SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



			For the transition period from ________ to ________

SOUTHWEST AIRLINES CO.

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.

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 ~~November 6, 2019:~~ ~~526,276,126~~July 23, 2020: 589,872,108

TABLE OF CONTENTS TO FORM 10-Q

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheet as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019

Condensed Consolidated Statement of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

Condensed Consolidated Statement of Stockholders' Equity as of ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

Condensed Consolidated Statement of Cash Flows for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019

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

SOUTHWEST AIRLINES CO.

FORM 10-Q

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Southwest Airlines Co.

Condensed Consolidated Balance Sheet

(in millions)

(unaudited)


	September 30, 2019			December 31, 2018				June 30, 2020		December 31, 2019
ASSETS							ASSETS
Current assets:							Current assets:
Cash and cash equivalents	$	2,488		$	1,854		Cash and cash equivalents	$	12,351	$	2,548
Short-term investments	1,528			1,835			Short-term investments	2,106		1,524
Accounts and other receivables	867			568			Accounts and other receivables	770		1,086
Inventories of parts and supplies, at cost	528			461			Inventories of parts and supplies, at cost	422		529
Prepaid expenses and other current assets	239			310			Prepaid expenses and other current assets	223		287
Total current assets	5,650			5,028			Total current assets	15,872		5,974

Property and equipment, at cost:							Property and equipment, at cost:
Flight equipment	21,736			21,753			Flight equipment	20,943		21,629
Ground property and equipment	5,446			4,960			Ground property and equipment	5,923		5,672
Deposits on flight equipment purchase contracts	933			775			Deposits on flight equipment purchase contracts	306		248
Assets constructed for others	172			1,768			Assets constructed for others	239		164
	28,287			29,256				27,411		27,713
Less allowance for depreciation and amortization	10,445			9,731			Less allowance for depreciation and amortization	11,164		10,688
	17,842			19,525				16,247		17,025
Goodwill	970			970			Goodwill	970		970
Operating lease right-of-use assets	1,352			—			Operating lease right-of-use assets	1,845		1,349
Other assets	653			720			Other assets	662		577
	$	26,467		$	26,243			$	35,596	$	25,895

LIABILITIES AND STOCKHOLDERS' EQUITY							LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:							Current liabilities:
Accounts payable	$	1,274		$	1,416		Accounts payable	$	970	$	1,574
Accrued liabilities	1,456			1,749			Accrued liabilities	2,372		1,749
Current operating lease liabilities	332			—			Current operating lease liabilities	336		353
Air traffic liability	4,930			4,134			Air traffic liability	4,988		4,457
Current maturities of long-term debt	637			606			Current maturities of long-term debt	695		819
Total current liabilities	8,629			7,905			Total current liabilities	9,361		8,952

Long-term debt less current maturities	2,398			2,771			Long-term debt less current maturities	8,905		1,846
Air traffic liability - noncurrent	1,036			936			Air traffic liability - noncurrent	1,891		1,053
Deferred income taxes	2,643			2,427			Deferred income taxes	2,114		2,364
Construction obligation	172			1,701			Construction obligation	239		164
Noncurrent operating lease liabilities	1,014			—			Noncurrent operating lease liabilities	1,486		978
Other noncurrent liabilities	644			650			Other noncurrent liabilities	722		706
Stockholders' equity:							Stockholders' equity:
Common stock	808			808			Common stock	888		808
Capital in excess of par value	1,554			1,510			Capital in excess of par value	4,159		1,581
Retained earnings	17,525			15,967			Retained earnings	16,842		17,945
Accumulated other comprehensive income (loss)	(63		)	20
Accumulated other comprehensive loss							Accumulated other comprehensive loss	(130)		(61)
Treasury stock, at cost	(9,893		)	(8,452		)	Treasury stock, at cost	(10,881)		(10,441)
Total stockholders' equity	9,931			9,853			Total stockholders' equity	10,878		9,832
	$	26,467		$	26,243			$	35,596	$	25,895

See accompanying notes.

Southwest Airlines Co.

Condensed Consolidated Statement of Comprehensive Income (Loss)

(in millions, except per share amounts)

See accompanying notes.

Southwest Airlines Co.

Condensed Consolidated Statement of Stockholders' Equity

(in millions, except per share amounts)



	Common Stock		Capital in excess of par value		Retained earnings		Accumulated other comprehensive income (loss)		Treasury stock		Total








Balance at December 31, 2019	$	808	$	1,581	$	17,945	$	(61)	$	(10,441)	$	9,832
Repurchase of common stock	—		—		—		—		(451)		(451)
Issuance of common and treasury stock pursuant to Employee stock plans	—		(8)		—		—		6		(2)
Share-based compensation	—		9		—		—		—		9
Cash dividends, $0.180 per share	—		—		(94)		—		—		(94)
Comprehensive loss	—		—		(94)		(125)		—		(219)
Balance at March 31, 2020	$	808	$	1,582	$	17,757	$	(186)	$	(10,886)	$	9,075
Issuance of common stock, net of issuance costs	80		2,144		—		—		—		2,224
Issuance of common and treasury stock pursuant to Employee stock plans	—		8		—		—		5		13
Share-based compensation	—		(2)		—		—		—		(2)

Stock warrants	—		35		—		—		—		35
Equity feature of convertible notes, net of issuance costs	—		392		—		—		—		392
Comprehensive loss	—		—		(915)		56		—		(859)
Balance at June 30, 2020	$	888	$	4,159	$	16,842	$	(130)	$	(10,881)	$	10,878



	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. 2016-12, Leases, codified in Accounting Standards Codification 842	—		—		55		—		—		55
Balance after adjustment for the new accounting standard	$	808	$	1,510	$	16,022	$	20	$	(8,452)	$	9,908
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, $0.160 per share	—		—		(89)		—		—		(89)
Comprehensive income	—		—		387		76		—		463
Balance at March 31, 2019	$	808	$	1,513	$	16,320	$	96	$	(8,946)	$	9,791
Repurchase of common stock	—		—		—		—		(450)		(450)
Issuance of common and treasury stock pursuant to Employee stock plans	—		8		—		—		2		10
Share-based compensation	—		13		—		—		—		13
Cash dividends, $0.180 per share	—		—		(99)		—		—		(99)
Comprehensive income	—		—		741		(66)		—		675
Balance at June 30, 2019	$	808	$	1,534	$	16,962	$	30	$	(9,394)	$	9,940

~~Southwest Airlines Co.~~

~~Condensed Consolidated Statement of Stockholders' Equity~~

~~(in millions, except per share amounts)~~

Common
Stock

Capital in
excess of
par value

Retained
earnings

Accumulated
other
comprehensive
income (loss)

Treasury
stock
Total
Balance at December 31, 2017 (as reported) $ 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 ) —
—
Balance after adjustment for the new accounting standard $ 808
$ 1,451
$ 13,850
$ (6 ) $ (6,462 ) $ 9,641
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
Repurchase of common stock —
—
—
—
(500 ) (500 )
Issuance of common and treasury stock pursuant to Employee stock plans —
8
—
—
1
9
Share-based compensation —
9
—
—
—
9
Cash dividends, $.160 per share —
—
(93 ) —
—
(93 )
Comprehensive income —
—
733
220
—
953
Balance at June 30, 2018 $ 808
$ 1,469
$ 14,878
$ 298
$ (7,456 ) $ 9,997
Repurchase of common stock —
—
—
—
(500 ) (500 )
Issuance of common and treasury stock pursuant to Employee stock plans —
7
—
—
2
9
Share-based compensation —
9
—
—
—
9
Cash dividends, $.160 per share —
—
(91 ) —
—
(91 )
Comprehensive income —
—
615
114
—
729
Balance at September 30, 2018 $ 808
$ 1,485
$ 15,402
$ 412
$ (7,954 ) $ 10,153

See accompanying notes.

Southwest Airlines Co.

Condensed Consolidated Statement of Cash Flows

Three months ended Nine months ended
September 30, September 30,
2019 2018 2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 659
$ 615
$ 1,787
$ 1,811
Adjustments to reconcile net income to cash provided by (used in) operating activities:

Depreciation and amortization 308
301
906
870
Unrealized/realized gains on fuel derivative instruments —
(2 ) —
(13 )
Deferred income taxes 174
104
224
308
Changes in certain assets and liabilities:

Accounts and other receivables (88 ) (13 ) (292 ) (109 )
Other assets 79
(30 ) 195
(243 )
Accounts payable and accrued liabilities 106
161
(240 ) 80
Air traffic liability (17 ) 52
897
1,018
Other liabilities (87 ) —
(210 ) —
Cash collateral received from derivative counterparties —
10
—
150
Other, net (43 ) 73
(104 ) 32
Net cash provided by operating activities 1,091
1,271
3,163
3,904

CASH FLOWS FROM INVESTING ACTIVITIES:

Capital expenditures (375 ) (454 ) (766 ) (1,384 )
Assets constructed for others —
(8 ) —
(49 )
Purchases of short-term investments (529 ) (678 ) (1,329 ) (1,607 )
Proceeds from sales of short-term and other investments 545
531
1,648
1,665
Other, net —
5
—
5
Net cash used in investing activities (359 ) (604 ) (447 ) (1,370 )

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from Employee stock plans 9
9
29
26
Reimbursement for assets constructed for others —
8
—
165
Payments of long-term debt and finance lease obligations (70 ) (98 ) (245 ) (255 )
Payments of cash dividends (96 ) (91 ) (372 ) (332 )
Repayment of construction obligation —
(8 ) —
(22 )
Repurchase of common stock (500 ) (500 ) (1,450 ) (1,500 )
Other, net (33 ) 3
(44 ) (7 )
Net cash used in financing activities (690 ) (677 ) (2,082 ) (1,925 )

NET CHANGE IN CASH AND CASH EQUIVALENTS 42
(10 ) 634
609

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,446
2,114
1,854
1,495

CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,488
$ 2,104
$ 2,488
$ 2,104

CASH PAYMENTS FOR:
Interest, net of amount capitalized $ 11
$ 18
$ 59
$ 70
Income taxes $ 169
$ 38
$ 487
$ 212

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Flight equipment under finance leases $ —
$ 18
$ —
$ 32
Assets constructed for others $ 28
$ 46
$ 73
$ 126
Southwest Airlines Co.

Condensed Consolidated Statement of Cash Flows


CASH PAYMENTS FOR:
Interest, net of amount capitalized	$	40	$	33	$	54	$	48
Income taxes	$	5	$	314	$	10	$	318

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS

Right-of-use assets acquired under operating leases	$	661	$	—	$	686	$	—


Assets constructed for others	$	41	$	24	$	75	$	45

See accompanying notes.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

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 ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. This includes all normal and recurring adjustments and elimination of significant intercompany transactions. Financial results for the Company and airlines in general can be seasonal in nature. In many years, the Company's revenues, as well as its Operating income and Net income, have been better in its second and third fiscal quarters than in its first and fourth fiscal quarters. However, in 2020, as a result of the COVID-19 pandemic, the Company's results were not in line with such historical trends. See Note 2 for further information. Air travel is also significantly impacted by general economic conditions, the amount of disposable income available to consumers, 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 34 for further information on fuel and the Company's hedging program. Operating results for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~,2020, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, ~~2019~~.2020. 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, ~~2018.~~2019.

~~Effective~~Certain prior period amounts have been reclassified to conform to the current presentation. In the Consolidated Statement of Cash Flows for the six months ended June 30, 2020, the Company has reclassified debt issuance costs of $5 million from Other, net, within the financing activities section to Capitalized financing costs.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

2. WORLDWIDE PANDEMIC

As a result of the rapid spread of the novel coronavirus, COVID-19, throughout the world, including into the United States, on March 11, 2020, the World Health Organization classified the virus as a pandemic. The speed with which the effects of the COVID-19 pandemic have changed the U.S. economic landscape, outlook, and in particular the travel industry, has been swift and unexpected. The Company began to see a negative impact on bookings for future travel in late February 2020, which quickly accelerated during the remainder of first quarter and into second quarter, when trip cancellations outpaced new passenger bookings during the majority of March and April 2020. The Company began proactively canceling a significant portion of its scheduled flights in March, and continued making cancellations throughout second quarter, as the Company grounded a significant portion of its fleet and operated a fraction of its previously scheduled capacity. The Company continued to experience significant negative impacts to passenger demand and bookings in second quarter 2020 due to the pandemic.

Based on these events and the uncertainty they created, the Company immediately began to focus on its liquidity, including quickly and substantially enhancing its cash holdings. Since the beginning of 2020, the Company has raised a total of $17.3 billion, net of fees.

On April 20, 2020, the Company entered into definitive documentation with the United States Department of Treasury (the "Treasury") with respect to funding support pursuant to the Payroll Support Program ("Payroll Support") under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). Payroll Support funds must be used to pay employee wages and benefits through at least September 30, 2020. The Company's expected aggregate receipts under the Payroll Support total approximately $3.3 billion. As consideration for the Payroll Support, the Company issued a promissory note (the "Note") in favor of the Treasury and entered into a warrant agreement with the Treasury (the "Warrant Agreement"), pursuant to which the Company agreed to issue warrants (each, a "Warrant") to purchase common stock of the Company to the Treasury. The Note was issued in an initial amount of $459 million, and the Company issued an initial Warrant to purchase up to 1.3 million shares of the Company's common stock. In accordance with the terms of the Note and the Warrant Agreement, upon each subsequent disbursement of Payroll Support to the Company (i) the principal amount of the Note will automatically be increased in an amount equal to 30 percent of any such disbursement and (ii) the Company will issue an additional Warrant to the Treasury in an amount equal to 10 percent of the principal amount of the increase to the Note in connection with such disbursement of Payroll Support, divided by the strike price of $36.47 (which was the closing price of the Company's common stock on April 9, 2020).

Through June 30, 2020, the Company has received three of four expected installments of Payroll Support, representing 90 percent of the expected Payroll Support from the Treasury. These cumulative amounts totaled $2.9 billion, including $1.6 billion received in April and $652 million received in both May and June 2020. As of June 30, 2020, the Company has provided a Note in the aggregate amount of $850 million and issued Warrants valued at a total of $35 million to purchase up to an aggregate of 2.3 million shares of the Company's common stock, subject to adjustment pursuant to the terms of the Warrants. Pursuant to the terms of the Payroll Support Program agreement and the CARES Act, the Payroll Support funds may only be utilized to pay qualifying salaries, wages, and benefits, as defined in the CARES Act. As of June 30, 2020, excluding the $850 million Note and the $1.1 billion in Payroll Support already allocated to reduce eligible costs in second quarter 2020, approximately $957 million in Payroll Support funds remain to be allocated during third quarter 2020 and were within Accrued liabilities in the accompanying unaudited Condensed Consolidated Balance Sheet. Such funds are included as part of Cash and cash equivalents in the accompanying unaudited Condensed Consolidated Balance Sheet as of ~~January 1, 2019,~~June 30, 2020. The Company expects the final 10 percent, or $326 million, of Payroll Support to be received in late July 2020, for which the Company ~~adopted Accounting Standards Update ("ASU") No. 2016-02, Leases, codified~~expects to provide consideration in ~~Accounting Standards Codification ("ASC") 842 (the "New Lease Standard"). All amounts~~the form of an increase of the Note in an amount of $98 million and ~~disclosures set forth~~issue a Warrant to purchase up to 268 thousand shares of the Company's common stock, subject to adjustment pursuant to the terms of the Warrant.

The Note matures in ~~this Form 10-Q~~full on April 19, 2030, and is subject to mandatory prepayment requirements in connection with certain change of control triggering events that may occur prior to its maturity. The Company has an option to prepay the Note at any time without premium or penalty. Amounts outstanding under the Note bear interest at a rate

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

of 1.00 percent before April 20, 2025 and, afterwards, at a rate equal to the Secured Overnight Financing Rate or other benchmark replacement rate consistent with customary market conventions plus a margin of 2.00 percent. The Note contains customary representations and warranties and events of default.

The Warrant Agreement sets out the Company’s obligations to issue Warrants in connection with disbursements of Payroll Support and to file a resale shelf registration statement for the ~~three~~Warrants and ~~nine~~the underlying shares of common stock. The Company has also granted the Treasury certain demand underwritten offering and piggyback registration rights with respect to the Warrants and the underlying common stock. Each Warrant is exercisable at a strike price of $36.47 per share of common stock and will expire on the fifth anniversary of the issue date of such Warrant. The Warrants will be settled through net share settlement or net cash settlement, at the Company’s option. The Warrants include adjustments for below market issuances, payment of dividends, and other customary anti-dilution provisions. The Warrants do not have voting rights.

Although the Company has not yet decided whether it will participate in the separate secured loan program established under the CARES Act, it did sign a non-binding letter of intent, effective in June, with the Treasury with respect to a potential loan with an estimated principal amount of approximately $2.8 billion. This was the next step in the loan application process, and the Company expects to receive further information about the secured loan program in third quarter 2020.

In addition to obtaining financing under the CARES Act as well as accessing the capital markets, the Company believes it has made significant progress on bolstering its liquidity through cost reductions. These efforts include aggressively evaluating all capital spending, discretionary spending, and non-essential costs for near-term cost reductions or deferrals; reducing the Company's published flight schedule; placing a significant number of aircraft in storage; implementing voluntary time-off programs for Employees; suspending all hiring and non-contract salary increases; reducing named executive officer salaries and Board of Director cash retainer fees by 20 percent; and modifying vendor and supplier payment terms. The Company will continue evaluating the need for further flight schedule adjustments. To support physical-distancing, the Company is currently limiting the number of seats sold on each flight to allow for middle seats to remain open for Customers who are not traveling together through at least October 2020, and will evaluate the possibility of extending this policy beyond October.

On June 1, 2020, the Company announced Voluntary Separation Program 2020, a voluntary separation program that allowed eligible Employees the opportunity to voluntarily separate from the Company in exchange for severance, medical/dental coverage for a specified period of time, and travel privileges based on years of service. Virtually all of the Company’s Employees hired before June 1, 2020 were eligible to participate in the Voluntary Separation Program 2020. Employees electing to participate in Voluntary Separation Program 2020 were required to notify the Company of their election no later than July 15, 2020--with the stipulation that all Employees electing to participate had a total of seven days from their date of initial election to rescind their election and remain employed by the Company. Following the deadline to rescind such election, a total of over 4,200 Employees have elected to participate in Voluntary Separation Program 2020, consisting of the following breakdown among workgroups: 390 from Customer Support and Services, 1,060 from Ground Operations and Provisioning, 725 Flight Attendants, 640 Pilots, 185 from Maintenance, 90 from other Contract groups, and 1,145 Managerial and Administrative Employees. Voluntary Separation Program 2020 participants’ last day of work will fall between August 15, 2020 and September 30, 2020, as assigned by the Company based on the operational needs of particular work locations and departments, determined on an individual-by-individual basis.

In conjunction with Voluntary Separation Program 2020, the Company also offered certain contract Employees the option to take voluntary Extended Emergency Time Off ("Extended ETO"), for periods between six and 18 months, with the exception of Pilots, who could elect to take Extended ETO for periods up to five years. Employees taking Extended ETO do not perform any work for the Company, but do get paid a portion of their wages and continue to receive all associated benefits, as well as accrue service credit for all benefits.

The purpose of the Voluntary Separation Program 2020 and Extended ETO is to maintain a suitable sized workforce to operate at reduced capacity relative to the Company's operations prior to the COVID-19 pandemic. In accordance with the accounting guidance in ASC Topic 712 (Compensation — Nonretirement Postemployment Benefits), the

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Company accrued a charge related to the special termination benefits described above associated with Employees who had accepted the Voluntary Separation Program 2020 offer at June 30, 2020 of $307 million during second quarter 2020, all of which will be paid out in subsequent periods to these Employees. Costs incurred for Voluntary Separation Program 2020 and Extended ETO are recorded as a component of Payroll support, voluntary separation, net. The Company will record the additional special termination benefits charge associated with the Employees whose voluntary separation and Extended ETO elections were finalized during July, and were subsequently accepted by the Company, during third quarter 2020, and expects this charge to be material to third quarter results.

In response to flight schedule adjustments due to the effects of the COVID-19 pandemic, a number of aircraft were taken out of the Company’s schedule beginning in late March. As of June 30, 2020, a portion of the Company's fleet had been placed in temporary storage, as well as some in a longer term storage program. Given the current expectation that these aircraft have been grounded temporarily, the Company has continued to record depreciation expense associated with them.

As a result of the events and impacts surrounding the COVID-19 pandemic, including the Company's net loss incurred during the six months ended ~~September~~June 30, ~~2019 reflect~~2020, and the ~~adoption~~significant number of ~~this ASU, while all periods prior to 2019 remain~~aircraft that have been placed in ~~accordance with prior accounting requirements. See Note 2 for further information.~~

storage, the Company considered whether these conditions indicated that it was more likely than not that the Company’s $970 million in Goodwill and its $295 million in indefinite-lived intangible assets were impaired. Upon review, the Company determined that, based on the facts and circumstances in existence as of June 30, 2020, the fair values more likely than not exceeded book values of both its reporting unit and its indefinite-lived intangible assets and therefore, no quantitative test was required.

In addition, the Company has assessed whether any impairment of its amortizable assets existed, and has determined that no charges were deemed necessary under applicable accounting standards as of June 30, 2020.

The Company’s assumptions about future conditions important to its assessment of potential impairment of its amortizable assets, indefinite-lived intangible assets, and goodwill, including the impacts of the COVID-19 pandemic and other ongoing impacts to its business, are subject to uncertainty, and the Company will continue to monitor these conditions in future periods as new information becomes available, and will update its analyses accordingly.

The Company's income tax benefit recorded for the first six months of 2020 was at a rate of 27.0 percent, which is higher than the first six months of 2019 tax rate of 23.4 percent. The higher effective tax rate in 2020 reflects the anticipated benefit of carrying back full year 2020 projected net losses to claim tax refunds against previous cash taxes paid relating to tax years 2015 through 2019, some of which were at higher rates than the current year.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

3. NEW ACCOUNTING PRONOUNCEMENTS

On ~~August 29, 2018,~~December 18, 2019, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This new standard eliminates certain exceptions in Accounting Standards Codification ("ASC") 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted in any interim period within that year. The Company elected to early adopt this standard as of January 1, 2020. The most significant impact to the Company is the removal of a limit on the tax benefit recognized on pre-tax losses in interim periods. However, the early adoption as of January 1, 2020, did not have an impact on the Company's financial statements or disclosures for the first six months of 2020.

On August 29, 2018, 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, and ~~for interim periods within those fiscal years. Early adoption is permitted, including during an interim period. Entities have~~ the ~~option to apply this~~ standard was adopted and applied prospectively ~~to all implementation costs incurred after~~by the ~~date~~Company as of ~~adoption or retrospectively. The Company is evaluating this new standard,~~January 1, 2020, but ~~does~~it did not ~~expect it to~~ have a significant impact on ~~its~~the Company's financial ~~statement presentation or results.~~statements and disclosures.

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 fiscal 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~~adopted the standard as of January 1, 2020, but it did not have a significant impact on the Company's financial statements or disclosures. See Note 9 for further information on the Company's fair value measurements.

On January 26, 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The new standard eliminates Step 2 from the goodwill impairment test. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and the standard was adopted and applied prospectively by the Company as of January 1, 2020, but it did not have a significant impact on the Company's financial statements and disclosures.

On June 16, 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. The new standard requires the use of an “expected loss” model on certain types of financial instruments. The standard also amends the impairment model for available-for-sale debt securities and requires estimated credit losses to be recorded as allowances instead of reductions to amortized cost of the securities. This standard is effective for public business entities in fiscal years beginning after December 15, 2019, and the standard was adopted and applied prospectively by the Company as of January 1, 2020, but it did not have a significant impact on the Company's financial statements and disclosures.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

~~but does not expect it to have a significant impact on its financial statement disclosures. See Note 8 for further information 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.

~~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 )

3.4. FINANCIAL DERIVATIVE INSTRUMENTS

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.

~~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.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~,2020, the Company had fuel derivative instruments in place for up to 6695 percent ~~and 76~~and 79 percent, respectively, of its fuel consumption. As of ~~September~~June 30, ~~2019,~~2020, the Company also had fuel derivative instruments in place to provide coverage at varying price ~~levels, but up to a maximum of approximately 65 percent of its remaining 2019 estimated fuel consumption, depending on where market prices settle.~~levels. The following table provides information about the Company’s volume of fuel hedging on an economic basis:

Maximum fuel hedged as of
September 30, 2019 Derivative underlying commodity type as of
Period (by year) (gallons in millions) (a) September 30, 2019
Remainder of 2019 344
WTI crude oil and Brent crude oil
2020 1,301
WTI crude oil, Brent crude oil, and Heating oil
2021 1,169
WTI crude oil and Brent crude oil
2022 552
WTI crude oil and Brent crude oil

Maximum fuel hedged as of

June 30, 2020

Derivative underlying commodity type as of

Period (by year)

(gallons in millions) (a)

June 30, 2020

Remainder of 2020

460

WTI crude oil, Brent crude oil, and Heating oil

2021

1,283

WTI crude oil and Brent crude oil

2022

1,056

WTI crude oil and Brent crude oil

Beyond 2022

529

WTI crude oil and Brent crude oil

(a) Due to the types of derivatives utilized by the Company and different price levels of those contracts, these volumes represent the maximum economic hedge in ~~place.~~place and may vary significantly as market prices and the Company's flight schedule fluctuates.

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 4.5.

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 (Loss) in the period of the change; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense. Factors that have and may continue to lead to the loss of hedge accounting include: significant fluctuation in energy prices, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging. Increased volatility in these commodity markets for an extended period of time, especially if such volatility were to worsen, could cause the Company to lose hedge accounting altogether for the commodities used in its fuel hedging program, which would create further volatility in the Company’s GAAP financial results. However, even though derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes derivative instruments continue to afford the Company the opportunity to stabilize jet fuel costs. When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent

~~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~~will be required to be immediately reclassified into earnings. During first and second quarter 2020, as a result of the drastic drop in demand for air travel, the Company's forecast for 2020 fuel purchases and consumption was significantly reduced, causing the Company to be in an estimated "over–hedged" position for second, third, and fourth quarter 2020. Therefore, the Company de–designated a portion of its fuel hedges related to second, third, and fourth quarter 2020 and has reclassified approximately $14 million and $16 million in losses from AOCI into Other (gains) losses, net, during the three and six months ended June 30, 2020, respectively. The Company did not have any such situations occur during ~~2018, or during the nine months ended September 30,~~ 2019.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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:

(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:

(a) At ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, these amounts include the cumulative amount of fair value hedging adjustments remaining for which hedge accounting has been discontinued, of ~~$19~~$18 million and ~~$20~~$19 million, respectively.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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

Balance Sheet September 30, December 31,
(in millions) location 2019 2018
Due to third parties for fuel contracts Accounts payable $ 1
$ —
Receivable from third parties for fuel contracts Accounts and other receivables —
2


	Balance Sheet	June 30,		December 31,
(in millions)	location	2020		2019
Cash collateral deposits held from counterparties for fuel contracts - current	Offset against Prepaid expenses and other current assets	$	1	$	10
Cash collateral deposits held from counterparties for fuel contracts - noncurrent	Offset against Other assets	31		15

All of the Company's fuel derivative instruments and interest rate swaps are subject to agreements that follow the netting guidance in the applicable accounting standards for derivatives and hedging. The types of derivative instruments the Company has determined are subject to netting requirements in the accompanying unaudited Condensed Consolidated Balance Sheet are those in which the Company pays or receives cash for transactions with the same counterparty and in the same currency via one net payment or receipt. For cash collateral held by the Company or provided to counterparties, the Company nets such amounts against the fair value of the Company's derivative portfolio by each counterparty. The Company has elected to utilize netting for both its fuel derivative instruments and interest rate swap agreements and also classifies such amounts as either current or noncurrent, based on the net fair value position with each of the Company's counterparties in the unaudited Condensed Consolidated Balance Sheet. If its fuel derivative instruments are in a net asset position with a counterparty, cash collateral amounts held are first netted against current outstanding derivative asset amounts associated with that counterparty until that balance is zero, and then any remainder is applied against the fair value of noncurrent outstanding derivative instruments. As of ~~September~~June 30, ~~2019, 0 cash collateral deposits were provided by or held by the Company from counterparties based on its outstanding fuel derivative portfolio, and~~2020, 0 cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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

Offsetting of derivative assets
(in millions)
(i) (ii) (iii) = (i) + (ii) (i) (ii) (iii) = (i) + (ii)
September 30, 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 $ 35
$ —
$ 35
$ 43
$ —
$ 43

Fuel derivative contracts Other assets $ 79
$ —
$ 79
(a) $ 95
$ —
$ 95
(a)
Interest rate derivative contracts Other assets $ 1
$ —
$ 1
(a) $ —
$ —
$ —
(a)


Offsetting of derivative assets
(in millions)
		(i)		(ii)		(iii) = (i) + (ii)			(i)		(ii)		(iii) = (i) + (ii)
		June 30, 2020											December 31, 2019
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	$	8	$	(1)	$	7		$	48	$	(10)	$	38
Fuel derivative contracts	Other assets	$	99	$	(31)	$	68	(a)	$	62	$	(15)	$	47	(a)


Interest rate derivative contracts	Prepaid expenses and other current assets	$	2	$	—	$	2		$	—	$	—	$	—
Interest rate derivative contracts	Other assets	$	—	$	—	$	—	(a)	$	2	$	—	$	2	(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 9.10.

Offsetting of derivative liabilities
(in millions)
(i) (ii) (iii) = (i) + (ii) (i) (ii) (iii) = (i) + (ii)
September 30, 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 $ 20
$ —
$ 20
$ 2
$ —
$ 2

Interest rate derivative contracts Other noncurrent liabilities $ 4
$ —
$ 4
$ 12
$ —
$ 12


Offsetting of derivative liabilities
(in millions)
		(i)		(ii)		(iii) = (i) + (ii)			(i)		(ii)		(iii) = (i) + (ii)
		June 30, 2020											December 31, 2019
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
Fuel derivative contracts	Prepaid expenses and other current assets	$	1	$	(1)	$	—		$	10	$	(10)	$	—
Fuel derivative contracts	Other assets	$	31	$	(31)	$	—	(a)	$	15	$	(15)	$	—	(a)




Interest rate derivative contracts	Accrued liabilities	$	60	$	—	$	60	(a)	$	5	$	—	$	5	(a)
Interest rate derivative contracts	Other noncurrent liabilities	$	14	$	—	$	14		$	1	$	—	$	1

(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 10.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The following tables present the impact of derivative instruments and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and 2019:

Location and amount recognized in income on cash flow and fair value hedging relationships
Nine months ended September 30, 2019 Nine months ended September 30, 2018
(in millions) Fuel and oil Interest expense Fuel and oil Interest expense
Total $ 28
$ 21
$ (32 ) $ 26

(Gain) loss on cash flow hedging relationships:
     Commodity contracts:
          Amount of (gain) loss reclassified from AOCI into income 28
—
(32 ) —
     Interest contracts:
          Amount of loss reclassified from AOCI into income —
3
—
4

Impact of fair value hedging relationships:
     Interest contracts:
          Hedged items —
17
—
�� 17
          Derivatives designated as hedging instruments —
1
—
5

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
	June 30,
(in millions)	2020		2019
Fuel derivative contracts	$	(9)	$	54
Interest rate derivatives	—		16
Total	$	(9)	$	70


Derivatives designated and qualified in cash flow hedging relationships
	(Gain) loss recognized in AOCI on derivatives, net of tax
	Six months ended
	June 30,
(in millions)	2020		2019
Fuel derivative contracts	$	75	$	(12)
Interest rate derivatives	32		27
Total	$	107	$	15

Derivatives designated and qualified in cash flow hedging relationships
(Gain) loss recognized in AOCI on derivatives, net of tax
Three months ended
September 30,
(in millions) 2019 2018
Fuel derivative contracts $ 95
$ (122 )
Interest rate derivatives 17
—
Total $ 112
$ (122 )

in income on derivatives

recognized in income

Interest rate derivatives

The Company also recorded expense associated with premiums paid for fuel derivative contracts that settled/expired during the three and six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018 of $20 million and $34 million, respectively, and the nine months ended September 30, 2019 and 2018 of~~ ~~$75 million~~ ~~and $101 million, respectively. These amounts~~2019. Fuel derivatives that qualify for hedge accounting are ~~recognized through changes in fair value within AOCI for designated hedges, and are ultimately~~ recorded ~~as a component of~~to Fuel and oil inexpense. Fuel derivatives that do not qualify for hedge accounting are recorded to Other (gains) and losses, net. The following tables present the impact of premiums paid for fuel derivative contracts and their location within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) during the period the ~~contracts settle.~~contract settles:

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 losses from fuel hedges as of ~~September~~June 30, ~~2019~~,2020, recorded in AOCI, were approximately ~~$43~~$63 million in unrealized losses,, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to ~~September~~June 30, ~~2019~~.2020.

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 Boeing 737 MAX 8 aircraft leases with deliveries originally 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, which qualified as cash flow hedges, 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. All 12 swap agreements were terminated during third quarter 2019, resulting in $32 million being "frozen" in AOCI. As a result of the extenuating circumstances involving the MAX aircraft, which are outside the control of the Company, these amounts will be recognized in earnings when the original forecasted transaction occurs, which remains probable.

During third quarter 2019, the Company entered into 12 separate forward-starting interest rate swap agreements, with similar terms as the third quarter 2019 terminated swaps, except for the range of 737 MAX 8 deliveries scheduled were between June 2020 and September 2020. As of June 30, 2020, all 12 of the aircraft leases are no longer probable to be received within the scheduled delivery range. Therefore, the 12 associated swap agreements were de-designated and $14 million and $31 million were "frozen" in AOCI for the three and six months ended June 30, 2020, respectively. These amounts will be recognized in earnings when the original forecasted transaction occurs, which continues to be probable. The mark-to-market changes for these swap agreements are now being recorded in earnings, resulting in a $5 million and $29 million unrealized loss to Other (gains) and losses, net, in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and six months ended June 30, 2020, respectively. In addition, 6 of the 12 swap agreements were terminated on June 30, 2020, resulting in

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

$31 million owed to the counterparty, which was recorded as an Accrued liability within the unaudited Condensed Consolidated Balance Sheet as of June 30, 2020.

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

Credit Risk and Collateral

Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company at the reporting date. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. At ~~September~~June 30, ~~2019,~~2020, 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 and 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.

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 ~~September~~June 30, ~~2019,~~2020, at which such postings are triggered:

(125) to (150) or >(550)(d)

If credit rating is investment

grade, fair value of fuel

derivative level at which:

(125) to (150) or >(550)(e)

Aircraft or cash can be pledged to

If credit rating is non-investment

grade, fair value of fuel derivative level at which:

(0) to (150) or >(550)

Aircraft or cash can be pledged to

(a) Individual counterparties with fair value of fuel derivatives < $7$8 million.

(b) The Company has the option of providing cash or letters of credit ~~in addition to aircraft collateral if the appraised value of the aircraft does not meet the collateral requirements.~~

~~(c) The Company has the option of providing cash, letters of credit, or pledging aircraft~~ as collateral.

~~(d)~~(c) The Company has the option to substitute letters of credit for 100 percent of cash collateral requirement.

~~(e)~~(d) Thresholds may vary based on changes in credit ratings within investment grade.

~~(f)~~(e) The Company has the option of providing cash ~~or pledging aircraft~~ as collateral.

~~(g)~~(f) Cash collateral is provided at 100 percent of fair value of fuel derivative contracts.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

4.5. COMPREHENSIVE INCOME

Comprehensive income (loss) includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting, unrealized gains and losses on certain investments, and actuarial gains/losses arising from the Company’s postretirement benefit obligation. The differences between Net income (loss) and Comprehensive income (loss) for the three and ~~nine~~six months ended ~~September~~June 30,~~2019~~ 2020 and ~~2018~~2019 were as follows:


	Three months ended June 30,
(in millions)	2020		2019
NET INCOME (LOSS)	$	(915)	$	741
Unrealized gain (loss) on fuel derivative instruments, net of deferred taxes of $9 and ($17)	30		(56)
Unrealized gain (loss) on interest rate derivative instruments, net of deferred taxes of $- and ($4)	1		(15)
Other, net of deferred taxes of $8 and $1	25		5
Total other comprehensive income (loss)	$	56	$	(66)
COMPREHENSIVE INCOME (LOSS)	$	(859)	$	675

Three months ended September 30,
(in millions) 2019 2018
NET INCOME $ 659
$ 615
Unrealized gain (loss) on fuel derivative instruments, net of
deferred taxes of ($24) and $32
(80 ) 107
Unrealized gain (loss) on interest rate derivative instruments, net of
deferred taxes of ($5) and $-
(15 ) 1
Other, net of deferred taxes of $- and $1 2
6
Total other comprehensive income (loss) $ (93 ) $ 114
COMPREHENSIVE INCOME $ 566
$ 729

A rollforward of the amounts included in AOCI is shown below for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020:


(in millions)	Fuel derivatives		Interest rate derivatives		Defined benefit plan items		Other		Deferred tax		Accumulated other comprehensive income (loss)




Balance at December 31, 2019	$	(125)	$	(33)	$	20	$	59	$	18	$	(61)


Changes in fair value	(97)		(42)		—		(4)		33		(110)
Reclassification to earnings	52		1		—		—		(12)		41
Balance at June 30, 2020	$	(170)	$	(74)	$	20	$	55	$	39	$	(130)

(in millions) Fuel derivatives Interest rate derivatives Defined benefit plan items Other Deferred tax
Accumulated other
comprehensive income (loss)
Balance at June 30, 2019 $ (31 ) $ (33 ) $ 58
$ 45
$ (9 ) $ 30
Changes in fair value (123 ) (22 ) —
2
33
(110 )
Reclassification to earnings 19
2
—
—
(4 ) 17
Balance at September 30, 2019 $ (135 ) $ (53 ) $ 58
$ 47
$ 20
$ (63 )

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

(in millions) Fuel derivatives Interest rate derivatives Defined benefit plan items Other Deferred tax
Accumulated other
comprehensive income (loss)
Balance at December 31, 2018 $ (56 ) $ —
$ 58
$ 25
$ (7 ) $ 20
Changes in fair value (107 ) (56 ) —
22
33
(108 )
Reclassification to earnings 28
3
—
—
(6 ) 25
Balance at September 30, 2019 $ (135 ) $ (53 ) $ 58
$ 47
$ 20
$ (63 )

The following tables illustrate the significant amounts reclassified out of each component of AOCI for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~:2020:


Three months ended June 30, 2020

(in millions)	Amounts reclassified from AOCI		Affected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)
AOCI components
Unrealized loss on fuel derivative instruments	$	14	Fuel and oil expense
	14		Other (gains) losses, net
	7		Less: Tax expense
	$	21	Net of tax
Unrealized loss on interest rate derivative instruments	$	1	Interest expense
	—		Less: Tax expense
	$	1	Net of tax

Total reclassifications for the period	$	22	Net of tax

Three months ended September 30, 2019
(in millions) Amounts reclassified from AOCI
Affected line item in the unaudited Condensed Consolidated Statement of
Comprehensive Income
AOCI components
Unrealized loss on fuel derivative instruments $ 19
Fuel and oil expense
4
Less: Tax expense
$ 15
Net of tax
Unrealized loss on interest rate derivative instruments $ 2
Interest expense
—
Less: Tax expense
$ 2
Net of tax

Total reclassifications for the period $ 17
Net of tax

Nine months ended September 30, 2019
(in millions) Amounts reclassified from AOCI
Affected line item in the unaudited Condensed Consolidated Statement of
Comprehensive Income
AOCI components
Unrealized loss on fuel derivative instruments $ 28
Fuel and oil expense
6
Less: Tax Expense
$ 22
Net of tax
Unrealized loss on interest rate derivative instruments $ 3
Interest expense
—
Less: Tax Expense
$ 3
Net of tax

Total reclassifications for the period $ 25
Net of tax


Six months ended June 30, 2020

(in millions)	Amounts reclassified from AOCI		Affected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)
AOCI components
Unrealized loss on fuel derivative instruments	$	36	Fuel and oil expense
	16		Other (gains) losses, net
	12		Less: Tax Expense
	$	40	Net of tax
Unrealized loss on interest rate derivative instruments	$	1	Interest expense
	—		Less: Tax Expense
	$	1	Net of tax

Total reclassifications for the period	$	41	Net of tax

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

5.6. REVENUE

Passenger Revenues

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

Revenue is categorized by revenue source as the Company believes it best depicts the nature, amount, timing, and uncertainty of revenue and cash flow. The following table provides the components of Passenger revenue recognized for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~2019:

Three months ended September 30, Nine months ended September 30,
(in millions) 2019 2018 2019 2018
Passenger non-loyalty $ 4,400
$ 4,417
$ 13,126
$ 12,969
Passenger loyalty - air transportation 657
623
1,814
1,702
Passenger ancillary sold separately 173
154
522
466
Total passenger revenues $ 5,230
$ 5,194
$ 15,462
$ 15,137


	Three months ended June 30,						Six months ended June 30,
(in millions)	2020		2019		2020		2019
Passenger non-loyalty	$	562	$	4,683	$	3,783	$	8,726
Passenger loyalty - air transportation	81		622		542		1,158
Passenger ancillary sold separately	61		182		224		347
Total passenger revenues	$	704	$	5,487	$	4,549	$	10,231

As of ~~September~~June 30, ~~2019,~~2020, and December 31, ~~2018,~~2019, the components of Air traffic liability and Air traffic liability - noncurrent, including contract liabilities based on tickets sold, unused funds available to the Customer, and loyalty points available for redemption, net of expected spoilage, within the unaudited Condensed Consolidated Balance Sheet were as follows:

Balance as of
(in millions) September 30, 2019 December 31, 2018
Air traffic liability - passenger travel and ancillary passenger services $ 2,627
$ 2,059
Air traffic liability - loyalty program 3,339
3,011
Total Air traffic liability $ 5,966
$ 5,070


	Balance as of
(in millions)	June 30, 2020		December 31, 2019
Air traffic liability - passenger travel and ancillary passenger services	$	3,023	$	2,125
Air traffic liability - loyalty program	3,856		3,385
Total Air traffic liability	$	6,879	$	5,510

Rollforwards of the Company's Air traffic liability - loyalty program for the three and six months ended June 30, 2020 and 2019 were as follows (in millions):


	Three months ended June 30,						Six months ended June 30,
	2020		2019		2020		2019
Air traffic liability - loyalty program - beginning balance	$	3,561	$	3,171	$	3,385	$	3,011
Amounts deferred associated with points awarded	385		757		1,041		1,468
Revenue recognized from points redeemed - Passenger	(81)		(622)		(542)		(1,158)
Revenue recognized from points redeemed - Other	(9)		(17)		(28)		(32)
Air traffic liability - loyalty program - ending balance	$	3,856	$	3,289	$	3,856	$	3,289

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The balance in Air traffic liability – passenger travel and ancillary passenger services also includes unused funds that are available for use by Customers and are not currently associated with a ticket, but represent funds effectively refunded and made available for use to purchase a ticket for a flight that occurs prior to their expiration. These funds are typically created as a result of a prior ticket cancellation or exchange. These performance obligations are expected to have a duration of twelve months or less; therefore, the Company has elected to not disclose the amount of the remaining transaction price and its expected timing of recognition for passenger tickets. Recognition of revenue associated with the Company’s loyalty liability can be difficult to predict, as the number of award seats available to members is not currently restricted and they could choose to redeem their points at any time that a seat is available. The performance obligations classified as a current liability related to the Company’s loyalty program were estimated based on expected redemptions utilizing historical redemption patterns, and forecasted flight availability, fares, and coefficients. The entire balance classified as Air traffic liability – noncurrent relates to loyalty points that were estimated to be redeemed in periods beyond 12 months following the representative balance sheet date. Based on historical trends, the Company expects the majority of loyalty points to be redeemed within two years. Rollforwards of the Company's Air traffic liability - loyalty program for the ~~three and nine months ended September 30, 2019 and 2018 were as follows (in millions):~~

Three months ended September 30, Nine months ended September 30,
2019 2018 2019 2018
Air traffic liability - loyalty program - beginning balance $ 3,289
$ 2,919
$ 3,011
$ 2,667
   Amounts deferred associated with points awarded 727
669
2,195
2,027
   Revenue recognized from points redeemed - Passenger (657 ) (623 ) (1,814 ) (1,702 )
   Revenue recognized from points redeemed - Other (20 ) (17 ) (53 ) (44 )
Air traffic liability - loyalty program - ending balance $ 3,339
$ 2,948
$ 3,339
$ 2,948

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 ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 were as follows (in millions):

Air traffic liability
Balance at December 31, 2018 $ 5,070
   Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty) 16,410
   Revenue from amounts included in contract liability opening balances (3,160 )
   Revenue from current period sales (12,354 )
Balance at September 30, 2019 $ 5,966


	Air traffic liability

Balance at December 31, 2019	$	5,510
Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)	5,946
Revenue from amounts included in contract liability opening balances	(1,936)
Revenue from current period sales	(2,641)
Balance at June 30, 2020	$	6,879

Air traffic liability
Balance at December 31, 2017 $ 4,565
   Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty) 16,200
   Revenue from amounts included in contract liability opening balances (3,098 )
   Revenue from current period sales (12,084 )
Balance at September 30, 2018 $ 5,583


	Air traffic liability

Balance at December 31, 2018	$	5,070
Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)	11,178
Revenue from amounts included in contract liability opening balances	(2,855)
Revenue from current period sales	(7,409)
Balance at June 30, 2019	$	5,984

During the first and second quarters 2020, the Company experienced a significantly higher number of Customer-driven flight cancellations as a result of the COVID-19 pandemic. See Note 2 for further information. As a result, the amount of Customer travel funds held by the Company, net of spoilage, that can be redeemed for future travel as of June 30, 2020, far exceeds previous periods and represents approximately 28 percent of the total Air traffic liability balance at June 30, 2020, as compared to approximately 1 percent of the total Air traffic liability balance at December 31, 2019. In order to provide additional flexibility to Customers who hold these funds, the Company has significantly relaxed its previous policies with regards to the time period within which these funds can be redeemed, which is typically twelve months from the original date of purchase. For all Customer travel funds created or expired between March 1 and September 7, 2020 associated with flight cancellations, the Company has extended the expiration date to September 7, 2022. Despite the possibility that some of these travel funds may be redeemed beyond the following twelve-month period, the Company has continued to classify them as "current" in the accompanying unaudited Condensed Consolidated Balance Sheet as they remain a demand liability and the Company does not have sufficient data to enable it to accurately estimate the portion that will not be redeemed for travel in the subsequent twelve months.

Spoilage estimates are based on the Company's Customers' historical travel behavior as well as assumptions about the Customers' future travel behavior. Assumptions used to generate spoilage estimates can be impacted by several factors including, but not limited to: fare increases, fare sales, changes to the Company's ticketing policies, changes to the Company’s refund, exchange, and unused funds policies, seat availability, and economic factors. Given the unprecedented amount of first half 2020 Customer flight cancellations and the amount of travel funds provided, the Company expects additional variability in the amount of spoilage revenue recorded in future periods, as the estimates of the portion of sold tickets that will expire unused may differ from historical experience.

The Company has a co-branded credit card agreement ~~(“Agreement”~~(the “Agreement”) with Chase Bank USA, N.A. (“Chase”), through which the Company sells loyalty points and certain marketing components, which consist of the use of Southwest Airlines’ brand and access to Rapid Rewards Member lists, licensing and advertising elements, and the use of the Company’s resource team. In 2018, Chase and Southwest executed a multi-year extension of the Agreement, extending the decades-long relationship between the parties. 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, the Agreement with Chase, within Other operating revenues. For the three months ended June 30, 2020 and 2019, the Company recognized $256 million and $336 million, respectively. For the six months ended June 30, 2020 and 2019, the Company recognized $577 million and $655 million, respectively.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Agreement with Chase, within Other operating revenues. For the three months ended September 30, 2019 and 2018, the Company recognized $329 million and $290 million, respectively. For the nine months ended September 30, 2019 and 2018, the Company recognized $984 million and $856 million, respectively.

6.7. NET INCOME (LOSS) PER SHARE

The following table sets forth the computation of basic and diluted net income (loss) per share (in millions, except per share amounts):. Antidilutive common stock equivalents, excluded from the diluted net income (loss) per share calculation, consisting primarily of restricted stock units and stock warrants, are not material. See Note 8 for further information.


	Three months ended June 30,						Six months ended June 30,
	2020		2019		2020		2019
NUMERATOR:
Net income (loss)	$	(915)	$	741	$	(1,009)	$	1,128

DENOMINATOR:
Weighted-average shares outstanding, basic and diluted	563		542		539		547



NET INCOME (LOSS) PER SHARE:
Basic and Diluted	$	(1.63)	$	1.37	$	(1.87)	$	2.06

Three months ended September 30, Nine months ended September 30,
2019 2018 2019 2018
NUMERATOR:
Net income $ 659
$ 615
$ 1,787
$ 1,811

DENOMINATOR:

Weighted-average shares outstanding, basic 533
569
542
578
Dilutive effect of restricted stock units 1
—
1
1
Adjusted weighted-average shares outstanding, diluted 534
569
543
579

NET INCOME PER SHARE:

Basic $ 1.24
$ 1.08
$ 3.30
$ 3.13
Diluted $ 1.23
$ 1.08
$ 3.29
$ 3.13

8. FINANCING ACTIVITIES

~~7. LEASES~~

Debt

During February 2020, the Company issued $500 million senior unsecured notes due 2030. The notes bear interest at 2.625 percent. Interest is payable semi-annually in arrears on February 10 and August 10, beginning in 2020.

On March 12, 2020, the Company entered into a new $1.0 billion 364-day term loan credit facility agreement (the “364-Day Credit Agreement”) with a syndicate of lenders identified in the 364-Day Credit Agreement. The 364-Day Credit Agreement was drawn in full on the closing date. On March 30, 2020, the Company amended and restated the 364-Day Credit Agreement (the “Amended and Restated 364-Day Credit Agreement”) with a syndicate of lenders identified in the Amended and Restated 364-Day Credit Agreement to add additional term loan commitments of approximately $2.3 billion, add an uncommitted accordion increase provision to permit additional term loans in an aggregate amount not to exceed approximately $417 million, amend the pricing, amend certain covenants, add certain covenants, and provide for the grant of a security interest in certain aircraft and related assets. The Company ~~enters into leases for aircraft, property,~~drew approximately $2.3 billion under the Amended and ~~other types of equipment in the normal course of business. The accounting for these leases follows the requirements of the New Lease Standard, which~~Restated 364-Day Credit Agreement on April 1, 2020. On April 24, 2020, the Company ~~adopted~~drew an additional $350 million under the $417 million accordion feature. The Amended and Restated 364-Day Credit Agreement was originally set to mature in full on March 29, 2021. The outstanding Amended and Restated 364-Day Credit Agreement balance was repaid in full in second quarter 2020, and the agreement has been terminated.

Concurrently with entering into the Amended and Restated 364-Day Credit Agreement on March 30, 2020, the Company also amended its existing $1.0 billion revolving credit facility expiring in August 2022 (the “Amended and Restated Revolving Credit Agreement”) to (i) amend the pricing and fees, (ii) amend certain covenants and provisions, (iii) add certain covenants, and (iv) provide for the grant of a security interest in certain aircraft and related assets. In second quarter 2020, the Company repaid in full the $1.0 billion drawn on the Amended and Restated Revolving Credit Agreement and, as of ~~January 1, 2019. See Note 2. For leases with terms greater than 12 months, an asset~~June 30, 2020, there were 0 amounts outstanding under the Amended and ~~lease liability are initially recorded~~Restated Revolving Credit Agreement.

Generally, amounts outstanding under the Amended and Restated Revolving Credit Agreement bear interest at an amount equal to the present value of the unpaid lease payments. The Company's lease term includes any option to extend the lease when it is reasonably certain that it will exercise that option. The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments, since the Company does not know the actual implicit rates in its leases. The Company gives consideration to its recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rate. The Company does not separate lease and nonlease components within any of its agreements.

~~As of September 30, 2019, the Company held aircraft leases with remaining terms ranging from one month to 12 years. The aircraft leases generally can be renewed for one to five years at~~interest rates based on ~~fair market value at~~either the end of the lease term. Residual value guarantees included in the Company's lease agreements are not material. On July 9, 2012, the Company signed an agreement with Delta Air Lines, Inc. and Boeing Capital Corp. to lease or sublease 88 AirTran Airways, Inc. Boeing 717-200 aircraft ("B717s") to Delta at agreed-upon lease rates. Excluding aircraft for which the leases had expired as of September 30, 2019, the following remained: 68 on operating leases, 10 owned, and 2 on finance leases. The sublease terms for the 68 B717s on operating lease and the 2 B717s on finance lease coincide with the Company's remaining lease terms for these aircraft from the original lessor, which have remaining lease terms ranging from approximately one month to five years. The Company's future sublease income associated with the 68 B717s on operating lease as of September 30, 2019 was as follows: $23 million remaining in 2019, $78 million in 2020, $41 million in 2021, $17 million in 2022, $7 million in 2023, and $1 million in 2024. The leasing of the 10 B717s that are ownedLIBOR rate (selected by the Company ~~is subject to certain conditions, and~~for designated interest periods) or the ~~remaining lease terms are up to four years, after which Delta will have~~“alternate base rate” (being the ~~option to purchase~~highest of (1) the ~~aircraft at the then-prevailing fair market value. The 10 owned B717s are accounted for as sales type leases, the 2 B717s classified by the Company as finance leases are accounted~~Wall Street Journal prime rate, (2) one-month adjusted LIBOR

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

~~for as direct financing leases,~~(one-month LIBOR plus a statutory reserve rate) plus 1%, and (3) the New York Fed Bank Rate, plus 0.5%). The underlying LIBOR rate is subject to a floor of 1% per annum and the ~~remaining 68 subleases are accounted for as operating leases. There are 0 contingent payments~~“alternate base rate” is subject to a floor of 1% per annum.

The Amended and ~~0 significant residual~~Restated Revolving Credit Agreement contains customary representations and warranties, covenants, and events of default. The Amended and Restated Revolving Credit Agreement is secured by a pool of aircraft and related assets, each with a minimum appraised value ~~conditions associated with~~ratio requirement. Under the ~~transaction.~~

~~At each airport where~~Amended and Restated Revolving Credit Agreement, the Company ~~conducts flight operations,~~is required to maintain, at all times after March 31, 2021, a specified ratio of (x) adjusted net income (before interest, taxes, depreciation, amortization, and aircraft rental expense) less cash dividends to (y) interest and aircraft rental expense; and to maintain a minimum level of liquidity of $2.5 billion (defined as the aggregate amount available to be borrowed under the Amended and Restated Revolving Credit Agreement plus the aggregate amount of unrestricted cash and cash equivalents of the Company). The Amended and Restated Revolving Credit Agreement is a series of short-term borrowings; at the end of each borrowing the Company must elect to roll the facility over into the next borrowing or pay down the facility. The Amended and Restated Revolving Credit Agreement also has ~~lease agreements, generally with a governmental unit or authority, for~~an accordion feature that would allow the ~~use~~Company, subject to, among other things, the procurement of airport terminals, airfields, office space, cargo warehouses, and/or maintenance facilities. These leases are classified as operating lease agreements and have lease terms remaining ranging from one monthincremental commitments, to ~~27 years. The majority~~increase the size of the ~~airport terminal leases contain certain provisions for periodic adjustments~~facility to ~~rates that depend upon airport operating costs or use~~$1.5 billion.

On May 1, 2020, the Company completed the public offering of $2.3 billion aggregate principal amount of 1.250% Convertible Senior Notes due 2025 (the “Convertible Notes”), which included the full exercise of the ~~facilities,~~underwriters' option to buy an additional $300 million aggregate principal amount of Convertible Notes. The Convertible Notes bear interest at the rate of 1.250% per year and ~~are reset~~will mature on May 1, 2025. Interest on the notes is payable semi-annually in arrears on May 1 and November 1 of each year, beginning on November 1, 2020. The Company expects to use the net proceeds received for general corporate purposes.

Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2025, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price of the common stock for at least ~~annually. Due~~20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after February 1, 2025, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances.

Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of common stock, at the Company’s election. The Company intends, however, to settle conversions by paying cash up to the ~~nature~~principal amount, with any excess conversion value settled in shares of common stock. The initial conversion rate is 25.9909 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $38.48 per share of common stock). The conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and ~~variability~~unpaid interest. In addition, in the event of certain corporate events that occur prior to the maturity date, the Company will increase the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event in certain circumstances. In the event of a “Fundamental Change,” as defined, the holders may require the Company to purchase for cash all or a portion of their notes at a purchase price equal to 100% of the ~~rates,~~principal amount of the ~~majority of these leases are not recorded on the unaudited Condensed Consolidated Balance Sheet.~~

notes, plus accrued and unpaid interest, if any. The Company ~~also leases certain technology assets, fuel storage tanks, and various other equipment that qualify as leases under~~may not redeem the ~~New Lease Standard. The remaining lease terms range from three months~~notes at its option prior to ~~eight years. Certain leases can be renewed from one to five years.~~the maturity date.

~~Lease-related assets and liabilities recorded on the unaudited Condensed Consolidated Balance Sheet were as follows:~~

(in millions)
Balance Sheet location September 30, 2019
Assets
Operating Operating lease right-of-use assets (net) $ 1,352
Finance Property and equipment (net of allowance for depreciation and amortization of $430) 835
Total lease assets $ 2,187

Liabilities
Current
Operating Current operating lease liabilities $ 332
Finance Current maturities of long-term debt 86
Noncurrent
Operating Noncurrent operating lease liabilities 1,014
Finance Long-term debt less current maturities 586
Total lease liabilities $ 2,018

~~The components of lease costs, included in the unaudited Condensed Consolidated Statement of Comprehensive Income, were as follows:~~

(in millions)
Statement of Comprehensive Income location Three months ended September 30, 2019 Nine months ended September 30, 2019
Operating lease cost - aircraft (a) Other operating expenses $ 44
$ 132
Operating lease cost - other
Landing fees and airport rentals, and Other operating expenses

22
66
Short-term lease cost Other operating expenses 1
3
Variable lease cost
Landing fees and airport rentals, and Other operating expenses

337
1,016
Finance lease cost:
Amortization of lease liabilities
Depreciation and amortization

29
87
Interest on lease liabilities Interest expense 6
20
Total net lease cost $ 439
$ 1,324

~~(a) Net of sublease income of $25 million and $75 million for the three and nine months ended September 30, 2019, respectively.~~

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

~~Supplemental~~Upon issuance, the Company bifurcated the Convertible Notes for accounting purposes between a liability component and an equity component utilizing applicable guidance. The liability component was determined by estimating the fair value of a hypothetical issuance of an identical offering excluding the conversion feature of the Convertible Notes, which has been estimated at $1.9 billion, and is reflected as a component of Long-term debt in the unaudited Condensed Consolidated Balance Sheet. The effective interest rate of this liability was 5.2%. The equity component was calculated as the difference between the liability component and the face amount of the Convertible Notes, determined to be $403 million, and is classified within Additional paid in capital in the unaudited Condensed Consolidated Balance Sheet. The Convertible Notes proceeds are also shown within the financing activities section in the unaudited Condensed Consolidated Statement of Cash Flows. The amount of the equity component in the transaction also represents a discount on liability portion of the Convertible Notes, and as such will be amortized as a non-cash component of interest expense over the 5-year term of the notes. The costs incurred in the issuance, including underwriters' discount, totaling $62 million, are classified as a cash ~~flow information related to leases, included~~outflow within the financing activities section in the unaudited Condensed Consolidated Statement of Cash Flows, ~~was as follows:~~and will also be amortized to expense over the term of the notes. Issuance costs attributable to the equity component of $11 million were netted with the equity component in the unaudited Condensed Consolidated Statement of Stockholders' Equity.

(in millions)
Three months ended September 30, 2019 Nine months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases $ 95
$ 298
Operating cash flows for finance leases 6
20
Financing cash flows for finance leases 21
64
Right-of-use assets obtained in exchange for lease obligations:
Operating leases 6
130
Finance leases —
1

AsThe Company intends to settle conversions by paying cash up to the principal amount of ~~September~~the Convertible Notes, with any excess conversion value settled in shares of common stock. Therefore, the Convertible Notes are being accounted for using the treasury stock method for the purposes of Net income (loss) per share. Using this method, the denominator will be affected when the average share price of the Company's common stock for a given period is greater than the conversion price of approximately $38.48 per share. The Convertible Notes stipulate that holders of the notes may not elect to convert their Convertible Notes to shares of common stock until after June 30, ~~2019, maturities of lease liabilities were as follows:~~

(in millions)
Operating leases Finance leases
Remainder of 2019 $ 115
$ 28
2020 347
109
2021 213
104
2022 141
101
2023 111
97
Thereafter 753
338
Total lease payments $ 1,680
$ 777
Less imputed interest (334 ) (105 )
Total lease obligations 1,346
672
Less current obligations (332 ) (86 )
Long-term lease obligations $ 1,014
$ 586

~~The table below presents additional information~~2020, and therefore there was no dilutive impact related to the notes until July 1, 2020. As consideration for the Payroll Support funding, the Company agreed to issue Warrants to the Treasury to purchase the Company's ~~leases as~~common stock in connection with each disbursement of ~~September 30, 2019:~~



~~Weighted average remaining lease term~~
~~Operating leases~~	~~9 years~~
~~Finance leases~~	~~8 years~~

~~Weighted average discount rate~~
~~Operating leases (a)~~	~~3.8~~	%
~~Finance leases~~	~~3.8~~	%

~~(a) Upon adoption~~Payroll Support to the Company. The Company accounts for the Warrants using the treasury stock method. Using this method, the denominator will be affected when the average share price of the ~~New Lease Standard,~~Company's common stock for a given period is greater than the ~~incremental borrowing rate used for existing leases was established as~~warrant exercise price of ~~January 1, 2019.~~

~~As of September 30, 2019,~~$36.47 per share. While the Company ~~had additional operating lease commitments that had not yet commenced~~is reporting a net loss, all potential shares are considered antidilutive and have no impact on Net income (loss) per share.

On May 4, 2020, the Company issued $2.0 billion of ~~approximately $533~~unsecured notes, consisting of $750 million aggregate principal amount of the Company’s 4.750% Notes due 2023 (the “$750 million 2023 Notes”) and $1.25 billion aggregate principal amount of the Company’s 5.250% Notes due 2025 (the “2025 Notes”). Interest on both the $750 million 2023 Notes and 2025 Notes is payable semi-annually in arrears on May 4 and November 4, beginning November 4, 2020. The proceeds from the $750 million 2023 Notes and 2025 Notes were used to repay a portion of the outstanding Amended and Restated 364-Day Credit Agreement balance.

On June 8, 2020, the Company issued $1.8 billion of unsecured notes, consisting of $500 million aggregate principal amount of the Company’s 4.750% Notes due 2023 (the “$500 million 2023 Notes”) and $1.3 billion aggregate principal amount of the Company’s 5.125% Notes due 2027 (the “2027 Notes”). Interest on both the $500 million 2023 Notes and 2027 Notes is payable semi-annually. Interest on the $500 million 2023 Notes is payable in arrears on May 4 and November 4, beginning November 4, 2020 and interest on the 2027 Notes is payable in arrears on June 15 and December 15, beginning December 15, 2020. Approximately $1.7 billion combined proceeds of the $500 million 2023 Notes and 2027 Notes were used to repay the remaining outstanding Amended and Restated 364-Day Credit Agreement balance. The Company expects to use the remaining proceeds for 16general corporate purposes.

In June 2020, the Company, through special purpose entities, entered into agreements with a financing institution and trusts to borrow $192 million secured by 6 Boeing ~~737 MAX 8 aircraft expected to be delivered~~737-800 aircraft. These borrowings, which were recorded as a financing transaction in ~~2019~~the Company's unaudited Condensed Consolidated Statement of Cash Flows, and ~~2020, each with lease terms that range from eight to nine years.~~as debt in the accompanying unaudited Condensed Consolidated Balance Sheet, bear interest at a rate of the 3 month

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

LIBOR plus 1.4%, payable in quarterly installments through June 30, 2028. The special purpose entities were determined to be variable interest entities for which the Company is the primary beneficiary, and therefore were consolidated in the accompanying unaudited Condensed Consolidated Financial Statements.

~~Disclosures related to periods prior to~~

Other Financings

Common Stock Issuance

On May 1, 2020, the ~~adoption~~Company completed the public offering of 80.5 million shares of $1.00 par value common stock of the ~~New Lease Standard~~Company, which included the full exercise of the underwriters’ option to purchase an additional 10.5 million shares of common stock, at a public offering price of $28.50 per share (the “Common Stock Offering”). The Company expects to use the net proceeds of $2.2 billion from the Common Stock Offering for general corporate purposes.

~~Future minimum lease payments~~

Sale-Leaseback of Aircraft

In second quarter 2020, the Company entered into transactions with third parties, involving ten of the Company’s Boeing 737-800 aircraft and ten of the Company's Boeing 737 MAX 8 aircraft that qualified as sale-leaseback arrangements under ~~capital~~applicable accounting guidance. The Company sold the ten 737-800 aircraft to a third party for $405 million, then immediately leased the aircraft back for approximately ten years. The Company sold the ten 737 MAX 8 aircraft to a third party for $410 million, then immediately leased the aircraft back for approximately 13 years. As such, the aircraft were de-recognized from Property and equipment at their remaining net book values. All of the leases ~~and noncancelable~~from the sale-leasebacks are accounted for as operating leases, and ~~rentals~~thus are now reflected as part of the Company’s Operating lease right-of-use assets and operating lease liabilities in the accompanying unaudited Condensed Consolidated Balance Sheet. The 737-800 and 737 MAX 8 sale-leaseback transactions resulted in a recognized gain of $153 million and $69 million, respectively, reflected within Other operating expenses, net in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income. The 737-800 and 737 MAX 8 sale-leaseback transactions have increased the Company's future operating lease obligations by $35 million remaining in 2020, $71 million in each of the years from 2021 through 2025, and approximately $440 million thereafter.

As of June 30, 2020, aggregate principal maturities of debt and finance leases (not including amounts associated with interest rate swap agreements, interest on finance leases, and amortization of purchase accounting adjustments) were $596 million for the remainder of 2020, $195 million in 2021, $499 million in 2022, $1.4 billion in 2023, $127 million in 2024, $3.7 billion in 2025, and $3.7 billion thereafter.

Southwest Airlines Co.

Notes to ~~be received under subleases with initial or remaining terms in excess of one year at December 31, 2018, were as follows:~~Condensed Consolidated Financial Statements

(unaudited)

(in millions)
Capital
leases

Operating
leases
Subleases
Operating
leases, net
2019 $ 111
$ 348
$ (92 ) $ 256
2020 109
357
(78 ) 279
2021 105
244
(41 ) 203
2022 100
172
(17 ) 155
2023 97
146
(7 ) 139
Thereafter 335
474
(1 ) 473
Total minimum lease payments $ 857
$ 1,741
$ (236 ) $ 1,505
Less amount representing interest 126

Present value of minimum lease payments (a) 731

Less current portion 85

Long-term portion $ 646

~~(a) Excludes lease incentive obligation of $114 million.~~

8.9. 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 ~~September~~June 30, ~~2019~~,2020, 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 and certificates of deposit), interest rate derivative contracts, fuel derivative contracts, and available-for-sale securities. The majority of the Company’s 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. Other available-for-sale securities primarily consist of investments associated with the Company’s excess benefit plan.

The Company’s fuel and interest rate 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 consist solely of swap agreements. See Note 34 for further information on the Company’s derivative instruments and hedging activities. The fair values of swap contracts 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 swap contracts as Level 2. 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 the same 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

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

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 the assets in the Company’s earnings.

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at ~~September~~June 30, ~~2019~~,2020, and December 31, ~~2018~~2019:

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)


				Fair value measurements at reporting date using:														Fair value measurements at reporting date using:
				Quoted prices in active markets for identical assets		Significant other observable inputs			Significant unobservable inputs									Quoted prices in active markets for identical assets				Significant other observable inputs				Significant unobservable inputs
Description	September 30, 2019			(Level 1)		(Level 2)			(Level 3)		Description			June 30, 2020				(Level 1)				(Level 2)				(Level 3)
Assets	(in millions)										Assets			(in millions)
Cash equivalents(a)
Cash equivalents											Cash equivalents
Cash equivalents (a)	$	2,078		$	2,078	$	—		$	—		$	11,961			$	11,961			$	—			$	—
Commercial paper	405			—		405			—		Commercial paper			90				—				90				—
Certificates of deposit	5			—		5			—		Certificates of deposit			19				—				19				—

Time deposits											Time deposits			281				—				281				—
Short-term investments:											Short-term investments:
Treasury bills	1,195			1,195		—			—		Treasury bills			1,649				1,649				—				—

Certificates of deposit	274			—		274			—		Certificates of deposit			132				—				132				—
Time deposits	59			—		59			—		Time deposits			325				—				325				—
Interest rate derivatives (see Note 3)	1			—		1			—
Interest rate derivatives (see Note 4)											Interest rate derivatives (see Note 4)			2								2
Fuel derivatives:											Fuel derivatives:

Option contracts (b)	114			—		—			114		Option contracts (b)			107				—				—				107

Other available-for-sale securities	178			178		—			—		Other available-for-sale securities			219				219				—				—
Total assets	$	4,309		$	3,451	$	744		$	114	Total assets			$	14,785			$	13,829			$	849			$	107
Liabilities											Liabilities
Interest rate derivatives (see Note 3)	$	(24	)	$	—	$	(24	)	$	—

Interest rate derivatives (see Note 4)											Interest rate derivatives (see Note 4)			$	(74)			$	—			$	(74)			$	—

(a) Cash equivalents are primarily composed of money market investments.

(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as an asset. See Note 34.


			Fair value measurements at reporting date using:
			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
Description	December 31, 2019		(Level 1)		(Level 2)		(Level 3)
Assets	(in millions)
Cash equivalents
Cash equivalents (a)	$	1,999	$	1,999	$	—	$	—
Commercial paper	535		—		535		—
Certificates of deposit	14		—		14		—

Short-term investments:
Treasury bills	1,196		1,196		—		—
Certificates of deposit	268		—		268		—
Time deposits	60		—		60		—


Interest rate derivatives (see Note 4)	2		—		2		—
Fuel derivatives:


Option contracts (b)	110		—		—		110


Other available-for-sale securities	197		197		—		—
Total assets	$	4,381	$	3,392	$	879	$	110
Liabilities






Interest rate derivatives (see Note 4)	$	(6)	$	—	$	(6)	$	—

(a) Cash equivalents are primarily composed of money market investments.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Fair value measurements at reporting date using:

Quoted prices in
active markets
for identical assets

Significant
other observable
inputs

Significant
unobservable
inputs
Description December 31, 2018 (Level 1) (Level 2) (Level 3)
Assets (in millions)
Cash equivalents
Cash equivalents (a) $ 1,392
$ 1,392
$ —
$ —
Commercial paper 454
—
454
—
Certificates of deposit 8
—
8
—
Short-term investments:
Treasury bills 1,582
1,582
—
—
Certificates of deposit 228
—
228
—
Time deposits 25
—
25
—
Fuel derivatives:
Option contracts (b) 138
—
—
138
Other available-for-sale securities 127
127
—
—
Total assets $ 3,954
$ 3,101
$ 715
$ 138
Liabilities
Interest rate derivatives (see Note 3) $ (14 ) $ —
$ (14 ) $ —

~~(a) Cash equivalents are primarily composed of money market investments.~~

(b) In the unaudited Condensed Consolidated Balance Sheet amounts are presented as a net asset. See Note 3.

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~The Company had~~
no ~~transfers of assets or liabilities between any of the above levels during the nine months ended September 30, 2019, or the year ended December 31, 2018.~~

The Company did not have any assets or liabilities measured at fair value on a nonrecurring basis during the ~~nine~~six months ended ~~September~~June 30, ~~2019,~~2020, or the year ended December 31, ~~2018.~~2019. The following tables present the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~:2020:

Fair value measurements using significant unobservable inputs (Level 3)
(in millions) Fuel derivatives
Balance at June 30, 2019 $ 187

Total losses (realized or unrealized) included in other comprehensive income (123 )
Purchases 50
(a)
Balance at September 30, 2019 $ 114


Fair value measurements using significant unobservable inputs (Level 3)
(in millions)	Fuel derivatives
Balance at March 31, 2020	$	85
Total gains (losses) for the period
Included in earnings	(15)		(a)
Included in other comprehensive income	26
Purchases	11		(b)


Balance at June 30, 2020	$	107
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 at June 30, 2020	$	(8)	(a)
The amount of total gains for the period included in other comprehensive loss attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2020	$	19

(a) Included in Other (gains) losses, net, within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

(b) The purchase of fuel derivatives is recorded gross based on the structure of the derivative instrument and whether a contract with multiple derivatives was purchased as a single instrument or separate instruments.

Fair value measurements using significant unobservable inputs (Level 3)
(in millions) Fuel derivatives
Balance at December 31, 2018 $ 138

Total losses (realized or unrealized) included in other comprehensive income (101 )
Purchases 126
(a)
Sales (2 ) (a)
Settlements (47 )
Balance at September 30, 2019 $ 114


Fair value measurements using significant unobservable inputs (Level 3)
(in millions)	Fuel derivatives
Balance at December 31, 2019	$	110
Total losses for the period
Included in earnings	(17)		(a)
Included in other comprehensive income	(80)
Purchases	94		(b)


Balance at June 30, 2020	$	107
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 at June 30, 2020	$	(8)	(a)
The amount of total losses for the period included in other comprehensive loss attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2020	$	(72)

(a) Included in Other (gains) losses, net, within the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss).

(b) The purchase ~~and sale~~ of fuel derivatives ~~are~~is recorded gross 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 ~~result~~have resulted in a higher (lower) fair value measurement, respectively, for the Company’s derivative option contracts.

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

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 at ~~September~~June 30, ~~2019~~:2020:


Quantitative information about Level 3 fair value measurements
	Valuation technique	Unobservable input	Period (by year)	Range	Weighted Average (a)
Fuel derivatives	Option model	Implied volatility	Third quarter 2020	37-64%	54	%
			Fourth quarter 2020	37-63%	47	%
			2021	30-47%	35	%
			2022	27-31%	29	%
			Beyond 2022	25-28%	27	%

(a) Implied volatility weighted by the notional amount (barrels of fuel) that will settle in respective period.



~~Quantitative information about Level 3 fair value measurements~~
	~~Valuation technique~~	~~Unobservable input~~	~~Period (by year)~~	~~Range~~
~~Fuel derivatives~~	~~Option model~~	~~Implied volatility~~	~~Fourth quarter 2019~~	~~22-38%~~
			~~2020~~	~~24-42%~~
			~~2021~~	~~20-29%~~
			~~2022~~	~~19-21%~~

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

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, at ~~September~~June 30, ~~2019~~,2020, 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. Debt under three of the Company’s debt agreements is not publicly held. 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.


(in millions)	Carrying value		Estimated fair value		Fair value level hierarchy
2.65% Notes due 2020	$	502	$	503	Level 2
2.75% Notes due 2022	300		304		Level 2
Pass Through Certificates due 2022 - 6.24%	168		172		Level 2
4.75% Notes due 2023	1,250		1,289		Level 2
1.25% Convertible Notes due 2025	1,909		2,762		Level 2
5.25% Notes due 2025	1,250		1,317		Level 2
3.00% Notes due 2026	300		296		Level 2
Term Loan Agreement payable through 2026 - 1.99%	169		159		Level 3
3.45% Notes due 2027	300		294		Level 2
5.125% Notes due 2027	1,300		1,352		Level 2
7.375% Debentures due 2027	121		134		Level 2
Term Loan Agreement payable through 2028 - 1.71%	196		176		Level 3
2.625% Notes due 2030	500		455		Level 2
1.000% Payroll Support Program Loan due 2030	850		629		Level 3

(in millions) Carrying value Estimated fair value Fair value level hierarchy
2.75% Notes due November 2019 $ 300
$ 300
Level 2
2.65% Notes due 2020 501
504
Level 2
Term Loan Agreement payable through 2020 - 5.223% 147
147
Level 3
737 Aircraft Notes payable through 2020 21
21
Level 3
2.75% Notes due 2022 300
304
Level 2
Pass Through Certificates due 2022 - 6.24% 197
208
Level 2
Term Loan Agreement payable through 2026 - 3.71% 188
188
Level 3
3.00% Notes due 2026 300
307
Level 2
3.45% Notes due 2027 300
315
Level 2
7.375% Debentures due 2027 123
152
Level 2

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

9.10. SUPPLEMENTAL FINANCIAL INFORMATION

(in millions) September 30, 2019 December 31, 2018
Derivative contracts $ 80
$ 95
Intangible assets, net 311
400
Finance lease receivable 50
61
Other 212
164
Other assets $ 653
$ 720


(in millions)	June 30, 2020		December 31, 2019
Trade receivables	$	46	$	53
Credit card receivables	38		112
Business partners and other suppliers	434		779
Income tax receivable	231		87
Other	21		55
Accounts and other receivables	$	770	$	1,086

(in millions) September 30, 2019 December 31, 2018
Accounts payable trade $ 270
$ 263
Salaries payable 199
216
Taxes payable excluding income taxes 188
220
Aircraft maintenance payable 109
69
Fuel payable 120
122
Other payable 388
526
Accounts payable $ 1,274
$ 1,416


(in millions)	June 30, 2020		December 31, 2019
Derivative contracts	$	68	$	49
Intangible assets, net	295		296


Other	299		232
Other assets	$	662	$	577

(in millions) September 30, 2019 December 31, 2018
Profitsharing and savings plans $ 423
$ 580
Vacation pay 427
403
Health 118
107
Workers compensation 169
166
Property and income taxes 70
68
Other 249
425
Accrued liabilities $ 1,456
$ 1,749


(in millions)	June 30, 2020		December 31, 2019
Accounts payable trade	$	139	$	304
Salaries payable	207		231
Taxes payable excluding income taxes	38		227
Aircraft maintenance payable	129		162
Fuel payable	68		129
Dividends payable	—		93
Other payable	389		428
Accounts payable	$	970	$	1,574

(in millions) September 30, 2019 December 31, 2018
Postretirement obligation $ 245
$ 232
Other deferred compensation 288
247
Other 111
171
Other noncurrent liabilities $ 644
$ 650


(in millions)	June 30, 2020		December 31, 2019
Deferred Payroll Support Program grant proceeds	$	957	$	—
Voluntary Separation Program 2020	307		—
Profitsharing and savings plans	26		695


Vacation pay	454		434

Health	104		120

Workers compensation	159		166
Property and income taxes	72		79
Derivative contracts	60		5
Other	233		250
Accrued liabilities	$	2,372	$	1,749


(in millions)	June 30, 2020		December 31, 2019
Postretirement obligation	$	299	$	288


Other deferred compensation	315		313

Other	108		105
Other noncurrent liabilities	$	722	$	706

For further information on supplier receivables, see Note 12. For further information on fuel derivative and interest rate derivative contracts, see Note 3.4.

Other Operating Expenses

Other operating expenses, ~~consist~~net for the three months ended June 30, 2020, included a $222 million gain on the sale of assets as a result of sale-leaseback transactions. See Note 8 for further information. Also reported within Other

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

operating expenses, net were aircraft rentals, distribution costs, advertising expenses, personnel expenses, professional fees, and other operating costs, none of which individually exceeded 10 percent of Operating expenses.

~~10.~~11. COMMITMENTS AND CONTINGENCIES

The Company adopted the provisions of the New Lease Standard effective January 1, 2019, using the modified retrospective adoption method. The New Lease Standard eliminated the previous build-to-suit lease accounting guidance and resulted in the derecognition of build-to-suit assets and liabilities that remained on the balance sheet after the end of the construction period. See Note 2 for further information. Descriptions of the Company's recently completed and current build-to-suit projects follows.

~~Fort Lauderdale-Hollywood International Airport~~

In ~~December 2013~~, the Company entered into an agreement with Broward County, Florida, which owns and operates Fort Lauderdale-Hollywood International Airport ("FLL"), to oversee and manage the design and construction of the

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~airport's Terminal 1 Modernization Project. In addition to significant improvements to the existing Terminal 1, the project included the design and construction of a new~~ ~~five-gate~~ Concourse A with an international processing facility. Funding for the project came directly from Broward County aviation sources, but flowed through the Company in its capacity as manager of the project. Construction of Concourse A was completed during second quarter 2017, and construction on Terminal 1 was substantially complete and operational as of the end of third quarter 2018. As construction was completed prior to adoption of the New Lease Standard, the Company derecognized the FLL related Assets constructed for others ("ACFO") and Construction obligation within the unaudited Condensed Consolidated Balance Sheet as of January 1, 2019.

Los Angeles International Airport

In March 2013, the Company executed a lease agreement (the "T1 Lease") with Los Angeles World Airports ("LAWA"), which owns and operates Los Angeles International Airport ("LAX"). Under the T1 Lease, which was amended in June 2014 and September 2017, the Company oversaw and managed the design, development, financing, construction, and commissioning of the airport's Terminal 1 Modernization Project. Construction on the Terminal 1 Modernization Project began during 2014 and was substantially complete and operational during fourth quarter 2018. As construction was completed prior to adoption of the New Lease Standard, the Company derecognized the LAX T1 Lease related ACFO and Construction obligation within the unaudited Condensed Consolidated Balance Sheet as of January 1, 2019.

In October 2017, the Company executed a ~~separate~~ lease agreement with ~~LAWA~~Los Angeles World Airports ("LAWA") (the "T1.5 Lease"). Under the T1.5 Lease, the Company is overseeing and managing the design, development, financing, construction, and commissioning of a passenger processing facility between Terminal 1 and 2 (the "Terminal 1.5 Project"). The Terminal 1.5 Project is expected to include ticketing, baggage claim, passenger screening, and a bus gate at a cost not to exceed $479 million for site improvements and non-proprietary improvements. Construction on the Terminal 1.5 Project began during third quarter 2017 and is estimated to be substantially completed ~~during 2020.~~in late 2020 or early 2021. The ~~Company has determined that due to its role in the project, it is considered the owner of the Terminal 1.5 Project for accounting purposes under the New Lease Standard. As a result, the~~ costs incurred to fund the Terminal 1.5 Project are included within ~~ACFO~~Assets Constructed for Others ("ACFO") and all amounts that have been or will be reimbursed will be included within Construction obligation on the accompanying unaudited Condensed Consolidated Balance Sheet. ~~Upon completion of the Terminal 1.5 Project, the Company will perform an evaluation to determine the treatment of these associated assets and liabilities.~~

Funding for ~~these projects~~this project is primarily through the Regional Airports Improvement Corporation (the "RAIC"), which is a quasi-governmental special purpose entity that ~~acts~~is acting as a conduit borrower under a syndicated credit ~~facilities~~facility provided by ~~groups~~a group of lenders. The Company guaranteed the obligations of the RAIC under separate credit facilities associated with the respective lease agreements. As of September 30, 2019, the Company's outstanding remaining guaranteed obligationA loan made under the credit facility for the Terminal 1.5 Project ~~was $183 million. Loans made under the separate credit facility for the Terminal 1.5 Project are~~is being used to reimburse the Company for the site improvements and non-proprietary improvements of the Terminal 1.5 Project, and the outstanding ~~loans~~loan will be repaid with the proceeds of LAWA’s payments to purchase completed construction phases. The Company guaranteed the obligation of the RAIC under the credit facility associated with the Terminal 1.5 Project. As of June 30, 2020, the Company's outstanding remaining guaranteed obligation under the credit facility for the Terminal 1.5 Project was $253 million.

Construction costs recorded in ACFO for the Terminal 1.5 Project were $239 million and $164 million, as of June 30, 2020, and December 31, 2019, respectively.

Dallas Love Field

During 2008, the City of Dallas approved the ~~LFMP,~~Love Field Modernization Project ("LFMP"), a project to reconstruct Dallas Love Field with modern, convenient air travel facilities. Pursuant to a Program Development Agreement with the City of Dallas and the Love Field Airport Modernization Corporation (or the "LFAMC," a Texas non-profit "local government corporation" established by the City of Dallas to act on the City of Dallas' behalf to facilitate the development of the LFMP), the Company managed this project. Major construction was effectively completed in 2014. During second quarter 2017, the City of Dallas approved using the remaining bond funds for additional terminal construction projects, which were effectively completed in 2018. As construction was completed prior to adoption of the New Lease Standard, the Company derecognized the LFMP Terminal related ACFO and Construction obligation within the unaudited Condensed Consolidated Balance Sheet as of January 1, 2019.

Although the City of Dallas received commitments from various sources that helped to fund portions of the LFMP project, including the Federal Aviation Administration ("FAA"), the Transportation Security Administration, and the City of Dallas' Aviation Fund, the majority of the funds used were from the issuance of bonds. The Company guaranteed

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

principal and interest payments on bonds issued by the LFAMC. As of ~~September~~June 30, ~~2019, $416~~2020, $407 million of principal remained outstanding. The net present value of the future principal and interest payments associated with the bonds was ~~$458~~$443 million as of ~~September~~June 30, ~~2019,~~2020, and was reflected as part of the Company's operating lease right–of–use assets and lease obligations in the unaudited Condensed Consolidated Balance Sheet. ~~See Notes 2 and 7 for further information.~~

During 2015, the City of Dallas issued additional bonds for the construction of a new parking garage at Dallas Love Field, which was completed and operational in fourth quarter 2018. As construction was completed prior to adoption of the New Lease Standard, the Company derecognized the LFMP Parking Garage related ACFO and Construction obligation within the unaudited Condensed Consolidated Balance Sheet as of January 1, 2019. The Company has not guaranteed the principal or interest payments on these bonds.

~~Construction costs recorded in ACFO for the Company's various projects as of September 30, 2019, and December 31, 2018, were as follows:~~

September 30, 2019 December 31, 2018
(in millions) ACFO
ACFO,
Net (a)
Construction Obligation ACFO
ACFO,
Net (a)
Construction Obligation
FLL Terminal $ —
$ —
$ —
$ 313
$ 304
$ 308
LAX Terminal 1 —
—
—
485
459
476
LAX Terminal 1.5 (b) 172
172
172
99
99
99
LFMP Terminal —
—
—
545
460
502
LFMP Parking Garage —
—
—
200
200
200
HOU International Terminal (c) —
—
—
126
115
116
$ 172
$ 172
$ 172
$ 1,768
$ 1,637
$ 1,701

~~(a) Net of accumulated depreciation.~~

~~(b) Project still in progress.~~

~~(c) Project completed in 2015 at Houston William P. Hobby Airport ("HOU").~~

Contingencies

The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business, including, but not limited to, examinations by the Internal Revenue Service ~~("IRS"~~(the "IRS"). The Company's management does not expect that the outcome of any of its currently ongoing legal proceedings or the outcome of any adjustments presented by the IRS, individually or collectively, will have a material adverse effect on the Company's financial condition, results of operations, or cash flow.

~~11.~~

Southwest Airlines Co.

Notes to Condensed Consolidated Financial Statements

(unaudited)

12. BOEING 737 MAX AIRCRAFT GROUNDING

On March 13, 2019, the FAA issued an emergency order for all U.S. airlines to ground all Boeing ~~737~~ MAX aircraft. The Company immediately complied with the order and grounded all 34 ~~737~~ MAX 8 aircraft in its fleet. The Company will continue to monitor the situation and any potential future accounting implications that arise. The most significant financial impacts of this grounding to the Company thus far have been lost revenues, operating income, and operating cash flows, and delayed capital expenditures, directly associated with its grounded ~~737~~ MAX 8 fleet and other new aircraft that have not been able to be delivered. In July 2019, the Boeing Company announced a $4.9 billion after-tax charge for "potential concessions and other considerations to customers for disruptions related to the 737 MAX grounding." ~~The~~In January 2020, the Boeing Company ~~has had discussions with Boeing regarding compensation for damages due~~announced an additional pre-tax charge of $2.6 billion related to "estimated potential concessions and other considerations to customers related to the 737 MAX ~~groundings, but has not reached any conclusions regarding these matters, and no amounts expected from Boeing have been included in 2019 results.~~grounding."

As of September 30, 2019, there had been no change to the Company's contractual obligations and commitments with regard to future purchases of aircraft. However, Boeing is not delivering new MAX aircraft and, therefore, not meeting

~~Southwest Airlines Co.~~

~~Notes to Condensed Consolidated Financial Statements~~

~~(unaudited)~~

~~its contractual delivery schedule. Based on the Company's current contractual obligations and Boeing's targeted regulatory approval of MAX return to service in~~During fourth quarter 2019, the Company ~~is still targeting receipt~~entered into a Memorandum of ~~7 MAX aircraft deliveries~~Understanding with Boeing to compensate Southwest for estimated financial damages incurred during ~~fourth quarter~~ 2019 related to the grounding of the MAX. The terms of the agreement are confidential, but are intended to provide for a substantial portion of the Company’s estimated financial damages associated with both the ~~remaining~~ 34 MAX aircraft ~~originally scheduled for delivery in~~that were grounded as of March 13, 2019, ~~shifting into 2020; however,~~as well as the ~~FAA will ultimately determine the timing of~~41 additional MAX ~~return to service, and~~aircraft the Company ~~therefore offers no assurances that current estimations~~was scheduled to receive (28 owned MAX from Boeing and ~~timelines~~13 leased MAX from third parties) from March 13, 2019 through December 31, 2019. In accordance with applicable accounting principles, the Company will account for substantially all of the proceeds received from Boeing as a reduction in cost basis spread across both the existing 31 owned MAX in the Company’s fleet, plus the Company’s future firm aircraft deliveries as of the date of the agreement. No material financial impacts of the agreement were realized in the Company’s earnings during the year ended December 31, 2019. A total of $428 million in proceeds received in cash from Boeing are ~~correct.~~reflected within Investing Activities in the Consolidated Statement of Cash Flows for the six months ended June 30, 2020.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Relevant comparative operating statistics for the three and ~~nine~~six months ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 are included below. The Company provides these operating statistics because they are commonly used in the airline industry and, as such, allow readers to compare the Company’s performance against its results for the prior year period, as well as against the performance of the Company’s peers.


	Three months ended June 30,
	2020				2019				Change
Revenue passengers carried (000s)	5,253				34,924				(85.0)	%
Enplaned passengers (000s)	6,990				42,569				(83.6)	%
Revenue passenger miles (RPMs) (in millions)^(a)	5,614				34,528				(83.7)	%
Available seat miles (ASMs) (in millions)^(b)	17,887				39,985				(55.3)	%
Load factor^(c)	31.4		%		86.4		%		(55.0)		pts.
Average length of passenger haul (miles)	1,069				989				8.1	%
Average aircraft stage length (miles)	749				750				(0.1)	%
Trips flown	153,088				347,684				(56.0)	%
Seats flown (000s)^(d)	23,650				52,398				(54.9)	%
Seats per trip^(e)	154.5				150.7				2.5	%
Average passenger fare	$	134.04			$	157.10			(14.7)	%
Passenger revenue yield per RPM (cents)^(f)	12.54				15.89				(21.1)	%
Operating revenues per ASM (cents)^(g)	5.63				14.78				(61.9)	%
Passenger revenue per ASM (cents)^(h)	3.94				13.72				(71.3)	%
Operating expenses per ASM (cents)⁽ⁱ⁾	11.94				12.36				(3.4)	%
Operating expenses per ASM, excluding fuel (cents)	10.50				9.52				10.3	%
Operating expenses per ASM, excluding fuel and profitsharing (cents)	10.50				9.09				15.5	%
Fuel costs per gallon, including fuel tax	$	1.23			$	2.13			(42.3)	%
Fuel costs per gallon, including fuel tax, economic	$	1.33			$	2.13			(37.6)	%
Fuel consumed, in gallons (millions)	208				532				(60.9)	%
Active fulltime equivalent Employees	61,118				59,793				2.2	%
Aircraft at end of period	737			(j)(k)	753			(j)	(2.1)	%

Three months ended September 30,
2019 2018 Change
Revenue passengers carried (000s) 33,538
33,860
(1.0 )%
Enplaned passengers (000s) 41,098
41,424
(0.8 )%
Revenue passenger miles (RPMs) (in millions)^(a)
32,889
34,024
(3.3 )%
Available seat miles (ASMs) (in millions)^(b)
39,379
40,570
(2.9 )%
Load factor^(c)
83.5 % 83.9 % (0.4 ) pts.
Average length of passenger haul (miles) 981
1,005
(2.4 )%
Average aircraft stage length (miles) 737
760
(3.0 )%
Trips flown 348,237
347,555
0.2 %
Seats flown (000s)^(d)
52,441
52,329
0.2 %
Seats per trip^(e)
150.6
150.6
—

Average passenger fare $ 155.95
$ 153.40
1.7 %
Passenger revenue yield per RPM (cents)^(f)
15.90
15.27
4.1 %
Operating revenues per ASM (cents)^(g)
14.32
13.74
4.2 %
Passenger revenue per ASM (cents)^(h)
13.28
12.80
3.8 %
Operating expenses per ASM (cents)⁽ⁱ⁾
12.24
11.77
4.0 %
Operating expenses per ASM, excluding fuel (cents) 9.47
8.81
7.5 %
Operating expenses per ASM, excluding fuel and profitsharing (cents) 9.11
8.47
7.6 %
Fuel costs per gallon, including fuel tax $ 2.07
$ 2.24
(7.6 )%
Fuel costs per gallon, including fuel tax, economic $ 2.07
$ 2.25
(8.0 )%
Fuel consumed, in gallons (millions) 524
535
(2.1 )%
Active fulltime equivalent Employees 60,590
58,559
3.5 %
Aircraft at end of period 752
742
1.3 %


	Six months ended June 30,
	2020				2019				Change
Revenue passengers carried (000s)	30,001				66,220				(54.7)	%
Enplaned passengers (000s)	36,768				80,382				(54.3)	%
Revenue passenger miles (RPMs) (in millions)^(a)	29,549				65,232				(54.7)	%
Available seat miles (ASMs) (in millions)^(b)	53,237				77,871				(31.6)	%
Load factor^(c)	55.5		%		83.8		%		(28.3)		pts.
Average length of passenger haul (miles)	985				985				—
Average aircraft stage length (miles)	741				751				(1.3)	%
Trips flown	465,481				674,074				(30.9)	%
Seats flown (000s)^(d)	70,780				101,871				(30.5)	%
Seats per trip^(e)	152.1				151.1				0.7	%
Average passenger fare	$	151.63			$	154.50			(1.9)	%
Passenger revenue yield per RPM (cents)^(f)	15.40				15.68				(1.8)	%
Operating revenues per ASM (cents)^(g)	9.85				14.20				(30.6)	%
Passenger revenue per ASM (cents)^(h)	8.55				13.14				(34.9)	%
Operating expenses per ASM (cents)⁽ⁱ⁾	12.17				12.31				(1.1)	%
Operating expenses per ASM, excluding fuel (cents)	10.05				9.55				5.2	%
Operating expenses per ASM, excluding fuel and profitsharing (cents)	10.05				9.21				9.1	%
Fuel costs per gallon, including fuel tax	$	1.69			$	2.09			(19.1)	%
Fuel costs per gallon, including fuel tax, economic	$	1.72			$	2.09			(17.7)	%
Fuel consumed, in gallons (millions)	664				1,026				(35.3)	%
Active fulltime equivalent Employees	61,118				59,793				2.2	%
Aircraft at end of period	737			(j)(k)	753			(j)	(2.1)	%

Seats flown (000s)^(d)

(a) A revenue passenger mile is one paying passenger flown one mile. Also referred to as "traffic," which is a measure of demand for a given period.

(b) An available seat mile is one seat (empty or full) flown one mile. Also referred to as "capacity," which is a measure of the space available to carry passengers in a given period.

(d) Seats flown is calculated using total number of seats available by aircraft type multiplied by the total trips flown by the same aircraft type during a particular period.

(e) Seats per trip is calculated by dividing seats flown by trips flown.

(f) Calculated as passenger revenue divided by revenue passenger miles. Also referred to as "yield," this is the average cost paid by a paying passenger to fly one mile, which is a measure of revenue production and fares.

(g) Calculated as operating revenues divided by available seat miles. Also referred to as "operating unit revenues," or "RASM," this is a measure of operating revenue production based on the total available seat miles flown during a particular period.

(h) Calculated as passenger revenue divided by available seat miles. Also referred to as "passenger unit revenues," this is a measure of passenger revenue production based on the total available seat miles flown during a particular period.

(i) Calculated as operating expenses divided by available seat miles. Also referred to as "unit costs," "cost per available seat mile," or "CASM" this is the average cost to fly an aircraft seat (empty or full) one mile, which is a measure of cost efficiencies.

(j) Included 34 Boeing MAX 737 aircraft in long term storage. See Note 12 to the unaudited Condensed Consolidated Financial Statements for further information.

(k) Included 77 Boeing 737 Next Generation aircraft removed from active fleet and placed in long-term storage as of June 30, 2020.

The Company began to see a negative impact on bookings for future travel in late February 2020, which quickly accelerated during the remainder of first quarter and continued throughout second quarter, which is attributable to concerns relating to the COVID-19 pandemic. See Note 2 to the unaudited Condensed Consolidated Financial Statements for further information.

The Company recorded ~~third~~second quarter and year-to-date GAAP and non-GAAP results for ~~2019~~2020 and ~~2018~~2019 as noted in the following tables. See Note Regarding Use of Non-GAAP Financial Measures and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures for additional detail regarding non-GAAP financial measures.

Three months ended Nine months ended
(in millions, except per share amounts) September 30, September 30,
GAAP 2019 2018 Percent Change 2019 2018 Percent Change
Operating income $ 819
$ 798
2.6 % $ 2,292
$ 2,386
(3.9 )%
Net income $ 659
$ 615
7.2 % $ 1,787
$ 1,811
(1.3 )%
Net income per share, diluted $ 1.23
$ 1.08
13.9 % $ 3.29
$ 3.13
5.1 %

Non-GAAP

Operating income $ 819
$ 796
2.9 % $ 2,292
$ 2,347
(2.3 )%
Net income $ 659
$ 614
7.3 % $ 1,787
$ 1,781
0.3 %
Net income per share, diluted $ 1.23
$ 1.08
13.9 % $ 3.29
$ 3.08
6.8 %

~~Third~~Second quarter 2020 Net loss was $915 million, compared with second quarter 2019 Net income of $741 million. Diluted loss per share for second quarter 2020 was ~~a third quarter record of $659 million, a 7.2 percent increase,~~$1.63, as compared with ~~third~~second quarter ~~2018 Net income of $615 million. Diluted earnings per share for third quarter~~ 2019 ~~was a third quarter record of $1.23, as compared with third quarter 2018~~ diluted earnings per share of ~~$1.08. Third~~$1.37. Second quarter 2020 non-GAAP Net loss was $1.5 billion, compared with second quarter 2019 ~~non-GAAP~~ Net income of $741 million. Non-GAAP diluted loss per share for second quarter 2020 was ~~also a third quarter record of $659 million, a 7.3 percent increase,~~$2.67, as compared with ~~third quarter 2018~~ non-GAAP ~~Net income of $614 million. Non-GAAP~~ diluted earnings per share ~~was a third~~of $1.37 for second quarter record of $1.23, as compared with $1.08 for third quarter 2018. Third quarter 2019 Operating income was $819 million, a 2.6 percent increase year-over-year. Third quarter 2019 non-GAAP Operating income was also $819 million, a 2.9 percent increase year-over-year.2019. The ~~increase~~decrease in both GAAP and non-GAAP Net income (loss) was primarily ~~driven by a 9.5~~due to the negative impacts to passenger demand and bookings, related to the COVID-19 pandemic, which caused an 82.9 percent decrease in Operating revenues in second quarter 2020. See below and Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. Second quarter 2020 Operating loss was $1.1 billion, compared with second quarter 2019 Operating income of $968 million. Second quarter 2020 non-GAAP Operating loss was $2.2 billion, compared with second quarter 2019 Operating income of $968 million.

For the six months ended June 30, 2020, Net loss was $1.0 billion, compared with Net income of $1.1 billion for the six months ended June 30, 2019. Diluted loss per share for the six months endedJune 30, 2020 was $1.87, as compared with diluted earnings per share of $2.06 for the six months ended June 30, 2019. For the six months ended June 30, 2020, non-GAAP Net loss was $1.6 billion, compared with Net income of $1.1 billion for the six months ended June 30, 2019. Non-GAAP diluted loss per share for the six months ended June 30, 2020, was $2.93, as compared with non-GAAP diluted earnings per share of $2.06 for the six months ended June 30, 2019. The decrease in both GAAP and non-GAAP Net income (loss) was primarily due to the negative impacts to passenger demand and bookings, related to the COVID-19 pandemic, which caused a 52.6 percent decrease in Operating revenues for the six months ended June 30, 2020. See below and Note 2 to the unaudited Condensed Consolidated Financial Statements for further information. Operating loss for the six months ended June 30, 2020, was $1.2 billion, and non-GAAP Operating loss for the six months ended June 30, 2020, was $2.3 billion.

While the Company has historically provided its calculation of non-GAAP return on invested capital (“ROIC”) as a measure of financial performance used by management to quantify the Company’s effectiveness in generating returns relative to the capital invested in the business, the Company has chosen not to present ROIC in this Form

10-Q and does not expect to present it again until and if the operating environment normalizes sufficiently to return the Company to operating income instead of operating loss. The COVID-19 pandemic has materially and adversely affected passenger demand and bookings, thereby materially and adversely affecting operating income and cash flows from operations. As a result, management ceased focus on ROIC and instead has focused on bolstering the Company’s liquidity through cost reductions, financings, sale-leaseback transactions, and securities offerings. In this environment, management believes ROIC is not a meaningful measure of financial performance, nor is it being used by management to evaluate the business in the current environment. See Liquidity and Capital Resources for a discussion of the Company’s liquidity.

See Notes 2 and 8 to the unaudited Condensed Consolidated Financial Statements for further information on the significant impacts to the Company’s operations, financial performance, and liquidity from the COVID-19 pandemic.

With the sudden and severe drop-off in passenger demand caused by COVID-19 concerns beginning in first quarter 2020, the Company's Load factor for April was only 7.8 percent. Beginning in early May 2020, the Company saw a modest improvement in passenger demand, bookings, and trip cancellation trends, resulting in net positive bookings where new passenger bookings outpaced trip cancellations. This represented a reversal in the net negative booking trends experienced during the majority of March and April 2020, when trip cancellations outpaced new passenger bookings. The Company’s April 2020 operating revenues decreased 91.8 percent, year-over-year; capacity decreased 58.3 percent, year-over-year; and Load factor was 7.8 percent. The Company’s May 2020 operating revenues decreased 84.7 percent, year-over-year; capacity decreased 63.8 percent, year-over-year; and Load factor was 29.9 percent. The Company’s June 2020 operating revenues decreased 73.3 percent, year-over-year; capacity decreased 43.6 percent, year-over-year; and Load factor was 49.5 percent.

Thus far in July 2020, bookings for all months have softened; trip cancellations have increased modestly; and the rate of sequential monthly improvement for revenue trends has slowed. The Company's July 2020 operating revenues are currently estimated to decrease, year-over-year, in the range of 70 to 75 percent; capacity is estimated to decrease approximately 30 percent, year-over-year; and Load factor is estimated to be in the range of 40 to 45 percent. The Company’s August 2020 operating revenues are currently estimated to decrease, year-over-year, in the range of 70 to 80 percent; capacity is estimated to decrease approximately 20 percent, year-over-year; and Load factor is estimated to be in the range of 30 to 40 percent.

The Company has published its flight schedule for sale through January 4, 2021. The Company currently estimates its third quarter 2020 capacity to decrease in the range of 20 to 30 percent, year-over-year. Based on current demand and bookings, as well as results from voluntary separation and emergency time off programs, the Company currently expects to reduce its fourth quarter 2020 capacity by approximately 25 percent, year-over-year, to better align to current demand trends and lower estimated staffing levels in fourth quarter 2020.

Based on current third quarter 2020 capacity plans, third quarter 2020 operating expenses, excluding fuel and oil expense, special items, and profitsharing expense, are expected to decrease in the range of 10 to 20 percent, year-over-year. The year-over-year projections do not reflect the potential impact of Fuel and oil expense, ~~coupled~~special items, and profitsharing expense in both years because the Company cannot reliably predict or estimate these items or expenses or their impact to its financial statements in future periods, especially considering the significant volatility of the Fuel and oil expense line item. Accordingly the Company believes a reconciliation of non-GAAP financial measures to the equivalent GAAP financial measures for projected results is not meaningful or available without unreasonable effort.

The Company has taken significant measures to enhance and expand upon its already generous and flexible ticketing policies, and to support the well-being of both its Employees and passengers on a daily basis. These include, but are not limited to the following:

The Company continues to communicate with its entire workforce on best practices to employ in the current environment while at work, especially considering that a large portion of its Employees come into direct contact with Customers on a daily basis.

As detailed in Note 2 to the unaudited Condensed Consolidated Financial Statements, in connection with the major negative impact of COVID-19 on air carriers, the Company has been receiving significant financial assistance from the U.S. Department of Treasury (the "Treasury") pursuant to the Payroll Support Program established pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act" or the "Act"). Amounts received or to be received under the Payroll Support Program are expected to aggregate approximately $3.3 billion and will be utilized to directly offset payroll expenses incurred by the Company, including specified benefits, between April 2020 and September 2020. Of this total, $2.3 billion consists of a grant that will not require repayment. This direct payroll support of $2.3 billion will be allocated on a pro-rata basis as a contra-expense line item in the unaudited Condensed Consolidated Statement of Comprehensive Income between second and third quarters of 2020. In second quarter 2020, an allocation of $1.1 billion was recorded to directly reduce operating expenses as a component of Payroll support, voluntary separation, net. The remaining amount will be recorded as a reduction of third quarter 2020 operating expenses.

In accordance with restrictions contained in the CARES Act, and except as permitted or required under the Payroll Support Program, the Company has agreed not to (1) conduct involuntary terminations or furloughs or (2) reduce the salaries, wages, or benefits of any Employee, in each case between the date of the Payroll Support Program agreement and September 30, 2020.

During second quarter 2020, the Company introduced voluntary separation and extended emergency time off programs with the goal of aligning staffing to reduced flight schedules to avoid involuntary furloughs and layoffs. Employees had until July 15th to elect to participate in these voluntary programs, and combined, approximately 16,900 Employees volunteered for these programs, representing nearly 27 percent ~~increase~~of the Company's workforce. In accordance with the accounting guidance in ~~revenues. This was partially offset by~~Accounting Standards Codification Topic 712 (Compensation —

Nonretirement Postemployment Benefits), the Company accrued a ~~4.7 percent increase~~charge of $307 million in ~~Salaries,~~second quarter 2020 related to the special termination benefits for Employees who had accepted the Company's offer in second quarter 2020 to participate in its Voluntary Separation Program 2020. The Company also estimates an additional charge of approximately $540 million in third quarter 2020 for the Employees who completed their election in July 2020 to participate in the Voluntary Separation Program 2020 and estimates a charge of more than $800 million in third quarter 2020 associated with its voluntary extended emergency time off program, upon final approval of Employee elections. The Company estimates nearly half of cash payments related to its voluntary separation program will be made during 2020, with payments for some Pilots occurring over a period of up to five years based on the terms of the program. These programs will allow the Company to reduce its fixed cost structure in the near-term, while maintaining the ability to adjust to a recovery in travel demand. The programs are expected to lower salaries, wages, and benefits ~~expense.~~by more than $400 million and $1 billion in fourth quarter 2020 and full year 2021, respectively.

The Company ended second quarter 2020 with 737 aircraft in its fleet. In response to capacity reductions due to the effects of the COVID-19 pandemic, the Company currently has nearly 100 aircraft in storage, including the Company's 34 Boeing 737 MAX 8 aircraft that were grounded as of March 13, 2019, to comply with the FAA's emergency order issued for all U.S. airlines to ground all MAX aircraft. See ~~below~~Note 2 to the unaudited Condensed Consolidated Financial Statements for further information on the effects of the COVID-19 pandemic. The Company has not received any MAX aircraft deliveries since February 2019, and Boeing is not currently delivering new MAX aircraft. See Note 12 to the unaudited Condensed Consolidated Financial Statements for further information. The Company ~~estimates the impact of the grounding of the Boeing 737 MAX~~returned five leased 737-700 aircraft during second quarter 2020 and entered into sale-leaseback transactions for 10 737-800 aircraft and 10 737-MAX 8 aircraft ~~("MAX") reduced its Operating income (both GAAP and non-GAAP) for third~~during second quarter 2019 by approximately $210 million. The Company is engaged in ongoing discussions with Boeing regarding compensation for damages related to the MAX groundings; however, it has not reached a settlement with Boeing, and no estimated settlement amounts have been included in third quarter 2019 results.2020. See Note 118 to the unaudited Condensed Consolidated Financial Statements for further information.

For the nine months ended September 30, 2019, Net income was $1.8 billion, a 1.3 percent decrease year-over-year. Diluted earnings per share for the nine months ended September 30, 2019 was $3.29, as compared with $3.13 for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, non-GAAP Net income was also $1.8 billion, a 0.3 percent increase year-over-year. Non-GAAP diluted earnings per share for the nine months ended September 30, 2019 was also $3.29, as compared with $3.08 for the nine months ended September 30, 2018. For the nine months ended September 30, 2019, Operating income was $2.3 billion, a 3.9 percent decrease year-over-year. For the nine months ended September 30, 2019, non-GAAP Operating income was also $2.3 billion, a 2.3 percent decrease year-over-year. The decrease in GAAP Net income was primarily due to the impact of the grounding of the MAX aircraft, unscheduled maintenance disruptions in first quarter, and the U.S. government shutdown in first quarter. The Company estimates the impact of the MAX groundings reduced its Operating income for the nine months ended September 30, 2019, by approximately $435 million. See Note 11 to the unaudited Condensed Consolidated Financial Statements for further information about the MAX groundings. The decrease in GAAP Net income also resulted from a 6.8 percent increase in Salaries, wages, and benefits expense, coupled with a 7.8 percent increase in Other operating expenses. This decrease was partially offset by a 2.7 percent increase in revenues, and a 5.3 percent decrease in Fuel and oil expense. See below for further information.

For the twelve months ended September 30, 2019, the Company's earnings performance, combined with its actions to manage invested capital, produced a 23.7 percent pre-tax non-GAAP return on invested capital ("ROIC"), or 18.6 percent on an after-tax basis, compared with the Company's pre-tax ROIC of 23.4 percent, or 18.1 percent on an after-tax basis, for the twelve months ended September 30, 2018. As a result of not receiving its scheduled MAX aircraft deliveries following the grounding in March 2019, the Company's cash balance at September 30, 2019, was higher than expected. However, the Company has not factored any amounts for excess cash into its invested capital and ROIC calculations for any of the periods presented. See the Company's calculation of ROIC in the accompanying reconciliation tables as well as the Note Regarding Use of Non-GAAP Financial Measures.

The Company ended third quarter 2019 with 752 aircraft in its fleet. All 34 of the Company's Boeing 737 MAX 8 aircraft have remained grounded since March 13, 2019. See Note 11 to the unaudited Condensed Consolidated Financial Statements for further information. Further, Boeing is not delivering new MAX aircraft and, therefore, not meeting its contractual delivery schedule. Based on Boeing's targeted regulatory approval of MAX return to service in fourth quarter 2019, the Company currently expects to receive seven MAX aircraft deliveries during fourth quarter 2019, with the remaining 34 MAX aircraft originally scheduled for delivery in 2019 shifting into 2020. As previously disclosed, as a result of the MAX groundings, the Company deferred the retirement of seven of its owned Boeing 737-700 aircraft to future years. The Company retired one 737-700 aircraft during third quarter 2019, and plans to retire an additional 10 ~~737-700 aircraft during fourth quarter 2019.~~

~~On October 23, 2019, Boeing announced a target regulatory approval of MAX return to service in fourth quarter 2019.~~ Upon a rescission of the ~~Federal Aviation Administration ("FAA")~~FAA order to ground the MAX fleet, the Company ~~continues~~will work closely with Boeing and the FAA to ~~estimate~~safely reintroduce the 34 MAX 8 aircraft currently in its fleet into service and estimates it will take ~~one to two~~the Company several months to comply with applicable FAA ~~directives,~~requirements, including all necessary Pilot simulator training. As such, the MAX has been removed from the Company's flight schedule through February 8, 2020. Based on continued uncertainty around the timing of MAX return to service, the Company soon plans to proactively remove the MAX from its flight schedule through March 6, 2020. The Company previously provided first quarter 2020 available seat mile guidance to increase in the range of 2 to 3 percent, year-over-year, based on MAX flight cancellations through February 8, 2020. Due to the planned future removal of MAX flights through March 6, 2020, the Company is unable to provide updated first quarter 2020 available seat mile guidance at this time. The FAA will determine the timing of MAX return to service, and the Company offers no assurances that current estimations and timelines are correct. The Company continues to be focused on proactively managing cancellations, minimizing operational disruptions, reaccommodating Customers, and minimizing the impact on its ontime performance.

Based on MAX flight cancellations through the remainder of 2019, the Company currently expects its fourth quarter 2019 ASMs to decrease in the range of 0.5 to 1 percent, compared with fourth quarter 2018, and expects its 2019 ASMs to decrease approximately ~~1.5~~ ~~percent, year-over-year.~~

Regulatory approval of MAX return to service is subject to Boeing's ongoing work with the FAA, who will determine the timing of MAX return to service. The MAX is currently out of the Company's published flight schedules through mid-December 2020. See Note 12 to the unaudited Condensed Consolidated Financial Statements for further information. The Company offers no assurances that current estimations and timelines are correct. Any changes to current estimations could result in additional flight schedule adjustments and reductions beyond ~~March 6,~~mid-December 2020, further delays in MAX aircraft deliveries, and additional financial damages.

Based on the Company's latest agreement with Boeing and current planning assumptions, the Company expects to take delivery of no more than 48 MAX aircraft through December 31, 2021. The Company and Boeing have agreed to make reasonable efforts in coming months to agree to a new delivery schedule that reflects this arrangement. The Company will continue collaborating with Boeing to review its aircraft order book and make any further adjustments to the delivery schedule as circumstances related to the MAX groundings and COVID-19 pandemic evolve. The Company also has flexibility with its retirement plans of Boeing 737-700 aircraft, and continues to plan for multiple scenarios for its fleet and capacity plans. The FAA's timetables and directives will determine the timing of MAX return to service, ~~scenarios.~~

and the timing of future aircraft deliveries is subject to change. The Company ~~began service to Hawaii in March 2019, from Oakland to Honolulu,~~offers no assurances that current estimations and ~~began Hawaii service to and from San Jose, California in~~timelines are correct.

In May ~~2019. The Company currently operates a dozen flights daily between Hawaii and the mainland, and offers 16 interisland daily departures amongst the Hawaiian Islands. By April 20,~~ 2020, the Company ~~plans to offer 28 daily departures between California~~began accepting corporate travel bookings through industry-standard business travel booking systems, including Travelport's Apollo and ~~Hawaii,~~Worldspan Global Distribution Systems, and 38 daily departures among the Hawaiian Islands. On November 10, 2019, the Company is scheduled to begin service between Sacramento and Honolulu, as well as interisland service between Honolulu and Lihue, which was accelerated from the Company's previous plan to beginTravelport's Galileo Global Distribution System in ~~January~~July 2020. The Company ~~is scheduled~~expects to ~~begin service from Oakland and San Jose to both Lihue and Kona, and new interisland service between Honolulu and Hilo, and Kona and Kahului, beginning January 2020.~~launch its fourth industry-standard Global Distribution System platform with Amadeus by year-end. The Company ~~is also scheduled to begin service from San Diego to Kahului on Maui on April 14, 2020, and from San Diego to Honolulu on April 20, 2020.~~

~~In July 2019, the Company announced~~published its ~~decision to cease service at Newark Liberty International Airport and consolidate its New York City presence at New York LaGuardia Airport, effective November 3, 2019.~~flight schedule through January 4, 2021, with a more robust schedule for business travelers. The Company ~~has~~ also announced its intention to begin more nonstop service ~~at Cozumel International Airport beginning March 7,~~for Atlanta and Denver airports, effective December 17, 2020, ~~subject~~including nonstop service from Atlanta, Georgia to ~~requisite governmental approvals.~~Oklahoma City, Oklahoma, Omaha, Nebraska, and Louisville, Kentucky, as well as nonstop service from Denver, Colorado to Birmingham, Alabama, Wichita, Kansas, and Little Rock,

Arkansas. The Company also intends to offer nonstop service, effective November 2020, from Long Beach, California to Phoenix, Arizona and Austin, Texas; as well as service between Nashville, Tennessee and Orange County, California.

The Company ~~continued~~suspended international operations in first quarter 2020, and resumed service to ~~return value~~Mexico and the Caribbean via Cancun, San Jose del Cabo/Los Cabos, Montego Bay, and Nassau on July 1, 2020. Service to ~~its Shareholders. During third quarter 2019,~~the Company's other international destinations is expected to resume pending the easing of government restrictions. In response to new local restrictions imposed by the Bahamian government, the Company ~~launched a new accelerated share repurchase program by advancing $500 million~~temporarily suspended operations to a third party financial institution in a privately negotiated transaction ("Third Quarter 2019 ASR Program"). This completed the remaining $400 million of its previous $2.0 billion share repurchase program that had been authorized by its Board of Directors in May 2018 and initiated the $2.0 billion share repurchase program authorized by its Board of Directors in May 2019. The Company received 9.5 million shares in total under the Third Quarter 2019 ASR Program, which was completed in October 2019. The purchase was recorded as a treasury share repurchase for purposes of calculating earnings per share. As of September 30, 2019, the Company had $1.9 billion remaining under its May 2019 $2.0 billion share repurchase authorization. The Company also made cash dividend payments totaling $96 million during third quarter 2019.Nassau effective July 22, 2020.

Material Changes in Results of Operations

Comparison of three months ended ~~September~~June 30, ~~2019~~2020 and ~~September~~June 30, ~~2018~~2019

Total operating revenues for ~~third~~second quarter ~~2019 increased~~2020 decreased by ~~$64 million,~~$4.9 billion, or ~~1.1~~82.9 percent, year-over-year, to ~~a third~~$1.0 billion, due primarily to the sharp decline in passenger demand and bookings, as well as capacity reductions, resulting from the COVID-19 pandemic. Second quarter ~~record of $5.6 billion, despite the negative revenue impacts as a result of the MAX groundings. Third~~2020 RASM was 5.63 cents, and decreased 61.9 percent, compared with second quarter 2019, ~~RASM increased 4.2 percent, year-over-year, to a third quarter record of 14.32 cents, largely~~primarily driven by a ~~Passenger revenue yield increase of 4.1 percent,~~ year-over-year ~~offset slightly by a~~ Load factor decrease of ~~0.4~~55.0 points, and a year-over-year ~~to 83.5~~passenger revenue yield decrease of 21.1 percent. ~~Third quarter 2019 year-over-year RASM benefited by approximately two points as a result of lower third quarter 2019 ASMs due to the MAX groundings, as well as an approximate~~ ~~one-point tailwind—with~~ ~~one-half~~ ~~point related to the Company's third quarter 2018 suboptimal schedule from the 2017 accelerated retirement of its Boeing 737-300 ("Classic") fleet, and~~ ~~one-half~~ point related to the negative revenue effects from the Flight 1380 accident in April 2018. On April 17, 2018, Southwest Airlines Flight 1380 from New York-LaGuardia to Dallas Love Field suffered an uncontained failure of its port CFM56-7B engine, resulting in a Customer fatality. Further, third quarter 2019 year-over-year RASM benefited by an approximate ~~one-half~~ ~~point due to revenue management capabilities implemented in 2018.~~



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)



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock ($1.00 par value)	LUV	New York Stock Exchange



Large accelerated filer	x	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐


	Three months ended September 30,						Nine months ended September 30,							Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018				2020		2019		2020		2019
OPERATING REVENUES:													OPERATING REVENUES:
Passenger	$	5,230		$	5,194		$	15,462		$	15,137		Passenger	$	704	$	5,487	$	4,549	$	10,231
Freight	42			43			129			130			Freight	38		44		77		87

Other	367			338			1,107			994			Other	266		378		616		741
Total operating revenues	5,639			5,575			16,698			16,261			Total operating revenues	1,008		5,909		5,242		11,059

OPERATING EXPENSES:													OPERATING EXPENSES:
Salaries, wages, and benefits	2,002			1,912			6,046			5,659			Salaries, wages, and benefits	1,714		2,068		3,568		4,043
Payroll support, voluntary separation, net													Payroll support, voluntary separation, net	(784)		—		(784)		—
Fuel and oil	1,090			1,205			3,242			3,425			Fuel and oil	257		1,136		1,128		2,152
Maintenance materials and repairs	313			283			916			814			Maintenance materials and repairs	140		310		412		603

Landing fees and airport rentals	345			337			1,036			1,011			Landing fees and airport rentals	275		357		614		691
Depreciation and amortization	308			301			906			870			Depreciation and amortization	313		302		624		598
Other operating expenses	762			739			2,260			2,096
Other operating expenses, net													Other operating expenses, net	220		768		917		1,499
Total operating expenses	4,820			4,777			14,406			13,875			Total operating expenses	2,135		4,941		6,479		9,586

OPERATING INCOME	819			798			2,292			2,386
OPERATING INCOME (LOSS)													OPERATING INCOME (LOSS)	(1,127)		968		(1,237)		1,473

OTHER EXPENSES (INCOME):													OTHER EXPENSES (INCOME):
Interest expense	30			33			90			99			Interest expense	96		31		124		61
Capitalized interest	(10		)	(9		)	(27		)	(29		)	Capitalized interest	(7)		(9)		(12)		(17)
Interest income	(23		)	(20		)	(70		)	(47		)	Interest income	(9)		(24)		(26)		(47)
Other (gains) losses, net	3			8			8			16			Other (gains) losses, net	32		2		60		4
Total other expenses (income)	—			12			1			39			Total other expenses (income)	112		—		146		1

INCOME BEFORE INCOME TAXES	819			786			2,291			2,347
INCOME (LOSS) BEFORE INCOME TAXES													INCOME (LOSS) BEFORE INCOME TAXES	(1,239)		968		(1,383)		1,472
PROVISION FOR INCOME TAXES	160			171			504			536			PROVISION FOR INCOME TAXES	(324)		227		(374)		344

NET INCOME	$	659		$	615		$	1,787		$	1,811
NET INCOME (LOSS)													NET INCOME (LOSS)	$	(915)	$	741	$	(1,009)	$	1,128

NET INCOME PER SHARE, BASIC	$	1.24		$	1.08		$	3.30		$	3.13
NET INCOME (LOSS) PER SHARE, BASIC													NET INCOME (LOSS) PER SHARE, BASIC	$	(1.63)	$	1.37	$	(1.87)	$	2.06

NET INCOME PER SHARE, DILUTED	$	1.23		$	1.08		$	3.29		$	3.13
NET INCOME (LOSS) PER SHARE, DILUTED													NET INCOME (LOSS) PER SHARE, DILUTED	$	(1.63)	$	1.37	$	(1.87)	$	2.06

COMPREHENSIVE INCOME	$	566		$	729		$	1,704		$	2,229
COMPREHENSIVE INCOME (LOSS)													COMPREHENSIVE INCOME (LOSS)	$	(859)	$	675	$	(1,078)	$	1,138

WEIGHTED AVERAGE SHARES OUTSTANDING													WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	533			569			542			578			Basic	563		542		539		547
Diluted	534			569			543			579			Diluted	563		542		539		547



	Three months ended						Nine months ended
	September 30,						September 30,
	2019			2018			2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	659		$	615		$	1,787		$	1,811
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization	308			301			906			870
Unrealized/realized gains on fuel derivative instruments	—			(2		)	—			(13		)
Deferred income taxes	174			104			224			308
Changes in certain assets and liabilities:
Accounts and other receivables	(88		)	(13		)	(292		)	(109		)
Other assets	79			(30		)	195			(243		)
Accounts payable and accrued liabilities	106			161			(240		)	80
Air traffic liability	(17		)	52			897			1,018
Other liabilities	(87		)	—			(210		)	—
Cash collateral received from derivative counterparties	—			10			—			150
Other, net	(43		)	73			(104		)	32
Net cash provided by operating activities	1,091			1,271			3,163			3,904

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(375		)	(454		)	(766		)	(1,384		)
Assets constructed for others	—			(8		)	—			(49		)
Purchases of short-term investments	(529		)	(678		)	(1,329		)	(1,607		)
Proceeds from sales of short-term and other investments	545			531			1,648			1,665
Other, net	—			5			—			5
Net cash used in investing activities	(359		)	(604		)	(447		)	(1,370		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Employee stock plans	9			9			29			26
Reimbursement for assets constructed for others	—			8			—			165
Payments of long-term debt and finance lease obligations	(70		)	(98		)	(245		)	(255		)
Payments of cash dividends	(96		)	(91		)	(372		)	(332		)
Repayment of construction obligation	—			(8		)	—			(22		)
Repurchase of common stock	(500		)	(500		)	(1,450		)	(1,500		)
Other, net	(33		)	3			(44		)	(7		)
Net cash used in financing activities	(690		)	(677		)	(2,082		)	(1,925		)

NET CHANGE IN CASH AND CASH EQUIVALENTS	42			(10		)	634			609

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	2,446			2,114			1,854			1,495

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	2,488		$	2,104		$	2,488		$	2,104

CASH PAYMENTS FOR:
Interest, net of amount capitalized	$	11		$	18		$	59		$	70
Income taxes	$	169		$	38		$	487		$	212

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Flight equipment under finance leases	$	—		$	18		$	—		$	32
Assets constructed for others	$	28		$	46		$	73		$	126



	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	)


			Asset derivatives				Liability derivatives						Asset derivatives						Liability derivatives
		Balance Sheet	Fair value at		Fair value at		Fair value at		Fair value at			Balance Sheet	Fair value at		Fair value at		Fair value at		Fair value at
(in millions)		location	9/30/2019		12/31/2018		9/30/2019		12/31/2018		(in millions)	location	6/30/2020		12/31/2019		6/30/2020		12/31/2019
Derivatives designated as hedges (a)											Derivatives designated as hedges (a)
Fuel derivative contracts (gross)		Prepaid expenses and other current assets	$	35	$	43	$	—	$	—	Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	7	$	48	$	—	$	—
Fuel derivative contracts (gross)		Other assets	79		95		—		—		Fuel derivative contracts (gross)	Other assets	99		62		—		—

Interest rate derivative contracts											Interest rate derivative contracts	Prepaid expenses and other current assets	2		—		—		—
Interest rate derivative contracts		Other assets	1		—		—		—		Interest rate derivative contracts	Other assets	—		2		—		—
Interest rate derivative contracts		Accrued liabilities	—		—		20		2		Interest rate derivative contracts	Accrued liabilities	—		—		—		5
Interest rate derivative contracts		Other noncurrent liabilities	—		—		4		12		Interest rate derivative contracts	Other noncurrent liabilities	—		—		14		1
Total derivatives designated as hedges	Total derivatives designated as hedges		$	115	$	138	$	24	$	14	Total derivatives designated as hedges				$	108	$	112	$	14	$	6
Derivatives not designated as hedges (a)											Derivatives not designated as hedges (a)
Fuel derivative contracts (gross)											Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	1	$	—	$	—	$	—

Interest rate derivative contracts											Interest rate derivative contracts	Accrued liabilities	—		—		60		—

Total derivatives not designated as hedges											Total derivatives not designated as hedges		$	1	$	—	$	60	$	—
Total derivatives											Total derivatives		$	109	$	112	$	74	$	6


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)				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)
	September 30,				September 30,					June 30,						June 30,
(in millions)	2019		2018		2019		2018		(in millions)	2020		2019		2020		2019
Current maturities of long-term debt	$	300	$	—	$	2	$	—	Current maturities of long-term debt	$	502	$	300	$	2	$	1
Long-term debt less current maturities	501		783		18		3		Long-term debt less current maturities	—		500		18		18
	$	801	$	783	$	20	$	3		$	502	$	800	$	20	$	19


Location and amount recognized in income on cash flow and fair value hedging relationships
	Three months ended June 30, 2020								Three months ended June 30, 2019
(in millions)	Fuel and oil		Other (gains)/losses, net		Interest expense		Fuel and oil		Interest expense
Total	$	14	$	14	$	3	$	(2)	$	7

(Gain) loss on cash flow hedging relationships:
Commodity contracts:
Amount of (gain) loss reclassified from AOCI into income	14		14		—		(2)		—
Interest contracts:
Amount of loss reclassified from AOCI into income	—		—		1		—		1

Impact of fair value hedging relationships:
Interest contracts:
Hedged items	—		—		4		—		6
Derivatives designated as hedging instruments	—		—		(2)		—		—


Location and amount recognized in income on cash flow and fair value hedging relationships
	Six months ended June 30, 2020										Six months ended June 30, 2019
(in millions)	Fuel and oil		Other (gains)/losses, net		Interest expense		Fuel and oil		Interest expense
Total	$	36	$	16	$	4	$	9	$	15

Loss on cash flow hedging relationships:
Commodity contracts:
Amount of loss reclassified from AOCI into income	36		16		—		9		—
Interest contracts:
Amount of loss reclassified from AOCI into income	—		—		1		—		2

Impact of fair value hedging relationships:
Interest contracts:
Hedged items	—		—		7		—		12
Derivatives designated as hedging instruments	—		—		(4)		—		1



Location and amount recognized in income on cash flow and fair value hedging relationships
	Three months ended September 30, 2019				Three months ended September 30, 2018
(in millions)	Fuel and oil		Interest expense		Fuel and oil			Interest expense
Total	$	19	$	8	$	(20	)	$	9

(Gain) loss on cash flow hedging relationships:
Commodity contracts:
Amount of (gain) loss reclassified from AOCI into income	19		—		(20		)	—
Interest contracts:
Amount of loss reclassified from AOCI into income	—		2		—			1

Impact of fair value hedging relationships:
Interest contracts:
Hedged items	—		6		—			6
Derivatives designated as hedging instruments	—		—		—			2



Location and amount recognized in income on cash flow and fair value hedging relationships
	Nine months ended September 30, 2019				Nine months ended September 30, 2018
(in millions)	Fuel and oil		Interest expense		Fuel and oil				Interest expense
Total	$	28	$	21	$	(32	)		$	26

(Gain) loss on cash flow hedging relationships:
Commodity contracts:
Amount of (gain) loss reclassified from AOCI into income	28		—		(32		)		—
Interest contracts:
Amount of loss reclassified from AOCI into income	—		3		—				4

Impact of fair value hedging relationships:
Interest contracts:
Hedged items	—		17		—			��	17
Derivatives designated as hedging instruments	—		1		—				5


Derivatives not designated as hedges
	Loss recognized in income on derivatives

	Three months ended					Location of loss recognized in income on derivatives
	June 30,
(in millions)	2020		2019
Fuel derivative contracts	$	1	$	—	Other (gains) losses, net
Interest rate derivatives	5		—		Other (gains) losses, net
Total	$	6	$	—



Derivatives not designated as hedges
	Gain recognized in income on derivatives
	Gain recognized in income on derivatives
	Nine months ended					Location of gain recognized in income on derivatives
	September 30,
(in millions)	2019		2018
Interest rate derivatives	$	—	$	(2	)	Interest expense


	Premium expense recognized in income on derivatives

	Three months ended					Location of premium expense recognized in income on derivatives
	June 30,
(in millions)	2020		2019
Fuel derivative contracts designated as hedges	$	13	$	28	Fuel and oil
Fuel derivative contracts not designated as hedges	$	11	$	—	Other (gains) and losses, net



	Air traffic liability
Balance at December 31, 2017	$	4,565
Current period sales (passenger travel, ancillary services, flight loyalty, and partner loyalty)	16,200
Revenue from amounts included in contract liability opening balances	(3,098		)
Revenue from current period sales	(12,084		)
Balance at September 30, 2018	$	5,583



(in millions)	Statement of Comprehensive Income location	Three months ended September 30, 2019		Nine months ended September 30, 2019
Operating lease cost - aircraft (a)	Other operating expenses	$	44	$	132
Operating lease cost - other	Landing fees and airport rentals, and Other operating expenses	22		66
Short-term lease cost	Other operating expenses	1		3
Variable lease cost	Landing fees and airport rentals, and Other operating expenses	337		1,016
Finance lease cost:
Amortization of lease liabilities	Depreciation and amortization	29		87
Interest on lease liabilities	Interest expense	6		20
Total net lease cost		$	439	$	1,324



(in millions)	Operating leases			Finance leases
Remainder of 2019	$	115		$	28
2020	347			109
2021	213			104
2022	141			101
2023	111			97
Thereafter	753			338
Total lease payments	$	1,680		$	777
Less imputed interest	(334		)	(105		)
Total lease obligations	1,346			672
Less current obligations	(332		)	(86		)
Long-term lease obligations	$	1,014		$	586



(in millions)	Capital leases		Operating leases		Subleases			Operating leases, net
2019	$	111	$	348	$	(92	)	$	256
2020	109		357		(78		)	279
2021	105		244		(41		)	203
2022	100		172		(17		)	155
2023	97		146		(7		)	139
Thereafter	335		474		(1		)	473
Total minimum lease payments	$	857	$	1,741	$	(236	)	$	1,505
Less amount representing interest	126
Present value of minimum lease payments (a)	731
Less current portion	85
Long-term portion	$	646



	Three months ended September 30,						Per ASM change			Percent change
(in cents, except for percentages)	2019			2018			Per ASM change			Percent change
Salaries, wages, and benefits		5.08	¢		4.71	¢		0.37	¢	7.9	%
Fuel and oil	2.77			2.96			(0.19		)	(6.4	)
Maintenance materials and repairs	0.80			0.70			0.10			14.3
Landing fees and airport rentals	0.88			0.83			0.05			6.0
Depreciation and amortization	0.78			0.74			0.04			5.4
Other operating expenses	1.93			1.83			0.10			5.5
Total		12.24	¢		11.77	¢		0.47	¢	4.0	%


Period			Maximum percent of estimated fuel consumption covered by fuel derivative contracts at varying West Texas Intermediate/Brent Crude Oil, Heating Oil, and Gulf Coast Jet Fuel-equivalent price levels (a)

2020			(b)
2021			59%
2022			43%
Beyond 2022			20%


Year	Fair value of fuel derivative contracts at June 30, 2020		Amount of losses deferred in AOCI at June 30, 2020 (net of tax)
Remainder of 2020	$	2	$	(31)
2021	16		(63)
2022	51		(29)
Beyond 2022	38		(7)
Total	$	107	$	(130)



Year	Fair value of fuel derivative contracts at September 30, 2019		Amount of losses deferred in AOCI at September 30, 2019 (net of tax)
Remainder of 2019	$	3	$	14
2020	45		38
2021	38		39
2022	28		12
Total	$	114	$	103



		~~Estimated economic fuel price per gallon, including taxes and fuel hedging premiums (d)~~
~~Average Brent Crude Oil price per barrel~~		~~Fourth Quarter 2019 (c)~~
~~$40~~		~~$1.60 - $1.70~~
~~$50~~		~~$1.75 - $1.85~~
~~Current Market (a)~~		~~$2.05 - $2.15~~
~~$70~~		~~$2.20 - $2.30~~
~~$80~~		~~$2.35 - $2.45~~
~~$90~~		~~$2.45 - $2.55~~
~~Estimated fuel hedging premium expense per gallon (b)~~		~~$.04~~


	Estimated economic fuel price per gallon, including taxes and fuel hedging premiums (e)
Average Brent Crude Oil price per barrel	Third Quarter 2020 (c)	Fourth Quarter 2020 (d)
$20	$.75 - $.85	$.60 - $.70
$30	$.95 - $1.05	$.90 - $1.00
Current Market (a)	$1.20 - $1.30	$1.25 - $1.35
$50	$1.35 - $1.45	$1.45 - $1.55
$60	$1.55 - $1.65	$1.75 - $1.85
$70	$1.70 - $1.80	$2.00 - $2.10
Estimated fuel hedging premium expense per gallon (b)	$.07	$.10
Estimated premium costs (b)	$24 million	$24 million


	Six months ended June 30,						Per ASM		Percent
(in cents, except for percentages)	2020		2019		change		change
Salaries, wages, and benefits	6.70	¢	5.20	¢	1.50	¢	28.8	%
Payroll support, voluntary separation, net	(1.47)		—		(1.47)		n.m.
Fuel and oil	2.12		2.76		(0.64)		(23.2)
Maintenance materials and repairs	0.77		0.77		—		—
Landing fees and airport rentals	1.15		0.89		0.26		29.2
Depreciation and amortization	1.17		0.77		0.40		51.9

Other operating expenses, net	1.73		1.92		(0.19)		(9.9)
Total	12.17	¢	12.31	¢	(0.14)	¢	(1.1)	%


Net income (loss), as reported	$	(915)		$	741			$	(1,009)		$	1,128
Deduct: Payroll support program, voluntary separation, net	(784)			—				(784)			—
Deduct: Contracts settling in the current period, but for which losses were reclassified from AOCI (a)	(10)			—				(10)			—
Add: Mark-to-market impact from fuel contracts settling in current and future periods (a)	15			—				17			—




Deduct: Gain from aircraft sale-leaseback transactions	(222)			—				(222)			—

Add: Mark-to-market impact from interest rate swap agreements	5			—				29			—
Add: Net income (loss) tax impact of special items, excluding GAAP to Non-GAAP tax rate difference (b)	327			—				319			—
Add: GAAP to Non-GAAP tax rate difference (c)	83			—				82			—
Net income (loss), excluding special items	$	(1,501)		$	741		n.m.	$	(1,578)		$	1,128		n.m.

Net income (loss) per share, diluted, as reported	$	(1.63)		$	1.37			$	(1.87)		$	2.06
Deduct: Impact of special items	(1.76)			—				(1.78)			—
Deduct: Net impact of net income (loss) above from fuel contracts divided by dilutive shares	(0.02)			—				(0.02)			—

Add: Net income (loss) tax impact of special items, excluding GAAP to Non-GAAP tax rate difference(b)	0.59			—				0.59			—
Add: GAAP to Non-GAAP tax rate difference (c)	0.15			—				0.15			—
Net income (loss) per share, diluted, excluding special items	$	(2.67)		$	1.37		n.m.	$	(2.93)		$	2.06		n.m.


Operating expenses per ASM (cents)	11.94		¢	12.36		¢		12.17		¢	12.31		¢
Add: Impact of special items	5.62			—				1.89			—
Deduct: Fuel and oil expense divided by ASMs	(1.44)			(2.84)				(2.12)			(2.76)

Deduct: Profitsharing expense divided by ASMs	—			(0.43)				—			(0.34)
Operating expenses per ASM, excluding Fuel and oil expense, profitsharing, and special items (cents)	16.12		¢	9.09		¢	77.3%	11.94		¢	9.21		¢	29.6%




	Twelve months ended				Twelve months ended
	September 30, 2019				September 30, 2018
Operating income, as reported	$	3,112			$	3,127
Net impact from fuel contracts	—				(41		)
Gain on sale of retired Boeing 737-300 aircraft	—				(25		)
Operating income, non-GAAP	$	3,112			$	3,061
Net adjustment for aircraft leases (a)	108				100
Adjusted operating income, non-GAAP (A)	$	3,220			$	3,161

Non-GAAP tax rate (B)	21.5		%	(d)	22.8		%	(e)

Net operating profit after-tax, NOPAT (A* (1-B) = C)	$	2,529			$	2,439

Debt, including finance leases (b)	$	3,227			$	3,461
Equity (b)	9,933				9,513
Net present value of aircraft operating leases (b)	530				624
Average invested capital	$	13,690			$	13,598
Equity adjustment for hedge accounting (c)	(92		)		(98		)
Adjusted average invested capital (D)	$	13,598			$	13,500

Non-GAAP ROIC, pre-tax (A/D)	23.7		%		23.4		%

Non-GAAP ROIC, after tax (C/D)	18.6		%		18.1		%



	The Boeing Company
	MAX 7 Firm Orders	MAX 8 Firm Orders		MAX 8 Options	Additional MAX 8s		Total
2019	7	21		—	16		44	(c)
2020	—	35		—	3		38
2021	—	44		—	—		44
2022	—	27		14	—		41
2023	12	22		23	—		57
2024	11	30		23	—		64
2025	—	40		36	—		76
2026	—	—		19	—		19
	30	219	(a)	115	19	(b)	383


		Average Age (Yrs)		Number of Aircraft		Number Owned	Number Leased					Average Age (Yrs)			Number of Aircraft				Number Owned				Number Leased
Type	Seats				Type			Seats
737-700	143		15		511			395	116	737-700	143			16				496			(a)	391			105
737-800	175	4		207		200	7	737-800		175			5			207				190				17
737 MAX 8	175	1		34	(a)	31	3	737 MAX 8		175		2			34		(b)		21				13
Totals		12		752		626	126	Totals				12			737				602				135



Issuer Purchases of Equity Securities (1)
	(a)	(b)			(c)	(d)
					Total number of shares purchased as part of publicly announced plans or programs	Maximum dollar value of shares that may yet be purchased under the plans or programs

	Total number of shares purchased	Average price paid per share

Period
July 1, 2019 through July 31, 2019	—	$	—	(2)	—	$	1,900,051,674
August 1, 2019 through August 31, 2019	9,491,900	$	—	(2)(3)	9,491,900	$	1,900,051,674
September 1, 2019 through September 30, 2019	—	$	—		—	$	1,900,051,674
Total	9,491,900				9,491,900



3.1			Restated Certificate of Formation of the Company, effective May 18, 2012 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 (File No. 1-7259)).
3.2			Second Amended and Restated Bylaws of the Company, effective November 17, 2016 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed November 21, 2016 (File No. 1-7259)).
~~31.1~~4.1			First Supplemental Indenture, dated May 1, 2020, between the Company and Wells Fargo Bank, N.A., as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed May 1, 2020 (File No. 1-7259)).
10.1			Supplemental Letter Agreement No. 03729-MISC-2001512, to Purchase Agreement No. 3729, dated December 13, 2011, between The Boeing Company and the Company. (1)
10.2			Supplemental Letter Agreement, dated April 23, 2020, to Purchase Agreement No. 3729, dated December 13, 2011, between The Boeing Company and the Company.
10.3			Supplemental Letter Agreement No. 6-1162-CJM-039, to Purchase Agreement No. 3729, dated December 13, 2011, between The Boeing Company and the Company. (1)
31.1			Rule 13a-14(a) Certification of Chief Executive Officer.
31.2			Rule 13a-14(a) Certification of Chief Financial Officer.
32.1			Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer. ~~(1)~~(2)
101.INS			XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH			Inline XBRL Taxonomy Extension Schema Document.
101.CAL			Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF			Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB			Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE			Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).



	SOUTHWEST AIRLINES CO.

~~November 8, 2019~~July 27, 2020	By:	/s/ Tammy Romo

		Tammy Romo
		Executive Vice President & Chief Financial Officer
		(On behalf of the Registrant and in
		her capacity as Principal Financial
		and Accounting Officer)