Item 8. Financial Statements and Supplementary Data

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Item 8. Financial Statements and Supplementary Data

Southwest Airlines Co.

Consolidated Balance Sheet

(in millions, except share data)


	December 31, 2024		December 31, 2023
ASSETS
Current assets:
Cash and cash equivalents	$	7,509	$	9,288
Short-term investments	1,216		2,186
Accounts and other receivables	1,110		1,154
Inventories of parts and supplies, at cost	800		807
Prepaid expenses and other current assets	639		520
Total current assets	11,274		13,955

Property and equipment, at cost:
Flight equipment	25,202		26,060
Ground property and equipment	8,244		7,460
Deposits on flight equipment purchase contracts	413		236
Assets constructed for others	88		62
	33,947		33,818
Less allowance for depreciation and amortization	14,891		14,443
	19,056		19,375
Goodwill	970		970
Operating lease right-of-use assets	1,369		1,223
Other assets	1,081		964
	$	33,750	$	36,487

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,818	$	1,862
Accrued liabilities	2,206		3,606
Current operating lease liabilities	328		208
Air traffic liability	6,294		6,551
Current maturities of long-term debt	1,630		29
Total current liabilities	12,276		12,256

Long-term debt less current maturities	5,069		7,978
Air traffic liability - noncurrent	1,948		1,728
Deferred income taxes	2,167		2,044

Noncurrent operating lease liabilities	1,031		985
Other noncurrent liabilities	909		981
Stockholders' equity:
Common stock, $1.00 par value: 2,000,000,000 shares authorized; 888,111,634 shares issued in 2024 and 2023	888		888
Capital in excess of par value	4,199		4,153
Retained earnings	16,332		16,297
Accumulated other comprehensive income (loss)	(25)		—
Treasury stock, at cost: 294,797,959 and 291,599,001 shares in 2024 and 2023, respectively	(11,044)		(10,823)
Total stockholders' equity	10,350		10,515
	$	33,750	$	36,487

See accompanying notes.

Southwest Airlines Co.

Consolidated Statement of Income

(in millions, except per share amounts)


	Year ended December 31,
		2024		2023		2022
OPERATING REVENUES:
Passenger		$	24,980	$	23,637	$	21,408
Freight		175		175		177
Other		2,328		2,279		2,229
Total operating revenues		27,483		26,091		23,814

OPERATING EXPENSES:
Salaries, wages, and benefits		12,240		11,152		9,376

Fuel and oil		5,812		6,217		5,975
Maintenance materials and repairs		1,353		1,188		852
Landing fees and airport rentals		1,962		1,789		1,508
Depreciation and amortization		1,657		1,522		1,351
Other operating expenses		4,138		3,999		3,735
Total operating expenses		27,162		25,867		22,797

OPERATING INCOME		321		224		1,017

NON-OPERATING EXPENSES (INCOME):
Interest expense		249		259		340
Capitalized interest		(35)		(23)		(39)
Interest income		(497)		(583)		(217)
Loss on extinguishment of debt		2		—		193
Other (gains) losses, net		4		(62)		12
Total non-operating expenses (income)		(277)		(409)		289

INCOME BEFORE INCOME TAXES		598		633		728

PROVISION FOR INCOME TAXES		133		168		189

NET INCOME		$	465	$	465	$	539

NET INCOME PER SHARE, BASIC		$	0.78	$	0.78	$	0.91

NET INCOME PER SHARE, DILUTED		$	0.76	$	0.76	$	0.87

See accompanying notes.

Southwest Airlines Co.

Consolidated Statement of Comprehensive Income

(in millions)


	Year ended December 31,
	2024		2023		2022
NET INCOME	$	465	$	465	$	539
Unrealized loss on fuel derivative instruments, net of deferred taxes of ($14), ($103), and ($44)	(44)		(337)		(143)

Unrealized gain (loss) on defined benefit plan items, net of deferred taxes of $4, ($5), and $24	14		(16)		80
Other, net of deferred taxes of $3, $8, and $6	5		9		19
OTHER COMPREHENSIVE LOSS	$	(25)	$	(344)	$	(44)
COMPREHENSIVE INCOME	$	440	$	121	$	495

See accompanying notes.

Southwest Airlines Co.

Consolidated Statement of Stockholders' Equity

(in millions, except per share amounts)


	Year ended December 31, 2024, 2023, and 2022
	Common Stock		Capital in excess of par value		Retained earnings		Accumulated other comprehensive income (loss)		Treasury stock			Total
Balance at December 31, 2021	$	888	$	4,224	$	15,774	$	388	$	(10,860)		$	10,414
Cumulative effect of adopting Accounting Standards Update No. 2020-06, Debt	—		(300)		55		—		—			(245)
Issuance of common and treasury stock pursuant to Employee stock plans	—		29		—		—		17			46
Share-based compensation	—		84		—		—		—			84
Cash dividends, $0.18 per share	—		—		(107)		—		—			(107)
Comprehensive income (loss)	$	—	$	—	$	539	$	(44)	$	—		$	495
Balance at December 31, 2022	$	888	$	4,037	$	16,261	$	344	$	(10,843)		$	10,687
Issuance of common and treasury stock pursuant to Employee stock plans	—		30		—		—		20			50
Share-based compensation	—		86		—		—		—			86
Cash dividends, $0.72 per share	—		—		(429)		—		—			(429)
Comprehensive income (loss)	$	—	$	—	$	465	$	(344)	$	—		$	121
Balance at December 31, 2023	$	888	$	4,153	$	16,297	$	—	$	(10,823)		$	10,515
Repurchase of common stock	—		—		—		—		(251)		(a)	(251)
Issuance of common and treasury stock pursuant to Employee stock plans	—		7		—		—		30			37
Share-based compensation	—		45		—		—		—			45
Cash dividends, $0.72 per share	—		—		(430)		—		—			(430)
Stock warrants repurchase	—		(6)		—		—		—			(6)
Comprehensive income (loss)	$	—	$	—	$	465	$	(25)	$	—		$	440
Balance at December 31, 2024	$	888	$	4,199	$	16,332	$	(25)	$	(11,044)		$	10,350

(a) Includes excise tax incurred on share repurchases, net of issuances, payable in April 2025.

See accompanying notes.

Southwest Airlines Co.

Consolidated Statement of Cash Flows

(in millions)


	Year ended December 31,
		2024		2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	465	$	465	$	539
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		1,657		1,522		1,351
Impairment of long-lived assets		—		—		35
Unrealized mark-to-market adjustment on available for sale securities		—		(4)		4
Unrealized/realized gain on fuel derivative instruments		—		—		(2)
Deferred income taxes		132		159		228

Gain on sale-leaseback transactions		(92)		—		—
Loss on extinguishment of debt		2		—		193
Changes in certain assets and liabilities:
Accounts and other receivables		19		(89)		422
Other assets		(8)		60		(66)
Accounts payable and accrued liabilities		(1,363)		1,386		936
Air traffic liability		(37)		29		525
Other liabilities		(197)		(137)		(334)
Cash collateral provided to derivative counterparties		(28)		(56)		(69)
Other, net		(88)		(171)		28
Net cash provided by operating activities		462		3,164		3,790

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(2,054)		(3,520)		(3,924)

Proceeds from sale-leaseback transactions		871		—		—
Assets constructed for others		(26)		(33)		(22)
Purchases of short-term investments		(5,014)		(6,970)		(5,592)
Proceeds from sales of short-term and other investments		5,995		7,591		5,792
Other, net		(33)		—		—
Net cash used in investing activities		(261)		(2,932)		(3,746)

CASH FLOWS FROM FINANCING ACTIVITIES:





Payroll Support Program stock warrants repurchase		(6)		—		—
Proceeds from Employee stock plans		60		48		45
Repurchase of common stock		(250)		—		—
Payments of long-term debt and finance lease obligations		(1,337)		(85)		(2,437)



Payments of cash dividends		(430)		(428)		—
Proceeds of terminated interest rate derivative instruments		—		23		—
Payments for repurchases and conversions of convertible debt		—		—		(648)


Other, net		(17)		6		8
Net cash used in financing activities		(1,980)		(436)		(3,032)

NET CHANGE IN CASH AND CASH EQUIVALENTS		(1,779)		(204)		(2,988)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		9,288		9,492		12,480

CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	7,509	$	9,288	$	9,492

CASH PAYMENTS FOR:
Interest, net of amount capitalized		$	220	$	228	$	305
Income taxes		$	9	$	18	$	20

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:



Adoption of Accounting Standards Update 2020-06, Debt		$	—	$	—	$	245
Right-of-use assets acquired or modified under operating leases		$	377	$	82	$	58




Flight and ground equipment acquired or modified under finance leases		$	15	$	—	$	—

See accompanying notes.

Southwest Airlines Co.

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

2. New Accounting Pronouncements and Accounting Changes

3. Net Income Per Share

4. Commitments and Contingencies

5. Revenue

6. Financing Activities

7. Leases

8. Common Stock

9. Stock Plans

10. Financial Derivative Instruments

11. Fair Value Measurements

12. Accumulated Other Comprehensive Income (Loss)

13. Employee Retirement Plans

14. Income Taxes

15. Supplemental Financial Information

Report of Independent Registered Public Accounting Firm

Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Southwest Airlines Co. (the "Company" or "Southwest") operates Southwest Airlines, a major domestic airline. The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. The accompanying Consolidated Financial Statements include the results of operations and cash flows for all periods presented and all significant inter-entity balances and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles in the United States ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

In late December 2022, Winter Storm Elliott impacted a significant portion of the United States, leading to wide-scale operational disruptions for the Company. In attempting to recover from this weather event, the Company was challenged in its efforts to realign flight crews, flight schedules, and fleet for a period of days during this peak demand travel period. As a result, the Company canceled a significant number of flights between December 21 and December 29, before ultimately returning to a normal flight schedule on December 30, 2022. These canceled flights resulted in a significant reduction in Passenger revenues during this period and also created a deceleration in bookings, primarily isolated to January and February 2023. In addition, the Company incurred significant costs associated with this event and recorded these expenses during December 2022 and first quarter 2023, totaling approximately $390 million and $55 million, respectively, which are included in the accompanying Consolidated Statement of Income. These estimated items included reimbursements to Customers impacted by the cancellations for costs they incurred, the estimated value of Rapid Rewards points offered as a gesture of goodwill to Customers that are expected to be redeemed, and additional premium pay and additional compensation for Employees directly or indirectly impacted by the cancellations and recovery efforts. The financial impacts of the event to the Company also included lower fuel and oil and profitsharing expenses.

Based on the Company's wide-scale operational disruption, the Company could be subject to fines and/or penalties resulting from investigations by government agencies as well as litigation from Customers and Shareholders. On October 27, 2023, the Department of Transportation (the "DOT") notified the Company that it had determined the Company failed to provide adequate Customer Service assistance, prompt flight status notifications, and proper and prompt refunds and that the assessment of a civil penalty was warranted. During fourth quarter 2023, the Company accrued an expense of $107 million associated with a settlement reached with the DOT in December 2023 based on their investigation into the disruption. Other than this December 2023 charge, there were no material impacts to operating revenues or expenses as a result of this disruption beyond first quarter 2023.

Cash and Cash Equivalents

Cash in excess of that necessary for operating requirements is invested in short-term, highly liquid, income-producing investments. Investments with original maturities of three months or less when purchased are classified as cash and cash equivalents, which primarily consist of certificates of deposit, money market funds, and investment grade commercial paper issued by major corporations and financial institutions. Cash and cash equivalents are stated at cost, which approximates fair value.

As of December 31, 2024 and 2023, $22 million and $50 million, respectively, in cash collateral deposits were held by the Company from its fuel hedge counterparties. As of December 31, 2024 and 2023, the Company had no outstanding interest rate swap agreements and therefore no cash collateral deposits were provided by or held by the Company from interest rate hedge counterparties. Cash collateral amounts provided or held associated with fuel derivative instruments are not restricted in any way and earn interest income at an agreed upon rate that approximates the rates earned on short-term securities issued by the U.S. Government. Depending on the fair value of the Company’s fuel derivative instruments, the amounts of collateral deposits held or provided at any point in time can fluctuate significantly. See Note 10 for further information on these collateral deposits and fuel derivative instruments.

Notes to Consolidated Financial Statements

Short-term and Noncurrent Investments

Short-term investments consist of investments with original maturities of greater than three months but less than twelve months when purchased. These are primarily short-term securities issued by the U.S. Government and certificates of deposit issued by domestic banks. All of these investments are classified as available-for-sale securities and are stated at fair value, which approximates cost. For all short-term investments, at each reset period or upon reinvestment, the Company accounts for the transaction as Proceeds from sales of short-term and other investments for the security relinquished, and Purchases of short-term investments for the security purchased, in the accompanying Consolidated Statement of Cash Flows. Unrealized gains and losses, net of tax, if any, are recognized in Accumulated other comprehensive income (loss) ("AOCI") in the accompanying Consolidated Balance Sheet. Realized net gains and losses on specific investments, if any, are reflected in Interest income in the accompanying Consolidated Statement of Income. Both unrealized and realized gains and/or losses associated with investments were immaterial for all years presented.

Noncurrent investments consist of investments with maturities of greater than twelve months. Noncurrent investments are included as a component of Other assets in the Consolidated Balance Sheet.

Accounts and Other Receivables

Accounts and other receivables are initially recorded at cost and are evaluated for collectability in every period. They primarily consist of the amounts due from the credit card companies associated with sales of tickets for future travel, amounts due from business partners in the Company’s loyalty program, and tax receivables from overpayment or net operating losses that are allowed to be carried back to prior periods to claim refunds against prior taxes paid. See Note 15 for further information. The allowance for doubtful accounts was immaterial as of December 31, 2024 and 2023. In addition, the provision for doubtful accounts and write-offs for 2024, 2023, and 2022 were each immaterial.

Inventories

Inventories primarily consist of aircraft fuel and flight equipment expendable parts, materials, and supplies. All of these items are carried at average cost, less an allowance for obsolescence. These items are generally charged to expense when issued for use. The reserve for obsolescence was immaterial as of December 31, 2024, and 2023. In addition, the Company’s provision for obsolescence and write-offs for 2024, 2023, and 2022 were each immaterial.

Property and Equipment

Property and equipment is stated at cost. Capital expenditures include payments made for aircraft, other flight equipment, purchase deposits related to future aircraft deliveries, airport and other facility construction projects, and ground and other property and equipment. Depreciation is provided by the straight-line method to estimated residual values over periods of approximately 25 years for flight equipment, and 5 to 30 years for ground property and equipment. As of December 31, 2024, residual values estimated for aircraft range from 14 percent to 20 percent, and generally range from 0 to 10 percent for ground property and equipment. Assets constructed for others consists of airport improvement projects in which the Company is considered to have control of the asset during the construction period. Once construction is effectively completed, the sale-leaseback model would apply when control passes from the lessee to the lessor. See Note 4 for further information. Leasehold improvements are amortized as a component of depreciation expense over the estimated useful life of the asset or the remaining term of the underlying lease, whichever is less. In certain situations, the term of the lease may include periods covered by renewal options, if renewal is reasonably certain.

The Company evaluates its long-lived assets used in operations for impairment when events and circumstances indicate that the undiscounted cash flows to be generated by that asset group are less than the carrying amounts of the asset group and may not be recoverable. Factors that would indicate potential impairment include, but are not

Notes to Consolidated Financial Statements

limited to, significant decreases in the market value of the long-lived asset group, a significant change in the long-lived asset group’s physical condition, and operating or cash flow losses associated with the use of the long-lived asset group. If an asset group is deemed to be impaired, an impairment loss is recorded for the excess of the asset group's book value in relation to its estimated fair value. During 2022, the Company recorded impairment charges of $28 million associated with the accelerated retirement of 10 of its Boeing 737-700 ("-700") aircraft. There were no material impairments in 2024 or 2023 associated with the accelerated retirement of the Company's aircraft. However, the Company identified certain -700 aircraft that were retired early in 2023 and 2024 or are planned for early retirement in 2025. This change in retirement dates, and the corresponding impact to depreciation expense, is considered a change in estimate and resulted in the following impact to expense in 2024 and 2023:


	Year ended December 31,
(in millions, except per share amounts)	2024		2023
Depreciation and amortization expense	$	57	$	28
Net income *	(38)		(17)
Net income per basic share	(0.06)		(0.03)
Net income per diluted share	(0.06)		(0.03)

net of profitsharing benefit and income taxes

Leases

The Company determines if an arrangement is a lease at inception. Operating leases are included in Operating lease right-of-use assets, Current operating lease liabilities, and Noncurrent operating lease liabilities in the Consolidated Balance Sheet. Finance leases are included in Property and equipment, Current maturities of long-term debt, and Long-term debt less current maturities in the Consolidated Balance Sheet.

Right-of-use assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. The lease liability is measured as the present value of the unpaid lease payments, and the right-of-use asset value is derived from the calculation of the lease liability. Lease payments include fixed and in-substance fixed payments, variable payments based on an index or rate, reasonably certain purchase options, termination penalties, fees paid by the lessee to the owners of a special-purpose entity for restructuring the transaction, and probable amounts the lessee will owe under a residual value guarantee. Lease payments do not include (i) variable lease payments other than those that depend on an index or rate, (ii) any guarantee by the lessee of the lessor’s debt, or (iii) any amount allocated to non-lease components, if such election was made upon adoption, per the provisions of the Accounting Standards Codification ("ASC") 842. The Company uses its estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments, since the Company does not know the actual implicit rates in its leases. The Company gives consideration to its most recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating its incremental borrowing rate. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. The Company combines lease and non-lease components for all asset groups. The lease term includes any option to extend the lease when it is reasonably certain to be exercised based on considering all relevant economic factors.

Aircraft and Engine Maintenance

The cost of scheduled inspections and repairs and routine maintenance costs for all aircraft and engines are charged to Maintenance materials and repairs expense within the accompanying Consolidated Statement of Income as incurred.

The Company has maintenance agreements related to certain aircraft engines with external service providers, including agreements that effectively transfer the risk of performance of such work to the service provider. Under the agreements where the risk of performance is deemed transferred to the counterparty, expense is recorded commensurate with the period in which the corresponding level of service is provided. For its engine maintenance

Notes to Consolidated Financial Statements

contracts that do not transfer risk to the service provider, the Company records expense on a time and materials basis when an engine repair event takes place.

Modifications that significantly enhance the operating performance or extend the useful lives of aircraft or engines are capitalized and amortized over the remaining life of the asset.

Goodwill and Intangible Assets

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

The Company’s intangible assets primarily consist of acquired rights to certain airport owned takeoff and landing slots (a "slot" is the right of an air carrier, pursuant to regulations of the Federal Aviation Administration ("FAA"), to operate a takeoff or landing at a specific time at certain airports) at certain domestic slot-controlled airports. Indefinite-lived slots of $296 million are included as a component of Other assets in the Company's Consolidated Balance Sheet, as of December 31, 2024 and 2023.

The Company applied the qualitative approach during its 2024 impairment tests, and no impairment was determined to exist for Goodwill or indefinite-lived intangible assets.

Revenue Recognition

Tickets sold for Passenger air travel are initially deferred as Air traffic liability. Passenger revenue is recognized and Air traffic liability is reduced when the service is provided (i.e., when the flight takes place). Air traffic liability primarily represents tickets sold for future travel dates, flight credits that are expected to be used in the future, and loyalty benefits that are expected to be redeemed in the future. The majority of the Company’s tickets sold are nonrefundable. Southwest has a No-Show policy that applies to fares that are not canceled or changed by a Customer at least ten minutes prior to a flight's scheduled departure. Nonrefundable tickets that are sold but not flown on the travel date, and are canceled in accordance with the No-Show policy, can be applied to future travel. Refundable tickets that are sold but not flown on the travel date can also be applied to future travel. A small percentage of tickets (or partial tickets) will go unused, which is sometimes referred to as breakage. The Company estimates the amount of tickets that will go unused and recognizes such amounts in Passenger revenue in proportion to the pattern of flights taken by the Customers, once the flight date has lapsed. Based on the Company's revenue recognition policy, revenue is recorded at the flight date for a Customer who does not change his/her itinerary or does not cancel in accordance with the No-Show policy as the Company has then fulfilled its performance obligation. Amounts collected from passengers for ancillary services are also recognized when the service is provided, which is typically the flight date.

During 2020 and in parts of 2021, the Company experienced a significantly higher number of Customer-driven flight cancellations as a result of the COVID-19 pandemic. For all Customer flight credits created or that would have otherwise expired between March 1 and September 7, 2020, the Company previously extended the expiration

Notes to Consolidated Financial Statements

date to September 7, 2022. On July 28, 2022, the Company modified its policy and announced that all unexpired flight credits as of that date, including flight credits previously extended as a result of the COVID-19 pandemic, no longer have an expiration date and thus will be able to be redeemed by Customers indefinitely. This change in policy was considered a contract modification under ASC 606, and the Company accounted for such change prospectively in third quarter 2022. Due to customer redemptions of these pre-policy change flight credits that were issued to Customers during 2022 and prior at a higher than projected rate throughout 2024, as well as currently projected redemptions beyond 2024, the Company determined that a reversal of a portion of prior recorded breakage revenue was warranted. This change in breakage revenue, and the corresponding impact to Passenger revenue, is considered a change in estimate and resulted in the following impact to 2024 results:


	Year ended December 31,
(in millions, except per share amounts)	2024
Breakage revenue adjustment	$	(116)
Net income *	(76)
Net income per basic share	(0.13)
Net income per diluted share	(0.12)

net of profitsharing benefit and income taxes

Breakage estimates are based on the Company's Customers' historical travel behavior as well as assumptions about their future travel behavior. Assumptions about the Customers' future travel behavior can be impacted by several factors including, but not limited to: fare increases; fare sales; changes to the Company's ticketing policies; changes to the Company’s refund, exchange, and unused flight credit policies; seat availability; and economic factors. As a result of the Company's policy change for flight credits in 2022, as well as changes in Customer behavior during 2020 and 2021, the amount of breakage realized on a long term prospective basis has been and is expected to continue to be lower and more stable than it had been previously. See Note 5 for further information.

Approximately $798 million, approximately $828 million, and approximately $811 million of the Company's Operating revenues in 2024, 2023, and 2022, respectively, were attributable to foreign operations. The remainder of the Company's Operating revenues, approximately $26.7 billion, approximately $25.0 billion, and approximately $23.0 billion in 2024, 2023, and 2022, respectively, were attributable to domestic operations.

Loyalty Program

The Company records a liability for the relative fair value of providing free travel under its loyalty program for all points earned from flight activity or sold to business partners participating in the Company’s Rapid Rewards loyalty program. The loyalty liability represents performance obligations that will be satisfied when a Rapid Rewards loyalty member redeems points for travel or other goods and services. Points earned from flight activity are valued at their relative standalone selling price by applying fair value based on historical redemption patterns. Points earned from business partner activity, which primarily consist of points sold, along with related marketing services, to companies participating in the Rapid Rewards loyalty program, are valued using a relative fair value methodology based on the contractual rate which partners pay to Southwest to award Rapid Rewards points to the business partner’s customers. For points that are expected to remain unused, the Company recognizes breakage in proportion to the pattern of points used by the Customer, which approximates the average period over which the population of Rapid Reward Members redeem their points. The Company records passenger revenue related to air transportation when the transportation is delivered. The marketing elements are recognized as Other - net revenue when earned. The Company’s liability for loyalty benefits includes a portion that is expected to be redeemed during the following twelve months (classified as a component of Air traffic liability), and a portion that is not expected to be redeemed during the following twelve months (classified as Air traffic liability - noncurrent). The Company continually updates this analysis and adjusts the split between current and non-current liabilities as appropriate. See Note 5 for further information.

Notes to Consolidated Financial Statements

Advertising

Advertising costs are charged to expense as incurred. Advertising and promotions expense for the years ended December 31, 2024, 2023, and 2022 was $346 million, $266 million, and $224 million, respectively, and is included as a component of Other operating expense in the accompanying Consolidated Statement of Income.

Share-based Employee Compensation

The Company has share-based compensation plans covering certain Employees, including a plan that also covers the Company’s Board of Directors. The Company accounts for share-based compensation based on its grant date fair value. See Note 9 for further information.

Financial Derivative Instruments

The Company accounts for financial derivative instruments at fair value and applies hedge accounting rules where appropriate. The Company utilizes various derivative instruments, including jet fuel, crude oil, unleaded gasoline, and heating oil-based derivatives, in an attempt to reduce the risk of its exposure to jet fuel price increases. These instruments are accounted for as cash flow hedges upon proper qualification. At times, the Company can have interest rate swap agreements, the primary objective of which is to hedge forecasted debt issuances. These interest rate hedges are appropriately designated as cash flow hedges.

Since the majority of the Company’s financial derivative instruments are not traded on a market exchange, the Company estimates their fair values. Depending on the type of instrument, the values are determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets.

All cash flows associated with purchasing and selling derivatives are classified as operating cash flows in the Consolidated Statement of Cash Flows, within Changes in certain assets and liabilities. The Company classifies its cash collateral provided to or held from counterparties in a "net" presentation on the Consolidated Balance Sheet against the fair value of the derivative positions with those counterparties. See Note 10 for further information.

Software Capitalization

The Company capitalizes certain internal and external costs related to the acquisition and development of internal use software during the application development stages of projects. The Company amortizes these costs using the straight-line method over the estimated useful life of the software, which is typically five to fifteen years. Costs incurred during the preliminary project or the post-implementation/operation stages of the project are expensed as incurred. Capitalized computer software, included as a component of Ground property and equipment in the accompanying Consolidated Balance Sheet, net of accumulated depreciation, was $1.1 billion and $1.0 billion as of December 31, 2024, and 2023, respectively. Computer software depreciation expense was $271 million, $246 million, and $232 million for the years ended December 31, 2024, 2023, and 2022, respectively, and is included as a component of Depreciation and amortization expense in the accompanying Consolidated Statement of Income. The Company evaluates internal use software for impairment on a quarterly basis, and if it is determined the value of an asset was not recoverable or it qualifies for impairment, a charge will be recorded to write down the software to the lower of its carrying value or fair value. The Company had no significant impairments during 2024, 2023, or 2022.

Insurance Reserves

The Company uses a combination of insurance and self-insurance mechanisms, including a wholly-owned captive insurance entity and participation in a reinsurance treaty, to provide for the potential liabilities associated with certain risks, including workers’ compensation, healthcare benefits, general liability, and aviation liability. Liabilities associated with the risks that are retained by the Company are not discounted and are estimated, in part,

Notes to Consolidated Financial Statements

by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.

Income Taxes

The Company accounts for deferred income taxes utilizing an asset and liability method, whereby deferred tax assets and liabilities are recognized based on the tax effect of temporary differences between the financial statements and the tax basis of assets and liabilities, as measured by current enacted tax rates. The Company also evaluates the need for a valuation allowance to reduce deferred tax assets to estimated recoverable amounts.

The Company uses the portfolio approach for releasing income tax effects associated with amounts reclassified out of Accumulated other comprehensive income (loss).

The Company’s policy for recording interest and penalties associated with uncertain tax positions is to record such items as a component of Income (loss) before income taxes. Penalties are recorded in Other (gains) losses, net, and interest paid or received is recorded in Interest expense or Interest income, respectively, in the accompanying Consolidated Statement of Income. There were no material amounts recorded for penalties and interest related to uncertain tax positions for all years presented. See Note 14 for further information.

Concentration Risk

Approximately 82 percent of the Company’s Employees are unionized and are covered by collective-bargaining agreements. As of December 2024, all the Company's collective bargaining labor contracts subject to Section 6 of the Railway Labor Act are closed until October 2026 when the next labor contract becomes amendable.

The Company attempts to minimize its concentration risk with regards to its cash, cash equivalents, and its investment portfolio. This is accomplished by diversifying and limiting amounts among different counterparties, the type of investment, and the amount invested in any individual security or money market fund.

To manage risk associated with financial derivative instruments held, the Company selects and will periodically review counterparties based on credit ratings, limits its exposure to a single counterparty, and monitors the market position of the program and its relative market position with each counterparty. The Company also has agreements with counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount or credit ratings fall below certain levels. Collateral deposits provided to or held from counterparties serve to decrease, but not totally eliminate, the credit risk associated with the Company’s hedging program. See Note 10 for further information.

As of December 31, 2024, the Company operated an all-Boeing fleet, all of which are variations of the Boeing 737. The Boeing 737 MAX aircraft ("MAX") are crucial to the Company’s growth plans and fleet modernization initiatives. Boeing has in the past experienced, and may continue to experience, delays in fulfilling its commitments with regards to delivery of the Boeing 737-8 ("-8") to the Company as a result of manufacturing challenges. Further, the Company's contractual delivery schedule for the Boeing 737-7 ("-7") is dependent on the FAA issuing required certifications and approvals to the Boeing Company ("Boeing") and the Company. The FAA will ultimately determine the timing of the -7 certification and entry into service, and the Company therefore offers no assurances that current estimations and timelines are correct.

Boeing no longer manufactures versions of the 737 other than the MAX family of aircraft. If the MAX aircraft were to become 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

Notes to Consolidated Financial Statements

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. Any of these events would have a 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.

The Company is also dependent on sole or limited suppliers for aircraft engines and certain other aircraft parts and services. Therefore, it would also be materially adversely impacted in the event of the unavailability of engines, parts and certain repair services, the inability to find adequate support at commercially reasonable terms, or mechanical or regulatory issues associated with such engines or other parts or services.

The Company has historically entered into agreements with some of its co-brand, payment, and loyalty partners that contain exclusivity aspects which place certain confidential restrictions on the Company from entering into certain arrangements with other payment and loyalty partners. These arrangements generally extend for the terms of the agreements, none of which extend beyond October 31, 2030 as of December 31, 2024. Some of these agreements automatically renew on an annual basis, unless either party objects to such extension. In January 2025, the Company reached an amended co-brand agreement with Chase Bank USA, N.A. ("Chase"). Among other items, the amendment includes enhanced Cardmember benefits associated with the Company's future assigned and premium seating initiative. None of these agreements are more than 10 years in length. The Company believes the financial benefits generated by the exclusivity aspects of these arrangements outweigh the risks involved with such agreements.

Operating Segments and Related Disclosures

Operating segments are defined as components of an enterprise with separate financial information, which are evaluated regularly by the chief operating decision maker ("CODM") and are used in resource allocation and performance assessments. The Company's CODM is considered to be the Company's President, Chief Executive Officer, & Vice Chairman of the Board of Directors. The Company is managed as a single operating segment that provides air transportation for passengers and cargo. Managing the Company as one segment allows the Company to benefit from the value of integrated revenue pricing and its route network. The Company's flight equipment, which are all variations of the Boeing 737 series of aircraft, forms one fleet that is deployed through a single route scheduling system to maximize its value. The Company's tangible assets consist primarily of flight equipment, which are mobile across geographic markets and, therefore, have not been allocated.

Financial information and annual operational plans and forecasts are prepared and reviewed by the CODM at the consolidated level. The CODM assesses performance for the Company's single reportable segment and decides how to allocate resources based on Net income (see the Consolidated Statement of Income). When making operational decisions, the CODM is indifferent to the results on a geographic region basis. The Company's objective in making resource allocation decisions is to optimize the consolidated financial results.

For single reportable segment-level financial information, total assets, and significant non-cash transactions, see Item 8. Financial Statements.

2. NEW ACCOUNTING PRONOUNCEMENTS AND ACCOUNTING CHANGES

On November 4, 2024, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This standard responds to investor input by requiring public companies to disclose, in interim and annual reporting periods, additional information about certain expenses in the notes to the financial statements. This standard is effective for all entities that are subject to Subtopic 220-40, for annual periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027, but early adoption is permitted. The Company is

Notes to Consolidated Financial Statements

evaluating this new standard but does not expect it to have a significant impact on its financial statement disclosures.

On December 14, 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This standard increases transparency and decision usefulness of income tax disclosures for investors by requiring information to better assess how an entity's operations and related tax risks and tax planning and operational opportunities affect its tax rate and prospects for future cash flows. This standard requires entities to provide enhanced disclosures related to the income tax rate reconciliation and income taxes paid. This standard is effective for all entities that are subject to Topic 740, Income Taxes for annual periods beginning after December 15, 2024, but early adoption is permitted. The Company has evaluated this new standard and does not expect it to have a significant impact on its financial statement disclosures. The Company will adopt this standard as of January 1, 2025, utilizing the retrospective application as permitted in the standard. See Note 14 for further information on the Company's income taxes.

On November 27, 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This standard improves reportable segment disclosures by adding and enhancing interim disclosure requirements, clarifying circumstances in which entities can disclose multiple segment measures of profit or loss, providing new segment disclosure requirements for entities with a single reportable segment, and adding other disclosure requirements. This standard is effective for all entities that are subject to Topic 280, Segment Reporting for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. This standard is applicable to the Company due to the single reportable segment requirement. The Company has included all required disclosures within its Form 10-K for the year ended December 31, 2024. See Note 1 for further information on segment disclosures.

On January 7, 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848). This standard provides optional temporary guidance for entities transitioning away from London Interbank Offered Rate ("LIBOR") to new reference interest rates so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions with Topic 848. These amendments do not apply to any contract modifications made after December 31, 2024, any new hedging relationships entered into after December 31, 2024, or to existing hedging relationships evaluated for effectiveness existing as of December 31, 2024, that apply certain optional practical expedients. This standard was effective immediately and may be applied (i) on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or (ii) on a prospective basis to new modifications from any date within an interim period that includes or is subsequent to the date of the issuance of a final update, up to the date that financial statements are available to be issued. The Company had no material LIBOR-related contract modifications during the twelve months ended December 31, 2024.

3. NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share (in millions except per share amounts). Basic net income per share is calculated by dividing net income by the weighted average of shares outstanding during the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. An immaterial number of shares related to the Company's restricted stock units were excluded from the denominator for the fiscal years ended December 31, 2024, 2023, and 2022 because inclusion of such shares would be antidilutive. The Company paid approximately $6 million during second quarter 2024 to repurchase and terminate its outstanding stock warrants, previously issued in connection with three separate payroll funding support ("Payroll Support") programs entered into with the United States Department of the Treasury ("Treasury") in 2020 and 2021. See Note 6 to the Consolidated Financial Statements for information regarding the Company's participation in the Payroll Support Program.

Notes to Consolidated Financial Statements


	Year ended December 31,
		2024		2023		2022
NUMERATOR:
Net income		$	465	$	465	$	539
Add: Interest expense		20		19		22
Net income attributable to common stockholders		$	485	$	484	$	561

DENOMINATOR:
Weighted-average shares outstanding, basic		598		595		593
Dilutive effects of convertible notes		43		43		47

Dilutive effect of restricted stock units		2		2		2

Adjusted weighted-average shares outstanding, diluted		643		640		642

NET INCOME PER SHARE:
Basic		$	0.78	$	0.78	$	0.91
Diluted		$	0.76	$	0.76	$	0.87

4. COMMITMENTS AND CONTINGENCIES

Commitments

The Company has contractual obligations and commitments primarily with regard to future purchases of aircraft, repayment of debt (see Note 6), and lease arrangements (see Note 7). During the year ended December 31, 2024, the Company entered into supplemental agreements with Boeing relating to its contractual order book for -7 and -8 aircraft. The Company's contractual order book with Boeing for -7 and -8 aircraft, which extends to 2031, was designed to support the Company's growth and fleet modernization plans, while also providing significant flexibility and optionality to manage its fleet gauge and size, including opportunities to accelerate fleet modernization efforts if growth opportunities do not materialize. The Company received 22 -8 aircraft deliveries from Boeing in 2024 and retired 34 -700 aircraft and 2 Boeing 737-800 ("-800") aircraft. In addition, during fourth quarter 2024, the Company exercised eight -7 options for delivery in 2025 and five -7 options for delivery in 2026.

Boeing continues to experience delays in fulfilling its commitments with regards to delivery of MAX aircraft to the Company, as a result of manufacturing and labor challenges, and delays in achieving FAA certification of one of its new aircraft types, the -7, for which Southwest expects to be the launch customer. During 2024, as a result of Boeing's ongoing delivery delays, the Company conservatively re-planned its capacity and delivery expectations for 2025. The Company will continue to closely monitor the ongoing aircraft delivery delays with Boeing and adjust expectations as needed.

Based on the Company's current agreement with Boeing, capital commitments associated with its firm orders as of December 31, 2024, were:


(in billions)			2025						2026			2027			2028			2029			2030 and thereafter			Total
Payments for capital commitments			$	3.4		(a)			$	2.0		$	2.5		$	2.8		$	2.5		$	2.8		$	16.0

(a) Capital commitments associated with the Company's firm orders in 2025 of $3.4 billion include approximately $2.1 billion primarily related to the existing scheduled 73 MAX aircraft to be delivered in 2025 and $1.3 billion related to 63 MAX aircraft (27 -7s and 36 -8s) that were contractually committed for 2024, but were not received.

Los Angeles International Airport

Notes to Consolidated Financial Statements

In April 2023, the Company executed a lease agreement with Los Angeles World Airports ("LAWA"), which owns and operates Los Angeles International Airport ("LAX"), for the ground lease and construction of a new concourse. In this agreement, the Company will manage the development, design, financing, and construction of nine new gates, along with additional features, at LAX. Construction of the concourse is estimated to not exceed $2.3 billion. During 2024, leadership met with LAWA and agreed to pause the project, with plans to restart it in 2026. The Company expects to commence construction in 2028 with construction to be completed in 2032.

Funding for this project will flow through a credit facility and the outstanding loans are expected to be paid off directly by LAWA to the credit facility at project completion, thus reimbursing the Company on all costs drawn on the credit facility. As of December 31, 2024, the credit facility has yet to be put into place and is expected to be established closer to the beginning of construction in 2028. The Company is expected to be reimbursed by the credit facility on prior payments made once in place.

Based on this agreement, the Company has determined that it does have control over the assets during this project for accounting purposes. As a result, the costs incurred to fund this project thus far, which totaled $88 million as of December 31, 2024, are included within Assets constructed for others on the accompanying Consolidated Balance Sheet.

William P. Hobby Airport

In March 2022, the Company executed a Memorandum of Agreement ("MOA") with the City of Houston, Texas (the "City") which owns William P. Hobby Airport ("Hobby") that is managed and operated by the City's Houston Airport System. Under the MOA, the Company will manage the development, design, and construction of seven new gates in Hobby's West Concourse.

The project is currently estimated to be completed in 2027 at a cost of at least $470 million. The Company is providing initial funding for the majority of the project, but is being reimbursed for such funding from the City on a monthly basis and therefore the project has not and is not expected to significantly impact the Company’s liquidity. The City plans to fund these reimbursements utilizing rates and charges collected from current and future Hobby occupants, including the Company.

Based on the MOA, as well as a terminal lease amendment expected to be finalized prior to the beginning of significant construction, the Company has determined that it does not control the assets during the construction period for accounting purposes, and thus will record the amounts funded for the project as a receivable until reimbursed by the City, and the balance is derecognized. There were no material amounts recorded in the accompanying Consolidated Balance Sheet as of December 31, 2024.

Dallas Love Field

During 2008, the City of Dallas approved the Love Field Modernization Project ("LFMP"), a project to reconstruct Dallas Love Field with modern, convenient air travel facilities. Pursuant to a Program Development Agreement with the City of Dallas and the Love Field Airport Modernization Corporation (or the "LFAMC," a Texas non-profit "local government corporation" established by the City of Dallas to act on the City of Dallas' behalf to facilitate the development of the LFMP), the Company managed this project. Major construction was effectively completed in 2014. During second quarter 2017, the City of Dallas approved using the remaining bond funds for additional terminal construction projects, which were effectively completed in 2018.

Although the City of Dallas received commitments from various sources that helped to fund portions of the LFMP project, including the FAA, the Transportation Security Administration, and the City of Dallas' Aviation Fund, the majority of the funds used were from the issuance of bonds. The Company guaranteed principal and interest payments on bonds issued by the LFAMC, of which only the "Series 2012" bonds remain outstanding. Given the Company’s guarantee associated with the Series 2012 bonds, the remaining debt service amount is considered a minimum lease payment under ASC Topic 842, Leases, and therefore remains a lease liability with a corresponding right-of-use asset within the Company’s Consolidated Balance Sheet.

Notes to Consolidated Financial Statements

As of December 31, 2024, $49 million of principal remained outstanding associated with the Series 2012 bonds. The net present values of the future principal and interest payments associated with the bonds were $52 million and $65 million as of December 31, 2024 and 2023, respectively, and were reflected as part of the Company's operating lease right–of–use assets and lease obligations in the Consolidated Balance Sheet.

Contingencies

The Company is from time to time subject to various legal proceedings and claims arising in the ordinary course of business and records a liability for such claims when it is probable that a loss will be incurred and the amount is reasonably estimable.

The Company is a defendant in class action litigation asserting it has not provided paid short-term military leave to certain employees, in violation of the federal Uniformed Services Employment and Reemployment Rights Act (“USERRA”). The United States District Court for the Northern District of California previously issued an order to effectively stay the action, pending an appeal from an order by the United States District Court for the Eastern District of Washington granting summary judgment in favor of an airline in a separate case involving substantially the same claims at issue in this action. On February 1, 2023, the Ninth Circuit reversed the district court’s grant of summary judgment and remanded the separate airline case to the District Court. The Ninth Circuit’s decision may adversely affect the Company’s defenses in the USERRA proceeding and may give rise to additional litigation in this or other areas. On October 29, 2024, the Company filed a motion to decertify the class. The motion is fully briefed and a hearing on the motion is set for February 27, 2025. The Court has set a trial date of September 11, 2025. The Company is currently not able to estimate a range of possible loss with regards to the litigation to which it is a defendant.

5. REVENUE

Passenger Revenues

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

Revenue is categorized by revenue source as the Company believes it best depicts the nature, amount, timing, and uncertainty of revenue and cash flow. The following table provides the components of Passenger revenue recognized for the years ended December 31, 2024, 2023, and 2022:


	Year ended December 31,
(in millions)		2024		2023		2022
Passenger non-loyalty		$	20,467	$	19,073	$	17,645
Passenger loyalty - air transportation		3,484		3,639		3,028
Passenger ancillary sold separately		1,029		925		735
Total passenger revenues		$	24,980	$	23,637	$	21,408

Passenger non-loyalty includes all revenues recognized from Passengers for flights purchased primarily with credit card. All Customers purchasing a ticket on Southwest Airlines are generally able to check up to two bags at no extra charge (with certain exceptions as stated in the Company's published Contract of Carriage), and the Company also does not charge a fee for a Customer to make a change to their flight after initial purchase, although fare differences may apply. Passenger loyalty - air transportation primarily consists of the revenue associated with award flights taken by loyalty program members upon redemption of loyalty points. In 2024, the Company launched Cash + Points where Customers can use a mixture of cash (or equivalent) and loyalty points to purchase flights on the

Notes to Consolidated Financial Statements

Company's website. Passenger ancillary sold separately includes any revenue associated with ancillary fees charged separately, such as in-flight purchases, EarlyBird Check-In®, and Upgraded Boarding.

In order to determine the value of each loyalty point, certain assumptions must be made at the time of measurement, which include the following:

Allocation of Passenger Revenue - Revenues from Passengers, related to travel, who also earn Rapid Rewards Points have been allocated between flight (recognized as revenue when transportation is provided) and Rapid Rewards Points (deferred until points are redeemed) based on each obligation’s relative standalone selling price. The Company utilizes historical earning patterns to assist in this allocation.
Fair Value of Rapid Rewards Points - Determined from the base fare value of tickets which were purchased using prior point redemptions for travel and other products and services, which the Company believes to be indicative of the fair value of points as perceived by Customers and representative of the value of each point at the time of redemption. The Company’s booking site allows a Customer to toggle between fares utilizing either cash (or equivalent) or point redemptions, which provides the Customer with an approximation of the equivalent value of their points. The value can differ, however, based on demand, the amount of time prior to the flight, and other factors. The mix of fare classes during the period measured represents a constraint, which could result in the assumptions above changing at the measurement date, as fare classes can have different coefficients used to determine the total loyalty points needed to purchase an award ticket. The mixture of these fare classes and changes in the coefficients used by the Company could cause the fair value per point to fluctuate.

For points that are expected to remain unused, the Company recognizes breakage in proportion to the pattern of points used by the Customer, which approximates the average period over which the population of Rapid Reward Members redeem their points. The Company utilizes historical behavioral data to develop a predictive statistical model to analyze the amount of breakage expected for points sold to business partners and earned through flight. The Company continues to evaluate expected breakage annually and applies appropriate adjustments in the fourth quarter of each year, or other times, if significant changes in Customer behavior are detected. Changes to breakage estimates impact revenue recognition prospectively. Due to the size of the Company’s liability for loyalty benefits, changes in Customer behavior and/or expected future redemption patterns could result in significant variations in Passenger revenue.

The Company allocates consideration received to performance obligations based on the relative fair value of those obligations. The Company maintains a decades-long relationship with and has a co-branded credit card agreement (“Agreement”) with Chase, through which the Company sells loyalty points and certain marketing components, which consist of the use of the Southwest Airlines brand and access to Rapid Rewards Member lists, licensing and advertising elements, and the use of the Company’s resource team. The Company estimates the selling prices and volumes over the term of the Agreement in order to determine the allocation of proceeds to each of the two performance obligations identified in the Agreement, which have been characterized as a transportation component and a marketing component. The allocations utilized are reviewed to determine if adjustment is necessary any time there is a modification to the Agreement. The Company records Passenger revenue related to loyalty point redemptions for air travel when the travel is delivered, and the marketing elements are recognized as Other revenue when the performance obligations related to those services are satisfied, which is generally the same period consideration is received from Chase.

As performance obligations to Customers are satisfied, the related revenue is recognized. The events that result in revenue recognition that are associated with performance obligations identified as a part of the Rapid Rewards Program are as follows:

Tickets and Rapid Rewards Points - When a flight occurs, the related performance obligation is satisfied and the related value provided by the Customer, whether from purchased tickets, Rapid Rewards Points, or a combination thereof, is recognized as revenue.

Notes to Consolidated Financial Statements

Loyalty points redeemed for goods and/or services other than travel - Rapid Rewards Members have the option to redeem points for goods and services offered through a third party vendor, who acts as principal. The performance obligation related to the purchase of these goods and services is satisfied when the good and/or service is delivered to the Customer.
Marketing Royalties - As part of its Agreement with Chase, Southwest provides certain deliverables, including use of the Southwest Airlines’ brand, access to Rapid Rewards Member lists, advertising elements, and the Company’s resource team. These performance obligations are satisfied each month that the Agreement is active.

As of the years ended December 31, 2024 and 2023, the components of Air traffic liability, including contract liabilities based on tickets sold and unused flight credits available to the Customer, both of which are net of recorded breakage, and loyalty points available for redemption, within the Consolidated Balance Sheet were as follows:


	Balance as of
(in millions)	December 31, 2024		December 31, 2023
Air traffic liability - passenger travel and ancillary passenger services	$	3,393	$	3,363
Air traffic liability - loyalty program	4,849		4,916
Total Air traffic liability	$	8,242	$	8,279

The balance in Air traffic liability - passenger travel and ancillary passenger services also includes flight credits not currently associated with a ticket that can be applied by Customers towards the purchase of future travel. These flight credits are typically created as a result of a prior ticket cancellation or exchange, and are reflected net of associated breakage. Rollforwards of the Company's Air traffic liability - loyalty program for the years ended December 31, 2024 and 2023 were as follows (in millions):


	Year ended December 31,
		2024		2023
Air traffic liability - loyalty program - beginning balance		$	4,916	$	5,189
Amounts deferred associated with points awarded		3,532		3,466
Revenue recognized from points redeemed - Passenger		(3,484)		(3,639)
Revenue recognized from points redeemed - Other		(115)		(100)

Air traffic liability - loyalty program - ending balance		$	4,849	$	4,916

Air traffic liability includes consideration received for ticket and loyalty related performance obligations which have not been satisfied as of a given date. Rollforwards of the amounts included in Air traffic liability as of December 31, 2024 and 2023 were as follows (in millions):


	Year ended December 31,
(in millions)	2024		2023

Air traffic liability - beginning balance	$	8,279	$	8,250
Current period sales (a)	25,057		23,766
Revenue from amounts included in contract liability opening balances	(5,082)		(5,031)
Revenue from current period sales	(20,012)		(18,706)
Air traffic liability - ending balance	$	8,242	$	8,279

(a)Current period sales include passenger travel, ancillary services, flight loyalty, and partner loyalty

On July 28, 2022, the Company announced that all existing Customer flight credits as of that date, as well as any future flight credits issued, no longer expire and will thus remain redeemable by Customers. Prior to this change,

Notes to Consolidated Financial Statements

flight credits would expire twelve months from the original fare purchase date. Flight credits for non-refundable fares will be issued as long as the flight is cancelled more than 10 minutes prior to the scheduled departure. This announcement was considered a contract modification under applicable accounting guidance and the Company accounted for such change prospectively in third quarter 2022. The Company’s balance of existing Customer flight credits as of the modification date was approximately $1.9 billion, including a portion of the extended flight credits issued during the early portion of the COVID-19 pandemic, that had been set to expire on September 7, 2022. As the Company continues to believe that a portion of Customer flight credits issued after July 28, 2022, will not be redeemed, it continues to estimate and record breakage associated with such amounts. The amount of breakage realized on a prospective basis, however, has been and is expected to continue to be lower and more stable as a percentage of Passenger revenues than it had been historically as a result of this policy change. Due to Customer redemptions throughout 2024 on the flight credits issued prior to the modification date, as well as currently projected redemptions beyond 2024, the Company determined a reversal of a portion of this prior breakage revenue of $116 million was warranted for the twelve months ended December 31, 2024. This change in breakage revenue, and the corresponding impact to passenger revenue, is considered a change in estimate (see Note 1 to the Consolidated Financial Statements for further information).

The amount of Customer flight credits represents approximately 8 percent of the total Air traffic liability balance as of December 31, 2024, and December 31, 2023, respectively.

Recognition of revenue associated with the Company’s loyalty liability can be difficult to predict, as the number of award seats available to Members is not currently restricted and Members could choose to redeem their points at any time that a seat is available. The performance obligations classified as a current liability related to the Company’s loyalty program were estimated based on expected redemptions utilizing historical redemption patterns, and forecasted flight availability and fares. The entire balance classified as Air traffic liability—noncurrent relates to loyalty points that were estimated to be redeemed in periods beyond the twelve months following the representative balance sheet date. Based on historical experience as well as current forecasted redemptions, the Company expects the majority of loyalty points to be redeemed within approximately one year of the date the points are issued. Despite the Company's policy change with regards to flight credits, it has not experienced significant flight credit redemptions beyond twelve months and it currently does not expect the amount of flight credits that will be redeemed beyond twelve months to be material as a percentage of the Air traffic liability as of the financial statement date.

All performance obligations related to freight services sold are completed within twelve months or less; therefore, the Company has elected to not disclose the amount of the remaining transaction price and its expected timing of recognition for freight shipments.

Other revenues primarily consist of marketing royalties associated with the Company’s co-brand Chase® Visa credit card program, but also include commissions and advertising associated with Southwest.com. All amounts classified as Other revenues are paid monthly, coinciding with the Company fulfilling its deliverables; therefore, the Company has elected to not disclose the amount of the remaining transaction price and its expected timing of recognition for such services provided.

The Company recognized revenue related to the marketing, advertising, and other travel-related benefits of the revenue associated with various loyalty partner agreements including, but not limited to, the Agreement with Chase, within Other operating revenues. For the years ended December 31, 2024, 2023, and 2022 the Company recognized $2.2 billion, $2.1 billion, and $2.1 billion, respectively.

The Company is also required to collect certain taxes and fees from Customers on behalf of government agencies and remit these back to the applicable governmental entity on a periodic basis. These taxes and fees include foreign and U.S. federal transportation taxes, federal security charges, and airport passenger facility charges. These items are collected from Customers at the time they purchase their tickets, are excluded from the contract transaction price, and are therefore not included in Passenger revenue. The Company records a liability upon collection from the Customer and relieves the liability when payments are remitted to the applicable governmental agency.

Notes to Consolidated Financial Statements

6. FINANCING ACTIVITIES


(in millions)	Maturity Dates	December 31, 2024		December 31, 2023


Unsecured

5.25% Notes	2025	$	—	$	1,302
1.25% Convertible Notes	2025	1,611		1,611
3.00% Notes	2026	300		300
7.375% Debentures	2027	107		111
3.45% Notes	2027	300		300
5.125% Notes	2027	1,727		1,727
2.625% Notes	2030	500		500



1.000% Payroll Support Program Loan (a)	2030	976		976
1.000% Payroll Support Program Loan (a)	2031	566		566
1.000% Payroll Support Program Loan (a)	2031	526		526
Finance leases		91		104
		$	6,704	$	8,023
Less current maturities		1,630		29
Less debt discount and issuance costs		5		16
		$	5,069	$	7,978

(a) The interest rate will change to Secured Overnight Financing Rate plus two percent on the fifth anniversary of the loans. The fifth anniversary for the first tranche occurs in April 2025.

Senior Unsecured Notes due through 2030

During 2020, the Company issued $2.0 billion of unsecured notes due 2027, of which $1.3 billion was issued June 8, 2020 (the “$1.3 billion 2027 Notes”) and $700 million was issued July 31, 2020 (the “$700 million 2027 Notes”). The notes bear interest at 5.125%. Interest is payable semi-annually in arrears. The $700 million 2027 Notes were offered as an additional issuance of the Company’s $1.3 billion 2027 Notes issued on June 8, 2020. The $700 million 2027 Notes were issued at a premium. The Company made early prepayments on the notes of $272 million throughout 2022, utilizing available cash on hand.

During 2020, the Company issued $1.55 billion of unsecured notes due 2025, of which $1.25 billion was issued May 4, 2020 (the “$1.25 billion 2025 Notes”) and $300 million was issued July 31, 2020 (the “$300 million 2025 Notes”), bearing interest at 5.250% with interest payable semi-annually in arrears. The $300 million 2025 Notes were offered as an additional issuance of the Company’s $1.25 billion 2025 Notes issued on May 4, 2020. The $300 million 2025 Notes were issued at a premium. The Company made early prepayments on the notes of $248 million throughout 2022, and prepaid the remaining notes in full in December 2024, utilizing available cash on hand.

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

During November 2017, the Company issued $300 million senior unsecured notes due 2027. The notes bear interest at 3.45 percent. Interest is payable semi-annually in arrears.

During November 2016, the Company issued $300 million senior unsecured notes due 2026. The notes bear interest at 3.00 percent. Interest is payable semi-annually in arrears.

On February 28, 1997, the Company issued $100 million of senior unsecured 7.375 percent debentures due March 1, 2027. Interest is payable semi-annually. The debentures may be redeemed, at the option of the Company, in whole at any time or in part from time to time, at a redemption price equal to the greater of the principal amount of the debentures plus accrued interest at the date of redemption or the sum of the present values of the remaining

Notes to Consolidated Financial Statements

scheduled payments of principal and interest thereon, discounted to the date of redemption at the comparable treasury rate plus 20 basis points, plus accrued interest at the date of redemption.

Convertible Notes due 2025

On May 1, 2020, the Company completed the public offering of $2.3 billion aggregate principal amount of Convertible Senior Notes (the “Convertible Notes”). The Convertible Notes bear interest at a rate of 1.25% and will mature on May 1, 2025. Interest on the notes is payable semi-annually in arrears.

Holders may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2025, in the event certain conditions are met, as stated in the offering documents. The Convertible Notes did not meet the criteria to be converted as of December 31, 2024, but are classified within Current maturities of long-term debt in the accompanying Consolidated Balance Sheet due to their maturity on May 1, 2025. Upon conversion, the Company will settle conversions by paying cash up to the principal amount of the Convertible Notes, with any excess conversion value also settled in cash. The initial conversion rate was 25.9909 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $38.48 per share of common stock). However, based on the Company's most recent cash dividends declared in November 2024, the bond conversion rate changed, and was 27.3384 as of December 31, 2024. As of December 31, 2024, the if-converted value of the Convertible Notes was less than the principal amount by $130 million, using the Company's closing stock price.

Upon issuance, the Company bifurcated the Convertible Notes for accounting purposes between a liability component and an equity component utilizing applicable guidance. The liability component was determined by estimating the fair value of a hypothetical issuance of an identical offering excluding the conversion feature of the Convertible Notes. The initial carrying amount of the equity component was calculated as the difference between the liability component and the face amount of the Convertible Notes. The Company adopted ASU 2020-06, as of January 1, 2022, utilizing the modified retrospective method approach. Upon adoption, the Company reclassified the remaining equity component, of $300 million, from Additional paid-in capital to Long-term debt associated with its Convertible Notes, and no longer records amortization of the debt discount to Interest expense.

The Company recognized interest expense associated with the Convertible Notes as follows:


(in millions)	December 31, 2024		December 31, 2023
Non-cash amortization of debt issuance costs	$	10	$	10
Contractual coupon interest	20		20
Total interest expense	$	30	$	30

The unamortized debt issuance costs are being recognized as non-cash interest expense based on the 5-year term of the notes, through May 1, 2025, less amounts that were or will be required to be accelerated immediately upon conversion or repurchases. The Company had no changes to contingencies related to the Convertible Notes for the year ended December 31, 2024. The effective interest rate associated with the Convertible Notes was approximately 1.9 percent for the year ended December 31, 2024. There were no Convertible Note prepayments or conversions exercised or settled during 2023 or 2024.

Payroll Support Program Loans due through 2031

As a result of the rapid spread of the novel coronavirus, COVID-19, throughout the world, including into the United States, on March 11, 2020, the World Health Organization classified the virus as a pandemic. The speed with which the effects of the COVID-19 pandemic changed the U.S. economic landscape, outlook, and in particular the travel industry, was swift and unexpected. The Company experienced significant disruptions in travel and reduced bookings throughout the remainder of 2020 and for the entirety of 2021 as a result of the pandemic and subsequent variants of COVID-19.

Notes to Consolidated Financial Statements

The Company entered into definitive documentation with Treasury with respect to payroll funding support ("Payroll Support") pursuant to three separate Payroll Support programs: the "PSP1 Payroll Support Program" in April 2020 under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"); the "PSP2 Payroll Support Program” in January 2021 under the Consolidated Appropriations Act, 2021; and the "PSP3 Payroll Support Program" in April 2021 under the American Rescue Plan Act of 2021.

As consideration for its receipt of funding under each of these Payroll Support programs, the Company issued a promissory note in favor of Treasury (classified as a component of Long term debt less current maturities in the Consolidated Balance Sheet) and entered into a warrant agreement with Treasury (classified as a component of Stockholders' equity in the Consolidated Balance Sheet).

The Company paid approximately $6 million during second quarter 2024 to repurchase and terminate its outstanding stock warrants, previously issued in connection with the Payroll Support programs entered into with Treasury in 2020 and 2021.

Revolving Credit Facility

The Company has access to $1.0 billion under the Amended Credit Agreement, which expires in August 2028. For the twelve months ended December 31, 2024 and 2023 there were no amounts outstanding under the Amended Credit Agreement.

Generally, amounts outstanding under the Amended Credit Agreement bear interest at rates based on either the SOFR rate (selected by the Company for designated interest periods) or the “alternate base rate” (being the highest of (1) the Wall Street Journal prime rate, (2) one-month adjusted SOFR (one-month SOFR plus 0.1 percent) plus 1 percent, and (3) the Federal Reserve Bank of New York Rate, plus 0.5 percent). The underlying SOFR rate is subject to a floor of 1 percent per annum and the “alternate base rate” is subject to a floor of 1 percent per annum.

The Amended Credit Agreement has an accordion feature that would allow the Company, subject to, among other things, the procurement of incremental commitments, to increase the size of the facility to $1.5 billion. The facility contains a financial covenant requiring a minimum coverage ratio of adjusted pre-tax income to fixed obligations, as defined. As of December 31, 2024, the Company was in compliance with this covenant and all other covenants in the Amended Credit Agreement.

The Company is required to provide standby letters of credit to support certain obligations that arise in the ordinary course of business. Although the letters of credit are an off-balance sheet item, the majority of the obligations to which they relate are reflected as liabilities in the Consolidated Balance Sheet. Outstanding letters of credit totaled $377 million as of December 31, 2024.

The Company had no assets pledged as collateral for its borrowings as of December 31, 2024.

Maturities

As of December 31, 2024, aggregate annual principal maturities of debt and finance leases (not including amounts associated with interest on finance leases) are as follows:


(in millions)
2025	$	1,633
2026	320
2027	2,149
2028	15
2029	9
Thereafter	2,571
Total	$	6,697

Notes to Consolidated Financial Statements

7. LEASES

The Company enters into leases for aircraft, property, and other types of equipment in the normal course of business. As allowed under ASC 842, Leases, the Company has elected a practical expedient to exclude from recognition lease assets and lease liabilities associated with leases that have an initial term of twelve months or less. Such expense was not material for the twelve months ended December 31, 2024, 2023, and 2022.

As of December 31, 2024, the Company held aircraft leases with remaining terms extending up to 9 years. The aircraft leases generally can be renewed for three months to three years at rates based on the fair market value at the end of the lease term. Residual value guarantees included in the Company's lease agreements are not material. Any lease return costs incurred by the Company are recognized as a component of Other operating expenses but were not material for all periods presented.

In fourth quarter 2024, the Company entered into an agreement with UMB Bank, N.A. ("UMB Bank") involving the sale of 36 of the Company’s Boeing -800 aircraft that qualified as sale-leaseback arrangements under applicable accounting guidance. Of the 36 -800 sale-leasebacks, 35 were executed in fourth quarter 2024 and one was finalized in late January 2025. The Company sold the 35 -800 aircraft in fourth quarter 2024 to UMB Bank for $871 million, then immediately leased the aircraft back for approximately two to three years. In first quarter 2025, the Company sold one -800 aircraft to UMB Bank for $24 million, then immediately leased the aircraft back for approximately three years. As such, 35 aircraft were de-recognized from Property and equipment at their remaining net book values at the time of sale. All of the leases from the sale-leasebacks are accounted for as operating leases, and thus are now reflected as part of the Company’s Operating lease right-of-use assets and operating lease liabilities in the accompanying Consolidated Balance Sheet. The -800 sale-leaseback transaction resulted in a recognized gain of $92 million and operating lease right-of-use assets and liabilities of $319 million in fourth quarter 2024 and will result in a recognized gain of $3 million in first quarter 2025, reflected within Other operating expenses, net in the accompanying Consolidated Statement of Comprehensive Income.

Throughout 2024, the Company entered into agreements with third parties to purchase two -700 aircraft, both of which were already in the Company's fleet under finance lease terms, one -800 aircraft, and the airframe of one -800 aircraft, both of which were already in the Company's fleet under operating lease terms. The Company paid the lessors $45 million in 2024, of which $3 million was recorded as the elimination of the Company's remaining finance lease obligation for the aircraft, and which was also reflected within Payments of long-term debt and finance lease obligations in the accompanying Consolidated Statement of Cash Flows and $2 million was recorded as the elimination of the Company's remaining operating lease obligation for the aircraft, and which was also reflected within Changes in Other noncurrent assets in the accompanying Consolidated Statement of Cash Flows. The remaining $40 million was the net purchase price of the aircraft and is included as part of the Company's Capital expenditures for 2024. There was no gain or loss recorded as a result of these transactions. As of December 31, 2024, the Company has 88 operating and 18 finance leased aircraft remaining.

In second and third quarter 2023, the Company also entered into additional transactions with third parties to purchase four -700 aircraft, all of which were already in the Company's fleet under finance lease terms. The Company paid the lessors $44 million in 2023, of which $3 million was recorded as the elimination of the Company's remaining finance lease obligation for the aircraft, and which was also reflected within Payments of long-term debt and finance lease obligations in the accompanying Consolidated Statement of Cash Flows. The remaining $41 million was the net purchase price of the aircraft and is included as part of the Company's Capital expenditures for 2023. There was no gain or loss recorded as a result of these transactions.

In fourth quarter 2022, the Company executed an aircraft sale agreement with AerCap Ireland Limited (“AerCap”) to purchase 39 -700 aircraft, all of which were already in the Company's fleet under finance lease terms. As each aircraft purchase was finalized, the Company relieved its related lease liability and continued to recognize the cost of the aircraft within Property and equipment section in the Consolidated Balance Sheet. The Company completed the purchase of 31 of these aircraft during fourth quarter 2022, and the remaining eight aircraft during first quarter 2023. The Company paid the lessor $365 million and $88 million in fourth quarter 2022 and first quarter 2023, respectively, as part of this transaction, of which $191 million and $50 million were recorded as the elimination of

Notes to Consolidated Financial Statements

the Company’s remaining finance lease obligation for the aircraft, and which was also reflected within Payments of long-term debt and finance lease obligations in the accompanying Consolidated Statement of Cash Flows. The remaining $174 million and $38 million was the net purchase price of the aircraft and is included as part of the Company’s Capital expenditures for fourth quarter 2022 and first quarter 2023, respectively. There was no gain or loss recorded as a result of these transactions.

At each airport where the Company conducts flight operations, the Company has lease agreements, generally with a governmental unit or authority, for the use of airport terminals, airfields, office space, cargo warehouses, gates, and/or maintenance facilities. These leases are classified as operating lease agreements and have remaining lease terms extending up to 36 years. Certain leases can be renewed from one year to 11 years. The majority of the airport terminal leases contain certain provisions for periodic adjustments to rates that depend upon airport operating costs or use of the facilities, and are reset at least annually. Because of the variable nature of these rates, these leases are not recorded as a right-of-use asset or a lease liability on the Consolidated Balance Sheet.

The Company also leases certain technology assets, fuel storage tanks, and various other equipment that qualify as leases under the applicable accounting guidance with lease terms extending up to four years. Certain leases can be renewed from six months to one year.

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


(in millions)	Balance Sheet location	December 31, 2024		December 31, 2023
Assets
Operating	Operating lease right-of-use assets (net)	$	1,369	$	1,223
Finance	Property and equipment (net of allowance for depreciation and amortization of $452 million and $477 million)	102		125
Total lease assets		$	1,471	$	1,348

Liabilities
Current
Operating	Current operating lease liabilities	$	328	$	208
Finance	Current maturities of long-term debt	22		29
Noncurrent
Operating	Noncurrent operating lease liabilities	1,031		985
Finance	Long-term debt less current maturities	69		75
Total lease liabilities		$	1,450	$	1,297

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


(in millions)	Year ended December 31, 2024		Year ended December 31, 2023		Year ended December 31, 2022
Operating lease cost - aircraft (a)	$	186	$	186	$	188
Operating lease cost - other	77		89		84
Short-term lease cost	2		2		2
Variable lease cost	1,916		1,733		1,447
Amortization of finance lease liabilities	35		44		106
Interest on finance lease liabilities	4		5		15
Total net lease cost	$	2,220	$	2,059	$	1,842

(a) Net of sublease income of $1 million, $7 million, and $17 million for the years ended December 31, 2024, 2023, and 2022.

Supplemental cash flow information related to leases, included in the Consolidated Statement of Cash Flows, was as follows:

Notes to Consolidated Financial Statements


(in millions)	Year ended December 31, 2024		Year ended December 31, 2023		Year ended December 31, 2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating leases	$	258	$	251	$	303
Operating cash flows for finance leases	4		5		16
Financing cash flows for finance leases	26		32		78

As of December 31, 2024, maturities of lease liabilities were as follows:


(in millions)	Operating leases		Finance leases
2025	$	368	$	25
2026	328		23
2027	240		23
2028	174		15
2029	138		10
Thereafter	317		3
Total lease payments	$	1,565	$	99
Less imputed interest	(206)		(8)
Total lease obligations	$	1,359	$	91
Less current obligations	(328)		(22)
Long-term lease obligations	$	1,031	$	69

The table below presents additional information related to the Company's leases:



Weighted average remaining lease term	December 31, 2024		December 31, 2023
Operating leases	6 years		8 years
Finance leases	4 years		5 years

Weighted average discount rate
Operating leases	4.1	%	4.0	%
Finance leases	4.0	%	3.9	%

8. COMMON STOCK

The Company has one class of capital stock, its common stock. Holders of shares of common stock are entitled to receive dividends when and if declared by the Board of Directors and are entitled to one vote per share on all matters submitted to a vote of the Shareholders. As of December 31, 2024, the Company had 80 million shares of common stock reserved for issuance pursuant to Employee equity plans (of which 28 million shares had not been granted) through various share-based compensation arrangements. Additionally, as part of the consideration for its receipt of funding under the Payroll Support programs, the Company entered into warrant agreements with Treasury (classified as a component of Stockholders' equity in the Consolidated Balance Sheet). The Company paid $6 million during second quarter 2024 to repurchase and terminate the outstanding stock warrants. See Notes 6 and 9 to the Consolidated Financial Statements for information regarding the Company's warrant agreements and equity plans, respectively.

Under an accelerated share repurchase program entered into by the Company with a third party financial institution in fourth quarter 2024 (the "Fourth Quarter 2024 ASR Program"), the Company paid $250 million and received an initial delivery of 6,795,787 shares during October 2024, representing an estimated 80 percent of the shares to be purchased by the Company under the Fourth Quarter 2024 ASR Program. This share amount was based on the

Notes to Consolidated Financial Statements

$29.43 closing price of the Company's common stock on October 25, 2024. Final settlement of the Fourth Quarter 2024 ASR Program occurred in January 2025 and was based on a discount to the volume-weighted average price per share of the Company's common stock during a calculation period completed in January 2025. Upon settlement, the third party financial institution delivered 1,010,663 additional shares of the Company’s common stock to the Company. Upon completion of the Fourth Quarter 2024 ASR Program in January 2025, the average purchase price per share for the 7,806,450 shares repurchased was $32.02.

9. STOCK PLANS

Share-based Compensation

The Company accounts for share-based compensation utilizing fair value, which is determined on the date of grant for all instruments. The Consolidated Statement of Income for the years ended December 31, 2024, 2023, and 2022, reflects share-based compensation expense of $45 million, $86 million, and $84 million, respectively. The total tax impact recognized in earnings from share-based compensation arrangements for the years ended December 31, 2024, 2023, and 2022, was not material. As of December 31, 2024, there was $58 million of total unrecognized compensation cost related to share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.8 years. The Company expects substantially all unvested shares associated with time-based restricted stock unit awards to vest.

Restricted Stock Units and Stock Grants

Under the Company’s Amended and Restated 2007 Equity Incentive Plan ("2007 Equity Plan"), which was approved by Shareholders, the Company granted restricted stock units ("RSUs") and performance-based restricted stock units ("PBRSUs") to certain Employees during 2024, 2023, and 2022.

The RSUs are scheduled to vest with respect to one-third of the shares covered thereby annually. Other than in connection with death or disability, vesting is subject to the individual’s continued service as an Employee, Board member, or advisor through the vesting date. However, with respect to the RSUs granted in 2022, 2023, and 2024, provided that the individual's service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” any outstanding unvested RSUs will remain outstanding as if the individual’s service has not terminated and will continue to vest in accordance with the schedule set forth in the notice of the grant. An individual's termination of service will be considered a "qualified retirement" if (a) the individual has completed at least 10 years of continuous service; (b) the individual’s age plus completed years of continuous service equal at least 65 at the time of the individual’s termination of service; and (c) the individual has not been terminated for cause.

Under the 2022 grants, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's Adjusted ROIC performance, as defined, and ranges from zero PBRSUs to 300 percent of granted PBRSUs, only after a minimum performance level has been achieved. Adjusted ROIC for the Performance Period is the average of the ROIC over the three full fiscal years within the Performance Period (2022, 2023, and 2024), and vesting is also subject generally to the individual’s continued employment or service. However, in the event the Company's average Adjusted ROIC is greater than zero and exceeds the median (i.e., 50th percentile) return on invested capital of certain of the Company's peer group of domestic mainline carriers subject to the Securities and Exchange Commission's reporting requirements ("Peer Group"), the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 50 percent. If the Company's relative Adjusted ROIC ranks highest compared to the Company's Peer Group, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 100 percent.

Under the 2023 grants, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's Adjusted ROIC performance, as defined, and ranges from zero PBRSUs to 200 percent of granted PBRSUs, only after a minimum performance level has been achieved. Adjusted ROIC for the Performance Period is the average of the ROIC, using an assumed federal tax rate of 24 percent, over the three full fiscal years within the

Notes to Consolidated Financial Statements

Performance Period (2023, 2024, and 2025), and vesting is also subject generally to the individual’s continued employment or service. However, in the event the Company's average Adjusted ROIC is greater than zero and exceeds the median (i.e., 50th percentile) return on invested capital of certain of the Company's Peer Group of domestic mainline carriers subject to the Securities and Exchange Commission's reporting requirements, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 50 percent. If the Company's relative Adjusted ROIC ranks highest compared to the Company's Peer Group, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 100 percent.

Under the 2024 grants, the number of PBRSUs vesting on the vesting date will be interpolated based on the Company's Adjusted ROIC performance, as defined, and ranges from zero PBRSUs to 200 percent of granted PBRSUs, only after a minimum performance level has been achieved. Adjusted ROIC for the Performance Period is the average of the ROIC, using an assumed federal tax rate of 24 percent, over the three full fiscal years within the Performance Period (2024, 2025, and 2026), and vesting is also subject generally to the individual’s continued employment or service. However, in the event the Company's average Adjusted ROIC is greater than zero and exceeds the median (i.e., 50th percentile) return on invested capital of certain of the Company's Peer Group of domestic mainline carriers subject to the Securities and Exchange Commission's reporting requirements, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 50 percent. If the Company's relative Adjusted ROIC ranks highest compared to the Company's Peer Group, the minimum number of PBRSUs that will vest, as of the vesting date, will be equal to the grant amount times 100 percent.

With respect to PBRSUs granted in 2022, 2023, and 2024, provided that the individual's service has terminated no earlier than 12 months after the date of grant, in the event of a “qualified retirement,” such individual’s PBRSUs will remain outstanding as if the individual’s service has not terminated and will otherwise be settleable in accordance with the notice of grant and applicable terms and conditions; however, the number of shares received upon settlement will be prorated based on the individual’s number of days of service between the date of grant and the end of the performance period.

For all RSU and PBRSU grants, forfeiture rates are estimated at the time of grant based on historical actuals for similar grants, and are trued-up to actuals over the vesting period. For all RSU and PBRSU grants, the Company recognizes all expense on a straight-line basis over the vesting period, as adjusted for qualified retirement provisions, with any changes in expense due to the number of RSUs and PBRSUs expected to vest being modified on a prospective basis.

Notes to Consolidated Financial Statements

Aggregated information regarding the Company’s RSUs and PBRSUs is summarized below:


	All Restricted Stock Units
	Units (000)		Wtd. Average Fair Value (per share)
Outstanding December 31, 2021	2,561		$	51.81
Granted	1,041	(a)	44.88
Vested	(559)		51.85
Surrendered	(100)		48.59
Outstanding December 31, 2022	2,943		47.97
Granted	1,750	(b)	35.37
Vested	(650)		48.45
Surrendered	(80)		39.69
Outstanding December 31, 2023	3,963		39.97
Granted	4,069	(c)	29.85
Vested	(2,012)		44.38
Surrendered	(133)		32.64
Outstanding December 31, 2024	5,887		33.73

(a) Includes 700 thousand PBRSUs

(b) Includes 1.1 million PBRSUs

In addition, the Company granted approximately 108 thousand shares of unrestricted stock at a weighted average grant price of $28.77 in 2024, approximately 73 thousand shares at a weighted average grant price of $30.12 in 2023, and approximately 42 thousand shares at a weighted average grant price of $44.23 in 2022, to members of its Board of Directors.

A remaining balance of up to 14 million shares of the Company’s common stock may be issued pursuant to grants under the 2007 Equity Plan.

Employee Stock Purchase Plan

Under the Amended and Restated 1991 Employee Stock Purchase Plan ("ESPP"), which has been approved by Shareholders, the Company is authorized to issue up to a remaining balance of 14 million shares of the Company’s common stock to Employees of the Company. These shares may be issued at a price equal to 90 percent of the market value at the end of each monthly purchase period. Common stock purchases are paid for through periodic payroll deductions.

The following table provides information about the Company’s ESPP activity during 2024, 2023, and 2022:


Employee Stock Purchase Plan
				(a)
	Total number			Weighted-average
	of shares	Average		fair value of each
	purchased	price paid		purchase right
Year ended	(in thousands)	per share		under the ESPP
December 31, 2022	1,453	$	36.10	$	4.02
December 31, 2023	1,972	$	27.46	$	3.05
December 31, 2024	2,227	$	26.38	$	2.93

(a) The weighted-average fair value of each purchase right under the ESPP granted is equal to a ten percent discount from the market value of the Common Stock at the end of each monthly purchase period.

Notes to Consolidated Financial Statements

Taxes

Grants of RSUs result in the creation of a deferred tax asset, which is a temporary difference, until the time the RSU vests. All excess tax benefits and tax deficiencies are recorded through the Consolidated Statement of Income. Due to the treatment of RSUs for tax purposes, the Company’s effective tax rate from year to year is subject to variability.

Notes to Consolidated Financial Statements

10. FINANCIAL DERIVATIVE INSTRUMENTS

Fuel Contracts

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

The Company has used financial derivative instruments for both short-term and long-term timeframes, and historically has used a mixture of purchased call options, collar structures (which include both a purchased call option and a sold put option), call spreads (which include a purchased call option and a sold call option), put spreads (which include a purchased put option and a sold put option), and fixed price swap agreements in its portfolio. Although the use of collar structures and swap agreements can reduce the overall cost of hedging, these instruments carry more risk than purchased call options in that the Company could end up in a liability position when the collar structure or swap agreement settles. With the use of purchased call options and call spreads, the Company cannot be in a liability position at settlement, but does not have coverage once market prices fall below the strike price of the purchased call option.

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

As of December 31, 2024, the Company has fuel derivative contracts in place through 2027. Based on the current geopolitical and market dynamics, higher premium costs over time, and aggressive cost reductions underway, the Company does not intend to add new hedging positions to its current hedge book. The Company is providing the following information about the Company’s volume of fuel hedging on an economic basis:


	Maximum fuel hedged as of
	December 31, 2024	Derivative underlying commodity type as of
Period (by year)	(gallons in millions) (a)	December 31, 2024
2025	1,033	Brent crude oil
2026	945	Brent crude oil
2027	277	Brent crude oil

Notes to Consolidated Financial Statements

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

Upon proper qualification, the Company accounts for its fuel derivative instruments as cash flow hedges. Qualification is re-evaluated quarterly, and all periodic changes in fair value of the derivatives designated as hedges are recorded in AOCI until the underlying jet fuel is consumed. See Note 12.

If a derivative initially does not qualify or ceases to qualify for hedge accounting, any change in the fair value of derivative instruments since the last reporting period would be recorded in Other (gains) losses, net in the Consolidated Statement of Income in the period of the change; however, any amounts previously recorded to AOCI would remain there until such time as the original forecasted transaction occurs, at which time these amounts would be reclassified to Fuel and oil expense. Factors that have and may continue to lead to the loss of hedge accounting include: significant fluctuation in energy prices or volumes of fuel purchased, significant weather events affecting refinery capacity and the production of refined products, and the volatility of the different types of products the Company uses in hedging. Certain types of derivative instruments do not qualify for hedge accounting, including those that result in a net sold position (sold gallons exceeding purchased gallons). Increased volatility in certain commodity markets for an extended period of time, especially if such volatility were to worsen, could cause the Company to lose hedge accounting altogether for the commodities used in its fuel hedging program, which would create further volatility in the Company’s GAAP financial results. However, even though certain derivatives may not qualify for hedge accounting, the Company continues to hold the instruments as management believes they continue to afford the Company the opportunity to stabilize jet fuel costs. When the Company has sold derivative positions in order to effectively "close" or offset a derivative already held as part of its fuel hedging portfolio, any subsequent changes in fair value of those positions are marked to market through the Consolidated Statement of Income. Likewise, any changes in fair value of those positions that were offset by entering into the sold positions and were de-designated as hedges are concurrently marked to market through the Consolidated Statement of Income. However, any changes in value related to hedges that were deferred as part of AOCI while designated as a hedge would remain until the originally forecasted transaction occurs. In a situation where it becomes probable that a fuel hedged forecasted transaction will not occur, any gains and/or losses that have been recorded to AOCI would be required to be immediately reclassified into the Consolidated Statement of Income.

During third quarter 2024, the routine statistical analysis performed by the Company to determine which commodities qualify for special hedge accounting treatment on a prospective basis indicated that WTI crude oil-based derivatives no longer qualified for hedge accounting. This change was primarily due to the fact that the correlation between WTI crude oil prices and jet fuel prices during recent periods had not been as strong as in the past, and therefore the Company could no longer demonstrate that derivatives based on WTI crude oil prices would result in effective hedges on a prospective basis. As such, all WTI-based instruments were de-designated from their hedging relationships and the change in fair value of all of the Company's derivatives based in WTI was recorded to Other (gains) losses for third and fourth quarter 2024. All WTI crude oil based derivatives in the Company's portfolio have settled as of December 31, 2024. The change in fair value of the Company's WTI derivative contracts during the second half of 2024 was a decrease of $37 million, which resulted in a corresponding loss in the Consolidated Statement of Income. Any amounts previously recorded to AOCI remained there until the original forecasted transaction occurred in accordance with hedge accounting requirements.

Accounting pronouncements pertaining to derivative instruments and hedging are complex with stringent requirements, including the documentation of a Company hedging strategy, statistical analysis to qualify a commodity for hedge accounting both on a historical and a prospective basis, and strict contemporaneous documentation that is required at the time each hedge is designated by the Company. This statistical analysis involves utilizing regression analyses that compare changes in the price of jet fuel to changes in the prices of the commodities used for hedging purposes.

Notes to Consolidated Financial Statements

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


		Asset derivatives				Liability derivatives
	Balance Sheet	Fair value at		Fair value at		Fair value at		Fair value at
(in millions)	location	12/31/2024		12/31/2023		12/31/2024		12/31/2023
Derivatives designated as hedges (a)
Fuel derivative contracts (gross)	Prepaid expenses and other current assets	$	22	$	86	$	—	$	—
Fuel derivative contracts (gross)	Other assets	108		137		—		—





Total derivatives designated as hedges		$	130	$	223	$	—	$	—

(a) Represents the position of each trade before consideration of offsetting positions with each counterparty and does not include the impact of cash collateral deposits provided to or received from counterparties. See discussion of credit risk and collateral following in this Note.

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


	Balance Sheet	December 31,		December 31,
(in millions)	location	2024		2023
Cash collateral deposits held from counterparties for fuel contracts - current	Offset against Prepaid expenses and other current assets	$	4	$	15
Cash collateral deposits held from counterparties for fuel contracts - noncurrent	Offset against Other assets	18		35
Receivable from third parties for fuel contracts	Accounts and other receivables	1		12

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

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

Notes to Consolidated Financial Statements


Offsetting of derivative assets
(in millions)
		(i)		(ii)			(iii) = (i) + (ii)			(i)		(ii)		(iii) = (i) + (ii)
		December 31, 2024								December 31, 2023
Description	Balance Sheet location	Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet			Net amounts of assets presented in the Balance Sheet			Gross amounts of recognized assets		Gross amounts offset in the Balance Sheet		Net amounts of assets presented in the Balance Sheet
Fuel derivative contracts	Prepaid expenses and other current assets	$	22	$	(4)	(b)	$	18		$	86	$	(15)	$	71
Fuel derivative contracts	Other assets	$	108	$	(18)		$	90	(a)	$	137	$	(35)	$	102	(a)

(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the Consolidated Balance Sheet in Note 15.


Offsetting of derivative liabilities
(in millions)
		(i)		(ii)			(iii) = (i) + (ii)			(i)		(ii)		(iii) = (i) + (ii)
		December 31, 2024								December 31, 2023
Description	Balance Sheet location	Gross amounts of recognized liabilities		Gross amounts offset in the Balance Sheet			Net amounts of liabilities presented in the Balance Sheet			Gross amounts of recognized liabilities		Gross amounts offset in the Balance Sheet		Net amounts of liabilities presented in the Balance Sheet
Fuel derivative contracts	Prepaid expenses and other current assets	$	4	$	(4)	(b)	$	—		$	15	$	(15)	$	—
Fuel derivative contracts	Other assets	$	18	$	(18)		$	—	(a)	$	35	$	(35)	$	—	(a)

(a) The net amounts of derivative assets and liabilities are reconciled to the individual line item amounts presented in the Consolidated Balance Sheet in Note 15.

Notes to Consolidated Financial Statements

The following tables present the impact of derivative instruments and their location within the Consolidated Statement of Income for the years ended December 31, 2024 and 2023:


Location and amount recognized in income on cash flow hedging relationships
	Year ended December 31, 2024		Year ended December 31, 2023
(in millions)	Fuel and oil		Other operating expenses		Fuel and oil		Other operating expenses
Total	$	72	$	8	$	(128)	$	7

(Gain) loss on cash flow hedging relationships
Commodity contracts:
Amount of (gain) loss reclassified from AOCI into income	72		—		(128)		—
Other:
Amount of loss reclassified from AOCI into income	—		8		—		7


Derivatives designated and qualified in cash flow hedging relationships
	(Gain) Loss recognized in AOCI on derivatives, net of tax
	Year ended
	December 31,
(in millions)	2024		2023
Fuel derivative contracts	$	99	$	238
Other	—		(7)
Total	$	99	$	231


Derivatives not designated as hedges
	(Gain) Loss recognized in income on derivatives

	Year ended
	December 31,				Location of (gain) loss recognized in income on derivatives
(in millions)	2024		2023
Fuel derivative contracts	$	34	$	(17)	Other (gains) losses, net

The Company also recorded expense (benefit) associated with premiums paid (received) for fuel derivative contracts that settled/expired during 2024, 2023 and 2022. Gains and/or losses associated with fuel derivatives that qualify for hedge accounting are ultimately recorded to Fuel and oil expense. Gains and/or losses associated with fuel derivatives that do not qualify for hedge accounting are recorded to Other (gains) losses, net. The following table presents the impact of premiums paid (received) for fuel derivative contracts and their location within the Consolidated Statement of Income during the period the contract settles:

Notes to Consolidated Financial Statements


	Premium expense (benefit) recognized in income on derivatives

	Year ended December 31,						Location of premium expense (benefit) recognized in income on derivatives

(in millions)	2024		2023		2022
Fuel derivative contracts designated as hedges	$	148	$	121	$	105	Fuel and oil
Fuel derivative contracts not designated as hedges	$	9	$	—	$	(28)	Other (gains) losses, net

The fair values of the derivative instruments, depending on the type of instrument, were determined by the use of present value methods or option value models with assumptions about commodity prices based on those observed in underlying markets or provided by third parties. Included in the Company’s cumulative unrealized loss from fuel hedges as of December 31, 2024, recorded in AOCI, were approximately $96 million in unrealized losses, net of taxes, which are expected to be realized in earnings during the twelve months subsequent to December 31, 2024.

Interest Rate Swaps

The Company is at times party to certain interest rate swap agreements that are accounted for as cash flow hedges, but had none in place as of December 31, 2024. During fourth quarter 2023, the Company terminated $150 million notional value of forward-starting interest rate swap agreements associated with the Company's forecasted issuance of debt. These swap agreements had been classified as cash flow hedges, and all fair market value changes were recorded to AOCI prior to their termination. The effect of this termination is that the value of the swaps originally recorded in AOCI, a gain of $23 million, will be amortized to Interest expense over the life of new debt instruments, which could be issued through 2027.

The Company also did not have any interest rate swap agreements designated as fair value hedges, as defined, during the periods presented.

Credit Risk and Collateral

Credit exposure related to fuel derivative instruments is represented by the fair value of contracts that are an asset to the Company at the reporting date. At such times, these outstanding instruments expose the Company to credit loss in the event of nonperformance by the counterparties to the agreements. However, the Company has not experienced any significant credit loss as a result of counterparty nonperformance in the past. To manage credit risk, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market position of the fuel hedging program and its relative market position with each counterparty. As of December 31, 2024, the Company had agreements with all of its active counterparties containing early termination rights and/or bilateral collateral provisions whereby security is required if market risk exposure exceeds a specified threshold amount based on the counterparty's credit rating. The Company also had agreements with counterparties in which cash deposits and letters of credit may be required to be posted as collateral whenever the net fair value of derivatives associated with those counterparties exceeds specific thresholds. In certain cases, the Company has the ability to substitute among these different forms of collateral at its discretion.

The following table provides the fair values of fuel derivatives, amounts posted as collateral, and applicable collateral posting threshold amounts as of December 31, 2024, at which such postings are triggered:

Notes to Consolidated Financial Statements


	Counterparty (CP)
(in millions)	A		B		C		D		E		F		G		H		I		Total
Fair value of fuel derivatives	$	30	$	17	$	18	$	10	$	14	$	11	$	13	$	13	$	4	$	130
Cash collateral held from CP	22		—		—		—		—		—		—		—		—		22

Option to substitute LC for cash	N/A		N/A		(a)		(a)		(a)		N/A		(a)		N/A		(a)
If credit rating is investment grade, fair value of fuel derivative level at which:
Cash is provided to CP	>(100)		>(50)		>(75)		>(125)		>(40)		>(65)		>(100)		>(100)		(b) (d)
Cash is received from CP	>0(b)		>150(b)		>250(b)		>125(b)		>100(b)		>70(b)		>100(b)		>100(b)		(b) (d)

If credit rating is non-investment grade, fair value of fuel derivative level at which:

Cash is received from CP	(c)		(c)		(c)		(c)		(c)		(c)		(c)		(c)		(c)

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

(b) Thresholds may vary based on changes in credit ratings within investment grade.

(d) Cash collateral is not required based on the current credit rating.

Notes to Consolidated Financial Statements

11. FAIR VALUE MEASUREMENTS

Accounting standards pertaining to fair value measurements establish a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of December 31, 2024, the Company held certain items that are required to be measured at fair value on a recurring basis. These included cash equivalents, short-term investments (primarily treasury bills), fuel derivative contracts, and available-for-sale securities. The majority of the Company’s cash equivalents and short-term investments consist of instruments classified as Level 1. However, the Company has certificates of deposit and time deposits that are classified as Level 2, due to the fact that the fair value for these instruments is determined utilizing observable inputs in non-active markets. Equity securities primarily consist of investments with readily determinable market values associated with the Company’s excess benefit plan.

The Company’s derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange. Fuel derivative instruments currently consist solely of option contracts, whereas interest rate derivatives consist solely of swap agreements. See Note 10 for further information on the Company’s derivative instruments and hedging activities. The Company’s Treasury Department, which reports to the Chief Financial Officer, determines the value of option contracts utilizing an option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are provided by financial institutions that trade these contracts. The option pricing model used by the Company is an industry standard model for valuing options and is a similar model used by the broker/dealer community (i.e., the Company’s counterparties). The inputs to this option pricing model are the option strike price, underlying price, risk free rate of interest, time to expiration, and volatility. Because certain inputs used to determine the fair value of option contracts are unobservable (principally implied volatility), the Company has categorized these option contracts as Level 3. Volatility information is obtained from external sources, but is analyzed by the Company for reasonableness and compared to similar information received from other external sources. The fair value of option contracts considers both the intrinsic value and any remaining time value associated with those derivatives that have not yet settled. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. To validate the reasonableness of the Company’s option pricing model, on a monthly basis, the Company compares its option valuations to third party valuations. If any significant differences were to be noted, they would be researched in order to determine the reason. However, historically, no significant differences have been noted. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of derivative contracts it holds.

Included in Equity securities are the Company's investments primarily associated with its deferred compensation plans, which consist of mutual funds that are publicly traded and for which market prices are readily available. These plans are non-qualified deferred compensation plans designed to hold contributions in excess of limits established by the Internal Revenue Code of 1986, as amended. The distribution timing and payment amounts under these plans are made based on the participant's distribution election and plan balance. Assets related to the funded portions of the deferred compensation plans are held in a rabbi trust, and the Company remains liable to these participants for the unfunded portion of the plans. The Company records changes in the fair value of plan obligations and plan assets, which net to zero, within the Salaries, wages, and benefits line and Other (gains) losses, net line, respectively, of the Consolidated Statement of Income.

Notes to Consolidated Financial Statements

The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2024, and December 31, 2023:


			Fair value measurements at reporting date using:
			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
Description	December 31, 2024		(Level 1)		(Level 2)		(Level 3)
Assets	(in millions)
Cash equivalents:
Cash equivalents (a)	$	7,209	$	7,209	$	—	$	—


Time deposits	300		—		300		—
Short-term investments:
Treasury bills	1,094		1,094		—		—
Certificates of deposit	122		—		122		—


Fuel derivatives:
Option contracts (b)	130		—		—		130

Equity securities	367		367		—		—
Total assets	$	9,222	$	8,670	$	422	$	130

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

(b) In the Consolidated Balance Sheet amounts are presented as an asset. See Note 10.


			Fair value measurements at reporting date using:
			Quoted prices in active markets for identical assets		Significant other observable inputs		Significant unobservable inputs
Description	December 31, 2023		(Level 1)		(Level 2)		(Level 3)
Assets	(in millions)
Cash equivalents:
Cash equivalents (a)	$	9,032	$	9,032	$	—	$	—
Commercial paper	135		—		135		—
Certificates of deposit	21		—		21		—
Time deposits	100		—		100		—
Short-term investments:
Treasury bills	1,983		1,983		—		—
Certificates of deposit	203		—		203		—

Fuel derivatives:
Option contracts (b)	223		—		—		223

Equity securities	280		280		—		—
Total assets	$	11,977	$	11,295	$	459	$	223

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

(b) In the Consolidated Balance Sheet amounts are presented as an asset. See Note 10.

The Company did not have any material assets or liabilities measured at fair value on a nonrecurring basis as of December 31, 2024 or 2023. The following tables present the Company’s activity for items measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for 2024 and 2023:

Notes to Consolidated Financial Statements


Fair value measurements using significant unobservable inputs (Level 3)
(in millions)	Fuel derivatives
Balance as of December 31, 2023	$	223
Total gains (losses) for the period
Included in earnings	(34)		(a)
Included in other comprehensive income	(130)
Purchases	123		(b)

Settlements	(52)
Balance as of December 31, 2024	$	130

The amount of total losses for the period included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held as of December 31, 2024	$	131

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

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


Fair value measurements using significant unobservable inputs (Level 3)
(in millions)	Fuel derivatives
Balance as of December 31, 2022	$	512
Total gains (losses) for the period
Included in earnings	17		(a)
Included in other comprehensive income	(312)
Purchases	273		(b)

Settlements	(267)
Balance as of December 31, 2023	$	223

The amount of total losses for the period included in other comprehensive income attributable to the change in unrealized gains or losses relating to assets still held as of December 31, 2023	$	209

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

The significant unobservable input used in the fair value measurement of the Company’s derivative option contracts is implied volatility. Holding other inputs constant, an increase (decrease) in implied volatility would have resulted in a higher (lower) fair value measurement, respectively, for the Company’s derivative option contracts.

The following table presents a range and weighted average of the unobservable inputs utilized in the fair value measurements of the Company’s fuel derivatives classified as Level 3 as of December 31, 2024:


Quantitative information about Level 3 fair value measurements
	Valuation technique	Unobservable input	Period (by year)	Range	Weighted Average (a)
Fuel derivatives	Option model	Implied volatility	2025	24-34%	27	%
			2026	22-29%	24	%
			2027	22-24%	23	%

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

The carrying amounts and estimated fair values of the Company’s short-term and long-term debt (including current maturities), as well as the applicable fair value hierarchy tier, as of December 31, 2024, are presented in the table below. The fair values of the Company’s publicly held long-term debt are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets;

Notes to Consolidated Financial Statements

therefore, the Company has categorized these agreements as Level 2. All privately held debt agreements are categorized as Level 3. The Company has determined the estimated fair value of this debt to be Level 3, as certain inputs used to determine the fair value of these agreements are unobservable. The Company utilizes indicative pricing from counterparties and a discounted cash flow method to estimate the fair value of the Level 3 items.


(in millions)	Maturity date	Carrying value		Estimated fair value		Fair value level hierarchy





1.25% Convertible Notes	2025	$	1,611	$	1,664	Level 2
3.00% Notes	2026	300		290		Level 2
7.375% Debentures	2027	107		112		Level 2
3.45% Notes	2027	300		289		Level 2
5.125% Notes	2027	1,727		1,736		Level 2
2.625% Notes	2030	500		444		Level 2



1.000% Payroll Support Program Loan (a)	2030	976		991		Level 3
1.000% Payroll Support Program Loan (a)	2031	566		553		Level 3
1.000% Payroll Support Program Loan (a)	2031	526		508		Level 3

(a) The interest rate will change to Secured Overnight Financing Rate plus two percent on the fifth anniversary of the loans. The fifth anniversary for the first tranche occurs in April 2025.

Notes to Consolidated Financial Statements

12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income includes changes in the fair value of certain financial derivative instruments that qualify for hedge accounting and actuarial gains/losses arising from the Company’s postretirement benefit obligation. A rollforward of the amounts included in AOCI, net of taxes, is shown below for 2024 and 2023:


(in millions)	Fuel derivatives		Defined benefit plan items		Other		Deferred tax impact		Accumulated other comprehensive income (loss)
Balance at December 31, 2022	$	305	$	170	$	(32)	$	(99)	$	344


Changes in fair value	(312)		(11)		10		73		(240)
Reclassification to earnings	(128)		(10)		7		27		(104)
Balance at December 31, 2023	$	(135)	$	149	$	(15)	$	1	$	—

Changes in fair value	(130)		25		—		25		(80)
Reclassification to earnings	72		(7)		8		(18)		55
Balance at December 31, 2024	$	(193)	$	167	$	(7)	$	8	$	(25)

The following table illustrates the significant amounts reclassified out of each component of AOCI for the year ended December 31, 2024:


Year ended December 31, 2024

(in millions)	Amounts reclassified from AOCI		Affected line item in the Consolidated Statement of Income
AOCI components
Unrealized loss on fuel derivative instruments	$	72	Fuel and oil expense

	17		Less: Tax expense
	$	55	Net of tax
Unrealized (gain) on defined benefit plan	$	(7)	Other (gains) losses, net
	(2)		Less: Tax expense
	$	(5)	Net of tax
Other	8		Other operating expenses
	3		Less: Tax expense
	$	5	Net of tax




Total reclassifications for the period	$	55	Net of tax

13. EMPLOYEE RETIREMENT PLANS

Defined Contribution Plans

The Company has defined contribution plans covering substantially all Employees. Contributions to these plans are primarily based on Employee elective deferrals as well as their eligible compensation and Company performance. The Company sponsors Employee savings plans under section 401(k) of the Internal Revenue Code of 1986, as amended. The Southwest Airlines Pilots Retirement Saving Plan has non-elective Company contributions. Before May 31, 2024, the Southwest Airlines Co. 401(k) Plan (the "401(k) Plan") included Company matching contributions and the Southwest Airlines Co. ProfitSharing Plan (the "ProfitSharing Plan") was a defined contribution plan under which the Company contributed a percentage of its annual net profits annually, as defined. Employee contributions to the ProfitSharing Plan were not permitted. Effective May 31, 2024, the Profitsharing

Notes to Consolidated Financial Statements

Plan's net assets were transferred and merged into the 401(k) Plan, which was subsequently renamed the Southwest Airlines Co. Retirement Savings Plan (the "Retirement Savings Plan"). As of the time of the merger, participants can now elect to invest in the Southwest Airlines Company Stock Fund for future investment contributions - including deferrals, matching contributions, or profitsharing contributions, within specified limits. The Retirement Savings Plan also has non-elective contributions for certain eligible workgroups that have negotiated such items as part of ratified collective bargaining contracts.

Amounts associated with the Company's defined contribution plans expensed in 2024, 2023, and 2022, reflected as a component of Salaries, wages, and benefits, were $843 million, $941 million, and $793 million, respectively.

Defined Benefit Plan

In 2024, the Company began offering a market based cash balance defined benefit plan covering eligible Pilots. The Company's funding obligation for the qualified plan is governed by the Employee Retirement Income Security Act of 1974 (ERISA) and any applicable regulations. The plan provides pay credits equal to 1 percent of eligible wages for qualifying participants, which are invested in a designated portfolio with a conservative allocation of 40 percent equity and 60 percent fixed income assets. Participants’ hypothetical account balances reflect market-based interest credits, calculated monthly based on the actual returns (positive or negative) of the designated portfolio. Participants' benefits consist of the sum of the pay credits and the market-based returns (or losses) accrued on the invested contributions. Any accrued amounts exceeding IRS-defined limits are paid in cash to eligible participants. As a defined benefit plan, participants are guaranteed a distribution equivalent to no less than the sum of the original pay credits to be distributed in the form of a single life annuity, if unmarried, or 50 percent joint and survivor, if married.

Postretirement Benefit Plans

The Company provides postretirement benefits to qualified retirees in the form of medical and dental coverage. Employees must meet minimum levels of service and age requirements as set forth by the Company, or as specified in collective-bargaining agreements with specific workgroups. Employees meeting these requirements, as defined, may use accrued unused sick time to pay for medical and dental premiums from the age of retirement until age 65.

The following table shows the change in the accumulated market based cash balance plan and postretirement benefit obligations for the years ended December 31, 2024 and 2023:


	Market Based Cash Balance Plan				Postretirement Benefits

	December 31,				December 31,
(in millions)	2024		2023		2024		2023
Accumulated Benefit Obligation at beginning of period	$	—	$	—	$	269	$	241
Service cost	31		—		16		14
Interest cost	—		—		14		12
Benefits paid	—		—		(18)		(9)
Actuarial (gain) loss	(1)		—		(35)		11
Plan Amendments	—		—		11		—


Accumulated Benefit Obligation at end of period	$	30	$	—	$	257	$	269

Fair value of plan assets at beginning of period	—		—		—		—
Actual gain/(loss) on plan assets	—		—		—		—
Employer contributions	31		—		20		9
Benefits paid	$	—	$	—	$	(20)	$	(9)
Fair value of plan assets at end of period	$	31	$	—	$	—	$	—

Notes to Consolidated Financial Statements

During 2024, the Company recorded $36 million in combined actuarial gains as a decrease to the market based cash balance and postretirement benefit plans with an offset to AOCI. These 2024 actuarial gains are reflected above and resulted from changes in certain key assumptions used to determine the Company’s year-end obligation. The assumption change that resulted in the largest portion of the actuarial gains was an increase in the discount rate used.

Benefits earned under the market based cash balance plan are expected to be paid from funded benefit plan assets, while the postretirement benefits are funded from current assets. The following table shows the estimated future benefit payments expected to be paid:


	Market Based Cash Balance Plan		Postretirement Benefits		Total
(in millions)
2025	$	1	$	16	$	17
2026	3		17		20
2027	7		18		25
2028	12		20		32
2029	18		21		39
Next 5 yrs thereafter	147		126		273

The following table reconciles the combined funded status of the market based cash balance and postretirement benefit plans to the accrued benefit plan cost recognized in Other noncurrent liabilities on the Company’s Consolidated Balance Sheet as of December 31, 2024 and 2023.


(in millions)	2024		2023
Funded status	$	(256)	$	(269)
Unrecognized net actuarial gain	(179)		(151)
Unrecognized prior service cost	13		2
Accumulated other comprehensive income	165		149
Consolidated Balance Sheet liability	$	(257)	$	(269)

The consolidated periodic benefit cost for the years ended December 31, 2024, 2023, and 2022, included the following:


	Market Based Cash Balance Plan		Postretirement Benefits
(in millions)	2024		2024		2023		2022
Service cost	$	11	$	16	$	14	$	19
Interest cost	—		14		12		9

Amortization of net gain	—		(7)		(10)		(2)


Net periodic benefit cost	$	11	$	23	$	16	$	26

Service cost is recognized within Salaries, wages, and benefits expense, and all other costs are recognized in Other (gains) losses, net in the Consolidated Statement of Income. Unrecognized prior service cost is expensed using a straight-line amortization of the cost over the average future service of Employees expected to receive benefits under the plans. Actuarial gains are amortized utilizing the minimum amortization method. The following actuarial assumptions were used to account for the Company’s market based cash balance and postretirement plans at December 31, 2024, 2023, and 2022:

Notes to Consolidated Financial Statements


	Market Based Cash Balance Plan		Postretirement Benefits
	2024		2024		2023		2022
Weighted-average discount rate	5.25	%	5.65	%	5.20	%	5.60	%
Assumed healthcare cost trend rate (a)	n/a		8.15	%	6.25	%	6.50	%
Weighted average expected long-term rate of return	5.25	%	n/a		n/a		n/a

(a)The assumed healthcare cost trend rate is expected to be 8.15% for 2025, then decline gradually to 4.5% by 2034 and remain level thereafter.

The selection of a discount rate is made annually and is selected by the Company based upon comparison of the expected future cash flows associated with the Company’s future payments under its consolidated benefit obligations to a yield curve created using high quality bonds that closely match those expected future cash flows.

This rate for postretirement benefits increased during 2024 due to market conditions. The assumed healthcare trend rate is also reviewed at least annually and is determined based upon both historical experience with the Company’s benefits paid and expectations of how those trends may or may not change in future years.

The expected long-term rate of return on plan assets is based on historical market and volatility data and expected market conditions, reflecting a target asset allocation of 40 percent equities and 60 percent fixed income. The Company reviews the rate of return on plan assets assumption annually. The annual investment performance for one particular year does not, by itself, significantly influence the Company's evaluation.

Notes to Consolidated Financial Statements

14. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred tax assets and liabilities as of December 31, 2024 and 2023, are as follows:


(in millions)	2024		2023
DEFERRED TAX LIABILITIES:
Accelerated depreciation	$	3,351	$	3,595
Prepaid insurance	282		258
Operating lease right-of-use assets	314		276
Other	99		91
Total deferred tax liabilities	4,046		4,220
DEFERRED TAX ASSETS:
Accrued employee benefits	337		757
Loyalty program and flight credit liability	604		599
Operating lease liabilities	319		279
Net operating losses and tax credits (a)	352		309
Other	267		232
Total deferred tax assets	1,879		2,176
Net deferred tax liability	$	2,167	$	2,044

(a) As of December 31, 2024 and 2023, the Company had approximately $56 million and $36 million, respectively, of state net operating loss carryforwards (tax effected) to reduce future state taxable income. These state net operating loss carryforwards will expire in years 2025 through 2046 if unused. As of December 31, 2024 and 2023, the Company had $253 million and $268 million, respectively, of federal net operating loss carryforwards (tax effected) that may be carried forward indefinitely.

The provision (benefit) for income taxes is composed of the following:


(in millions)	2024		2023		2022
CURRENT:
Federal	$	—	$	(10)	$	(36)
State	1		19		(3)

Total current	1		9		(39)
DEFERRED:
Federal	108		140		208
State	24		19		20
Total deferred	132		159		228
Income tax provision (benefit)	$	133	$	168	$	189

Notes to Consolidated Financial Statements

The effective tax rate on Income (loss) before income taxes differed from the federal income tax statutory rate for the following reasons:


(in millions)	2024		2023		2022
Tax at statutory U.S. tax rates	$	126	$	133	$	153
State income taxes, net of federal benefit	20		30		12
Nondeductible per diem	9		8		1

Convertible debt repurchases	—		—		31
DOT settlement	(3)		22		—
Federal tax credits	(33)		(19)		(13)
Other, net	14		(6)		5
Total income tax provision (benefit)	$	133	$	168	$	189

The only periods subject to examination for the Company’s federal tax return are tax years 2020-2024. The Company is also subject to various examinations from state and local income tax jurisdictions in the ordinary course of business. These examinations are not expected to have a material effect on the financial results of the Company.

15. SUPPLEMENTAL FINANCIAL INFORMATION


(in millions)	December 31, 2024		December 31, 2023
Trade receivables	$	47	$	104
Credit card receivables	143		200
Business partners and other suppliers	573		501
Taxes receivable	11		35
Fuel hedging and receivables	1		12
Reinsurance receivable	168		145
Other	167		157
Accounts and other receivables	$	1,110	$	1,154


(in millions)	December 31, 2024		December 31, 2023
Derivative contracts	$	90	$	102
Intangible assets, net	300		296
Equity securities	367		280
Prepaid maintenance	263		258
Other	61		28
Other assets	$	1,081	$	964


(in millions)	December 31, 2024		December 31, 2023
Accounts payable trade	$	339	$	265
Salaries, withholdings and payroll taxes	536		400
Ticket taxes and fees	318		302
Aircraft maintenance payable	33		140
Fuel payable	86		161
Dividends payable	107		107
Third party services	176		269
Other payable	223		218
Accounts payable	$	1,818	$	1,862

Notes to Consolidated Financial Statements


(in millions)	December 31, 2024		December 31, 2023

Voluntary Separation Program	$	48	$	65
Profitsharing and savings plans	151		141

Vacation pay	657		516
Health	192		163
Workers compensation	178		133
Property and income taxes	53		63

Interest	23		34

Bonus and incentive pay (a)	208		2,022
Reinsurance payable	249		190
Aircraft maintenance	92		26
Other	355		253
Accrued liabilities	$	2,206	$	3,606


(in millions)	December 31, 2024		December 31, 2023

Voluntary Separation Program	$	20	$	61
Postretirement obligation	256		269
Other deferred compensation	412		358
Other	221		293
Other noncurrent liabilities	$	909	$	981

(a) Balance as of December 31, 2023 primarily consists of contract labor ratification bonuses and/or accruals. Also includes non-contract incentive pay. Approximately $1.9 billion was paid in the year ended December 31, 2024 to Pilots, Flight Attendants, and Ramp, Operations, Provisioning, and Cargo Agents as bonuses upon the ratification of the labor contract agreements with the Southwest Airlines Pilots Association ("SWAPA"), Transport Workers of America Union Local 556 ("TWU 556"), and the Transport Workers Union Local 555 ("TWU 555"), respectively.

For further information on fuel derivative and interest rate derivative contracts, see Note 10.

Other Operating Expenses

Other operating expenses consist of aircraft rentals, distribution costs, advertising expenses, personnel expenses, professional fees, certain technology-related costs, and other operating costs, none of which individually exceed 10 percent of Total operating expenses.

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Southwest Airlines Co.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Southwest Airlines Co. (the Company) as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 7, 2025 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Notes to Consolidated Financial Statements


			Valuation of fuel derivative instruments
Description of the Matter			As described in Notes 1, 10, and 11 to the consolidated financial statements, the Company’s fuel derivative instruments consist of over-the-counter contracts, which are not traded on a public exchange and require the Company to estimate their fair values. The fair value of fuel option contracts is determined using option pricing models with inputs such as commodity prices, strike prices, risk-free interest rates, term to expiration and volatility. Because certain inputs used to determine the fair value of option contracts are unobservable (principally implied volatility), the Company has categorized these option contracts as Level 3 fair value measures. The Company analyzes volatility information for reasonableness and compares it to similar information received from external sources and limited observable market data. The fair value of the option contracts considers both the intrinsic value and any remaining time value associated with the derivatives that have not settled. Auditing the fair value measurement of fuel option contracts is complex and requires significant judgment in order to evaluate the application of the option pricing model and evaluating the reasonableness of the unobservable input of implied volatility used in the fair value measurement of the Company’s fuel option contracts.
How We Addressed the Matter in Our Audit			We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process to calculate the fair value of fuel option contracts, including controls that related to the volatility input. To test the valuation of fuel derivative instruments, our audit procedures included, among others, involving internal valuation specialists to assist in the testing of the significant inputs into the option pricing model by comparing the market data inputs, including volatility, to external sources. With the support of our specialists, we also tested the application of and the computational accuracy of the option pricing model by performing independent corroborative calculations. Additionally, we compared the Company’s fuel option contract valuations to the counterparty valuations, which were independently obtained as part of our audit procedures.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1971.

Dallas, Texas

February 7, 2025

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Southwest Airlines Co.

Opinion on Internal Control Over Financial Reporting

We have audited Southwest Airlines Co.’s internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework), (the COSO criteria). In our opinion, Southwest Airlines Co. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2024, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Southwest Airlines Co. as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “financial statements”) of the Company and our report dated February 7, 2025 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Annual Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Notes to Consolidated Financial Statements

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Dallas, Texas

February 7, 2025

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