave to certain Employees 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 transformational plan;

Charges associated with severance, post-employment benefits, and professional fees as a result of the Company's reduction in workforce;

Non-cash impairment charges to remove certain assets from the Consolidated Balance Sheet that are no longer in use;

Expenses associated with a contract termination charge related to one of the Company's health insurance providers;

Unrealized mark-to-market adjustment associated with a forward contract entered into in fourth quarter 2025.

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

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

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

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

Operating income, non-GAAP;

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Income before income taxes, non-GAAP;

Income tax rate, non-GAAP;

Provision for income taxes, net, non-GAAP;

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Net income per share, diluted, non-GAAP;

and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profitsharing (cents).

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

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

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

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

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

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

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

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

and Operating expenses per ASM, non-GAAP, excluding Fuel and oil expense and profit sharing (cents).

The Company has also provided its target for leverage, which is a non-GAAP measure of financial performance.

Management believes this supplemental measure can provide a more accurate view of the Company's leverage and risk, since it considers the Company’s debt and debt-like obligation profile and capital.

Leverage ratios are widely used by investors, analysts, and rating agencies in the valuation, comparison, rating, and investment recommendations of companies.

Although leverage ratios are commonly-used financial measures, definitions differ.

The Company calculates leverage as adjusted debt divided by trailing twelve month adjusted EBITDAR.

Adjusted EBITDAR is calculated as earnings before interest and taxes, and non-operating other (gains) losses, net, excluding special items, and adjusted by adding depreciation and amortization and the fixed portion of operating lease expense ("adjusted EBITDAR").

Adjusted debt includes current and long-term debt, finance lease obligations, and operating lease liabilities (including fleet, ground, and other).

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

Liquidity and Capital Resources

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.

Net cash provided by operating activities for 2025 was $1.8 billion, and net cash provided by operating activities for 2024 was $462 million.

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

The vast majority of tickets are purchased prior to the day on which travel is provided and, in some cases, several months before the anticipated travel date.

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

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.

The operating cash flows for 2025 were largely impacted by the Company's net results (as adjusted for noncash items), a $103 million profit-sharing contribution for 2024 pursuant to the Company's Retirement Savings Plan, and a $1.1 billion decrease in Air traffic liability primarily driven by immediate recognition of a larger portion of revenues (and thus lower revenue deferred) associated with the Company's co-brand agreement with Chase from 2025 modifications to the agreement.

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

Operating cash flows for 2024 were largely impacted by the Company's net results (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.

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.

Net cash used in investing activities for 2025 was $1.4 billion, and net cash used in investing activities for 2024 was $261 million.

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

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.

Capital expenditures, net were $2.7 billion for 2025, compared with $2.1 billion in the same prior year period, and increased year-over-year largely due to an increase in payments for scheduled aircraft deliveries.

Capital expenditures during 2024 included approximately $22 million associated with the Company's purchase of finance leased aircraft.

The Company also raised $871 million in 2024 from the sale-leaseback of 35 aircraft.

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

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 estimates its 2026 net capital spending to be in the range of $3.0 billion to $3.5 billion based on its expectation of 66 -8 aircraft deliveries in 2026, with the remainder representing non-aircraft capital spending, partially offset by proceeds from planned fleet sales.

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.

Net cash used in financing activities for 2025 was $4.7 billion, and net cash used in financing activities for 2024 was $2.0 billion.

During the twelve months ended December 31, 2025, the Company paid $399 million in cash dividends to Shareholders related to the first, second, and third quarter 2025 and fourth quarter 2024 declarations.

Additionally, the Company expended $2.6 billion to repurchase the Company's outstanding common stock through authorized share repurchases during the twelve months ended December 31, 2025.

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.

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.

however, no potential early future repurchases are included in the Company's current maturities of long-term debt as of December 31, 2025.

During 2025, the Company repaid the Convertible Notes, the PSP1 Payroll Support Program loan, and the PSP2 Payroll Support Program loan in the amounts of $1.6 billion, $976 million, and $566 million, respectively.

During fourth quarter 2025, the Company made an early partial prepayment of the PSP3 Payroll Support Program loan in the amount of $100 million utilizing available cash on hand.

Additionally, during 2025 the Company issued $750 million senior unsecured notes due 2035 and $750 million senior unsecured notes due 2028.

See Note 6 to the Consolidated Financial Statements for further information on the Company's debt repayments, issuances, and future debt maturities.

The Company paid $430 million in cash dividends to Shareholders and repaid $1.3 billion in debt and finance lease obligations during the year ended December 31, 2024.

The Company repurchased $2.6 billion of its common stock in 2025 through a series of accelerated share repurchase programs, completing its September 2024 $2.5 billion authorization and leaving $1.7 billion remaining under its July 2025 $2.0 billion authorization as of December 31, 2025.

See Note 8 to the Consolidated Financial Statements

for further information on the Company's share repurchases.

These purchases were recorded as treasury share repurchases for purposes of calculating earnings per share.

Under a forward contract entered into by the Company with a third-party financial institution in fourth quarter 2025, the Company committed $750 million for an Accelerated Share Repurchase Program (“ASR”) to be completed in January 2026 (the "January 2026 ASR Program").

On January 2, 2026, the Company paid $750 million and, upon settlement, the third-party financial institution delivered 17,965,193 shares of the Company’s common stock to the Company.

Upon completion of the January 2026 ASR, the Company had $950 million remaining under its July 2025 $2.0 billion share repurchase authorization.

The Company also entered into another agreement to repurchase $400 million of its outstanding common stock through an ASR program entered into in January 2026 (the "First Quarter 2026 ASR Program") under its current $2.0 billion authorization.

Final settlement is scheduled to occur by the end of April 2026, and the Company will have $550 million remaining under its $2.0 billion authorization.

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 2023 are included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2024, under Part II Item 7, Liquidity and Capital Resources.

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Total available liquidity 4,731 $ 9,725

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

On July 22, 2025, the Company exercised the accordion feature under its amended and restated revolving credit facility (the "Amended Credit Agreement"), increasing the size of the facility to $1.5 billion.

As of December 31, 2025, the Company had access to $1.5 billion under the Amended Credit Agreement, which expires in August 2028.

There were no amounts outstanding under the Amended Credit Agreement as of December 31, 2025.

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

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 $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.

The Company believes it has various options available to meet its capital and operating commitments, including unrestricted cash and cash equivalents of $3.2 billion as of December 31, 2025, and anticipated future internally generated funds from operations.

The Company regularly evaluates its capital structure to efficiently manage financial risks, liquidity access, and cost of capital.

The Company may consider, from time-to-time, additional financing arrangements, including secured or unsecured debt, as appropriate.

The Company continues to have a large base of unencumbered aircraft and other related assets with a net book value of approximately $17.0 billion.

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

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Baa2 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.

The Company's capital allocation framework supports its continued commitment to a strong and efficient investment-grade balance sheet.

The Company is currently targeting liquidity of approximately $4.5 billion, comprised of cash and cash equivalents, short-term investments, and a revolving credit line, which was recently increased to $1.5 billion.

The Company will also target leverage in the range of 1.0 times to 2.5 times, which it calculates as adjusted debt to adjusted EBITDAR.

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 upon events or other factors that are uncertain or unknown at this time.

Given the Company's current liquidity position, available resources, and prevailing outlook, it expects to be able to fulfill both its short-term and long-term material cash requirements.

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

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.

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

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 the United States Department of the Treasury ("Treasury") in the form of payroll support, and this assistance had a significant impact on the Company's reported GAAP financial results through 2021.

During 2025, cash flows were impacted through the early repayment of payroll support loans.

The Company has approximately $426 million in such loans that will have to be repaid to Treasury in future periods.

See Note 6 to the Consolidated Financial Statements for further detail on the Company's debt and the timing of expected and future principal payments.

The Company also has significant future obligations associated with fixed interest payments associated with its debt.

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 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.

The Company considers its prevailing stock price, the trading price of its convertible debt instruments, and its available liquidity in determining how much of these instruments it may attempt to repurchase in such transactions.

As of December 31, 2025, future interest payments associated with its fixed rate unsecured notes were $162 million in 2026, $104 million in 2027, $46 million in 2028, $13 million in 2029, and $7 million in 2030.

During fourth quarter 2025, the Company issued $750 million 4.375 percent senior unsecured notes due 2028 and $750 million 5.25 percent senior unsecured notes due 2035.

The Company entered into a fixed-to-floating interest rate swap to convert the interest on the 5.25 percent senior unsecured notes due 2035 to a floating rate until their maturity.

As of December 31, 2025, based on prevailing forward market interest rates, future interest payments associated with its floating rate unsecured notes were $41 million in 2026, $37 million in 2027, $38 million in 2028, $40 million in 2029, $41 million in 2030, and $223 million thereafter.

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

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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 2025 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.

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, $253 million and $56 million (tax-effected), respectively, to reduce taxable income in future periods.

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.

The Company has federal and state operating loss carryforwards of $504 million and $66 million (tax-effected), respectively, to reduce taxable income in future periods.

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

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Passenger revenue is recognized and Air traffic liability is reduced when the service is provided (i.e., when the flight takes place).

Air traffic liability primarily represents tickets sold for future travel dates, flight credits that are expected to be used in the future, and loyalty benefits that are expected to be redeemed in the future.

Air traffic liability primarily represents tickets sold for future travel dates, flight credits that are expected to be used in the future, and loyalty program benefits that are expected to be redeemed in the future.

Air traffic liability typically fluctuates throughout the year based on seasonal travel patterns, fare sale activity, and activity associated with the Company’s loyalty program.

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Estimating the amount of tickets that will ultimately go unused involves some level of subjectivity and judgment.

The majority of the Company's tickets sold are nonrefundable, although flight credits created when a Customer cancels or modifies an existing flight itinerary can be applied towards the purchase of future travel.

A significant amount of the Company's tickets sold are nonrefundable, although flight credits created when a Customer cancels or modifies an existing flight itinerary can be applied towards the purchase of future travel.

Unused flight credits are the primary source of breakage.

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Fully refundable tickets rarely go unused.

As a result of the COVID-19 pandemic, for all Customer flight credits created or scheduled to expire between March 1 and September 7, 2020 associated with flight cancellations, the Company initially extended the expiration date to September 7, 2022.

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

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.

On July 28, 2022, the Company modified its flight credit policy and announced that all $1.9 billion of unexpired flight credits outstanding as of that date, the majority of which were associated with travel disruptions during the COVID-19 pandemic, would no longer have an expiration date and thus will be able to be redeemed by Customers indefinitely.

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

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 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.

Based on actual Customer redemptions of these flight credits throughout 2024, as well as projected redemptions beyond 2024, the Company determined a reversal of a portion of this prior breakage revenue in the amount of $116 million was warranted in fourth quarter 2024.

See Note 1 to the Consolidated Financial Statements for further information regarding this adjustment and Note 5 to the Consolidated Financial Statements for further information regarding these extended flight credits.

As of December 31, 2025, redemptions of these extended flight credits had declined to an immaterial amount on a monthly basis and the Company has determined that future redemptions of these credits will be immaterial.

On May 28, 2025, the Company again modified its flight credit policy.

However, flight credits issued between July 28, 2022, and May 27, 2025 (including those issued subsequent to May 27, 2025, but which related to travel that had already been booked as of that date), do not have an expiration date.

For non-expiring flight credits issued during this period, the Company has also been recording breakage for the amount of such flight credits that it does not expect to be redeemed.

However, redemptions of these credits are expected to continue for an extended period of time into the future.

Although the Company does not currently expect to incur significant breakage adjustments associated with this population of flight credits in future periods, Customer behavior could be different than expected and from prior experience and could thus result in future adjustments, including by a material amount.

For every hypothetical one percentage point change in redemption and/or breakage amounts versus what has been

already recorded associated with these non-expiring flight credits, it would lead to an approximate $79 million change in Passenger revenues.

The majority of flight credits created from reservations booked and ticketed or voluntarily changed on or after May 28, 2025, have a specified expiration date of one year or less, depending on the type of fare purchased.

However, with the launch of the new Getaways by Southwest™ ("Getaways") product, the Company has begun to issue vacation travel credits for cancelled bookings, with an 18-month expiration period from the original booking date.

The Company is also recording breakage for such credits with expiration dates to the extent it expects them to not be redeemed prior to expiration.

Through December 31, 2025, based on actual redemptions and redemption patterns exhibited by Customers thus far, the Company believes its breakage estimates are materially accurate and does not expect future material adjustments associated with these flight credits.

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.

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

The Company’s estimation techniques have been consistently applied from year to year;

however, as with any estimates, actual ticket breakage may vary from estimated amounts.

Fair Value Measurements and Financial Derivative Instruments

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

As of December 31, 2024, these consisted of its fuel derivative option contracts, which were an asset of $130 million.

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

See "Quantitative and Qualitative Disclosures about Market Risk" for more information on these risk management activities, Note 10 to the Consolidated Financial Statements for more information on the Company’s fuel hedging program and financial derivative instruments, and Note 11 to the Consolidated Financial Statements for more information about fair value measurements.

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

As of December 31, 2024, the Company was a party to over 175 separate financial derivative instruments related to its fuel hedging program for future periods.

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

For example, during 2024, market "spot" prices for Brent crude oil peaked at a high average daily price of approximately $91 per barrel and hit a low average daily price of approximately $69 per barrel.

During 2023, market spot prices ranged from a high average daily price of approximately $97 per barrel to a low average daily price of approximately $72 per barrel.

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, 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.

The Company enters into financial derivative instruments with third party institutions in "over-the-counter" markets.

Since the majority of the Company’s financial derivative instruments are not traded on a market exchange, the Company estimates their fair values.

Depending on the type of instrument, the values are determined by the use of present value methods or standard option value models with assumptions about commodity prices based on those observed in underlying markets.

The Company determines the fair value of fuel derivative option contracts utilizing an option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are quoted by its counterparties.

In situations where the Company obtains inputs via quotes from its counterparties, it verifies the reasonableness of these quotes via similar quotes from another counterparty as of each date for which financial statements are prepared.

The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds.

Due to the fact that certain inputs used in determining the estimated fair value of its option contracts are considered unobservable (primarily implied volatility), the Company has categorized these option contracts as Level 3.

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, 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.

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

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

This is due to the fact that future price changes in these refined products may not be consistent with historical price changes.

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.

The loss of hedge accounting would create further volatility in the Company’s GAAP financial results.

As discussed in Note 10 to the Consolidated Financial Statements, any changes in fair value of cash flow derivatives designated as hedges are offset within AOCI until the period in which the expected future cash flow impacts earnings.

Any changes in the fair value of fuel derivatives that do not qualify for hedge accounting are reflected in earnings within Other (gains) losses, net, in the period of the change.

Because the Company has extensive historical experience in valuing the derivative instruments it holds, and such experience is continually evaluated against its counterparties each period when such instruments expire and are settled for cash, the Company believes it is unlikely that an independent third party would value the Company’s derivative contracts at a significantly different amount than what is reflected in the Company’s financial statements.

In addition, the Company also has bilateral credit provisions in some of its counterparty agreements, which provide for parties (or the Company) to provide cash collateral when the fair value of fuel derivatives with a single party exceeds certain threshold levels.

Since this cash collateral is based on the estimated fair value of the Company’s outstanding fuel derivative contracts, this provides further validation to the Company’s estimate of fair values.

Although the Company’s process for estimating breakage has been consistently applied from year to year, it continues to update and refine its analysis and techniques to take into consideration the differing attributes of flight credits as the Company's policies have changed over time.

As with any estimates, actual ticket breakage may vary from estimated amounts.

Loyalty Accounting

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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).

The amount of points earned under the program is based on the fare amount and fare type, with higher fare types (e.g., Choice Extra) earning more points than lower fare types (e.g., Basic).

Each fare type is associated with a points earning multiplier, and points for flights are calculated by multiplying the fare amount for the flight by the fare type multiplier.

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;

Likewise, the amount of points required to be redeemed for a flight can vary depending on destination, time, day of travel, demand, fare type, point redemption rate, and other factors, and is subject to change at any time until the booking is confirmed.

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.

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

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

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.

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

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.

For periods presented in the Consolidated Financial Statements, the most recent instance in which the Agreement was amended was in 2025.

The Company and Chase amended the co-brand credit card agreement in the first quarter of 2025 to extend the term of the agreement and add enhanced airline benefits for Cardmembers associated with the Company's planned assigned seating and premium seating initiative, and again in the second quarter of 2025 to add benefits to Cardmembers related to the Company's changes in its checked bag policy that went into effect on May 28, 2025.

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.

These elements are combined into two performance obligations, transportation and marketing, and consideration from the Agreement is allocated based on the relative selling price of each performance obligation.

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

These elements are combined into three performance obligations:

transportation, marketing, and airline benefits, and consideration from the Agreement is allocated based on the relative selling price of each performance obligation.

Significant management judgment was used to estimate the selling price of each of the performance obligations in the Agreement at inception, including each time in which the Agreement has been materially amended.

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The Company estimates the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to each of the multiple performance obligations.

The Company records revenue related to air transportation when the transportation is delivered and revenue related to marketing elements when the performance obligation is satisfied.

A one percent increase or decrease in the Company's estimate of the standalone selling prices, implemented as of January 1, 2024, causing a change to the allocation of proceeds to air transportation would not have had a material impact on the Company's Operating revenues for the year ended December 31, 2024.

The Company records revenue related to air transportation when the travel is delivered, revenue related to marketing elements when the performance obligations related to those services are satisfied, which is generally the same period consideration is received from Chase, and revenue related to airline benefits when they are provided.

A hypothetical one percent increase or decrease in the Company's estimate of the standalone selling prices, implemented as of January 1, 2025, causing a change to the allocation of proceeds to air transportation would not have had a material impact on the Company's Operating revenues for the year ended December 31, 2025.

Under its current program, Southwest estimates the portion of loyalty points that will not be redeemed.

In estimating the breakage, the Company takes into account the Member’s past behavior, as well as several factors related to the Member’s account that are expected to be indicative of the likelihood of future point redemption.

In estimating breakage revenue, the Company takes into account the Member’s past behavior, as well as several factors related to the Member’s account that are expected to be indicative of the likelihood of future point redemption.

These factors are typically representative of a Member’s level of engagement in the loyalty program.

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The Company believes it has obtained sufficient historical behavioral data to develop a predictive statistical model to analyze the amount of breakage expected for all loyalty points.

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

The Company updates this model at least annually, and applies the new breakage rates effective October 1 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.

For the year ended December 31, 2025, 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 $256 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).

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

What changed 10-K

Item 7. Management’s Discussion and Analysis