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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, 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
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 25, 2024: 598,456,459



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, 2024December 31, 2023
ASSETS  
Current assets: 
Cash and cash equivalents$8,367 $9,288 
Short-term investments2,145 2,186 
Accounts and other receivables1,354 1,154 
Inventories of parts and supplies, at cost812 807 
Prepaid expenses and other current assets603 520 
Total current assets13,281 13,955 
Property and equipment, at cost:
Flight equipment26,131 26,060 
Ground property and equipment7,500 7,460 
Deposits on flight equipment purchase contracts395 236 
Assets constructed for others71 62 
34,097 33,818 
Less allowance for depreciation and amortization14,536 14,443 
 19,561 19,375 
Goodwill970 970 
Operating lease right-of-use assets1,182 1,223 
Other assets1,024 964 
 $36,018 $36,487 
LIABILITIES AND STOCKHOLDERS' EQUITY  
Current liabilities:  
Accounts payable$1,949 $1,862 
Accrued liabilities2,400 3,606 
Current operating lease liabilities206 208 
Air traffic liability7,642 6,551 
Current maturities of long-term debt28 29 
Total current liabilities12,225 12,256 
Long-term debt less current maturities7,974 7,978 
Air traffic liability - noncurrent1,752 1,728 
Deferred income taxes1,981 2,044 
Noncurrent operating lease liabilities953 985 
Other noncurrent liabilities937 981 
Stockholders' equity:  
Common stock888 888 
Capital in excess of par value4,138 4,153 
Retained earnings15,959 16,297 
Accumulated other comprehensive income19  
Treasury stock, at cost(10,808)(10,823)
Total stockholders' equity10,196 10,515 
 $36,018 $36,487 
    
See accompanying notes.
3

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

 Three months ended March 31,
 20242023
OPERATING REVENUES:  
Passenger$5,712 $5,105 
Freight42 41 
Other575 560 
Total operating revenues6,329 5,706 
OPERATING EXPENSES:  
Salaries, wages, and benefits2,940 2,478 
Fuel and oil1,531 1,547 
Maintenance materials and repairs361 240 
Landing fees and airport rentals464 408 
Depreciation and amortization408 365 
Other operating expenses1,018 952 
Total operating expenses6,722 5,990 
OPERATING LOSS(393)(284)
OTHER EXPENSES (INCOME):
Interest expense65 66 
Capitalized interest(7)(6)
Interest income(141)(125)
Other gains, net(12)(14)
Total other income(95)(79)
LOSS BEFORE INCOME TAXES(298)(205)
BENEFIT FOR INCOME TAXES(67)(46)
NET LOSS$(231)$(159)
NET LOSS PER SHARE, BASIC$(0.39)$(0.27)
NET LOSS PER SHARE, DILUTED$(0.39)$(0.27)
COMPREHENSIVE LOSS$(212)$(306)
WEIGHTED AVERAGE SHARES OUTSTANDING 
Basic597 594 
Diluted597 594 
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 

  
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 
    See accompanying notes.
5

Southwest Airlines Co.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
Three months ended
March 31,
 20242023
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net loss$(231)$(159)
Adjustments to reconcile net loss to cash provided by (used in) operating activities: 
Depreciation and amortization408 365 
Unrealized mark-to-market adjustment on available for sale securities (4)
Unrealized/realized loss on fuel derivative instruments1  
Deferred income taxes(68)(52)
Changes in certain assets and liabilities: 
Accounts and other receivables(308)(232)
Other assets(14)50 
Accounts payable and accrued liabilities(897)(72)
Air traffic liability1,115 947 
Other liabilities(71)(47)
Cash collateral received from (provided to) derivative counterparties (30)
Other, net(39)(60)
Net cash provided by (used in) operating activities(104)706 
CASH FLOWS FROM INVESTING ACTIVITIES:  
Capital expenditures(583)(1,046)
Assets constructed for others(9)(6)
Purchases of short-term investments(1,678)(2,204)
Proceeds from sales of short-term and other investments1,720 1,679 
Other, net(35) 
Net cash used in investing activities(585)(1,577)
CASH FLOWS FROM FINANCING ACTIVITIES:  
Proceeds from Employee stock plans15 9 
Payments of long-term debt and finance lease obligations(8)(59)
Payments of cash dividends(215)(214)
Other, net(24)2 
Net cash used in financing activities(232)(262)
NET CHANGE IN CASH AND CASH EQUIVALENTS(921)(1,133)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD9,288 9,492 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$8,367 $8,359 
CASH PAYMENTS FOR:
Interest, net of amount capitalized$18 $19 
Income taxes$3 $2 
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Right-of-use assets acquired under operating leases$16 $47 
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 Loss for the three months ended March 31, 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 March 31, 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 hedging program. Operating results for the three months ended March 31, 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.

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
8

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


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, 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 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 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.

9

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


As of March 31, 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 hedging on an economic basis:

Maximum fuel hedged as of
March 31, 2024Derivative underlying commodity type as of
Period (by year)(gallons in millions) (a)March 31, 2024
Remainder of 2024949 West Texas Intermediate ("WTI") crude oil, Brent crude oil, and Heating oil
20251,033 Brent crude oil
2026718 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 4.

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 the unaudited Condensed Consolidated Statement of Comprehensive Loss. 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 Loss. 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 Loss. The Company did not have any such situations where a derivative ceased to qualify for hedge accounting during 2023, or during the three months ended March 31, 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)location3/31/202412/31/20233/31/202412/31/2023
Derivatives designated as hedges (a)     
Fuel derivative contracts (gross)Prepaid expenses and other current assets$113 $86 $ $ 
Fuel derivative contracts (gross)Other assets148 137   
Total derivatives designated as hedges$261 $223 $ $ 
Derivatives not designated as hedges (a)     
Fuel derivative contracts (gross)Prepaid expenses and other current assets$19 $ $23 $ 
Total derivatives $280 $223 $23 $ 
(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 SheetMarch 31,December 31,
(in millions)location20242023
Cash collateral deposits held from counterparties for fuel contracts - currentOffset against Prepaid expenses and other current assets$18 $15 
Cash collateral deposits held from counterparties for fuel contracts - noncurrentOffset against Other assets32 35 
Receivable from third parties for fuel contractsAccounts and other receivables8 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)
March 31, 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$132 $(41)$91 $86 $(15)$71 
Fuel derivative contractsOther assets$148 $(32)$116 (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)
March 31, 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$41 $(41)$ $15 $(15)$ 
Fuel derivative contractsOther assets$32 $(32)$ 
(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 Loss for the three months ended March 31, 2024 and 2023:

Location and amount recognized in income on cash flow and fair value hedging relationships
Three months ended March 31, 2024Three months ended March 31, 2023
(in millions)Fuel and oilOther operating expensesFuel and oilOther operating expenses
Total$22 $2 $(28)$2 
(Gain) loss on cash flow hedging relationships
Commodity contracts:
Amount of (gain) loss reclassified from AOCI into income22  (28) 
Other:
Amount of loss reclassified from AOCI into income 2  2 



12

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


Derivatives designated and qualified in cash flow hedging relationships
 (Gain) loss recognized in AOCI on derivatives, net of tax
 Three months ended
 March 31,
(in millions)20242023
Fuel derivative contracts$(1)$125 
Other 2 
Total$(1)$127 

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)20242023
Fuel derivative contracts$1 $ 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, 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) and losses, net. The following table presents the impact of premiums paid for fuel derivative contracts and their location within the unaudited Condensed Consolidated Statement of Comprehensive 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)20242023
Fuel derivative contracts designated as hedges$39 $30 Fuel and oil

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 March 31, 2024, recorded in AOCI, were approximately $34 million in unrealized losses, net of taxes, which are expected to be realized in the unaudited Condensed Consolidated Statement of Comprehensive Loss during the twelve months subsequent to March 31, 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 March 31, 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 three months ended March 31, 2023, all of the Company's interest rate swap agreements qualified for the "shortcut" or "critical terms match" methods of accounting for hedges, which dictate that the hedges were assumed to be perfectly effective at origination, and, thus, there was no ineffectiveness to be recorded in the unaudited Condensed Consolidated Statement of Comprehensive Loss. All interest rate swap agreements were terminated prior to December 31, 2023.
13

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



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. As of March 31, 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 March 31, 2024, at which such postings are triggered:

 Counterparty (CP) 
(in millions)ABCDEFG
H
Total
Fair value of fuel derivatives$55 $29 $32 $17 $53 $23 $32 $16 $257 
Cash collateral held from CP50        50 
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.

14

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


4.    COMPREHENSIVE LOSS

Comprehensive income (loss) 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 loss and Comprehensive loss for the three months ended March 31, 2024 and 2023 were as follows:
 Three months ended March 31,
(in millions)20242023
NET LOSS$(231)$(159)
Unrealized gain (loss) on fuel derivative instruments, net of
  deferred taxes of $6 and ($44)
17 (147)
Other, net of deferred taxes of $ and $
2  
Total other comprehensive income (loss)$19 $(147)
COMPREHENSIVE LOSS$(212)$(306)

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three months ended March 31, 2024:
(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 value1    1 
Reclassification to earnings22  2 (6)18 
Balance at March 31, 2024$(112)$149 $(13)$(5)$19 

The following table illustrates the significant amounts reclassified out of each component of AOCI for the three months ended March 31, 2024:
Three months ended March 31, 2024
(in millions)Amounts reclassified from AOCI
Affected line item in the unaudited Condensed Consolidated Statement of Comprehensive Loss
AOCI components
Unrealized loss on fuel derivative instruments$22 Fuel and oil expense
6 Less: Tax expense
$16 Net of tax
Other$2 Other operating expenses
 Less: Tax expense
$2 Net of tax
Total reclassifications for the period$18 Net of tax



5.    REVENUE

Passenger Revenues

15

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


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 months ended March 31, 2024 and 2023:
 Three months ended March 31,
(in millions)20242023
Passenger non-loyalty$4,680 $4,082 
Passenger loyalty - air transportation799 825 
Passenger ancillary sold separately233 198 
Total passenger revenues$5,712 $5,105 

As of March 31, 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)March 31, 2024December 31, 2023
Air traffic liability - passenger travel and ancillary passenger services$4,407 $3,363 
Air traffic liability - loyalty program4,987 4,916 
Total Air traffic liability$9,394 $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 reflected net of associated breakage. Rollforwards of the Company's Air traffic liability - loyalty program for the three months ended March 31, 2024 and 2023 were as follows:

Three months ended March 31,
(in millions)20242023
Air traffic liability - loyalty program - beginning balance$4,916 $5,189 
Amounts deferred associated with points awarded893 846 
Revenue recognized from points redeemed - Passenger(799)(825)
Revenue recognized from points redeemed - Other(23)(20)
Air traffic liability - loyalty program - ending balance$4,987 $5,190 

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 March 31, 2024 and 2023 were as follows:

16

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


Three months ended March 31,
(in millions)20242023
Air traffic liability - beginning balance$8,279 $8,250 
Current period sales (a)6,850 6,072 
Revenue from amounts included in contract liability opening balances(2,557)(2,568)
Revenue from current period sales(3,178)(2,557)
Air traffic liability - ending balance$9,394 $9,197 
(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 March 31, 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 March 31, 2024 and 2023, the Company recognized $542 million and $521 million, respectively.
    

6.    NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net loss per share (in millions, except per share amounts). Basic net loss per share is calculated by dividing net loss by the weighted average of shares outstanding during the period. Diluted net loss 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.

Three months ended March 31,
 20242023
NUMERATOR:
Net loss attributable to common stockholders$(231)$(159)
DENOMINATOR:
Weighted-average shares outstanding, basic and diluted597 594 
NET LOSS PER SHARE:
Basic$(0.39)$(0.27)
Diluted$(0.39)$(0.27)
Antidilutive amounts excluded from calculations:  
Convertible debt43 42 
Restricted stock units3 3 
Stock warrants2 1 



17

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


7.    FAIR VALUE MEASUREMENTS

Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of March 31, 2024, the Company held certain items that are required to be measured at fair value on a recurring basis. These included cash equivalents, short-term investments (primarily treasury bills), fuel derivative contracts, and available-for-sale securities. The majority of the Company’s cash equivalents and short-term investments consist of instruments classified as Level 1. However, the Company has certificates of deposit, commercial paper, and time deposits that are classified as Level 2, due to the fact that the fair value for these instruments is determined utilizing observable inputs in non-active markets. Equity securities primarily consist of investments with readily determinable market values associated with the Company’s excess benefit plan.

The Company’s derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange. Fuel derivative instruments currently consist solely of option contracts, whereas interest rate derivatives have historically consisted solely of swap agreements. See Note 3 for further information on the Company’s derivative instruments and hedging activities. The Company’s Treasury Department, which reports to the Chief Financial Officer, determines the value of option contracts utilizing an option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are provided by financial institutions that trade these contracts. The option pricing model used by the Company is an industry standard model for valuing options and is a similar model used by the broker/dealer community (i.e., the Company’s counterparties). The inputs to this option pricing model are the option strike price, underlying price, risk free rate of interest, time to expiration, and volatility. Because certain inputs used to determine the fair value of option contracts are unobservable (principally implied volatility), the Company has categorized these option contracts as Level 3. Volatility information is obtained from external sources but is analyzed by the Company for reasonableness and compared to similar information received from other external sources. The fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives that have not yet settled. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. To validate the reasonableness of the Company’s option pricing model, on a monthly basis, the Company compares its option valuations to third party valuations. If any significant differences were to be noted, they would be researched in order to determine the reason. However, historically, no significant differences have been noted. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds.

Included in Other available-for-sale securities are the Company’s investments associated with its deferred compensation plans, which consist of mutual funds that are publicly traded and for which market prices are readily available. These plans are non-qualified deferred compensation plans designed to hold contributions in excess of limits established by the Internal Revenue Code of 1986, as amended. The distribution timing and payment amounts under these plans are made based on the participant’s distribution election and plan balance. Assets related to the funded portions of the deferred compensation plans are held in a rabbi trust, and the Company remains liable to these participants for the unfunded portion of the plans. The Company records changes in the fair value of plan obligations and plan assets, which net to zero, within the Salaries, wages, and benefits line and Other gains, net line, respectively, of the unaudited Condensed Consolidated Statement of Comprehensive Loss.

18

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


The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis as of March 31, 2024, and December 31, 2023:
  Fair value measurements at reporting date using:
Quoted prices in active markets for identical assetsSignificant other observable inputsSignificant unobservable inputs
DescriptionMarch 31, 2024(Level 1)(Level 2)(Level 3)
Assets(in millions)
Cash equivalents:    
Cash equivalents (a)$8,119 $8,119 $ $ 
Commercial paper135  135  
Certificates of deposit13  13  
Time deposits100  100  
Short-term investments: 
Treasury bills1,934 1,934   
Certificates of deposit211  211  
Fuel derivatives: 
Option contracts (b)280   280 
Equity Securities286 286   
Total assets$11,078 $10,339 $459 $280 
Liabilities    
Fuel derivatives:
Option contracts (b)$(23)$ $ $(23)
(a) Cash equivalents are primarily composed of money market investments and treasury bills.
(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as a net asset. See Note 3.
  Fair value measurements at reporting date using:
Quoted prices in active markets for identical assetsSignificant other observable inputsSignificant unobservable inputs
DescriptionDecember 31, 2023(Level 1)(Level 2)(Level 3)
Assets(in millions)
Cash equivalents:   
Cash equivalents (a)$9,032 $9,032 $ $ 
Commercial paper135  135  
Certificates of deposit21  21  
Time deposits100  100  
Short-term investments:    
Treasury bills1,983 1,983   
Certificates of deposit203  203  
Fuel derivatives:    
Option contracts (b)223   223 
Equity Securities280 280   
Total assets$11,977 $11,295 $459 $223 
(a) Cash equivalents are primarily composed of money market investments and treasury bills.
(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as an asset. See Note 3.

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2024, or the year ended December 31, 2023. The following table presents the
19

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


Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2024:
Fair value measurements using significant unobservable inputs (Level 3)
(in millions)Fuel derivatives
Balance as of December 31, 2023$223 
Total gains (losses) for the period
Included in other comprehensive loss1 
Purchases51 (b)
Settlements(18)
Balance as of March 31, 2024$257 
The amount of total losses for the period
  included in earnings attributable to the
  change in unrealized gains or losses relating
  to assets still held as of March 31, 2024
$1 (a)
The amount of total losses for the period
  included in other comprehensive income attributable to the
  change in unrealized gains or losses relating
  to assets still held as of March 31, 2024
$4 
(a) Included in Other gains, net, within the unaudited Condensed Consolidated Statement of Comprehensive Loss.
(b) The purchase of fuel derivatives is recorded on a gross basis based on the structure of the derivative instrument and whether a contract with multiple derivatives was purchased as a single instrument or separate instruments.

The significant unobservable input used in the fair value measurement of the Company’s derivative option contracts is implied volatility. Holding other inputs constant, an increase (decrease) in implied volatility would have resulted in a higher (lower) fair value measurement, respectively, for the Company’s derivative option contracts.

The following table presents a range and weighted average of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 as of March 31, 2024:
Quantitative information about Level 3 fair value measurements
 Valuation techniqueUnobservable inputPeriod (by year)RangeWeighted Average (a)
Fuel derivativesOption modelImplied volatilitySecond quarter 2024
14-33%
24 %
Third quarter 2024
21-31%
25 %
Fourth quarter 2024
22-30%
25 %
2025
21-23%
22 %
2026
21-22%
21 %
(a) Implied volatility weighted by the notional amount (barrels of underlying commodity) that will settle in respective period.

The carrying amounts and estimated fair values of the Company’s short-term and long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, as of March 31, 2024, are presented in the table below. The fair values of the Company’s publicly held long-term debt are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets; therefore, the Company has categorized these agreements as Level 2. All privately held debt agreements are categorized as Level 3. The Company has determined the estimated fair value of this debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes indicative pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items.

20

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


(in millions)Carrying valueEstimated fair valueFair value level hierarchy
5.25% Notes due 2025
1,302 1,298 Level 2
1.25% Convertible Notes due 2025
1,611 1,630 Level 2
3.00% Notes due 2026
300 283 Level 2
7.375% Debentures due 2027
110 114 Level 2
3.45% Notes due 2027
300 283 Level 2
5.125% Notes due 2027
1,727 1,725 Level 2
2.625% due 2030
500 435 Level 2
1.000% Payroll Support Program Loan due 2030 (a)
976 953 Level 3
1.000% Payroll Support Program Loan due 2031 (a)
566 532 Level 3
1.000% Payroll Support Program Loan due 2031 (a)
526 489 Level 3
(a) The interest rate will change to Secured Overnight Financing Rate plus two percent on the fifth anniversary of the loans.


8. SUPPLEMENTAL FINANCIAL INFORMATION
(in millions)March 31, 2024December 31, 2023
Trade receivables$58 $104 
Credit card receivables280 200 
Business partners and other suppliers612 501 
Taxes receivable13 35 
Fuel hedging and receivables8 12 
Reinsurance receivable251 145 
Other132 157 
Accounts and other receivables$1,354 $1,154 
(in millions)March 31, 2024December 31, 2023
Derivative contracts$116 $102 
Intangible assets, net295 296 
Equity securities286 280 
Prepaid maintenance264 258 
Other63 28 
Other assets$1,024 $964 
(in millions)March 31, 2024December 31, 2023
Accounts payable trade$281 $265 
Salaries, withholdings and payroll taxes446 400 
Ticket taxes and fees443 302 
Aircraft maintenance payable151 140 
Fuel payable144 161 
Dividends payable 107 
Accrued third party services229 269 
Other payable255 218 
Accounts payable$1,949 $1,862 
21

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


(in millions)March 31, 2024December 31, 2023
Voluntary Separation Program$64 $65 
Profitsharing and savings plans41 141 
Vacation pay541 516 
Health174 163 
Workers compensation137 133 
Property and income taxes56 63 
Interest73 34 
Bonus and incentive pay (a)736 2,022 
Reinsurance payable300 190 
Other278 279 
Accrued liabilities$2,400 $3,606 
(in millions)March 31, 2024December 31, 2023
Voluntary Separation Program$40 $61 
Postretirement obligation273 269 
Other deferred compensation358 358 
Other266 293 
Other noncurrent liabilities$937 $981 
(a) Primarily consists of anticipated contract labor ratification bonuses and/or accruals. Also includes non-contract incentive pay. Approximately $1.35 billion was paid in first quarter 2024 to Pilots as a ratification bonus upon the ratification of the labor contract agreement with the Southwest Airlines Pilots Association ("SWAPA").

For further information on derivative instruments, see Note 3.

Other Operating Expenses
Other operating expenses consist of aircraft rentals, distribution costs, advertising expenses, personnel expenses, professional fees, and other operating costs, none of which individually exceeded 10 percent of Total operating expenses.

9.    COMMITMENTS AND CONTINGENCIES

Commitments

The Company's contractual order book with The Boeing Company ("Boeing") for 737-7 ("-7") and 737-8 ("-8") aircraft, which extends to 2031, was designed to support the Company's growth and fleet modernization plans, while also providing significant flexibility to manage its fleet size, including opportunities to accelerate fleet modernization efforts if growth opportunities do not materialize. The Company received five -8 aircraft deliveries from Boeing in first quarter 2024 and retired three 737-700 ("-700") aircraft.

Boeing continues to experience delays in fulfilling its commitments with regards to delivery of MAX aircraft to the Company, as a result of manufacturing challenges, as well as delays in achieving FAA certification of one of its new aircraft types, the -7, for which Southwest expects to be the launch customer. As a result of Boeing's delivery delays, the Company has conservatively re-planned its capacity and delivery expectations for the remainder of this year and next.

The Company entered into a Supplemental Agreement with Boeing to formalize the conversion of 19 2025 -7 firm orders into -8 firm orders as of March 31, 2024. Therefore, as of March 31, 2024, the Company had the following firm orders and options for future periods:
22

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



The Boeing Company
-7 Firm Orders-8 Firm Orders-7 or -8 OptionsTotal
202427 58  85 (c)
202540 19 15 74 
202659  26 85 
202719