Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Reconciliation of Reported Amounts to Non-GAAP Financial Measures (unaudited) (in millions, except per share and per ASM amounts)

	Year ended December 31,								Percent
	2015				2014				Change
Total operating revenues, as reported	$	19,820			$	18,605
Deduct: Special revenue adjustment	(172		)		—
Operating revenues, Non-GAAP	$	19,648			$	18,605			5.6	%
Fuel and oil expense, unhedged	$	3,362			$	5,321
Add (Deduct): Fuel hedge losses (gains) included in Fuel and oil expense	254				(28		)
Fuel and oil expense, as reported	$	3,616			$	5,293
Add (Deduct): Net impact from fuel contracts	323				(28		)
Fuel and oil expense, non-GAAP	$	3,939			$	5,265			(25.2	)%
Total operating expenses, as reported	$	15,704			$	16,380
Deduct: Union contract bonuses	(334		)		(9		)
Add (Deduct): Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period settled contracts	72				(4		)
Add (Deduct): Contracts settling in the current period, but for which gains and/or (losses) have been recognized in a prior period*	251				(24		)
Deduct: Acquisition and integration costs	(39		)		(126		)
Add: Litigation settlement	37				—
Total operating expenses, non-GAAP	$	15,691			$	16,217			(3.2	)%
Operating income, as reported	$	4,116			$	2,225
Deduct: Special revenue adjustment	(172		)		$	—
Add: Union contract bonuses	334				9
Add (Deduct): Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period settled contracts	(72		)		4
Add (Deduct): Contracts settling in the current period, but for which gains and/or (losses) have been recognized in a prior period*	(251		)		24
Add: Acquisition and integration costs	39				126
Deduct: Litigation settlement	(37		)		—
Operating income, non-GAAP	$	3,957			$	2,388			65.7	%
Net income, as reported	$	2,181			$	1,136
Deduct: Special revenue adjustment (a)	(108		)		—
Add: Union contract bonuses (a)	210				6
Add: Mark-to-market impact from fuel contracts settling in future periods	373				251
Add (Deduct): Ineffectiveness from fuel hedges settling in future periods	(9		)		5
Add (Deduct): Other net impact of fuel contracts settling in the current or a prior period (excluding reclassifications)	(251		)		24
Deduct: Income tax impact of fuel contracts	(42		)		(104		)
Add: Acquisition and integration costs (a)	24				79
Deduct: Litigation settlement (a)	(23		)		—
Net income, non-GAAP	$	2,355			$	1,397			68.6	%

	Year ended December 31,								Percent
	2015				2014				Change
Net income per share, diluted, as reported	$	3.27			$	1.64
Add: Net impact to net income above from fuel contracts divided by dilutive shares (a)	0.06				0.25
Add: Impact of special items (a)	0.19				0.12
Net income per share, diluted, non-GAAP	$	3.52			$	2.01			75.1	%
Operating expenses per ASM (cents)		11.18	¢			12.50	¢
Deduct: Fuel expense divided by ASMs	(2.57		)		(4.04		)
Deduct: Impact of special items	(0.24		)		(0.10		)
Operating expenses per ASM, non-GAAP, excluding fuel and special items (cents)		8.37	¢			8.36	¢		0.1	%

• As a result of prior hedge ineffectiveness and/or contracts marked to market through earnings.

(a) Amounts net of tax.

Return on Invested Capital (ROIC) (in millions) (unaudited)

	Year Ended				Year Ended				Year Ended
	December 31, 2015				December 31, 2014				December 31, 2013
Operating Income, as reported	$	4,116			$	2,225			$	1,278
Deduct: Special revenue adjustment	(172		)		—				—
Add: Union contract bonuses	334				9				—
Add (Deduct): Net impact from fuel contracts	(323		)		28				84
Add: Acquisition and integration costs	39				126				86
Deduct: Litigation settlement	(37		)		—				—
Operating Income, non-GAAP	3,957				2,388				1,448
Net adjustment for aircraft leases (1)	114				133				143
Adjustment for fuel hedge accounting	(124		)		(62		)		(60		)
Adjusted Operating Income, non-GAAP	$	3,947			$	2,459			$	1,531
Average invested capital (2)	$	11,037			$	11,470			$	11,664
Equity adjustment for hedge accounting	1,027				104				50
Adjusted average invested capital	$	12,064			$	11,574			$	11,714
ROIC, pre-tax	32.7		%		21.2		%		13.1		%

(1) Net adjustment related to presumption that all aircraft in fleet are owned (i.e., the impact of eliminating aircraft rent expense and replacing with estimated depreciation expense for those same aircraft).

(2) Average invested capital is an average of the five most recent quarter end balances of debt, net present value of aircraft leases, and equity adjusted for hedge accounting.

Note Regarding Use of Non-GAAP Financial Measures

The Company's Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). These GAAP financial statements include (i) unrealized non-cash adjustments and reclassifications, which can be significant, as a result of accounting requirements and elections made under accounting pronouncements relating to derivative instruments and hedging and (ii) other charges and benefits the Company believes are not indicative of its ongoing operational performance.

As a result, the Company also provides financial information in this filing that was not prepared in accordance with GAAP and should not be considered as an alternative to the information prepared in accordance with GAAP. The Company provides supplemental non-GAAP financial information, including results that it refers to as "economic," which the Company's management utilizes to evaluate its ongoing financial performance and the Company believes provides greater transparency to investors as supplemental information to its GAAP results. The Company's economic financial results differ from GAAP results in that they only include the actual cash settlements from fuel hedge contracts - all reflected within Fuel and oil expense in the period of settlement. Thus, Fuel and oil expense on an economic basis reflects the Company’s actual net cash outlays for fuel during the applicable period, inclusive of settled fuel derivative contracts. Any net premium costs paid related to option contracts are reflected as a component of Other (gains) losses, net, for both GAAP and non-GAAP (including economic) purposes in the period of contract settlement. The Company believes these economic results provide a better measure of the impact of the Company's fuel hedges on its operating performance and liquidity since they exclude the unrealized, non-cash adjustments and reclassifications that are recorded in GAAP results in accordance with accounting guidance relating to derivative instruments, and they reflect all cash settlements related to fuel derivative contracts within Fuel and oil expense. This enables the Company's management, as well as investors, to consistently assess the Company's operating performance on a year-over-year or quarter-over-quarter basis after considering all efforts in place to manage fuel expense. However, because these measures are not determined in accordance with GAAP, such measures are susceptible to varying calculations and not all companies calculate the measures in the same manner. As a result, the aforementioned measures, as presented, may not be directly comparable to similarly titled measures presented by other companies.

Further information on (i) the Company's fuel hedging program, (ii) the requirements of accounting for derivative instruments, and (iii) the causes of hedge ineffectiveness and/or mark-to-market gains or losses from derivative instruments is included in Note 10 to the Consolidated Financial Statements.

In addition to its “economic” financial measures, as defined above, the Company has also provided other non-GAAP financial measures, including results that it refers to as "excluding special items," as a result of items that the Company believes are not indicative of its ongoing operations. These include a one-time Special revenue adjustment due to the July 2015 amended co-branded credit card agreement (the "Agreement") with Chase Bank USA, N.A. ("Chase") and the resulting change in accounting methodology, expenses associated with the Company’s acquisition and integration of AirTran, a gain resulting from a litigation settlement received in January 2015, and union contract bonuses recorded for certain workgroups. The Company believes that evaluation of its financial performance can be enhanced by a presentation of results that exclude the impact of these items in order to evaluate the results on a comparative basis with results in prior periods that do not include such items and as a basis for evaluating operating results in future periods. As a result of the Company’s acquisition of AirTran, which closed on May 2, 2011, the Company has incurred substantial charges associated with the integration of the two companies. The Company does not expect to incur any further Acquisition and integration costs beyond 2015.

The Company has also provided return on invested capital, which is a non-GAAP financial measure. The Company believes return on invested capital is a meaningful measure because it quantifies how well the Company generates operating income relative to the capital it has invested in its business. Although return on invested capital is commonly used as a measure of capital efficiency, definitions of return on invested capital may differ; therefore, the Company is providing an explanation of its calculation for return on invested capital (before taxes and excluding special items) in the accompanying reconciliation.

YEAR IN REVIEW

For the 43rd consecutive year, the Company was profitable, recording GAAP and non-GAAP results for 2015 and 2014 as follows:

		Year ended
(in millions, except per share amounts)		December 31,
GAAP		2015				2014				Percent Change
Operating income		$	4,116			$	2,225			85.0
Net income		$	2,181			$	1,136			92.0
Net income per share, diluted		$	3.27			$	1.64			99.4
Non-GAAP
Operating income		$	3,957			$	2,388			65.7
Net income		$	2,355			$	1,397			68.6
Net income per share, diluted		$	3.52			$	2.01			75.1
See the previous 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.

Net income for the year ended December 31, 2015, was a Company record $2.2 billion, or $3.27 per diluted share, a 92.0 percent increase in Net income year-over-year. This increase primarily was due to a 6.5 percent increase in Operating revenues, driven by strong demand for low-fare air travel and a 7.2 percent year-over-year capacity growth, and the impact of the July 2015 amended Agreement with Chase and the resulting change in accounting methodology. See Note 1 to the Consolidated Financial Statements for further information. Also, Operating expenses decreased 4.1 percent, primarily as a result of lower fuel prices, which more than offset increases in certain cost categories discussed below, including Salaries, Wages, and Benefits expense, which included the Company's record Employee Profitsharing expense of $620 million. Excluding special items in both years, non-GAAP Net income was a record $2.4 billion, or $3.52 per diluted share, a 68.6 percent increase in non-GAAP Net income year-over-year. Year ended December 31, 2015 Operating income was $4.1 billion and non-GAAP Operating income was $4.0 billion. Both GAAP and non-GAAP annual Operating income results for 2015 were Company records and significantly surpassed the prior year performance.

For the twelve months ended December 31, 2015, the Company's exceptional earnings performance, combined with its actions to prudently manage invested capital, produced a 32.7 percent pre-tax Return on invested capital, excluding special items ("ROIC"). This represented a significant increase compared with the Company's ROIC of 21.2 percent for the twelve months ended December 31, 2014. The increase in ROIC was achieved primarily through successful integration of AirTran, operational and network enhancements, and declining fuel prices.

During 2015, the Company continued to return significant value to its Shareholders. The Company returned a record $1.4 billion to Shareholders through a combined $180 million in dividend payments and $1.2 billion through three separate accelerated share repurchase programs and the buyback of its common shares on the open market. On January 25, 2016, the Company launched a new accelerated share repurchase program by advancing $500 million to a financial institution in a privately negotiated transaction ("First Quarter 2016 ASR Program"). The Company received an initial delivery of shares, representing an estimated 75 percent of the shares to be purchased by the Company under the First Quarter 2016 ASR Program. The specific number of shares that the Company ultimately will repurchase under the First Quarter 2016 ASR Program will be determined based generally on a discount to the volume-weighted average price per share of the Company's common stock during a calculation period to be completed no later than April 2016. The purchase will be recorded as a treasury share purchase for purposes of calculating earnings per share. Subsequent to the launch of the First Quarter 2016 ASR Program, the Company has $200 million remaining under its existing $1.5 billion share repurchase program. See Part II, Item 5 for further information on the Company's share repurchase authorizations.

Company Overview

Following the Company’s effective completion of the AirTran integration at the end of 2014, one of the Company’s primary areas of focus was on allowing its expanded network to develop, while also improving the reliability of its operations. Throughout most of 2015, the Company had a significantly higher than normal portion of its network considered under development, due to new service implemented upon converting both international and domestic destinations over from AirTran to Southwest, as well as growth in existing Southwest markets including Dallas, Houston, Washington D.C, and New York. In 2016, the portion of those markets under development will return to a more long-term historical figure based on capacity. Following the integration of AirTran, the Company also made investments in its 2015 flight schedule to improve its overall on-time performance. The Company’s on-time performance during 2015 as reported through November 2015 was approximately 80 percent, which increased approximately 7 points compared to full year 2014.

During 2015, the Company took several steps designed to enhance its existing service in cities across the network or to connect existing cities with new service not previously offered by Southwest, most notably:

•	The Company began offering daily nonstop flights to 20 new cities from Dallas Love Field, marking the Company's most robust schedule ever offered at Dallas Love Field, with 180 daily departures to 50 nonstop destinations.

•	The Company connected Central America to the Company's network with the addition of Liberia, Costa Rica; San Jose, Costa Rica; and Belize City, Belize in 2015.

•	The Company began service to Puerto Vallarta, Mexico in June 2015.

•	During October 2015, the all-new international terminal at Houston Hobby opened and the Company commenced service from Houston Hobby to Mexico (Cancun, Mexico City, Puerto Vallarta, Cabo San Lucas/Los Cabos), Belize City, Belize; San Jose, Costa Rica; Liberia, Costa Rica; and Montego Bay, Jamaica.

During 2015, the Company took delivery of 19 737-800 aircraft from Boeing and 24 pre-owned Boeing 737-700 aircraft from third parties, and retired four Boeing 737 Classic (737-300 and 737-500) aircraft during the year. Following AirTran's final passenger service on December 28, 2014, the Company removed all remaining Boeing 717-200 aircraft ("B717s") from service. As of December 31, 2015, 87 of AirTran's 88 B717 aircraft had been delivered to Delta pursuant to a lease/sublease agreement, and one B717 aircraft was undergoing conversion in preparation for delivery to Delta. See Note 7 to the Consolidated Financial Statements for further information.

The Company is scheduled to be the launch customer for Boeing’s new, more fuel-efficient 737 MAX 8 aircraft, which is expected to enter service in 2017. The 737 MAX 8 is expected to reduce fuel burn and CO2 emissions approximately 20 percent, compared with the original Next-Generation 737s (737-300 and 737-500) when they first entered service. Southwest is also scheduled to be the launch customer for the Boeing 737 MAX 7 series aircraft, with deliveries expected to begin in 2019. Currently, the Company has firm orders in place for 170 MAX 8 aircraft and 30 MAX 7 aircraft.

At the end of December 2015, the Company revised its future firm delivery schedule to reflect 33 additional -800s, and the conversion of its remaining 25 -700 firm orders to -800s. In addition, two pre-owned -700s were added to its delivery schedule. The incremental seat gauge and aircraft will be used to replace the capacity associated with the Company's year-end decision to further accelerate the retirement of its Classic fleet to no later than mid-2018, as compared to the previous plan of 2021. The Company continues to plan for modest year-over-year fleet growth through 2018 of no more than two percent, on average. The Company also expects an approximate five to six percent increase year-over-year in 2016 ASMs. The revised delivery schedule is currently estimated to increase the Company's firm aircraft capital commitments by $400 million beyond 2015. Replacing the Boeing 737-300s and Boeing 737-500s with more efficient and cost-effective aircraft is expected to provide significant cost savings, along with improving the Customer experience with better ontime performance and WiFi-equipped aircraft. Additional information regarding the Company's aircraft delivery schedule is included in Note 4 to the Consolidated Financial Statements.

During 2015, the following events took place regarding the Company's unionized Employee groups in contract negotiations:

•	Dispatchers, represented by the Transport Workers Union, Local 550 ("TWU 550"), ratified a new four-year contract which becomes amendable on November 30, 2019.

•	Flight Simulator Technicians, represented by the International Brotherhood of Teamsters, ratified a new four-year contract which becomes amendable on April 30, 2019.

•	Meteorologists, represented by TWU 550, approved their first-ever collective-bargaining agreement following certification by the National Mediation Board late last year. This new, four-year contract becomes amendable on June 1, 2019.

•	Flight Attendants, represented by the Transport Workers Union, Local 556, reached a tentative collective-bargaining agreement with the Company, which was announced in July 2015. The Flight Attendants failed to ratify this agreement, as announced by the Company on July 24, 2015, and the parties will continue negotiations.

•	Pilots, represented by the Southwest Airlines Pilots' Association, reached a tentative collective bargaining agreement with the Company, which was announced September 17, 2015. The Pilots failed to ratify this agreement, as announced by the Company on November 4, 2015, and the parties will continue negotiations.

•	Ramp, Operations, Provisioning, and Freight Agents, represented by the Transport Workers Union Local 555, reached a tentative collective bargaining agreement with the Company, which was announced on December 29, 2015. The agreement has been presented to members for ratification and the vote will be closed in first quarter 2016.

2015 Compared with 2014

Operating Revenues

Passenger revenues for 2015 increased by $641 million, or 3.6 percent, compared with 2014. Holding load factor and yield constant, the increase was primarily attributable to a 7.2 percent increase in capacity as strong Customer demand for low-fare air travel enabled the Company to fill the additional seats, as evidenced by a Company record annual load factor of 83.6 percent. On a unit basis, Passenger revenue decreased 3.4 percent, year-over-year, largely driven by a 4.7 percent decrease in passenger revenue yield, year-over-year.

Freight revenues for 2015 increased by $4 million, or 2.3 percent, compared with 2014, primarily due to increased pounds shipped. Based on current trends, the Company currently expects Freight revenues in first quarter 2016 to be comparable to fourth quarter 2015.

The Company recorded a Special revenue adjustment during 2015 of $172 million. This adjustment represented a one-time non-cash reduction to the deferred revenue liability as a result of the July 2015 amended Agreement with Chase and the resulting change in accounting methodology. The adjustment is classified as a special item and thus excluded from the Company's non-GAAP financial results. See Note 1 to the Consolidated Financial Statements and the Note Regarding Use of Non-GAAP Financial Measures for further information.

Other revenues for 2015 increased by $398 million, or 51.6 percent, compared with 2014, primarily as a result of the July 2015 amended Agreement with Chase and the resulting change in accounting methodology. The Agreement resulted in an acceleration of the timing of revenue recognition on a prospective basis beginning July 1, 2015, as well as a change in classification. The transportation element of the consideration received is now allocated a lower relative value, resulting in a reduction in the revenues classified as Passenger on a prospective basis, and the higher relative value associated with the non-transportation elements results in an increase in the portion of revenues classified as Other within the Consolidated Statement of Income; however, the precise revenue impact for future periods is not determinable until the volume of future transactions for the period is known. Ancillary revenues increased slightly year-over-year, primarily due to an increase in EarlyBird Check-in® and A1-15 select boarding positions sold at the

gate, which was partially offset by the decrease in revenues from the termination of AirTran passenger service and related ancillary fees.

While some yield softness has continued into January, demand for low-fare air travel, thus far, remains strong. Based on favorable booking and revenue trends, and including the estimated $110 million first quarter 2016 effect of the amended Agreement with Chase, the Company is currently expecting first quarter 2016 operating unit revenues to be flat with first quarter 2015. See Note 1 to the Consolidated Financial Statements for further information.

Operating Expenses

Operating expenses for 2015 decreased by $676 million, or 4.1 percent, compared with 2014, while capacity increased 7.2 percent over the same period. Historically, except for changes in the price of fuel, changes in most Operating expenses for airlines are driven by changes in capacity, or ASMs. The following table presents the Company's Operating expenses per ASM for 2015 and 2014, followed by explanations of these changes on a per ASM basis and/or on a dollar basis:

	Year ended December 31,								Per ASM				Percent
(in cents, except for percentages)	2015				2014				change				change
Salaries, wages, and benefits		4.54	¢			4.14	¢			0.40	¢		9.7	%
Fuel and oil	2.57				4.04				(1.47		)		(36.4	)
Maintenance materials and repairs	0.72				0.75				(0.03		)		(4.0	)
Aircraft rentals	0.17				0.22				(0.05		)		(22.7	)
Landing fees and other rentals	0.83				0.85				(0.02		)		(2.4	)
Depreciation and amortization	0.72				0.72				—				—
Acquisition and integration	0.03				0.10				(0.07		)		(70.0	)
Other operating expenses	1.60				1.68				(0.08		)		(4.8	)
Total		11.18	¢			12.50	¢			(1.32	)¢		(10.6	)%

Operating expenses per ASM for 2015 decreased by 10.6 percent, compared with 2014, primarily due to a decrease in Fuel and oil expense, partially offset by an increase in Salaries, wages, and benefits expense. On a non-GAAP basis, Operating expenses per ASM for 2015, excluding fuel and special items, increased 0.1 percent year-over-year primarily due to higher Salaries, wages, and benefits expense. Based on current cost trends, the Company expects its first quarter 2016 unit costs, excluding fuel, special items, and profitsharing to increase approximately two percent, compared with first quarter 2015. See the previous Note Regarding Use of Non-GAAP Financial Measures.

Salaries, wages, and benefits expense for 2015 increased by $949 million, or 17.5 percent, compared with 2014. Salaries, wages, and benefits expense per ASM for 2015 increased 9.7 percent, compared with 2014. On both a dollar and per ASM basis, approximately half of these increases were the result of higher salaries primarily due to the accrued $334 million of union bonuses as a result of ongoing negotiations with various workgroups during 2015, increased training, additional headcount, and contractual increases. The remaining increase was primarily due to higher profitsharing expense as a result of significantly higher profits in 2015. The Company’s profitsharing expense is based on profits that exclude the unrealized gains and/or losses the Company records for its fuel hedging program. Additionally, pursuant to the terms of the Company's ProfitSharing Plan (the "Plan"), acquisition and integration costs were excluded from the calculation of profitsharing expense from April 1, 2011, through December 31, 2013. These costs, totaling $385 million, are being amortized on a pro rata basis as a reduction of operating profits, as defined by the Plan, from 2014 through 2018. In addition, Acquisition and integration costs incurred during 2014 and 2015 reduced operating profits, as defined, in the calculation of profitsharing. Based on current cost trends, the Company expects first quarter 2016 Salaries, wages, and benefits expense per ASM, excluding profitsharing and special items, to increase, compared with first quarter 2015.

The Company conducted negotiations with various unionized Employee groups during the year including Dispatchers, who ratified a new four-year contract, Flight Simulator Technicians, who ratified a new four-year contract, Meteorologists, who approved their first-ever collective bargaining agreement, Flight Attendants, Pilots, and Ramp, Operations, Provisioning, and Freight Agents. The following table sets forth the Company’s unionized Employee groups that are currently in negotiations on collective-bargaining agreements:

Employee Group	Approximate Number of Employees	Representatives	Amendable Date
Southwest Pilots	7,600	Southwest Airlines Pilots’ Association (“SWAPA”)	August 2012
Southwest Flight Attendants	13,100	Transportation Workers of America, AFL-CIO, Local 556 (“TWU 556”)	May 2013
Southwest Ramp, Operations, Provisioning, Freight Agents	11,000	Transportation Workers of America, AFL-CIO, Local 555 (“TWU 555”)	June 2011
Southwest Material Specialists (formerly known as Stock Clerks)	300	International Brotherhood of Teamsters, Local 19 (“IBT 19”)	August 2013
Southwest Mechanics	2,300	Aircraft Mechanics Fraternal Association (“AMFA”)	August 2012
Southwest Facilities Maintenance Technicians	40	AMFA	N/A
Southwest Flight Crew Training Instructors	80	Transportation Workers of America, AFL-CIO, Local 557 (“TWU 557”)	December 2015
Southwest Source of Support Representatives	90	IAM 142	N/A

Fuel and oil expense for 2015 decreased by $1.7 billion, or 31.7 percent, compared with 2014. On a per ASM basis, Fuel and oil expense for 2015 decreased 36.4 percent, compared with 2014. Excluding the impact of fuel hedge accounting, both the dollar and per ASM decreases were attributable to lower jet fuel prices. The Company's average economic jet fuel price per gallon decreased 29.1 percent year-over-year, from $2.92 for 2014 to $2.07 for 2015. The Company also slightly improved fuel efficiency, when measured on the basis of ASMs generated per gallon of fuel, primarily as a result of modernization of the Company's fleet and a 4.0 percent increase in stage length. Fuel gallons consumed increased 5.6 percent, compared with 2014, while year-over-year capacity increased 7.2 percent.

As a result of the Company's fuel hedging program, the Company recognized losses totaling $254 million in Fuel and oil expense for 2015, compared with net gains totaling $28 million for 2014. These totals include cash settlements realized from the settlement of fuel derivative contracts totaling $577 million paid to counterparties for 2015, compared to $56 million received from counterparties for 2014, although such totals exclude gains and/or losses recognized from hedge ineffectiveness and from derivatives that do not qualify for hedge accounting. These impacts are recorded as a component of Other (gains) losses, net. See Note 10 to the Consolidated Financial Statements.

As of January 15, 2016, on an economic basis, the Company had derivative contracts in place related to expected future fuel consumption as follows:

		Average percent of estimated fuel consumption covered by
		fuel derivative contracts at varying WTI/Brent Crude Oil,
Period		Heating Oil, and Gulf Coast Jet Fuel-equivalent price levels
First quarter 2016 (1)		—
Full year 2016 (2)		Approx. 20%
2017 (2)		Approx. 65%
2018 (2)		Approx. 35%

(1) The Company is effectively unhedged for the first quarter 2016 at current price levels. A majority of the financial impact of the derivative contracts currently held for the quarter is locked-in and is included in the economic jet fuel price simulations below.

(2) Given the Company has entered into different derivative contracts at various prices, these percentages are an average based on the assumption that Brent crude oil prices settle above current market prices. See Note 10 to the Consolidated Financial Statements for further information.

As a result of applying hedge accounting in prior periods, a portion of the amounts in Accumulated other comprehensive income (loss) (“AOCI”) are considered "frozen," and these amounts will be recognized in earnings in future periods when the underlying fuel derivative contracts settle. The following table displays the Company's estimated fair value of remaining fuel derivative contracts (not considering the impact of the cash collateral provided to or received from counterparties (See Note 10 to the Consolidated Financial Statements for further information), as well as the amount of deferred gains/losses in AOCI at December 31, 2015, and the expected future periods in which these items are expected to settle and/or be recognized in earnings (in millions):

Year		Fair value (liability) of fuel derivative contracts at December 31, 2015				Amount of gains (losses) deferred in AOCI at December 31, 2015 (net of tax)
2016		$	(863	)		$	(618	)
2017		(630		)		(409		)
2018		12				(21		)
Total		$	(1,481	)		$	(1,048	)

Based on forward market prices and the amounts in the above table (and excluding any other subsequent changes to the fuel hedge portfolio), the Company's jet fuel costs per gallon could exceed market (i.e., unhedged) prices during some of these future periods. This is based primarily on expected future cash settlements associated with fuel derivatives, but excludes any impact associated with the ineffectiveness of fuel hedges or fuel derivatives that are marked to market because they do not qualify for hedge accounting. See Note 10 to the Consolidated Financial Statements for further information. Assuming no changes to the Company's current fuel derivative portfolio, but including all previous hedge activity for fuel derivatives that have not yet settled, and considering only the expected net cash payments related to hedges that will settle, the Company is providing a sensitivity table for first quarter 2016, and full year 2016, jet fuel prices at different crude oil assumptions as of January 15, 2016, and for expected premium costs associated with settling contracts each period, respectively.

	Estimated economic jet fuel price per gallon, including taxes
Average Brent Crude Oil price per barrel	1Q 2016 (2)	Full Year 2016 (2)
$15	$1.20 - $1.25	$1.30 - $1.35
$25	$1.45 - $1.50	$1.50 - $1.55
Current Market (1)	$1.65 - $1.70	$1.70 - $1.75
$45	$2.00 - $2.05	$1.95 - $2.00
$55	$2.30 - $2.35	$2.15 - $2.20
Estimated Premium Costs (3)	$35 - $40 million	$150 - $160 million

(1) Brent crude oil average market prices as of January 15, 2016, were approximately $30 and $33 per barrel for first quarter 2016 and full year 2016, respectively.

(2) The economic fuel price per gallon sensitivities provided assume the relationship between Brent crude oil and refined products based on market prices as of January 15, 2016.

(3) Fuel hedge premium expense is recognized as a component of Other (gains) losses, net.

Maintenance materials and repairs expense for 2015 increased by $27 million, or 2.8 percent, compared with 2014. On a per ASM basis, Maintenance materials and repairs expense for 2015 decreased 4.0 percent, compared with 2014, as the dollar increases were more than offset by the 7.2 percent increase in capacity. On a dollar basis, the majority of the increase was attributable to the timing of regular airframe maintenance checks, partially offset by reduced engine and avionic repair expense as a result of the B717 aircraft transitioning out of the Company's fleet. The Company currently expects Maintenance materials and repairs expense per ASM for first quarter 2016 to increase, compared with first quarter 2015.

Aircraft rentals expense for 2015 decreased by $57 million, or 19.3 percent, compared with 2014. On a per ASM basis, Aircraft rentals expense decreased 22.7 percent, compared with 2014. On both a dollar and per ASM basis, the decrease was primarily due to the transition of leased B717 aircraft out of the Company's fleet for conversion and delivery to Delta. The Company currently expects Aircraft rentals expense per ASM for first quarter 2016 to be comparable to fourth quarter 2015.

Landing fees and other rentals expense for 2015 increased by $55 million, or 5.0 percent, compared with 2014. On a per ASM basis, Landing fees and other rentals expense for 2015 decreased 2.4 percent, compared with 2014, as the dollar increases were more than offset by the 7.2 percent increase in capacity. On a dollar basis, the majority of the increase was due was due to higher space rental rates at various airports. The remaining increase was due to heavier landing weights for the Company's higher capacity 737-800 aircraft, which now make up a larger portion of the Company's fleet. The Company currently expects Landing fees and other rentals expense per ASM for first quarter 2016 to decrease, compared with first quarter 2015.

Depreciation and amortization expense for 2015 increased by $77 million, or 8.2 percent, compared with 2014. On a per ASM basis, Depreciation and amortization expense remained flat, compared with 2014. On a dollar basis, the majority of the increase was due to the purchase and capital lease of new and used aircraft since 2014, the majority of which replaced B717s removed from service in late 2014. The Company currently expects Depreciation and amortization expense per ASM for first quarter 2016 to increase, compared with first quarter 2015, due to the accelerated retirement of the owned 737-300 and 737-500 fleet and the acquisition of new 737-800 and 737-700 aircraft. See Note 1 to the Consolidated Financial Statements for further information.

The Company incurred $39 million in Acquisition and integration costs in 2015, related to the AirTran integration, compared with $126 million in 2014. This expense primarily consisted of Employee training, facilities integration, and certain expenses associated with the grounding and conversion costs resulting from the transition of B717s to Delta. The Company does not expect to incur any further Acquisition and integration costs beyond 2015. See Note 7 to the Consolidated Financial Statements for further information.

Other operating expenses for 2015 increased by $37 million, or 1.7 percent, compared with 2014. On a per ASM basis, Other operating expenses for 2015 decreased 4.8 percent, compared with 2014, as the dollar increases were more than offset by the 7.2 percent increase in capacity. On a dollar basis, the increase was equally attributable to higher personnel expenses associated with travel costs of the Company's flight crew and credit card fees paid to third parties associated with the increase in Passenger revenues. These and other smaller increases were partially offset by a decrease in security expenses as a result of the repeal of the TSA Aviation Security Infrastructure Fee in October 2014 and a litigation settlement received by the Company in the first quarter of 2015. The Company currently expects Other operating expenses per ASM for first quarter 2016 to be comparable with fourth quarter 2015.

Other

Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities. See Note 10 to the Consolidated Financial Statements for further information on the Company's hedging activities. The following table displays the components of Other (gains) losses, net, for the years ended December 31, 2015, and 2014:

	Year ended December 31,
(in millions)	2015				2014
Mark-to-market impact from fuel contracts settling in future periods	$	373			$	251
Ineffectiveness from fuel hedges settling in future periods	(9		)		5
Realized ineffectiveness and mark-to-market (gains) or losses	72				(4		)
Premium cost of fuel contracts	124				62
Other	(4		)		(5		)
	$	556			$	309

Income Taxes

The Company's effective tax rate was approximately 37.3 percent for 2015, compared with 37.4 percent for 2014. On a non-GAAP basis, the Company currently projects a full year 2016 effective tax rate of approximately 37 to 38 percent based on forecasted financial results. However, the Company’s effective tax rate during interim periods of 2016 may differ significantly from this full-year estimate.

Reconciliation of Reported Amounts to Non-GAAP Financial Measures (unaudited) (in millions, except per share and per ASM amounts)

		Year ended December 31,								Percent Change
		2014				2013
Fuel and oil expense, unhedged		$	5,321			$	5,645
Add (Deduct): Fuel hedge (gains) losses included in Fuel and oil expense		(28		)		118
Fuel and oil expense, as reported		$	5,293			$	5,763
Deduct: Net impact from fuel contracts		(28		)		(84		)
Fuel and oil expense, non-GAAP		$	5,265			$	5,679			(7.3	)%
Total operating expenses, as reported		$	16,380			$	16,421
Add (Deduct): Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period settled contracts		(4		)		3
Deduct: Contracts settling in the current period, but for which gains and/or (losses) have been recognized in a prior period*		(24		)		(87		)
Deduct: Acquisition and integration costs		(126		)		(86		)
Deduct: Union contract bonuses		(9		)		—
Total operating expenses, non-GAAP		$	16,217			$	16,251			(0.2	)%
Operating income, as reported		$	2,225			$	1,278
Add (Deduct): Reclassification between Fuel and oil and Other (gains) losses, net, associated with current period settled contracts		4				(3		)
Add: Contracts settling in the current period, but for which gains and/or (losses) have been recognized in a prior period*		24				87
Add: Acquisition and integration costs		126				86
Add: Union contract bonuses		9				—
Operating income, non-GAAP		$	2,388			$	1,448			64.9	%
Net income, as reported		$	1,136			$	754
Add (Deduct): Mark-to-market impact from fuel contracts settling in future periods		251				(103		)
Add: Ineffectiveness from fuel hedges settling in future periods		5				11
Add: Other net impact of fuel contracts settling in the current or a prior period (excluding reclassifications)		24				87
Add (Deduct): Income tax impact of fuel contracts		(104		)		2
Add: Acquisition and integration costs (a)		79				54
Add: Union contract bonuses (a)		6				—
Net income, non-GAAP		$	1,397			$	805			73.5	%
Net income per share, diluted, as reported		$	1.64			$	1.05
Add: Net impact to net income above from fuel contracts divided by dilutive shares (a)		0.25				—
Add: Impact of special items, net (a)		0.12				0.07
Net income per share, diluted, non-GAAP		$	2.01			$	1.12			79.5	%
Operating expenses per ASM (cents)			12.50	¢			12.60	¢
Deduct: Fuel expense divided by ASMs (cents)		(4.04		)		(4.42		)
Deduct: Impact of special items, net (cents)		(0.10		)		(0.07		)
Operating expenses per ASM, non-GAAP, excluding fuel and special items (cents)			8.36	¢			8.11	¢		3.1	%

*As a result of prior hedge ineffectiveness and/or contracts marked to market through earnings.

(a) Amounts net of tax

See previous Note Regarding Use of Non-GAAP Financial Measures.

2014 Compared with 2013

Operating Revenues

Passenger revenues for 2014 increased by $937 million, or 5.6 percent, compared with 2013. Holding other factors constant, approximately half of the increase in Passenger revenues was attributable to the 2.4 point increase in load factor and the majority of the remaining increase was attributable to higher passenger yields, both driven by strong Customer demand for air travel and successful execution of the Company's strategic initiatives. Passenger revenue included an increase due to a change in estimate, which was recorded on a prospective basis and effective October 1, 2014, of approximately $55 million. See Note 1 to the Consolidated Financial Statements regarding this change in accounting estimate.

Freight revenues for 2014 increased by $11 million, or 6.7 percent, compared with 2013, primarily due to benefits from new and maturing markets as a result of the AirTran integration.

Other revenues for 2014 decreased by $42 million, or 5.2 percent, compared with 2013, primarily due to a decline in ancillary revenues. The majority of the decline in ancillary revenues was due to the adoption of Southwest's more Customer-friendly fee policies for Customers who could purchase travel on AirTran in 2014 through southwest.com, and the overall reduction in AirTran flights in 2014 as a result of the integration process. This decline was partially offset by an increase in certain Southwest specific ancillary revenues, such as EarlyBird Check-in® and A1-15 select boarding positions sold at the gate.

Operating Expenses

Operating expenses for 2014 decreased by $41 million, or 0.2 percent, compared with 2013, while capacity increased 0.5 percent over the same period. Historically, except for changes in the price of fuel, changes in most Operating expenses for airlines are driven by changes in capacity, or ASMs. The following table presents the Company's Operating expenses per ASM for 2014 and 2013, followed by explanations of these changes on a per ASM basis and/or on a dollar basis:

	Year ended December 31,								Per ASM				Percent change
(in cents, except for percentages)	2014				2013				change
Salaries, wages, and benefits		4.14	¢			3.86	¢			0.28	¢		7.3	%
Fuel and oil	4.04				4.42				(0.38		)		(8.6	)
Maintenance materials and repairs	0.75				0.83				(0.08		)		(9.6	)
Aircraft rentals	0.22				0.28				(0.06		)		(21.4	)
Landing fees and other rentals	0.85				0.85				—				—
Depreciation and amortization	0.72				0.66				0.06				9.1
Acquisition and integration	0.10				0.07				0.03				42.9
Other operating expenses	1.68				1.63				0.05				3.1
Total		12.50	¢			12.60	¢			(0.10	)¢		(0.8	)%

Operating expenses per ASM for 2014 decreased by 0.8 percent, compared with 2013, primarily due to a decrease in Fuel and oil expense, partially offset by an increase in Salaries, wages, and benefits expense. On a non-GAAP basis, Operating expenses per ASM for 2014, excluding fuel and special items, increased 3.1 percent year-over-year primarily due to higher Salaries, wages, and benefits expense. See the previous Note Regarding Use of Non-GAAP Financial Measures.

Salaries, wages, and benefits expense for 2014 increased by $399 million, or 7.9 percent, compared with 2013. Salaries, wages, and benefits expense per ASM for 2014 increased 7.3 percent, compared with 2013. On both a dollar and per ASM basis, approximately 60 percent of these increases were the result of higher salaries primarily due to increased

training, additional headcount, and contractual increases. The majority of the remaining increase was the result of higher profitsharing expense due to increased profits in 2014.

Fuel and oil expense for 2014 decreased by $470 million, or 8.2 percent, compared with 2013. On a per ASM basis, Fuel and oil expense for 2014 decreased 8.6 percent, compared with 2013. Excluding the impact of fuel hedge accounting, both the dollar and per ASM decreases were primarily attributable to lower jet fuel prices. The Company's average economic jet fuel price per gallon decreased 6.4 percent year-over-year, from $3.12 for 2013 to $2.92 for 2014. In addition, fuel efficiency improved slightly due to the Company's fleet modernization efforts, as fuel gallons consumed decreased 0.9 percent, compared with 2013, while year-over-year capacity increased 0.5 percent.

As a result of the Company's fuel hedging program, the Company recognized net gains totaling $28 million in Fuel and oil expense for 2014, compared with net losses totaling $118 million for 2013. These totals include cash settlements realized from the settlement of fuel derivative contracts totaling $56 million received from counterparties for 2014, compared with $34 million paid to counterparties for 2013, although such totals exclude gains and/or losses recognized from hedge ineffectiveness and from derivatives that do not qualify for hedge accounting. These impacts are recorded as a component of Other (gains) losses, net.

Maintenance materials and repairs expense for 2014 decreased by $102 million, or 9.4 percent, compared with 2013. On a per ASM basis, Maintenance materials and repairs expense for 2014 decreased 9.6 percent, compared with 2013. On both a dollar and per ASM basis, approximately 70 percent of the decrease was attributable to the completion of the Evolve aircraft interior retrofit program during 2013, and the majority of the remaining decrease was attributable to lower engine and avionics repair expense as a result of the 717-200 aircraft transitioning out of the Company's fleet.

Aircraft rentals expense for 2014 decreased by $66 million, or 18.3 percent, compared with 2013. On a per ASM basis, Aircraft rentals expense decreased 21.4 percent, compared with 2013. On both a dollar and per ASM basis, the decrease primarily was due to the transition of leased B717 aircraft out of the Company's fleet for conversion and delivery to Delta.

Landing fees and other rentals expense for 2014 increased by $8 million, or 0.7 percent, compared with 2013. On a per ASM basis, Landing fees and other rentals expense for 2014 were flat, compared with 2013. The dollar increase was primarily due to heavier landing weights for the -800 aircraft.

Depreciation and amortization expense for 2014 increased by $71 million, or 8.2 percent, compared with 2013. On a per ASM basis, Depreciation and amortization expense increased 9.1 percent, compared with 2013. On both a dollar and per ASM basis, approximately half the increase was attributable to technology projects that were placed into service during 2014 and approximately half was due to the purchase of new and used aircraft over the last twelve months.

The Company incurred $126 million in Acquisition and integration costs in 2014, which primarily consisted of expense associated with the removal of the remaining B717 fleet from service during December 2014, B717 fleet conversion costs, fleet integration, Employee training, facility integration, and technology integration projects. During 2013, the Company recorded $86 million in Acquisition and integration expense, which primarily consisted of B717 fleet conversion costs, fleet integration, Employee training, technology integration projects, and facility integration expenses.

Other operating expenses for 2014 increased by $79 million, or 3.7 percent, compared with 2013. On a per ASM basis, Other operating expenses for 2014 increased 3.1 percent, compared with 2013. On both a dollar and per ASM basis, approximately 40 percent of the increase was the result of higher contract programming and consulting expenses, 20 percent of the increase was the result of maintenance agreement contract rate increases, and the remainder of the increase was due to individually insignificant items.

Other

Other (gains) losses, net, primarily includes amounts recorded as a result of the Company's hedging activities. See Note 10 to the Consolidated Financial Statements for further information on the Company's hedging activities. The following table displays the components of Other (gains) losses, net, for the years ended December 31, 2014, and 2013:

	Year ended December 31,
(in millions)	2014				2013
Mark-to-market impact from fuel contracts settling in future periods	$	251			$	(103	)
Ineffectiveness from fuel hedges settling in future periods	5				11
Realized ineffectiveness and mark-to-market (gains) or losses	(4		)		3
Premium cost of fuel contracts	62				60
Other	(5		)		(3		)
	$	309			$	(32	)

Income Taxes

The Company's effective tax rate was approximately 37.4 percent for 2014, compared with 37.6 percent for 2013.

Liquidity and Capital Resources

Net cash provided by operating activities for 2015, 2014, and 2013 was $3.2 billion, $2.9 billion, and $2.5 billion, respectively. Operating cash inflows are primarily derived from providing air transportation to Customers. The vast majority of tickets are purchased prior to the day on which travel is provided and, in some cases, several months before the anticipated travel date. Operating cash outflows are related to the recurring expenses of airline operations. The operating cash flows for 2015, 2014, and 2013 were impacted primarily by the Company's results of operations, as adjusted for non-cash items, which increased significantly year-over-year for each period, as well as changes in the Air traffic liability and Accrued liabilities balances. Operating cash flows also can be significantly impacted by the Company’s fuel and interest rate hedge positions and the corresponding cash collateral requirements associated with those positions. The Company has the ability to post aircraft in lieu of cash collateral in certain situations, and did so during 2015. See Note 10 to the Consolidated Financial Statements for further information. During 2015 and 2014, the Company provided $570 million and $233 million, respectively, in cash collateral to derivative counterparties. In 2013, the Company received $57 million in cash collateral from derivative counterparties. Cash flows associated with entering into new fuel derivatives, which are also classified as Other, net, operating cash flows, were net outflows of $556 million in 2015, net outflows of $247 million in 2014, and net inflows of $60 million in 2013. Net cash provided by operating activities is primarily used to finance capital expenditures, repay debt, fund stock repurchases, pay dividends, and provide working capital.

Net cash used in investing activities for 2015, 2014, and 2013 was $1.9 billion, $1.7 billion, and $1.4 billion, respectively. Investing activities in 2015, 2014, and 2013 included payments for new aircraft delivered to the Company, progress payments for future aircraft deliveries, and purchases and sales of short-term and noncurrent investments, which fluctuate primarily based on anticipated working capital needs. Investing activities in 2015 and 2014 also included payments associated with airport construction projects, denoted as Assets constructed for others. See Note 4 to the Consolidated Financial Statements for further information. During 2015, 2014, and 2013, the Company's purchases and sales of short-term and noncurrent investments resulted in net cash provided of $237 million, $105 million, and $63 million, respectively. The Company currently estimates its 2016 capital expenditures will be approximately $2.0 billion.

Net cash used in financing activities for 2015, 2014, and 2013 was $1.0 billion, $1.2 billion, and $851 million, respectively. During 2015, the Company repaid $213 million in debt and capital lease obligations, compared with $561 million and $313 million during 2014 and 2013, respectively. During 2015, the Company issued $500 million 2.65 percent senior unsecured notes due 2020 under its shelf registration statement, compared with the 2014 issuance of $300 million 2.75 percent senior unsecured notes due 2019 under its shelf registration statement. See Note 6 to the Consolidated Financial Statements for further information. The Company repurchased approximately $1.2 billion of its outstanding common stock through authorized share repurchases during 2015, compared with repurchases of $955 million and $540 million during 2014 and 2013, respectively. The Company also paid $180 million in dividends to Shareholders during 2015, compared to $139 million in 2014 and $71 million in 2013. Although the Company currently intends to continue paying dividends on a quarterly basis for the foreseeable future, the Company's Board of Directors may change the timing, amount, and payment of dividends on the basis of results of operations, financial condition, cash requirements, future prospects, and other factors deemed relevant by the Board of Directors.

The Company is a “well-known seasoned issuer” and currently has an effective shelf registration statement registering an indeterminate amount of debt and equity securities for future sales. The Company currently intends to use the proceeds from any future securities sales off this shelf registration statement for general corporate purposes.

The Company has access to a $1 billion unsecured revolving credit facility expiring in April 2018. Interest on the facility is based on the Company's credit ratings at the time of borrowing. At the Company's current ratings, the interest cost would be LIBOR plus a spread of 112.5 basis points. The facility contains a financial covenant requiring a minimum coverage ratio of adjusted pre-tax income to fixed obligations, as defined. As of December 31, 2015, the Company was in compliance with this covenant and there were no amounts outstanding under the revolving credit facility.

As of May 11, 2015, the Company completed its previously authorized $1.0 billion share repurchase program, bringing in a total of 28.0 million shares over the course of the program. Furthermore, on May 13, 2015, the Company's Board of Directors approved a new $1.5 billion share repurchase program. Following the Board of Directors' authorization of the Company's new $1.5 billion share repurchase program, the Company entered into the following share repurchases:

Share repurchases		Shares received		Cash paid
Second Quarter Accelerated Share Repurchase Program		8,085,077		$	300,000,000
Third Quarter Accelerated Share Repurchase Program		12,892,204		500,000,000
Total		20,977,281		$	800,000,000

On July 8, 2015, Moody's upgraded the Company's secured equipment trust certificates and its senior unsecured debt rating to “Baa1” from “Baa2." The upgrade of the Company’s senior unsecured debt rating was based on improving credit metrics, with the Company having meaningfully strengthened its earnings, cash flow and financial leverage in recent years while executing the AirTran integration.

On October 30, 2015, Fitch upgraded the Company's debt rating to "BBB+" from "BBB" and revised the rating outlook to positive from stable. Fitch noted the Company's improved credit portfolio due to the integration of AirTran, its continued pay down of debt, and its credit metrics, which have returned to pre-recession levels.

Standard and Poor's credit rating for the Company is 'BBB' and is unchanged from 2014.

The Company has a large net deferred tax liability on its Consolidated Balance Sheet. The deferral of income taxes has resulted in a significant benefit to the Company and its liquidity position. Since the Company purchases the majority of the aircraft it acquires, it has been able to utilize accelerated depreciation methods (including bonus depreciation) available under the Internal Revenue Code of 1986, as amended, in 2015 and in previous years, which has enabled the Company to defer the cash tax payments associated with these depreciable assets to future years. Based on the Company’s scheduled future aircraft deliveries from Boeing and existing tax laws in effect, the Company will continue to defer a portion of cash income taxes to future years. The Company has paid in the past, and will continue to pay in the future, significant cash taxes to the various taxing jurisdictions where it operates. The Company expects to be able to continue to meet such obligations utilizing cash and investments on hand, as well as cash generated from its ongoing operations.

Off-Balance Sheet Arrangements, Contractual Obligations, and Contingent Liabilities and Commitments

The Company has contractual obligations and commitments primarily with regard to future purchases of aircraft, payment of debt, and lease arrangements. During December 2015, the Company and Boeing revised the Company's future firm aircraft order book to reflect 33 additional -800s, and the conversion of its remaining 25 -700 firm orders to -800s. For aircraft commitments with Boeing, the Company is required to make cash deposits toward the purchase of aircraft in advance. These deposits are classified as Deposits on flight equipment purchase contracts in the Consolidated Balance Sheet until the aircraft is delivered, at which time deposits previously made are deducted from the final purchase price of the aircraft and are reclassified as Flight equipment. See Note 4 to the Consolidated Financial Statements for a complete table of the Company’s firm orders, options, and purchase rights with Boeing and other parties.

The leasing of aircraft (including the sale and leaseback of aircraft) provides flexibility to the Company as a source of financing. Although the Company is responsible for all maintenance, insurance, and expense associated with operating leased aircraft, and retains the risk of loss for these aircraft, it has not made guarantees to the lessors regarding the residual value (or market value) of the aircraft at the end of the lease terms. As of December 31, 2015, the Company had 201 leased aircraft, including 78 B717s subleased to Delta. Of these leased aircraft, 171 are under operating leases, including 76 B717s subleased to Delta. Assets and obligations under operating leases are not included in the Company’s

Consolidated Balance Sheet. Disclosure of the contractual obligations associated with the Company’s leased aircraft is included below.

The Company is required to provide standby letters of credit to support certain obligations that arise in the ordinary course of business and may choose to provide letters of credit in place of posting cash collateral related to its fuel hedging positions. Although the letters of credit are off-balance sheet, the majority of the obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet. Outstanding letters of credit totaled $184 million at December 31, 2015.

The following table aggregates the Company’s material expected contractual obligations and commitments as of December 31, 2015:

		Obligations by period (in millions)
Contractual obligations		2016				2017 - 2018				2019 - 2020				Beyond 2020				Total
Long-term debt (1)		$	585			$	732			$	1,202			$	239			$	2,758
Interest commitments - fixed (2)		108				115				57				59				339
Interest commitments - floating (3)		18				47				42				—				107
Operating lease commitments (4)		557				1,019				714				1,529				3,819
Capital lease commitments (5)		46				91				89				209				435
Aircraft purchase commitments (6)		1,070				2,393				2,666				4,421				10,550
Other commitments		94				54				11				13				172
Total contractual obligations		$	2,478			$	4,451			$	4,781			$	6,470			$	18,180

(1)	Includes principal only. See Note 6 to the Consolidated Financial Statements.

(2)	Related to fixed-rate debt only.

(3)	Interest obligations associated with floating-rate debt (either at issuance or through swaps) is estimated utilizing forward interest rate curves as of December 31, 2015, and can be subject to significant fluctuation.

(4)	Includes Love Field Modernization Program commitment amounts, and includes the impact of the B717 lease/sublease transaction entered into in 2012. See Note 7 to the Consolidated Financial Statements.

(5)	Includes interest on capital leases.

(6)	Firm orders from Boeing and commitments with other parties.

The Company believes that its current liquidity position, including unrestricted cash and short-term investments of $3.1 billion as of December 31, 2015, anticipated future internally generated funds from operations, and its fully available, unsecured revolving credit facility of $1.0 billion that expires in April 2018, will enable it to meet its future known obligations in the ordinary course of business. However, if a liquidity need were to arise, the Company believes it has access to financing arrangements because of its current investment grade credit ratings, large value of unencumbered assets, and modest leverage, which should enable it to meet its ongoing capital, operating, and other liquidity requirements. The Company will continue to consider various borrowing or leasing options to maximize liquidity and supplement cash requirements as necessary.

Airport Projects

The Company has commitments associated with various airport improvement projects that will impact its future liquidity needs in differing ways. These projects include the construction of new facilities and the rebuilding or modernization of existing facilities and are discussed in more detail in Note 4 to the Consolidated Financial Statements.

Dallas Love Field

For the rebuilding of the facilities at Dallas Love Field, the Company has guaranteed principal, premium, and interest on $456 million in bonds issued by the Love Field Airport Modernization Corporation (“LFAMC”) that were utilized to fund the majority of the project. Repayment of the bonds will be through the “Facilities Payments” described below.

Reimbursement of the Company for its payment of Facilities Payments is expected to be made through recurring ground rents, fees, and other revenues collected at the airport.

Prior to the issuance of the bonds by the LFAMC, the Company entered into two separate funding agreements: (i) a “Facilities Agreement” pursuant to which the Company is obligated to make debt service payments on the principal and interest amounts associated with the bonds ("Facilities Payments"), less other sources of funds the City of Dallas may apply to the repayment of the bonds (including but not limited to passenger facility charges collected from passengers originating from the airport); and (ii) a “Revenue Credit Agreement” pursuant to which the City of Dallas will reimburse the Company for the Facilities Payments made by the Company.

A majority of the monies transferred from the City of Dallas to the Company under the Revenue Credit Agreement are expected to originate from a reimbursement account created in the “Use and Lease Agreement” between the City of Dallas and the Company. The Use and Lease Agreement is a 20-year agreement providing for, among other things, the Company’s lease of space at the Airport from the City of Dallas. The remainder of such monies transferred from the City of Dallas to the Company under the Revenue Credit Agreement is expected to originate from (i) use and lease agreements with other airlines, (ii) various concession agreements, and (iii) other airport miscellaneous revenues.

The Company’s liquidity could be impacted by this project to the extent there are timing differences between the Company’s payment of the Facilities Payments pursuant to the Facilities Agreement and the transfer of monies back to the Company pursuant to the Revenue Credit Agreement; however, the Company does not currently expect that to occur. The project is not expected to have a significant impact on the Company’s capital resources or financial position.

Fort Lauderdale-Hollywood International Airport

The Company has committed to oversee and manage the design and construction of Fort-Lauderdale-Hollywood International Airport's Terminal 1 Modernization Project, including the design and construction of a new five-gate Concourse A with an international processing facility, at a cost not to exceed $295 million. Funding for the project will come directly from Broward County aviation sources, but will flow through the Company in its capacity as manager of the project. In general, as work is being completed on the project by various contractors, invoices would be submitted to Broward County for initial payment to the Company, which would then make such payments to the contractors performing the work.

The Company’s liquidity could be impacted by this project to the extent there are instances in which the Company chooses to make payments to contractors prior to receiving initial payment from Broward County, although the Company currently does not expect this to occur often based on its past experience with smaller projects conducted at the airport. The project is not expected to have a significant impact on the Company’s capital resources or financial position. Major construction on the project began during third quarter 2015 and is estimated to be completed during 2017.

Houston William P. Hobby Airport

The Company oversaw and managed the construction, at Houston William P. Hobby Airport, of a new five-gate international terminal with international passenger processing facilities, expansion of the existing security checkpoint, and upgrades to the Southwest ticketing counter area. The Company and the City of Houston ("City") entered into an Airport Use and Lease Agreement ("Lease") to control the execution of this expansion and the financial terms thereof. The project cost approximately $156 million, and the Company provided the funding for, and management of the project. In return, the Company receives a monthly credit for the capital cost portions of the international terminal from the date of initial occupancy of the terminal until expiration of the Lease. Additionally, a small portion of the project qualified for rental credits that will be utilized against the Company’s 2016 lease payments at the airport. At any time after the completion of the project, the City may buy out the Company’s investment in the international terminal via a cash payment for the then-unamortized cost of the project.

The Company’s liquidity has been impacted by this project from the point of initial funding through the time at which it receives monthly credits, and whether or not the City chooses to buy out the Company’s investment prior to the full amortization of the project. The project did not have a significant impact on the Company’s capital resources or financial

position. Construction began during third quarter 2013 and was effectively completed in October 2015, at which time the Company began operating from the new facility.

Los Angeles International Airport

In March 2013, the Company executed a lease agreement with Los Angeles World Airports (“LAWA”), which owns and operates Los Angeles International Airport. Under the lease agreement, which was amended in June 2014, the Company is overseeing and managing the design, development, financing, construction and commissioning of the airport's Terminal 1 Modernization Project (the “Project”) at a cost not to exceed $526 million. The Project is being funded primarily using the Regional Airports Improvement Corporation ("RAIC"), which is a quasi-governmental special purpose entity that acts as a conduit borrower under a syndicated credit facility provided by a group of lenders. Loans made under the credit facility are being used to fund the development of the Project, and the outstanding loans will be repaid with the proceeds of LAWA’s payments to purchase completed Project phases. The Company has guaranteed the obligations of the RAIC under the credit facility.

The Company’s liquidity could be impacted by this project under certain circumstances; however, the Company does not expect this to occur based on its past experience with other projects. The project is not expected to have a significant impact on the Company’s capital resources or financial position. Construction on the Project began during 2014 and is estimated to be completed during 2018.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s Consolidated Financial Statements have been prepared in accordance with GAAP. The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The preparation of financial statements in accordance with GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying footnotes. The Company’s estimates and assumptions are based on historical experience and changes in the business environment. However, actual results may differ from estimates under different conditions, sometimes materially. Critical accounting policies and estimates are defined as those that both (i) are most important to the portrayal of the Company’s financial condition and results and (ii) require management’s most subjective judgments. The Company’s most critical accounting policies and estimates are described below.

Revenue Recognition

Tickets sold for Passenger air travel are initially deferred as Air traffic liability. Passenger revenue is recognized and Air traffic liability is reduced when the service is provided (i.e., when the flight takes place). Air traffic liability primarily represents tickets sold for future travel dates and funds that are past flight date and remain unused. The balance in Air traffic liability, which includes a portion of the Company’s liability associated with its frequent flyer program, fluctuates throughout the year based on seasonal travel patterns, fare sale activity, and activity associated with the Company’s frequent flyer program.

For air travel on Southwest, the amount of tickets that will expire unused are estimated and recognized in Passenger revenue once the scheduled flight date has passed. Estimating the amount of tickets that will expire unused involves some level of subjectivity and judgment. The majority of Southwest’s tickets sold are nonrefundable, which is the primary source of unused tickets. In September 2013, Southwest implemented a No Show policy that applies to nonrefundable fares that are not canceled or changed by a Customer at least ten minutes prior to a flight's scheduled departure. See Note 1 to the Consolidated Financial Statements for further information. According to Southwest’s current “Contract of Carriage,” all refundable tickets that are sold but not flown on the travel date can be reused for another flight up to a year from the date of sale, or some tickets can be refunded. This policy also applies to unused Customer funds that may be the result of an exchange downgrade. A small percentage of tickets (or partial tickets) expire unused. Fully refundable tickets rarely expire unused. Estimates of tickets that will expire unused are based on historical experience over many years. Southwest has consistently applied this accounting method to estimate revenue from unused tickets at the date of scheduled travel.

Events and circumstances outside of historical fare sale activity or historical Customer travel patterns can result in actual spoiled tickets differing significantly from estimates. The Company evaluates its estimates within a narrow range of acceptable amounts. If actual spoilage results in an amount outside of this range, estimates and assumptions are reviewed and adjustments to Air traffic liability and to Passenger revenue are recorded, as necessary. Additional factors that may affect estimated spoiled tickets include, but may not be limited to, changes to the Company’s ticketing policies, the Company’s refund, exchange, and unused funds policies, the mix of refundable and nonrefundable fares, promotional fare activity, and the impact of the economic environment on Customer behavior. The Company’s estimation techniques have been consistently applied from year to year; however, as with any estimates, actual spoiled tickets may vary from estimated amounts. During 2014, the Company revised assumptions regarding Customer behavior subsequent to the implementation of its No Show policy. Consequently, the Company’s estimate of the amount of spoiled tickets recorded during 2014 was approximately 15 percent higher than what it believed its historical averages would indicate for that year. The Company believes the change in policy resulted in a permanent shift in Customer behavior for 2014 and all subsequent periods, barring any future modifications to the Company's ticketing policies. The Company believes these estimates are supported by actual data and are reasonable given the underlying fact patterns.

The Company believes it is unlikely that materially different estimates for future spoiled tickets would be reported based on other reasonable assumptions or conditions suggested by actual historical experience and other data available at the time estimates were made.

Accounting for Long-Lived Assets

Flight equipment and related assets make up the majority of the Company’s long-lived assets. Flight equipment primarily relates to the 609 Boeing 737 aircraft in the Company’s fleet at December 31, 2015, which are either owned or on capital lease. The remaining 95 Boeing 737 aircraft in the Company’s fleet at December 31, 2015, are operated under operating leases. The Company also has 88 Boeing 717 aircraft, which are part of the lease/sublease with Delta. As these aircraft are not in service for the Company, they are not included in the fleet count as of December 31, 2015. See Note 7 to the Consolidated Financial Statements for further information. In accounting for long-lived assets, the Company must make estimates about the expected useful lives of the assets, the expected residual values of the assets, and the potential for impairment based on the fair value of the assets and their future expected cash flows.

The following table shows a breakdown of the Company’s long-lived asset groups along with information about estimated useful lives and residual values for new assets generally purchased from the manufacturer and assets constructed for others:

		Estimated useful life		Estimated residual value
Airframes and engines		23 to 25 years		2 to 20 percent
Aircraft parts		Fleet life		4 percent
Assets constructed for others		25 to 30 years		17 to 25 percent
Ground property and equipment		5 to 30 years		0 to 10 percent

In estimating the lives and expected residual values of its aircraft, the Company primarily has relied upon actual experience with the same or similar aircraft types, current and projected future market information, and recommendations from Boeing. Aircraft estimated useful lives are based on the number of “cycles” flown (one take-off and landing) as well as the aircraft age. The Company has made a conversion of cycles into years based on both historical and anticipated future utilization of the aircraft. Subsequent revisions to these estimates, which can be significant, could be caused by changes to aircraft maintenance programs, changes in utilization of the aircraft (actual cycles during a given period of time), governmental regulations on aging aircraft, and changing market prices of new and used aircraft of the same or similar types. The Company evaluates its estimates and assumptions each reporting period and, when warranted, adjusts these estimates and assumptions. Generally, these adjustments are accounted for on a prospective basis through depreciation and amortization expense. See Notes 1 and 2 to the Consolidated Financial Statements for further information.

The Company believes it is unlikely that materially different estimates for expected lives, expected residual values, and impairment evaluations would be made or reported based on other reasonable assumptions or conditions suggested by actual historical experience and other data available at the time estimates were made.

Financial Derivative Instruments

The Company utilizes financial derivative instruments primarily to manage its risk associated with changing jet fuel prices. See “Quantitative and Qualitative Disclosures about Market Risk” for more information on these risk management activities, and see Note 10 to the Consolidated Financial Statements for more information on the Company’s fuel hedging program and financial derivative instruments.

All derivatives are required to be reflected at fair value and recorded on the Consolidated Balance Sheet. At December 31, 2015, the Company was a party to over 1,200 separate financial derivative instruments related to its fuel hedging program for the years 2016 through 2018. Changes in the fair values of these instruments can vary dramatically based on changes in the underlying commodity prices. For example, during 2015, market “spot” prices for Brent crude oil peaked at a high of approximately $68 per barrel and hit a low price of approximately $36 per barrel. During 2014, market spot prices ranged from a high of $115 per barrel to a low of $57 per barrel. Market price changes can be driven by factors such as supply and demand, inventory levels, weather events, refinery capacity, political agendas, the value of the U.S. dollar, geopolitical events, and general economic conditions, among other items. The financial derivative instruments utilized by the Company primarily are a combination of collars, purchased call options, call spreads, put spreads, and fixed price swap agreements.

The Company enters into financial derivative instruments with third party institutions in “over-the-counter” markets. Since the majority of the Company’s financial derivative instruments are not traded on a market exchange, the Company estimates their fair values. Depending on the type of instrument, the values are determined by the use of present value methods or standard option value models with assumptions about commodity prices based on those observed in underlying markets. Also, since there is not a reliable forward market for jet fuel beyond approximately 24 months, the Company must estimate the future prices of jet fuel in order to measure the effectiveness of the hedging instruments in offsetting changes to those prices. Forward jet fuel prices are estimated through the observation of similar commodity futures prices (such as crude oil, heating oil, and unleaded gasoline) and adjusted based on variations of those like

commodities to the Company’s ultimate expected price to be paid for jet fuel at the specific locations in which the Company hedges.

Fair values for financial derivative instruments and forward jet fuel prices are estimated prior to the time that the financial derivative instruments settle and the time that jet fuel is purchased and consumed, respectively. However, once settlement of the financial derivative instruments occurs and the hedged jet fuel is purchased and consumed, all values and prices are known and are recognized in the financial statements. In some periods, because of increased volatility in energy markets, the Company lost hedge accounting for certain types of commodities, including the periods from July 2013 through July 2015, when the Company lost hedge accounting for West Texas Intermediate crude oil ("WTI") instruments. As such, the changes in fair value of all of the Company's derivatives in WTI were recorded directly to Other (gains) losses, net in the Consolidated Statement of Income. The Company did not lose hedge accounting for an entire commodity during any other periods presented. Although the Company continues to use a prospective assessment to determine that other commodities continue to qualify for hedge accounting in specific locations where the Company hedges, there are no assurances that these commodities will continue to qualify in the future. This is due to the fact that future price changes in these refined products may not be consistent with historical price changes. 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.

Estimating the fair value of these fuel derivative instruments and forward prices for jet fuel will also result in changes in their fair values from period to period and thus determine their accounting treatment. To the extent that the change in the estimated fair value of a fuel derivative instrument differs from the change in the estimated price of the associated jet fuel to be purchased, both on a cumulative and a period-to-period basis, ineffectiveness of the fuel hedge can result. This could result in the immediate recording of non-cash charges or income, representing the change in the fair value of the derivative, even though the derivative instrument may not expire/settle until a future period. Likewise, if a derivative contract ceases to qualify for hedge accounting, the change in the fair value of the derivative instrument is recorded every period to Other (gains) and losses, net in the Consolidated Statement of Income in the period of the change.

Ineffectiveness is inherent in hedging jet fuel with derivative positions based in other crude oil related commodities, especially given the past volatility in the prices of refined products. Due to the volatility in markets for crude oil and related products, the Company is unable to predict the amount of ineffectiveness each period, including the loss of hedge accounting, which could be determined on a derivative by derivative basis or in the aggregate for a specific commodity. This may result, and has historically resulted, in increased volatility in the Company’s financial statements. The amount of hedge ineffectiveness and unrealized gains and losses on the change in fair value of derivative contracts settling in future periods recorded during historical periods has been due to a number of factors. These factors include: the significant fluctuation in energy prices, the number of derivative positions the Company holds, significant weather events that have affected refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses for mitigation of fuel price volatility. The discontinuation of hedge accounting for specific hedges and for specific refined products, such as unleaded gasoline, can also be a result of these factors. Depending on the level at which the Company is hedged at any point in time, as the fair value of the Company’s hedge positions fluctuate in amount from period to period, there could be continued variability recorded in the Consolidated Statement of Income, and furthermore, the amount of hedge ineffectiveness and unrealized gains or losses recorded in earnings may be material. This is primarily because small differences in the correlation of crude oil related products could be leveraged over large volumes.

The Company continually looks for better and more accurate methodologies in forecasting expected future cash flows relating to its jet fuel hedging program. These estimates are an important component used in the measurement of effectiveness for the Company’s fuel hedges. The current methodology used by the Company in forecasting forward jet fuel prices is primarily based on the idea that different types of commodities are statistically better predictors of forward jet fuel prices, depending on specific geographic locations in which the Company hedges. The Company then adjusts for certain items, such as transportation costs, that are stated in fuel purchasing contracts with its vendors, in order to estimate the actual price paid for jet fuel associated with each hedge. This methodology for estimating expected

future cash flows (i.e., jet fuel prices) has been consistently applied during 2015, 2014, and 2013, and has not changed for either assessing or measuring hedge ineffectiveness during these periods.

The Company believes it is unlikely that materially different estimates for the fair value of financial derivative instruments and forward jet fuel prices would be made or reported based on other reasonable assumptions or conditions suggested by actual historical experience and other data available at the time estimates were made.

Fair Value Measurements

The Company utilizes unobservable (Level 3) inputs in determining the fair value of certain assets and liabilities. At December 31, 2015, these primarily included a portion of its fuel derivative option contracts, which were a net liability of $1.7 billion.

The Company determines the fair value of fuel derivative 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 quoted by its counterparties. In situations where the Company obtains inputs via quotes from its counterparties, it verifies the reasonableness of these quotes via similar quotes from another counterparty as of each date for which financial statements are prepared. 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. Due to the fact that certain inputs used in determining estimated fair value of its option contracts are considered unobservable (primarily implied volatility), the Company has categorized these option contracts as Level 3.

As discussed in Note 10 to the Consolidated Financial Statements, any changes in fair value of cash flow hedges that are considered to be effective, as defined, are offset within AOCI until the period in which the expected future cash flow impacts earnings. Any changes in the fair value of fuel derivatives that are ineffective, as defined, or that do not qualify for hedge accounting, are reflected in earnings within Other (gains) losses, net, in the period of the change. Because the Company has extensive historical experience in valuing the derivative instruments it holds, and such experience is continually evaluated against its counterparties each period when such instruments expire and are settled for cash, the Company believes it is unlikely that an independent third party would value the Company’s derivative contracts at a significantly different amount than what is reflected in the Company’s financial statements. In addition, the Company also has bilateral credit provisions in some of its counterparty agreements, which provide for parties (or the Company) to provide cash collateral when the fair value of fuel derivatives with a single party exceeds certain threshold levels. Since this cash collateral is based on the estimated fair value of the Company’s outstanding fuel derivative contracts, this provides further validation to the Company’s estimate of fair values.

Frequent Flyer Accounting

The Company utilizes estimates in the recognition of liabilities associated with its frequent flyer program. These estimates primarily include the liability associated with Rapid Rewards frequent flyer member ("Member") account balances that are expected to be redeemed for travel or other products at a future date. Frequent flyer account balances include points earned through flights taken, points sold to Customers, or points earned through business partners participating in the frequent flyer program.

Under the Southwest Rapid Rewards frequent flyer program, Members earn points for every dollar spent. The amount of points earned under the program is based on the fare and fare class purchased, with higher fare products (e.g., Business Select) earning more points than lower fare products (e.g., Wanna Get Away). Each fare class is associated with a points earning multiplier, and points for flights are calculated by multiplying the fare for the flight by the fare class multiplier. Likewise, the amount of points required to be redeemed for a flight is based on the fare and fare class purchased. Under the program, (i) Members are able to redeem their points for every available seat, every day, on every flight, with no blackout dates; and (ii) points do not expire so long as the Rapid Rewards Member has points-earning activity during a 24-month time period. In addition, Southwest co-branded Chase Visa credit card holders are able to redeem their points for items other than travel on Southwest Airlines, such as international flights on other

airlines, cruises, hotel stays, rental cars, gift cards, event tickets, and more. In addition to earning points for revenue flights and qualifying purchases with Rapid Rewards Partners, Rapid Rewards Members also have the ability to purchase, gift, and transfer points, as well as the ability to donate points to selected charities.

The Company utilizes the incremental cost method of accounting for points earned through flights taken in its frequent flyer program. A liability is recorded for the estimated incremental cost of providing free travel as points are being earned. The liability recorded represents the total number of points expected to be redeemed by Members, regardless of whether the Members may have enough to qualify for a full travel award. The incremental cost liability is primarily composed of direct Passenger costs such as fuel, food, and other operational costs, but does not include any contribution to fixed overhead costs or profit. At December 31, 2015, the incremental cost liability was approximately $58 million.

The Company also sells frequent flyer points and related services to business partners participating in the frequent flyer program. The majority of the points sold to business partners are through the Southwest co-branded Chase Visa credit card. Historically, funds received from the sale of points associated with these agreements were accounted for under the residual method. Under the residual method, the Company estimated the percent of the amount received from frequent flyer points sold associated with Southwest’s co-branded Chase Visa credit card that related to free travel. The estimated amounts associated with free travel are deferred and recognized as Passenger revenue when the ultimate free travel awards are flown. During third quarter 2015, the Company executed an amended co-branded credit card agreement (“Agreement”) with Chase Bank USA, N.A. (“Chase”), which materially modified the previously existing agreement between Chase and the Company. Consideration received as part of this Agreement is subject to ASU 2009-13, "Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force." The modified Agreement has the following multiple elements: travel points to be awarded; use of the Southwest Airlines’ brand and access to Rapid Reward Member lists; advertising elements; and the Company’s resource team. Under ASU 2009-13, these deliverables are accounted for separately and allocation of consideration from the Agreement is determined based on the relative selling price of each deliverable. The application of ASU 2009-13 to the Agreement decreases the relative value of the air transportation deliverables that the Company records as deferred revenue (and ultimately Passenger revenues when redeemed awards are flown) and increases the relative value of the marketing-related deliverables recorded in Other revenues at the time these marketing-related deliverables are provided. This is principally due to the previous application of the residual method, which effectively applied the entire discount associated with the agreement to the marketing deliverables.

Significant management judgment was used to estimate the selling price of each of the deliverables. The objective was to determine the price at which the Company would transact a sale if the product or service was sold on a stand-alone basis. The Company determined the best estimate of selling price by considering multiple inputs and methods including, but not limited to, the estimated selling price of comparable travel, discounted cash flows, brand value, published selling prices, number of points awarded, and the number of points redeemed. The Company estimated the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to each of the multiple deliverables. The Company records passenger revenue related to air transportation and certificates for discounted companion travel when the transportation is delivered. A 1.0 percent increase or decrease in the Company's estimate of the allocation of proceeds to air transportation would have changed the Company's Operating revenues by less than $5 million for 2015.

The Company followed the transition approach of ASU 2009-13, which required that the Company's existing deferred revenue balance, classified within Air traffic liability, be adjusted to reflect the value, on a relative selling price basis, of any undelivered element remaining at the date of contract modification. The relative selling price of the undelivered element (air transportation) was lower than the rate at which it had been deferred under the previous contract and the Company recorded a one-time, non-cash adjustment to decrease frequent flyer deferred revenue and increase revenue through the recording of a Special revenue adjustment of $172 million. In addition, 2015 Operating revenues increased by an estimated net $255 million as a result of the amended Agreement with Chase and the resulting July 1, 2015, change in accounting methodology. See Note 1 to the Consolidated Financial Statements for further information.

Under its current program, Southwest estimates the portion of frequent flyer points that will not be redeemed. In estimating spoilage, the Company takes into account the Member’s past behavior, as well as several factors related to

the Member’s account that are expected to be indicative of the likelihood of future point redemption. These factors include, but are not limited to, tenure with program, points accrued in the program, and whether or not the customer has a co-branded credit card. During fourth quarter 2014, the Company obtained sufficient historical behavioral data to develop a predictive statistical model to analyze the amount of spoilage expected for points sold to business partners, which indicated an increase in the expected spoilage rate. This change in estimate, which was recorded on a prospective basis, as of October 1, 2014, resulted in an increase in Passenger revenue of approximately $55 million for the quarter and the year ended December 31, 2014, and an increase in Passenger revenue of approximately $115 million for the first nine months of 2015. The Company has again updated its analysis of projected spoilage and implemented a new rate on a prospective basis beginning in fourth quarter 2015. The application of the new spoilage rate as of October 1, 2015, did not result in a significant difference to Passenger revenues during fourth quarter 2015, and is likewise not expected to have a material impact on 2016 Passenger revenues. For the year ended December 31, 2015, based on actual redemptions of points sold to business partners, a hypothetical one percentage point change in the estimated spoilage rate would have resulted in a change to Passenger revenue of approximately $34 million (an increase in spoilage would have resulted in an increase in revenue and a decrease in spoilage would have resulted in a decrease in revenue). Given that Member behavior will continue to develop as the program matures, the Company expects the current estimates may change in future periods. However, the Company believes its current estimates are reasonable given current facts and circumstances.

Goodwill and Other Intangible Assets

As a result of the Company’s acquisition of AirTran on May 2, 2011, the Company has reflected Goodwill on its Consolidated Balance Sheet in the amount of $970 million at December 31, 2015, the excess of the consideration transferred over the fair value of AirTran’s assets and liabilities on the acquisition date. In addition, the Company's other intangible assets have a net carrying amount of approximately $464 million at December 31, 2015, of which $303 million related to indefinite-lived intangible assets. Indefinite-lived assets are not amortized and primarily consist of take-off and landing slots at certain domestic slot-controlled airports. Finite-lived intangible assets include leasehold rights to airport gates and certain intangible assets recognized as a part of the valuation of AirTran and are amortized over their estimated economic useful lives. Goodwill and indefinite-lived intangible assets are not amortized, but tested for impairment annually, as of October 1st, or more frequently if events or circumstances indicate that impairment may exist.

The Company applies a fair value based impairment test to the carrying value of goodwill and indefinite-lived intangible assets annually on October 1st, or more frequently if certain events or circumstances indicate that an impairment loss may have been incurred. The Company assesses the value of goodwill and indefinite-lived assets under either a qualitative or quantitative approach. Under a qualitative approach, the Company considers various market factors, including applicable key assumptions listed below. These factors are analyzed to determine if events and circumstances have affected the fair value of goodwill and indefinite-lived intangible assets. If the Company determines that it is more likely than not that an indefinite-lived intangible asset is impaired, the quantitative approach is used to assess the asset’s fair value and the amount of the impairment. Under a quantitative approach, the fair value is calculated based on key assumptions listed below. If the asset’s carrying value exceeds its fair value calculated using the quantitative approach, an impairment charge is recorded for the difference in fair value and carrying value.

When performing a quantitative impairment assessment of goodwill and indefinite-lived intangible assets, fair value is estimated based on (i) recent market transactions, where available, (ii) projected discounted cash flows (an income approach) or (iii) a combination of limited market transactions and the lease savings method (which reflects potential annual after-tax lease savings arising from owning the slots rather than leasing them from another airline at market rates).

Key assumptions and/or estimates made in the Company’s impairment tests include: (i) a projection of revenues, expenses, and cash flows; (ii) terminal period revenue growth and cash flows; (iii) an estimated weighted average cost of capital; (iv) an assumed discount rate depending on the asset, (v) a tax rate and (vi) market prices for comparable assets. The Company believes these assumptions are consistent with those a hypothetical market participant would use given circumstances that were present at the time the estimates were made. However, actual results and amounts may be significantly different from the Company’s estimates.

As part of this evaluation, the Company assesses whether changes in (i) macroeconomic conditions; (ii) industry and market conditions; (iii) cost factors; (iv) overall financial performance; and (v) Company-specific events, have occurred which would impact the use and/or fair value of these assets since the Company's quantitative analysis in 2013. In 2015, the Company performed a qualitative assessment of goodwill and determined that there was no indication that goodwill was impaired. The qualitative assessment included analysis and weighting of all relevant factors noted above. The Company performed a quantitative assessment of all indefinite-lived intangible assets and determined that there was no impairment in 2015.

Future impairment of Goodwill and indefinite-lived intangible assets may result from changes in assumptions, estimates, or circumstances, some of which are beyond the Company’s control. Factors which could result in an impairment of Goodwill, holding other assumptions constant, could include, but are not limited to: (i) reduced passenger demand as a result of domestic or global economic conditions; (ii) significantly higher prices for jet fuel; (iii) lower fares or passenger yields as a result of increased competition or lower demand; (iv) a significant increase in future capital expenditure commitments; and (v) significant disruptions to the Company’s operations as a result of both internal and external events such as terrorist activities, actual or threatened war, labor actions by Employees, or further industry regulation. Factors which could result in an impairment of owned domestic slots, holding other assumptions constant, could include, but are not limited to: (i) a change in competition in the slotted airport; (ii) significantly higher prices for jet fuel; and (iii) increased competition at a nearby airport.