Company Quick10K Filing
Quick10K
Southwest Airlines
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$52.46 543 $28,490
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-19 Regulation FD
8-K 2019-05-15 Shareholder Vote
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-02-20 Regulation FD
8-K 2019-01-24 Earnings, Exhibits
8-K 2019-01-24 Earnings, Exhibits
8-K 2019-01-08 Earnings, Exhibits
8-K 2018-12-12 Regulation FD
8-K 2018-12-07 Regulation FD, Exhibits
8-K 2018-11-07 Regulation FD, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-10-05 Earnings, Exhibits
8-K 2018-09-12 Regulation FD, Exhibits
8-K 2018-08-08 Regulation FD, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-07-10 Earnings, Exhibits
8-K 2018-06-06 Regulation FD, Exhibits
8-K 2018-06-04 Regulation FD
8-K 2018-05-16 Shareholder Vote
8-K 2018-05-08 Regulation FD, Exhibits
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-04-06 Earnings, Exhibits
8-K 2018-03-20 Earnings, Regulation FD, Exhibits
8-K 2018-03-08 Regulation FD, Exhibits
8-K 2018-01-25 Earnings, Exhibits
8-K 2018-01-09 Earnings, Exhibits
8-K 2018-01-02 Earnings
DPZ Domino's Pizza 11,600
GBT Global Blood Therapeutics 3,280
CNO CNO Financial Group 2,690
ATTO Atento 257
HCFT Hunt Companies Finance Trust 82
UUU Universal Security Instruments 3
GDFF Global Diversified Futures Fund 0
SYEV Seychelle Environmental Technologies 0
FXY Invesco Currencyshares Japanese Yen Trust 0
MODD Modular Medical 0
LUV 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 luv-3312019xex311.htm
EX-31.2 luv-3312019xex312.htm
EX-32.1 luv-3312019xex321.htm

Southwest Airlines Earnings 2019-03-31

LUV 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

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

FORM 10-Q

(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2019
 
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

southwestheartimagea01.jpg

Southwest Airlines Co.
(Exact name of registrant as specified in its charter)
TEXAS
74-1563240
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
P.O. Box 36611
 
Dallas, Texas
75235-1611
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code:  (214) 792-4000

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 þ  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 þ  No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 þ
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 þ

Number of shares of Common Stock outstanding as of the close of business on April 26, 2019: 543,064,878




TABLE OF CONTENTS TO FORM 10-Q

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of March 31, 2019 and December 31, 2018
Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2019 and 2018
Condensed Consolidated Statement of Stockholders' Equity as of March 31, 2019 and 2018
Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2019 and 2018
Notes to Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
SIGNATURES




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, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,344

 
$
1,854

Short-term investments
1,517

 
1,835

Accounts and other receivables
784

 
568

Inventories of parts and supplies, at cost
484

 
461

Prepaid expenses and other current assets
354

 
310

Total current assets
5,483

 
5,028

 
 
 
 
Property and equipment, at cost:
 

 
 

Flight equipment
21,666

 
21,753

Ground property and equipment
5,082

 
4,960

Deposits on flight equipment purchase contracts
780

 
775

Assets constructed for others
120

 
1,768

 
27,648

 
29,256

Less allowance for depreciation and amortization
9,875

 
9,731

 
17,773

 
19,525

Goodwill
970

 
970

Operating lease right-of-use assets
1,508

 

Other assets
725

 
720

 
$
26,459

 
$
26,243

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
1,412

 
$
1,416

Accrued liabilities
1,350

 
1,749

Current operating lease liabilities
361

 

Air traffic liability
5,029

 
4,134

Current maturities of long-term debt
571

 
606

Total current liabilities
8,723

 
7,905

 
 
 
 
Long-term debt less current maturities
2,602

 
2,771

Air traffic liability - noncurrent
985

 
936

Deferred income taxes
2,480

 
2,427

Construction obligation
120

 
1,701

Noncurrent operating lease liabilities
1,150

 

Other noncurrent liabilities
608

 
650

Stockholders' equity:
 

 
 

Common stock
808

 
808

Capital in excess of par value
1,513

 
1,510

Retained earnings
16,320

 
15,967

Accumulated other comprehensive income
96

 
20

Treasury stock, at cost
(8,946
)
 
(8,452
)
Total stockholders' equity
9,791

 
9,853

 
$
26,459

 
$
26,243

See accompanying notes.

3



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

 
Three months ended March 31,
 
2019
 
2018
OPERATING REVENUES:
 
 
 
Passenger
$
4,745

 
$
4,585

Freight
42

 
42

Other
362

 
317

Total operating revenues
5,149

 
4,944

 
 
 
 
OPERATING EXPENSES:
 

 
 

Salaries, wages, and benefits
1,976

 
1,821

Fuel and oil
1,015

 
1,018

Maintenance materials and repairs
293

 
257

Landing fees and airport rentals
333

 
330

Depreciation and amortization
297

 
277

Other operating expenses
730

 
625

Total operating expenses
4,644

 
4,328

 
 
 
 
OPERATING INCOME
505

 
616

 
 
 
 
OTHER EXPENSES (INCOME):
 

 
 

Interest expense
31

 
32

Capitalized interest
(9
)
 
(10
)
Interest income
(23
)
 
(12
)
Other (gains) losses, net
2

 
4

Total other expenses (income)
1

 
14

 
 
 
 
INCOME BEFORE INCOME TAXES
504

 
602

PROVISION FOR INCOME TAXES
117

 
139

 
 
 
 
NET INCOME
$
387

 
$
463

 
 
 
 
NET INCOME PER SHARE, BASIC
$
0.70

 
$
0.79

 
 
 
 
NET INCOME PER SHARE, DILUTED
$
0.70

 
$
0.79

 
 
 
 
COMPREHENSIVE INCOME
$
463

 
$
547

 
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 

Basic
551

 
587

Diluted
552

 
588

See accompanying notes.

4



Southwest Airlines Co.
Condensed Consolidated Statement of Stockholders' Equity
(in millions, except per share amounts)
(unaudited)

 
 
Quarter ended March 31, 2018
  
 
Common
Stock
 
Capital in
excess of
par value
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Treasury
stock
 
Total
Balance at December 31, 2017
 
$
808

 
$
1,451

 
$
13,832

 
$
12

 
$
(6,462
)
 
$
9,641

Cumulative effect of adopting Accounting Standards Update No. 2017-12, Targeted Improvements to Accounting for Hedging Activities
 

 

 
18

 
(18
)
 

 

Repurchase of common stock
 

 

 

 

 
(500
)
 
(500
)
Issuance of common and treasury stock pursuant to Employee stock plans
 

 
(9
)
 

 

 
5

 
(4
)
Share-based compensation
 

 
10

 

 

 

 
10

Cash dividends, $.125 per share
 

 

 
(75
)
 

 

 
(75
)
Comprehensive income
 

 

 
463

 
84

 

 
547

Balance at March 31, 2018
 
$
808

 
$
1,452

 
$
14,238

 
$
78

 
$
(6,957
)
 
$
9,619


 
 
Quarter ended March 31, 2019
  
 
Common
Stock
 
Capital in
excess of
par value
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Treasury
stock
 
Total
Balance at December 31, 2018
 
$
808

 
$
1,510

 
$
15,967

 
$
20

 
$
(8,452
)
 
$
9,853

Cumulative effect of adopting Accounting Standards Update No. 2016-02, Leases, codified in Accounting Standards Codification 842 (See Note 2)
 

 

 
55

 

 

 
55

Repurchase of common stock
 

 

 

 

 
(500
)
 
(500
)
Issuance of common and treasury stock pursuant to Employee stock plans
 

 
(10
)
 

 

 
6

 
(4
)
Share-based compensation
 

 
13

 

 

 

 
13

Cash dividends, $.160 per share
 

 

 
(89
)
 

 

 
(89
)
Comprehensive income
 

 

 
387

 
76

 

 
463

Balance at March 31, 2019
 
$
808

 
$
1,513

 
$
16,320

 
$
96

 
$
(8,946
)
 
$
9,791


See accompanying notes.


5



Southwest Airlines Co.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
 
Three months ended
 
March 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
387

 
$
463

Adjustments to reconcile net income to cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
297

 
277

Unrealized/realized gains on fuel derivative instruments

 
(7
)
Deferred income taxes
13

 
72

Changes in certain assets and liabilities:
 

 
 

Accounts and other receivables
(222
)
 
(15
)
Other assets
29

 
(178
)
Accounts payable and accrued liabilities
(257
)
 
(501
)
Air traffic liability
944

 
866

Other liabilities
(69
)
 

Cash collateral received from derivative counterparties
15

 
65

Other, net
(32
)
 
(40
)
Net cash provided by operating activities
1,105

 
1,002

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 

 
 

Capital expenditures
(160
)
 
(409
)
Assets constructed for others

 
(24
)
Purchases of short-term investments
(251
)
 
(200
)
Proceeds from sales of short-term and other investments
575

 
560

Net cash provided by (used in) investing activities
164

 
(73
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 

 
 

Proceeds from Employee stock plans
10

 
9

Reimbursement for assets constructed for others

 
139

Payments of long-term debt and finance lease obligations
(99
)
 
(82
)
Payments of cash dividends
(178
)
 
(148
)
Repayment of construction obligation

 
(7
)
Repurchase of common stock
(500
)
 
(500
)
Other, net
(12
)
 
(13
)
Net cash used in financing activities
(779
)
 
(602
)
 
 
 
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
490

 
327

 
 
 
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
1,854

 
1,495

 
 
 
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
2,344

 
$
1,822

 
 
 
 
CASH PAYMENTS FOR:
 
 
 
Interest, net of amount capitalized
$
15

 
$
18

Income taxes
$
4

 
$
4

 
 
 
 
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
 
 
 
Flight equipment under finance leases
$
1

 
$
14

Assets constructed for others
$
21

 
$
40

See accompanying notes.

6



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

1.    BASIS OF PRESENTATION

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

The accompanying unaudited Condensed Consolidated Financial Statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States ("GAAP") for complete financial statements. The unaudited Condensed Consolidated Financial Statements for the interim periods ended March 31, 2019 and 2018 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. This includes all normal and recurring adjustments and elimination of significant intercompany transactions. Financial results for the Company and airlines in general can be seasonal in nature. In many years, the Company's revenues, as well as its Operating income and Net income, have been better in its second and third fiscal quarters than in its first and fourth fiscal quarters. Air travel is also significantly impacted by general economic conditions, the amount of disposable income available to consumers, unemployment levels, corporate travel budgets, extreme or severe weather and natural disasters, fears of terrorism or war, 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, 2019, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2019. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Southwest Airlines Co. Annual Report on Form 10-K for the year ended December 31, 2018.

Effective as of January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2016-02, Leases, codified in Accounting Standards Codification ("ASC") 842 (the "New Lease Standard"). All amounts and disclosures set forth in this Form 10-Q for first quarter 2019 reflect the adoption of this ASU, while all periods prior to 2019 remain in accordance with prior accounting requirements. See Note 2 for further information.

2.    NEW ACCOUNTING PRONOUNCEMENTS

On August 29, 2018, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software. This new standard requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40, Accounting for Internal-Use Software, to determine which implementation costs to (i) capitalize as assets and amortize over the term of the hosting arrangement or (ii) expense as incurred. This new standard is effective for public business entities in fiscal years beginning after December 15, 2019. Early adoption is permitted, including during an interim period. Entities have the option to apply this standard prospectively to all implementation costs incurred after the date of adoption or retrospectively. 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 August 28, 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement. This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and for interim periods within those years. Early adoption is permitted, including during an interim period. This new standard requires changes to the disclosure requirements for fair value measurements for certain Level 3 items, and specifies that some of the changes must be applied prospectively, while others should be applied retrospectively. The Company is evaluating this new standard, but does not expect it to have a significant impact on its financial statement disclosures. See Note 8 for further information

7

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


on the Company's fair value measurements.

On February 25, 2016, the FASB issued the New Lease Standard. The New Lease Standard requires lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases (with the exception of short-term leases, as defined in the New Lease Standard) at the lease commencement date and recognize expenses on the income statement in a similar manner to the legacy guidance in ASC 840, Leases ("ASC 840"). The lease liability is measured as the present value of the unpaid lease payments and the right-of-use asset will be derived from the calculation of the lease liability. Lease payments include fixed and in-substance fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, fees paid by the lessee to the owners of a special-purpose entity for restructuring the transaction, and probable amounts the lessee will owe under a residual value guarantee. Lease payments do not include (i) variable lease payments other than those that depend on an index or rate, (ii) any guarantee by the lessee of the lessor’s debt, or (iii) any amount allocated to non-lease components, if such election is made upon adoption, per the provisions of the New Lease Standard.

The Company adopted the provisions of the New Lease Standard effective January 1, 2019, using the modified retrospective adoption method, utilizing the simplified transition option available in the New Lease Standard, which allows entities to continue to apply the legacy guidance in ASC 840, including its disclosure requirements, in the comparative periods presented in the year of adoption. The Company elected the package of practical expedients available under the transition provisions of the New Lease Standard, including (i) not reassessing whether expired or existing contracts contain leases, (ii) not reassessing lease classification, and (iii) not revaluing initial direct costs for existing leases.

In addition, the New Lease Standard eliminated the previous build-to-suit lease accounting guidance and resulted in derecognition of build-to-suit assets and liabilities that remained on the balance sheet after the end of the construction period, including the related deferred taxes. However, given the Company's guarantee associated with the bonds issued to fund the Dallas Love Field Modernization Program (the "LFMP"), the remaining debt service amount as of the adoption date was considered a minimum rental payment under the New Lease Standard, and therefore was recorded as a lease liability on the unaudited Condensed Consolidated Balance Sheet that will be reduced through future debt service payments made in 2019 and beyond. See Note 7 for disclosures related to the New Lease Standard, and Note 10 for further information on the Company’s build-to-suit projects.


8

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


The following table provides the unaudited Condensed Consolidated Balance Sheet impact of applying the New Lease Standard effective as of January 1, 2019. The impact to the Company's results of operations and cash flows was not significant:

 
Balance as of January 1, 2019
(in millions)
Balances removed under prior accounting
 
Balances added under New Lease Standard
 
Net impact of New Lease Standard
Prepaid expenses and other current assets
$
1

 
$

 
$
(1
)
Flight equipment

 
(110
)
 
(110
)
Assets constructed for others
1,669

 

 
(1,669
)
Less allowance for depreciation and amortization
(166
)
 
(2
)
 
164

Operating lease right-of-use assets

 
1,466

 
1,466

Other assets
121

 

 
(121
)
Total assets
$
1,625

 
$
1,354

 
$
(271
)
 
 
 
 
 
 
Accounts payable
$
8

 
$

 
$
(8
)
Accrued liabilities
37

 

 
(37
)
Current operating lease liabilities

 
355

 
355

Current maturities of long-term debt

 
(14
)
 
(14
)
Long-term debt less current maturities

 
(96
)
 
(96
)
Deferred income taxes
(17
)
 

 
17

Construction obligation
1,602

 

 
(1,602
)
Noncurrent operating lease liabilities

 
1,119

 
1,119

Other noncurrent liabilities
60

 

 
(60
)
Retained earnings
(65
)
 
(10
)
 
55

Total liabilities and stockholders' equity
$
1,625

 
$
1,354

 
$
(271
)



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

The Company has used financial derivative instruments for both short-term and long-term timeframes, and primarily uses a mixture of purchased call options, collar structures (which include both a purchased call option and a sold put option), call spreads (which include a purchased call option and a sold call option), put spreads (which include a purchased put option and a sold put option), and fixed price swap agreements in its portfolio. Although the use of collar structures and swap agreements can reduce the overall cost of hedging, these instruments carry more risk than purchased call options in that the Company could end up in a liability position when the collar structure or swap agreement settles.

9

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


With the use of purchased call options and call spreads, the Company cannot be in a liability position at settlement, but does not have coverage once market prices fall below the strike price of the purchased call option.

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

For the three months ended March 31, 2019, the Company had fuel derivative instruments in place for up to 84 percent of its fuel consumption. As of March 31, 2019, the Company also had fuel derivative instruments in place to provide coverage at varying price levels, but up to a maximum of approximately 67 percent of its remaining 2019 estimated fuel consumption, depending on where market prices settle. The following table provides information about the Company’s volume of fuel hedging on an economic basis considering current market prices:

 
 
Maximum fuel hedged as of
 
 
 
 
March 31, 2019
 
Derivative underlying commodity type as of
Period (by year)
 
(gallons in millions) (a)
 
March 31, 2019
Remainder of 2019
 
1,103

 
WTI crude and Brent crude oil
2020
 
1,301

 
WTI crude oil, Brent crude oil, and Heating oil
2021
 
698

 
WTI crude and Brent crude oil
2022
 
88

 
WTI 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.

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

The Company's results are subject to the possibility that the derivatives will no longer qualify for hedge accounting, in which case any change in the fair value of derivative instruments since the last reporting period would be recorded in Other (gains) losses, net, in the unaudited Condensed Consolidated Statement of Comprehensive Income in the period of the change; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense. Factors that have and may continue to lead to the loss of hedge accounting include: significant fluctuation in energy prices, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging. Increased volatility in these commodity markets for an extended period of time, especially if such volatility were to worsen, could cause the Company to lose hedge accounting altogether for the commodities used in its fuel hedging program, which would create further volatility in the Company’s GAAP financial results. However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the Company the opportunity to stabilize jet fuel costs. When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent

10

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


changes in fair value of those positions are marked to market through earnings. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de-designated as hedges are concurrently marked to market through earnings. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs. In a situation where it becomes probable that a fuel hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings. The Company did not have any such situations occur during 2018, or during the three months ended March 31, 2019.

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:

 
 
 
 
Asset derivatives
 
Liability derivatives
 
 
Balance Sheet
 
Fair value at
 
Fair value at
 
Fair value at
 
Fair value at
(in millions)
 
location
 
3/31/2019
 
12/31/2018
 
3/31/2019
 
12/31/2018
Derivatives designated as hedges (a)
 
 
 
 
 
 
 
 
 
 
Fuel derivative contracts (gross)
 
Prepaid expenses and other current assets
 
$
104

 
$
43

 
$

 
$

Fuel derivative contracts (gross)
 
Other assets
 
150

 
95

 

 

Interest rate derivative contracts
 
Accrued liabilities
 

 

 
15

 
2

Interest rate derivative contracts
 
Other noncurrent liabilities
 

 

 
8

 
12

Total derivatives designated as hedges
 
$
254

 
$
138

 
$
23

 
$
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.

The following table presents the amounts recorded on the unaudited Condensed Consolidated Balance Sheet related to fair value hedges:

Balance Sheet location of hedged item
 
Carrying amount of the hedged liabilities
 
Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged liabilities (a)
 
 
March 31,
 
March 31,
(in millions)
 
2019
 
2018
 
2019
 
2018
Current maturities of long-term debt
 
$
300

 
$

 
$
2

 
$

Long-term debt less current maturities
 
495

 
784

 
13

 
5

 
 
$
795

 
$
784

 
$
15

 
$
5

(a) At March 31, 2019 and 2018, these amounts include the cumulative amount of fair value hedging adjustments remaining for which hedge accounting has been discontinued of $20 million and $21 million, respectively.


11

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


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

 
 
Balance Sheet
 
March 31,
 
December 31,
(in millions)
 
location
 
2019
 
2018
Cash collateral deposits held from counterparties for fuel
  contracts - current
 
Offset against Prepaid expenses and other current assets
 
$
15

 
$

Due to third parties for fuel contracts
 
Accounts payable
 
7

 

Receivable from third parties for fuel contracts
 
Accounts and other receivables
 
6

 
2


 
All of the Company's fuel derivative instruments and interest rate swaps are subject to agreements that follow the netting guidance in the applicable accounting standards for derivatives and hedging. The types of derivative instruments the Company has determined are subject to netting requirements in the accompanying unaudited Condensed Consolidated Balance Sheet are those in which the Company pays or receives cash for transactions with the same counterparty and in the same currency via one net payment or receipt. For cash collateral held by the Company or provided to counterparties, the Company nets such amounts against the fair value of the Company's derivative portfolio by each counterparty. The Company has elected to utilize netting for both its fuel derivative instruments and interest rate swap agreements and also classifies such amounts as either current or noncurrent, based on the net fair value position with each of the Company's counterparties in the unaudited Condensed Consolidated Balance Sheet.

The Company's application of its netting policy associated with cash collateral differs depending on whether its derivative instruments are in a net asset position or a net liability position. 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. If the Company's fuel derivative instruments are in a net liability position with the counterparty, cash collateral amounts provided are first netted against noncurrent outstanding derivative amounts associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of current outstanding derivative instruments.

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

Offsetting of derivative assets
 
(in millions)
 
 
 
 
 
(i)
 
(ii)
 
(iii) = (i) + (ii)
 
(i)
 
(ii)
 
(iii) = (i) + (ii)
 
 
 
 
 
March 31, 2019
 
December 31, 2018
 
Description
 
Balance Sheet location
 
Gross amounts of recognized assets
 
Gross amounts offset in the Balance Sheet
 
Net amounts of assets presented in the Balance Sheet
 
Gross amounts of recognized assets
 
Gross amounts offset in the Balance Sheet
 
Net amounts of assets presented in the Balance Sheet
 
Fuel derivative contracts
 
Prepaid expenses and other current assets
 
$
104

 
$
(15
)
 
$
89

 
$
43

 
$

 
$
43

 
Fuel derivative contracts
 
Other assets
 
$
150

 
$

 
$
150

(a)
$
95

 
$

 
$
95

(a)

(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 9.


12

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


Offsetting of derivative liabilities
 
(in millions)
 
 
 
 
 
(i)
 
(ii)
 
(iii) = (i) + (ii)
 
(i)
 
(ii)
 
(iii) = (i) + (ii)
 
 
 
 
 
March 31, 2019
 
December 31, 2018
 
Description
 
Balance Sheet location
 
Gross amounts of recognized liabilities
 
Gross amounts offset in the Balance Sheet
 
Net amounts of liabilities presented in the Balance Sheet
 
Gross amounts of recognized liabilities
 
Gross amounts offset in the Balance Sheet
 
Net amounts of liabilities presented in the Balance Sheet
 
Interest rate derivative contracts
 
Accrued liabilities
 
$
15

 
$

 
$
15

 
$
2

 
$

 
$
2

 
Interest rate derivative contracts
 
Other noncurrent liabilities
 
$
8

 
$

 
$
8

 
$
12

 
$

 
$
12

 


13

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


The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2019 and 2018:
Location and amount of loss recognized in income on cash flow and fair value hedging relationships
 
 
Three months ended March 31, 2019
 
Three months ended March 31, 2018
(in millions)
 
Fuel and oil
 
Interest expense
 
Fuel and oil
 
Interest expense
Total
 
$
11

 
$
8

 
$
4

 
$
10

 
 
 
 
 
 
 
 
 
Loss on cash flow hedging relationships:
 
 
 
 
 
 
 
 
     Commodity contracts:
 
 
 
 
 
 
 
 
          Amount of loss reclassified from AOCI into income
 
11

 

 
4

 

     Interest contracts:
 
 
 
 
 
 
 
 
          Amount of loss reclassified from AOCI into income
 

 
1

 

 
2

 
 
 
 
 
 
 
 
 
Impact of fair value hedging relationships:
 
 
 
 
 
 
 
 
     Interest contracts:
 
 
 
 
 
 
 
 
          Hedged items
 

 
6

 

 
6

          Derivatives designated as hedging instruments
 

 
1

 

 
2



Derivatives designated and qualified in cash flow hedging relationships
 
(Gain) loss recognized in AOCI on derivatives
 
 
Three months ended
 
 
March 31,
 
(in millions)
2019
 
2018
 
Fuel derivative contracts
$
(68
)
*
$
(78
)
*
Interest rate derivatives
12

*
(1
)
*
Total
$
(56
)
 
$
(79
)
 

*Net of tax

Derivatives not designated as hedges
 
Gain
recognized in income on
derivatives
 
 
 
 
 
 
Three months ended
 
Location of gain
 recognized in income
on derivatives
 
March 31,
 
(in millions)
2019
 
2018
 
Interest rate derivatives

 
(1
)
 
Interest expense


The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three months ended March 31, 2019 and 2018 of $28 million and $34 million, respectively. These amounts are recognized through changes in fair value within AOCI for designated hedges, and are ultimately recorded as a component of Fuel and oil in the unaudited Condensed Consolidated Statement of Comprehensive Income during the period the contracts settle.


14

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


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 net unrealized gains from fuel hedges as of March 31, 2019, recorded in AOCI, were approximately $12 million in unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to March 31, 2019.

Interest Rate Swaps
The Company is party to certain interest rate swap agreements that are accounted for as either fair value hedges or cash flow hedges, as defined in the applicable accounting guidance for derivative instruments and hedging. Several of the Company's interest rate swap agreements qualify for the "shortcut" method of accounting for hedges, which dictates that the hedges are assumed to be perfectly effective, and thus there is no ineffectiveness to be recorded in earnings.

During first quarter 2019, the Company entered into 12 separate forward-starting interest rate swap agreements related to a series of 12 aircraft leases with deliveries scheduled between July 2019 and February 2020. These lease contracts expose the Company to interest rate risk as the rental payments are adjusted and become fixed based on the 9-year swap rate at the time of delivery. The primary objective for these interest rate derivatives was to hedge the forecasted monthly rental payments. These swap agreements provide for a single payment at maturity based upon the change in the 9-year swap rate between the execution date and the termination date. These interest rate derivatives qualify for the "critical terms match" method of accounting for cash flow hedges, which dictates that the hedges are assumed to be perfectly effective, and thus there is no ineffectiveness to be recorded in earnings.

For the Company’s interest rate swap agreements that do not qualify for the "shortcut" or "critical terms match" methods of accounting, ineffectiveness is measured at each reporting period. The ineffectiveness associated with all of the Company’s interest rate swap agreements for all periods presented was not material.

Credit Risk and Collateral
Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company at the reporting date. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. At March 31, 2019, 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 credit rating. The Company also had agreements with counterparties in which cash deposits, letters of credit, and/or pledged aircraft are 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.


15

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


The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of March 31, 2019, at which such postings are triggered:

 
Counterparty (CP)
 
 
(in millions)
A
 
B
 
C
 
D