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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     For the quarterly period ended March 31, 2022
 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ________ to ________
Commission File No. 1-7259
luv-20220331_g1.jpg

SOUTHWEST AIRLINES CO.
(Exact name of registrant as specified in its charter)
Texas74-1563240
(State or other jurisdiction of(IRS Employer
incorporation or organization)Identification No.)
P.O. Box 36611
Dallas,Texas75235-1611
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code:  (214) 792-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock ($1.00 par value)LUVNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  No x
    Number of shares of Common Stock outstanding as of the close of business on April 28, 2022: 592,956,438



TABLE OF CONTENTS TO FORM 10-Q

2

SOUTHWEST AIRLINES CO.
FORM 10-Q
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements
Southwest Airlines Co.
Condensed Consolidated Balance Sheet
(in millions)
(unaudited)

March 31, 2022December 31, 2021
ASSETS  
Current assets: 
Cash and cash equivalents$13,098 $12,480 
Short-term investments2,642 3,024 
Accounts and other receivables1,692 1,357 
Inventories of parts and supplies, at cost623 537 
Prepaid expenses and other current assets767 638 
Total current assets18,822 18,036 
Property and equipment, at cost:
Flight equipment21,147 21,226 
Ground property and equipment6,472 6,342 
Deposits on flight equipment purchase contracts254  
Assets constructed for others9 6 
27,882 27,574 
Less allowance for depreciation and amortization12,945 12,732 
 14,937 14,842 
Goodwill970 970 
Operating lease right-of-use assets1,555 1,590 
Other assets978 882 
 $37,262 $36,320 
LIABILITIES AND STOCKHOLDERS' EQUITY  
Current liabilities:  
Accounts payable$1,648 $1,282 
Accrued liabilities1,360 1,624 
Current operating lease liabilities240 239 
Air traffic liability6,406 5,566 
Current maturities of long-term debt415 453 
Total current liabilities10,069 9,164 
Long-term debt less current maturities10,309 10,274 
Air traffic liability - noncurrent2,204 2,159 
Deferred income taxes1,826 1,770 
Noncurrent operating lease liabilities1,277 1,315 
Other noncurrent liabilities1,160 1,224 
Stockholders' equity:  
Common stock888 888 
Capital in excess of par value3,940 4,224 
Retained earnings15,551 15,774 
Accumulated other comprehensive income891 388 
Treasury stock, at cost(10,853)(10,860)
Total stockholders' equity10,417 10,414 
 $37,262 $36,320 
    
See accompanying notes.
3

Southwest Airlines Co.
Condensed Consolidated Statement of Comprehensive Income (Loss)
(in millions, except per share amounts)
(unaudited)

 Three months ended March 31,
 20222021
OPERATING REVENUES:  
Passenger$4,135 $1,712 
Freight42 43 
Other517 297 
Total operating revenues4,694 2,052 
OPERATING EXPENSES, NET:  
Salaries, wages, and benefits2,229 1,571 
Payroll support and voluntary Employee programs, net (1,448)
Fuel and oil1,004 469 
Maintenance materials and repairs211 173 
Landing fees and airport rentals346 313 
Depreciation and amortization324 312 
Other operating expenses731 463 
Total operating expenses, net4,845 1,853 
OPERATING INCOME (LOSS)(151)199 
OTHER EXPENSES (INCOME):
Interest expense93 114 
Capitalized interest(9)(11)
Interest income(3)(2)
Other (gains) losses, net144 (48)
Total other expenses (income)225 53 
INCOME (LOSS) BEFORE INCOME TAXES(376)146 
PROVISION (BENEFIT) FOR INCOME TAXES(98)30 
NET INCOME (LOSS)$(278)$116 
NET INCOME (LOSS) PER SHARE, BASIC$(0.47)$0.20 
NET INCOME (LOSS) PER SHARE, DILUTED$(0.47)$0.19 
COMPREHENSIVE INCOME$225 $180 
WEIGHTED AVERAGE SHARES OUTSTANDING 
Basic592 591 
Diluted592 609 
See accompanying notes.
4

Southwest Airlines Co.
Condensed Consolidated Statement of Stockholders' Equity
(in millions, except per share amounts)
(unaudited)
  
Common StockCapital in excess of par valueRetained earningsAccumulated other comprehensive incomeTreasury stockTotal
Balance at December 31, 2021$888 $4,224 $15,774 $388 $(10,860)$10,414 
Cumulative effect of adopting Accounting Standards Update No. 2020-06, Debt (See Note 3)— (300)55 — — (245)
Issuance of common and treasury stock pursuant to Employee stock plans—  — — 7 7 
Share-based compensation— 16 — — — 16 
Comprehensive income (loss)— — (278)503 — 225 
Balance at March 31, 2022$888 $3,940 $15,551 $891 $(10,853)$10,417 


  
Common StockCapital in excess of par valueRetained earningsAccumulated other comprehensive income (loss)Treasury stockTotal
Balance at December 31, 2020$888 $4,191 $14,777 $(105)$(10,875)$8,876 
Cumulative effect of adopting Accounting Standards Update No. 2016-01, Financial Instruments— — 19 (19)—  
Issuance of common and treasury stock pursuant to Employee stock plans— (8)— — 8  
Share-based compensation— 14 — — — 14 
Stock warrants— 23 — — — 23 
Comprehensive income— — 116 64 — 180 
Balance at March 31, 2021$888 $4,220 $14,912 $(60)$(10,867)$9,093 
    See accompanying notes.
5

Southwest Airlines Co.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
Three months ended
March 31,
 20222021
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net income (loss)$(278)$116 
Adjustments to reconcile net income (loss) to cash provided by operating activities: 
Depreciation and amortization324 312 
Impairment of long-lived assets16  
Unrealized mark-to-market adjustment on available for sale securities5  
Unrealized/realized (gain) loss on fuel derivative instruments34 (7)
Deferred income taxes(97)5 
Loss on partial extinguishment of convertible and unsecured notes72  
Changes in certain assets and liabilities: 
Accounts and other receivables(334)(234)
Other assets(44)(11)
Accounts payable and accrued liabilities177 (66)
Air traffic liability885 599 
Other liabilities(105)(122)
Cash collateral received from derivative counterparties385 38 
Other, net31 15 
Net cash provided by operating activities1,071 645 
CASH FLOWS FROM INVESTING ACTIVITIES:  
Capital expenditures(510)(95)
Assets constructed for others(4) 
Purchases of short-term investments(925)(1,324)
Proceeds from sales of short-term and other investments1,300 1,218 
Net cash used in investing activities(139)(201)
CASH FLOWS FROM FINANCING ACTIVITIES:  
Proceeds from Payroll Support Program loan and warrants 511 
Proceeds from Employee stock plans6 13 
Payments of long-term debt and finance lease obligations(93)(67)
Payments for repurchases and conversions of convertible debt(230) 
Other, net3 7 
Net cash provided by (used in) financing activities(314)464 
NET CHANGE IN CASH AND CASH EQUIVALENTS618 908 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD12,480 11,063 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$13,098 $11,971 
CASH PAYMENTS FOR:
Interest, net of amount capitalized$20 $17 
Income taxes$4 $1 
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Adoption of Accounting Standards Update 2020-06, Debt (See Note 3)$245 $ 
Right-of-use assets acquired under operating leases$24 $218 
Flight equipment acquired against supplier credit memo$ $305 
Assets constructed for others$ $32 
See accompanying notes.
6

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)

7

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


1.    BASIS OF PRESENTATION

Southwest Airlines Co. (the "Company" or "Southwest") operates Southwest Airlines, a major passenger airline that provides scheduled air transportation in the United States and near-international markets. The unaudited Condensed Consolidated Financial Statements include accounts of the Company and its wholly owned subsidiaries.

The accompanying unaudited Condensed Consolidated Financial Statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States ("GAAP") for complete financial statements. The unaudited Condensed Consolidated Financial Statements for the interim periods ended March 31, 2022 and 2021 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. This includes all normal and recurring adjustments and elimination of significant intercompany transactions. Financial results for the Company and airlines in general can be seasonal in nature. In many years, the Company's revenues, as well as its Operating income and Net income, have been better in its second and third fiscal quarters than in its first and fourth fiscal quarters. However, beginning in early 2020, as a result of the COVID-19 pandemic, the Company's results have not always been in line with such historical trends. See Note 2 for further information. Air travel is also significantly impacted by general economic conditions, the amount of disposable income available to consumers and changes in consumer behavior, unemployment levels, corporate travel budgets, global pandemics such as COVID-19, extreme or severe weather and natural disasters, fears of terrorism or war, governmental actions, and other factors beyond the Company's control. These and other factors, such as the price of jet fuel in some periods, the nature of the Company's fuel hedging program, and the periodic volatility of commodities used by the Company for hedging jet fuel, have created, and may continue to create, significant volatility in the Company's financial results. See Note 4 for further information on fuel and the Company's hedging program. Operating results for the three months ended March 31, 2022, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2022. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
8

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


2.    WORLDWIDE PANDEMIC

As a result of the rapid spread of the novel coronavirus, COVID-19, throughout the world, including into the United States, on March 11, 2020, the World Health Organization classified the virus as a pandemic. The speed with which the effects of the COVID-19 pandemic changed the U.S. economic landscape, outlook, and in particular the travel industry, was swift and unexpected. The Company experienced significant disruptions in travel and reduced bookings throughout the remainder of 2020 and for the entirety of 2021 as a result of the pandemic and subsequent variants of COVID-19. Following a significant negative impact to revenues and bookings in January and February 2022, which included increased trip cancellations and staffing challenges associated with the Omicron variant, the Company saw improvements in revenue trends in March 2022 as COVID-19 cases significantly trended downward. The Company continues to monitor demand for air travel and proactively adjust its published flight schedules and capacity.

Since the start of the pandemic, the Company entered into definitive documentation with the United States Department of the Treasury ("Treasury") with respect to payroll funding support ("Payroll Support") pursuant to three separate Payroll Support programs: the "PSP1 Payroll Support Program" in April 2020 under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"); the "PSP2 Payroll Support Program” in January 2021 under the Consolidated Appropriations Act, 2021; and the "PSP3 Payroll Support Program" in April 2021 under the American Rescue Plan Act of 2021.

As consideration for each of these Payroll Support programs, the Company issued a promissory note in favor of Treasury and entered into a warrant agreement with Treasury. The following table provides the details from the PSP1, PSP2 and PSP3 Payroll Support programs:

(dollars in millions, shares in thousands)GrantPromissory NoteWarrants Total Payroll Support ProceedsWarrants (shares)Warrant strike pricePromissory Note Maturity Date
PSP1$2,337 $976 $40 $3,354 2,676 
$36.47/share
April 19, 2030
PSP2$1,393 $566 $27 $1,987 1,223 
$46.28/share
January 15, 2031
PSP3 $1,310 $526 $18 $1,852 899 
$58.51/share
April 23, 2031
Total$5,040 $2,068 $85 $7,193 4,798 
In connection with the receipt of Payroll Support, the Company is subject to certain restrictions, including the elimination of share repurchases and dividends through September 30, 2022; and limits on executive compensation until April 1, 2023.

Under each of the three Payroll Support programs, funds received were used solely to pay qualifying employee salaries, wages, and benefits. All grant portions of the Payroll Support programs received had been allocated and classified as a contra-expense line item in the Company's financial statements by the end of 2021, including approximately $1.2 billion for the three months ended March 31, 2021 in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

On June 1, 2020, the Company announced Voluntary Separation Program 2020 ("Voluntary Separation Program"), a voluntary separation program that allowed eligible Employees the opportunity to voluntarily separate from the Company in exchange for severance, medical/dental coverage for a specified period of time, and travel privileges based on years of service. A total of over 4,200 Employees elected to participate in Voluntary Separation Program.

9

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


In conjunction with Voluntary Separation Program, the Company also offered certain contract Employees the option to take voluntary Extended Emergency Time Off ("Extended ETO"), for periods between six and 18 months, with the exception of Pilots, who could elect to take Extended ETO for periods up to five years, all subject to early recalls. Approximately 12,000 Employees participated in the Extended ETO program in 2020 and 2021 combined. The Company had no Employees remaining on Extended ETO as of March 31, 2022.

The purpose of Voluntary Separation Program and Extended ETO was to maintain a reduced workforce to operate at reduced capacity relative to the Company's operations prior to the COVID-19 pandemic. In accordance with the accounting guidance in Accounting Standards Codification ("ASC") Topic 712 (Compensation — Nonretirement Postemployment Benefits), the Company accrued charges related to the special termination benefits described above upon Employees accepting Voluntary Separation Program or Extended ETO offers. The Company accrued expenses totaling $1.4 billion for its Voluntary Separation Program and Extended ETO program in 2020, which are being reduced as program benefits are paid. For both the Voluntary Separation Program and Extended ETO programs combined, approximately $32 million of the liability balances were relieved during the first three months of 2022 through payments to Employees, leaving a balance of $296 million as of March 31, 2022, all of which relates to the Voluntary Separation Program. During first quarter 2021, the Company determined that it was no longer probable that the remaining portion of the Employees on Extended ETO would remain on such leave for their entire elected term. Therefore, a portion of the accruals previously recorded were reversed, resulting in a net $115 million credit to expense during first quarter 2021. Both the initial charge and the partial reversal were classified within Payroll support and voluntary Employee programs, net, in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

In response to flight schedule adjustments due to the effects of the COVID-19 pandemic, a number of aircraft were taken out of the Company’s schedule beginning in late March 2020, and placed in short-term storage, as well as some in a longer term storage program. As of March 31, 2022, four aircraft remained in storage, and given the expectation that this storage was temporary in nature, the Company has continued to record depreciation expense associated with them.

3.    NEW ACCOUNTING PRONOUNCEMENTS
On May 3, 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This new standard provides clarification and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This standard is effective for fiscal years beginning after December 15, 2021, and the standard was adopted and applied prospectively by the Company as of January 1, 2022, but the adoption and application did not have a significant impact on the Company's financial statements and disclosures, including interim periods.

On January 7, 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). This new standard provides optional temporary guidance for entities transitioning away from London Interbank Offered Rate ("LIBOR") to new reference interest rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions with Topic 848. These amendments do not apply to any contract modifications made after December 31, 2022, any new hedging relationships entered into after December 31, 2022, or to existing hedging relationships evaluated for effectiveness existing as of December 31, 2022, that apply certain optional practical expedients. This standard was effective immediately and may be applied (i) on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or (ii) on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The Company had no material LIBOR-related contract modifications during the three months ended March 31, 2022.
10

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)



On August 5, 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. This new standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock, made targeted improvements to the disclosures for convertible instruments and earnings-per-share ("EPS") guidance, and amended the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. This standard is effective for fiscal years beginning after December 15, 2021, and the Company adopted this standard as of January 1, 2022, utilizing the modified retrospective method. Under the modified approach, the Company applied guidance to all financial instruments that were outstanding as of the beginning of the year of adoption with the cumulative effect recognized as an adjustment to the opening balance of retained earnings. Upon adoption, the Company reclassified the remaining equity component of $300 million, from Additional paid-in capital to Long-term debt associated with its 1.25% Convertible Senior Notes due 2025 (the “Convertible Notes”), and no longer records amortization of the debt discount to Interest expense. The cumulative effect from prior period amortization of the debt discount that has been recorded to Interest expense, offset by reductions to Capital in excess of par value related to the requisition of the equity component through previous repurchases, resulted in a $55 million adjustment to the opening balance of Retained earnings upon adoption. The new standard requires the use of the if-converted method to calculate diluted EPS, which is generally more dilutive, rather than the treasury stock method as was the Company's policy pre-adoption. The first quarter 2022 impact of adopting this new standard was an increase to the Company's Net loss in the amount of $36 million, or $0.06 per diluted share, as a result of higher losses recognized on the Company’s extinguishment transactions following the elimination of the equity component of the Convertible Notes, partially offset by the elimination of the non-cash interest expense associated with the prior debt discount amortization. See Note 7.

11

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


4.    FINANCIAL DERIVATIVE INSTRUMENTS

Fuel Contracts
Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices. Furthermore, jet fuel and oil typically represents one of the largest operating expenses for airlines. The Company endeavors to acquire jet fuel at the lowest possible cost and to reduce volatility in operating expenses through its fuel hedging program. Although the Company may periodically enter into jet fuel derivatives for short-term timeframes, because jet fuel is not widely traded on an organized futures exchange, there are limited opportunities to hedge directly in jet fuel for time horizons longer than approximately 24 months into the future. However, the Company has found that financial derivative instruments in other commodities, such as West Texas Intermediate ("WTI") crude oil, Brent crude oil, and refined products, such as heating oil and unleaded gasoline, can be useful in decreasing its exposure to jet fuel price volatility. The Company does not purchase or hold any financial derivative instruments for trading or speculative purposes.

The Company has used financial derivative instruments for both short-term and long-term timeframes, and primarily uses a mixture of purchased call options, collar structures (which include both a purchased call option and a sold put option), call spreads (which include a purchased call option and a sold call option), put spreads (which include a purchased put option and a sold put option), and fixed price swap agreements in its portfolio. Although the use of collar structures and swap agreements can reduce the overall cost of hedging, these instruments carry more risk than purchased call options in that the Company could end up in a liability position when the collar structure or swap agreement settles. With the use of purchased call options and call spreads, the Company cannot be in a liability position at settlement, but does not have coverage once market prices fall below the strike price of the purchased call option.

For the purpose of evaluating its net cash spend for jet fuel and for forecasting its future estimated jet fuel expense, the Company evaluates its hedge volumes strictly from an "economic" standpoint and thus does not consider whether the hedges have qualified or will qualify for hedge accounting. The Company defines its "economic" hedge as the net volume of fuel derivative contracts held, including the impact of positions that have been offset through sold positions, regardless of whether those contracts qualify for hedge accounting. The level at which the Company is economically hedged for a particular period is also dependent on current market prices for that period, as well as the types of derivative instruments held and the strike prices of those instruments. For example, the Company may enter into "out-of-the-money" option contracts (including "catastrophic" protection), which may not generate intrinsic gains at settlement if market prices do not rise above the option strike price. Therefore, even though the Company may have an economic hedge in place for a particular period, that hedge may not produce any hedging gains at settlement and may even produce hedging losses depending on market prices, the types of instruments held, and the strike prices of those instruments.

12

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


As of March 31, 2022, the Company had fuel derivative instruments in place to provide coverage at varying price levels. The following table provides information about the Company’s volume of fuel hedging on an economic basis:

Maximum fuel hedged as of
March 31, 2022Derivative underlying commodity type as of
Period (by year)(gallons in millions) (a)March 31, 2022
Remainder of 2022915 WTI crude oil and Brent crude oil
2023769 WTI crude oil and Brent crude oil
2024358 WTI crude oil and Brent crude oil
(a) Due to the types of derivatives utilized by the Company and different price levels of those contracts, these volumes represent the maximum economic hedge in place and may vary significantly as market prices and the Company's flight schedule fluctuate.

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. Qualification is re-evaluated quarterly, and all periodic changes in fair value of the derivatives designated as hedges are recorded in Accumulated other comprehensive income ("AOCI") until the underlying jet fuel is consumed. See Note 5.

If a derivative ceases to qualify for hedge accounting, any change in the fair value of derivative instruments since the last reporting period would be recorded in Other (gains) losses, net, in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) in the period of the change; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense. Factors that have and may continue to lead to the loss of hedge accounting include: significant fluctuation in energy prices, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging. 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, which would create further volatility in the Company’s GAAP financial results. However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the Company the opportunity to stabilize jet fuel costs. When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent changes in fair value of those positions are marked to market through earnings. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de-designated as hedges are concurrently marked to market through earnings. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs. In a situation where it becomes probable that a fuel hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings.

During 2021, as a result of the drop in demand for air travel compared with 2019 due to the pandemic, the Company was in an estimated "over-hedged" position and was required to de-designate a portion of its fuel hedges for hedge accounting purposes. However, the impact of such de-designations was not material to 2021 financial results.

All cash flows associated with purchasing and selling fuel derivatives are classified as Other operating cash flows in the unaudited Condensed Consolidated Statement of Cash Flows. The following table presents the location of all assets and liabilities associated with the Company’s derivative instruments within the unaudited Condensed Consolidated Balance Sheet:
13

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)



  Asset derivativesLiability derivatives
 Balance SheetFair value atFair value atFair value atFair value at
(in millions)location3/31/202212/31/20213/31/202212/31/2021
Derivatives designated as hedges (a)     
Fuel derivative contracts (gross)Prepaid expenses and other current assets$849 $409 $— $— 
Fuel derivative contracts (gross)Other assets470 287 — — 
Interest rate derivative contractsOther assets3 — — — 
Interest rate derivative contractsOther noncurrent liabilities— — 1 4 
Total derivatives designated as hedges$1,322 $696 $1 $4 
Derivatives not designated as hedges (a)     
Fuel derivative contracts (gross)Prepaid expenses and other current assets$— $— $46 $— 
Total derivatives $1,322 $696 $47 $4 
(a) Represents the position of each trade before consideration of offsetting positions with each counterparty and does not include the impact of cash collateral deposits provided to or received from counterparties. See discussion of credit risk and collateral following in this Note 4.

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

 Balance SheetMarch 31,December 31,
(in millions)location20222021
Cash collateral deposits held from counterparties for fuel contracts - currentOffset against Prepaid expenses and other current assets$410 $80 
Cash collateral deposits held from counterparties for fuel contracts - noncurrentOffset against Other assets150 95 
Receivable from third parties for fuel contractsAccounts and other receivables111 8 
 
All of the Company's fuel derivative instruments and interest rate swaps are subject to agreements that follow the netting guidance in the applicable accounting standards for derivatives and hedging. The types of derivative instruments the Company has determined are subject to netting requirements in the accompanying unaudited Condensed Consolidated Balance Sheet are those in which the Company pays or receives cash for transactions with the same counterparty and in the same currency via one net payment or receipt. For cash collateral held by the Company or provided to counterparties, the Company nets such amounts against the fair value of the Company's derivative portfolio by each counterparty. The Company has elected to utilize netting for both its fuel derivative instruments and interest rate swap agreements and also classifies such amounts as either current or noncurrent, based on the net fair value position with each of the Company's counterparties in the unaudited Condensed Consolidated Balance Sheet. If its fuel derivative instruments are in a net asset position with a counterparty, cash collateral amounts held are first netted against current outstanding derivative asset amounts associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of noncurrent outstanding derivative instruments. As of March 31, 2022, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

14

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


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

Offsetting of derivative assets
(in millions)
(i)(ii)(iii) = (i) + (ii)(i)(ii)(iii) = (i) + (ii)
March 31, 2022December 31, 2021
DescriptionBalance Sheet locationGross amounts of recognized assetsGross amounts offset in the Balance SheetNet amounts of assets presented in the Balance SheetGross amounts of recognized assetsGross amounts offset in the Balance SheetNet amounts of assets presented in the Balance Sheet
Fuel derivative contractsPrepaid expenses and other current assets$849 $(456)
(b)
$393 $409 $(80)$329 
Fuel derivative contractsOther assets$470 $(150)$320 (a)$287 $(95)$192 (a)
Interest rate derivative contractsOther assets$3 $ $3 (a)$ $ $ (a)
(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 9.
(b) Includes the current portion of cash collateral deposits held from counterparties and derivative liability associated with fuel contracts.


Offsetting of derivative liabilities
(in millions)
(i)(ii)(iii) = (i) + (ii)(i)(ii)(iii) = (i) + (ii)
March 31, 2022December 31, 2021
DescriptionBalance Sheet locationGross amounts of recognized liabilitiesGross amounts offset in the Balance SheetNet amounts of liabilities presented in the Balance SheetGross amounts of recognized liabilitiesGross amounts offset in the Balance SheetNet amounts of liabilities presented in the Balance Sheet
Fuel derivative contractsPrepaid expenses and other current assets$456 $(456)
(b)
$ $80 $(80)$ 
Fuel derivative contractsOther assets$150 $(150)$ (a)$95 $(95)$ (a)
Interest rate derivative contractsOther noncurrent liabilities$1 $ $1 $4 $ $4 
(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 9.
(b) Includes the current portion of cash collateral deposits held from counterparties and derivative liability associated with fuel contracts.
15

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three months ended March 31, 2022 and 2021:

Location and amount recognized in income on cash flow and fair value hedging relationships
Three months ended March 31, 2022Three months ended March 31, 2021
(in millions)Fuel and oilOther (gains)/losses, netOther operating expensesFuel and oilOther (gains)/losses, netInterest expense
Total$(203)$ $2 $16 $6 $1 
(Gain) loss on cash flow hedging relationships:
Commodity contracts:
Amount of (gain) loss reclassified from AOCI into income(203)  16 6  
Interest contracts:
Amount of loss reclassified from AOCI into income  2   1 



Derivatives designated and qualified in cash flow hedging relationships
 Gain recognized in AOCI on derivatives, net of tax
 Three months ended
 March 31,
(in millions)20222021
Fuel derivative contracts$654 $84 
Interest rate derivatives4 9 
Total$658 $93 



Derivatives not designated as hedges
 (Gain) loss recognized in income on derivatives 
  
 Three months endedLocation of (gain) loss recognized in income on derivatives
 March 31,
(in millions)20222021
Fuel derivative contracts$34 $(5)Other (gains) losses, net



The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three months ended March 31, 2022 and 2021. Gains and/or losses associated with fuel derivatives that qualify for hedge accounting are ultimately recorded to Fuel and oil expense. Gains and/or losses associated with fuel derivatives that do not qualify for hedge accounting are recorded to Other (gains) and losses, net. The following
16

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


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

 Premium expense recognized in income on derivatives  
  
 Three months endedLocation of premium expense recognized in income on derivatives
 March 31,
(in millions)20222021
Fuel derivative contracts designated as hedges$26 $14 Fuel and oil
Fuel derivative contracts not designated as hedges 11 Other (gains) losses, net

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets or provided by third parties. Included in the Company’s cumulative unrealized gains from fuel hedges as of March 31, 2022, recorded in AOCI, were approximately $578 million in unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to March 31, 2022.

Interest Rate Swaps
The Company is party to certain interest rate swap agreements that are accounted for as cash flow hedges, and has in the past held interest rate swap agreements that have qualified as fair value hedges, as defined in the applicable accounting guidance for derivative instruments and hedging. Several of the Company's interest rate swap agreements qualify for the "shortcut" or "critical terms match" methods of accounting for hedges, which dictate that the hedges were assumed to be perfectly effective at origination, and, thus, there was no ineffectiveness to be recorded in earnings.

For the Company’s interest rate swap agreements that do not qualify for the "shortcut" or "critical terms match" methods of accounting, ineffectiveness is assessed at each reporting period. If hedge accounting is achieved, all periodic changes in fair value of the interest rate swaps are recorded in AOCI.

Credit Risk and Collateral
Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company at the reporting date. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. At March 31, 2022, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating. The Company also had agreements with counterparties in which cash deposits and letters of credit were required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds. In certain cases, the Company has the ability to substitute among these different forms of collateral at its discretion.

The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of March 31, 2022, at which such postings are triggered:

17

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


 Counterparty (CP) 
(in millions)ABCDEFGOther (a)Total
Fair value of fuel derivatives$315 $161 $303 $124 $146 $96 $101 $27 $1,273 
Cash collateral held from CP341 25 84 19 58 33   560 
Option to substitute LC for cashN/AN/A
 (b)
 (b)

 (b)
N/A
 (b)
  
If credit rating is investment
grade, fair value of fuel
derivative level at which:
     
Cash is provided to CP
>(100)
>(50)
>(75)
>(125)

>(40)
>(65)
>(100)
  
Cash is received from CP
>0(c)
>150(c)
>250(c)
>125(c)
>100(c)
>70(c)
>100(c)
  
If credit rating is non-investment
grade, fair value of fuel derivative level at which:
     
Cash is received from CP
 (d)
 (d)
 (d)
 (d)
 (d)
 (d)
 (d)
  
(a) Individual counterparties with fair value of fuel derivatives < $16 million.
(b) The Company has the option to substitute letters of credit for 100 percent of cash collateral requirement.
(c) Thresholds may vary based on changes in credit ratings within investment grade.
(d) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.

18

Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


5.    COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting, unrealized gains and losses on certain investments, and actuarial gains/losses arising from the Company’s postretirement benefit obligation. The differences between Net income (loss) and Comprehensive income (loss) for the three months ended March 31, 2022 and 2021 were as follows:
 Three months ended March 31,
(in millions)20222021
NET INCOME (LOSS)$(278)$116 
Unrealized gain on fuel derivative instruments, net of
  deferred taxes of $151 and $30
498 101 
Unrealized gain on interest rate derivative instruments, net of
  deferred taxes of $2 and $3
5 10 
Other, net of deferred taxes of $ and ($13)
 (47)
Total other comprehensive income$503 $64 
COMPREHENSIVE INCOME$225 $180 


A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three months ended March 31, 2022:
(in millions)Fuel derivativesInterest rate derivativesDefined benefit plan itemsDeferred taxAccumulated other comprehensive income
Balance at December 31, 2021$492 $(57)$66 $(113)$388 
Changes in fair value852 5 — (199)658 
Reclassification to earnings(203)2 — 46 (155)
Balance at March 31, 2022$1,141 $(50)$66 $(266)$891 


The following table illustrates the significant amounts reclassified out of each component of AOCI for the three months ended March 31, 2022:
Three months ended March 31, 2022
(in millions)Amounts reclassified from AOCIAffected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)
AOCI components
Unrealized gain on fuel derivative instruments$(203)Fuel and oil expense
(47)Less: Tax expense
$(156)Net of tax
Unrealized loss on interest rate derivative instruments$2 Interest expense