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

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     For the quarterly period ended September 30, 2023
 or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ________ to ________
Commission File No. 1-7259
southwestheartimage.jpg

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  No x
    Number of shares of Common Stock outstanding as of the close of business on October 26, 2023: 596,115,380



TABLE OF CONTENTS TO FORM 10-Q

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of September 30, 2023 and December 31, 2022
Condensed Consolidated Statement of Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 and 2022
Condensed Consolidated Statement of Stockholders' Equity as of September 30, 2023 and 2022
Condensed Consolidated Statement of Cash Flows for the three and nine months ended September 30, 2023 and 2022
Notes to Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
SIGNATURES
2

Table of Contents
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, 2023December 31, 2022
ASSETS  
Current assets: 
Cash and cash equivalents$9,497 $9,492 
Short-term investments2,236 2,800 
Accounts and other receivables1,467 1,040 
Inventories of parts and supplies, at cost799 790 
Prepaid expenses and other current assets632 686 
Total current assets14,631 14,808 
Property and equipment, at cost:
Flight equipment25,724 23,725 
Ground property and equipment7,344 6,855 
Deposits on flight equipment purchase contracts345 376 
Assets constructed for others51 28 
33,464 30,984 
Less allowance for depreciation and amortization14,389 13,642 
 19,075 17,342 
Goodwill970 970 
Operating lease right-of-use assets1,288 1,394 
Other assets1,016 855 
 $36,980 $35,369 
LIABILITIES AND STOCKHOLDERS' EQUITY  
Current liabilities:  
Accounts payable$1,736 $2,004 
Accrued liabilities2,880 2,043 
Current operating lease liabilities220 225 
Air traffic liability7,246 6,064 
Current maturities of long-term debt30 42 
Total current liabilities12,112 10,378 
Long-term debt less current maturities7,984 8,046 
Air traffic liability - noncurrent1,754 2,186 
Deferred income taxes2,157 1,985 
Noncurrent operating lease liabilities1,039 1,118 
Other noncurrent liabilities880 969 
Stockholders' equity:  
Common stock888 888 
Capital in excess of par value4,135 4,037 
Retained earnings16,657 16,261 
Accumulated other comprehensive income201 344 
Treasury stock, at cost(10,827)(10,843)
Total stockholders' equity11,054 10,687 
 $36,980 $35,369 
    
See accompanying notes.
3

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

 Three months ended September 30,Nine months ended September 30,
 2023202220232022
OPERATING REVENUES:    
Passenger$5,912 $5,613 $17,426 $15,867 
Freight44 44 131 133 
Other569 563 1,711 1,642 
Total operating revenues6,525 6,220 19,268 17,642 
OPERATING EXPENSES:    
Salaries, wages, and benefits2,728 2,322 7,991 6,771 
Fuel and oil1,564 1,750 4,514 4,390 
Maintenance materials and repairs326 204 836 624 
Landing fees and airport rentals457 395 1,324 1,128 
Depreciation and amortization375 335 1,107 984 
Other operating expenses958 819 2,868 2,343 
Total operating expenses6,408 5,825 18,640 16,240 
OPERATING INCOME117 395 628 1,402 
OTHER EXPENSES (INCOME):  
Interest expense63 86 193 272 
Capitalized interest(4)(11)(15)(31)
Interest income(156)(70)(425)(101)
Loss on extinguishment of debt 76  192 
Other (gains) losses, net(23)(39)(44)57 
Total other expenses (income)(120)42 (291)389 
INCOME BEFORE INCOME TAXES237 353 919 1,013 
PROVISION FOR INCOME TAXES44 76 202 254 
NET INCOME$193 $277 $717 $759 
NET INCOME PER SHARE, BASIC$0.32 $0.47 $1.20 $1.28 
NET INCOME PER SHARE, DILUTED$0.31 $0.44 $1.15 $1.21 
COMPREHENSIVE INCOME (LOSS)$336 $(223)$574 $676 
WEIGHTED AVERAGE SHARES OUTSTANDING   
Basic596 593 595 593 
Diluted640 639 639 643 
See accompanying notes.
4

Table of Contents
Southwest Airlines Co.
Condensed Consolidated Statement of Stockholders' Equity
(in millions, except per share amounts)
(unaudited)
  
Common StockCapital in excess of par valueRetained earningsAccumulated other comprehensive income (loss)Treasury stockTotal
Balance at December 31, 2022$888 $4,037 $16,261 $344 $(10,843)$10,687 
Issuance of common and treasury stock pursuant to Employee stock plans— 1 — — 7 8 
Share-based compensation— 20 — — — 20 
Cash dividends, $0.18 per share
— — (107)— — (107)
Comprehensive loss— — (159)(147)— (306)
Balance at March 31, 2023$888 $4,058 $15,995 $197 $(10,836)$10,302 
Issuance of common and treasury stock pursuant to Employee stock plans— 11 — — 5 16 
Share-based compensation— 34 — — — 34 
Cash dividends, $0.18 per share
— — (107)— — (107)
Comprehensive income (loss)— — 683 (139)— 544 
Balance at June 30, 2023$888 $4,103 $16,571 $58 $(10,831)$10,789 
Issuance of common and treasury stock pursuant to Employee stock plans— 9 — — 4 13 
Share-based compensation— 23 — — — 23 
Cash dividends, $0.18 per share
— — (107)— — (107)
Comprehensive income— — 193 143 — 336 
Balance at September 30, 2023$888 $4,135 $16,657 $201 $(10,827)$11,054 

  
Common StockCapital in excess of par valueRetained earningsAccumulated other comprehensive income (loss)Treasury stockTotal
Balance at December 31, 2021$888 $4,224 $15,774 $388 $(10,860)$10,414 
Cumulative effect of adopting Accounting Standards Update No. 2020-06, Debt— (300)55 — — (245)
Issuance of common and treasury stock pursuant to Employee stock plans— — — — 7 7 
Share-based compensation— 16 — — — 16 
Comprehensive income (loss)— — (278)503 — 225 
Balance at March 31, 2022$888 $3,940 $15,551 $891 $(10,853)$10,417 
Issuance of common and treasury stock pursuant to Employee stock plans— 10 — — 3 13 
Share-based compensation— 16 — — — 16 
Comprehensive income (loss)— — 760 (86)— 674 
Balance at June 30, 2022$888 $3,966 $16,311 $805 $(10,850)$11,120 
Issuance of common and treasury stock pursuant to Employee stock plans— 9 — — 4 13 
Share-based compensation— 14 — — — 14 
Comprehensive income (loss)— — 277 (500)— (223)
Balance at September 30, 2022$888 $3,989 $16,588 $305 $(10,846)$10,924 
    See accompanying notes.
5

Table of Contents
Southwest Airlines Co.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
Three months endedNine months ended
September 30,September 30,
 2023202220232022
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net income$193 $277 $717 $759 
Adjustments to reconcile net income to cash provided by operating activities:   
Depreciation and amortization375 335 1,107 984 
Impairment of long-lived assets 4  35 
Unrealized mark-to-market adjustment on available for sale securities  (4)7 
Unrealized/realized (gain) on fuel derivative instruments(21)(26)(14)(11)
Deferred income taxes57 76 214 250 
Loss on extinguishment of debt 76  192 
Changes in certain assets and liabilities:   
Accounts and other receivables(216)58 (405)162 
Other assets(35)30 74 (14)
Accounts payable and accrued liabilities352 (70)645 436 
Air traffic liability(59)(93)750 700 
Other liabilities(89)(83)(180)(292)
Cash collateral received from (provided to) derivative counterparties40 (325)(6)(41)
Other, net19 (25)(159)44 
Net cash provided by operating activities616 234 2,739 3,211 
CASH FLOWS FROM INVESTING ACTIVITIES:    
Capital expenditures(842)(1,072)(2,812)(2,568)
Assets constructed for others(8)(7)(23)(14)
Purchases of short-term investments(1,620)(1,743)(5,347)(4,213)
Proceeds from sales of short-term and other investments2,406 1,702 5,914 3,982 
Net cash used in investing activities(64)(1,120)(2,268)(2,813)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Proceeds from Employee stock plans13 12 36 32 
Payments of long-term debt and finance lease obligations(11)(1,679)(78)(1,825)
Payments of cash dividends(214) (428) 
Payments for repurchases and conversions of convertible debt (239) (648)
Other, net(1)1 4 6 
Net cash used in financing activities(213)(1,905)(466)(2,435)
NET CHANGE IN CASH AND CASH EQUIVALENTS339 (2,791)5 (2,037)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD9,158 13,234 9,492 12,480 
CASH AND CASH EQUIVALENTS AT END OF PERIOD$9,497 $10,443 $9,497 $10,443 
CASH PAYMENTS FOR:
Interest, net of amount capitalized$19 $42 $134 $203 
Income taxes$1 $8 $9 $19 
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Adoption of Accounting Standards Update 2020-06, Debt$ $ $ $245 
Right-of-use assets acquired under operating leases$9 $14 $78 $42 
See accompanying notes.
6

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

1. Basis of Presentation
2. New Accounting Pronouncements
3. Financial Derivative Instruments
4. Comprehensive Income (Loss)
5. Revenue
6. Net Income Per Share
7. Fair Value Measurements
8. Supplemental Financial Information
9. Commitments and Contingencies
10. Financing Activities
7

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


1.    BASIS OF PRESENTATION

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

In late December 2022, the Company experienced a wide-scale operational disruption as historically extreme winter weather across a significant portion of the United States impacted its operational plan and flight schedules. Subsequent to Winter Storm Elliott, the Company was challenged to realign flight crews, flight schedules, and aircraft for a period of several days during this peak demand travel period. This disruption and subsequent recovery efforts resulted in the cancellation of more than 16,700 flights during the period from December 21 through December 31, 2022. These events also created a deceleration in bookings, primarily isolated to January and February 2023, as well as increased first quarter 2023 expenses by approximately $55 million, which are included in the accompanying unaudited Condensed Consolidated Statement of Comprehensive Income (Loss) for the nine months ended September 30, 2023. These first quarter 2023 expenses included reimbursements to Customers impacted by the cancellations for costs they incurred in excess of the amounts accrued as of December 31, 2022, adjustments to the estimated value of Rapid Rewards points offered as a gesture of goodwill to Customers as a result of changes in the estimates of the points expected to be redeemed, and additional premium pay and additional compensation for Employees directly or indirectly impacted by the cancellations and recovery efforts. There were no material impacts to operating revenues or expenses beyond first quarter 2023 as a result of this disruption.

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 30, 2023 and 2022 include all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods. This includes all normal and recurring adjustments and elimination of significant intercompany transactions. Financial results for the Company and airlines in general can be seasonal in nature. In many years, the Company's revenues, as well as its Operating income and Net income, have performed better in its second and third fiscal quarters than in its first and fourth fiscal quarters. Air travel is also significantly impacted by general economic conditions, the amount of disposable income available to consumers and changes in consumer behavior, unemployment levels, corporate travel budgets, global pandemics such as COVID-19, extreme or severe weather and natural disasters, fears of terrorism or war, governmental actions, and other factors beyond the Company's control. These and other factors, such as the price of jet fuel in some periods, the nature of the Company's fuel hedging program, and the periodic volatility of commodities used by the Company for hedging jet fuel, have created, and may continue to create, significant volatility in the Company's financial results. See Note 3 for further information on fuel and the Company's hedging program. Operating results for the three and nine months ended September 30, 2023, are not necessarily indicative of the results that may be expected for future quarters or for the year ended December 31, 2023. 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, 2022.

2.    NEW ACCOUNTING PRONOUNCEMENTS

On January 7, 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). This standard provides optional temporary guidance for entities transitioning away from London Interbank Offered Rate ("LIBOR") to new reference interest rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions with Topic 848. These amendments do not apply to any contract modifications made after December 31, 2024, any new hedging relationships entered into after December 31, 2024, or to existing hedging relationships evaluated for effectiveness existing as of December 31, 2024, that apply certain optional practical expedients. This standard was effective immediately and may be applied (i) on a full retrospective basis as
8

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


of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or (ii) on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The Company had no material LIBOR-related contract modifications during the nine months ended September 30, 2023.

3.    FINANCIAL DERIVATIVE INSTRUMENTS

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

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. The Company does not purchase or hold any financial derivative instruments for trading or speculative purposes.

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

As of September 30, 2023, the Company had fuel derivative instruments in place to provide coverage at varying price levels. The following table provides information about the Company’s volume of fuel hedging on an economic basis:

Maximum fuel hedged as of
September 30, 2023Derivative underlying commodity type as of
Period (by year)(gallons in millions) (a)September 30, 2023
Remainder of 2023271 West Texas Intermediate ("WTI") crude oil, Brent crude oil, and Heating oil
20241,265 WTI crude oil and Brent crude oil
20251,033 Brent crude oil
2026176 Brent crude oil
(a) Due to the types of derivatives utilized by the Company and different price levels of those contracts, these volumes represent the maximum economic hedge in place and may vary significantly as market prices and the Company's flight schedule fluctuate.

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. Qualification is re-evaluated quarterly, and all periodic changes in fair value of the derivatives designated as hedges
9

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


are recorded in Accumulated other comprehensive income ("AOCI") until the underlying jet fuel is consumed. See Note 4.

When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel derivative instrument portfolio, any subsequent changes in fair value of those positions are marked to market through earnings. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de-designated as hedges are concurrently marked to market through earnings. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs. In a situation where it becomes probable that a fuel hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into earnings. The Company did not have any such situations where a derivative ceased to qualify for hedge accounting during 2022, or during the nine months ended September 30, 2023.

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


  Asset derivativesLiability derivatives
 Balance SheetFair value atFair value atFair value atFair value at
(in millions)location9/30/202312/31/20229/30/202312/31/2022
Derivatives designated as hedges (a)     
Fuel derivative contracts (gross)Prepaid expenses and other current assets$250 $352 $ $ 
Fuel derivative contracts (gross)Other assets223 160   
Interest rate derivative contractsOther assets23 14   
Total derivatives designated as hedges$496 $526 $ $ 
Derivatives not designated as hedges (a)     
Fuel derivative contracts (gross)Prepaid expenses and other current assets$42 $ $28 $ 
Total derivatives $538 $526 $28 $ 
(a) Represents the position of each trade before consideration of offsetting positions with each counterparty and does not include the impact of cash collateral deposits provided to or received from counterparties. See discussion of credit risk and collateral following in this Note.

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

 Balance SheetSeptember 30,December 31,
(in millions)location20232022
Cash collateral deposits held from counterparties for fuel contracts - currentOffset against Prepaid expenses and other current assets$70 $106 
Cash collateral deposits held from counterparties for fuel contracts - noncurrentOffset against Other assets30  
Receivable from third parties for fuel contractsAccounts and other receivables45 34 
 
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
10

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


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 30, 2023, no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

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

Offsetting of derivative assets
(in millions)
(i)(ii)(iii) = (i) + (ii)(i)(ii)(iii) = (i) + (ii)
September 30, 2023December 31, 2022
DescriptionBalance Sheet locationGross amounts of recognized assetsGross amounts offset in the Balance SheetNet amounts of assets presented in the Balance SheetGross amounts of recognized assetsGross amounts offset in the Balance SheetNet amounts of assets presented in the Balance Sheet
Fuel derivative contractsPrepaid expenses and other current assets$292 $(98)$194 $352 $(106)$246 
Fuel derivative contractsOther assets$223 $(30)$193 (a)$160 $ $160 (a)
Interest rate derivative contractsOther assets$23 $ $23 (a)$14 $ $14 (a)
(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the unaudited Condensed Consolidated Balance Sheet in Note 8.


Offsetting of derivative liabilities
(in millions)
(i)(ii)(iii) = (i) + (ii)(i)(ii)(iii) = (i) + (ii)
September 30, 2023December 31, 2022
DescriptionBalance Sheet locationGross amounts of recognized liabilitiesGross amounts offset in the Balance SheetNet amounts of liabilities presented in the Balance SheetGross amounts of recognized liabilitiesGross amounts offset in the Balance SheetNet amounts of liabilities presented in the Balance Sheet
Fuel derivative contractsPrepaid expenses and other current assets$98 $(98)$ $106 $(106)$ 
Fuel derivative contractsOther assets$30 $(30)$ $ $ $ 


11

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 months ended September 30, 2023 and 2022:

Location and amount recognized in income on cash flow and fair value hedging relationships
Three months ended September 30, 2023Three months ended September 30, 2022
(in millions)Fuel and oilOther operating expensesFuel and oilOther operating expenses
Total$(52)$2 $(195)$2 
(Gain) loss on cash flow hedging relationships
Commodity contracts:
Amount of (gain) reclassified from AOCI into income(52) (195) 
Interest contracts:
Amount of loss reclassified from AOCI into income 2  2 

Location and amount recognized in income on cash flow and fair value hedging relationships
Nine months ended September 30, 2023Nine months ended September 30, 2022
(in millions)Fuel and oilOther operating expensesFuel and oilOther operating expenses
Total$(93)$5 $(703)$5 
(Gain) loss on cash flow hedging relationships
Commodity contracts:
Amount of (gain) reclassified from AOCI into income(93) (703) 
Interest contracts:
Amount of loss reclassified from AOCI into income 5  5 

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)20232022
Fuel derivative contracts$(175)$354 
Interest rate derivatives(7)(2)
Total$(182)$352 

12

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


Derivatives designated and qualified in cash flow hedging relationships
 (Gain) loss recognized in AOCI on derivatives, net of tax
 Nine months ended
 September 30,
(in millions)2023 2022
Fuel derivative contracts$78 $(438)
Interest rate derivatives(7)(14)
Total$71  $(452)

Derivatives not designated as hedges
 (Gain) loss recognized in income on derivatives 
  
 Three months endedLocation of (gain) loss recognized in income on derivatives
 September 30,
(in millions)20232022
Fuel derivative contracts$(33)$(38)Other (gains) losses, net

Derivatives not designated as hedges
 (Gain) loss recognized in income on derivatives 
  
 Nine months endedLocation of (gain) loss recognized in income on derivatives
 September 30,
(in millions)20232022
Fuel derivative contracts$(26)$(23)Other (gains) losses, net

The Company also recorded expense (benefit) associated with premiums paid for fuel derivative contracts that settled/expired during the three and nine months ended September 30, 2023 and 2022. Gains and/or losses associated with fuel derivatives that qualify for hedge accounting are ultimately recorded to Fuel and oil expense. Gains and/or losses associated with fuel derivatives that do not qualify for hedge accounting are recorded to Other (gains) and losses, net. The following 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 contract settles:

 Premium expense (benefit) recognized in income on derivatives  
  
 Three months endedLocation of premium expense (benefit) recognized in income on derivatives
 September 30,
(in millions)20232022
Fuel derivative contracts designated as hedges$30 $26 Fuel and oil
Fuel derivative contracts not designated as hedges (14)Other (gains) losses, net

13

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


 Premium expense (benefit) recognized in income on derivatives 
  
 Nine months endedLocation of premium expense (benefit) recognized in income on derivatives
 September 30,
(in millions)20232022
Fuel derivative contracts designated as hedges$91 $79 Fuel and oil
Fuel derivative contracts not designated as hedges$ $(14)Other (gains) losses, net

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets or provided by third parties. Included in the Company’s cumulative unrealized gains from fuel hedges as of September 30, 2023, recorded in AOCI, were approximately $77 million in unrealized gains, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to September 30, 2023.

Interest Rate Swaps
The Company is party to certain interest rate swap agreements that are accounted for as cash flow hedges. The Company did not have any interest rate swap agreements designated as fair value hedges, as defined, during the periods presented. All of the Company's interest rate swap agreements qualify for the "shortcut" or "critical terms match" methods of accounting for hedges, which dictate that the hedges were assumed to be perfectly effective at origination, and, thus, there was no ineffectiveness to be recorded in earnings.

Credit Risk and Collateral
Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company at the reporting date. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. As of September 30, 2023, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating. The Company also had agreements with counterparties in which cash deposits and letters of credit were required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds. In certain cases, the Company has the ability to substitute among these different forms of collateral at its discretion.

The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of September 30, 2023, at which such postings are triggered:

14

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


 Counterparty (CP) 
(in millions)ABCDEFG
H
Total
Fair value of fuel derivatives$120 $57 $84 $28 $77 $35 $60 $26 $487 
Cash collateral held from CP100        100 
Option to substitute LC for cashN/AN/A
 (a)
 (a)

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

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

15

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


4.    COMPREHENSIVE INCOME (LOSS)

Comprehensive income includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting and actuarial gains/losses arising from the Company’s postretirement benefit obligation. The differences between Net income and Comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022 were as follows:
 Three months ended September 30,
(in millions)20232022
NET INCOME$193 $277 
Unrealized gain (loss) on fuel derivative instruments, net of
  deferred taxes of $41 and ($153)
135 (504)
Unrealized gain on interest rate derivative instruments, net of
  deferred taxes of $2 and $
8 4 
Total other comprehensive income (loss)$143 $(500)
COMPREHENSIVE INCOME (LOSS)$336 $(223)

 Nine months ended September 30,
(in millions)20232022
NET INCOME$717 $759 
Unrealized loss on fuel derivative instruments, net of
  deferred taxes of ($45) and ($31)
(150)(101)
Unrealized gain on interest rate derivative instruments, net of
  deferred taxes of $2 and $5
11 18 
Other, net of deferred taxes of $4 and $
(4) 
Total other comprehensive loss$(143)$(83)
COMPREHENSIVE INCOME$574 $676 

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the three and nine months ended September 30, 2023:
(in millions)Fuel derivativesInterest rate derivativesDefined benefit plan itemsDeferred tax impactAccumulated other comprehensive income (loss)
Balance at June 30, 2023$(65)$(29)$170 $(18)$58 
Changes in fair value228 8 — (55)181 
Reclassification to earnings(52)2 — 12 (38)
Balance at September 30, 2023$111 $(19)$170 $(61)$201 

(in millions)Fuel derivativesInterest rate derivativesDefined benefit plan itemsDeferred tax impactAccumulated other comprehensive income (loss)
Balance at December 31, 2022$305 $(32)$170 $(99)$344 
Changes in fair value(101)8 — 21 (72)
Reclassification to earnings(93)5 — 17 (71)
Balance at September 30, 2023$111 $(19)$170 $(61)$201 
16

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



The following tables illustrate the significant amounts reclassified out of each component of AOCI for the three and nine months ended September 30, 2023:
Three months ended September 30, 2023
(in millions)Amounts reclassified from AOCI
Affected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)
AOCI components
Unrealized (gain) on fuel derivative instruments$(52)Fuel and oil expense
(12)Less: Tax expense
$(40)Net of tax
Unrealized loss on interest rate derivative instruments$2 Other operating expenses
 Less: Tax expense
$2 Net of tax
Total reclassifications for the period$(38)Net of tax

Nine months ended September 30, 2023
(in millions)Amounts reclassified from AOCI
Affected line item in the unaudited Condensed Consolidated Statement of Comprehensive Income (Loss)
AOCI components
Unrealized (gain) on fuel derivative instruments$(93)Fuel and oil expense
(22)Less: Tax expense
$(71)Net of tax
Unrealized loss on interest rate derivative instruments$5 Other operating expenses
1 Less: Tax expense
$4 Net of tax
Other Other
4 Less: Tax Expense
$(4)Net of tax
Total reclassifications for the period$(71)Net of tax


5.    REVENUE

Passenger Revenues

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

Revenue is categorized by revenue source as the Company believes it best depicts the nature, amount, timing, and uncertainty of revenue and cash flow. The following table provides the components of Passenger revenue recognized for the three and nine months ended September 30, 2023 and 2022:
17

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


 Three months ended September 30,Nine months ended September 30,
(in millions)2023202220232022
Passenger non-loyalty$4,758 $4,630 $14,023 $13,112 
Passenger loyalty - air transportation916 791 2,730 2,236 
Passenger ancillary sold separately238 192 673 519 
Total passenger revenues$5,912 $5,613 $17,426 $15,867 

As of September 30, 2023, and December 31, 2022, the components of Air traffic liability, including contract liabilities based on tickets sold and unused flight credits available to the Customer, both of which are net of recorded breakage, and loyalty points available for redemption, within the unaudited Condensed Consolidated Balance Sheet were as follows:
 Balance as of
(in millions)September 30, 2023December 31, 2022
Air traffic liability - passenger travel and ancillary passenger services$4,004 $3,061 
Air traffic liability - loyalty program4,996 5,189 
Total Air traffic liability$9,000 $8,250 

The balance in "Air traffic liability - passenger travel and ancillary passenger services" also includes flight credits not currently associated with a ticket that can be applied by Customers towards the purchase of future travel. These flight credits are typically created as a result of a prior ticket cancellation or exchange, and are reflected net of associated breakage. Rollforwards of the Company's "Air traffic liability - loyalty program" for the three and nine months ended September 30, 2023 and 2022 were as follows (in millions):

Three months ended September 30,Nine months ended September 30,
2023202220232022
Air traffic liability - loyalty program - beginning balance$5,079 $4,885 $5,189 $4,789 
Amounts deferred associated with points awarded859 815