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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 June 30, 2024
 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
southwestheartimage.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
Common Stock Purchase RightsNew 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 July 25, 2024: 599,157,019


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)

June 30, 2024December 31, 2023
ASSETS  
Current assets: 
Cash and cash equivalents$8,142 $9,288 
Short-term investments1,860 2,186 
Accounts and other receivables1,346 1,154 
Inventories of parts and supplies, at cost784 807 
Prepaid expenses and other current assets619 520 
Total current assets12,751 13,955 
Property and equipment, at cost:
Flight equipment26,274 26,060 
Ground property and equipment7,704 7,460 
Deposits on flight equipment purchase contracts466 236 
Assets constructed for others77 62 
34,521 33,818 
Less allowance for depreciation and amortization14,856 14,443 
 19,665 19,375 
Goodwill970 970 
Operating lease right-of-use assets1,132 1,223 
Other assets1,045 964 
 $35,563 $36,487 
LIABILITIES AND STOCKHOLDERS' EQUITY  
Current liabilities:  
Accounts payable$2,028 $1,862 
Accrued liabilities1,870 3,606 
Current operating lease liabilities198 208 
Air traffic liability7,086 6,551 
Current maturities of long-term debt2,931 29 
Total current liabilities14,113 12,256 
Long-term debt less current maturities5,065 7,978 
Air traffic liability - noncurrent1,990 1,728 
Deferred income taxes2,089 2,044 
Noncurrent operating lease liabilities915 985 
Other noncurrent liabilities926 981 
Stockholders' equity:  
Common stock888 888 
Capital in excess of par value4,151 4,153 
Retained earnings16,218 16,297 
Accumulated other comprehensive income11 — 
Treasury stock, at cost(10,803)(10,823)
Total stockholders' equity10,465 10,515 
 $35,563 $36,487 
    
See accompanying notes.
3
Southwest Airlines Co.
Condensed Consolidated Statement of Comprehensive Income
(in millions, except per share amounts)
(unaudited)

 Three months ended June 30,Six months ended June 30,
 2024202320242023
OPERATING REVENUES:    
Passenger$6,712 $6,409 $12,424 $11,514 
Freight45 47 87 87 
Other597 581 1,172 1,142 
Total operating revenues7,354 7,037 13,683 12,743 
OPERATING EXPENSES:    
Salaries, wages, and benefits2,999 2,786 5,939 5,264 
Fuel and oil1,599 1,403 3,130 2,950 
Maintenance materials and repairs350 271 711 511 
Landing fees and airport rentals511 459 975 867 
Depreciation and amortization404 367 812 731 
Other operating expenses1,093 956 2,110 1,909 
Total operating expenses6,956 6,242 13,677 12,232 
OPERATING INCOME398 795 6 511 
OTHER EXPENSES (INCOME):  
Interest expense63 65 128 130 
Capitalized interest(8)(5)(15)(11)
Interest income(130)(144)(271)(269)
Other gains, net(5)(7)(17)(21)
Total other income(80)(91)(175)(171)
INCOME BEFORE INCOME TAXES478 886 181 682 
PROVISION FOR INCOME TAXES111 203 44 158 
NET INCOME$367 $683 $137 $524 
NET INCOME PER SHARE, BASIC$0.61 $1.15 $0.23 $0.88 
NET INCOME PER SHARE, DILUTED$0.58 $1.08 $0.23 $0.84 
COMPREHENSIVE INCOME$359 $544 $148 $238 
WEIGHTED AVERAGE SHARES OUTSTANDING   
Basic599 595 598 595 
Diluted643 639 643 639 
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 income (loss)Treasury stockTotal
Balance at December 31, 2023$888 $4,153 $16,297 $— $(10,823)$10,515 
Issuance of common and treasury stock pursuant to Employee stock plans— (25)— — 15 (10)
Share-based compensation— 10 — — — 10 
Cash dividends, $0.18 per share
— — (107)— — (107)
Comprehensive income (loss)— — (231)19 — (212)
Balance at March 31, 2024$888 $4,138 $15,959 $19 $(10,808)$10,196 
Issuance of common and treasury stock pursuant to Employee stock plans— 12 — — 5 17 
Share-based compensation— 7 — — — 7 
Cash dividends, $0.18 per share
— — (108)— — (108)
Stock warrants repurchase— (6)— — — (6)
Comprehensive income (loss)— — 367 (8)— 359 
Balance at June 30, 2024$888 $4,151 $16,218 $11 $(10,803)$10,465 

  
Common StockCapital in excess of par valueRetained earningsAccumulated other comprehensive income (loss)Treasury stockTotal
Balance at December 31, 2022$888 $4,037 $16,261 $344 $(10,843)$10,687 
Issuance of common and treasury stock pursuant to Employee stock plans— 1 — — 7 8 
Share-based compensation— 20 — — — 20 
Cash dividends, $0.18 per share
— — (107)— — (107)
Comprehensive loss— — (159)(147)— (306)
Balance at March 31, 2023$888 $4,058 $15,995 $197 $(10,836)$10,302 
Issuance of common and treasury stock pursuant to Employee stock plans— 11 — — 5 16 
Share-based compensation— 34 — — — 34 
Cash dividends, $0.18 per share
— — (107)— — (107)
Comprehensive income (loss)— — 683 (139)— 544 
Balance at June 30, 2023$888 $4,103 $16,571 $58 $(10,831)$10,789 
    See accompanying notes.
5
Southwest Airlines Co.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
Three months endedSix months ended
June 30,June 30,
 2024202320242023
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net income$367 $683 $137 $524 
Adjustments to reconcile net loss to cash provided by (used in) operating activities:   
Depreciation and amortization404 367 812 731 
Unrealized mark-to-market adjustment on available for sale securities— — — (4)
Unrealized/realized loss on fuel derivative instruments1 6 2 6 
Deferred income taxes110 209 43 157 
Changes in certain assets and liabilities:   
Accounts and other receivables34 44 (274)(188)
Other assets32 58 18 109 
Accounts payable and accrued liabilities(576)364 (1,473)293 
Air traffic liability(317)(137)798 809 
Other liabilities(45)(44)(117)(90)
Cash collateral provided to derivative counterparties(20)(16)(20)(46)
Other, net(13)(118)(54)(178)
Net cash provided by (used in) operating activities(23)1,416 (128)2,123 
CASH FLOWS FROM INVESTING ACTIVITIES:    
Capital expenditures(494)(925)(1,077)(1,971)
Assets constructed for others(6)(8)(16)(14)
Purchases of short-term investments(1,532)(1,522)(3,210)(3,727)
Proceeds from sales of short-term and other investments1,820 1,828 3,540 3,508 
Other, net6 — (28)— 
Net cash used in investing activities(206)(627)(791)(2,204)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Payroll Support Program stock warrants repurchase(6)— (6)— 
Proceeds from Employee stock plans15 14 30 22 
Payments of long-term debt and finance lease obligations(8)(8)(16)(67)
Payments of cash dividends— — (215)(214)
Other, net3 4 (20)6 
Net cash provided by (used in) financing activities4 10 (227)(253)
NET CHANGE IN CASH AND CASH EQUIVALENTS(225)799 (1,146)(334)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD8,367 8,359 9,288 9,492 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$8,142 $9,158 $8,142 $9,158 
CASH PAYMENTS FOR:
Interest, net of amount capitalized$92 $96 $110 $115 
Income taxes$4 $6 $7 $8 
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Right-of-use assets acquired under operating leases$6 $22 $21 $69 
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.

In late December 2022, the Company experienced a wide-scale operational disruption as extreme winter weather across a significant portion of the United States impacted its operational plan and flight schedules. Subsequent to Winter Storm Elliott, the Company was challenged to realign flight crews, flight schedules, and aircraft for a period of several days during this peak demand travel period. This disruption and subsequent recovery efforts resulted in the cancellation of more than 16,700 flights during the period from December 21 through December 31, 2022. These events also created a deceleration in bookings, primarily isolated to January and February 2023, as well as increased first quarter 2023 expenses by approximately $55 million, which are included in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income for the six months ended June 30, 2023. These first quarter 2023 expenses included reimbursements to Customers impacted by the cancellations for costs they incurred in excess of the amounts accrued as of December 31, 2022, adjustments to the estimated value of Rapid Rewards points offered as a gesture of goodwill to Customers as a result of changes in the estimates of the points expected to be redeemed, and additional premium pay and additional compensation for Employees directly or indirectly impacted by the cancellations and recovery efforts.

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

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 June 30, 2024 and 2023 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. This includes all normal and recurring adjustments and elimination of significant intercompany transactions. Financial results for the Company and airlines in general can be seasonal in nature. In many years, the Company's revenues, as well as its Operating income and Net income, have performed better in its second and third fiscal quarters than in its first and fourth fiscal quarters. Air travel is also significantly impacted by general economic conditions, the amount of disposable income available to consumers and changes in consumer behavior, unemployment levels, corporate travel budgets, global pandemics, extreme or severe weather and natural disasters, fears of terrorism or war, governmental actions, and other factors beyond the Company's control. These and other factors, such as the price of jet fuel in some periods, the nature of the Company's fuel hedging program, and the periodic volatility of commodities used by the Company for hedging jet fuel, have created, and may continue to create, significant volatility in the Company's financial results. See Note 3 for further information on fuel and the Company's fuel hedging program. Operating results for the three and six months ended June 30, 2024, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2024. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.
During second quarter 2024, the Company identified certain 737-700 ("-700") aircraft that are planned for early retirement in 2025. These accelerated retirement dates, and the corresponding impact to depreciation expense, are considered a change in estimate and resulted in the following impact to Depreciation and amortization expense for the three and six months ended June 30, 2024:

8
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


 Three months endedSix months ended
(in millions, except per share amounts)June 30, 2024June 30, 2024
Depreciation and amortization expense$10 $10 
Net income *$(6)$(6)
Net income per basic share$(0.01)$(0.01)
Net income per diluted share$(0.01)$(0.01)
* net of profitsharing benefit and income taxes


2.    NEW ACCOUNTING PRONOUNCEMENTS

On December 14, 2023, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This standard increases transparency and decision usefulness of income tax disclosures for investors by requiring information to better assess how an entity's operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows. This standard requires entities to provide enhanced disclosures related to the income tax rate reconciliation and income taxes paid. This standard is effective for all entities that are subject to Topic 740, Income Taxes for annual periods beginning after December 15, 2024, but early adoption is permitted. The Company is evaluating this new standard but does not expect it to have a significant impact on its financial statement presentation or results.

On November 27, 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This standard improves reportable segment disclosures by adding and enhancing interim disclosure requirements, clarifying circumstances in which entities can disclose multiple segment measures of profit or loss, providing new segment disclosure requirements for entities with a single reportable segment, and adding other disclosure requirements. This standard is effective for all entities that are subject to Topic 280, Segment Reporting for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, but early adoption is permitted. The Company is evaluating this new standard but does not expect it to have a significant impact on its financial statement presentation or results.

3.    FINANCIAL DERIVATIVE INSTRUMENTS

Fuel Contracts
Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices. Furthermore, jet fuel typically represents one of the largest operating expenses for airlines. The Company endeavors to acquire jet fuel at the lowest possible net cost and to reduce volatility in operating expenses through its fuel hedging program.

The Company has used financial derivative instruments for both short-term and long-term timeframes, and historically has used a mixture of purchased call options, collar structures (which include both a purchased call option and a sold put option), call spreads (which include a purchased call option and a sold call option), put spreads (which include a purchased put option and a sold put option), and fixed price swap agreements in its portfolio. The Company does not purchase or hold any financial derivative instruments for trading or speculative purposes.

For the purpose of evaluating its net cash spend for jet fuel and for forecasting its future estimated jet fuel expense, the Company evaluates its hedge volumes strictly from an "economic" standpoint and, thus, does not consider whether the hedges have qualified or will qualify for hedge accounting. The Company defines its "economic" hedge as the net volume of fuel derivative contracts held, including the impact of positions that have been offset through sold positions, regardless of whether those contracts qualify for hedge accounting. The level at which the Company is economically hedged for a particular period is also dependent on current market prices for that period, as well as the types of derivative instruments held and the strike prices of those instruments. For example, the Company may
9
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


enter into "out-of-the-money" option contracts (including "catastrophic" protection, which the Company defines as prices significantly higher than historical average levels), which may not generate intrinsic gains at settlement if market prices do not rise above the option strike price. Therefore, even though the Company may have an economic hedge in place for a particular period, that hedge may not produce any hedging gains at settlement and may even produce hedging losses depending on market prices, the types of instruments held, and the strike prices of those instruments.

As of June 30, 2024, the Company had fuel derivative instruments in place to provide coverage at varying price levels. The following table provides information about the Company’s volume of fuel hedged on an economic basis:

Maximum fuel hedged as of
June 30, 2024Derivative underlying commodity type as of
Period (by year)(gallons in millions) (a)June 30, 2024
Remainder of 2024633 West Texas Intermediate ("WTI") crude oil, Brent crude oil, and Heating oil
20251,033 Brent crude oil
2026832 Brent crude oil
(a) Due to the types of derivatives utilized by the Company and different price levels of those contracts, these volumes represent the maximum economic hedge in place and may vary significantly as market prices fluctuate and if the Company's published flight schedule or capacity plans change.

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. Qualification is re-evaluated quarterly, and all periodic changes in fair value of the derivatives designated as hedges are recorded in Accumulated other comprehensive income ("AOCI") until the underlying jet fuel is consumed. See Note 4.

When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel hedging portfolio, any subsequent changes in fair value of those positions are marked to market through the unaudited Condensed Consolidated Statement of Comprehensive Income. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de-designated as hedges are concurrently marked to market through the unaudited Condensed Consolidated Statement of Comprehensive Income. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs. In a situation where it becomes probable that a fuel hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into the unaudited Condensed Consolidated Statement of Comprehensive Income. The Company did not have any such situations where a derivative ceased to qualify for hedge accounting during 2023, or during the six months ended June 30, 2024.

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

10
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)location6/30/202412/31/20236/30/202412/31/2023
Derivatives designated as hedges (a)     
Fuel derivative contracts (gross)Prepaid expenses and other current assets$83 $86 $— $— 
Fuel derivative contracts (gross)Other assets139 137 — — 
Total derivatives designated as hedges$222 $223 $— $— 
Derivatives not designated as hedges (a)     
Fuel derivative contracts (gross)Prepaid expenses and other current assets$12 $— $14 $— 
Total derivatives $234 $223 $14 $— 
(a) Represents the position of each trade before consideration of offsetting positions with each counterparty and does not include the impact of cash collateral deposits provided to or received from counterparties. See discussion of credit risk and collateral following in this Note.

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

 Balance SheetJune 30,December 31,
(in millions)location20242023
Cash collateral deposits held from counterparties for fuel contracts - currentOffset against Prepaid expenses and other current assets$13 $15 
Cash collateral deposits held from counterparties for fuel contracts - noncurrentOffset against Other assets17 35 
Receivable from third parties for fuel contractsAccounts and other receivables6 12 
 
All of the Company's derivative instruments are subject to agreements that follow the netting guidance in the applicable accounting standards for derivatives and hedging. The types of derivative instruments the Company has determined are subject to netting requirements in the accompanying unaudited Condensed Consolidated Balance Sheet are those in which the Company pays or receives cash for transactions with the same counterparty and in the same currency via one net payment or receipt. For cash collateral held by the Company or provided to counterparties, the Company nets such amounts against the fair value of the Company's derivative portfolio by each counterparty. The Company has elected to utilize netting for its derivative instruments and also classifies such amounts as either current or noncurrent, based on the net fair value position with each of the Company's counterparties in the unaudited Condensed Consolidated Balance Sheet. If 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.

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

11
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Offsetting of derivative assets
(in millions)
(i)(ii)(iii) = (i) + (ii)(i)(ii)(iii) = (i) + (ii)
June 30, 2024December 31, 2023
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$95 $(27)$68 $86 $(15)$71 
Fuel derivative contractsOther assets$139 $(17)$122 (a)$137 $(35)$102 (a)
(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 8.


Offsetting of derivative liabilities
(in millions)
(i)(ii)(iii) = (i) + (ii)(i)(ii)(iii) = (i) + (ii)
June 30, 2024December 31, 2023
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$27 $(27)$— $15 $(15)$— 
Fuel derivative contractsOther assets$17 $(17)$— 
(a)
$35 $(35)$— 
(a)
(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 8.

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2024 and 2023:

Location and amount recognized in income on cash flow hedging relationships
Three months ended June 30, 2024Three months ended June 30, 2023
(in millions)Fuel and oilOther operating expensesFuel and oilOther operating expenses
Total$17 $2 $(14)$2 
(Gain) loss on cash flow hedging relationships
Commodity contracts:
Amount of (gain) loss reclassified from AOCI into income17 — (14)— 
Other:
Amount of loss reclassified from AOCI into income— 2 — 2 

12
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Location and amount recognized in income on cash flow hedging relationships
Six months ended June 30, 2024Six months ended June 30, 2023
(in millions)Fuel and oilOther operating expensesFuel and oilOther operating expenses
Total$39 $4 $(42)$3 
(Gain) loss on cash flow hedging relationships
Commodity contracts:
Amount of (gain) loss reclassified from AOCI into income39 — (42)— 
Other:
Amount of loss reclassified from AOCI into income— 4 — 3 

Derivatives designated and qualified in cash flow hedging relationships
 (Gain) loss recognized in AOCI on derivatives, net of tax
 Three months ended
 June 30,
(in millions)20242023
Fuel derivative contracts$23 $126 
Other$— (1)
Total$23 $125 

Derivatives designated and qualified in cash flow hedging relationships
 (Gain) loss recognized in AOCI on derivatives, net of tax
 Six months ended
 June 30,
(in millions)20242023
Fuel derivative contracts$22 $252 
Other— — 
Total$22 $252 

Derivatives not designated as hedges
 (Gain) loss recognized in income on derivatives 
  
 Three months endedLocation of (gain) loss recognized in income on derivatives
 June 30,
(in millions)20242023
Fuel derivative contracts$2 $6 Other (gains) losses, net






13
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


Derivatives not designated as hedges
 (Gain) loss recognized in income on derivatives 
  
 Six months endedLocation of (gain) loss recognized in income on derivatives
 June 30,
(in millions)20242023
Fuel derivative contracts$3 $6 Other (gains) losses, net


The Company also recorded expense (benefit) associated with premiums paid (received) for fuel derivative contracts that settled/expired during the three and six months ended June 30, 2024 and 2023. Gains and/or losses associated with fuel derivatives that qualify for hedge accounting are ultimately recorded to Fuel and oil expense. Gains and/or losses associated with fuel derivatives that do not qualify for hedge accounting are recorded to Other gains, net. The following tables present the impact of premiums paid (received) for fuel derivative contracts and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income during the period the contract settles:

 Premium expense (benefit) recognized in income on derivatives  
  
 Three months endedLocation of premium expense (benefit) recognized in income on derivatives
 June 30,
(in millions)20242023
Fuel derivative contracts designated as hedges$40 $30 Fuel and oil
Fuel derivative contracts not designated as hedges(1)— Other (gains) losses, net

 Premium expense (benefit) recognized in income on derivatives 
  
 Six months endedLocation of premium expense (benefit) recognized in income on derivatives
 June 30,
(in millions)20242023
Fuel derivative contracts designated as hedges$79 $61 Fuel and oil
Fuel derivative contracts not designated as hedges(1)— Other (gains) losses, net

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets or provided by third parties. Included in the Company’s cumulative unrealized losses from fuel hedges as of June 30, 2024, recorded in AOCI, were approximately $53 million in unrealized losses, net of taxes, which are expected to be realized in the unaudited Condensed Consolidated Statement of Comprehensive Income during the twelve months subsequent to June 30, 2024.

Interest Rate Swaps
The Company is at times party to certain interest rate swap agreements that are accounted for as cash flow hedges, but had none in place as of June 30, 2024, or as of December 31, 2023. The Company also did not have any interest rate swap agreements designated as fair value hedges, as defined, during the periods presented. During the six months ended June 30, 2023, all of the Company's interest rate swap agreements qualified for the "shortcut" or "critical terms match" methods of accounting for hedges, which dictate that the hedges were assumed to be perfectly
14
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


effective at origination, and, thus, there was no ineffectiveness to be recorded in the unaudited Condensed Consolidated Statement of Comprehensive Income. All interest rate swap agreements were terminated prior to December 31, 2023.

Credit Risk and Collateral
Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company as of the reporting date. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. As of June 30, 2024, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating. The Company also had agreements with counterparties in which cash deposits and letters of credit were required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds. In certain cases, the Company has the ability to substitute among these different forms of collateral at its discretion.

The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of June 30, 2024, at which such postings are triggered:

 Counterparty (CP) 
(in millions)ABCDEFG
H
Total
Fair value of fuel derivatives$46 $28 $29 $14 $40 $18 $26 $19 $220 
Cash collateral held from CP30 — — — — — — — 30 
Option to substitute LC for cashN/AN/A
 (a)
 (a)

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

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

15
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


4.    COMPREHENSIVE INCOME

Comprehensive income includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting and actuarial gains/losses arising from the Company’s postretirement benefit obligation. The differences between Net income and Comprehensive income for the three and six months ended June 30, 2024 and 2023 were as follows:
 Three months ended June 30,
(in millions)20242023
NET INCOME$367 $683 
Unrealized loss on fuel derivative instruments, net of
  deferred taxes of ($3) and ($42)
(10)(137)
Other, net of deferred taxes of $— and $5
2 (2)
Total other comprehensive loss$(8)$(139)
COMPREHENSIVE INCOME$359 $544 

 Six months ended June 30,
(in millions)20242023
NET INCOME137 524 
Unrealized gain (loss) on fuel derivative instruments, net of
  deferred taxes of $3 and ($86)
7 (284)
Other, net of deferred taxes of $— and $5
4 (2)
Total other comprehensive income (loss)11 (286)
COMPREHENSIVE INCOME148 238 

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three and six months ended June 30, 2024:
(in millions)Fuel derivativesDefined benefit plan itemsOtherDeferred tax impactAccumulated other comprehensive income (loss)
Balance at March 31, 2024$(112)$149 $(13)$(5)$19 
Changes in fair value(30)— — 7 (23)
Reclassification to earnings17 — 2 (4)15 
Balance at June 30, 2024$(125)$149 $(11)$(2)$11 

(in millions)Fuel derivativesDefined benefit plan itemsOtherDeferred tax impactAccumulated other comprehensive income (loss)
Balance at December 31, 2023$(135)$149 $(15)$1 $— 
Changes in fair value(29)— — 7 (22)
Reclassification to earnings39 — 4 (10)33 
Balance at June 30, 2024$(125)$149 $(11)$(2)$11 
16
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


The following tables illustrate the significant amounts reclassified out of each component of AOCI for the three and six months ended June 30, 2024:
Three months ended June 30, 2024
(in millions)Amounts reclassified from AOCI
Affected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income
AOCI components
Unrealized loss on fuel derivative instruments$17 Fuel and oil expense
4 Less: Tax expense
$13 Net of tax
Other$2 Other operating expenses
— Less: Tax expense
$2 Net of tax
Total reclassifications for the period$15 Net of tax

Six months ended June 30, 2024
(in millions)Amounts reclassified from AOCI
Affected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income
AOCI components
Unrealized loss on fuel derivative instruments$39 Fuel and oil expense
10 Less: Tax expense
$29 Net of tax
Other$4 Other operating expenses
— Less: Tax expense
$4 Net of tax
Total reclassifications for the period$33 Net of tax

5.    REVENUE

Passenger Revenues

The Company’s contracts with its Customers primarily consist of its tickets sold, which are initially deferred as Air traffic liability. Passenger revenue associated with tickets is recognized when the performance obligation to the Customer is satisfied, which is primarily when travel is provided.

Revenue is categorized by revenue source as the Company believes it best depicts the nature, amount, timing, and uncertainty of revenue and cash flow. The following table provides the components of Passenger revenue recognized for the three and six months ended June 30, 2024 and 2023:
 Three months ended June 30,Six months ended June 30,
(in millions)2024202320242023
Passenger non-loyalty$5,544 $5,183 $10,224 $9,265 
Passenger loyalty - air transportation895 989 1,694 1,814 
Passenger ancillary sold separately273 237 506 435 
Total passenger revenues$6,712 $6,409 $12,424 $11,514 

17
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


As of June 30, 2024, and December 31, 2023, the components of Air traffic liability, including contract liabilities based on tickets sold and unused flight credits available to the Customer, both of which are net of recorded breakage, and loyalty points available for redemption, within the unaudited Condensed Consolidated Balance Sheet were as follows:
 Balance as of
(in millions)June 30, 2024December 31, 2023
Air traffic liability - passenger travel and ancillary passenger services$4,114 $3,363 
Air traffic liability - loyalty program4,962 4,916 
Total Air traffic liability$9,076 $8,279 

The balance in Air traffic liability - passenger travel and ancillary passenger services also includes flight credits not currently associated with a ticket that can be applied by Customers towards the purchase of future travel. These flight credits are typically created as a result of a prior ticket cancellation or exchange, and are recorded net of associated breakage. Rollforwards of the Company's Air traffic liability - loyalty program for the three and six months ended June 30, 2024 and 2023 were as follows:

Three months ended June 30,Six months ended June 30,
(in millions)2024202320242023
Air traffic liability - loyalty program - beginning balance$4,987 $5,190 4,916 $5,189 
Amounts deferred associated with points awarded901 903 1,794 1,750 
Revenue recognized from points redeemed - Passenger(895)(989)(1,694)(1,814)
Revenue recognized from points redeemed - Other(31)(25)(54)(46)
Air traffic liability - loyalty program - ending balance$4,962 $5,079 $4,962 $5,079 

Air traffic liability includes consideration received for ticket and loyalty related performance obligations which have not been satisfied as of a given date. Rollforwards of the amounts included in Air traffic liability as of June 30, 2024 and 2023 were as follows:

Six months ended June 30,
(in millions)20242023
Air traffic liability - beginning balance$8,279 $8,250 
Current period sales (a)13,276 12,369 
Revenue from amounts included in contract liability opening balances(4,021)(4,170)
Revenue from current period sales(8,458)(7,390)
Air traffic liability - ending balance$9,076 $9,059 
(a)Current period sales includes passenger travel, ancillary services, flight loyalty, and partner loyalty

Under the Company's policy, flight credits never expire. However, as the Company believes that a portion of Customer flight credits issued will not be redeemed, it estimates and records breakage associated with such amounts. The amount of Customer flight credits represents approximately 6 percent and 8 percent of the total Air traffic liability balance as of June 30, 2024, and December 31, 2023, respectively.

The Company recognized revenue related to the marketing, advertising, and other travel-related benefits of the revenue associated with various loyalty partner agreements including, but not limited to, its co-branded credit card agreement with Chase Bank USA, N.A, within Other operating revenues. For the three months ended June 30, 2024 and 2023, the Company recognized $556 million and $540 million, respectively. For the six months ended June 30, 2024 and 2023, the Company recognized $1.1 billion and $1.1 billion, respectively.
    

18
Southwest Airlines Co.
Notes to Condensed Consolidated Financial Statements
(unaudited)


6.    NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income per share (in millions, except per share amounts). Basic net income per share is calculated by dividing net income by the weighted average of shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the three and six months ended June 30, 2024 and 2023, an immaterial number of shares related to the Company's restricted stock units and stock warrants, were excluded from the denominator because inclusion of such shares would be antidilutive. The Company paid $6 million during June 2024 to repurchase and cancel its outstanding stock warrants, previously issued in connection with the Payroll Support Program.

Three months ended June 30,Six months ended June 30,
 2024202320242023
NUMERATOR:
Net income$367 $683 $