Southwest Airlines (LUV) 10-K risk factor changes: FY2019 vs FY2018

[removed: The] [added: The] airline industry is particularly sensitive to changes in economic conditions; in the event of unfavorable economic conditions or economic uncertainty, the Company's results of operations could be negatively affected, which could require the Company to adjust its business [removed: strategies.][added: strategies.]

[removed: The] [added: The] Company's business can be significantly impacted by high and/or volatile fuel prices, and the Company's operations are subject to disruption in the event of any delayed supply of fuel; therefore, the Company's strategic plans and future profitability are likely to be impacted by the Company's ability to effectively address fuel price increases and fuel price volatility and [removed: availability.][added: availability.]

Airlines are inherently dependent upon energy to operate, and jet fuel and oil represented approximately [removed: 25] [added: 22] percent of the Company's operating expenses for [removed: 2018.][added: 2019.]

For example, fuel prices can be impacted by [removed: political] [added: political, environmental,] and economic factors, such as (i) dependency on foreign imports of crude oil and the potential for hostilities or other conflicts in oil producing areas; (ii) [removed: limited] [added: disruptions in] domestic refining or pipeline capacity due to weather, natural disasters, or other factors; (iii) worldwide demand for fuel, particularly in developing countries, which can result in inflated energy prices; (iv) changes in U.S. governmental policies on fuel production, transportation, taxes, and marketing; and (v) changes in currency exchange rates.

[removed: The Company is also] subject to the risk that cash collateral may be required to be posted to fuel hedge counterparties, which could have a significant impact on the Company's financial position and liquidity.

Adjustments in the Company's overall fuel hedging strategy, as well as the ability of the commodities used in fuel hedging to qualify for special hedge accounting, [removed: are likely to] [added: could] continue to affect the Company's results of operations.

[removed: Also, see] [added: See] Note 2 to the Consolidated Financial Statements for information on changes in applicable standards for hedge accounting.

[removed: The] [added: The] Company's low-cost structure has historically been one of its primary competitive advantages, and many factors have affected and could continue to affect the Company's ability to control its [removed: costs.][added: costs.]

For example, labor and fuel costs, as well as other costs such as [added: airport costs and] regulatory compliance costs, can negatively affect the Company's ability to control its costs.

Jet fuel and oil constituted approximately [removed: 25] [added: 22] percent of the Company's operating expenses during [removed: 2018,] [added: 2019,] and the Company's ability to control the cost of fuel is subject to the external factors discussed in the [removed: second] [added: third] Risk Factor above.

Salaries, wages, and benefits constituted approximately [removed: 41] [added: 43] percent of the Company's operating expenses during [removed: 2018.][added: 2019.]

Additionally, as indicated above under "Business - Employees," the majority of Southwest's unionized Employee work groups, including its [added: Pilots;] Flight Attendants; Customer Service Agents, Customer Representatives, and Source of Support Representatives; [removed: Material Specialists; Mechanics;] [added: Aircraft Appearance Technicians;] Dispatchers; Flight [removed: Simulator Technicians;] [added: Crew Training Instructors;] and Meteorologists, are in unions currently in negotiations for labor agreements or have labor agreements that become amendable in [removed: 2019,] [added: 2020,] which could result in additional pressure on the Company's low-cost structure.

[removed: Additionally,] [added: Further,] the Company cannot control decisions by other [added: airlines to reduce their capacity.]

The Company is [removed: also] reliant upon third party vendors and service providers, [removed: in particular with respect to its fleet] and [removed: technology initiatives and performance, and] the Company's low-cost advantage is [removed: also] dependent in part on its ability to obtain and maintain commercially reasonable terms with those parties.

[removed: The] [added: The] Company is increasingly dependent on technology to operate its business and continues to implement substantial changes to its information systems; any failure, disruption, breach, or delay in implementation of the Company's information systems could materially adversely affect its [removed: operations.][added: operations.]

Implementation and integration of complex systems and technology [removed: presents] [added: present] significant challenges in terms of costs, human resources, and development of effective internal controls.

The Company is also reliant upon the performance of its third party vendors for timely and effective [removed: completion] [added: implementation and support] of many of its technology initiatives and for maintaining adequate information security measures.

In addition, the Company's operations could be adversely affected, or [removed: it] [added: the Company] could face imposition of regulatory penalties, if it were unable to timely or effectively modify its systems as necessary or appropriately balance the introduction of new capabilities with the management of existing systems.

The Company has experienced system interruptions and delays that [removed: make] [added: have made] its websites and operational systems unavailable or slow to respond, which [removed: can prevent] [added: has prevented] the Company from efficiently processing Customer transactions or providing [removed: services, and these could occur again in the future.][added: services.]

[removed: These] [added: Any future] system interruptions [removed: and] [added: or] delays [removed: can] [added: could] reduce the Company's operating revenues and the attractiveness of its services, as well as increase the Company's costs.

The Company's [removed: computer] [added: technologies] and [removed: communications] systems and functions could be damaged or interrupted by catastrophic events [added: beyond its control] such as fires, floods, earthquakes, tornadoes and hurricanes, power loss, computer and telecommunications failures, acts of war or terrorism, computer viruses, security breaches, and similar events or disruptions.

Any of these [added: events would have a]

[added: Any of these] events could cause system interruptions, delays, and loss of critical data, and could prevent the Company from processing Customer transactions or providing services, which could make the Company's business and services less attractive and subject the Company to liability.

[removed: The] [added: The] Company's business is labor intensive; therefore, the Company [removed: would] [added: could] be adversely affected if it were unable to maintain satisfactory relations with its Employees or its Employees' [removed: Representatives.][added: Representatives.]

Salaries, wages, and benefits represented approximately [removed: 41] [added: 43] percent of the Company's operating expenses for the year ended December 31, [removed: 2018.][added: 2019.]

In addition, as of December 31, [removed: 2018,] [added: 2019,] approximately 83 percent of the Company's Employees were represented for collective bargaining purposes by labor unions, making the Company particularly exposed in the event of labor-related job actions.

Employment-related [removed: issues] [added: matters (some of which relate to negotiated items)] that have impacted, and continue to impact, the Company's results of [removed: operations, some of which are negotiated items,] [added: operations] include hiring/retention rates, pay rates, outsourcing, work rules, health care costs, and retirement benefits.

[removed: The] [added: The] Company is currently dependent on [added: a] single [removed: aircraft and] engine [removed: suppliers,] [added: supplier,] as well as single suppliers of certain other [removed: parts;] [added: aircraft parts and equipment;] therefore, the Company [removed: would] [added: could] be materially adversely affected (i) if it were unable to obtain timely or sufficient delivery of aircraft [added: parts] or [removed: other] equipment from Boeing or other suppliers or adequate maintenance or other support from any of these suppliers, [added: or] (ii) in the event of a mechanical or regulatory issue associated with the Company's aircraft [removed: or equipment, or (iii) in the event the pricing and operational attributes of the Company's aircraft] [added: parts] or [removed: equipment become less competitive.][added: equipment.]

The Company is [added: also] dependent on [removed: Boeing as its] sole [removed: supplier] [added: or limited suppliers] for aircraft [removed: and many of its aircraft parts] [added: engines] and [removed: is dependent on other suppliers for] certain other aircraft [removed: parts or other] [added: parts, equipment, and] services.

[removed: Therefore, if the Company were unable to acquire additional aircraft from] [added: If] Boeing, or [removed: if Boeing] [added: other suppliers,] were unable or unwilling to [removed: make] timely [removed: or adequate deliveries of aircraft or to] provide adequate [added: products or] support for [removed: its] [added: their] products, [added: or in] the [added: event of a mechanical or regulatory issue associated with engines or other parts, the] Company's operations [removed: would] [added: could] be materially adversely affected.

The Company could also be materially adversely affected if the pricing or operational attributes of its [added: aircraft] equipment were to become less competitive.

[removed: Developing] [added: Developing] and expanding data security and privacy requirements could increase the Company's operating costs, and any failure of the Company to maintain the security of certain Customer, Employee, and business-related information could result in damage to the Company's reputation and could be costly to [removed: remediate.][added: remediate.]

The Company must receive information related to its Customers [added: and Employees] in order to run its business, and the Company's operations depend upon secure retention and the secure transmission of information over public networks, including information permitting cashless payments.

This information is subject to the continually evolving risk of [removed: intrusion, tampering, and theft.]

As a result, the Company must [removed: address] [added: monitor] a growing and fast-evolving set of legal requirements in this area.

The Company has a dedicated [removed: cyber–security] [added: cyber-security] team and program that focuses on current and emerging data security [removed: and data privacy] matters.

The Company continues to assess and invest in the growing needs of the [removed: cyber–security] [added: cyber-security] team through the allocation of skilled personnel, ongoing training, and support of the adoption and implementation of technologies coupled with [removed: cyber–security] [added: cyber-security] risk management frameworks.

[removed: The] [added: The] Company's results of operations could be adversely impacted if it is unable to effectively execute its strategic [removed: plans.][added: plans.]

The Company is reliant on the success of its revenue strategies and other strategic plans and initiatives to [added: grow and to] help offset [removed: certain] increasing costs.

The timely and effective execution of the Company's strategic plans could be negatively affected by (i) the Company's ability to timely and effectively implement, transition, and maintain related information technology systems and infrastructure; (ii) the Company's ability to effectively balance its investment of incremental operating expenses and capital expenditures related to its strategies against the need to effectively control costs; and (iii) [added: as discussed further above,] the Company's dependence on third parties with respect to the execution of its strategic plans.

The Company is currently dependent on Boeing as the sole manufacturer of the Company's aircraft.

Further prolonged grounding by the FAA of the Boeing 737 MAX aircraft could materially and adversely affect the Company’s business plans, strategies, and results of operations.

The Boeing 737 MAX aircraft are crucial to the Company’s growth plans and fleet modernization initiatives.

On March 13, 2019, the FAA issued an emergency order for all U.S. airlines to ground the MAX aircraft, including the 34 MAX aircraft in the Company’s fleet.

The MAX aircraft remains grounded and, based on continued uncertainty around the timing of the MAX return to service, the Company has removed the MAX from its flight schedule through June 6, 2020, and will likely further extend MAX-related flight schedule adjustments.

Further, MAX deliveries have remained suspended following the MAX groundings, and Boeing is not currently manufacturing new MAX aircraft.

The Company does not know whether, on what conditions, or when the MAX groundings will end.

Regulatory approval of MAX return to service is subject to Boeing's ongoing work with the FAA, who will determine the timing of MAX return to service.

The MAX groundings adversely affected operating results for the year ended December 31, 2019, and could have a material, adverse effect on the Company's operating results in future periods.

A continued prolonged extension or permanent grounding of the MAX aircraft would require additional flight schedule adjustments and result in further delays in aircraft deliveries, as well as lower operating revenues, operating income, and net income due to a variety of factors, including, among others, (i) lost revenue due to flight cancellations and disruptions as a result of a smaller operating aircraft fleet, (ii) the lack of ability to make corresponding reductions in expenses because of the fixed nature of many expenses, and (iii) possible negative effects on Customer confidence and airline choice.

Boeing no longer manufactures versions of the 737 other than the 737 MAX family of aircraft.

If the 737 MAX aircraft were to remain unavailable for the Company’s flight operations, the Company’s growth would be restricted unless and until it could procure and operate other types of aircraft from Boeing or another manufacturer, seller, or lessor, and the Company’s operations would be materially adversely affected.

In particular, if the Company’s growth were to be dependent upon the introduction of a new aircraft make and model to the Company’s fleet, the Company would need to, among other things, (i) develop and implement new maintenance, operating, and training programs, (ii) secure extensive regulatory approvals, and (iii) implement new technologies.

The requirements associated with operating a new aircraft make and model could take an extended period of time to fulfill and would likely impose substantial costs on the Company.

A shift away from a single fleet type could also add complexity to the Company’s operations, present operational and compliance risks, and materially increase the Company's costs.

material, adverse effect on the Company's business, operating results, and financial condition.

The Company could also be materially adversely affected if the pricing or operational attributes of its aircraft were to become less competitive.

Further, even upon a rescission of the FAA order to ground the MAX aircraft, the Company will continue to be reliant on Boeing to provide necessary resources and support to return the MAX to service.

Boeing has recommended that pilots receive special flight simulator training before operating the MAX aircraft, although the FAA is ultimately responsible for establishing the training requirements for operating the MAX.

Special simulator training would further delay the MAX return to service.

In addition, following the MAX return to service, the Company could face significant operational challenges in efficiently taking delivery of a large number of MAX aircraft from Boeing and reintroducing the MAX aircraft into the Company's network in a controlled and steady manner.

Additionally, because of airport infrastructure updates and other factors, the Company has experienced increased space rental rates at various airports in its network.

Disruptions to capital markets, shortages of skilled personnel, geopolitical developments, and/or adverse economic conditions could subject certain of the Company's third party vendors and service providers to significant financial pressures which could lead to performance problems, ceased operations, or bankruptcies among these third party vendors and

service providers.

If a third party vendor or service provider is unable to fulfill its commitments to the Company, the Company may be unable to replace that third party vendor or service provider in a short period of time, or at competitive terms, which could have a material adverse effect on the Company's results of operations.

Further, some of the Company's competitors have launched multi-year cost savings efforts to meet specific financial and growth targets.

Common efforts include fleet transformation to gain fuel efficiencies, fleet simplification, and increasing the number of seats per trip through seat retrofits and the use of larger aircraft.

As discussed below under "Management’s Discussion and Analysis of Financial Condition and Results of Operations," the Company experienced significant unit cost pressure in 2019 following the MAX groundings.

Historically, except for changes in the price of fuel, changes in operating expenses for airlines have been largely driven by changes in capacity.

However, the Company's operating expenses are largely fixed once flight schedules are published; and the Company experienced lower than expected capacity during 2019 due to the MAX groundings.

Throughout the duration of the MAX groundings, the Company has made schedule adjustments and canceled flights based on guidance from Boeing estimating the timing of MAX return to service.

Further changes to guidance relating to the expected duration of the MAX groundings could require the Company to make additional schedule adjustments and drive additional unit cost pressure and negatively affect fuel efficiency.

The Company offers no assurances that current estimations and timelines related to the MAX groundings are correct.

These technologies and systems include, among others, the Company's website and reservation system, flight dispatch and tracking systems, flight simulators, check-in kiosks, maintenance record keeping management systems, telecommunications systems, flight planning and scheduling systems, crew scheduling systems, and financial planning, management, and accounting systems.

The performance, reliability, and security of the Company's technology infrastructure and supporting systems are critical to the Company's operations and initiatives.

If any of the Company's significant technologies or automated systems were to cease functioning, or if its third party vendor service providers were to fail to adequately and timely provide technical support, system maintenance, or software upgrades for any of the Company's existing systems, the Company could experience service interruptions, delays, and loss of critical data, which could harm its operations, and result in financial losses and reputational damage.

The Company is dependent on Boeing as its sole supplier for many of its aircraft parts.

intrusion, tampering, and theft.

The Company is subject to extensive FAA regulation, which may materially and adversely affect the Company’s business plans, strategies, and results of operations.

The FAA promulgates and enforces regulations affecting the airline industry, and exercises extensive regulatory oversight of the Company’s operations.

airlines to reduce their capacity.

Although the Company is able to purchase some aircraft from parties other than Boeing, most of its purchases are directly from Boeing.

In addition, the Company would be materially adversely affected in the event of a mechanical or regulatory issue associated with the Boeing 737 aircraft type, whether as a result of downtime for part or all of the Company's fleet, increased maintenance costs, or because of a negative perception by the flying public.

The Company believes, however, that its years of experience with the Boeing 737 aircraft type, as well as the efficiencies Southwest has historically achieved by operating with a single aircraft type, continue to outweigh the risks associated with its single aircraft supplier strategy.

The Company is also dependent on sole or limited suppliers for aircraft engines and certain other aircraft parts and services and would, therefore, also be materially adversely affected in the event of the unavailability of, inadequate support for, or a mechanical or regulatory issue associated with, engines and other parts.

In January 2018, the Company submitted a formal application to the FAA for authorization to conduct ETOPS using Boeing 737-800 aircraft, in connection with the Company’s plans to begin service to Hawaii.

Due to the government shutdown in late 2018 and early 2019, the Company's ETOPS application process was delayed subject to the government reopening and the FAA's related ability to resume normal certification activities.

Further, as discussed above under "Business - Competition," the longer stage length of the Company's expected Hawaiian routes, as compared with the Company's average stage length of its other routes, could put pressure on the Company's revenues per available seat mile.

[removed: YEAR] [added: YEAR] IN [removed: REVIEW][added: REVIEW]

For the [removed: 46th] [added: 47th] consecutive year, the Company was profitable, recording GAAP and non-GAAP results for [removed: 2018] [added: 2019] and [removed: 2017] [added: 2018] as noted in the following tables.

See Note Regarding Use of Non-GAAP Financial Measures [removed: and the Reconciliation of Reported Amounts to Non-GAAP Financial Measures] for additional [removed: detail regarding non-GAAP financial measures.][added: information.]

| | | [removed: Year ended] [added: Year ended] | | | | | | | | |

| (in millions, except per share amounts) | | [removed: 2018] [added: December 31,] | | | | [removed: 2017] | | | | [removed: Percent Change] |

| [removed: Operating income] [added: Operating income, as reported] | [added: $] | [added: 2,957 | | |] $ | 3,206 | | | $ | 3,407 | | | [removed: (5.9) |]

| Net income | | $ | [removed: 2,465] [added: 2,300] | | | $ | [removed: 3,357] [added: 2,465] | | | [removed: (26.6)] [added: (6.7)] |

| Net income per share, diluted | | $ | [removed: 4.29] [added: 4.27] | | | $ | [removed: 5.57] [added: 4.29] | | | [removed: (23.0)] [added: (0.5)] |

| [removed: Operating income] [added: Operating income, non-GAAP] | [added: 2,957] | [removed: $] | [added: | |] 3,167 | | | [removed: $] | 3,347 | | | [removed: (5.4)] |

| Net income | | $ | [removed: 2,435] [added: 2,300] | | | $ | [removed: 2,116] [added: 2,435] | | | [removed: 15.1] [added: (5.5)] |

| Net income per share, diluted | | $ | [removed: 4.24] [added: 4.27] | | | $ | [removed: 3.51] [added: 4.24] | | | [removed: 20.8] [added: 0.7] |

Net income for the year ended December 31, [removed: 2018,] [added: 2019,] was [removed: $2.47] [added: $2.3] billion, a [removed: 26.6] [added: 6.7] percent decrease year-over-year, as compared to [removed: the 2017 record] [added: 2018] Net income of [removed: $3.36] [added: $2.5] billion.

Diluted earnings per share for [removed: 2018] [added: 2019] was [removed: $4.29,] [added: $4.27,] as compared [removed: to the 2017 record diluted earnings per share of $5.57.][added: with $4.29 for 2018.]

[added: For the year ended December 31, 2019,] Non-GAAP Net income was [removed: a record of $2.44] [added: also $2.3] billion, a [removed: 15.1] [added: 5.5] percent [removed: increase] [added: decrease] year-over-year.

Non-GAAP diluted earnings per share for [removed: 2018] [added: 2019] was [removed: a record of $4.24.][added: also $4.27, as compared with $4.24 for 2018.]

This [removed: non-cash] [added: gain on sale of retired Boeing 737-300 aircraft was considered a special] item [removed: is] [added: and thus] excluded from the Company's non-GAAP results.

Operating income for the year ended December 31, [removed: 2018,] [added: 2019,] was [removed: $3.2] [added: $3.0] billion, a decrease of [removed: 5.9] [added: 7.8] percent year-over-year, and non-GAAP Operating income was also [removed: $3.2 billion.][added: $3.0 billion, a 6.6 percent decrease year-over-year.]

For the twelve months ended December 31, [removed: 2018,] [added: 2019,] the Company's earnings performance, combined with its actions to manage invested capital, produced a [removed: 23.6] [added: 22.9] percent pre-tax non-GAAP return on invested capital ("ROIC"), or [removed: 18.4] [added: 17.8] percent on an after-tax basis, compared with the Company's pre-tax ROIC of [removed: 27.6] [added: 23.6] percent, or [removed: 17.6] [added: 18.4] percent on an after-tax basis, for the twelve months ended December 31, [removed: 2017.][added: 2018.]

The [added: primary] cause of the year-over-year decline in pre-tax ROIC was the decrease in Operating income for the twelve months ended December 31, [removed: 2018,] [added: 2019,] compared with the twelve months ended December 31, [removed: 2017, as well as the increase in Equity, driven by the impacts of Tax Reform.][added: 2018.]

During [removed: 2018,] [added: 2019,] the Company continued to return value to its Shareholders.

The Company returned [removed: $2.3] [added: $2.4] billion to Shareholders through [removed: $332] [added: $372] million in dividend payments and $2.0 billion through four separate accelerated share repurchase [removed: programs.][added: programs and other open market share repurchases.]

During [removed: October 2018,] [added: November 2019,] the Company launched the Fourth Quarter [removed: 2018] [added: 2019] ASR Program by advancing [removed: $500] [added: $550] million to a financial institution in a privately negotiated transaction.

[removed: The purchase was] [added: These purchases will be] recorded as [removed: a] treasury share [removed: purchase] [added: repurchases] for purposes of calculating earnings per share.

The specific number of shares that the Company ultimately will repurchase under the [removed: First] [added: Fourth] Quarter 2019 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 [removed: April 2019.][added: February 13, 2020.]

The [removed: purchase will be] [added: Company entered into the following share repurchases during 2019, which were each] recorded as a treasury share purchase for purposes of calculating earnings per share.

[removed: Subsequent to the launch of the First Quarter 2019 ASR Program, the] [added: The] Company has [removed: $850 million] [added: $1.35 billion] remaining under its May [removed: 2018] [added: 2019] $2.0 billion share repurchase authorization.

[removed: Company Overview][added: Company Overview]

[removed: The] [added: As of December 31, 2019, the] Company [removed: now serves 99] [added: served 101] destinations across 40 states and ten near-international [removed: countries,] [added: countries] and [added: currently] operates over 4,000 departures a day.

The Company [removed: has further announced its decision to cease service] [added: ceased services] at Benito Juárez Mexico City International [removed: Airport, with the last day of service scheduled] [added: Airport] on March 30, 2019.

During [removed: 2018,] [added: 2019,] the Company took delivery of [removed: 26 new 737-800 aircraft and 18] [added: three] new [removed: 737] MAX [removed: 8] aircraft from [removed: Boeing, as well as 1 pre-owned Boeing 737-700 aircraft from a] third [removed: party.][added: parties.]

As of December 31, [removed: 2018,] [added: 2019,] the Company had firm orders in place with Boeing for 219 737 MAX 8 aircraft and 30 737 MAX 7 aircraft.

See [removed: Part I, Item 2] [added: below] for further information.

[removed: 2018 Compared with 2017][added: 2018 Compared with 2017]

[removed: Operating Revenues][added: Operating Revenues]

Passenger revenues for [removed: 2018] [added: 2019] increased by [removed: $692] [added: $321] million, or [removed: 3.5] [added: 1.6] percent, compared with [removed: 2017.][added: 2018.]

On a unit basis, Passenger revenues [removed: decreased 0.4] [added: increased 3.2] percent, year-over-year, [added: largely] driven by a [removed: slight decrease in Load factor to 83.4 percent, partially offset by a 0.1] [added: 3.1] percent increase in Passenger revenue [removed: yield.][added: yield and a slight increase in Load factor, year-over-year, to 83.5 percent.]

Freight revenues for [removed: 2018 increased] [added: 2019 decreased] by [removed: $2] [added: $3] million, or [removed: 1.2] [added: 1.7] percent, compared with [removed: 2017,] [added: 2018,] primarily due to [removed: increased capacity.][added: decreased demand.]

Based on current trends, the Company currently expects Freight revenues in first quarter [removed: 2019] [added: 2020] to increase, compared with first quarter [removed: 2018.][added: 2019.]

The Company currently expects Other revenues in first quarter [removed: 2019] [added: 2020] to increase, compared with first quarter [removed: 2018.][added: 2019.]

Operating unit revenues for [removed: 2018 were flat] [added: 2019 increased by 3.7 percent,] compared with [removed: 2017.][added: 2018.]

| GAAP | | 2019 | | | | 2018 | | | | Percent Change |

| Operating income | | $ | 2,957 | | | $ | 3,206 | | | (7.8) |

| Operating income | | $ | 2,957 | | | $ | 3,167 | | | (6.6) |

The decrease in GAAP Net income was primarily due to the impact of the Federal Aviation Administration ("FAA") grounding of the Boeing 737 MAX aircraft ("MAX"), unscheduled maintenance disruptions in first quarter 2019, and the U.S. government shutdown in first quarter 2019.

The decrease in GAAP Net income also resulted from an 8.4 percent increase in Salaries, wages, and benefits expense, which included a discretionary, special $124 million pre-tax profitsharing award which was accrued in fourth quarter 2019, coupled with a 6.1 percent increase in Other operating expenses.

These increases were partially offset by a 2.1 percent increase in Operating revenues, and a 5.8 percent decrease in Fuel and oil expense.

Boeing 737 MAX Grounding

The estimated 2019 Operating income reduction attributable to the MAX groundings from March 13, 2019, through the end of the year, was $828 million.

The Company reached a confidential agreement (the “Boeing settlement”) with The Boeing Company on compensation related to estimated 2019 financial damages due to the grounding of the MAX.

The terms of the Boeing settlement are confidential, but are intended to provide for a substantial portion of the Company's financial damages in 2019 associated with the MAX grounding.

The Boeing settlement did not impact 2019 earnings, as substantially all of the compensation will be accounted for as a reduction of the cost basis for both owned MAX aircraft and future purchased MAX aircraft, which is expected to reduce depreciation expense in future years.

The Company’s Board of Directors authorized a discretionary, special $124 million pre-tax profitsharing award for Boeing compensation which was accrued in fourth quarter 2019.

The Company continues to engage in discussions with Boeing regarding compensation for 2020 damages related to the MAX groundings; however, no settlement assumptions have been factored into the Company's 2020 outlook.

Based on continued uncertainty around the timing of MAX return to service, the Company has proactively removed the MAX from its flight schedule through June 6, 2020.

Based on recent guidance from Boeing estimating that the ungrounding of the MAX will be mid-2020, the Company will likely extend MAX-related flight schedule adjustments further to provide operational reliability and a dependable flight schedule

for our Customers booking their summer travel.

As a result of not paying for its scheduled MAX aircraft deliveries following the grounding in March 2019, the Company's cash balance at December 31, 2019, was higher than projected.

However, the Company has not factored any amounts for excess cash into its invested capital and ROIC calculations for any of the periods presented.

The Company subsequently received 7.3 million shares of common stock in December 2019, representing an estimated 75 percent of the shares to be purchased by the Company under the Fourth Quarter 2019 ASR Program, and subsequently received an additional 1.8 million shares in January 2020 in further partial settlement of the Fourth Quarter 2019 ASR Program.

The Company also entered into an additional open market share repurchase plan for the purchase of up to an additional $50 million of its shares of common stock depending on market prices.

See "Liquidity and Capital Resources" below for further information on the Company's 2019 share repurchases.

The Company began service to Hawaii in March 2019 from Oakland to Honolulu, and from San Jose, California in May 2019.

On November 10, 2019, the Company began service between Sacramento and Honolulu, as well as interisland service between Honolulu and Lihue.

The Company currently operates 18 flights daily between Hawaii and the mainland, and 34 interisland flights daily amongst the Hawaiian Islands.

By April 20, 2020, the Company is scheduled to offer 28 daily departures between California and Hawaii, and 38 daily departures among the Hawaiian Islands.

The Company began service from Oakland and San Jose to both Lihue and Kona, and new interisland service between Honolulu and Hilo, and Kona and Kahului, in January 2020.

The Company also is scheduled to begin service from San Diego to Kahului on Maui on April 14, 2020, and from San Diego to Honolulu on April 20, 2020.

In 2019, the Company also announced plans to begin service from Houston Hobby to Cozumel, Mexico in March 2020, subject to government approvals.

Also in 2019, the Company decided to close its operations at Newark Liberty International Airport and consolidate its New York City presence at New York LaGuardia Airport.

These deliveries occurred prior to the March 13, 2019, FAA emergency order issued for all U.S. airlines to ground all MAX aircraft.

All 34 of the Company's MAX aircraft have remained grounded since March 13, 2019.

Upon a rescission of the FAA order to ground the MAX, the Company currently estimates it will take at least a couple of months to comply with applicable FAA directives, including all necessary Pilot training.

Based on continued uncertainty around the timing of MAX return to service, the Company has proactively removed the MAX from its flight schedule through June 6, 2020 and will likely

extend MAX-related flight schedule adjustments.

The FAA will determine the timing of MAX return to service, and the Company offers no assurances that current estimations and timelines are correct.

The Company continues to be focused on proactively managing cancellations, minimizing operational disruptions, reaccommodating Customers, and minimizing the impact on its ontime performance.

As previously disclosed, Boeing is not currently delivering new MAX aircraft and, therefore, not meeting its contractual delivery schedule.

The Company had 41 MAX aircraft on order from Boeing or third parties from 2019 that have yet to be delivered, one of which contractually shifted to 2021.

As a result of the MAX groundings, the Company deferred the planned retirement of seven of its owned Boeing 737-700 aircraft to future years.

The Company retired one 737-700 aircraft during third quarter 2019 and an additional three 737-700 aircraft during fourth quarter 2019.

The fiscal years ended December 31, 2017 and 2016 reflect recast financial information related to the Company's January 1, 2018, adoption of the New Revenue Standard, the New Retirement Standard, and the New Hedging Standard, as detailed in Note 2 to the Consolidated Financial Statements.

| | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | |

| | | December 31, | | | | | | | | |

| GAAP | | | | | | As Recast | | | | |

The decrease in GAAP Net income was primarily driven by a prior year $1.3 billion adjustment to reduce the Company's Provision for income taxes related to the Tax Cuts and Jobs Act legislation enacted in December 2017 ("Tax Reform"), which resulted in a re-measurement of the Company's deferred tax assets and liabilities at the new federal corporate tax rate of 21 percent.

The decrease in Operating income was primarily driven by higher market jet fuel prices.

These factors were partially offset by a 3.5 percent increase in Passenger revenues driven by a 3.9 percent increase in capacity, as strong demand enabled the Company to fill the majority of the additional seats offered.

The increase in after-tax ROIC was primarily due to the reduction in the federal corporate tax rate in 2018.

The Company received 9.8

million shares in total under the Fourth Quarter 2018 ASR Program, which was completed in December 2018.

On January 28, 2019, the Company launched a new accelerated share repurchase program by advancing $500 million to a financial institution in a privately negotiated transaction ("First Quarter 2019 ASR Program").

Additionally, the Company has announced plans to begin service to Hawaii, subject to requisite governmental approvals, including approval from the Federal Aviation Administration (the "FAA") for Extended Operations ("ETOPS"), a regulatory requirement to operate between the U.S. mainland and the Hawaiian Islands.

The Company has also announced its intent to begin service to four Hawaiian airports: Honolulu International Airport, Lihue Airport, Kona International Airport at Keahole, and Kahului Airport, from four initial gateway airports in California: Oakland Metropolitan Airport, San Diego International Airport, Mineta San Jose International Airport, and Sacramento International Airport.

The Company became the first airline in North America to offer scheduled service utilizing Boeing’s new, more fuel-efficient, 737 MAX 8 aircraft, which entered service in fourth quarter 2017.

The Company is scheduled to be the launch customer for the Boeing 737 MAX 7 series aircraft, with deliveries expected to begin in 2019.

For 2019, the Company's current firm aircraft commitments and forecasted Boeing 737-700 retirements would result in approximately 775 aircraft by year-end 2019.

The Company plans to continue its route network and schedule optimization efforts through the addition of new markets and itineraries, while also pruning less profitable flights from its schedule.

The Company currently plans to grow its 2019 available seat miles no more than five percent, year-over-year, with first quarter 2019 year-over-year growth in the 3.5 to 4 percent range.

The Company continues to expect the retirement of its Boeing 737-300 ("Classic") aircraft, the last of which took place at the end of third quarter 2017, to produce significant incremental cost savings and improvements in pre-tax results of at least $200 million, cumulatively, by the end of 2020.

On May 9, 2017, the Company completed a multi-year initiative to completely transition its reservation system to the Amadeus Altéa Passenger Service System.

As expected, the new reservation system produced incremental benefits in pretax results of approximately $200 million in 2018 through the deployment of certain revenue management tools and techniques.

The increase was largely due to a 3.9 percent increase in capacity, as strong demand enabled the Company to fill the majority of the additional seats offered.

Passenger revenues for 2018 included an estimated $130 million negative impact to revenue due to temporarily lower passenger yields from an aggressive May 2018 fare sale for June through October 2018 travel, which was offered in conjunction with the Company’s broad marketing efforts following the Flight 1380 accident.

The increase in yield was largely due to the successful deployment of several revenue management enhancements enabled by the Company's new reservation system, an improved fare environment in second half 2018, and strong passenger demand for low fares.

Other revenues for 2018 increased by $125 million, or 10.3 percent, compared with 2017, primarily due to an increase in revenues associated with cardholder spend on the Company's co-branded Chase® Visa credit card.

Based on revenue and booking trends thus far in first quarter 2019, and assuming no further significant impact on bookings from the recent government shutdown, the Company currently estimates first quarter 2019 operating unit revenues to increase in the four to five percent range, compared with first quarter 2018.

Historically, except for changes in the price of fuel, changes in Operating expenses for airlines have been largely driven by changes in capacity, or ASMs.

| | | | | | | | | | | | | | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | |

| | 2018 | | | | 2017 | | | | Per ASM | | | | Percent | |

| Total | | 11.74 | ¢ | | | 11.53 | ¢ | | | 0.21 | ¢ | | 1.8 | % |

Operating expenses per ASM for 2018 increased by 1.8 percent, compared with 2017, primarily due to increases in market jet fuel prices.

See Note

These increases more than offset the impact in 2017 of the $1,000 per Employee bonus awarded as a result of Tax Reform, which totaled $70 million in the 2017 results.

The following table sets

| Southwest Material Specialists (formerly known as Stock Clerks) | 300 | International Brotherhood of Teamsters, Local 19 ("IBT 19") | August 2013. The Company reached a tentative agreement with IBT 19 in January 2019. If ratified by the Company's Material Specialists, the contract will become amendable in 2024. |

| Southwest Mechanics | 2,400 | Aircraft Mechanics Fraternal Association ("AMFA") | August 2012 |

As of December 31, [removed: 2018,] [added: 2019,] the Company operated a total of [removed: 123] [added: 122] aircraft under operating and [removed: capital lease.][added: finance leases.]

The Company also has [removed: 75] [added: 67] aircraft under operating and [removed: capital] [added: finance] lease that have been subleased to another carrier.

[removed: Hedging][added: Hedging]

The Company expects to consume approximately 2.2 billion gallons of jet fuel in [removed: 2019.][added: 2020.]

Based on this anticipated usage, a change in jet fuel prices of just one cent per gallon would impact the Company’s Fuel and oil expense by approximately $22 million for [removed: 2019,] [added: 2020,] excluding any impact associated with fuel derivative instruments held.

As of December 31, [removed: 2018,] [added: 2019,] the Company held a net position of fuel derivative instruments that represented a hedge for a portion of its anticipated jet fuel purchases for future periods.

The gross fair value of outstanding financial derivative instruments related to the Company’s jet fuel market price risk at December 31, [removed: 2018,] [added: 2019,] was an asset of [removed: $138] [added: $110] million.

[removed: No] [added: In addition, $25 million in] cash collateral deposits were [removed: provided by or] held by the Company in connection with these instruments based on their fair value as of December 31, [removed: 2018.][added: 2019.]

An immediate 10 percent increase or decrease in underlying fuel-related commodity prices from the December 31, [removed: 2018,] [added: 2019,] prices would correspondingly change the fair value of the commodity derivative instruments in place by approximately [removed: $114] [added: $143] million.

This sensitivity analysis uses industry standard valuation models and holds all inputs constant at December 31, [removed: 2018,] [added: 2019,] levels, except underlying futures prices.

As of December 31, [removed: 2018,] [added: 2019,] the Company had [removed: eight] [added: nine] counterparties in which the derivatives held were an asset.

To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and [removed: monitors the market position of the fuel hedging program and its relative market position with each counterparty.]

At December 31, [removed: 2018,] [added: 2019,] the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty’s credit rating.

[added: The] Company also had agreements with counterparties in which cash deposits, letters of credit, and/or pledged aircraft are required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds.

Refer to the counterparty credit risk and collateral table provided in Note 10 to the Consolidated Financial Statements for the fair values of fuel derivatives, [added: amounts held as collateral,] and applicable collateral posting threshold amounts as of December 31, [removed: 2018,] [added: 2019,] at which such postings are triggered.

As of December 31, [removed: 2018,] [added: 2019,] no cash collateral deposits were provided by or held by the Company based on its outstanding interest rate swap agreements.

[removed: Financial] [added: Financial] Market [removed: Risk][added: Risk]

While the Company uses financial leverage, it strives to maintain a strong balance sheet and has [removed: a "BBB+"] [added: an "A\-"] rating with Fitch, a "BBB+" rating with Standard & Poor’s, and an "A3" credit rating with Moody’s as of December 31, [removed: 2018,] [added: 2019,] all of which are considered "investment grade." As disclosed in Note 10 to the Consolidated Financial Statements, the Company has converted certain of its long-term debt to floating rate debt by entering into an interest rate swap agreement.

[removed: As of December 31, 2018,] [added: The following table presents the Company's fixed-rate senior unsecured notes outstanding,] excluding the notes or debentures that have been converted to a floating rate, [removed: the Company’s fixed-rate senior unsecured notes outstanding included its $300 million 2.75% senior unsecured notes due 2022, its $300 million 3.00% senior unsecured notes due 2026, its $100 million 7.375% senior unsecured notes due 2027, and its $300 million 3.45% senior unsecured notes due 2027.][added: as of December 31, 2019:]

As a result of the gain realized on this transaction, which is being amortized over the remaining term of the corresponding notes, and based on projected interest rates at the date of termination, the Company does not believe its future interest expense, based on projected future interest rates at the date of termination, associated with these notes will significantly differ from the expense it would have recorded had [added: the notes remained at floating rates.]

The following table displays the characteristics of the Company’s secured fixed rate debt as of December 31, [removed: 2018:][added: 2019:]

| | | [removed: Principal amount (in millions)] [added: Principal amount (in millions)] | | | | [removed: Effective fixed rate] [added: Effective fixed rate] | | | [removed: Final maturity] [added: Final maturity] | | [removed: Underlying collateral] [added: Underlying collateral] |

| Term Loan Agreement | | $ | [removed: 23] [added: 134] | | | [removed: 6.315] [added: 5.223] | % | | [removed: 5/6/2019] [added: 5/9/2020] | | [removed: 14] [added: 21] specified Boeing 737-700 aircraft |

The carrying value of the Company’s floating rate debt totaled [removed: $994] [added: $683] million, and this debt had a weighted-average maturity of [removed: 2.12] [added: 1.73] years at floating rates averaging [removed: 3.48] [added: 3.12] percent for the year ended December 31, [removed: 2018.][added: 2019.]

In [removed: total,] [added: addition,] the [removed: Company’s fixed-rate] [added: Company's total] debt [removed: and] [added: (both] floating [added: and fixed] rate [removed: debt represented 11] [added: debt) divided by total assets was 10.3] percent [removed: and 5 percent, respectively,] [added: as] of [removed: its consolidated noncurrent assets at] December 31, [removed: 2018.][added: 2019.]

The Company also has some risk associated with changing interest rates due to the short-term nature of its invested cash, which totaled [removed: $1.9] [added: $2.5] billion, and short-term investments, which totaled [removed: $1.8] [added: $1.5] billion at December 31, [removed: 2018.][added: 2019.]

A hypothetical 10 percent change in market interest rates as of December 31, [removed: 2018,] [added: 2019,] would not have a material effect on the fair value of the Company’s fixed-rate debt instruments.

Assuming floating market rates in effect as of December 31, [removed: 2018] [added: 2019] were held constant throughout a 12-month period, a hypothetical 10 percent change in those rates would have an immaterial impact on the Company’s net earnings and cash flows.

Utilizing these assumptions and considering the Company’s cash balance (excluding the impact of cash collateral deposits held from or provided to counterparties, if applicable), short-term investments, and floating-rate debt outstanding at December 31, [removed: 2018,] [added: 2019,] an increase in rates would have a net positive effect on the Company’s earnings and cash flows, while a decrease in rates would have a net negative effect on the Company’s earnings and cash flows.

As of December 31, [removed: 2018,] [added: 2019,] the Company was in compliance with this covenant and there were no amounts outstanding under the revolving credit facility.

The Company’s hedging counterparty agreements contain ratings triggers in which cash collateral could be required to be posted with the counterparty if the Company’s credit rating were to fall below investment grade by two of the three major rating agencies, and if the Company [removed: was] [added: were] in a net liability position with the counterparty.

As of December 31, [removed: 2018,] [added: 2019,] the Company was in compliance with all credit card processing agreements.

monitors the market position of the fuel hedging program and its relative market position with each counterparty.

| | | | | |

| --- | --- | --- | --- | --- |

| | | | | |

| (in millions) | | December 31, 2019 | | |

| 2.75% Notes due 2022 | | $ | 300 | |

| 3.00% Notes due 2026 | | 300 | | |

| 7.375% Debentures due 2027 | | 100 | | |

| 3.45% Notes due 2027 | | 300 | | |

The Company's floating rate debt represented 25.6 percent of the Company's total outstanding debt as of December 31, 2019.

There was no cash reserved for this purpose as of December 31, 2019.

The

Due to the Company's investment grade credit rating, terms of the Company’s current fuel hedging agreements with counterparties, and the types of derivatives held as of December 31, 2018, in the Company's judgment, it does not have cash collateral exposure.

See Note 10 to the Consolidated Financial Statements.

the notes remained at floating rates.

| Term Loan Agreement | | 10 | | | | 4.84 | % | | 7/1/2019 | | 4 specified Boeing 737-700 aircraft |

| Term Loan Agreement | | 187 | | | | 5.223 | % | | 5/9/2020 | | 21 specified Boeing 737-700 aircraft |

[removed: A] [added: On July 11, 2019, a] complaint alleging violations of federal [removed: antitrust] [added: and state] laws and seeking certification as a class action was filed against [removed: Delta Air Lines, Inc. and AirTran Holdings, Inc.] [added: Boeing] and [removed: its subsidiary AirTran Airways, Inc. (collectively with AirTran Holdings, Inc., "AirTran")] [added: the Company] in the United States District Court for the [removed: Northern] [added: Eastern] District of [removed: Georgia] [added: Texas] in [removed: Atlanta on May 22, 2009.][added: Sherman.]

[removed: AirTran] [added: The Company] denies all allegations of wrongdoing, including those in the [removed: Consolidated Amended Complaint.][added: complaint.]

[removed: Also, on] [added: On] June 30, 2015, the U.S. Department of Justice ("DOJ") issued a Civil Investigative Demand ("CID") to the Company.

Since then, a number of similar class action complaints were filed in the United States District Courts for the Central District of California, the Northern District of California, the District of Columbia, the Middle District of Florida, the Southern District of Florida, the Northern District of Georgia, the Northern District of Illinois, the Southern District [added: of Indiana, the Eastern District of Louisiana, the District of Minnesota, the District of New Jersey, the Eastern District of New York, the Southern District of New York, the Middle District of North Carolina, the District of Oklahoma, the Eastern District of Pennsylvania, the Northern District of Texas, the District of Vermont, and the Eastern District of Wisconsin.]

The Court granted preliminary approval of the settlement on January 3, [removed: 2018.][added: 2018, and the plaintiffs provided notice to the proposed settlement class.]

| [removed: Item 4.] [added: Item 4.] | [removed: Mine] [added: Mine] Safety [removed: Disclosures] [added: Disclosures] |

The following information regarding the Company’s executive officers is as of February 1, [removed: 2019.][added: 2020.]

| [removed: Name] [added: Name] | [removed: Position] [added: Position] | [removed: Age] [added: Age] |

| Gary C. Kelly | Chairman of the Board & Chief Executive Officer | [removed: 63] [added: 64] |

| Thomas M. Nealon | President | [removed: 57] [added: 58] |

| Michael G. Van de Ven | Chief Operating Officer | [removed: 57] [added: 58] |

| Robert E. Jordan | Executive Vice President Corporate Services | [removed: 58] [added: 59] |

| Tammy Romo | Executive Vice President & Chief Financial Officer | [removed: 56] [added: 57] |

| Mark R. Shaw | Executive Vice President & Chief Legal & Regulatory Officer | [removed: 56] [added: 57] |

| Andrew M. Watterson | Executive Vice President & Chief [removed: Revenue] [added: Commercial] Officer | [removed: 52] [added: 53] |

| Gregory D. Wells | Executive Vice President Daily Operations | [removed: 60] [added: 61] |

[removed: Gary] [added: *Gary] C.

[removed: Kelly] [added: Kelly*] has served as the Company's Chairman of the Board since May 2008 and as its Chief Executive Officer since July 2004.

[removed: Thomas] [added: *Thomas] M.

[removed: Nealon] [added: Nealon*] has served as the Company's President since January 2017.

[removed: Michael] [added: *Michael] G.

Van de [removed: Ven] [added: Ven*] has served as the Company's Chief Operating Officer since May 2008.

[removed: Robert] [added: *Robert] E.

[removed: Jordan] [added: Jordan*] has served as the Company's Executive Vice President Corporate Services since July [removed: 2017 and as President of AirTran Airways, Inc. since May 2011.][added: 2017.]

[removed: Tammy Romo] [added: *Tammy Romo*] has served as the Company's Executive Vice President & Chief Financial Officer since July 2015.

Ms. Romo also served as Senior Vice President Finance & Chief Financial Officer from September 2012 to July 2015, Senior Vice President of Planning from February 2010 to September 2012, Vice President of Financial Planning from September 2008 to February 2010, Vice President Controller from February 2006 to August 2008, Vice President Treasurer from September 2004 to February 2006, Senior Director of Investor Relations from March 2002 to September [added: 2004, Director of Investor Relations from December 1994 to March 2002, Manager of Investor Relations from September 1994 to December 1994, and Manager of Financial Reporting from September 1991 to September 1994.]

[removed: Mark] [added: *Mark] R.

[removed: Shaw] [added: Shaw*] has served as the Company's Executive Vice President & Chief Legal & Regulatory Officer since November 2018.

[removed: Andrew] [added: *Andrew] M.

[removed: Watterson] [added: Watterson*] has served as the Company's Executive Vice President & Chief [removed: Revenue] [added: Commercial] Officer since [removed: July 2017.][added: January 2020.]

Mr. Watterson also served as [added: Executive Vice President & Chief Revenue Officer from July 2017 to January 2020,] Senior Vice President & Chief Revenue Officer from January 2017 to July 2017, Senior Vice President of Network & Revenue from January 2016 to January 2017, and as Vice President of Network Planning & Performance from October 2013 to January 2016.

[removed: Gregory] [added: *Gregory] D.

[removed: Wells] [added: Wells*] has served as the Company's Executive Vice President Daily Operations since January 2017.

Mr. Wells has over [removed: 36] [added: 37] years of experience with the Company.

[removed: PART II][added: PART II]

The Court held a fairness hearing on March 22, 2019, and it issued an order granting final approval of the settlement on May 9, 2019.

On June 10, 2019, three objectors filed notices of appeal to the United States Court of Appeals for the District of Columbia Circuit.

Two of the objectors dismissed their appeals, and the Company and the other settling parties moved to dismiss the remaining appeal because the district court did not certify the approval order as appealable.

The district court denied the remaining objectors' request to certify the approval order as a final appealable order, and on November 6, 2019, the objectors asked the court of appeals to dismiss their appeal.

The case is continuing as to the remaining defendants.

The complaint alleges that Boeing and the Company colluded to conceal defects with the MAX aircraft in

violation of the Racketeer Influenced and Corrupt Organization Act and also asserts related state law claims based upon the same alleged facts.

The initial complaint seeks damages on behalf of putative classes of customers who purchased tickets for air travel from either the Company or American Airlines between August 29, 2017, and March 13, 2019.

The complaint generally seeks money damages, equitable monetary relief, injunctive relief, declaratory relief, and attorneys’ fees and other costs.

On September 13, 2019, the Company filed a motion to dismiss the complaint and to strike certain class allegations.

The plaintiffs filed a response to the Company's motion, and thereafter the parties filed respective reply briefs.

On December 9, 2019, the Court held a hearing on the Company and Boeing’s motions to dismiss, and the parties are currently awaiting the Court’s ruling.

The Company believes the plaintiffs' positions are without merit and intends to vigorously defend itself.

INFORMATION ABOUT OUR EXECUTIVE OFFICERS

The complaint alleged, among other things, that AirTran attempted to monopolize air travel in violation of Section 2 of the Sherman Act, and conspired with Delta in imposing $15-per-bag fees for the first item of checked luggage in violation of Section 1 of the Sherman Act.

The initial complaint sought treble damages on behalf of a putative class of persons or entities in the United States who directly paid Delta and/or AirTran such fees on domestic flights beginning December 5, 2008.

After the filing of the May 2009 complaint, various other nearly identical complaints also seeking certification as class actions were filed in federal district courts in Atlanta, Georgia; Orlando, Florida; and Las Vegas, Nevada.

All of the cases were consolidated before a single federal district court judge in Atlanta.

A Consolidated Amended Complaint was filed in the consolidated action on February 1, 2010, which broadened the allegations to add claims that Delta and AirTran conspired to reduce capacity on competitive routes and to raise prices in violation of Section 1 of the Sherman Act.

In addition to treble damages for the amount of first baggage fees paid to AirTran and to Delta, the Consolidated Amended Complaint sought injunctive relief against a broad range of alleged anticompetitive activities, as well as attorneys' fees.

On August 2, 2010, the Court dismissed plaintiffs' claims that AirTran and Delta had violated Section 2 of the Sherman Act; the Court let stand the claims of a conspiracy with respect to the imposition of a first bag fee and the airlines' capacity and pricing decisions.

On July 12, 2016, the Court granted plaintiffs' motion to certify a class of all persons who paid first bag fees to AirTran or Delta from December 8, 2008 to November 1, 2014 (the date on which AirTran stopped charging first bag fees).

Defendants appealed that decision.

On March 29, 2017, the Court granted defendants’ motion for summary judgment and dismissed all claims against AirTran.

On March 9, 2018, the Court of Appeals affirmed the district court’s order granting summary judgment to AirTran and Delta, and on June 8, 2018, the Court of Appeals denied plaintiffs' petition for rehearing and rehearing en banc.

On November 5, 2018, the plaintiffs petitioned the Supreme Court for a writ of certiorari, which the Supreme Court denied on January 7, 2019.

of Indiana, the Eastern District of Louisiana, the District of Minnesota, the District of New Jersey, the Eastern District of New York, the Southern District of New York, the Middle District of North Carolina, the District of Oklahoma, the Eastern District of Pennsylvania, the Northern District of Texas, the District of Vermont, and the Eastern District of Wisconsin.

The plaintiffs provided notice to the settlement class pursuant to a notice program approved by the Court, and the deadline for class members to opt out or object was January 4, 2019.

The fairness hearing for the settlement is scheduled for March 22, 2019.

In addition, on July 8, 2015, the Company was named as a defendant in a putative class action filed in the Federal Court in Canada alleging that the Company, Air Canada, American Airlines, Delta Air Lines, and United Airlines colluded to restrict capacity and maintain higher fares for Canadian residents traveling in the United States and for travel between the United States and Canada.

Similar lawsuits were filed in the Supreme Court of British Columbia on July 15, 2015, Court of Queen's Bench for Saskatchewan on August 4, 2015, Superior Court of the Province of Quebec on September 21, 2015, and Ontario Superior Court of Justice on October 6, 2015.

In December 2015, the Company entered into Tolling and Discontinuance agreements with putative class counsel in the Federal Court, British Columbia, and Ontario proceedings and a discontinuance agreement with putative class counsel in the Quebec proceeding.

The other defendants entered into an agreement with the same putative class counsel to stay the Federal Court, British Columbia, and Quebec proceedings and to proceed in Ontario.

On June 10, 2016, the Federal Court granted plaintiffs' motion to discontinue that action against the Company without prejudice and stayed the action against the other defendants.

On July 13, 2016, the plaintiff unilaterally discontinued the action against the Company in British Columbia.

On February 14, 2017, the Quebec Court granted the plaintiff’s motion to discontinue the Quebec proceeding against the Company and to stay that proceeding against the other defendants.

On March 10, 2017, the Ontario Court granted the plaintiff’s motion to discontinue that proceeding as to the Company.

On September 29, 2017, the Company and the other defendants entered into a tolling agreement suspending any limitations periods that may apply to possible claims among them for contribution and indemnity arising from the Canadian litigation.

The Saskatchewan claim has not been served on the Company, and the time for the Company to respond to that complaint has not yet begun to run.

The plaintiff in that case generally seeks damages (including punitive damages in certain cases), prejudgment interest, disgorgement of any benefits accrued by the defendants as a result of the allegations, injunctive relief, and attorneys' fees and other costs.

The Company denies all allegations of wrongdoing and intends to vigorously defend this civil case in Canada.

The Company does not currently serve Canada.

EXECUTIVE OFFICERS OF THE REGISTRANT

2004, Director of Investor Relations from December 1994 to March 2002, Manager of Investor Relations from September 1994 to December 1994, and Manager of Financial Reporting from September 1991 to September 1994.

Prior to becoming an officer of the Company, Mr. Watterson served as Vice President of Planning and Revenue Management at Hawaiian Airlines from May 2011 to October 2013.

[removed: UNITED STATES][added: UNITED STATES]

[removed: SECURITIES] [added: SECURITIES] AND EXCHANGE [removed: COMMISSION][added: COMMISSION]

[removed: Washington,] [added: Washington,] D.C. [removed: 20549][added: 20549]

[removed: FORM 10-K][added: FORM 10-K]

| [removed: þ] [added: ☒] | [removed: ANNUAL] [added: ANNUAL] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

[removed: | |] For the fiscal year ended December 31, [removed: 2018 |][added: 2019]

| [removed: ¨] [added: ☐] | [removed: TRANSITION] [added: TRANSITION] REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF [removed: 1934] [added: 1934] |

[removed: ][added: ]

[removed: Southwest Airlines Co.][added: SOUTHWEST AIRLINES CO.]

| [removed: TEXAS] [added: Texas] | [added: |] 74-1563240 |

| (State or other jurisdiction of | [added: |] (IRS Employer |

| incorporation or organization) | [added: |] Identification No.) |

| P.O. Box 36611 | | [added: |]

| Dallas, [added: |] Texas | 75235-1611 |

| (Address of principal executive offices) | [added: |] (Zip Code) |

Registrant's telephone number, including area code: [removed: (214) 792-4000][added: (214) 792-4000]

[removed: Securities] [added: Securities] registered pursuant to Section 12(b) of the [removed: Act:][added: Act:]

| Title of [removed: Each Class] [added: each class] | [added: Trading Symbol] | Name of [removed: Each Exchange] [added: each exchange] on [removed: Which Registered] [added: which registered] |

| Common Stock ($1.00 par value) | [added: LUV] | New York Stock Exchange |

[removed: Securities] [added: Securities] registered pursuant to Section 12(g) of the [removed: Act:][added: Act:]

[removed: None][added: None]

Yes [removed: þ] [added: x] No [removed: ¨][added: o]

Yes [removed: ¨] [added: o] No [removed: þ][added: x]

Yes [removed: þ] [added: x] No [removed: ¨][added: o]

Yes [removed: þ] [added: x] No [removed: ¨][added: o]

| Large accelerated filer [removed: þ] | [added: x] | Accelerated filer [removed: ¨] | [added: ☐ |]

| Non-accelerated filer [removed: ¨] | [added: ☐] | Smaller reporting company [removed: ¨] | [added: ☐ |]

| | | Emerging growth company [removed: ¨] | [added: ☐ |]

Yes [removed: ¨] [added: ☐] No [removed: þ][added: x]

The aggregate market value of the common stock held by non-affiliates of the registrant was approximately [removed: $29,086,256,077] [added: $27,212,024,231] computed by reference to the closing sale price of the common stock on the New York Stock Exchange on June [removed: 30, 2018,] [added: 28, 2019,] the last trading day of the registrant’s most recently completed second fiscal quarter.

Number of shares of common stock outstanding as of the close of business on [removed: February 1, 2019: 552,688,849] [added: January 30, 2020: 517,295,540] shares

[removed: DOCUMENTS] [added: DOCUMENTS] INCORPORATED BY [removed: REFERENCE][added: REFERENCE]

Portions of the Definitive Proxy Statement for the Company’s Annual Meeting of Shareholders to be held May [removed: 15, 2019,] [added: 21, 2020,] are incorporated into Part III of this Annual Report on Form 10-K.

[removed: TABLE] [added: TABLE] OF [removed: CONTENTS][added: CONTENTS]

| | [removed: PART I] [added: PART I] | |

| [removed: Item 1. | [Business](#sC5F96C2468025E74AB4681A7D20948E4)] [added: Item 1.] | [removed: [3](#sC5F96C2468025E74AB4681A7D20948E4)] [added: Business] |

| Item 1A. | [Risk [removed: Factors](#s5344C52FD2DC54B2B32FDF7E5E3D6723)] [added: Factors](#sE63E28387EDE589690D247CE6D920A3B)] | [removed: [21](#s5344C52FD2DC54B2B32FDF7E5E3D6723)] [added: [20](#sE63E28387EDE589690D247CE6D920A3B)] |

| Item 1B. | [Unresolved Staff [removed: Comments](#sC84CD27107B050B698B147A9C37246A2)] [added: Comments](#s83036B3814D957368B740C20855A48C8)] | [removed: [28](#sC84CD27107B050B698B147A9C37246A2)] [added: [28](#s83036B3814D957368B740C20855A48C8)] |

| Item 2. | [removed: [Properties](#s317CA29BDA3C5B048977CC1DE771D505)] [added: [Properties](#s8A589D5CC75C50E0A4253AD6FF893273)] | [removed: [29](#s317CA29BDA3C5B048977CC1DE771D505)] [added: [29](#s8A589D5CC75C50E0A4253AD6FF893273)] |

| Item 3. | [Legal [removed: Proceedings](#sDEC1C2A28E435DCC9CE1A2C33B478F51)] [added: Proceedings](#s89D7441943D4558DA940D1D725809B1D)] | [removed: [30](#sDEC1C2A28E435DCC9CE1A2C33B478F51)] [added: [31](#s89D7441943D4558DA940D1D725809B1D)] |

| [Signatures](#s3D9FC3A37D0D5349AA460D3DE9A79E59) | | [125](#s3D9FC3A37D0D5349AA460D3DE9A79E59) |

These destinations included Honolulu on the Island of Oahu, Kahului on Maui, Kona on Hawaii, and Lihue on Kauai.

The Company added a fifth Hawaiian destination, Hilo on Hawaii, on January 19, 2020.

During first quarter 2019, the Company ceased service at Benito Juárez Mexico City International Airport.

Further, in fourth quarter 2019, the Company ceased service at Newark Liberty International Airport, in order to consolidate its New York City presence at New York LaGuardia Airport.

On March 13, 2019, the FAA issued an emergency order for all U.S. airlines to ground the Boeing 737 MAX aircraft, including the 34 MAX 8 aircraft in the Company’s fleet at that time (the "MAX groundings").

As discussed below under "Company Operations" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations," the MAX groundings adversely affected the Company's operations and financial results for the year ended December 31, 2019.

The MAX aircraft remains grounded and, based on continued uncertainty around the timing of the MAX return to service, the Company has removed the MAX from its flight schedule through June 6, 2020.

The MAX groundings and the uncertainty of the timing of the MAX aircraft's return to service caused air carriers with the MAX aircraft in their fleets, including Southwest, to remove the aircraft from their flight schedules through 2019, reducing available seat miles (also referred to as "capacity," an available seat mile is one seat, empty or full, flown one mile and is a measure of space available to carry passengers in a given period).

This, in turn, led to slower aggregate industry growth.

MAX-impacted carriers also experienced lost revenues and unforecasted expenses as a result of the MAX groundings.

As discussed further below under "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's capacity declined 1.6 percent year-over-year for 2019.

It remains uncertain how long MAX-impacted carriers will be unable to fly the MAX.

The Company's network and schedule optimization efforts have been particularly beneficial in addressing the impact of the MAX groundings.

For example, as Hawaii is an attractive leisure destination for the Company's California Customers, the Company began service to Hawaii in first quarter 2019 with inaugural service from Oakland to Honolulu on the Island of Oahu.

In second quarter 2019, the Company began service from Oakland to Kahului on the Island of Maui, and service from San Jose to Honolulu and Kahului.

Interisland service also began during second quarter 2019, with service between Honolulu and Kahului, and between Honolulu and Kona on the Island of Hawaii.

During fourth quarter 2019, the Company began service at Lihue Airport on the Island of Kauai; and added Sacramento as an additional California gateway city.

Additionally, in January 2020, the Company began service at Hilo International Airport on the Island of Hawaii.

The Company is also scheduled to begin service from San Diego to Kahului on April 14, 2020, and from San Diego to Honolulu on April 20, 2020.

By April 20, 2020, the Company is scheduled to offer 28 daily departures between California and Hawaii, and 38 daily departures among the Hawaiian Islands.

In addition to California and Hawaii, the Company

remains focused on strengthening its schedule in core markets to provide additional regional and international connectivity, improving its recoverability during irregular operations, and growing its presence in strategic markets that serve as cornerstones for its network such as Baltimore, Denver, and Houston.

| 2019 | | $ | 4,347 | | | $ | 2.09 | | | 22.3 | % |

| First Quarter 2019 | | $ | 1,015 | | | $ | 2.05 | | | 21.9 | % |

| Second Quarter 2019 | | $ | 1,136 | | | $ | 2.13 | | | 23.0 | % |

| Third Quarter 2019 | | $ | 1,090 | | | $ | 2.07 | | | 22.6 | % |

| Fourth Quarter 2019 | | $ | 1,105 | | | $ | 2.09 | | | 21.8 | % |

Company's other aircraft; however, the MAX groundings resulted in the removal of these more fuel-efficient aircraft from the Company's schedule, which, in turn, drove a decline in the Company's overall fuel efficiency in 2019.

In such event, subject to certain

When available, Southwest sells Upgraded Boarding at the airport, which allows a Customer to pay for an open priority boarding position in the first 15 positions in its "A" boarding group.

Beginning January 1, 2021, A-List and A-List Preferred Members will have the same standby privileges free of airline charges, but will be required to pay any additional government taxes and fees associated with changes in their itinerary.

Southwest Business® Initiatives

During 2019, the Company increased its focus on growing the Company's corporate travel business with the goal of making it easier for corporate travel Customers and travel management companies to do business with Southwest.

In third quarter 2019, the Company entered into an agreement with Amadeus IT Group, S.A. ("Amadeus"), and expanded its agreement with Travelport, LP and Travelport International Operations Limited (collectively, "Travelport"), to enable corporate travel Customers and travel management companies to book Southwest products on the Amadeus and Travelport global distribution system ("GDS") platforms.

The Company's expansion into the Travelport and Amadeus GDS channels is intended to facilitate corporate travel managers' ability to book, change, cancel, and modify Southwest reservations.

The Company expects the new capabilities to be ready for bookings in 2020.

The Company also has an agreement with Airlines Reporting Corporation to implement industry-standard processes to handle the settlement of tickets booked through Travelport and Amadeus channels.

In 2019, Southwest Business also continued to invest in and enhance its online booking tool SWABIZ®.

SWABIZ is designed for business Customers who prefer a self-service and low-cost solution for booking their air travel on Southwest.

10-K 1 luv-12312018x10k.htm FORM 10-K

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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

| [Signatures](#sDCD3099FDB58573A857F2419DD24BF88) | | [129](#sDCD3099FDB58573A857F2419DD24BF88) |

The Company has announced its intent to serve Honolulu International Airport, Lihue Airport, Kona International Airport at Keahole, and Kahului Airport from four initial California cities: Oakland, San Diego, San Jose, and Sacramento.

In June 2018, the Company ceased service at Bishop International Airport in Flint, Michigan.

In recent years, the U.S. airline industry, including Southwest, has increased available seat miles (also referred to as "capacity," an available seat mile is one seat, empty or full, flown one mile and is a measure of space available to carry passengers in a given period), and has also increased the number of seats per trip through slimline seat retrofits and the use of new and larger aircraft.

Despite recent fuel price volatility, strategic capacity increases are expected to continue in 2019.

During 2018, the Company continued to incorporate the Boeing 737 MAX 8 and the Boeing 737-800 aircraft into its fleet, both of which offer significantly more Customer seating capacity than the Company’s other aircraft.

This has enabled the Company to more economically serve long-haul routes, as well as high-demand, slot-controlled, and gate-restricted airports, by adding seats for such routes without increasing the number of flights (a "slot" is the right of an air carrier, pursuant to regulations of the FAA, to operate a takeoff or landing at a specific time at certain airports).

For example, Hawaii is an attractive leisure destination for the Company's California Customers, and the Company has announced its intent to serve Honolulu International Airport, Lihue Airport, Kona International Airport at Keahole, and Kahului Airport from four initial California cities: Oakland, San Diego, San Jose, and Sacramento.

In order to complement the Company’s network, during 2018, the Company entered into an agreement with Alaska Airlines to lease 12 slots at New York's LaGuardia Airport and eight slots at Washington Reagan National Airport through 2028.

During 2018, the Company commenced international service out of Indianapolis, San Jose, Sacramento, Columbus, New Orleans, Pittsburgh, and Raleigh-Durham.

In addition, Southwest Airlines Cargo® began shipping cargo to select international destinations beginning in 2018, including Mexico City, Cancun, Cabo San Lucas/Los Cabos, Puerto Vallarta, Montego Bay, and San Jose, Costa Rica.

Southwest's point-

| 2003 | | $ | 920 | | | $ | 0.80 | | | 16.5 | % |

| 2004 | | $ | 1,106 | | | $ | 0.92 | | | 18.1 | % |

| 2005 | | $ | 1,470 | | | $ | 1.13 | | | 21.4 | % |

| 2006 | | $ | 2,284 | | | $ | 1.64 | | | 28.0 | % |

| 2007 | | $ | 2,690 | | | $ | 1.80 | | | 29.7 | % |

| 2008 | | $ | 3,713 | | | $ | 2.44 | | | 35.1 | % |

| First Quarter 2018 | | $ | 1,018 | | | $ | 2.07 | | | 23.5 | % |

| Second Quarter 2018 | | $ | 1,202 | | | $ | 2.21 | | | 25.2 | % |

| Third Quarter 2018 | | $ | 1,205 | | | $ | 2.24 | | | 25.2 | % |

| Fourth Quarter 2018 | | $ | 1,192 | | | $ | 2.25 | | | 24.4 | % |

*Effective as of January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2017-12, Targeted Improvements to Accounting for Hedging Activities, and ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.

See Note 2 to the Consolidated Financial Statements for further information.

The Boeing 737 MAX 8 is expected to continue to significantly reduce fuel use and CO2 emissions, as compared with the Company's other aircraft.

The Company added 18 Boeing 737 MAX 8 aircraft to its fleet in 2018 and ended 2018 with 31 Boeing 737 MAX 8 aircraft in its fleet.

In 2019, the Company expects to continue its fleet modernization initiative through the scheduled delivery of an additional 37 Boeing 737 MAX 8 aircraft and the Company's initial delivery of seven Boeing 737 MAX 7 aircraft.

When available, Southwest sells Upgraded Boarding at the airport.

These are open priority boarding positions in the first 15 positions in its "A" boarding group.

The Company also continues to offer free access to its live and on-demand television product on most of its flights.

Customers can listen to hundreds of live radio stations, pick from artist radio channels, listen to selected playlists, and listen to podcasts.

Customers may also use their iHeartRadio app while onboard, and existing subscribers to the All Access and Plus products have access to their entire music library and saved playlists.

[removed: Aircraft][added: Aircraft]

Southwest operated a total of [removed: 750] [added: 747] Boeing 737 aircraft as of December 31, [removed: 2018,] [added: 2019,] of which [removed: 51] [added: 52] and [removed: 72] [added: 70] were under operating and [removed: capital] [added: finance] leases, respectively.

The following table details information on the [removed: 750] [added: 747] aircraft as of December 31, [removed: 2018:][added: 2019:]

| [removed: Type] [added: Type] | | [removed: Seats] [added: Seats] | | [removed: Average Age (Yrs)] [added: Average Age (Yrs)] | | | [removed: Number of Aircraft] [added: Number of Aircraft] | | | [removed: Number Owned (a)] [added: Number Owned (a)] | | | [removed: Number Leased] [added: Number Leased] | |

| 737-800 | | 175 | | [removed: 3] [added: 4] | | | 207 | | | 200 | | | 7 | |

| 737 MAX 8 | | 175 | | [removed: 1] [added: 2] | | | [removed: 31] [added: 34] | | | 31 | | | [removed: —] [added: 3] | |

| (a) | As discussed further in Note 6 to the Consolidated Financial Statements, [removed: 169] [added: 96] of the Company's aircraft were pledged as collateral as of December 31, [removed: 2018,] [added: 2019,] for secured borrowings and/or in the case that the Company has obligations related to its fuel derivative instruments with counterparties that exceed certain thresholds. |

As of December 31, [removed: 2018,] [added: 2019,] the Company had firm deliveries and options for Boeing 737 MAX 7 and 737 MAX 8 aircraft as follows:

| | [removed: The] [added: The] Boeing [removed: Company] [added: Company] | | | | | | | | | | | | | | [added: |]

| | [removed: MAX] [added: MAX] 7 Firm [removed: Orders] [added: Orders] | | | [removed: MAX] [added: MAX] 8 Firm [removed: Orders] [added: Orders] | | | [removed: MAX] [added: MAX] 8 [removed: Options] [added: Options] | | | [removed: Additional] [added: Additional] MAX [removed: 8s] [added: 8s] | | | [removed: Total] [added: Total] | | [added: |]

| 2020 | [removed: —] [added: 7] | | | [removed: 35] [added: 55] | | | — | | | [removed: 3] [added: 16] | | | [removed: 38] [added: 78] | | [added: (a) |]

| 2021 | — | | | [removed: 44] [added: 45] | | | — | | | — | | | [removed: 44] [added: 45] | | [added: (b) |]

| 2022 | — | | | 27 | | | 14 | | | — | | | 41 | | [added: |]

| 2023 | 12 | | | 22 | | | 23 | | | — | | | 57 | | [added: |]

| 2024 | 11 | | | 30 | | | 23 | | | — | | | 64 | | [added: |]

| 2025 | — | | | 40 | | | 36 | | | — | | | 76 | | [added: |]

| 2026 | — | | | — | | | 19 | | | — | | | 19 | | [added: |]

| | 30 | | | 219 | | [removed: (a)] [added: (c)] | 115 | | | [removed: 19] [added: 16] | | [removed: (b)] [added: (d)] | [removed: 383] [added: 380] | | [added: |]

[removed: (a)] [added: (c)] The Company has flexibility to substitute 737 MAX 7 in lieu of 737 MAX 8 firm [removed: orders beginning] [added: orders, upon written advance notification as stated] in [removed: 2019.][added: the contract.]

[removed: (b)] [added: (d)] To be acquired in leases from various third parties.

[removed: Ground] [added: Ground] Facilities and [removed: Services][added: Services]

In 2018, the Company announced its intent to build a new aircraft maintenance facility, [removed: scheduled] [added: expected] to be completed in [removed: 2021, subject to FAA approvals,] [added: 2022,] at Baltimore-Washington International Airport.

The Company owns two additional headquarters buildings, located across the street from the Company's main headquarters building, on land owned by the Company including (a) [removed: the] [added: an] energy-efficient, modern building, called TOPS, which houses certain operational and training functions, including [removed: its] [added: the Company's] 24-hour operations and (b) the Wings Complex, completed in 2018, consisting of a Leadership Education and Aircrew Development (LEAD) Center (housing [added: 18 of] the Company's [removed: 15] [added: 20] Boeing 737 flight simulators and classroom space for Pilot training), an additional office building, and a parking garage.

As of December 31, [removed: 2018,] [added: 2019,] the Company operated seven Customer Support and Services call centers.

However, the Company has arrangements with certain aircraft maintenance [removed: firms] [added: providers] for major component inspections and repairs for its airframes and engines, which comprise the majority of the Company's annual aircraft maintenance costs.

| 737-700 | | 143 | | 15 | | | 506 | | | 394 | | | 112 | |

| Totals | | | | 12 | | | 747 | | | 625 | | | 122 | |

Note: All MAX deliveries were suspended as of March 13, 2019, upon the FAA emergency order for all U.S. airlines to ground all MAX aircraft.

The FAA's timetables and directives will determine the timing of MAX return to service.

The delivery schedule below reflects contractual commitments; although, the timing of future deliveries is uncertain.

One of the Company's 2019 undelivered aircraft contractually shifted to 2021.

For purposes of the delivery schedule below, the Company has included the remaining 40 of its 2019 undelivered aircraft within its 2020 contractual commitments, and has not made any further adjustments to this schedule based on current estimations.

However, Boeing currently has 27 MAX 8 aircraft produced and in storage that the Company is including in its current 2020 fleet planning assumptions.

The Company also currently expects to retire 16 737-700 aircraft in 2020.

The Company offers no assurances that current estimations and timelines are correct.

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(a) 2020 Contractual Detail

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| | The Boeing Company | | | | | | | | | | |

| | MAX 7 Firm Orders | | | MAX 8 Firm Orders | | | Additional MAX 8s | | | Total | |

| 2019 Contractual Deliveries | 7 | | | 20 | | | 13 | | | 40 | |

| 2020 Contractual Deliveries | — | | | 35 | | | 3 | | | 38 | |

| 2020 Contractual Total | 7 | | | 55 | | | 16 | | | 78 | |

2020 total contractual deliveries include 40 contractual aircraft that the Company expected to be delivered in 2019, but were not received due to the MAX groundings.

(b) Includes one contractual aircraft delivery that shifted from 2019 to 2021.

In 2019, the Company announced its intent to build a new aircraft maintenance facility, scheduled to be completed by the end of 2020, at Denver International Airport.

Construction has begun on an expansion of the LEAD Center, and is expected to be operational in late 2020.

| | | | | | | | | | | | | | | |

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| 737-700 | | 143 | | 15 | | | 512 | | | 396 | | | 116 | |

| Totals | | | | 11 | | | 750 | | | 627 | | | 123 | |

| 2019 | 7 | | | 21 | | | — | | | 16 | | | 44 | |

As of [removed: February 1, 2019,] [added: January 30, 2020,] there were approximately [removed: 12,267] [added: 11,920] holders of record of the Company’s common stock.

[removed: Stock] [added: Stock] Performance [removed: Graph][added: Graph]

[removed: The] [added: *The] following Performance Graph and related information shall not be deemed "soliciting material" or "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of [removed: 1934.][added: 1934.*]

The following graph compares the cumulative total shareholder return on the Company’s common stock over the five-year period ended December 31, [removed: 2018,] [added: 2019,] with the cumulative total return during such period of the Standard and Poor’s 500 Stock Index and the NYSE ARCA Airline Index.

The comparison assumes $100 was invested on December 31, [removed: 2013,] [added: 2014,] in the Company’s common stock and in each of the foregoing indices and assumes reinvestment of dividends.

[removed: COMPARISON] [added: COMPARISON] OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG SOUTHWEST AIRLINES CO., S&P 500 INDEX, AND NYSE ARCA AIRLINE [removed: INDEX][added: INDEX]

[removed: ][added: ]

| | | [removed: 12/31/2013] [added: 12/31/2014] | | | | [removed: 12/31/2014] [added: 12/31/2015] | | | | [removed: 12/31/2015] [added: 12/31/2016] | | | | [removed: 12/31/2016] [added: 12/31/2017] | | | | [removed: 12/31/2017] [added: 12/31/2018] | | | | [removed: 12/31/2018] [added: 12/31/2019] | | |

[removed: Issuer Repurchases][added: Issuer Repurchases]

| | | | | | | | | | [removed: Total] [added: Total] number [removed: of] [added: of] | | | [removed: Maximum dollar] [added: Maximum dollar] | | | |

| | | | | | | | | | [removed: shares purchased] [added: shares purchased] | | | [removed: value] [added: value] of shares [removed: that] [added: that] | | | |

| | | [removed: Total number] [added: Total number] | | | [removed: Average] [added: Average] | | | | [removed: as] [added: as] part of [removed: publicly] [added: publicly] | | | [removed: may] [added: may] yet be [removed: purchased] [added: purchased] | | | |

| | | [removed: of shares] [added: of shares] | | | [removed: price paid] [added: price paid] | | | | [removed: announced plans] [added: announced plans] | | | [removed: under] [added: under] the [removed: plans] [added: plans] | | | |

| [removed: Period] [added: Period] | | [removed: purchased] [added: purchased] | | | [removed: per share] [added: per share] | | | | [removed: or programs] [added: or programs] | | | [removed: or programs] [added: or programs] | | | |

| (1) | On May [removed: 17, 2017,] [added: 16, 2018,] the Company's Board of Directors authorized the repurchase of up to $2.0 billion of the Company's common stock. On May [removed: 16, 2018,] [added: 15, 2019,] the Company’s Board of Directors authorized the repurchase of up to [removed: an additional] $2.0 billion of the Company’s common stock in a new share repurchase authorization, upon the completion of the May [removed: 2017] [added: 2018] share repurchase authorization. Repurchases are made in accordance with applicable securities laws in open market or private, including accelerated, repurchase transactions from time to time, depending on market conditions, and may be discontinued at any time. |

| (2) | Under an accelerated share repurchase program entered into by the Company with a third party financial institution in third quarter [removed: 2018] [added: 2019] (the [removed: "Third] [added: “Third] Quarter [removed: 2018] [added: 2019] ASR [removed: Program"),] [added: Program”),] the Company paid $500 million and received an initial delivery of [removed: 6,349,325] [added: 7,471,534] shares during August [removed: 2018,] [added: 2019,] representing an estimated 75 percent of the shares to be purchased by the Company under the Third Quarter [removed: 2018] [added: 2019] ASR Program based on a volume-weighted average price of [removed: $59.0614] [added: $50.1905] per share of the Company’s common stock on the [removed: New York Stock Exchange] [added: NYSE] during a calculation period between [removed: August 1, 2018] [added: July 30, 2019] and August [removed: 22, 2018.] [added: 20, 2019.] Final settlement of the Third Quarter [removed: 2018] [added: 2019] ASR Program occurred in October [removed: 2018] [added: 2019] and was determined based generally on a discount to the volume-weighted average price per share of the Company's common stock during a calculation period completed in October [removed: 2018.] [added: 2019.] Upon settlement, the third party financial institution delivered [removed: 1,848,814] [added: 2,019,792] additional shares of the Company’s common stock to the Company. In total, the average purchase price per share for the [removed: 8,198,139] [added: 9,491,326] shares repurchased under the Third Quarter [removed: 2018] [added: 2019] ASR Program, upon completion of the Third Quarter [removed: 2018] [added: 2019] ASR Program in October [removed: 2018,] [added: 2019,] was [removed: $60.9895.] [added: $52.6797.] |

| (3) | Under an accelerated share repurchase program entered into by the Company with a third party financial institution in fourth quarter [removed: 2018] [added: 2019] (the "Fourth Quarter [removed: 2018] [added: 2019] ASR Program"), the Company paid [removed: $500] [added: $550] million [removed: in October 2018] and received an initial delivery of [removed: 7,827,176] [added: 7,276,275] shares during December [removed: 2018,] [added: 2019,] representing an estimated 75 percent of the shares to be purchased by the Company under the Fourth Quarter [removed: 2018] [added: 2019] ASR Program based on a [added: volume-weighted average] price of [removed: $47.91] [added: $56.6911] per [removed: share, which was the closing price] [added: share] of the Company’s common stock on the [removed: New York Stock Exchange on October 29, 2018.] [added: NYSE during a calculation period between November 13, 2019 and December 11, 2019.] The third party financial institution delivered an additional [removed: 1,472,253] [added: 1,835,017] shares to the Company in further partial settlements of the Fourth Quarter [removed: 2018] [added: 2019] ASR Program in [removed: December 2018,] [added: January 2020,] which was determined based generally on a discount to the volume-weighted average price per share of the Company's common stock during calculation periods completed in [removed: December 2018. Final settlement] [added: January 2020. The specific number] of [added: shares that] the [added: Company ultimately will repurchase under the] Fourth Quarter [removed: 2018] [added: 2019] ASR Program [removed: occurred in December 2018 and was] [added: will be] determined based generally on a discount to the volume-weighted average price per share of the [removed: Company's] [added: Company’s] common stock during a calculation period [added: to be] completed [removed: in December 2018. Upon] [added: no later than February 13, 2020. At] settlement, [added: under certain circumstances,] the third party financial institution [removed: delivered 536,204] [added: may be required to deliver] additional shares of [removed: the Company’s] common stock to the [removed: Company. In total, the average purchase price per share for the 9,835,633 shares repurchased] [added: Company, or] under [added: certain circumstances,] the [removed: Fourth Quarter 2018 ASR Program, upon completion] [added: Company may be required to deliver shares] of [added: its common stock or may elect to make a cash payment to] the [removed: Fourth Quarter 2018 ASR Program in December 2018, was $50.8356.] [added: third party financial institution.] |

| Southwest Airlines Co. | | $ | 100 | | | $ | 102 | | | $ | 120 | | | $ | 158 | | | $ | 114 | | | $ | 134 | |

| S&P 500 | | $ | 100 | | | $ | 101 | | | $ | 113 | | | $ | 138 | | | $ | 132 | | | $ | 174 | |

| NYSE ARCA Airline | | $ | 100 | | | $ | 85 | | | $ | 109 | | | $ | 116 | | | $ | 91 | | | $ | 112 | |

| | | (a) | | | (b) | | | | (c) | | | (d) | | | |

| October 1, 2019 through October 31, 2019 | | 2,019,792 | | | $ | — | | (2) | 2,019,792 | | | $ | 1,900,051,674 | | |

| November 1, 2019 through November 30, 2019 | | — | | | $ | — | | (3) | — | | | $ | 1,350,051,674 | | |

| December 1, 2019 through December 31, 2019 | | 7,276,275 | | | $ | — | | (3) | 7,276,275 | | | $ | 1,350,051,674 | | |

| Total | | 9,296,067 | | | | | | | 9,296,067 | | | | | | |

| Southwest Airlines Co. | | $ | 100 | | | $ | 226 | | | $ | 232 | | | $ | 271 | | | $ | 359 | | | $ | 257 | |

| S&P 500 | | $ | 100 | | | $ | 114 | | | $ | 115 | | | $ | 129 | | | $ | 157 | | | $ | 150 | |

| NYSE ARCA Airline | | $ | 100 | | | $ | 150 | | | $ | 127 | | | $ | 164 | | | $ | 174 | | | $ | 137 | |

| | | (a) | | | (b) | | | | (c) | | | (d) | | | |

| October 1, 2018 through October 31, 2018 | | 1,848,814 | | | $ | — | | (2)(3) | 1,848,814 | | | $ | 1,350,032,588 | | |

| November 1, 2018 through November 30, 2018 | | — | | | $ | — | | | — | | | $ | 1,350,032,588 | | |

| December 1, 2018 through December 31, 2018 | | 9,835,633 | | | $ | — | | (3) | 9,835,633 | | | $ | 1,350,032,588 | | |

| Total | | 11,684,447 | | | | | | | 11,684,447 | | | | | | |

The following financial information, for the five years ended December 31, [removed: 2018,] [added: 2019,] has been derived from the Company’s Consolidated Financial Statements.

| | | [removed: Year] [added: Year] ended December [removed: 31,] [added: 31,] | | | | | | | | | | | | | | | | | | |

| | | [removed: 2018] [added: 2019] | | | | [removed: 2017] [added: 2018] | | | | [removed: 2016] [added: 2017] | | | | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | |

| [removed: Financial] [added: Financial] Data (in millions, except per share [removed: amounts):] [added: amounts):] | | | | | | | | | | | | | | | | | | | | |

| Operating revenues | | $ | [removed: 21,965] [added: 22,428] | | | $ | [removed: 21,146] [added: 21,965] | | | $ | [removed: 20,289] [added: 21,146] | | | $ | [removed: 19,820] [added: 20,289] | | | $ | [removed: 18,605] [added: 19,820] | |

| Operating expenses | | [removed: 18,759] [added: 19,471] | | | | [removed: 17,739] [added: 18,759] | | | | [removed: 16,767] [added: 17,739] | | | | [removed: 15,821] [added: 16,767] | | | | [removed: 16,437] [added: 15,821] | | |

| Operating income | | [removed: 3,206] [added: 2,957] | | | | [removed: 3,407] [added: 3,206] | | | | [removed: 3,522] [added: 3,407] | | | | [removed: 3,999] [added: 3,522] | | | | [removed: 2,168] [added: 3,999] | | |

| Other expenses (income) net | | [removed: 42] [added: —] | | | | [removed: 142] [added: 42] | | | | [removed: 72] [added: 142] | | | | [removed: 520] [added: 72] | | | | [removed: 352] [added: 520] | | |

| Income before taxes | | [removed: 3,164] [added: 2,957] | | | | [removed: 3,265] [added: 3,164] | | | | [removed: 3,450] [added: 3,265] | | | | [removed: 3,479] [added: 3,450] | | | | [removed: 1,816] [added: 3,479] | | |

| Provision [added: (benefit)] for income taxes | | [added: 657 | | | |] 699 | | | | (92 | | ) | | 1,267 | | | | 1,298 | | | [removed: | 680 | | |]

| Net income | | $ | [removed: 2,465] [added: 2,300] | | | $ | [removed: 3,357] [added: 2,465] | | | $ | [removed: 2,183] [added: 3,357] | | | $ | [removed: 2,181] [added: 2,183] | | | $ | [removed: 1,136] [added: 2,181] | |

| Net income per share, basic | | $ | [removed: 4.30] [added: 4.28] | | | $ | [removed: 5.58] [added: 4.30] | | | $ | [removed: 3.48] [added: 5.58] | | | $ | [removed: 3.30] [added: 3.48] | | | $ | [removed: 1.65] [added: 3.30] | |

| Net income per share, diluted | | $ | [removed: 4.29] [added: 4.27] | | | $ | [removed: 5.57] [added: 4.29] | | | $ | [removed: 3.45] [added: 5.57] | | | $ | [removed: 3.27] [added: 3.45] | | | $ | [removed: 1.64] [added: 3.27] | |

| Total assets at period-end | | $ | [removed: 26,243] [added: 25,895] | | | $ | [removed: 25,110] [added: 26,243] | | | $ | [removed: 23,286] [added: 25,110] | | | $ | [removed: 21,312] [added: 23,286] | | | $ | [removed: 19,723] [added: 21,312] | |

| Long-term obligations at period-end | | $ | [removed: 2,771] [added: 1,846] | | | $ | [removed: 3,320] [added: 2,771] | | | $ | [removed: 2,821] [added: 3,320] | | | $ | [removed: 2,541] [added: 2,821] | | | $ | [removed: 2,434] [added: 2,541] | |

| Stockholders’ equity at period-end | | $ | [removed: 9,853] [added: 9,832] | | | $ | [removed: 9,641] [added: 9,853] | | | $ | [removed: 7,784] [added: 9,641] | | | $ | [removed: 7,358] [added: 7,784] | | | $ | [removed: 6,775] [added: 7,358] | |

| [removed: Operating Data:] [added: Operating Data:] | | | | | | | | | | | | | | | | | | | | |

| Revenue passengers carried [added: (000s)] | | [removed: 134,890,243] [added: 134,056] | | | | [removed: 130,256,190] [added: 134,890] | | | | [removed: 124,719,765] [added: 130,256] | | | | [removed: 118,171,211] [added: 124,720] | | | | [removed: 110,496,912] [added: 118,171] | | |

| Revenue passenger miles (RPMs) [removed: (000s) (a)] [added: (in millions)(a)] | | [removed: 133,322,322] [added: 131,345] | | | | [removed: 129,041,420] [added: 133,322] | | | | [removed: 124,797,986] [added: 129,041] | | | | [removed: 117,499,879] [added: 124,798] | | | | [removed: 108,035,133] [added: 117,500] | | |

| Available seat miles (ASMs) [removed: (000s) (b)] [added: (in millions)(b)] | | [removed: 159,795,153] [added: 157,254] | | | | [removed: 153,811,072] [added: 159,795] | | | | [removed: 148,522,051] [added: 153,811] | | | | [removed: 140,501,409] [added: 148,522] | | | | [removed: 131,003,957] [added: 140,501] | | |

| Load [removed: factor (c)] [added: factor(c)] | | [removed: 83.4] [added: 83.5] | | % | | [removed: 83.9] [added: 83.4] | | % | | [removed: 84.0] [added: 83.9] | | % | | [removed: 83.6] [added: 84.0] | | % | | [removed: 82.5] [added: 83.6] | | % |

| Average length of passenger haul (miles) | | [removed: 988] [added: 980] | | | | [removed: 991] [added: 988] | | | | [removed: 1,001] [added: 991] | | | | [removed: 994] [added: 1,001] | | | | [removed: 978] [added: 994] | | |

| Average aircraft stage length (miles) | | [removed: 757] [added: 748] | | | | [removed: 754] [added: 757] | | | | [removed: 760] [added: 754] | | | | [removed: 750] [added: 760] | | | | [removed: 721] [added: 750] | | |

| Trips flown | | [removed: 1,375,030] [added: 1,367,727] | | | | [removed: 1,347,893] [added: 1,375,030] | | | | [removed: 1,311,149] [added: 1,347,893] | | | | [removed: 1,267,358] [added: 1,311,149] | | | | [removed: 1,255,502] [added: 1,267,358] | | |

| Average passenger fare | | $ | [removed: 151.64] [added: 154.98] | | | $ | [removed: 151.73] [added: 151.64] | | | $ | [removed: 152.89] [added: 151.73] | | | $ | [removed: 154.85] [added: 152.89] | | | $ | [removed: 159.80] [added: 154.85] | |

| Passenger revenue yield per RPM [removed: (cents) (f)] [added: (cents)(f)] | | [removed: 15.34] [added: 15.82] | | | | [removed: 15.32] [added: 15.34] | | | | [removed: 15.28] [added: 15.32] | | | | [removed: 15.57] [added: 15.28] | | | | [removed: 16.34] [added: 15.57] | | |

| Operating [removed: revenue] [added: revenues] per ASM [removed: (cents) (g)(j)] [added: (cents)(g)(j)] | | [removed: 13.75] [added: 14.26] | | | | 13.75 | | | | [removed: 13.66] [added: 13.75] | | | | [removed: 13.98] [added: 13.66] | | | | [removed: 14.20] [added: 13.98] | | |

| Passenger revenue per ASM [removed: (cents) (h)] [added: (cents)(h)] | | [removed: 12.80] [added: 13.21] | | | | [removed: 12.85] [added: 12.80] | | | | [removed: 12.84] [added: 12.85] | | | | [removed: 13.02] [added: 12.84] | | | | [removed: 13.48] [added: 13.02] | | |

| Operating expenses per ASM [removed: (cents) (i)] [added: (cents)(i)] | | [removed: 11.74] [added: 12.38] | | | | [removed: 11.53] [added: 11.74] | | | | [removed: 11.29] [added: 11.53] | | | | [removed: 11.26] [added: 11.29] | | | | [removed: 12.55] [added: 11.26] | | |

| Operating expenses per ASM, excluding fuel (cents) | | [removed: 8.85] [added: 9.62] | | | | [removed: 8.88] [added: 8.85] | | | | [removed: 8.73] [added: 8.88] | | | | [removed: 8.60] [added: 8.73] | | | | [removed: 8.46] [added: 8.60] | | |

| Operating expenses per ASM, excluding fuel and profitsharing (cents) | | [removed: 8.51] [added: 9.19] | | | | [removed: 8.53] [added: 8.51] | | | | [removed: 8.34] [added: 8.53] | | | | [removed: 8.16] [added: 8.34] | | | | [removed: 8.19] [added: 8.16] | | |